Honeywell International Inc. — 2016 Second-Quarter Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data. Comparisons are with the corresponding 2015 periods.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net sales | $9,991 | $9,775 | $19,513 | $18,988 |
| Gross margin | 31.7% | 30.3% | 31.5% | 30.6% |
| Income before taxes | $1,755 | $1,662 | $3,383 | $3,226 |
| Net income attributable to Honeywell | $1,282 | $1,194 | $2,468 | $2,310 |
| Diluted EPS | $1.66 | $1.51 | $3.19 | $2.91 |
| Cash dividends per share | $0.595 | $0.5175 | $1.190 | $1.035 |
- Q2 sales rose 2%; first-half sales rose 3%. Management attributed growth to acquisitions, which contributed 5 percentage points in both periods, partly offset by lower volume and foreign-currency translation.
- Q2 and first-half diluted EPS increased, supported by higher pension and postretirement income, stronger Aerospace and Automation and Control Solutions (ACS) segment profit, and fewer weighted-average shares. The filing reports SG&A of $1,329 in Q2 and $2,609 for the first half; respective prior-year amounts were $1,242 and $2,472.
- Effective tax rates were 26.5% in Q2 and the first half, versus 26.5% and 26.6%, respectively, in 2015.
Cash flow, liquidity and debt
- First-half operating cash flow was $1,801, compared with $1,829 in 2015. Capital expenditures were $475; operating cash flow less capital expenditures was $1,326.
- Investing activities used $1,542, including $1,084 of cash paid for acquisitions. Financing activities used $720, including $1,633 of share repurchases and $957 of dividends paid. Cash declined $410 to $5,045.
- At June 30, cash was $5,045 and current assets were $20,380, against current liabilities of $15,911. Commercial paper and other short-term borrowings were $3,788; current maturities of long-term debt were $618; long-term debt was $9,607.
- Total debt, including current maturities, was $10,225, up from $6,131 at December 31, 2015. Honeywell issued euro-denominated notes with gross proceeds of $4,438 in February. It reported no borrowings under its credit agreements; facilities included a $4 billion agreement extended to July 2021 and a separate $1.5 billion 364-day agreement.
Material changes and segment trends
- Aerospace: Q2 sales declined 1% to $3,779, while segment profit rose 2% to $791. Commercial aftermarket and Transportation Systems grew; commercial original equipment and Defense and Space declined.
- ACS: Q2 sales increased 9% to $3,886 and segment profit increased 8% to $615, primarily reflecting acquisitions and operational improvement, partly offset by foreign exchange.
- Performance Materials and Technologies (PMT): Q2 sales declined 3% to $2,326 and segment profit declined 4% to $490. UOP weakness, including lower gas-processing project revenue, was a key factor. Management expected the project slowdown to continue; catalyst volumes were expected to rise in the second half.
- In July, Honeywell announced a realignment of ACS into Home and Building Technologies and Safety and Productivity Solutions, creating a four-segment reporting structure beginning with Q3 2016 results. It also agreed to acquire Intelligrated for approximately $1.5 billion, subject to regulatory approval, with closing expected in Q3.
- Honeywell announced plans to spin off its Resins and Chemicals business as AdvanSix, expected by year-end 2016, subject to customary conditions and approvals.
Outlook, management commentary and risks
- Management expected a 2016 effective tax rate of approximately 26.5%. Repositioning actions were expected to generate $175–$200 of incremental pretax savings in 2016 versus 2015; expected 2016 cash spending was approximately $175.
- Management expected continued lower business and general aviation original-equipment sales volumes. It also noted that the UOP customer-project slowdown was expected to continue.
- Q2 repositioning and other charges were $140, including $56 of net asbestos litigation charges, $31 of environmental charges, and a net repositioning charge of $53. First-half charges totaled $265. The company reported workforce reductions and related productivity, transformation, acquisition-synergy and outsourcing actions.
- Recorded environmental liabilities were $523. Honeywell said ultimate environmental costs and timing could not be determined and could be material to results or operating cash flows when recognized or paid, while not expecting a material adverse effect on consolidated financial position based on existing reserves and experience.
- Asbestos-related liabilities were $1,551, with $451 of related insurance recoveries. NARCO claim estimates depend on uncertain assumptions; the company recorded the low end of its estimated liability range and said it could not reasonably estimate NARCO claims beyond 2018. Bendix estimates cover a five-year horizon and depend on claims experience and insurance recoveries.
- Pending retiree healthcare litigation could increase other postretirement benefit obligations by approximately $176 for pre-2003 retirees or $110 for post-2003 retirees if rulings are adverse. A Department of Justice investigation concerns parts manufactured in the U.K. and China for the F-35; the outcome is uncertain.
- The filing disclosed permitted non-U.S. subsidiary sales to Iran under OFAC General License H: approximately $2 of second-quarter revenue from adsorbents and approximately $0.4 of second-quarter revenue under a gas-meter contract valued at approximately $3.5.
- The filing cautions that quarterly results are not necessarily indicative of full-year results. It also identifies forward-looking statements as subject to risks and uncertainties.
Most important facts for investors to verify
- Whether acquisition-driven sales growth translates into sustained organic growth, particularly given volume and currency headwinds.
- Whether PMT/UOP project weakness persists and whether expected second-half catalyst growth materializes.
- How the Intelligrated acquisition, AdvanSix spin-off and ACS segment realignment affect results, cash needs and comparability.
- Whether the expected repositioning savings are achieved and whether spending or restructuring charges differ from expectations.
- Developments in asbestos and environmental estimates, insurance recoverability, retiree healthcare litigation and the F-35 investigation.
- The impact of higher total debt, acquisition spending, share repurchases and dividends on liquidity and capital allocation.