Business context and reporting period
Honeywell International Inc. filed this unaudited Form 10-Q for the quarter ended June 30, 2015. Comparisons are with the three and six months ended June 30, 2014. Dollar amounts are in millions except per-share data.
Financial results and key metrics
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net sales | $9,775 | $10,253 | $18,988 | $19,932 |
| Income before taxes | $1,662 | $1,523 | $3,226 | $2,934 |
| Net income attributable to Honeywell | $1,194 | $1,099 | $2,310 | $2,116 |
| Diluted EPS | $1.51 | $1.38 | $2.91 | $2.66 |
| Gross margin | 30.3% | 28.8% | 30.6% | 28.4% |
| Effective tax rate | 26.5% | 26.1% | 26.6% | 26.3% |
- Sales declined 5% in both Q2 and the first half. Management attributed the decline to foreign exchange (5 percentage points in each period) and acquisitions/divestitures, partly offset by volume growth.
- Q2 segment profit increased in all three segments: Aerospace $777 (up 2%), Automation and Control Solutions $567 (up 6%), and Performance Materials and Technologies $509 (up 7%). First-half segment profit was $3,524, up from $3,305.
- Operating cash flow was $1,829 for the first half, versus $2,029 in 2014. Investing activities used $2,545; financing activities used $70. Cash declined $1,005 to $5,954.
- At June 30, cash and short-term available-for-sale investments totaled $9,116; total debt was $9,694, producing reported net cash of negative $578, compared with negative $210 at year-end 2014. Current assets were $23,180 and current liabilities $15,574.
- Cash dividends were $0.5175 per share in Q2 and $1.0350 for the first half. First-half repurchases were $486; $3.6 billion remained under the previously announced $5 billion repurchase program.
Material changes versus the prior comparable period
- Despite lower sales, gross margin improved 1.5 percentage points in Q2 and 2.2 points in the first half. Management cited segment margin gains, productivity, favorable foreign exchange effects on costs, and increased pension income; lower repositioning charges also aided the first-half comparison.
- First-half net income attributable to Honeywell rose $194 and diluted EPS rose $0.25. Higher segment profit and pension income contributed; lower other income, including the absence of a prior-year investment-sale gain, and higher tax expense partly offset the gains.
- Sales fell in each segment. Aerospace was down 5% in Q2, including the effect of the Friction Materials divestiture and foreign exchange. ACS was down 1%, with organic growth offset by currency. PMT was down 9%, reflecting lower organic volumes and currency.
- Foreign exchange translation produced a $510 other comprehensive loss in the first half, versus income of $61 in the 2014 period.
Outlook, management commentary, risks and unusual items
- The filing does not provide a clear overall full-year sales or earnings guidance figure. Management expected repositioning actions to generate $100–$125 of incremental pretax savings in 2015 and estimated approximately $125 of 2015 cash spending on those actions.
- Management said customer project delays affecting UOP and Process Solutions were expected to continue. Unfavorable pricing in Advanced Materials, particularly Resins and Chemicals, was also expected to continue during 2015.
- Repositioning and other charges were $129 in Q2 and $260 in the first half, including asbestos litigation and environmental liabilities. First-half workforce reductions covered 3,980 positions; the quarter’s reductions covered 940 positions.
- Recorded environmental liabilities were $592. Gross asbestos-related liabilities were $1,550, with related insurance recoveries of $464. Estimates depend on claim experience, legal outcomes, and insurer recoverability. Honeywell reported NARCO annual trust contribution caps of $140 for 2015–2018, subject to stated terms.
- Retiree healthcare litigation could increase other postretirement benefits by approximately $180 for pre-2003 retirees and $120 for post-2003 retirees if rulings are adverse. A Department of Justice investigation concerning Joint Strike Fighter parts remained unresolved. Honeywell said outcomes could not be predicted.
- On July 10, 2015, after quarter-end, Honeywell entered into a renewed $4 billion five-year credit agreement. Management stated disclosure controls were effective and there had been no material change in market-risk disclosures.
Important facts for investors to verify
- Whether currency movements, divestitures, and the reported organic volume trends persist, particularly in PMT and Aerospace Transportation Systems.
- Whether anticipated productivity gains and repositioning savings offset continued project delays, pricing pressure, and other operating costs.
- Cash conversion and liquidity: operating cash flow fell year over year, while cash and short-term investments were below total debt at period-end.
- Changes in asbestos and environmental estimates, insurance recoveries, and the outcomes of retiree healthcare litigation and the Joint Strike Fighter investigation.
- Share repurchase and dividend levels, pension funding needs, and the terms and availability of the renewed credit agreement.