Honeywell International Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; comparisons are with the three months ended March 31, 2010 unless otherwise noted. Amounts are in millions of dollars except per-share data. The interim financial statements are unaudited and were reviewed by the independent accountant, not audited.
Financial performance and position
| Metric | Q1 2011 | Q1 2010 / prior balance-sheet date | Change |
|---|---|---|---|
| Net sales | $8,909 | $7,776 | +15% |
| Gross margin | 25.8% | 24.7% | +1.1 percentage points |
| Income before taxes | $975 | $702 | +39% |
| Net income attributable to Honeywell | $705 | $489 | +44% |
| Diluted EPS | $0.88 | $0.63 | +$0.25 |
| Effective tax rate | 27.4% | 29.3% | -1.9 percentage points |
| Operating cash flow | $(443) | $743 | Down $1,186 |
| Cash and cash equivalents | $3,076 | $2,650 at Dec. 31, 2010 | +$426 |
| Total debt, including current maturities | $7,279 | $6,278 at Dec. 31, 2010 | +$1,001 |
| Current assets / current liabilities | $16,031 / $11,770 | $15,011 / $11,717 at Dec. 31, 2010 | — |
- Revenue growth comprised 8% volume, 3% price, 1% foreign exchange and 3% net acquisitions/divestitures. Product sales were $7,050 and services sales were $1,859.
- Net income margin was approximately 7.9%, versus 6.3% in Q1 2010. SG&A was $1,254, or 14.1% of sales, compared with $1,111, or 14.3%.
- Operating cash use reflected a voluntary $1 billion contribution to U.S. pension plans and a $401 million unfavorable working-capital impact; higher net income partly offset these uses. Investing activities provided $16 and financing activities provided $786. Cash increased by $426, also reflecting $67 of favorable foreign-exchange effects.
- Cash dividends paid were $264; the quarterly dividend was $0.3325 per share, versus $0.3025 a year earlier.
Business segments
| Segment | Sales | Sales change | Segment profit | Profit change |
|---|---|---|---|---|
| Aerospace | $2,696 | +8% | $467 | +13% |
| Automation and Control Solutions | $3,656 | +17% | $459 | +19% |
| Specialty Materials | $1,355 | +19% | $284 | +67% |
| Transportation Systems | $1,202 | +19% | $144 | +50% |
Management attributed Aerospace growth to stronger commercial aircraft equipment and aftermarket demand, partly offset by lower defense and space sales. Automation and Control Solutions benefited from organic growth and acquisitions, including Sperian. Specialty Materials gained from higher prices and demand, while Transportation Systems benefited from turbocharger volumes and new platform launches.
Material changes and notable items
- Cost of products and services sold increased 13% to $6,610, slower than sales growth; gross margin improved primarily on stronger Aerospace and Specialty Materials margins. Management cited higher material, labor and indirect costs.
- Q1 other income included a $39 pretax gain on the sale of the automotive on-board sensor products business, partly offset by a $29 loss on early debt redemption.
- Honeywell issued $1,400 of senior notes in February: $800 of 4.25% notes due 2021 and $600 of 5.375% notes due 2041. It repurchased its $400 of 5.625% notes due 2012, incurring the $29 early-redemption loss.
- Long-term debt rose, while the company entered a new $2,800 five-year revolving credit agreement, expandable to $3,500. No borrowings were outstanding under the new or prior agreement at quarter-end; the facility has no financial covenants and does not restrict dividends.
- The Board authorized up to $3 billion of share repurchases in February. The company said it expected repurchases during 2011 primarily to offset dilution from employee equity plans; timing and amount depend on market conditions and capital needs.
Outlook, commentary, risks and contingencies
- The filing provides no overall revenue or earnings guidance. Management cautioned that Q1 results are not necessarily indicative of full-year results.
- Repositioning actions were expected to generate approximately $200 of incremental pretax savings in 2011 versus 2010. Management expected approximately $150 of additional 2011 cash expenditures for remaining severance and exit actions, funded from operating cash flow.
- Honeywell was evaluating further voluntary pension contributions in 2011 and expected to contribute a portion of proceeds from the planned sale of its Consumer Products Group business. Timing and amounts depend on factors including asset returns and discount rates. The filing also notes a possible fourth-quarter pension mark-to-market adjustment.
- Q1 repositioning and other charges were $133, including $51 for environmental liabilities, $38 for asbestos-related litigation net of insurance, and $44 of net repositioning charges. The actions included reductions affecting 586 positions.
- Recorded environmental liabilities were $776. Asbestos-related liabilities totaled $1,718, with $875 of related insurance recoveries recorded. Management identified uncertainty around remediation costs, asbestos claims and insurance recoverability; adverse developments could materially affect results or operating cash flows in the periods recognized or paid.
- Other notable legal matters included a $11.8 fine and environmental projects under a federal RCRA plea agreement, a $0.69 state fine, pending federal air-compliance matters at the Hopewell facility, and a proposed Virginia consent order with an approximately $0.364 penalty. The filing also describes a patent suit seeking up to approximately $120, as well as other litigation; management did not expect the cited matters to materially adversely affect consolidated financial position.
- Market exposures include foreign exchange, interest rates, commodities and counterparty credit risk. Management reported no material change in market-risk disclosures from the 2010 Form 10-K. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether sales growth and margin gains persist after separating organic growth, pricing, foreign exchange and acquisitions/divestitures.
- How operating cash flow develops after the exceptional $1 billion pension contribution and working-capital investment, and whether further pension contributions occur.
- The use of new debt proceeds, future debt maturities, and actual share repurchases relative to the $3 billion authorization.
- Progress and costs of the Consumer Products Group sale and the planned use of proceeds for pension funding.
- Changes in environmental and asbestos liabilities, timing of the NARCO reorganization, and collectability of related insurance recoveries.
- Resolution and financial effects of the Hopewell compliance matters and significant pending litigation.