Honeywell International Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Amounts are in U.S. dollars; financial figures are in millions except per-share data. Honeywell reported four segments: Aerospace, Home and Building Technologies, Performance Materials and Technologies, and Safety and Productivity Solutions.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $9,804 | $9,611 | $29,317 | $28,599 |
| Net income attributable to Honeywell | $1,240 | $1,264 | $3,775 | $3,574 |
| Diluted EPS | $1.60 | $1.60 | $4.86 | $4.51 |
| Gross margin | 29.6% | 30.8% | 30.9% | 30.7% |
| Operating cash flow | Not separately stated for the quarter | $3,456 | $3,556 |
Q3 sales rose 2%, while net income attributable to Honeywell fell 2% and diluted EPS was unchanged. For the first nine months, sales rose 3%, net income attributable to Honeywell increased 6%, and diluted EPS increased 8%. Q3 gross margin contracted 1.2 percentage points; nine-month gross margin improved 0.2 points. The filing attributes quarterly margin pressure in part to segment mix/acquisitions, Aerospace OEM incentives, and higher repositioning charges.
Q3 segment results were mixed: Home and Building Technologies sales increased 17% and segment profit 8%; Aerospace sales decreased 6% and profit 20%; Performance Materials and Technologies sales increased 2% and profit 6%; Safety and Productivity Solutions sales decreased 2% and profit 11%. Segment reporting was realigned during 2016, with prior periods reclassified.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $3,456, down $100 year over year. Capital expenditures were $749, implying approximate free cash flow of $2,707, versus $2,871 in 2015.
- Investing activities used $3,276, including $2,568 of cash paid for acquisitions. Financing activities provided $708; cash increased $976 to $6,431.
- At September 30, cash was $6,431 and current assets were $21,834 versus current liabilities of $18,213. Commercial paper and other short-term borrowings were $5,601; current maturities of long-term debt were $649; long-term debt was $9,608. Total debt was approximately $15,858, up from $12,068 at year-end 2015.
- Honeywell issued euro-denominated notes in February, generating $4,438 of gross proceeds. It reported no borrowings under its committed credit agreements. The $4 billion credit agreement was extended to July 2021; additional 364-day facilities were established.
- Nine-month share repurchases were $1,866 and dividends paid were $1,410. The company reported $4.3 billion remaining under its $5 billion repurchase authorization at September 30.
Material changes, outlook and unusual items
- Honeywell acquired Intelligrated on August 29 for approximately $1,483 net of cash acquired; $1,124 was preliminarily allocated to goodwill. The filing reports $2,532 of aggregate nine-month acquisition costs net of cash acquired and debt assumed.
- The Resins and Chemicals business was spun off as AdvanSix on October 1, 2016, immediately after the quarter-end reporting date; its operating results are included through the spin-off effective date. Honeywell also sold Honeywell Technology Solutions Inc. for $300 and recorded a pretax gain of $176.
- Q3 net repositioning and other charges were $302, versus $133 a year earlier; nine-month charges were $567, versus $393. The nine-month charges included asbestos and environmental costs. Workforce reductions covered 5,888 positions in the first nine months.
- Management expected 2016 effective tax rate of approximately 24.5%, excluding any pension mark-to-market adjustment and gains or losses from early debt extinguishment. Repositioning actions were expected to generate $275–$300 of incremental pretax savings in 2016; expected full-year cash spending was approximately $200.
- Based on conditions at September 30, management identified a potential fourth-quarter pension mark-to-market adjustment of approximately $1.5 billion, but said the actual amount could not be determined and would depend on interest rates and market performance. It also anticipated refinancing certain debt in Q4; a potential extinguishment charge was approximately $140, subject to market conditions.
- Risks include environmental and asbestos claims, other litigation and investigations, foreign exchange and market conditions, and uncertainty in pension estimates. Environmental liabilities were recorded at $502; asbestos liabilities were $1,570 with related recorded insurance recoveries of $456. Management noted that ultimate environmental costs and timing cannot be determined and could be material to results or operating cash flows in periods recognized or paid.
- The filing cautions that quarterly results are not necessarily indicative of full-year results. It also notes adoption of share-based payment accounting guidance, which reduced income tax expense and increased diluted EPS by $0.07 in Q3 and $0.14 for the nine months.
Important facts for investors to verify
- Whether sales and margin trends persist, particularly Aerospace OEM weakness and the growth, profitability, and integration of recent acquisitions.
- The final fourth-quarter pension mark-to-market adjustment and any debt-refinancing or extinguishment charge.
- Actual cash generation after working-capital movements, capital spending, repositioning payments, acquisitions, dividends, and share repurchases.
- Final purchase accounting for Intelligrated and Elster, and the financial effects of the AdvanSix spin-off.
- Changes in asbestos and environmental estimates, insurance recoverability, litigation outcomes, and related cash requirements.
- Whether the projected 2016 tax rate and repositioning savings are achieved; management states forward-looking estimates are subject to risks and actual results may differ.