Honeywell International Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017; financial statements are unaudited. Dollar amounts are in millions except per-share data. Comparisons are with the corresponding 2016 periods.
Business context and results
Honeywell reports four segments: Aerospace; Home and Building Technologies; Performance Materials and Technologies; and Safety and Productivity Solutions. Q2 net sales were $10,078, up 1%; first-half sales were $19,570, essentially flat year over year. Management attributed sales changes to volume growth, partly offset by foreign-exchange effects and divestitures.
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net sales | $10,078 | $9,991 | $19,570 | $19,513 |
| Income before taxes | $1,778 | $1,755 | $3,502 | $3,383 |
| Net income attributable to Honeywell | $1,392 | $1,319 | $2,718 | $2,535 |
| Diluted EPS | $1.80 | $1.70 | $3.51 | $3.26 |
| Gross margin | 32.0% | 31.7% | 32.5% | 31.5% |
| Effective tax rate | 21.3% | 24.4% | 22.0% | 24.5% |
Cash flow, debt and liquidity
- First-half operating cash flow was $2,387, versus $1,902 in 2016. Management cited improved working capital and higher net income, partly offset by $252 higher cash tax payments.
- Investing cash outflow was $992, compared with $1,542; financing cash outflow was $1,583, compared with $821. Cash increased $34 to $7,877.
- At June 30, cash and cash equivalents were $7,877 and short-term investments were $1,944. Total current assets were $24,064; current liabilities were $17,981.
- Long-term debt was $11,329 and current maturities of long-term debt were $1,378. Commercial paper and other short-term borrowings were $3,803. Honeywell reported total debt, including current maturities, of $12,707 in its debt note, versus $12,409 at December 31, 2016.
- Honeywell extended its $4 billion revolving credit agreement to April 2022 and entered a separate $1.5 billion 364-day credit agreement; no borrowings were outstanding under these facilities.
Material changes and segment performance
- Segment profit increased to $1,910 in Q2 from $1,847 and to $3,699 for the first half from $3,567. Profit increased in each segment, while corporate expense also rose.
- Aerospace sales declined 3% in Q2 and 4% year to date, mainly reflecting the government services divestiture and currency effects; segment profit rose 4% and 2%, respectively. Commercial aftermarket sales grew, while commercial original equipment and defense and space sales were weaker on a reported basis.
- Home and Building Technologies sales rose 2% in Q2 and 3% year to date; segment profit rose 2% and 5%. Organic growth and productivity contributed, partly offset by currency and product mix.
- Performance Materials and Technologies sales fell 8% in Q2 and 9% year to date, principally due to divestitures, including the former resins and chemicals business. Segment profit nevertheless rose 1% in both periods, supported by productivity, volume and pricing.
- Safety and Productivity Solutions sales rose 30% in Q2 and 27% year to date, and segment profit rose 24% and 26%. Much of the sales increase reflected acquisitions, particularly Intelligrated; organic growth was more modest.
Outlook, risks and unusual items
- Management expected a 2017 effective tax rate of approximately 24%. The filing does not provide a broader full-year sales or EPS forecast in the supplied text.
- Repositioning actions were expected to generate $250–$350 of incremental pretax savings in 2017 versus 2016. Expected 2017 cash spending was approximately $225; $94 had been spent in the first half. Q2 repositioning and other charges totaled $224, versus $140 a year earlier.
- Environmental liabilities were $554 at June 30. Honeywell stated that ultimate costs and timing are uncertain and could materially affect results or operating cash flows in periods recognized or paid, although it did not expect a material adverse effect on consolidated financial position.
- Recorded asbestos liabilities were $1,545, with related insurance recoveries of $424. The company highlighted uncertainty in future claims, claim values and insurance recoveries. It also disclosed potential increases in retiree healthcare obligations of approximately $95 for post-2003 retirees and $129 for pre-2003 retirees if it loses the UAW litigation.
- The Department of Justice declined prosecution in the Joint Strike Fighter investigation; Honeywell stated the matter was fully resolved. Other litigation outcomes remain uncertain and could affect results or cash flows.
- Honeywell expected to adopt the new revenue standard on January 1, 2018 using the modified retrospective method. It expected no material consolidated financial impact, but anticipated changes in certain Aerospace revenue and cost classifications and expanded disclosures. Adoption of the lease standard was planned for 2019; impact evaluation was ongoing.
- Q2 foreign-exchange economic hedges resulted in $84 of expense in other income/expense. The filing also disclosed Iran-related activities by non-U.S. subsidiaries under applicable U.S. authorizations, including Q2 revenue of approximately $8.8 from UOP services and $1.4 from product sales, plus approximately $0.1 of Process Solutions product sales.
Important facts for investors to verify
- How much reported sales and profit growth is organic versus attributable to acquisitions, divestitures, foreign exchange and repositioning charges—particularly in Safety and Productivity Solutions.
- Whether operating cash flow remains strong as working capital changes, cash taxes and planned repositioning spending evolve.
- The assumptions, payment timing and insurance recoverability underlying the environmental and asbestos reserves, including NARCO trust claims and the NARCO standstill agreement due to expire in October 2017.
- Whether the approximately 24% expected tax rate and $250–$350 repositioning savings target are achieved.
- The eventual effects of revenue-standard adoption on Aerospace contract balances and presentation, and the balance-sheet impact of the new lease standard.
- Developments in the UAW retiree healthcare litigation and any future Iran-related activity and required disclosures.