Honeywell International Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparison is with Q1 2019 unless stated otherwise. Amounts are U.S. dollars. Honeywell operates through Aerospace, Honeywell Building Technologies, Performance Materials and Technologies, and Safety and Productivity Solutions.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $8.463 billion | $8.884 billion | Down 5% |
| Gross margin | 34.6% | 33.8% | Up 0.8 percentage points |
| Income before taxes | $1.935 billion | $1.842 billion | Up |
| Net income attributable to Honeywell | $1.581 billion | $1.416 billion | Up 12% |
| Diluted EPS | $2.21 | $1.92 | Up 15% |
| Operating cash flow | $939 million | $1.134 billion | Down $195 million |
Management attributed the sales decline primarily to lower volume, partly related to COVID-19, and unfavorable foreign-currency translation; pricing contributed positively. Gross margin improved on stronger Aerospace and Building Technologies margins and lower repositioning costs. SG&A fell to $1.238 billion from $1.363 billion, primarily from productivity savings. The effective tax rate declined to 17.0% from 22.0%, reflecting India tax-law changes and resolution of U.S. tax matters, partly offset by lower share-based compensation tax benefits.
Segments
- Aerospace: Sales of $3.361 billion, up 1%; segment profit of $937 million, up 12%. Defense and Space grew, while commercial aviation OEM sales declined 11%.
- Honeywell Building Technologies: Sales of $1.281 billion, down 8%; segment profit of $262 million, down 3%.
- Performance Materials and Technologies: Sales of $2.397 billion, down 7%; segment profit of $512 million, down 9%.
- Safety and Productivity Solutions: Sales of $1.424 billion, down 10%; segment profit of $178 million, down 16%. Safety equipment orders rose significantly amid COVID-19, despite lower segment sales overall.
Cash, debt and liquidity
At March 31, 2020, cash and cash equivalents were $7.721 billion and short-term investments were $1.070 billion. Current assets were $22.613 billion versus current liabilities of $17.377 billion. Commercial paper and other short-term borrowings totaled $3.528 billion; current maturities of long-term debt were $1.042 billion and long-term debt was $11.542 billion. Honeywell reported no outstanding borrowings under its credit agreements at quarter-end.
Cash declined by $1.346 billion during the quarter. Investing activities provided $350 million, compared with $609 million used in Q1 2019, while financing activities used $2.446 billion, including $1.923 billion of share repurchases and $635 million of dividends. Operating cash flow was lower, mainly due to working-capital effects and higher repositioning payments, partly offset by lower cash taxes.
Honeywell issued €1.0 billion of notes in March 2020, with approximately $1.136 billion gross proceeds, and paid €1.123 billion of 2020 notes in February. The company entered into a $6.0 billion delayed-draw term-loan facility on March 26 for general corporate purposes; it stated that no credit-agreement borrowings were outstanding at March 31. In the filing, Honeywell said it intended to draw the full facility on or before June 26, 2020. It also entered into a $1.5 billion 364-day credit agreement on April 10, after quarter-end.
Outlook, risks and notable items
- COVID-19: Management said it could not reasonably estimate the pandemic’s duration or severity. Risks include reduced customer spending and payment capacity, disruption to manufacturing and suppliers, and adverse effects on liquidity and cash flow. Airline, oil and gas, and automotive markets were identified as particularly exposed. The filing provides no specific full-year earnings or revenue guidance.
- Cost actions and PPE: Honeywell described workforce and other cost measures and announced plans to add U.S. N95 mask capacity of 20 million masks per month. Q1 repositioning charges were $62 million; cash spending was $88 million. Management expected approximately $300 million of repositioning cash spending in 2020.
- Capital returns: Q1 share repurchases totaled $1.923 billion; $5.1 billion remained under the authorized repurchase program at March 31. The quarterly dividend rate had increased 10% to $0.90 per share, effective with the Q4 2019 dividend.
- Contingencies: Recorded environmental liabilities were $715 million; Honeywell said ultimate costs and timing could be material to results or operating cash flows, though it did not expect a material adverse effect on financial position. Asbestos-related liabilities totaled $2.309 billion, with $425 million of insurance recoveries recorded. The company noted uncertainty around NARCO claims data and that updated estimates could produce a material change.
- Legal matters: On April 3, 2020, an appeals court ruled for Honeywell in the retiree healthcare case, eliminating the damages exposure described in the filing, subject to possible further appeals. Honeywell was defending a separate Garrett-related indemnification dispute and cooperating with government investigations.
Important facts for investors to verify
- How the COVID-19 downturn affected subsequent-quarter sales, especially commercial aviation and other exposed end markets, and whether the company issued later formal guidance.
- Whether Honeywell drew the delayed-draw facility, the resulting debt and interest costs, and how liquidity evolved after March 31.
- Whether operating cash flow recovered and whether share repurchases continued at the Q1 pace.
- Any material changes in environmental or asbestos estimates, insurance recoveries, or the Garrett indemnification dispute.
- Whether the reported margin improvement and lower tax rate proved sustainable beyond Q1.