10-K 1 c89913_10k.htm 3B2 EDGAR HTML -- c89913_10k.htm

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

Form 10-K

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

For the fiscal year ended December 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
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

115 Tabor Road
Morris Plains, New Jersey

 

07950

 

 

 

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code (973) 455-2000

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

Title of Each Class

 

Name of Each Exchange
on Which Registered

 

 

 

Common Stock, par value $1 per share*

 

New York Stock Exchange

Floating Rate Senior Notes due 2018

 

New York Stock Exchange

0.650% Senior Notes due 2020

 

New York Stock Exchange

1.300% Senior Notes due 2023

 

New York Stock Exchange

2.250% Senior Notes due 2028

 

New York Stock Exchange

 

 

*

 

The common stock is also listed on the London Stock Exchange.

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No x

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 Website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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

Large accelerated filer x      Accelerated filer o      Non-accelerated filer o      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 Act). Yes o No x

The aggregate market value of the voting stock held by nonaffiliates of the Registrant was approximately $101.4 billion at June 30, 2017.

There were 752,002,033 shares of Common Stock outstanding at January 26, 2018.

Documents Incorporated by Reference

Part III: Proxy Statement for Annual Meeting of Shareowners to be held April 23, 2018.

 

 


 

TABLE OF CONTENTS

 

 

 

 

 

 

 

 

 

Item

 

 

 

Page

Part I

 

1.

 

Business

 

1

 

 

 

 

Executive Officers of the Registrant

 

5

 

 

1A.

 

Risk Factors

 

5

 

 

1B.

 

Unresolved Staff Comments

 

13

 

 

2.

 

Properties

 

13

 

 

3.

 

Legal Proceedings

 

13

 

 

4.

 

Mine Safety Disclosures

 

13

Part II.

 

5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

14

 

 

6.

 

Selected Financial Data

 

16

 

 

7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

17

 

 

7A.

 

Quantitative and Qualitative Disclosures About Market Risks

 

35

 

 

8.

 

Financial Statements and Supplementary Data

 

36

 

 

9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

90

 

 

9A.

 

Controls and Procedures

 

90

 

 

9B.

 

Other Information

 

90

Part III.

 

10.

 

Directors and Executive Officers of the Registrant

 

91

 

 

11.

 

Executive Compensation

 

92

 

 

12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

92

 

 

13.

 

Certain Relationships and Related Transactions

 

93

 

 

14.

 

Principal Accounting Fees and Services

 

93

Part IV.

 

15.

 

Exhibits and Financial Statement Schedules

 

94

 

 

16.

 

Form 10-K Summary

 

94

Signatures

 

95


 

PART I.

Item 1. Business

Honeywell International Inc. (“Honeywell” or “the Company”) invents and commercializes technologies that address some of the world’s most critical challenges around energy, safety, security, productivity and global urbanization. As a diversified technology and manufacturing company, we are uniquely positioned to blend physical products with software to serve customers worldwide with aerospace products and services, turbochargers, energy efficient products and solutions for homes, businesses and transportation, specialty chemicals, electronic and advanced materials, process technology for refining and petrochemicals, and productivity, sensing, safety and security technologies for buildings, homes and industries. Our products and solutions enable a safer, more comfortable and more productive world, enhancing the quality of life of people around the globe. Honeywell was incorporated in Delaware in 1985.

Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports, are available free of charge on our website (www.honeywell.com) under the heading Investor Relations (see SEC Filings and Reports) immediately after they are filed with, or furnished to, the Securities and Exchange Commission (SEC). In addition, in this Annual Report on Form 10-K, the Company incorporates by reference certain information from parts of its Proxy Statement for the 2018 Annual Meeting of Stockholders, which we expect to file with the SEC on or about March 8, 2018, and which will also be available free of charge on our website.

Major Businesses

We globally manage our business operations through four segments: Aerospace, Home and Building Technologies, Performance Materials and Technologies, and Safety and Productivity Solutions. Financial information related to our segments is included in Note 21 Segment Financial Data of Notes to Consolidated Financial Statements. Effective October 2017, the Company realigned the Smart Energy business, previously part of the Home and Building Technologies segment, into the Process Solutions business within the Performance Materials and Technologies segment. The business descriptions below reflect that realignment.

The major products/services, customers/uses and key competitors of each of our segments are:

Aerospace

Aerospace is a leading global supplier of products, software and services for aircraft and vehicles that it sells to original equipment manufacturers (OEM) and other customers in a variety of end markets: air transport, regional, business and general aviation aircraft, airlines, aircraft operators, defense and space contractors and automotive and truck manufacturers. Aerospace is a leading provider of aircraft engines, integrated avionics, systems and service solutions, and related products and services for aircraft manufacturers, and turbochargers to improve the performance and efficiency of passenger cars and commercial vehicles. Aerospace also provides spare parts, repair, overhaul and maintenance services (principally to aircraft operators) for the aftermarket. Aerospace products and services include auxiliary power units, propulsion engines, environmental control systems, wireless connectivity services, electric power systems, engine controls, flight safety, communications, navigation hardware and software, radar and surveillance systems, aircraft lighting, management and technical services, advanced systems and instruments, satellite and space components, aircraft wheels and brakes, repair and overhaul services, turbochargers and thermal systems.

Home and Building Technologies

Home and Building Technologies is a leading global provider of products, software, solutions and technologies that help owners of homes stay connected and in control of their comfort, security and energy use; and enable commercial building owners and occupants to ensure their facilities are safe, energy efficient, sustainable and productive. Home and Building Technologies products and services include controls and displays for heating, cooling, indoor air quality, ventilation, humidification,

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combustion, lighting and home automation; advanced software applications for home/building control and optimization; sensors, switches, control systems and instruments for measuring pressure, air flow, temperature and electrical current; products, services and solutions for measurement, regulation, control and metering of gases and electricity; metering and communications systems for water utilities and industries; access control; video surveillance; fire products; remote patient monitoring systems; and installation, maintenance and upgrades of systems that keep buildings safe, comfortable and productive.

Performance Materials and Technologies

Performance Materials and Technologies is a global leader in developing and manufacturing advanced materials, process technologies and automation solutions. UOP provides process technology, products, including catalysts and adsorbents, equipment and consulting services that enable customers to efficiently produce gasoline, diesel, jet fuel, petrochemicals and renewable fuels for the petroleum refining, gas processing, petrochemical, and other industries. Process Solutions is a pioneer in automation control, instrumentation, advanced software and related services for the oil and gas, refining, pulp and paper, industrial power generation, chemicals and petrochemicals, biofuels, life sciences, and metals, minerals and mining industries. Through its metering business, Process Solutions also enables utilities and distribution companies to deploy advanced capabilities that transform operations, improve reliability and environmental sustainability, and better serve customers. Advanced Materials manufactures a wide variety of high-performance products, including fluorocarbons, hydrofluoroolefins, specialty films, waxes, additives, advanced fibers, customized research chemicals and intermediates, and electronic materials and chemicals.

Safety and Productivity Solutions

Safety and Productivity Solutions is a leading global provider of products, software and connected solutions to customers around the globe that improve productivity, workplace safety and asset performance. Safety products include personal protection equipment and footwear designed for work, play and outdoor activities. Productivity Solutions products and services include gas detection technology; mobile devices and software for computing, data collection and thermal printing; supply chain and warehouse automation equipment, software and solutions; custom-engineered sensors, switches and controls for sensing and productivity solutions; and software-based data and asset management productivity solutions.

Competition

We are subject to competition in substantially all product and service areas. Some of our key competitors are:

 

 

Aerospace: Borg-Warner (automotive), Garmin, General Electric, Rockwell Collins, Thales and United Technologies

 

 

Home and Building Technologies: Emerson Electric, Itron, Johnson Controls, Schneider and Siemens

 

 

Performance Materials and Technologies: Albemarle, BASF, Dow, Dupont, Emerson and Sinopec

 

 

Safety and Productivity Solutions: 3M, Mine Safety Appliances (MSA), Kion Group, TE Connectivity and Zebra Technologies

Our businesses compete on a variety of factors such as price, quality, reliability, delivery, customer service, performance, applied technology, product innovation and product recognition. Brand identity, service to customers and quality are important competitive factors for our products and services, and there is considerable price competition. Other competitive factors include breadth of product line, research and development efforts and technical and managerial capability. While our competitive position varies among our products and services, we believe we are a significant competitor in each of our major product and service classes. Many of our competitors have substantial

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financial resources and significant technological capabilities. In addition, some of our products compete with the captive component divisions of OEMs.

Aerospace Sales

Our Aerospace segment sales were 36%, 38% and 39% of our total sales in 2017, 2016 and 2015. Our sales to commercial aerospace OEMs were 6%, 6% and 8% of our total sales in 2017, 2016 and 2015. In addition, our sales to commercial aftermarket customers of aerospace products and services were 13%, 12% and 12% of our total sales in 2017, 2016 and 2015.

U.S. Government Sales

Sales to the U.S. Government (principally by Aerospace), acting through its various departments and agencies and through prime contractors, amounted to $3,203 million, $3,330 million and $3,743 million in 2017, 2016 and 2015, which included sales to the U.S. Department of Defense, as a prime contractor and subcontractor, of $2,546 million, $2,647 million and $2,680 million in 2017, 2016 and 2015. U.S. defense spending decreased in 2017 compared to 2016. We do not expect our overall operating results to be significantly affected by any proposed changes in 2018 federal defense spending due principally to the varied mix of the government programs which impact us (OEMs’ production, engineering development programs, aftermarket spares and repairs and overhaul programs), as well as our diversified commercial businesses.

Backlog

Our total backlog at December 31, 2017 and 2016 was $17,690 million and $17,277 million. We anticipate that approximately $12,337 million of the 2017 backlog will be filled in 2018. We believe that backlog is not necessarily a reliable indicator of our future sales because a substantial portion of the orders constituting this backlog may be canceled at the customer’s option. The 2016 backlog previously disclosed has been revised to apply the methodology used for the 2017 backlog and excludes certain previously included amounts that do not meet the criteria for inclusion.

International Operations

We are engaged in manufacturing, sales, service and research and development (R&D) globally. U.S. exports and non-U.S. manufactured products are significant to our operations. U.S. exports comprised 12% of our total sales in 2017, 13% in 2016 and 14% in 2015. Non-U.S. manufactured products and services, mainly in Europe and Asia, were 44% of our total sales in 2017, 43% in 2016 and 39% in 2015.

 

 

 

 

 

 

 

 

 

Manufactured Products and Systems and
Performance of Services

 

Year Ended December 31, 2017

 

Aerospace

 

Home and
Building
Technologies

 

Performance
Materials and
Technologies

 

Safety and
Productivity
Solutions

 

 

(% of Segment Sales)

U.S. Exports

 

 

 

21

%

 

 

 

 

1

%

 

 

 

 

15

%

 

 

 

 

4

%

 

Non-U.S.

 

 

 

34

%

 

 

 

 

50

%

 

 

 

 

54

%

 

 

 

 

41

%

 

Information related to risks attendant to our foreign operations is included in Item 1A. Risk Factors under the caption “Macroeconomic and Industry Risks.”

Raw Materials

The principal raw materials used in our operations are generally readily available. Although we occasionally experience disruption in raw materials supply, we experienced no significant problems in the purchase of key raw materials or commodities in 2017. We are not dependent on any one supplier for a material amount of our raw materials.

The costs of certain key raw materials, including R240, fluorspar, copper, ethylene and perchloroethylene in Performance Materials and Technologies and nickel, steel, titanium and other metals in Aerospace, are expected to continue to fluctuate. We will continue to attempt to offset raw

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material cost increases with formula or long-term supply agreements, price increases and hedging activities where feasible. We do not presently anticipate that a shortage of raw materials will cause any material adverse impacts during 2018.

Patents, Trademarks, Licenses and Distribution Rights

Our segments are not dependent upon any single patent or related group of patents, or any licenses or distribution rights. In our judgment, our intellectual property rights are adequate for the conduct of our business. We believe that, in the aggregate, the rights under our patents, trademarks and licenses are generally important to our operations, but we do not consider any individual patent, trademark or any licensing or distribution rights related to a specific process or product to be of material importance in relation to our total business.

Research and Development

The Company’s principal research and development activities are in the U.S., India, Europe, and China. Research and development expense totaled $1,835 million, $1,864 million and $1,856 million in 2017, 2016 and 2015. R&D expense was 5% of sales in each of 2017, 2016 and 2015. Customer-sponsored (principally by the U.S. Government) R&D activities amounted to an additional $876 million, $967 million and $998 million in 2017, 2016 and 2015.

Environment

We are subject to various federal, state, local and foreign government requirements regarding protection of human health and the environment. We believe that, as a general matter, our policies, practices and procedures are properly designed to prevent unreasonable risk of environmental damage, and of resulting financial liability, in connection with our business. Some risk of environmental damage is, however, inherent in some of our operations and products, as it is with other companies engaged in similar businesses.

We are and have been engaged in the handling, manufacturing, use and disposal of many substances classified as hazardous by one or more regulatory agencies. We believe that, as a general matter, our policies, practices and procedures are properly designed to prevent unreasonable risk of environmental damage and personal injury, and that our handling, manufacture, use and disposal of these substances are in accord with environmental and safety laws and regulations. It is also possible that future knowledge or other developments, such as improved capability to detect substances in the environment or increasingly strict environmental laws and standards and enforcement policies, could bring into question our current or past handling, manufacture, use or disposal of these substances.

Among other environmental requirements, we are subject to the federal Superfund and similar state and foreign laws and regulations, under which we have been designated as a potentially responsible party that may be liable for cleanup costs associated with current and former operating sites and various hazardous waste sites, some of which are on the U.S. Environmental Protection Agency’s National Priority List. Although there is a possibility that a responsible party might have to bear more than its proportional share of the cleanup costs if it is unable to obtain appropriate contribution from other responsible parties, we do not anticipate having to bear significantly more than our proportional share in multi-party situations taken as a whole.

We do not believe that existing or pending climate change legislation, regulation, or international treaties or accords are reasonably likely to have a material effect in the foreseeable future on the Company’s business or markets that it serves, nor on its results of operations, capital expenditures, earnings, competitive position or financial standing. We will continue to monitor emerging developments in this area.

Employees

We have approximately 131,000 employees at December 31, 2017, of whom approximately 46,000 are located in the United States.

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Executive Officers of the Registrant

The executive officers of Honeywell, listed as follows, are elected annually by the Board of Directors. There are no family relationships among them.

 

 

 

Name, Age,
Date First
Elected an
Executive Officer

 

Business Experience

Darius Adamczyk, 52
2017(a)

 

President and Chief Executive Officer since April 2017. Chief Operating Officer since from April 2016 to March 2017. President and Chief Executive Officer Performance Materials and Technologies from April 2014 to April 2016. President of Honeywell Process Solutions from April 2012 to April 2014. President of Honeywell Scanning & Mobility from July 2008 to April 2012.

Rajeev Gautam, 65
2016

 

President and Chief Executive Officer Performance Materials and Technologies since April 2016. President of Honeywell UOP from January 2009 to April 2016.

Mark R. James, 56
2007

 

Senior Vice President Human Resources, Procurement and Communications since November 2007.

Anne T. Madden, 53
2017

 

Senior Vice President and General Counsel since October 2017. Vice President of Corporate Development and Global M&A from January 2002 to October 2017.

Timothy O. Mahoney, 61
2009

 

President and Chief Executive Officer Aerospace since September 2009.

Gary S. Michel, 55
2017

 

President and Chief Executive Officer Home and Building Technologies since October 2017.

Krishna Mikkilineni, 58
2010

 

Senior Vice President Engineering, Operations and Information Technology since April 2013. Senior Vice President Engineering and Operations from April 2010 to April 2013 and President Honeywell Technology Solutions from January 2009 to April 2013.

Thomas A. Szlosek, 54
2014

 

Senior Vice President and Chief Financial Officer since April 2014. Vice President of Corporate Finance from April 2013 to April 2014. Chief Financial Officer of Automation and Control Solutions from February 2007 to April 2013.

John F. Waldron, 42
2016

 

President and Chief Executive Officer, Safety and Productivity Solutions since July 2016. President of Sensing and Productivity Solutions from July 2015 to July 2016. President of Scanning and Mobility from April 2012 to July 2015. Vice President and General Manager of Americas Scanning and Mobility from January 2012 to April 2012.

 

 

 

(a)

 

Also a Director.

Item 1A. Risk Factors

Cautionary Statement About Forward-Looking Statements

We describe many of the trends and other factors that drive our business and future results in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and in other parts of this report (including this Item 1A). Such discussions contain 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 management intends, expects, projects, believes or anticipates will or may occur in the future. They

5


 

are based on management’s assumptions and assessments in 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 significantly from those envisaged by our forward-looking statements, including with respect to any changes in or abandonment of the proposed spin-offs. We do not undertake to update or revise any of our forward-looking statements. Our forward-looking statements are also subject to risks and uncertainties that can affect our performance in both the near-and long-term. These forward-looking statements should be considered in light of the information included in this Form 10-K, including, in particular, the factors discussed below. These factors may be revised or supplemented in subsequent reports on Forms 10-Q and 8-K.

Risk Factors

Our business, operating results, cash flows and financial condition are subject to the principal risks and uncertainties set forth below, any one of which could cause our actual results to vary materially from recent results or from our anticipated future results.

Macroeconomic and Industry Risks

Industry and economic conditions may adversely affect the markets and operating conditions of our customers, which in turn can affect demand for our products and services and our results of operations.

 

 

Aerospace—Operating results of Aerospace are directly tied to cyclical industry and economic conditions, as well as changes in customer buying patterns of aftermarket parts, supplier stability, factory transitions and capacity constraints. The operating results of our Commercial Aviation business unit may be adversely affected by downturns in the global demand for air travel which impacts new aircraft production or the delay or cancellation of new aircraft orders, delays in launch schedules for new aircraft, the retirement of aircraft and global flying hours, which impact air transport, regional, business and general aviation aircraft utilization rates. Operating results could also be impacted by changes in overall trends related to end market demand for the product portfolio, as well as, new entrants and non-traditional players entering the market. Operating results in our Defense and Space business unit may be affected by the mix of U.S. and foreign government appropriations for defense and space programs and by compliance risks. Results may also be impacted by the potential introduction of counterfeit parts into our global supply chain. Operating results in our Transportation Systems business unit may be affected by the level of production and demand for automobiles and trucks equipped with turbochargers, regulatory changes regarding automobile and truck emissions and fuel economy, growing importance of automotive electrification, consumer demand and spending for automotive aftermarket products and delays in launch schedules for new automobile and truck platforms.

 

 

Home and Building Technologies—Operating results may be adversely impacted by downturns in the level of global residential and commercial construction activity (including retrofits and upgrades), lower capital spending and operating expenditures on building projects, less industrial plant expansion, changes in the competitive landscape including new market entrants and new technologies, and fluctuations in inventory levels in distribution channels.

 

 

Performance Materials and Technologies—Operating results may be adversely impacted by downturns in capacity utilization for chemical, industrial, refining, petrochemical and semiconductor plants, our customers’ availability of capital for refinery construction and expansion, raw material demand and supply volatility, product commoditization, and our ability to maximize our facilities’ production capacity and minimize downtime. In particular, the volatility in oil and natural gas prices have and will continue to impact our customers’ operating levels and capital spending and thus demand for our products and services.

 

 

Safety and Productivity Solutions—Operating results may be adversely impacted by downturns in the level of global capital spending and operating expenditures, including in the

6


 

 

 

 

oil and gas industry, reduced investments in process automation, safety monitoring, and plant capacity utilization initiatives, fluctuations in retail markets, lower customer demand due to the failure to anticipate and respond to overall trends related to end market demand, changes in the competitive landscape including new market entrants and technology that may lead to product commoditization, and adverse industry economic conditions, all of which could result in lower market share, reduced selling prices and lower margins.

An increasing percentage of our sales and operations is in non-U.S. jurisdictions and is subject to the economic, political, regulatory, foreign exchange and other risks of international operations.

Our international operations, including U.S. exports, represent more than half of the Company’s sales. Risks related to international operations include exchange control regulations, wage and price controls, antitrust regulations, employment regulations, foreign investment laws, import, export and other trade restrictions (such as sanctions and embargoes), violations by our employees of anti-corruption laws (despite our efforts to mitigate these risks), changes in regulations regarding transactions with state-owned enterprises, nationalization of private enterprises, acts of terrorism, and our ability to hire and maintain qualified staff and maintain the safety of our employees in these regions. Instability and uncertainties arising from the global geopolitical environment, including the United Kingdom referendum in favor of exiting the European Union and the evolving international and domestic political, regulatory and economic landscape, the potential for changes in global trade policies including sanctions and trade barriers, trends such as populism, economic nationalism and negative sentiment toward multinational companies, and the cost of compliance with increasingly complex and often conflicting regulations worldwide can impair our flexibility in modifying product, marketing, pricing or other strategies for growing our businesses, as well as our ability to improve productivity and maintain acceptable operating margins.

Operating outside of the United States also exposes us to foreign exchange risk, which we monitor and seek to reduce through hedging activities. However, foreign exchange hedging activities bear a financial cost and may not always be available to us or be successful in eliminating such volatility. Finally, we generate significant amounts of cash outside of the United States that is invested with financial and non-financial counterparties. While we employ comprehensive controls regarding global cash management to guard against cash or investment loss and to ensure our ability to fund our operations and commitments, a material disruption to the counterparties with whom we transact business could expose Honeywell to financial loss.

Risks related to our defined benefit pension plans may adversely impact our results of operations and cash flow.

Significant changes in actual investment return on pension assets, discount rates, and other factors could adversely affect our results of operations and require cash pension contributions in future periods. Changes in discount rates and actual asset returns different than our anticipated asset returns can result in significant non-cash actuarial gains or losses which we record in the fourth quarter of each fiscal year, and, if applicable, in any quarter in which an interim re-measurement is triggered. With regard to cash pension contributions, funding requirements for our pension plans are largely dependent upon interest rates, actual investment returns on pension assets and the impact of legislative or regulatory changes related to pension funding obligations.

Operational Risks

Raw material price fluctuations, the ability of key suppliers to meet quality and delivery requirements, or catastrophic events can increase the cost of our products and services, impact our ability to meet commitments to customers and cause us to incur significant liabilities.

The cost of raw materials is a key element in the cost of our products, particularly in Performance Materials and Technologies (R240, fluorspar, copper, ethylene and perchloroethylene) and in

7


 

Aerospace (nickel, steel, titanium and other metals). Our inability to offset material price inflation through increased prices to customers, formula or long-term fixed price contracts with suppliers, productivity actions or through commodity hedges could adversely affect our results of operations.

Many major components, product equipment items and raw materials, particularly in Aerospace, are procured or subcontracted on a single or sole-source basis. Although we maintain a qualification and performance surveillance process and we believe that sources of supply for raw materials and components are generally adequate, it is difficult to predict what effects shortages or price increases may have in the future. Our ability to manage inventory and meet delivery requirements may be constrained by our suppliers’ inability to scale production and adjust delivery of long-lead time products during times of volatile demand. Our inability to fill our supply needs would jeopardize our ability to fulfill obligations under commercial and government contracts, which could, in turn, result in reduced sales and profits, contract penalties or terminations, and damage to customer relationships.

We may be unable to successfully execute or effectively integrate acquisitions, and divestitures may not occur as planned.

We regularly review our portfolio of businesses and pursue growth through acquisitions and seek to divest non-core businesses. We may not be able to complete transactions on favorable terms, on a timely basis, or at all, and during integration we may discover cybersecurity and compliance issues. In addition, our results of operations and cash flows may be adversely impacted by (i) the failure of acquired businesses to meet or exceed expected returns, including risk of impairment; (ii) the failure to integrate multiple acquired businesses into Honeywell simultaneously and on schedule and/or to achieve expected synergies; (iii) the inability to dispose of non-core assets and businesses on satisfactory terms and conditions; and (iv) the discovery of unanticipated liabilities, labor relations difficulties or other problems in acquired businesses for which we lack contractual protections, insurance or indemnities, or with regard to divested businesses, claims by purchasers to whom we have provided contractual indemnification.

The proposed spin-offs of our Homes and Global Distribution business and of our Transportation Systems business into two stand-alone, publicly-traded companies are each contingent upon the satisfaction of a number of conditions, may not be completed on the currently contemplated timeline, or at all, and may not achieve the intended benefits.

On October 10, 2017, the Company announced its intention to separately spin-off our Homes and Global Distribution business, which is part of our Home and Building Technologies segment, and our Transportation Systems business, which is part of our Aerospace segment, into two stand-alone, publicly-traded companies. Completion of each proposed spin-off is subject to readiness of each spin-off to operate as an independent public company, finalization of the financial statements of the spun-off business, assurance that the separation will be tax-free to our shareowners for U.S. federal income tax purposes, finalization of the capital structure of the three corporations, the effectiveness of appropriate filings with the U.S. Securities and Exchange Commission, final approval of the Board of Directors, and other customary matters. Each proposed spin-off is complex in nature, and may be affected by unanticipated developments, credit and equity markets, or changes in market conditions. These or other unanticipated developments could delay or prevent the proposed spin-offs or cause the proposed spin-offs to occur on terms or conditions that are less favorable than anticipated, including without limitation, the failure to qualify as tax-free to our shareowners, and the inability of the two spun-off companies to incur sufficient indebtedness to allow for a distribution to Honeywell of proceeds concurrently with the consummation of the spin-offs or to make ongoing cash contributions towards the satisfaction of certain of our legacy asbestos and environmental remediation liabilities. Furthermore, if the spin-offs are completed, we cannot assure you that each will be successful in meeting its objectives. There is the potential for business disruption and significant separation costs. Any of these factors could have a material adverse effect on our business, financial condition, results of operations, cash flows and/or the price of our common stock.

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Our future growth is largely dependent upon our ability to develop new technologies and introduce new products that achieve market acceptance in increasingly competitive markets with acceptable margins.

Our future growth rate depends upon a number of factors, including our ability to (i) identify and evolve with emerging technological and broader industry trends in our target end-markets, (ii) develop and maintain competitive products, (iii) defend our market share against an ever-expanding number of competitors including many new and non-traditional competitors, (iv) enhance our products by adding innovative features that differentiate our products from those of our competitors and prevent commoditization of our products, (v) develop, manufacture and bring compelling new products to market quickly and cost-effectively, (vi) monitor disruptive technologies and business models, (vii) achieve sufficient return on investment for new products introduced based on capital expenditures and research and development spending, (viii) respond to changes in overall trends related to end market demand, and (x) attract, develop and retain individuals with the requisite technical expertise and understanding of customers’ needs to develop new technologies and introduce new products.

The failure of our technologies or products to gain market acceptance due to more attractive offerings by our competitors could significantly reduce our revenues and adversely affect our competitive standing and prospects.

Failure to increase productivity through sustainable operational improvements, as well as an inability to successfully execute repositioning projects or to effectively manage our workforce, may reduce our profitability or adversely impact our businesses.

Our profitability and margin growth are dependent upon our ability to drive sustainable improvements. In addition, we seek productivity and cost savings benefits through repositioning actions and projects, such as consolidation of manufacturing facilities, transitions to cost-competitive regions and product line rationalizations. Risks associated with these actions include delays in execution of the planned initiatives, additional unexpected costs, realization of fewer than estimated productivity improvements and adverse effects on employee morale. We may not realize the full operational or financial benefits we expect, the recognition of these benefits may be delayed and these actions may potentially disrupt our operations. In addition, organizational changes, attrition, labor relations difficulties, or workforce stoppage could have a material adverse effect on our business, reputation, financial position and results of operations.

As a supplier to the U.S. Government, we are subject to unique risks, such as the right of the U.S. Government to terminate contracts for convenience and to conduct audits and investigations of our operations and performance.

U.S. Government contracts are subject to termination by the government, either for the convenience of the government or for our failure to perform consistent with the terms of the applicable contract. Our contracts with the U.S. Government are also subject to government audits that may recommend downward price adjustments and other changes. When appropriate and prudent, we have made adjustments and paid voluntary refunds in the past and may do so in the future.

We are also subject to government investigations of business practices and compliance with government procurement regulations. If, as a result of any such investigation or other government investigations (including investigation of violations of certain environmental, employment or export laws), Honeywell or one of its businesses were found to have violated applicable law, then it could be suspended from bidding on or receiving awards of new government contracts, suspended from contract performance pending the completion of legal proceedings and/or have its export privileges suspended.

Our operations and the prior operations of predecessor companies expose us to the risk of material environmental liabilities.

Mainly because of past operations and operations of predecessor companies, we are subject to potentially material liabilities related to the remediation of environmental hazards and to claims of

9


 

personal injuries or property damages that may be caused by hazardous substance releases and exposures. We continue to incur remedial response and voluntary clean-up costs for site contamination and are a party to lawsuits and claims associated with environmental and safety matters, including past production of products containing hazardous substances. Additional lawsuits, claims and costs involving environmental matters are likely to continue to arise in the future. Various federal, state, local and foreign governments regulate the discharge of materials into the environment and can impose substantial fines and criminal sanctions for violations, and require installation of costly equipment or operational changes to limit emissions and/or decrease the likelihood of accidental hazardous substance releases. In addition, changes in laws, regulations and enforcement of policies, the discovery of previously unknown contamination or new technology or information related to individual sites, the establishment of stricter state or federal toxicity standards with respect to certain contaminants, or the imposition of new clean-up requirements or remedial techniques could require us to incur additional costs in the future that would have a negative effect on our financial condition or results of operations.

Cybersecurity incidents could disrupt business operations, result in the loss of critical and confidential information, and adversely impact our reputation and results of operations.

Global cybersecurity threats and incidents can range from uncoordinated individual attempts to gain unauthorized access to information technology (IT) systems to sophisticated and targeted measures known as advanced persistent threats, directed at the Company, its products, its customers and/or its third party service providers, including cloud providers. Our customers, including the U.S. government, are increasingly requiring cybersecurity protections and mandating cybersecurity standards in our products, and we may incur additional costs to comply with such demands. While we have experienced, and expect to continue to experience, these types of threats and incidents, none of them to date have been material to the Company. We seek to deploy comprehensive measures to deter, prevent, detect, respond to and mitigate these threats, including identity and access controls, data protection, vulnerability assessments, product software designs which we believe are less susceptible to cyber attacks, continuous monitoring of our IT networks and systems and maintenance of backup and protective systems. Despite these efforts, cybersecurity incidents, depending on their nature and scope, could potentially result in the misappropriation, destruction, corruption or unavailability of critical data and confidential or proprietary information (our own or that of third parties) and the disruption of business operations. Cybersecurity incidents aimed at the software imbedded in our products could lead to third party claims that our product failures have caused a similar range of damages to our customers, and this risk is enhanced by the increasingly connected nature of our products. The potential consequences of a material cybersecurity incident include financial loss, reputational damage, litigation with third parties, theft of intellectual property, fines levied by the Federal Trade Commission, diminution in the value of our investment in research, development and engineering, and increased cybersecurity protection and remediation costs due to the increasing sophistication and proliferation of threats, which in turn could adversely affect our competitiveness and results of operations.

Data privacy, identity protection, and information security may require significant resources and presents certain risks.

We collect, store, have access to and otherwise process certain confidential or sensitive data, including proprietary business information, personal data and other information that is subject to privacy and security laws, regulations and/or customer-imposed controls. Despite our efforts to protect such data, we may be vulnerable to material security breaches, theft, misplaced or lost data, programming errors, or employee errors that could potentially lead to the compromising of such data, improper use of our systems, software solutions or networks, unauthorized access, use, disclosure, modification or destruction of information, defective products, production downtimes and operational disruptions. In addition, we operate in an environment in which there are different and potentially conflicting data privacy laws in effect in the various U.S. states and foreign jurisdictions in which we operate and we must understand and comply with each law and standard in each of these jurisdictions while ensuring the data is secure. Government enforcement actions can be costly and interrupt the

10


 

regular operation of our business, and violations of data privacy laws can result in fines, reputational damage and civil lawsuits, any of which may adversely affect our business, reputation and financial statements.

A material disruption of our operations, particularly at our manufacturing facilities or within our information technology infrastructure, could adversely affect our business.

Our facilities, supply chains, distribution systems and information technology systems are subject to catastrophic loss due to natural disasters including hurricanes and floods, power outages, fires, explosions, terrorism, equipment failures, sabotage, adverse weather conditions, public health crises, labor disputes, critical supply failure, inaccurate downtime forecast, political disruption, and other reasons, which can result in undesirable consequences, including financial losses and damaged relationships with customers. We employ information technology systems and networks to support the business and rely on them to process, transmit and store electronic information, and to manage or support a variety of business processes and activities. Disruptions to our information technology infrastructure from system failures, shutdowns, power outages, telecommunication or utility failures, and other events, including disruptions at our cloud computing, server, systems and other third party IT service providers, could interfere with our operations, interrupt production and shipments, damage customer and business partner relationships, and negatively impact our reputation.

Legal and Regulatory Risks

Our U.S. and non-U.S. tax liabilities are dependent, in part, upon the distribution of income among various jurisdictions in which we operate.

Our future results of operations could be adversely affected by changes in the effective tax rate as a result of a change in the mix of earnings in countries with differing statutory tax rates, changes in tax laws, regulations and judicial rulings (or changes in the interpretation thereof), changes in generally accepted accounting principles, changes in the valuation of deferred tax assets and liabilities, changes in the amount of earnings permanently reinvested offshore, the results of audits and examinations of previously filed tax returns and continuing assessments of our tax exposures and various other governmental enforcement initiatives. Our tax expense includes estimates of tax reserves and reflects other estimates and assumptions, including assessments of future earnings of the Company which could impact the valuation of our deferred tax assets. Changes in tax laws or regulations, including further regulatory developments arising from U.S. tax reform legislation as well as multi-jurisdictional changes enacted in response to the action items provided by the Organization for Economic Co-operation and Development (OECD), will increase tax uncertainty and impact our provision for income taxes.

Changes in legislation or government regulations or policies can have a significant impact on our results of operations.

The sales and margins of each of our segments are directly impacted by government regulations including safety, performance and product certification regulations. Within Aerospace, the operating results of Commercial Original Equipment and Commercial Aftermarket may be impacted by, among other things, mandates of the Federal Aviation Administration and other similar international regulatory bodies requiring the installation of equipment on aircraft. Our Defense and Space business unit may be affected by changes in government procurement regulations, while emissions, fuel economy and energy efficiency standards for motor vehicles can impact Transportation Systems. Within Home and Building Technologies, the demand for and cost of providing products, services and solutions can be impacted by fire, security, safety, health care, environmental and energy efficiency standards and regulations. Performance Materials and Technologies’ results of operations can be impacted by environmental standards, regulations, and judicial determinations. Growth in all our businesses within emerging markets may be adversely impacted by the inability to acquire and retain qualified employees where local employment law mandates may be restrictive. Noncompliance with legislation and regulations can result in fines and penalties.

11


 

We cannot predict with certainty the outcome of litigation matters, government proceedings and other contingencies and uncertainties.

We are subject to a number of 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 (including asbestos), prior acquisitions and divestitures, employment, employee benefits plans, intellectual property, antitrust, import and export, and environmental, health and safety matters. Our potential liabilities are subject to change over time due to new developments, changes in settlement strategy or the impact of evidentiary requirements, and we may become subject to or be required to pay damage awards or settlements that could have a material adverse effect on our results of operations, cash flows and financial condition. While we maintain insurance for certain risks, the amount of our insurance coverage may not be adequate to cover the total amount of all insured claims and liabilities. The incurrence of significant liabilities for which there is no or insufficient insurance coverage could adversely affect our results of operations, cash flows, liquidity and financial condition.

12


 

Item 1B. Unresolved Staff Comments

None

Item 2. Properties

We have approximately 1,287 locations, of which 296 are manufacturing sites. Our properties and equipment are in good operating condition and are adequate for our present needs. We do not anticipate difficulty in renewing existing leases as they expire or in finding alternative facilities.

Item 3. Legal Proceedings

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 a discussion of environmental, asbestos and other litigation matters in Note 19 Commitments and Contingencies of Notes to Consolidated Financial Statements.

Item 4. Mine Safety Disclosures

Not applicable.

13


 

Part II.

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Honeywell’s common stock is listed on the New York Stock Exchange. Market and dividend information for Honeywell’s common stock is included in Note 24 Unaudited Quarterly Financial Information of Notes to Consolidated Financial Statements.

The number of record holders of our common stock at December 31, 2017 was 47,678.

Information regarding securities authorized for issuance under equity compensation plans is included in Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters under the caption “Equity Compensation Plans.”

Honeywell purchased 10,300,000 shares of its common stock, par value $1 per share, in the quarter ending December 31, 2017. In December 2017, the Board of Directors authorized the repurchase of up to a total of $8 billion of Honeywell common stock, which included amounts remaining under and replaced the previously approved share repurchase program. $7.7 billion remained available as of as of December 31, 2017 for additional share repurchases. Honeywell presently expects to repurchase outstanding shares from time to time to generally offset the dilutive impact of employee stock based compensation plans, including option exercises, restricted unit vesting and matching contributions under our savings plans. Additionally, we 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 our operating, financing and other investing activities.

The following table summarizes Honeywell’s purchase of its common stock for the three months ended December 31, 2017:

 

 

 

 

 

 

 

 

 

Issuer Purchases of Equity Securities

Period

 

Total
Number of
Shares
Purchased

 

Average
Price Paid
per Share

 

Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans
or Programs

 

Approximate Dollar
Value of Shares that
May Yet be Purchased
Under Plans or
Programs
(Dollars in millions)

October 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

November 2017

 

 

 

4,200,000

 

 

 

$

 

146.89

 

 

 

 

4,200,000

 

 

 

$

 

2,125

 

December 2017

 

 

 

6,100,000

 

 

 

$

 

153.54

 

 

 

 

6,100,000

 

 

 

$

 

7,737

 

14


 

Performance Graph

The following graph compares the five-year cumulative total return on our common stock to the total returns on the Standard & Poor’s (S&P) 500 Stock Index and a composite of S&P’s Industrial Conglomerates and Aerospace and Defense indices, on a 65%/35% weighted basis (the Composite Index). The weighting of the components of the Composite Index are based on our segments’ relative contribution to total segment profit. The selection of the Industrial Conglomerates component of the Composite Index reflects the diverse and distinct range of non-aerospace businesses conducted by Honeywell. The annual changes for the five-year period shown in the graph are based on the assumption that $100 had been invested in Honeywell stock and each index on December 31, 2012 and that all dividends were reinvested.

COMPARISON OF CUMULATIVE FIVE YEAR TOTAL RETURN

15


 

HONEYWELL INTERNATIONAL INC.

This selected financial data should be read in conjunction with Honeywell’s Consolidated Financial Statements and related Notes included elsewhere in this Annual Report as well as the section of this Annual Report titled Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 6. Selected Financial Data

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

2017(1)

 

2016

 

2015

 

2014

 

2013

 

 

(Dollars in millions, except per share amounts)

Results of Operations

 

 

 

 

 

 

 

 

 

 

Net sales

 

 

$

 

40,534

 

 

 

$

 

39,302

 

 

 

$

 

38,581

 

 

 

$

 

40,306

 

 

 

$

 

39,055

 

Net income attributable to Honeywell

 

 

 

1,655

 

 

 

 

4,809

 

 

 

 

4,768

 

 

 

 

4,239

 

 

 

 

3,924

 

Earnings Per Common Share

 

 

 

 

 

 

 

 

 

 

Earnings from continuing operations:

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

2.17

 

 

 

 

6.29

 

 

 

 

6.11

 

 

 

 

5.40

 

 

 

 

4.99

 

Assuming dilution

 

 

 

2.14

 

 

 

 

6.20

 

 

 

 

6.04

 

 

 

 

5.33

 

 

 

 

4.92

 

Dividends per share

 

 

 

2.74

 

 

 

 

2.45

 

 

 

 

2.15

 

 

 

 

1.87

 

 

 

 

1.68

 

Financial Position at Year-End

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment-net

 

 

 

5,926

 

 

 

 

5,793

 

 

 

 

5,789

 

 

 

 

5,383

 

 

 

 

5,278

 

Total assets

 

 

 

59,387

 

 

 

 

54,146

 

 

 

 

49,316

 

 

 

 

45,451

 

 

 

 

45,435

 

Short-term debt

 

 

 

5,309

 

 

 

 

3,593

 

 

 

 

6,514

 

 

 

 

2,637

 

 

 

 

2,028

 

Long-term debt

 

 

 

12,573

 

 

 

 

12,182

 

 

 

 

5,554

 

 

 

 

6,046

 

 

 

 

6,801

 

Total debt

 

 

 

17,882

 

 

 

 

15,775

 

 

 

 

12,068

 

 

 

 

8,683

 

 

 

 

8,829

 

Redeemable noncontrolling interest

 

 

 

5

 

 

 

 

3

 

 

 

 

290

 

 

 

 

219

 

 

 

 

167

 

Shareowners’ equity

 

 

 

17,439

 

 

 

 

19,547

 

 

 

 

18,418

 

 

 

 

17,784

 

 

 

 

17,579

 

 

 

(1)

 

2017 Net Income attributable to Honeywell and Earnings Per Common Share were impacted by the Tax Cuts and Jobs Act; see Note 5 Income Taxes of Notes to Consolidated Financial Statements for further details.

16


 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Dollars in millions, except per share amounts)

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 years ended December 31, 2017. All references to Notes relate to Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data.

In October 2017, the Company announced the results of a comprehensive portfolio review which included the announcement of our intent to spin-off our Homes and Global Distribution business, as well as our Transportation Systems business, into two stand-alone, publicly traded companies.

Effective October 2017, we realigned the Smart Energy business, previously part of the Home and Building Technologies segment, into the Process Solutions business within the Performance Materials and Technologies segment. Effective July 2016, the Company realigned the business units comprising its Automation and Control Solutions segment by forming two new segments: Home and Building Technologies and Safety and Productivity Solutions. These realignments have no impact on the Company’s historical consolidated financial position, results of operations or cash flows. Prior period amounts have been reclassified to conform to current period segment presentation.

On October 1, 2016, the Company completed the tax-free spin-off of its Resins and Chemicals business, part of Performance Materials and Technologies, into a standalone, publicly-traded company (named AdvanSix Inc. (“AdvanSix”)) to Honeywell shareowners. The assets and liabilities associated with AdvanSix have been removed from the Company’s Consolidated Balance Sheet as of the effective date of the spin-off. The results of operations for AdvanSix are included in the Consolidated Statement of Operations through the effective date of the spin-off.

On September 16, 2016, the Company completed the sale of the Aerospace government services business, Honeywell Technology Solutions Inc (“HTSI” or “government services business”). The assets and liabilities associated with HTSI have been removed from the Company’s Consolidated Balance Sheet as of the effective date of the sale. The results of operations for HTSI are included in the Consolidated Statement of Operations through the effective date of the sale.

EXECUTIVE SUMMARY

During 2017, Honeywell continued to successfully deliver on its financial commitments while still creating long-term value for our shareowners. We grew net sales 3% to $40,534 million and grew income before taxes 7% to $6,902 million. The improvement in year over year income before taxes was attributable to both organic sales growth as well as operational improvements that increased operating margins. We believe our ability to consistently grow earnings derives from the consistent, rigorous deployment of the Honeywell Operating System as well as a long history of identifying and investing in productivity initiatives. We have made concerted efforts to revitalize our commercial excellence processes, such as Velocity Product Development (“VPD”), which enables higher organic revenue at better margins.

We are careful to not allow the attainment of short-term financial results imperil the creation of long-term, sustainable shareowner value. Hence, as part of the announcement in October 2017 of the results of our portfolio review, we affirmed our commitment to a strategy and investments that are intended to enable us to become one of the world’s leading software industrial companies. Our refocused strategy and investments are intended to take better advantage of our core technological and software strengths in high growth businesses that participate in six attractive industrial end markets. Each of these end markets is characterized by favorable global mega-trends including energy efficiency, infrastructure investment, urbanization and safety.

17


 

In 2017 we deployed capital of over $6 billion, including the following:

 

 

Share Repurchases—we continue to repurchase our shares with the goal of keeping share count flat by offsetting the dilutive impact of employee stock based compensation and savings plans. Additionally, we seek to reduce share count via share repurchases as and when attractive opportunities arise. In 2017, we repurchased 20.5 million shares for $2.9 billion.

 

 

Dividend—In 2017, we paid cash dividends of $2.1 billion and increased our annual dividend rate by 12%, as we seek to continue to grow the dividend faster than earnings. Since 2010, we have increased the dividend rate by 10% or more eight times.

 

 

Capital Investment in Facilities—we invested over $1 billion in capital expenditures focused on high return projects.

CONSOLIDATED RESULTS OF OPERATIONS

Net Sales

 

 

 

 

 

 

 

 

 

2017

 

2016

 

2015

Net sales

 

 

$

 

40,534

 

 

 

$

 

39,302

 

 

 

$

 

38,581

 

% change compared with prior period

 

 

 

3

%

 

 

 

 

2

%

 

 

 

The change in net sales is attributable to the following:

 

 

 

 

 

 

 

2017
Versus
2016

 

2016
Versus
2015

Volume

 

 

 

3%

 

 

 

 

(2)%

 

Price

 

 

 

1%

 

 

 

 

 

Acquisitions/Divestitures

 

 

 

(1)%

 

 

 

 

5%

 

Foreign Currency Translation

 

 

 

 

 

 

 

(1)%

 

 

 

 

 

 

 

 

 

3%

 

 

 

 

2%

 

 

 

 

 

 

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 in 2017 compared with 2016 was flat. The strengthening of the Euro was offset by the weakening of the British Pound against the U.S. Dollar.

The foreign currency translation impact in 2016 compared with 2015 is principally driven by the weakening of the British Pound, Chinese Renminbi and Canadian Dollar, partially offset by the strengthening of the Japanese Yen against the U.S. Dollar.

Cost of Products and Services Sold

 

 

 

 

 

 

 

 

 

2017

 

2016

 

2015

Cost of products and services sold

 

 

$

 

27,575

 

 

 

$

 

27,150

 

 

 

$

 

26,747

 

% change compared with prior period

 

 

 

2

%

 

 

 

 

2

%

 

 

 

Gross Margin percentage

 

 

 

32.0

%

 

 

 

 

30.9

%

 

 

 

 

30.7

%

 

Cost of products and services sold increased in 2017 compared with 2016 principally due to increased direct material costs of approximately $290 million (driven by higher sales volume and acquisitions partially offset by divestitures and productivity, net of inflation), higher repositioning and other charges of approximately $260 million and higher depreciation and amortization of approximately $90 million, partially offset by higher pension and other postretirement benefits income, and lower pension mark-to-market expense, allocated to cost of products and services sold of approximately $110 million, and decreased indirect material costs of approximately $70 million.

Gross margin percentage increased in 2017 compared with 2016 principally due to higher gross margin in Aerospace and Performance Materials and Technologies (approximately 1.7 percentage point impact collectively) and higher pension and other postretirement benefits income and lower pension market to market expense allocated to cost of products and services sold (approximately 0.3 percentage point impact), partially offset by higher repositioning and other charges (approximately

18


 

0.6 percentage point impact) and by lower gross margin in Home and Building Solutions and Safety and Productivity Solutions (approximately 0.3 percentage point impact collectively).

Cost of products and services sold increased in 2016 compared with 2015 principally due to increased direct material costs of approximately $380 million (driven primarily by acquisitions, net of divestitures, partially offset by the favorable impact of productivity, net of inflation, and foreign currency translation), higher depreciation and amortization attributable to acquisitions of approximately $135 million and increased pension mark-to-market expense allocated to cost of products and services sold of $70 million, partially offset by higher pension and other postretirement benefits income allocated to cost of products and services sold of $200 million.

Gross margin percentage increased in 2016 compared with 2015 principally due to higher gross margin in Performance Materials and Technologies (approximately 0.2 percentage point impact) and higher pension and other postretirement benefits income allocated to cost of products and services sold (approximately 0.5 percentage point impact), partially offset by lower gross margin in Aerospace, Home and Building Technologies and Safety and Productivity Solutions an (approximately 0.3 percentage point impact collectively) and increased pension mark-to-market expense allocated to cost of products and services sold (approximately 0.2 percentage point impact).

Selling, General and Administrative Expenses

 

 

 

 

 

 

 

 

 

2017

 

2016

 

2015

Selling, general and administrative expense

 

 

$

 

5,808

 

 

 

$

 

5,469

 

 

 

$

 

5,006

 

% of sales

 

 

 

14.3

%

 

 

 

 

13.9

%

 

 

 

 

13.0

%

 

Selling, general and administrative expenses (SG&A) increased in 2017 compared with 2016 primarily due to increased labor costs (driven primarily by acquisitions, net of divestitures, investment for growth and merit increases), and higher repositioning charges, partially offset by decreased pension mark-to-market expense allocated to SG&A.

SG&A increased in 2016 compared with 2015 primarily due to increased labor costs (driven primarily by acquisitions, net of divestitures, investment for growth and merit increases), increased pension mark-to-market expense allocated to SG&A and higher repositioning charges, partially offset by the favorable impact from foreign currency translation and increased pension income allocated to SG&A.

Tax Expense

 

 

 

 

 

 

 

 

 

2017

 

2016

 

2015

Tax expense

 

 

$

 

5,204

 

 

 

$

 

1,601

 

 

 

$

 

1,739

 

Effective tax rate

 

 

 

75.4

%

 

 

 

 

24.8

%

 

 

 

 

26.4

%

 

On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (“Tax Act”) that instituted fundamental changes to the U.S. tax system. The Tax Act includes changes to the taxation of foreign earnings by implementing a dividend exemption system, expansion of the current anti-deferral rules, a minimum tax on low-taxed foreign earnings and new measures to deter base erosion. The Tax Act also permanently reduces the corporate tax rate from 35% to 21%, imposes a one-time mandatory transition tax on the historical earnings of foreign affiliates and implements a territorial style tax system. The impacts of these changes are reflected in the 2017 tax expense which resulted in a provisional charge of approximately $3.8 billion, which is subject to adjustment given the provisional nature of the charge. This resulted in an effective tax rate higher than the statutory rate in 2017.

The effective tax rates for 2016 and 2015 were lower than the U.S. statutory rate of 35% primarily due to lower tax rates on non-U.S. earnings.

The Company currently expects the effective tax rate for 2018 to be in the range of 22.0% and 23.0%. The effective tax rate may vary from quarter to quarter due to unusual or infrequently occurring items, the resolution of income tax audits, changes in tax laws, the tax impact from employee share-based payments, taxes incurred in connection to the territorial style tax system, or other items such as pension mark-to-market adjustments.

19


 

For further discussion of changes in the effective tax rate, see Note 5 Income Taxes of Notes to Consolidated Financial Statements.

Net Income Attributable to Honeywell

 

 

 

 

 

 

 

 

 

2017

 

2016

 

2015

Net income attributable to Honeywell

 

 

$

 

1,655

 

 

 

$

 

4,809

 

 

 

$

 

4,768

 

Earnings per share of common stock–assuming dilution

 

 

$

 

2.14

 

 

 

$

 

6.20

 

 

 

$

 

6.04

 

Earnings per share of common stock–assuming dilution decreased in 2017 compared with 2016 primarily driven by additional income tax expense from the Tax Act, higher repositioning and other charges, partially offset by higher segment profit across all segments, lower pension mark-to-market expense and increased pension and other postretirement income.

Earnings per share of common stock–assuming dilution increased in 2016 compared with 2015 primarily driven by increased pension and other postretirement income, higher segment profit in Home and Building Technologies and Performance Materials and Technologies, the gain related to the Honeywell Technology Solutions, Inc. divestiture, a decrease in the weighted average shares outstanding and the tax benefit from adoption of the Financial Accounting Standards Board’s (FASB) accounting standard related to employee share-based payment accounting, partially offset by lower segment profit in Aerospace and Safety and Productivity Solutions, increased pension mark-to-market expense and higher repositioning and other charges.

BUSINESS OVERVIEW

Our consolidated results are principally impacted by:

 

 

Changes in global economic growth rates and industry conditions and demand in our key end markets;

 

 

The impact of fluctuations in foreign currency exchange rates (in particular the Euro), relative to the U.S. Dollar;

 

 

The extent to which cost savings from productivity actions are able to offset or exceed the impact of material and non-material inflation;

 

 

The impact of the pension discount rate and asset returns on pension expense, including mark-to-market adjustments, and funding requirements; and

 

 

The impact from the Tax Act.

Our 2018 areas of focus, most of which are applicable to each of our segments include:

 

 

Driving profitable organic growth through R&D and technological excellence to deliver innovative products that customers value and expansion and localization of our footprint in high growth regions;

 

 

Executing on our strategy to become a software-industrial company, which for us means products and services that facilitate the connected plane, home, building and factory;

 

 

Expanding margins by maintaining and improving the Company’s cost structure through manufacturing and administrative process improvements, repositioning, and other productivity actions;

 

 

Executing disciplined, rigorous M&A and integration processes to deliver growth through acquisitions;

 

 

Ensuring the successful completion of the proposed spin-offs of our Homes and Global Distribution business, as well as our Transportation Systems business, into two stand-alone, publicly traded companies;

 

 

Controlling corporate costs, including costs incurred for asbestos and environmental matters, pension and other post-retirement benefits;

 

 

Increasing availability of capital through strong cash flow conversion from effective working capital management and proactively managing debt levels to enable the Company to smartly

20


 

 

 

 

deploy capital for strategic acquisitions, dividends, share repurchases and capital expenditures; and

 

 

Aligning our operating structure to benefit from the territorial tax system being implemented by the Tax Act.

Review of Business Segments

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

% Change

 

2017
Versus
2016

 

2016
Versus
2015

 

2017

 

2016

 

2015

Aerospace Sales

 

 

 

 

 

 

 

 

 

 

Commercial Aviation Original Equipment

 

 

$

 

2,475

 

 

 

$

 

2,525

 

 

 

$

 

2,905

 

 

 

 

(2

)%

 

 

 

 

(13

)%

 

Commercial Aviation Aftermarket

 

 

 

5,103

 

 

 

 

4,796

 

 

 

 

4,656

 

 

 

 

6

%

 

 

 

 

3

%

 

Defense and Space

 

 

 

4,053

 

 

 

 

4,375

 

 

 

 

4,715

 

 

 

 

(7

)%

 

 

 

 

(7

)%

 

Transportation Systems

 

 

 

3,148

 

 

 

 

3,055

 

 

 

 

2,961

 

 

 

 

3

%

 

 

 

 

3

%

 

 

 

 

 

 

 

 

Total Aerospace Sales

 

 

 

14,779

 

 

 

 

14,751

 

 

 

 

15,237

 

 

 

 

 

Home and Building Technologies Sales

 

 

 

 

 

 

 

 

 

 

Home and Building Products

 

 

 

4,928

 

 

 

 

4,803

 

 

 

 

4,576

 

 

 

 

3

%

 

 

 

 

5

%

 

Home and Building Distribution

 

 

 

4,849

 

 

 

 

4,687

 

 

 

 

4,450

 

 

 

 

3

%

 

 

 

 

5

%

 

 

 

 

 

 

 

 

Total Home and Building Technologies Sales

 

 

 

9,777

 

 

 

 

9,490

 

 

 

 

9,026

 

 

 

 

 

Performance Materials and Technologies Sales

 

 

 

 

 

 

 

 

 

 

UOP

 

 

 

2,753

 

 

 

 

2,469

 

 

 

 

2,976

 

 

 

 

12

%

 

 

 

 

(17

)%

 

Process Solutions

 

 

 

4,795

 

 

 

 

4,640

 

 

 

 

3,124

 

 

 

 

3

%

 

 

 

 

49

%

 

Advanced Materials

 

 

 

2,791

 

 

 

 

3,327

 

 

 

 

3,510

 

 

 

 

(16

)%

 

 

 

 

(5

)%

 

 

 

 

 

 

 

 

Total Performance Materials and Technologies Sales

 

 

 

10,339

 

 

 

 

10,436

 

 

 

 

9,610

 

 

 

 

 

Safety and Productivity Solutions Sales

 

 

 

 

 

 

 

 

 

 

Safety

 

 

 

2,169

 

 

 

 

2,075

 

 

 

 

2,135

 

 

 

 

5

%

 

 

 

 

(3

)%

 

Productivity Solutions

 

 

 

3,470

 

 

 

 

2,550

 

 

 

 

2,573

 

 

 

 

36

%

 

 

 

 

(1

)%

 

 

 

 

 

 

 

 

Total Safety and Productivity Solutions Sales

 

 

 

5,639

 

 

 

 

4,625

 

 

 

 

4,708

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

$

 

40,534

 

 

 

$

 

39,302

 

 

 

$

 

38,581

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

2016

 

Change

 

2015

 

Change

Net sales

 

 

$

 

14,779

 

 

 

$

 

14,751

 

 

 

 

 

 

 

$

 

15,237

 

 

 

 

(3

)%

 

Cost of products and services sold

 

 

 

10,320

 

 

 

 

10,820

 

 

 

 

 

 

11,068

 

 

 

Selling, general and administrative and other expenses

 

 

 

1,171

 

 

 

 

940

 

 

 

 

 

 

951

 

 

 

 

 

 

 

 

 

 

 

 

Segment profit

 

 

$

 

3,288

 

 

 

$

 

2,991

 

 

 

 

10

%

 

 

 

$

 

3,218

 

 

 

 

(7

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Factors Contributing to Year-Over-Year Change

 

2017 vs. 2016

 

2016 vs. 2015

 

Sales

 

Segment
Profit

 

Sales

 

Segment
Profit

Organic growth/ Operational segment profit

 

 

 

2

%

 

 

 

 

11

%

 

 

 

 

(3

)%

 

 

 

 

(6

)%

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1

)%

 

Acquisitions, divestitures and other, net

 

 

 

(2

)%

 

 

 

 

(1

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total % Change

 

 

 

 

 

 

 

10

%

 

 

 

 

(3

)%

 

 

 

 

(7

)%

 

 

 

 

 

 

 

 

 

 

21


 

2017 compared with 2016

Aerospace sales were flat due to organic sales growth, offset by the government services business divestiture.

 

 

Commercial Original Equipment sales decreased 2% (decreased 2% organic) primarily due to lower shipments to business jet OEMs, partially offset by lower air transport and regional OEM incentives.

 

 

Commercial Aftermarket sales increased 6% (increased 6% organic) primarily driven by higher repair and overhaul activities and increased spares shipments.

 

 

Defense and Space sales decreased 7% (increased 1% organic) primarily due to the government services business divestiture and lower Space sales, partially offset by growth in U.S. defense.

 

 

Transportation Systems sales increased 3% (increased 2% organic) primarily driven by higher commercial vehicle volumes, gas turbo penetration and the favorable impact from foreign currency translation, partially offset by lower diesel turbo volumes.

Aerospace segment profit increased due to an increase in operational segment profit, partially offset by the government services business divestiture. The increase in operational segment profit was driven primarily by productivity, net of inflation, including restructuring benefits, lower OEM incentives and higher organic sales volume, partially offset by the government services business divestiture. Cost of products and services sold decreased primarily driven by the government services business divestiture and productivity, net of inflation, partially offset by higher organic sales volume.

2016 compared with 2015

Aerospace sales decreased primarily due to higher OEM incentives, a decrease in organic sales volumes and the government services business divestiture, which was partially offset by growth from acquisitions.

 

 

Commercial Original Equipment sales decreased by 13% (decreased 12% organic) primarily due to higher OEM incentives and decreased demand from business and general aviation original equipment manufacturers, partially offset by higher shipments to air transport OEMs.

 

 

Commercial Aftermarket sales increased by 3% (increased 3% organic) primarily driven by higher repair and overhaul activities and increased spares shipments.

 

 

Defense and Space sales decreased by 7% (decreased 6% organic) primarily due to declines in U.S. space and international defense programs, lower U.S. government services revenue, largely attributable to the impact of divestitures, and decreased demand from commercial helicopter OEMs, partially offset by sales from acquisitions.

 

 

Transportation Systems sales increased by 3% (increased 4% organic) primarily driven by new platform launches and higher global turbo gas penetration.

Aerospace segment profit decreased primarily due to a 6% decrease in operational segment profit and a 1% unfavorable impact from foreign currency translation. The decrease in operational segment profit was primarily due to product mix, higher OEM incentives and lower sales volumes, partially offset by productivity and price, net of inflation. Cost of products and services sold decreased primarily driven by productivity, net of inflation, and lower sales volumes, partially offset by acquisitions, net of divestitures.

Home and Building Technologies

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

2016

 

Change

 

2015

 

Change

Net sales

 

 

$

 

9,777

 

 

 

$

 

9,490

 

 

 

 

3

%

 

 

 

$

 

9,026

 

 

 

 

5

%

 

Cost of products and services sold

 

 

 

6,430

 

 

 

 

6,152

 

 

 

 

 

 

5,859

 

 

 

Selling, general and administrative and other expenses

 

 

 

1,697

 

 

 

 

1,717

 

 

 

 

 

 

1,675

 

 

 

 

 

 

 

 

 

 

 

 

Segment profit

 

 

$

 

1,650

 

 

 

$

 

1,621

 

 

 

 

2

%

 

 

 

$

 

1,492

 

 

 

 

9

%

 

 

 

 

 

 

 

 

 

 

22


 

 

 

 

 

 

 

 

 

 

Factors Contributing to Year-Over-Year Change

 

2017 vs. 2016

 

2016 vs. 2015

 

Sales

 

Segment
Profit

 

Sales

 

Segment
Profit

Organic growth/ Operational segment profit

 

 

 

2

%

 

 

 

 

1

%

 

 

 

 

5

%

 

 

 

 

8

%

 

Foreign currency translation

 

 

 

 

 

 

 

1

%

 

 

 

 

(2

)%

 

 

 

 

(2

)%

 

Acquisitions and divestitures, net

 

 

 

1

%

 

 

 

 

 

 

 

 

2

%

 

 

 

 

3

%

 

 

 

 

 

 

 

 

 

 

Total % Change

 

 

 

3

%

 

 

 

 

2

%

 

 

 

 

5

%

 

 

 

 

9

%

 

 

 

 

 

 

 

 

 

 

2017 compared with 2016

Home and Building Technologies sales increased primarily due to an increase in organic sales, pricing, and acquisitions.

 

 

Sales in Home and Building Products increased by 3% (increased 2% organic) due to an increase in organic sales growth and acquisitions. Organic sales growth was primarily attributable to sales volume in Environmental & Energy Solutions, and Security and Fire businesses.

 

 

Sales in Home and Building Distribution increased by 3% (increased 3% organic) due to organic sales growth in the global distribution business and Building Solutions.

Home and Building Technologies segment profit increased 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 productivity, net of inflation, and pricing, partially offset by unfavorable product mix. Cost of products and services increased due to higher organic sales and acquisitions.

2016 compared with 2015

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

 

 

Sales in Home and Building Products increased by 5% (increased 2% organic) principally driven by organic sales growth and acquisitions. Organic sales growth was primarily attributable to new product introductions in our Environmental and Energy Solutions business and volume growth in our Security and Fire business.

 

 

Sales in Home and Building Distribution increased by 5% (increased 7% organic) principally due to organic sales growth partially offset by the unfavorable impact of foreign currency translation. Organic sales growth was primarily driven by volume in our global distribution business and Building Solutions.

Home and Building Technologies segment profit increased primarily due to an increase in operational segment profit and acquisition partially offset by the unfavorable impact of foreign currency translation. The increase in operational segment profit was primarily driven by productivity net of inflation and pricing. Cost of products and services increased due to growth from organic sales and acquisitions, partially offset by the favorable impact of foreign currency translation and productivity, net of inflation.

Performance Materials and Technologies

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

2016

 

Change

 

2015

 

Change

Net sales

 

 

$

 

10,339

 

 

 

$

 

10,436

 

 

 

 

(1

)%

 

 

 

$

 

9,610

 

 

 

 

9

%

 

Cost of products and services sold

 

 

 

6,764

 

 

 

 

6,978

 

 

 

 

 

 

6,516

 

 

 

Selling, general and administrative and other expenses

 

 

 

1,369

 

 

 

 

1,346

 

 

 

 

 

 

1,084

 

 

 

 

 

 

 

 

 

 

 

 

Segment profit

 

 

$

 

2,206

 

 

 

$

 

2,112

 

 

 

 

4

%

 

 

 

$

 

2,010

 

 

 

 

5

%

 

 

 

 

 

 

 

 

 

 

23


 

 

 

 

 

 

 

 

 

 

Factors Contributing to Year-Over-Year Change

 

2017 vs. 2016

 

2016 vs. 2015

 

Sales

 

Segment
Profit

 

Sales

 

Segment
Profit

Organic growth/ Operational segment profit

 

 

 

8

%

 

 

 

 

10

%

 

 

 

 

(3

)%

 

 

 

 

2

%

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

(1

)%

 

 

 

 

(2

)%

 

Acquisitions and divestitures, net

 

 

 

(9

)%

 

 

 

 

(6

)%

 

 

 

 

13

%

 

 

 

 

5

%

 

 

 

 

 

 

 

 

 

 

Total % Change

 

 

 

(1

)%

 

 

 

 

4

%

 

 

 

 

9

%

 

 

 

 

5

%

 

 

 

 

 

 

 

 

 

 

2017 compared with 2016

Performance Materials and Technologies sales decreased primarily due to divestitures, partially offset by organic sales growth.

 

 

UOP sales increased by 12% (increased 12% organic) driven primarily by higher gas processing project revenues, increased catalyst volumes, increased equipment sales, and increased engineering revenues, partially offset by decreased licensing revenues.

 

 

Process Solutions sales increased by 3% (increased 3% organic) driven primarily by higher revenue in smart energy, services, thermal solutions, and software, partially offset by lower field products sales.

 

 

Advanced Materials sales decreased by 16% (increased 11% organic) driven primarily by the spin-off of the former resins and chemicals business, partially offset by increased volumes in fluorine products.

Performance Materials and Technologies segment profit increased primarily due to an increase in operational segment profit, partially offset by divestitures. 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.

2016 compared with 2015

Performance Materials and Technologies sales increased due to growth from acquisitions, net of divestitures, partially offset by a decrease in organic sales volumes and the unfavorable impact of foreign currency translation.

 

 

UOP sales decreased by 17% (decreased 16% organic) driven primarily by lower gas processing revenues due to a significant slowdown in customer projects and decreased catalyst volumes in the first nine months, partially offset by increased catalyst, licensing and equipment sales in the fourth quarter.

 

 

Process Solutions sales increased by 49% (increased 4% organic) driven primarily by increased volumes driven by acquisitions, net of divestitures, and higher revenues in projects, partially offset by lower field products sales.

 

 

Advanced Materials sales decreased by 5% (increased 3% organic) driven primarily by the impact of the October 1, 2016 spin-off of the former resins and chemicals business and lower market pricing, as well as lower raw material pass-through pricing in the former resins and chemicals business in the first nine months, partially offset by increased volumes in fluorine and specialty products.

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

24


 

Safety and Productivity Solutions

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

2016

 

Change

 

2015

 

Change

Net sales

 

 

$

 

5,639

 

 

 

$

 

4,625

 

 

 

 

22

%

 

 

 

$

 

4,708

 

 

 

 

(2

)%

 

Cost of products and services sold

 

 

 

3,714

 

 

 

 

3,001

 

 

 

 

 

 

3,020

 

 

 

Selling, general and administrative and other expenses

 

 

 

1,073

 

 

 

 

944

 

 

 

 

 

 

942

 

 

 

 

 

 

 

 

 

 

 

 

Segment profit

 

 

$

 

852

 

 

 

$

 

680

 

 

 

 

25

%

 

 

 

$

 

746

 

 

 

 

(9

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Factors Contributing to Year-Over-Year Change

 

2017 vs. 2016

 

2016 vs. 2015

 

Sales

 

Segment
Profit

 

Sales

 

Segment
Profit

Organic growth/ Operational segment profit

 

 

 

5

%

 

 

 

 

18

%

 

 

 

 

(7

)%

 

 

 

 

(8

)%

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

(1

)%

 

 

 

 

(2

)%

 

Acquisitions and divestitures, net

 

 

 

17

%

 

 

 

 

7

%

 

 

 

 

6

%

 

 

 

 

1

%

 

 

 

 

 

 

 

 

 

 

Total % Change

 

 

 

22

%

 

 

 

 

25

%

 

 

 

 

(2

)%

 

 

 

 

(9

)%

 

 

 

 

 

 

 

 

 

 

2017 compared with 2016

Safety and Productivity Solutions sales increased primarily due to acquisitions and organic sales volume.

 

 

Sales in Safety increased by 5% (increased 4% organic) due to increased sales volume in the Industrial Safety business, higher distribution in the Retail business, and the favorable impact of foreign currency translation.

 

 

Sales in Productivity Solutions increased by 36% (increased 6% organic) principally due to growth from acquisitions (Intelligrated was acquired in August 2016).

Safety and Productivity Solutions segment profit increased due to an increase from operational segment profit and acquisitions. The increase in operational segment profit is driven by higher productivity, net of inflation, and sales volume. Cost of products and services increased primarily due to acquisitions and higher sales volume offset by productivity, net of inflation.

2016 compared with 2015

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

 

 

Sales in Safety decreased by 3% (decreased 2% organic) due to decreased sales volume in the Industrial Safety business, lower distribution in the Retail business, and the unfavorable impact of foreign currency translation.

 

 

Sales in Productivity Solutions decreased by 1% (decreased 11% organic) principally due to declines in the Productivity Products business, partially offset by growth from acquisitions.

Safety and Productivity Solutions segment profit decreased due to a decrease in operational segment profit and the unfavorable impact of foreign currency translation, partially offset by growth from acquisitions. The decrease in operational segment profit is due to decreased sales volumes, partially offset by price and productivity, net of inflation, and growth from acquisitions. Cost of products and services decreased primarily due to productivity, net of inflation, decreased sales volumes, and the favorable impact of foreign currency translation partially offset by growth from acquisitions.

Repositioning Charges

See Note 3 Repositioning and Other Charges of Notes to Consolidated Financial Statements for a discussion of our repositioning actions and related charges incurred in 2017, 2016 and 2015. These repositioning actions are expected to generate incremental pre-tax savings of $300 million in 2018 compared with 2017 principally from planned workforce reductions. Cash spending related to our repositioning actions was $177 million, $228 million and $118 million in 2017, 2016 and 2015, 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.

25


 

LIQUIDITY AND CAPITAL RESOURCES

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, access to the public debt and equity markets and the ability to access non-U.S. cash as a result of the Tax Act. We continue to balance our cash and financing uses through investment in our existing core businesses, acquisition activity, share repurchases and dividends.

Cash Flow Summary

Our cash flows from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows, are summarized as follows:

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

2017

 

2016

 

2015

Cash provided by (used for):

 

 

 

 

 

 

Operating activities

 

 

$

 

5,966

 

 

 

$

 

5,498

 

 

 

$

 

5,519

 

Investing activities

 

 

 

(3,574

)

 

 

 

 

(3,342

)

 

 

 

 

(6,514

)

 

Financing activities

 

 

 

(3,516

)

 

 

 

 

346

 

 

 

 

37

 

Effect of exchange rate changes on cash

 

 

 

340

 

 

 

 

(114

)

 

 

 

 

(546

)

 

 

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

 

$

 

(784

)

 

 

 

$

 

2,388

 

 

 

$

 

(1,504

)

 

 

 

 

 

 

 

 

2017 compared with 2016

Cash provided by operating activities increased by $468 million primarily due to a $504 million increase in segment profit and a $294 million favorable impact from working capital (favorable accounts payable partially offset by inventory and accounts receivable), partially offset by higher cash tax payments of $609 million.

Cash used for investing activities increased by $232 million primarily due to (i) a net $2,056 million increase in investments, primarily short-term marketable securities, (ii) an increase of $500 million of settlement payments of foreign currency exchange contracts used as economic hedges on certain non-functional currency denominated monetary assets and liabilities and (iii) a decrease in proceeds from the sales of businesses of $296 million (most significantly Honeywell Technology Solutions Inc. in 2016), partially offset by a decrease in cash paid for acquisitions of $2,491 million (most significantly Intelligrated in 2016).

Cash used for financing activities increased by $3,862 million primarily due to a decrease in the net proceeds from debt issuances of $2,827 million, an increase in net repurchases of common stock of $699 million and an increase in cash dividends paid of $204 million.

2016 compared with 2015

Cash provided by operating activities decreased by $21 million primarily due to a $725 million unfavorable impact from working capital, offset by (i) a $395 million improvement in customer advances and deferred income, (ii) a $171 million increase in net income before the non-cash pension mark-to-market adjustment (iii) the absence of $151 million in OEM incentive payments and (iv) lower cash tax payments of $50 million.

Cash used for investing activities decreased by $3,172 million primarily due to (i) a decrease in cash paid for acquisitions of $2,655 million, most significantly Elster in 2015, (ii) an increase in proceeds from the sales of businesses of $295 million (most significantly Honeywell Technology Solutions Inc.) and (iii) a $384 million favorable change in settlements of foreign currency exchange contracts used as economic hedges on certain non-functional currency denominated monetary assets and liabilities. The decreases were partially offset by a net $146 million increase in investments, primarily short-term marketable securities.

26


 

Cash provided by financing activities increased by $309 million primarily due to an increase in the net proceeds from debt issuances of $497 million, partially offset by an increase in cash dividends paid of $189 million including amounts paid to the former UOP Russell LLC noncontrolling shareholder.

Liquidity

Each of our businesses is focused on implementing strategies to increase operating cash flows through revenue growth, margin expansion and improved working capital turnover. Considering the current economic environment in which each of the businesses operate and their business plans and strategies, including the focus on growth, cost reduction and productivity initiatives, we believe that cash balances and operating cash flow will continue to be our principal source of liquidity. In addition to the available cash and operating cash flows, additional sources of liquidity include committed credit lines, short-term debt from the commercial paper markets, long-term borrowings, and access to the public debt and equity markets.

We monitor the third-party depository institutions that hold our cash and cash equivalents on a daily basis. Our emphasis is primarily safety of principal and secondarily maximizing yield of those funds. We diversify our cash and cash equivalents among counterparties to minimize exposure to any one of these entities.

A source of liquidity is our ability to issue short-term debt in the commercial paper market. Commercial paper notes are sold at a discount and have a maturity of not more than 365 days from date of issuance. Borrowings under the commercial paper program are available for general corporate purposes as well as for financing acquisitions. The weighted average interest rate on short-term borrowings and commercial paper outstanding as of December 31, 2017 was (0.17%) and as of December 31, 2016 was (0.13%).

Our ability to access the commercial paper market, and the related cost of these borrowings, is affected by the strength of our credit rating and market conditions. Our credit ratings are periodically reviewed by the major independent debt-rating agencies. As of December 31, 2017, Standard and Poor’s (S&P), Fitch, and Moody’s have ratings on our long-term debt of A, A and A2 and short-term debt of A-1, F1 and P1. S&P, Fitch and Moody’s have Honeywell’s rating outlook as “stable.” To date, the Company has not experienced any limitations in our ability to access these sources of liquidity.

We also have a current shelf registration statement filed with the Securities and Exchange Commission under which we may issue additional debt securities, common stock and preferred stock that may be offered in one or more offerings on terms to be determined at the time of the offering. Net proceeds of any offering would be used for general corporate purposes, including repayment of existing indebtedness, share repurchases, capital expenditures and acquisitions.

See Note 2 Acquisitions and Divestitures and Note 12 Long-term Debt and Credit Agreements of Notes to Consolidated Financial Statements for additional discussion of items impacting our liquidity.

In 2017, the Company repurchased $2,889 million of outstanding shares to offset the dilutive impact of employee stock based compensation plans, including option exercises, restricted unit vesting and matching contributions under our savings plans. Additionally, we sought to reduce share count via share repurchases as and when attractive opportunities arose. In December 2017, the Board of Directors authorized the repurchase of up to a total of $8 billion of Honeywell common stock, of which $7.7 billion remained available as of December 31, 2017 for additional share repurchases. This authorization included amounts remaining under and replaced the previously approved share repurchase program. Honeywell presently expects to repurchase outstanding shares from time to time to generally offset the dilutive impact of employee stock based compensation plans, including option exercises, restricted unit vesting and matching contributions under our savings plans. We will continue to seek to reduce share count via share repurchases as and when attractive opportunities arise.

At December 31, 2017, a substantial portion of the Company’s cash and cash equivalents were held by foreign subsidiaries. As a result of the Tax Act, the Company no longer intends to permanently reinvest its historical foreign earnings and plans to repatriate at least $7 billion of such earnings to the U.S. over the next two years.

27


 

In addition to our normal operating cash requirements, our principal future cash requirements will be to fund capital expenditures, dividends, strategic acquisitions, share repurchases, employee benefit obligations, environmental remediation costs, asbestos claims, severance and exit costs related to repositioning actions and debt repayments.

Specifically, we expect our primary cash requirements in 2018 to be as follows:

 

 

Capital expenditures—we expect to spend approximately $900 million for capital expenditures in 2018 primarily for growth, production and capacity expansion, cost reduction, maintenance, and replacement.

 

 

Share repurchases—under the Company’s share repurchase program, $7.7 billion is available as of December 31, 2017 for additional share repurchases. Honeywell presently expects to repurchase outstanding shares from time to time to offset the dilutive impact of employee stock-based compensation plans, including 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 our level of operating, financing and other investing activities.

 

 

Dividends—we increased our quarterly dividend rate by 12% to $.745 per share of common stock effective with the fourth quarter 2017 dividend. The Company intends to continue to pay quarterly dividends in 2018.

 

 

Asbestos claims—we expect our cash spending for asbestos claims and our cash receipts for related insurance recoveries to be approximately $350 million and $24 million in 2018.

 

 

Pension contributions—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 to satisfy regulatory funding standards. 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.

 

 

Repositioning actions—we expect that cash spending for severance and other exit costs necessary to execute repositioning actions will be approximately $250 million in 2018.

 

 

Environmental remediation costs—we expect to spend approximately $225 million in 2018 for remedial response and voluntary clean-up costs.

 

 

Spin-off separation costs—we expect to incur significant cash expenditures associated with the announced spin-off transactions, including third party professional services and tax costs, the amounts of which are still being determined.

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 businesses 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 2016, we realized $565 million in cash proceeds from sales and a spin-off of non-strategic businesses.

Based on past performance and current expectations, we believe that our operating cash flows will be sufficient to meet our future operating cash needs. Our available cash, committed credit lines and access to the public debt and equity markets, provide additional sources of short-term and long-term liquidity to fund current operations, debt maturities, and future investment opportunities.

28


 

Contractual Obligations and Probable Liability Payments

Following is a summary of our significant contractual obligations and probable liability payments at December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

Total(6)

 

Payments by Period

 

Thereafter

 

2018

 

2019-
2020

 

2021-
2022

Long-term debt, including capitalized leases(1)

 

 

$

 

13,924

 

 

 

$

 

1,351

 

 

 

$

 

4,225

 

 

 

$

 

2,310

 

 

 

$

 

6,038

 

Interest payments on long-term debt, including capitalized leases

 

 

 

3,267

 

 

 

 

307

 

 

 

 

559

 

 

 

 

422

 

 

 

 

1,979

 

Minimum operating lease payments

 

 

 

1,126

 

 

 

 

295

 

 

 

 

387

 

 

 

 

218

 

 

 

 

226

 

Purchase obligations(2)

 

 

 

1,713

 

 

 

 

819

 

 

 

 

523

 

 

 

 

323

 

 

 

 

48

 

Estimated environmental liability payments(3)

 

 

 

595

 

 

 

 

226

 

 

 

 

271

 

 

 

 

89

 

 

 

 

9

 

Asbestos related liability payments(4)

 

 

 

1,523

 

 

 

 

350

 

 

 

 

731

 

 

 

 

407

 

 

 

 

35

 

Asbestos insurance recoveries(5)

 

 

 

(435

)

 

 

 

 

(24

)

 

 

 

 

(114

)

 

 

 

 

(84

)

 

 

 

 

(213

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 

21,713

 

 

 

$

 

3,324

 

 

 

$

 

6,582

 

 

 

$

 

3,685

 

 

 

$

 

8,122

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

 

Assumes all long-term debt is outstanding until scheduled maturity.

 

(2)

 

Purchase obligations are entered into with various vendors in the normal course of business and are consistent with our expected requirements.

 

(3)

 

The payment amounts in the table only reflect the environmental liabilities which are probable and reasonably estimable as of December 31, 2017.

 

(4)

 

These amounts are estimates of asbestos related cash payments for NARCO and Bendix based on our asbestos related liabilities which are probable and reasonably estimable as of December 31, 2017. See Asbestos Matters in Note 19 Commitments and Contingencies of Notes to Consolidated Financial Statements for additional information.

 

(5)

 

These amounts represent our insurance recoveries that are deemed probable for asbestos related liabilities as of December 31, 2017. See Asbestos Matters in Note 19 Commitments and Contingencies of Notes to Consolidated Financial Statements for additional information.

 

(6)

 

The table excludes tax liability payments, including those for unrecognized tax benefits. See Note 5 Income Taxes of Notes to Consolidated Financial Statements for additional information.

Environmental Matters

Accruals for environmental matters deemed probable and reasonably estimable were $287 million, $195 million and $194 million in 2017, 2016 and 2015. In addition, in 2017 and 2016 we incurred operating costs for ongoing businesses of approximately $82 million and $83 million relating to compliance with environmental regulations.

Spending related to known environmental matters was $212 million, $228 million and $273 million in 2017, 2016 and 2015 and is estimated to be approximately $225 million in 2018. We expect to fund expenditures for these environmental matters from operating cash flow. The timing of cash expenditures depends on several factors, including the timing of litigation and settlements of remediation liability, personal injury and property damage claims, regulatory approval of cleanup projects, execution timeframe of projects, remedial techniques to be utilized and agreement with other parties.

See Note 19 Commitments and Contingencies of Notes to Consolidated Financial Statements for further discussion of our environmental matters.

Financial Instruments

The following table illustrates the potential change in fair value for interest rate sensitive instruments based on a hypothetical immediate one percentage point increase in interest rates across all maturities and the potential change in fair value for foreign exchange rate sensitive instruments

29


 

based on a 10% weakening of the U.S. Dollar versus local currency exchange rates across all maturities at December 31, 2017 and 2016.

 

 

 

 

 

 

 

 

 

 

 

Face or
Notional
Amount

 

Carrying
Value(1)

 

Fair
Value(1)

 

Estimated
Increase
(Decrease)
in Fair
Value(2)

December 31, 2017

 

 

 

 

 

 

 

 

Interest Rate Sensitive Instruments

 

 

 

 

 

 

 

 

Long-term debt (including current maturities)

 

 

$

 

13,924

 

 

 

$

 

(13,924

)

 

 

 

$

 

(14,695

)

 

 

 

$

 

(782

)

 

Interest rate swap agreements

 

 

 

2,600

 

 

 

 

(8

)

 

 

 

 

(8

)

 

 

 

 

(233

)

 

Foreign Exchange Rate Sensitive Instruments

 

 

 

 

 

 

 

 

Foreign currency exchange contracts(3)

 

 

 

9,273

 

 

 

 

(53

)

 

 

 

 

(53

)

 

 

 

 

(58

)

 

December 31, 2016

 

 

 

 

 

 

 

 

Interest Rate Sensitive Instruments

 

 

 

 

 

 

 

 

Long-term debt (including current maturities)

 

 

$

 

12,409

 

 

 

$

 

(12,409

)

 

 

 

$

 

(13,008

)

 

 

 

$

 

(537

)

 

Interest rate swap agreements

 

 

 

1,850

 

 

 

 

21

 

 

 

 

21

 

 

 

 

(112

)

 

Foreign Exchange Rate Sensitive Instruments

 

 

 

 

 

 

 

 

Foreign currency exchange contracts(3)

 

 

 

9,554

 

 

 

 

150

 

 

 

 

150

 

 

 

 

(195

)

 

 

 

(1)

 

Asset or (liability).

 

(2)

 

A hypothetical immediate one percentage point decrease in interest rates across all maturities and a potential change in fair value of foreign exchange rate sensitive instruments based on a 10% strengthening of the U.S. dollar versus local currency exchange rates across all maturities will result in a change in fair value equal to the inverse of the amount disclosed in the table.

 

(3)

 

Changes in the fair value of foreign currency exchange contracts are offset by changes in the fair value, cash flows, or net investments of underlying hedged foreign currency transactions or foreign operations.

See Note 14 Financial Instruments and Fair Value Measures of Notes to Consolidated Financial Statements for further discussion on the agreements.

CRITICAL ACCOUNTING POLICIES

The preparation of our consolidated financial statements in accordance with generally accepted accounting principles is based on the selection and application of accounting policies that require us to make significant estimates and assumptions about the effects of matters that are inherently uncertain. We consider the accounting policies discussed below to be critical to the understanding of our financial statements. Actual results could differ from our estimates and assumptions, and any such differences could be material to our consolidated financial statements.

Contingent Liabilities—We are subject to a number of lawsuits, investigations and claims (some of which involve substantial dollar amounts) that arise out of the conduct of our global business operations or those of previously owned entities, including matters relating to commercial transactions, government contracts, product liability (including asbestos), prior acquisitions and divestitures, employee benefit plans, intellectual property, legal and environmental, health and safety matters. We continually assess the likelihood of any adverse judgments or outcomes to our contingencies, as well as potential amounts or ranges of probable losses, and recognize a liability, if any, for these contingencies based on a thorough analysis of each matter with the assistance of outside legal counsel and, if applicable, other experts. Such analysis includes making judgments concerning matters such as the costs associated with environmental matters, the outcome of negotiations, the number and cost of pending and future asbestos claims, and the impact of evidentiary requirements. Because most contingencies are resolved over long periods of time, liabilities may change in the future due to new developments (including new discovery of facts, changes in legislation and outcomes of similar cases through the judicial system), changes in assumptions or changes in our settlement strategy. See Note 19 Commitments and Contingencies of Notes to Consolidated Financial Statements for a

30


 

discussion of management’s judgment applied in the recognition and measurement of our environmental and asbestos liabilities which represent our most significant contingencies.

Asbestos Related Contingencies and Insurance Recoveries—Honeywell’s involvement in asbestos related personal injury actions relates to two predecessor companies. Regarding North American Refractories Company (“NARCO”) asbestos related claims, we accrued for pending claims based on terms and conditions in agreements with NARCO, its former parent company, and certain asbestos claimants, and an estimate of the unsettled claims pending as of the time NARCO filed for bankruptcy protection. We also accrued for the estimated value of future NARCO asbestos related claims expected to be asserted against the NARCO Trust. The estimate of future NARCO claims was prepared in 2002, in the same year NARCO filed for bankruptcy protection, using NARCO tort system litigation experience based on a commonly accepted methodology used by numerous bankruptcy courts addressing 524(g) trusts. Accordingly, the estimated value of future NARCO asbestos claims was prepared before there was data on claims filings and payment rates in the NARCO Trust under the Trust Distribution Procedures and also prepared when the stay of all NARCO asbestos claims was in effect (which remained in effect until NARCO emerged from Bankruptcy protection). Some critical assumptions underlying this commonly accepted methodology included 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 the future NARCO liability reflects 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. Given the Trust’s lack of sufficient claims processing experience since NARCO emerged from bankruptcy protection, it is not yet possible to reliably estimate future claim costs based on actual Trust experience. Regarding Bendix Friction Materials (“Bendix”) asbestos related claims, we accrued for the estimated value of pending claims using average resolution values for the previous five years. We also accrued for the estimated value of future anticipated claims related to Bendix for the next five years based on historic claims filing experience and dismissal rates, disease classifications, and average 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.

In connection with the recognition of liabilities for asbestos related matters, we record asbestos related insurance recoveries that are deemed probable. In assessing the probability of insurance recovery, we make 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. 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. Projecting future events is subject to various uncertainties that could cause the insurance recovery on asbestos related liabilities to be higher or lower than that projected and recorded. Given the inherent uncertainty in making future projections, we reevaluate our projections concerning our probable insurance recoveries in light of any changes to the projected liability, our recovery experience or other relevant factors that may impact future insurance recoveries.

See Note 19 Commitments and Contingencies of Notes to Consolidated Financial Statements for a discussion of management’s judgments applied in the recognition and measurement of our asbestos-related liabilities and related insurance recoveries.

Defined Benefit Pension Plans—We sponsor both funded and unfunded U.S. and non-U.S. defined benefit pension plans. For financial reporting purposes, net periodic pension (income) expense is calculated annually based upon a number of actuarial assumptions, including a discount rate for plan obligations and an expected long-term rate of return on plan assets. Changes in the discount rate and expected long-term rate of return on plan assets could materially affect the annual pension (income) expense amount. Annual pension (income) expense is comprised of service and interest cost, assumed return on plan assets, prior service amortization (Pension Ongoing (Income) Expense) and a potential mark-to-market adjustment (MTM Adjustment).

31


 

The key assumptions used in developing our 2017, 2016 and 2015 net periodic pension (income) expense for our U.S. plans included the following:

 

 

 

 

 

 

 

 

 

2017

 

2016

 

2015

Discount Rate:

 

 

 

 

 

 

Projected benefit obligation

 

 

 

4.20

%

 

 

 

 

4.46

%

 

 

 

 

4.08

%

 

Service cost(1)

 

 

 

4.42

%

 

 

 

 

4.69

%

 

 

 

 

N/A

 

Interest cost(1)

 

 

 

3.49

%

 

 

 

 

3.59

%

 

 

 

 

N/A

 

Assets:

 

 

 

 

 

 

Expected rate of return

 

 

 

7.75

%

 

 

 

 

7.75

%

 

 

 

 

7.75

%

 

Actual rate of return

 

 

 

20.5

%

 

 

 

 

9.7

%

 

 

 

 

1.5

%

 

Actual 10 year average annual compounded rate of return

 

 

 

7.4

%

 

 

 

 

6.4

%

 

 

 

 

6.8

%

 

 

 

(1)

 

N/A in 2015 as the discount rate methodology was changed in fourth quarter of 2015. See Note 20 Pension and Other Postretirement Benefits of Notes to Consolidated Financial Statements.

The MTM Adjustment represents the recognition of net actuarial gains or losses in excess of 10% of the greater of the fair value of plan assets or the plans’ projected benefit obligation (the corridor). Net actuarial gains and losses occur when the actual experience differs from any of the various assumptions used to value our pension plans or when assumptions change. The primary factors contributing to actuarial gains and losses are changes in the discount rate used to value pension obligations as of the measurement date each year and the difference between expected and actual returns on plan assets. The mark-to-market accounting method results in the potential for volatile and difficult to forecast MTM Adjustments. MTM charges were $87 million, $273 million and $67 million in 2017, 2016 and 2015.

We determine the expected long-term rate of return on plan assets utilizing historical plan asset returns over varying long-term periods combined with our expectations of future market conditions and asset mix considerations (see Note 20 Pension and Other Postretirement Benefits of Notes to Consolidated Financial Statements for details on the actual various asset classes and targeted asset allocation percentages for our pension plans). We plan to continue to use an expected rate of return on plan assets of 7.75% for 2018 as this is a long-term rate based on historical plan asset returns over varying long term periods combined with our expectations of future market conditions and the asset mix of the plan’s investments.

The discount rate reflects the market rate on December 31 (measurement date) for high-quality fixed-income investments with maturities corresponding to our benefit obligations and is subject to change each year. The discount rate can be volatile from year to year as it is determined based upon prevailing interest rates as of the measurement date. We used a 3.68% discount rate to determine benefit obligations as of December 31, 2017, reflecting the decrease in the market interest rate environment since the prior year-end.

In addition to the potential for MTM Adjustments, changes in our expected rate of return on plan assets and discount rate resulting from economic events also affects future pension ongoing (income) expense. The following table highlights the sensitivity of our U.S. pension obligations and ongoing (income) expense to changes in these assumptions, assuming all other assumptions remain constant. These estimates exclude any potential MTM Adjustment:

 

 

 

 

 

Change in Assumption

 

Impact on 2018
Pension Ongoing
Expense

 

Impact on PBO

0.25 percentage point decrease in discount rate

 

Decrease $22 million

 

Increase $520 million

0.25 percentage point increase in discount rate

 

Increase $22 million

 

Decrease $510 million

0.25 percentage point decrease in expected rate of return on assets

 

Increase $47 million

 

0.25 percentage point increase in expected rate of return on assets

 

Decrease $46 million

 

Pension ongoing income for all of our pension plans is expected to be approximately $984 million in 2018 compared with pension ongoing income of $713 million in 2017. The expected increase is

32


 

primarily due to higher asset returns in 2017 in our U.S. and UK plans. Also, if required, an MTM Adjustment will be recorded in the fourth quarter of 2018 in accordance with our pension accounting method as previously described. It is difficult to reliably forecast or predict whether there will be a MTM Adjustment in 2018, and if one is required, what the magnitude of such adjustment will be. MTM Adjustments are primarily driven by events and circumstances beyond the control of the Company such as changes in interest rates and the performance of the financial markets.

Long-Lived Assets (including Tangible and Finite-Lived Intangible Assets)—The determination of useful lives (for depreciation/amortization purposes) and whether or not tangible and intangible assets are impaired involves the use of accounting estimates and assumptions, changes in which could materially impact our financial condition or operating performance if actual results differ from such estimates and assumptions. We evaluate the recoverability of the carrying amount of our long-lived assets whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset group may not be fully recoverable. The principal factors in considering when to perform an impairment review are as follows:

 

 

Significant under-performance (i.e., declines in sales, earnings or cash flows) of a business or product line in relation to expectations;

 

 

Annual operating plans or five-year strategic plans that indicate an unfavorable trend in operating performance of a business or product line;

 

 

Significant negative industry or economic trends; or

 

 

Significant changes or planned changes in our use of the assets.

Once it is determined that an impairment review is necessary, recoverability of assets is measured by comparing the carrying amount of the asset grouping to the estimated future undiscounted cash flows. If the carrying amount exceeds the estimated future undiscounted cash flows, the asset grouping is considered to be impaired. The impairment is then measured as the difference between the carrying amount of the asset grouping and its fair value. We endeavor to utilize the best information available to measure fair value, which is usually either market prices (if available), level 1 or level 2 of the fair value hierarchy, or an estimate of the future discounted cash flow, level 3 of the fair value hierarchy. The key estimates in our discounted cash flow analysis include assumptions as to expected industry and business growth rates, sales volume, selling prices and costs, cash flows, and the discount rate selected. These estimates are subject to changes in the economic environment, including market interest rates and expected volatility. Management believes the estimates of future cash flows and fair values are reasonable; however, changes in estimates due to variance from assumptions could materially affect the valuations.

Goodwill and Indefinite-Lived Intangible Assets Impairment Testing—Goodwill and intangible assets deemed to have indefinite lives are not amortized, but are subject to annual, or more frequent if necessary, impairment testing. In testing goodwill and indefinite-lived intangible assets, the fair value is estimated utilizing a discounted cash flow approach utilizing cash flow forecasts in our five year strategic and annual operating plans adjusted for terminal value assumptions. These impairment tests involve the use of accounting estimates and assumptions, changes in which could materially impact our financial condition or operating performance if actual results differ from such estimates and assumptions. To address this uncertainty we perform sensitivity analysis on key estimates and assumptions.

Income Taxes—On a recurring basis, we assess the need for a valuation allowance against our deferred tax assets by considering all available positive and negative evidence, such as past operating results, projections of future taxable income, enacted tax law changes and the feasibility and impact of tax planning initiatives. Our projections of future taxable income include a number of estimates and assumptions regarding our volume, pricing and costs, as well as the timing and amount of reversals of taxable temporary differences.

Sales Recognition on Long-Term Contracts—In 2017, we recognized approximately 16% of our total net sales using the percentage-of-completion method for long-term contracts. These long-term contracts are measured on the cost-to-cost basis for engineering-type contracts and the units-of-delivery basis for production-type contracts. Accounting for these contracts involves management

33


 

judgment in estimating total contract revenue and cost. 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). Contract costs are incurred over a period of time, which can be several years, and the estimation of these costs requires management judgment. 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. 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.

34


 

OTHER MATTERS

Litigation

See Note 19 Commitments and Contingencies of Notes to Consolidated Financial Statements for a discussion of environmental, asbestos and other litigation matters.

Recent Accounting Pronouncements

See Note 1 Summary of Significant Accounting Policies of Notes to Consolidated Financial Statements for a discussion of recent accounting pronouncements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risks

Information relating to market risks is included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations under the caption “Financial Instruments”.

35


 

ITEM 8. Financial Statements and Supplementary Data

HONEYWELL INTERNATIONAL INC.
CONSOLIDATED STATEMENT OF OPERATIONS

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

2017

 

2016

 

2015

 

 

(Dollars in millions,
except per share amounts)

Product sales

 

 

$

 

32,317

 

 

 

$

 

31,362

 

 

 

$

 

30,695

 

Service sales

 

 

 

8,217

 

 

 

 

7,940

 

 

 

 

7,886

 

 

 

 

 

 

 

 

Net sales

 

 

 

40,534

 

 

 

 

39,302

 

 

 

 

38,581

 

 

 

 

 

 

 

 

Costs, expenses and other

 

 

 

 

 

 

Cost of products sold

 

 

 

22,659

 

 

 

 

22,170

 

 

 

 

21,775

 

Cost of services sold

 

 

 

4,916

 

 

 

 

4,980

 

 

 

 

4,972

 

 

 

 

 

 

 

 

 

 

 

27,575

 

 

 

 

27,150

 

 

 

 

26,747

 

Selling, general and administrative expenses

 

 

 

5,808

 

 

 

 

5,469

 

 

 

 

5,006

 

Other (income) expense

 

 

 

(67

)

 

 

 

 

(102

)

 

 

 

 

(68

)

 

Interest and other financial charges

 

 

 

316

 

 

 

 

338

 

 

 

 

310

 

 

 

 

 

 

 

 

 

 

 

33,632

 

 

 

 

32,855

 

 

 

 

31,995

 

 

 

 

 

 

 

 

Income before taxes

 

 

 

6,902

 

 

 

 

6,447

 

 

 

 

6,586

 

Tax expense

 

 

 

5,204

 

 

 

 

1,601

 

 

 

 

1,739

 

 

 

 

 

 

 

 

Net income

 

 

 

1,698

 

 

 

 

4,846

 

 

 

 

4,847

 

Less: Net income attributable to the noncontrolling interest

 

 

 

43

 

 

 

 

37

 

 

 

 

79

 

 

 

 

 

 

 

 

Net income attributable to Honeywell

 

 

$

 

1,655

 

 

 

$

 

4,809

 

 

 

$

 

4,768

 

 

 

 

 

 

 

 

Earnings per share of common stock—basic

 

 

$

 

2.17

 

 

 

$

 

6.29

 

 

 

$

 

6.11

 

 

 

 

 

 

 

 

Earnings per share of common stock—assuming dilution

 

 

$

 

2.14

 

 

 

$

 

6.20

 

 

 

$

 

6.04

 

 

 

 

 

 

 

 

Cash dividends per share of common stock

 

 

$

 

2.74

 

 

 

$

 

2.45

 

 

 

$

 

2.15

 

 

 

 

 

 

 

 

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

36


 

HONEYWELL INTERNATIONAL INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

2017

 

2016

 

2015

 

 

(Dollars in millions)

Net income

 

 

$

 

1,698

 

 

 

$

 

4,846

 

 

 

$

 

4,847

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

Foreign exchange translation adjustment

 

 

 

(37

)

 

 

 

 

(52

)

 

 

 

 

(1,152

)

 

Actuarial gains/(losses)

 

 

 

753

 

 

 

 

(443

)

 

 

 

 

(464

)

 

Prior service (cost) credit

 

 

 

(59

)

 

 

 

 

(18

)

 

 

 

 

446

 

Prior service credit recognized during year

 

 

 

(70

)

 

 

 

 

(78

)

 

 

 

 

(13

)

 

Actuarial losses recognized during year

 

 

 

83

 

 

 

 

236

 

 

 

 

72

 

Settlements and curtailments

 

 

 

19

 

 

 

 

(5

)

 

 

 

 

2

 

Foreign exchange translation and other

 

 

 

(49

)

 

 

 

 

73

 

 

 

 

41

 

 

 

 

 

 

 

 

Pensions and other postretirement benefit adjustments

 

 

 

677

 

 

 

 

(235

)

 

 

 

 

84

 

Effective portion of cash flow hedges recognized in other comprehensive income

 

 

 

(101

)

 

 

 

 

103

 

 

 

 

91

 

Less: reclassification adjustment for (losses) gains included in net income

 

 

 

60

 

 

 

 

(5

)

 

 

 

 

99

 

 

 

 

 

 

 

 

Changes in fair value of effective cash flow hedges

 

 

 

(161

)

 

 

 

 

108

 

 

 

 

(8

)

 

Other comprehensive income (loss), net of tax

 

 

 

479

 

 

 

 

(179

)

 

 

 

 

(1,076

)

 

Comprehensive income

 

 

 

2,177

 

 

 

 

4,667

 

 

 

 

3,771

 

Less: Comprehensive income attributable to the noncontrolling interest

 

 

 

51

 

 

 

 

29

 

 

 

 

73

 

 

 

 

 

 

 

 

Comprehensive income attributable to Honeywell

 

 

$

 

2,126

 

 

 

$

 

4,638

 

 

 

$

 

3,698

 

 

 

 

 

 

 

 

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

37


 

HONEYWELL INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEET

 

 

 

 

 

 

 

December 31,

 

2017

 

2016

 

 

(Dollars in millions)

ASSETS

 

 

 

 

Current assets:

 

 

 

 

Cash and cash equivalents

 

 

$

 

7,059

 

 

 

$

 

7,843

 

Short-term investments

 

 

 

3,758

 

 

 

 

1,520

 

Accounts receivable—net

 

 

 

8,866

 

 

 

 

8,177

 

Inventories

 

 

 

4,613

 

 

 

 

4,366

 

Other current assets

 

 

 

1,706

 

 

 

 

1,152

 

 

 

 

 

 

Total current assets

 

 

 

26,002

 

 

 

 

23,058

 

Investments and long-term receivables

 

 

 

667

 

 

 

 

587

 

Property, plant and equipment—net

 

 

 

5,926

 

 

 

 

5,793

 

Goodwill

 

 

 

18,277

 

 

 

 

17,707

 

Other intangible assets—net

 

 

 

4,496

 

 

 

 

4,634

 

Insurance recoveries for asbestos related liabilities

 

 

 

411

 

 

 

 

417

 

Deferred income taxes

 

 

 

236

 

 

 

 

347

 

Other assets

 

 

 

3,372

 

 

 

 

1,603

 

 

 

 

 

 

Total assets

 

 

$

 

59,387

 

 

 

$

 

54,146

 

 

 

 

 

 

LIABILITIES

 

 

 

 

Current liabilities:

 

 

 

 

Accounts payable

 

 

$

 

6,584

 

 

 

$

 

5,690

 

Commercial paper and other short-term borrowings

 

 

 

3,958

 

 

 

 

3,366

 

Current maturities of long-term debt

 

 

 

1,351

 

 

 

 

227

 

Accrued liabilities

 

 

 

6,968

 

 

 

 

7,048

 

 

 

 

 

 

Total current liabilities

 

 

 

18,861

 

 

 

 

16,331

 

Long-term debt

 

 

 

12,573

 

 

 

 

12,182

 

Deferred income taxes

 

 

 

2,894

 

 

 

 

486

 

Postretirement benefit obligations other than pensions

 

 

 

512

 

 

 

 

473

 

Asbestos related liabilities

 

 

 

1,173

 

 

 

 

1,014

 

Other liabilities

 

 

 

5,930

 

 

 

 

4,110

 

Redeemable noncontrolling interest

 

 

 

5

 

 

 

 

3

 

SHAREOWNERS’ EQUITY

 

 

 

 

Capital—common stock issued

 

 

 

958

 

 

 

 

958

 

—additional paid-in capital

 

 

 

6,212

 

 

 

 

5,781

 

Common stock held in treasury, at cost

 

 

 

(15,914

)

 

 

 

 

(13,366

)

 

Accumulated other comprehensive income (loss)

 

 

 

(2,235

)

 

 

 

 

(2,714

)

 

Retained earnings

 

 

 

28,255

 

 

 

 

28,710

 

 

 

 

 

 

Total Honeywell shareowners’ equity

 

 

 

17,276

 

 

 

 

19,369

 

Noncontrolling interest

 

 

 

163

 

 

 

 

178

 

 

 

 

 

 

Total shareowners’ equity

 

 

 

17,439

 

 

 

 

19,547

 

 

 

 

 

 

Total liabilities, redeemable noncontrolling interest and shareowners’ equity

 

 

$

 

59,387

 

 

 

$

 

54,146

 

 

 

 

 

 

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

38


 

HONEYWELL INTERNATIONAL INC.
CONSOLIDATED STATEMENT OF CASH FLOWS

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

2017

 

2016

 

2015

 

 

(Dollars in millions)

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

 

$

 

1,698

 

 

 

$

 

4,846

 

 

 

$

 

4,847

 

Less: Net income attributable to the noncontrolling interest

 

 

 

43

 

 

 

 

37

 

 

 

 

79

 

 

 

 

 

 

 

 

Net income attributable to Honeywell

 

 

 

1,655

 

 

 

 

4,809

 

 

 

 

4,768

 

Adjustments to reconcile net income attributable to Honeywell to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation

 

 

 

717

 

 

 

 

726

 

 

 

 

672

 

Amortization

 

 

 

398

 

 

 

 

304

 

 

 

 

211

 

(Gain) loss on sale of non-strategic businesses and assets

 

 

 

7

 

 

 

 

(178

)

 

 

 

 

1

 

Repositioning and other charges

 

 

 

1,021

 

 

 

 

695

 

 

 

 

546

 

Net payments for repositioning and other charges

 

 

 

(628

)

 

 

 

 

(625

)

 

 

 

 

(537

)

 

Pension and other postretirement (income) expense

 

 

 

(647

)

 

 

 

 

(360

)

 

 

 

 

(323

)

 

Pension and other postretirement benefit payments

 

 

 

(106

)

 

 

 

 

(143

)

 

 

 

 

(122

)

 

Stock compensation expense

 

 

 

176

 

 

 

 

184

 

 

 

 

175

 

Deferred income taxes

 

 

 

2,294

 

 

 

 

76

 

 

 

 

315

 

Excess tax benefits from share based payment arrangements

 

 

 

 

 

 

 

 

 

 

 

(81

)

 

Other

 

 

 

1,642

 

 

 

 

194

 

 

 

 

57

 

Changes in assets and liabilities, net of the effects of acquisitions and divestitures:

 

 

 

 

 

 

Accounts receivable

 

 

 

(682

)

 

 

 

 

(547

)

 

 

 

 

201

 

Inventories

 

 

 

(259

)

 

 

 

 

(18

)

 

 

 

 

230

 

Other current assets

 

 

 

(568

)

 

 

 

 

(106

)

 

 

 

 

90

 

Accounts payable

 

 

 

924

 

 

 

 

254

 

 

 

 

(17

)

 

Accrued liabilities

 

 

 

22

 

 

 

 

233

 

 

 

 

(667

)

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

 

 

5,966

 

 

 

 

5,498

 

 

 

 

5,519

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Expenditures for property, plant and equipment

 

 

 

(1,031

)

 

 

 

 

(1,095

)

 

 

 

 

(1,073

)

 

Proceeds from disposals of property, plant and equipment

 

 

 

86

 

 

 

 

21

 

 

 

 

15

 

Increase in investments

 

 

 

(6,743

)

 

 

 

 

(3,954

)

 

 

 

 

(6,714

)

 

Decrease in investments

 

 

 

4,414

 

 

 

 

3,681

 

 

 

 

6,587

 

Cash paid for acquisitions, net of cash acquired

 

 

 

(82

)

 

 

 

 

(2,573

)

 

 

 

 

(5,228

)

 

Proceeds from sales of businesses, net of fees paid

 

 

 

 

 

 

 

296

 

 

 

 

1

 

Other

 

 

 

(218

)

 

 

 

 

282

 

 

 

 

(102

)

 

 

 

 

 

 

 

 

Net cash used for investing activities

 

 

 

(3,574

)

 

 

 

 

(3,342

)

 

 

 

 

(6,514

)

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from issuance of commercial paper and other short-term borrowings

 

 

 

13,701

 

 

 

 

18,997

 

 

 

 

12,992

 

Payments of commercial paper and other short-term borrowings

 

 

 

(13,532

)

 

 

 

 

(21,461

)

 

 

 

 

(8,727

)

 

Proceeds from issuance of common stock

 

 

 

520

 

 

 

 

409

 

 

 

 

186

 

Proceeds from issuance of long-term debt

 

 

 

1,238

 

 

 

 

9,245

 

 

 

 

60

 

Payments of long-term debt

 

 

 

(292

)

 

 

 

 

(2,839

)

 

 

 

 

(880

)

 

Excess tax benefits from share based payment arrangements

 

 

 

 

 

 

 

 

 

 

 

81

 

Repurchases of common stock

 

 

 

(2,889

)

 

 

 

 

(2,079

)

 

 

 

 

(1,884

)

 

Cash dividends paid

 

 

 

(2,119

)

 

 

 

 

(1,915

)

 

 

 

 

(1,726

)

 

Payments to purchase the noncontrolling interest

 

 

 

 

 

 

 

(238

)

 

 

 

 

 

AdvanSix pre-separation funding

 

 

 

 

 

 

 

269

 

 

 

 

 

AdvanSix pre-spin borrowing

 

 

 

 

 

 

 

38

 

 

 

 

 

AdvanSix cash at spin-off

 

 

 

 

 

 

 

(38

)

 

 

 

 

 

Other

 

 

 

(143

)

 

 

 

 

(42

)

 

 

 

 

(65

)

 

 

 

 

 

 

 

 

Net cash (used for) provided by financing activities

 

 

 

(3,516

)

 

 

 

 

346

 

 

 

 

37

 

 

 

 

 

 

 

 

Effect of foreign exchange rate changes on cash and cash equivalents

 

 

 

340

 

 

 

 

(114

)

 

 

 

 

(546

)

 

 

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

 

 

(784

)

 

 

 

 

2,388

 

 

 

 

(1,504

)

 

Cash and cash equivalents at beginning of period

 

 

 

7,843

 

 

 

 

5,455

 

 

 

 

6,959

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

 

$

 

7,059

 

 

 

$

 

7,843

 

 

 

$

 

5,455

 

 

 

 

 

 

 

 

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

39


 

HONEYWELL INTERNATIONAL INC.
CONSOLIDATED STATEMENT OF SHAREOWNERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

2017

 

2016

 

2015

 

Shares

 

$

 

Shares

 

$

 

Shares

 

$

 

 

(in millions)

Common stock, par value

 

 

 

957.6

 

 

 

 

958

 

 

 

 

957.6

 

 

 

 

958

 

 

 

 

957.6

 

 

 

 

958

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional paid-in capital

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

 

 

 

 

5,781

 

 

 

 

 

 

5,377

 

 

 

 

 

 

5,038

 

Issued for employee savings and option plans

 

 

 

 

 

255

 

 

 

 

 

 

183

 

 

 

 

 

 

164

 

Stock-based compensation expense

 

 

 

 

 

176

 

 

 

 

 

 

171

 

 

 

 

 

 

175

 

Other owner changes

 

 

 

 

 

 

 

 

 

 

 

50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

 

 

 

 

6,212

 

 

 

 

 

 

5,781

 

 

 

 

 

 

5,377

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

 

 

(196.8

)

 

 

 

 

(13,366

)

 

 

 

 

(187.2

)

 

 

 

 

(11,664

)

 

 

 

 

(175.4

)

 

 

 

 

(9,995

)

 

Reacquired stock or repurchases of common stock

 

 

 

(20.5

)

 

 

 

 

(2,889

)

 

 

 

 

(19.3

)

 

 

 

 

(2,079

)

 

 

 

 

(18.8

)

 

 

 

 

(1,884

)

 

Issued for employee savings and option plans

 

 

 

10.6

 

 

 

 

341

 

 

 

 

9.7

 

 

 

 

377

 

 

 

 

6.7

 

 

 

 

215

 

Other owner changes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

 

 

(206.7

)

 

 

 

 

(15,914

)

 

 

 

 

(196.8

)

 

 

 

 

(13,366

)

 

 

 

 

(187.2

)

 

 

 

 

(11,664

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained earnings

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

 

 

 

 

28,710

 

 

 

 

 

 

26,147

 

 

 

 

 

 

23,115

 

Net income attributable to Honeywell

 

 

 

 

 

1,655

 

 

 

 

 

 

4,809

 

 

 

 

 

 

4,768

 

Dividends on common stock

 

 

 

 

 

(2,101

)

 

 

 

 

 

 

(1,883

)

 

 

 

 

 

 

(1,686

)

 

AdvanSix spin-off

 

 

 

 

 

(9

)

 

 

 

 

 

 

(362

)

 

 

 

 

 

 

 

Redemption value adjustment

 

 

 

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

(50

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

 

 

 

 

28,255

 

 

 

 

 

 

28,710

 

 

 

 

 

 

26,147

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

 

 

 

 

(2,714

)

 

 

 

 

 

 

(2,535

)

 

 

 

 

 

 

(1,459

)

 

Foreign exchange translation adjustment

 

 

 

 

 

(37

)

 

 

 

 

 

 

(52

)

 

 

 

 

 

 

(1,152

)

 

Pensions and other postretirement benefit adjustments

 

 

 

 

 

677

 

 

 

 

 

 

(235

)

 

 

 

 

 

 

84

 

Changes in fair value of effective cash flow hedges

 

 

 

 

 

(161

)

 

 

 

 

 

 

108

 

 

 

 

 

 

(8

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

 

 

 

 

(2,235

)

 

 

 

 

 

 

(2,714

)

 

 

 

 

 

 

(2,535

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

 

 

 

 

178

 

 

 

 

 

 

135

 

 

 

 

 

 

127

 

Acquisitions

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

3

 

Net income attributable to noncontrolling interest

 

 

 

 

 

43

 

 

 

 

 

 

37

 

 

 

 

 

 

35

 

Foreign exchange translation adjustment

 

 

 

 

 

8

 

 

 

 

 

 

(8

)

 

 

 

 

 

 

(6

)

 

Dividends paid

 

 

 

 

 

(55

)

 

 

 

 

 

 

(17

)

 

 

 

 

 

 

(26

)

 

Other owner changes

 

 

 

 

 

(11

)

 

 

 

 

 

 

30

 

 

 

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

 

 

 

 

163

 

 

 

 

 

 

178

 

 

 

 

 

 

135

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total shareowners’ equity

 

 

 

750.9

 

 

 

 

17,439

 

 

 

 

760.8

 

 

 

 

19,547

 

 

 

 

770.4

 

 

 

 

18,418

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

40


 

HONEYWELL INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per share amounts)

Note 1. Summary of Significant Accounting Policies

Accounting Principles—The financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. The following is a description of Honeywell’s significant accounting policies.

Principles of Consolidation—The consolidated financial statements include the accounts of Honeywell International Inc. and all of its subsidiaries and entities in which a controlling interest is maintained. Our consolidation policy requires equity investments that we exercise significant influence over but do not control the investee and are not the primary beneficiary of the investee’s activities to be accounted for using the equity method. Investments through which we are not able to exercise significant influence over the investee and which we do not have readily determinable fair values are accounted for under the cost method. All intercompany transactions and balances are eliminated in consolidation.

Property, Plant and Equipment—Property, plant and equipment are recorded at cost, including any asset retirement obligations, less accumulated depreciation. For financial reporting, the straight-line method of depreciation is used over the estimated useful lives of 10 to 50 years for buildings and improvements and 2 to 16 years for machinery and equipment. Recognition of the fair value of obligations associated with the retirement of tangible long-lived assets is required when there is a legal obligation to incur such costs. Upon initial recognition of a liability, the cost is capitalized as part of the related long-lived asset and depreciated over the corresponding asset’s useful life.

Goodwill and Indefinite-Lived Intangible Assets—Goodwill and indefinite-lived intangible assets are subject to impairment testing annually as of March 31, and whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. This testing compares carrying values to fair values and, when appropriate, the carrying value of these assets is reduced to fair value. We completed our annual goodwill impairment test as of March 31, 2017 and determined that there was no impairment as of that date.

Other Intangible Assets with Determinable Lives—Other intangible assets with determinable lives consist of customer lists, technology, patents and trademarks and other intangibles and are amortized over their estimated useful lives, ranging from 2 to 24 years.

Sales Recognition—Product and service sales are recognized when persuasive evidence of an arrangement exists, product delivery has occurred or services have been rendered, pricing is fixed or determinable, and collection is reasonably assured. Service sales, principally representing repair, maintenance and engineering activities are recognized over the contractual period or as services are rendered. Sales under long-term contracts are recorded on a percentage-of-completion method measured on the cost-to-cost basis for engineering-type contracts and the units-of-delivery basis for production-type contracts. Provisions for anticipated losses on long-term contracts are recorded in full when such losses become evident. Revenues from contracts with multiple element arrangements are recognized as each element is earned based on the relative fair value of each element provided the delivered elements have value to customers on a standalone basis. Amounts allocated to each element are based on its objectively determined fair value, such as the sales price for the product or service when it is sold separately or competitor prices for similar products or services.

Environmental—We accrue costs related to environmental matters when it is probable that we have incurred a liability related to a contaminated site and the amount can be reasonably estimated. For additional information, see Note 19 Commitments and Contingencies.

Asbestos Related Contingencies and Insurance Recoveries—We recognize a liability for any asbestos related contingency that is probable of occurrence and reasonably estimable. In connection with the recognition of liabilities for asbestos related matters, we record asbestos related insurance recoveries that are deemed probable. For additional information, see Note 19 Commitments and Contingencies.

41


 

HONEYWELL INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except per share amounts)

Aerospace Sales Incentives—We provide sales incentives to commercial aircraft manufacturers and airlines in connection with their selection of our aircraft equipment, predominately wheel and braking system hardware, avionics, and auxiliary power units, for installation on commercial aircraft. These incentives consist of free or deeply discounted products, credits for future purchases of product and upfront cash payments. These costs are recognized in the period incurred as cost of products sold or as a reduction to sales, as appropriate.

Research and Development—Research and development costs for company-sponsored research and development projects are expensed as incurred. Such costs are principally included in cost of products sold and were $1,835 million, $1,864 million and $1,856 million in 2017, 2016 and 2015. The 2016 research and development costs previously disclosed have been revised to reflect the amounts recorded in the 2016 Consolidated Statement of Operations and had no impact on the results of operations.

Stock-Based Compensation Plans—The principal awards issued under our stock-based compensation plans, which are described in Note 18 Stock-Based Compensation Plans, are non-qualified stock options and restricted stock units. The cost for such awards is measured at the grant date based on the fair value of the award. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods (generally the vesting period of the equity award) and is included in selling, general and administrative expenses. Forfeitures are estimated at the time of grant to recognize expense for those awards that are expected to vest and are based on our historical forfeiture rates.

Pension Benefits—We recognize net actuarial gains or losses in excess of 10% of the greater of the fair value of plan assets or the plans’ projected benefit obligation (the corridor) annually in the fourth quarter each year (MTM Adjustment), and, if applicable, in any quarter in which an interim remeasurement is triggered. The remaining components of pension (income) expense, primarily service and interest costs and assumed return on plan assets, are recognized on a quarterly basis (Pension ongoing (income) expense).

Foreign Currency Translation—Assets and liabilities of subsidiaries operating outside the United States with a functional currency other than U.S. Dollars are translated into U.S. Dollars using year-end exchange rates. Sales, costs and expenses are translated at the average exchange rates in effect during the year. Foreign currency translation gains and losses are included as a component of Accumulated other comprehensive income (loss). For subsidiaries operating in highly inflationary environments, inventories and property, plant and equipment, including related expenses, are remeasured at the exchange rate in effect on the date the assets were acquired, while monetary assets and liabilities are remeasured at year-end exchange rates. Remeasurement adjustments for these subsidiaries are included in earnings.

Derivative Financial Instruments—We minimize our risks from interest and foreign currency exchange rate fluctuations through our normal operating and financing activities and, when deemed appropriate through the use of derivative financial instruments. Derivative financial instruments are used to manage risk and are not used for trading or other speculative purposes. We do not use leveraged derivative financial instruments. Derivative financial instruments that qualify for hedge accounting must be designated and effective as a hedge of the identified risk exposure at the inception of the contract. Accordingly, changes in fair value of the derivative contract must be highly correlated with changes in fair value of the underlying hedged item at inception of the hedge and over the life of the hedge contract.

All derivatives are recorded on the balance sheet as assets or liabilities and measured at fair value. For derivatives designated as hedges of the fair value of assets or liabilities, the changes in fair values of both the derivatives and the hedged items are recorded in current earnings. For derivatives designated as cash flow hedges, the effective portion of the changes in fair value of the derivatives are recorded in Accumulated other comprehensive income (loss) and subsequently recognized in earnings when the hedged items impact earnings. Cash flows of such derivative financial instruments are

42


 

HONEYWELL INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except per share amounts)

classified consistent with the underlying hedged item. For derivative instruments that are designated and qualify as a net investment hedge, the effective portion of the derivative’s gain or loss is reported as a component of Other comprehensive income (loss) and recorded in Accumulated other comprehensive income (loss). The gain or loss will be subsequently reclassified into net earnings when the hedged net investment is either sold or substantially liquidated.

Income Taxes—Significant judgment is required in evaluating tax positions. We establish additional reserves for income taxes when, despite the belief that tax positions are fully supportable, there remain certain positions that do not meet the minimum recognition threshold. The approach for evaluating certain and uncertain tax positions is defined by the authoritative guidance which determines when a tax position is more likely than not to be sustained upon examination by the applicable taxing authority. In the normal course of business, the Company and its subsidiaries are examined by various federal, state and foreign tax authorities. We regularly assess the potential outcomes of these examinations and any future examinations for the current or prior years in determining the adequacy of our provision for income taxes. We continually assess the likelihood and amount of potential adjustments and adjust the income tax provision, the current tax liability and deferred taxes in the period in which the facts that give rise to a change in estimate become known.

Cash and cash equivalents—Cash and cash equivalents include cash on hand and highly liquid investments having an original maturity of three months or less.

Earnings Per Share—Basic earnings per share is based on the weighted average number of common shares outstanding. Diluted earnings per share is based on the weighted average number of common shares outstanding and all dilutive potential common shares outstanding.

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

Recent Accounting Pronouncements—We consider the applicability and impact of all Accounting Standards Updates (ASUs) issued by the Financial Accounting Standards Board (FASB). ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated results 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 supersedes upon adoption previous revenue recognition guidance, including industry-specific guidance. The underlying principle requires an entity to recognize revenue for 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 in certain circumstances, allowing estimates of variable consideration to be recognized before contingencies are resolved. 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 Company has completed its evaluation of the new standard and has assessed the impacts of adoption on the Consolidated Financial Statements and disclosures. Based on the evaluation of our current contracts and revenue streams, revenue recognition is mostly consistent under both the previous and new standard, with the exception of two key revenue streams within our Aerospace segment, which are described below.

First, the previous accounting policy for costs incurred for nonrecurring engineering and development activities of our Aerospace products with commercial customers was generally to record the expense as incurred. Any customer funding received for such efforts was recognized when earned as a reduction of cost of sales. Upon adoption of the new standard, the customer funding is generally classified as revenue and not as a reduction of cost of sales. Such revenues are deferred and

43


 

HONEYWELL INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except per share amounts)

subsequently recognized as products are delivered to the customers. Additionally, under the new guidance, expenses incurred, up to the customer agreed funded amount, are deferred as an asset and subsequently recognized as cost of sales as products are delivered to the customer. As a result of these changes, both deferred costs (assets) and deferred revenue (liability) increased by approximately $1,090 million effective January 1, 2018. The aforementioned change in classification within the Consolidated Statement of Operations and timing difference in recognition is expected to have a minor impact on our gross margin percentage but no change to gross profit.

Second, the accounting for revenues for our mechanical service programs at our Aerospace segment are impacted. Our previous policy was to recognize revenue over time as costs were incurred (input method). Upon adoption, we continue to recognize revenue over time, but recognition is based on a series of distinct services using the output method. At adoption, this change results in unbilled receivables and deferred revenue being eliminated through retained earnings.

We adopted the new standard effective January 1, 2018 using the modified retrospective transition method. The cumulative effect recorded to the opening balance of retained earnings of the above impacted revenue streams is $75 million.

The disclosures in our notes to Consolidated Financial Statements related to revenue recognition will be significantly expanded under the new standard, specifically around the quantitative and qualitative information about performance obligations, changes in contract assets and liabilities, and disaggregation of revenue.

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 that will be effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. We expect to adopt the requirements of the new standard effective January 1, 2019. The guidance requires the use of a modified retrospective approach. We are currently evaluating our lease portfolio to assess overall financial statement impact and planning for adoption and implementation of this standard. We will continue to evaluate the adoption impact of this standard on our consolidated financial position, results of operations, and related notes to financial statements.

In October 2016, the FASB issued an accounting standard update which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, at the time the entity transfer occurs rather than when the asset is ultimately transferred to a third party, as required under current U.S. GAAP. The guidance is intended to reduce diversity in practice, particularly for transfers involving intellectual property. Subsequent to 2017 fiscal year, we adopted the accounting standard update as of January 1, 2018. The guidance requires application on a modified retrospective basis. The adoption of this guidance increases our deferred tax assets by approximately $340 million with a cumulative-effect adjustment to retained earnings of the same amount.

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 cost component of net benefit cost. The employer is required to report the service cost component in the same line item or items in the statement of operations 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 statement of operations 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. Subsequent to 2017 fiscal year, we adopted the accounting standard update as of January 1, 2018. This guidance impacts the presentation of our Consolidated Financial Statements. Our current presentation of the service cost component is consistent with the requirements of the new standard. We will present the other components within Other (income) expense (we currently present the other components within Cost of products and services sold and

44


 

HONEYWELL INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except per share amounts)

Selling, general, and administrative expenses). All components will continue to be excluded from Segment Profit (see Note 20 Pension and Other Postretirement Benefits for components of net period benefit cost).

In August 2017, the FASB issued amendments to hedge accounting guidance. These amendments are intended to better align a company’s risk management strategies and financial reporting for hedging relationships. Under the new guidance, more hedging strategies will be eligible for hedge accounting and the application of hedge accounting is simplified. In addition, the new guidance amends presentation and disclosure requirements. The guidance is effective for fiscal years beginning after December 15, 2018 with early adoption permitted, including the interim periods within those years. The guidance requires the use of a modified retrospective approach. We are currently evaluating whether to early adopt the new guidance and the impact of this amendment on our consolidated financial position, results of operations, and related notes to financial statements.

Note 2. Acquisitions and Divestitures

During 2017 there were no significant acquisitions individually or in aggregate. During 2016, we acquired businesses for an aggregate cost (net of cash and debt assumed) of $2,538 million.

In August 2016, the Company acquired Intelligrated, a leading provider of supply chain and warehouse automation technologies, for an aggregate value, net of cash acquired, of $1,488 million. Intelligrated is part of Safety and Productivity Solutions. In the third quarter of 2017, we completed our evaluation of the fair value of all of the assets and liabilities acquired. Management recorded goodwill and intangible assets acquired of, $1,121 million and $507 million, respectively. The Intelligrated identifiable intangible assets primarily include customer relationships, technology, and trade name that are being amortized over their estimated lives ranging from 1 to 15 years using straight line and accelerated amortization methods. The goodwill is non-deductible for tax purposes.

In April 2016, the Company completed the acquisition of Xtralis International Holdings Limited (“Xtralis”), a leading global provider of aspiration smoke detection and perimeter security technologies, for an aggregate cost, net of cash acquired and debt assumed, of $515 million. Xtralis is part of Home and Building Technologies.

In February 2016, the Company acquired 100 percent of the issued and outstanding shares of COM DEV International (“COM DEV”), a leading satellite and space components provider, for an aggregate value, net of cash acquired and debt assumed, of $347 million. COM DEV is part of Aerospace.

In January 2016, the Company acquired the remaining 30 percent noncontrolling interest in UOP Russell LLC, which develops technology and manufactures modular equipment to process natural gas, for $240 million. UOP Russell LLC is part of Performance Materials and Technologies.

In December 2015, the Company completed the acquisition of the Elster Division of Melrose Industries plc (“Elster”), for an aggregate value, net of cash acquired, of $4,899 million. Elster had 2015 revenues of $1,670 million and has been integrated into Home and Building Technologies and

45


 

HONEYWELL INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except per share amounts)

Performance Materials and Technologies. The following table summarizes the fair value of the acquired Elster assets and liabilities.

 

 

 

Current assets

 

 

$

 

519

 

Intangible assets

 

 

 

2,163

 

Other noncurrent assets

 

 

 

193

 

Current liabilities

 

 

 

(566

)

 

Noncurrent liabilities

 

 

 

(973

)

 

 

 

 

Net assets acquired

 

 

 

1,336

 

Noncontrolling interest

 

 

 

(2

)

 

Goodwill

 

 

 

3,565

 

 

 

 

Purchase Price

 

 

$

 

4,899

 

 

 

 

The Elster identifiable intangible assets primarily include customer relationships, trade names and technology that are being amortized over their estimated lives ranging from 1 to 20 years using straight line and accelerated amortization methods. The goodwill is non-deductible for tax purposes.

On October 1, 2016, the Company completed the tax-free spin-off of its Resins and Chemicals business, part of Performance Materials and Technologies, into a standalone, publicly-traded company (named AdvanSix Inc. (“AdvanSix”)) to Honeywell shareowners. The assets and liabilities associated with AdvanSix have been removed from the Company’s Consolidated Balance Sheet. The results of operations for AdvanSix are included in the Consolidated Statement of Operations through the effective date of the spin-off.

Honeywell shareowners of record as of the close of business on September 16, 2016 received one share of AdvanSix common stock for every 25 shares of Honeywell common stock. Immediately prior to the effective date of the spin-off, AdvanSix incurred debt to make a cash distribution of $269 million to the Company. At the same time, AdvanSix also incurred $38 million of borrowings in order to fund its post spin-off working capital.

In 2016 in connection with the spin-off, the Company entered into certain agreements with AdvanSix to effect our legal and structural separation including a transition services agreement with AdvanSix to provide certain administrative and other services for a limited time. As of the end of 2017, most of those agreements have ended.

On September 16, 2016, the Company completed the sale of Honeywell Technology Solutions Inc. for a sale price of $300 million. The Company recognized a pre-tax gain of $176 million, which was recorded in Other (income) expense. The Honeywell Technology Solutions Inc. business was part of Aerospace.

46


 

HONEYWELL INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except per share amounts)

Note 3. Repositioning and Other Charges

A summary of repositioning and other charges follows:

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

2017

 

2016

 

2015

Severance

 

 

$

 

305

 

 

 

$

 

283

 

 

 

$

 

197

 

Asset impairments

 

 

 

142

 

 

 

 

43

 

 

 

 

13

 

Exit costs

 

 

 

60

 

 

 

 

43

 

 

 

 

6

 

Reserve adjustments

 

 

 

(16

)

 

 

 

 

(109

)

 

 

 

 

(53

)

 

 

 

 

 

 

 

 

Total net repositioning charge

 

 

 

491

 

 

 

 

260

 

 

 

 

163

 

 

 

 

 

 

 

 

Asbestos related litigation charges, net of insurance

 

 

 

207

 

 

 

 

222

 

 

 

 

189

 

Probable and reasonably estimable environmental liabilities

 

 

 

287

 

 

 

 

195

 

 

 

 

194

 

Other

 

 

 

36

 

 

 

 

18

 

 

 

 

 

 

 

 

 

 

 

 

Total net repositioning and other charges

 

 

$

 

1,021

 

 

 

$

 

695

 

 

 

$

 

546

 

 

 

 

 

 

 

 

The following table summarizes the pre-tax distribution of total net repositioning and other charges by classification:

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

2017

 

2016

 

2015

Cost of products and services sold

 

 

$

 

784

 

 

 

$

 

522

 

 

 

$

 

483

 

Selling, general and administrative expenses

 

 

 

187

 

 

 

 

126

 

 

 

 

63

 

Other (income) expense

 

 

 

50

 

 

 

 

47

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 

1,021

 

 

 

$

 

695

 

 

 

$

 

546

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

2017

 

2016

 

2015

Aerospace

 

 

$

 

296

 

 

 

$

 

298

 

 

 

$

 

211

 

Home and Building Technologies

 

 

 

78

 

 

 

 

28

 

 

 

 

43

 

Performance Materials and Technologies

 

 

 

102

 

 

 

 

101

 

 

 

 

40

 

Safety and Productivity Solutions

 

 

 

51

 

 

 

 

1

 

 

 

 

34

 

Corporate

 

 

 

494

 

 

 

 

267

 

 

 

 

218

 

 

 

 

 

 

 

 

 

 

 

$

 

1,021

 

 

 

$

 

695

 

 

 

$

 

546

 

 

 

 

 

 

 

 

In 2017, we recognized repositioning charges totaling $507 million including severance costs of $305 million related to workforce reductions of 7,096 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 site transitions, in each of our segments, to more cost-effective locations. The repositioning charge included asset impairments of $142 million principally in our Corporate segment related to the write-down of legacy properties and certain equipment in connection with their planned disposition and the write-down of a research and development facility in connection with a planned exit from such facility. The repositioning charge included exit costs of $60 million principally for closure obligations associated with site transitions in each of our segments and for lease exit obligations in our Corporate segment.

In 2016, we recognized repositioning charges totaling $369 million including severance costs of $283 million related to workforce reductions of 6,585 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; the separation of the

47


 

HONEYWELL INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except per share amounts)

former Automation and Control Solutions reporting segment into two new reporting segments; site transitions in each of our segments to more cost-effective locations; and achieving acquisition-related synergies. The repositioning charge included asset impairments of $43 million principally related to the write-off of certain intangible assets in connection with the sale of a Performance Materials and Technologies business. The repositioning charge included exit costs of $43 million principally for expenses related to the spin-off of our AdvanSix business and closure obligations associated with site transitions. Also, $109 million of previously established accruals, primarily for severance, were returned to income as a result of higher attrition than anticipated in prior severance programs resulting in lower required severance payments, lower than expected severance costs in certain repositioning actions, and changes in scope of previously announced repositioning actions.

In 2015, we recognized repositioning charges totaling $216 million including severance costs of $197 million related to workforce reductions of 6,405 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. Also, $53 million of previously established accruals, primarily for severance, were returned to income due principally to higher attrition than anticipated in prior severance programs resulting in lower required severance payments, and changes in scope of previously announced repositioning actions.

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

 

 

 

 

 

 

 

 

 

 

 

Severance
Costs

 

Asset
Impairments

 

Exit
Costs

 

Total

Balance at December 31, 2014

 

 

$

 

285

 

 

 

$

 

 

 

 

$

 

30

 

 

 

$

 

315

 

2015 charges

 

 

 

197

 

 

 

 

13

 

 

 

 

6

 

 

 

 

216

 

2015 usage—cash

 

 

 

(109

)

 

 

 

 

 

 

 

 

(9

)

 

 

 

 

(118

)

 

2015 usage—noncash

 

 

 

 

 

 

 

(13

)

 

 

 

 

 

 

 

 

(13

)

 

Acquisitions

 

 

 

16

 

 

 

 

 

 

 

 

 

 

 

 

16

 

Adjustments

 

 

 

(49

)

 

 

 

 

 

 

 

 

(4

)

 

 

 

 

(53

)

 

Foreign currency translation

 

 

 

(11

)

 

 

 

 

 

 

 

 

(2

)

 

 

 

 

(13

)

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2015

 

 

 

329

 

 

 

 

 

 

 

 

21

 

 

 

 

350

 

 

 

 

 

 

 

 

 

 

2016 charges

 

 

 

283

 

 

 

 

43

 

 

 

 

43

 

 

 

 

369

 

2016 usage—cash

 

 

 

(203

)

 

 

 

 

 

 

 

 

(25

)

 

 

 

 

(228

)

 

2016 usage—noncash

 

 

 

(6

)

 

 

 

 

(43

)

 

 

 

 

 

 

 

 

(49

)

 

Adjustments

 

 

 

(106

)

 

 

 

 

 

 

 

 

(3

)

 

 

 

 

(109

)

 

Foreign currency translation

 

 

 

1

 

 

 

 

 

 

 

 

(3

)

 

 

 

 

(2

)

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2016

 

 

 

298

 

 

 

 

 

 

 

 

33

 

 

 

 

331

 

 

 

 

 

 

 

 

 

 

2017 charges

 

 

 

305

 

 

 

 

142

 

 

 

 

60

 

 

 

 

507

 

2017 usage—cash

 

 

 

(163

)

 

 

 

 

 

 

 

 

(14

)

 

 

 

 

(177

)

 

2017 usage—noncash

 

 

 

 

 

 

 

(142

)

 

 

 

 

 

 

 

 

(142

)

 

Adjustments and reclassifications

 

 

 

(13

)

 

 

 

 

 

 

 

 

(10

)

 

 

 

 

(23

)

 

Foreign currency translation

 

 

 

15

 

 

 

 

 

 

 

 

2

 

 

 

 

17

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

 

$

 

442

 

 

 

$

 

 

 

 

$

 

71

 

 

 

$

 

513

 

 

 

 

 

 

 

 

 

 

48


 

HONEYWELL INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except per share amounts)

Certain repositioning projects in each of our reportable operating segments in 2017, 2016 and 2015 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 were not significant.

Note 4. Other (Income) Expense

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

2017

 

2016

 

2015

Equity (income) loss of affiliated companies

 

 

$

 

(39

)

 

 

 

$

 

(31

)

 

 

 

$

 

(30

)

 

(Gain) loss on sale of non-strategic businesses and assets

 

 

 

7

 

 

 

 

(178

)

 

 

 

 

1

 

Interest income

 

 

 

(151

)

 

 

 

 

(106

)

 

 

 

 

(104

)

 

Foreign exchange

 

 

 

18

 

 

 

 

12

 

 

 

 

43

 

Other, net

 

 

 

98

 

 

 

 

201

 

 

 

 

22

 

 

 

 

 

 

 

 

 

 

 

$

 

(67

)

 

 

 

$

 

(102

)

 

 

 

$

 

(68

)

 

 

 

 

 

 

 

 

Refer to Note 2 Acquisitions and Divestitures and Note 12 Long-term Debt and Credit Agreements for further details of transactions recognized in 2016 within Other (income) expense.

Note 5. Income Taxes

Income before taxes

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

2017

 

2016

 

2015

U.S.

 

 

$

 

2,825

 

 

 

$

 

2,976

 

 

 

$

 

3,361

 

Non-U.S.

 

 

 

4,077

 

 

 

 

3,471

 

 

 

 

3,225

 

 

 

 

 

 

 

 

 

 

$

 

6,902

 

 

 

$

 

6,447

 

 

 

$

 

6,586

 

 

 

 

 

 

 

 

Tax expense (benefit)

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

2017

 

2016

 

2015

Tax expense (benefit) consists of

 

 

 

 

 

 

Current:

 

 

 

 

 

 

U.S. Federal

 

 

$

 

2,061

 

 

 

$

 

869

 

 

 

$

 

786

 

U.S. State

 

 

 

62

 

 

 

 

97

 

 

 

 

78

 

Non-U.S.

 

 

 

787

 

 

 

 

559

 

 

 

 

560

 

 

 

 

 

 

 

 

 

 

 

$

 

2,910

 

 

 

$

 

1,525

 

 

 

$

 

1,424

 

 

 

 

 

 

 

 

Deferred:

 

 

 

 

 

 

U.S. Federal

 

 

$

 

39

 

 

 

$

 

38

 

 

 

$

 

196

 

U.S. State

 

 

 

132

 

 

 

 

17

 

 

 

 

49

 

Non-U.S.

 

 

 

2,123

 

 

 

 

21

 

 

 

 

70

 

 

 

 

 

 

 

 

 

 

 

2,294

 

 

 

 

76

 

 

 

 

315

 

 

 

 

 

 

 

 

 

 

 

$

 

5,204

 

 

 

$

 

1,601

 

 

 

$

 

1,739

 

 

 

 

 

 

 

 

49


 

HONEYWELL INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except per share amounts)

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

2017

 

2016

 

2015

The U.S. federal statutory income tax rate is reconciled to our effective income tax rate as follows:

 

 

 

 

 

 

U.S. federal statutory income tax rate

 

 

 

35.0

%

 

 

 

 

35.0

%

 

 

 

 

35.0

%

 

Taxes on non-U.S. earnings below U.S. tax rate(1)

 

 

 

(12.9

)

 

 

 

 

(8.0

)

 

 

 

 

(8.0

)

 

U.S. state income taxes(1)

 

 

 

1.4

 

 

 

 

1.1

 

 

 

 

1.2

 

Manufacturing incentives

 

 

 

(0.7

)

 

 

 

 

(0.7

)

 

 

 

 

(1.5

)

 

Employee stock ownership plan dividend tax benefit

 

 

 

(0.4

)

 

 

 

 

(0.5

)

 

 

 

 

(0.4

)

 

Tax credits

 

 

 

(0.9

)

 

 

 

 

(0.7

)

 

 

 

 

(1.0

)

 

Reserves for tax contingencies

 

 

 

1.6

 

 

 

 

1.2

 

 

 

 

0.7

 

Employee share-based payments

 

 

 

(2.9

)

 

 

 

 

(2.0

)

 

 

 

 

 

U.S. Tax Cuts and Jobs Act enactment

 

 

 

54.4

 

 

 

 

 

 

 

 

 

All other items—net

 

 

 

0.8

 

 

 

 

(0.6

)

 

 

 

 

0.4

 

 

 

 

 

 

 

 

 

 

 

 

75.4

%

 

 

 

 

24.8

%

 

 

 

 

26.4

%

 

 

 

 

 

 

 

 

 

 

(1)

 

Net of changes in valuation allowance

The effective tax rate increased by 50.6 percentage points in 2017 compared to 2016. The increase was primarily attributable to the provisional impact of U.S. tax reform (see “The Tax Cuts and Jobs Act” further below), partially offset by increased tax benefits from foreign tax credits and for employee share-based payments. The Company’s non-U.S. effective tax rate was 71.4%, an increase of approximately 54.7 percentage points compared to 2016. The year-over-year increase in the non-U.S. effective tax rate was primarily driven by the Company’s change in assertion regarding foreign unremitted earnings, increased expense for reserves in various jurisdictions and increased withholding taxes, partially offset by higher earnings in low tax rate jurisdictions.

The effective tax rate decreased by 1.6 percentage points in 2016 compared to 2015. The decrease was primarily attributable to excess tax benefits from employee share-based payments arising from adoption of the FASB’s amended guidance related to employee share-based payment accounting, partially offset by increased tax reserves in various jurisdictions and lower tax benefits from manufacturing incentives. The Company’s non-U.S effective tax rate was 16.7%, a decrease of approximately 2.8 percentage points compared to 2015. The year-over-year decrease in the non-U.S. effective tax rate was primarily driven by higher earnings in lower tax rate jurisdictions and a decrease in the tax impact of restructuring and divestitures. The effective tax rate was lower than the U.S. federal statutory rate of 35% primarily due to overall non-U.S. earnings taxed at lower rates.

50


 

HONEYWELL INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except per share amounts)

Deferred tax assets (liabilities)

The tax effects of temporary differences and tax carryforwards which give rise to future income tax benefits and payables are as follows:

 

 

 

 

 

Deferred tax assets:

 

December 31,

 

2017

 

2016

Pension

 

 

$

 

 

 

 

$

 

411

 

Postretirement benefits other than pensions

 

 

 

177

 

 

 

 

262

 

Asbestos and environmental

 

 

 

325

 

 

 

 

471

 

Employee compensation and benefits

 

 

 

218

 

 

 

 

418

 

Other accruals and reserves

 

 

 

376

 

 

 

 

765

 

Net operating and capital losses

 

 

 

632

 

 

 

 

669

 

Tax credit carryforwards

 

 

 

510

 

 

 

 

206

 

 

 

 

 

 

Gross deferred tax assets

 

 

 

2,238

 

 

 

 

3,202

 

Valuation allowance

 

 

 

(663

)

 

 

 

 

(621

)

 

 

 

 

 

 

Total deferred tax assets

 

 

$

 

1,575

 

 

 

$

 

2,581

 

 

 

 

 

 

Deferred tax liabilities:

 

 

 

 

Pension

 

 

$

 

(40

)

 

 

 

$

 

 

Property, plant and equipment

 

 

 

(439

)

 

 

 

 

(560

)

 

Intangibles

 

 

 

(1,326

)

 

 

 

 

(1,843

)

 

Unremitted earnings of foreign subsidiaries

 

 

 

(2,151

)

 

 

 

 

(43

)

 

Other asset basis differences

 

 

 

(210

)

 

 

 

 

(231

)

 

Other

 

 

 

(67

)

 

 

 

 

(43

)

 

 

 

 

 

 

Total deferred tax liabilities

 

 

 

(4,233

)

 

 

 

 

(2,720

)

 

 

 

 

 

 

Net deferred tax liability

 

 

$

 

(2,658

)

 

 

 

$

 

(139

)

 

 

 

 

 

 

As discussed further below under “The Tax Cuts and Jobs Act,” the Company no longer intends to reinvest the historical earnings of its foreign subsidiaries as of December 31, 2017 and has recorded a provisional deferred tax liability mainly comprised of non-U.S. withholding taxes of approximately $2.1 billion.

Our gross deferred tax assets include $794 million related to non-U.S. operations comprised principally of net operating losses, capital loss and tax credit carryforwards (mainly in Canada, France, Germany, Luxembourg and the United Kingdom) and deductible temporary differences. We maintain a valuation allowance of $660 million against a portion of the non-U.S. gross deferred tax assets. The change in the valuation allowance resulted in increases of $4 million, $69 million and $114 million to income tax expense in 2017, 2016 and 2015. In the event we determine that we will not be able to realize our net deferred tax assets in the future, we will reduce such amounts through an increase to income tax expense in the period such determination is made. Conversely, if we determine that we will be able to realize net deferred tax assets in excess of the carrying amounts, we will decrease the recorded valuation allowance through a reduction to income tax expense in the period that such determination is made.

51


 

HONEYWELL INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except per share amounts)

As of December 31, 2017, our net operating loss, capital loss and tax credit carryforwards were as follows:

 

 

 

 

 

 

 

Jurisdiction

 

Expiration
Period

 

Net Operating
and Capital Loss
Carryforwards

 

Tax Credit
Carryforwards

U.S. Federal

 

2037

 

 

$

 

16

 

 

 

$

 

332

 

U.S. State

 

2037

 

 

 

508

 

 

 

 

24

 

Non-U.S.

 

2037

 

 

 

607

 

 

 

 

159

 

Non-U.S.

 

Indefinite

 

 

 

2,211

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 

3,342

 

 

 

$

 

515

 

 

 

 

 

 

 

 

Many jurisdictions impose limitations on the timing and utilization of net operating loss and tax credit carryforwards. In those instances, whereby there is an expected permanent limitation on the utilization of the net operating loss or tax credit carryforward, the deferred tax asset and amount of the carryforward have been reduced.

 

 

 

 

 

 

 

 

 

2017

 

2016

 

2015

Change in unrecognized tax benefits:

 

 

 

 

 

 

Balance at beginning of year

 

 

$

 

877

 

 

 

$

 

765

 

 

 

$

 

659

 

Gross increases related to current period tax positions

 

 

 

94

 

 

 

 

96

 

 

 

 

56

 

Gross increases related to prior periods tax positions

 

 

 

153

 

 

 

 

88

 

 

 

 

175

 

Gross decreases related to prior periods tax positions

 

 

 

(91

)

 

 

 

 

(33

)

 

 

 

 

(72

)

 

Decrease related to resolutions of audits with tax authorities

 

 

 

(76

)

 

 

 

 

(3

)

 

 

 

 

(11

)

 

Expiration of the statute of limitations for the assessment of taxes

 

 

 

(54

)

 

 

 

 

(10

)

 

 

 

 

(13

)

 

Foreign currency translation

 

 

 

44

 

 

 

 

(26

)

 

 

 

 

(29

)

 

 

 

 

 

 

 

 

Balance at end of year

 

 

$

 

947

 

 

 

$

 

877

 

 

 

$

 

765

 

 

 

 

 

 

 

 

As of December 31, 2017, 2016, and 2015 there were $947 million, $877 million and $765 million of unrecognized tax benefits that if recognized would be recorded as a component of Tax expense.

The following table summarizes tax years that remain subject to examination by major tax jurisdictions as of December 31, 2017:

 

 

 

 

 

Jurisdiction

 

Open Tax Years
Based on Originally Filed Returns

 

Examination in
progress

 

Examination not yet
initiated

U.S. Federal

 

2013   2016

 

2015   2017

U.S. State

 

2011   2016

 

2012   2017

Australia

 

N/A

 

2016   2017

Canada(1)

 

2012   2014, 2016

 

2015   2017

China

 

2003   2017

 

N/A

France

 

2012   2017

 

2006   2011

Germany(1)

 

2008   2015

 

2016   2017

India

 

1999   2015

 

2016   2017

Switzerland(1)

 

2012   2016

 

2017

United Kingdom

 

2013   2015

 

2016   2017

 

 

(1)

 

Includes provincial or similar local jurisdictions, as applicable.

Based on the outcome of these examinations, or as a result of the expiration of statute of limitations for specific jurisdictions, it is reasonably possible that certain unrecognized tax benefits for tax positions taken on previously filed tax returns will materially change from those recorded as liabilities in our financial statements. In addition, the outcome of these examinations may impact the valuation of certain deferred tax assets (such as net operating losses) in future periods.

52


 

HONEYWELL INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except per share amounts)

Unrecognized tax benefits for examinations in progress were $487 million, $398 million and $349 million, as of December 31, 2017, 2016, and 2015. Estimated interest and penalties related to the underpayment of income taxes are classified as a component of Tax expense in the Consolidated Statement of Operations and totaled $28 million, $18 million and $11 million for the years ended December 31, 2017, 2016, and 2015. Accrued interest and penalties were $423 million, $395 million and $336 million, as of December 31, 2017, 2016, and 2015.

The Tax Cuts and Jobs Act

On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (“Tax Act”) that instituted fundamental changes to the taxation of multinational corporations. The Tax Act includes changes to the taxation of foreign earnings by implementing a dividend exemption system, expansion of the current anti-deferral rules, a minimum tax on low-taxed foreign earnings and new measures to deter base erosion. The Tax Act also includes a permanent reduction in the corporate tax rate to 21%, repeal of the corporate alternative minimum tax, expensing of capital investment, and limitation of the deduction for interest expense. Furthermore, as part of the transition to the new tax system, a one-time transition tax is imposed on a U.S. shareholder’s historical undistributed earnings of foreign affiliates. Although the Tax Act is generally effective January 1, 2018, GAAP requires recognition of the tax effects of new legislation during the reporting period that includes the enactment date, which was December 22, 2017.

As a result of the impacts of the Tax Act, the SEC provided guidance that allows the Company to record provisional amounts for those impacts, with the requirement that the accounting be completed in a period not to exceed one year from the date of enactment. As of December 31, 2017, the Company has not completed the accounting for the tax effects of the Tax Act. Therefore, we have recorded provisional amounts for the effects of the Tax Act. The primary impacts of the Tax Act relate to the re-measurement of deferred tax assets and liabilities resulting from the change in the corporate tax rate (“Corporate Tax Rate Change”); the one-time mandatory transition tax on undistributed earnings of foreign affiliates (“Mandatory Transition Tax”); and deferred taxes in connection with a change in the Company’s intent to permanently reinvest the historical undistributed earnings of its foreign affiliates (“Undistributed Foreign Earnings”).

Corporate Tax Rate Change—For the year ended December 31, 2017, we recorded a tax benefit of approximately $235 million due to the decrease in the corporate tax rate from 35% to 21%.

At the date of enactment, the Company had a deferred tax liability for the excess of its net book value over its tax basis of its U.S. assets and liabilities that will generate future taxable income in excess of book income. Due to the Tax Act, this additional taxable income will be subject to tax at a lower corporate tax rate, consequently reducing the Company’s deferred tax liability as of the date of enactment.

Mandatory Transition Tax—For the year ended December 31, 2017, we recorded a provisional tax charge of approximately $1.9 billion due to the imposition of the mandatory transition tax (“MTT”) on the deemed repatriation of undistributed foreign earnings.

The Tax Act imposes a one-time tax on undistributed and previously untaxed post-1986 foreign earnings and profits (E&P), as determined in accordance with U.S. tax principles, of certain foreign corporations owned by U.S. shareholders. In general, we have estimated $20 billion of E&P related to our foreign affiliates that is subject to the MTT. The MTT is imposed at a rate of 15.5% to the extent of the cash and cash equivalents that are held by the foreign affiliates at certain testing dates; the remaining E&P is taxed at a rate of 8.0%. In accordance with the Tax Act, the Company will elect to pay the MTT liability over a period of eight years, with the first installment of $144 million due in 2018; the remainder of the balance is recorded in Other liabilities (noncurrent). As of December 31, 2017, the Company has recorded a provisional amount because certain information related to the computation of E&P 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

53


 

HONEYWELL INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except per share amounts)

application and interpretation of the recently enacted legislation. The Company will disclose the impact to the provisional amount in the reporting period in which the accounting is completed, which will not exceed one year from the date of enactment of the Tax Act.

Undistributed Foreign Earnings—For the year ended December 31, 2017, we recorded a provisional tax charge of approximately $2.1 billion due to the Company’s intent to no longer permanently reinvest the historical undistributed earnings of its foreign affiliates.

We previously considered substantially all of the earnings in our non-U.S. subsidiaries to be permanently reinvested and, accordingly, recorded no deferred income taxes on such earnings. As a result of the fundamental changes to the taxation of multinational corporations created by the Tax Act, the Company no longer intends to permanently reinvest the historical undistributed earnings of its foreign affiliates, which amounted to approximately $20 billion as of December 31, 2017 (including current year earnings). GAAP requires recognition of a deferred tax liability in the reporting period in which its intent to no longer permanently reinvest its historical undistributed foreign earnings is made. Although no U.S. federal taxes will be imposed on such future distributions of foreign earnings, in many cases the cash transfer will be subject to foreign withholding and other local taxes. Accordingly, at December 31, 2017 the Company has included a provisional deferred tax liability, mostly related to non-U.S. withholding taxes. The Company has recorded a provisional amount because certain information related to the computation of E&P, distributable reserves and foreign exchange gains and losses is not readily available. The Company will disclose the impact to the provisional amount in the reporting period in which the accounting is completed, which will not exceed one year from the date of enactment of the Tax Act. The provisional amount is based on the Company’s current legal ownership structure which may change in the future. Any future tax impacts resulting from changes to the legal ownership structure will not be considered changes to the provisional amount and will be recorded in the reporting period in which a plan to modify the legal structure is adopted, which may exceed one year from the date of enactment of the Tax Act.

Global Intangible Low Taxed Income—In addition to the changes described above, the Tax Act imposes a U.S. tax on global intangible low taxed income (“GILTI”) that is earned by certain foreign affiliates owned by a U.S. shareholder. The computation of GILTI is still subject to interpretation and additional clarifying guidance is expected, but is generally intended to impose tax on the earnings of a foreign corporation that are deemed to exceed a certain threshold return relative to the underlying business investment. In accordance with guidance issued by FASB, the Company has made a policy election to treat future taxes related to GILTI as a current period expense in the reporting period in which the tax is incurred.

Note 6. Earnings Per Share

The details of the earnings per share calculations for the years ended December 31, 2017, 2016 and 2015 are as follows:

 

 

 

 

 

 

 

Basic

 

Years Ended December 31,

 

2017

 

2016

 

2015

Net income attributable to Honeywell

 

 

$

 

1,655

 

 

 

$

 

4,809

 

 

 

$

 

4,768

 

Weighted average shares outstanding

 

 

 

762.1

 

 

 

 

764.3

 

 

 

 

779.8

 

Earnings per share of common stock

 

 

$

 

2.17

 

 

 

$

 

6.29

 

 

 

$

 

6.11

 

54


 

HONEYWELL INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except per share amounts)

 

 

 

 

 

 

 

Assuming Dilution

 

Years Ended December 31,

 

2017

 

2016

 

2015

Net income attributable to Honeywell

 

 

$

 

1,655

 

 

 

$

 

4,809

 

 

 

$

 

4,768

 

Average Shares

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

762.1

 

 

 

 

764.3

 

 

 

 

779.8

 

Dilutive securities issuable—stock plans

 

 

 

10.0

 

 

 

 

11.0

 

 

 

 

9.5

 

 

 

 

 

 

 

 

Total weighted average diluted shares outstanding

 

 

 

772.1

 

 

 

 

775.3

 

 

 

 

789.3

 

 

 

 

 

 

 

 

Earnings per share of common stock—assuming dilution

 

 

$

 

2.14

 

 

 

$

 

6.20

 

 

 

$

 

6.04

 

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. In 2017, 2016, and 2015 the weighted number of stock options excluded from the computations were 2.8 million, 7.5 million, and 7.1 million. These stock options were outstanding at the end of each of the respective periods.

Note 7. Accounts Receivable

 

 

 

 

 

 

 

December 31,

 

2017

 

2016

Trade

 

 

$

 

9,068

 

 

 

$

 

8,449

 

Less—Allowance for doubtful accounts

 

 

 

(202

)

 

 

 

 

(272

)

 

 

 

 

 

 

 

 

 

8,866

 

 

 

 

8,177

 

 

 

 

 

 

Trade Receivables includes $1,853 million and $1,626 million of unbilled balances under long-term contracts as of December 31, 2017 and December 31, 2016. These amounts are billed in accordance with the terms of customer contracts to which they relate.

Note 8. Inventories

 

 

 

 

 

 

 

December 31,

 

2017

 

2016

Raw materials

 

 

$

 

1,193

 

 

 

$

 

1,104

 

Work in process

 

 

 

790

 

 

 

 

775

 

Finished products

 

 

 

2,669

 

 

 

 

2,552

 

 

 

 

 

 

 

 

 

 

4,652

 

 

 

 

4,431

 

Reduction to LIFO cost basis

 

 

 

(39

)

 

 

 

 

(65

)

 

 

 

 

 

 

 

 

 

$

 

4,613

 

 

 

$

 

4,366

 

 

 

 

 

 

Inventories valued at LIFO amounted to $324 million and $296 million at December 31, 2017 and 2016. Had such LIFO inventories been valued at current costs, their carrying values would have been approximately $39 million and $65 million higher at December 31, 2017 and 2016.

55


 

HONEYWELL INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except per share amounts)

Note 9. Property, Plant and Equipment—Net

 

 

 

 

 

 

 

December 31,

 

2017

 

2016

Land and improvements

 

 

$

 

287

 

 

 

$

 

363

 

Machinery and equipment

 

 

 

10,762

 

 

 

 

9,956

 

Buildings and improvements

 

 

 

3,463

 

 

 

 

3,248

 

Construction in progress

 

 

 

675

 

 

 

 

940

 

 

 

 

 

 

 

 

 

15,187

 

 

 

 

14,507

 

Less—Accumulated depreciation

 

 

 

(9,261

)

 

 

 

 

(8,714

)

 

 

 

 

 

 

 

 

$

 

5,926

 

 

 

$

 

5,793

 

 

 

 

 

 

Depreciation expense was $717 million, $726 million and $672 million in 2017, 2016 and 2015.

Note 10. Goodwill and Other Intangible Assets—Net

The following table summarizes the change in the carrying amount of goodwill for the years ended December 31, 2017 and 2016 by segment. Certain prior period balances have been recast due to a business realignment; Refer to Note 21 Segment Financial Data.

 

 

 

 

 

 

 

 

 

 

 

December 31,
2016

 

Acquisitions/
Divestitures

 

Currency
Translation
Adjustment

 

December 31,
2017

Aerospace

 

 

$

 

2,441

 

 

 

$

 

2

 

 

 

$

 

25

 

 

 

$

 

2,468

 

Home and Building Technologies

 

 

 

5,807

 

 

 

 

(32

)

 

 

 

 

185

 

 

 

 

5,960

 

Performance Materials and Technologies

 

 

 

4,924

 

 

 

 

34

 

 

 

 

284

 

 

 

 

5,242

 

Safety and Productivity Solutions

 

 

 

4,535

 

 

 

 

(8

)

 

 

 

 

80

 

 

 

 

4,607

 

 

 

 

 

 

 

 

 

 

 

 

$

 

17,707

 

 

 

$

 

(4

)

 

 

 

$

 

574

 

 

 

$

 

18,277

 

 

 

 

 

 

 

 

 

 

Other intangible assets are comprised of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

December 31, 2016

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

Determinable life intangibles:

 

 

 

 

 

 

 

 

 

 

 

 

Patents and technology

 

 

$

 

1,990

 

 

 

$

 

(1,272

)

 

 

 

$

 

718

 

 

 

$

 

1,841

 

 

 </