Honeywell International Inc. — Q2 2014 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and six months ended June 30, 2014, compared with the corresponding 2013 periods. Honeywell operates across Aerospace, Automation and Control Solutions, Performance Materials and Technologies, and Transportation Systems. The interim statements received an independent accountant’s review, not an audit.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $10,253 million | $9,693 million | $19,932 million | $19,021 million |
| Income before taxes | $1,523 million | $1,329 million | $2,934 million | $2,589 million |
| Net income attributable to Honeywell | $1,099 million | $1,021 million | $2,116 million | $1,987 million |
| Diluted EPS | $1.38 | $1.28 | $2.66 | $2.49 |
| Gross margin | 28.8% | 27.5% | 28.4% | 27.4% |
| Effective tax rate | 26.1% | 23.1% | 26.3% | 23.1% |
Q2 sales rose 6% year over year (3% volume, 1% foreign exchange and 2% acquisitions/divestitures); six-month sales rose 5%. Q2 diluted EPS increased 8%, and six-month diluted EPS increased 7%. Gross margin improvement reflected higher segment margins and pension income, and in Q2 lower repositioning and other charges. SG&A was 13.4% of sales in Q2 versus 13.2%; for the first half it was 13.6% versus 13.2%.
Segment results, Q2: Aerospace sales were $2,991 million, flat, and segment profit was $592 million, up 2%. Automation and Control Solutions sales were $3,607 million, up 10%, and profit was $533 million, up 14%. Performance Materials and Technologies sales were $2,636 million, up 6%, and profit was $475 million, up 8%. Transportation Systems sales were $1,019 million, up 8%, and profit was $167 million, up 33%. Segment profit is a company-defined measure before specified corporate costs and other items.
Cash flow, debt and liquidity
- Six-month operating cash flow was $2,029 million, up from $1,597 million. The company attributed the improvement chiefly to higher pretax income, lower net repositioning-related cash payments and reduced pension contributions; working-capital use and higher cash taxes partly offset the increase.
- Investing cash outflow was $1,205 million, including a net increase in investments of $781 million and capital expenditures of $421 million. Financing cash outflow was $694 million, including $551 million of share repurchases, $736 million of dividends paid and $606 million of long-term debt repayments.
- Cash and cash equivalents were $6,582 million at June 30, up from $6,422 million at December 31, 2013. Current assets were $22,453 million and current liabilities $14,324 million.
- Long-term debt, including current maturities, was $6,899 million; commercial paper was $2,249 million and short-term borrowings $96 million. Honeywell repaid $600 million of notes in February, funded with commercial paper. Debt maturities included $882 million in 2015.
- Honeywell reported $4.4 billion remaining under its $5 billion share-repurchase authorization at June 30. It expects repurchases during 2014 primarily to offset employee equity-plan dilution; timing and amount may vary.
Management commentary, outlook and material matters
- Management expected approximately $150 million of incremental pretax savings in 2014 from repositioning actions versus 2013. It expected about $175 million of additional 2014 cash expenditures for severance and other exit costs; $77 million had been paid in the first half.
- The filing gives no companywide full-year revenue or EPS guidance. Management expected a modest increase in Aerospace Defense and Space sales in Q3; it expected UOP growth to moderate in the second half because of project timing and comparison effects. Advanced Materials pricing pressure was expected to moderate over the remainder of the year.
- Honeywell completed the sale of Friction Materials to Federal-Mogul on July 11, 2014, for approximately $155 million. It recorded a $33 million total pre-tax and after-tax loss, of which $5 million was recognized in 2014. Transportation Systems was to be realigned into Aerospace beginning with Q3 reporting. Honeywell Process Solutions had already moved from Automation and Control Solutions to Performance Materials and Technologies for Q2 reporting.
- Repositioning and other charges were $117 million in Q2 and $331 million in the first half. First-half charges included $134 million for probable, reasonably estimable environmental liabilities and $99 million primarily for Bendix asbestos estimates.
- At June 30, recorded environmental liabilities were $659 million. Asbestos liabilities were $1,607 million, with $509 million in related insurance recoveries. Honeywell noted uncertainty around ultimate claims, costs, timing and insurance recoveries; future costs could materially affect results or operating cash flows in periods recognized or paid.
- Two retiree-healthcare cases could increase postretirement benefit obligations by approximately $180 million for pre-2003 retirees and $105 million for post-2003 retirees if Honeywell loses. A Department of Justice investigation concerns parts used in the F-35 program; the outcome is uncertain. The company stated it did not expect these matters to materially adversely affect its consolidated financial position.
- Honeywell planned approximately $150 million in non-U.S. pension contributions for 2014; $140 million, including cash and marketable securities, had been contributed in the first half. No U.S. pension contribution was required for 2014.
Most important facts for investors to verify
- Whether sales growth and margin gains persist, especially given higher SG&A and the tax-rate increase.
- Working-capital trends, including receivables and inventory, and the sustainability of operating cash flow.
- Commercial-paper reliance, upcoming debt maturities and the company’s liquidity under changing market conditions.
- Assumptions behind asbestos and environmental reserves and recoveries, including the timing and collectability of insurance.
- Execution and cash costs of repositioning, the Friction Materials divestiture, and the coming segment-reporting realignment.