Honeywell International Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also provides unaudited fourth-quarter results. Honeywell is a diversified technology and manufacturing company operating through Aerospace, Automation and Control Solutions (ACS), and Performance Materials and Technologies (PMT).
Financial performance
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net sales | $38.581 billion | $40.306 billion | Down 4% |
| Gross profit | $11.834 billion | $11.349 billion | Up 4% |
| Gross margin | 30.7% | 28.2% | Up 2.5 percentage points |
| Income before taxes | $6.586 billion | $5.818 billion | Up 13% |
| Net income attributable to Honeywell | $4.768 billion | $4.239 billion | Up 12% |
| Diluted EPS | $6.04 | $5.33 | Up 13% |
| Operating cash flow | $5.454 billion | $5.024 billion | Up $430 million |
Revenue declined principally because of unfavorable foreign-currency translation (4 percentage points of the sales change), with smaller impacts from price and acquisitions/divestitures; volume and other factors partly offset the decline. Segment profit rose to $7.256 billion from $6.696 billion, with reported segment margin expansion of 220 basis points. R&D expense was $1.856 billion, or 5% of sales.
Fourth quarter: Sales were $9.982 billion versus $10.266 billion in Q4 2014; gross profit was $3.065 billion versus $2.700 billion; net income attributable to Honeywell was $1.194 billion versus $956 million; and diluted EPS was $1.53 versus $1.20.
Segments and material changes
| Segment | 2015 sales | 2015 segment profit | Year-over-year sales change |
|---|---|---|---|
| Aerospace | $15.237 billion | $3.218 billion | Down 2% |
| ACS | $14.109 billion | $2.313 billion | Down 3% |
| PMT | $9.235 billion | $1.935 billion | Down 10% |
Profit increased in all three segments despite lower reported sales. Aerospace benefited from productivity, pricing, higher commercial original-equipment and aftermarket activity, and lower prior-year OEM incentives; Transportation Systems reported sales were sharply lower partly because of currency and the Friction Materials divestiture. ACS organic sales grew, but currency translation reduced reported revenue. PMT faced weaker project and gas-processing demand, lower raw-material pass-through pricing, and plant outages in Resins and Chemicals.
Cash, debt and liquidity
- Cash and cash equivalents were $5.455 billion at year-end, down from $6.959 billion. Operating cash flow was $5.454 billion; investing cash flow was negative $6.514 billion and financing cash flow was positive $102 million. The investing outflow principally reflected $5.228 billion of acquisition spending.
- Capital expenditures were $1.073 billion. Honeywell repurchased $1.884 billion of stock and paid $1.726 billion in cash dividends.
- Total debt was $12.068 billion, up from $8.683 billion, including $6.514 billion of short-term debt and current maturities and $5.554 billion of long-term debt. The increase in short-term borrowing supported, among other needs, the Elster acquisition.
- Total current assets were $20.053 billion and current liabilities were $18.371 billion. Honeywell reported a $4 billion five-year credit agreement and a separate $3 billion 364-day credit agreement; it stated it had not experienced limitations accessing liquidity sources. Credit ratings were A/A/A2 for long-term debt, with stable outlooks.
- Backlog was $18.183 billion versus $18.313 billion; approximately $11.601 billion of the year-end 2015 backlog was expected to be filled in 2016. The company cautions that customers may cancel a substantial portion.
Outlook, commentary and risks
- Management described 2015 as a challenging macroeconomic year and emphasized productivity, margin expansion, growth investment, working-capital management, and strategic acquisitions. It did not provide a consolidated 2016 sales or EPS forecast in the supplied filing text.
- Management expected a 2016 effective tax rate of approximately 26.5%. It planned approximately $1.1 billion of 2016 capital spending, $175 million of repositioning cash costs, and $250 million of environmental remediation spending. It expected $175–$200 million of incremental pretax savings from repositioning actions in 2016 versus 2015.
- PMT commentary anticipated continued weakness in UOP gas-processing projects, with Process Solutions project weakness expected to moderate during 2016. Raw-material pass-through price volatility was expected to continue in Advanced Materials. ACS noted softness in project installation and U.S. energy retrofit activity.
- Honeywell spent approximately $5.2 billion on acquisitions in 2015, including the $4.899 billion acquisition of Elster, completed December 29. Subsequent to year-end, it acquired UOP Russell’s remaining interest and COM DEV, and agreed to acquire Xtralis, subject to regulatory approval.
- Key exposures include global economic and end-market cyclicality, foreign exchange movements, oil and gas market conditions, raw-material and supplier risks, pension assumptions and market returns, acquisition integration, cybersecurity, tax uncertainty, government-contract risks, and environmental and asbestos claims.
- Recorded environmental liabilities were $518 million. Asbestos liabilities were $1.543 billion, with $449 million of related insurance recoveries recorded. The company noted uncertainty in estimating future environmental costs and asbestos claims. The UAW retiree-healthcare litigation could increase other postretirement benefits by approximately $176 million for pre-2003 retirees and $110 million for post-2003 retirees if Honeywell loses; a Department of Justice investigation concerning parts used in the F-35 was ongoing, with outcome unclear.
- The filing disclosed four inadvertent shipments of low-value, non-U.S. items that transited Iran in 2013–2014; Honeywell voluntarily disclosed the matter to OFAC and reported no revenue from the transit. Auditors opined that the financial statements and internal controls were fairly presented/effective; Elster was excluded from the year-end internal-control assessment because it was acquired immediately before year-end.
Most important facts for investors to verify
- Whether earnings and margin gains can be sustained despite the 4% sales decline and currency pressure, especially given PMT’s weaker demand and raw-material-linked pricing.
- Integration, returns, and financing of Elster and other acquisitions, alongside the rise in total debt and short-term borrowings.
- Cash conversion and capital allocation capacity after acquisitions, dividends, repurchases, and planned 2016 capital spending.
- Assumptions behind asbestos liabilities and insurance recoveries, environmental reserves, pension estimates, and potential outcomes of the disclosed litigation and investigations.
- Whether expected 2016 repositioning savings, segment recovery commentary, and the 26.5% tax-rate expectation are achieved.