Honeywell International Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014; balance-sheet figures are as of September 30, 2014. Amounts are in millions of dollars except per-share data. Interim financial statements are unaudited; the independent accountant performed a review, not an audit.
Business context and results
Honeywell reported three segments: Aerospace, Automation and Control Solutions (ACS), and Performance Materials and Technologies (PMT). Segment reporting was realigned during 2014: Honeywell Process Solutions moved to PMT, and Transportation Systems moved to Aerospace following the Friction Materials divestiture. Prior-period segment figures were reclassified; the changes did not affect consolidated results.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $10,108 | $9,647 | $30,040 | $28,668 |
| Income before taxes | $1,580 | $1,384 | $4,514 | $3,973 |
| Net income attributable to Honeywell | $1,167 | $990 | $3,283 | $2,977 |
| Diluted EPS | $1.47 | $1.24 | $4.13 | $3.73 |
| Gross margin | 29.5% | 28.0% | 28.8% | 27.6% |
| Effective tax rate | 24.6% | 27.2% | 25.7% | 24.5% |
Sales rose 5% in both the quarter and year-to-date periods. Management attributed quarterly growth to volume (+4%) and price (+1%); year-to-date growth reflected volume (+3%) and acquisitions/divestitures (+2%). Quarterly and year-to-date segment profit increased in all three segments: Aerospace $790 (+8%) and $2,252 (+7%); ACS $583 (+11%) and $1,587 (+12%); PMT $444 (+8%) and $1,392 (+5%), respectively.
Cash flow, liquidity and capital
- Nine-month operating cash flow was $3,262, up from $2,667. Management cited higher pretax income, lower repositioning-related cash payments and reduced pension contributions; working capital was a $146 unfavorable year-over-year factor.
- Investing activities used $1,639, including $680 of capital expenditures and net investment purchases. Financing activities used $1,503, including $689 of share repurchases and $1,101 of dividends. Cash increased $6 to $6,428.
- At September 30, current assets were $22,358 and current liabilities $13,947. Long-term debt was $6,760; current maturities were $189, commercial paper $1,849 and short-term borrowings $91. The company repaid $600 of notes in February, funded with commercial paper.
- Honeywell repurchased $689 of shares and paid dividends of $1.35 per share year to date. $4.3 billion remained under its previously announced $5 billion repurchase authorization.
Changes, outlook and notable items
- Quarterly income growth reflected stronger segment profit, increased pension income and higher other income, partly offset by increased tax expense. Year-to-date other income included a $105 realized gain from selling B/E Aerospace shares; this was a nonrecurring contributor to results.
- SG&A rose to 13.3% of sales in Q3 from 12.9% and to 13.5% year to date from 13.1%, primarily due to labor costs, acquisitions, merit increases and growth investment.
- Management expected 2014 repositioning actions to generate approximately $125 of incremental pretax savings versus 2013. The filing also describes approximately $150 of expected 2014 cash expenditures for remaining severance and exit actions.
- Segment commentary was mixed for the fourth quarter: UOP sales were expected to decline due to project timing and a tougher comparison; unfavorable Advanced Materials pricing was expected to continue. Process Solutions orders and backlog increased during the quarter and year to date. The filing provides no clear consolidated earnings or revenue guidance.
- Environmental liabilities were $628; asbestos liabilities were $1,593, partly offset by $501 of recorded insurance recoveries. Management stated that ultimate environmental costs and timing remain uncertain. NARCO asbestos estimates cover claims through 2018; Honeywell cited a $743–$961 estimated liability range and recorded its minimum.
- Other disclosed contingencies include UAW retiree-health litigation, where adverse rulings could increase postretirement benefits by approximately $180 for pre-2003 retirees and $105 for post-2003 retirees, and a DOJ investigation concerning parts used in the F-35 program. Outcomes cannot be predicted.
- Foreign currency translation reduced nine-month other comprehensive income by $484. Management said a pension mark-to-market adjustment, if required under its accounting method, would be recorded in Q4. Management cautioned that interim results are not necessarily indicative of full-year results.
Key investor verification points
- Assess how much of earnings growth came from recurring segment operations versus the $105 investment gain, pension income and tax-audit resolution benefits.
- Track cash conversion and working capital, capital spending, investment purchases, commercial paper balances and debt maturities.
- Review the assumptions, insurance recoverability and potential cash timing underlying asbestos and environmental reserves.
- Monitor fourth-quarter segment trends, especially UOP project timing and Advanced Materials pricing, alongside repositioning savings and cash costs.
- Confirm the effect of segment realignments when comparing reported segment performance with prior periods.