Honeywell International Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2012. All dollar amounts are in millions except per-share data. Interim financial statements are unaudited; the independent accountants performed a review, not an audit.
Financial performance
| Metric | Q3 2012 | Q3 2011 | First nine months 2012 | First nine months 2011 |
|---|---|---|---|---|
| Net sales | $9,342 | $9,298 | $28,084 | $27,056 |
| Income from continuing operations | $946 | $686 | $2,676 | $2,172 |
| Net income attributable to Honeywell | $950 | $862 | $2,675 | $2,377 |
| Diluted EPS from continuing operations | $1.20 | $0.87 | $3.38 | $2.73 |
| Gross margin | 27.1% | 24.4% | 26.6% | 25.6% |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $2,168 | $1,356 |
- Q3 sales were nearly flat year over year; nine-month sales increased 4%. For the nine-month period, reported sales growth reflected volume (+3%), price (+1%), foreign exchange (-2%), and acquisitions/divestitures (+2%).
- Q3 and nine-month continuing-operations income and diluted EPS improved. Reported net income comparisons also reflect $177 million and $209 million of discontinued-operations income in 2011, respectively, primarily related to the Consumer Products Group, sold in July 2011.
- Q3 gross margin rose 2.7 percentage points, primarily because repositioning charges were lower; nine-month gross margin rose 1.0 point. SG&A was 13.3% of sales in Q3 and 13.2% year to date, versus 14.0% in both prior-year comparisons.
Segments and material changes
- Aerospace: Q3 sales increased 4% to $3,043 and segment profit rose 9% to $582. Nine-month sales increased 7% to $9,020 and profit rose 16% to $1,678, reflecting commercial demand, productivity, and favorable OEM payment comparisons. Defense and Space sales declined.
- Automation and Control Solutions: Q3 sales were essentially flat at $3,958, while profit rose 5% to $571. Nine-month sales increased 2% to $11,708 and profit rose 6% to $1,587. Foreign exchange and softness in some industrial and regional markets offset growth elsewhere.
- Performance Materials and Technologies: Q3 sales increased 1% to $1,478 and profit rose 8% to $275. Nine-month sales increased 10% to $4,639 and profit rose 15% to $944, led by UOP and acquisitions. Advanced Materials faced weaker end-market conditions and pricing.
- Transportation Systems: Q3 sales declined 10% to $863 and profit declined 14% to $104. Nine-month sales fell 7% to $2,717 and profit fell 8% to $338, affected by foreign exchange, weaker European light-vehicle production, and lower aftermarket sales.
Cash, liquidity, and debt
- Cash and cash equivalents were $4,760 at September 30, up from $3,698 at year-end 2011. Current assets were $17,746 and current liabilities $12,713 (current ratio approximately 1.40).
- Nine-month operating cash flow was $2,168, compared with $1,356 in 2011. Capital expenditures were $586. Cash flow benefited from lower pension contributions and higher earnings, partly offset by lower accrued liabilities and higher cash taxes.
- Total debt, including short-term borrowings, commercial paper, current maturities, and long-term debt, was approximately $7,989, versus $7,555 at December 31, 2011. Long-term debt and related current maturities had a reported fair value of $8,223 versus $7,015 carrying value.
- Cash dividends paid were $880 year to date. The company reported $1.9 billion remaining under its share repurchase authorization; no shares were repurchased in the first nine months of 2012.
- A $3 billion five-year revolving credit agreement was established in April 2012; there were no borrowings under it. The agreement has no financial covenants and does not restrict dividends.
Outlook, commentary, risks, and unusual items
- The filing does not provide a clear full-year revenue or earnings guidance range. Management expected repositioning actions to generate approximately $150 million of incremental pretax savings in 2012 versus 2011; remaining 2012 cash costs for those actions were estimated at approximately $150 million.
- Honeywell planned up to $250 million of additional pension contributions during the remainder of 2012, following $779 million contributed in the first nine months. A fourth-quarter pension mark-to-market charge was possible; its amount could not be projected and depends on year-end discount rates and asset returns.
- Production at the Metropolis Works nuclear conversion facility was suspended pending seismic-related upgrades and NRC review. The company expected upgrades could be completed by Q3 2013 and said the suspension and upgrade costs were not expected to materially affect 2012 segment results.
- Environmental liabilities were $709; asbestos-related liabilities were $1,768 with $725 of recorded insurance recoveries. The company noted estimation and timing uncertainty. NARCO-related obligations depend in part on bankruptcy proceedings, trust implementation, future claims, and insurance recoveries.
- Other matters include an EPA/Justice Department investigation of the Hopewell, Virginia facility and alleged Clean Air Act violations, and litigation over retiree health-care contribution caps. An adverse ruling in the latter could increase postretirement benefits by an estimated $150 million. The filing also identifies cybersecurity incidents as a risk, though none had been material to date.
- A definitive agreement signed in September contemplated acquiring a 70% controlling interest in Thomas Russell Co. for approximately $525 million, with closing expected in October 2012. The remaining 30% could be acquired under specified future terms.
- Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter. The filing cautions that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether fourth-quarter demand, foreign-exchange movements, and segment trends—particularly Transportation Systems and defense-related aerospace—alter the earnings trajectory.
- The eventual pension mark-to-market adjustment, pension funding needs, and the cash impact of remaining repositioning actions.
- Progress, restart timing, and costs for the Metropolis facility upgrades, along with the related impact on Fluorine Products.
- Changes in asbestos and environmental estimates, insurance recoverability, and the status of NARCO trust and other legal proceedings.
- Completion and financing of the Thomas Russell acquisition, and the effect of the transaction on debt, cash, and Performance Materials and Technologies.