Honeywell International Inc. — Q1 2017 Form 10-Q
Business context and period: The filing reports unaudited results for the three months ended March 31, 2017, compared with the three months ended March 31, 2016. Honeywell operates four reportable segments: Aerospace; Home and Building Technologies; Performance Materials and Technologies; and Safety and Productivity Solutions. Dollar amounts below are in millions, except per-share data.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $9,492 | $9,522 |
| Income before taxes | $1,724 | $1,628 |
| Net income attributable to Honeywell | $1,326 | $1,216 |
| Diluted EPS | $1.71 | $1.56 |
| Gross margin | 33.0% | 31.2% |
| Effective tax rate | 22.7% | 24.7% |
| Operating cash flow | $940 | $319 |
| Capital expenditures | $168 | $194 |
- Sales were essentially flat year over year: volume contributed 2% growth, offset by 1% unfavorable foreign exchange and 1% net impact from acquisitions and divestitures. Lower product and service costs helped lift gross margin; SG&A rose to $1,349 from $1,280, or 14.2% of sales versus 13.4%.
- Operating cash flow increased $621, which management attributed primarily to a $414 favorable working-capital impact and $106 higher net income. Operating cash flow less capital expenditures was $772, versus $125 in Q1 2016.
- At March 31, cash and cash equivalents were $7,710 and short-term investments were $1,885. Current assets were $23,580 and current liabilities $17,281. Commercial paper and other short-term borrowings were $3,415; current maturities of long-term debt were $1,271; long-term debt was $11,181.
- Cash decreased $133 during the quarter to $7,710. Investing used $604 and financing used $618. Share repurchases were $310 and dividends paid were $503.
Material changes and segment results
- Aerospace: Sales fell 4% to $3,546; segment profit was essentially flat at $796. Management cited the government-services divestiture and currency headwinds; lower business-jet original-equipment shipments were partly offset by stronger commercial aftermarket activity.
- Home and Building Technologies: Sales rose 3% to $2,553 and segment profit rose 8% to $389, reflecting organic growth, acquisitions and restructuring benefits, partly offset by currency and growth investment.
- Performance Materials and Technologies: Sales declined 9% to $2,069 while segment profit increased 2% to $471. Divestitures, including the former resins and chemicals business, weighed on sales; organic growth, productivity and pricing supported profit.
- Safety and Productivity Solutions: Sales rose 25% to $1,324 and segment profit rose 29% to $194. The sales increase was primarily acquisition-driven, including Intelligrated, with organic growth also contributing.
- Consolidated segment profit increased to $1,789 from $1,720. Honeywell repurchased 2.575 million shares in the quarter; $3.8 billion remained available under its $5 billion repurchase authorization.
Outlook, risks and unusual items
- Management expected a 2017 effective tax rate of approximately 25%. The filing does not provide a clear full-year revenue or EPS forecast.
- Repositioning actions were expected to generate $200–$300 of incremental pretax savings in 2017 versus 2016. Expected 2017 cash spending was approximately $225; $54 was spent in Q1. Q1 workforce reductions covered 622 positions.
- Q1 net repositioning and other charges were $129, including $29 of net repositioning charges, $50 of asbestos-related litigation charges net of insurance, and $50 for probable and reasonably estimable environmental liabilities.
- Environmental liabilities recorded totaled $538 at quarter-end. Honeywell said ultimate costs and timing cannot be determined and could materially affect results or operating cash flows when recognized or paid, though it did not expect a material adverse effect on financial position based on reserves and experience.
- Recorded asbestos liabilities were $1,548, with related insurance recoveries of $430. Estimates depend on uncertain claims, resolution values, trust processes and insurer recoveries. For NARCO, annual contribution caps are $140 in 2017 and 2018 and $145 thereafter, subject to stated provisions; no Annual Contribution Claims payments had been made as of March 31.
- Pending retiree healthcare litigation could increase other postretirement benefits by approximately $129 for pre-2003 retirees and $95 for post-2003 retirees if Honeywell loses on the relevant caps. The company also disclosed a Department of Justice investigation concerning parts used in the F-35; its outcome cannot be predicted.
- Honeywell reported approximately $12.5 of Q1 revenue from UOP services to Iranian counterparties under non-U.S. subsidiaries’ activities pursuant to General License H, and stated it intended to continue such business in compliance with applicable laws.
- Honeywell was evaluating new accounting standards. It did not currently expect the 2018 revenue-recognition standard to materially affect financial position or results, but said certain areas, particularly Aerospace, could change; lease-accounting effects remained under evaluation.
Important facts for investors to verify
- Whether the improvement in cash generation and gross margin is sustained, given the significant working-capital contribution to Q1 operating cash flow.
- How segment trends develop, particularly Aerospace demand, Performance Materials and Technologies’ divestiture effects, and acquisition-driven growth in Safety and Productivity Solutions.
- Whether the expected $200–$300 repositioning savings and approximately $225 of 2017 cash spending are achieved.
- Updates to environmental and asbestos liabilities, insurance recoveries, and the NARCO Trust claims process, as well as outcomes of the retiree healthcare litigation and F-35 investigation.
- Subsequent changes in debt, cash deployment, share repurchases, and the expected 2017 tax rate.