Honeywell International Inc. — FY 2009 Form 10-K
Reporting period: Fiscal year ended December 31, 2009. This is an annual report, not a quarterly filing; quarterly figures below identify the fourth quarter where provided. Honeywell is a diversified manufacturer and technology company with four reportable segments: Aerospace, Automation and Control Solutions (ACS), Specialty Materials, and Transportation Systems. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data.
Financial performance and position
| Metric | FY 2009 | FY 2008 |
|---|---|---|
| Net sales | $30,908 | $36,556 |
| Gross profit / gross margin | $7,723 / 25.0% | $8,562 / 23.4% |
| Income before taxes | $2,978 | $3,821 |
| Net income attributable to Honeywell | $2,153 | $2,792 |
| Diluted EPS | $2.85 | $3.76 |
| Operating cash flow | $3,946 | $3,791 |
| Capital expenditures | $609 | $884 |
| Total debt at year-end | $7,607 | $8,375 |
| Cash and cash equivalents at year-end | $2,801 | $2,065 |
| Total assets / shareowners’ equity | $36,004 / $8,954 | $35,490 / $7,269 |
Sales fell 15%, principally from a 14% volume decline and a 2% adverse foreign-exchange effect, partly offset by acquisitions. Cost of sales fell 17%, and gross margin rose 1.6 percentage points, reflecting lower material and labor costs, productivity actions, and lower repositioning charges. SG&A declined to $4,341, though increased to 14.0% of sales from 13.8%. The effective tax rate was 26.5%. Segment profit was $4,097, down from $4,845.
Operating cash flow increased $155, primarily from favorable working capital, lower cash taxes, and receivables-related proceeds, partly offset by lower earnings and higher repositioning payments. Cash increased by $736 during the year. Current assets were $13,936 and current liabilities $11,147. The filing reports $298 of commercial paper outstanding and $1,018 of scheduled long-term debt maturities in 2010. Honeywell had a $2.8 billion committed revolving facility with no borrowings or letters of credit outstanding at year-end.
Quarter four 2009 sales were $8,072, versus $8,712 in Q4 2008; attributable net income was $698 versus $707, and diluted EPS was $0.91 versus $0.97.
Segments and changes versus prior period
| Segment | 2009 sales | Sales change | 2009 segment profit | Profit change |
|---|---|---|---|---|
| Aerospace | $10,763 | -15% | $1,893 | -18% |
| ACS | $12,611 | -10% | $1,588 | -2% |
| Specialty Materials | $4,144 | -21% | $605 | -16% |
| Transportation Systems | $3,389 | -27% | $156 | -62% |
- Aerospace: Commercial aerospace weakened sharply: business and general aviation original-equipment sales declined 51%, while defense and space sales were essentially unchanged. Defense and space represented 50% of Aerospace sales.
- ACS: Lower volumes and unfavorable currency effects reduced sales; acquisitions partly offset the decline. Profit held up comparatively well through cost controls and productivity savings.
- Specialty Materials: Lower commodity prices and customer project deferrals weighed on sales, especially in resins and chemicals and UOP. Fourth-quarter segment profit increased 56% year over year, according to management.
- Transportation Systems: Weak global vehicle production and unfavorable currency effects drove steep declines. Fourth-quarter turbocharger volumes improved, contributing to a $66 million increase in segment profit.
Backlog was $13,182 at year-end 2009, versus $12,972 in 2008; approximately $9,339 was expected to be filled in 2010. The company cautions that customer orders may be canceled.
Outlook, risks, and unusual items
- 2010 plans: Management emphasized cost reduction, productivity, working-capital management, emerging-market expansion, and readiness for improving demand. It expected commercial Aerospace aftermarket sales to remain soft in the first half of 2010, while anticipating increased Transportation Systems profit from new platform launches. The filing does not provide consolidated 2010 revenue or EPS guidance.
- Planned cash uses: Approximately $700 of capital expenditures, $940 of common dividends, $654 of asbestos claim payments offset by estimated $62 insurance receipts, $285 of environmental remediation spending, and $225 of severance and exit costs. Management anticipated no share repurchases in 2010. It planned approximately $400 of voluntary U.S. pension contributions in Honeywell shares and $150 of non-U.S. pension contributions.
- Restructuring and other charges: $478 in 2009, compared with $1,012 in 2008; this included $171 of net repositioning charges, $155 of asbestos-related litigation charges net of insurance, and $145 of environmental liabilities. Repositioning actions were expected to generate about $300 of incremental pretax savings in 2010 versus 2009.
- Pensions and benefits: The pension plans’ funded status was negative $4,121 at year-end. Management projected 2010 pension expense of approximately $820, a $712 increase from 2009, principally due to amortization of prior actuarial losses. U.S. plan funding needs beyond 2010 could become significant.
- Contingencies: Recorded environmental liabilities were $779 at year-end, with management noting that additional costs could be material to results or cash flows in periods recognized or paid. Recorded asbestos liabilities were $1,694, against $1,003 of recorded insurance recoveries; recoveries depend on insurers and legal outcomes. The NARCO trust plan remained subject to an insurers’ appeal. A federal investigation into sludge storage at the Metropolis facility was ongoing; Honeywell said it did not expect a material adverse effect. The filing also describes pending litigation and tax examinations; $720 of uncertain tax positions was excluded from the contractual-obligations table.
- Other exposures: Risks include cyclical aerospace, construction, chemical and automotive markets; raw-material cost volatility and reliance on some single-source suppliers; foreign exchange and international operations; government-contract audits, funding changes or termination; pension and healthcare assumptions; and possible impairment of goodwill or other assets. Goodwill was $10,494; no impairment was identified in the 2009 annual or interim tests.
Key facts for investors to verify
- Whether sales and segment profitability recover from the 2009 volume downturn, particularly in Transportation Systems and commercial Aerospace.
- Whether cost savings, productivity initiatives, and the expected 2010 restructuring savings materialize without impairing growth or execution.
- The cash and earnings impact of pension expense and contributions, environmental remediation, and asbestos claims, including the timing and collectability of related insurance recoveries.
- How the $1,018 of 2010 debt maturities are refinanced and whether planned dividends and other cash needs are funded from operating cash flow.
- Developments in the NARCO trust appeal, Metropolis investigation, pending litigation, and tax audits that could change recorded liabilities or cash flows.
The independent auditor issued an unqualified opinion on the financial statements and concluded that internal control over financial reporting was effective as of December 31, 2009.