Honeywell International Inc. — Q3 2022 Form 10-Q
Business context and reporting period. Honeywell is a diversified technology and manufacturing company operating through Aerospace, Honeywell Building Technologies, Performance Materials and Technologies, and Safety and Productivity Solutions. This unaudited report covers the quarter and nine months ended September 30, 2022, compared with the corresponding 2021 periods. Unless noted otherwise, amounts are in U.S. dollars.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $8,951 million | $8,473 million | $26,280 million | $25,735 million |
| Net income attributable to Honeywell | $1,552 million | $1,257 million | $3,947 million | $4,114 million |
| Diluted EPS | $2.28 | $1.80 | $5.76 | $5.86 |
| Gross margin | 33.2% | 32.2% | 32.6% | 32.2% |
| Segment profit | $1,952 million | $1,793 million | $5,585 million | $5,361 million |
Q3 sales increased 6% year over year, reflecting 11% favorable pricing, partly offset by a 2% volume decline and 3% unfavorable currency translation. For the nine months, sales increased 2%: 9% pricing was partly offset by 4% lower volume and 3% unfavorable currency translation. Q3 net income attributable to Honeywell rose about 23%; nine-month net income declined about 4%.
For the nine months, operating cash flow was $2,908 million, down from $3,375 million. Capital expenditures were $525 million; operating cash flow less capital expenditures was approximately $2,383 million, versus $2,761 million in 2021. Investing activities provided $540 million, compared with $1,347 million used in 2021; financing activities used $6,609 million, versus $5,195 million.
At September 30, cash and cash equivalents were $7,449 million, and short-term investments were $516 million. Total current assets were $22,525 million and current liabilities were $18,109 million. Total borrowings, as presented by the company, were $16,985 million, down from $19,599 million at year-end 2021. The company had no borrowings under its $4.0 billion five-year or $1.5 billion 364-day credit agreements.
Material changes and segment trends
- Aerospace: Q3 sales rose 9% to $2,976 million and segment profit rose 11% to $818 million, supported by commercial aviation demand and aftermarket activity; defense sales declined.
- Honeywell Building Technologies: Q3 sales rose 11% to $1,526 million and segment profit rose 14% to $368 million, on pricing and higher volumes, partly offset by foreign exchange.
- Performance Materials and Technologies: Q3 sales rose 8% to $2,720 million and segment profit rose 10% to $615 million. Advanced Materials growth offset weaker demand in some oil and gas-related activity and Russia-related effects.
- Safety and Productivity Solutions: Q3 sales declined 7% to $1,727 million, while segment profit rose 11% to $271 million. For the nine months, sales declined 13% and segment profit declined 10%, reflecting lower volumes, foreign exchange, the retail footwear divestiture, and cost pressures.
Q3 consolidated gross margin improved, with favorable pricing partly offset by higher materials and labor costs, repositioning charges, and lower Safety and Productivity Solutions volumes. The company repurchased $2,827 million of stock and paid $2,028 million of dividends during the nine months. Shares outstanding declined to 672.3 million from 688.4 million a year earlier.
Outlook, commentary, risks, and unusual items
- The filing provides no specific numeric earnings or revenue guidance. Management expected supply-chain constraints and inflationary pressures to continue through the remainder of 2022 and into 2023, and described pricing, supplier engagement, and product adjustments as mitigation measures. Management believed operating cash flows, cash, credit lines, and market access would be sufficient to meet funding needs.
- The Russia-Ukraine conflict led Honeywell to suspend substantially all sales, distribution, and service activity in Russia and Belarus in March 2022 and approve a Russia wind-down in June. Nine-month repositioning and other charges totaled $714 million, versus $338 million in 2021; this included $291 million of Russia-related other charges. Additional Russian entity sales were completed in October, with effects expected in Q4. The company said potential future Russia-related losses could affect results, but were not expected to be material to its financial position based on information then available.
- Repositioning included workforce reductions of 2,940 positions during the nine months and $153 million of asset impairments, primarily associated with moving respiratory-product manufacturing. A Q2 licensing and settlement agreement in Productivity Solutions and Services provides for up to $360 million in equal quarterly installments over eight quarters, beginning in Q2 2022.
- Honeywell accrued an estimated $210 million probable loss for UOP-related investigations and potential resolution: $160 million was recorded in 2021 and an additional $50 million in Q2 2022. The ultimate outcome and terms remained uncertain.
- Environmental liabilities were $663 million at September 30, 2022. Asbestos-related liabilities were $1,982 million, with $279 million of related insurance recoveries. A potential NARCO asbestos settlement remained unresolved and could require a lump-sum payment above the currently reserved NARCO liability; any settlement would require court approval.
- Management cited inflation, labor shortages, supply disruptions, foreign exchange, geopolitical developments, and international regulatory and trade risks. The company also noted that environmental, litigation, and contingency costs could materially affect results or operating cash flows in the periods recognized or paid.
Important facts for investors to verify
- Whether pricing continues to offset material, labor, and logistics inflation, and whether lower-volume trends in Safety and Productivity Solutions improve.
- How working capital and operating cash flow develop, given the year-to-date decline and increased cash use in financing.
- Final costs and cash consequences of the Russia wind-down, including the October 2022 divestitures and remaining obligations.
- Developments in the UOP investigations, NARCO asbestos litigation and potential settlement, and environmental liabilities.
- Cash returns and balance-sheet changes, including the pace of repurchases, dividends, and debt repayment.