Honeywell International Inc. — FY2010 Form 10-K
Business context and reporting period
Annual report for the fiscal year ended December 31, 2010, filed February 11, 2011. Honeywell is a diversified technology and manufacturing company with four reportable segments: Aerospace; Automation and Control Solutions (ACS); Specialty Materials; and Transportation Systems. Figures are in U.S. dollars; financial amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | FY2010 | FY2009 |
|---|---|---|
| Net sales | $33,370 | $30,908 |
| Gross profit / gross margin | $7,851 / 23.5% | $6,896 / 22.3% |
| Income before taxes | $2,843 | $2,049 |
| Net income attributable to Honeywell | $2,022 | $1,548 |
| Diluted EPS | $2.59 | $2.05 |
| Cash from operating activities | $4,203 | $3,946 |
| Capital expenditures | $651 | $609 |
| Total debt at year-end | $6,644 | $7,607 |
| Cash and cash equivalents at year-end | $2,650 | $2,801 |
| Total assets / shareowners’ equity | $37,834 / $10,787 | $35,993 / $8,971 |
Sales grew 8% year over year, mainly from volume (+5%), price (+2%), and acquisitions net of divestitures (+1%). Operating cash flow less capital expenditures was approximately $3.55 billion. The current ratio was approximately 1.28, based on current assets of $15,011 million and current liabilities of $11,717 million. Debt less cash was approximately $3,994 million. The company reported a $2.8 billion committed revolving credit facility, with no borrowings or letters of credit outstanding; credit ratings were A/A/A2 long-term with stable outlooks.
Fourth quarter: Sales were $9,041 million versus $8,072 million in Q4 2009; gross profit was $1,898 million versus $1,421 million; net income attributable to Honeywell was $369 million versus $150 million; diluted EPS was $0.47 versus $0.20. Q4 2010 included a $471 million pension mark-to-market expense.
Segments and material changes
| Segment | FY2010 sales | Change vs. FY2009 | FY2010 segment profit | Change vs. FY2009 |
|---|---|---|---|---|
| Aerospace | $10,683 | -1% | $1,835 | -3% |
| ACS | $13,749 | +9% | $1,770 | +11% |
| Specialty Materials | $4,726 | +14% | $749 | +24% |
| Transportation Systems | $4,212 | +24% | $473 | +$317 million |
ACS, Specialty Materials and Transportation Systems benefited from stronger volumes as markets recovered. Aerospace remained pressured by weak business and general aviation original-equipment demand, partly offset by aftermarket and defense/space sales. Transportation Systems’ sharp profit increase followed a weak 2009. Consolidated results also benefited from lower pension expense and lower interest costs; the effective tax rate rose to 28.4% from 22.7%.
Outlook, commentary, risks and unusual items
- Management’s 2011 priorities included profitable growth, emerging-market expansion, productivity and repositioning savings, working-capital improvement, and managing raw-material costs. The filing does not provide a clear consolidated revenue or EPS forecast.
- Management expected approximately $200 million of incremental pretax savings from repositioning actions in 2011, with about $150 million of related cash severance and exit costs. Planned 2011 capital expenditures were approximately $800 million; scheduled long-term debt maturities were $523 million.
- Management anticipated a slight decline in defense and space revenue in 2011. It expected continued higher Turbo Technologies volumes, supported by new platform launches and diesel penetration in Western Europe.
- In January 2011, Honeywell agreed to sell its Consumer Products Group for approximately $950 million, subject to customary closing conditions; closing was expected in Q3 2011. The company estimated a pretax gain of approximately $350 million, or $200 million after tax.
- In 2010 Honeywell adopted a pension accounting method recognizing actuarial gains and losses and asset-value changes annually in Q4, with prior periods retrospectively restated. This makes pension expense more volatile and affects period comparisons. FY2010 pension mark-to-market expense was $471 million.
- Material exposures include environmental remediation, asbestos litigation and insurance recoveries, government-contract audits and termination rights, product and other litigation, pension funding and actuarial assumptions, tax examinations, volatile raw-material costs, supplier concentration, foreign exchange, and cyclical aerospace, construction and automotive demand.
- Recorded environmental liabilities were $753 million at year-end; management estimated 2011 remediation spending of approximately $325 million. Recorded asbestos liabilities were $1,719 million, with $875 million of related insurance recoveries. Honeywell cautioned that actual costs and recovery timing could differ from estimates.
- The SEC/DOJ investigation into uranium-processing sludge storage at Metropolis was ongoing, with resolution expected in Q1 2011. Federal authorities also investigated Clean Air Act and permit compliance at the Hopewell, Virginia facility; negotiations were underway. Honeywell stated that the identified environmental proceedings were not expected to materially adversely affect consolidated financial position, results or operating cash flows.
- PricewaterhouseCoopers issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Most important facts for investors to verify
- Reconcile the $2,022 million attributable net income and $2.59 diluted EPS to the pension accounting change, Q4 mark-to-market charge, and reported cash generation.
- Assess whether the 2010 recovery in ACS, Specialty Materials and Transportation Systems volumes and profits continued, and whether Aerospace weakness worsened or improved.
- Review pension plan funding status and sensitivity to discount rates and asset returns, including the $1 billion voluntary contribution made in January 2011.
- Track environmental and asbestos liabilities, court and regulatory developments, and the collectability and timing of associated insurance recoveries.
- Confirm completion and realized proceeds/gain from the planned Consumer Products Group divestiture, and the use of proceeds, including potential pension contributions.
- Monitor working capital, customer advances, raw-material inflation, supplier delivery risks, and planned share repurchases and dividends against the company’s liquidity needs.