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| HON > SEC Filings for HON > Form 10-Q on 27-Jul-2009 | All Recent SEC Filings |
27-Jul-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 second quarter and six months ended June 30, 2009. The financial information as of June 30, 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 AND SIX MONTHS ENDED JUNE 30, 2009 COMPARED WITH THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2008
Net Sales
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- --------------------
2009 2008 2009 2008
---------- ------- -------- --------
Net sales $ 7,566 $ 9,674 $ 15,136 $ 18,569
% change compared with prior period (22 )% (18 )%
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The decrease in net sales in the second quarter and six months of 2009 compared with the second quarter and six months of 2008 is attributable to the following:
Three Months Six Months
-------------- -------------
Volume (17 )% (14 )%
Price (1 ) -
Foreign Exchange (4 ) (4 )
Acquisitions/Divestitures - -
------ -----
(22 )% (18 )%
------ -----
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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,
---------------------- --------------------
2009 2008 2009 2008
---------- ------- -------- --------
Cost of products and services sold $ 5,682 $ 7,323 $ 11,438 $ 13,995
% change compared with prior period (22 )% (18 )%
Gross Margin percentage 24.9 % 24.3 % 24.4 % 24.6 %
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Cost of products and services sold decreased by $1,641 million or 22 percent in the second quarter of 2009 compared with the second quarter of 2008 and by $2,557 million or 18 percent in the first six months of 2009 compared with the first six months of 2008. These decreases are principally due to i) lower sales as a result of the factors discussed above and in the Review of Business Segments section of this MD&A and ii) the positive impact of cost savings initiatives across each of our Business Segments, benefits from prior repositioning actions, and reduced incentive compensation expense.
Gross margin percentage increased by 0.6 percentage points in the second quarter of 2009 compared with the second quarter of 2008 primarily due to higher margins in our Specialty Materials and Automation and Control Solutions segments and lower other postretirement benefits expense (primarily related to a curtailment gain, see Note 14 of Notes to Financial Statements). These items were
Gross margin percentage decreased by 0.2 percentage points in the first six months of 2009 compared with the first six months of 2008 primarily due to lower margins in our Transportation Systems, Aerospace and Specialty Materials segments and higher pension expense, partially offset by higher margins in our Automation and Control Solutions segment, lower other postretirement benefits expense (primarily related to a curtailment gain, see Note 14 of Notes to Financial Statements) and lower 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,
---------------------- ---------------------
2009 2008 2009 2008
---------- -------- ---------- -------
Selling, general and administrative expenses $ 1,084 $ 1,290 $ 2,236 $ 2,545
Percent of sales 14.3 % 13.3 % 14.8 % 13.7 %
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Selling, general and administrative expenses as a percentage of sales increased by 1.0 percentage points in the second quarter of 2009 compared with the second quarter of 2008 and by 1.1 percentage points in the first six months of 2009 compared with the first six months of 2008. These increases are primarily due to lower sales volumes, partially offset by the positive impact of cost savings initiatives in each of our Business Segments resulting in decreased selling and general and administrative expense of $206 million in the second quarter of 2009 and $309 million in the first six months of 2009.
Other (Income) Expense
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- ----------------------
2009 2008 2009 2008
--------- ----------- --------- ---------
Equity (income)/loss of affiliated companies $ (9 ) $ (6 ) $ (15 ) $ (22 )
Gain on sale of non-strategic businesses and assets - (12 ) - (12 )
Interest income (6 ) (29 ) (18 ) (54 )
Foreign exchange 5 3 27 14
Other (net) 61 1 59 5
--- ----- --- ------- -- ------ -- ------
$ 51 $ (43 ) $ 53 $ (69 )
--- ----- --- ------- -- ------ -- ------
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Other expense of $51 million and $53 million in the second quarter and first six months of 2009 compared with Other income of $43 million and $69 million in the second quarter and first six months of 2008 are primarily due to an other-than-temporary impairment charge of $62 million in the second quarter of 2009, lower interest income (primarily due to lower interest rates) and higher foreign exchange losses.
Interest and Other Financial Charges
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2009 2008 2009 2008
--------- --------- --------- ---------
Interest and other financial charges $ 123 $ 115 $ 240 $ 230
% change compared with prior period 7 % 4 %
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Interest and other financial charges increased by $8 million in the second quarter of 2009 compared with the second quarter of 2008 and by $10 million in the first sixth months of 2009 compared with the first six months of 2008 primarily due to higher debt balances, partially offset by lower borrowing costs.
Tax Expense
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ --------------------
2009 2008 2009 2008
---------- ---------- --------- -------
Tax expense $ 166 $ 261 $ 310 $ 493
Effective tax rate 26.5 % 26.4 % 26.5 % 26.4 %
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The effective tax rate increased by 0.1 percent in the second quarter of 2009 compared with the second quarter of 2008 and the first six months of 2009 compared with the first six months of 2008 primarily due to a decreased benefit from the settlement of tax audits, partially offset by a reduction in the valuation allowance for tax losses and the benefit of U.S. research and development credits in 2009.
The effective tax rate in both periods 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 Six Months Ended
June 30, June 30,
------------------------ --------------------
2009 2008 2009 2008
---------- ---------- --------- -------
Net income Attributable to Honeywell $ 450 $ 723 $ 847 $ 1,366
Earnings per share of common stock - assuming dilution $ 0.60 $ 0.96 $ 1.14 $ 1.81
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Earnings per share of common stock - assuming dilution decreased by $0.36 per share in the second quarter of 2009 compared with the second quarter of 2008 and by $0.67 per share in the first six months of 2009 compared with the first six months of 2008. The decrease in both periods is primarily due to decreased segment profit in each of our Business Segments and increased Other (Income) Expense, as discussed above, partially offset by lower other postretirement benefits expense and lower repositioning charges.
Review of Business Segments
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ---------------------
2009 2008 2009 2008
---------- -------- --------- --------
Net Sales
Aerospace $ 2,719 $ 3,281 $ 5,478 $ 6,311
Automation and Control Solutions 3,013 3,616 6,014 6,796
Specialty Materials 1,048 1,450 2,102 2,859
Transportation Systems 786 1,327 1,542 2,603
Corporate - - - -
-- ------- -- ----- -- ------ - ------
$ 7,566 $ 9,674 $ 15,136 $ 18,569
-- ------- -- ----- -- ------ - ------
Segment Profit
Aerospace $ 454 $ 602 $ 942 $ 1,165
Automation and Control Solutions 346 390 657 718
Specialty Materials 150 186 275 451
Transportation Systems 25 149 22 298
Corporate (45 ) (49 ) (90 ) (105 )
-- ------- -- ----- -- ------ - ------
Total Segment Profit 930 1,278 1,806 2,527
-- ------- -- ----- -- ------ - ------
Other income (expense) (A) (60 ) 37 (68 ) 47
Interest and other financial charges (123 ) (115 ) (240 ) (230 )
Stock compensation expense (B) (35 ) (35 ) (77 ) (76 )
Pension and other postretirement expense (B) 58 (26 ) 3 (53 )
Repositioning and other charges (B) (144 ) (150 ) (255 ) (347 )
-- ------- -- ----- -- ------ - ------
Income before taxes $ 626 $ 989 $ 1,169 $ 1,868
-- ------- -- ----- -- ------ - ------
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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 Six Months Ended
June 30, June 30,
---------------------- --------------------
2009 2008 2009 2008
---------- ------- --------- -------
Net sales $ 2,719 $ 3,281 $ 5,478 $ 6,311
% change compared with prior period (17 )% (13 )%
Segment profit $ 454 $ 602 $ 942 $ 1,165
% change compared with prior period (25 )% (19 )%
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Aerospace sales by major customer end-markets for the second quarter and six months ended June 30, 2009 and 2008 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
----------------- ----------- ---------------- -----------
2009 2009
Versus Versus
Customer End-Markets 2009 2008 2008 2009 2008 2008
------------------------------------------------ ------- ------ ----------- ------- ----- -----------
Commercial:
Air transport and regional original equipment 12 % 16 % (38 %) 13 % 17 % (31 %)
Air transport and regional aftermarket 23 22 (14 ) 22 22 (12 )
Business and general aviation original equipment 7 11 (42 ) 9 11 (29 )
Business and general aviation aftermarket 8 10 (31 ) 8 10 (28 )
Defense and Space 50 41 (1 ) 48 40 1
-- ---- -- --- -- ---- - ---
Total 100 % 100 % (17 %) 100 % 100 % (13 %)
-- ---- -- --- -- ---- - ---
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Aerospace sales decreased by 17 percent in the second quarter of 2009 compared with the second quarter of 2008 and by 13 percent in the first six months of 2009 compared with the first six months of 2008. Details regarding the decrease in sales by customer end-markets are as follows:
• Air transport and regional original equipment (OE) sales decreased by 38 percent in the second quarter and 31 percent in the first six months driven primarily by lower sales to our OE customers, consistent with production rates and platform mix, and the impact of divesting our Consumables Solutions business.
• Air transport and regional aftermarket sales decreased by 14 percent in the second quarter and 12 percent in the first six months primarily as a result of decreased sales of spare parts and lower maintenance activity driven by the impact of higher parked aircraft part utilization, customer inventory reduction initiatives and decreased flying hours of approximately 4% in the second quarter and in the first six months.
• Business and general aviation OE sales decreased by 42 percent in the second quarter and 29 percent in the first six months due to the expected decrease in new business jet deliveries reflecting rescheduling and cancellation of deliveries by OE customers which we expect to continue to adversely impact sales over the remainder of 2009.
• Business and general aviation aftermarket sales decreased by 31 percent in the second quarter and 28 percent in the first six months 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 decreased by 1 percent in the second quarter and increased by 1 in the first six months, with higher sales of logistics services in both periods, offset in the second quarter by reduced sales of missiles and helicopter systems.
Aerospace segment profit decreased by 25 percent in the second quarter of 2009 compared with the second quarter of 2008 and by 19 percent in the first six months of 2009 compared to the first six months of 2008 due primarily to lower sales as a result of the factors discussed above and inflation, partially offset by productivity driven by cost savings initiatives and benefits from prior repositioning actions, reduced incentive compensation expense, and increased prices.
Automation and Control Solutions
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- --------------------
2009 2008 2009 2008
---------- ------- --------- -------
Net sales $ 3,013 $ 3,616 $ 6,014 $ 6,796
% change compared with prior period (17 )% (12 )%
Segment profit $ 346 $ 390 $ 657 $ 718
% change compared with prior period (11 )% (8 )%
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Automation and Control Solutions ("ACS") sales decreased by 17 percent in the second quarter of 2009 compared with the second quarter of 2008, including decreased sales volume (reflecting slower global economic growth) and an unfavorable impact of foreign exchange of 7 percent, partially offset by a 3 percent growth from acquisitions.
ACS sales decreased by 12 percent in the first six months of 2009 compared with the first six months of 2008, including decreased sales volume (reflecting slower global economic growth) and an unfavorable impact of foreign exchange of 8 percent, partially offset by a 5 percent growth from acquisitions.
• Sales in our Products businesses decreased by 18 percent in the second quarter and 12 percent in the first six months, principally due to (i) lower volume of sales in each or our businesses (excluding the impact of acquisitions) and (ii) the unfavorable impact of foreign exchange. Softness in residential and industrial end-markets was partially offset by the positive impact of acquisitions, most significantly Metrologic Instruments and Norcross Safety Products.
• Sales in our Solutions businesses decreased by 15 percent in the second quarter and 11 percent in the first six months driven by the unfavorable impact of foreign exchange and volume decreases largely due to softening demand as a result of customer deferral of capital and operating expenditures. Orders and backlog decreased in the second quarter and first six months compared to the corresponding periods in 2008 primarily due to the unfavorable impact of foreign exchange, softening demand (as noted above) and order timing and delays.
ACS segment profit decreased by 11 percent in the second quarter of 2009 compared with the second quarter of 2008 and by 8 percent in the first six months of 2009 compared with the first six months of 2008. These decreases are 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 and benefits from prior repositioning actions.
Specialty Materials
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- --------------------
2009 2008 2009 2008
---------- ------- --------- -------
Net sales $ 1,048 $ 1,450 $ 2,102 $ 2,859
% change compared with prior period (28 )% (26 )%
Segment profit $ 150 $ 186 $ 275 $ 451
% change compared with prior period (19 )% (39 )%
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Specialty Materials sales decreased by 28 percent in the second quarter of 2009 compared with the second quarter of 2008 and by 26 percent in the first six months of 2009 compared with the first six months of 2008 driven by (i) a 24 percent second quarter and a 25 percent first six months decrease in UOP sales due to lower catalyst sales and licensing revenue and customer deferrals of projects as a result of reduced demand for additional capacity and catalyst reloads in the refining and petrochemical industries, (ii) a 41 percent second quarter and 38 percent first six months decrease in Resins and Chemicals sales due to substantial price declines arising from pass through of lower raw material cost partially offset by increased export volumes, (iii) a 30 percent second quarter and 27 percent first six months decrease in Specialty Products sales most significantly due to continued demand softness across key customer end-markets and (iv) a 15 percent second quarter and 13 percent first six months decrease in our Fluorine Products business due to lower volume sales of refrigerants and insulating materials principally driven by customer inventory reduction initiatives, partially offset by pricing increases. We expect these industry conditions to continue during the third quarter of 2009.
Specialty Materials segment profit decreased by 19 percent in the second quarter of 2009 compared with the second quarter of 2008 and by 39 percent in the first six months of 2009 compared with the first six months 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 Six Months Ended
June 30, June 30,
------------------------ --------------------
2009 2008 2009 2008
-------- ----------- --------- -------
Net sales $ 786 $ 1,327 $ 1,542 $ 2,603
% change compared with prior period (41 )% (41 )%
Segment profit $ 25 $ 149 $ 22 $ 298
% change compared with prior period (83 )% (93 )%
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Transportation Systems sales decreased by 41 percent in both the second quarter of 2009 compared with the second quarter of 2008 and in the first six months of 2009 compared with the first six months of 2008, primarily due to lower volumes (driven by the ongoing challenging global automotive industry conditions) and the negative impact of foreign exchange.
• Turbo Technologies sales decreased 51 percent in the second quarter and 52 percent in the first six months primarily due to lower sales volumes to both our commercial and light vehicle engine manufacturing customers and the negative impact of foreign exchange. We continue to see a decline in diesel penetration rates in Western Europe and a shift in consumer preference towards lower displacement engines. We expect production rates of commercial and light vehicles to begin to increase in the fourth quarter of 2009.
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