HONEYWELL INTERNATIONAL INC quarterly report, Q1 FY2016

Business context and reporting period

Honeywell International Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2016, compared with the three months ended March 31, 2015. The company reports through Aerospace, Automation and Control Solutions (ACS), and Performance Materials and Technologies (PMT). Management cautions that quarterly results are not necessarily indicative of full-year results.

Key financial metrics

Operating cash flow less capital expenditures was negative $63 million, versus positive $256 million in Q1 2015. The company paid $499 million in dividends and repurchased $1.156 billion of shares. The quarterly dividend per share was $0.5950, compared with $0.5175 a year earlier.

Material changes versus the prior comparable period

• Reported sales increased 3%; management attributed the change to a 5% contribution from acquisitions and divestitures, partly offset by a 2% foreign-exchange impact. The company estimates that additional reporting days benefited current-quarter sales by approximately 3%.
• Aerospace sales rose 3% to $3.705 billion and segment profit rose 6% to $798 million. ACS sales increased 13% to $3.677 billion, but segment profit rose 3% to $530 million. PMT sales declined 9% to $2.140 billion and segment profit declined 12% to $441 million.
• PMT weakness was concentrated in UOP: sales fell 38%, reflecting a significant slowdown in gas-processing customer projects, which management expected to continue, and lower catalyst and equipment sales.
• Net income attributable to Honeywell rose about 6%, and diluted EPS rose from $1.41 to $1.53, supported by higher Aerospace and ACS segment profit, higher pension and postretirement income, and fewer weighted-average shares.
• Operating cash flow decreased by $164 million, primarily because cash tax payments increased by $202 million; this was partly offset by the absence of $151 million in OEM incentive payments made in Q1 2015.
• Cash declined by $982 million during the quarter. Investing cash use included $1.056 billion of acquisition payments. Financing included $4.448 billion of long-term debt proceeds, $2.450 billion of net repayments of short-term borrowings, and $238 million to acquire the remaining 30% interest in UOP Russell LLC.

Outlook, management commentary, risks and unusual items

• Management expected the 2016 effective tax rate to be approximately 26.5%.
• Repositioning actions were expected to generate $175–$200 million of incremental pretax savings in 2016 versus 2015. Expected 2016 cash spending was approximately $175 million; $54 million was spent in Q1.
• Honeywell issued €4.0 billion of senior notes in February, with maturities from 2018 through 2028. It reported no borrowings under its $3 billion 364-day credit agreement or $4 billion five-year credit agreement.
• Management planned approximately $160 million of contributions to non-U.S. pension plans in 2016, including $106 million of marketable securities contributed in January; no U.S. pension-plan contribution was required in 2016.
• During Q1, Honeywell acquired COM DEV for approximately $347 million. The acquisition of Xtralis for approximately $515 million closed on April 1, 2016, after quarter-end. Purchase accounting for Xtralis, COM DEV and the 2015 Elster acquisition remained subject to final adjustment.
• Environmental liabilities were $539 million at March 31. Honeywell said ultimate costs and timing cannot be determined and could be material to results or operating cash flows in periods recognized or paid, although it did not expect a material adverse effect on consolidated financial position.
• Asbestos-related liabilities were $1.544 billion, with related insurance recoveries of $454 million. The NARCO future-claims estimate was recorded at the $743 million low end of a $743–$961 million range; Honeywell said it could not reasonably estimate NARCO claims beyond 2018. Bendix projections cover the next five years and depend on claims and resolution assumptions.
• Pending matters include a retiree healthcare-cap litigation dispute; adverse rulings could increase postretirement benefit obligations by approximately $176 million for pre-2003 retirees and $110 million for post-2003 retirees. Honeywell also disclosed a DOJ investigation concerning parts used in the F-35 program, for which the outcome was uncertain.
• The company was evaluating the effects of new revenue-recognition, lease-accounting, and share-based-payment standards. Management reported disclosure controls as effective and no material change in internal control over financial reporting.

Important facts for investors to verify

• Whether reported sales growth persists after accounting for the estimated 3% benefit from additional reporting days and the contribution from acquisitions.
• Whether UOP’s customer-project slowdown continues, and whether PMT segment sales and profit recover.
• Whether operating cash flow improves after the quarter’s lower conversion and acquisition-related cash spending.
• Debt and liquidity trends following the euro-note issuance, acquisition spending, share repurchases, and short-term debt repayments.
• Future developments and estimates for environmental and asbestos liabilities, insurance recoveries, the UAW litigation, and the F-35 investigation.