Honeywell International Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited consolidated results. Comparisons are with Q1 2020 unless stated otherwise. Honeywell operates through Aerospace, Honeywell Building Technologies, Performance Materials and Technologies, and Safety and Productivity Solutions.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Net sales | $8.454 billion | $8.463 billion; essentially flat |
| Income before taxes | $1.861 billion | $1.935 billion |
| Net income attributable to Honeywell | $1.427 billion | $1.581 billion |
| Diluted EPS | $2.03 | $2.21 |
| Operating cash flow | $978 million | $939 million |
| Capital expenditures | $221 million | $139 million |
| Cash and cash equivalents | $11.718 billion | $14.275 billion at Dec. 31, 2020 |
| Total borrowings | $21.327 billion | $22.384 billion at Dec. 31, 2020 |
Gross profit, calculated as net sales less cost of products and services sold, was $2.745 billion, or approximately 32.5% of sales, versus $2.929 billion, or approximately 34.6%. Operating cash flow less capital expenditures was approximately $757 million, compared with $800 million. The company reported cash plus short-term investments of approximately $12.7 billion. Current assets were $25.587 billion and current liabilities were $17.950 billion at quarter-end.
Material changes versus Q1 2020
- Sales were essentially unchanged: a 4% volume decline was offset by 2% price and 2% foreign-currency translation benefits. Honeywell estimated that additional reporting days contributed approximately 3% to year-over-year sales comparisons.
- Segment sales and profit were mixed: Aerospace sales fell 22% and segment profit fell 19%; Building Technologies sales rose 6% and profit rose 16%; Performance Materials and Technologies sales fell 2% and profit fell 15%; Safety and Productivity Solutions sales rose 49% and profit rose 70%.
- Lower income, higher taxes, repositioning charges and share-based compensation contributed to lower diluted EPS. Other income improved, including a $90 million pretax gain on the sale of the retail footwear business and higher pension income.
- Operating cash flow increased $39 million, principally from favorable working capital, partly offset by lower net income. Investing cash flow included $1.303 billion paid for an acquisition. The company repurchased $822 million of shares, compared with $1.923 billion in Q1 2020.
Guidance, commentary, risks and unusual items
- Outlook: The filing provides no specific numerical quarterly or full-year guidance. Management said operating cash flows are expected to be sufficient for future operating needs, with cash, credit lines and capital-market access as additional liquidity sources.
- COVID-19: Management said the pandemic continued to weigh on Aerospace and Performance Materials and Technologies, while respiratory PPE and warehouse automation supported Safety and Productivity Solutions. Building Technologies showed early improvement. Management remained cautious about infection rates, vaccination challenges and new variants.
- Acquisition and divestiture: Honeywell acquired Sparta Systems for $1.303 billion and allocated $1.036 billion to goodwill, which is nondeductible for tax purposes. The retail footwear sale generated $230 million gross cash consideration and a $90 million pretax gain.
- Restructuring: Net repositioning and other charges were $141 million versus $62 million. Charges included $28 million severance, $42 million asset impairments and $49 million exit costs; cash spending on repositioning actions was $105 million.
- Contingencies: Environmental liabilities were $623 million. Asbestos-related liabilities were $2.173 billion, with $383 million of recorded insurance recoveries. The company warns that environmental and asbestos estimates involve uncertainty and could affect results or operating cash flows.
- Garrett bankruptcy: Honeywell had recorded $959 million of short- and long-term receivables under indemnification and tax agreements at December 31, 2020, with no carrying-value adjustment in Q1. A proposed reorganization plan contemplated an initial $375 million cash/preferred-stock payment and subsequent payments, but confirmation and collection were uncertain at the filing date.
- Capital allocation and financing: The board authorized up to $10 billion of share repurchases; $9.7 billion remained available at March 31. New $4.0 billion five-year and $1.5 billion 364-day credit agreements were in place, with no borrowings under either at quarter-end.
Most important facts for investors to verify
- Whether recovery in aviation, oil and gas, and other COVID-affected markets offsets the company’s dependence on PPE and warehouse-automation demand.
- Whether gross-margin pressure, higher material costs and repositioning charges persist, and how much of reported results reflects one-time gains or pension income.
- Cash conversion and liquidity after the Sparta acquisition, dividends, repurchases and scheduled debt maturities.
- Outcome and recoverability of Honeywell’s claims in Garrett’s bankruptcy, and any resulting receivable remeasurement.
- Changes in asbestos and environmental estimates, insurance recoveries and related litigation or payment obligations.
- Impact of the additional reporting days on comparability; management estimated an approximately 3% sales benefit versus Q1 2020.