Honeywell International Inc. — Q1 2014 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three months ended March 31, 2014, compared with the three months ended March 31, 2013. Honeywell reported four segments: Aerospace; Automation and Control Solutions (ACS); Performance Materials and Technologies (PMT); and Transportation Systems. The interim statements received an independent accountants’ review, not an audit.
Key financial results
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $9.679 billion | $9.328 billion |
| Income before taxes | $1.411 billion | $1.260 billion |
| Net income attributable to Honeywell | $1.017 billion | $966 million |
| Diluted EPS | $1.28 | $1.21 |
| Gross margin | 28.0% | 27.3% |
| Operating cash flow | $688 million | $341 million |
| Capital expenditures | $192 million | $148 million |
| Cash dividends per share | $0.45 | $0.41 |
Revenue rose 4%, attributed to 1% volume growth and a 3% net contribution from acquisitions and divestitures. The effective tax rate increased to 26.6% from 23.1%, mainly because Q1 2013 had tax benefits from law changes. The 2014 rate remained below the 35% statutory rate, partly due to foreign earnings taxed at lower rates and manufacturing incentives.
Segment performance
| Segment | Sales change | Segment profit change | Reported context |
|---|---|---|---|
| Aerospace | (2%) | Flat | Defense and Space declines offset by commercial growth, pricing and productivity. |
| ACS | +8% | +11% | Growth reflected acquisitions and organic sales; profit benefited from price and productivity. |
| PMT | +2% | (3%) | Profit pressured by catalyst shipment mix, Advanced Materials pricing and growth investment. |
| Transportation Systems | +9% | +39% | Higher volume and productivity drove profit growth, partly offset by unfavorable pricing. |
Cash flow, debt and liquidity
- Operating cash flow was $688 million, up $347 million year over year, primarily from a $178 million favorable working-capital impact and $135 million lower pension and postretirement contributions; higher cash taxes partly offset the improvement.
- Investing activities used $345 million, including $192 million of capital expenditures and net purchases of investments. Financing activities used $48 million. Cash increased $250 million to $6.672 billion.
- At March 31, cash was $6.672 billion; current assets were $21.531 billion and current liabilities $14.353 billion. Long-term debt was $6.804 billion, with $65 million of current maturities, $2.399 billion of commercial paper and $88 million of short-term borrowings.
- Honeywell repaid $600 million of notes in February, funding the repayment with commercial paper. It repurchased $320 million of shares and paid $363 million in dividends during the quarter. About $4.7 billion remained available under its $5 billion repurchase authorization.
Material changes and unusual items
- Other income included a $105 million realized gain from selling B/E Aerospace shares. This helped lift reported earnings and is a significant non-recurring comparison item.
- Repositioning and other charges were $214 million, versus $128 million a year earlier. They included $82 million of repositioning charges, $82 million of environmental charges and $48 million primarily related to updated Bendix asbestos estimates. The repositioning actions included reductions of 1,520 positions.
- The company estimated approximately $150 million of incremental 2014 pretax savings from repositioning actions, with about $175 million of additional 2014 cash expenditures expected to execute remaining actions.
- In January, Honeywell agreed to sell its Friction Materials business for approximately $155 million; closing was expected in the second half of 2014, subject to approvals. A total pretax and after-tax loss of approximately $30 million was recognized or expected in connection with the sale, with $2 million recognized in Q1.
- In April, Honeywell announced that Honeywell Process Solutions would move from ACS to PMT, with segment reporting to reflect the change beginning in Q2 2014.
Outlook, risks and contingencies
- The filing provides no clear consolidated full-year revenue or earnings guidance. Management said unfavorable Advanced Materials pricing was expected to moderate over the remainder of 2014 and cited increasing project orders and backlog in ACS Process Solutions and Building Solutions.
- Environmental liabilities were $670 million at quarter-end. Honeywell said ultimate costs and timing are uncertain and could materially affect results or operating cash flows in periods recognized or paid, though it did not expect a material adverse effect on financial position based on existing reserves and experience.
- Asbestos-related liabilities totaled $1.617 billion, with $661 million of related insurance recoveries recorded. NARCO trust funding includes annual caps for qualifying claims, plus certain obligations outside those caps. Estimates depend on claim experience and insurance recoveries; the company noted substantial uncertainty in long-term projections.
- Two retiree healthcare cases could increase postretirement obligations by approximately $180 million for pre-2003 retirees and $105 million for post-2003 retirees if Honeywell loses. The Department of Justice was investigating parts made in the United Kingdom and China for the F-35; the outcome was not predictable.
- Honeywell identified exposure to currency, interest-rate and commodity-market risks, managed in part through hedging. It reported no material change in market-risk disclosures from its 2013 Form 10-K.
- Management cautioned that quarterly results should not necessarily be viewed as indicative of full-year results. Disclosure controls and procedures were assessed as effective, with no reported material change in internal control over financial reporting.
Investor verification points
- Separate underlying earnings performance from the $105 million securities-sale gain and the higher repositioning, environmental and asbestos charges.
- Track whether operating cash flow remains strong after working-capital movements and lower pension contributions, and compare planned 2014 pension funding with actual contributions.
- Monitor environmental and asbestos reserve adequacy, NARCO trust payments, insurance recoverability and developments in retiree healthcare and the F-35 investigation.
- Confirm completion, proceeds and final accounting for the Friction Materials divestiture, and assess the effects of the segment realignment on reported comparisons.
- Review commercial-paper use, debt maturities, share repurchases and dividends alongside available cash and operating cash generation.