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HONEYWELL INTERNATIONAL (HON)
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HONEYWELL INTERNATIONAL : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A) (Dollars in millions, except per share amounts) (form 10-Q)

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04/20/2018 | 07:19pm CEST

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, 2018. The financial information as of March 31, 2018 should be read in conjunction with the consolidated financial statements for the year ended December 31, 2017 contained in our 2017 Annual Report on Form 10-K.

On January 1, 2018, the Company adopted a new accounting standard that resulted in the components of net periodic pension cost and net periodic postretirement benefit cost other than service costs to no longer be presented in Cost of products and services sold and Selling, general and administrative expenses, but to instead be presented within Other (income) expense. See Note 2 Summary of Significant Accounting Policies and Note 4 Other (Income) Expense of Notes to Consolidated Financial Statements for further details.

On January 1, 2018, the Company adopted new accounting guidance on revenue from contracts with customers, using the modified retrospective method applied to contracts that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under that guidance, while prior period amounts are not adjusted and continue to be reported in accordance with the previous guidance. See Note 6 Revenue Recognition and Contracts with Customers of Notes to Consolidated Financial Statements for further details.

A. Results of Operations - three months ended March 31, 2018 compared with the

    three months ended March 31, 2017




Net Sales



                                         Three Months Ended
                                             March 31,
                                          2018         2017
Net sales                             $   10,392     $ 9,492
% change compared with prior period            9 %




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



                               Three Months
Volume                                   4 %
Price                                    1 %
Foreign currency translation             4 %
                                         9 %



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 strengthening of the Euro, British Pound and Chinese Renminbi against the U.S. Dollar. In addition to the drivers noted above, there was a lesser impact from the adoption of the new revenue recognition standard.

Cost of Products and Services Sold


                                         Three Months Ended
                                             March 31,
                                          2018         2017

Cost of products and services sold $ 7,193 $ 6,529 % change compared with prior period 10 % Gross margin percentage

                    30.8 %       31.2 %




Cost of products and services sold increased principally due to higher direct material costs of approximately $610 million (driven primarily by higher sales volumes and foreign currency translation, partially offset by productivity net of inflation).


                                       27







Gross margin percentage decreased primarily due to lower gross margin in Aerospace and Performance Materials and Technologies (approximately 0.4 percentage point impact collectively).

Selling, General and Administrative Expenses


                                                  Three Months Ended
                                                      March 31,
                                                   2018         2017

Selling, general and administrative expenses $ 1,475 $ 1,422 % of sales

                                          14.2 %       15.0 %




Selling, general and administrative expenses increased primarily driven by the unfavorable impact from foreign currency translation and higher repositioning charges allocated to selling, general and administrative expenses, partially offset by the favorable impact of productivity, net of inflation.


Other (Income) Expense



                            Three Months Ended
                                March 31,
                             2018          2017
Other (income) expense   $    (268 )     $ (258 )



Other (income) expense increased primarily due to an increase in pension ongoing income - non-service which was partially offset by separation costs associated with the announced spin-offs of our Homes and Global Distribution business and Transportation Systems business.


Tax Expense



                        Three Months Ended
                            March 31,
                         2018          2017

Tax expense          $     458       $  392
Effective tax rate        24.0 %       22.7 %



The effective tax rate increased for the quarter primarily due to decreased tax benefits from employee share-based payments and tax reserves, partially offset by tax benefits from U.S. tax reform.

The effective tax rate for the three months ended in 2018 was higher than the U.S. federal statutory rate of 21% primarily as a result of state income taxes and U.S tax reform's expansion of the anti-deferral rules that impose U.S. taxes on foreign earnings.

The effective tax rate for the three months ended 2017 was lower than the U.S. federal statutory rate of 35% resulting in part from non-U.S. earnings taxed at lower rates and from benefits from manufacturing incentives.

On December 22, 2017, the U.S. enacted tax reform that instituted fundamental changes to the taxation of multinational corporations. As a result of the tax reform, we recorded a provisional tax charge at December 31, 2017 of $1.9 billion related to the mandatory transition tax and $2.1 billion related to taxes on undistributed foreign earnings that are no longer intended to be permanently reinvested. We recorded a provisional amount because certain information related to the computation of earnings and profits, distributable reserves, and foreign exchange gains and losses is not readily available; some of the testing dates to determine taxable amounts have not yet occurred; and there is limited information from federal and state taxing authorities regarding the application and interpretation of the recently enacted legislation. In accordance with current SEC guidance the Company will report the impact of final provisional amounts in the reporting period in which the accounting is completed, which will not exceed one year from the date of enactment of the tax reform.


                                       28





As of March 31, 2018, the Company has not completed the accounting for any of the tax effects of the tax reform described above and there have been no material changes to our estimated amounts. Accordingly, there has been no change to the provisional amounts previously recorded and there is no impact to the March 31, 2018 effective tax rate for such provisional amounts.

The effective tax rate can vary from quarter to quarter for unusual or infrequently occurring items, such as the tax impacts from the resolution of income tax audits, changes in tax laws, employee share-based payments, revisions to the provisional amounts from U.S. tax reform, internal restructurings or pension mark-to-market adjustments.

Net Income Attributable to Honeywell


                                                            Three Months Ended
                                                                March 31,
                                                             2018         2017

Net income attributable to Honeywell                     $   1,438      $ 1,326

Earnings per share of common stock - assuming dilution $ $1.89 $ $1.71

Earnings per share of common stock - assuming dilution increased primarily driven by increased segment profit across all segments and increased pension and other postretirement income partially offset by a higher effective tax rate, higher repositioning and other charges, and separation costs associated with the announced spin-offs of our Homes and Global Distribution business and Transportation Systems business.


                                       29






Review of Business Segments



                                                       Three Months Ended
                                                            March 31,
                                                                            %
                                                   2018        2017       Change

Aerospace sales Commercial Aviation Original Equipment $ 695 $ 611 14% Commercial Aviation Aftermarket

                    1,268       1,201        6%
Defense and Space                                  1,086         950        14%
Transportation Systems                               928         784        18%
Total Aerospace sales                              3,977       3,546

Home and Building Technologies sales
Homes                                              1,157       1,055        10%
Buildings                                          1,276       1,214        5%
Total Home and Building
Technologies sales                                 2,433       2,269

Performance Materials and Technologies sales
UOP                                                  612         577        6%
Process Solutions                                  1,214       1,109        9%
Advanced Materials                                   708         667        6%
Total Performance Materials and
Technologies sales                                 2,534       2,353

Safety and Productivity Solutions sales
Safety                                               551         521        6%
Productivity Solutions                               897         803        12%

Total Safety and Productivity Solutions sales 1,448 1,324

Net sales                                       $ 10,392     $ 9,492




Aerospace



                                                                Three Months Ended
                                                                    March 31,
                                                                                    %
                                                           2018        2017       Change

Net sales                                                $ 3,977     $ 3,546        12%
Cost of products and services sold                         2,790       2,468
Selling, general and administrative expenses and other       294         282
Segment profit                                           $   893     $   796        12%




                                       30






                                                     2018 vs. 2017
                                                   Three Months Ended
                                                       March 31,
                                                               Segment

Factors Contributing to Year-Over-Year Change Sales Profit

Organic growth/ Operational segment profit            8 %            6 %
Foreign currency translation                          3 %            4 %
Acquisitions, divestitures and other, net             1 %            2 %
Total % change                                       12 %           12 %



Aerospace sales increased primarily due to organic sales growth, the favorable impact of foreign currency translation and the impact of the adoption of the new revenue recognition accounting standard (included within Acquisitions, divestitures and other, net in the table above).

· Commercial Original Equipment sales increased by 14% (increased 9% organic)

   primarily due to increased demand from air transport, regional, and business
   aviation original equipment manufacturers (OEM), lower OEM incentives and the
   impact from the classification of nonrecurring engineering and development
   funding resulting from the adoption of the new revenue recognition accounting
   standard.



· Commercial Aftermarket sales increased by 6% (increased 4% organic) primarily

   driven by increased spares shipments to air transport and regional customers
   and the impact to service program revenues resulting from the adoption of the
   new revenue recognition accounting standard.



· Defense and Space sales increased by 14% (increased 13% organic) primarily

   driven by growth in U.S. defense.



· Transportation Systems sales increased 18% (increased 7% organic) primarily

   driven by higher volumes in light vehicle gas turbos and commercial vehicles
   and the favorable impact of foreign currency translation.



Aerospace segment profit increased due to an increase in operational segment profit, the favorable impact of currency translation, and the impact on service programs from the adoption of the new revenue recognition accounting standard. The increase in operational segment profit was driven primarily by higher organic sales volumes, lower OEM incentives, partially offset by the favorable impact of non-recurring customer contract close-outs and renewals in the prior year and inflation impacts. Cost of products and services sold increase primarily driven by higher organic sales, the impact of foreign currency translation and inflation.

Home and Building Technologies



In the first quarter of 2018, the Home and Building Technologies segment made
organizational changes to further align its businesses under Homes and Buildings
reporting, respectively.



                                                             Three Months Ended
                                                                  March 31,
                                                    2018            2017          % Change
Net sales                                       $    2,433      $    2,269                7 %
Cost of products and services sold                   1,586           1,480
Selling, general and administrative expenses
and other                                              431             412
Segment profit                                  $      416      $      377               10 %





                                       31






                                                      2018 vs. 2017
                                                   Three Months Ended
                                                        March 31,
                                                                 Segment

Factors Contributing to Year-Over-Year Change Sales Profit Organic growth/ Operational segment profit

              2 %           5 %
Foreign currency translation                            5 %           5 %
Total % change                                          7 %          10 %



Home and Building Technologies sales increased primarily due to the favorable impact of foreign currency translation and organic sales growth.

· Sales in Homes increased by 10% (increased 6% organic) due to higher organic

   growth across the Products and Software and Distribution (ADI) businesses and
   the favorable impact of foreign currency translation.



· Sales in Buildings increased by 5% (flat organic) principally due to the

   favorable impact of foreign currency translation. Organic sales growth in
   Building Solutions was offset by lower volumes in Building Products.



Home and Building Technologies segment profit increased due to higher operational segment profit and the favorable impact of foreign currency translation. The increase in operational segment profit is primarily due to the favorable impact from price partially offset by higher sales of lower margin offerings. Cost of products and services sold increased primarily due to the impact of foreign currency translation and higher sales volume.

Performance Materials and Technologies


                                                             Three Months Ended
                                                                  March 31,
                                                    2018            2017          % Change
Net sales                                       $    2,534      $    2,353                8 %
Cost of products and services sold                   1,681           1,547
Selling, general and administrative expenses
and other                                              334             323
Segment profit                                  $      519      $      483                7 %





                                                                     2018 vs. 2017
                                                                  Three Months Ended
                                                                       March 31,
                                                                                Segment
               Factors Contributing to Year-Over-Year Change      Sales         Profit

               Organic growth/ Operational segment profit              3 %           3 %
               Foreign currency translation                            5 %           4 %
               Total % change                                          8 %           7 %




Performance Materials and Technologies sales increased due to the favorable impact of foreign currency translation and an increase in organic sales volumes.

· UOP sales increased by 6% (increased 3% organic) driven by the favorable impact

   of foreign currency translation and by increases primarily in catalyst and
   engineering revenues, partially offset by lower gas processing project
   revenues.



· Process Solutions sales increased by 9% (increased 4% organic) driven by the

   favorable impact of foreign currency translation and by increases primarily in
   smart energy, maintenance and migration services, and thermal solutions
   revenues.




                                       32





· Advanced Materials sales increased by 6% (increased 1% organic) driven by the

   favorable impact of foreign currency translation and by increases primarily in
   fluorine products revenues.



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

Safety and Productivity Solutions


                                                                Three Months Ended
                                                                    March 31,
                                                                                    %
                                                           2018        2017       Change

Net sales                                                $ 1,448     $ 1,324          9 %
Cost of products and services sold                           949         864
Selling, general and administrative expenses and other       268         266
Segment profit                                           $   231     $   194         19 %




                                                     2018 vs. 2017
                                                   Three Months Ended
                                                       March 31,
                                                               Segment

Factors Contributing to Year-Over-Year Change Sales Profit

Organic growth/ Operational segment profit            6 %           14 %
Foreign exchange                                      3 %            5 %
Total % change                                        9 %           19 %



Safety and Productivity Solutions sales increased due to organic sales growth and the favorable impact of foreign currency translation.

· Sales in Safety increased by 6% (increased 2% organic) due to increased sales

   volume in the Retail business and the favorable impact of foreign currency
   translation.



· Sales in Productivity Solutions increased 12% (increased 8% organic) due to

   increased organic sales volume at Intelligrated and the favorable impact of
   foreign currency translation.



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



Repositioning



Cash spending related to our repositioning actions was $79 million in the three months ended March 31, 2018 and was funded through operating cash flows. In 2018, we expect cash spending for repositioning actions to be approximately $250 million and to be funded through operating cash flows.


                                       33





B. Liquidity and Capital Resources



Cash Flow Summary



                                                          Three Months Ended
                                                              March 31,
                                                           2018          2017
Cash provided by (used for):
Operating activities                                   $     1,136     $  940
Investing activities                                           994       (604 )
Financing activities                                        (1,448 )     (618 )
Effect of exchange rate changes on cash                        156        149

Net increase (decrease) in cash and cash equivalents $ 838 $ (133 )

Cash provided by operating activities increased by $196 million primarily due to decreased cash tax payments of $191 million.

Cash provided by investing activities increased by $1,598 million primarily due to a net $1,686 million decrease in investments, primarily short term marketable securities, partially offset by an increase of $94 million in settlement payments of foreign currency exchange contracts used as economic hedges on certain non-functional currency denominated monetary assets and liabilities.

Cash used for financing activities increased by $830 million primarily due to an increase in net repurchases of common stock of $791 million and an increase in cash dividends paid of $53 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 2018, 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 $140 million ($99 million of marketable securities were contributed in January 2018) to our non-U.S. plans in 2018 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, 2018, the Company repurchased $940 million of outstanding shares. Under the Company's previously approved $8 billion share repurchase program, $6.8 billion remained available as of March 31, 2018 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. Additionally, we will seek to reduce share count via share repurchases as and when attractive opportunities arise. The amount and timing of future repurchases may vary depending on market conditions and the level of operating, financing and other investing activities.

See Note 9 Long-term Debt and Credit Agreements of Notes to Consolidated Financial Statements for additional discussion of items impacting our liquidity.


                                       34






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 14 Commitments and Contingencies of Notes to Consolidated Financial Statements for further discussion of environmental, asbestos and other litigation matters.



Critical Accounting Policies



Sales Recognition on Long-Term Contracts-We recognize sales for long-term contracts with performance obligations satisfied over time using either an input or output method. We recognize revenue over time as we perform on these contracts based on the continuous transfer of control to the customer. With control transferring over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. We generally use the cost-to-cost input method of progress for our contracts because it best depicts the transfer of control to the customer that occurs as we incur costs. Under the cost-to-cost method, the extent of progress towards completion is measured based on the proportion of costs incurred to date to the total estimated costs at completion of the performance obligation. Due to the nature of the work required to be performed on many of our performance obligations, the estimation of total revenue and cost at completion requires judgment. Contract revenues are largely determined by negotiated contract prices and quantities, modified by our assumptions regarding contract options, change orders, incentive and award provisions associated with technical performance and price adjustment clauses (such as inflation or index-based clauses). Cost estimates are largely based on negotiated or estimated purchase contract terms, historical performance trends and other economic projections. Significant factors that influence these estimates include inflationary trends, technical and schedule risk, internal and subcontractor performance trends, business volume assumptions, asset utilization, and anticipated labor agreements. Revenue and cost estimates are regularly monitored and revised based on changes in circumstances. Impacts from changes in estimates of net sales and cost of sales are recognized on a cumulative catch-up basis, which recognizes in the current period the cumulative effect of the changes on current and prior periods based on a performance obligation's percentage of completion. Anticipated losses on long-term contracts are recognized when such losses become evident. We maintain financial controls over the customer qualification, contract pricing and estimation processes to reduce the risk of contract losses.

The financial information as of March 31, 2018 should be read in conjunction with the consolidated financial statements for the year ended December 31, 2017 contained in our 2017 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 2017 Annual Report on Form 10-K.

Recent Accounting Pronouncements

See Note 2 Summary of Significant Accounting Policies of Notes to Consolidated Financial Statements for a discussion of recent accounting pronouncements.

© Edgar Online, source Glimpses

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Financials ($)
Sales 2018 42 374 M
EBIT 2018 8 289 M
Net income 2018 6 066 M
Debt 2018 8 523 M
Yield 2018 2,04%
P/E ratio 2018 18,57
P/E ratio 2019 16,98
EV / Sales 2018 2,84x
EV / Sales 2019 2,68x
Capitalization 112 B
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Honeywell International Technical Analysis Chart | HON | US4385161066 | 4-Traders
Technical analysis trends HONEYWELL INTERNATIONAL
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Income Statement Evolution
Consensus
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Mean consensus OUTPERFORM
Number of Analysts 19
Average target price 171 $
Spread / Average Target 16%
EPS Revisions
Managers
NameTitle
Darius Adamczyk President, Chief Executive Officer & Director
David M. Cote Chairman
Thomas A. Szlosek Chief Financial Officer & Senior Vice President
Krishna Mikkilineni SVP-Engineering Operation & Information Technology
Jaime Chico Pardo Lead Independent Director
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