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| HON > SEC Filings for HON > Form 10-Q on 24-Apr-2009 | All Recent SEC Filings |
24-Apr-2009
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 first quarter ended March 31, 2009. The financial information as of March 31, 2009 should be read in conjunction with the financial statements for the year ended December 31, 2008 contained in our Form 10-K filed on February 13, 2009.
A. RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2009 COMPARED WITH THREE MONTHS ENDED MARCH 31, 2008
Net Sales
Three Months Ended
March 31,
----------------------
2009 2008
---------- -------
Net sales $ 7,570 $ 8,895
% change compared with prior period (15 )%
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The decrease in net sales in the first quarter of 2009 compared with the first quarter of 2008 is attributable to the following:
Volume (11 )%
Foreign Exchange (5 )
Price -
Acquisitions/Divestitures 1
- ---
(15 )%
- ---
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We estimate that our sales in the first quarter of 2009 compared to the first quarter of 2008 include an approximate 4 percent benefit from additional reporting days in the current year period resulting from our normal quarterly closing procedures. See Note 1 to Financial Statements for further discussion. 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
March 31,
----------------------
2009 2008
---------- --------
Cost of products and services sold $ 5,756 $ 6,672
Gross Margin percentage 24.0 % 25.0 %
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Gross margin percentage decreased by 1.0 percentage point in the first quarter of 2009 compared with the first quarter of 2008 primarily due to lower margins in our Transportation Systems and Specialty Materials segments and higher pension and other postretirement expense, partially offset by lower repositioning charges and a benefit from reduced incentive compensation payments.
For further discussion of segment results see "Review of Business Segments".
Selling, General and Administrative Expenses
Three Months Ended
March 31,
----------------------
2009 2008
---------- --------
Selling, general and administrative expenses $ 1,152 $ 1,255
Percent of sales 15.2 % 14.1 %
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Selling, general and administrative expenses as a percentage of sales increased by 1.1 percentage points in the first quarter of 2009 compared with the first quarter of 2008 primarily due to lower sales volumes, partially offset by the benefits of cost savings initiatives in each of our segments resulting in a $103 million decrease in selling and general and administrative expense compared to the prior year period.
Other (Income) Expense
Three Months Ended
March 31,
----------------------
2009 2008
--------- ---------
Equity (income)/loss of affiliated companies $ (6 ) $ (16 )
Interest income (12 ) (25 )
Foreign exchange 22 11
Other (net) (2 ) 4
--------- ---------
$ 2 $ (26 )
--------- ---------
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Other expense of $2 million in the first quarter of 2009 compared with Other income of $26 the first quarter of 2008 is primarily due to lower interest income (primarily due to lower interest rates), lower income from equity method investments (mainly in our Specialty Material segment) and higher foreign exchange losses.
Interest and Other Financial Charges
Three Months Ended
March 31,
----------------------
2009 2008
--------- ---------
Interest and other financial charges $ 117 $ 115
% change compared with prior period 2 %
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Interest and other financial charges increased by $2 million in the first quarter of 2009 compared with the first quarter of 2008, primarily due to higher debt balances, partially offset by lower borrowing costs.
Tax Expense
Three Months Ended
March 31,
------------------------
2009 2008
---------- ----------
Tax expense $ 144 $ 232
Effective tax rate 26.5 % 26.4 %
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The effective tax rate in the first quarter of 2009 increased 0.1 percent compared to the first quarter of 2008 due to a decreased impact of favorable settlements with the taxing authorities.
The effective tax rate was lower than the statutory rate of 35 percent due, in part, to foreign earnings taxed at lower tax rates and benefits from the domestic manufacturing deduction and research & development tax credits.
Net Income Attributable to Honeywell
Three Months Ended
March 31,
------------------------
2009 2008
---------- ----------
Net income attributable to Honeywell $ 397 $ 643
Earnings per share of common stock - assuming dilution $ 0.54 $ 0.85
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Earnings per share of common stock - assuming dilution decreased by $0.31 per share in the first quarter of 2009 compared with the first quarter of 2008 primarily due primarily to lower segment profit (most significantly in Transportation Systems and Specialty Materials) and higher pension and other postretirement expense, partially offset by decreased repositioning and environmental charges.
Review of Business Segments
Three Months Ended
March 31,
----------------------
2009 2008
---------- --------
Net Sales
Aerospace $ 2,759 $ 3,030
Automation and Control Solutions 3,001 3,180
Specialty Materials 1,054 1,409
Transportation Systems 756 1,276
Corporate - -
-- ------- -- -----
$ 7,570 $ 8,895
-- ------- -- -----
Segment Profit
Aerospace $ 488 $ 563
Automation and Control Solutions 311 328
Specialty Materials 125 265
Transportation Systems (3 ) 149
Corporate (45 ) (56 )
-- ------- -- -----
Total Segment Profit 876 1,249
-- ------- -- -----
Other income (expense) (A) (8 ) 10
Interest and other financial charges (117 ) (115 )
Stock compensation expense (B) (42 ) (41 )
Pension and other postretirement expense (B) (55 ) (27 )
Repositioning and other charges (B) (111 ) (197 )
-- ------- -- -----
Income before taxes $ 543 $ 879
-- ------- -- -----
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(A) Equity income/(loss) of affiliated companies is included in Segment Profit.
(B) Amounts included in cost of products and services sold and selling, general and administrative expenses.
Aerospace
Three Months Ended
March 31,
----------------------
2009 2008
---------- -------
Net sales $ 2,759 $ 3,030
% change compared with prior period (9 )%
Segment profit $ 488 $ 563
% change compared with prior period (13 )%
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Aerospace sales by major customer end-markets for the first quarter ended March 31, 2009 and 2008 were as follows:
Three Months Ended
March 31,
-------------------------------
% of
Aerospace % Changes
Sales in Sales
----------------- -----------
2009
Versus
Customer End-Markets 2009 2008 2008
------------------------------------------------ ------- ------ -----------
Commercial:
Air transport and regional original equipment 14 % 17 % (24 %)
Air transport and regional aftermarket 22 22 (11 )
Business and general aviation original equipment 11 11 (14 )
Business and general aviation aftermarket 8 10 (25 )
Defense and Space 45 40 4
-- ---- -- ---
Total 100 % 100 % (9 %)
-- ---- -- ---
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Aerospace sales decreased by 9 percent in the first quarter of 2009 compared with the first quarter of 2008 (including a partial offset due to the impact of additional reporting days in the current quarter). We continue to see softness in the commercial end-markets, partially offset by growth in defense and space. Further details regarding the decrease in sales by customer end-markets are as follows:
• Air transport and regional original equipment (OE) sales decreased by 24 percent driven primarily by the divestiture of the Consumer Solutions business. Excluding the divestiture, sales in the quarter to our OE customers were flat consistent with production rates.
• Air transport and regional aftermarket sales decreased by 11 percent primarily as a result of decreased sales of spare parts and lower maintenance activity driven by decreased flying hours of approximately 4.5% coupled with the impact of higher parked aircraft part utilization and changes in customer buying behavior to reduce inventory levels. The 2009 decline in flight hours is expected to be larger than previously anticipated.
• Business and general aviation OE sales decreased by 14 percent due to the expected decrease in new business jet deliveries with fewer additions to the fractional ownership and charter fleets. We expect to experience an increase in the rescheduling and cancellation of deliveries by OE customers over the remainder of 2009.
• Business and general aviation aftermarket sales decreased by 25 percent primarily due to decreased sales of spare parts and lower revenue associated with maintenance service agreements consistent with the expected decrease in business jet utilization.
• Defense and space sales increased by 4 percent, primarily due to higher sales of certain logistics services and helicopter OE sales, partially offset by reduced demand for missiles and surface systems.
Aerospace segment profit decreased by 13 percent in the first quarter of 2009 compared with the first quarter of 2008 primarily due to lower sales as a result of the factors discussed above and inflation partially offset by productivity (including a benefit from reduced incentive compensation payments) and increased prices.
Automation and Control Solutions
Three Months Ended
March 31,
----------------------
2009 2008
---------- -------
Net sales $ 3,001 $ 3,180
% change compared with prior period (6 )%
Segment profit $ 311 $ 328
% change compared with prior period (5 )%
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Automation and Control Solutions ("ACS") sales decreased by 6 percent in the first quarter of 2009 compared with the first quarter of 2008, including an unfavorable impact of foreign exchange of 9 percent, and decreased sales volume (reflecting slower global economic growth) partially offset by a 7 percent growth from acquisitions and the impact of additional reporting days in the current quarter.
• Sales in our Products businesses decreased by 5 percent, including (i) lower volume of sales most significantly of security, sensing and control, and environmental and combustion control products and (ii) the unfavorable impact of foreign exchange. Softness in key product end-markets, including residential construction and transportation, were partially offset by the positive impact of acquisitions, most significantly Norcross Safety Products and Metrologic Instruments.
• Sales in our Solutions businesses decreased by 6 percent driven by the unfavorable impact of foreign exchange partially offset by volume increases, most notably due to strong conversion to sales from our energy project order backlog. Additionally, we are monitoring our long-cycle solutions businesses for signs of softening demand. Orders and backlog decreased in the first quarter primarily due to the unfavorable impact of foreign exchange and order delays.
ACS segment profit decreased by 5 percent in the first quarter of 2009 compared with the first quarter of 2008. This decrease is due principally to lower sales as a result of the factors discussed above and inflation, partially offset by price and productivity driven by cost savings initiatives.
Specialty Materials
Three Months Ended
March 31,
----------------------
2009 2008
---------- -------
Net sales $ 1,054 $ 1,409
% change compared with prior period (25 )%
Segment profit $ 125 $ 265
% change compared with prior period (53 )%
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Specialty Materials sales decreased by 25 percent in the first quarter of 2009 compared with the first quarter of 2008 driven by (i) a 27 percent decrease in our UOP business due to lower volume of catalyst sales and a decline in its projects business principally from lower demand in the refining and petrochemical industries and lower license revenue, (ii) a 35 percent decrease in our Resins and Chemicals business due to substantial price declines (most significantly the result of formula pricing arrangements), (iii) a 24 percent decrease in our specialty products business most significantly due to continued demand softness in the semi-conductor industry, and (iv) a 10 percent decrease in our fluorine products business primarily due to lower volume sales of refrigerants and insulating materials, partially offset by pricing increases. We expect these factors to continue during the second quarter of 2009.
Specialty Materials segment profit decreased by 53 percent in the first quarter of 2009 compared with the first quarter of 2008. This decrease is due principally to lower sales as a result of the factors discussed above, partially offset by lower raw material costs and the positive impact of cost savings initiatives.
Transportation Systems
Three Months Ended
March 31,
----------------------
2009 2008
--------- --------
Net sales $ 756 $ 1,276
% change compared with prior period (41 )%
Segment profit $ (3 ) $ 149
% change compared with prior period (102 )%
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Transportation Systems sales decreased by 41 percent in the first quarter of 2009 compared with the first quarter of 2008, primarily due to lower volumes and the negative impact of foreign exchange.
• Turbo Technologies sales decreased by 53 percent primarily due to the ongoing challenging global automotive industry conditions, impacting sales to both our commercial and light vehicle engine manufacturing customers, and the unfavorable impact of foreign exchange. We continue to see a shift in consumer preference towards lower displacement engines (evidenced by a decline in diesel penetration rates in Western Europe), as well as the delay of platform launches.
• Consumer Products Group sales decreased by 3 percent primarily due to lower prices (primarily to pass through ethylene glycol cost decreases) and the unfavorable impact of foreign exchange.
• Friction Materials sales decreased by 35 percent primarily due to continued product volume sales declines driven by ongoing challenging global automotive industry conditions and the unfavorable impact of foreign exchange.
Repositioning and Other Charges
See Note 3 of Notes to Financial Statements for a discussion of repositioning and other charges incurred in the three months ended March 31, 2009 and 2008. Our repositioning actions are expected to generate incremental pretax savings of approximately $200 million in 2009 compared with 2008 principally from planned workforce reductions. Cash expenditures for severance and other exit costs necessary to execute these actions were $59 million in the first three months of 2009 and were funded through operating cash flows. Cash expenditures for severance and other costs necessary to execute the remaining actions will be approximately $250 million in 2009 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 three months ended
March 31, 2009 and 2008, are summarized as follows:
2009 2008
------ ------
Cash provided by (used for):
Operating activities $ 341 $ 721
Investing activities (126 ) (189 )
Financing activities (150 ) (188 )
Effect of exchange rate changes on cash (78 ) 61
- ---- - ----
Net (decrease) increase in cash and cash equivalents $ (13 ) $ 405
- ---- - ----
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Cash provided by operating activities decreased by $380 million during the first three months of 2009 compared with the first three months of 2008 primarily due to decreased earnings, lower receipts from the sale of insurance receivables of $82 million, partially offset by a decrease in working capital of $259 million (lower accounts and other receivables and inventory, partially offset by lower accounts payable) and lower cash taxes of $206 million.
Cash used for investing activities decreased by $63 million during the first three months of 2009 compared with the first three months of 2008 due primarily to decreased expenditures for property, plant, and equipment of $41 million and a $35 million decrease in cash paid for acquisitions.
Cash used for financing activities decreased by $38 million during the first three months of 2009 compared with the first three months of 2008 primarily due to a decrease in repurchases of common stock of $441 million partially offset by a decrease in net proceeds from debt (including commercial paper) of $329 million and a decrease in proceeds from issuance of common stock primarily related to stock option exercises of $47 million.
The Company continues to manage its businesses to maximize operating cash flows as the primary source of liquidity. In addition to our available cash and operating cash flows, additional sources of liquidity include committed credit lines, short-term debt from the commercial paper market, long-term borrowings, access to the public debt and equity markets as well as the ability to sell trade accounts receivables. We continue to balance our cash and financing uses through investment in our existing core businesses, acquisition activity, share repurchases and dividends.
We continuously assess the relative strength of each business in our portfolio as to strategic fit, market position, profit and cash flow contribution in order to upgrade our combined portfolio and identify business units that will most benefit from increased investment. We identify acquisition candidates that will further our strategic plan and strengthen our existing core businesses. We also identify business units that do not fit into our long-term strategic plan based on their market position, relative profitability or growth potential. These business units are considered for potential divestiture, restructuring or other repositioning actions subject to regulatory constraints.
We plan to make voluntary contributions of Honeywell common stock to our U.S. pension plans in 2009 totaling approximately $800 million to improve the funded status of our plans, of which $200 million was contributed in the quarter ended March 31, 2009.
In February 2009, the Company issued $600 million 3.875% Senior Notes due 2014 and $900 million 5.00% Senior Notes due 2019 (collectively, the "2009 Senior Notes"). The 2009 Senior Notes are senior unsecured and unsubordinated obligations of Honeywell and rank equally with all of Honeywell's existing and future senior unsecured debt and senior to all of Honeywell's subordinated debt. The offering resulted in gross proceeds of $1.5 billion, offset by $12 million in discount and issuance costs. Proceeds from the Senior Notes were used to repay outstanding commercial paper.
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