Honeywell International Inc. — Q2 2019 Form 10-Q
Business context and reporting period
Unaudited results cover the quarter and six months ended June 30, 2019, compared with the same periods in 2018. Honeywell reported four segments: Aerospace, Honeywell Building Technologies, Performance Materials and Technologies, and Safety and Productivity Solutions. Comparisons are significantly affected by the 2018 spin-offs of Transportation Systems (Garrett Motion) and Homes and Global Distribution (Resideo).
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $9.243B | $10.919B | $18.127B | $21.311B |
| Net income attributable to Honeywell | $1.541B | $1.267B | $2.957B | $2.706B |
| Diluted EPS | $2.10 | $1.68 | $4.02 | $3.57 |
| Gross margin | 34.1% | 30.3% | 33.9% | 30.5% |
| Operating cash flow | — | — | $2.812B | $2.997B |
| Capital expenditures | — | — | $312M | $339M |
Q2 diluted EPS increased 25%; six-month diluted EPS increased 13%. Six-month operating cash flow less capital expenditures was $2.500B, versus $2.658B in 2018. Cash and cash equivalents were $8.225B at June 30, down from $9.287B at year-end; short-term investments were $1.718B. Current assets were $23.768B and current liabilities $19.894B.
Balance-sheet debt, including commercial paper, short-term borrowings and current maturities, totaled approximately $16.183B at June 30, compared with approximately $16.214B at December 31, 2018. No borrowings were outstanding under the company’s credit agreements. Honeywell repurchased $2.650B of shares and paid $1.203B in cash dividends during the first half. A $10B repurchase authorization was approved in April, with $8.7B remaining at quarter-end.
Material changes versus prior comparable periods
- Reported sales fell 15% in both Q2 and the first half. Management attributed the declines primarily to the spin-offs: acquisitions/divestitures reduced sales by 18% in Q2 and 20% year to date. Organic volume grew 3% in Q2 and 5% year to date; price contributed 2%, while currency reduced growth by 2% in each period.
- Honeywell-attributable net income rose 22% in Q2 and 9% for the first half. Lower tax expense, improved segment operations, lower repositioning and other charges, and a reduced share count contributed; lower pension income and the absence of spun-off businesses partly offset gains.
- Gross margin improved, supported by higher segment margins and lower repositioning charges and pension service costs. SG&A declined in dollars, largely because the spun-off businesses were no longer included, but increased as a percentage of sales.
- Segment performance was mixed. First-half Performance Materials and Technologies sales rose 1% and segment profit rose 8%; Safety and Productivity Solutions sales rose 2% but profit fell 19%. Aerospace and Building Technologies reported lower sales and profit primarily due to the spin-offs, despite organic growth in retained businesses.
Outlook, management commentary, risks and unusual items
- No full-year sales or earnings guidance is stated in the supplied filing text. Management expected approximately $300M of cash spending on repositioning actions during 2019, funded from operating cash flows.
- Q2 net repositioning and other charges were $126M, compared with $266M a year earlier; first-half charges were $210M versus $457M. The 2019 Q2 charges included $39M of environmental liabilities and $6M of asbestos litigation charges. First-half workforce reductions covered 2,313 positions.
- Environmental liabilities were $794M at June 30. Honeywell reported reimbursement receivables under agreements with Resideo and Garrett. Garrett disputes the enforceability of its agreement and alleges Honeywell has not met its obligations; Honeywell rejects those claims and says it is seeking resolution.
- Asbestos-related liabilities were $2.471B, with $462M of related insurance recoveries. The $743M NARCO Trust liability has not been updated because Honeywell says claims-processing data remain insufficiently reliable; the company warns a future estimate change could be material. Honeywell is also cooperating with an SEC investigation concerning prior Bendix asbestos accounting and contests related shareholder class-action claims.
- Other exposures include environmental proceedings, a retiree healthcare appeal, and DOJ, SEC and Brazilian investigations concerning third parties associated with Petrobras and Unaoil. The company says it cannot estimate reasonably possible losses for most matters; outcomes could affect results or operating cash flows in periods recognized or paid.
- The filing says disclosure controls were effective at period-end and reports no material change to risk factors or market-risk disclosures. Forward-looking statements remain subject to uncertainties, and interim results are not necessarily indicative of full-year performance.
Important facts for investors to verify
- Separate retained-business organic growth from reported declines caused by the Garrett and Resideo spin-offs.
- Track the Safety and Productivity Solutions profit decline and whether productivity, pricing and volume trends improve.
- Monitor operating cash conversion, working capital, cash taxes, share repurchases and debt maturities.
- Assess the assumptions behind asbestos liabilities and insurance recoveries, environmental accruals, and reimbursement collectability from Garrett and Resideo.
- Check subsequent disclosures for 2019 full-year guidance, repositioning spending, and developments in the SEC investigation and other legal matters.