Honeywell International, Inc. :HON-US: Earnings Analysis: Q1, 2017 By the Numbers : April 25, 2017

Honeywell International, Inc. reports financial results for the quarter ended March 31, 2017.

We analyze the earnings along side the following peers of Honeywell International, Inc. – General Electric Company (GE-US) that have also reported for this period.

Highlights

  • Summary numbers: Revenues of USD 9492 million, Net Earnings of USD 1326 million.
  • Gross margins widened from 32.35% to 34.47% compared to the same period last year, operating (EBITDA) margins now 23.04% from 21.77%.
  • Year-on-year change in operating cash flow of 265.76% is about the same as the change in earnings, likely no significant movement in accruals or reserves.
  • Earnings growth from operating margin improvements as well as one-time items.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2017-03-31 2016-12-31 2016-09-30 2016-06-30 2016-03-31
Relevant Numbers (Quarterly)
Revenues (mil) 9492 9985 9804 9991 9522
Revenue Growth (%YOY) -0.32 0.03 2.01 2.21 3.35
Earnings (mil) 1326 1034 1240 1282 1186
Earnings Growth (%YOY) 11.8 -13.4 -1.9 7.37 6.27
Net Margin (%) 13.97 10.36 12.65 12.83 12.46
EPS 1.71 1.34 1.6 1.66 1.53
Return on Equity (%) 26.5 21.25 25.89 27.48 25.59
Return on Assets (%) 9.74 7.68 9.47 10.1 9.52

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Market Share Versus Profits

Revenues History
Earnings History

HON-US‘s change in revenue this period compared to the same period last year of -0.32% is almost the same as its change in earnings, and is about average among the announced results thus far in its peer group, suggesting that HON-US is holding onto its market share. Also, for comparison purposes, revenues changed by -4.94% and earnings by 28.24% compared to the immediate last period.

Revenues Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Leader, Earnings Focus, Laggard, Revenues Focus

Earnings Growth Analysis

The company’s earnings growth was influenced by year-on-year improvement in gross margins from 32.35% to 34.47% as well as better cost controls. As a result, operating margins (EBITDA margins) rose from 21.77% to 23.04% compared to the same period last year. For comparison, gross margins were 31.11% and EBITDA margins were 18.73% in the last reporting period.

Gross Margin Versus EBITDA Margin

Quadrant label definitions. Hover to know more

Differentiated; Low Cost, Commodity; Low Cost, Commodity; High Cost, Differentiated; High Cost

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

HON-US‘s gross margin improvement has not produced any big difference in its working capital. Working capital days are currently 62.44, compared to last year’s level of 26.54 days. This leads Capital Cube to conclude that the improvements in gross margins are likely from operating decisions and not trade-offs with the balance sheet.

Gross Margin Versus Working Capital Days

Quadrant label definitions. Hover to know more

Customer Financed, Cash Starved, Supplier Financed, Cash Rich

Cash Versus Earnings – Sustainable Performance?

It is important to examine a company�s cash versus earnings numbers to gauge whether its performance is sustainable.

HON-US‘s change in operating cash flow of 265.76% compared to the same period last year is about the same as its change in earnings this period. Additionally, this change in operating cash flow is about average among its peer group. This suggests that the company did not use accruals or reserves to manage earnings this period, and that, all else being equal, the earnings number is sustainable.

Operating Cash Flow Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Cash Flow based Earnings, Likely Non-cash Earnings, Low Cash Flow Base, Likely Undeclared Earnings

Margins

The company’s earnings growth has also been influenced by the following factors: (1) Improvements in operating (EBIT) margins from 19.11% to 20.19% and (2) one-time items. The company’s pretax margins are now 18.16% compared to 17.10% for the same period last year.

EBIT Margin Versus PreTax Margin

Quadrant label definitions. Hover to know more

Operation driven Earnings, One-time Favorables, Low Earnings Base, One-time Unfavorables
EBIT Margin History
PreTax Margin History

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Company Profile

Honeywell International, Inc. is a diversified technology and manufacturing company. It offers aerospace products and services; turbochargers; control, sensing and security technologies for buildings and homes; specialty chemicals; electronic and advanced materials; process technology for refining and petrochemicals; and energy efficient products and solutions for homes, business and transportation. The company operates through the following segments: Aerospace; Automation and Control Solutions; and Performance Materials and Technologies. The Aerospace segment supplies aircraft engines, integrated avionics, systems and service solutions, and related products and services for aircraft manufacturers, airlines, aircraft operators, military services, and defense and space contractors. The Aerospace segment’s products and services include auxiliary power units, propulsion engines, environmental control systems, connectivity, electric power systems, engine controls, flight safety, communications, navigation, radar and surveillance systems, aircraft lighting, management and technical services, logistics services, advanced systems and instruments, aircraft wheels and brakes, repair and overhaul services, turbochargers and thermal systems. The Automation and Control Solutions segment provides products, software and technologies for environmental and energy solutions; sensors, switches and controls for sensing and productivity solutions; security and fire safety products; industrial safety products; and building solutions and services for homes, commercial buildings and industrial facilities. The Performance Materials and Technologies segment develops and manufactures advanced materials, process technologies and automation solutions. Its process technology and products include catalysts and adsorbents, equipment and consulting services to produce gasoline, diesel, jet fuel, petrochemicals and renewable fuels for the petroleum refining, gas processing and petrochemical industries. Honeywell International was founded by Albert M. Butz in 1885 and is headquartered in Morris Plains, NJ.

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