10-K 1 c79276_10k.htm 3B2 EDGAR HTML -- c79276_10k.htm

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

Form 10-K

S ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2014
OR

£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from   to  
Commission file number 1-8974

Honeywell International Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware

 

22-2640650

 

 

 

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

101 Columbia Road
Morris Township, New Jersey

 

07962

 

 

 

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code (973) 455-2000

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

Title of Each Class

 

Name of Each Exchange
on Which Registered

 

 

 

Common Stock, par value $1 per share*

 

New York Stock Exchange

91/2% Debentures due June 1, 2016

 

New York Stock Exchange

 

 

*

  The common stock is also listed on the London Stock Exchange.

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes S No £

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes £ No S

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes S No £

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes S No £

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. S

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):

Large accelerated filer S      Accelerated filer £      Non-accelerated filer £      Smaller reporting company £

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes £ No S

The aggregate market value of the voting stock held by nonaffiliates of the Registrant was approximately $73.0 billion at June 30, 2014.

There were 782,663,047 shares of Common Stock outstanding at January 23, 2015.

Documents Incorporated by Reference

Part III: Proxy Statement for Annual Meeting of Shareowners to be held April 27, 2015.

 

 


 

TABLE OF CONTENTS

 

 

 

 

 

 

 

 

 

Item

 

 

 

Page

Part I

 

1.

 

Business

 

1

 

 

 

 

Executive Officers of the Registrant

 

5

 

 

1A.

 

Risk Factors

 

6

 

 

1B.

 

Unresolved Staff Comments

 

10

 

 

2.

 

Properties

 

11

 

 

3.

 

Legal Proceedings

 

11

 

 

4.

 

Mine Safety Disclosures

 

11

Part II.

 

5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

12

 

 

6.

 

Selected Financial Data

 

14

 

 

7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

15

 

 

7A.

 

Quantitative and Qualitative Disclosures About Market Risk

 

32

 

 

8.

 

Financial Statements and Supplementary Data

 

33

 

 

9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

81

 

 

9A.

 

Controls and Procedures

 

81

 

 

9B.

 

Other Information

 

81

Part III.

 

10.

 

Directors and Executive Officers of the Registrant

 

81

 

 

11.

 

Executive Compensation

 

82

 

 

12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

82

 

 

13.

 

Certain Relationships and Related Transactions

 

84

 

 

14.

 

Principal Accounting Fees and Services

 

84

Part IV.

 

15.

 

Exhibits and Financial Statement Schedules

 

84

Signatures

 

85


 

PART I.

Item 1. Business

Honeywell International Inc. (Honeywell or the Company) is a diversified technology and manufacturing company, serving customers worldwide with aerospace products and services, turbochargers, control, sensing and security technologies for buildings, homes and industry, specialty chemicals, electronic and advanced materials, process technology for refining and petrochemicals, and energy efficient products and solutions for homes, business and transportation. Honeywell was incorporated in Delaware in 1985.

We maintain an internet website at http://www.honeywell.com. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports, are available free of charge on our website under the heading “Investor Relations” (see “SEC Filings & Reports”) immediately after they are filed with, or furnished to, the Securities and Exchange Commission (SEC). In addition, in this Form 10-K, the Company incorporates by reference certain information from parts of its proxy statement for the 2015 Annual Meeting of Stockholders, which we expect to file with the SEC on or about March 12, 2015, and which will also be available free of charge on our website.

Major Businesses

We globally manage our business operations through three businesses that are reported as operating segments: Aerospace, Automation and Control Solutions (ACS), and Performance Materials and Technologies (PMT). Financial information related to our operating segments is included in Note 21 Segment Financial Data of Notes to Financial Statements.

The major products/services, customers/uses and key competitors of each of our operating segments are as follows:

Aerospace

Our Aerospace segment is a leading global supplier of aircraft engines, integrated avionics, systems and service solutions, and related products and services for aircraft manufacturers, airlines, aircraft operators, military services, and defense and space contractors. Aerospace is also a leading manufacturer of turbochargers to improve performance and efficiency of passenger cars and commercial vehicles. Our Aerospace products and services include auxiliary power units, propulsion engines, environmental control systems, electric power systems, engine controls, flight safety, communications, navigation, radar and surveillance systems, aircraft lighting, management and technical services, logistics services, advanced systems and instruments, aircraft wheels and brakes, repair and overhaul services and turbochargers and thermal systems. Aerospace sells its products to original equipment (OE) manufacturers in the air transport, regional, business and general aviation aircraft, and automotive and truck manufacturers segments, and provides spare parts and repair and maintenance services (principally to aircraft operators) for the aftermarket.

Automation and Control Solutions

Our ACS segment is a leading global provider of environmental and combustion controls, sensing controls, security and life safety products and services, scanning and mobility devices and building solutions and services for homes, commercial buildings and industrial facilities. Our ACS products and services include controls and displays for heating, cooling, indoor air quality, ventilation, humidification, combustion, lighting and home automation; advanced software applications for home/building control and optimization; sensors, switches, control systems and instruments for measuring pressure, air flow, temperature and electrical current; security, fire and gas detection; personal protection equipment; access control; video surveillance; remote patient monitoring systems; products for automatic identification and data collection; installation, maintenance and upgrades of systems that keep buildings safe, comfortable and productive; and automation and control solutions for industrial plants, including field instruments and advanced software and automation systems that integrate, control and

1


 

monitor complex processes in many types of industrial settings as well as equipment that controls, measures and analyzes natural gas production and transportation.

Performance Materials and Technologies

Our PMT segment is a global leader in developing and manufacturing advanced materials, process technologies and automation solutions. PMT’s UOP business provides process technology, products, including catalysts and adsorbents, equipment and consulting services to efficiently produce gasoline, diesel, jet fuel, petrochemicals and renewable fuels for the petroleum refining, gas processing, petrochemical, and other industries. PMT’s Process Solutions business is a pioneer in automation control, instrumentation and services for the oil and gas, refining, pulp and paper, industrial power generation, chemicals and petrochemicals, biofuels, life sciences, and metals, minerals and mining industries. PMT’s Advanced Materials businesses manufacture a wide variety of high-performance products, including fluorocarbons, hydrofluoroolefins, caprolactam, resins, ammonium sulfate fertilizer, phenol, specialty films, waxes, additives, advanced fibers, customized research chemicals and intermediates, and electronic materials and chemicals.

Competition

We are subject to active competition in substantially all product and service areas. Some of our key competitors are as follows:

 

 

Aerospace: Borg-Warner (automotive), Garmin, General Electric, Rockwell Collins, Thales and United Technologies

 

 

ACS: 3M, Johnson Controls, Schneider, Siemens and Zebra-Motorola

 

 

PMT: Albemarle, BASF, Dow, Dupont, Emerson and Sinopec

Our businesses compete on a variety of factors, such as price, quality, reliability, delivery, customer service, performance, applied technology, product innovation and product recognition. Brand identity, service to customers and quality are important competitive factors for our products and services, and there is considerable price competition. Other competitive factors include breadth of product line, research and development efforts and technical and managerial capability. While our competitive position varies among our products and services, we believe we are a significant competitor in each of our major product and service classes. A number of our products and services are sold in competition with those of a large number of other companies, some of which have substantial financial resources and significant technological capabilities. In addition, some of our products compete with the captive component divisions of original equipment manufacturers.

Aerospace Sales

Our sales to aerospace customers were 39%, 40%, and 41% of our total sales in 2014, 2013 and 2012, respectively. Our sales to commercial aerospace original equipment manufacturers were 6%, 7%, and 7% of our total sales in 2014, 2013 and 2012, respectively. In addition, our sales to commercial aftermarket customers of aerospace products and services were 11%, 11%, and 12% of our total sales in 2014, 2013 and 2012, respectively.

U.S. Government Sales

Sales to the U.S. Government (principally by our Aerospace segment), acting through its various departments and agencies and through prime contractors, amounted to $3,693 million, $3,856 million and $4,109 million in 2014, 2013 and 2012, respectively, which included sales to the U.S. Department of Defense, as a prime contractor and subcontractor, of $2,792 million, $3,066 million and $3,273 million in 2014, 2013 and 2012, respectively. U.S. defense spending decreased in 2014 compared to 2013. We do not expect our overall operating results to be significantly affected by any proposed changes in 2015 federal defense spending due principally to the varied mix of the government programs which impact us (Original Equipment Manufacturers’ production, engineering

2


 

development programs, aftermarket spares and repairs and overhaul programs), increases in direct foreign defense and space market sales, as well as our diversified commercial businesses.

Backlog

Our total backlog at December 31, 2014 and 2013 was $18,313 million and $17,512 million, respectively. We anticipate that approximately $12,605 million of the 2014 backlog will be filled in 2015. We believe that backlog is not necessarily a reliable indicator of our future sales because a substantial portion of the orders constituting this backlog may be canceled at the customer’s option.

International Operations

We are engaged in manufacturing, sales, service and research and development globally. U.S. exports and foreign manufactured products are significant to our operations. U.S. exports comprised 14% of our total sales in each of 2014, 2013 and 2012. Foreign manufactured products and services, mainly in Europe and Asia, were 41% of our total sales in each of 2014, 2013 and 2012.

             

 

 

 

 

 

 

 

Manufactured Products and Systems and
Performance of Services

 

Year Ended December 31, 2014

 

Aerospace

 

Automation and
Control Solutions

 

Performance
Materials and
Technologies

 

 

(% of Total Sales)

U.S. Exports

 

 

 

20

%

 

 

 

 

3

%

 

 

 

 

21

%

 

Non-U.S.

 

 

 

32

%

 

 

 

 

67

%

 

 

 

 

16

%

 

Raw Materials

The principal raw materials used in our operations are generally readily available. Although we occasionally experience disruption in raw materials supply, we experienced no significant problems in the purchase of key raw materials or commodities in 2014. We are not dependent on any one supplier for a material amount of our raw materials, except related to R240 (a key component in foam blowing agents), a raw material used in our PMT segment.

The costs of certain key raw materials, including cumene, fluorspar, R240, natural gas, perchloroethylene, sulfur and ethylene in our PMT business and nickel, steel, titanium and other metals in our Aerospace business, are expected to continue to fluctuate. We will continue to attempt to offset raw material cost increases with formula or long-term supply agreements, price increases and hedging activities where feasible. We do not presently anticipate that a shortage of raw materials will cause any material adverse impacts during 2015.

Patents, Trademarks, Licenses and Distribution Rights

Our segments are not dependent upon any single patent or related group of patents, or any licenses or distribution rights. In our judgment, our intellectual property rights are adequate for the conduct of our business. We believe that, in the aggregate, the rights under our patents, trademarks and licenses are generally important to our operations, but we do not consider any individual patent, trademark or any licensing or distribution rights related to a specific process or product, to be of material importance in relation to our total business.

Research and Development

The Company’s principal research and development activities are in the U.S., India, Europe and China. Research and development (R&D) expense totaled $1,892 million, $1,804 million and $1,847 million in 2014, 2013 and 2012, respectively. The increase in R&D expense of 5% in 2014 compared to 2013 was primarily due to increased expenditures for new product development in our ACS and PMT segments. Customer-sponsored (principally the U.S. Government) R&D activities amounted to an additional $1,034 million, $969 million and $835 million in 2014, 2013 and 2012, respectively.

3


 

Environment

We are subject to various federal, state, local and foreign government requirements regarding protection of human health and the environment. We believe that, as a general matter, our policies, practices and procedures are properly designed to prevent unreasonable risk of environmental damage, and of resulting financial liability, in connection with our business. Some risk of environmental damage is, however, inherent in some of our operations and products, as it is with other companies engaged in similar businesses.

We are and have been engaged in the handling, manufacture, use and disposal of many substances classified as hazardous by one or more regulatory agencies. We believe that, as a general matter, our policies, practices and procedures are properly designed to prevent unreasonable risk of environmental damage and personal injury, and that our handling, manufacture, use and disposal of these substances are in accord with environmental and safety laws and regulations. It is also possible that future knowledge or other developments, such as improved capability to detect substances in the environment or increasingly strict environmental laws and standards and enforcement policies, could bring into question our current or past handling, manufacture, use or disposal of these substances.

Among other environmental requirements, we are subject to the federal Superfund and similar state and foreign laws and regulations, under which we have been designated as a potentially responsible party that may be liable for cleanup costs associated with current and former operating sites and various hazardous waste sites, some of which are on the U.S. Environmental Protection Agency’s National Priority List. Although there is a possibility that a responsible party might have to bear more than its proportional share of the cleanup costs if it is unable to obtain appropriate contribution from other responsible parties, to date we have not had to bear significantly more than our proportional share in multi-party situations taken as a whole.

We do not believe that existing or pending climate change legislation, regulation, or international treaties or accords are reasonably likely to have a material effect in the foreseeable future on the Company’s business or markets that it serves, nor on its results of operations, capital expenditures or financial position. We will continue to monitor emerging developments in this area.

Employees

We have approximately 127,000 employees at December 31, 2014, of whom approximately 50,000 are located in the United States.

4


 

Executive Officers of the Registrant

The executive officers of Honeywell, listed as follows, are elected annually by the Board of Directors. There are no family relationships among them.

     

 

 

 

Name, Age,
Date First
Elected an
Executive Officer

 

Business Experience

David M. Cote, 62
2002(a)

 

Chairman of the Board and Chief Executive Officer since July 2002.

     

Darius Adamczyk, 49
2014

 

President and Chief Executive Officer Performance Materials and Technologies since April 2014. President of Honeywell Process Solutions from April 2012 to April 2014. President of Honeywell Scanning & Mobility from July 2008 to April 2012.

     

Katherine L. Adams, 50
2009

 

Senior Vice President and General Counsel since April 2009. Vice President and General Counsel from September 2008 to April 2009.

     

Roger Fradin, 61
2004

 

Vice Chairman since April 2014. President and Chief Executive Officer Automation and Control Solutions from January 2004 to April 2014.

     

Alexandre Ismail, 49
2009

 

President and Chief Executive Officer Automation and Control Solutions since April 2014. President Energy, Safety and Security from May 2013 to April 2014. President and Chief Executive Officer Transportation Systems from April 2009 to May 2013.

     

Mark R. James, 53
2007

 

Senior Vice President Human Resources, Procurement and Communications since November 2007.

     

Andreas C. Kramvis, 62
2008

 

Vice Chairman since April 2014. President and Chief Executive Officer Performance Materials and Technologies from March 2008 to April 2014.

     

Timothy O. Mahoney, 58
2009

 

President and Chief Executive Officer Aerospace since September 2009. Vice President Aerospace Engineering and Technology and Chief Technology Officer from March 2007 to August 2009.

     

Krishna Mikkilineni, 55
2010

 

Senior Vice President Engineering, Operations and Information Technology since April 2013. Senior Vice President Engineering and Operations from April 2010 to April 2013 and President Honeywell Technology Solutions from January 2009 to April 2013. Vice President Honeywell Technology Solutions from July 2002 to January 2009.

     

Thomas A. Szlosek, 51
2014

 

Senior Vice President and Chief Financial Officer since April 2014. Vice President of Corporate Finance from April 2013 to April 2014. Chief Financial Officer of Automation and Control Solutions from February 2007 to April 2013.

 

 

 

(a)

  Also a Director.

5


 

Item 1A. Risk Factors

Cautionary Statement about Forward-Looking Statements

We describe many of the trends and other factors that drive our business and future results in Item 7. Management’s Discussion and Analysis of Financial Condition, Results of Operations and in other parts of this report (including this Item 1A). Such discussions contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934.

Forward-looking statements are those that address activities, events or developments that management intends, expects, projects, believes or anticipates will or may occur in the future. They are based on management’s assumptions and assessments in light of past experience and trends, current economic and industry conditions, expected future developments and other relevant factors. They are not guarantees of future performance, and actual results, developments and business decisions may differ significantly from those envisaged by our forward-looking statements. We do not undertake to update or revise any of our forward-looking statements. Our forward-looking statements are also subject to risks and uncertainties that can affect our performance in both the near-and long-term. These forward-looking statements should be considered in light of the information included in this Form 10-K, including, in particular, the factors discussed below. These factors may be revised or supplemented in subsequent reports on Forms 10-Q and 8-K.

Risk Factors

Our business, operating results, cash flows and financial condition are subject to the risks and uncertainties set forth below, any one of which could cause our actual results to vary materially from recent results or from our anticipated future results.

Macroeconomic and Industry Risks

Industry and economic conditions may adversely affect the markets and operating conditions of our customers, which in turn can affect demand for our products and services and our results of operations.

 

 

Aerospace—Operating results of our business units within Aerospace are directly tied to cyclical industry and economic conditions, as well as changes in customer buying patterns with respect to aftermarket parts, supplier stability, factory transitions and capacity constraints. The operating results of our Commercial Original Equipment and Commercial aftermarket business units may be adversely affected by downturns in the global demand for air travel which impacts new aircraft production or the delay or cancellation of new aircraft orders, delays in launch schedules for new aircraft, the retirement of aircraft and global flying hours, which impacts business and general aviation aircraft utilization rates. Operating results in our Defense and Space Systems business unit may be affected by the mix of U.S. and foreign government appropriations for defense and space programs. Operating results in our Transportation Systems business unit may be affected by the level of production and demand for automobiles and trucks equipped with turbochargers, regulatory changes regarding automobile and truck emissions and fuel economy, consumer demand and spending for automotive aftermarket products and delays in launch schedules for new automobile and truck platforms.

 

 

Automation and Control Solutions—Operating results may be adversely impacted by downturns in the level of global residential and commercial construction (including retrofits and upgrades), capital spending and operating expenditures on building and process automation, industrial plant capacity utilization and expansion, and inventory levels in distribution channels.

 

 

Performance Materials and Technologies—Operating results may be adversely impacted by downturns in the capacity utilization for chemical, industrial, refining, petrochemical and semiconductor plants, our customers’ availability of capital for refinery construction and expansion, raw material demand and supply volatility, and our ability to maximize our facilities’ production capacity and minimize downtime. Pricing of certain chemical products are driven by

6


 

 

 

  raw materials that are correlated to the price of oil, hence revenue could be significantly impacted by volatility in the price of oil.

An increasing percentage of our sales and operations is in non-U.S. jurisdictions and is subject to the economic, political, regulatory, foreign exchange and other risks of international operations.

Our international operations, including U.S. exports, represent more than half of the Company’s sales. Risks related to international operations include exchange control regulations, wage and price controls, employment regulations, foreign investment laws, import, export and other trade restrictions (such as embargoes), violations by our employees of anti-corruption laws (despite our efforts to mitigate these risks), changes in regulations regarding transactions with state-owned enterprises, nationalization of private enterprises, acts of terrorism, and our ability to hire and maintain qualified staff and maintain the safety of our employees in these regions. Instability and uncertainties arising from the global geopolitical environment and the cost of compliance with increasingly complex and often conflicting regulations worldwide can impair our flexibility in modifying product, marketing, pricing or other strategies for growing our businesses, as well as our ability to improve productivity and maintain acceptable operating margins.

Operating outside of the United States also exposes us to foreign exchange risk, which we monitor and seek to reduce through hedging activities. However, foreign exchange hedging activities bear a financial cost and may not always be available to us or successful in eliminating such volatility. Finally, we generate significant amounts of cash outside of the United States that is invested with financial and non-financial counterparties. While we employ comprehensive controls regarding global cash management to guard against cash or investment loss and to ensure our ability to fund our operations and commitments, a material disruption to the counterparties with whom we transact business could expose Honeywell to financial loss.

A change in the level of U.S. Government defense and space funding or the mix of programs to which such funding is allocated could adversely impact Aerospace’s defense and space sales and results of operations.

A shift in defense or space spending to programs in which we do not participate and/or reductions in funding for or termination of existing programs could adversely impact our results of operations.

Risks related to our defined benefit pension plans may adversely impact our results of operations and cash flow.

Significant changes in actual investment return on pension assets, discount rates, and other factors could adversely affect our results of operations and require cash pension contributions in future periods. Changes in discount rates and actual asset returns different than our anticipated asset returns can result in significant non-cash actuarial gains or losses which we record in the fourth quarter of each fiscal year, and, if applicable, in any quarter in which an interim re-measurement is triggered. With regard to cash pension contributions, funding requirements for our pension plans are largely dependent upon interest rates, actual investment returns on pension assets and the impact of legislative or regulatory changes related to pension funding obligations.

Operational Risks

Raw material price fluctuations, the ability of key suppliers to meet quality and delivery requirements, or catastrophic events can increase the cost of our products and services, impact our ability to meet commitments to customers and cause us to incur significant liabilities.

The cost of raw materials is a key element in the cost of our products, particularly in PMT (cumene, fluorspar, R240, natural gas, perchloroethylene, sulfur and ethylene) and Aerospace (nickel, steel, titanium and other metals). Our inability to offset material price inflation through increased prices

7


 

to customers, formula or long-term fixed price contracts with suppliers, productivity actions or through commodity hedges could adversely affect our results of operations.

Many major components, product equipment items and raw materials, particularly in Aerospace, are procured or subcontracted on a single or sole-source basis. Although we maintain a qualification and performance surveillance process and we believe that sources of supply for raw materials and components are generally adequate, it is difficult to predict what effects shortages or price increases may have in the future. Our ability to manage inventory and meet delivery requirements may be constrained by our suppliers’ inability to scale production and adjust delivery of long-lead time products during times of volatile demand. Our inability to fill our supply needs would jeopardize our ability to fulfill obligations under commercial and government contracts, which could, in turn, result in reduced sales and profits, contract penalties or terminations, and damage to customer relationships.

Failure to increase productivity through sustainable operational improvements, as well as an inability to successfully execute repositioning projects, may reduce our profitability or adversely impact our businesses.

Our profitability and margin growth are dependent upon our ability to drive sustainable improvements. In addition, we seek productivity and cost savings benefits through repositioning actions and projects, such as consolidation of manufacturing facilities, transitions to cost-competitive regions and product line rationalizations. Risks associated with these actions include delays in execution of the planned initiatives, additional unexpected costs, adverse effects on employee morale and the failure to meet operational targets due to employee attrition. We may not realize the full operational or financial benefits we expect, the recognition of these benefits may be delayed and these actions may potentially disrupt our operations.

Our future growth is largely dependent upon our ability to develop new technologies and introduce new products that achieve market acceptance in highly competitive markets with acceptable margins.

Our future growth rate depends upon a number of factors, including our ability to (i) identify emerging technological trends in our target end-markets, (ii) develop and maintain competitive products, (iii) enhance our products by adding innovative features that differentiate our products from those of our competitors and prevent commoditization of our products, (iv) develop, manufacture and bring new products to market quickly and cost-effectively, and (v) develop and retain individuals with the requisite technical expertise and understanding of customers’ needs to develop new technologies and introduce new products.

The failure of our technologies or products to gain market acceptance due to more attractive offerings by our competitors could significantly reduce our revenues and adversely affect our competitive standing and prospects.

We may be unable to successfully execute or effectively integrate acquisitions, and divestitures may not occur as planned.

We regularly review our portfolio of businesses and pursue growth through acquisitions and seek to divest non-core businesses. We may not be able to complete transactions on favorable terms, on a timely basis or at all. In addition, our results of operations and cash flows may be adversely impacted by (i) the failure of acquired businesses to meet or exceed expected returns, (ii) the failure to integrate acquired businesses into Honeywell on schedule and/or to achieve expected synergies, (iii) the inability to dispose of non-core assets and businesses on satisfactory terms and conditions, and (iv) the discovery of unanticipated liabilities or other problems in acquired businesses for which we lack contractual protections, insurance or indemnities or, with regard to divested businesses, claims by purchasers to whom we have provided contractual indemnification.

8


 

As a supplier of military and other equipment to the U.S. Government, we are subject to unusual risks, such as the right of the U.S. Government to terminate contracts for convenience and to conduct audits and investigations of our operations and performance.

U.S. Government contracts are subject to termination by the government, either for the convenience of the government or for our failure to perform consistent with the terms of the applicable contract. Our contracts with the U.S. Government are also subject to government audits that may recommend downward price adjustments and other changes. When appropriate and prudent, we have made adjustments and paid voluntary refunds in the past and may do so in the future.

We are also subject to government investigations of business practices and compliance with government procurement regulations. If, as a result of any such investigation or other government investigations (including violations of certain environmental, employment or export laws), Honeywell or one of its businesses were found to have violated applicable law, it could be suspended from bidding on or receiving awards of new government contracts, suspended from contract performance pending the completion of legal proceedings and/or have its export privileges suspended.

Our operations and the prior operations of predecessor companies expose us to the risk of material environmental liabilities.

Mainly because of past operations and operations of predecessor companies, we are subject to potentially material liabilities related to the remediation of environmental hazards and to claims of personal injuries or property damages that may be caused by hazardous substance releases and exposures. We continue to incur remedial response and voluntary clean-up costs for site contamination and are a party to lawsuits and claims associated with environmental and safety matters, including past production of products containing hazardous substances. Additional lawsuits, claims and costs involving environmental matters are likely to continue to arise in the future. Various federal, state, local and foreign governments regulate the discharge of materials into the environment and can impose substantial fines and criminal sanctions for violations, and require installation of costly equipment or operational changes to limit emissions and/or decrease the likelihood of accidental hazardous substance releases. In addition, changes in laws, regulations and enforcement of policies, the discovery of previously unknown contamination or new technology or information related to individual sites, the establishment of stricter state or federal toxicity standards with respect to certain contaminants, or the imposition of new clean-up requirements or remedial techniques could require us to incur additional costs in the future that would have a negative effect on our financial condition or results of operations.

Cybersecurity incidents could disrupt business operations, result in the loss of critical and confidential information, and adversely impact our reputation and results of operations.

Global cybersecurity threats and incidents can range from uncoordinated individual attempts to gain unauthorized access to information technology (IT) systems to sophisticated and targeted measures known as advanced persistent threats, directed at the Company, its products, its customers and/or its third party service providers. While we have experienced, and expect to continue to experience, these types of threats and incidents, none of them to date have been material to the Company. We seek to deploy comprehensive measures to prevent, detect, address and mitigate these threats (including access controls, data encryption, vulnerability assessments, product software designs which we believe are less susceptible to cyber attacks, continuous monitoring of our IT networks and systems and maintenance of backup and protective systems. Despite these efforts, cybersecurity incidents, depending on their nature and scope, could potentially result in the misappropriation, destruction, corruption or unavailability of critical data and confidential or proprietary information (our own or that of third parties) and the disruption of business operations. Cybersecurity incidents aimed at the software imbedded in our products could lead to third party claims that our product failures have caused a similar range of damages to our customers. The potential consequences of a material cybersecurity incident include reputational damage, litigation with third parties, diminution in the value of our investment in research, development and engineering, and increased cybersecurity protection and remediation costs, which in turn could adversely affect our competitiveness and results of operations.

9


 

Legal and Regulatory Risks

Our U.S. and non-U.S. tax liabilities are dependent, in part, upon the distribution of income among various jurisdictions in which we operate.

Our tax expense includes estimates of tax reserves and reflects other estimates and assumptions, including assessments of future earnings of the Company which could impact the valuation of our deferred tax assets. Our future results of operations could be adversely affected by changes in the effective tax rate as a result of a change in the mix of earnings in countries with differing statutory tax rates, changes in tax laws, regulations and judicial rulings, changes in generally accepted accounting principles, changes in the valuation of deferred tax assets and liabilities, changes in the amount of earnings permanently reinvested offshore, the results of audits and examinations of previously filed tax returns and continuing assessments of our tax exposures and various other governmental enforcement initiatives.

Changes in legislation or government regulations or policies can have a significant impact on our results of operations.

The sales and margins of each of our segments are directly impacted by government regulations including safety, performance and product certification regulations. Within Aerospace, the operating results of our Commercial Original Equipment and Commercial Aftermarket business units may be impacted by, among other things, mandates of the Federal Aviation Administration and other similar international regulatory bodies requiring the installation of equipment on aircraft. Our Defense and Space business unit may be effected by changes in government procurement regulations, while emissions, fuel economy and energy efficiency standards for motor vehicles can impact the Transportation Systems business unit. Within ACS, the demand for and cost of providing products, services and solutions can be impacted by fire, security, safety, health care, environmental and energy efficiency standards and regulations. PMT’s results of operations can be affected by environmental, safety and energy efficiency standards and regulations.

We cannot predict with certainty the outcome of litigation matters, government proceedings and other contingencies and uncertainties.

We are subject to a number of lawsuits, investigations and disputes (some of which involve substantial amounts claimed) arising out of the conduct of our business, including matters relating to commercial transactions, government contracts, product liability (including asbestos), prior acquisitions and divestitures, employment, employee benefits plans, intellectual property, antitrust, import and export matters and environmental, health and safety matters. Our potential liabilities are subject to change over time due to new developments, changes in settlement strategy or the impact of evidentiary requirements, and we may become subject to or be required to pay damage awards or settlements that could have a material adverse effect on our results of operations, cash flows and financial condition. While we maintain insurance for certain risks, the amount of our insurance coverage may not be adequate to cover the total amount of all insured claims and liabilities. The incurrence of significant liabilities for which there is no or insufficient insurance coverage could adversely affect our results of operations, cash flows, liquidity and financial condition.

Item 1B. Unresolved Staff Comments

Not applicable.

10


 

Item 2. Properties

We have approximately 1,250 locations, of which 264 are plants. Our properties and equipment are in good operating condition and are adequate for our present needs. We do not anticipate difficulty in renewing existing leases as they expire or in finding alternative facilities.

Item 3. Legal Proceedings

We are subject to a number of lawsuits, investigations and claims (some of which involve substantial amounts) arising out of the conduct of our business. See a discussion of environmental, asbestos and other litigation matters in Note 19 Commitments and Contingencies of Notes to Financial Statements.

Environmental Matters Involving Potential Monetary Sanctions in Excess of $100,000

The Virginia Department of Environmental Quality (“DEQ”) has alleged that Honeywell’s facility in Hopewell, Virginia failed to comply with certain conditions of its wastewater discharge permit at various times between August 2013 and February 2014. Honeywell has met with the DEQ about this matter and negotiations to resolve it are ongoing. We do not believe that it will have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Item 4. Mine Safety Disclosures

Not applicable.

11


 

Part II.

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Honeywell’s common stock is listed on the New York Stock Exchange. Market and dividend information for Honeywell’s common stock is included in Note 24 Unaudited Quarterly Financial Information of Notes to Financial Statements.

The number of record holders of our common stock at December 31, 2014 was 52,591.

Honeywell purchased 2,500,000 shares of its common stock, par value $1 per share, in the quarter ending December 31, 2014. Under the Company’s previously reported $5 billion share repurchase program, $4.1 billion remained available as of December 31, 2014 for additional share repurchases. Honeywell presently expects to repurchase outstanding shares from time to time to offset the dilutive impact of employee stock based compensation plans, including option exercises, restricted unit vesting and matching contributions under our savings plans. The amount and timing of future repurchases may vary depending on market conditions and the level of our operating, financing and other investing activities.

The following table summarizes Honeywell’s purchase of its common stock for the three months ended December 31, 2014:

 

 

 

 

 

 

 

 

 

 

Issuer Purchases of Equity Securities

Period

 

(a)

 

(b)

 

(c)

 

(d)

 

Total
Number of
Shares
Purchased

 

Average
Price Paid
per Share

 

Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans
or Programs

 

Approximate Dollar
Value of Shares that
May Yet be Purchased
Under Plans or
Programs
(Dollars in millions)

November 2014

 

 

 

2,500,000

 

 

 

$

 

94.00

 

 

 

 

2,500,000

 

 

 

$

 

4,076

 

12


 

Performance Graph

The following graph compares the five-year cumulative total return on our common stock to the total returns on the Standard & Poor’s (S&P) 500 Stock Index and a composite of S&P’s Industrial Conglomerates and Aerospace and Defense indices, on a 65%/35% weighted basis, respectively (the Composite Index). The weighting of the components of the Composite Index are based on our segments’ relative contribution to total segment profit. The selection of the Industrial Conglomerates component of the Composite Index reflects the diverse and distinct range of non-aerospace businesses conducted by Honeywell. The annual changes for the five-year period shown in the graph are based on the assumption that $100 had been invested in Honeywell stock and each index on December 31, 2009 and that all dividends were reinvested.

COMPARISON OF CUMULATIVE FIVE YEAR TOTAL RETURN

13


 

HONEYWELL INTERNATIONAL INC.

This selected financial data should be read in conjunction with Honeywell’s Consolidated Financial Statements and related Notes included elsewhere in this Annual Report as well as the section of this Annual Report titled Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 6. Selected Financial Data

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

2014

 

2013

 

2012

 

2011

 

2010

 

 

(Dollars in millions, except per share amounts)

Results of Operations

 

 

 

 

 

 

 

 

 

 

Net sales

 

 

$

 

40,306

 

 

 

$

 

39,055

 

 

 

$

 

37,665

 

 

 

$

 

36,529

 

 

 

$

 

32,350

 

Amounts attributable to Honeywell:

 

 

 

 

 

 

 

 

 

 

Income from continuing operations less net income attributable to the noncontrolling interest

 

 

 

4,239

 

 

 

 

3,924

 

 

 

 

2,926

 

 

 

 

1,858

 

 

 

 

1,944

 

Income from discontinued operations(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

209

 

 

 

 

78

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Honeywell

 

 

 

4,239

 

 

 

 

3,924

 

 

 

 

2,926

 

 

 

 

2,067

 

 

 

 

2,022

 

Earnings Per Common Share

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

 

 

5.40

 

 

 

 

4.99

 

 

 

 

3.74

 

 

 

 

2.38

 

 

 

 

2.51

 

Income from discontinued operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0.27

 

 

 

 

0.10

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Honeywell

 

 

 

5.40

 

 

 

 

4.99

 

 

 

 

3.74

 

 

 

 

2.65

 

 

 

 

2.61

 

Assuming dilution:

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

 

 

5.33

 

 

 

 

4.92

 

 

 

 

3.69

 

 

 

 

2.35

 

 

 

 

2.49

 

Income from discontinued operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0.26

 

 

 

 

0.10

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Honeywell

 

 

 

5.33

 

 

 

 

4.92

 

 

 

 

3.69

 

 

 

 

2.61

 

 

 

 

2.59

 

Dividends per share

 

 

 

1.87

 

 

 

 

1.68

 

 

 

 

1.53

 

 

 

 

1.37

 

 

 

 

1.21

 

Financial Position at Year-End

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment—net

 

 

 

5,383

 

 

 

 

5,278

 

 

 

 

5,001

 

 

 

 

4,804

 

 

 

 

4,724

 

Total assets

 

 

 

45,451

 

 

 

 

45,435

 

 

 

 

41,853

 

 

 

 

39,808

 

 

 

 

37,834

 

Short-term debt

 

 

 

2,637

 

 

 

 

2,028

 

 

 

 

1,101

 

 

 

 

674

 

 

 

 

889

 

Long-term debt

 

 

 

6,046

 

 

 

 

6,801

 

 

 

 

6,395

 

 

 

 

6,881

 

 

 

 

5,755

 

Total debt

 

 

 

8,683

 

 

 

 

8,829

 

 

 

 

7,496

 

 

 

 

7,555

 

 

 

 

6,644

 

Redeemable noncontrolling interest

 

 

 

219

 

 

 

 

167

 

 

 

 

150

 

 

 

 

 

 

 

 

 

Shareowners’ equity

 

 

 

17,784

 

 

 

 

17,579

 

 

 

 

13,065

 

 

 

 

10,902

 

 

 

 

10,787

 

 

 

(1)

 

For the year ended December 31, 2011, income from discontinued operations includes a $178 million, net of tax gain, resulting from the sale of the Consumer Products Group business.

14


 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Dollars in millions, except per share amounts)

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand the results of operations and financial condition of Honeywell International Inc. and its consolidated subsidiaries (Honeywell or the Company) for the three years ended December 31, 2014. All references to Notes relate to Notes to Financial Statements in Item 8. Financial Statements and Supplementary Data.

In April 2014, the Company announced the realignment of our Honeywell Process Solutions business from Automation and Control Solutions (ACS) into Performance Materials and Technologies (PMT). The Company has reported its financial performance based on the inclusion of Honeywell Process Solutions in Performance Materials and Technologies for all periods presented.

In July 2014, following the closing of the sale of its Friction Materials business, the Company announced the realignment of its Transportation Systems business segment with its Aerospace business segment. Under the realigned segment reporting structure, the Company has three business segments: Aerospace, Automation and Control Solutions and Performance Materials and Technologies. The Company has reported its financial performance based on the inclusion of Transportation Systems in Aerospace for all periods presented.

These realignments have no impact on the Company’s historical consolidated financial position, results of operations or cash flows. Prior period amounts have been reclassified to conform to current period presentation.

EXECUTIVE SUMMARY

For Honeywell, 2014 represented a year of strong performance despite a continued slow growth global environment. Honeywell’s 2014 revenues were $40.3 billion representing a 3% improvement compared to 2013 revenues of $39.1 billion. Our segment profit improved by 5%, more than one and one-half times revenue growth, evidencing the Company’s continued focus on operational excellence. We achieved strong segment profit expansion while reinvesting in our businesses through seed planting and continued focus on effective repositioning. The Company’s operational excellence and ability to expand profit faster than sales growth is due in part to a consistent, methodical application of several key internal business processes, the Honeywell Enablers, which drive improvements in organizational efficiency and service quality, bringing world-class products and services to markets faster and more cost effectively for our customers. We continued to execute on our key strategies for growth including penetration of high growth regions and investments in high return capital expenditures and new products and technologies, while maintaining our cost disciplines and leveraging the Honeywell Enablers.

The Company continues to invest for future growth as measured by a number of important metrics:

 

 

R&D spending at 4.7% of revenues was targeted at such high growth areas as natural gas processing, low global warming refrigerants and blowing agents, avionics equipment and technology, connected voice and wireless control devices and technologies, software and mobile app development and data science to deliver value.

 

 

Capital expenditures of $1,094 million (in addition to $947 million in 2013) principally related to the construction and expansion of Aerospace and PMT manufacturing facilities, as well as continued investment in our ACS facilities.

 

 

The Company recognized $184 million of charges relating to repositioning actions to support sustainable productivity in years to come.

 

 

The Company continued to monitor its portfolio of businesses to ensure they fit our long-term strategic plan. In 2014, the Company sold its Friction Materials business for approximately $155 million. In addition, the Company signed a definitive agreement to acquire Datamax-O’Neil,

15


 

 

 

 

a global manufacturer of fixed and mobile printers, for $185 million (the transaction is expected to close in early 2015).

 

 

Expansion of Honeywell’s presence and sales in high growth regions and countries such as China, India, Latin America, the Middle East and Eastern Europe. Sales to customers outside the United States increased by 5% in 2014 and now account for approximately 55% of total revenues.

 

 

Operating cash flow grew by 16% in 2014 to $5,024 million. This operating cash flow performance enabled us to invest $1,094 million in capital expenditures, repay $600 million in long-term debt, provide a 15% increase in the Company’s cash dividend rate (vs. 2013) and repurchase 10.0 million shares of common stock.

CONSOLIDATED RESULTS OF OPERATIONS

Net Sales

 

 

 

 

 

 

 

 

 

2014

 

2013

 

2012

Net sales

 

 

$

 

40,306

 

 

 

$

 

39,055

 

 

 

$

 

37,665

 

% change compared with prior period

 

3%

 

4%

 

 

The change in net sales is attributable to the following:

 

 

 

 

 

 

 

2014
Versus
2013

 

2013
Versus
2012

Volume

 

 

 

3%

 

 

 

 

1%

 

Price

 

 

 

 

 

 

 

1%

 

Acquisitions/Divestitures

 

 

 

1%

 

 

 

 

2%

 

Other

 

 

 

(1)%

 

 

 

 

 

 

 

 

 

 

 

 

 

3%

 

 

 

 

4%

 

 

 

 

 

 

A discussion of net sales by segment can be found in the Review of Business Segments section of this MD&A.

Cost of Products and Services Sold

 

 

 

 

 

 

 

 

 

2014

 

2013

 

2012

Cost of products and services sold

 

 

$

 

28,957

 

 

 

$

 

28,364

 

 

 

$

 

28,291

 

% change compared with prior period

 

2%

 

 

 

 

 

 

Gross Margin percentage

 

 

 

28.2

%

 

 

 

 

27.4

%

 

 

 

 

24.9

%

 

Cost of products and services sold increased in 2014 compared with 2013 principally due to an increase in direct material and labor costs of approximately $645 million (driven by higher sales volume and acquisitions, net of divestitures) and an increase in pension and other postretirement benefit expense of approximately $35 million, partially offset by a decrease in repositioning and other charges of approximately $40 million.

Gross margin percentage increased in 2014 compared with 2013 principally due to higher gross margin in all of our business segments (approximately 0.7 percentage point impact collectively) and lower repositioning and other charges (approximately 0.1 percentage point impact), partially offset by higher pension and other postretirement benefit expense (approximately 0.1 percentage point impact).

Cost of products and services sold increased in 2013 compared with 2012 principally due to an increase in direct material costs of approximately $585 million and indirect material costs of approximately $115 million (driven by higher sales volume and acquisitions) and increased repositioning and other charges of approximately $140 million partially offset by a decrease in pension expense of approximately $760 million, primarily driven by the $650 million decrease in the pension mark-to-market adjustment allocated to cost of products and services sold (approximately $30 million in 2013 versus approximately $680 million in 2012).

16


 

Gross margin percentage increased in 2013 compared with 2012 principally due to lower pension expense (approximately 2.0 percentage point impact primarily driven by the decrease in the pension mark-to-market adjustment allocated to cost of products and services sold), higher segment gross margin in all of our business segments (approximately 0.5 percentage point impact collectively) and lower other postretirement expense (0.1 percentage point impact) partially offset by higher repositioning and other charges (approximately 0.4 percentage point impact).

Selling, General and Administrative Expenses

 

 

 

 

 

 

 

 

 

2014

 

2013

 

2012

Selling, general and administrative expense

 

 

$

 

5,518

 

 

 

$

 

5,190

 

 

 

$

 

5,218

 

% of sales

 

13.7%

 

13.3%

 

13.9%

Selling, general and administrative expenses (SG&A) increased in 2014 compared with 2013 as a percentage of sales primarily driven by an estimated $435 million increase in labor costs (primarily acquisitions, incentive compensation, merit increases and investment for growth) and an estimated $30 million increase in pension and other postretirement benefit expense, partially offset by a $25 million decrease in repositioning charges.

Selling, general and administrative expenses decreased in 2013 compared with 2012 as a percentage of sales primarily driven by (i) higher sales as a result of the factors discussed in the Review of Business Segments section of this MD&A, (ii) an estimated $270 million decrease in pension expense primarily driven by an approximately $250 million decrease in the pension mark-to-market charge allocated to SG&A (approximately $20 million in 2013 versus approximately $270 million in 2012) partially offset by an estimated $215 million increase in labor costs (primarily acquisitions, merit increases and investment for growth) and an $80 million increase in repositioning charges.

Tax Expense

 

 

 

 

 

 

 

 

 

2014

 

2013

 

2012

Tax expense

 

 

$

 

1,489

 

 

 

$

 

1,450

 

 

 

$

 

944

 

Effective tax rate

 

 

 

25.6

%

 

 

 

 

26.8

%

 

 

 

 

24.4

%

 

For discussion of income taxes and the effective income tax rate, see Note 5 Income Taxes in the Notes to Financial Statements.

The effective income tax rates for 2014, 2013 and 2012 reflect pension mark-to-market adjustments and tax benefits associated with lower tax rates on non-U.S. earnings, the vast majority of which we intend to permanently reinvest outside the United States.

Net Income Attributable to Honeywell

 

 

 

 

 

 

 

 

 

2014

 

2013

 

2012

Net income attributable to Honeywell

 

 

$

 

4,239

 

 

 

$

 

3,924

 

 

 

$

 

2,926

 

Earnings per share of common stock—assuming dilution

 

 

$

 

5.33

 

 

 

$

 

4.92

 

 

 

$

 

3.69

 

Earnings per share of common stock—assuming dilution increased in 2014 compared with 2013 primarily due to increased segment profit in each of our business segments and lower repositioning and other charges, partially offset by higher pension and other postretirement expense and increased tax expense.

Earnings per share of common stock—assuming dilution increased in 2013 compared with 2012 primarily due to lower pension expense, increased segment profit in each of our business segments and higher other income, partially offset by increased tax expense and higher repositioning and other charges.

17


 

BUSINESS OVERVIEW

Our consolidated operating results are principally impacted by:

 

 

Change in global economic growth rates and industry conditions and demand in our key end markets;

 

 

Overall sales mix, in particular the mix of Aerospace original equipment and aftermarket sales and the mix of ACS products, distribution and services sales;

 

 

The impact of fluctuations in foreign currency exchange rates (in particular the Euro), relative to the U.S. dollar;

 

 

The extent to which cost savings from productivity actions are able to offset or exceed the impact of material and non-material inflation; and

 

 

The impact of the pension discount rate and asset returns on pension expense, including mark-to-market adjustments, and funding requirements.

Our 2015 areas of focus are supported by the Honeywell Enablers, including the Honeywell Operating System (HOS Gold), Velocity Product Development, Functional Transformation and the Honeywell User Experience. These areas of focus are generally applicable to each of our operating segments and include:

 

 

Driving profitable growth through R&D, technological excellence and optimized manufacturing capability to deliver innovative products that customers value;

 

 

Expanding margins by maintaining and improving the Company’s cost structure through manufacturing and administrative process improvements, repositioning, and other actions, which will drive productivity and enhance the flexibility of the business as it works to proactively respond to changes in end market demand;

 

 

Proactively managing raw material costs through formula and long-term supply agreements and hedging activities, where feasible and prudent;

 

 

Driving strong cash flow conversion through effective working capital management which will enable the Company to undertake strategic actions to benefit the business including capital expenditures, strategic acquisitions, and returning cash to shareholders;

 

 

Driving organic growth through expansion of our localized footprint in high growth regions, including China, India, Eastern Europe, the Middle East and Latin America;

 

 

Driving inorganic growth through the identification of appropriate acquisition targets and deployment of our disciplined, rigorous M&A and integration processes;

 

 

Aligning and prioritizing capital expenditures for long-term growth, while considering short-term demand volatility;

 

 

Monitoring both suppliers and customers for signs of liquidity constraints, limiting exposure to any resulting inability to meet delivery commitments or pay amounts due, and identifying alternate sources of supply as necessary; and

 

 

Controlling Corporate and other non-operating costs, including costs incurred for asbestos and environmental matters, pension and other post-retirement expenses and tax expense.

18


 

Review of Business Segments

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

% Change

 

2014
Versus
2013

 

2013
Versus
2012

 

2014

 

2013

 

2012

Aerospace Sales

 

 

 

 

 

 

 

 

 

 

Commercial Original Equipment

 

 

$

 

2,607

 

 

 

$

 

2,651

 

 

 

$

 

2,568

 

 

 

 

(2

)%

 

 

 

 

3

%

 

Commercial Aftermarket

 

 

 

4,578

 

 

 

 

4,459

 

 

 

 

4,364

 

 

 

 

3

%

 

 

 

 

2

%

 

Defense and Space

 

 

 

4,754

 

 

 

 

4,870

 

 

 

 

5,108

 

 

 

 

(2

)%

 

 

 

 

(5

)%

 

Transportation Systems

 

 

 

3,659

 

 

 

 

3,755

 

 

 

 

3,561

 

 

 

 

(3

)%

 

 

 

 

5

%

 

 

 

 

 

 

 

 

Total Aerospace Sales

 

 

 

15,598

 

 

 

 

15,735

 

 

 

 

15,601

 

 

 

 

 

Automation and Control Solutions Sales

 

 

 

 

 

 

 

 

 

 

Energy Safety & Security

 

 

 

9,738

 

 

 

 

8,756

 

 

 

 

8,123

 

 

 

 

11

%

 

 

 

 

8

%

 

Building Solutions & Distribution

 

 

 

4,749

 

 

 

 

4,709

 

 

 

 

4,664

 

 

 

 

1

%

 

 

 

 

1

%

 

 

 

 

 

 

 

 

Total Automation and Control Solutions Sales

 

 

 

14,487

 

 

 

 

13,465

 

 

 

 

12,787

 

 

 

 

 

Performance Materials and Technologies Sales

 

 

 

 

 

 

 

 

 

 

UOP

 

 

 

3,195

 

 

 

 

2,962

 

 

 

 

2,253

 

 

 

 

8

%

 

 

 

 

31

%

 

Process Solutions

 

 

 

3,122

 

 

 

 

3,091

 

 

 

 

3,093

 

 

 

 

1

%

 

 

 

 

 

Advanced Materials

 

 

 

3,904

 

 

 

 

3,802

 

 

 

 

3,931

 

 

 

 

3

%

 

 

 

 

(3

)%

 

 

 

 

 

 

 

 

Total Performance Materials and Technologies Sales

 

 

 

10,221

 

 

 

 

9,855

 

 

 

 

9,277

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

$

 

40,306

 

 

 

$

 

39,055

 

 

 

$

 

37,665

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace

 

 

 

 

 

 

 

 

 

 

 

                     

 

 

2014

 

2013

 

Change

 

2012

 

Change

Net sales

 

 

$

 

15,598

 

 

 

$

 

15,735

 

 

 

 

(1

)%

 

 

 

$

 

15,601

 

 

 

 

1

%

 

Cost of products and services sold

 

 

 

11,699

 

 

 

 

11,889

 

 

 

 

 

 

11,863

 

 

 

Selling, general and administrative expenses

 

 

 

712

 

 

 

 

705

 

 

 

 

 

 

763

 

 

 

Other

 

 

 

272

 

 

 

 

271

 

 

 

 

 

 

264

 

 

 

 

 

 

 

 

 

 

 

 

Segment profit

 

 

$

 

2,915

 

 

 

$

 

2,870

 

 

 

 

2

%

 

 

 

$

 

2,711

 

 

 

 

6

%

 

 

 

 

 

 

 

 

 

 

                 

 

 

 

 

 

 

 

 

 

Factors Contributing to Year-Over-Year Change

 

2014 vs. 2013

 

2013 vs. 2012

 

Sales

 

Segment
Profit

 

Sales

 

Segment
Profit

Organic growth/ Operational segment profit

 

 

 

2

%

 

 

 

 

8

%

 

 

 

 

1

%

 

 

 

 

6

%

 

Acquisitions, divestitures and other, net

 

 

 

(3

)%

 

 

 

 

(6

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total % Change

 

 

 

 (1

)%

 

 

 

 

 2

%

 

 

 

 

 1

%

 

 

 

 

 6

%

 

 

 

 

 

 

 

 

 

 

2014 compared with 2013

Aerospace sales decreased primarily due to the Friction Materials divestiture and an increase in incentive payments due to air transport and regional and business and general aviation original equipment (OE) manufacturers (OEM Incentive Payments), partially offset by an increase in organic sales, as discussed below.

 

 

Commercial Original Equipment sales decreased by 2% (increased by 3% organic) primarily due to an increase in OEM Incentive Payments to air transport and regional OE manufacturers, partially offset by higher air transport volumes, consistent with the OE Manufacturers’ higher production rates, and business and general aviation engine shipments.

 

 

Commercial Aftermarket sales increased by 3% driven primarily by higher sales of spare parts to air transport and regional customers, partially offset by a decline in retrofits, modifications and

19


 

 

 

 

upgrades and lower repair and overhaul activities for our business and general aviation customers.

 

 

Defense and Space sales decreased by 2% primarily due to lower U.S. government services revenue and the absence of a prior year royalty gain, partially offset by growth in international programs.

 

 

Transportation Systems sales decreased by 3% (increased by 5% organic) primarily due to the Friction Materials divestiture, partially offset by continued growth from new platform launches, higher global turbo gas penetration and increased commercial vehicle demand in Europe.

Aerospace segment profit increased by 2% due to an 8% increase in operational segment profit, partially offset by a 6% unfavorable impact from acquisitions, divestitures and other (predominantly higher OEM Incentive Payments and the absence of a prior year royalty gain), as discussed above. The increase in operational segment profit is driven primarily by favorable price and productivity, net of inflation. Cost of products and services sold totaled $11.7 billion in 2014, a decrease of $190 million, primarily due to the factors discussed above (excluding price).

2013 compared with 2012

Aerospace sales increased primarily due to favorable pricing, increased volumes in our Commercial Original Equipment business and increased licensing revenue (primarily due to a royalty gain in the fourth quarter), offset by decreased volumes in our Defense and Space and Commercial Aftermarket businesses and an increase in incentive payments due to business and general aviation and air transport and regional OE manufacturers to partially offset their pre-production costs associated with new aircraft platforms.

 

 

Commercial Original Equipment sales increased by 3% driven primarily by higher air transport volumes, consistent with the OE Manufacturers’ higher production rates, and strong demand in the business jet mid to large cabin segment, partially offset by an increase in OEM Incentive Payments to business and general aviation customers.

 

 

Commercial Aftermarket sales increased by 2% driven primarily by higher retrofits, modifications and upgrades activities and higher repair and overhaul activities for air transport and regional customers, partially offset by fewer repair and overhaul activities for business and general aviation customers.

 

 

Defense and Space sales decreased by 5% primarily due to U.S. government program ramp downs and lower defense budget, partially offset by a royalty gain in the fourth quarter.

 

 

Transportation Systems sales increased by 5% primarily due to an increase in organic sales driven by continued strong growth from new platform launches and higher global turbo gas penetration.

Aerospace segment profit increased by 6% primarily due to an increase in operational segment profit driven by commercial sales growth, as discussed above, including favorable pricing and productivity, net of inflation, partially offset by lower defense and space sales, as discussed above. Cost of products and services sold totaled $11.9 billion in 2013, an increase of approximately $26 million, primarily due to the factors discussed above (excluding price).

Automation and Control Solutions

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

2013

 

Change

 

2012

 

Change

Net sales

 

 

$

 

14,487

 

 

 

$

 

13,465

 

 

 

 

8

%

 

 

 

$

 

12,787

 

 

 

 

5

%

 

Cost of products and services sold

 

 

 

9,447

 

 

 

 

8,872

 

 

 

 

 

 

8,511

 

 

 

Selling, general and administrative expenses

 

 

 

2,584

 

 

 

 

2,358

 

 

 

 

 

 

2,197

 

 

 

Other

 

 

 

256

 

 

 

 

252

 

 

 

 

 

 

243

 

 

 

 

 

 

 

 

 

 

 

 

Segment profit

 

 

$

 

2,200

 

 

 

$

 

1,983

 

 

 

 

11

%

 

 

 

$

 

1,836

 

 

 

 

8

%

 

 

 

 

 

 

 

 

 

 

20


 

 

 

 

 

 

 

 

 

 

Factors Contributing to Year-Over-Year Change

 

2014 vs. 2013

 

2013 vs. 2012

 

Sales

 

Segment
Profit

 

Sales

 

Segment
Profit

Organic growth/ Operational segment profit

 

 

 

4

%

 

 

 

 

9

%

 

 

 

 

3

%

 

 

 

 

7

%

 

Foreign exchange

 

 

 

(1

)%

 

 

 

 

(1

)%

 

 

 

 

 

 

 

 

 

Acquisitions and divestitures, net

 

 

 

5

%

 

 

 

 

3

%

 

 

 

 

2

%

 

 

 

 

1

%

 

 

 

 

 

 

 

 

 

 

Total % Change

 

 

 

 8

%

 

 

 

 

 11

%

 

 

 

 

 5

%

 

 

 

 

 8

%

 

 

 

 

 

 

 

 

 

 

2014 compared with 2013

ACS sales increased by 8% in 2014 compared with 2013, primarily due to growth from acquisitions, net of divestitures and organic sales growth, partially offset by the unfavorable impact of foreign exchange.

 

 

Sales in our Energy, Safety & Security businesses increased by 11% (4% organic) in 2014 principally due to (i) acquisitions, net of divestitures, (ii) higher global sales volumes in our Environmental and Combustion Controls business driven by strong U.S. residential market conditions and new product introductions, (iii) increases in sales volumes in our Fire and Industrial Safety businesses driven by organic growth in all regions and (iv) increases in sales volumes in our Scanning and Mobility business in the second half of 2014.

 

 

Sales in Building Solutions & Distribution increased by 1% (2% organic) in 2014 principally due to increased sales volumes in our Americas Distribution business partially offset by softness in the U.S. energy retrofit business. Building solutions backlog increased in 2014.

ACS segment profit increased by 11% in 2014 compared with 2013 due to a 9% increase in operational segment profit and a 3% increase from acquisitions, net of divestitures, partially offset by the unfavorable impact of foreign exchange. The increase in operational segment profit is primarily the result of higher sales volumes as discussed above, and the positive impact of price and productivity, net of inflation partially offset by continued investment for growth. Cost of products and services sold totaled $9.4 billion in 2014, an increase of $575 million which is primarily due to higher sales volume, acquisitions, net of divestitures and inflation, partially offset by productivity and the favorable impact of foreign exchange.

2013 compared with 2012

ACS sales increased by 5% in 2013 compared with 2012, primarily due to a 3% increase in organic revenue driven by increased sales volume and 2% growth from acquisitions, net of divestitures.

 

 

Sales in our Energy, Safety & Security businesses increased by 8% (3% organic) in 2013 principally due to (i) the positive impact of acquisitions, (ii) increases in sales volumes in our environmental and combustion control and security businesses driven by improved U.S. residential market conditions and new product introductions and (iii) higher sales volumes of our fire systems and sensors and safety products (in the second half), partially offset by decreases in sales volumes of our sensing and control products (in the first half of 2013) and scanning and mobility products primarily the result of continued softness in their U.S. end markets.

 

 

Sales in our Building Solutions & Distribution businesses increased by 1% in 2013 principally due to increased sales volumes in our Americas Distribution business due to improved U.S. residential market conditions partially offset by continued softness in the U.S. energy retrofit business.

ACS segment profit increased by 8% in 2013 compared with 2012 due to a 7% increase in operational segment profit and a 1% increase from acquisitions. The increase in operational segment profit is primarily the result of the positive impact from price and productivity, net of inflation, investment for growth and higher sales volumes as discussed above. Cost of products and services sold totaled $8.9 billion in 2013, an increase of $361 million which is primarily due to higher sales volume, acquisitions and inflation partially offset by the favorable impact of productivity and foreign exchange.

21


 

Performance Materials and Technologies

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

2013

 

Change

 

2012

 

Change

Net sales

 

 

$

 

10,221

 

 

 

$

 

9,855

 

 

 

 

4

%

 

 

 

$

 

9,277

 

 

 

 

6

%

 

Cost of products and services sold

 

 

 

7,221

 

 

 

 

6,974

 

 

 

 

 

 

6,627

 

 

 

Selling, general and administrative expenses

 

 

 

1,049

 

 

 

 

1,025

 

 

 

 

 

 

979

 

 

 

Other

 

 

 

134

 

 

 

 

131

 

 

 

 

 

 

121

 

 

 

 

 

 

 

 

 

 

 

 

Segment profit

 

 

$

 

1,817

 

 

 

$

 

1,725

 

 

 

 

5

%

 

 

 

$

 

1,550

 

 

 

 

11

%

 

 

 

 

 

 

 

 

 

 

                 

 

 

 

 

 

 

 

 

 

Factors Contributing to Year-Over-Year Change

 

2014 vs. 2013

 

2013 vs. 2012

 

Sales

 

Segment
Profit

 

Sales

 

Segment
Profit

Organic growth/ Operational segment profit

 

 

 

5

%

 

 

 

 

6

%

 

 

 

 

1

%

 

 

 

 

6

%

 

Foreign exchange

 

 

 

(1

)%

 

 

 

 

(1

)%

 

 

 

 

 

 

 

 

 

Acquisitions and divestitures, net

 

 

 

 

 

 

 

 

 

 

 

5

%

 

 

 

 

 5

%

 

 

 

 

 

 

 

 

 

 

Total % Change

 

 

 

 4

%

 

 

 

 

 5

%

 

 

 

 

 6

%

 

 

 

 

11

%

 

 

 

 

 

 

 

 

 

 

2014 compared with 2013

PMT sales increased by 4% due to 5% increase in organic sales partially offset by the unfavorable impact of foreign exchange.

 

 

UOP sales increased by 8% driven primarily by higher catalyst and gas processing volumes partially offset by lower equipment and service revenues in the first nine months. Catalyst sales decreased in the fourth quarter due to the timing of shipments as well as stronger volume growth in the fourth quarter of 2013 as compared to 2014 which was partially offset by increased licensing revenues.

 

 

Sales in our Process Solutions business increased by 1% (4% organic) driven primarily by volume growth in advanced solutions software and services and field products partially offset by unfavorable foreign exchange, predominately in the fourth quarter. Project and service orders and backlog increased in 2014.

 

 

Advanced Materials sales increased by 3% primarily driven by increased volume in Fluorine Products and Resins and Chemicals, partially offset by unfavorable pricing most significantly in Fluorine Products and Resins and Chemicals. We anticipate unfavorable pricing to continue in 2015 primarily in Resins and Chemicals where sales fluctuate with the market price of certain raw materials, which are correlated to the price of oil.

PMT segment profit increased by 5% due to a 6% increase in operational segment profit partially offset by the unfavorable impact of foreign exchange. The increase in operational segment profit is primarily due to higher sales volumes, as discussed above, and productivity, net of inflation partially offset by unfavorable Advanced Materials pricing, continued investment for growth and unfavorable foreign exchange. Cost of products and services sold totaled $7.2 billion in 2014, an increase of $247 million which is primarily due to higher volume and continued investment for growth partially offset by productivity, net of inflation and the favorable impact of foreign exchange.

2013 compared with 2012

PMT sales increased by 6% due to 5% growth from acquisitions and 1% increase in organic growth.

 

  UOP sales increased by 31% (9% organic) primarily driven by (i) the favorable impact of acquisitions, (ii) higher volume of petrochemical catalysts, (iii) increased revenue from gas processing and (iv) increased equipment revenue in the first half of 2013, partially offset by decreased service revenues related to scheduled project completions and lower licensing revenues.

22


 

 

 

Sales in our Process Solutions business were flat (increased 1% organic) principally due to decreased volume reflecting the completion of several large projects as expected offset by service and software solutions volume growth.

 

  Advanced Materials sales decreased by 3% primarily driven by (i) lower Flourine Products volume (due to the unfavorable impact of unseasonably cool weather on refrigerant volume and planned plant outages in the first half of 2013) and price, (ii) soft end market conditions in Electronic Materials and (iii) lower production volume in Resins and Chemicals.

PMT segment profit increased by 11% due to a 6% increase in operational segment profit and a 5% increase from acquisitions. The increase in operational segment profit is primarily due to higher UOP sales volume and positive impact of productivity, net of inflation and investment for growth. Cost of products and services sold totaled $6.9 billion in 2013, an increase of $347 million which is primarily due to acquisitions and inflation, partially offset by productivity.

Repositioning Charges

See Note 3 Repositioning and Other Charges of Notes to Financial Statements for a discussion of our repositioning actions and related charges incurred in 2014, 2013 and 2012. These repositioning actions are expected to generate incremental pretax savings of $100 million to $125 million in 2015 compared with 2014 principally from planned workforce reductions. Cash spending related to our repositioning actions was $161 million, $160 million and $136 million in 2014, 2013 and 2012, respectively, and was funded through operating cash flows. In 2015, we expect cash spending for repositioning actions to be approximately $150 million and to be funded through operating cash flows.

23


 

LIQUIDITY AND CAPITAL RESOURCES

The Company continues to manage its businesses to maximize operating cash flows as the primary source of liquidity. In addition to our available cash and operating cash flows, additional sources of liquidity include committed credit lines, short-term debt from the commercial paper market, long-term borrowings, and access to the public debt and equity markets. We continue to balance our cash and financing uses through investment in our existing core businesses, acquisition activity, share repurchases and dividends.

Cash Flow Summary

Our cash flows from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows, are summarized as follows:

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

2014

 

2013

 

2012

Cash provided by (used for):

 

 

 

 

 

 

Operating activities

 

 

$

 

5,024

 

 

 

$

 

4,335

 

 

 

$

 

3,517

 

Investing activities

 

 

 

(1,876

)

 

 

 

 

(1,959

)

 

 

 

 

(1,428

)

 

Financing activities

 

 

 

(2,272

)

 

 

 

 

(433

)

 

 

 

 

(1,206

)

 

Effect of exchange rate changes on cash

 

 

 

(339

)

 

 

 

 

(155

)

 

 

 

 

53

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

 

$

 

537

 

 

 

$

 

1,788

 

 

 

$

 

936

 

 

 

 

 

 

 

 

2014 compared with 2013

Cash provided by operating activities increased by $689 million primarily due to (i) a $508 million increase of net income before the non-cash pension mark-to-market adjustment, (ii) reduced net payments for repositioning and other charges of $233 million (primarily due to the collection of a $130 million asbestos receivable due from one of our insurance carriers and lower asbestos related payments of $98 million), (iii) reduced cash contributions to our pension and other postretirement plans of $131 million and (iv) lower cash tax payments of approximately $129 million, partially offset by a $93 million unfavorable impact from working capital (primarily driven by higher inventory to support sales growth).

Cash used for investing activities decreased by $83 million primarily due to a decrease in cash paid for acquisitions of $1,129 million (most significantly Intermec and RAE Systems, Inc. in 2013) and an increase in proceeds from the sales of businesses of $157 million (most significantly Friction Materials), partially offset by (i) a net $688 million increase in investments (primarily short-term marketable securities), (ii) an increase of approximately $371 million in settlement payments of foreign currency exchange contracts used as economic hedges on certain non-functional currency denominated monetary assets and liabilities and (iii) a $147 million increase in expenditures for property, plant and equipment.

Cash used for financing activities increased by $1,839 million primarily due to a decrease in the net proceeds from debt issuances of $1,589 million, an increase in cash dividends paid of $157 million and lower net proceeds from the issuance of common stock of $33 million.

2013 compared with 2012

Cash provided by operating activities increased by $818 million primarily due to (i) reduced cash contributions to our pension plans of $883 million, (ii) a $447 million increase of net income before the non-cash pension mark-to-market adjustment, (iii) a $135 million favorable impact from working capital (driven by improved accounts payable performance and inventory, partially offset by higher receivables primarily due to sales growth and timing of sales), partially offset by higher cash tax payments of approximately $352 million and a $260 million increase in net payments for repositioning and other charges (most significantly the NARCO Trust establishment payments of $164 million).

24


 

Cash used for investing activities increased by $531 million primarily due to an increase in cash paid for acquisitions of $695 million (most significantly Intermec and RAE Systems Inc.), partially offset by an increase of approximately $190 million in settlement receipts of foreign currency exchange contracts used as economic hedges on certain non-functional currency denominated monetary assets and liabilities.

Cash used for financing activities decreased by $773 million primarily due to an increase in the net proceeds from debt issuances of $1,462 million, partially offset by an increase in net repurchases of common stock of $651 million and an increase in cash dividends paid of $142 million.

Liquidity

Each of our businesses is focused on implementing strategies to increase operating cash flows through revenue growth, margin expansion and improved working capital turnover. Considering the current economic environment in which each of the businesses operate and their business plans and strategies, including the focus on growth, cost reduction and productivity initiatives, we believe that cash balances and operating cash flow will continue to be our principal source of liquidity. In addition to the available cash and operating cash flows, additional sources of liquidity include committed credit lines, short-term debt from the commercial paper markets, long-term borrowings, and access to the public debt and equity markets. At December 31, 2014, a substantial portion of the Company’s cash and cash equivalents were held by foreign subsidiaries. If the amounts held outside of the U.S. were to be repatriated, under current law, they would be subject to U.S. federal income taxes, less applicable foreign tax credits. However, our intent is to permanently reinvest the vast majority of these funds outside of the U.S. It is not practicable to estimate the amount of tax that might be payable if some or all of such earnings were to be repatriated, and the amount of foreign tax credits that would be available to reduce or eliminate the resulting U.S. income tax liability.

We monitor the third-party depository institutions that hold our cash and cash equivalents on a daily basis. Our emphasis is primarily on safety of principal and secondarily on maximizing yield on those funds. We diversify our cash and cash equivalents among counterparties to minimize exposure to any one of these entities.

A source of liquidity is our ability to issue short-term debt in the commercial paper market. Commercial paper notes are sold at a discount and have a maturity of not more than 365 days from date of issuance. Borrowings under the commercial paper program are available for general corporate purposes as well as for financing acquisitions. The weighted average interest rate on short-term borrowings and commercial paper outstanding at December 31, 2014 and 2013 was 0.60% and 0.79%, respectively.

Our ability to access the commercial paper market, and the related cost of these borrowings, is affected by the strength of our credit rating and market conditions. Our credit ratings are periodically reviewed by the major independent debt-rating agencies. As of December 31, 2014, Standard and Poor’s (S&P), Fitch, and Moody’s have ratings on our long-term debt of A, A and A2 respectively, and short-term debt of A-1, F1 and P1 respectively. S&P, Fitch and Moody’s have Honeywell’s rating outlook as “stable”. To date, the Company has not experienced any limitations in our ability to access these sources of liquidity.

We also have a current shelf registration statement filed with the Securities and Exchange Commission under which we may issue additional debt securities, common stock and preferred stock that may be offered in one or more offerings on terms to be determined at the time of the offering. Net proceeds of any offering would be used for general corporate purposes, including repayment of existing indebtedness, capital expenditures and acquisitions.

On December 10, 2013, the Company entered into a $4 billion Amended and Restated Five Year Credit Agreement (“Credit Agreement”) with a syndicate of banks. Commitments under the Credit Agreement can be increased pursuant to the terms of the Credit Agreement to an aggregate amount not to exceed $4.5 billion. The Credit Agreement is maintained for general corporate purposes. There have been no borrowings under the Credit Agreement.

25


 

During 2014, the Company repurchased $924 million of outstanding shares to offset the dilutive impact of employee stock based compensation plans, including option exercises, restricted unit vesting and matching contributions under our savings plans. In December 2013, the Board of Directors authorized the repurchase of up to a total of $5 billion of Honeywell common stock, $4.1 billion remained available as of December 31, 2014 for additional share repurchases.

In addition to our normal operating cash requirements, our principal future cash requirements will be to fund capital expenditures, dividends, strategic acquisitions, share repurchases, employee benefit obligations, environmental remediation costs, asbestos claims, severance and exit costs related to repositioning actions and debt repayments.

Specifically, we expect our primary cash requirements in 2015 to be as follows:

 

 

Capital expenditures—we expect to spend approximately $1.3 billion for capital expenditures in 2015 primarily for growth, production and capacity expansion, cost reduction, maintenance, and replacement.

 

 

Share repurchases—under the Company’s share repurchase program, $4.1 billion is available as of December 31, 2014 for additional share repurchases. Honeywell presently expects to repurchase outstanding shares from time to time to offset the dilutive impact of employee stock-based compensation plans, including option exercises, restricted unit vesting and matching contributions under our savings plans. The amount and timing of future repurchases may vary depending on market conditions and our level of operating, financing and other investing activities.

 

 

Dividends—we increased our dividend rate by 15% to $.5175 per share of common stock effective with the fourth quarter 2014 dividend. The Company intends to continue to pay quarterly dividends in 2015.

 

 

Asbestos claims—we expect our cash spending for asbestos claims and our cash receipts for related insurance recoveries to be approximately $350 million and $30 million, respectively, in 2015.

 

 

Pension contributions—in 2015, we are not required to make contributions to our U.S. pension plans. We plan to make contributions of cash and/or marketable securities of approximately $140 million ($109 million of marketable securities were contributed in January 2015) to our non-U.S. plans to satisfy regulatory funding standards. The timing and amount of contributions to both our U.S. and non-U.S. plans may be impacted by a number of factors, including the funded status of the plans.

 

 

Repositioning actions—we expect that cash spending for severance and other exit costs necessary to execute repositioning actions will approximate $150 million in 2015.

 

 

Environmental remediation costs—we expect to spend approximately $275 million in 2015 for remedial response and voluntary clean-up costs.

We continuously assess the relative strength of each business in our portfolio as to strategic fit, market position, profit and cash flow contribution in order to upgrade our combined portfolio and identify business units that will most benefit from increased investment. We identify acquisition candidates that will further our strategic plan and strengthen our existing core businesses. We also identify businesses that do not fit into our long-term strategic plan based on their market position, relative profitability or growth potential. These businesses are considered for potential divestiture, restructuring or other repositioning actions subject to regulatory constraints. In 2014 and 2013, we realized $160 million and $3 million, respectively, in cash proceeds from sales of non-strategic businesses.

Based on past performance and current expectations, we believe that our operating cash flows will be sufficient to meet our future operating cash needs. Our available cash, committed credit lines, access to the public debt and equity markets, provide additional sources of short-term and long-term liquidity to fund current operations, debt maturities, and future investment opportunities.

26


 

Contractual Obligations and Probable Liability Payments

Following is a summary of our significant contractual obligations and probable liability payments at December 31, 2014:

                     

 

 

 

 

 

 

 

 

 

 

 

 

 

Total(6)

 

Payments by Period

 

Thereafter

 

2015

 

2016-
2017

 

2018-
2019

Long-term debt, including capitalized leases(1)

 

 

$

 

6,985

 

 

 

$

 

939

 

 

 

$

 

962

 

 

 

$

 

1,807

 

 

 

$

 

3,277

 

Interest payments on long-term debt, including capitalized leases

 

 

 

3,349

 

 

 

 

303

 

 

 

 

552

 

 

 

 

414

 

 

 

 

2,080

 

Minimum operating lease payments

 

 

 

1,281

 

 

 

 

330

 

 

 

 

470

 

 

 

 

224

 

 

 

 

257

 

Purchase obligations(2)

 

 

 

1,643

 

 

 

 

953

 

 

 

 

472

 

 

 

 

158

 

 

 

 

60

 

Estimated environmental liability payments(3)

 

 

 

591

 

 

 

 

278

 

 

 

 

218

 

 

 

 

75

 

 

 

 

20

 

Asbestos related liability payments(4)

 

 

 

1,552

 

 

 

 

352

 

 

 

 

737

 

 

 

 

413

 

 

 

 

50

 

Asbestos insurance recoveries(5)

 

 

 

(485

)

 

 

 

 

(31

)

 

 

 

 

(112

)

 

 

 

 

(105

)

 

 

 

 

(237

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 

14,916

 

 

 

$

 

3,124

 

 

 

$

 

3,299

 

 

 

$

 

2,986

 

 

 

$

 

5,507

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

 

Assumes all long-term debt is outstanding until scheduled maturity.

 

(2)

 

Purchase obligations are entered into with various vendors in the normal course of business and are consistent with our expected requirements.

 

(3)

 

The payment amounts in the table only reflect the environmental liabilities which are probable and reasonably estimable as of December 31, 2014.

 

(4)

 

These amounts are estimates of asbestos related cash payments for NARCO and Bendix based on our asbestos related liabilities which are probable and reasonably estimable as of December 31, 2014. See Asbestos Matters in Note 19 Commitments and Contingencies of Notes to Financial Statements for additional information.

 

(5)

 

These amounts represent our insurance recoveries that are deemed probable for asbestos related liabilities as of December 31, 2014. See Asbestos Matters in Note 19 Commitments and Contingencies of Notes to Financial Statements for additional information.

 

(6)

 

The table excludes tax effects as well as $659 million of uncertain tax positions. See Note 5 Income Taxes of Notes to Financial Statements for additional information.

Environmental Matters

Accruals for environmental matters deemed probable and reasonably estimable were $268 million, $272 million and $234 million in 2014, 2013 and 2012, respectively. In addition, in both 2014 and 2013 we incurred operating costs for ongoing businesses of approximately $88 million relating to compliance with environmental regulations.

Spending related to known environmental matters was $321 million, $304 million and $320 million in 2014, 2013 and 2012, respectively, and is estimated to be approximately $275 million in 2015. We expect to fund expenditures for these environmental matters from operating cash flow. The timing of cash expenditures depends on a numbers of factors, including the timing of litigation and settlements of remediation liability, personal injury and property damage claims, regulatory approval of cleanup projects, execution timeframe of projects, remedial techniques to be utilized and agreement with other parties.

See Note 19 Commitments and Contingencies of Notes to Financial Statements for further discussion of our environmental matters.

Financial Instruments

The following table illustrates the potential change in fair value for interest rate sensitive instruments based on a hypothetical immediate one percentage point increase in interest rates across all maturities and the potential change in fair value for foreign exchange rate sensitive instruments

27


 

based on a 10% weakening of the U.S. Dollar versus local currency exchange rates across all maturities at December 31, 2014 and 2013.

 

 

 

 

 

 

 

 

 

 

 

Face or
Notional
Amount

 

Carrying
Value(1)

 

Fair
Value(1)

 

Estimated
Increase
(Decrease)
in Fair
Value(2)

December 31, 2014

 

 

 

 

 

 

 

 

Interest Rate Sensitive Instruments

 

 

 

 

 

 

 

 

Long-term debt (including current maturities)

 

 

$

 

6,985

 

 

 

$

 

(6,985

)

 

 

 

$

 

(7,817

)

 

 

 

$

 

(478

)

 

Interest rate swap agreements

 

 

 

1,100

 

 

 

 

93

 

 

 

 

93

 

 

 

 

(69

)

 

Foreign Exchange Rate Sensitive Instruments

 

 

 

 

 

 

 

 

Foreign currency exchange contracts(3)

 

 

 

7,291

 

 

 

 

10

 

 

 

 

10

 

 

 

 

86

 

December 31, 2013

 

 

 

 

 

 

 

 

Interest Rate Sensitive Instruments

 

 

 

 

 

 

 

 

Long-term debt (including current maturities)

 

 

$

 

7,433

 

 

 

$

 

(7,433

)

 

 

 

$

 

(8,066

)

 

 

 

$

 

(466

)

 

Interest rate swap agreements

 

 

 

1,700

 

 

 

 

55

 

 

 

 

55

 

 

 

 

(77

)

 

Foreign Exchange Rate Sensitive Instruments

 

 

 

 

 

 

 

 

Foreign currency exchange contracts(3)

 

 

 

7,298

 

 

 

 

(7

)

 

 

 

 

(7

)

 

 

 

 

296

 

 

 

(1)

 

Asset or (liability).

 

(2)

 

A hypothetical immediate one percentage point decrease in interest rates across all maturities and a potential change in fair value of foreign exchange rate sensitive instruments based on a 10% strengthening of the U.S. dollar versus local currency exchange rates across all maturities will result in a change in fair value equal to the inverse of the amount disclosed in the table.

 

(3)

 

Changes in the fair value of foreign currency exchange contracts are offset by changes in the fair value or cash flows of underlying hedged foreign currency transactions.

See Note 14 Financial Instruments and Fair Value Measures of Notes to Financial Statements for further discussion.

CRITICAL ACCOUNTING POLICIES

The preparation of our consolidated financial statements in accordance with generally accepted accounting principles is based on the selection and application of accounting policies that require us to make significant estimates and assumptions about the effects of matters that are inherently uncertain. We consider the accounting policies discussed below to be critical to the understanding of our financial statements. Actual results could differ from our estimates and assumptions, and any such differences could be material to our consolidated financial statements.

Contingent Liabilities—We are subject to a number of lawsuits, investigations and claims (some of which involve substantial dollar amounts) that arise out of the conduct of our global business operations or those of previously owned entities, including matters relating to commercial transactions, government contracts, product liability (including asbestos), prior acquisitions and divestitures, employee benefit plans, intellectual property, and environmental, health and safety matters. We continually assess the likelihood of any adverse judgments or outcomes to our contingencies, as well as potential amounts or ranges of probable losses, and recognize a liability, if any, for these contingencies based on a careful analysis of each matter with the assistance of outside legal counsel and, if applicable, other experts. Such analysis includes making judgments concerning matters such as the costs associated with environmental matters, the outcome of negotiations, the number and cost of pending and future asbestos claims, and the impact of evidentiary requirements. Because most contingencies are resolved over long periods of time, liabilities may change in the future due to new developments (including new discovery of facts, changes in legislation and outcomes of similar cases through the judicial system), changes in assumptions or changes in our settlement strategy. See Note 19 Commitments and Contingencies of Notes to Financial Statements for a discussion of

28


 

management’s judgment applied in the recognition and measurement of our environmental and asbestos liabilities which represent our most significant contingencies.

Asbestos Related Contingencies and Insurance Recoveries—Honeywell’s involvement in asbestos related personal injury actions relates to two predecessor companies. Regarding North American Refractories Company (NARCO) asbestos related claims, we accrued for pending claims based on terms and conditions in agreements with NARCO, its former parent company, and certain asbestos claimants, and an estimate of the unsettled claims pending as of the time NARCO filed for bankruptcy protection. We also accrued for the estimated value of future NARCO asbestos related claims expected to be asserted against the NARCO Trust through 2018. In light of the inherent uncertainties in making long term projections and in connection with the initial operation of a 524(g) trust, as well as the stay of all NARCO asbestos claims from January 2002 through the effective date of the NARCO Trust on April 30, 2013, we do not believe that we have a reasonable basis for estimating NARCO asbestos claims beyond 2018. Regarding Bendix asbestos related claims, we accrued for the estimated value of pending claims using average resolution values for the previous five years. We also accrued for the estimated value of future anticipated claims related to Bendix for the next five years based on historic claims filing experience and dismissal rates, disease classifications, and average resolution values in the tort system for the previous five years. In light of the uncertainties inherent in making long-term projections, as well as certain factors unique to friction product asbestos claims, we do not believe that we have a reasonable basis for estimating asbestos claims beyond the next five years.

In connection with the recognition of liabilities for asbestos related matters, we record asbestos related insurance recoveries that are deemed probable. In assessing the probability of insurance recovery, we make judgments concerning insurance coverage that we believe are reasonable and consistent with our historical dealings and our knowledge of any pertinent solvency issues surrounding insurers. While the substantial majority of our insurance carriers are solvent, some of our individual carriers are insolvent, which has been considered in our analysis of probable recoveries. Projecting future events is subject to various uncertainties that could cause the insurance recovery on asbestos related liabilities to be higher or lower than that projected and recorded. Given the inherent uncertainty in making future projections, we reevaluate our projections concerning our probable insurance recoveries in light of any changes to the projected liability, our recovery experience or other relevant factors that may impact future insurance recoveries.

See Note 19 Commitments and Contingencies of Notes to Financial Statements for a discussion of management’s judgments applied in the recognition and measurement of our asbestos-related liabilities and related insurance recoveries.

Defined Benefit Pension Plans—We sponsor both funded and unfunded U.S. and non-U.S. defined benefit pension plans. For financial reporting purposes, net periodic pension (income) expense is calculated annually based upon a number of actuarial assumptions, including a discount rate for plan obligations and an expected long-term rate of return on plan assets. Changes in the discount rate and expected long-term rate of return on plan assets could materially affect the annual pension (income) expense amount. Annual pension (income) expense is comprised of a potential mark-to-market adjustment (MTM Adjustment) and service and interest cost, assumed return on plan assets and prior service amortization (Pension Ongoing (Income) Expense).

The key assumptions used in developing our 2014, 2013 and 2012 net periodic pension (income) expense for our U.S. plans included the following:

 

 

 

 

 

 

 

 

 

2014

 

2013

 

2012

Discount rate

 

 

 

4.89

%

 

 

 

 

4.06

%

 

 

 

 

4.89

%

 

Assets:

 

 

 

 

 

 

Expected rate of return

 

 

 

7.75

%

 

 

 

 

7.75

%

 

 

 

 

8

%

 

Actual rate of return

 

 

 

8

%

 

 

 

 

23

%

 

 

 

 

13

%

 

Actual 10 year average annual compounded rate of return

 

 

 

8

%

 

 

 

 

8

%

 

 

 

 

8

%

 

The MTM Adjustment represents the recognition of net actuarial gains or losses in excess of the corridor. Net actuarial gains and losses occur when the actual experience differs from any of the

29


 

various assumptions used to value our pension plans or when assumptions change. The primary factors contributing to actuarial gains and losses are changes in the discount rate used to value pension obligations as of the measurement date each year and the difference between expected and actual returns on plan assets. The mark-to-market accounting method results in the potential for volatile and difficult to forecast MTM Adjustments. MTM charges were $249 million, $51 million and $957 million in 2014, 2013 and 2012, respectively.

We determine the expected long-term rate of return on plan assets utilizing historical plan asset returns over varying long-term periods combined with our expectations of future market conditions and asset mix considerations (see Note 20 Pension and Other Postretirement Benefits of Notes to Financial Statements for details on the actual various asset classes and targeted asset allocation percentages for our pension plans). We plan to continue to use an expected rate of return on plan assets of 7.75% for 2015 as this is a long-term rate based on historical plan asset returns over varying long term periods combined with our expectations of future market conditions and the asset mix of the plan’s investments.

The discount rate reflects the market rate on December 31 (measurement date) for high-quality fixed-income investments with maturities corresponding to our benefit obligations and is subject to change each year. The discount rate can be volatile from year to year as it is determined based upon prevailing interest rates as of the measurement date. We will use a 4.08% discount rate in 2015, reflecting the significant decline in the market interest rate environment since the prior year-end.

In addition to the potential for MTM Adjustments, changes in our expected rate of return on plan assets and discount rate resulting from economic events also affects future pension ongoing (income) expense. The following table highlights the sensitivity of our U.S. pension obligations and ongoing (income) expense to changes in these assumptions, assuming all other assumptions remain constant. These estimates exclude any potential MTM Adjustment:

 

 

 

 

 

Change in Assumption

 

Impact on 2015
Pension Ongoing Expense

 

Impact on PBO

0.25 percentage point decrease in discount rate

 

Decrease $14 million

 

Increase $542 million

0.25 percentage point increase in discount rate

 

Increase $13 million

 

Decrease $515 million

0.25 percentage point decrease in expected rate of return on assets

 

Increase $41 million

 

0.25 percentage point increase in expected rate of return on assets

 

Decrease $41 million

 

Pension ongoing income for all of our pension plans is expected to be approximately $385 million in 2015 compared with pension ongoing income of $254 million in 2014. The increase in pension ongoing income in 2015 compared with 2014 results primarily from lower interest cost due to a decline in discount rates at December 31, 2014 compared with December 31, 2013 and an increase in the plans’ assets at December 31, 2014 compared with December 31, 2013 mainly due to strong asset returns in 2014. Also, if required, an MTM Adjustment will be recorded in the fourth quarter of 2015 in accordance with our pension accounting method as previously described. It is difficult to reliably forecast or predict whether there will be a MTM Adjustment in 2015, and if one is required what the magnitude of such adjustment will be. MTM Adjustments are primarily driven by events and circumstances beyond the control of the Company such as changes in interest rates and the performance of the financial markets.

Long-Lived Assets (including Tangible and Finite-Lived Intangible Assets)—The determination of useful lives (for depreciation/amortization purposes) and whether or not tangible and intangible assets are impaired involves the use of accounting estimates and assumptions, changes in which could materially impact our financial condition or operating performance if actual results differ from such estimates and assumptions. We evaluate the recoverability of the carrying amount of our long-lived assets whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset group may not be fully recoverable. The principal factors in considering when to perform an impairment review are as follows:

 

  Significant under-performance (i.e., declines in sales, earnings or cash flows) of a business or product line in relation to expectations;

30


 

 

 

Annual operating plans or five-year strategic plans that indicate an unfavorable trend in operating performance of a business or product line;

 

 

Significant negative industry or economic trends; or

 

 

Significant changes or planned changes in our use of the assets.

Once it is determined that an impairment review is necessary, recoverability of assets is measured by comparing the carrying amount of the asset grouping to the estimated future undiscounted cash flows. If the carrying amount exceeds the estimated future undiscounted cash flows, the asset grouping is considered to be impaired. The impairment is then measured as the difference between the carrying amount of the asset grouping and its fair value. We endeavor to utilize the best information available to measure fair value, which is usually either market prices (if available), level 1 or level 2 of the fair value hierarchy, or an estimate of the future discounted cash flow, level 3 of the fair value hierarchy. The key estimates in our discounted cash flow analysis include expected industry growth rates, our assumptions as to volume, selling prices and costs, and the discount rate selected.

Goodwill and Indefinite-Lived Intangible Assets Impairment Testing—In testing goodwill and indefinite-lived intangible assets, the fair value is estimated utilizing a discounted cash flow approach utilizing cash flow forecasts in our five year strategic and annual operating plans adjusted for terminal value assumptions. These impairment tests involve the use of accounting estimates and assumptions, changes in which could materially impact our financial condition or operating performance if actual results differ from such estimates and assumptions. To address this uncertainty we perform sensitivity analysis on key estimates and assumptions.

Income Taxes—On a recurring basis, we assess the need for a valuation allowance against our deferred tax assets by considering all available positive and negative evidence, such as past operating results, projections of future taxable income, enacted tax law changes and the feasibility and impact of tax planning initiatives. Our projections of future taxable income include a number of estimates and assumptions regarding our volume, pricing and costs, as well as the timing and amount of reversals of taxable temporary differences.

Sales Recognition on Long-Term Contracts—In 2014, we recognized approximately 15% of our total net sales using the percentage-of-completion method for long-term contracts in our Aerospace, ACS and PMT segments. These long-term contracts are measured on the cost-to-cost basis for engineering-type contracts and the units-of-delivery basis for production-type contracts. Accounting for these contracts involves management judgment in estimating total contract revenue and cost. Contract revenues are largely determined by negotiated contract prices and quantities, modified by our assumptions regarding contract options, change orders, incentive and award provisions associated with technical performance and price adjustment clauses (such as inflation or index-based clauses). Contract costs are incurred over a period of time, which can be several years, and the estimation of these costs requires management judgment. Cost estimates are largely based on negotiated or estimated purchase contract terms, historical performance trends and other economic projections. Significant factors that influence these estimates include inflationary trends, technical and schedule risk, internal and subcontractor performance trends, business volume assumptions, asset utilization, and anticipated labor agreements. Revenue and cost estimates are regularly monitored and revised based on changes in circumstances. Anticipated losses on long-term contracts are recognized when such losses become evident. We maintain financial controls over the customer qualification, contract pricing and estimation processes to reduce the risk of contract losses.

OTHER MATTERS

Litigation

See Note 19 Commitments and Contingencies of Notes to Financial Statements for a discussion of environmental, asbestos and other litigation matters.

31


 

Recent Accounting Pronouncements

See Note 1 Summary of Significant Accounting Policies of Notes to Financial Statements for a discussion of recent accounting pronouncements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Information relating to market risk is included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations under the caption “Financial Instruments”.

32


 

ITEM 8. Financial Statements and Supplementary Data

HONEYWELL INTERNATIONAL INC.
CONSOLIDATED STATEMENT OF OPERATIONS

             

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

2014

 

2013

 

2012

 

 

(Dollars in millions,
except per share amounts)

Product sales

 

 

$

 

32,398

 

 

 

$

 

31,214

 

 

 

$

 

29,812

 

Service sales

 

 

 

7,908

 

 

 

 

7,841

 

 

 

 

7,853

 

 

 

 

 

 

 

 

Net sales

 

 

 

40,306

 

 

 

 

39,055

 

 

 

 

37,665

 

 

 

 

 

 

 

 

Costs, expenses and other

 

 

 

 

 

 

Cost of products sold

 

 

 

23,889

 

 

 

 

23,317

 

 

 

 

22,929

 

Cost of services sold

 

 

 

5,068

 

 

 

 

5,047

 

 

 

 

5,362

 

 

 

 

 

 

 

 

 

 

 

28,957

 

 

 

 

28,364

 

 

 

 

28,291

 

Selling, general and administrative expenses

 

 

 

5,518

 

 

 

 

5,190

 

 

 

 

5,218

 

Other (income) expense

 

 

 

(305

)

 

 

 

 

(238

)

 

 

 

 

(70

)

 

Interest and other financial charges

 

 

 

318

 

 

 

 

327

 

 

 

 

351

 

 

 

 

 

 

 

 

 

 

 

34,488

 

 

 

 

33,643

 

 

 

 

33,790

 

 

 

 

 

 

 

 

Income from continuing operations before taxes

 

 

 

5,818

 

 

 

 

5,412

 

 

 

 

3,875

 

Tax expense

 

 

 

1,489

 

 

 

 

1,450

 

 

 

 

944

 

 

 

 

 

 

 

 

Net income

 

 

 

4,329

 

 

 

 

3,962

 

 

 

 

2,931

 

Less: Net income attributable to the noncontrolling interest

 

 

 

90

 

 

 

 

38

 

 

 

 

5

 

 

 

 

 

 

 

 

Net income attributable to Honeywell

 

 

$

 

4,239

 

 

 

$

 

3,924

 

 

 

$

 

2,926

 

 

 

 

 

 

 

 

Earnings per share of common stock—basic

 

 

$

 

5.40

 

 

 

$

 

4.99

 

 

 

$

 

3.74

 

 

 

 

 

 

 

 

Earnings per share of common stock—assuming dilution

 

 

$

 

5.33

 

 

 

$

 

4.92

 

 

 

$

 

3.69

 

 

 

 

 

 

 

 

Cash dividends per share of common stock

 

 

$

 

1.87

 

 

 

$

 

1.68

 

 

 

$

 

1.53

 

 

 

 

 

 

 

 

The Notes to Financial Statements are an integral part of this statement.

33


 

HONEYWELL INTERNATIONAL INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

             

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

2014

 

2013

 

2012

 

 

(Dollars in millions)

Net income

 

 

$

 

4,329

 

 

 

$

 

3,962

 

 

 

$

 

2,931

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

Foreign exchange translation adjustment

 

 

 

(1,044

)

 

 

 

 

(52

)

 

 

 

 

282

 

Actuarial gains (losses)

 

 

 

(1,411

)

 

 

 

 

2,064

 

 

 

 

(839

)

 

Prior service credit

 

 

 

73

 

 

 

 

99

 

 

 

 

9

 

Prior service cost (credit) recognized during year

 

 

 

(2

)

 

 

 

 

5

 

 

 

 

6

 

Actuarial losses recognized during year

 

 

 

202

 

 

 

 

61

 

 

 

 

649

 

Transition obligation recognized during year

 

 

 

1

 

 

 

 

2

 

 

 

 

2

 

Settlements and curtailments

 

 

 

 

 

 

 

(26

)

 

 

 

 

(2

)

 

Foreign exchange translation and other

 

 

 

54

 

 

 

 

(2

)

 

 

 

 

(23

)

 

 

 

 

 

 

 

 

Pensions and other postretirement benefit adjustments

 

 

 

(1,083

)

 

 

 

 

2,203

 

 

 

 

(198

)

 

Unrealized gains (losses) for the period

 

 

 

15

 

 

 

 

140

 

 

 

 

(6

)

 

Less: reclassification adjustment for gains included in net income

 

 

 

185

 

 

 

 

127

 

 

 

 

 

 

 

 

 

 

 

 

Changes in fair value of available for sale investments

 

 

 

(170

)

 

 

 

 

13

 

 

 

 

(6

)

 

Effective portion of cash flow hedges recognized in other comprehensive income

 

 

 

20

 

 

 

 

(30

)

 

 

 

 

14

 

Less: reclassification adjustment for losses included in net income

 

 

 

 

 

 

 

(23

)

 

 

 

 

(13

)

 

 

 

 

 

 

 

 

Changes in fair value of effective cash flow hedges

 

 

 

20

 

 

 

 

(7

)

 

 

 

 

27

 

Other comprehensive income (loss), net of tax

 

 

 

(2,277

)

 

 

 

 

2,157

 

 

 

 

105

 

Comprehensive income

 

 

 

2,052

 

 

 

 

6,119

 

 

 

 

3,036

 

Less: Comprehensive income attributable to the noncontrolling interest

 

 

 

87

 

 

 

 

36

 

 

 

 

5

 

 

 

 

 

 

 

 

Comprehensive income attributable to Honeywell

 

 

$

 

1,965

 

 

 

$

 

6,083

 

 

 

$

 

3,031

 

 

 

 

 

 

 

 

The Notes to Financial Statements are an integral part of this statement.

34


 

HONEYWELL INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEET

         

 

 

 

 

 

 

 

December 31,

 

2014

 

2013

 

 

(Dollars in millions)

ASSETS

 

 

 

 

Current assets:

 

 

 

 

Cash and cash equivalents

 

 

$

 

6,959

 

 

 

$

 

6,422

 

Accounts, notes and other receivables

 

 

 

7,960

 

 

 

 

7,929

 

Inventories

 

 

 

4,405

 

 

 

 

4,293

 

Deferred income taxes

 

 

 

722

 

 

 

 

849

 

Investments and other current assets

 

 

 

2,145

 

 

 

 

1,671

 

 

 

 

 

 

Total current assets

 

 

 

22,191

 

 

 

 

21,164

 

Investments and long-term receivables

 

 

 

465

 

 

 

 

393

 

Property, plant and equipment—net

 

 

 

5,383

 

 

 

 

5,278

 

Goodwill

 

 

 

12,788

 

 

 

 

13,046

 

Other intangible assets—net

 

 

 

2,208

 

 

 

 

2,514

 

Insurance recoveries for asbestos related liabilities

 

 

 

454

 

 

 

 

595

 

Deferred income taxes

 

 

 

404

 

 

 

 

368

 

Other assets

 

 

 

1,558

 

 

 

 

2,077

 

 

 

 

 

 

Total assets

 

 

$

 

45,451

 

 

 

$

 

45,435

 

 

 

 

 

 

LIABILITIES

 

 

 

 

Current liabilities:

 

 

 

 

Accounts payable

 

 

$

 

5,365

 

 

 

$

 

5,174

 

Short-term borrowings

 

 

 

51

 

 

 

 

97

 

Commercial paper

 

 

 

1,647

 

 

 

 

1,299

 

Current maturities of long-term debt

 

 

 

939

 

 

 

 

632

 

Accrued liabilities

 

 

 

6,771

 

 

 

 

6,979

 

 

 

 

 

 

Total current liabilities

 

 

 

14,773

 

 

 

 

14,181

 

Long-term debt

 

 

 

6,046

 

 

 

 

6,801

 

Deferred income taxes

 

 

 

236

 

 

 

 

804

 

Postretirement benefit obligations other than pensions

 

 

 

911

 

 

 

 

1,019

 

Asbestos related liabilities

 

 

 

1,200

 

 

 

 

1,150

 

Other liabilities

 

 

 

4,282

 

 

 

 

3,734

 

Redeemable noncontrolling interest

 

 

 

219

 

 

 

 

167

 

SHAREOWNERS’ EQUITY

 

 

 

 

Capital—common stock issued

 

 

 

958

 

 

 

 

958

 

—additional paid-in capital

 

 

 

5,038

 

 

 

 

4,682

 

Common stock held in treasury, at cost

 

 

 

(9,995

)

 

 

 

 

(9,374

)

 

Accumulated other comprehensive income (loss)

 

 

 

(1,459

)

 

 

 

 

818

 

Retained earnings

 

 

 

23,115

 

 

 

 

20,383

 

 

 

 

 

 

Total Honeywell shareowners’ equity

 

 

 

17,657

 

 

 

 

17,467

 

Noncontrolling interest

 

 

 

127

 

 

 

 

112

 

 

 

 

 

 

Total shareowners’ equity

 

 

 

17,784

 

 

 

 

17,579

 

 

 

 

 

 

Total liabilities, redeemable noncontrolling interest and shareowners’ equity

 

 

$

 

45,451

 

 

 

$

 

45,435

 

 

 

 

 

 

The Notes to Financial Statements are an integral part of this statement.

35


 

HONEYWELL INTERNATIONAL INC.
CONSOLIDATED STATEMENT OF CASH FLOWS

             

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

2014

 

2013

 

2012

 

 

(Dollars in millions)

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

 

$

 

4,329

 

 

 

$

 

3,962

 

 

 

$

 

2,931

 

Less: Net income attributable to the noncontrolling interest

 

 

 

90

 

 

 

 

38

 

 

 

 

5

 

 

 

 

 

 

 

 

Net income attributable to Honeywell

 

 

 

4,239

 

 

 

 

3,924

 

 

 

 

2,926

 

Adjustments to reconcile net income attributable to Honeywell to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

 

924

 

 

 

 

989

 

 

 

 

926

 

Loss (gain) on sale of non-strategic businesses and assets

 

 

 

11

 

 

 

 

20

 

 

 

 

(5

)

 

Gain on sale of available for sale investments

 

 

 

(221

)

 

 

 

 

(195

)

 

 

 

 

 

Repositioning and other charges

 

 

 

598

 

 

 

 

663

 

 

 

 

443

 

Net payments for repositioning and other charges

 

 

 

(530

)

 

 

 

 

(763

)

 

 

 

 

(503

)

 

Pension and other postretirement expense (income)

 

 

 

44

 

 

 

 

(19

)

 

 

 

 

1,065

 

Pension and other postretirement benefit payments

 

 

 

(167

)

 

 

 

 

(298

)

 

 

 

 

(1,183

)

 

Stock compensation expense

 

 

 

187

 

 

 

 

170

 

 

 

 

170

 

Deferred income taxes

 

 

 

132

 

 

 

 

262

 

 

 

 

84

 

Excess tax benefits from share based payment arrangements

 

 

 

(102

)

 

 

 

 

(132

)

 

 

 

 

(56

)

 

Other

 

 

 

(327

)

 

 

 

 

308

 

 

 

 

108

 

Changes in assets and liabilities, net of the effects of acquisitions and divestitures:

 

 

 

 

 

 

Accounts, notes and other receivables

 

 

 

(172

)

 

 

 

 

(365

)

 

 

 

 

(119

)

 

Inventories

 

 

 

(200

)

 

 

 

 

41

 

 

 

 

25

 

Other current assets

 

 

 

120

 

 

 

 

(421

)

 

 

 

 

(78

)

 

Accounts payable

 

 

 

307

 

 

 

 

352

 

 

 

 

(13

)

 

Accrued liabilities

 

 

 

181

 

 

 

 

(201

)

 

 

 

 

(273

)

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

 

 

5,024

 

 

 

 

4,335

 

 

 

 

3,517

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Expenditures for property, plant and equipment

 

 

 

(1,094

)

 

 

 

 

(947

)

 

 

 

 

(884

)

 

Proceeds from disposals of property, plant and equipment

 

 

 

18

 

 

 

 

15

 

 

 

 

5

 

Increase in investments

 

 

 

(4,074

)

 

 

 

 

(1,220

)

 

 

 

 

(702

)

 

Decrease in investments

 

 

 

3,288

 

 

 

 

1,122

 

 

 

 

559

 

Cash paid for acquisitions, net of cash acquired

 

 

 

(4

)

 

 

 

 

(1,133

)

 

 

 

 

(438

)

 

Proceeds from sales of businesses, net of fees paid

 

 

 

160

 

 

 

 

3

 

 

 

 

21

 

Other

 

 

 

(170

)

 

 

 

 

201

 

 

 

 

11

 

 

 

 

 

 

 

 

Net cash used for investing activities

 

 

 

(1,876

)

 

 

 

 

(1,959

)

 

 

 

 

(1,428

)

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Net increase (decrease) in commercial paper

 

 

 

348

 

 

 

 

899

 

 

 

 

(199

)

 

Net (decrease) increase in short-term borrowings

 

 

 

(39

)

 

 

 

 

31

 

 

 

 

22

 

Proceeds from issuance of common stock

 

 

 

265

 

 

 

 

447

 

 

 

 

342

 

Proceeds from issuance of long-term debt

 

 

 

97

 

 

 

 

1,063

 

 

 

 

102

 

Payments of long-term debt

 

 

 

(609

)

 

 

 

 

(607

)

 

 

 

 

(1

)

 

Excess tax benefits from share based payment arrangements

 

 

 

102

 

 

 

 

132

 

 

 

 

56

 

Repurchases of common stock

 

 

 

(924

)

 

 

 

 

(1,073

)

 

 

 

 

(317

)

 

Cash dividends paid

 

 

 

(1,510

)

 

 

 

 

(1,353

)

 

 

 

 

(1,211

)

 

Other

 

 

 

(2

)

 

 

 

 

28

 

 

 

 

 

 

 

 

 

 

 

 

Net cash used for financing activities

 

 

 

(2,272

)

 

 

 

 

(433

)

 

 

 

 

(1,206

)

 

 

 

 

 

 

 

 

Effect of foreign exchange rate changes on cash and cash equivalents

 

 

 

(339

)

 

 

 

 

(155

)

 

 

 

 

53

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

 

 

537

 

 

 

 

1,788

 

 

 

 

936

 

Cash and cash equivalents at beginning of period

 

 

 

6,422

 

 

 

 

4,634

 

 

 

 

3,698

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

 

$

 

6,959

 

 

 

$

 

6,422

 

 

 

$

 

4,634

 

 

 

 

 

 

 

 

The Notes to Financial Statements are an integral part of this statement.

36


 

HONEYWELL INTERNATIONAL INC.
CONSOLIDATED STATEMENT OF SHAREOWNERS’ EQUITY

                         

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

2014

 

2013

 

2012

 

Shares

 

$

 

Shares

 

$

 

Shares

 

$

 

 

(in millions)

Common stock, par value

 

 

 

957.6

 

 

 

 

958

 

 

 

 

957.6

 

 

 

 

958

 

 

 

 

957.6

 

 

 

 

958

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional paid-in capital

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

 

 

 

 

4,682

 

 

 

 

 

 

4,358

 

 

 

 

 

 

4,157

 

Issued for employee savings and option plans

 

 

 

 

 

175

 

 

 

 

 

 

155

 

 

 

 

 

 

22

 

Stock-based compensation expense

 

 

 

 

 

187

 

 

 

 

 

 

170

 

 

 

 

 

 

170

 

Other owner changes

 

 

 

 

 

(6

)

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

 

 

 

 

5,038

 

 

 

 

 

 

4,682

 

 

 

 

 

 

4,358

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

 

 

(173.8

)

 

 

 

 

(9,374

)

 

 

 

 

(174.8

)

 

 

 

 

(8,801

)

 

 

 

 

(182.9

)

 

 

 

 

(8,948

)

 

Reacquired stock or repurchases of common stock

 

 

 

(10.0

)

 

 

 

 

(924

)

 

 

 

 

(13.5

)

 

 

 

 

(1,073

)

 

 

 

 

(5.0

)

 

 

 

 

(317

)

 

Issued for employee savings and option plans

 

 

 

8.4

 

 

 

 

303

 

 

 

 

14.5

 

 

 

 

500

 

 

 

 

13.1

 

 

 

 

464

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

 

 

(175.4

)

 

 

 

 

(9,995

)

 

 

 

 

(173.8

)

 

 

 

 

(9,374

)

 

 

 

 

(174.8

)

 

 

 

 

(8,801

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained earnings

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

 

 

 

 

20,383

 

 

 

 

 

 

17,799

 

 

 

 

 

 

16,083

 

Net income attributable to Honeywell

 

 

 

 

 

4,239

 

 

 

 

 

 

3,924

 

 

 

 

 

 

2,926

 

Dividends on common stock

 

 

 

 

 

(1,478

)

 

 

 

 

 

 

(1,329

)

 

 

 

 

 

 

(1,210

)

 

Redemption value adjustment

 

 

 

 

 

(29

)

 

 

 

 

 

 

(11

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

 

 

 

 

23,115

 

 

 

 

 

 

20,383

 

 

 

 

 

 

17,799

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

 

 

 

 

818

 

 

 

 

 

 

(1,339

)

 

 

 

 

 

 

(1,444

)

 

Foreign exchange translation adjustment

 

 

 

 

 

(1,044

)

 

 

 

 

 

 

(52

)

 

 

 

 

 

 

282

 

Pensions and other postretirement benefit adjustments

 

 

 

 

 

(1,083

)

 

 

 

 

 

 

2,203

 

 

 

 

 

 

(198

)

 

Changes in fair value of available for sale investments

 

 

 

 

 

(170

)

 

 

 

 

 

 

13

 

 

 

 

 

 

(6

)

 

Changes in fair value of effective cash flow hedges

 

 

 

 

 

20

 

 

 

 

 

 

(7

)

 

 

 

 

 

 

27

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

 

 

 

 

(1,459

)

 

 

 

 

 

 

818

 

 

 

 

 

 

(1,339

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

 

 

 

 

112

 

 

 

 

 

 

90

 

 

 

 

 

 

96

 

Acquisitions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6

 

Interest sold (bought)

 

 

 

 

 

(7

)

 

 

 

 

 

 

 

 

 

 

 

 

7

 

Net income attributable to noncontrolling interest

 

 

 

 

 

40

 

 

 

 

 

 

9

 

 

 

 

 

 

2

 

Foreign exchange translation adjustment

 

 

 

 

 

(3

)

 

 

 

 

 

 

(2

)

 

 

 

 

 

 

 

Dividends paid

 

 

 

 

 

(17

)

 

 

 

 

 

 

(16

)

 

 

 

 

 

 

(21

)

 

Contributions from noncontrolling interest holders

 

 

 

 

 

5

 

 

 

 

 

 

28

 

 

 

 

 

 

 

Other owner changes

 

 

 

 

 

(3

)

 

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

 

 

 

 

127

 

 

 

 

 

 

112

 

 

 

 

 

 

90

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total shareowners’ equity

 

 

 

782.2

 

 

 

 

17,784

 

 

 

 

783.8

 

 

 

 

17,579

 

 

 

 

782.8

 

 

 

 

13,065

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Notes to Financial Statements are an integral part of this statement.

37


 

HONEYWELL INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS

(Dollars in millions, except per share amounts)

Note 1. Summary of Significant Accounting Policies

Accounting Principles—The financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. The following is a description of Honeywell’s significant accounting policies.

Principles of Consolidation—The consolidated financial statements include the accounts of Honeywell International Inc. and all of its subsidiaries and entities in which a controlling interest is maintained. Our consolidation policy requires equity investments that we exercise significant influence over but do not control the investee and are not the primary beneficiary of the investee’s activities to be accounted for using the equity method. Investments through which we are not able to exercise significant influence over the investee and which we do not have readily determinable fair values are accounted for under the cost method. All intercompany transactions and balances are eliminated in consolidation.

Redeemable noncontrolling interest is considered to be temporary equity and is therefore reported outside of permanent equity on the Consolidated Balance Sheet at the greater of the initial carrying amount adjusted for the noncontrolling interest’s share of net income (loss) or its redemption value.

Property, Plant and Equipment—Property, plant and equipment are recorded at cost, including any asset retirement obligations, less accumulated depreciation. For financial reporting, the straight-line method of depreciation is used over the estimated useful lives of 10 to 50 years for buildings and improvements and 2 to 16 years for machinery and equipment. Recognition of the fair value of obligations associated with the retirement of tangible long-lived assets is required when there is a legal obligation to incur such costs. Upon initial recognition of a liability, the cost is capitalized as part of the related long-lived asset and depreciated over the corresponding asset’s useful life.

Goodwill and Indefinite-Lived Intangible Assets—Goodwill and indefinite-lived intangible assets are subject to impairment testing annually as of March 31, or whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. This testing compares carrying values to fair values and, when appropriate, the carrying value of these assets is reduced to fair value. We completed our annual goodwill impairment test as of March 31, 2014 and determined that there was no impairment as of that date.

Other Intangible Assets with Determinable Lives—Other intangible assets with determinable lives consist of customer lists, technology, patents and trademarks and other intangibles and are amortized over their estimated useful lives, ranging from 2 to 24 years.

Sales Recognition—Product and service sales are recognized when persuasive evidence of an arrangement exists, product delivery has occurred or services have been rendered, pricing is fixed or determinable, and collection is reasonably assured. Service sales, principally representing repair, maintenance and engineering activities in our Aerospace and Automation and Control Solutions (ACS) segments, are recognized over the contractual period or as services are rendered. Sales under long-term contracts in the Aerospace, ACS and Performance Materials and Technologies (PMT) segments are recorded on a percentage-of-completion method measured on the cost-to-cost basis for engineering-type contracts and the units-of-delivery basis for production-type contracts. Provisions for anticipated losses on long-term contracts are recorded in full when such losses become evident. Revenues from contracts with multiple element arrangements are recognized as each element is earned based on the relative fair value of each element provided the delivered elements have value to customers on a standalone basis. Amounts allocated to each element are based on its objectively determined fair value, such as the sales price for the product or service when it is sold separately or competitor prices for similar products or services.

Environmental—We accrue costs related to environmental matters when it is probable that we have incurred a liability related to a contaminated site and the amount can be reasonably estimated. For additional information, see Note 19 Commitments and Contingencies.

38


 

HONEYWELL INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except per share amounts)

Asbestos Related Contingencies and Insurance Recoveries—We recognize a liability for any asbestos related contingency that is probable of occurrence and reasonably estimable. In connection with the recognition of liabilities for asbestos related matters, we record asbestos related insurance recoveries that are deemed probable. For additional information, see Note 19 Commitments and Contingencies.

Aerospace Sales Incentives—We provide sales incentives to commercial aircraft manufacturers and airlines in connection with their selection of our aircraft equipment, predominately wheel and braking system hardware, avionics, and auxiliary power units, for installation on commercial aircraft. These incentives consist of free or deeply discounted products, credits for future purchases of product and upfront cash payments. These costs are recognized in the period incurred as cost of products sold or as a reduction to sales, as appropriate.

Research and Development—Research and development costs for company-sponsored research and development projects are expensed as incurred. Such costs are principally included in Cost of Products Sold and were $1,892 million, $1,804 million and $1,847 million in 2014, 2013 and 2012, respectively.

Stock-Based Compensation Plans—The principal awards issued under our stock-based compensation plans, which are described in Note 18 Stock-Based Compensation Plans, are non-qualified stock options and restricted stock units (RSUs). The cost for such awards is measured at the grant date based on the fair value of the award. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods (generally the vesting period of the equity award) and is included in selling, general and administrative expense in our Consolidated Statement of Operations. Forfeitures are estimated at the time of grant to recognize expense for those awards that are expected to vest and are based on our historical forfeiture rates.

Pension Benefits—We recognize net actuarial gains or losses in excess of 10% of the greater of the fair value of plan assets or the plans’ projected benefit obligation (the corridor) annually in the fourth quarter each year (MTM Adjustment), and, if applicable, in any quarter in which an interim remeasurement is triggered. The remaining components of pension (income) expense, primarily service and interest costs and assumed return on plan assets, are recognized on a quarterly basis (Pension ongoing (income) expense).

Foreign Currency Translation—Assets and liabilities of subsidiaries operating outside the United States with a functional currency other than U.S. dollars are translated into U.S. dollars using year-end exchange rates. Sales, costs and expenses are translated at the average exchange rates in effect during the year. Foreign currency translation gains and losses are included as a component of Accumulated Other Comprehensive Income (Loss). For subsidiaries operating in highly inflationary environments, inventories and property, plant and equipment, including related expenses, are remeasured at the exchange rate in effect on the date the assets were acquired, while monetary assets and liabilities are remeasured at year-end exchange rates. Remeasurement adjustments for these subsidiaries are included in earnings.

Derivative Financial Instruments—We minimize our risks from interest and foreign currency exchange rate fluctuations through our normal operating and financing activities and, when deemed appropriate through the use of derivative financial instruments. Derivative financial instruments are used to manage risk and are not used for trading or other speculative purposes and we do not use leveraged derivative financial instruments. Derivative financial instruments that qualify for hedge accounting must be designated and effective as a hedge of the identified risk exposure at the inception of the contract. Accordingly, changes in fair value of the derivative contract must be highly correlated with changes in fair value of the underlying hedged item at inception of the hedge and over the life of the hedge contract.

39


 

HONEYWELL INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except per share amounts)

All derivatives are recorded on the balance sheet as assets or liabilities and measured at fair value. For derivatives designated as hedges of the fair value of assets or liabilities, the changes in fair values of both the derivatives and the hedged items are recorded in current earnings. For derivatives designated as cash flow hedges, the effective portion of the changes in fair value of the derivatives are recorded in Accumulated Other Comprehensive Income (Loss) and subsequently recognized in earnings when the hedged items impact earnings. Cash flows of such derivative financial instruments are classified consistent with the underlying hedged item.

Income Taxes—Significant judgment is required in evaluating tax positions. We establish additional reserves for income taxes when, despite the belief that tax positions are fully supportable, there remain certain positions that do not meet the minimum recognition threshold. The approach for evaluating certain and uncertain tax positions is defined by the authoritative guidance which determines when a tax position is more likely than not to be sustained upon examination by the applicable taxing authority. In the normal course of business, the Company and its subsidiaries are examined by various federal, state and foreign tax authorities. We regularly assess the potential outcomes of these examinations and any future examinations for the current or prior years in determining the adequacy of our provision for income taxes. We continually assess the likelihood and amount of potential adjustments and adjust the income tax provision, the current tax liability and deferred taxes in the period in which the facts that give rise to a change in estimate become known.

Earnings Per Share—Basic earnings per share is based on the weighted average number of common shares outstanding. Diluted earnings per share is based on the weighted average number of common shares outstanding and all dilutive potential common shares outstanding.

Reclassifications—Certain prior year amounts have been reclassified to conform to the current year presentation.

Recent Accounting Pronouncements—Changes to accounting principles generally accepted in the United States of America (U.S. GAAP) are established by the Financial Accounting Standards Board (FASB) in the form of accounting standards updates (ASU’s) to the FASB’s Accounting Standards Codification.

The Company considers the applicability and impact of all ASU’s. ASU’s not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial position or results of operations.

In May 2014, the FASB issued guidance on revenue from contracts with customers that will supersede most current revenue recognition guidance, including industry-specific guidance. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of time value of money in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The guidance is effective for the interim and annual periods beginning on or after December 15, 2016 (early adoption is not permitted). The guidance permits the use of either a retrospective or cumulative effect transition method. We have not yet selected a transition method and are currently evaluating the impact of the amended guidance on our consolidated financial position, results of operations and related disclosures.

Note 2. Divestiture

In 2014, the Company sold its Friction Materials business to Federal Mogul Corporation for $155 million and recognized a pre-tax and after-tax loss of $33 million (of which $5 million was

40


 

HONEYWELL INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except per share amounts)

recognized in 2014). The sale of Friction Materials, which was part of the Transportation Systems business, is consistent with the Company’s strategic focus on its portfolio of differentiated global technologies.

Following the closing of the sale, the Company announced the realignment of its Transportation Systems business segment with its Aerospace business segment. Under the realigned segment reporting structure, the Company has three business segments: Aerospace, Automation and Control Solutions and Performance Materials and Technologies. This realignment has no impact on the Company’s historical consolidated financial position, results of operations or cash flows. The Company has reported its financial performance based on the inclusion of Transportation Systems in Aerospace for all periods presented.

Note 3. Repositioning and Other Charges

A summary of repositioning and other charges follows:

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

2014

 

2013

 

2012

Severance

 

 

$

 

156

 

 

 

$

 

186

 

 

 

$

 

91

 

Asset impairments

 

 

 

12

 

 

 

 

23

 

 

 

 

12

 

Exit costs

 

 

 

16

 

 

 

 

22

 

 

 

 

16

 

Reserve adjustments

 

 

 

(38

)

 

 

 

 

(30

)

 

 

 

 

(66

)

 

 

 

 

 

 

 

 

Total net repositioning charge

 

 

 

146

 

 

 

 

201

 

 

 

 

53

 

 

 

 

 

 

 

 

Asbestos related litigation charges, net of insurance

 

 

 

182

 

 

 

 

181

 

 

 

 

156

 

Probable and reasonably estimable environmental liabilities

 

 

 

268

 

 

 

 

272

 

 

 

 

234

 

Other

 

 

 

2

 

 

 

 

9

 

 

 

 

 

 

 

 

 

 

 

 

Total net repositioning and other charges

 

 

$

 

598

 

 

 

$

 

663

 

 

 

$

 

443

 

 

 

 

 

 

 

 

The following table summarizes the pretax distribution of total net repositioning and other charges by income statement classification:

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

2014

 

2013

 

2012

Cost of products and services sold

 

 

$

 

525

 

 

 

$

 

566

 

 

 

$

 

428

 

Selling, general and administrative expenses

 

 

 

73

 

 

 

 

97

 

 

 

 

15

 

 

 

 

 

 

 

 

 

 

$

 

598

 

 

 

$

 

663

 

 

 

$

 

443

 

 

 

 

 

 

 

 

The following table summarizes the pretax impact of total net repositioning and other charges by segment:

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

2014

 

2013

 

2012

Aerospace

 

 

$

 

193

 

 

 

$

 

235

 

 

 

$

 

192

 

Automation and Control Solutions

 

 

 

80

 

 

 

 

68

 

 

 

 

13

 

Performance Materials and Technologies

 

 

 

33

 

 

 

 

56

 

 

 

 

17

 

Corporate

 

 

 

292

 

 

 

 

304

 

 

 

 

221

 

 

 

 

 

 

 

 

 

 

$

 

598

 

 

 

$

 

663

 

 

 

$

 

443

 

 

 

 

 

 

 

 

In 2014, we recognized repositioning charges totaling $184 million including severance costs of $156 million related to workforce reductions of 2,975 manufacturing and administrative positions across all of our segments. The workforce reductions were primarily related to cost savings actions taken in connection with our productivity and ongoing functional transformation initiatives, factory transitions in our ACS and Aerospace segments to more cost-effective locations, and site consolidations and

41


 

HONEYWELL INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except per share amounts)

organizational realignments of businesses in our ACS and PMT segments. Also, $38 million of previously established accruals, primarily for severance, mainly in our Aerospace and ACS segment were returned to income in 2014 due principally to the change in scope of a previously announced repositioning action and to fewer employee severance actions caused by higher attrition than originally planned associated with prior severance programs.

In 2013, we recognized repositioning charges totaling $231 million including severance costs of $186 million related to workforce reductions of 3,081 manufacturing and administrative positions across all of our segments. The workforce reductions were primarily related to cost savings actions taken in connection with our productivity and ongoing functional transformation initiatives, achieving acquisition-related synergies in our ACS segment, outsourcing of non-core components in our Aerospace segment, the shutdown of a manufacturing facility in our PMT segment, and factory transitions in our ACS segment to more cost-effective locations. Also, $30 million of previously established accruals, primarily for severance, in our ACS and PMT segments were returned to income in 2013 due to changes in the scope of previously announced repositioning actions, lower than expected costs in completing the exit of a product line and fewer employee severance actions caused by higher attrition than originally planned associated with prior severance programs.

In 2012, we recognized repositioning charges totaling $119 million including severance costs of $91 million related to workforce reductions of 2,204 manufacturing and administrative positions across all of our segments. The workforce reductions were primarily related to the planned shutdown of a manufacturing facility in our Aerospace segment, the exit from a product line in our PMT segment, and cost savings actions taken in connection with our productivity and ongoing functional transformation initiatives. Also, $66 million of previously established accruals, primarily for severance, in our ACS, Aerospace and PMT segments were returned to income in 2012 due primarily to fewer employee severance actions caused by higher attrition than originally planned associated with prior severance programs and changes in the scope of previously announced repositioning actions.

The following table summarizes the status of our total repositioning reserves:

 

 

 

 

 

 

 

 

 

 

 

Severance
Costs

 

Asset
Impairments

 

Exit
Costs

 

Total

Balance at December 31, 2011

 

 

$

353

 

 

 

$

 

 

 

$

 

59

 

 

 

$

 

412

 

 

 

 

 

 

 

 

 

 

2012 charges

 

 

 

91

 

 

 

 

12

 

 

 

 

16

 

 

 

 

119

 

2012 usage—cash

 

 

 

(113

)

 

 

 

 

 

 

 

 

(23

)

 

 

 

 

(136

)

 

2012 usage—noncash

 

 

 

 

 

 

 

(12

)

 

 

 

 

 

 

 

 

(12

)

 

Adjustments

 

 

 

(61

)

 

 

 

 

 

 

 

 

(5

)

 

 

 

 

(66

)

 

Foreign currency translation

 

 

 

6

 

 

 

 

 

 

 

 

 

 

 

 

6

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2012

 

 

 

276

 

 

 

 

 

 

 

 

47

 

 

 

 

323

 

 

 

 

 

 

 

 

 

 

2013 charges

 

 

 

186

 

 

 

 

23

 

 

 

 

22

 

 

 

 

231

 

2013 usage—cash

 

 

 

(139

)

 

 

 

 

 

 

 

 

(21

)

 

 

 

 

(160

)

 

2013 usage—noncash

 

 

 

 

 

 

 

(23

)

 

 

 

 

 

 

 

 

(23

)

 

Adjustments

 

 

 

(27

)

 

 

 

 

 

 

 

 

(3

)

 

 

 

 

(30

)

 

Foreign currency translation

 

 

 

6

 

 

 

 

 

 

 

 

 

 

 

 

6

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2013

 

 

 

302

 

 

 

 

 

 

 

 

45

 

 

 

 

347

 

 

 

 

 

 

 

 

 

 

2014 charges

 

 

 

156

 

 

 

 

12

 

 

 

 

16

 

 

 

 

184

 

2014 usage—cash

 

 

 

(135

)

 

 

 

 

 

 

 

 

(26

)

 

 

 

 

(161

)

 

2014 usage—noncash

 

 

 

 

 

 

 

(12

)

 

 

 

 

 

 

 

 

(12

)

 

Adjustments

 

 

 

(33

)

 

 

 

 

 

 

 

 

(5

)

 

 

 

 

(38

)

 

Foreign currency translation

 

 

 

(5

)

 

 

 

 

 

 

 

 

 

 

 

 

(5

)

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2014

 

 

$

285

 

 

 

$

 

 

 

$

 

30

 

 

 

$

 

315

 

 

 

 

 

 

 

 

 

 

42


 

HONEYWELL INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except per share amounts)

Certain repositioning projects in our Aerospace, ACS and PMT segments in 2014, 2013 and 2012 included exit or disposal activities, the costs related to which will be recognized in future periods when the actual liability is incurred. Such exit and disposal costs were not significant.

Note 4. Other (income) expense

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

2014

 

2013

 

2012

Equity (income) loss of affiliated companies

 

 

$

 

(36

)

 

 

 

$

 

(36

)

 

 

 

$

 

(45

)

 

Gain on sale of available for sale investments

 

 

 

(221

)

 

 

 

 

(195

)

 

 

 

 

 

Loss (gain) on sale of non-strategic businesses and assets

 

 

 

11

 

 

 

 

20

 

 

 

 

(5

)

 

Interest income

 

 

 

(102

)

 

 

 

 

(69

)

 

 

 

 

(58

)

 

Foreign exchange

 

 

 

34

 

 

 

 

34

 

 

 

 

36

 

Other, net

 

 

 

9

 

 

 

 

8

 

 

 

 

2

 

 

 

 

 

 

 

 

 

 

$

 

(305

)

 

 

 

$

 

(238

)

 

 

 

$

 

(70

)

 

 

 

 

 

 

 

 

Gain on sale of available for sale investments of $221 million and $195 million for 2014 and 2013, respectively, are due to realized gain related to the sale of marketable equity securities. These securities (B/E Aerospace common stock), designated as available for sale, were obtained in conjunction with the sale of the Consumables Solutions business in July 2008.

Note 5. Income Taxes

Income from continuing operations before taxes

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

2014

 

2013

 

2012

U.S.

 

 

$

 

3,340

 

 

 

$

 

3,002

 

 

 

$

 

1,761

 

Non-U.S.

 

 

 

2,478

 

 

 

 

2,410

 

 

 

 

2,114

 

 

 

 

 

 

 

 

 

 

$

 

5,818

 

 

 

$

 

5,412

 

 

 

$

 

3,875

 

 

 

 

 

 

 

 

Tax expense (benefit)

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

2014

 

2013

 

2012

Tax expense (benefit) consists of

 

 

 

 

 

 

Current:

 

 

 

 

 

 

U.S. Federal

 

 

$

 

746

 

 

 

$

 

663

 

 

 

$

 

470

 

U.S. State

 

 

 

39

 

 

 

 

97

 

 

 

 

10

 

Non-U.S.

 

 

 

572

 

 

 

 

428

 

 

 

 

380

 

 

 

 

 

 

 

 

 

 

 

$

 

1,357

 

 

 

$

 

1,188

 

 

 

$

 

860

 

 

 

 

 

 

 

 

Deferred:

 

 

 

 

 

 

U.S. Federal

 

 

$

 

114

 

 

 

$

 

160

 

 

 

$

 

85

 

U.S. State

 

 

 

63

 

 

 

 

72

 

 

 

 

19

 

Non-U.S.

 

 

 

(45

)

 

 

 

 

30

 

 

 

 

(20

)

 

 

 

 

 

 

 

 

 

 

 

132

 

 

 

 

262

 

 

 

 

84

 

 

 

 

 

 

 

 

 

 

 

$

 

1,489

 

 

 

$

 

1,450

 

 

 

$

 

944

 

 

 

 

 

 

 

 

43


 

HONEYWELL INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except per share amounts)

             

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

2014

 

2013

 

2012

The U.S. federal statutory income tax rate is reconciled to our effective income tax rate as follows:

 

 

 

 

 

 

U.S. federal statutory income tax rate

 

 

 

35.0

%

 

 

 

 

35.0

%

 

 

 

 

35.0

%

 

Taxes on non-U.S. earnings below U.S. tax rate(1)

 

 

 

(7.0

)

 

 

 

 

(7.2

)

 

 

 

 

(7.1

)

 

U.S. state income taxes(1)

 

 

 

1.2

 

 

 

 

1.8

 

 

 

 

0.8

 

Manufacturing incentives

 

 

 

(1.0

)

 

 

 

 

(0.9

)

 

 

 

 

(1.7

)

 

ESOP dividend tax benefit

 

 

 

(0.4

)

 

 

 

 

(0.5

)

 

 

 

 

(0.6

)

 

Tax credits

 

 

 

(1.0

)

 

 

 

 

(1.8

)

 

 

 

 

(0.4

)

 

Reserves for tax contingencies

 

 

 

(0.2

)

 

 

 

 

0.6

 

 

 

 

(0.4

)

 

All other items—net

 

 

 

(1.0

)

 

 

 

 

(0.2

)

 

 

 

 

(1.2

)

 

 

 

 

 

 

 

 

 

 

 

 

25.6

%

 

 

 

 

26.8

%

 

 

 

 

24.4

%

 

 

 

 

 

 

 

 

 

 

(1)

 

Net of changes in valuation allowance

The effective tax rate decreased by 1.2 percentage points in 2014 compared to 2013. The decrease was primarily attributable to lower tax expense from the resolution of audits, partially offset by the impact of more income in jurisdictions with higher tax rates and additional reserves. The Company’s non-U.S. effective tax rate for 2014 was 21.3%, an increase of approximately 2.3 percentage points compared to 2013. The increase in the non-U.S. effective tax rate was primarily attributable to additional reserves and the impact of more income in jurisdictions with higher tax rates, partially offset by the tax impact of dispositions. The effective tax rate was lower than the U.S. federal statutory rate of 35% primarily due to overall non-U.S. earnings taxed at lower rates.

The effective tax rate increased by 2.4 percentage points in 2013 compared to 2012. The increase was primarily attributable to lower mark-to-market pension expense in the U.S. Other factors causing an increase in the effective tax rate include higher tax expense related to an increase in tax reserves and higher state tax expense. These increases in the effective tax rate were partially offset by tax benefits from retroactive law changes in the U.S. The Company’s non-U.S. effective tax rate for 2013 was 19.0%, an increase of approximately 2.0 percentage points compared to 2012. The increase in the non-U.S. effective tax rate was primarily attributable to higher expense related to retroactive tax law changes in Germany and additional reserves in various jurisdictions, coupled with higher earnings in higher tax rate jurisdictions. The effective tax rate was lower than the U.S. federal statutory rate of 35% primarily due to overall non-U.S. earnings taxed at lower rates.

44


 

HONEYWELL INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except per share amounts)

Deferred tax assets (liabilities)

The tax effects of temporary differences and tax carryforwards which give rise to future income tax benefits and payables are as follows:

 

 

 

 

 

Deferred tax assets:

 

December 31,

 

2014

 

2013

Pension

 

 

$

 

573

 

 

 

$

 

32

 

Postretirement benefits other than pensions

 

 

 

441

 

 

 

 

499

 

Asbestos and environmental

 

 

 

477

 

 

 

 

437

 

Employee compensation and benefits

 

 

 

387

 

 

 

 

382

 

Other accruals and reserves

 

 

 

672

 

 

 

 

702

 

Net operating and capital losses

 

 

 

639

 

 

 

 

838

 

Tax credit carryforwards

 

 

 

199

 

 

 

 

266

 

 

 

 

 

 

Gross deferred tax assets

 

 

 

3,388

 

 

 

 

3,156

 

Valuation allowance

 

 

 

(560

)

 

 

 

 

(614

)

 

 

 

 

 

 

Total deferred tax assets

 

 

$

 

2,828

 

 

 

$

 

2,542

 

 

 

 

 

 

Deferred tax liabilities:

 

 

 

 

Property, plant and equipment

 

 

$

 

(612

)

 

 

 

$

 

(654

)

 

Intangibles

 

 

 

(1,060

)

 

 

 

 

(1,126

)

 

Other asset basis differences

 

 

 

(286

)

 

 

 

 

(350

)

 

Other

 

 

 

(7

)

 

 

 

 

(22

)

 

 

 

 

 

 

Total deferred tax liabilities

 

 

 

(1,965

)

 

 

 

 

(2,152

)

 

 

 

 

 

 

Net deferred taxes

 

 

$

 

863

 

 

 

$

 

390

 

 

 

 

 

 

The net deferred tax assets are included as components of Current and Non-Current Deferred Income Taxes and Accrued Liabilities within the Consolidated Balance Sheet.

Our net deferred tax asset of $863 million consists of $305 million related to non-U.S. operations which are comprised principally of net deductible temporary differences and net operating loss, capital loss and tax credit carryforwards (mainly in Canada and the United Kingdom). We maintain a valuation allowance of $557 million against a portion of the non-U.S. gross deferred tax assets. Our valuation allowance decreased by $54 million in 2014, increased by $16 million in 2013 and increased by $7 million in 2012. The amount of the change in the valuation allowance that was credited to income tax expense for 2014 was $10 million and the amounts charged to income tax expense for 2013 and 2012 were $49 million and $18 million, respectively. In the event we determine that we will not be able to realize our net deferred tax assets in the future, we will reduce such amounts through a charge to income in the period such determination is made. Conversely, if we determine that we will be able to realize net deferred tax assets in excess of the carrying amounts, we will decrease the recorded valuation allowance through a credit to income tax expense in the period that such determination is made.

As of December 31, 2014, our net operating loss, capital loss and tax credit carryforwards were as follows:

             

 

 

 

 

 

 

 

Jurisdiction

 

Expiration
Period

 

Net Operating
and Capital Loss
Carryforwards

 

Tax Credit
Carryforwards

U.S. Federal

 

 

 

2032

 

 

 

$

 

1

 

 

 

$

 

51

 

U.S. State

 

 

 

2034

 

 

 

 

2,200

 

 

 

 

35

 

Non-U.S.

 

 

 

2034

 

 

 

 

2,463

 

 

 

 

148

 

 

 

 

 

 

 

 

Total

 

 

 

 

$

 

4,664

 

 

 

$

 

234

 

 

 

 

 

 

 

 

45


 

HONEYWELL INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except per share amounts)

Many jurisdictions impose limitations on the timing and utilization of net operating loss and tax credit carryforwards. In those instances whereby there is an expected permanent limitation on the utilization of the net operating loss or tax credit carryforward the deferred tax asset and amount of the carryforward have been reduced.

U.S. federal income taxes have not been provided on undistributed earnings of the vast majority of our international subsidiaries as it is our intention to reinvest these earnings into the respective subsidiaries. At December 31, 2014 Honeywell has not provided for U.S. federal income and non-U.S. withholding taxes on approximately $15.0 billion of such earnings of our non-U.S. operations. It is not practicable to estimate the amount of tax that might be payable if some or all of such earnings were to be repatriated, and the amount of foreign tax credits that would be available to reduce or eliminate the resulting U.S. income tax liability.

             

 

 

 

 

 

 

 

 

 

2014

 

2013

 

2012

Change in unrecognized tax benefits:

 

 

 

 

 

 

Balance at beginning of year

 

 

$

 

729

 

 

 

$

 

722

 

 

 

$

 

815

 

Gross increases related to current period tax positions

 

 

 

65

 

 

 

 

41

 

 

 

 

25

 

Gross increases related to prior periods tax positions

 

 

 

204

 

 

 

 

118

 

 

 

 

44

 

Gross decreases related to prior periods tax positions

 

 

 

(277

)

 

 

 

 

(21

)

 

 

 

 

(62

)

 

Decrease related to resolutions of audits with tax authorities

 

 

 

(32

)

 

 

 

 

(92

)

 

 

 

 

(40

)

 

Expiration of the statute of limitations for the assessment of taxes

 

 

 

(10

)

 

 

 

 

(30

)

 

 

 

 

(64

)

 

Foreign currency translation

 

 

 

(20

)

 

 

 

 

(9

)

 

 

 

 

4

 

 

 

 

 

 

 

 

Balance at end of year

 

 

$

 

659

 

 

 

$

 

729

 

 

 

$

 

722

 

 

 

 

 

 

 

 

As of December 31, 2014, 2013, and 2012 there were $659 million, $729 million and $722 million of unrecognized tax benefits that if recognized would be recorded as a component of income tax expense.

Generally, our uncertain tax positions are related to tax years that remain subject to examination by the relevant tax authorities. The following table summarizes these open tax years by major jurisdiction as of December 31, 2014:

         

 

 

 

 

 

Jurisdiction

 

Open Tax Years
Based on Originally Filed Returns

 

Examination in
progress

 

Examination not yet
initiated

U.S. Federal

 

2010   2013

 

2013   2014

U.S. State

 

2007   2013

 

2006   2014

United Kingdom

 

N/A

 

2012   2014

Canada(1)

 

2007   2013

 

2014

Germany(1)

 

2006   2012

 

2013   2014

France

 

2008   2013

 

2004   2007, 2014

Netherlands

 

2009

 

2010   2014

Australia

 

N/A

 

2009   2014

China

 

2003   2012

 

2013   2014

India

 

1999   2012

 

2013   2014

Italy

 

2008   2013

 

2014

 

 

(1)

 

Includes provincial or similar local jurisdictions, as applicable.

Based on the outcome of these examinations, or as a result of the expiration of statute of limitations for specific jurisdictions, it is reasonably possible that certain unrecognized tax benefits for tax positions taken on previously filed tax returns will materially change from those recorded as liabilities for uncertain tax positions in our financial statements. In addition, the outcome of these

46


 

HONEYWELL INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except per share amounts)

examinations may impact the valuation of certain deferred tax assets (such as net operating losses) in future periods.

Unrecognized tax benefits for examinations in progress were $403 million, $431 million and $443 million, as of December 31, 2014, 2013, and 2012, respectively. Estimated interest and penalties related to the underpayment of income taxes are classified as a component of Tax Expense in the Consolidated Statement of Operations and totaled $24 million, $17 million and $37 million for the years ended December 31, 2014, 2013, and 2012, respectively. Accrued interest and penalties were $325 million, $301 million and $284 million, as of December 31, 2014, 2013, and 2012, respectively.

Note 6. Earnings Per Share

The details of the earnings per share calculations for the years ended December 31, 2014, 2013 and 2012 are as follows:

 

 

 

 

 

 

 

Basic

 

Years Ended December 31,

 

2014

 

2013

 

2012

Net income attributable to Honeywell

 

 

$

 

4,239

 

 

 

$

 

3,924

 

 

 

$

 

2,926

 

Weighted average shares outstanding

 

 

 

784.4

 

 

 

 

786.4

 

 

 

 

782.4

 

Earnings per share of common stock

 

 

$

 

5.40

 

 

 

$

 

4.99

 

 

 

$

 

3.74

 
             

 

 

 

 

 

 

 

Assuming Dilution

 

Years Ended December 31,

 

2014

 

2013

 

2012

Net income attributable to Honeywell

 

 

$

 

4,239

 

 

 

$

 

3,924

 

 

 

$

 

2,926

 

Average Shares

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

784.4

 

 

 

 

786.4

 

 

 

 

782.4

 

Dilutive securities issuable—stock plans

 

 

 

10.8

 

 

 

 

10.9

 

 

 

 

9.5

 

 

 

 

 

 

 

 

Total weighted average diluted shares outstanding

 

 

 

795.2

 

 

 

 

797.3

 

 

 

 

791.9

 

 

 

 

 

 

 

 

Earnings per share of common stock—assuming dilution

 

 

$

 

5.33

 

 

 

$

 

4.92

 

 

 

$

 

3.69

 

The diluted earnings per share calculations exclude the effect of stock options when the options’ assumed proceeds exceed the average market price of the common shares during the period. In 2014, 2013, and 2012 the weighted number of stock options excluded from the computations were 4.7 million, 2.2 million, and 12.5 million, respectively. These stock options were outstanding at the end of each of the respective periods.

Note 7. Accounts, Notes and Other Receivables

 

 

 

 

 

 

 

December 31,

 

2014

 

2013

Trade

 

 

$

 

7,788

 

 

 

$

 

7,530

 

Other

 

 

 

445

 

 

 

 

646

 

 

 

 

 

 

 

 

 

8,233

 

 

 

 

8,176

 

Less—Allowance for doubtful accounts

 

 

 

(273

)

 

 

 

 

(247

)

 

 

 

 

 

 

 

 

$

 

7,960

 

 

 

$

 

7,929

 

 

 

 

 

 

Trade Receivables includes $1,636 million and $1,609 million of unbilled balances under long-term contracts as of December 31, 2014 and December 31, 2013, respectively. These amounts are billed in accordance with the terms of customer contracts to which they relate.

47


 

HONEYWELL INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except per share amounts)

Note 8. Inventories

 

 

 

 

 

 

 

December 31,

 

2014

 

2013

Raw materials

 

 

$

 

1,124

 

 

 

$

 

1,121

 

Work in process

 

 

 

815

 

 

 

 

841

 

Finished products

 

 

 

2,634

 

 

 

 

2,497

 

 

 

 

 

 

 

 

 

 

4,573

 

 

 

 

4,459

 

Reduction to LIFO cost basis

 

 

 

(168

)

 

 

 

 

(166

)

 

 

 

 

 

 

 

 

 

$

 

4,405

 

 

 

$

 

4,293

 

 

 

 

 

 

Inventories valued at LIFO amounted to $434 million and $405 million at December 31, 2014 and 2013, respectively. Had such LIFO inventories been valued at current costs, their carrying values would have been approximately $168 million and $166 million higher at December 31, 2014 and 2013, respectively.

Note 9. Property, Plant and Equipment—Net

 

 

 

 

 

 

 

December 31,

 

2014

 

2013

Land and improvements

 

 

$

 

343

 

 

 

$

 

376

 

Machinery and equipment

 

 

 

10,313

 

 

 

 

10,437

 

Buildings and improvements

 

 

 

3,119

 

 

 

 

3,157

 

Construction in progress

 

 

 

727

 

 

 

 

647

 

 

 

 

 

 

 

 

 

14,502

 

 

 

 

14,617

 

Less—Accumulated depreciation

 

 

 

(9,119

)

 

 

 

 

(9,339

)

 

 

 

 

 

 

 

 

$

 

5,383

 

 

 

$

 

5,278

 

 

 

 

 

 

Depreciation expense was $667 million, $670 million and $660 million in 2014, 2013 and 2012, respectively.

Note 10. Goodwill and Other Intangible Assets—Net

The change in the carrying amount of goodwill for the years ended December 31, 2014 and 2013 by segment is as follows:

 

 

 

 

 

 

 

 

 

 

 

December 31,
2013

 

Acquisitions/
Divestitures

 

Currency
Translation
Adjustment

 

December 31,
2014

Aerospace

 

 

$

 

2,273

 

 

 

$

 

(4

)

 

 

 

$

 

(11

)

 

 

 

$

 

2,258

 

Automation and Control Solutions

 

 

 

8,006

 

 

 

 

12

 

 

 

 

(194

)

 

 

 

 

7,824

 

Performance Materials and Technologies

 

 

 

2,767

 

 

 

 

 

 

 

 

(61

)

 

 

 

 

2,706

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 

13,046

 

 

 

$

 

8

 

 

 

$

 

(266

)

 

 

 

$

 

12,788

 

 

 

 

 

 

 

 

 

 

48


 

HONEYWELL INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

December 31, 2013

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

Determinable life intangibles:

 

 

 

 

 

 

 

 

 

 

 

 

Patents and technology

 

 

$

 

1,400

 

 

 

$

 

(1,005

)

 

 

 

$

 

395

 

 

 

$

 

1,438

 

 

 

$

 

(935

)

 

 

 

$

 

503

 

Customer relationships

 

 

 

1,867

 

 

 

 

(857

)

 

 

 

 

1,010

 

 

 

 

1,904

 

 

 

 

(749

)

 

 

 

 

1,155

 

Trademarks

 

 

 

191

 

 

 

 

(125

)

 

 

 

 

66

 

 

 

 

194

 

 

 

 

(118

)

 

 

 

 

76

 

Other

 

 

 

291

 

 

 

 

(260

)

 

 

 

 

31

 

 

 

 

294

 

 

 

 

(234

)

 

 

 

 

60

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,749

 

 

 

 

(2,247

)

 

 

 

 

1,502

 

 

 

 

3,830

 

 

 

 

(2,036

)

 

 

 

 

1,794

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indefinite life intangibles:

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks

 

 

 

706

 

 

 

 

 

 

 

 

706

 

 

 

 

720

 

 

 

 

 

 

 

 

720

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 

4,455

 

 

 

$

 

(2,247

)

 

 

 

$

 

2,208

 

 

 

$

 

4,550

 

 

 

$

 

(2,036

)

 

 

 

$

 

2,514

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intangible assets amortization expense was $257 million, $319 million, and $266 million in 2014, 2013, 2012, respectively. Estimated intangible asset amortization expense for each of the next five years approximates $208 million in 2015, $183 million in 2016, $173 million in 2017, $157 million in 2018, and $143 million in 2019.

Note 11. Accrued Liabilities

 

 

 

 

 

 

 

December 31,

 

2014

 

2013

Customer advances and deferred income

 

 

$

 

2,094

 

 

 

$

 

2,172

 

Compensation, benefit and other employee related

 

 

 

1,476

 

 

 

 

1,506

 

Asbestos related liabilities

 

 

 

352

 

 

 

 

461

 

Repositioning

 

 

 

284

 

 

 

 

303

 

Product warranties and performance guarantees

 

 

 

332

 

 

 

 

323

 

Environmental costs

 

 

 

278

 

 

 

 

304

 

Income taxes

 

 

 

261

 

 

 

 

240

 

Accrued interest

 

 

 

101

 

 

 

 

100

 

Other taxes (payroll, sales, VAT etc.)

 

 

 

243

 

 

 

 

249

 

Insurance

 

 

 

264

 

 

 

 

255

 

Other (primarily operating expenses)

 

 

 

1,086

 

 

 

 

1,066

 

 

 

 

 

 

 

 

 

$

 

6,771

 

 

 

$

 

6,979

 

 

 

 

 

 

49


 

HONEYWELL INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except per share amounts)

Note 12. Long-term Debt and Credit Agreements

 

 

 

 

 

 

 

December 31,

 

2014

 

2013

3.875% notes due 2014

 

 

$

 

 

 

 

$

 

600

 

Floating rate notes due 2015

 

 

 

700

 

 

 

 

700

 

5.40% notes due 2016

 

 

 

400

 

 

 

 

400

 

5.30% notes due 2017

 

 

 

400

 

 

 

 

400

 

5.30% notes due 2018

 

 

 

900

 

 

 

 

900

 

5.00% notes due 2019

 

 

 

900

 

 

 

 

900

 

4.25% notes due 2021

 

 

 

800

 

 

 

 

800

 

3.35% notes due 2023

 

 

 

300

 

 

 

 

300

 

5.70% notes due 2036

 

 

 

550

 

 

 

 

550

 

5.70% notes due 2037

 

 

 

600

 

 

 

 

600

 

5.375% notes due 2041

 

 

 

600

 

 

 

 

600

 

Industrial development bond obligations, floating rate maturing at various dates through 2037

 

 

 

30

 

 

 

 

35

 

6.625% debentures due 2028

 

 

 

216

 

 

 

 

216

 

9.065% debentures due 2033

 

 

 

51

 

 

 

 

51

 

Other (including capitalized leases), 0.6%-9.5% maturing at various dates through 2023

 

 

 

538

 

 

 

 

381

 

 

 

 

 

 

 

 

 

 

6,985

 

 

 

 

7,433

 

Less: current portion

 

 

 

(939

)

 

 

 

 

(632

)

 

 

 

 

 

 

 

 

 

$

 

6,046

 

 

 

$

 

6,801

 

 

 

 

 

 

The schedule of principal payments on long-term debt is as follows:

 

 

 

 

 

December 31,
2014

2015

 

 

$

 

939

 

2016

 

 

 

485

 

2017

 

 

 

477

 

2018

 

 

 

904

 

2019

 

 

 

903

 

Thereafter

 

 

 

3,277

 

 

 

 

 

 

 

6,985

 

Less-current portion

 

 

 

(939

)

 

 

 

 

 

 

$

 

6,046