Honeywell International Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data. The filing attributes major operating impacts to the COVID-19 pandemic and resulting global recession.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $7,797 | $9,086 | $23,737 | $27,213 |
| Gross margin | 31.0% | 33.5% | 31.8% | 33.8% |
| Income before taxes | $1,148 | $1,967 | $4,302 | $5,791 |
| Net income attributable to Honeywell | $758 | $1,624 | $3,420 | $4,581 |
| Diluted EPS | $1.07 | $2.23 | $4.81 | $6.25 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $3,426 | $4,283 |
- Q3 sales fell 14% year over year, primarily from lower volumes; nine-month sales fell 13%. Price contributed 2% in both periods, while nine-month foreign currency translation reduced sales by 1%.
- Q3 gross margin contracted 2.5 percentage points. Management cited lower volumes across businesses; cost reductions and productivity actions partly offset the pressure.
- At September 30, cash and cash equivalents were $14,036 and short-term investments were $972, or approximately $15.0 billion combined. Total debt, including short-term borrowings and current maturities, was approximately $22.2 billion, compared with approximately $16.0 billion at year-end 2019.
- Nine-month investing cash outflow was $410; financing cash inflow was $1,972. Cash increased $4,969 during the nine months. The company issued long-term debt and repurchased $2,149 of shares; dividends paid were $1,921.
Segments and notable changes
- Aerospace: Q3 sales declined 25% to $2,662 and segment profit declined 32% to $617. Commercial aviation OEM and aftermarket sales each fell 47%; Defense and Space sales rose 12%.
- Honeywell Building Technologies: Q3 sales declined 8% to $1,305 and segment profit declined 5% to $282.
- Performance Materials and Technologies: Q3 sales declined 16% to $2,252 and segment profit declined 24% to $442, reflecting lower demand, including in oil and gas markets.
- Safety and Productivity Solutions: Q3 sales rose 8% to $1,578 and segment profit rose 12% to $219, supported by respiratory PPE demand and warehouse automation.
- Nine-month repositioning and other charges were $486, versus $306 a year earlier. These included $433 of severance associated with workforce reductions of 13,042 positions. Q3 repositioning and other charges were $144.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific consolidated revenue or earnings guidance. Management said the pandemic, infection trends, vaccine availability, customer demand, and economic recovery remained uncertain; reported results to date should not be taken as indicative of full-year results.
- Management reported that all manufacturing sites remained operational and more than 95% were at normal production levels at September 30. It described continued cost reductions, safety measures, and investment in PPE and other COVID-related products.
- Garrett bankruptcy and receivables: Garrett’s Chapter 11 filing put approximately $1.407 billion of Honeywell receivables at risk before adjustments. Honeywell recorded a $350 million non-cash charge to reduce their carrying value and said it might need further adjustments. Competing restructuring proposals were subject to negotiations and bankruptcy-court approval; an October alternative proposal contemplated $1.45 billion of payments over time. Recovery and final accounting remain uncertain.
- Other contingencies: Recorded environmental liabilities were $666. Asbestos-related liabilities were $2,206, with related insurance recoveries of $416. Honeywell noted that ultimate environmental and asbestos costs and timing remain uncertain; the NARCO estimate could change materially if more reliable claims data becomes available.
- The company increased its quarterly dividend rate by 3% to $0.93 per share effective with the fourth-quarter 2020 dividend. It reported $4.8 billion remaining under its share repurchase authorization.
- Honeywell changed certain Performance Materials and Technologies inventories from LIFO to FIFO in Q3; the $7 cumulative effect reduced cost of products sold and was not material. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether commercial aviation and other COVID-sensitive markets recover, and whether lower volumes continue to weigh on margins and cash generation.
- Garrett bankruptcy developments, recoverability of Honeywell’s receivables, and any additional impairment charges.
- Environmental and asbestos liability estimates, insurance recoveries, and any changes in claims or payment assumptions.
- Debt maturities, borrowing costs, liquidity, and the sustainability of dividends and share repurchases amid reduced operating cash flow.
- Whether PPE-related demand and other growth areas can offset weakness in aerospace, oil and gas, and building markets.