HONEYWELL INTERNATIONAL INC annual report, FY2019

Honeywell International Inc. — 2019 Form 10-K

Reporting period: Fiscal year ended December 31, 2019; filed February 14, 2020. Honeywell operates through Aerospace, Honeywell Building Technologies, Performance Materials and Technologies, and Safety and Productivity Solutions.

Financial performance

Metric20192018
Net sales$36.709 billion$41.802 billion
Income before taxes$7.559 billion$7.487 billion
Net income attributable to Honeywell$6.143 billion$6.765 billion
Diluted EPS$8.41$8.98
Operating cash flow$6.897 billion$6.434 billion
Capital expenditures$839 million$828 million
Gross margin33.7%30.5%
Total debt$16.002 billion$16.214 billion

Approximate free cash flow, calculated as operating cash flow less capital expenditures, was $6.058 billion. Year-end cash and cash equivalents were $9.067 billion, with $1.349 billion of short-term investments; current assets were $24.303 billion versus current liabilities of $18.098 billion.

Reported sales fell 12%, principally because Transportation Systems and Homes and Global Distribution were spun off in 2018. Excluding those businesses’ 2018 sales, Honeywell said sales increased 4% in 2019. Income before taxes rose about 1%, while attributable net income and diluted EPS declined, reflecting the absence of spun-off business earnings and higher tax expense. Gross margin improved, helped by segment margins and lower repositioning and other charges.

Segment sales and profit were mixed: Aerospace sales were $14.054 billion and segment profit $3.607 billion; Building Technologies sales were $5.717 billion and profit $1.165 billion; Performance Materials and Technologies sales were $10.834 billion and profit $2.433 billion; Safety and Productivity Solutions sales were $6.104 billion and profit $790 million. The latter segment’s profit declined 23%, while Aerospace and Performance Materials and Technologies profit increased.

Fourth-quarter results

For the quarter ended December 31, 2019, sales were $9.496 billion, gross profit $3.168 billion, net income attributable to Honeywell $1.562 billion, and diluted EPS $2.16. Compared with fourth-quarter 2018, sales decreased from $9.729 billion, while gross profit increased from $3.044 billion; attributable net income and diluted EPS declined from $1.721 billion and $2.31, respectively.

Outlook, risks and unusual items

  • The filing reports $25.612 billion in backlog/remaining performance obligations; Honeywell expected to recognize approximately 57% as 2020 revenue. It did not provide a clear consolidated 2020 sales or EPS forecast in the supplied filing text.
  • Management expected approximately $900 million of 2020 capital expenditures and $300 million of cash spending on repositioning actions. The quarterly dividend increased 10% to $0.90 per share beginning in fourth-quarter 2019.
  • Management emphasized productivity, commercial excellence, digital transformation, Honeywell Forge, and a strategy to become a leading software-industrial company. It reported deploying $7.8 billion of capital in 2019 across capital expenditures, dividends, repurchases, acquisitions, and venture investments.
  • Key risks include cyclical demand across end markets, foreign-exchange and trade-policy exposure, supply-chain and raw-material constraints, cybersecurity and data privacy, pension assumptions, and environmental, asbestos, product-liability, and other litigation exposures.
  • Environmental liabilities were $709 million at year-end; asbestos-related liabilities were $2.357 billion, alongside $434 million of related insurance recoveries. Reimbursements from spun-off Resideo and Garrett are important to certain environmental and asbestos cash flows. Garrett has sued to challenge its reimbursement agreement; Honeywell said it believes the claims lack merit and the agreement is enforceable.
  • The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The audit identified NARCO asbestos liability estimation and PMT long-term fixed-price contract revenue recognition as critical audit matters.

Most important facts for investors to verify

  • Assess comparable growth and margins after adjusting for the 2018 Garrett and Resideo spin-offs; reported year-over-year sales comparisons are not like-for-like.
  • Review Safety and Productivity Solutions’ organic sales and profit decline and whether subsequent results support a recovery.
  • Track cash conversion, capital allocation, debt maturities, and the effects of share repurchases and dividend increases.
  • Monitor asbestos and environmental liabilities, insurance recoveries, and the enforceability and collectability of Garrett and Resideo reimbursement obligations.
  • Evaluate the assumptions behind the NARCO Trust liability and PMT long-term contract cost estimates, both highlighted as critical audit matters.