HONEYWELL INTERNATIONAL INC annual report, FY2011

Business context and reporting period

Honeywell International Inc. filed this Form 10-K for the fiscal year ended December 31, 2011. It is a diversified global technology and manufacturing company with four reportable segments: Aerospace; Automation and Control Solutions (ACS); Performance Materials and Technologies (PMT); and Transportation Systems. The filing presents full-year results; fourth-quarter data are also provided.

Financial performance and position

Unless otherwise stated, dollar amounts are in millions.

• Sales rose 13% year over year: 6% volume, 2% price, 3% net acquisitions/divestitures, and 2% foreign exchange.
• Segment sales and profit: Aerospace $11,475 / $2,023; ACS $15,535 / $2,083; PMT $5,659 / $1,042; Transportation Systems $3,859 / $485. Segment profit increased in all four segments versus 2010.
• Operating cash flow declined $1,370, mainly reflecting $1,050 of increased voluntary U.S. pension contributions, lower deferred-tax effects, and higher cash tax payments. Investing used $611; financing used $1,114; cash increased by $1,048 overall.
• Year-end current assets were $16,134 and current liabilities $12,275. The company reported $599 of commercial paper outstanding and had a $2,800 committed five-year credit facility with no borrowings at year-end.
• Capital expenditures were $798 in 2011; the company expected approximately $1,100 in 2012. Dividends paid were $1,091, and the annual dividend per share was $1.37.

Material changes versus the prior comparable period

• Sales increased 13%, while gross margin fell 1.8 percentage points. Management attributed the margin decline chiefly to higher pension and postretirement expense, including the pension mark-to-market charge, and repositioning costs.
• Continuing income attributable to Honeywell decreased by $86, despite stronger segment profit. The 2011 pension mark-to-market adjustment was $1,802, versus $471 in 2010; repositioning and other charges rose to $743 from $598.
• Net income increased $45, supported by $209 of discontinued-operations income, including a $178 after-tax gain on the sale of the Consumer Products Group (CPG). Diluted EPS from continuing operations decreased, while total diluted EPS increased slightly.
• Operating cash flow was lower, while cash balances increased. The company issued $1,400 of long-term notes, repaid debt, repurchased $1,085 of shares, and made $1,650 of voluntary U.S. pension contributions.
• CPG was sold in July for approximately $955 cash proceeds. Honeywell also acquired EMS for approximately $513 and King’s Safetywear for approximately $331. The Specialty Materials segment was renamed PMT.

Outlook, commentary, risks, and unusual items

• For 2012, management expected slight declines in defense and space revenue. It anticipated ACS sales growth and Transportation Systems turbocharger growth to moderate in the first quarter; PMT Advanced Materials growth was expected to moderate in the first half, amid slowing demand and increased refrigerant supply.
• Management forecast approximately $150 of incremental pretax savings from repositioning actions in 2012, with approximately $150 of related cash spending. Planned 2012 pension contributions were $800–$1,000; other expected cash needs included about $1,200 in dividends, $300 in environmental remediation, and $240 in asbestos claims, partly offset by approximately $75 of asbestos insurance receipts.
• Key exposures include cyclical aerospace, construction, industrial, refining and automotive demand; U.S. defense appropriations; volatile raw-material costs; supplier concentration and interruptions; foreign exchange and international conditions; and pension-market and discount-rate sensitivity. The company noted that a substantial portion of cash was held by foreign subsidiaries and intended to remain permanently invested abroad.
• Environmental liabilities were recorded at $723 at year-end; estimated 2012 remediation spending was approximately $300. Asbestos-related liabilities were $1,736, with $780 of recorded insurance recoveries. Management cautioned that actual claim costs, insurance recovery and timing could differ from estimates.
• Federal authorities investigated alleged Clean Air Act and permit violations at the Hopewell, Virginia facility, including benzene waste operations and emissions. Honeywell was negotiating a resolution and stated it did not expect the matter to materially adversely affect consolidated financial position, results or operating cash flows.
• Other notable items include the Q4 2011 attributable loss of $310, primarily in the context of the significant annual pension mark-to-market charge; a $29 pretax loss on early debt redemption; and $127 of long-lived-asset impairment charges. The filing reports effective internal control over financial reporting and an unqualified audit opinion.

Important facts for investors to verify

1. Reconcile full-year and quarterly earnings, especially the $1,802 pension mark-to-market adjustment and the Q4 attributable loss, and assess sensitivity to pension assumptions and asset returns.
2. Review cash conversion and the effects of pension funding, taxes, working capital, capital spending, dividends, and share repurchases on liquidity and debt.
3. Assess whether segment growth and profit trends support management’s 2012 outlook, including expected moderation in ACS, PMT Advanced Materials, and turbocharger sales.
4. Track the development of environmental and asbestos liabilities, associated cash payments, and the timing and collectability of insurance recoveries.
5. Confirm acquisition integration and divestiture effects, and distinguish continuing results from the CPG discontinued-operations gain.