Feb. 14, 2020, 1:30 p.m. EST

10-K: HONEYWELL INTERNATIONAL INC

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(EDGAR Online via COMTEX) -- 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, 2019. All references to Notes relate to Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data. On October 1, 2018, we completed the tax-free spin-off to Honeywell shareowners of our Transportation Systems business, previously part of Aerospace, into a standalone publicly-traded company, Garrett Motion Inc. ("Garrett"). On October 29, 2018, we completed the tax-free spin-off to Honeywell shareowners of our Homes and Global Distribution business, previously part of Home and Building Technologies (renamed Honeywell Building Technologies following the spin-off), into a standalone publicly-traded company, Resideo Technologies, Inc. ("Resideo"). We removed the assets and liabilities associated with Garrett and Resideo from our Consolidated Balance Sheet as of the effective dates of the respective spin-offs. We included the results of operations for Garrett and Resideo in our Consolidated Statement of Operations through the effective dates of the respective spin-offs. Total sales and total cost of products and services sold attributable to these spin-offs, impacting segment profit, were $6.6 billion and $4.8 billion for the year ended December 31, 2018. A detailed discussion of the prior year 2018 to 2017 year-over-year changes are not included herein and can be found in the Management's Discussion and Analysis section in the 2018 Annual Report on Form 10-K filed February 8, 2019. EXECUTIVE SUMMARY During 2019, we continued to deliver on our financial commitments and to create long-term shareowner value. Income before taxes grew 1% to $7.6 billion despite the spin-offs. The improvement in year over year Income before taxes was attributable to both sales growth as well as operational improvements that increased operating margins. We believe our ability to drive continuous earnings growth over a long history results from consistently identifying and investing in productivity initiatives. We continue to focus on commercial excellence and improvements in our manufacturing and operational processes, including our Integrated Supply Chain and Honeywell Digital transformations, to drive higher sales at better margins. We are careful not to allow the attainment of short-term financial results to imperil the creation of long-term, sustainable shareowner value. We are committed to a strategy to become one of the world's leading software industrial companies. Our technology investments allow us to introduce new technology solutions in high growth businesses in broad-based, attractive industrial end markets. Each of these end markets is characterized by favorable global mega-trends including energy efficiency, infrastructure investment, urbanization and safety. In 2019 we deployed capital of $7.8 billion, including capital expenditures, dividends, share repurchases, mergers and acquisitions, and venture investments. BUSINESS OBJECTIVES Our businesses are focused on the following objectives: Driving profitable growth through delivering innovative products through research and development and technological excellence, and through continued enhancement of our footprint in high growth regions;

Continuing to execute on our strategy to become the premier software-industrial, including the ongoing expansion of Honeywell Forge connected solutions for aircraft, buildings, cybersecurity, plants, and workers and driving a recurring revenue model across the Company;

Expanding margins by optimizing the Company's cost structure through Supply Chain and Honeywell Digital transformation initiatives, commercial excellence, repositioning, and other manufacturing and operational process improvements;

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

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

Increasing availability of capital through strong cash flow generation and conversion from effective working capital management and proactively managing debt to enable the Company to smartly deploy capital for strategic acquisitions, dividends, share repurchases and capital expenditures.

CONSOLIDATED RESULTS OF OPERATIONS







        Net Sales
                                               2019          2018        2017
        Net sales                           $ 36,709      $ 41,802     $ 40,534
        % change compared with prior period      (12 )%          3 %
        


Net sales decreased in 2019 compared to 2018 due to the spin-offs. Our 2018 results included $6,550 million of sales related to the Transportation Systems and Homes and Global Distribution businesses. Absent the impact of the spin-offs during 2018, sales grew 4% from $35,252 in 2018 to $36,709 in 2019. The change in net sales is attributable to the following:







                                      2019      2018
                                     Versus    Versus
                                      2018      2017
        Volume                          3  %     4  %
        Price                           2  %     2  %
        Foreign Currency Translation   (1 )%     1  %
        Acquisitions/Divestitures     (16 )%    (4 )%
                                      (12 )%     3  %
        


A discussion of net sales by segment can be found in the Review of Business Segments section of this Management's Discussion and Analysis.







        Cost of Products and Services Sold
                                               2019          2018         2017
        Cost of products and services sold  $ 24,339      $ 29,046     $ 28,144
        % change compared with prior period      (16 )%          3 %
        Gross Margin percentage                 33.7  %       30.5 %       30.6 %
        


Cost of products and services sold decreased in 2019 compared to 2018 due to lower direct and indirect material costs of approximately $3,920 million, lower labor costs of approximately $160 million (both driven by the spin-offs of the Transportation Systems and Homes and Global Distribution businesses), and lower repositioning and other charges of approximately $530 million, largely due to lower asbestos and environmental related charges net of the reimbursements. Absent the impact of these items during 2018, cost of products and services sold increased approximately 3%.







        Selling, General and Administrative Expenses
                                                       2019        2018        2017
        Selling, general and administrative expenses $ 5,519     $ 6,051     $ 6,087
        % of sales                                      15.0 %      14.5 %      15.0 %
        


Selling, general and administrative expenses decreased in 2019 compared with 2018 primarily due to the impact of the spin-offs. In addition, selling, general and administrative expenses decreased due to productivity and the favorable impact of foreign currency translation, partially offset by labor inflation.







        Other (Income) Expense
                                  2019         2018        2017
        Other (income) expense $ (1,065 )   $ (1,149 )   $ (963 )
        


Other (income) expense decreased in 2019 compared with 2018 primarily due to lower pension non-service income, partially offset by lower separation costs.







        Tax Expense
                             2019       2018       2017
        Tax expense        $ 1,329     $ 659     $ 5,362
        Effective tax rate    17.6 %     8.8 %      77.2 %
        


The effective tax rate for 2019 was lower than the U.S. federal statutory rate of 21% primarily resulting from the impacts of revised guidance related to U.S. Tax Reform and internal restructuring initiatives that resulted in a $281 million reduction of accrued withholding taxes related to unremitted foreign earnings.







        Net Income Attributable to Honeywell
                                                               2019       2018       2017
        Net income attributable to Honeywell                 $ 6,143    $ 6,765    $ 1,545
        Earnings per share of common stock-assuming dilution $  8.41    $  8.98    $  2.00
        


Earnings per share of common stock-assuming dilution decreased in 2019 compared with 2018 primarily driven by the absence of profit attributable to the spin-offs, higher income tax expense (attributable to a lower income tax benefit related to U.S. Tax Reform and internal restructuring initiatives when compared to the prior year), partially offset by increased operational segment profit and lower repositioning and other charges.







        Review of Business Segments
        We globally manage our business operations through four segments: Aerospace,
        Honeywell Building Technologies, Performance Materials and Technologies, and
        Safety and Productivity Solutions.
                                                                                        % Change
                                                                                   2019           2018
                                          Years Ended December 31,                Versus         Versus
                                     2019            2018           2017           2018           2017
        Aerospace Sales
        Commercial Aviation
        Original Equipment       $     2,997     $    2,833     $    2,475             6  %          14  %
        Commercial Aviation
        Aftermarket                    5,731          5,373          5,103             7  %           5  %
        Defense and Space              5,326          4,665          4,053            14  %          15  %
        Transportation Systems             -          2,622          3,148          (100 )%         (17 )%
        Total Aerospace Sales         14,054         15,493         14,779
        Honeywell Building
        Technologies Sales
        Homes                              -          3,928          4,482          (100 )%         (12 )%
        Buildings                      5,717          5,370          5,295             6  %           1  %
        Total Honeywell Building
        Technologies Sales             5,717          9,298          9,777
        Performance Materials
        and Technologies Sales
        UOP                            2,890          2,845          2,753             2  %           3  %
        Process Solutions              5,146          4,981          4,795             3  %           4  %
        Advanced Materials             2,798          2,848          2,791            (2 )%           2  %
        Total Performance
        Materials and
        Technologies Sales            10,834         10,674         10,339
        Safety and Productivity
        Solutions Sales
        Safety                         2,215          2,278          2,169            (3 )%           5  %
        Productivity Solutions         3,889          4,059          3,470            (4 )%          17  %
        Total Safety and
        Productivity Solutions
        Sales                          6,104          6,337          5,639
        Net Sales                $    36,709     $   41,802     $   40,534
        








        Aerospace
                                     2019           2018          Change           2017          Change
        Net sales                $   14,054     $   15,493            (9 )%    $   14,779             5 %
        Cost of products and
        services sold                 9,398         10,837                         10,320
        Selling, general and
        administrative and other
        expenses                      1,049          1,153                          1,171
        Segment profit           $    3,607     $    3,503             3  %    $    3,288             7 %
                                                         2019 vs. 2018         2018 vs. 2017
                                                                 Segment               Segment
        Factors Contributing to Year-Over-Year Change  Sales      Profit     Sales      Profit
        Organic                                          9  %       21  %     9  %         9  %
        Foreign currency translation                     -  %        -  %     1  %         1  %
        Acquisitions, divestitures and other, net      (18 )%      (18 )%    (5 )%        (3 )%
        Total % Change                                  (9 )%        3  %     5  %         7  %
        


2019 compared with 2018

Commercial Aviation Aftermarket sales increased 7% (increased 7% organic) primarily due to growth in air transport and regional and business aviation.

Defense and Space sales increased 14% (increased 14% organic) primarily driven by growth in U.S. and international defense.

Aerospace segment profit increased primarily due to organic sales volume, price, and productivity, net of inflation, partially offset by the divestiture impacts following the spin-off of the Transportation Systems business. Cost of products and services sold decreased primarily due to the spin-off of the Transportation Systems business and productivity, net of inflation, partially offset by higher sales volume.







        Honeywell Building Technologies
                                     2019           2018          Change          2017          Change
        Net sales                $    5,717     $    9,298           (39 )%   $    9,777            (5 )%
        Cost of products and
        services sold                 3,444          6,066                         6,430
        Selling, general and
        administrative and other
        expenses                      1,108          1,624                         1,697
        Segment profit           $    1,165     $    1,608           (28 )%   $    1,650            (3 )%
                                                         2019 vs. 2018         2018 vs. 2017
                                                                 Segment               Segment
        Factors Contributing to Year-Over-Year Change  Sales      Profit     Sales      Profit
        Organic                                          5  %        8  %     3  %         5  %
        Foreign currency translation                    (2 )%       (2 )%     1  %         1  %
        Acquisitions, divestitures and other, net      (42 )%      (34 )%    (9 )%        (9 )%
        Total % Change                                 (39 )%      (28 )%    (5 )%        (3 )%
        


2019 compared with 2018

Honeywell Building Technologies segment profit decreased primarily due to the divestiture impacts following the spin-off of the Homes and Global Distribution business. This was offset by an increase in organic sales volumes and price, partially offset by inflation. Cost of products and services sold decreased due to the spin-off, partially offset by higher sales volumes.







        Performance Materials and Technologies
                                     2019           2018          Change           2017          Change
        Net sales                $   10,834     $   10,674             1 %     $   10,339             3 %
        Cost of products and
        services sold                 6,989          6,948                          6,764
        Selling, general and
        administrative and other
        expenses                      1,412          1,398                          1,369
        Segment profit           $    2,433     $    2,328             5 %     $    2,206             6 %
                                                      2019 vs. 2018                     2018 vs. 2017
        Factors Contributing to                                  Segment                            Segment
        Year-Over-Year Change                    Sales            Profit           Sales             Profit
        Organic                                      4  %             6  %             2 %               5 %
        Foreign currency translation                (3 )%            (1 )%             1 %               1 %
        Acquisitions, divestitures and
        other, net                                   -                -                - %               - %
        Total % Change                               1  %             5  %             3 %               6 %
        


2019 compared with 2018

Process Solutions sales increased 3% (increased 6% organic) driven primarily by increases in maintenance and migration services, project volumes, field products, and software sales, partially offset by the unfavorable impact of foreign currency translation.

Advanced Materials sales decreased 2% (flat organic) driven primarily by the unfavorable impact of foreign currency translation and decreased volumes in specialty products, partially offset by growth in fluorine products sales.

Performance Materials and Technologies segment profit increased primarily due to productivity, net of inflation, and price, partially offset by higher sales of lower margin products and the impact of foreign currency translation. Cost of products and services sold increased primarily due to higher sales volumes, partially offset by the impact of foreign currency translation and productivity, net of inflation.







        Safety and Productivity Solutions
                                     2019           2018          Change          2017          Change
        Net sales                $    6,104     $    6,337            (4 )%   $    5,639            12 %
        Cost of products and
        services sold                 4,158          4,205                         3,714
        Selling, general and
        administrative and other
        expenses                      1,156          1,100                         1,073
        Segment profit           $      790     $    1,032           (23 )%   $      852            21 %
                                                         2019 vs. 2018         2018 vs. 2017
                                                                 Segment               Segment
        Factors Contributing to Year-Over-Year Change  Sales      Profit     Sales      Profit
        Organic                                        (4 )%       (23 )%     11 %         20 %
        Foreign currency translation                   (2 )%        (2 )%      1 %          1 %
        Acquisitions, divestitures and other, net       2  %         2  %      - %          - %
        Total % Change                                 (4 )%       (23 )%     12 %         21 %
        


2019 compared with 2018

Sales in Productivity Solutions decreased 4% (decreased 6% organic) primarily due to lower organic sales in Productivity Products and the unfavorable impact of foreign currency translation, partially offset by acquisitions.

Safety and Productivity Solutions segment profit decreased as a result of lower sales volumes in Productivity Products, higher sales of lower margin products and the impact of foreign currency translation, partially offset by higher productivity, net of inflation, favorable pricing and acquisitions. Cost of products and services sold decreased primarily due to higher productivity, net of inflation, and the impact of foreign currency translation, partially offset by acquisitions.

LIQUIDITY AND CAPITAL RESOURCES







                                                                  Years Ended December 31,
                                                                2019        2018        2017
        Cash provided by (used for):
        Operating activities                                 $  6,897     $ 6,434     $ 5,966
        Investing activities                                     (533 )     1,027      (3,574 )
        Financing activities                                   (6,600 )    (5,032 )    (3,516 )
        Effect of exchange rate changes on cash                    16        (201 )       340
        Net (decrease) increase in cash and cash equivalents $   (220 )   $ 2,228     $  (784 )
        


2019 compared with 2018

Feb 14, 2020

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