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| HON > SEC Filings for HON > Form 10-Q on 17-Oct-2008 | All Recent SEC Filings |
17-Oct-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 third quarter and nine months ended September 30, 2008. The financial information as of September 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 NINE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED WITH THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2007
Net Sales
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
Net sales $ 9,275 $ 8,735 $ 27,844 $ 25,314
% change compared with prior period 6 % 10 %
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The increase in net sales in the third quarter and nine months of 2008 compared with the third quarter and nine months of 2007 is attributable to the following:
Three Months Nine Months
Price 3 % 2 %
Volume (2 ) 2
Foreign Exchange 2 3
Acquisitions/Divestitures 3 3
6 % 10 %
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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 Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
Cost of products and services sold $ 7,476 $ 6,646 $ 21,471 $ 19,287
Gross Margin percentage 19.4 % 23.9 % 22.9 % 23.8 %
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Gross margin percentage decreased by 4.5 percentage points in the third quarter of 2008 compared with the third quarter of 2007 primarily due to higher repositioning charges, lower gross margins in our Specialty Materials, Aerospace and Transportation Systems segments, partially offset by lower pension expense.
Gross margin percentage decreased by 0.9 percentage points in the first nine months of 2008 compared with the first nine months of 2007 primarily due to higher repositioning charges, lower gross margins in our Specialty Materials and Transportation Systems segments, partially offset by higher gross margins in our Aerospace and Automation and Control Solutions segments and lower pension expense.
For further discussion of segment results see "Review of Business Segments".
Selling, General and Administrative Expenses
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
Selling, general and administrative expenses $ 1,309 $ 1,144 $ 3,854 $ 3,360
Percent of sales 14.1 % 13.1 % 13.8 % 13.3 %
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Selling, general and administrative expenses as a percentage of sales increased by 1.0 percentage points in the third quarter of 2008 compared with the third quarter of 2007 and by 0.5 percentage points in the first nine months of 2008 compared with the first nine 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 Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
Equity (income)/loss of affiliated companies $ (27 ) $ (5 ) $ (49 ) $ (7 )
Gain on sale of non-strategic businesses and assets (623 ) (6 ) (635 ) (21 )
Interest income (21 ) (16 ) (75 ) (55 )
Foreign exchange 12 7 26 19
Other (net) 3 4 17 17
$ (656 ) $ (16 ) $ (716 ) $ (47 )
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Other income increased by $640 million in the third quarter of 2008 compared with the third quarter of 2007 and $669 million in the first nine months of 2008 compared with the first nine months of 2007 primarily due to a higher Gain on sale of non-strategic businesses and assets representing the sale of our Consumables Solutions business and higher income from equity method investments (mainly in our Specialty Materials segment).
Interest and Other Financial Charges
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
Interest and other financial charges $ 112 $ 124 $ 342 $ 331
% change compared with prior period (10 %) 3 %
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Interest and other financial charges decreased by 10 percent in the third quarter compared with the third quarter of 2007 primarily due to lower borrowing costs, partially offset by higher debt balances.
Interest and other financial charges increased by 3 percent in the first nine months 2008 compared with the first nine months of 2007 primarily due to higher debt balances, partially offset by lower borrowing costs.
Tax Expense
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
Tax expense $ 315 $ 219 $ 808 $ 628
Effective tax rate 30.5 % 26.2 % 27.9 % 26.4 %
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The effective tax rate in the third quarter of 2008 increased by 4.3 percent compared to the third quarter of 2007 and by 1.5 percent in the first nine months of 2008 compared to the first nine months of 2007 primarily due to the sale of our Consumables Solutions business. See Note 3 of Notes to Financial Statements.
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 Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
Net income $ 719 $ 618 $ 2,085 $ 1,755
Earnings per share of common stock - assuming
dilution $ 0.97 $ 0.81 $ 2.79 $ 2.25
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Earnings per share of common stock - assuming dilution increased by $0.16 per share in the third quarter of 2008 compared with the third quarter of 2007 primarily due to the gain on the sale of our Consumables Solutions business, lower pension expense and a reduction in the number of shares outstanding due to the Company's stock repurchase program partially offset by higher Repositioning and Other Chargers and higher tax expense.
Earnings per share of common stock - assuming dilution increased by $0.54 per share in the first nine months of 2008 compared with the first nine months of 2007 primarily due to the gain on the sale of our Consumables Solutions business, higher segment profit, lower pension expense and a reduction in the number of shares outstanding due to the Company's stock repurchase program partially offset by higher Repositioning and Other Charges and higher tax expense.
Review of Business Segments
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
Net Sales
Aerospace $ 3,110 $ 3,102 $ 9,421 $ 8,969
Automation and Control Solutions 3,688 3,196 10,484 9,036
Specialty Materials 1,321 1,211 4,180 3,626
Transportation Systems 1,156 1,226 3,759 3,683
Corporate - - - -
$ 9,275 $ 8,735 $ 27,844 $ 25,314
Segment Profit
Aerospace $ 516 $ 560 $ 1,681 $ 1,583
Automation and Control Solutions 430 373 1,148 980
Specialty Materials 158 157 609 524
Transportation Systems 102 124 400 437
Corporate (48 ) (47 ) (153 ) (144 )
Total Segment Profit 1,158 1,167 3,685 3,380
Other income (expense) (A) 629 16 667 47
Interest and other financial charges (112 ) (124 ) (342 ) (331 )
Stock compensation expense (B), (C) (31 ) (13 ) (107 ) (54 )
Pension and other postretirement expense (B) (36 ) (105 ) (89 ) (251 )
Repositioning and other charges (B) (574 ) (104 ) (921 ) (408 )
Income before taxes $ 1,034 $ 837 $ 2,893 $ 2,383
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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 $5 and $7 million for the three and nine months ended September 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 $24 and $95 million for the three and nine months ended September 30, 2007, respectively. Stock option expense is for all periods presented. See Note 12 of Notes to Financial Statements.
Aerospace
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
Net sales $ 3,110 $ 3,102 $ 9,421 $ 8,969
% change compared with prior period - % 5 %
Segment profit $ 516 $ 560 $ 1,681 $ 1,583
% change compared with prior period (8 %) 6 %
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Aerospace sales by major customer end-markets for the third quarter and nine months ended September 30, 2008 and 2007 were as follows:
Three Months Ended Nine Months Ended
September 30, September 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 13 % 15 % (11 %) 16 % 16 % 3 %
Air transport and
regional
aftermarket 23 23 4 22 22 6
Business and general
aviation
original equipment 11 11 (4 ) 11 11 1
Business and general
aviation
aftermarket 10 10 3 10 10 8
Defense and Space 43 41 2 41 41 6
Total 100 % 100 % - % 100 % 100 % 5 %
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Aerospace sales were essentially flat in the third quarter of 2008 compared with the third quarter of 2007, due to a net decrease of 3 percent from acquisitions and divestitures (primarily the sale of our Consumables Solutions business) and a 2 percent reduction of revenue related to amounts due to business and general aviation original equipment manufacturers (OEMs) to partially offset their pre-production costs associated with new aircraft platforms. These amounts principally reflect a re-alignment of contract milestones and related payments to more closely align with the development schedule for new aircraft platforms. Further details regarding sales by customer end-markets are as follows:
• Air transport and regional original equipment (OE) sales decreased by 11 percent in the third quarter driven by an 18 percent decrease from the sale of our Consumable Solutions business, partially offset by increased deliveries to our air transport customers, notwithstanding a decrease in total aircraft production rates at major OEM's, mainly due to a strike at a major OEM. While we were able to substantially mitigate the impact of the strike in the third quarter, a prolonged strike would negatively impact future revenue.
• Air transport and regional aftermarket sales increased by 4 percent in the third quarter primarily as a result of increased volume and price of spare parts. Consistent with our previously reported expectations, the growth rate in global flying hours slowed to 3 percent in the third quarter and is expected to continue to slow in the fourth quarter of 2008.
• Business and general aviation OE sales decreased by 4 percent in the third quarter due to the reduction of revenue discussed above partially
offset by continued strong demand in the business jet end-market as evidenced by an increase in new business jet deliveries, improved pricing and continued additions to the fractional ownership and charter fleets, as well as the recovery of sales previously postponed by delayed supplier deliveries.
• Business and general aviation aftermarket sales increased by 3 percent in the third quarter due to higher price of spare parts partially offset by lower volume under maintenance service agreements and lower engine utilization rates.
• Defense and space sales increased by 2 percent in the third quarter primarily due to higher sales of specialty foam insulation, helicopter avionics, certain surface systems, logistics services and an increase in government funded engineering relating to the Orion (CEV) program and classified space programs.
Aerospace sales increased by 5 percent in the first nine months of 2008 compared with the first nine months of 2007 including a reduction of revenue related to amounts due to business and general aviation original equipment manufacturers (OEMs) to partially offset their pre-production costs associated with new aircraft platforms, principally in the third quarter as discussed above. Further details regarding sales by customer end-markets are as follows:
• Air transport and regional original equipment (OE) sales increased by 3 percent in the first nine months driven by increased deliveries to our air transport customers due to higher year to date aircraft production rates at major OE manufacturers, as discussed above, and a 6 percent decrease from the sale of our Consumable Solutions business.
• Air transport and regional aftermarket sales increased by 6 percent in the first nine months primarily as a result of increased volume and price of spare parts and increased maintenance activity relating to an approximate 5 percent increase in global flying.
• Business and general aviation OE sales increased by 1 percent in the first nine 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 as well as the recovery of sales previously postponed by delayed supplier deliveries, partially offset by the reduction of revenue discussed above.
• Business and general aviation aftermarket sales increased by 8 percent in the first nine months primarily due to increased revenue under maintenance service agreements and higher sales of spare parts.
• Defense and space sales increased by 6 percent in the first nine months, primarily due logistics services (including the positive impact of the acquisition of Dimensions International) and higher sales specialty foam insulation, certain surface systems and an increase in government funded engineering relating to the Orion (CEV) program and classified space programs.
Aerospace segment profit decreased by 8 percent in the third quarter of 2008 compared with the third quarter of 2007 due to the reduction of Business and general aviation revenue discussed above, the Consumable Solutions divestiture, inflation and higher spending to support new platform growth partially offset by increased prices, productivity and volume growth.
Automation and Control Solutions
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
Net sales $ 3,688 $ 3,196 $ 10,484 $ 9,036
% change compared with prior period 15 % 16 %
Segment profit $ 430 $ 373 $ 1,148 $ 980
% change compared with prior period 15 % 17 %
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Automation and Control Solutions ("ACS") sales increased by 15 percent in the third quarter of 2008 compared with the third quarter of 2007, including net growth from acquisitions and divestitures of 11 percent and 2 percent favorable impact of foreign exchange.
• Sales in our Products businesses grew by 19 percent, including (i) the positive impact of acquisitions, most significantly Norcross Safety Products, Metrologic Instruments, Hand Held Products Inc. and Maxon Corporation, (ii) the favorable impact of foreign exchange, (iii) increased sales of our environmental and combustion control products, driven by new products and demand for energy efficient controls, including strong sales to retail channels and (iv) continued strong demand for our life safety products, particularly fire systems and sensors. These factors were partially offset by decreases in sales volume of our security and sensing and controls products, reflecting softness in the U.S. and Europe. Additionally, we are monitoring our short-cycle products businesses for signs of softening demand.
• Sales in our Solutions businesses increased by 10 percent primarily due to (i) volume growth, driven by continued orders growth and strong conversion to sales from our orders backlog, and (ii) the favorable impact of foreign exchange.
Automation and Control Solutions ("ACS") sales increased by 16 percent in the first nine months of 2008 compared with the first nine months of 2007, including net growth from acquisitions and divestitures of 9 percent and 4 percent favorable impact of foreign exchange. This increase reflects sales growth in all regions.
• 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., Maxon Corporation and Metrologic Instruments, (ii) the favorable impact of foreign exchange, (iii) continued strong demand for our life safety products, particularly fire systems and sensors and (iv) increased sales of our environmental and combustion control products, driven by new products and demand for energy efficient controls, including growth across all regions. These factors were partially offset by decreases in sales volume of our security and sensing and controls products, reflecting softness in the U.S. and Europe.
• Sales in our Solutions businesses increased by 13 percent primarily due to (i) volume growth, driven by continued orders growth and strong conversion to sales from our orders backlog (ii) the favorable impact of
foreign exchange and (iii) the positive impact of acquisitions, most significantly Enraf Holding B.V.
ACS segment profit increased by 15 percent in the third quarter of 2008 compared with the third quarter of 2007 and increased by 17 percent in the first nine months of 2008 compared with the first nine 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 Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
Net sales $ 1,321 $ 1,211 $ 4,180 $ 3,626
% change compared with prior period 9 % 15 %
Segment profit $ 158 $ 157 $ 609 $ 524
% change compared with prior period 1 % 16 %
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Specialty Materials sales increased by 9 percent in the third quarter of 2008 compared with the third quarter of 2007. This increase was primarily driven by increased pricing reflecting the pass-through of higher raw material costs and other pricing actions most significantly in Resins and Chemicals (including benefits from formula based pricing arrangements) and Fluorine Products with sales increase of 52 percent and 18 percent, respectively. These factors were partially offset by i) a 14 percent decrease in UOP sales primarily as a result of lower volume in its products business reflecting the anticipated decline in the third quarter of 2008 in light of shipments that occurred previously in 2008, and ii) the unfavorable impact of hurricanes Gustav and Ike on plant operations and logistics in the Gulf of Mexico region. This impact is expected to continue in the fourth quarter of 2008, most significantly with the shutdown of our Specialty Products Orange, Texas facility. We are in the initial stages of assessing the overall impact of these hurricanes as well as our potential insurance recoveries for both property damage and business interruption. We are seeing preliminary signs of slowing global demand for commodities such as caprolactam and ammonium sulfate and will continue to monitor these developments.
Specialty Materials sales increased by 15 percent in the first nine months of 2008 compared with the first nine months of 2007 with growth in each of our businesses. These increases were primarily driven by (i) increased pricing reflecting the pass-through of higher raw material costs and other pricing actions (including benefits from formula based pricing arrangements), most significantly in Resins and Chemicals and Fluorine Products, (ii) a 35 percent increase in Resins and Chemicals sales due to increased pricing (as noted above) and higher volume due to improved plant performance, (iii) an 11 percent increase in UOP sales as a result of higher volume sales in its products and projects businesses principally due to strength in the refining and petrochemical industries.
Specialty Materials segment profit increased by 1 percent in the third quarter of 2008 compared with the third quarter of 2007. This increase is due principally to increased Resins and Chemicals and Fluorine Products sales as a result of the factors discussed above and higher income from our joint ventures, substantially offset by lower UOP sales and the impacts of hurricanes Gustav and Ike. Overall, the effects of increased pricing reflecting the pass-through of higher raw material costs and other pricing actions (including benefits from formula based pricing arrangements) and productivity gains substantially offset raw material (most significantly sulfur) and other inflation.
Specialty Materials segment profit increased by 16 percent in the first nine months of 2008 compared with the first nine months of 2007. This increase is due
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