Honeywell International Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This filing reports full-year results; quarterly figures below are included where relevant. Honeywell is a diversified industrial technology and manufacturing company operating through Aerospace, Automation and Control Solutions (ACS), Performance Materials and Technologies (PMT), and Transportation Systems.
Financial performance and position
All dollar amounts are in millions, except per-share data.
| Metric | 2012 | 2011 | Change / context |
|---|---|---|---|
| Net sales | $37,665 | $36,529 | Up 3%; volume +2%, price +1%, acquisitions/divestitures +2%, foreign exchange −2% |
| Gross profit / margin | $9,374 / 24.9% | $7,973 / 21.8% | Margin up 3.1 percentage points |
| Income from continuing operations attributable to Honeywell | $2,926 | $1,858 | Up approximately 58% |
| Diluted continuing-operations EPS | $3.69 | $2.35 | Up approximately 57% |
| Effective tax rate | 24.4% | 18.3% | Higher year over year |
| Operating cash flow | $3,517 | $2,833 | Up 24% |
| Capital expenditures | $884 | $798 | Up 11% |
| Total debt at year-end | $7,496 | $7,555 | Down $59 |
| Cash and cash equivalents at year-end | $4,634 | $3,698 | Up $936 |
Year-end current assets were $17,598 and current liabilities $13,045, giving a current ratio of approximately 1.35. The company reported $400 of commercial paper outstanding and had a $3,000 revolving credit agreement with no borrowings. A substantial portion of cash was held by foreign subsidiaries and intended to be permanently reinvested abroad.
Segment sales and profit: Aerospace $12,040 and $2,279; ACS $15,880 and $2,232; PMT $6,184 and $1,154; Transportation Systems $3,561 and $432. Segment profit rose 10% overall. Aerospace, ACS, and PMT segment profit increased 13%, 7%, and 11%, respectively; Transportation Systems profit fell 11%.
In the fourth quarter, sales were $9,581 and net income attributable to Honeywell was $251, or $0.32 diluted EPS. Fourth-quarter gross profit was $1,900. The filing’s quarterly table shows fourth-quarter 2011 net loss attributable to Honeywell of $310; the filing attributes substantial year-to-year earnings volatility in part to pension mark-to-market adjustments.
Material changes versus the prior comparable period
- Revenue growth moderated to 3% from 13% in 2011, with foreign exchange reducing 2012 reported growth by 2 percentage points.
- Gross margin expanded, primarily reflecting lower pension expense—including a $957 pension mark-to-market charge versus $1,802 in 2011—and lower repositioning charges. The company cautioned that pension charges can be volatile.
- Operating cash flow increased by $684, principally due to lower pension contributions and higher earnings before the non-cash pension mark-to-market adjustment; higher cash taxes partly offset the improvement.
- Aerospace commercial sales increased, while defense and space sales declined 3%. PMT grew on UOP activity and acquisitions. Transportation Systems sales fell 8%, reflecting weaker European vehicle production and unfavorable foreign exchange.
- Year-end debt was broadly stable, while shareowners’ equity rose to $13,065 from $10,902. The company repurchased $317 of shares in 2012, compared with $1,085 in 2011, and paid $1,211 in cash dividends.
Outlook, risks, contingencies, and unusual items
- Outlook: No consolidated revenue or EPS guidance is provided in the supplied filing text. Management described 2013 priorities as profitable growth, margin expansion, cash conversion, productivity, and investment in high-growth regions. It expected a slight decline in defense and space revenue due to anticipated U.S. government spending reductions, but did not expect a significant impact on overall operating results.
- 2013 cash plans: Expected capital expenditures of approximately $1.2 billion; dividends of approximately $1.3 billion; repositioning-related cash spending of approximately $175 million; environmental remediation spending of approximately $300 million; and net asbestos-related cash spending of approximately $436 million ($480 million payments less $44 million expected insurance receipts). Management believed operating cash flow and available liquidity would meet expected needs.
- Restructuring and pension: The company recorded $119 of 2012 repositioning actions, including workforce reductions affecting 2,204 positions. It expected approximately $150 of incremental pretax savings in 2013 versus 2012. The 2012 pension mark-to-market expense was $957. Management forecast ongoing pension income of $50–$75 in 2013, excluding any potential mark-to-market adjustment; U.S. pension contributions were not required for 2013.
- Acquisitions: Honeywell acquired a 70% interest in Thomas Russell Co. for approximately $525, including assumed noncontrolling interest arrangements. A planned acquisition of Intermec for approximately $600 was pending shareholder approval and regulatory review, with closing expected by the end of Q2 2013.
- Facility matter: Operations at the Metropolis Works nuclear conversion facility were suspended pending seismic-related upgrades and NRC review. Honeywell expected possible completion by Q3 2013 and said the suspension and upgrade costs were not expected to materially affect 2013 PMT results.
- Contingencies: Recorded environmental liabilities were $654 at year-end, with the company noting that ultimate costs could be material to results or cash flows in periods recognized or paid. Asbestos liabilities were $1,772, with $707 of related insurance recoveries recorded. Timing and amount of future NARCO trust obligations and insurance collections remain uncertain.
- Other risks: The filing identifies economic and industry cyclicality, raw-material cost and supplier risks, foreign-exchange exposure, government funding and contract risks, litigation, environmental obligations, pension assumptions, tax exposures, cybersecurity, and international operations. A potential adverse ruling in retiree health-benefit litigation could increase other postretirement benefits by approximately $175.
- Tax item: The American Taxpayer Relief Act was enacted after year-end. Retroactive 2012 tax provisions were not reflected in the 2012 effective tax rate; their impact was expected to be recorded in Q1 2013.
Important facts for investors to verify
- Review the full notes and segment disclosures to distinguish recurring operating improvement from pension mark-to-market, restructuring, tax, and other unusual items.
- Assess the sustainability of 2012 margin and earnings gains given pension sensitivity to discount rates and asset returns, and the increase in the effective tax rate.
- Monitor the cash implications and resolution timing of environmental remediation, asbestos claims, and NARCO trust proceedings, including the collectability and timing of insurance recoveries.
- Check the completion, financing, integration, and performance of the Intermec acquisition and the remaining-interest provisions for Thomas Russell Co.
- Track Transportation Systems’ recovery, ACS project-order trends, PMT market conditions, and U.S. defense and space funding against management’s qualitative 2013 expectations.
- Confirm the geographic availability of cash, near-term debt maturities, and planned capital returns against the company’s stated liquidity outlook.