Quarterly Report (10-q)

Date : 04/21/2017 @ 1:01PM
Source : Edgar (US Regulatory)
Stock : Honeywell International Inc. (HON)
Quote : 135.85  -2.23 (-1.62%) @ 5:48PM
Honeywell share price Chart

Quarterly Report (10-q)

United States
Securities and Exchange Commission
Washington, D.C. 20549

 

Form 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2017

 

OR

 

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______ to _____

 

Commission file number 1-8974

 

Honeywell International Inc.
(Exact name of registrant as specified in its charter)

 

  Delaware   22-2640650  
  (State or other jurisdiction of   (I.R.S. Employer  
  incorporation or organization)   Identification No.)  
         
 

115 Tabor Road

Morris Plains, New Jersey

  07950  
  (Address of principal executive offices)   (Zip Code)  

 

    (973) 455-2000    
  (Registrant’s telephone number, including area code)  
     
    Not Applicable    
  (Former name, former address and former fiscal year,  
  if changed since last report)  

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x Accelerated filer o
Non-Accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company o
  Emerging growth company o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to section 13(a) of the Exchange Act. o

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

 

There were 762,338,156 shares of Common Stock outstanding at March 31, 2017.

 

Honeywell International Inc.

Index

 

Part I.   Financial Information Page No.
           
Item 1. Financial Statements:    
           
Consolidated Statement of Operations (unaudited) – Three Months Ended March 31, 2017 and 2016 3  
           
Consolidated Statement of Comprehensive Income (unaudited) –  Three Months Ended March 31, 2017 and 2016 4  
           
Consolidated Balance Sheet (unaudited) – March 31, 2017 and December 31, 2016 5  
           
Consolidated Statement of Cash Flows (unaudited) – Three Months Ended March 31, 2017 and 2016 6  
           
Notes to Consolidated Financial Statements (unaudited) 7  
           
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 22  
           
Item 3. Quantitative and Qualitative Disclosures About Market Risks 29  
           
Item 4. Controls and Procedures 29  
           
Part II. Other Information    
           
Item 1. Legal Proceedings 30  
           
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 30  
           
Item 5. Other Information 30  
           
Item 6. Exhibits 31  
           
Signatures 32  

 

Cautionary Statement about Forward-Looking Statements

 

This report contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are those that address activities, events or developments that we or our management intends, expects, projects, believes or anticipates will or may occur in the future. They are based on management’s assumptions and assessments in the light of past experience and trends, current economic and industry conditions, expected future developments and other relevant factors. They are not guarantees of future performance, and actual results, developments and business decisions may differ from those envisaged by our forward-looking statements. Our forward-looking statements are also subject to risks and uncertainties, which can affect our performance in both the near- and long-term. These forward-looking statements should be considered in the light of the information included in this report and our other filings with the Securities and Exchange Commission, including, without limitation, the Risk Factors, as well as the description of trends and other factors in Management’s Discussion and Analysis of Financial Condition and Results of Operations, set forth in our 2016 Annual Report on Form 10-K.

2

PART I. FINANCIAL INFORMATION

 

The financial statements and related footnotes as of March 31, 2017 should be read in conjunction with the financial statements for the year ended December 31, 2016 contained in our 2016 Annual Report on Form 10-K.

 

ITEM 1. FINANCIAL STATEMENTS

 

 

Honeywell International Inc.

Consolidated Statement of Operations

(Unaudited)

 

    Three Months Ended
    March 31,
    2017   2016
         
    (Dollars in millions, except per share amounts)
Product sales   $ 7,540     $ 7,619  
Service sales     1,952       1,903  
Net sales     9,492       9,522  
                 
Costs, expenses and other                
Cost of products sold     5,237       5,349  
Cost of services sold     1,119       1,198  
      6,356       6,547  
Selling, general and administrative expenses     1,349       1,280  
Other (income) expense     (12 )     (18 )
Interest and other financial charges     75       85  
      7,768       7,894  
                 
Income before taxes     1,724       1,628  
Tax expense     392       402  
Net income     1,332       1,226  
                 
Less: Net income attributable to the noncontrolling interest     6       10  
                 
Net income attributable to Honeywell   $ 1,326     $ 1,216  
                 
Earnings per share of common stock - basic   $ 1.74     $ 1.58  
Earnings per share of common stock - assuming dilution   $ 1.71     $ 1.56  
Cash dividends per share of common stock   $ 0.6650     $ 0.5950  

 

The Notes to Consolidated Financial Statements are an integral part of this statement.

3

Honeywell International Inc.

Consolidated Statement of Comprehensive Income

(Unaudited)

 

    Three Months Ended
March 31,
    2017   2016
         
    (Dollars in millions)
Net income   $ 1,332     $ 1,226  
                 
Other comprehensive income (loss), net of tax                
                 
Foreign exchange translation adjustment     248       122  
                 
Prior service credit (cost)     (46 )     -  
Actuarial losses (gains) recognized     2       3  
Prior service (credit) cost recognized     (16 )     (19 )
Pension and other postretirement benefits adjustments     (60 )     (16 )
                 
Effective portion of cash flow hedges recognized in other comprehensive income (loss)     (13 )     (32 )
Less: Reclassification adjustment for gains (losses) included in net income     23       (6 )
Changes in fair value of effective cash flow hedges     (36 )     (26 )
Other comprehensive income (loss), net of tax     152       80  
                 
Comprehensive income     1,484       1,306  
Less: Comprehensive income attributable to the noncontrolling interest     9       10  
Comprehensive income attributable to Honeywell   $ 1,475     $ 1,296  

 

The Notes to Consolidated Financial Statements are an integral part of this statement.

4

 

Honeywell International Inc.

Consolidated Balance Sheet

(Unaudited)

 

    March 31,
2017
  December 31,
2016
    (Dollars in millions)
ASSETS                
Current assets:                
Cash and cash equivalents   $ 7,710     $ 7,843  
Short-term investments     1,885       1,520  
Accounts receivable - net     8,155       8,177  
Inventories     4,652       4,366  
Other current assets     1,178       1,152  
Total current assets     23,580       23,058  
                 
Investments and long-term receivables     533       587  
Property, plant and equipment - net     5,816       5,793  
Goodwill     17,827       17,707  
Other intangible assets - net     4,592       4,634  
Insurance recoveries for asbestos related liabilities     407       417  
Deferred income taxes     337       347  
Other assets     1,687       1,603  
Total assets   $ 54,779     $ 54,146  
                 
LIABILITIES                
Current liabilities:                
Accounts payable   $ 5,805     $ 5,690  
Commercial paper and other short-term borrowings     3,415       3,366  
Current maturities of long-term debt     1,271       227  
Accrued liabilities     6,790       7,048  
Total current liabilities     17,281       16,331  
                 
Long-term debt     11,181       12,182  
Deferred income taxes     414       486  
Postretirement benefit obligations other than pensions     546       473  
Asbestos related liabilities     1,002       1,014  
Other liabilities     3,877       4,110  
                 
Redeemable noncontrolling interest     3       3  
                 
SHAREOWNERS’ EQUITY                
Capital - common stock issued     958       958  
- additional paid-in capital     5,927       5,781  
Common stock held in treasury, at cost     (13,526 )     (13,366 )
Accumulated other comprehensive loss     (2,562 )     (2,714 )
Retained earnings     29,526       28,710  
Total Honeywell shareowners’ equity     20,323       19,369  
Noncontrolling interest     152       178  
Total shareowners’ equity     20,475       19,547  
Total liabilities, redeemable noncontrolling interest and shareowners’ equity   $ 54,779     $ 54,146  

 

The Notes to Consolidated Financial Statements are an integral part of this statement.

5

Honeywell International Inc.

Consolidated Statement of Cash Flows

(Unaudited)

 

    Three Months Ended
March 31,
    2017   2016
    (Dollars in millions)
Cash flows from operating activities:                
Net income   $ 1,332     $ 1,226  
Less: Net income attributable to the noncontrolling interest     6       10  
Net income attributable to Honeywell     1,326       1,216  
Adjustments to reconcile net income attributable to Honeywell to net cash provided by operating activities:                
Depreciation     170       179  
Amortization     101       74  
Repositioning and other charges     129       125  
Net payments for repositioning and other charges     (137 )     (134 )
Pension and other postretirement income     (183 )     (159 )
Pension and other postretirement benefit payments     (24 )     (38 )
Stock compensation expense     50       53  
Deferred income taxes     (42 )     48  
Other     14       88  
Changes in assets and liabilities, net of the effects of acquisitions and divestitures:                
Accounts receivable     23       (208 )
Inventories     (286 )     (241 )
Other current assets     (25 )     (54 )
Accounts payable     115       (113 )
Accrued liabilities     (291 )     (517 )
Net cash provided by operating activities     940       319  
                 
Cash flows from investing activities:                
Expenditures for property, plant and equipment     (168 )     (194 )
Proceeds from disposals of property, plant and equipment     24       1  
Increase in investments     (1,256 )     (836 )
Decrease in investments     825       880  
Cash paid for acquisitions, net of cash acquired     -       (1,056 )
Other     (29 )     9  
Net cash used for investing activities     (604 )     (1,196 )
                 
Cash flows from financing activities:                
Proceeds from issuance of commercial paper and other short-term borrowings     2,468       6,300  
Payments of commercial paper and other short-term borrowings     (2,467 )     (8,750 )
Proceeds from issuance of common stock     221       105  
Proceeds from issuance of long-term debt     11       4,448  
Payments of long-term debt     (5 )     (419 )
Repurchases of common stock     (310 )     (1,156 )
Cash dividends paid     (503 )     (499 )
Payments to purchase the noncontrolling interest     -       (238 )
Other     (33 )     (14 )
Net cash used for financing activities     (618 )     (223 )
Effect of foreign exchange rate changes on cash and cash equivalents     149       118  
Net decrease in cash and cash equivalents     (133 )     (982 )
Cash and cash equivalents at beginning of period     7,843       5,455  
Cash and cash equivalents at end of period     7,710       4,473  

 

The Notes to Consolidated Financial Statements are an integral part of this statement.

6

 

Honeywell International Inc.

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars in millions, except per share amounts)

 

Note 1. Basis of Presentation

 

In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of Honeywell International Inc. and its consolidated subsidiaries (Honeywell or the Company) at March 31, 2017 and 2016 and the results of operations and cash flows for the three months ended March 31, 2017 and 2016. The results of operations and cash flows for the three months ended March 31, 2017 should not necessarily be taken as indicative of the entire year.

 

We report our quarterly financial information using a calendar convention; the first, second and third quarters are consistently reported as ending on March 31, June 30 and September 30. It has been our practice to establish actual quarterly closing dates using a predetermined fiscal calendar, which requires our businesses to close their books on a Saturday in order to minimize the potentially disruptive effects of quarterly closing on our business processes. The effects of this practice are generally not significant to reported results for any quarter and only exist within a reporting year. In the event that differences in actual closing dates are material to year-over-year comparisons of quarterly or year-to-date results, we will provide appropriate disclosures. Our actual closing dates for the three months ended March 31, 2017 and 2016 were April 1, 2017 and April 2, 2016.

 

Certain prior year amounts have been reclassified to conform to current year presentation.

 

Note 2. Recent Accounting Pronouncements

 

We consider the applicability and impact of all Accounting Standards Updates (ASUs). ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated result of operations, financial position and cash flows (consolidated financial statements).

 

In May 2014, and in following related amendments, the FASB issued guidance on revenue from contracts with customers that will supersede most current revenue recognition guidance, including industry-specific guidance. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of time value of money in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The effective date is for interim and annual periods beginning on or after December 15, 2017. The guidance permits the use of either a retrospective or cumulative effect transition method. We have not yet selected a transition method. We expect that our disclosures in our notes to consolidated financial statements related to revenue recognition will be significantly expanded under the new standard. The FASB has issued, and may issue in the future, interpretive guidance which may cause our evaluation to change. We believe we are following an appropriate timeline to allow for proper recognition, presentation and disclosure upon adoption effective the beginning of fiscal year 2018.

 

We are still finalizing the analysis to quantify the adoption impact of the new standard, but we do not currently expect it to have a material impact on our consolidated financial position or results of operations. Based on the evaluation of our current contracts and revenue streams, most will be recorded consistently under both the current and new standard. We expect the new standard will have no cash impact and, as such, does not affect the economics of our underlying customer contracts. However, we expect the guidance in certain areas, particularly in our Aerospace segment, to impact our current revenue recognition policies.

 

The current accounting policy for costs incurred for nonrecurring engineering and development activities of our Aerospace products under agreements with commercial customers is generally to expense as incurred. Any customer funding received for such efforts is recognized when earned as a reduction of cost of sales. Under the new guidance, customer funding for such expenses incurred must be assessed to determine whether the contract is within the scope of the new revenue standard, and if so, determine the appropriate timing of the recognition of funding and related income statement classification. We are continuing to evaluate the impact for these activities.

7

Honeywell International Inc.

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars in millions, except per share amounts)

 

In addition, we expect revenues for our mechanical service programs at our Aerospace business to continue to be recognized over time and not point in time, but under the new guidance the timing may change to reflect the impact of recognition as a series of distinct services using the output method. With the adoption of the standard, certain unbilled receivables or deferred revenue will be eliminated through retained earnings, but we do not expect a material impact.

 

In February 2016, the FASB issued guidance on accounting for leases which requires lessees to recognize most leases on their balance sheets for the rights and obligations created by those leases. The guidance requires enhanced disclosures regarding the amount, timing, and uncertainty of cash flows arising from leases and will be effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The guidance requires the use of a modified retrospective approach. We are evaluating the impact of the guidance on our consolidated financial position, results of operations and related disclosures.

 

In January 2017, the FASB issued guidance to simplify the subsequent measurement of goodwill impairment. The new guidance eliminates the two-step process that required identification of potential impairment and a separate measure of the actual impairment. Goodwill impairment charges, if any, would be determined by reducing the goodwill balance by the difference between the carrying value and the reporting unit’s fair value (impairment loss is limited to the carrying value). This standard is effective for annual or any interim goodwill impairment tests beginning after December 15, 2019. The adoption of this standard is not expected to have a material impact on our consolidated financial statements.

 

In March 2017, the FASB issued guidance on presentation of net periodic pension cost and net periodic postretirement benefit cost. The new standard requires that an employer disaggregate the service costs components of net benefit cost. The employer is required to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component, such as in other income and expense . The guidance is effective for fiscal years beginning after December 15, 2017. This guidance will impact the presentation of our consolidated financial statements. Our current presentation of service cost components is consistent with the requirements of the new standard. Upon our adoption of the new standard, we expect to present the other components within Other (income) expense (we currently present within Cost of products and services sold and Selling, general, and administrative expenses). All components will continue to be excluded from Segment Profit (see Note 10 Segment Financial Data).

8

Honeywell International Inc.

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars in millions, except per share amounts)

 

Note 3. Repositioning and Other Charges

 

A summary of repositioning and other charges follows:

 

    Three Months Ended
March 31,
 
    2017   2016  
Severance   $ 20     $ 28    
Asset impairments     2       7    
Exit costs     1       2    
Reserve adjustments     6       (17 )  
 Total net repositioning charge     29       20    
                   
Asbestos related litigation charges, net of insurance     50       53    
Probable and reasonably estimable environmental liabilities     50       52    
 Total net repositioning and other charges   $ 129     $ 125    

 

The following table summarizes the pretax distribution of total net repositioning and other charges by income statement classification:

 

    Three Months Ended
March 31,
 
    2017   2016  
Cost of products and services sold   $ 136     $ 105    
Selling, general and administrative expenses     (7 )     20    
    $ 129     $ 125    

 

The following table summarizes the pretax impact of total net repositioning and other charges by segment:

 

    Three Months Ended
March 31,
 
    2017   2016  
Aerospace   $ 73     $ 49    
Home and Building Technologies     (1 )     17    
Performance Materials and Technologies     3       9    
Safety and Productivity Solutions     (4 )     (10 )  
Corporate     58       60    
    $ 129     $ 125    

 

In the quarter ended March 31, 2017, we recognized repositioning charges totaling $23 million including severance costs of $20 million related to workforce reductions of 622 manufacturing and administrative positions across our segments. The workforce reductions were primarily related to cost savings actions taken in connection with our productivity and ongoing functional transformation initiatives and with factory transitions, mainly in Aerospace, to more cost-effective locations. Also, $6 million, net, of reserve adjustments increased the previously established accruals, primarily for severance in Aerospace, due mainly to lower attrition than anticipated and higher expected severance payments.

 

In the quarter ended March 31, 2016, we recognized repositioning charges totaling $37 million including severance costs of $28 million related to workforce reductions of 293 manufacturing and administrative positions mainly in Home and Building Technologies and Performance Materials and Technologies. The workforce

9

Honeywell International Inc.

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars in millions, except per share amounts)

 

reductions were primarily related to achieving acquisition-related synergies and outsourcing of certain packaging operations. Also, $17 million of previously established accruals, primarily for severance, in Home and Building Technologies, Safety and Productivity Solutions, and Performance Materials and Technologies, were returned to income primarily as a result of higher attrition than anticipated in prior severance programs resulting in lower required severance payments.

 

The following table summarizes the status of our total repositioning reserves:

 

      Severance   Asset   Exit    
      Costs   Impairments   Costs   Total
  December 31, 2016   $ 298     $ -     $ 33     $ 331  
  Charges     20       2       1       23  
  Usage - cash     (50 )     -       (4 )     (54 )
  Usage - noncash     -       (2 )     -       (2 )
  Foreign currency translation     5       -       -       5  
  Adjustments and reclassifications     6       -       (8 )     (2 )
  March 31, 2017   $ 279     $ -     $ 22     $ 301  

 

Certain repositioning projects in 2017 and 2016 included exit or disposal activities, the costs related to which will be recognized in future periods when the actual liability is incurred. Such exit and disposal costs are not expected to be significant.

 

Note 4. Earnings Per Share

 

    Three Months Ended
March 31,
Basic   2017   2016
Net income attributable to Honeywell   $ 1,326     $ 1,216  
                 
Weighted average shares outstanding     763.1       767.9  
                 
Earnings per share of common stock   $ 1.74     $ 1.58  

 

    Three Months Ended
March 31,
Assuming Dilution   2017   2016
Net income attributable to Honeywell   $ 1,326     $ 1,216  
                 
Average Shares                
Weighted average shares outstanding     763.1       767.9  
Dilutive securities issuable - stock plans     10.8       11.7  
Total weighted average shares outstanding     773.9       779.6  
                 
Earnings per share of common stock   $ 1.71     $ 1.56  

 

The diluted earnings per share calculations exclude the effect of stock options when the options’ assumed proceeds exceed the average market price of the common shares during the period. For the three months ended March 31, 2017 and 2016, the weighted average number of stock options excluded from the computations was 2.1 million and 8.4 million. These stock options were outstanding at the end of each of the respective periods.

10

Honeywell International Inc.

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars in millions, except per share amounts)

 

Note 5. Accounts Receivable

 

    March 31,   December 31,
    2017   2016
Trade   $ 8,367     $ 8,449  
Less - Allowance for doubtful accounts     (212 )     (272 )
    $ 8,155     $ 8,177  

 

Trade receivables include $1,665 million and $1,626 million of unbilled balances under long-term contracts as of March 31, 2017 and December 31, 2016. These amounts are billed in accordance with the terms of customer contracts to which they relate.

 

Note 6. Inventories

 

    March 31,   December 31,
    2017   2016
Raw materials   $ 1,193     $ 1,104  
Work in process     787       775  
Finished products     2,710       2,552  
      4,690       4,431  
Reduction to LIFO cost basis     (38 )     (65 )
    $ 4,652     $ 4,366  
11

Honeywell International Inc.

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars in millions, except per share amounts)

 

 

Note 7. Long-term Debt

 

      March 31,   December 31,
      2017   2016
  Floating rate Euro notes due 2018     1,069       1,054  
  1.40% notes due 2019     1,250       1,250  
  Floating rate notes due 2019     250       250  
  0.65% Euro notes due 2020     1,069       1,054  
  4.25% notes due 2021     800       800  
  1.85% notes due 2021     1,500       1,500  
  1.30% Euro notes due 2023     1,335       1,317  
  3.35% notes due 2023     300       300  
  2.50% notes due 2026     1,500       1,500  
  2.25% Euro notes due 2028     801       790  
  5.70% notes due 2036     550       550  
  5.70% notes due 2037     600       600  
  5.375% notes due 2041     600       600  
  Industrial development bond obligations, floating rate maturing at various dates through 2037     30       30  
  6.625% debentures due 2028     216       216  
  9.065% debentures due 2033     51       51  
  Other (including capitalized leases and debt issuance costs),
0.5% weighted average maturing at various dates through 2023
    531       547  
        12,452       12,409  
  Less: current portion     (1,271 )     (227 )
      $ 11,181     $ 12,182  

 

Note 8. Financial Instruments and Fair Value Measures

 

Our credit, market, foreign currency and interest rate risk management policies are described in Note 14, Financial Instruments and Fair Value Measures, of Notes to Consolidated Financial Statements in our 2016 Annual Report on Form 10-K.

 

The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis:

 

    March 31,   December 31,
    2017   2016
Assets:                
Foreign currency exchange contracts   $ 104     $ 152  
Available for sale investments     2,015       1,670  
Interest rate swap agreements     61       69  
                 
Liabilities:                
Foreign currency exchange contracts   $ 7     $ 2  
Interest rate swap agreements     52       48  

 

The foreign currency exchange contracts and interest rate swap agreements are valued using broker quotations or market transactions in either the listed or over-the-counter markets. These derivative instruments are classified within level 2. The Company holds investments in certificates of deposits, time deposits and commercial paper that are designated as available for sale and are valued using published prices based on

12

Honeywell International Inc.

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars in millions, except per share amounts)

 

observable market data. These investments are classified within level 2. The Company also holds available for sale investments in U.S. government and corporate debt securities valued utilizing published prices based on quoted market pricing, which are classified within level 1.

 

The carrying value of cash and cash equivalents, accounts receivable, payables, commercial paper and short-term borrowings contained in the Consolidated Balance Sheet approximates fair value. The following table sets forth the Company’s financial assets and liabilities that were not carried at fair value:

 

  March 31, 2017   December 31, 2016
  Carrying   Fair   Carrying   Fair
Value Value Value Value
Assets                      
Long-term receivables $ 263   $ 253   $ 280   $ 273
Liabilities                      
Long-term debt and related current maturities $ 12,452   $ 13,070   $ 12,409   $ 13,008

 

The Company determined the fair value of the long-term receivables by discounting based upon the terms of the receivable and counterparty details including credit quality. As such, the fair value of these receivables is considered level 2. The Company determined the fair value of the long-term debt and related current maturities utilizing transactions in the listed markets for identical or similar liabilities. As such, the fair value of the long-term debt and related current maturities is also considered level 2 as well.

 

Interest rate swap agreements are designated as hedge relationships with gains or losses on the derivative recognized in interest and other financial charges offsetting the gains and losses on the underlying debt being hedged. For the three months ended March 31, 2017 and 2016, we recognized $11 million of losses and $29 million of gains in earnings on interest rate swap agreements. Gains and losses are fully offset by losses and gains on the underlying debt being hedged.

 

We also economically hedge our exposure to changes in foreign exchange rates principally with forward contracts. These contracts are marked-to-market with the resulting gains and losses recognized in earnings offsetting the gains and losses on the non-functional currency denominated monetary assets and liabilities being hedged. We recognized $34 million and $32 million of expense in other (income) expense for the three months ended March 31, 2017 and 2016.

13

Honeywell International Inc.

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars in millions, except per share amounts)

 

Note 9. Accumulated Other Comprehensive Income (Loss)

 

Changes in Accumulated Other Comprehensive Income by Component

 

    Foreign
Exchange
Translation
Adjustment
  Pension
and Other
Postretirement
Benefits
Adjustments
  Changes in
Fair Value
of Effective
Cash Flow
Hedges
  Total
Balance at December 31, 2016   $ (1,944 )   $ (879 )   $ 109     $ (2,714 )
Other comprehensive income  (loss) before reclassifications     248       (46 )     (13 )     189  
Amounts reclassified from  accumulated other  comprehensive income     -       (14 )     (23 )     (37 )
Net current period other  comprehensive income (loss)     248       (60 )     (36 )     152  
Balance at March 31, 2017   $ (1,696 )   $ (939 )   $ 73     $ (2,562 )
                                 
    Foreign
Exchange
Translation
Adjustment
  Pension
and Other
Postretirement
Benefits
Adjustments
  Changes in
Fair Value
of Effective
Cash Flow
Hedges
  Total
Balance at December 31, 2015   $ (1,892 )   $ (644 )   $ 1     $ (2,535 )
Other comprehensive income  (loss) before reclassifications     122       -       (32 )     90  
Amounts reclassified from  accumulated other  comprehensive income     -       (16 )     6       (10 )
Net current period other  comprehensive income (loss)     122       (16 )     (26 )     80  
Balance at March 31, 2016   $ (1,770 )   $ (660 )   $ (25 )   $ (2,455 )
14

Honeywell International Inc.

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars in millions, except per share amounts)

 

Note 10. Segment Financial Data

 

We globally manage our business operations through four reportable operating segments. Segment information is consistent with how management reviews the businesses, makes investing and resource allocation decisions and assesses operating performance.

 

Honeywell’s senior management evaluates segment performance based on segment profit. Segment profit is measured as segment income (loss) before taxes excluding general corporate unallocated expense, other income (expense), interest and other financial charges, stock compensation expense, pension and other postretirement income (expense), and repositioning and other charges.

 

      Three Months Ended
March 31,
Net Sales     2017       2016  
Aerospace                
Products   $ 2,396     $ 2,490  
Services     1,150       1,215  
Total     3,546       3,705  
Home and Building Technologies                
Products     2,217       2,197  
Services     336       280  
Total     2,553       2,477  
Performance Materials and Technologies                
Products     1,674       1,884  
Services     395       397  
Total     2,069       2,281  
Safety and Productivity Solutions                
Products     1,253       1,048  
Services     71       11  
Total     1,324       1,059  
    $ 9,492     $ 9,522  
                 
Segment Profit                
Aerospace   $ 796     $ 798  
Home and Building Technologies     389       360  
Performance Materials and Technologies     471       461  
Safety and Productivity Solutions     194       150  
Corporate     (61 )     (49 )
Total segment profit     1,789       1,720  
                 
Other income (a)     6       12  
Interest and other financial charges     (75 )     (85 )
Stock compensation expense (b)     (50 )     (53 )
Pension ongoing income (b)     179       150  
Other postretirement income (b)     4       9  
Repositioning and other charges (b)     (129 )     (125 )
Income before taxes   $ 1,724     $ 1,628  

 

(a) Equity income (loss) of affiliated companies is included in segment profit.
   
(b) Amounts included in cost of products and services sold and selling, general and administrative expenses .
15

Honeywell International Inc.

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars in millions, except per share amounts)

 

Note 11. Pension Benefits

 

Net periodic pension benefit income for our significant defined benefit plans include the following components:

 

      Three Months Ended
      U.S. Plans
March 31,
      Non-U.S. Plans
March 31,
 
      2017       2016       2017       2016  
Service cost   $ 43     $ 48     $ 9     $ 12  
Interest cost     147       150       35       47  
Expected return on plan assets     (315 )     (306 )     (99 )     (99 )
Amortization of prior service (credit)     (11 )     (11 )     -       (1 )
    $ (136 )   $ (119 )   $ (55 )   $ (41 )

 

Note 12. Commitments and Contingencies

 

Environmental Matters

 

Our environmental matters are described in Note 19, Commitments and Contingencies, of Notes to Consolidated Financial Statements in our 2016 Annual Report on Form 10-K.

 

The following table summarizes information concerning our recorded liabilities for environmental costs:

 

December 31, 2016   $ 511  
Accruals for environmental matters deemed probable and reasonably estimable     50  
Environmental liability payments     (31 )
Other     8  
March 31, 2017   $ 538  

 

Environmental liabilities are included in the following balance sheet accounts:

 

      March 31,       December 31,  
      2017       2016  
Accrued liabilities   $ 252     $ 252  
Other liabilities     286       259  
    $ 538     $ 511  

 

We do not currently possess sufficient information to reasonably estimate the amounts of environmental liabilities to be recorded upon future completion of studies, litigation or settlements, and neither the timing nor the amount of the ultimate costs associated with environmental matters can be determined although they could be material to our consolidated results of operations and operating cash flows in the periods recognized or paid. However, considering our past experience and existing reserves, we do not expect that environmental matters will have a material adverse effect on our consolidated financial position.

 

Onondaga Lake, Syracuse, NY —In 2016, we largely completed a dredging/capping remedy of Onondaga Lake pursuant to a consent decree approved by the United States District Court for the Northern District of New York in January 2007. Some additional long-term monitoring and maintenance activities will continue, as required by the consent decree. Honeywell is also conducting remedial investigations and activities at other sites in Syracuse. We have recorded reserves for these investigations and activities where appropriate, consistent with the accounting policy described above.

 

Honeywell has entered into a cooperative agreement with potential natural resource trustees to assess

16

Honeywell International Inc.

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars in millions, except per share amounts)

 

alleged natural resource damages relating to this site. It is not possible to predict the outcome or duration of this assessment, or the amounts of, or responsibility for, any damages.

 

Asbestos Matters

 

Honeywell is a defendant in asbestos related personal injury actions related to two predecessor companies:

 

  · North American Refractories Company (NARCO), which was sold in 1986, produced refractory products (bricks and cement used in high temperature applications). Claimants consist largely of individuals who allege exposure to NARCO asbestos-containing refractory products in an occupational setting.
     
  · Bendix Friction Materials (Bendix) business, which was sold in 2014, manufactured automotive brake parts that contained chrysotile asbestos in an encapsulated form. Claimants consist largely of individuals who allege exposure to asbestos from brakes from either performing or being in the vicinity of individuals who performed brake replacements.

 

The following tables summarize information concerning NARCO and Bendix asbestos related balances:

 

Asbestos Related Liabilities                  
      Bendix       NARCO       Total  
December 31, 2016   $ 641     $ 919     $ 1,560  
 Accrual for update to estimated liability     46       7       53  
 Asbestos related liability payments     (58 )     (7 )     (65 )
March 31, 2017   $ 629     $ 919     $ 1,548  

 

Insurance Recoveries for Asbestos Related Liabilities                  
      Bendix       NARCO       Total  
December 31, 2016   $ 121     $ 319     $ 440  
Probable insurance recoveries related to estimated liability     3       -       3  
Insurance receipts for asbestos related liabilities     (12 )     (1 )     (13 )
                         
March 31, 2017   $ 112     $ 318     $ 430  

 

NARCO and Bendix asbestos related balances are included in the following balance sheet accounts:

 

    March 31,     December 31,  
      2017       2016  
Other current assets   $ 23     $ 23  
Insurance recoveries for asbestos related liabilities     407       417  
    $ 430     $ 440  
                 
Accrued liabilities   $ 546     $ 546  
Asbestos related liabilities     1,002       1,014  
    $ 1,548     $ 1,560  

 

NARCO Products –In connection with NARCO’s emergence from bankruptcy on April 30, 2013, a federally authorized 524(g) trust (NARCO Trust) was established for the evaluation and resolution of all existing and future NARCO asbestos claims. Both Honeywell and NARCO are protected by a permanent channeling injunction barring all present and future individual actions in state or federal courts and requiring all asbestos related claims based on exposure to NARCO asbestos-containing products to be made against the NARCO Trust. The NARCO Trust reviews submitted claims and determines award amounts in accordance with established Trust Distribution Procedures approved by the Bankruptcy Court which set forth the criteria claimants must meet to qualify for compensation including, among other things, exposure and medical criteria that

17

Honeywell International Inc.

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars in millions, except per share amounts)

 

determine the award amount. In addition, Honeywell provided, and continues to provide, input to the design of control procedures for processing NARCO claims, and has on-going audit rights to review and monitor the claims processors’ adherence to the established requirements of the Trust Distribution Procedures.

 

Honeywell is obligated to fund NARCO asbestos claims submitted to the NARCO Trust which qualify for payment under the Trust Distribution Procedures (Annual Contribution Claims), subject to annual caps of $140 million in the years 2017 and 2018 and $145 million for each year thereafter. However, the initial $100 million of claims processed through the NARCO Trust (the Initial Claims Amount) will not count against the annual cap and any unused portion of the Initial Claims Amount will roll over to subsequent years until fully utilized. In 2015, Honeywell filed suit against the NARCO Trust in Bankruptcy Court alleging breach of certain provisions of the Trust Agreement and Trust Distribution Procedures. The parties agreed to dismiss the proceeding without prejudice pursuant to an 18 month Standstill Agreement that expires in October 2017. Claims processing will continue during this period subject to a defined dispute resolution process. As of March 31, 2017, Honeywell has not made any payments to the NARCO Trust for Annual Contribution Claims.

 

Honeywell is also responsible for payments due to claimants pursuant to settlement agreements reached during the pendency of the NARCO bankruptcy proceedings that provide for the right to submit claims to the NARCO Trust subject to qualification under the terms of the settlement agreements and Trust Distribution Procedures criteria (Pre-established Unliquidated Claims), which amounts are estimated at $150 million and are expected to be paid during the initial years of trust operations ($5 million of which has been paid since the effective date of the NARCO Trust). Such payments are not subject to the annual cap described above.

 

Our consolidated financial statements reflect an estimated liability for pre-established unliquidated claims ($145 million), unsettled claims pending as of the time NARCO filed for bankruptcy protection ($31 million) and for the estimated value of future NARCO asbestos claims expected to be asserted against the NARCO Trust ($743 million). The estimate of future NARCO claims is based on a commonly accepted methodology used by numerous bankruptcy courts addressing 524(g) trusts and also reflects disputes concerning implementation of the Trust Distribution Procedures by the NARCO Trust, a lack of sufficient trust claims processing experience, as well as the stay of all NARCO asbestos claims which remained in place throughout NARCO’s Chapter 11 case. Some critical assumptions underlying this commonly accepted methodology include claims filing rates, disease criteria and payment values contained in the Trust Distribution Procedures, estimated approval rates of claims submitted to the NARCO Trust and epidemiological studies estimating disease instances. The estimated value of future NARCO claims was originally established at the time of the NARCO Chapter 11 filing reflecting claims expected to be asserted against NARCO over a fifteen year period. This projection resulted in a range of estimated liability of $743 million to $961 million. We believe that no amount within this range is a better estimate than any other amount, and accordingly, we have recorded the minimum amount in the range.

 

Our insurance receivable corresponding to the estimated liability for pending and future NARCO asbestos claims reflects coverage which reimburses Honeywell for portions of NARCO-related indemnity and defense costs and is provided by a large number of insurance policies written by dozens of insurance companies in both the domestic insurance market and the London excess market. We conduct analyses to estimate the probable amount of insurance that is recoverable for asbestos claims. While the substantial majority of our insurance carriers are solvent, some of our individual carriers are insolvent, which has been considered in our analysis of probable recoveries. We made judgments concerning insurance coverage that we believe are reasonable and consistent with our historical dealings and our knowledge of any pertinent solvency issues surrounding insurers.

 

Projecting future events is subject to many uncertainties that could cause the NARCO-related asbestos liabilities or assets to be higher or lower than those projected and recorded. Given the uncertainties, we review our estimates periodically, and update them based on our experience and other relevant factors. Similarly, we will reevaluate our projections concerning our probable insurance recoveries in light of any changes to the projected liability or other developments that may impact insurance recoveries.

18

Honeywell International Inc.

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars in millions, except per share amounts)

 

Bendix Products —The following tables present information regarding Bendix related asbestos claims activity:

 

    Three Months Ended
March 31,
    Years Ended
December 31,
Claims Activity     2017       2016       2015  
Claims Unresolved at the beginning of period     7,724       7,779       9,267  
Claims Filed     709       2,830       2,862  
Claims Resolved     (1,807 )     (2,885 )     (4,350 )
Claims Unresolved at the end of period     6,626       7,724       7,779  

 

Disease Distribution of Unresolved Claims   March 31,     December 31,
      2017       2016       2015  
Mesothelioma and Other Cancer Claims     3,057       3,490       3,772  
Nonmalignant Claims     3,569       4,234       4,007  
 Total Claims     6,626       7,724       7,779  

 

Honeywell has experienced average resolution values per claim excluding legal costs as follows:

 

    Years Ended December 31,
      2016       2015       2014       2013       2012  
    (in whole dollars)
Malignant claims   $ 44,000     $ 44,000     $ 53,500     $ 51,000     $ 49,000  
Nonmalignant claims   $ 4,485     $ 100     $ 120     $ 850     $ 1,400  

 

It is not possible to predict whether resolution values for Bendix-related asbestos claims will increase, decrease or stabilize in the future.

 

Our consolidated financial statements reflect an estimated liability for resolution of pending (claims actually filed as of the financial statement date) and future Bendix-related asbestos claims. We have valued Bendix pending and future claims using average resolution values for the previous five years. We update the resolution values used to estimate the cost of Bendix pending and future claims during the fourth quarter each year.

 

The liability for future claims represents the estimated value of future asbestos related bodily injury claims expected to be asserted against Bendix over the next five years. Such estimated cost of future Bendix-related asbestos claims is based on historic claims filing experience and dismissal rates, disease classifications, and resolution values in the tort system for the previous five years. In light of the uncertainties inherent in making long-term projections, as well as certain factors unique to friction product asbestos claims, we do not believe that we have a reasonable basis for estimating asbestos claims beyond the next five years. The methodology used to estimate the liability for future claims is similar to that used to estimate the liability for future NARCO-related asbestos claims.

 

Our insurance receivable corresponding to the liability for settlement of pending and future Bendix asbestos claims reflects coverage which is provided by a large number of insurance policies written by dozens of insurance companies in both the domestic insurance market and the London excess market. Based on our ongoing analysis of the probable insurance recovery, insurance receivables are recorded in the financial statements simultaneous with the recording of the estimated liability for the underlying asbestos claims. This determination is based on our analysis of the underlying insurance policies, our historical experience with our insurers, our ongoing review of the solvency of our insurers, judicial determinations relevant to our insurance programs, and our consideration of the impacts of any settlements reached with our insurers.

19

Honeywell International Inc.

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars in millions, except per share amounts)

 

Honeywell believes it has sufficient insurance coverage and reserves to cover all pending Bendix-related asbestos claims and Bendix-related asbestos claims estimated to be filed within the next five years. Although it is impossible to predict the outcome of either pending or future Bendix-related asbestos claims, we do not believe that such claims would have a material adverse effect on our consolidated financial position in light of our insurance coverage and our prior experience in resolving such claims. If the rate and types of claims filed, the average resolution value of such claims and the period of time over which claim settlements are paid (collectively, the Variable Claims Factors) do not substantially change, Honeywell would not expect future Bendix-related asbestos claims to have a material adverse effect on our results of operations or operating cash flows in any fiscal year. No assurances can be given, however, that the Variable Claims Factors will not change .

 

Other Matters

 

We are subject to a number of other lawsuits, investigations and disputes (some of which involve substantial amounts claimed) arising out of the conduct of our business, including matters relating to commercial transactions, government contracts, product liability, prior acquisitions and divestitures, employment, employee benefit plans, intellectual property, and environmental, health and safety matters. We recognize a liability for any contingency that is probable of occurrence and reasonably estimable. We continually assess the likelihood of adverse judgments of outcomes in these matters, as well as potential ranges of possible losses (taking into consideration any insurance recoveries), based on a careful analysis of each matter with the assistance of outside legal counsel and, if applicable, other experts. Included in these other matters are the following:

 

Honeywell v. United Auto Workers (UAW) et. al —In July 2011, Honeywell filed an action in federal court (District of New Jersey) against the UAW and all former employees who retired under a series of Master Collective Bargaining Agreements (MCBAs) between Honeywell and the UAW seeking a declaratory judgment that certain express limitations on its obligation to contribute toward the healthcare coverage of such retirees (the CAPS) set forth in the MCBAs may be implemented, effective January 1, 2012. The UAW and certain retiree defendants filed a mirror suit in the Eastern District of Michigan alleging that the MCBAs do not provide for CAPS on the Company’s liability for healthcare coverage. The New Jersey action was dismissed and Honeywell subsequently answered the UAW’s complaint in Michigan and asserted counterclaims for fraudulent inducement, negligent misrepresentation and breach of implied warranty. The UAW filed a motion to dismiss these counterclaims. The court dismissed Honeywell’s fraudulent inducement and negligent misrepresentation claims, but let stand the claim for breach of implied warranty. In the second quarter of 2014, the parties agreed to stay the proceedings with respect to those retirees who retired before the initial inclusions of the CAPS in the 2003 MCBA until the Supreme Court decided the M&G Polymers USA, LLC v. Tackett case . In a ruling on January 26, 2015, the Supreme Court held that retiree health insurance benefits provided in collective bargaining agreements do not carry an inference that they are vested or guaranteed to continue for life and that the “vesting” issue must be decided pursuant to ordinary principles of contract law. The stay of the proceedings has been lifted and the case is again proceeding. Based on the Supreme Court’s ruling, Honeywell is confident that the CAPS will be upheld and that its liability for healthcare coverage premiums with respect to the putative class will be limited as negotiated and expressly set forth in the applicable MCBAs. In the event of an adverse ruling, however, Honeywell’s other postretirement benefits for pre-2003 retirees would increase by approximately $129 million, reflecting the estimated value of these CAPS.

 

In December 2013, the UAW and certain of the plaintiffs filed a motion for partial summary judgment with respect to those retirees who retired after the initial inclusion of the CAPS in the 2003 MCBA. The UAW sought a ruling that the 2003 MCBA did not limit Honeywell’s obligation to contribute to healthcare coverage for the post-2003 retirees. That motion remains pending. Honeywell is confident that the Court will find that the 2003 MCBA does, in fact, limit Honeywell’s retiree healthcare obligation for post-2003 retirees. In the event of an adverse ruling, however, Honeywell’s other postretirement benefits for post-2003 retirees would increase by approximately $95 million, reflecting the estimated value of these CAPS.

 

Joint Strike Fighter Investigation - In 2013 the Company received subpoenas from the Department of Justice requesting information relating primarily to parts manufactured in the United Kingdom and China used in the F-35 fighter jet. The Company is cooperating fully with the investigation. While we believe that Honeywell has complied with all relevant U.S. laws and regulations regarding the manufacture of these sensors, it is not possible

20

Honeywell International Inc.

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars in millions, except per share amounts)

 

to predict the outcome of the investigation or what action, if any, may result from it.

 

Given the uncertainty inherent in litigation and investigations (including the specific matters referenced above), we do not believe it is possible to develop estimates of reasonably possible loss in excess of current accruals for these matters (other than as specifically set forth above). Considering our past experience and existing accruals, we do not expect the outcome of these matters, either individually or in the aggregate, to have a material adverse effect on our consolidated financial position. Because most contingencies are resolved over long periods of time, potential liabilities are subject to change due to new developments, changes in settlement strategy or the impact of evidentiary requirements, which could cause us to pay damage awards or settlements (or become subject to equitable remedies) that could have a material adverse effect on our results of operations or operating cash flows in the periods recognized or paid.

21
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF  
  FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)  
  (Dollars in millions, except per share amounts)  

 

The following MD&A is intended to help the reader understand the results of operations and financial condition of Honeywell International Inc. and its consolidated subsidiaries (Honeywell or the Company) for the three months ended March 31, 2017. The financial information as of March 31, 2017 should be read in conjunction with the consolidated financial statements for the year ended December 31, 2016 contained in our 2016 Annual Report on Form 10-K.

 

A. Results of Operations – three months ended March 31, 2017 compared with the three months ended March 31, 2016

 

Net Sales  

 

    Three Months Ended
    March 31,
    2017     2016  
Net sales   $ 9,492     $ 9,522  
% change compared with prior period     -          

 

The change in net sales compared to the prior year period is attributable to the following:

 

    Three Months
Volume     2 %
Foreign Exchange     (1 )%
Acquisitions/Divestitures     (1 )%
      -  

 

A discussion of net sales by segment can be found in the Review of Business Segments section of this MD&A. The foreign currency translation impact is principally driven by the weakening of the British Pound and Euro against the U.S. Dollar.

 

Cost of Products and Services Sold    

 

    Three Months Ended
    March 31,
    2017   2016
Cost of products and services sold   $ 6,356     $ 6,547  
% change compared with prior period     (3 )%         
Gross margin percentage     33.0  %     31.2 %

 

Cost of products and services sold decreased principally due to lower labor costs of approximately $125 million and decreased direct and indirect material costs of approximately $80 million (driven primarily by productivity, net of inflation, and divestitures, net of acquisitions, and foreign currency translation, partially offset by higher sales volumes).

 

Gross margin percentage increased primarily due to higher gross margin in Aerospace and Performance Materials and Technologies (approximately 1.9 percentage point impact collectively) and increased pension and other postretirement income allocated to cost of products and services sold (approximately 0.1 percentage point impact), partially offset by higher repositioning and other charges allocated to cost of products and services sold (approximately 0.3 percentage point impact).

22

  Selling, General and Administrative Expenses  

 

    Three Months Ended
March 31,
    2017   2016
Selling, general and administrative expenses   $ 1,349     $ 1,280  
% of sales     14.2 %     13.4 %

 

Selling, general and administrative expenses increased primarily driven by an increase in labor costs (principally attributed to acquisitions, net of divestitures, merit increases and investment for growth) and higher sales volumes, partially offset by lower repositioning charges allocated to selling, general and administrative expenses and the favorable impact from foreign currency translation.

 

Tax Expense

   

    Three Months Ended
    March 31,
    2017   2016
Tax expense   $ 392     $ 402  
Effective tax rate     22.7 %     24.7 %

 

The effective tax rate decreased for the quarter primarily due to the resolution of tax matters with non-U.S. jurisdictions and increased tax benefits from employee share-based payments, partially offset by increased expense for reserves and taxes on the unremitted earnings of certain foreign affiliates that are not deemed permanently reinvested.

 

The effective tax rates for the three months ended in 2017 and 2016 were lower than the U.S. federal statutory rate of 35% resulting in part from non-U.S. earnings taxed at lower rates, the vast majority of which we intend to permanently reinvest outside the United States, and from benefits from manufacturing incentives.

 

The Company currently expects the effective tax rate for 2017 to be approximately 25%. The effective tax rate can vary from quarter to quarter for unusual or infrequently occurring items, the resolution of income tax audits, changes in tax laws or other items such as pension mark-to-market adjustments and the tax impact from employee share-based payments.

 

Net Income Attributable to Honeywell

 

    Three Months Ended
    March 31,
    2017   2016
Net income attributable to Honeywell   $ 1,326     $ 1,216  
                 
Earnings per share of common stock –  assuming dilution   $ 1.71     $ 1.56  

 

Earnings per share of common stock – assuming dilution increased, primarily driven by increased segment profit in Safety and Productivity Solutions, Home and Building Technologies and Performance Materials and Technologies, lower effective tax rate and higher pension and other postretirement income.

23

Review of Business Segments

 

    Three Months Ended      
    March 31,   %
    2017   2016   Change
Aerospace Sales                    
Commercial Aviation Original Equipment   $ 611     $ 701     (13)%
Commercial Aviation Aftermarket     1,201       1,148     5%
Defense and Space     950       1,069     (11)%
Transportation Systems     784       787     -
Total Aerospace Sales     3,546       3,705      
                     
Home and Building Technologies Sales                    
Home and Building Products     1,441       1,398     3%
Home and Building Distribution     1,112       1,079     3%
Total Home and Building Technologies Sales     2,553       2,477      
                     
Performance Materials and Technologies Sales                    
UOP     577       568     2%
Process Solutions     825       837     (1)%
Advanced Materials     667       876     (24)%
Total Performance Materials and Technologies Sales     2,069       2,281      
                     
Safety and Productivity Solutions Sales                    
Safety     521       508     3%
Productivity Solutions     803       551     46%
Total Safety and Productivity Solutions Sales     1,324       1,059      
                     
Net Sales   $ 9,492     $ 9,522      

 

Aerospace

 

    Three Months Ended
    March 31,
    2017   2016   %
Change
Net sales   $ 3,546     $ 3,705     (4) %
Cost of products and service sold     2,468       2,682      
Selling, general and administrative expenses and other     282       225      
Segment profit   $ 796   $ 798      

 

    2017 vs. 2016
    Three Months Ended
    March 31,
Factors Contributing to Year-Over-Year Change   Sales   Segment Profit
Organic growth/ Operational segment profit   -     3 %
Foreign exchange   (1) %   (1) %
Acquisitions and divestitures, net   (3) %   (2) %
Total % Change   (4) %   -  
24

Aerospace sales decreased primarily due to the government services business divestiture and the unfavorable impact of foreign currency translation.

 

  Commercial Aviation Original Equipment sales decreased by 13% (decreased 13% organic) primarily due to lower shipments to business jet original equipment manufacturers (OEMs).
     
  Commercial Aviation Aftermarket sales increased by 5% (increased 5% organic) driven primarily by higher repair and overhaul activities and increased spares shipments to air transport and regional customers.
     
  Defense and Space sales decreased by 11% (flat organic) primarily due to the government services business divestiture. Organic sales are flat primarily due to growth in our core U.S. defense business, offset by lower sales in our commercial helicopter and space businesses.
     
  Transportation Systems sales were flat (increased 2% organic) driven primarily by higher commercial vehicle volumes and gas turbo penetration, offset by diesel turbo platform completions and the unfavorable impact of foreign currency translation.

 

Aerospace segment profit was flat primarily due to an increase in operational segment profit, offset by the government services business divestiture and the unfavorable impact of foreign currency translation. The increase in operational segment profit is driven primarily by restructuring benefits and pricing, partially offset by lower sales volumes to business jet OEMs. Cost of products and services sold decreased primarily due to the government services business divestiture, productivity, net of inflation, and restructuring benefits.

 

Home and Building Technologies

 

    Three Months Ended
    March 31,
    2017   2016   % Change
Net sales   $ 2,553     $ 2,477     3%
Cost of products and services sold     1,712       1,657      
Selling, general and administrative expenses and other     452       460      
Segment profit   $ 389     $ 360     8%

 

    2017 vs. 2016
    Three Months Ended
    March 31,
Factors Contributing to Year-Over-Year Change   Sales   Segment Profit
Organic growth/ Operational segment profit   3%   9%
Foreign currency translation   (2)%   (2)%
Acquisitions and divestitures, net   2%   1%
Total % Change   3%   8%

 

Home and Building Technologies sales increased primarily due to organic sales growth and acquisitions partially offset by the unfavorable impact of foreign currency translation.

 

  Sales in Home and Building Products increased by 3% (increased 3% organic) principally due to organic growth and acquisitions partially offset by the unfavorable impact of foreign currency translation. Organic growth was primarily attributable to new product introductions in Environmental and Energy Solutions and volume growth in Security and Fire.
     
  Sales in Home and Building Distribution increased by 3% (increased 4% organic) principally due to organic growth partially offset by the unfavorable impact of foreign currency translation. Organic sales growth was primarily driven by increased sales volume in the global distribution business.
25

Home and Building Technologies segment profit increased due to higher operational segment profit and acquisitions, partially offset by the unfavorable impact of foreign currency translation. The increase in operational segment profit is primarily due to restructuring benefits and volume partially offset by investments for growth. Cost of products and services sold increased primarily due to higher sales volume and acquisitions partially offset by the impact of foreign currency translation.

 

Performance Materials and Technologies

 

    Three Months Ended
    March 31,
    2017   2016   % Change
Net sales   $ 2,069     $ 2,281     (9) %
Cost of products and services sold     1,315       1,528      
Selling, general and administrative expenses and other     283       292      
Segment profit   $ 471     $ 461     2 %

 

    2017 vs. 2016
    Three Months Ended
    March 31,
Factors Contributing to Year-Over-Year Change   Sales   Segment Profit
Organic growth/ Operational segment profit   5%   15%
Foreign currency translation   (1)%   (2)%
Acquisitions and divestitures, net   (13)%   (11)%
Total % Change   (9)%   2%

 

Performance Materials and Technologies sales decreased due to divestitures and the unfavorable impact of foreign currency translation, partially offset by growth in organic sales volumes.

 

  UOP sales increased by 2% (increased 3% organic) driven primarily by higher gas processing revenues due to an increase in customer projects, partially offset by decreased licensing revenue.
     
  Process Solutions sales decreased by 1% (flat organic) driven primarily by decreased revenues in projects and lower field product sales, partially offset by higher revenue in software and services.
     
  Advanced Materials sales decreased by 24% (increased 11% organic) driven primarily by the spin-off of the former resins and chemicals business, partially offset by increased fluorine products volumes.

 

Performance Materials and Technologies segment profit increased due to an increase in operational segment profit, partially offset by divestitures and the unfavorable impact of foreign currency translation. The increase in operational segment profit is primarily due to productivity, net of inflation, higher organic sales volume and pricing, partially offset by unfavorable product mix and continued investments for growth. Cost of products and services sold decreased primarily due to divestitures and productivity, net of inflation, partially offset by higher organic sales volumes.

26

Safety and Productivity Solutions

 

    Three Months Ended
    March 31,
    2017   2016   %
Change
Net sales   $ 1,324     $ 1,059     25%
 Cost of products and services sold     864       690      
 Selling, general and administrative expenses and other     266       219      
Segment profit   $ 194     $ 150     29%

 

    2017 vs. 2016
    Three Months Ended
    March 31,
Factors Contributing to Year-Over-Year Change   Sales   Segment Profit
Organic growth/ Operational segment profit   3%   27%
Foreign exchange   (1)%   (1)%
Acquisitions and divestitures, net   23%   3%
Total % Change   25%   29%

 

Safety and Productivity Solutions sales increased primarily due to growth from acquisitions and organic sales volume, partially offset by the unfavorable impact of foreign currency translation.

 

  Sales in Safety increased by 3% (increased 3% organic) due to increased sales volume in the Industrial Safety business, partially offset by the unfavorable impact of foreign currency translation.
     
  Sales in Productivity Solutions increased 46% (increased 3% organic) principally due to growth from acquisitions, primarily Intelligrated, and organic growth in Workflow Solutions, partially offset by the unfavorable impact of foreign currency translation.

 

Safety and Productivity Solutions segment profit increased primarily due to an increase in operational segment profit and acquisitions, partially offset by the unfavorable impact of foreign currency translation. The increase in operational segment profit was primarily driven by higher productivity, net of inflation, and sales volume. Cost of products and services sold increased primarily due to acquisitions.

 

Repositioning

 

Our repositioning actions are expected to generate incremental pretax savings of $200 million to $300 million in 2017 compared with 2016 principally from planned workforce reductions. Cash spending related to our repositioning actions was $54 million in the three months ended March 31, 2017 and was funded through operating cash flows. In 2017, we expect cash spending for repositioning actions to be approximately $225 million and to be funded through operating cash flows.

27
B. Liquidity and Capital Resources

 

Cash Flow Summary

 

    Three Months Ended
    March 31,
    2017   2016
Cash provided by (used for):                
Operating activities   $ 940     $ 319  
Investing activities     (604 )     (1,196 )
Financing activities     (618 )     (223 )
Effect of exchange rate changes on cash     149       118  
Net (decrease) increase in cash and cash equivalents   $ (133 )   $ (982 )

 

Cash provided by operating activities increased by $621 million primarily due to a $414 million favorable impact from working capital and an increase in net income of $106 million.

 

Cash used for investing activities decreased by $592 million primarily due to a decrease in cash paid for acquisitions of $1,056 million, partially offset by a net $475 million increase in investments, primarily short term marketable securities.

 

Cash used for financing activities increased by $395 million primarily due to a decrease in the net proceeds from debt issuances of $1,572 million, partially offset by a decrease in net repurchases of common stock of $962 million and the acquisition in 2016 of the remaining 30% noncontrolling interest of UOP Russell LLC of $238 million.

 

Liquidity

 

The Company continues to manage its businesses to maximize operating cash flows as the primary source of liquidity. In addition to our available cash and operating cash flows, additional sources of liquidity include committed credit lines, short-term debt from the commercial paper market, long-term borrowings, as well as access to the public debt and equity markets. We continue to balance our cash and financing uses through investment in our existing core businesses, debt reduction, acquisition activity, share repurchases and dividends.

 

We continuously assess the relative strength of each business in our portfolio as to strategic fit, market position, profit and cash flow contribution in order to upgrade our combined portfolio and identify business units that will most benefit from increased investment. We identify acquisition candidates that will further our strategic plan and strengthen our existing core businesses. We also identify business units that do not fit into our long-term strategic plan based on their market position, relative profitability or growth potential. These businesses are considered for potential divestiture, restructuring or other repositioning actions subject to regulatory constraints.

 

In 2017, we are not required to make contributions to our U.S. pension plans. We plan to make contributions of cash and/or marketable securities of approximately $130 million ($89 million of marketable securities were contributed in January 2017) to our non-U.S. plans in 2017 to satisfy regulatory funding requirements. The timing and amount of contributions to both our U.S. and non-U.S. plans may be impacted by a number of factors, including the funded status of the plans.

 

In the three months ended March 31, 2017, the Company repurchased $310 million of outstanding shares. Under the Company’s previously approved $5 billion share repurchase program, $3.8 billion remained available as of March 31, 2017 for additional share repurchases. Honeywell presently expects to repurchase outstanding shares from time to time to offset the dilutive impact over the long-term of employee stock-based compensation plans, including future option exercises, restricted unit vesting and matching contributions under our savings plans. The amount and timing of future repurchases may vary depending on market conditions and the level of operating, financing and other investing activities.

28

C. Other Matters

 

Litigation

 

We are subject to a number of lawsuits, investigations and claims (some of which involve substantial amounts) arising out of the conduct of our business. See Note 12 Commitments and Contingencies of Notes to Consolidated Financial Statements for further discussion of environmental, asbestos and other litigation matters.

 

Critical Accounting Policies

 

The financial information as of March 31, 2017 should be read in conjunction with the consolidated financial statements for the year ended December 31, 2016 contained in our 2016 Annual Report on Form 10-K.

 

For a discussion of the Company’s critical accounting policies, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2016 Annual Report on Form 10-K.

 

Recent Accounting Pronouncements

 

See Note 2 Recent Accounting Pronouncements of Notes to Consolidated Financial Statements for a discussion of recent accounting pronouncements.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risks

 

For a discussion of the Company’s quantitative and qualitative disclosures about market risks, see Item 7A. Quantitative and Qualitative Disclosures About Market Risks, in our 2016 Annual Report on Form 10-K. As of March 31, 2017, there has been no material change in this information .

 

Item 4. Controls and Procedures

 

Honeywell management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that such disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q to ensure information required to be disclosed in the reports that Honeywell files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that it is accumulated and communicated to our management, including our Chief Executive Officer, our Chief Financial Officer, and our Controller, as appropriate, to allow timely decisions regarding required disclosure. There have been no changes that have materially affected, or are reasonably likely to materially affect, Honeywell’s internal control over financial reporting that have occurred during the period covered by this Quarterly Report on Form 10-Q.

29

Part II. Other Information

 

Item 1. Legal Proceedings

 

General Legal Matters

 

We are subject to a number of lawsuits, investigations and claims (some of which involve substantial amounts) arising out of the conduct of our business. See Note 12 Commitments and Contingencies of Notes to Consolidated Financial Statements for a discussion of environmental, asbestos and other litigation matters.

 

Environmental Matters Involving Potential Monetary Sanctions in Excess of $100,000

 

None.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Honeywell purchased 2,575,000 shares of its common stock, par value $1 per share, in the quarter ended March 31, 2017. Under the Company’s previously approved $5 billion share repurchase program, $3.8 billion remained available as of March 31, 2017 for additional share repurchases. The following table summarizes Honeywell’s purchase of its common stock for the quarter ended March 31, 2017:

 

Issuer Purchases of Equity Securities
    (a)   (b)   (c )   (d)
            Total Number   Approximate Dollar
            of Shares   Value of Shares that
    Total       Purchased as   May Yet be Purchased
    Number of   Average   Part of Publicly   Under Plans or
    Shares   Price Paid   Announced Plans   Programs
Period   Purchased   per Share   or Programs   (Dollars in millions)
February 2017   2,575,000   $120.35   2,575,000   $3,767

 

Item 5. Other Information

 

Iran Threat Reduction and Syrian Human Rights Act of 2012

 

Under the Iran Threat Reduction and Syrian Human Rights Act of 2012, which added Section 13(r) of the Securities Exchange Act of 1934, Honeywell is required to disclose in its periodic reports if it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with entities or individuals designated pursuant to certain Executive Orders. All of our activities in Iran during the three months ended March 31, 2017, including the activities disclosed below, were conducted by our non-U.S. subsidiaries under General License H and otherwise in compliance with all applicable laws, including sanctions regulations administered by U.S. Treasury’s Office of Foreign Assets Control (OFAC).

 

In the three months ended March 31, 2017, the UOP business, part of Performance Materials and Technologies, engaged in the following activities related to Iran’s oil, gas and/or petrochemical sectors:

 

  Delivered services to Iranian counterparties pursuant to new and existing contracts, which resulted in revenue of approximately $12.5 million in the three months ended March 31, 2017, (expected total value of these contracts is approximately $48.3 million).
     
  Sold non-U.S. origin products to non-U.S. third-parties for end-use in Iran pursuant to new and existing contracts, which resulted in revenue of approximately $0.4 million in the three months ended March 31, 2017 (expected total value of these contracts is approximately $0.9 million).

 

In the three months ended March 31, 2017, the Process Solutions business, part of Performance Materials and Technologies, sold less than $0.1 million of non-U.S. origin products to distributors (including an Iranian distributor) for use in the gas distribution sector in Iran.

30

Our non-U.S. subsidiaries intend to continue doing business in Iran under General License H in compliance with all applicable laws, which sales may require additional disclosure pursuant to Section 13(r) of the Act.

 

Item 6. Exhibits

 

  (a) See the Exhibit Index on page 33 of this Quarterly Report on Form 10-Q.
31

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Honeywell International Inc.

 

Date:  April 21, 2017 By: /s/ Jennifer H. Mak
    Jennifer H. Mak
    Vice President and Controller
    (on behalf of the Registrant
    and as the Registrant’s
    Principal Accounting Officer)
32

EXHIBIT INDEX

 

Exhibit
No.
  Description
     
10.1*   Chief Executive Officer Business Continuity Agreement as approved by the Board of Directors of Honeywell International Inc. on June 28, 2016 (incorporated by reference to Exhibit 99.1 to Honeywell’s Form 8-K filed June 28, 2016), and amended by the attached amendment (filed herewith)
     
10.2*   2016 Stock Incentive Plan of Honeywell International Inc. and its Affiliates – Form of Performance Plan Grant Agreement (filed herewith)
     
11   Computation of Per Share Earnings (1)
     
12   Computation of Ratio of Earnings to Fixed Charges (filed herewith)
     
31.1   Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
     
31.2   Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
     
32.1   Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
     
32.2   Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
     
101.INS   XBRL Instance Document (filed herewith)
     
101.SCH   XBRL Taxonomy Extension Schema (filed herewith)
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase (filed herewith)
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase (filed herewith)
     
101.LAB   XBRL Taxonomy Extension Label Linkbase (filed herewith)
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase (filed herewith)
     
   
(1)

Data required is provided in Note 4 Earnings Per Share of Notes to Consolidated Financial Statements.

 

*The Exhibits identified above with an asterisk (*) are management contracts or compensatory plans or arrangements.

33

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