Honeywell International Inc. — Q1 2015 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2015, compared with Q1 2014. Honeywell reported three segments: Aerospace, Automation and Control Solutions (ACS), and Performance Materials and Technologies (PMT). All dollar amounts are in millions unless noted.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $9,213 | $9,679 |
| Income before taxes | $1,564 | $1,411 |
| Net income attributable to Honeywell | $1,116 | $1,017 |
| Diluted EPS | $1.41 | $1.28 |
| Operating cash flow | $421 | $688 |
| Capital expenditures | $165 | $192 |
- Sales fell 5%: volume contributed +2%, price −1%, foreign exchange −4%, and acquisitions/divestitures −2%.
- Gross margin rose to 30.9% from 28.0%. Management attributed the improvement primarily to higher segment margins, productivity, favorable foreign-exchange effects, and lower repositioning and other charges.
- Segment profit increased to $1,721 from $1,596. Aerospace profit rose 7% to $752, ACS rose 10% to $516, and PMT rose 6% to $503.
- Effective tax rate was 26.7%, compared with 26.6%. Q1 2015 cash dividends were $0.5175 per share, versus $0.45.
Liquidity, debt and balance sheet
- At March 31, cash and cash equivalents were $6,575; short-term available-for-sale investments were $1,750. Total debt, including commercial paper and current maturities, was $9,660. Management’s defined net cash was negative $1,335, versus negative $210 at year-end 2014.
- Current assets were $22,272 and current liabilities $15,432. Commercial paper increased to $2,695 from $1,647; current maturities of long-term debt increased to $1,304 from $939. Long-term debt was $5,661, down from $6,046.
- Operating cash flow decreased by $267 year over year, with management citing an Aerospace OEM incentive payment, higher cash taxes, lower customer advances, and working-capital effects, partly offset by higher net income.
- Investing activities used $920, including $185 for acquisitions; financing activities provided $367, including a $1,048 net increase in commercial paper. Cash declined $384 during the quarter, including a $252 foreign-exchange impact.
Material changes and management commentary
- Sales declined across the company, partly because of foreign exchange and the Friction Materials divestiture. Aerospace Transportation Systems sales fell 23% reported, while UOP sales increased 8%. PMT Advanced Materials sales declined 12%; management said unfavorable pricing, including in Resins and Chemicals, was expected to continue in 2015.
- Management reported productivity and cost reductions across segments. Q1 repositioning and other charges were $131, down from $214; repositioning charges included workforce reductions affecting 3,040 positions.
- Management expected repositioning actions to generate $100–$125 of incremental pretax savings in 2015 versus 2014, with approximately $150 of repositioning cash spending during 2015.
- Honeywell repurchased $363 of shares in Q1; $3.7 billion remained available under its reported repurchase program. It planned approximately $140 of non-U.S. pension contributions for 2015, including $109 of marketable securities contributed in January; no U.S. pension contribution was required for 2015.
Risks, contingencies and unusual items
- Environmental liabilities were $602 at quarter-end. Asbestos-related liabilities were $1,549, with related insurance recoveries of $477. Estimates depend on claims, resolution values, insurance recoverability, and other assumptions; the company noted that future outcomes may differ.
- Honeywell disclosed retiree healthcare litigation over contractual caps. An adverse ruling could increase postretirement benefit obligations by approximately $180 for pre-2003 retirees and $120 for post-2003 retirees.
- A Department of Justice investigation concerns parts used in the F-35 fighter jet; Honeywell said it was cooperating and could not predict the outcome. Virginia regulators also alleged wastewater-permit violations at the Hopewell facility; negotiations were ongoing, and Honeywell did not expect a material adverse effect.
- Other income/expense included $162 of expense from foreign-exchange hedging in Q1 2015, compared with $57 of income in Q1 2014. Other comprehensive loss was $640, largely reflecting a $721 foreign-currency translation loss.
- The company was evaluating the impact of the new revenue-recognition standard, effective for periods beginning on or after December 15, 2016; it had not selected a transition method.
- Management cautioned that quarterly results are not necessarily indicative of full-year results. It reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether sales trends, foreign-exchange effects, and segment-level organic growth develop as management anticipated.
- Whether productivity and restructuring savings offset continuing pricing pressure, inflation, and growth investments.
- Cash conversion and liquidity, including the rise in commercial paper and management-defined net cash turning more negative.
- Updates to asbestos and environmental estimates, insurance recoveries, and the retiree healthcare and F-35 matters.
- Execution of the 2015 repositioning savings, spending, pension contributions, and share-repurchase plans.