Honeywell International Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with the three months ended March 31, 2017 unless noted. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data.
Business context and results
Honeywell operates through Aerospace, Home and Building Technologies, Performance Materials and Technologies, and Safety and Productivity Solutions. Net sales rose 9%, with management attributing growth to volume, pricing, and favorable foreign currency translation. All four segments reported higher sales and segment profit.
| Metric | Q1 2018 | Q1 2017 | Change / note |
|---|---|---|---|
| Net sales | $10,392 | $9,492 | +9%; volume +4%, price +1%, currency +4% |
| Income before taxes | $1,909 | $1,724 | +11% |
| Net income attributable to Honeywell | $1,438 | $1,326 | +8% |
| Diluted EPS | $1.89 | $1.71 | +11% |
| Gross margin | 30.8% | 31.2% | Down 0.4 percentage point |
| SG&A as a share of sales | 14.2% | 15.0% | Improved 0.8 percentage point |
| Effective tax rate | 24.0% | 22.7% | Higher year over year |
| Operating cash flow | $1,136 | $940 | + $196 |
| Capital expenditures | $140 | $168 | Cash outflow |
Financial position and liquidity
- At March 31, cash and cash equivalents were $7,897 and short-term investments were $2,383, a combined $10,280. Total current assets were $25,587 and current liabilities were $18,755; the current ratio was approximately 1.36.
- Debt comprised $5,406 of commercial paper and other short-term borrowings and $12,881 of long-term debt, including current maturities: approximately $18,287 total. Honeywell reported no outstanding borrowings under its credit agreements.
- Cash increased $838 to $7,897 during the quarter. Investing activities provided $994, primarily reflecting net reductions in investments; financing activities used $1,448.
- Share repurchases were $940 and cash dividends were $556. The quarterly dividend per share was $0.745, versus $0.665 a year earlier. The company had $6.8 billion remaining under its $8 billion repurchase authorization.
Material changes and management commentary
- Segment sales and profit increased year over year: Aerospace sales/profit were $3,977/$893; Home and Building Technologies $2,433/$416; Performance Materials and Technologies $2,534/$519; and Safety and Productivity Solutions $1,448/$231.
- Gross margin declined mainly because of lower margins in Aerospace and Performance Materials and Technologies. Higher direct material costs—about $610 million—were driven primarily by sales volume and currency, partly offset by productivity net of inflation.
- Operating cash flow improved mainly because cash tax payments were $191 million lower. Financing cash use rose, principally due to increased share repurchases and dividends.
- Honeywell adopted the new revenue-recognition standard on January 1, 2018 using the modified retrospective method. Adoption reduced opening retained earnings by $75 million. Management estimated Q1 revenue would have been about $120 million lower under the previous accounting guidance, so reported revenue growth is not fully comparable on an unchanged accounting basis.
- A pension accounting change moved non-service pension and postretirement components to Other (income) expense; prior periods were retrospectively presented. The filing also notes that Q1 results should not necessarily be viewed as indicative of full-year results.
Outlook, risks, contingencies, and unusual items
- No comprehensive full-year financial guidance is stated in the supplied filing text. Honeywell expected approximately $250 million of 2018 cash spending on repositioning actions, funded from operating cash flows.
- Management cited announced spin-offs of the Homes and Global Distribution business and Transportation Systems business. Q1 included $55 million of separation costs; the filing cautions that proposed spin-offs may change or be abandoned.
- Repositioning and other charges were $193 million, versus $129 million a year earlier. Q1 repositioning actions included 1,153 planned workforce reductions and a $47 million asset impairment, primarily related to a legacy property planned for disposition.
- The effective tax rate was affected by lower benefits from employee share-based payments and tax reserves, partly offset by U.S. tax reform benefits. The company had recorded provisional 2017 tax-reform charges of $1.9 billion for the transition tax and $2.1 billion for taxes on foreign earnings no longer intended to be permanently reinvested; it reported no material change to those estimates in Q1 and had not completed the accounting.
- Recorded environmental liabilities were $630 million. Asbestos-related liabilities were $1,528 million, with $428 million of recorded insurance recoveries. Honeywell noted estimation uncertainty; environmental costs could materially affect results or operating cash flows when recognized or paid.
- In a retiree-healthcare dispute, a district court ruled Honeywell owed the “full premium” for certain past periods. Honeywell appealed; if the ruling is upheld, the filing states damages would be at least $12 million. The company also said it intended to terminate the affected healthcare coverage as of July 31, 2018.
- Honeywell disclosed Q1 Iran-related activity by non-U.S. UOP subsidiaries conducted under applicable licenses: approximately $6.7 million revenue from services and $10.2 million from product sales to non-U.S. third parties for end-use in Iran.
Important facts for investors to verify
- Whether announced spin-offs proceed, and their timing, separation costs, and effect on continuing-business results.
- How much reported growth reflects underlying demand versus foreign exchange and the new revenue-recognition standard.
- Whether gross-margin pressure from materials, inflation, and product mix persists, and whether productivity offsets it.
- Final U.S. tax-reform accounting and potential changes to provisional tax estimates.
- Developments in environmental, asbestos, and retiree-healthcare matters, including insurance recoverability and cash-payment timing.
- Cash generation, debt and commercial-paper balances, and the pace of repurchases and dividends; the filing provides no comprehensive full-year earnings guidance in the supplied text.