Honeywell International Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. All dollar amounts are in millions unless otherwise noted. Comparisons are with the corresponding 2019 periods.
Business context
Honeywell operates through Aerospace, Honeywell Building Technologies, Performance Materials and Technologies, and Safety and Productivity Solutions. The quarter was heavily affected by COVID-19 and the global recession: lower air travel, weaker oil and gas demand, and reduced customer spending weighed on results. Demand for respiratory personal protective equipment (PPE) and warehouse automation provided offsets.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $7,477 | $9,243 | $15,940 | $18,127 |
| Income before taxes | $1,219 | $1,982 | $3,154 | $3,824 |
| Net income attributable to Honeywell | $1,081 | $1,541 | $2,662 | $2,957 |
| Diluted EPS | $1.53 | $2.10 | $3.74 | $4.02 |
| Gross margin | 29.4% | 34.1% | 32.2% | 33.9% |
| Operating cash flow | — | $2,419 | $2,812 |
- Q2 sales fell 19% year over year, driven chiefly by a 20% volume decline; pricing contributed 2%, while foreign exchange reduced sales by 1%. Six-month sales were down 12%.
- Q2 diluted EPS declined 27%. Lower segment profit and higher repositioning charges were partly offset by lower taxes and higher pension income.
- Q2 SG&A was $1,183, down $204 year over year; it equaled 15.8% of sales versus 15.0%. The effective tax rate was 9.8% for Q2 and 14.2% for the first half, versus 21.5% and 21.8%, respectively, in 2019. Lower rates primarily reflected favorable tax resolutions and changes.
- Six-month investing cash outflow was $358, including $366 of capital expenditures. Financing provided $2,741, including $7,101 of long-term debt issuance; share repurchases were $1,985 and dividends paid were $1,285. Cash and cash equivalents rose $4,711 to $13,778.
Segments and material changes
- Aerospace: Q2 sales fell 28% to $2,543 and segment profit fell 42% to $528. Commercial aviation aftermarket sales declined 54%; Defense and Space sales increased 7%.
- Honeywell Building Technologies: Q2 sales declined 19% to $1,177 and segment profit declined 17% to $250, reflecting weaker discretionary spending and lower volumes.
- Performance Materials and Technologies: Q2 sales decreased 19% to $2,218 and segment profit decreased 35% to $419, amid lower oil and gas demand, project delays, and reduced volumes.
- Safety and Productivity Solutions: Q2 sales were nearly flat, down 1% to $1,539, while segment profit rose 12% to $213. PPE and warehouse/workflow demand helped offset weakness elsewhere.
Liquidity, debt and capital allocation
- At June 30, cash and cash equivalents were $13,778 and short-term investments were $1,349, totaling about $15.1 billion of available cash and short-term investments.
- Commercial paper and other short-term borrowings were $3,531; current maturities of long-term debt were $967; long-term debt was $17,591. Total debt carrying value, including current maturities, was $18,558, up from $12,486 at year-end 2019.
- Honeywell issued $3.0 billion of senior notes and drew $3.0 billion under a delayed-draw term loan in June. It reported no outstanding borrowings under its $1.5 billion 364-day or $4.0 billion five-year credit agreements.
- Management said operating cash flow, cash balances, committed credit lines, and capital-market access should support operations and future needs. The company increased its quarterly dividend rate by 10% to $0.90 per share effective in Q4 2019. As of June 30, $5.0 billion remained available under the share repurchase authorization.
Outlook, management commentary and risks
- The filing provides no numerical full-year earnings or revenue guidance. Management cautioned that interim results are not necessarily indicative of full-year results and said it continued to monitor pandemic conditions.
- Management described ongoing cost actions, including reduced work schedules, canceled 2020 merit increases, executive and board compensation reductions, and permanent workforce reductions. More than 95% of manufacturing sites were operating near capacity at quarter-end.
- Q2 repositioning and other charges were $280; first-half charges were $342. First-half severance charges included workforce reductions affecting 9,929 positions, primarily to align costs with lower and anticipated demand. Q2 actions covered 7,805 positions. The first-half cash spending for repositioning actions was $172.
- COVID-19 risks include prolonged demand weakness, especially in aviation, oil and gas, and automotive markets; customer or supplier financial distress; operational and supply-chain disruption; lower cash flow; and increased cybersecurity exposure from remote work.
- Environmental liabilities were $709 at June 30. Asbestos-related liabilities were $2,256, against recorded insurance recoveries of $421. Honeywell said future environmental costs and the timing and amount of ultimate liabilities are uncertain and could be material to results or operating cash flows when recognized or paid.
- Honeywell recorded $1,070 of short- and long-term receivables from Garrett under an indemnification and reimbursement agreement. Garrett had disclosed conditions raising substantial doubt about its ability to continue as a going concern; amendments allow certain payments to be deferred if covenant conditions are not met. Honeywell stated it believed the receivable was collectible. Garrett disputes the agreements, and Honeywell disputes Garrett’s allegations.
- The company said NARCO asbestos claims data remained insufficient to update its liability estimate; a future revision could be material. It also disclosed ongoing legal proceedings and investigations, while stating it did not expect the matters discussed to have a material adverse effect on consolidated financial position.
Important facts for investors to verify
- How quickly aviation, building, and industrial demand recovers, and whether COVID-19-related customer or supplier distress affects sales, collections, or operations.
- Whether lower sales volumes continue to pressure gross and segment margins despite productivity and cost-reduction measures.
- Debt repayment and refinancing needs, cash generation, and the company’s use of repurchases and dividends during the downturn.
- Garrett’s financial capacity to meet deferred and future reimbursement obligations, and the outcome of the related disputes.
- Future developments in NARCO and Bendix asbestos estimates, environmental obligations, and related insurance recoveries.
- The sustainability of the unusually low 2020 effective tax rates, which benefited from specific tax resolutions and changes.