Honeywell International Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Unless noted otherwise, amounts are in millions of dollars. Honeywell operates four reportable segments: Aerospace, Honeywell Building Technologies, Performance Materials and Technologies, and Safety and Productivity Solutions.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $8,884 | $10,392 |
| Gross margin | 33.8% | 30.8% |
| Income before taxes | $1,842 | $1,911 |
| Net income attributable to Honeywell | $1,416 | $1,439 |
| Diluted EPS | $1.92 | $1.89 |
| Cash from operating activities | $1,134 | $1,136 |
- Sales declined 15% year over year; the filing attributes the change to volume growth of 6%, price of 2%, foreign exchange of negative 3%, and acquisitions/divestitures of negative 20%.
- Net income attributable to Honeywell decreased about 2%, while diluted EPS rose about 2%, supported in part by a lower share count. Gross margin improved 3.0 percentage points. SG&A was $1,363, or 15.3% of sales, versus $1,475, or 14.2%.
- Segment sales and profit: Aerospace $3,341 and $838; Honeywell Building Technologies $1,389 and $271; Performance Materials and Technologies $2,572 and $564; Safety and Productivity Solutions $1,582 and $212. Segment profit increased 9% at Performance Materials and Technologies, but declined 6% at Aerospace, 35% at Building Technologies, and 8% at Safety and Productivity Solutions.
Cash, liquidity, and debt
- Cash and cash equivalents were $8,625 at March 31, 2019, down from $9,287 at year-end; short-term investments were $2,059, up from $1,623.
- Operating cash flow was nearly unchanged. Investing activities used $609, including a net increase in investments, primarily short-term marketable securities. Financing activities used $1,235, including $750 of share repurchases and $606 of cash dividends.
- Total debt was approximately $16,112, comprising $3,514 of commercial paper and other short-term borrowings, $4,000 of current long-term debt, and $8,598 of long-term debt. No borrowings were outstanding under the company’s credit agreements.
- Honeywell repurchased $750 of shares in the quarter; approximately $3.0 billion remained under its $8 billion authorization at March 31, 2019. Cash dividends were $0.82 per share.
Material changes and management commentary
- Year-over-year sales and segment comparisons are significantly affected by the October 2018 tax-free spin-offs of Transportation Systems to Garrett Motion and Homes and Global Distribution to Resideo. Q1 2019 excludes those businesses; Q1 2018 includes their results. Management cited organic growth in all four segments, although segment results varied.
- Management attributed higher gross margin mainly to stronger margins in Aerospace, Building Technologies, and Performance Materials and Technologies, along with lower repositioning charges and pension service costs. Safety and Productivity Solutions profit was pressured by lower Productivity Products volume and inflation.
- Repositioning and other charges were $84 versus $191 a year earlier. The 2019 quarter included workforce reductions affecting 1,047 positions. Cash spending on repositioning was $44; management expected approximately $300 of such cash spending for 2019, funded from operating cash flow.
- The company adopted lease accounting guidance on January 1, 2019, recording net operating lease right-of-use assets and liabilities of $0.7 billion. Prior-period amounts were not restated.
Outlook, risks, and contingencies
- The filing provides no specific full-year revenue, earnings, or cash-flow guidance. Management’s stated 2019 repositioning cash-spending expectation is approximately $300.
- Environmental liabilities were $812, with $609 of receivables due from Resideo under an indemnification and reimbursement agreement. Honeywell stated the ultimate cost and timing of environmental matters cannot be determined and could be material to results or operating cash flows, though it does not expect a material adverse effect on consolidated financial position.
- Asbestos-related liabilities totaled $2,491, with insurance recoveries of $469. Honeywell said the $743 NARCO Trust liability may require a material adjustment when sufficiently reliable claims data becomes available. The company also disclosed uncertainty about asbestos claims, recoveries, and insurer solvency.
- Garrett disputes Honeywell’s compliance with, and the enforceability of, an indemnification agreement; Honeywell rejects the allegations. Honeywell also disclosed an SEC Enforcement investigation and a shareholder class action concerning prior accounting for Bendix asbestos claims.
- A UAW retiree-healthcare dispute is on appeal. Honeywell said potential damages would be at least $12 if the lower court’s full-premium ruling is upheld. The company reported no material change to its previously disclosed risk factors or market-risk disclosures.
- Management concluded disclosure controls were effective at quarter-end and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Assess the underlying growth and margin trends separately from the effects of the Garrett and Resideo spin-offs, currency movements, and other portfolio changes.
- Review segment-level performance, especially Building Technologies’ reported decline due to the Homes spin-off and the profit decrease at Safety and Productivity Solutions.
- Monitor cash conversion, investment balances, debt maturities, and the planned level and timing of share repurchases and dividends.
- Track developments in NARCO and Bendix asbestos estimates, environmental liabilities, insurance recoveries, and the Garrett indemnification dispute.
- Confirm subsequent updates to management’s 2019 outlook; this filing does not provide comprehensive full-year financial guidance.