Honeywell International Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone fourth-quarter filing. Financial amounts are in U.S. dollars; figures are in millions unless otherwise indicated.
Business context and reporting period
Honeywell is a diversified technology and manufacturing company operating through Aerospace, Honeywell Building Technologies, Performance Materials and Technologies, and Safety and Productivity Solutions. During 2018, it completed the spin-offs of Transportation Systems to Garrett Motion and Homes and Global Distribution to Resideo; results for both businesses are included only through their respective spin-off dates. The company’s strategy emphasizes software-enabled industrial offerings and profitable growth.
Key financial metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Net sales | $41,802 | $40,534 |
| Income before taxes | $7,487 | $6,950 |
| Net income attributable to Honeywell | $6,765 | $1,545 |
| Diluted earnings per share | $8.98 | $2.00 |
| Cash provided by operating activities | $6,434 | $5,966 |
| Capital expenditures | $828 | $1,031 |
| Cash and cash equivalents at year-end | $9,287 | $7,059 |
| Total debt at year-end | $16,214 | $17,882 |
Sales increased 3%; management attributed the change to volume (+4%), price (+2%), acquisitions and divestitures (-4%), and foreign currency translation (+1%). Gross margin was 30.5%, compared with 30.6% in 2017. Operating cash flow less capital expenditures was approximately $5,606 million. The effective tax rate was 8.8%, versus 77.2% in 2017; these rates and the large year-over-year increase in reported net income were materially affected by U.S. tax reform and other tax items.
Fourth-quarter data: Sales were $9,729 million, versus $10,843 million in fourth-quarter 2017. Net income attributable to Honeywell was $1,721 million and diluted EPS was $2.31; fourth-quarter 2017 recorded a net loss of $2,519 million and diluted loss per share of $3.32, primarily reflecting the U.S. tax-reform charge.
Year-end current assets were $24,362 million and current liabilities were $18,924 million. Debt comprised $6,458 million of short-term debt and $9,756 million of long-term debt. Honeywell reported $1.623 billion of short-term investments in addition to cash. Its long-term debt ratings were A (S&P), A (Fitch), and A2 (Moody’s), each with a stable outlook.
Material changes versus the prior comparable period
- Segment profit rose to $8,190 million from $7,690 million. Aerospace profit increased 7%, Performance Materials and Technologies 6%, and Safety and Productivity Solutions 21%; Honeywell Building Technologies profit declined 3%.
- Safety and Productivity Solutions sales grew 12%; Aerospace sales rose 5% and Performance Materials and Technologies sales rose 3%. Honeywell Building Technologies sales fell 5%, principally due to the Resideo spin-off.
- Operating cash flow increased $468 million. Cash increased by $2,228 million during 2018; investing activities provided $1,027 million, while financing activities used $5,032 million.
- Total debt declined by $1,668 million. The company repurchased 26.5 million shares for $4.0 billion and paid $2.272 billion in cash dividends. The annual dividend rate was increased 10% to $0.82 quarterly per share effective in fourth-quarter 2018.
- Backlog, defined as remaining performance obligations under the new revenue standard, was $24,850 million versus $17,690 million. The filing cautions that the 2018 definition reflects adoption of the new standard, limiting direct comparability.
Outlook, management commentary, risks and unusual items
- Management’s 2019 priorities include profitable growth, software-industrial strategy execution, margin expansion, disciplined acquisitions, cost control, working-capital management, and prudent debt management. The filing does not provide clear numerical 2019 revenue or EPS guidance.
- Honeywell expected to recognize approximately 56% of year-end performance obligations as revenue in 2019. It expected 2019 capital expenditures of approximately $800 million and repositioning cash spending of approximately $300 million. Management stated that operating cash flows, cash balances, committed credit lines, and capital-market access should support expected needs.
- 2018 net repositioning and other charges were $1,091 million, including $520 million of repositioning charges, $163 million of asbestos-related litigation charges, and $345 million of probable environmental liabilities. Cash spending on repositioning actions was $285 million.
- The company revised its accounting estimate for unasserted Bendix asbestos claims to include projected claims through 2059, rather than a five-year horizon, and revised prior-period financial statements. The revision increased the estimated asbestos liability at December 31, 2017 by $1,087 million. The SEC Division of Enforcement opened an investigation related to the prior accounting; Honeywell said it would cooperate. A shareholder class action was also filed, which Honeywell said it believed had no merit.
- At year-end, asbestos liabilities were $2,514 million, with $477 million of recorded insurance recoveries. The company also recorded environmental liabilities of $755 million. Future costs and recoveries are uncertain; the filing states that additional environmental costs could be material to results or cash flows in the periods recognized or paid.
- Other principal risks include economic and end-market cyclicality, international and foreign-exchange exposure, tariffs and trade restrictions, supplier constraints and raw-material inflation, pension asset returns and discount rates, cybersecurity and data privacy, government-contract compliance, and litigation and regulatory changes. The company noted that it had ceased doing business in Iran after completing authorized wind-down activities.
- Defined-benefit pension income was a significant contributor to results; management expected worldwide pension ongoing income to decline to approximately $590 million in 2019 from $992 million in 2018. Actual 2018 pension-asset returns were negative, and future mark-to-market adjustments may be volatile.
- The company adopted the new revenue-recognition standard in 2018; it recorded a $75 million reduction to opening retained earnings. It also adopted the new lease standard effective January 1, 2019, expecting approximately $0.7 billion of additional lease assets and liabilities.
Important facts for investors to verify
- Review the audited financial statements and tax note to distinguish recurring operating performance from the effects of tax reform, restructuring, and the unusually low 2018 effective tax rate.
- Assess the revised Bendix asbestos estimate, the SEC investigation, related litigation, insurance recoverability, and Garrett’s reimbursement obligations.
- Check environmental exposure, the Resideo indemnity and reimbursement arrangement, and the timing and collectability of spin-off-related receivables.
- Evaluate post-spin-off segment comparability, the revenue-standard impact on reported sales and backlog, and the extent to which 2018 growth reflects organic performance.
- Monitor the 2019 pension-income decline, pension funding requirements, debt maturities, and cash deployment across dividends, repurchases, acquisitions, and capital investment.
The independent auditor expressed an unqualified opinion on the financial statements and on internal control over financial reporting as of December 31, 2018.