Honeywell International Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited results. Honeywell is a diversified technology and manufacturing company with four reportable segments: Aerospace, Honeywell Building Technologies, Performance Materials and Technologies, and Safety and Productivity Solutions. Dollar amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $8,376 | $8,454 | Down 1% |
| Gross profit | $2,702 | $2,745 | Down $43 |
| Gross margin | 32.3% | 32.5% | Down 0.2 percentage points |
| Income before taxes | $1,505 | $1,861 | Down 19% |
| Net income attributable to Honeywell | $1,134 | $1,427 | Down 21% |
| Diluted EPS | $1.64 | $2.03 | Down 19% |
| Operating cash flow | $36 | $978 | Down $942 |
| Capital expenditures | $183 | $221 | — |
| Cash dividends per share | $0.98 | $0.93 | Up $0.05 |
Sales volume declined 6% and foreign currency translation reduced sales by 2%, partly offset by 7% favorable pricing. Higher repositioning and other charges, including Russia-related reserves, contributed to lower earnings. The effective tax rate rose versus Q1 2021 and was above the 21% U.S. federal statutory rate; the filing attributes this mainly to Russia-related charges without a corresponding tax benefit, lower share-based compensation tax benefits, and incremental tax reserves and state taxes, partly offset by favorable foreign tax resolutions.
Operating cash flow was pressured by an $815 million working-capital outflow, including increases in receivables and inventory and a decline in accrued liabilities. Investing cash outflow was $10 million, versus $1,304 million in Q1 2021, mainly reflecting lower acquisition spending and $197 million received from Garrett. Financing cash outflow was $1,719 million, including $1,018 million of share repurchases and $668 million of dividends paid. Cash and cash equivalents ended the quarter at $9,281, down from $10,959 at year-end 2021.
Segments
| Segment | Sales | Year-over-year sales | Segment profit | Year-over-year profit |
|---|---|---|---|---|
| Aerospace | $2,749 | Up 4% | $753 | Down 1% |
| Honeywell Building Technologies | $1,429 | Up 5% | $336 | Up 10% |
| Performance Materials and Technologies | $2,453 | Up 5% | $510 | Up 18% |
| Safety and Productivity Solutions | $1,744 | Down 18% | $253 | Down 17% |
Safety and Productivity Solutions was the largest source of sales decline, reflecting lower volumes, the retail footwear divestiture, and foreign exchange. Aerospace benefited from commercial aviation aftermarket demand and pricing, while defense and space sales fell. Building Technologies and Performance Materials and Technologies increased profit, supported by pricing and product mix.
Financial position and liquidity
At March 31, 2022, total assets were $63,352 and total shareowners’ equity was $19,051. Total borrowings were $19,369, compared with $19,599 at December 31, 2021. Current debt maturities rose to $3,207 from $1,803, while long-term debt declined to $12,636 from $14,254. Cash and short-term investments totaled $9,774. The company reported no borrowings under its $4.0 billion five-year and $1.5 billion 364-day revolving credit agreements. Management said operating cash flows, available cash, committed credit lines, and access to capital markets are expected to provide sufficient liquidity for operating needs, debt maturities, and investment opportunities.
Honeywell repurchased 5.5 million shares for approximately $1.0 billion during the quarter; $6.1 billion remained under its authorized repurchase program at March 31. Environmental liabilities were $635; asbestos-related liabilities were $2,035, with $355 of related insurance recoveries.
Material changes, outlook, and risks
- Russia-Ukraine conflict: Honeywell suspended substantially all sales, distribution, and service activities in Russia and Belarus on March 9. It recorded $183 million of reserves and asset impairments in Q1. Russia represented approximately 1% of 2021 global revenue and less than 1% of total assets. Management estimated that potential future Russia business impairments would not be material to consolidated financial position based on information available, but warned that further or unknown effects could be material.
- Repositioning and unusual charges: Net repositioning and other charges were $387, versus $141 in Q1 2021. The quarter included $123 of asset impairments, mainly related to relocating respiratory-product manufacturing, and workforce reductions of 1,196 positions. Charges also included asbestos litigation and environmental items.
- Operating environment: Management expects supply-chain constraints and inflationary pressures to continue during 2022, with labor shortages also affecting operations. The company cited COVID-19-related disruption, commodity-price volatility, and foreign-exchange effects.
- Guidance: The supplied filing text does not provide a clear numerical full-year earnings or revenue guidance figure. Management stated that interim results are not necessarily indicative of full-year results.
- Contingencies: Environmental costs could be material to results or operating cash flow in periods recognized or paid, although Honeywell does not expect a material adverse effect on consolidated financial position. The company is litigating with the NARCO asbestos trust and cannot predict the outcome. It also continues discussions with authorities concerning Petrobras/Unaoil investigations; a probable loss of at least $160 million had been accrued in 2021, while final amounts could differ.
- Other notable item: Honeywell acquired US Digital Design for $184 million in January 2022. The company also reported a pending final court approval hearing for a proposed $10 million settlement of a shareholder class action concerning prior Bendix asbestos accounting.
Important facts for investors to verify
- Whether pricing and cost actions can offset ongoing inflation, supply-chain, labor, and foreign-exchange pressures without further margin erosion.
- How Safety and Productivity Solutions sales recover from lower volumes and project timing, and whether commercial aerospace demand continues to improve.
- Future cash conversion and working-capital trends, given Q1 operating cash flow of only $36 million and substantial working-capital outflows.
- Actual cash requirements for the $3.2 billion of current debt maturities, repurchases, dividends, acquisitions, and environmental and asbestos matters.
- Further financial and operational impacts from the Russia-Ukraine conflict, including the adequacy of the $183 million Q1 reserve.
- Developments in environmental and asbestos estimates, the NARCO trust litigation, and the Petrobras/Unaoil investigations and related accrued liability.