HONEYWELL INTERNATIONAL INC quarterly report, Q3 FY2010

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Honeywell International Inc. — Q3 2010 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2010; comparisons are with the corresponding 2009 periods unless stated otherwise. Amounts are in U.S. dollars. Interim statements are unaudited and should be read with the 2009 Form 10-K.

Financial performance

  • Revenue: Q3 net sales were $8.392 billion, up 9% (volume +8%, price +1%, acquisitions +1%, foreign exchange −1%). Nine-month sales were $24.329 billion, up 7%.
  • Profit and EPS: Q3 net income attributable to Honeywell was $499 million, down from $608 million; diluted EPS was $0.64 versus $0.80. Nine-month attributable net income was $1.353 billion versus $1.455 billion; diluted EPS was $1.74 versus $1.94.
  • Margins and costs: Gross margin was 22.7% in Q3 versus 24.7%, and 23.0% for nine months versus 24.5%. Management attributed the decline principally to higher pension expense and repositioning and other charges. Q3 SG&A was 14.0% of sales versus 13.4%; the nine-month rate was 14.3% in both years.
  • Segment results: Q3 sales/profit were Aerospace $2.704/$0.458 billion, Automation and Control Solutions $3.474/$0.471 billion, Specialty Materials $1.175/$0.194 billion, and Transportation Systems $1.039/$0.122 billion. Nine-month Aerospace profit declined 6% to $1.314 billion; profits increased in the other three segments, led by Transportation Systems (+296%) and Specialty Materials (+34%).
  • Cash flow: Nine-month operating cash flow was $3.158 billion, up from $2.615 billion. Capital expenditures were $351 million; operating cash flow less capital expenditures was approximately $2.807 billion. Investing used $1.980 billion, including $1.318 billion for acquisitions. Financing used $1.301 billion, including $704 million of dividends. Cash declined $161 million to $2.640 billion.
  • Balance sheet and debt: At September 30, cash was $2.640 billion, current assets $15.163 billion, and current liabilities $11.546 billion. Long-term debt was $6.265 billion; current maturities, commercial paper, and short-term borrowings brought reported debt to approximately $7.250 billion. Debt was approximately $7.607 billion at December 31, 2009. The company repaid $1.000 billion of 7.50% notes in Q1, funding repayment with commercial paper and operating cash.
  • Dividends: Cash dividends were $0.3025 per share in Q3 and $0.9075 per share for the nine months, unchanged from 2009.

Material changes and notable items

  • September acquisition of approximately 98% of Sperian Protection, a personal protective equipment business with 2009 revenue of about $900 million. Transaction value net of acquired cash was approximately $1.475 billion, including $326 million of assumed debt. The remaining 2% was acquired in October for approximately $16 million. Purchase accounting remained subject to adjustment.
  • Repositioning and other charges rose to $212 million in Q3 from $114 million and to $482 million for nine months from $369 million. Nine-month charges included $169 million for probable environmental liabilities and $135 million for asbestos litigation, net of insurance, among other items.
  • Q3 results included a $62 million pretax gain from consolidating a Specialty Materials joint venture. The company recorded a $13 million one-time, noncash tax charge in Q1 related to the change in Medicare Part D tax treatment.
  • Nine-month pension expense increased substantially; the cash-flow reconciliation includes $600 million of pension and other postretirement expense. Honeywell contributed $400 million of its common stock to U.S. pension plans and $179 million of marketable securities to non-U.S. plans during the period.

Outlook, risks and contingencies

  • Honeywell expected repositioning actions to generate approximately $275 million of incremental pretax savings in 2010 versus 2009. Remaining 2010 cash spending to execute those actions was estimated at approximately $200 million.
  • Management anticipated a $600 million cash contribution to U.S. pension plans in Q4 2010, subject to investment returns, discount rates, timing, and other factors. No broad consolidated earnings or revenue guidance is provided in the supplied filing text.
  • Management reported increased orders and backlog in Automation and Control Solutions, and expected higher Transportation Systems turbocharger volumes to continue, citing new platform launches and diesel penetration. Aerospace results remained exposed to delayed defense and space programs, weak business aviation demand, parked aircraft, and deferred maintenance.
  • Environmental liabilities recorded were $835 million. The company said additional environmental costs could materially affect results or operating cash flow when recognized or paid, though it did not expect a material adverse effect on financial position based on existing reserves and experience.
  • Recorded asbestos liabilities were $1.715 billion, with $870 million of related insurance receivables. NARCO plan effectiveness remained dependent on unresolved affiliate bankruptcy appeals; insurance recoveries and future claims are uncertain. Bendix estimates depend on claim rates, disease mix, resolution values, and insurance recoverability.
  • Other legal matters include a BorgWarner patent claim seeking up to approximately $120 million, which the plaintiff asserts could be trebled; trial was scheduled for May 2011. The company also disclosed environmental investigations and negotiations involving its Metropolis, Illinois and Hopewell, Virginia facilities. Management did not expect these matters to materially adversely affect financial position, while acknowledging possible effects on results or cash flow.
  • Management warned that customer or supplier financing difficulties and bankruptcies could affect cash flow or results, particularly in long-cycle, airline, and automotive markets; no material impact had been experienced to date. The filing states market-risk disclosures had not materially changed.

Key facts for investors to verify

  • Whether sales growth converts to sustained margins and earnings as higher pension, labor, material, and repositioning costs weigh on profitability.
  • Final Sperian purchase accounting, integration progress, and realization of expected acquisition synergies.
  • The timing and amount of the planned Q4 pension contribution, and the effect of pension assumptions on future expense and cash needs.
  • Environmental and asbestos liability estimates, insurance collectability, and developments in the NARCO trust and significant litigation.
  • Working-capital trends: receivables and inventories increased, and management attributed higher cash usage to working capital alongside rising sales volume.