Honeywell International Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; financial statements are unaudited. The independent accountant performed a review, not an audit. Amounts are in millions of dollars except per-share data.
Business context and results
Honeywell reports four continuing segments: Aerospace, Automation and Control Solutions (ACS), Specialty Materials, and Transportation Systems. Consumer Products Group (CPG) was reclassified as a discontinued operation in connection with its planned sale.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $9,086 | $7,926 | $17,758 | $15,462 |
| Income from continuing operations | $796 | $558 | $1,486 | $1,036 |
| Net income attributable to Honeywell | $810 | $566 | $1,515 | $1,055 |
| Diluted EPS | $1.02 | $0.73 | $1.90 | $1.36 |
| Gross margin | 26.7% | 24.7% | 26.3% | 24.8% |
| Net cash from operating activities | Not separately presented for Q2 | $695 | $1,833 |
Quarterly and six-month sales increased 15%. Management attributed the year-to-date increase to volume (6%), price (3%), acquisitions/divestitures (4%), and foreign exchange (2%). Segment profit rose to $1,301 in Q2 from $1,079, and to $2,561 for six months from $2,085. All four segments reported higher year-to-date segment profit; Specialty Materials and Transportation Systems had the largest percentage gains.
Cash, debt, and liquidity
- Cash and cash equivalents were $3,548 at June 30, 2011, up from $2,650 at year-end 2010. Current assets were $17,386 and current liabilities $12,111.
- Long-term debt, including current maturities, totaled $7,304; short-term borrowings were $68 and commercial paper $350. The company issued $1,400 of long-term notes and repurchased $400 of notes due 2012 during the first quarter.
- Operating cash flow was $695, down $1,138 year over year. The principal drivers cited were a voluntary $1 billion U.S. pension contribution, higher working capital and approximately $145 of higher cash taxes, partly offset by higher net income.
- Investing cash use was $74, compared with $1,492 in the prior-year period; financing provided $190, compared with $544 used. Capital expenditures were $289, dividends paid $530, and share repurchases $504 for the six months.
- A new $2.8 billion five-year revolving credit agreement supports general corporate purposes and commercial paper; no borrowings were outstanding under it. The filing states it has no financial covenants and does not restrict dividends.
Material changes and management commentary
- Gross margin improved by 2.0 percentage points in Q2 and 1.5 points year to date. Management cited stronger segment margins, lower pension and postretirement expense, and lower repositioning and other charges. SG&A declined as a share of sales.
- ACS Q2 sales increased 20%, including acquisition and foreign-exchange contributions; Specialty Materials sales rose 12%; Transportation Systems sales rose 26%; Aerospace sales rose 6%. Aerospace aftermarket demand improved, while defense and space sales were broadly flat.
- Management expected approximately $200 of incremental pretax savings from repositioning actions in 2011 versus 2010. It expected roughly $150 of cash costs for remaining actions during 2011; $81 had been paid in the first half.
- Honeywell expected CPG’s sale for approximately $950 to close in Q3 2011, with an estimated pretax gain of approximately $300 (about $150 after tax). It expected to contribute approximately $400 of sale proceeds to U.S. pension plans.
- The company agreed to acquire EMS Technologies for approximately $491 net of cash acquired, subject to tender-offer conditions and regulatory approvals, with closing expected in Q3 2011. It also agreed to acquire a phenol production facility, expected to close in July 2011.
- Management said Fluorine Products sales growth and turbocharger growth were expected to moderate in the second half of 2011. No overall full-year revenue or EPS guidance is clearly provided in the supplied filing text.
Risks, contingencies, and unusual items
- Honeywell recorded $227 of repositioning and other charges in the first half, including $101 for probable environmental liabilities and $78 for asbestos-related litigation, net of insurance. The Q2 total was $94.
- Recorded environmental liabilities were $775 at June 30. The company said ultimate costs and timing remain uncertain; additional costs could materially affect results or cash flows in periods recognized or paid, though it did not expect a material adverse effect on financial position.
- Asbestos liabilities totaled $1,727, with $852 of related insurance recoveries recorded. A NARCO bankruptcy-related appeal and unresolved insurance coverage issues create uncertainty; adverse outcomes could affect results. Bendix liabilities and estimates depend on claims rates, resolution values, and insurance recoverability.
- Other legal matters include a pending Solvay patent case scheduled for trial in September 2011 and a proposed $23.8 settlement of remaining pension-plan class-action claims, subject to court approval. The company said outcomes could affect results or cash flows even where it did not expect material effects on financial position.
- Federal authorities issued notices of violation concerning Clean Air Act and permit requirements at the Hopewell, Virginia facility; Honeywell was negotiating a resolution and did not expect a material adverse effect.
- Q2 earnings included a $61 million postretirement curtailment gain related to retiree medical plan amendments. Six-month results also included a $41 million pretax gain from the sale of an automotive sensor business and a $29 million loss on early debt redemption.
Most important facts for investors to verify
- Whether CPG and EMS transactions closed on the expected terms and schedule, and the realized gain and pension contribution from the CPG sale.
- Whether operating cash flow recovers after the unusually large pension contribution and working-capital investment.
- Progress on margin improvement, restructuring savings, and the expected second-half moderation in Fluorine Products and turbocharger growth.
- Changes in environmental and asbestos reserves, insurance recoveries, and key legal proceedings, including NARCO and Solvay.
- Debt issuance, share repurchases, dividends, and liquidity following the planned acquisition and pension funding.