Honeywell (NYSE: HON) today announced financial results for the third quarter of 2018 and revised its full-year 2018 guidance to reflect the impact of the spin-offs.
“Honeywell continued to build on its strong first-half performance, delivering exceptional results across the board. Organic sales were up 7 percent driven by continued double-digit growth in our warehouse automation business; strong growth across the Aerospace business; demand for Solstice® low global-warming materials and short-cycle Process Solutions software and services; and continued momentum in Homes and ADI global distribution. The increased volumes, coupled with our operational excellence initiatives, drove 70 basis points of segment margin expansion, which is 20 basis points above the high end of our guidance. This resulted in adjusted earnings per share1 of $2.03, up 17 percent year-over-year,” said Darius Adamczyk, Chairman and Chief Executive Officer of Honeywell. “In the third quarter, we generated more than $1.8 billion of adjusted free cash flow2, up 51 percent year-over-year, with conversion of 119 percent. We also repurchased approximately $600 million in Honeywell shares in the third quarter and increased our dividend by 10 percent – the ninth double-digit increase since 2010. Through the third quarter of 2018, we have committed more than $4.5 billion in capital deployment through share repurchases, dividends and acquisitions.
“This has been an exciting year for Honeywell. The portfolio changes we announced at this time last year are nearly complete, and we recently announced the acquisition of Transnorm, a leading provider of warehouse automation solutions with a large and growing installed base and an attractive aftermarket. We are well positioned to deliver strong results in 2019 and are committed to delivering outstanding returns for our shareowners over the long term,” Adamczyk concluded.
The company revised its full-year guidance3 to reflect the strong operational performance in the first three quarters of 2018, the completion of the spin-off of Garrett Motion Inc. (NYSE: GTX), which separated from Honeywell on October 1, and the expected completion of the spin-off of Resideo Technologies, Inc. on October 29. Sales are now expected to be $41.7 billion to $41.8 billion; organic sales growth is now expected to be approximately 6 percent; segment margin expansion is now expected to be 50 to 60 basis points; and adjusted earnings per share4 is now expected to be $7.95 to $8.00. The new guidance range takes into account $0.27 of net earnings dilution from the separation of the Garrett and Resideo businesses, partially offset by a $0.07 increase to reflect the company’s improved fourth-quarter outlook.
The company also updated its cash flow guidance. A summary of the company’s full-year guidance changes can be found in Table 1.
Honeywell will discuss the results during an investor conference call today starting at 8:30 a.m. Eastern Daylight Time.
Honeywell sales for the third quarter were up 6 percent on a reported basis and up 7 percent on an organic basis. The difference between reported and organic sales primarily relates to the impact of foreign currency translation. Third-quarter reported earnings per share was $3.11, which includes $233 million of separation costs (including net tax impacts) associated with the Garrett and Resideo spin-offs and a $1 billion favorable adjustment to the charge the company took in the fourth quarter of 2017 related to U.S. tax legislation. The third-quarter financial results can be found in Tables 2 and 3.
Aerospace sales for the third quarter were up 10 percent on an organic basis driven by robust demand from business aviation original equipment manufacturers, continued strength in the U.S. and international defense business, growth in the air transport and business aviation aftermarket, and demand for light vehicle gas turbochargers in Transportation Systems (which was spun-off as Garrett Motion Inc. effective October 1). Segment margin expanded 80 basis points to 22.1 percent, primarily driven by higher defense and aftermarket volumes, Commercial Excellence and lower customer incentives.
Home and Building Technologies sales for the third quarter were up 3 percent on an organic basis driven by continued strength in the ADI Global Distribution business, demand for commercial fire products and residential thermal solutions, and growth in Building Solutions. Segment margin expanded 10 basis points to 17.1 percent, primarily driven by Commercial Excellence and productivity (including benefits from previously funded and executed restructuring), largely offset by inflation and unfavorable mix.
Performance Materials and Technologies sales for the third quarter were up 4 percent on an organic basis driven by demand for Solstice® low global warming products in Advanced Materials; short-cycle products, services and software demand in Process Solutions; and growth in engineering sales in UOP. Segment margin contracted, as anticipated, by 70 basis points to 21.2 percent, primarily driven by unfavorable mix in UOP.
Safety and Productivity Solutions sales for the third quarter were up 12 percent on an organic basis driven by continued double-digit sales growth in the Intelligrated business, strong demand for new mobility solutions in productivity products, and higher volumes in sensing and industrial safety. Segment margin expanded 150 basis points to 16.6 percent, primarily driven by Commercial Excellence, productivity and higher sales volumes.
To participate on the conference call, please dial (866) 548-4713 (domestic) or (323) 794-2093 (international) approximately ten minutes before the 8:30 a.m. EDT start. Please mention to the operator that you are dialing in for Honeywell’s third quarter 2018 earnings call or provide the conference code HON3Q18. The live webcast of the investor call as well as related presentation materials will be available through the “Investor Relations” section of the company’s Website (www.honeywell.com/investor). Investors can hear a replay of the conference call from 12:30 p.m. EDT, October 19, until 12:30 p.m. EDT, October 26, by dialing (888) 203-1112 (domestic) or (719) 457-0820 (international). The access code is 5040626.
TABLE 1: FULL-YEAR 2018 GUIDANCE – NOW UPDATED TO REFLECT SPIN-OFFS5
|Previous Guidance||Current Guidance|
|Sales||$43.1B – $43.6B||$41.7B – $41.8B|
|Organic Growth||5% – 6%||~ 6%|
|Segment Margin||19.4% – 19.6%||19.5% – 19.6%|
|Expansion||Up 40 – 60 bps||Up 50 – 60 bps|
|Adjusted Earnings Per Share||$8.10 – $8.20||$7.95 – $8.00|
|Earnings Growth||13% – 15%||11% – 12%|
|Operating Cash Flow||N/A||$6.2B – $6.8B|
|Growth||4% – 14%|
|Adjusted Free Cash Flow||$5.6B – $6.2B||$5.8B – $6.2B|
|Growth||13% – 26%||18% – 26%|
TABLE 2: SUMMARY OF FINANCIAL RESULTS – TOTAL HONEYWELL
|3Q 2017||3Q 2018||Change|
|Segment Margin||18.7%||19.4%||70 bps|
|Operating Income Margin||15.2%||15.6%||40 bps|
|Earnings Per Share|
|Adjusted (Excluding Separation Costs of $233M and $1B
Favorable Adjustment to the 4Q17 U.S. Tax Legislation Charge)
|Cash Flow from Operations||1,407||1,878||33%|
|Adjusted Free Cash Flow (Excluding Separation Cost Impacts of $114M)||1,195||1,809||51%|
TABLE 3: SUMMARY OF FINANCIAL RESULTS – SEGMENTS
|AEROSPACE||3Q 2017||3Q 2018||Change|
|Segment Margin||21.3%||22.1%||80 bps|
|HOME AND BUILDING TECHNOLOGIES|
|Segment Margin||17.0%||17.1%||10 bps|
|PERFORMANCE MATERIALS AND TECHNOLOGIES|
|Segment Margin||21.9%||21.2%||(70) bps|
|SAFETY AND PRODUCTIVITY SOLUTIONS|
|Segment Margin||15.1%||16.6%||150 bps|
1 Adjusted EPS and adjusted EPS V% excludes separation costs related to the spin-offs of Resideo and Garrett, and adjustments to the 4Q17 U.S. tax legislation charge.
2 Adjusted free cash flow, associated conversion and adjusted free cash flow V% exclude impacts from separation costs related to the spin-offs. Conversion also excludes adjustments to the 4Q17 U.S. tax legislation charge.
3 As discussed in the attached reconciliations, we do not publish margin or EPS guidance on a GAAP basis.
4 Adjusted EPS guidance excludes pension mark-to-market, separation costs related to the spin-offs of Resideo and Garrett, and adjustments to the 4Q17 U.S. tax legislation charge.
5 Guidance reflects the completion of the spin-off of Garrett Motion Inc. on Oct. 1 and the expected completion of the spin-off of Resideo Technologies, Inc. on Oct. 29. Guidance for EPS and EPS V% excludes pension mark-to-market, separation costs related to the spin-offs, and the 4Q17 U.S. tax legislation charge and adjustments to such charge; guidance for adjusted free cash flow and adjusted free cash flow V% exclude impacts from separation costs related to the spin-offs. As discussed in the attached reconciliation, we do not publish margin or EPS guidance on a GAAP basis.
Honeywell (www.honeywell.com) is a Fortune 100 software-industrial company that delivers industry specific solutions that include aerospace and automotive products and services; control technologies for buildings, homes, and industry; and performance materials globally. Our technologies help everything from aircraft, cars, homes and buildings, manufacturing plants, supply chains, and workers become more connected to make our world smarter, safer, and more sustainable. For more news and information on Honeywell, please visit www.honeywell.com/newsroom.
This release contains certain statements that may be deemed “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical fact, that address activities, events or developments that we or our management intends, expects, projects, believes or anticipates will or may occur in the future are forward-looking statements. Such statements are based upon certain assumptions and assessments made by our management in light of their experience and their perception of historical trends, current economic and industry conditions, expected future developments and other factors they believe to be appropriate. The forward-looking statements included in this release are also subject to a number of material risks and uncertainties, including but not limited to economic, competitive, governmental, and technological factors affecting our operations, markets, products, services and prices, as well as the ability to effect the Resideo separation. Such forward-looking statements are not guarantees of future performance, and actual results, developments and business decisions may differ from those envisaged by such forward-looking statements, including with respect to any changes in or abandonment of the proposed Resideo separation. We identify the principal risks and uncertainties that affect our performance in our Form 10-K and other filings with the Securities and Exchange Commission.
This release contains financial measures presented on a non-GAAP basis. Honeywell’s non-GAAP financial measures used in this release are as follows: segment profit, on an overall Honeywell basis, a measure by which we assess operating performance, which we define as operating income adjusted for certain items as presented in the Appendix; segment margin, on an overall Honeywell basis, which we define as segment profit divided by sales; organic sales growth, which we define as sales growth less the impacts from foreign currency translation, acquisitions and divestitures for the first 12 months following transaction date, and impacts from adoption of the new accounting guidance on revenue from contracts with customers that arise solely due to non-comparable accounting treatment of contracts existing in the prior period; adjusted free cash flow, which we define as cash flow from operations less capital expenditures and which we adjust to exclude the impact of separation costs related to the spin-offs of Resideo and Garrett, if and as noted in the release; adjusted free cash flow conversion, which we define as adjusted free cash flow divided by net income attributable to Honeywell, excluding pension mark-to-market expenses, separation costs related to the spin-offs, the 4Q17 U.S. tax legislation charge, and adjustments to such charge, if and as noted in the release; and adjusted earnings per share, which we adjust to exclude pension mark-to-market expenses, as well as for other components, such as separation costs related to the spin-offs, the 4Q17 U.S. tax legislation charge, and adjustments to such charge, if and as noted in the release. Other than references to reported earnings per share, all references to earnings per share in this release are so adjusted. The respective tax rates applied when adjusting earnings per share for these items are identified in the release or in the reconciliations presented in the Appendix. Management believes that, when considered together with reported amounts, these measures are useful to investors and management in understanding our ongoing operations and in the analysis of ongoing operating trends. These metrics should be considered in addition to, and not as replacements for, the most comparable GAAP measure. Refer to the Appendix attached to this release for reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures.