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

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Form 10-Q for HONEYWELL INTERNATIONAL INC


19-Jul-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 and six months ended June 30, 2013. The financial information as of June 30, 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 and six months ended June 30, 2013 compared with the three and six months ended June 30, 2012

Net Sales
                                          Three Months Ended           Six Months Ended
                                               June 30,                    June 30,
                                         2013            2012         2013          2012
Net sales                             $   9,693       $  9,435     $  19,021     $ 18,742
% change compared with prior period           3 %                          1 %

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

                                         Three Months      Year to Date
             Volume                                  1 %              (1 )%
             Price                                   -                 1 %
             Acquisitions/Divestitures               2 %               1 %
                                                     3 %               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           Six Months Ended
                                               June 30,                    June 30,
                                         2013            2012         2013          2012
Cost of products and services sold    $   7,027       $  6,922     $  13,810     $ 13,802
% change compared with prior period           2 %                          -

Gross Margin percentage                    27.5 %         26.6 %        27.4 %       26.4 %

Cost of products and services sold increased by $105 million or 2 percent in the quarter ended June 30, 2013 compared with the quarter ended June 30, 2012 principally due to an estimated increase in direct material costs of approximately $90 million and indirect material costs of approximately $50 million driven substantially by a 3 percent increase in sales as a result of the factors (excluding price) discussed above and in the Review of Business Segments section of this MD&A, higher depreciation and amortization expenses of $22 million (most significantly in Performance Materials and Technologies), and increased repositioning actions partially offset by a decrease in pension and other postretirement expenses of approximately $50 million and increased productivity.

Cost of products and services sold was flat in the six months ended June 30, 2013 compared with the six months ended June 30, 2012 principally due to an estimated increase in direct and indirect material costs of approximately $50 million (driven substantially by increased volume in the second quarter of 2013) and higher depreciation and amortization expenses of $40 million (most significantly in Performance Materials and Technologies) offset by a decrease in pension and other postretirement expenses of approximately $80 million and increased productivity.

Gross margin percentage increased by 0.9 percentage point in the quarter ended June 30, 2013 compared with the quarter ended June 30, 2012 primarily due to higher segment gross margin in our Aerospace

and Automation and Control Solutions segments (approximately 1.0 percentage point impact collectively) and decreased pension and other post retirement expense (0.5 percentage point impact collectively) partially offset by lower segment gross margin in our Performance Materials and Technologies segment (approximately 0.4 percentage point impact) and increased repositioning actions (approximately 0.2 percentage point impact).

Gross margin percentage increased by 1.0 percentage point in the six months ended June 30, 2013 compared with the six months ended June 30, 2012 primarily due to higher segment gross margin in our Aerospace and Automation and Control Solutions segments (approximately 0.6 percentage point impact collectively) and decreased pension and other post retirement expense (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                Six Months Ended
                                               June 30,                         June 30,
                                        2013              2012            2013             2012
Selling, general and
administrative expense              $    1,281       $     1,226      $    2,510       $    2,457
Percent of sales                          13.2 %            13.0 %          13.2 %           13.1 %

Selling, general and administrative expenses (SG&A) increased as a percentage of sales by 0.2 percentage points in the quarter ended June 30, 2013 compared to the quarter ended June 30, 2012 driven by an estimated $30 million increase in labor costs (primarily acquisitions, investment for growth and merit increases) and $20 million increase in repositioning actions, partially offset by an estimated $10 million decrease in pension and other postretirement expenses and lower bad debt expense.

SG&A increased as a percentage of sales by 0.1 percentage points in the six months ended June 30, 2013 compared with the six months ended June 30, 2012 driven by an estimated $70 million increase in labor costs (primarily merit increases, acquisitions and investment for growth) and a $40 million increase in repositioning actions, partially offset by (i) an estimated $20 million decrease in pension and other postretirement expenses, (ii) lower bad debt expense, and
(iii) disciplined cost management.

Other (Income) Expense
                                          Three Months Ended                 Six Months Ended
                                               June 30,                          June 30,
                                        2013              2012            2013              2012
Equity income of affiliated
companies                           $      (11 )     $       (14 )    $      (20 )     $       (24 )
Loss on sale of non-strategic
businesses and assets                        -                 1               -                 1
Interest income                            (15 )             (14 )           (32 )             (28 )
Foreign exchange                             1                 3               3                13
Other, net                                   1                 1              (3 )               -
                                    $      (24 )     $       (23 )    $      (52 )     $       (38 )

Other Income (Expense) increased by $14 million for the six months ended June 30, 2013 compared to the six months ended June 30, 2012 most significantly due to lower foreign exchange expense.

Interest and Other Financial Charges
                                           Three Months Ended            Six Months Ended
                                                June 30,                     June 30,
                                          2013             2012         2013           2012
Interest and other financial charges   $     80        $      87     $    164        $  176
% change compared with prior period          (8 )%                         (7 )%

Interest and other financial charges decreased by $7 million in the quarter ended June 30, 2013 compared with the quarter ended June 30, 2012 and by $12 million in the six months ended 2013 compared with the six months ended June 30, 2012 primarily due to lower borrowing costs.

Tax Expense
                          Three Months Ended            Six Months Ended
                               June 30,                     June 30,
                        2013             2012          2013           2012
Tax expense          $     307       $      318     $    598       $   615
Effective tax rate        23.1 %           26.0 %       23.1 %        26.2 %

The effective tax rate decreased by 2.9 percent in the quarter ended June 30, 2013 compared with the quarter ended June 30, 2012 primarily due to a decrease in tax expense from the resolution of tax audits.

The effective tax rate decreased by 3.1 percent in the six months ended June 30, 2013 compared with the six months ended June 30, 2012 primarily due to a decrease in tax expense for retroactive law changes in the U.S. and the resolution of tax audits, partially offset by increased tax expense for retroactive law changes in Germany and additional reserves in various jurisdictions.

The effective tax rate for the three and six months periods ending in 2013 were 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 three and six months periods ending in 2012 were 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                Six Months Ended
                                               June 30,                         June 30,
                                        2013              2012            2013             2012
Net income attributable to
Honeywell                           $    1,021       $       902      $    1,987       $    1,725

Earnings per share of common
stock - assuming dilution           $     1.28       $      1.14      $     2.49       $     2.19

Earnings per share of common stock - assuming dilution increased by $0.14 per share in the quarter ended June 30, 2013 compared with the quarter ended June 30, 2012 primarily due to increased segment profit in our Automation and Control Solutions and Aerospace segments, lower pension and other postretirement expense and the lower tax rate discussed above, partially offset by higher repositioning and other charges.

Earnings per share of common stock - assuming dilution increased by $0.30 per share in the six months ended June 30, 2013 compared with the six months ended June 30, 2012, primarily due to increased segment

profit in each of our business segments, lower pension and other postretirement expense and the lower tax rate discussed above, partially offset by higher repositioning and other charges.

Review of Business Segments



                                             Three Months Ended          Six Months Ended
                                                  June 30,                   June 30,
                                              2013          2012         2013         2012
Net Sales
Aerospace
Products                                   $    1,767      $ 1,750     $  3,473     $  3,455
Services                                        1,230        1,277        2,435        2,522
Total                                           2,997        3,027        5,908        5,977
Automation and Control Solutions
Products                                        3,467        3,407        6,706        6,658
Services                                          598          555        1,145        1,092
Total                                           4,065        3,962        7,851        7,750
Performance Materials and Technologies
Products                                        1,563        1,418        3,178        2,885
Services                                          121          128          223          276
Total                                           1,684        1,546        3,401        3,161
Transportation Systems
Products                                          947          900        1,861        1,854
Services                                            -            -            -            -
Total                                             947          900        1,861        1,854
                                           $    9,693      $ 9,435     $ 19,021     $ 18,742

Segment Profit
Aerospace                                  $      583      $   562     $  1,134     $  1,096
Automation and Control Solutions                  585          525        1,108        1,016
Performance Materials and Technologies            320          350          694          669
Transportation Systems                            126          114          237          234
Corporate                                         (55 )        (58 )       (106 )       (107 )
Total segment profit                            1,559        1,493        3,067        2,908

Other income (expense)(a)                          13            9           32           14
Interest and other financial charges              (80 )        (87 )       (164 )       (176 )
Stock compensation expense(b)                     (37 )        (40 )        (91 )        (91 )
Pension ongoing income (expense)(b)                25           (9 )         46          (22 )
Other postretirement income (expense)(b)           20           (9 )         (2 )        (32 )
Repositioning and other charges (b)              (171 )       (134 )       (299 )       (256 )
Income before taxes                        $    1,329      $ 1,223     $  2,589     $  2,345

(a) Equity income (loss) of affiliated companies is included in segment profit.

Amounts included in cost of products and services sold and selling, general
(b) and administrative expenses.

                                     Three Months Ended                     Six Months Ended
                                          June 30,                %             June 30,               %
                                      2013          2012        change      2013         2012        change

Aerospace Sales
Commercial:
Original Equipment
Air transport and regional         $      430      $   407        6 %     $    881     $    822        7 %
Business and general aviation             264          236       12 %          493          492        -
Aftermarket
Air transport and regional                736          725        2 %        1,436        1,453       (1 )%
Business and general aviation             374          356        5 %          713          703        1 %
Defense and Space                       1,193        1,303       (8 )%       2,385        2,507       (5 )%
Total Aerospace Sales                   2,997        3,027                   5,908        5,977

Automation and Control Solutions
Sales
Energy Safety & Security                2,081        2,022        3 %        4,084        3,994        2 %
Process Solutions                         795          768        4 %        1,502        1,490        1 %
Building Solutions &
Distribution                            1,189        1,172        1 %        2,265        2,266        -
Total Automation and Control
Solution Sales                          4,065        3,962                   7,851        7,750

Performance Materials and
Technologies
UOP                                       707          508       39 %        1,482        1,087       36 %
Advanced Materials                        977        1,038       (6 )%       1,919        2,074       (7 )%
Total Performance Materials and
Technologies Sales                      1,684        1,546                   3,401        3,161

Transportation Systems Sales
Transportation Systems                    947          900        5 %        1,861        1,854        -
Total Transportation Systems
Sales                                     947          900                   1,861        1,854

Net Sales                          $    9,693      $ 9,435                $ 19,021     $ 18,742

Aerospace



                                          Three Months Ended                  Six Months Ended
                                               June 30,                           June 30,
                                                              %                                  %
                                    2013        2012        Change     2013        2012        Change
Net sales                          $ 2,997     $ 3,027       (1 )%    $ 5,908     $ 5,977       (1 )%
Cost of products and services
sold                                 2,218       2,261                  4,398       4,468
Selling, general and
administrative expenses                145         152                    271         308
Other                                   51          52                    105         105
Segment profit                     $   583     $   562        4 %     $ 1,134     $ 1,096        3 %




                                                                    2013 vs. 2012
                                                    Three Months Ended          Six Months Ended
                                                         June 30,                   June 30,
                                                                 Segment                    Segment
Factors Contributing to Year-Over-Year Change       Sales        Profit        Sales        Profit
Organic growth/ Operational segment profit             (1 )%           4 %        (1 )%           3 %
Total % Change                                         (1 )%           4 %        (1 )%           3 %

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

                                            Three Months Ended                      Six Months Ended
                                                 June 30,                               June 30,
                                      % of Aerospace             %           % of Aerospace             %
                                                             Increase/                              Increase/
                                          Sales             (Decrease)           Sales             (Decrease)
Customer End-Markets                 2013         2012       in Sales       2013         2012       in Sales
Commercial original equipment
Air transport and regional                14 %       13 %       6 %             15 %        14 %       7 %
Business and general aviation              9 %        8 %      12 %              8 %         8 %       -
Commercial original equipment             23 %       21 %       8 %             23 %        22 %       5 %

Commercial aftermarket
Air transport and regional                25 %       24 %       2 %             25 %        24 %      (1 )%
Business and general aviation             12 %       12 %       5 %             12 %        12 %       1 %
Commercial aftermarket                    37 %       36 %       3 %             37 %        36 %       -

Defense and Space                         40 %       43 %      (8 )%            40 %        42 %      (5 )%

Total 100 % 100 % (1 )% 100 % 100 % (1 )%

Aerospace sales decreased by 1 percent in the quarter ended June 30, 2013 compared with the quarter ended June 30, 2012 driven primarily by decreased volumes in our defense and space business, partially offset by increased volumes in our commercial original equipment (OE) business and favorable pricing.

Aerospace sales decreased by 1 percent in the six months ended June 30, 2013 compared with the six months ended June 30, 2012 driven primarily by decreased volumes in our defense and space and commercial aftermarket businesses, partially offset by increased volumes in our commercial original equipment (OE) business and favorable pricing.

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

Commercial OE sales increased by 8 percent and 5 percent in the quarter and six months ended June 30, 2013, respectively, due to the following:

Air transport and regional OE sales increased by 6 percent and 7 percent in the quarter and six months ended June 30, 2013, respectively, driven by higher volumes, consistent with the OE Manufacturers' higher production rates.

Business and general aviation OE sales increased by 12 percent in the quarter ended June 30, 2013 driven by strong demand in the mid to large cabin business aircraft segment.

Business and general aviation OE sales were flat in the six months ended June 30, 2013 primarily due to strong demand in the business jet mid to large cabin segment and favorable reduction in payments to business and general aviation OE Manufacturers (OEM payments), offset by a high volume of shipments in 2012 and the decline in revenue as a result of the 2012 Hawker Beechcraft bankruptcy.

Commercial aftermarket sales increased by 3 percent and were flat for the quarter and six months ended June 30, 2013, respectively, due to the following:

Air transport and regional aftermarket sales increased by 2 percent in the quarter ended June 30, 2013, primarily due to favorable pricing and higher spares volumes, driven by global flight hour growth.

Air transport and regional aftermarket sales decreased by 1 percent in the six months ended June 30, 2013, primarily due to lower spares volumes, partially offset by global flight hour growth.

Business and general aviation aftermarket sales increased by 5 percent in the quarter ended June 30, 2013 and 1 percent in the six months ended June 30, 2013 primarily resulting from higher sales for retrofit, modifications and upgrades.

Defense and space sales decreased by 8 percent and 5 percent in the quarter and six months ended June 30, 2013, respectively. The decreases are primarily due to U.S. government program ramp downs and lower defense budget, as anticipated, partially offset by international aftermarket sales growth.

Aerospace segment profit increased by 4 percent in the quarter ended June 30, 2013 compared with quarter ended June 30, 2012 due to a 4 percent increase in operational segment profit. The increase in operational segment profit is driven by favorable impact from price and productivity, net of inflation, partially offset by lower defense and space sales as discussed above. Cost of products and services sold totaled $2.2 billion for the quarter ended June 30, 2013, a decline of $43 million primarily due to the factors discussed above (excluding price).

Aerospace segment profit increased by 3 percent for the six months ended June 30, 2013 compared with the six months ended June 30, 2012 due to an increase in operational segment profit. The increase in operational segment profit is due to the favorable impact from price and productivity, net of inflation, including the absence of the unfavorable impact of the Hawker Beechcraft bankruptcy (first half of 2012), partially offset by lower defense and space sales as discussed above. Cost of products sold totaled $4.4 billion for the six months ended June 30, 2013, a decrease of approximately $70 million primarily due to the factors discussed above (excluding price).

Automation and Control Solutions



                                         Three Months Ended                  Six Months Ended
                                              June 30,                           June 30,
                                                              %                                 %
                                    2013        2012       Change     2013        2012        Change
Net sales                          $ 4,065     $ 3,962        3 %    $ 7,851     $ 7,750        1 %
Cost of products and services
sold                                 2,690       2,691                 5,191       5,214
Selling, general and
administrative expenses                714         674                 1,399       1,374
Other                                   76          72                   153         146
Segment profit                     $   585     $   525       11 %    $ 1,108     $ 1,016        9 %




                                                                           2013 vs. 2012
                                                       Three Months Ended                 Six Months Ended
                                                            June 30,                          June 30,
                                                                     Segment                           Segment
Factors Contributing to Year-Over-Year Change       Sales             Profit         Sales              Profit
Organic growth/ Operational segment profit                3 %               11 %           1 %                  9 %
Total % Change                                            3 %               11 %           1 %                  9 %

Automation and Control Solutions ("ACS") sales increased by 3 percent in the quarter ended June 30, 2013 compared with the quarter ended June 30, 2012 and 1 percent in the six months ended June 30, 2013 compared with the six months ended June 30, 2012 primarily due to organic sales growth.

Sales in our Energy, Safety & Security businesses increased by 3 percent in the three months ended June 30, 2013 and 2 percent in the six months ended June 30, 2013 principally due to (i) higher sales volumes of our environmental and combustion controls products primarily the result of improved residential market conditions, new product introductions and normal seasonality in the first quarter of 2013 as compared to the mild winter in the first quarter of 2012, (ii) increases in sales volumes due to improved U.S. residential market conditions and new product introductions in our security business, and (iii) higher sales volumes of our fire systems and sensors in the second quarter driven by growth

in all regions, most notably the Americas, partially offset by decreases in sales volumes of our sensing and control products primarily the result of continued softness in industrial end-markets.

Sales in our Process Solutions business increased by 4 percent in the three months ended June 30, 2013 and 1 percent in the six months ended June 30, 2013 principally due to increased volume reflecting service and software solutions growth partially offset by the completion of several large projects as expected.

Sales in our Building Solutions & Distribution businesses increased by 1 percent in the three months ended June 30, 2013 and were flat in the six months ended June 30, 2013 principally due to increased sales volumes in our Americas Distribution business due to improved U.S. residential market conditions partially offset by continued softness in the U.S. energy retrofit business.

ACS segment profit increased by 11 percent in the quarter ended June 30, 2013 compared with the quarter ended June 30, 2012 primarily due to the positive impact of price and productivity, net of inflation and higher sales volumes as discussed above. Cost of products and services sold was flat which is primarily due to productivity offset by higher sales volumes and inflation.

ACS segment profit increased by 9 percent in the six months ended June 30, 2013 compared with the six months ended June 30, 2012 primarily due to the positive impact of price and productivity, net of inflation and higher sales volumes as discussed above. Cost of products and services sold totaled $5.2 billion for the six months ended June 30, 2013, a decrease of $23 million which is primarily due . . .

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