Honeywell's Second-Quarter Earnings Per Share 42 Cents, up 14% versus Prior Year; Sales Climb 11% with Increases in All Four Operating Segments
MORRIS TOWNSHIP, N.J.--July 21, 2004--Honeywell-- EPS Increases Despite $107 Million Pre-Tax Pension Headwind
-- Second-Quarter Operating Cash Flow of $505 Million and Free Cash Flow of $357 Million
-- Continued Progress on Portfolio, Productivity and Growth Initiatives
Honeywell today announced second-quarter earnings per share of 42 cents, an increase of 5 cents or 14% over the prior year. Sales of $6.4 billion were up 11% compared to 2003, primarily due to strong volume growth in all four operating segments. Cash flow from operations was $505 million and free cash flow (cash flow from operations less capital expenditures) was $357 million.
"In the second quarter, all four Honeywell businesses saw increases in sales and improving end markets," said Honeywell Chairman and Chief Executive Officer Dave Cote. "Double digit net income growth was driven by strong conversion on higher volume. We are benefiting from the depth and breadth of our technology, our strong customer relationships and the actions taken to prepare for the market turnaround we are now experiencing. We continue to fund growth initiatives that will translate into future opportunities across our businesses."
Net income increased to $361 million for the quarter, with volume-driven profitability partially offset by the impact of higher non-cash pension expense. Free cash flow of $357 million equals approximately 100% of net income. Net debt (total debt minus cash and cash equivalents) was $1.9 billion, or 15% of net capital (shareowners' equity plus net debt).
"Order rates continue to be strong in all of our businesses," Mr. Cote said. "The Aerospace business was awarded its third major contract on Boeing's 7E7 Dreamliner. With the addition of the Flight Control Electronics contract, the estimated total program value is now in excess of $2.5 billion. Automation and Control Solutions introduced a new touch screen programmable thermostat and won significant new contracts in its Building and Process Solutions businesses. Transportation System's Garrett(R) turbo technology was introduced on the new diesel Mercedes Benz E320 in the United States with very positive reviews. In Specialty Materials, our Spectra(R) bullet-resistant fiber and our broad fluorines product offerings continue to experience double digit orders growth."
During the quarter the company continued to make progress divesting non-core businesses and improving its cost base. Divestitures (principally Security Monitoring) resulted in gains of $233 million. Additionally, the company recorded a $40 million impairment charge relating to the planned disposition of its Polyester business and a $170 million charge in connection with environmental and other litigation matters. Productivity projects resulted in a $32 million charge for repositioning and other actions.
Second-Quarter Segment Highlights
Aerospace
-- Sales were up 14%, compared with the second quarter of 2003, led by 20% growth in Commercial sales. Defense & Space sales grew 7% in the quarter.
-- Segment margin was 15.0%, compared with 12.2% a year ago, due primarily to strong growth in high margin aftermarket sales.
-- Honeywell received its third award on Boeing's new 7E7 Dreamliner. The company now has content in Flight Control Electronics, the Crew Information System/Management System and the Navigation package on this next generation aircraft.
-- Primus Epic(R) Integrated Avionics System received its sixth certification with FAA approval on Dassault's Falcon 2000EX EASy Business Jet.
-- The company's Enhanced Ground Proximity Warning System (EGPWS) deliveries reached 30,000 units.
Automation and Control Solutions
-- Sales were up 7%, compared with the second quarter of 2003, primarily due to new product introductions, strong demand for sensing technologies and favorable foreign currency translation.
-- Segment margin was 10.5%, compared with 10.2% a year ago, primarily driven by volume growth.
-- VisionPRO touch screen programmable thermostat, an innovation in climate control, was launched with very positive consumer reaction.
-- Building Solutions was awarded over $30 million in contracts for design and construction of integrated systems, including a centralized closed circuit television monitoring and digital recording system for the urban railway network in Perth, Australia.
-- Process Solutions won a $20 million contract with Petrom to implement Experion PKS(TM) safety systems and advanced process solutions at its refinery in Romania.
Transportation Systems
-- Sales increased 15%, compared with the second quarter of 2003, driven by continued strong growth in Turbochargers and favorable foreign currency translation.
-- Segment margin was 14.1%, compared with 13.8% a year ago, primarily driven by unit volume.
-- Acceptance of diesel continues to grow in the United States, with the recent introduction of the new Mercedes Benz E320, which is equipped with Honeywell's Garrett(R) turbo technology. This vehicle, which has garnered very positive reviews, joins several other newly introduced turbo diesel vehicles in the United States, including the Volkswagen Passat and Touareg.
-- Consumer Products Group continued to drive brand extensions and successfully launched new Autolite(R) and Prestone(R) branded products at select specialty retailers.
Specialty Materials
-- Sales were up 9%, compared with the second quarter of 2003, driven by double-digit increases in Chemicals, Performance Products and Electronic Materials.
-- Segment margin was 5.7%, compared with 6.2% a year ago, reflecting higher raw material costs primarily in non-core businesses.
-- Performance Products announced a $20 million investment to expand Spectra(R) production in order to meet increasing demand for this light, incredibly strong bullet-resistant fiber.
-- Electronic Materials enhanced its capability to support the move to smaller computer chip technology by acquiring a thermal solutions product line and manufacturing operations in Thailand.
Honeywell will discuss its results during its investor webcast at 8:00 am on July 21st. The webcast and related presentation materials will be available at www.honeywell.com/investor.
Honeywell is a $23 billion diversified technology and manufacturing leader, serving customers worldwide with aerospace products and services; control technologies for buildings, homes and industry; turbochargers; automotive products; and specialty chemicals. Based in Morris Township, N.J., Honeywell is one of 30 stocks that make up the Dow Jones Industrial Average and is a component of the Standard & Poor's 500 Index. Its shares are traded on the New York Stock Exchange under the symbol HON, as well as on the London, Chicago and Pacific Stock Exchanges. For more about Honeywell, visit www.honeywell.com.
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Honeywell International Inc.
Consolidated Statement of Operations (Unaudited)
------------------------------------------------
(In millions except per share amounts)
Three Months Ended
June 30,
------------------
2004 2003
------ ------
Net sales $6,388 $5,749
------ ------
Costs, expenses and other
Cost of goods sold 5,228 (A) 4,514 (C)
Selling, general and administrative expenses 823 (A) 762 (C)
(Gain) loss on sale of non-strategic
businesses (233)(B) (31)(D)
Equity in (income) loss of affiliated
companies (17)(A) (6)
Other (income) expense (18) (24)(E)
Interest and other financial charges 82 87
------ ------
5,865 5,302
------ ------
Income before taxes 523 447
Tax expense 162 128
------ ------
Net income $ 361 $ 319
====== ======
Earnings per share of common stock - basic $ 0.42 $ 0.37
====== ======
Earnings per share of common stock - assuming
dilution $ 0.42 $ 0.37
====== ======
Weighted average number of shares outstanding-
basic 860 860
====== ======
Weighted average number of shares outstanding -
assuming dilution 863 861
====== ======
(A) Cost of goods sold, selling, general and administrative expenses
and equity in (income) loss of affiliated companies include provisions
of $232, $6 and $4 million, respectively, for environmental,
litigation, business impairment and net repositioning charges. Total
net pretax charges were $242 million (after-tax $158 million, or $0.18
per share).
(B) Represents the pretax gain on the sale of our Security Monitoring
business, and adjustments related to businesses sold in prior periods
(after-tax $130 million, or $0.15 per share).
(C) Cost of goods sold and selling, general and administrative
expenses include provisions of $29 and $5 million, respectively, for
environmental, net repositioning and other charges. Total net pretax
charges were $34 million (after-tax $21 million, or $0.03 per share).
(D) Represents the pretax gain on the sale of our Engineering Plastics
business, including the tax benefits associated with prior capital
losses (after-tax $9 million, or $0.01 per share).
(E) Includes a gain of $20 million (after-tax $15 million, or $0.02
per share) related to the settlement of a patent infringement lawsuit.
Honeywell International Inc.
Consolidated Statement of Operations
(Unaudited)
----------------------------------------------
(In millions except per share amounts)
Six Months Ended
June 30,
-------------------
2004 2003
------- -------
Net sales $12,566 $11,148
------- -------
Costs, expenses and other
Cost of goods sold 10,158 (A) 8,754 (C)
Selling, general and administrative
expenses 1,631 (A) 1,465 (C)
(Gain) loss on sale of non-strategic
businesses (265)(B) (31)(D)
Equity in (income) loss of affiliated
companies (24)(A) (4)
Other (income) expense (28) (27)(E)
Interest and other financial charges 166 171
------- -------
11,638 10,328
------- -------
Income before taxes and cumulative effect of
accounting change 928 820
Tax expense 272 227
------- -------
Income before cumulative effect of accounting
change 656 593
Cumulative effect of accounting change - (20)(F)
------- -------
Net income $ 656 $ 573
======= =======
Earnings per share of common stock - basic:
Income before cumulative effect of
accounting change $ 0.76 $ 0.69
Cumulative effect of accounting change - (0.02)(F)
------- -------
Net income $ 0.76 $ 0.67
======= =======
Earnings per share of common stock - assuming
dilution:
Income before cumulative effect of
accounting change $ 0.76 $ 0.69
Cumulative effect of accounting change - (0.02)(F)
------- -------
Net income $ 0.76 $ 0.67
======= =======
Weighted average number of shares outstanding-
basic 860 858
======= =======
Weighted average number of shares outstanding
- assuming dilution 864 859
======= =======
(A) Cost of goods sold, selling, general and administrative expenses
and equity in (income) loss of affiliated companies include provisions
of $284, $8 and $6 million, respectively, for environmental,
litigation, business impairment and net repositioning charges. Total
net pretax charges were $298 million (after-tax $193 million, or $0.22
per share).
(B) Represents the pretax gains on the sales of our VCSEL Optical
Products and Security Monitoring businesses, and adjustments related
to businesses sold in prior periods (after-tax $144 million, or $0.17
per share).
(C) Cost of goods sold and selling, general and administrative
expenses include provisions of $29 and $5 million, respectively, for
environmental, net repositioning and other charges. Total net pretax
charges were $34 million (after-tax $21 million, or $0.03 per share).
(D) Represents the pretax gain on the sale of our Engineering
Plastics business, including the tax benefits associated with prior
capital losses (after-tax $9 million, or $0.01 per share).
(E) Includes a gain of $20 million (after-tax $15 million, or
$0.02 per share) related to the settlement of a patent infringement
lawsuit.
(F) Effective January 1, 2003, we adopted Statement of Financial
Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" (SFAS No. 143). SFAS No. 143 requires recognition of the
fair value of obligations associated with the retirement of tangible
long-lived assets when there is a legal obligation to incur such
costs. This adoption resulted in an after-tax cumulative effect
expense adjustment of $20 million, or $0.02 per share.
Honeywell International Inc.
Segment Data (Unaudited)
----------------------------
(Dollars in millions)
Net Sales Periods Ended June 30,
--------- ----------------------
Three Months Six Months
------------ ----------
2004 2003 2004 2003
------ ------ ------- -------
Aerospace $2,453 $2,161 $ 4,757 $ 4,223
Automation and Control Solutions 1,968 1,837 3,915 3,554
Specialty Materials 901 823 1,757 1,600
Transportation Systems 1,065 925 2,136 1,765
Corporate 1 3 1 6
------ ------ ------- -------
Total $6,388 $5,749 $12,566 $11,148
====== ====== ======= =======
Segment Profit Periods Ended June 30,
-------------- ----------------------
Three Months Six Months
------------ ----------
2004 2003 2004 2003
------ ------ ------- -------
Aerospace $ 367 $ 264 $ 674 $ 521
Automation and Control Solutions 207 187 402 384
Specialty Materials 51 51 99 82
Transportation Systems 150 128 293 220
Corporate (38) (34) (77) (66)
------ ------ ------- -------
Total Segment Profit 737 596 1,391 1,141
Gain on sale of non-strategic
businesses 233 31 265 31
Equity in income of affiliated
companies 17 6 24 4
Other income 18 24 28 27
Interest and other financial
charges (82) (87) (166) (171)
Pension and other postretirement
benefits (expense) (A) (162) (89) (322) (178)
Repositioning, environmental,
litigation and business
impairment charges (A) (238) (34) (292) (34)
------ ------ ------- -------
Income before taxes and
cumulative effect of
accounting change $ 523 $ 447 $ 928 $ 820
====== ====== ======= =======
(A)Amounts included in cost of goods sold and selling, general
and administrative expenses.
Honeywell International Inc.
Consolidated Balance Sheet (Unaudited)
--------------------------------------
(Dollars in millions)
June December
30, 31,
2004 2003
------- -------
ASSETS
Current assets:
Cash and cash equivalents $ 3,232 $ 2,950
Accounts, notes and other receivables 3,905 3,643
Inventories 3,003 3,040
Deferred income taxes 1,311 1,526
Other current assets 566 465
------- -------
Total current assets 12,017 11,624
Investments and long-term receivables 414 569
Property, plant and equipment - net 4,185 4,295
Goodwill 5,837 5,789
Other intangible assets - net 1,110 1,098
Insurance recoveries for asbestos related
liabilities 1,401 1,317
Deferred income taxes 447 342
Prepaid pension benefit cost 3,063 3,173
Other assets 1,077 1,107
------- -------
Total assets $29,551 $29,314
======= =======
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Accounts payable $ 2,273 $ 2,240
Short-term borrowings 44 152
Commercial paper 95 -
Current maturities of long-term debt 146 47
Accrued liabilities 4,495 4,314
------- -------
Total current liabilities 7,053 6,753
Long-term debt 4,825 4,961
Deferred income taxes 313 316
Postretirement benefit obligations other than
pensions 1,695 1,683
Asbestos related liabilities 2,096 2,279
Other liabilities 2,683 2,593
Shareowners' equity 10,886 10,729
------- -------
Total liabilities and shareowners'
equity $29,551 $29,314
======= =======
Certain prior year amounts have been reclassified to conform with the
current year presentation.
Honeywell International Inc.
Consolidated Statement of Cash Flows
(Unaudited)
-------------------------------------
(Dollars in millions)
Three Months Six Months
Ended Ended
June 30, June 30,
--------------- ---------------
2004 2003 2004 2003
------ ------ ------ ------
Cash flows from operating activities:
Net income $ 361 $ 319 $ 656 $ 573
Adjustments to reconcile net
income to net cash provided
by operating activities:
Cumulative effect of
accounting change - - - 20
(Gain) loss on sale of non-
strategic businesses (233) (31) (265) (31)
Repositioning, environmental,
litigation and business
impairment charges 242 34 298 34
Severance and exit cost
payments (32) (43) (82) (93)
Environmental and non-
asbestos litigation payments (55) (15) (92) (36)
Asbestos related liability
payments (222) (357) (323) (388)
Insurance receipts for
asbestos related liabilities 30 475 48 477
Depreciation 142 148 288 290
Undistributed earnings of
equity affiliates (21) (6) (29) (4)
Deferred income taxes 53 85 82 134
Pension and other
postretirement benefits
expense 162 89 322 178
Pension contributions - U.S.
Plans (5) (170) (5) (170)
Other postretirement benefit
payments (51) (51) (99) (99)
Other (41) 52 (40) (3)
Changes in assets and
liabilities, net of the
effects of acquisitions and
divestitures:
Accounts, notes and
other receivables (75) (51) (243) (80)
Inventories 58 (5) 12 (95)
Other current assets 7 (24) (7) 18
Accounts payable 42 65 117 175
Accrued liabilities 143 39 204 126
------ ------ ------ ------
Net cash provided by operating
activities 505 553 842 1,026
------ ------ ------ ------
Cash flows from investing activities:
Expenditures for property, plant
and equipment (148) (171) (283) (276)
Proceeds from disposals of
property, plant and equipment 2 - 2 -
Decrease in investments - - 80 -
Cash paid for acquisitions (13) (32) (109) (122)
Proceeds from sales of businesses 323 90 394 90
------ ------ ------ ------
Net cash provided by (used for)
investing activities 164 (113) 84 (308)
------ ------ ------ ------
Cash flows from financing activities:
Net increase (decrease) in
commercial paper (270) (190) 95 (13)
Net increase (decrease) in short-
term borrowings (127) 82 (124) 78
Proceeds from issuance of common
stock 19 7 45 31
Payments of long-term debt (3) - (23) (70)
Repurchases of common stock (63) - (292) -
Cash dividends on common stock (161) (161) (322) (322)
------ ------ ------ ------
Net cash (used for) financing
activities (605) (262) (621) (296)
------ ------ ------ ------
Effect of foreign exchange rate
changes on cash and cash equivalents (32) 158 (23) 183
------ ------ ------ ------
Net increase in cash and cash
equivalents 32 336 282 605
Cash and cash equivalents at
beginning of period 3,200 2,290 2,950 2,021
------ ------ ------ ------
Cash and cash equivalents at end of
period $3,232 $2,626 $3,232 $2,626
====== ====== ====== ======
Honeywell International Inc.
Reconciliation of Cash Provided by Operating Activities to Free Cash
Flow (Unaudited)
---------------------------------------------------------------------
(Dollars in millions)
Three Months Six Months
Ended Ended
June 30, June 30,
------------- --------------
2004 2003 2004 2003
----- ----- ----- ------
Cash provided by operating activities $ 505 $ 553 $ 842 $1,026
Expenditures for property, plant and
equipment (148) (171) (283) (276)
----- ----- ----- ------
Free cash flow $ 357 $ 382 $ 559 $ 750
===== ===== ===== ======
We define free cash flow as cash provided by operating activities,
less cash expenditures for property, plant and equipment.
We believe that this metric is useful to investors and management
as a measure of cash generated by business operations that will be
used to repay scheduled debt maturities and can be used to invest in
future growth through new business development activities or
acquisitions, and to pay dividends, repurchase stock, or repay debt
obligations prior to their maturities. This metric can also be used to
evaluate our ability to generate cash flow from business operations
and the impact that this cash flow has on our liquidity.