Honeywell International Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods. Honeywell operates across Aerospace, Honeywell Building Technologies, Performance Materials and Technologies, and Safety and Productivity Solutions. Amounts are in U.S. dollars.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $8.473B | $7.797B | $25.735B | $23.737B |
| Income before taxes | $1.700B | $1.148B | $5.442B | $4.302B |
| Net income attributable to Honeywell | $1.257B | $758M | $4.114B | $3.420B |
| Diluted EPS | $1.80 | $1.07 | $5.86 | $4.81 |
| Operating cash flow | Not reported separately | Not reported separately | $3.375B | $3.426B |
Sales rose 9% in Q3 and 8% year to date, reflecting higher volumes, favorable pricing and currency translation. Gross margin, calculated from reported sales and cost of products and services, was approximately 32.2% in Q3 versus 31.0% a year earlier, and 32.2% year to date versus 31.8%. Management cited stronger demand, volume leverage, pricing and lower repositioning charges as contributors; rising material and labor costs partly offset improvement.
For the first nine months, capital expenditures were $614M, implying free cash flow of approximately $2.761B (operating cash flow less capital expenditures), compared with approximately $2.811B in 2020. Cash and cash equivalents were $11.087B at September 30, 2021; short-term investments were $1.049B. Total borrowings were $21.249B, down from $22.384B at December 31, 2020. Current assets were $26.033B and current liabilities $20.207B. No borrowings were outstanding under the company’s $4.0B five-year and $1.5B 364-day credit agreements.
Changes and segment performance
- Q3 sales increased across all segments. Aerospace sales rose 3% and segment profit 20%; commercial aviation aftermarket demand improved, while defense and space sales fell 16% amid supply constraints and lower demand.
- Building Technologies sales rose 5% and segment profit 14%; Performance Materials and Technologies sales rose 11% and segment profit 26%; Safety and Productivity Solutions sales rose 18% and segment profit 12%.
- For the nine months, Safety and Productivity Solutions had the strongest reported sales growth, up 33%, supported by warehouse automation and productivity solutions. Aerospace sales remained 5% below the prior-year period.
- Sparta Systems was acquired for $1.303B in February and included in Performance Materials and Technologies. Honeywell sold its retail footwear business in March for $230M gross proceeds and recorded a $95M pretax gain.
Liquidity, outlook, risks and unusual items
- Financing cash outflow was $5.195B for the first nine months, including $2.499B of share repurchases and $1.950B of dividends. Cash declined by $3.188B from year-end 2020. Investing cash outflow included $1.334B for acquisitions; cash inflows included $375M from Garrett and $203M from the footwear-business sale.
- The board authorized up to $10B in share repurchases in February 2021; $8.0B remained available at September 30. The company stated that operating cash flows, cash, credit lines and market access should be sufficient for expected operating needs and obligations. No specific earnings or revenue guidance is provided in the supplied filing text.
- COVID-19-related recovery remained uneven. Management highlighted supply-chain constraints and material and labor shortages, and cautioned that new virus variants and other factors remained unpredictable. These pressures contributed to installation inefficiencies in Safety and Productivity Solutions.
- Other income was $215M in Q3 and $1.023B for the first nine months, including substantial pension non-service income. Results also included a $160M charge for UOP matters; the company accrued at least $160M as a probable loss while discussions with authorities continued. The filing says the ultimate outcome and timing are uncertain.
- Environmental liabilities were $639M; asbestos-related liabilities were $2.065B, with $365M of related insurance recoveries. The company noted uncertainty around ultimate costs and recoveries. Honeywell and the NARCO Trust had filed lawsuits against each other, and the company said it could not predict the outcome.
- Honeywell identified possible workforce attrition and labor-supply effects from U.S. government contractor vaccination requirements and a potential OSHA vaccination-or-testing standard. Disclosure controls were assessed as effective, with no material change to internal control over financial reporting reported.
Important facts for investors to verify
- Whether sales recovery, especially in commercial aerospace, continues and whether supply constraints, labor availability and input-cost inflation affect volume and margins.
- The composition and sustainability of reported earnings growth, including pension income, the UOP charge, repositioning costs, and the prior-year Garrett-related charge.
- Cash conversion and working-capital trends, given lower year-to-date operating cash flow and increases in receivables and inventory.
- Developments in the UOP investigations, NARCO and Bendix asbestos matters, environmental obligations, and the recoverability and timing of Resideo and Garrett-related amounts.
- Capital allocation and debt maturities, including future repurchases, dividends, and the expected realization of Garrett preferred-stock redemptions.