Honeywell International Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. Honeywell is a diversified industrial technology and manufacturing company operating through Aerospace, Home and Building Technologies, Performance Materials and Technologies, and Safety and Productivity Solutions. The filing is an annual report; it also provides fourth-quarter results.
Financial performance
| Metric | 2017 | 2016 | Change / context |
|---|---|---|---|
| Net sales | $40.534 billion | $39.302 billion | Up 3%; volume contributed 3%, price 1%, and acquisitions/divestitures net reduced growth 1%. |
| Gross profit / margin | $12.959 billion / 32.0% | $12.152 billion / 30.9% | Margin improved 1.1 percentage points. |
| Income before taxes | $6.902 billion | $6.447 billion | Up 7%. |
| Net income attributable to Honeywell | $1.655 billion | $4.809 billion | Down substantially, principally due to a provisional Tax Act charge of approximately $3.8 billion. |
| Diluted EPS | $2.14 | $6.20 | Tax Act effects drove the decline. |
| Operating cash flow | $5.966 billion | $5.498 billion | Up $468 million. |
| Capital expenditures | $1.031 billion | $1.095 billion | FY2017 free cash flow, calculated as operating cash flow less capital expenditures, was approximately $4.935 billion. |
| Cash and cash equivalents | $7.059 billion | $7.843 billion | Short-term investments were $3.758 billion versus $1.520 billion. |
| Total debt | $17.882 billion | $15.775 billion | Includes $5.309 billion short-term debt and $12.573 billion long-term debt. |
| Shareowners’ equity | $17.439 billion | $19.547 billion | Decreased year over year. |
| Dividends per share | $2.74 | $2.45 | Quarterly rate increased 12% to $0.745 beginning in Q4. |
Fourth-quarter 2017 sales were $10.843 billion. Honeywell reported a quarterly net loss attributable to the company of $2.411 billion, or diluted loss per share of $3.18, primarily reflecting Tax Act effects.
Segment performance
- Aerospace: Sales of $14.779 billion, essentially flat; segment profit rose 10% to $3.288 billion. Aftermarket sales grew 6%, while Defense and Space sales declined 7%, partly reflecting the government-services divestiture.
- Home and Building Technologies: Sales rose 3% to $9.777 billion; segment profit rose 2% to $1.650 billion.
- Performance Materials and Technologies: Sales declined 1% to $10.339 billion, primarily due to divestitures; segment profit rose 4% to $2.206 billion. UOP sales grew 12%, while Advanced Materials sales fell 16%, including the impact of the prior-year AdvanSix spin-off.
- Safety and Productivity Solutions: Sales rose 22% to $5.639 billion and segment profit rose 25% to $852 million, reflecting acquisitions, including Intelligrated, and organic growth.
Material changes and capital allocation
- Management attributed higher pre-tax income to organic sales growth and operational improvements, including productivity and margin expansion. Gross margin improved, although SG&A increased to 14.3% of sales from 13.9%.
- Honeywell repurchased 20.5 million shares for $2.889 billion and paid $2.119 billion in cash dividends. A new $8 billion repurchase authorization was approved in December; $7.7 billion remained available at year-end.
- In October, Honeywell announced plans to spin off Homes and Global Distribution and Transportation Systems as separate public companies. These were proposed transactions, subject to conditions and approval, and could be delayed or not completed.
- The company realigned Smart Energy into Process Solutions in October 2017. It completed the AdvanSix spin-off in October 2016 and sold Honeywell Technology Solutions Inc. in September 2016.
Outlook, risks and unusual items
- Management expected a 2018 effective tax rate of 22.0%–23.0%, subject to factors including tax-law interpretation, audits, pension adjustments, and other unusual items.
- For 2018, Honeywell expected approximately $900 million of capital expenditures, $250 million of repositioning cash spending, $225 million of environmental spending, and $350 million of asbestos claim payments, partly offset by approximately $24 million of related insurance receipts. It expected no required U.S. pension contributions and approximately $140 million of contributions to non-U.S. plans.
- Repositioning actions were expected to produce $300 million of incremental pre-tax savings in 2018 versus 2017. The company recorded $1.021 billion of repositioning and other charges in 2017, including $491 million of repositioning charges, asbestos charges net of insurance, and environmental liabilities.
- The Tax Act produced a provisional charge of approximately $3.8 billion, including a $1.9 billion transition-tax charge and approximately $2.1 billion for taxes associated with the decision to no longer permanently reinvest historical foreign earnings, partly offset by a tax benefit from the lower U.S. corporate rate. The accounting remained provisional at year-end.
- Honeywell planned to repatriate at least $7 billion of historical foreign earnings to the U.S. over two years. Management cited international operations, foreign exchange, customer end-market cycles, raw-material costs and supply, pension assumptions, cybersecurity, and the proposed spin-offs among relevant risks.
- Recorded year-end liabilities included $595 million for environmental matters and $1.523 billion for asbestos claims, with $435 million of probable asbestos insurance recoveries. Actual future costs and recovery amounts may differ; the filing states that environmental losses beyond recorded liabilities could not be reasonably estimated.
- The auditor issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective as of December 31, 2017.
Most important facts for investors to verify
- Reconcile reported earnings and quarterly loss to the provisional Tax Act charges, and monitor any subsequent adjustment to the tax accounting and the stated 2018 tax-rate outlook.
- Track organic sales, segment margins, and the sustainability of productivity-led profit growth, particularly where reported growth includes acquisitions or divestitures.
- Assess debt maturities and liquidity: total debt was $17.882 billion, including $5.309 billion classified as short-term debt; compare this with cash, short-term investments, and cash generation.
- Monitor whether the proposed spin-offs proceed, their separation costs and financing, and any effects on liabilities, cash flows, or the remaining businesses.
- Review asbestos and environmental claim experience, insurance recoverability, pension assumptions, and the cash requirements disclosed for 2018.