Microsoft Excel LibreOffice Calc

Honeywell International Inc. (HON)

Economic Value Added (EVA)

Difficulty: Advanced

EVA is registered trademark of Stern Stewart.

Economic value added or economic profit is the difference between revenues and costs,where costs include not only expenses, but also cost of capital.

Economic Profit

Honeywell International Inc., economic profit calculation

USD $ in millions

Microsoft Excel LibreOffice Calc
12 months ended Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Net operating profit after taxes (NOPAT)1 7,727  4,171  5,413  5,103  4,474 
Cost of capital2 11.32% 11.13% 11.09% 11.45% 11.75%
Invested capital3 42,543  40,104  40,005  35,350  29,500 
Economic profit4 2,912  (291) 975  1,054  1,006 

Based on: 10-K (filing date: 2019-02-08), 10-K (filing date: 2018-02-09), 10-K (filing date: 2017-02-10), 10-K (filing date: 2016-02-12), 10-K (filing date: 2015-02-13).

2018 Calculations

1 NOPAT. See Details »

2 Cost of capital. See Details »

3 Invested capital. See Details »

4 Economic profit = NOPAT – Cost of capital × Invested capital
= 7,727 – 11.32% × 42,543 = 2,912

Item Description The company
Economic profit Economic profit is a measure of corporate performance computed by taking the spread between the return on invested capital and the cost of capital, and multiplying by the invested capital. Honeywell International Inc.’s economic profit declined from 2016 to 2017 but then increased from 2017 to 2018 exceeding 2016 level.

Net Operating Profit after Taxes (NOPAT)

Honeywell International Inc., NOPAT calculation

USD $ in millions

Microsoft Excel LibreOffice Calc
12 months ended Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Net income attributable to Honeywell 6,765  1,655  4,809  4,768  4,239 
Deferred income tax expense (benefit)1 (586) 2,294  76  315  132 
Increase (decrease) in allowance for doubtful accounts2 (5) (70) 43  (11) 26 
Increase (decrease) in LIFO reserve3 –  (26) (51) (52) 2 
Increase (decrease) in customer advances and deferred income4 1,393  42  270  (225) (29)
Increase (decrease) in obligations for product warranties and product performance guarantees5 (98) (79) 71  13  (2)
Increase (decrease) in repositioning reserves6 53  182  (19) 35  (32)
Increase (decrease) in equity equivalents7 757  2,343  390  75  97 
Interest and other financial charges 367  316  338  310  318 
Interest expense, operating lease obligations8 29  34  41  72  79 
Adjusted interest and other financial charges 396  350  379  382  397 
Tax benefit of interest and other financial charges9 (83) (123) (133) (134) (139)
Adjusted interest and other financial charges, after taxes10 313  228  246  248  258 
(Gain) loss on marketable securities –  –  –  –  (221)
Interest income (217) (151) (106) (104) (102)
Investment income, before taxes (217) (151) (106) (104) (323)
Tax expense (benefit) of investment income11 46  53  37  36  113 
Investment income, after taxes12 (171) (98) (69) (68) (210)
Net income (loss) attributable to noncontrolling interest 63  43  37  79  90 
Net operating profit after taxes (NOPAT) 7,727  4,171  5,413  5,103  4,474 

Based on: 10-K (filing date: 2019-02-08), 10-K (filing date: 2018-02-09), 10-K (filing date: 2017-02-10), 10-K (filing date: 2016-02-12), 10-K (filing date: 2015-02-13).

2018 Calculations

1 Elimination of deferred tax expense. See Details »

2 Addition of increase (decrease) in allowance for doubtful accounts.

3 Addition of increase (decrease) in LIFO reserve. See Details »

4 Addition of increase (decrease) in customer advances and deferred income.

5 Addition of increase (decrease) in obligations for product warranties and product performance guarantees.

6 Addition of increase (decrease) in repositioning reserves.

7 Addition of increase (decrease) in equity equivalents to net income attributable to Honeywell.

8 Addition of interest expense on capitalized operating leases. See Details »

9 Tax benefit of interest and other financial charges = Adjusted interest and other financial charges × Statutory income tax rate
= 396 × 21.00% = 83

10 Addition of after taxes interest expense to net income attributable to Honeywell.

11 Tax expense (benefit) of investment income = Investment income, before tax × Statutory income tax rate
= 217 × 21.00% = 46

12 Elimination of after taxes investment income.

Item Description The company
NOPAT Net operating profit after taxes is income from operations, but after removement of taxes calculated on cash basis that are relevant to operating income. Honeywell International Inc.’s NOPAT declined from 2016 to 2017 but then increased from 2017 to 2018 exceeding 2016 level.

Cash Operating Taxes

Honeywell International Inc., cash operating taxes calculation

USD $ in millions

Microsoft Excel LibreOffice Calc
12 months ended Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Tax expense 659  5,204  1,601  1,739  1,489 
Less: Deferred income tax expense (benefit) (586) 2,294  76  315  132 
Add: Tax savings from interest and other financial charges 83  123  133  134  139 
Less: Tax imposed on investment income 46  53  37  36  113 
Cash operating taxes 1,283  2,980  1,620  1,521  1,383 

Based on: 10-K (filing date: 2019-02-08), 10-K (filing date: 2018-02-09), 10-K (filing date: 2017-02-10), 10-K (filing date: 2016-02-12), 10-K (filing date: 2015-02-13).

Item Description The company
Cash operating taxes Cash operating taxes are estimated by adjusting income tax expense for changes in deferred taxes and tax benefit from the interest deduction. Honeywell International Inc.’s cash operating taxes increased from 2016 to 2017 but then declined significantly from 2017 to 2018.

Invested Capital

Honeywell International Inc., invested capital calculation (financing approach)

USD $ in millions

Microsoft Excel LibreOffice Calc
Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Commercial paper and other short-term borrowings 3,586  3,958  3,366  5,937  1,698 
Current maturities of long-term debt 2,872  1,351  227  577  939 
Long-term debt, excluding current maturities 9,756  12,573  12,182  5,554  6,046 
PV of operating lease payments1 789  1,040  1,017  1,007  1,078 
Total reported debt & leases 17,003  18,922  16,792  13,075  9,761 
Total Honeywell shareowners’ equity 18,180  17,276  19,369  18,283  17,657 
Net deferred tax (assets) liabilities2 1,331  2,658  139  275  (863)
Allowance for doubtful accounts3 197  202  305  262  273 
LIFO reserve4 39  39  65  116  168 
Customer advances and deferred income5 3,667  2,274  2,232  1,962  2,187 
Obligations for product warranties and product performance guarantees6 310  408  487  416  403 
Repositioning reserves7 566  513  331  350  315 
Equity equivalents8 6,110  6,094  3,559  3,381  2,483 
Accumulated other comprehensive (income) loss, net of tax9 3,437  2,235  2,714  2,535  1,459 
Redeemable noncontrolling interest 7  5  3  290  219 
Noncontrolling interest 178  163  178  135  127 
Adjusted total Honeywell shareowners’ equity 27,912  25,773  25,823  24,624  21,945 
Construction in progress10 (588) (675) (940) (848) (727)
Available for sale investments11 (1,784) (3,916) (1,670) (1,501) (1,479)
Invested capital 42,543  40,104  40,005  35,350  29,500 

Based on: 10-K (filing date: 2019-02-08), 10-K (filing date: 2018-02-09), 10-K (filing date: 2017-02-10), 10-K (filing date: 2016-02-12), 10-K (filing date: 2015-02-13).

1 Addition of capitalized operating leases. See Details »

2 Elimination of deferred taxes from assets and liabilities. See Details »

3 Addition of allowance for doubtful accounts receivable.

4 Addition of LIFO reserve. See Details »

5 Addition of customer advances and deferred income.

6 Addition of obligations for product warranties and product performance guarantees.

7 Addition of repositioning reserves.

8 Addition of equity equivalents to total Honeywell shareowners’ equity.

9 Removal of accumulated other comprehensive income.

10 Subtraction of construction in progress.

11 Subtraction of available for sale investments.

Item Description The company
Invested capital Capital is an approximation of the economic book value of all cash invested in going-concern business activities. Honeywell International Inc.’s invested capital increased from 2016 to 2017 and from 2017 to 2018.

Cost of Capital

Honeywell International Inc., cost of capital calculations

Fair Value1 Weights Cost of Capital
Equity2 108,349  108,349  ÷ 125,857  = 0.86 0.86 × 12.81% = 11.03%
Debt3 16,719  16,719  ÷ 125,857  = 0.13 0.13 × 2.62% × (1 – 21.00%) = 0.27%
PV of operating lease payments4 789  789  ÷ 125,857  = 0.01 0.01 × 2.62% × (1 – 21.00%) = 0.01%
Total: 125,857  1.00 11.32%

Based on: 10-K (filing date: 2019-02-08).

1 USD $ in millions

2 Equity. See Details »

3 Debt. See Details »

4 PV of operating lease payments. See Details »

Fair Value1 Weights Cost of Capital
Equity2 111,221  111,221  ÷ 130,914  = 0.85 0.85 × 12.81% = 10.88%
Debt3 18,653  18,653  ÷ 130,914  = 0.14 0.14 × 2.48% × (1 – 35.00%) = 0.23%
PV of operating lease payments4 1,040  1,040  ÷ 130,914  = 0.01 0.01 × 2.48% × (1 – 35.00%) = 0.01%
Total: 130,914  1.00 11.13%

Based on: 10-K (filing date: 2018-02-09).

1 USD $ in millions

2 Equity. See Details »

3 Debt. See Details »

4 PV of operating lease payments. See Details »

Fair Value1 Weights Cost of Capital
Equity2 92,752  92,752  ÷ 110,143  = 0.84 0.84 × 12.81% = 10.79%
Debt3 16,374  16,374  ÷ 110,143  = 0.15 0.15 × 2.98% × (1 – 35.00%) = 0.29%
PV of operating lease payments4 1,017  1,017  ÷ 110,143  = 0.01 0.01 × 2.98% × (1 – 35.00%) = 0.02%
Total: 110,143  1.00 11.09%

Based on: 10-K (filing date: 2017-02-10).

1 USD $ in millions

2 Equity. See Details »

3 Debt. See Details »

4 PV of operating lease payments. See Details »

Fair Value1 Weights Cost of Capital
Equity2 79,610  79,610  ÷ 93,275  = 0.85 0.85 × 12.81% = 10.93%
Debt3 12,658  12,658  ÷ 93,275  = 0.14 0.14 × 5.45% × (1 – 35.00%) = 0.48%
PV of operating lease payments4 1,007  1,007  ÷ 93,275  = 0.01 0.01 × 5.45% × (1 – 35.00%) = 0.04%
Total: 93,275  1.00 11.45%

Based on: 10-K (filing date: 2016-02-12).

1 USD $ in millions

2 Equity. See Details »

3 Debt. See Details »

4 PV of operating lease payments. See Details »

Fair Value1 Weights Cost of Capital
Equity2 81,694  81,694  ÷ 92,288  = 0.89 0.89 × 12.81% = 11.34%
Debt3 9,515  9,515  ÷ 92,288  = 0.10 0.10 × 5.55% × (1 – 35.00%) = 0.37%
PV of operating lease payments4 1,078  1,078  ÷ 92,288  = 0.01 0.01 × 5.55% × (1 – 35.00%) = 0.04%
Total: 92,288  1.00 11.75%

Based on: 10-K (filing date: 2015-02-13).

1 USD $ in millions

2 Equity. See Details »

3 Debt. See Details »

4 PV of operating lease payments. See Details »

Economic Spread

Honeywell International Inc., economic spread calculation

Microsoft Excel LibreOffice Calc
Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Selected Financial Data (USD $ in millions)
Economic profit1 2,912  (291) 975  1,054  1,006 
Invested capital2 42,543  40,104  40,005  35,350  29,500 
Ratio
Economic spread3 6.85% -0.73% 2.44% 2.98% 3.41%

Based on: 10-K (filing date: 2019-02-08), 10-K (filing date: 2018-02-09), 10-K (filing date: 2017-02-10), 10-K (filing date: 2016-02-12), 10-K (filing date: 2015-02-13).

2018 Calculations

1 Economic profit. See Details »

2 Invested capital. See Details »

3 Economic spread = 100 × Economic profit ÷ Invested capital
= 100 × 2,912 ÷ 42,543 = 6.85%

Ratio Description The company
Economic spread The ratio of economic profit to invested capital, also equal to the difference between return on invested capital (ROIC) and cost of capital. Honeywell International Inc.’s economic spread deteriorated from 2016 to 2017 but then improved from 2017 to 2018 exceeding 2016 level.

Economic Profit Margin

Honeywell International Inc., economic profit margin calculation

Microsoft Excel LibreOffice Calc
Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Selected Financial Data (USD $ in millions)
Economic profit1 2,912  (291) 975  1,054  1,006 
Net sales 41,802  40,534  39,302  38,581  40,306 
Add: Increase (decrease) in customer advances and deferred income 1,393  42  270  (225) (29)
Adjusted net sales 43,195  40,576  39,572  38,356  40,277 
Ratio
Economic profit margin2 6.74% -0.72% 2.46% 2.75% 2.50%

Based on: 10-K (filing date: 2019-02-08), 10-K (filing date: 2018-02-09), 10-K (filing date: 2017-02-10), 10-K (filing date: 2016-02-12), 10-K (filing date: 2015-02-13).

2018 Calculations

1 Economic profit. See Details »

2 Economic profit margin = 100 × Economic profit ÷ Adjusted net sales
= 100 × 2,912 ÷ 43,195 = 6.74%

Ratio Description The company
Economic profit margin The ratio of economic profit to sales. It is the company’s profit margin covering income efficiency and asset management. Economic profit margin is not biased in favor of capital-intensive business models, because any added capital is a cost to the economic profit margin. Honeywell International Inc.’s economic profit margin deteriorated from 2016 to 2017 but then improved from 2017 to 2018 exceeding 2016 level.