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HON > SEC Filings for HON > Form 10-Q on 19-Apr-2013All Recent SEC Filings

Show all filings for HONEYWELL INTERNATIONAL INC

Form 10-Q for HONEYWELL INTERNATIONAL INC


19-Apr-2013

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" or the "Company") for the three months ended March 31, 2013. The financial information as of March 31, 2013 should be read in conjunction with the financial statements for the year ended December 31, 2012 contained in our Form 10-K filed on February 15, 2013.

A. Results of Operations - three months ended March 31, 2013 compared with the three months ended March 31, 2012

Net Sales



                                                    Three Months Ended
                                                         March 31,
                                                     2013          2012
            Net sales                             $    9,328      $ 9,307
            % change compared with prior period            -

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

                                                Three Months
                    Volume                                 (2 )%
                    Price                                   1 %
                    Acquisitions/Divestitures               1 %
                                                            -

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,
                                                    2013           2012
            Cost of products and services sold    $   6,783       $ 6,880
            % change compared with prior period          (1 )%

            Gross Margin percentage                    27.3 %        26.1 %

Cost of products and services sold decreased by $97 million or 1 percent in the quarter ended March 31, 2013 compared with the quarter ended March 31, 2012 principally due to a decrease in direct and indirect material costs of approximately $80 million (driven substantially by lower volume and increased productivity) and a decrease in pension expense of approximately $25 million.

Gross margin percentage increased by 1.2 percentage points in the quarter ended March 31, 2013 compared with the quarter ended March 31, 2012 primarily due to higher segment gross margin in our Automation and Control Solutions and Performance Materials and Technologies segments (approximately 0.6 percentage point impact collectively), decrease in pension expense (approximately 0.3 percentage point impact) and lower repositioning and other charges allocated to cost of products and services sold (approximately 0.1 percentage point impact).

For further discussion of segment results see Review of Business Segments.

Selling, General and Administrative Expenses



                                                        Three Months Ended
                                                             March 31,
                                                         2013          2012
        Selling, general and administrative expense   $    1,229      $ 1,231
        Percent of sales                                    13.2 %       13.2 %

Selling, general and administrative expenses as a percentage of sales was flat in the quarter ended March 31, 2013 compared to the quarter ended March 31, 2012 driven by disciplined cost management offset by merit increases and acquisitions.

Other (Income) Expense



                                                         Three Months Ended
                                                              March 31,
                                                        2013            2012
       Equity (income)/loss of affiliated companies   $      (9 )     $     (10 )
       Interest income                                      (17 )           (14 )
       Foreign exchange                                       2              10
       Other, net                                            (4 )            (1 )
                                                      $     (28 )     $     (15 )

Other income of $28 million increased by $13 million during the quarter ended March 31, 2013 compared to the quarter ended March 31, 2012.

Interest and Other Financial Charges



                                                     Three Months Ended
                                                          March 31,
                                                    2013            2012
            Interest and other financial charges   $    84         $    89
            % change compared with prior period         (6 )%

Interest and other financial charges decreased by $5 million in the quarter ended March 31, 2013 compared with the quarter ended March 31, 2012 primarily due to lower borrowing costs.

Tax Expense



                                            Three Months Ended
                                                 March 31,
                                            2013           2012
                     Tax expense          $     291       $   297
                     Effective tax rate        23.1 %        26.5 %

The effective tax rate decreased by 3.4 percent in the quarter ended March 31, 2013 compared with the quarter ended March 31, 2012 primarily due to retroactive law changes in the U.S. partially offset by retroactive law changes in Germany and increased tax expense for reserves in various jurisdictions.

The effective tax rate for the period ending in 2013 was lower than the statutory rate of 35 percent due, in part, to foreign earnings taxed at lower rates, benefits from manufacturing incentives and U.S. tax credits.

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

Net Income Attributable to Honeywell



                                                              Three Months Ended
                                                                   March 31,
                                                              2013           2012

   Net income attributable to Honeywell                     $     966       $   823
   Earnings per share of common stock - assuming dilution   $    1.21       $  1.04

Earnings per share of common stock - assuming dilution increased by $ 0.17 per share in the quarter ended March 31, 2013 compared with the quarter ended March 31, 2012 primarily due to increased segment profit in our Aerospace, Automation and Control Solutions and Performance Materials and Technologies segments and lower pension expense.

Review of Business Segments



                                                       Three Months Ended
                                                            March 31,
                                                        2013          2012
          Net Sales
          Aerospace
          Product                                    $    1,706      $ 1,705
          Service                                         1,205        1,245
          Total                                           2,911        2,950
          Automation and Control Solutions
          Product                                         3,239        3,251
          Service                                           547          537
          Total                                           3,786        3,788
          Performance Materials and Technologies
          Product                                         1,615        1,467
          Service                                           102          148
          Total                                           1,717        1,615
          Transportation Systems
          Product                                           914          954
          Service                                             -            -
          Total                                             914          954
                                                     $    9,328      $ 9,307

          Segment Profit
          Aerospace                                  $      551      $   534
          Automation and Control Solutions                  523          491
          Performance Materials and Technologies            374          319
          Transportation Systems                            111          120
          Corporate                                         (51 )        (49 )
          Total Segment Profit                            1,508        1,415

          Other income (expense)(a)                          19            5
          Interest and other financial charges              (84 )        (89 )
          Stock compensation expense(b)                     (54 )        (51 )
          Pension ongoing income (expense)(b)                21          (13 )
          Other postretirement income (expense)(b)          (22 )        (23 )
          Repositioning and other charges (b)              (128 )       (122 )
          Income before taxes                        $    1,260      $ 1,122

(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
                                                            March 31,             %
                                                        2013        2012        change
  Aerospace Sales
  Commercial:
  Original equipment
  Air transport and regional                           $   451     $   415            9 %
  Business and general aviation                            229         256          (11 )%
  Aftermarket
  Air transport and regional                               700         728           (4 )%
  Business and general aviation                            339         347           (2 )%
  Defense and Space                                      1,192       1,204           (1 )%
  Total Aerospace Sales                                  2,911       2,950

  Automation and Control Solutions Sales
  Energy Safety & Security                               2,003       1,972            2 %
  Process Solutions                                        707         722           (2 )%
  Building Solutions & Distribution                      1,076       1,094           (2 )%
  Total Automation and Control Solutions Sales           3,786       3,788

  Performance Materials and Technologies Sales
  UOP                                                      775         579           34 %
  Advanced Materials                                       942       1,036           (9 )%
  Total Performance Materials and Technologies Sales     1,717       1,615

  Transportation Systems Sales
  Transportation Systems                                   914         954           (4 )%
  Total Transportation Systems Sales                       914         954

  Net Sales                                            $ 9,328     $ 9,307

Aerospace



                                                           Three Months Ended
                                                               March 31,
                                                    2013        2012        % Change
    Net sales                                      $ 2,911     $ 2,950             (1 )%

    Cost of products and services sold               2,180       2,207
    Selling, general and administrative expenses       126         156
    Other                                               54          53
    Segment profit                                 $   551     $   534              3 %




                                                            2013 vs. 2012
                                                         Three Months Ended
                                                              March 31,
                                                                       Segment
       Factors Contributing to Year-Over-Year Change      Sales        Profit

       Organic growth/ Operational segment profit            (1 )%           2 %
       Other                                                  -              1 %

       Total % Change                                        (1 )%           3 %

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

                                                         Three Months Ended
                                                              March 31,
                                                                              %
                                                   % of Aerospace         Increase/
                                                        Sales            (Decrease)
     Customer End-Markets                         2013         2012       In Sales
     Commercial original equipment:
     Air transport and regional                       15 %        14 %             9 %
     Business and general aviation                     8 %         9 %           (11 )%
     Commercial original equipment                    23 %        23 %             1 %

     Commercial aftermarket:
     Air transport and regional                       24 %        25 %            (4 )%
     Business and general aviation                    12 %        12 %            (2 )%
     Commercial aftermarket                           36 %        37 %            (3 )%

     Defense and space                                41 %        40 %            (1 )%
     Total                                           100 %       100 %            (1 )%

Aerospace sales decreased by 1 percent in the quarter ended March 31, 2013 compared with the quarter ended March 31, 2012 driven primarily by decreased volumes in our commercial aftermarket and defense and space businesses.

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

Commercial OE sales increased by 1 percent (1 percent organic) in the quarter ended March 31, 2013 due to the following:

Air transport and regional OE sales increased by 9 percent (9 percent organic) in the quarter ended March 31, 2013 driven primarily by higher volumes to our OE customers, consistent with higher production rates and a favorable platform mix.

Business and general aviation OE sales decreased by 11 percent (negative 12 percent organic) in the quarter ended March 31, 2013 driven by lower sales to our OE customers reflecting higher than normal shipments in the first quarter of 2012 coupled with an unfavorable impact from the Hawker Beechcraft bankruptcy, partially offset by a favorable 2 percent impact from a reduction in payments to business and general aviation OE Manufacturers (OEM payments) to offset their pre-production costs associated with new aircraft platforms.

Commercial aftermarket sales decreased by 3 percent in the quarter ended March 31, 2013 due to the following:

Air transport and regional aftermarket sales decreased by 4 percent in the quarter ended March 31, 2013 primarily as a result of decreased sales of spare parts reflecting higher than normal shipments in the first quarter of 2012, partially offset by increased global flying hours of approximately 2 percent.

Business and general aviation aftermarket sales decreased by 2 percent in the quarter ended March 31, 2013 primarily due to reduced revenue associated with fewer maintenance events partially offset by a higher uptake in retrofit, modifications, and upgrades.

Defense and space sales decreased by 1 percent (negative 1 percent organic) in the quarter ended March 31, 2013 primarily due to anticipated program ramp downs in the U.S., partially offset by international aftermarket sales.

Aerospace segment profit increased by 3 percent in the quarter ended March 31, 2013 compared with quarter ended March 31, 2012 due primarily to a 2 percent increase in operational segment profit and a 1 percent favorable impact from a reduction in OEM payments, discussed above. The increase in operational segment profit is driven by the favorable impact of higher price and productivity, net of inflation (including the absence of prior year unfavorable impact of the Hawker Beechcraft bankruptcy), partially offset by lower commercial aftermarket and defense and space demand. Cost of products and services sold totaled $2.2 billion for the quarter ended March 31, 2013, a decrease of approximately $27 million which is primarily a result of the factors discussed above (excluding price).

Automation and Control Solutions



                                                      Three Months Ended
                                                           March 31,
                                                2013        2012       % Change
Net sales                                      $ 3,786     $ 3,788             -
Cost of products and services sold               2,501       2,523
Selling, general and administrative expenses       685         700
Other                                               77          74
Segment profit                                 $   523     $   491             7 %

                                                            2013 vs. 2012
                                                         Three Months Ended
                                                              March, 31
                                                                       Segment
       Factors Contributing to Year-Over-Year Change      Sales        Profit

       Organic growth/ Operational segment profit              -             7 %

       Total % Change                                          -             7 %

Automation and Control Solutions ("ACS") sales were flat in the quarter ended March 31, 2013 compared with the quarter ended March 31, 2012.

Sales in our Energy, Safety & Security businesses increased by 2 percent (1 percent organic) in the quarter ended March 31, 2013 principally due to (i) higher sales volumes of our environmental and combustion controls products primarily the result of normal seasonality in 2013 as compared to the 2012 mild winter and improved residential HVAC market conditions; and (ii) higher sales volumes due to continued strong U.S. residential market conditions and new product introductions in the security business partially offset by decreases in sales volumes of our sensing and control products primarily the result of softness in industrial end markets.

Sales in our Process Solutions business decreased 2 percent (negative 1 percent organic) in the quarter ended March 31, 2013 reflecting several large project completions in the prior year partially offset by service and software solutions growth.

Sales in our Building Solutions & Distribution businesses decreased by 2 percent (negative 1 percent organic) in the quarter ended March 31, 2013 principally due to softness in the U.S. energy retrofit business partially offset by increased sales volume in our Americas Distribution business due to continued strong U.S. residential market conditions.

ACS segment profit increased by 7 percent in the quarter ended March 31, 2013 compared with the quarter ended March 31, 2012 primarily due to the positive impact from price and productivity, net of inflation. Cost of products and services sold totaled $2.5 billion in 2013, a decrease of approximately $22 million which is primarily due to productivity and lower sales volumes partially offset by inflation.

Performance Materials and Technologies



                                                     Three Months Ended
                                                          March 31,
                                                2013        2012       Change
Net sales                                      $ 1,717     $ 1,615           6 %
Cost of products and services sold               1,206       1,169
Selling, general and administrative expenses       118         111
Other                                               19          16
Segment profit                                 $   374     $   319          17 %

                                                            2013 vs. 2012
                                                         Three Months Ended
                                                              March 31,
                                                                       Segment
       Factors Contributing to Year-Over-Year Change      Sales        Profit

       Organic growth/ Operational segment profit            (2 )%          13 %
       Acquisitions and divestitures, net                     8 %            4 %

       Total % Change                                         6 %           17 %

Performance Materials and Technologies sales increased by 6 percent in the quarter ended March 31, 2013 compared with the quarter ended March 31, 2012 due to an 8 percent growth from acquisitions partially offset by a decrease in organic sales of 2 percent.

UOP sales increased 34 percent (10 percent organic) in the quarter ended March 31, 2013 compared to March 31, 2012 primarily driven by (i) the favorable impact from acquisitions, and (ii) higher volume of petrochemical catalysts and increased equipment revenues, reflecting continued strength in our end markets.

Advanced Materials sales decreased by 9 percent in the quarter ended March 31, 2013 compared to March 31, 2012 primarily driven by planned plant outages in our Fluorine Products and Resins and Chemicals businesses.

Performance Materials and Technologies segment profit increased by 17 percent in the quarter ended March 31, 2013 compared with the quarter ended March 31, 2012 due to a 13 percent increase in operational segment profit and a 4 percent increase from acquisitions. The increase in operational segment profit is primarily due to higher UOP sales volume as discussed above and favorable price, net of inflation, and partially offset by continued investment to support growth. Cost of products and services sold totaled $1.2 billion in the quarter ended March 31, 2013, an increase of $37 million which is primarily due to acquisitions and inflation partially offset by lower sales volumes in Advanced Materials.

The Company is in the process of upgrading its Metropolis Works nuclear conversion facility, a Fluorine Products facility, as required by the U.S. Nuclear Regulatory Commission (NRC). Since the second quarter of 2012 production at the Metropolis facility has been suspended. It will recommence upon completion of certain seismic-related upgrades and final review by the NRC. The Company believes that completion of the upgrades to the facility could be completed by the end of the second quarter of 2013. The continued suspension of operations and the cost of the plant upgrades are not expected to have a material negative impact on Performance Materials and Technologies' 2013 results of operations.

Transportation Systems



                                                     Three Months Ended
                                                         March 31,
                                                2013        2012      Change
Net sales                                      $   914      $ 954          (4 )%
Cost of products and services sold                 751        784
Selling, general and administrative expenses        39         35
Other                                               13         15
Segment profit                                 $   111      $ 120          (8 )%

                                                            2013 vs. 2012
                                                         Three Months Ended
                                                              March 31,
                                                                       Segment
       Factors Contributing to Year-Over-Year Change      Sales        Profit

       Organic growth/ Operational segment profit            (4 )%          (7 )%
       Foreign exchange                                       -             (1 )%

       Total % Change                                        (4 )%          (8 )%

Transportation Systems sales decreased by 4 percent in the quarter ended March 31, 2013 compared with the quarter ended March 31, 2012 driven by a decrease in organic sales. Lower sales were primarily driven by decreased light vehicle production in Europe and lower aftermarket sales partially offset by new platform launches, including higher turbo gas penetration in North America and China.

Transportation Systems segment profit decreased by 8 percent in the quarter ended March 31, 2013 compared with the quarter ended March 31, 2012. The decrease in operational segment profit is primarily due to unfavorable pricing and decreased volume, partially offset by productivity (net of the impact of ongoing projects to drive operational improvement in the Friction Materials business). Cost of products and services sold totaled $751 million in the quarter ended March 31, 2013, a decrease of $33 million which is primarily a result of decreased volume and increased productivity.

Repositioning and Other Charges

See Note 4 of Notes to Financial Statements for a discussion of repositioning and other charges incurred in the three months ended March 31, 2013. Our repositioning actions are expected to generate incremental pretax savings of approximately $150 million in 2013 compared with 2012 principally from planned workforce reductions. Cash expenditures for severance and other exit costs necessary to execute these actions were $31 million in the first three months of 2013 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 $175 million in 2013 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, 2013 and 2012, are summarized as follows:

                                                               2013       2012
       Cash provided by/(used for):
       Operating activities                                   $  341     $  196
       Investing activities                                     (311 )     (122 )
       Financing activities                                      (58 )      169
       Effect of exchange rate changes on cash                   (67 )       47
       Net (decrease)/increase in cash and cash equivalents   $  (95 )   $  290

Cash provided by operating activities increased by $145 million during the three months ended March 31, 2013 compared with the three months ended March 31, 2012 primarily due to i) increased net income of $143 million, ii) reduced cash . . .

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