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HON > SEC Filings for HON > Form 10-Q on 19-Oct-2012All Recent SEC Filings

Show all filings for HONEYWELL INTERNATIONAL INC

Form 10-Q for HONEYWELL INTERNATIONAL INC


19-Oct-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)
(Dollars in millions, except per share amounts)

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 three and nine months ended September 30, 2012. The financial information as of September 30, 2012 should be read in conjunction with the financial statements for the year ended December 31, 2011 contained in our Form 10-K filed on February 17, 2012.

The Consumer Products Group business had historically been part of the Transportation Systems reportable segment. In accordance with the applicable accounting guidance for the disposal of long-lived assets, the results of our Consumer Products Group business are presented as discontinued operations and, as such, have been excluded from continuing operations and from segment results for all periods presented. See Note 3 Acquisitions and Divestitures for further details.

A. Results of Operations - three and nine months ended September 30, 2012 compared with the three and nine months ended September 30, 2011

Net Sales
                                         Three Months Ended         Nine Months Ended
                                           September 30,              September 30,

                                          2012         2011         2012         2011

Net sales                             $   9,342      $ 9,298     $ 28,084     $ 27,056
% change compared with prior period           -                         4 %

The change in net sales compared to the prior year period is attributable to the following:

                                          Three Months      Year to Date

             Volume                              2 %               3 %
             Price                               -                 1 %
             Foreign Exchange                   (3 )%             (2 )%
             Acquisitions/Divestitures           1 %               2 %

                                                 -                 4 %

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

                                          2012         2011         2012         2011

Cost of products and services sold    $   6,808      $ 7,033     $ 20,610     $ 20,121
% change compared with prior period          (3 )%                      2 %

Gross Margin percentage                    27.1 %       24.4 %       26.6 %       25.6 %

Cost of products and services sold decreased by $225 million or 3 percent in the quarter ended September 30, 2012 compared with the quarter ended September 30, 2011 principally due to a decrease in repositioning actions of approximately $240 million.

Cost of products and services sold increased by $489 million or 2 percent in the nine months ended September 30, 2012 compared with the nine months ended September 30, 2011 principally due to an estimated increase in direct material costs of approximately $520 million driven substantially by a 4 percent increase in sales as a result of the factors (excluding price) shown above and discussed in the Review of Business Segments section of this MD&A and an increase in other postretirement expense of approximately $140 million due to the


absence of 2011 curtailment gains, partially offset by a decrease in repositioning actions of approximately $200 million.

Gross margin percentage increased by 2.7 percentage point in the quarter ended September 30, 2012 compared with the quarter ended September 30, 2011 primarily due to lower repositioning actions (approximately 2.6 percentage point impact) and higher segment gross margin in each of our business segments (approximate 0.8 percentage point impact) partially offset by higher other postretirement expense (approximately 0.9 percentage point impact).

Gross margin percentage increased by 1.0 percentage point in the nine months ended September 30, 2012 compared with the nine months ended September 30, 2011 primarily due to lower repositioning actions (approximately 0.7 percentage point impact) and higher segment gross margin in our Aerospace and Performance Materials and Technologies segments (approximately 0.5 percentage point impact collectively) partially offset by higher other postretirement expense net of decreased pension expense (approximately 0.4 percentage point impact collectively).

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,

                                                   2012          2011          2012          2011

Selling, general and administrative expense    $   1,238       $ 1,303      $   3,695      $ 3,783
Percent of sales                                    13.3 %        14.0 %         13.2 %       14.0 %

Selling, general and administrative expenses (SG&A) decreased as a percentage of sales by 0.7 percentage points in the quarter ended September 30, 2012 compared to the quarter ended September 30, 2011 driven by an estimated $60 million decrease in repositioning actions, $40 million decrease in foreign exchange and $20 million decrease in pension expense, partially offset by the impact of an estimated $55 million increase in costs resulting from merit increases, investment for growth and acquisitions.

SG&A decreased as a percentage of sales by 0.8 percentage points in the nine months ended September 30, 2012 compared with the nine months ended September 30, 2011 driven by the impact of higher sales as a result of the factors discussed in the Review of Business Segments section of this MD&A, an estimated $80 million decrease in repositioning actions, $80 million decrease in foreign exchange and $35 million decrease in pension expense, partially offset by an estimated $150 million increase in costs resulting from merit increases, acquisitions and investment for growth.

Other (Income) Expense
                                               Three Months Ended            Nine Months Ended
                                                  September 30,                September 30,

                                               2012           2011          2012           2011

Equity income of affiliated companies       $    (12 )     $    (13 )    $    (36 )     $    (36 )
Gain on sale of non-strategic businesses
and assets                                        (4 )           (6 )          (3 )          (52 )
Interest income                                  (14 )          (15 )         (42 )          (42 )
Foreign exchange                                  15              5            28             23
Other, net                                        (1 )            8            (1 )           35

                                            $    (16 )     $    (21 )    $    (54 )     $    (72 )

Other income of $54 million for the nine months ended September 30, 2012 decreased compared to other income of $72 million for the nine months ended September 30, 2011 due primarily to a $41 million pre-tax gain related to the divestiture of the automotive on-board sensor products business within our Automation and Control


Solutions segment in the first quarter of 2011, partially offset by a loss of $29 million resulting from early redemption of debt in 2011.

Interest and Other Financial Charges


                                          Three Months Ended          Nine Months Ended
                                             September 30,              September 30,

                                           2012         2011           2012         2011

Interest and other financial charges   $    88         $    90     $    264        $ 285
% change compared with prior period         (2 )%                        (7 )%

Interest and other financial charges decreased by $2 million in the quarter ended September 30, 2012 compared with the quarter ended September 30, 2011 and by $21 million in the nine months ended 2012 compared with the nine months ended September 30, 2011 primarily due to lower borrowing costs, partially offset by higher average debt balances.

Tax Expense


                        Three Months Ended         Nine Months Ended
                          September 30,              September 30,

                         2012          2011         2012         2011

Tax expense          $     278       $  207     $     893      $  767
Effective tax rate        22.7 %       23.2 %        25.0 %      26.1 %

The effective tax rate decreased by 0.5 percent in the quarter ended September 30, 2012 compared with the quarter ended September 30, 2011 and 1.1 percent in the nine months ended September 30, 2012 compared with the nine months ended September 30, 2011 primarily due to increased benefits from manufacturing incentives and tax credits, partially offset by decreased benefits from the resolution of tax audits.

The effective tax rate for the periods ending in 2012 was lower than the statutory rate of 35 percent due, in part, to foreign earnings taxed at lower tax rates and benefits from manufacturing incentives.

The effective tax rate for the periods ending in 2011 was lower than the statutory rate of 35 percent due, in part, to foreign earnings taxed at lower tax rates and benefits from manufacturing incentives and U.S. tax credits.


Net Income Attributable to Honeywell


                                          Three Months Ended                Nine Months Ended
                                            September 30,                     September 30,

                                         2012             2011            2012             2011


Net income attributable to
Honeywell
Income from continuing
operations less net
income attributable to the
noncontrolling interest             $       950       $      685      $     2,675      $    2,168
Income from discontinued
operations                                    -              177                -             209

Net income attributable to
Honeywell                                   950              862            2,675           2,377

Earnings per share of common
stock - assuming dilution
Income from continuing
operations                                 1.20             0.87             3.38            2.73
Income from discontinued
operations                                    -             0.23                -            0.26

Net income attributable to
Honeywell                           $      1.20       $     1.10      $      3.38      $     2.99

Earnings per share of common stock - assuming dilution increased by $0.10 per share in the quarter ended September 30, 2012 compared with the quarter ended September 30, 2011 primarily due to increased segment profit in our Aerospace, Automation and Control Solutions and Performance Materials and Technologies segments, lower repositioning and other charges and lower pension expense, partially offset by decreased income from discontinued operations, higher other postretirement expense and tax expense.

Earnings per share of common stock - assuming dilution increased by $0.39 per share in the nine months ended September 30, 2012 compared with the nine months ended September 30, 2011, primarily due to increased segment profit in our Aerospace, Performance Materials and Technologies, and Automation and Control Solutions segments, lower repositioning and other charges and lower pension expense, partially offset by decreased income from discontinued operations, higher other postretirement expense and tax expense.


Review of Business Segments


                                         Three Months Ended                Nine Months Ended
                                           September 30,                     September 30,

                                         2012             2011            2012            2011


Net Sales
Aerospace
Products                            $     1,733       $    1,660      $    5,188      $    4,685
Services                                  1,310            1,262           3,832           3,743

Total                                     3,043            2,922           9,020           8,428
Automation and Control Solutions
Products                                  3,392            3,388          10,050           9,855
Services                                    566              560           1,658           1,629

Total                                     3,958            3,948          11,708          11,484
Performance Materials and
Technologies
Products                                  1,344            1,300           4,229           3,812
Services                                    134              168             410             417

Total                                     1,478            1,468           4,639           4,229
Transportation Systems
Products                                    863              960           2,717           2,915
Services                                      -                -               -               -

Total                                       863              960           2,717           2,915
Corporate
Products                                      -                -               -               -
Services                                      -                -               -               -

Total                                         -                -               -               -

                                    $     9,342       $    9,298      $   28,084      $   27,056


Segment Profit
Aerospace                           $       582       $      532      $    1,678      $    1,450
Automation and Control Solutions            571              544           1,587           1,499
Performance Materials and
Technologies                                275              254             944             819
Transportation Systems                      104              121             338             368
Corporate                                   (57 )            (84 )          (164 )          (208 )

Total Segment Profit                      1,475            1,367           4,383          3,928


Other income(a)                               4                8              18              36
Interest and other financial
charges                                     (88 )            (90 )          (264 )          (285 )
Stock compensation expense(b)               (40 )            (38 )          (131 )          (129 )
Pension ongoing expense(b)                   (7 )            (26 )           (29 )           (83 )
Other postretirement
income/(expense)(b)                         (20 )             82             (52 )           109
Repositioning and other charges
(b)                                        (100 )           (410 )          (356 )          (637 )

Income from continuing
operations before taxes             $     1,224       $      893      $    3,569      $    2,939

(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.


                                   Three Months Ended                       Nine Months Ended
                                      September 30,                           September 30,
                                                                %                                       %
                                    2012          2011        change        2012          2011        change

Aerospace Sales
Commercial:
Original Equipment
Air transport and regional      $     412       $   361        14 %      $  1,234      $  1,093        13 %
Business and general
aviation                              240           213        13 %           732           496        48 %
Aftermarket
Air transport and regional            742           721         3 %         2,195         2,073         6 %
Business and general
aviation                              355           314        13 %         1,058           879        20 %
Defense and Space                   1,294         1,313        (1 )%        3,801         3,887        (2 )%

Total Aerospace Sales               3,043         2,922                     9,020         8,428

Automation and Control
Solutions Sales
Energy Safety & Security            2,004         2,016        (1 )%        5,998         5,937         1 %
Process Solutions                     761           763         -           2,251         2,186         3 %
Building Solutions &
Distribution                        1,193         1,169         2 %         3,459         3,361         3 %

Total Automation and Control
Solution Sales                      3,958         3,948                    11,708        11,484

Performance Materials and
Technologies
UOP                                   542           506         7 %         1,629         1,380        18 %
Advanced Materials                    936           962        (3 )%        3,010         2,849         6 %

Total Performance Materials
and Technologies Sales              1,478         1,468                     4,639         4,229

Transportation Systems Sales
Transportation Systems                863           960       (10 )%        2,717         2,915        (7 )%

Total Transportation Systems
Sales                                 863           960                     2,717         2,915

Net Sales                       $   9,342       $ 9,298                  $ 28,084      $ 27,056

Aerospace


                                    Three Months Ended                     Nine Months Ended
                                       September 30,                         September 30,

                                                          %                                     %
                              2012         2011        Change        2012         2011        Change

Net sales                   $ 3,043      $ 2,922          4%       $ 9,020      $ 8,428          7%
Cost of products and
services sold                 2,277        2,192                     6,758        6,396
Selling, general and
administrative expenses         151          149                       464          431
Other                            33           49                       120          151

Segment profit              $   582      $   532          9%       $ 1,678      $ 1,450         16%


                                                                2012 vs. 2011

                                              Three Months Ended               Nine Months Ended
                                                 September 30,                   September 30,


       Factors Contributing to                               Segment                        Segment
        Year-Over-Year Change                Sales           Profit          Sales          Profit

Organic growth/ Operational segment
profit                                           4 %               9 %           5%             10%
Acquisitions and divestitures, net               -                 -             1%              1%
Other                                            -                 -             1%              5%

Total % Change                                   4 %               9 %           7%             16%

Aerospace sales by major customer end-markets were as follows:

                                    Three Months Ended                          Nine Months Ended
                                      September 30,                               September 30,

                              % of Aerospace              %              % of Aerospace              %
                                                      Increase/                                  Increase/
                                  Sales               (Decrease)              Sales              (Decrease)
Customer End-Markets        2012          2011         in Sales         2012         2011         in Sales

Commercial original
equipment
Air transport and
regional                       13 %         12 %          14 %            14 %         13 %          13 %
Business and general
aviation                        8 %          7 %          13 %             8 %          6 %          48 %

Commercial original
equipment                      21 %         19 %          14 %            22 %         19 %          24 %

Commercial
aftermarket
Air transport and
regional                       24 %         25 %           3 %            24 %         25 %           6 %
Business and general
aviation                       12 %         11 %          13 %            12 %         10 %          20 %

Commercial
aftermarket                    36 %         36 %           6 %            36 %         35 %          10 %

Defense and Space              43 %         45 %          (1 )%           42 %         46 %          (2 )%

Total                         100 %        100 %           4 %           100 %        100 %           7 %

Aerospace sales increased by 4 percent in the quarter ended September 30, 2012 compared with the quarter ended September 30, 2011 primarily due to a 4 percent increase in organic growth resulting from increased commercial original equipment (OE) and aftermarket sales.

Aerospace sales increased by 7 percent for the nine months ended September 30, 2012 compared with the nine months ended September 30, 2011 due principally to a 5 percent increase in organic growth due to increased commercial sales volume, a 1 percent growth from acquisitions, net of divestitures, and a 1 percent increase in revenue related to a $73 million reduction in payments to business and general aviation OE manufacturers to partially offset their pre-production costs associated with new aircraft platforms (OEM payments).

Details regarding the changes in sales by customer end-markets are as follows:

Commercial OE sales increased by 14 percent (12 percent organic) and by 24 percent (15 percent organic) in the three and nine months ended September 30, 2012, respectively, due to the following:

Air transport and regional OE sales increased by 14 percent (14 percent organic) and 13 percent (12 percent organic) in the three and nine months ended September 30, 2012, respectively, driven by higher sales to our OE customers, consistent with higher production rates, and a favorable platform mix.

Business and general aviation OE sales increased by 13 percent (9 percent organic) in the quarter ended September 30, 2012 and increased by 48 percent (22 percent organic) in the nine months ended September 30, 2012 driven by strong demand in the business jet end-market, favorable


platform mix, and growth from acquisitions in both the three and nine months ended September 30, 2012 and the favorable 15 percent impact of the OEM payments discussed above for the nine months ended September 30, 2012.

Commercial aftermarket sales increased by 6 percent and 10 percent in the three and nine months ended September 30, 2012, respectively, due to the following:

Air transport and regional aftermarket sales increased in the three months ended September 30, 2012 by 3 percent primarily as a result of higher maintenance activity driven by an approximate 2 percent increase in global flying hours.

Air transport and regional aftermarket sales increased in the nine months ended September 30, 2012 by 6 percent primarily as a result of (i) increased sales of spare parts and higher maintenance activity driven by an approximate 2 percent increase in global flying hours for the nine month period ended September 30, 2012, (ii) increased sales of avionics upgrades, and (iii) changes in customer buying patterns relating to maintenance activity in the first half of 2012.

Business and general aviation aftermarket sales increased by 13 percent in the quarter ended September 30, 2012 and 20 percent in the nine months ended September 30, 2012 primarily due to increased sales of spare parts and revenue associated with maintenance service agreements and a higher penetration in retrofit, modifications, and upgrades.

Defense and space sales decreased by 1 percent (negative 2 percent organic) in the three months ended September 30, 2012 and decreased by 2 percent (negative 4 percent organic) for the nine months ended September 30, 2012 primarily due to anticipated program ramp downs, partially offset by international aftermarket sales and growth from acquisitions, net of divestitures.

Aerospace segment profit increased by 9 percent in the quarter ended September 30, 2012 compared with quarter ended September 30, 2011 due to an increase in operational segment profit driven by the favorable impact from higher commercial demand, price and productivity, net of inflation, partially offset by increased investments for growth. Cost of goods sold totaled $2.3 billion for the quarter ended September 30, 2012, an increase of $85 million primarily due to the factors discussed above (excluding price).

Aerospace segment profit increased by 16 percent for the nine months ended September 30, 2012 compared with the nine months ended September 30, 2011 due to an increase in operational segment profit of 10 percent resulting from higher sales volume, a 5 percent favorable impact from the OEM payments, discussed above, and a 1 percent increase from acquisitions, net of divestitures. The increase in operational segment profit is due to higher commercial demand, price and productivity, net of inflation, partially offset by increased research, development and engineering investments. Cost of goods sold totaled $6.8 billion for the nine months ended September 30, 2012, an increase of approximately $362 million primarily due to the factors discussed above (excluding price).

Automation and Control Solutions


                                      Three Months Ended                       Nine Months Ended
                                        September 30,                            September 30,

                                                           %                                         %
                               2012         2011         Change         2012          2011         Change
. . .
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