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| HON > SEC Filings for HON > Form 10-Q on 18-Jul-2008 | All Recent SEC Filings |
18-Jul-2008
Quarterly Report
The following MD&A is intended to help the reader understand the results of operations and financial condition of Honeywell International Inc. ("Honeywell") for the second quarter and six months ended June 30, 2008. The financial information as of June 30, 2008 should be read in conjunction with the financial statements for the year ended December 31, 2007 contained in our Form 10-K filed on February 15, 2008.
A. RESULTS OF OPERATIONS - THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2008 COMPARED WITH THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2007
Net Sales
Three Months Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
Net sales $9,674 $8,538 $18,569 $16,579
% change compared with prior period 13% 12%
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The increase in net sales in the second quarter and six months of 2008 compared with the second quarter and six months of 2007 is attributable to the following:
Three Months Six Months
Price 3 % 2 %
Volume 3 3
Foreign Exchange 3 4
Acquisitions/Divestitures 4 3
13 % 12 %
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A discussion of net sales by segment can be found in the Review of Business Segments section of this MD&A.
Cost of Products and Services Sold
Three Months Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
Cost of products and services sold $7,323 $6,491 $13,995 $12,641
Gross Margin percentage 24.3% 24.0% 24.6% 23.8%
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Gross margin percentage increased by 0.3 percentage points in the second quarter of 2008 compared with the second quarter of 2007 primarily due to higher margins in our Aerospace segment and lower pension expense, partially offset by lower margins in our Transportation Systems and Specialty Materials segments and higher repositioning charges.
Gross margin percentage increased by 0.8 percentage points in the first six months of 2008 compared with the first six months of 2007 primarily due to higher margins in our Aerospace, Automation and Control Solutions and Specialty Materials segments and lower pension expense, partially offset by lower margins in our Transportation Systems segment and higher repositioning charges.
For further discussion of segment results see "Review of Business Segments".
Selling, General and Administrative Expenses
Three Months Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
Selling, general and administrative expenses $1,290 $1,127 $2,545 $2,216
Percent of sales 13.3% 13.2% 13.7% 13.4%
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Selling, general and administrative expenses as a percentage of sales increased by 0.1 percentage points in the second quarter of 2008 compared with the second quarter of 2007 and by 0.3 percentage points in the first six months of 2008 compared with the first six months of 2007. These increases are primarily due to higher general and administrative costs in our Automation and Control Solutions segment (primarily due to acquisitions) and higher repositioning charges.
Other (Income) Expense
Three Months Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
Equity (income)/loss of affiliated companies $ (6 ) $ (4 ) $ (22 ) $ (2 )
Gain on sale of non-strategic businesses and assets (12 ) (15 ) (12 ) (15 )
Interest income (29 ) (20 ) (54 ) (39 )
Foreign exchange 3 7 14 12
Other (net) 6 12 14 13
$ (38 ) $ (20 ) $ (60 ) $ (31 )
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Other income increased by $18 million in the second quarter of 2008 compared with the second quarter of 2007 primarily due to increased interest income (primarily due to higher cash balances) and a loss on the sale of an insurance related receivable in the second quarter of 2007.
Other income increased by $29 million in the first six months of 2008 compared with the first six months of 2007 primarily due to higher income from equity method investments (mainly in our Specialty Materials segment) and increased interest income (primarily due to higher cash balances).
Interest and Other Financial Charges
Three Months Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
Interest and other financial charges $115 $110 $230 $207
% change compared with prior period 5 % 11 %
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Interest and other financial charges increased in both the second quarter and first six months 2008 compared with the same periods in the prior year, primarily due to higher debt balances, partially offset by lower borrowing costs.
Tax Expense
Three Months Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
Tax expense $261 $219 $493 $409
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The effective tax rate in the second quarter of 2008 increased by 0.1 percent compared to the second quarter of 2007 primarily due to the absence of U.S. research and development credits in 2008 partially offset by an increased benefit from the settlement of tax audits.
The effective tax rate in the first six months of 2008 was the same as the first six months of 2007 primarily due to the absence of U.S. research and development credits in 2008 offset by an increased benefit from the settlement of tax audits.
The effective tax rate in both periods was lower than the statutory rate of 35 percent due in part to the increase in foreign earnings, the benefits from the domestic manufacturing deduction and tax planning strategies.
Net Income
Three Months Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
Net income $723 $611 $1,366 $1,137
Earnings per share of common stock -
assuming dilution $0.96 $0.78 $1.81 $1.44
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Earnings per share of common stock - assuming dilution increased by $0.18 per share in the second quarter of 2008 compared with the second quarter of 2007 and by $0.37 per share in the first six months of 2008 compared with the first six months of 2007. The increase in both periods is primarily due to increased segment profit, and a reduction in the number of shares outstanding due to the Company's stock repurchase program.
Review of Business Segments
Three Months Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
Net Sales
Aerospace $ 3,281 $ 3,027 $ 6,311 $ 5,867
Automation and Control Solutions 3,616 3,039 6,796 5,840
Specialty Materials 1,450 1,216 2,859 2,415
Transportation Systems 1,327 1,256 2,603 2,457
Corporate - - - -
$ 9,674 $ 8,538 $ 18,569 $ 16,579
Segment Profit
Aerospace $ 602 $ 523 $ 1,165 $ 1,023
Automation and Control Solutions 390 333 718 607
Specialty Materials 186 175 451 367
Transportation Systems 149 157 298 313
Corporate (49 ) (54 ) (105 ) (97 )
Total Segment Profit 1,278 1,134 2,527 2,213
Other income (expense) (A) 32 20 38 31
Interest and other financial charges (115 ) (110 ) (230 ) (207 )
Stock compensation expense (B), (C) (35 ) (17 ) (76 ) (41 )
Pension and other postretirement expense (B) (26 ) (72 ) (53 ) (146 )
Repositioning and other charges (B) (150 ) (125 ) (347 ) (304 )
Income before taxes $ 984 $ 830 $ 1,859 $ 1,546
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(A) Equity income/(loss) of affiliated companies is included in Segment Profit, on a prospective basis, commencing January 1, 2008. Other income/(expense), as presented above, includes equity income/(loss) of affiliated companies of $4 and $2 million for the three and six months ended June 30, 2007, respectively. See Note 12 of Notes to Financial Statements.
(B) Amounts included in cost of products and services sold and selling, general and administrative expenses.
(C) Costs associated with restricted stock units ("RSU") are excluded from Segment Profit, on a prospective basis, commencing January 1, 2008. Stock compensation expense, including RSU expense, totaled $32 and $71 million for the three and six months ended June 30, 2007, respectively. Stock option expense is for all periods presented. See Note 12 of Notes to Financial Statements.
Aerospace
Three Months Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
Net sales $ 3,281 $ 3,027 $ 6,311 $ 5,867
% change compared with prior period 8 % 8 %
Segment profit $ 602 $ 523 $ 1,165 $ 1,023
% change compared with prior period 15 % 14 %
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Aerospace sales by major customer end-markets for the second quarter and six months ended June 31, 2008 and 2007 were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
% of % of
Aerospace % Changes Aerospace % Changes
Sales in Sales Sales in Sales
2008 2008
Versus Versus
Customer End-Markets 2008 2007 2007 2008 2007 2007
Commercial:
Air transport and regional
original equipment 16 % 16 % 8 % 17 % 16 % 10 %
Air transport and regional
aftermarket 22 22 6 22 23 6
Business and general aviation
original equipment 11 11 3 11 11 3
Business and general aviation
aftermarket 10 10 8 10 10 10
Defense and Space 41 41 11 40 40 8
Total 100 % 100 % 8 % 100 % 100 % 8 %
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Aerospace sales increased by 8 percent in both the second quarter of 2008 compared with the second quarter of 2007 and the first six months of 2008 compared with the first six months of 2007. Details regarding the increase in sales by customer end-markets are as follows:
º Air transport and regional original equipment (OE) sales increased by 8 percent in the second quarter and 10 percent in the first six months driven by increased deliveries to our air transport customers due to higher aircraft production rates at major OE manufacturers, which is expected to continue.
º Air transport and regional aftermarket sales increased by 6 percent in both the second quarter and the first six months primarily as a result of increased volume and price of spare parts and increased maintenance activity relating to an approximate 6 percent increase in global flying hours in both the second quarter and the first six months. We expect the global flying hours growth rate to be slower in the second half of 2008.
º Business and general aviation OE sales increased by 3 percent in both the second quarter and the first six months due to continued strong demand in the business jet end-market as evidenced by an increase in new business jet deliveries, improved pricing, new platform launches and continued additions to the fractional ownership and charter fleets, partially offset by the impact of delayed supplier deliveries.
º Business and general aviation aftermarket sales increased by 8 percent in the second quarter and 10 percent in the first six months primarily due
to increased revenue under maintenance service agreements, higher enginefleet hours and higher sales of spare parts.
º Defense and space sales increased by 11 percent in the second quarter and 8 percent in the first six months, primarily due to the positive impact of the acquisition of Dimensions International, higher sales of certain surface systems and an increase in government funded engineering relating to the Orion (CEV) program and classified space programs.
Aerospace segment profit increased by 15 percent in the second quarter of 2008 compared with the second quarter of 2007 and by 14 percent in the first six months of 2008 compared to the first six months of 2007 due primarily to increased prices, productivity and volume growth partially offset by inflation and higher spending to support new platform growth.
Automation and Control Solutions
Three Months Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
Net sales $ 3,616 $ 3,039 $ 6,796 $ 5,840
% change compared with prior period 19 % 16 %
Segment profit $ 390 $ 333 $ 718 $ 607
% change compared with prior period 17 % 18 %
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Automation and Control Solutions ("ACS") sales increased by 19 percent in the second quarter of 2008 compared with the second quarter of 2007, including net growth from acquisitions and divestitures of 10 percent and 5 percent favorable impact of foreign exchange. This increase reflects sales growth in all regions.
º Sales in our Products businesses grew by 22 percent, including (i) the
positive impact of acquisitions, most significantly Norcross Safety
Products, Hand Held Products Inc. and Maxon Corporation, (ii) the favorable
impact of foreign exchange, (iii) increased sales of our environmental and
combustion control products, most significantly in emerging regions and
(iv) continued strong demand for our life safety products, particularly
fire systems and sensors.
º Sales in our Solutions businesses increased by 15 percent driven by (i) the favorable impact of foreign exchange, (ii) volume growth, driven by continued orders growth and strong conversion to sales from our orders backlog and (iii) the positive impact of acquisitions, most significantly Enraf Holding B.V..
Automation and Control Solutions ("ACS") sales increased by 16 percent in the first six months of 2008 compared with the first six months of 2007, including net growth from acquisitions and divestitures of 8 percent and 5 percent favorable impact of foreign exchange. This increase reflects sales growth in all regions.
º Sales in our Products businesses grew by 18 percent, including (i) the
positive impact of acquisitions, most significantly Norcross Safety
Products, Hand Held Products Inc. and Maxon Corporation, (ii) the favorable
impact of foreign exchange, (iii) increased sales of our environmental and
combustion control products, most significantly in emerging regions and
(iv) continued strong demand for our life safety products, particularly
fire systems and sensors.
º Sales in our Solutions businesses increased by 14 percent driven by (i) the favorable impact of foreign exchange, (ii) volume growth, driven by continued orders growth and strong conversion to sales from our orders backlog and (iii) the positive impact of acquisitions, most significantly Enraf Holding B.V..
ACS segment profit increased by 17 percent in the second quarter of 2008 compared with the second quarter of 2007 and increased by 18 percent in the first six months of 2008 compared with the first six months of 2007. These increases are due principally to productivity savings, improved pricing, acquisitions and the favorable impact of foreign exchange, partially offset by inflation.
Specialty Materials
Three Months Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
Net sales $ 1,450 $ 1,216 $ 2,859 $ 2,415
% change compared with prior period 19 % 18 %
Segment profit $ 186 $ 175 $ 451 $ 367
% change compared with prior period 6 % 23 %
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Specialty Materials sales increased by 19 percent in the second quarter of 2008 compared with the second quarter of 2007 and by 18 percent in the first six months of 2008 compared with the first six months of 2007 with growth in each of our businesses. These increases were primarily driven by (i) a 27 percent second quarter and a 25 percent first six months increase in UOP sales as a result of higher volume in its products business principally due to continued strength in the refining and petrochemical industries, (ii) increased pricing reflecting the pass-through of higher raw material costs (including benefits from formula based pricing arrangements), most significantly in Resins and Chemicals and Fluorine Products and (iii) a 30 percent second quarter and 27 percent first six months increase in Resins and Chemicals sales due to increased pricing (as noted above) and higher volume due to improved plant performance.
Specialty Materials segment profit increased by 6 percent in the second quarter of 2008 compared with the second quarter of 2007 and by 23 percent in the first six months of 2008 compared with the first six months of 2007. These increases are due principally to increased UOP and Resins and Chemicals sales as a result of the factors discussed above. Overall, the effects of increased pricing reflecting the pass-through of higher raw material costs (including benefits from formula based pricing arrangements) and productivity gains more than offset raw material (most significantly sulfur) and other inflation and higher selling expenses.
Transportation Systems
Three Months Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
Net sales $ 1,327 $ 1,256 $ 2,603 $ 2,457
% change compared with prior period 6 % 6 %
Segment profit $ 149 $ 157 $ 298 $ 313
% change compared with prior period (5 %) (5 %)
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Transportation Systems sales increased by 6 percent in the second quarter of 2008 compared with the second quarter of 2007, due to the favorable impact of foreign exchange.
º Turbo Technologies sales increased by 7 percent primarily due to the favorable impact of foreign exchange and higher volume and pricing to commercial engine manufacturers, partially offset by lower sales to European light vehicle manufacturers reflecting a shift in consumer preference towards lower displacement engines as well as the delay of new platform launches.
º Consumer Products Group ("CPG") sales decreased by 7 percent primarily due to lower sales of automotive aftermarket products reflecting the impact of higher gasoline prices and lower consumer confidence on discretionary spending, partially offset by higher prices (primarily to pass through ethylene glycol cost increases).
º Friction Materials sales increased by 17 percent primarily due to the favorable impact of foreign exchange.
Transportation Systems sales increased by 6 percent in the first six months of 2008 compared with the first six months of 2007, primarily due to the favorable impact of foreign exchange.
º Turbo Technologies sales increased by 10 percent primarily due to the favorable impact of foreign exchange, higher volume and pricing to commercial engine manufacturers, partially offset by lower sales to European light vehicle manufacturers due to the reasons discussed above.
º CPG sales decreased by 8 percent primarily due to lower sales of automotive aftermarket products due to the reasons discussed above, partially offset by higher prices (primarily to pass through ethylene glycol cost increases).
º Friction Materials sales increased by 11 percent primarily due to the favorable impact of foreign exchange.
Transportation Systems segment profit decreased by 5 percent in both the second quarter of 2008 compared with the second quarter of 2007 and the first six months of 2008 compared with the first six months of 2007. These decreases were primarily due to CPG volume declines, as discussed above, and investments in product development to support future Turbo platforms. These factors were partially offset by increased productivity in our Turbo Technologies business and the favorable impact of foreign exchange.
Repositioning and Other Charges
See Note 4 of Notes to Financial Statements for a discussion of repositioning and other charges incurred in the second quarter and six months ended June 30, 2008 and 2007. Our repositioning actions are expected to generate incremental pretax savings of approximately $110 million in 2008 compared with 2007 principally from planned workforce reductions. Cash expenditures for severance and other exit costs necessary to execute these actions were $51 million in the first six months of 2008 and were funded through operating cash flows. Cash expenditures for severance and other costs necessary to execute the remaining actions will approximate a total of $125 million in 2008 and will be funded through operating cash flows.
B. LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Summary
Our cash flows from operating, investing and financing activities, as
reflected in the Consolidated Statement of Cash Flows for the six months ended
June 30, 2008 and 2007, are summarized as follows:
2008 2007
Cash provided by (used for):
Operating activities $ 1,763 $ 1,561
Investing activities (1,576 ) (257 )
Financing activities 148 (910 )
Effect of exchange rate changes on cash 40 15
Net increase in cash and cash equivalents $ 375 $ 409
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Cash provided by operating activities increased by $202 million during the first six months of 2008 compared with the first six months of 2007 primarily due to increased earnings, increased accrued expenses of $111 million (primarily accrued income taxes), lower cash payments for asbestos of $52 million, and increased deferred income tax expense of $46 million partially offset by an increase in working capital of $267 million (higher accounts and other receivables, higher inventory, partially offset by higher accounts payable).
Cash used for investing activities increased by $1,319 million during the first six months of 2008 compared with the first six months of 2007 due primarily to a $1,200 million increase in cash paid for acquisitions (most significantly the acquisition of Norcross in the second quarter of 2008), increased expenditures for property, plant, and equipment of $56 million, and . . .
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