Business context and reporting period
Honeywell International Inc. is a diversified technology and manufacturing company serving aerospace, building technologies, performance materials and process technologies, and safety and productivity markets. This Form 10-K covers the fiscal year ended December 31, 2016; quarterly figures below identify the fourth quarter where relevant. Amounts are in U.S. dollars unless otherwise stated.
In 2016, Honeywell reorganized its former Automation and Control Solutions segment into Home and Building Technologies and Safety and Productivity Solutions. It also sold Honeywell Technology Solutions Inc. and spun off AdvanSix; prior segment periods were recast for comparability.
Financial performance and position
| Metric | 2016 | 2015 |
|---|---|---|
| Net sales | $39.302 billion | $38.581 billion |
| Gross profit / gross margin | $12.152 billion / 30.9% | $11.834 billion / 30.7% |
| Income before tax | $6.447 billion | $6.586 billion |
| Net income attributable to Honeywell | $4.809 billion | $4.768 billion |
| Diluted EPS | $6.20 | $6.04 |
| Operating cash flow | $5.498 billion | $5.519 billion |
| Cash and cash equivalents at year-end | $7.843 billion | $5.455 billion |
| Total debt at year-end | $15.775 billion | $12.068 billion |
| Dividends per share | $2.45 | $2.15 |
Net sales rose 2%, net income attributable to Honeywell rose 1%, and diluted EPS rose 3%. Gross margin improved 0.2 percentage point. SG&A increased to $5.469 billion from $5.006 billion, while the effective tax rate declined to 24.8% from 26.4%.
Fourth-quarter net sales were $9.985 billion, essentially flat against $9.982 billion a year earlier. Fourth-quarter net income attributable to Honeywell was $1.034 billion versus $1.194 billion, and diluted EPS was $1.34 versus $1.53.
Operating cash flow was nearly unchanged year over year; management attributed pressure principally to a $958 million unfavorable working-capital impact. Capital expenditures were $1.095 billion. Approximate operating cash flow less capital expenditures was $4.4 billion, compared with $4.4 billion in 2015. Cash increased by $2.388 billion during 2016, while investing activities used $3.342 billion and financing activities provided $346 million.
At year-end, total assets were $54.146 billion and shareowners’ equity was $19.547 billion. Current assets were $23.058 billion and current liabilities were $16.331 billion. Debt increased substantially, reflecting new debt issuance and refinancing; Honeywell issued approximately $8.9 billion of senior notes and repurchased $2.2 billion of older notes. It reported stable A/A/A2 long-term ratings from S&P, Fitch and Moody’s and no borrowing under its committed credit agreements.
Operating segments
- Aerospace: Sales fell 3% to $14.751 billion and segment profit fell 7% to $2.991 billion. Lower commercial original-equipment sales, OEM incentives and declines in defense and space were partly offset by aftermarket and transportation-systems growth.
- Home and Building Technologies: Sales rose 16% to $10.654 billion and segment profit rose 11% to $1.683 billion, primarily reflecting acquisitions alongside organic growth.
- Performance Materials and Technologies: Sales declined 2% to $9.272 billion, while segment profit rose 3% to $2.050 billion. UOP sales were weak amid slower customer projects; Process Solutions benefited from the Elster acquisition.
- Safety and Productivity Solutions: Sales declined 2% to $4.625 billion and segment profit declined 9% to $680 million, reflecting lower volumes partly offset by acquisitions and productivity.
Material changes, outlook, risks and unusual items
- Honeywell spent more than $7.5 billion on capital deployment in 2016, including over $2.5 billion on acquisitions, $2.079 billion on share repurchases, and $1.095 billion on capital expenditures. It increased the annual dividend rate by 12% and repurchased 19.3 million shares.
- Management expected a 2017 effective tax rate of approximately 25%, repositioning savings of $200 million to $300 million versus 2016, capital expenditures of approximately $1.1 billion, and repositioning cash spending of approximately $225 million. It expected operating cash flow to meet future operating cash needs. The filing does not provide a clear consolidated 2017 sales or EPS guidance figure.
- Management’s 2017 priorities included leadership transition, profitable organic growth, software and connected-product expansion, acquisition integration, margin improvement, and working-capital and debt management. The filing notes a CEO succession plan and leadership transitions in three of four operating segments.
- Net repositioning and other charges were $695 million, including $260 million of net repositioning charges, $222 million of net asbestos litigation charges, and $195 million of environmental liabilities. Pension mark-to-market expense was $273 million. The Honeywell Technology Solutions sale generated a $176 million pretax gain; early redemption of debt incurred a $126 million make-whole premium. Early adoption of employee share-based-payment accounting reduced 2016 tax expense by $127 million and benefited diluted EPS by $0.14.
- Principal risks include end-market cyclicality and customer capital spending, foreign exchange and geopolitical exposure, raw-material costs and supplier constraints, acquisition integration, pension assumptions and funding, cybersecurity incidents, tax uncertainty, and environmental, asbestos and other litigation liabilities. The company reported asbestos-related liabilities of $1.560 billion and probable insurance recoveries of $440 million at year-end. Environmental liabilities were $511 million; management said the ultimate timing and cost are uncertain and could be material to results or cash flows in periods recognized or paid.
- In 2017, Honeywell expected approximately $546 million in asbestos claim cash payments and $23 million in related insurance receipts, approximately $250 million of environmental spending, and approximately $130 million of contributions to non-U.S. pension plans; it expected no required contribution to U.S. pension plans.
- Substantial cash was held by foreign subsidiaries, and Honeywell intended to permanently reinvest the vast majority of foreign earnings. It had not provided U.S. federal and non-U.S. withholding taxes on approximately $18.3 billion of such earnings; potential repatriation tax was not practicably estimable.
- The independent auditor gave unqualified opinions on the consolidated financial statements and internal control over financial reporting; management also concluded controls were effective. Honeywell disclosed certain non-U.S. subsidiary activities involving Iran under General License H, including reported fourth-quarter revenues from specified activities.
Important facts for investors to verify
- Separate underlying organic growth from the effects of acquisitions, divestitures, foreign exchange and the AdvanSix spin-off, especially in Home and Building Technologies.
- Assess whether Aerospace and Safety and Productivity Solutions can stabilize sales and segment profit, and whether UOP’s project activity recovers.
- Review the increase in debt and the cash-flow outlook alongside planned acquisitions, dividends, repurchases and capital spending.
- Examine sensitivity of pension expense and obligations to discount rates and asset returns, and the assumptions behind asbestos liabilities and insurance recoveries.
- Track execution of leadership changes, segment realignment, acquisition integration and the projected repositioning savings.
- Evaluate potential tax effects of repatriating offshore earnings, pending tax examinations, environmental matters and other legal contingencies.