Honeywell International Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Amounts are in millions of dollars except per-share data. Comparisons are with the corresponding 2014 periods.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $9,611 | $10,108 | $28,599 | $30,040 |
| Income before taxes | $1,707 | $1,580 | $4,933 | $4,514 |
| Net income attributable to Honeywell | $1,264 | $1,167 | $3,574 | $3,283 |
| Diluted EPS | $1.60 | $1.47 | $4.51 | $4.13 |
| Gross margin | 30.8% | 29.5% | 30.7% | 28.8% |
| Operating cash flow | Nine-month figure: $3,495 | Prior-year nine-month figure: $3,262 |
Q3 sales declined 5%, while Honeywell-attributable income rose about 8% and diluted EPS rose about 9%. For the nine months, sales declined 5%, while attributable income and diluted EPS each increased about 9%. Higher segment profit, productivity, pension income and lower costs supported earnings; foreign exchange was a substantial sales headwind. The effective tax rate was 25.2% in Q3 and 26.1% year to date, versus 24.6% and 25.7%, respectively.
- Segments: Q3 sales were $3,820 for Aerospace (down 2%), $3,571 for Automation and Control Solutions (down 3%), and $2,220 for Performance Materials and Technologies (down 13%). Segment profit increased in all three: Aerospace $833 (up 5%), Automation and Control Solutions $614 (up 5%), and Performance Materials and Technologies $461 (up 4%).
- Cash, liquidity and debt: Cash and equivalents were $6,563 at quarter-end; short-term available-for-sale investments were $3,006. Total debt was $10,563, including $3,696 of commercial paper and $1,268 of current long-term debt maturities. The company reported net cash of negative $994 under its defined measure, versus negative $210 at year-end 2014. A $4 billion five-year credit agreement and a separate $3 billion 364-day facility provide additional liquidity.
- Cash uses and capital returns: Nine-month investing cash outflow was $2,584, including significant investment purchases; financing cash outflow was $852. Honeywell repurchased $1,721 of shares and paid $1,261 in dividends during the first nine months. Nine-month dividends per share were $1.5525.
Material changes and management commentary
- Foreign-currency translation reduced sales by about 5% in both Q3 and the year-to-date period, principally due to the weaker euro and Canadian dollar. The Friction Materials divestiture also affected year-to-date comparisons.
- Performance Materials and Technologies faced lower organic sales, including a slowdown in UOP customer projects and weakness in Process Solutions project and field products; management said these conditions were expected to continue. Lower raw-material pass-through pricing and unplanned plant outages also weighed on Advanced Materials sales.
- Aerospace benefited from growth in commercial original equipment and aftermarket demand, offset by weaker Transportation Systems sales, including foreign exchange, the Friction Materials divestiture and lower commercial vehicle production.
- Management expected repositioning actions to generate incremental pretax savings of $100–$125 in 2015 versus 2014 and forecast approximately $125 of 2015 cash spending for those actions. It also planned approximately $140 of 2015 contributions to non-U.S. pension plans; $128 had been contributed by September 30. No broader company revenue or earnings guidance is stated in the provided filing text.
- Honeywell agreed to acquire Elster for approximately $5.1 billion, subject to regulatory review and expected to close in Q1 2016. The transaction was expected to be funded with available cash and commercial paper.
Risks, contingencies and unusual items
- Net repositioning and other charges were $133 in Q3 and $393 year to date. These included asbestos litigation and environmental charges; Q3 repositioning actions included workforce reductions affecting 902 positions.
- Recorded environmental liabilities were $575 at September 30. Asbestos-related liabilities were $1,550, with related insurance recoveries of $445. Estimates depend on claim experience, insurance recoverability and other uncertain assumptions; Honeywell noted that future claims or changing claim factors could affect costs and cash flows.
- Pending retiree healthcare litigation could increase postretirement benefit obligations by approximately $180 for pre-2003 retirees and $120 for post-2003 retirees if Honeywell loses. The company expressed confidence in its position.
- The Department of Justice investigation concerning parts used in the F-35 continued; Honeywell said it was cooperating and that the outcome could not be predicted. A Virginia wastewater-permit matter was settled for a $300,000 penalty and corrective measures.
- Foreign-exchange translation contributed to a nine-month other comprehensive loss of $914, and total comprehensive income attributable to Honeywell was $2,664, down from $2,747 in the prior-year period. Pension mark-to-market adjustments in Q4 could vary materially with discount rates and asset returns; the company said the amount could not yet be projected.
Important facts for investors to verify
- Whether the Q3 and year-to-date margin improvements and segment-profit growth can persist despite sales declines and ongoing foreign-exchange pressure.
- Elster’s regulatory approval, closing timetable, final funding mix and effect on debt and liquidity.
- The assumptions and insurance recoverability underlying environmental and asbestos reserves, and developments in the retiree healthcare litigation and F-35 investigation.
- The impact of pension market conditions and the Q4 mark-to-market adjustment, alongside planned pension contributions and repositioning costs.
- Future commercial-paper balances, share repurchases and dividend payments relative to operating cash flow and acquisition funding needs.