Honeywell International Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013; comparisons are with the corresponding 2012 periods unless stated otherwise. Amounts are in U.S. dollars, generally millions, except per-share data. Interim financial statements were reviewed, not audited.
Financial performance
- Q2 revenue: Net sales were $9.693 billion, up 3% from $9.435 billion. Product sales rose to $7.744 billion from $7.475 billion; service sales edged down to $1.949 billion from $1.960 billion.
- Q2 earnings: Net income attributable to Honeywell was $1.021 billion, up 13% from $902 million. Diluted EPS increased to $1.28 from $1.14. Income before taxes was $1.329 billion; tax expense was $307 million and the effective tax rate was 23.1%, versus 26.0%.
- First-half performance: Sales were $19.021 billion, up 1%; attributable net income was $1.987 billion, up 15%; diluted EPS was $2.49, versus $2.19.
- Margins: Gross margin was 27.5% in Q2 and 27.4% for the first half, compared with 26.6% and 26.4%, respectively. SG&A was 13.2% of sales in both 2013 periods, slightly higher than 2012. Q2 net margin, calculated from reported attributable net income and sales, was approximately 10.5%, versus 9.6%.
- Cash flow: First-half operating cash flow was $1.597 billion, compared with $1.169 billion. Capital expenditures were $344 million; operating cash flow less capital expenditures was approximately $1.253 billion, versus $817 million. Cash declined $85 million to $4.549 billion.
- Balance sheet and liquidity: At June 30, cash was $4.549 billion and current assets were $17.849 billion; current liabilities were $13.480 billion. Long-term debt was $5.779 billion, with $632 million of current maturities, $1.2 billion of commercial paper and $91 million of short-term borrowings. These listed debt categories total approximately $7.702 billion, versus $7.496 billion at year-end 2012.
- Shareholder returns: First-half dividends paid were $665 million; cash dividends per share were $0.41 in Q2. The company repurchased $602 million of shares in the first half, including $463 million in Q2.
Material changes and segment trends
- Q2 segment profit rose 4% in Aerospace to $583 million, 11% in Automation and Control Solutions (ACS) to $585 million, and 11% in Transportation Systems to $126 million. Performance Materials and Technologies (PMT) segment profit fell 9% to $320 million.
- For the first half, segment profit increased 3% in Aerospace, 9% in ACS, 4% in PMT, and 1% in Transportation Systems. PMT’s sales growth was acquisition-driven; lower Advanced Materials volumes and growth-related investment weighed on Q2 profit.
- Aerospace sales were down 1% in Q2, mainly because of lower defense and space sales; ACS sales rose 3%, PMT sales rose 9%, and Transportation Systems sales rose 5%.
- Management attributed improved gross margin chiefly to Aerospace and ACS performance, productivity and lower pension and postretirement expense. Q2 net repositioning and other charges increased to $171 million from $134 million; first-half charges were $299 million versus $256 million.
Outlook, risks and unusual items
- Management expected repositioning actions to generate approximately $150 million of incremental pretax savings in 2013 versus 2012. Cash expenditures for these actions were $60 million in the first half; the filing estimates approximately $175 million of 2013 cash expenditures for the actions.
- The planned Intermec acquisition, for approximately $600 million net of cash acquired, was expected to close in Q3 2013 subject to U.S. regulatory review and was to be funded with cash and commercial paper. The RAE Systems acquisition closed June 3 for $338 million net of cash acquired; its results were not material to consolidated results through June 30.
- Management reported that production at the Metropolis Works facility recommenced in July 2013 after NRC review and approval. Advanced Materials volumes had been affected by cool weather and planned outages; the company expected Resins and Chemicals production to improve in the second half.
- Contingencies: Environmental liabilities were $676 million at June 30. Asbestos-related liabilities were $1.722 billion, with $702 million of recorded insurance recoveries. The NARCO bankruptcy plan became effective April 30; trust funding obligations include capped future claims funding and additional settlement payments. Estimates and recoveries remain uncertain.
- Honeywell cited continuing exposure to environmental claims, asbestos claims, other litigation, foreign exchange, commodity and interest-rate movements, and weaker defense spending. An adverse ruling in retiree healthcare litigation could increase other postretirement benefits by an estimated $175 million. The Hopewell, Virginia consent decree included a $3 million civil penalty and remedial actions.
- The filing cautions that interim results are not necessarily indicative of full-year results and that forward-looking statements are subject to risks and uncertainties. It provides no clear full-year revenue or EPS guidance in the supplied text.
Key facts for investors to verify
- Whether revenue growth and margin improvement persisted, particularly in ACS and Aerospace, and whether PMT’s expected second-half recovery materialized.
- Intermec’s regulatory clearance, closing, funding and integration; and final purchase accounting for RAE.
- Actual 2013 repositioning savings and cash costs relative to management’s estimates.
- Changes in environmental and asbestos estimates, insurance recoveries, NARCO Trust claims and related cash payments.
- Debt and commercial-paper levels, cash conversion, share repurchases and dividends; and any subsequent outlook or material developments not included in this quarter’s filing.