Honeywell International Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; comparisons are with the corresponding 2011 periods unless noted. Financial statements are unaudited. The independent accountant performed a review, not an audit, and reported no material modifications needed for GAAP conformity.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Net sales | $9.435 billion | $9.086 billion | $18.742 billion | $17.758 billion |
| Income from continuing operations | $905 million | $796 million | $1.730 billion | $1.486 billion |
| Net income attributable to Honeywell | $902 million | $810 million | $1.725 billion | $1.515 billion |
| Diluted EPS from continuing operations | $1.14 | $1.00 | $2.19 | $1.86 |
| Gross margin | 26.6% | 26.7% | 26.4% | 26.3% |
| Operating cash flow | Not presented by quarter | $1.169 billion | $695 million |
Second-quarter sales rose 4% and first-half sales rose 6%. Honeywell attributed growth to volume, acquisitions net of divestitures, and, year to date, price; foreign exchange reduced sales growth. First-half diluted EPS from continuing operations increased 18% year over year. SG&A declined to 13.0% of sales in Q2 and 13.1% year to date, versus 13.7% and 14.0%, respectively.
Segments and material changes
- Aerospace: Q2 sales increased 8% to $3.027 billion and segment profit increased 25% to $562 million. First-half sales rose 9% and profit rose 19%. Results benefited partly from lower payments to business and general aviation manufacturers; defense and space sales declined.
- Automation and Control Solutions: Q2 sales rose 2% to $3.962 billion and profit rose 6% to $525 million. First-half sales rose 3% and profit 6%; foreign exchange was a headwind.
- Performance Materials and Technologies: Q2 sales rose 10% to $1.546 billion and profit 25% to $350 million. First-half sales rose 14% and profit 18%, supported by UOP activity and acquisitions.
- Transportation Systems: Q2 sales fell 9% to $900 million and profit fell 12% to $114 million. First-half sales declined 5% and profit 5%, with foreign exchange and European light-vehicle weakness among the pressures.
Q2 gross margin edged down 0.1 percentage point; the first-half margin improved 0.1 point. Higher repositioning and postretirement costs weighed on margins, partly offset by stronger segment margins in Aerospace and Performance Materials and Technologies.
Cash flow, balance sheet and debt
- First-half operating cash flow was $1.169 billion, up from $695 million. Management cited lower pension contributions, improved receivables and inventory performance, and higher net income, partly offset by lower accrued expenses and higher cash taxes. Capital expenditures were $352 million, implying approximate operating cash flow less capital expenditures of $817 million.
- Cash and cash equivalents were $4.221 billion at June 30, up from $3.698 billion at year-end. Current assets were $16.644 billion and current liabilities $12.812 billion.
- Long-term debt, including current maturities, totaled $6.962 billion; commercial paper was $948 million and short-term borrowings $65 million. The company reported no borrowings under its $3.0 billion revolving credit agreement. The agreement has no financial covenants and matures April 2, 2017.
- First-half investing cash use was $543 million, including $352 million of capital spending; financing cash use was $48 million. Dividends paid were $582 million. No share repurchases were made in the first half; $1.9 billion remained available under the repurchase authorization at June 30.
- Honeywell contributed $523 million to pension plans in the first half and planned up to an additional $500 million for the rest of 2012. The filing reports quarterly dividend per share of $0.3725, compared with $0.3325 a year earlier.
Outlook, commentary and risks
- The filing provides no consolidated full-year revenue or EPS guidance. Management expected Aerospace commercial aftermarket growth to moderate in the second half and UOP sales growth to moderate, in part due to project timing and comparison with unusually high prior-year catalyst volumes.
- Repositioning actions were expected to generate approximately $150 million of incremental pretax savings in 2012 versus 2011. Remaining 2012 cash expenditures for severance and exit costs were expected to total approximately $150 million.
- Production at the Metropolis Works fluorine-products facility was not to restart until Honeywell and the NRC agreed on required upgrades following an inspection. Upgrades could take approximately 12–15 months; the company did not expect the suspension and upgrades to materially affect 2012 segment results.
- Q2 repositioning and other charges were $134 million, including $67 million of environmental charges and $43 million primarily for an update to Bendix asbestos estimates, net of probable insurance recoveries. First-half charges were $256 million.
- Recorded environmental liabilities were $715 million. Asbestos-related liabilities totaled $1.761 billion, with $743 million of recorded insurance recoveries. Estimates and recoveries remain subject to litigation, trust proceedings, insurer solvency and other uncertainties; adverse developments could affect results or cash flows.
- A potential adverse ruling over retiree healthcare caps could increase other postretirement benefits for pre-2003 retirees by approximately $150 million. Federal authorities were negotiating with Honeywell over alleged Clean Air Act violations at its Hopewell, Virginia facility; the company did not expect the matter to have a material adverse effect.
- Management identified foreign exchange, commodity prices, economic and end-market conditions, litigation, environmental obligations, asbestos claims and pension funding as risks. Actual results may differ from forward-looking statements. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether second-half trends in Aerospace aftermarket, UOP, European automotive demand and other end markets match management’s commentary.
- Progress and cash requirements for pension contributions, repositioning savings, and the expected remaining 2012 restructuring expenditures.
- Developments and updated estimates concerning Metropolis Works restart timing and upgrade costs.
- Changes in environmental and asbestos liabilities, insurance recoverability, NARCO trust proceedings and related litigation outcomes.
- Debt maturities, commercial-paper usage, liquidity needs and any subsequent share repurchases or dividends.