Honeywell International Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparative figures are for the three months ended March 31, 2011 unless otherwise noted. Amounts are in millions of dollars, except per-share data. Interim statements are unaudited; the independent accountant performed a review, not an audit.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $9,307 | $8,672 | +7% |
| Income from continuing operations attributable to Honeywell | $823 | $687 | +$136 |
| Net income attributable to Honeywell | $823 | $705 | +$118 |
| Diluted EPS | $1.04 | $0.88 | +$0.16 |
| Gross margin | 26.1% | 25.9% | +0.2 percentage points |
| SG&A as a percentage of sales | 13.2% | 14.2% | -1.0 percentage point |
| Effective tax rate | 26.5% | 27.1% | -0.6 percentage point |
| Operating cash flow | $196 | $(443) | +$639 |
| Cash dividends per share | $0.3725 | $0.3325 | Higher |
Sales growth reflected volume (+5%), acquisitions/divestitures (+2%), and price (+1%), partly offset by foreign exchange (-1%). Management attributed higher continuing-operations earnings primarily to higher segment profit across all business segments. Lower pension cash contributions and improved working capital helped operating cash flow; cash flow remained modest relative to earnings.
Segments and material period changes
- Aerospace: Sales of $2,950, up 9%; segment profit of $534, up 14%. Commercial original equipment and aftermarket demand grew, while defense and space sales declined 1% amid anticipated program ramp-downs.
- Automation and Control Solutions: Sales of $3,788, up 4%; segment profit of $491, up 7%. Growth included Process Solutions and Building Solutions; Energy, Safety & Security was affected by softer European and residential HVAC demand.
- Performance Materials and Technologies: Sales of $1,615, up 19%; segment profit of $319, up 12%. UOP sales rose 40%, supported by refining and petrochemical demand; acquisitions also contributed to growth.
- Transportation Systems: Sales of $954, down 1%; segment profit of $120, up 2%. Foreign exchange and weaker European light-vehicle production and aftermarket sales weighed on revenue.
- Q1 2011 included $18 of after-tax income from discontinued operations related to the Consumer Products Group, sold in July 2011. Q1 2012 had no discontinued-operations income. The 2011 comparison also included a $39 pretax gain on the sale of an automotive sensor business and a $29 loss from early debt redemption in other income/expense.
Cash, debt and liquidity
- Cash and cash equivalents were $3,988 at March 31, 2012, versus $3,698 at December 31, 2011. Q1 net cash increased $290.
- Investing activities used $122, including $152 of capital expenditures. Financing activities provided $169, including a $349 increase in commercial paper and $291 of dividends paid.
- Long-term debt, including current maturities, was $6,884; current maturities were $615. Commercial paper was $948 and short-term borrowings were $69. The filing reports no borrowings under its revolving credit agreements.
- In April 2012, Honeywell entered a new five-year $3,000 credit agreement, expandable to $3,500, with a $700 letter-of-credit sublimit. It extends maturity to April 2017, improves pricing, has no financial covenants, and does not restrict dividends.
- Honeywell contributed $256 to pension plans in Q1 and planned up to an additional $750 in contributions during the remainder of 2012. A $1.9 billion share-repurchase authorization remained available at quarter-end.
Outlook, commentary, risks and unusual items
- The filing provides no company-wide revenue or earnings guidance. Management expected European Transportation Systems market conditions to continue through the first half of 2012.
- Repositioning actions were expected to generate approximately $150 of incremental pretax savings in 2012 versus 2011. Q1 cash spending on severance and exit costs was $47; the filing also estimated approximately $150 of cash expenditures for the remaining actions in 2012.
- Q1 repositioning and other charges totaled $122, including $61 for probable and reasonably estimable environmental liabilities and $36 for asbestos litigation charges, net of insurance. Environmental liabilities were $723 at quarter-end.
- Asbestos liabilities totaled $1,747 and related insurance receivables were $751. Recovery and ultimate claim amounts remain subject to uncertainty. The NARCO plan of reorganization had not yet become effective; the company recorded the minimum of its estimated $743–$961 range for future NARCO claims.
- An adverse outcome in the UAW retiree healthcare litigation could increase other postretirement benefits by approximately $150. The Quick Lube antitrust settlement was subject to court approval and was not expected to have a material impact.
- Federal authorities were investigating alleged Clean Air Act and permit violations at the Hopewell, Virginia facility; Honeywell was negotiating with authorities. The filing said it did not expect environmental matters to materially affect financial position, but noted possible material effects on results or operating cash flows in periods recognized or paid.
- Management cautioned that quarterly results should not necessarily be taken as indicative of full-year results. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Key facts for investors to verify
- Whether sales and segment-profit growth persisted, especially in Aerospace commercial markets and Performance Materials and Technologies.
- Whether operating cash flow improved sustainably, given working-capital movements and planned pension contributions of up to $750 for the rest of 2012.
- Actual timing and cash cost of repositioning actions, and delivery of the stated 2012 savings.
- Developments in environmental liabilities, asbestos claims and recoveries, the NARCO reorganization, and the Hopewell regulatory investigation.
- Execution and availability of the April 2012 credit facility, alongside debt maturities, commercial-paper usage, dividends and share repurchases.