Honeywell International Inc. — Q3 2013 Form 10-Q
Business context and reporting period. Unaudited results cover the three and nine months ended September 30, 2013, compared with the same 2012 periods. Honeywell operates Aerospace, Automation and Control Solutions (ACS), Performance Materials and Technologies (PMT), and Transportation Systems. The interim financial statements were reviewed by PwC, not audited.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $9.647B | $9.342B | $28.668B | $28.084B |
| Gross margin | 28.0% | 27.1% | 27.6% | 26.6% |
| Income before taxes | $1.384B | $1.224B | $3.973B | $3.569B |
| Net income attributable to Honeywell | $990M | $950M | $2.977B | $2.675B |
| Diluted EPS | $1.24 | $1.20 | $3.73 | $3.38 |
| Effective tax rate | 27.2% | 22.7% | 24.5% | 25.0% |
Q3 sales rose 3%, while diluted EPS increased 3%; nine-month sales rose 2% and diluted EPS increased 10%. Gross margin improved in both periods, reflecting stronger segment margins and lower pension and postretirement expense. Q3 tax rate increased mainly because of reduced benefits from tax-audit resolutions, manufacturing incentives, and U.S. tax credits.
- Segment results, Q3: ACS sales $4.129B and segment profit $631M; PMT sales $1.629B and profit $305M; Aerospace sales $2.973B and profit $602M; Transportation Systems sales $916M and profit $128M. Segment profit increased in all four segments.
- Notable drivers: Aerospace sales declined 2%, primarily from lower defense and space activity. ACS sales rose 4%, PMT rose 10% (including acquisition contribution), and Transportation Systems rose 6%. Transportation Systems profit growth reflected productivity and higher sales, partly offset by pricing.
Cash flow, liquidity, and debt
- Nine-month operating cash flow was $2.667B, up from $2.168B. Management attributed the increase mainly to lower pension contributions and higher income before noncash pension items; working capital, taxes, and NARCO-related payments partly offset it.
- Investing cash outflow was $1.554B, versus $865M, mainly reflecting $1.001B more acquisition spending. Capital expenditures were $547M.
- Financing cash outflow was $133M. The company paid $995M in dividends and repurchased $769M of shares; commercial paper increased by $1.699B.
- Cash was $5.499B at September 30, 2013, versus $4.634B at year-end 2012. Current assets were $19.304B and current liabilities $14.663B.
- Long-term debt, including current maturities, was $6.421B; commercial paper was $2.099B and short-term borrowings $88M. The filing reports no receivables sold under its receivables program at quarter-end.
Material changes, outlook, and risks
- Honeywell acquired RAE Systems for $338M and Intermec for $607M, net of cash acquired. Both were included in ACS; their reported post-acquisition results were not material to consolidated results. Acquisitions drove much of the increase in goodwill and intangible assets.
- Net repositioning and other charges were $120M in Q3 and $419M year to date, versus $100M and $356M, respectively, in 2012. Charges included environmental liabilities and asbestos-related litigation estimates. Management expected repositioning actions to generate approximately $150M of incremental pretax savings in 2013 versus 2012; remaining 2013 severance and exit cash costs were estimated at approximately $175M.
- Management provided no consolidated full-year revenue or EPS guidance in the supplied filing text. It planned approximately $160M of 2013 contributions to non-U.S. pension plans; $151M had been contributed through September. No U.S. pension contribution was required in 2013.
- Contingencies: Environmental liabilities were $652M at quarter-end; the company said additional costs could materially affect results or operating cash flow when recognized or paid, but did not expect a material adverse effect on financial position. Asbestos liabilities were $1.665B, with $697M of related insurance recoveries. NARCO Trust funding includes annual caps for qualifying claims, plus certain obligations outside those caps. Estimates rely on assumptions and are subject to uncertainty.
- A dispute over retiree healthcare caps could increase other postretirement benefits by approximately $175M if Honeywell loses. The filing also describes other litigation and notes potential liabilities may change; it says outcomes were not expected to materially affect financial position based on existing accruals and experience.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting. The filing notes forward-looking statements are subject to risks and actual outcomes may differ.
Important facts for investors to verify
- Whether sales and segment-profit growth can continue, especially given lower Aerospace defense and space demand and mixed organic trends in PMT.
- Integration, purchase accounting, and returns from the RAE and Intermec acquisitions, including their contribution to ACS growth and goodwill.
- Cash conversion and working-capital trends, alongside increased commercial paper and total borrowings after acquisition spending.
- Actual repositioning savings and cash costs compared with management’s 2013 estimates.
- Future NARCO and Bendix asbestos claims, insurance recoveries, environmental remediation costs, and the retiree healthcare litigation outcome.