Honeywell International Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing is an annual report, not a standalone fourth-quarter filing; selected quarterly results are noted below. Dollar amounts are in millions unless otherwise stated.
Business context and reporting period
Honeywell is a diversified global technology and manufacturing company operating through Aerospace, Automation and Control Solutions (ACS), Performance Materials and Technologies (PMT), and Transportation Systems. Approximately 55% of 2013 sales were generated outside the United States. Segment sales shares were approximately 31% Aerospace, 42% ACS, 17% PMT, and 10% Transportation Systems.
Key financial results
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net sales | $39,055 | $37,665 | +4% |
| Gross profit / gross margin | $10,691 / 27.4% | $9,374 / 24.9% | Margin +2.5 percentage points |
| Income from continuing operations before tax | $5,412 | $3,875 | +40% |
| Net income attributable to Honeywell | $3,924 | $2,926 | +34% |
| Diluted EPS | $4.92 | $3.69 | +33% |
| Operating cash flow | $4,335 | $3,517 | +23% |
| Capital expenditures | $947 | $884 | +7% |
| Tax expense / effective tax rate | $1,450 / 26.8% | $944 / 24.4% | Rate +2.4 percentage points |
2013 net income margin was approximately 10.0%. Cash and equivalents were $6,422 at year-end; total debt was $8,829, comprising $2,028 short-term and $6,801 long-term. Current assets were $21,164 and current liabilities $14,181. Operating cash flow less capital expenditures was approximately $3,388. Cash and equivalents exceeded total debt by approximately $2,407.
Segment profit rose 8% overall to $6,351. Aerospace sales were $11,980 and profit $2,372; ACS $16,556 and $2,437; PMT $6,764 and $1,271; Transportation Systems $3,755 and $498. These are segment-profit measures, not consolidated operating income.
Material changes versus prior period
- Revenue growth reflected approximately 1% volume, 1% pricing, and 2% acquisitions/divestitures; foreign exchange was approximately neutral.
- ACS revenue grew 4% and segment profit 9%; PMT revenue grew 9% and profit 10%, with acquisitions contributing materially to PMT growth. Transportation Systems revenue grew 5% and profit 15%. Aerospace revenue was essentially flat and profit rose 4%, while defense and space sales declined 5%.
- Gross margin improvement was substantially influenced by lower pension expense, especially the pension mark-to-market charge: $51 in 2013 versus $957 in 2012 and $1,802 in 2011. Management also cited operational improvement across segments.
- Operating cash flow increased by $818, principally reflecting lower pension contributions and higher earnings before the non-cash pension mark-to-market adjustment, partly offset by higher cash taxes.
- Year-end cash increased to $6,422 from $4,634. Total debt increased to $8,829 from $7,496; commercial paper outstanding rose to $1,299 from $400.
- Fourth-quarter 2013 sales were $10,387 and net income attributable to Honeywell was $947, versus $9,581 and $251, respectively, in fourth-quarter 2012. Diluted EPS was $1.19 versus $0.32.
Outlook, management commentary, risks and unusual items
- Management described 2013 as a year of growth and improved profitability, emphasizing productivity, research and development, repositioning, acquisitions, and expansion in higher-growth markets. The filing does not provide a clear consolidated 2014 revenue or EPS guidance figure.
- For 2014, the company expected a slight decline in defense and space revenue due to anticipated U.S. government spending reductions, but did not expect a significant effect on overall operating results. Backlog was $16,523, of which approximately $12,262 was expected to be filled in 2014; management cautioned that orders may be canceled.
- Management expected approximately $150 of incremental pretax repositioning savings in 2014, about $175 of repositioning cash spending, $1,200 of capital expenditures, and approximately $300 of environmental remediation spending. The company intended to continue quarterly dividends and repurchases, subject to conditions.
- 2013 included a $195 realized gain on the sale of B/E Aerospace shares and a $28 pretax loss related to the planned Friction Materials divestiture. The sale, for approximately $155, was agreed in January 2014 and expected to close in the second half of 2014, subject to conditions.
- Repositioning and other charges totaled $663, including $201 of net repositioning charges, $181 of asbestos litigation charges net of insurance, and $272 of environmental liabilities. Environmental remediation liabilities were $643 at year-end; asbestos liabilities were $1,611, with $672 of related insurance recoveries recorded. Management noted uncertainty in the timing and ultimate amounts of these obligations.
- The NARCO asbestos trust became effective in April 2013. Honeywell’s future funding obligations include annual caps, with additional specified settlement obligations; the company said it could not reasonably estimate NARCO claims beyond 2018. A Department of Justice investigation concerning parts used in the F-35 program was ongoing; the company said it was cooperating and could not predict the outcome.
- Other principal risks include cyclicality in aerospace, construction, industrial, chemical and automotive markets; government budget and contract risks; raw-material price and supplier disruption; foreign exchange and international operations; pension assumptions and funding; tax exposures; cybersecurity; and environmental, product-liability and other litigation. Approximately $13.5 billion of foreign earnings were intended to remain permanently reinvested outside the U.S.
Important facts for investors to verify
- How much of earnings growth and margin expansion is sustainable after the unusually large year-over-year reduction in pension mark-to-market expense?
- Whether 2014 cash generation covers planned capital spending, dividends, buybacks, acquisitions, pension contributions, and asbestos and environmental payments.
- The realized performance and integration of Intermec and RAE, acquired for a combined net cost of approximately $945, and the eventual terms and completion of the Friction Materials sale.
- Developments in NARCO and Bendix asbestos claims, insurance recoveries, environmental remediation estimates, and the F-35 investigation.
- The maturity and refinancing profile of debt, including commercial paper and the $600 of notes due in 2014, alongside liquidity access and the company’s substantial foreign cash holdings.