Business context and reporting period
Honeywell International Inc. filed this Form 10-K for the fiscal year ended December 31, 2014. It is a diversified global technology and manufacturing company operating through Aerospace, Automation and Control Solutions (ACS), and Performance Materials and Technologies (PMT). The filing also reports unaudited fourth-quarter results.
In 2014, Honeywell realigned Honeywell Process Solutions from ACS to PMT and Transportation Systems into Aerospace; prior-period segment results were recast. The company also sold its Friction Materials business.
Financial performance
| Metric | 2014 | 2013 |
|---|---|---|
| Net sales | $40.306 billion | $39.055 billion |
| Gross profit | $11.349 billion | $10.691 billion |
| Gross margin | 28.2% | 27.4% |
| Income before tax | $5.818 billion | $5.412 billion |
| Net income attributable to Honeywell | $4.239 billion | $3.924 billion |
| Diluted EPS | $5.33 | $4.92 |
| Operating cash flow | $5.024 billion | $4.335 billion |
| Capital expenditures | $1.094 billion | $947 million |
| Total debt | $8.683 billion | $8.829 billion |
Revenue rose 3%, driven by 3% volume growth and 1% net contribution from acquisitions and divestitures, partly offset by a 1% adverse “other” impact; price was flat. Segment profit increased 5% to $6.696 billion. ACS led segment growth, with sales up 8% and segment profit up 11%; PMT sales rose 4% and segment profit 5%; Aerospace sales declined 1% while segment profit increased 2%.
Cash and cash equivalents were $6.959 billion at year-end, versus $6.422 billion in 2013. Current assets were $22.191 billion and current liabilities $14.773 billion. Honeywell had a $4 billion committed credit agreement with no borrowings under it. Operating cash flow increased 16%; cash used for investing was $1.876 billion and cash used for financing was $2.272 billion. Dividends paid were $1.510 billion, and the company repurchased $924 million of shares.
Fourth-quarter 2014 sales were $10.266 billion, compared with $10.387 billion in fourth-quarter 2013. Fourth-quarter net income attributable to Honeywell was $956 million versus $947 million, and diluted EPS was $1.20 versus $1.19.
Material changes and unusual items
- Net income increased 8% and diluted EPS increased 8%; gross margin improved by 0.8 percentage point. Management attributed earnings growth principally to improved segment profit and lower repositioning and other charges, partly offset by higher pension and postretirement expense and tax expense.
- Cash from operations increased by $689 million. The filing cites higher income before non-cash pension mark-to-market adjustments, reduced repositioning and other payments, lower pension contributions and lower cash taxes; working capital was a partial offset.
- Other income included a $221 million realized gain on the sale of available-for-sale securities, compared with $195 million in 2013. The Friction Materials sale generated a reported $33 million loss, of which $5 million was recognized in 2014.
- Pension mark-to-market expense was $249 million, compared with $51 million in 2013 and $957 million in 2012. Such adjustments depend on actuarial assumptions and market performance and can be volatile.
- Net repositioning and other charges were $598 million, including $146 million of repositioning charges, $182 million of asbestos-related litigation charges net of insurance, and $268 million of environmental liabilities. Repositioning actions included workforce reductions of 2,975 positions.
Outlook, risks and contingencies
- The filing gives no specific 2015 revenue or EPS guidance. Management described priorities of profitable growth, productivity, working-capital management, investment in new products and expansion in high-growth regions.
- For 2015, Honeywell expected capital expenditures of approximately $1.3 billion, repositioning cash spending of approximately $150 million, and $100 million to $125 million of incremental pretax repositioning savings versus 2014.
- Management expected approximately $275 million of 2015 environmental remediation spending and approximately $350 million of asbestos claim payments, partly offset by approximately $30 million of insurance receipts. It expected about $140 million of contributions to non-U.S. pension plans and no required U.S. pension contribution for 2015.
- Key risks include economic and industry cyclicality, commercial aerospace demand and U.S. defense funding, international and foreign-exchange exposure, raw-material costs and supplier constraints, oil-linked chemical pricing, pension assumptions and funding needs, execution of productivity and acquisition plans, cybersecurity incidents, regulation, and litigation.
- Recorded environmental liabilities were $591 million at year-end; the company said ultimate costs and timing are uncertain and could be material to results or operating cash flows in the periods recognized or paid. Asbestos liabilities were $1.552 billion, with $485 million of related insurance recoveries recorded. Estimates depend on claim experience, future filings, resolution values and insurer recoveries.
- The company disclosed a Department of Justice investigation concerning parts used in the F-35 and a retiree healthcare litigation matter; it said outcomes could not be predicted. It also reported an ongoing Virginia wastewater-permit matter and did not expect it to materially affect consolidated results, financial position or cash flows.
- Management and the independent auditor concluded that internal control over financial reporting was effective as of December 31, 2014. The auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Whether 2015 sales, segment margins and cash generation sustain the 2014 improvement, particularly amid foreign-exchange pressure and uneven segment trends.
- How much reported earnings benefited from the $221 million securities gain, and how pension mark-to-market and other unusual charges affect comparability.
- Whether planned repositioning savings are realized and whether the associated 2015 spending remains near management’s estimate.
- Changes in asbestos and environmental estimates, claim payments, insurance recoveries and the outcomes of material litigation or investigations.
- Cash availability and debt maturities, including that substantial cash was held by foreign subsidiaries and approximately $15 billion of foreign earnings was intended to remain permanently reinvested outside the United States.