Honeywell International Inc. — Q3 2009 Form 10-Q
Reporting period: Three and nine months ended September 30, 2009; balance sheet compared with December 31, 2008. Amounts are in millions of dollars except per-share data. The interim financial statements were reviewed by the independent accountant, not audited.
Financial performance
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Net sales | $7,700 | $9,275 | $22,836 | $27,844 |
| Gross margin | 24.7% | 19.4% | 24.5% | 22.9% |
| Income before taxes | $798 | $1,038 | $1,967 | $2,907 |
| Net income attributable to Honeywell | $608 | $719 | $1,455 | $2,085 |
| Diluted EPS | $0.80 | $0.97 | $1.94 | $2.79 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $2,615 | $2,532 |
Sales fell 17% in Q3 and 18% year to date, driven primarily by a 14% volume decline in both periods, with additional unfavorable foreign exchange and modest price declines. Gross margin improved as cost reductions, lower material and labor costs, and fewer repositioning charges more than offset reduced sales; segment margin performance was mixed. SG&A was $1,034 in Q3 and $3,270 year to date. The effective tax rates were 22.4% and 24.9%, respectively.
All four operating segments reported lower sales year to date. Transportation Systems had the steepest segment-profit declines: 39% in Q3 and 79% year to date. Aerospace segment profit fell 12% and 17%; Automation and Control Solutions was flat in Q3 and down 5% year to date; Specialty Materials was down 2% and 29%.
Cash, debt, and liquidity
Nine-month operating cash flow was $2,615, versus $2,532 a year earlier; investing cash use was $850, and financing cash use was $1,328. Cash increased $539 to $2,604. Management attributed stronger operating cash flow mainly to favorable working capital and lower cash taxes, partly offset by lower earnings and higher repositioning payments. Capital expenditures were $352, compared with $552.
Total debt was $7,275, including $1,019 of current maturities, compared with $6,888 at year-end 2008. Long-term debt was $6,256; commercial paper was $696 and short-term borrowings $253. Honeywell issued $1,500 of senior notes in February 2009 and used the proceeds to repay commercial paper. Its receivables-program modification caused qualifying receivables to remain on the balance sheet, with $200 of related short-term borrowings outstanding at September 30.
Current assets were $13,886 and current liabilities $11,034. The company cited cash, operating cash flow, committed credit lines, commercial paper, debt and equity markets, and receivables sales as liquidity sources. It contributed $740 of planned $800 in Honeywell common stock to U.S. pension plans during the first nine months.
Changes, outlook, and notable items
- Revenue and earnings declined sharply year over year, while gross margin improved. The comparison is affected by the $623 pretax gain from the 2008 sale of Consumables Solutions; 2008 other income also included that gain.
- Repositioning and other charges were $114 in Q3 and $369 year to date, versus $574 and $921 in 2008. The 2009 year-to-date total included $107 of environmental charges and $111 of net asbestos-related litigation charges. The company expected repositioning actions to generate about $225 of incremental pretax savings in 2009 versus 2008, with full-year cash expenditures for severance and other exit costs expected to be about $225.
- In August, Honeywell acquired the RMG Group for approximately $416 net of cash acquired, funded with available cash; its results were not material to consolidated results through September 30.
- Management expected difficult Specialty Materials industry conditions to continue and said reduced business-aviation deliveries and utilization would continue to pressure Aerospace sales. It expected light-vehicle production rates to begin increasing in Q4 2009. These are business commentary, not company-wide earnings guidance; the filing provides no clear consolidated earnings forecast.
- Environmental liabilities were $857 at quarter-end. Honeywell stated that the timing and ultimate cost are uncertain and could materially affect results or operating cash flow in periods recognized or paid, though it did not expect a material adverse effect on financial position based on existing reserves and experience.
- Asbestos liabilities totaled $1,730, with $1,049 of recorded insurance recoveries. NARCO liability was about $1.13 billion and depended in part on final resolution of bankruptcy-plan appeals and insurance recoveries. Bendix liability was $600 million; future claims, settlement values, and insurance recoverability remain uncertain.
- Other risks include customer or supplier financing difficulties, litigation and investigations. Honeywell reported that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.
Most important facts for investors to verify
- Whether the sharp sales and segment-profit declines stabilize, especially in Transportation Systems, Aerospace commercial markets, and Specialty Materials.
- Whether margin gains and planned repositioning savings can be sustained despite lower demand, and whether expected restructuring cash costs remain on plan.
- Cash conversion, working-capital movements, debt maturities and refinancing needs, including the impact of the receivables program.
- Assumptions behind asbestos liabilities and insurance recoveries, pending NARCO proceedings, and changes in environmental remediation estimates.
- Whether management issues updated consolidated guidance; this filing does not provide a clear consolidated earnings forecast.