HONEYWELL INTERNATIONAL INC. The following Management Discussion and Analysis is intended to help the reader understand the results of operations and financial condition ofHoneywell International Inc. and its consolidated subsidiaries ("Honeywell" or "the Company") for the three months (quarter) and nine months endedSeptember 30, 2020 . The financial information as ofSeptember 30, 2020 should be read in conjunction with the Consolidated Financial Statements for the year endedDecember 31, 2019 contained in our 2019 Annual Report on Form 10-K.
COVID-19 UPDATE
InDecember 2019 , a novel strain of coronavirus (COVID-19) was identified inAsia . Over the next several months, COVID-19 quickly spread across the world. InMarch 2020 , theWorld Health Organization declared COVID-19 a worldwide pandemic. As ofSeptember 30, 2020 , the virus continues to spread, infecting more than 10 million people worldwide. No vaccine is currently available. Governments took unprecedented actions to contain the spread of COVID-19, temporarily shutting down non-essential businesses, issuing stay at home or "shelter in place" orders and asking citizens to avoid all non-essential travel. In certain situations, governments closed borders and issued mandatory quarantines. Companies were asked, in many cases were required, to allow non-essential employees to work remotely. Consumer spending declined, global travel demand declined significantly, and the world entered a global recession. These events impacted our business operations in multiple ways. In the first quarter of 2020, we quickly responded to the changing environment. InJanuary 2020 , we implemented policies in select countries withinAsia to restrict travel and require employees to work from home for all roles that allow for remote work. InMarch 2020 , we expanded this work from home policy to include our employees worldwide. We introduced appropriate safety and hygiene protocols to enable our manufacturing employees to operate safely through the pandemic. We actively monitored the changing government rules and regulations for each of our locations worldwide.
We remain cautious as many factors remain unpredictable, including COVID-19 infection rates and vaccine availability timeline. We are monitoring COVID-19 infection rates globally and acknowledge the risk of new surges in COVID-19 infections.
We prepared procedures for the phased return of our employees to office sites and trained our local site leaders in the appropriate safety and hygiene protocols. As ofSeptember 30, 2020 , all of our manufacturing sites continue to operate and, outside ofIndia , most of our employees inAsia have returned to the workplace in some capacity. We also returned workers to select office sites withinEurope andNorth America . In many countries, including theU.S. , most of our non-manufacturing employees continue to work from home (for all roles that allow for remote work). The global recession resulted in a slow-down in demand for many of the products and services that we offer. The impact on each of our businesses is outlined below: •Aerospace - The decline in global travel negatively impacted many of our customers, resulting in lower demand for our products from original equipment manufacturers (OEMs) and negatively impacted demand for our aftermarket businesses. As a result, this segment's sales and profits declined in the three months endedSeptember 30, 2020 , compared to the three months endedSeptember 30, 2019 . •Performance Materials and Technologies - Many of our customers operate in the oil and gas industry. The decline in global travel, coupled with excessive oil and gas supply, negatively impacted many of our customers and resulted in lower demand for our products. As a result, this segment's sales and profits declined in the three months endedSeptember 30, 2020 , compared to the three months endedSeptember 30, 2019 . 36
-------------------------------------------------------------------------------- •Honeywell Building Technologies - Our customers own or manage buildings in a variety of industries including commercial real estate, hospitality, government, healthcare, banking and education. The global recession impacted many of these industries, resulting in a reduction of discretionary spending. As a result, this segment experienced lower demand for our products, and segment sales and profits declined in the three months endedSeptember 30, 2020 , compared to the three months endedSeptember 30 , ,2019. •Safety and Productivity Solutions - The global pandemic created significant demand for our respiratory personal protective equipment (PPE) driving increases in sales and profits in the three months endedSeptember 30, 2020 , compared to the three months endedSeptember 30, 2019 . As a result of the slowdown in demand for our products, we implemented several cost reduction programs across our enterprise. We canceled our 2020 merit increases and reduced executive andBoard of Director compensation. We initiated reduced work schedules across the company and implemented permanent census reductions. We also took several steps to secure additional liquidity. InMay 2020 , we completed a public Senior Notes offering, which provided$3 billion of available liquidity. InAugust 2020 , we completed a public Senior Notes offering, which provided$3 billion of available liquidity which was used to repay the outstanding principal amount of$3.0 billion under the Term Loan Agreement. As ofSeptember 30, 2020 , there are no outstanding borrowings or commitments remaining under the Term Loan Agreement. As ofSeptember 30, 2020 , we held$15.0 billion of available cash and short-term investments.
We continue to monitor and respond to the changing conditions created by the pandemic.
We continue to monitor the COVID-19 situation and its impacts globally. We are prioritizing the health and safety of our employees. Out of an abundance of caution for the health of our employees and to support local government initiatives to stem the spread of the virus, we implemented several precautions at various sites around the world at all times in compliance with local government requirements andCenters for Disease Control and Prevention (CDC ) guidelines. These include, but are not limited to: •Limiting visitor site access to business-essential purposes; •Introducing screening checks at certain sites where permissible or mandated; •Enabling employees to work from home wherever and whenever required or appropriate; •Continuously updating travel guidance, according to latest developments; and •Complying with all local health authority guidance or regulations and our own protocols, including requesting employees to comply with self-quarantine requirements whenever advisable. We have taken a number of measures to support our employees during these difficult times. We extended medical benefits globally to cover out-of-pocket costs associated with testing for coronavirus, and for those on ourU.S. company medical plans, we are also covering treatment costs. InMexico , we introduced a medical benefit for employees at lower compensation levels to ensure access to private medical treatment. In theU.S. , we changed our sick leave plan for non-exempt employees to make more sick time available earlier in the year if it is needed. We established a$10 million company-funded relief fund targeting employees worldwide at lower compensation levels, especially those on reduced work hourswho didn't receive high levels of income replacement from unemployment or other government assistance. To date, Honeywell has made substantial mask donations to frontline workers across multiple regions. Honeywell funded a$2 million Small Business Innovation Fund in Charlotte to help storefront businesses with 50 or fewer employees make investments in new technologies and business models to adjust to the realities of operating in the COVID-19 environment; businesses owned by women, minorities and veterans will be prioritized. In addition, Honeywell funded the provision of approximately nine million meals and a month's supply of hygiene kits to more than 12,500 families inIndia suffering hardships due to the crisis. 37 --------------------------------------------------------------------------------
Our Commitment to Public Health
We produce critical worker safety gear such as face masks, gloves, goggles, safety suits, and protective footwear. We play an essential role in the health and well-being of people and economies, and our customers and communities are depending on us more than ever to deliver for them. We are committed to supporting the safety of our employees, customers and fellow citizens around the world. We are investing in new production facilities and continue to expand existing facilities to increase production of essential PPE products. We will bring these products to market as quickly as possible. We are committed to healthcare professionals, first responders, distributors and other stakeholders in an effort to ensure our PPE products are being placed quickly and cost-effectively in the hands of those most in need. We announced our new capacity in theU.S. to make N95 masks, with production lines added inRhode Island andArizona that will collectively produce 40 million masks each month to support health, safety, and response workers globally. In addition, we are expanding our non-U.S. capacity with a new mask manufacturing line in theU.K that is expected to produce 4.5 million masks each month, and a new line inIndia that is expected to produce 2 million masks each month. Separately, we are collaborating withMubadala Investment Company's subsidiary, Strata Manufacturing, in theUAE to produce 30 million masks annually.
We have communicated the following principles to our authorized distributor network:
•Our expectation that, at a minimum, all of our partners will comply with all applicable laws prohibiting price gouging and apply appropriate diligence to the greatest extent possible to understand how our products are being purchased so that they are placed quickly and cost-effectively in the hands of those most in need - including first responders and medical professionals.
•While we do not control the prices that third parties set, we expect our partners to fairly price PPE used in the COVID-19 response effort.
•If we find that one of our partners is not upholding the letter or spirit of these principles, we reserve the right not to fulfill that partner's orders and terminate our relationship with that party. We are also investing in developing and bringing to market a wide array of new COVID-related products, including but not limited to Healthy Buildings solutions, remote operations offerings, automation technologies to help speed vaccine development, vaccine packaging solutions, an ultraviolet cleaning system for aircraft, and innovative dual-layer face covers and safety packs.
Plant Productivity and Safety
In situations where our businesses were deemed essential, we worked with local officials to determine how to safely operate our manufacturing facilities. We successfully operated these manufacturing facilities with minimal disruption in our productivity. In the second quarter of 2020, we repurposed certain manufacturing facilities to produce PPE that was in short supply around the world. As ofSeptember 30, 2020 , more than 95% of our manufacturing sites were operating at normal production levels. We continue to provide essential services and produce essential goods around the world. We employ standards such as screening checks, use of masks, face coverings and other safety equipment and social distancing practices along production lines in many of our production facilities at all times in compliance with local government requirements andCDC guidelines. We take appropriate actions including disinfecting and quarantine procedures when a suspected COVID-19 case is identified. 38 --------------------------------------------------------------------------------
Customers and Suppliers
Current global economic conditions due to COVID-19 have adversely affected and may continue to adversely affect our customers' or suppliers' ability to operate or obtain financing, particularly in our airline, oil & gas, and automotive end markets. Customer or supplier bankruptcies, delays in their ability to obtain financing, or the unavailability of financing could adversely affect our cash flow or results of operations. We continue to actively monitor both supplier and customer financial health and take measures to manage our supply chain disruptions and limit our exposure.
See Part II, Item 1A. Risk Factors for discussion of risks associated to the COVID-19 pandemic.
Garrett Bankruptcy OnSeptember 20, 2020 , Garrett Motion Inc. ("Garrett") and certain of its affiliates filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in theUnited States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court "). Garrett is still in the early stages of its bankruptcy process, and any further impacts on our financial statements remain subject to the various relief ultimately granted to Garrett and its affiliates by theBankruptcy Court and the plan of reorganization ultimately confirmed in their bankruptcy proceedings, among other things.
Two competing proposals have been publicly disclosed to date (the "Competing Proposals"):
1.Garrett entered into a Share and Asset Purchase Agreement, dated as ofSeptember 20, 2020 (the "Proposed Stalking Horse Bid"), withKPS Capital Partners, LP ("KPS"). As most recently amended, the Proposed Stalking Horse Bid contemplates a proposed purchase of Garrett's business for$2.6 billion and a Chapter 11 plan that implements the sale of Garrett's business, pays Garrett's secured creditors in full and pays 90% of Garrett's unsecured notes obligations from the cash from the sale, provides Garrett's current stockholders an opportunity to co-invest up to$350 million in the purchase of common stock of the a new company organized by KPS to purchase Garrett's business on same terms as KPS, and includes as part of the sale certain claims and causes of action against Honeywell and others arising out of the spin-off, with details related to this aspect of its proposed sale structure to be forthcoming. 2.Honeywell signed a coordination agreement withOaktree Capital Management, L.P. ("Oaktree") andCenterbridge Partners, L.P. ("Centerbridge"), which has since been signed by equity holders representing approximately 50% of Garrett's outstanding common stock (the "Alternative Proposal"). The coordination agreement supports a proposed plan of reorganization under which Honeywell would receive cash payments totaling$1.45 billion comprising an initial payment of$275 million and$1.175 billion paid over a twelve-year period endingDecember 31, 2034 . These cash payments would be paid in full and final satisfaction of Garrett's obligations under the Garrett Indemnity and Tax Matters Agreement. Under the Alternative Proposal, Garrett's secured creditors and unsecured notes obligations would be paid in full, and equity would be reinstated. Both of the Competing Proposals remain subject to various conditions and milestones, as well asBankruptcy Court approval and confirmation. It is also possible that there will be additional bids and alternative proposed plans of reorganization for Garrett. There can be no assurance that either the Proposed Stalking Horse Bid (including the plan of reorganization contemplated thereby) or the Alternative Proposal will be accepted by the requisite parties and approved and confirmed by theBankruptcy Court . We understand based on Garrett's public disclosures that the business fundamentals of Garrett remain strong and, in the quarter endedJune 30, 2020 , Garrett continued to generate positive earnings before interest, taxes, depreciation, and amortization. We believe such disclosures by Garrett management demonstrate Garrett's ability to meet its financial obligations despite temporary adverse business conditions resulting from COVID-19, particularly in light of the financial covenant relief provided by the Credit Agreement and IRA Amendments. The ultimate outcome of the bankruptcy process is uncertain. Depending on the transaction and/or plan of reorganization ultimately approved and confirmed by theBankruptcy Court , the amount collected could be more or less than such reduced amount of the remaining net receivable amounts recorded in our financial statements. 39 -------------------------------------------------------------------------------- We will continue to monitor theBankruptcy Court proceedings in order to appropriately assess and enforce our rights in this matter. We intend to vigorously defend our rights to collect amounts due under the Indemnity Agreement and Tax Matters Agreement with Garrett. We continue to strongly believe that Garrett's attempts to challenge the enforceability of these agreements have no merit, that we have fully complied with our obligations thereunder, and that both agreements are valid and enforceable. The accounting adjustment and related charge described above does not impact or change our view of the strength and merits of these positions. For additional information, see "Risk Factors - Garrett is currently subject to bankruptcy proceedings in theUnited States Bankruptcy Court for the Southern District of New York . The outcome of the bankruptcy proceedings is unknown and may adversely affect our results of operations and financial condition" and Note 16 to Commitments and Contingencies of Notes to Consolidated Interim Financial Statements. 40 --------------------------------------------------------------------------------
A. Results of Operations - three and nine months ended
the three and nine months ended
Three Months Ended September
30, Nine Months Ended
2020 2019 2020 2019
Net sales $ 7,797 $ 9,086 $ 23,737 $ 27,213
% change compared with prior period (14) % (13) %
The change in net sales compared to the prior year period is attributable to the
following:
Three Months Year to Date
Volume (16) % (14) %
Price 2 % 2 %
Foreign Currency Translation - % (1) %
(14) % (13) %
A discussion of net sales by segment can be found in the Review of Business Segments section of this Management Discussion and Analysis.
The unfavorable volume impact in the quarter and nine months is driven by lower sales in certain products across our businesses due to the global recession attributable to COVID-19 and volatility in the oil and gas industry, partially offset by the strength in respiratory PPE products, warehouse automation projects, and defense and space business. The unfavorable impact of foreign currency translation in the nine months is driven by the strengthening of theU.S. Dollar against the currencies of the majority of our international markets, primarily the Chinese Renminbi, Indian Rupee, Canadian Dollar, Russian Ruble, and Australian Dollar.
Cost of Products and Services Sold
Three Months Ended
2020 2019 2020 2019
Cost of products and services sold $ 5,383 $ 6,038 $ 16,193 $ 18,011
% change compared with prior period (11) % (10) %
Gross margin percentage 31.0 % 33.5 % 31.8 % 33.8 %
Cost of products and services sold decreased in the quarter primarily due to
lower direct and indirect material costs of approximately $220 million and $110
million and lower labor costs of approximately $370 million (both driven by
lower sales volumes and other cost actions to improve productivity), partially
offset by higher repositioning and other charges of approximately $20 million .
Cost of products and services sold decreased in the nine months primarily due to
lower direct and indirect material costs of approximately $1,170 million and
$240 million and lower labor costs of approximately $530 million (both driven by
lower sales volumes and other cost actions to improve productivity), partially
offset by higher repositioning and other charges of approximately $80 million .
Gross margin percentage decreased in the quarter and nine months primarily due to lower sales volumes across each of our businesses.
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--------------------------------------------------------------------------------Selling, General and Administrative Expenses
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Selling, general and administrative expense $ 1,103 $ 1,296 $ 3,524 $ 4,046
% of sales 14.1 % 14.3 % 14.8 % 14.9 %
Selling, general and administrative expenses decreased
Other (Income) Expense
Three Months Ended
2020 2019 2020 2019
Other (income) expense $ 62 $ (311) $ (546) $ (901)
Other expense increased for the quarter primarily due to the non-cash charge
associated with the reduction in carrying value to present value of
reimbursement receivables due from Garrett Motion Inc. (Garrett), lower interest
income and lower foreign exchange income, partially offset by higher pension
income.
Other income decreased for the nine months primarily due to the non-cash charge associated with the reduction in carrying value to present value of reimbursement receivables due from Garrett, lower interest income and lower foreign exchange income, partially offset by higher pension income.
Tax Expense (Benefit)
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Tax expense (benefit) $ 367 $ 319 $ 816 $ 1,151
Effective tax rate 32.0 % 16.2 % 19.0 % 19.9 %
The effective tax rate increased for the quarter ended September 30, 2020
compared to the quarter ended September 30, 2019 primarily from a non-cash
charge related to the reduction of the aggregate carrying value of certain
receivables with no corresponding tax benefit, the absence of tax benefits
related to the reduction of accrued withholding taxes on unremitted foreign
earnings and decreased tax benefits for employee share based compensation. The
effective tax rate decreased for the nine months ended September 30, 2020
compared to the nine months ended September 30, 2019 primarily from the
favorable resolution of a foreign tax matter related to the spin-off
transactions, tax law changes in India , and the resolution of certain U.S. tax
matters offset by a non-cash charge related to the reduction of the aggregate
carrying value of certain receivables with no corresponding tax benefit, the
absence of tax benefits related to the reduction of accrued withholding taxes on
unremitted foreign earnings and decreased tax benefits for employee share based
compensation.
The effective tax rate for the three months ended September 30, 2020 was higher
than the U.S. federal statutory rate of 21% primarily from a non-cash charge
related to the reduction of the aggregate carrying value of certain receivables
with no corresponding tax benefit, incremental tax reserves and state taxes
partially offset by foreign earnings taxed at lower foreign tax rates. The
effective tax rate for the nine months ended September 30, 2020 was lower than
the U.S. federal statutory rate of 21% primarily from foreign earnings taxed at
lower foreign tax rates, the favorable resolution of a foreign tax matter
related to the spin-off transactions, tax law changes in India and the
resolution of certain U.S. tax matters offset by a non-cash charge related to
the reduction of the aggregate carrying value of certain receivables with no
corresponding tax benefit, incremental tax reserves and state taxes.
The effective tax rate for the quarter and nine months ended
42
--------------------------------------------------------------------------------Net Income Attributable to Honeywell
Three Months Ended September
30, Nine Months Ended September 30,
2020 2019 2020 2019
Net income attributable to Honeywell $ 758 $ 1,624 $ 3,420 $ 4,581
Earnings per share of common stock - assuming $ 1.07 $ 2.23 $ 4.81 $ 6.25
dilution
Earnings per share of common stock - assuming dilution decreased in the quarter
primarily driven by lower segment profit, non-cash charge associated with the
reduction in carrying value to present value of reimbursement receivables due
from Garrett, higher repositioning and other charges and higher income taxes.
Earnings per share of common stock - assuming dilution decreased in the nine
months primarily driven by lower segment profit, non-cash charge associated with
the reduction in carrying value to present value of reimbursement receivables
due from Garrett, higher repositioning and other charges and lower interest
income, partially offset by lower income taxes, higher pension ongoing income
and the favorable impact of lower share count.
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--------------------------------------------------------------------------------Review of Business Segments
Three Months Ended September 30, Nine Months Ended September 30,
% %
2020 2019 Change 2020 2019 Change
Aerospace sales
Commercial Aviation Original Equipment $ 406 $ 772 (47) % $ 1,527 $ 2,265 (33) %
Commercial Aviation Aftermarket 774 1,452 (47) % 2,807 4,234 (34) %
Defense and Space 1,482 1,320 12 % 4,232 3,894 9 %
Total Aerospace sales 2,662 3,544 8,566 10,393
Honeywell Building Technologies sales
Buildings 1,305 1,415 (8) % 3,763 4,254 (12) %
Total Honeywell Building Technologies
sales 1,305 1,415 3,763 4,254
Performance Materials and Technologies
sales
UOP 461 717 (36) % 1,572 2,030 (23) %
Process Solutions 1,135 1,283 (12) % 3,379 3,818 (11) %
Advanced Materials 656 670 (2) % 1,916 2,129 (10) %
Total Performance Materials and
Technologies sales 2,252 2,670 6,867 7,977
Safety and Productivity Solutions
sales
Safety 599 558 7 % 1,612 1,653 (2) %
Productivity Solutions 979 899 9 % 2,929 2,936 - %
Total Safety and Productivity
Solutions sales 1,578 1,457 4,541 4,589
Net sales $ 7,797 $ 9,086 $ 23,737 $ 27,213
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Aerospace
Three Months Ended Nine Months Ended
September 30, September 30,
% %
2020 2019 Change 2020 2019 Change
Net sales $ 2,662 $ 3,544 (25) % $ 8,566 $ 10,393 (18) %
Cost of products and services sold 1,854 2,375 5,848 6,944
Selling, general and administrative and other
expenses 191 261 636 796
Segment profit $ 617 $ 908 (32) % $ 2,082 $ 2,653 (22) %
2020 vs. 2019
Three Months Ended Nine Months Ended
September 30, September 30,
Segment Segment
Factors Contributing to Year-Over-Year Change Sales Profit Sales Profit
Organic (25) % (32) % (18) % (22) %
Foreign currency translation - % - % - % - %
Acquisitions, divestitures and other, net - % - % - % - %
Total % change (25) % (32) % (18) % (22) %
Aerospace sales decreased for the quarter and nine months ended September 30,
2020 due primarily to lower sales volumes as the decline in global travel
negatively impacted many of our customers, resulting in lower demand for our
products from OEMs and reduced demand for our aftermarket products and services.
•Commercial Aviation Original Equipment sales decreased 47% (decreased 47%
organic) in the quarter and decreased 33% (decreased 32% organic) in the nine
months primarily due to lower demand from air transport and regional and
business aviation OEMs.
•Commercial Aviation Aftermarket sales decreased 47% (decreased 47% organic) in the quarter and decreased 34% (decreased 34% organic) in the nine months primarily due to lower demand in air transport and regional and business aviation.
•Defense and Space sales increased 12% (increased 13% organic) in the quarter and increased 9% (increased 9% organic) in the nine months driven by growth inU.S. and international defense.
Aerospace segment profit decreased in the quarter and nine months primarily driven by lower sales volume, lower sales of higher margin products and services, partially offset by favorable pricing. Cost of products and services sold decreased in the quarter and nine months due to lower volumes.
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--------------------------------------------------------------------------------Honeywell Building Technologies
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 % Change 2020 2019 % Change
Net sales $ 1,305 $ 1,415 (8) % $ 3,763 $ 4,254 (12) %
Cost of products and services sold 770 841 2,223 2,563
Selling, general and administrative and other
expenses 253 277 746 823
Segment profit $ 282 $ 297 (5) % $ 794 $ 868 (9) %
2020 vs. 2019
Three Months Ended Nine Months Ended
September 30, September 30,
Segment Segment
Factors Contributing to Year-Over-Year Change Sales Profit Sales Profit
Organic (8) % (6) % (11) % (8) %
Foreign currency translation - % 1 % (1) % (1) %
Acquisitions, divestitures and other, net - % - % - % - %
Total % change (8) % (5) % (12) % (9) %
Honeywell Building Technologies sales decreased in the quarter ended September
30, 2020 due to lower organic sales. Sales decreased in the nine months ended
September 30, 2020 due to lower organic sales and the unfavorable impact of
foreign currency translation. Our customers own or manage buildings in a variety
of industries including commercial real estate, hospitality, airports and other
government buildings, healthcare and education. The global recession impacted
many of these industries, resulting in a reduction of discretionary spending and
demand for our products and services.
•Sales in Building Technologies decreased 8% (decreased 8% organic) in the
quarter primarily due to lower sales volumes in both Products and Building
Solutions . Sales decreased 12% (decreased 11% organic) in the nine months
primarily due to lower sales volumes in both Products and Building Solutions and
the unfavorable impact of foreign currency translation.
Honeywell Building Technologies segment profit decreased in the quarter
primarily due to lower sales volumes, partially offset by favorable pricing and
the favorable impact of foreign currency translation. Segment profit decreased
in the nine months primarily due to lower sales volumes and the unfavorable
impact of foreign currency translation, partially offset by favorable pricing.
Cost of products and services sold decreased in the quarter and nine months due
to lower sales volumes.
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Performance Materials and Technologies
Three Months Ended Nine Months Ended
September 30, September 30,
% %
2020 2019 Change 2020 2019 Change
Net sales $ 2,252 $ 2,670 (16) % $ 6,867 $ 7,977 (14) %
Cost of products and services sold 1,523 1,742 4,572 5,121
Selling, general and administrative and other 922 1,066
expenses 287 346
Segment profit $ 442 $ 582 (24) % $ 1,373 $ 1,790 (23) %
2020 vs. 2019
Three
Months Ended
Segment Segment
Factors Contributing to Year-Over-Year Change Sales Profit Sales Profit
Organic (16) % (24) % (13) % (23) %
Foreign currency translation - % - % (1) % - %
Acquisitions, divestitures, and other, net - % - % - % - %
Total % change (16) % (24) % (14) % (23) %
Performance Materials and Technologies sales decreased for the quarter ended
September 30, 2020 primarily due to lower sales volumes. Sales decreased in the
nine month period due to lower sales volumes and the unfavorable impact of
foreign currency translation. Many of our customers operate in the oil and gas
industry. The decline in global travel, coupled with excessive oil and gas
supply, negatively impacted many of our customers resulting in lower demand for
our products and services.
•UOP sales decreased 36% (decreased 36% organic) in the quarter primarily due to
lower catalyst shipments and decreases in licensing and engineering driven by
project delays. UOP sales decreased 23% (decreased 22% organic) in the nine
months driven primarily by decreases in catalyst volumes, licensing, and
engineering sales volumes and the unfavorable impact of foreign currency
translation.
•Process Solutions sales decreased 12% (decreased 12% organic) in the quarter
primarily driven by decreases in products, migration services and automation
projects volumes. Process Solutions sales decreased 11% (decreased 10% organic)
in the nine months driven primarily by decreases in products businesses,
automation projects and migration services volumes and the unfavorable impact of
foreign currency translation.
•Advanced Materials sales decreased 2% (decreased 4% organic) in the quarter
driven primarily by decreased volumes in foam and stationary products partially
offset by increased automotive refrigerants, the favorable impact of foreign
currency translation and increased specialty products volumes. Advanced
Materials sales decreased 10% (decreased 10% organic) in the nine months driven
primarily by decreased volumes in fluorine products due to lower demand in
automotive refrigerants.
Performance Materials and Technologies segment profit decreased in the quarter
and nine months due to operating leverage on lower sales volumes and lower sales
of higher margin products, partially offset by other productivity actions. Cost
of products and services sold decreased in the quarter and nine months primarily
due to lower sales volumes.
47
--------------------------------------------------------------------------------Safety and Productivity Solutions
Three Months Ended Nine Months Ended
September 30, September 30,
% %
2020 2019 Change 2020 2019 Change
Net sales $ 1,578 $ 1,457 8 % $ 4,541 $ 4,589 (1) %
Cost of products and services sold 1,113 984 3,164 3,129
Selling, general and administrative and other
expenses 246 278 767 862
Segment profit $ 219 $ 195 12 % $ 610 $ 598 2 %
2020 vs. 2019
Three Months Ended Nine Months Ended
September 30, September 30,
Segment Segment
Factors Contributing to Year-Over-Year Change Sales Profit Sales Profit
Organic 8 % 13 % - % 4 %
Foreign currency translation - % - % (1) % (2) %
Acquisitions, divestitures, and other, net - % (1) % - % - %
Total % change 8 % 12 % (1) % 2 %
Safety and Productivity Solutions sales increased in the quarter ended
September 30, 2020 due to organic growth. The global pandemic has created
significant continued demand for our respiratory PPE and additional demand for
on-line shopping services, providing continued support for our warehouse
automation services. Sales decreased in the nine months ended September 30, 2020
due to flat organic sales and the unfavorable impact of foreign currency
translation.
•Sales in Safety increased 7% (increased 6% organic) in the quarter due to
organic sales growth and the favorable impact of foreign currency translation.
Safety experienced a significant increase in order volume for respiratory PPE in
the quarter due to the global pandemic, partially offset by lower demand for gas
sensing and detection equipment. Sales decreased 2% (decreased 2% organic) in
the nine months primarily due to lower sales in gas sensing and detection
equipment, partially offset by higher sales in PPE.
•Sales in Productivity Solutions increased 9% (increased 9% organic) in the
quarter due to organic growth in Warehouse and Workflow Solutions and
Productivity Solutions and Services. Sales were flat (flat organic) in the nine
months primarily due to higher sales in Warehouse and Workflow Solutions, offset
by lower sales in Sensing and IoT and Productivity Solutions and Services.
Safety and Productivity Solutions segment profit increased in the quarter and
the nine months primarily due to improved productivity and favorable pricing,
partially offset by higher sales of lower margin products and higher costs
associated with ramping up of respiratory PPE production to meet significant
increase in order volume. Cost of products and services sold increased in the
quarter and the nine months due to higher organic sales volume, partially offset
by higher productivity.
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Repositioning and Other Charges
Cash spending related to our repositioning actions was
B. Liquidity and Capital Resources
We continue to manage our businesses to maximize operating cash flows as the primary source of liquidity. In addition to our available cash and operating cash flows, we maintain additional sources of liquidity, including committed credit lines, short-term debt from the commercial paper market, long-term borrowings, access to the public debt and equity markets and the ability to access non-U.S. cash as a result ofU.S. Tax Reform. We use cash generated through operations to invest in our existing core businesses, acquisitions, share repurchases and dividends.
Cash Flow Summary
Our cash flows from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows, are summarized as follows:
Nine Months Ended
2020 2019
Cash provided by (used for):
Operating activities $ 3,426 $ 4,283
Investing activities (410) (122)
Financing activities 1,972 (2,491)
Effect of exchange rate changes on cash (19) (49)
Net increase (decrease) in cash and cash equivalents $
4,969
Cash provided by operating activities decreased by$857 million primarily due to lower net income of$1,161 million and an unfavorable impact from changes in other assets and liabilities of$10 million , partially offset by a favorable impact from working capital of$314 million . Cash used for investing activities increased by$288 million primarily due to a$320 million increase in payments related to settlements of derivative contracts and$111 million increase in capital expenditures, partially offset by a net decrease in investments of$163 million . Cash provided by financing activities increased by$4,463 million primarily due to an increase in proceeds from the issuance of long-term debt of$7,380 million and decrease in share repurchases of$1,501 million , partially offset by an increase in payments of long-term debt of$4,117 million and decrease in proceeds from issuance of common stock of$262 million .
Liquidity
Each of our businesses is focused on increasing operating cash flows through
revenue growth, margin expansion and improved working capital turnover. We
believe that cash balances and operating cash flow will continue to be our
principal source of liquidity. In addition to the available cash and operating
cash flows, additional sources of liquidity include committed credit lines,
short-term debt from the commercial paper markets, long-term borrowings, and
access to the public debt and equity markets. To date, the Company has not
experienced any limitations in our ability to access these sources of liquidity.
Also, considering the current economic environment in which each of our
businesses operate, our business strategies and our productivity initiatives, we
believe that our cash balances and operating cash flows will remain our
principal source of liquidity.
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We monitor the third-party depository institutions that hold our cash and cash
equivalents. Our emphasis is primarily safety of principal and secondarily
maximizing yield of those funds. We diversify our cash and cash equivalents
among counterparties to minimize exposure to any one of these entities. As of
September 30, 2020 , we held $15.0 billion of cash and cash equivalents and
short-term investments.
A source of liquidity is our ability to access the commercial paper market.
Commercial paper notes are sold at a discount or premium and have a maturity of
not more than 365 days from date of issuance. Borrowings under the commercial
paper program are available for general corporate purposes as well as for
financing acquisitions. As of September 30, 2020 , we had $3.5 billion of
commercial paper notes outstanding.
We also have the following credit agreements:
•A$1.5 billion 364-Day Credit Agreement (the "364-Day Credit Agreement") with a syndicate of banks, datedApril 10, 2020 . This 364-Day Credit Agreement is maintained for general corporate purposes. The 364-Day Credit Agreement replaces the previously reported 364-day credit agreement dated as ofApril 26, 2019 , which was terminated onApril 10, 2020 . As ofSeptember 30, 2020 , there were no outstanding borrowings under our 364-Day Credit Agreement. •A$4.0 billion Five Year Credit Agreement (the "5-Year Credit Agreement") with a syndicate of banks, datedApril 26, 2019 . This 5-Year Credit Agreement is maintained for general corporate purposes. Commitments under the 5-Year Credit Agreement can be increased pursuant to the terms of the 5-Year Credit Agreement to an aggregate amount not to exceed$4.5 billion . As ofSeptember 30, 2020 , there were no outstanding borrowings under our 5-Year Credit Agreement. We continuously assess the relative strength of each business in our portfolio as to strategic fit, market position, profit and cash flow contribution in order to upgrade our combined portfolio and identify business units that will most benefit from increased investment. We identify acquisition candidates that will further our strategic plan and strengthen our existing core businesses. We also identify business units that do not fit into our long-term strategic plan based on their market position, relative profitability or growth potential. These businesses are considered for potential divestiture, restructuring or other repositioning actions subject to regulatory constraints. In the nine months endedSeptember 30, 2020 , the Company repurchased$2,149 million of outstanding shares. InApril 2019 , the Board of Directors authorized the repurchase of up to a total of$10 billion of Honeywell common stock, which included amounts remaining under, and replaced, the previously approved share repurchase program. As ofSeptember 30, 2020 ,$4.8 billion remained available for additional share repurchases. Honeywell presently expects to repurchase outstanding shares from time to time to offset the dilutive impact over the long-term of employee stock-based compensation plans, including future option exercises, restricted unit vesting and matching contributions under our savings plans. Additionally, we will seek to reduce share count via share repurchases as and when attractive opportunities arise. The amount and timing of future repurchases may vary depending on market conditions and the level of operating, financing and other investing activities. We continue to identify opportunities to improve our liquidity and negotiate payment terms with our vendors to conform to best in class industry standards. In addition, we facilitate supply chain finance ("SCF") programs with multiple third-party financial institutions. These programs enable our suppliers, at their sole discretion, to sell their receivables from the Company to these financial institutions on terms that are negotiated between the supplier and the respective financial institution. Our obligations, including the amounts due and scheduled payment dates, are not impacted by our suppliers' decision to sell their receivables under these programs. Amounts due to our suppliers that elected to participate in the SCF programs are included in Accounts payable on the Consolidated Balance Sheet. Based on past performance and current expectations, we believe that our operating cash flows will be sufficient to meet our future operating cash needs. Our available cash, committed credit lines and access to the public debt and equity markets, provide additional sources of short-term and long-term liquidity to fund current operations, debt maturities, and future investment opportunities. See Part II, Item 1A Risk Factors for discussion of risks related to the COVID-19 pandemic. The Company increased the quarterly dividend rate by 3% to$0.93 per share of common stock effective with the fourth quarter 2020 dividend. We believe our strong financial position, continued investments for growth, and effective cost management strategies allow us to increase our quarterly dividend rate. 50 --------------------------------------------------------------------------------
See Note 11 Long-term Debt and Credit Agreements of Notes to Consolidated Financial Statements for additional discussion of items impacting our liquidity.
C. Other Matters Litigation We are subject to a number of lawsuits, investigations and claims (some of which involve substantial amounts) arising out of the conduct of our business. See Note 16 Commitments and Contingencies of Notes to Consolidated Financial Statements for further discussion of environmental, asbestos and other litigation matters.
Critical Accounting Policies
The financial information as ofSeptember 30, 2020 should be read in conjunction with the Consolidated Financial Statements for the year endedDecember 31, 2019 contained in our 2019 Annual Report on Form 10-K.
For a discussion of the Company's critical accounting policies, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2019 Annual Report on Form 10-K.
Recent Accounting Pronouncements
See Note 2 Summary of Significant Accounting Policies of Notes to Consolidated Financial Statements for a discussion of recent accounting pronouncements.
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