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) endedMarch 31, 2021 . The financial information as ofMarch 31, 2021 should be read in conjunction with the Consolidated Financial Statements for the year endedDecember 31, 2020 contained in our 2020 Annual Report on Form 10-K. See Note 1 Basis of Presentation of Notes to Financial Statements for discussion on the estimated impact from additional reporting days resulting from our normal quarterly closing procedures. See Note 3 Acquisitions and Divestitures of Notes to Consolidated Financial Statements for a discussion of acquisition and divestiture activity during the quarter endedMarch 31, 2021 . COVID-19 UPDATE Our business faced significant disruptions due to the COVID-19 pandemic in 2020 and the resulting global recession, causing a slow-down in demand for many of our products and services. Although many jurisdictions worldwide authorized the emergency use of vaccines as a method to limit and control infections, as ofMarch 31, 2021 , the pandemic continues to impact our business as vaccination efforts continue to face challenges and new variants of the virus continue to emerge. When compared to the three months endedMarch 31, 2020 , the pandemic resulted in a decline of sales for the Aerospace and Performance Materials and Technologies segments. Sales for the Safety and Productivity Solutions segment continue to benefit from significant demand for our respiratory PPE and warehouse automation services, and the Honeywell Building Technologies segment is showing early signs of improvement as our customers prepare to safely return to the office, school, and travel. We remain cautious as many factors remain unpredictable. We actively monitor and respond to the changing conditions created by the pandemic, with focus on prioritizing the health and safety of our employees, dedicating resources to support our communities, and innovating to address our customers' needs. During the three months endedMarch 31, 2021 , we made the following commitments to our employees and communities: •InJanuary 2021 , Honeywell,Atrium Health ,Tepper Sports & Entertainment andCharlotte Motor Speedway launched a unique public-private initiative, with support fromNorth Carolina GovernorRoy Cooper , Charlotte MayorVi Lyles and leaders fromMecklenburg County , to optimize mass vaccination events. The partnership has fully vaccinated more than 46,000 people. •InFebruary 2021 , we sponsored a week-long vaccination program in thePhoenix area, supported by volunteers from our Aerospace business. •We announced that we will continue to pay out-of-pocket prescribed coronavirus testing costs for all employees worldwide and treatment costs incurred by employees and their dependents enrolled in Honeywell medical plans throughDecember 31, 2021 . This is an extension beyond our previously communicated end date ofMarch 31 . We continue to monitor COVID-19 infection rates globally and acknowledge the risk of new surges in COVID-19 infections. Please see section titled Risk Factors in our 2020 Annual Report on Form 10-K for discussion of risks associated with the COVID-19 pandemic. A discussion of the impact of COVID-19 can also be found in the Review of Business Segments section of this Management Discussion and Analysis.
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RESULTS OF OPERATIONS
Consolidated Financial Results
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Segment Profit by Segment
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CONSOLIDATED OPERATING RESULTSNet Sales [[Image Removed: hon-20210331_g5.jpg]]
The change in net sales was attributable to the following:
Q1 2021 vs. Q1 2020
Volume (4) %
Price 2 %
Foreign Currency Translation 2 %
Acquisitions/Divestitures - %
- %
Q1 2021 compared to Q1 2020
A discussion of net sales by segment can be found in the Review of Business
Segments section of this Management Discussion and Analysis.
Net sales is largely unchanged. The overall mix of sales between our business
segments changed, driven by the following:
•Lower sales volumes across our Aerospace segment due to the impact of the
global recession attributable to COVID-19,
•Offset by increased demand for our respiratory PPE and warehouse automation
businesses in the Safety and Productivity Solutions segment.
The favorable impact of foreign currency translation in the quarter is driven by
the weakening of the U.S. Dollar against the currencies of the majority of our
international markets, primarily the Euro, Chinese Renminbi, British Pound,
Australian Dollar, and Canadian Dollar.
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Cost of Products and Services Sold
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Q1 2021 compared to Q1 2020
Cost of products and services sold increased due to the following:
•Higher direct material costs of approximately
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Q1 2021 compared to Q1 2020
Gross margin and Gross margin as a percentage of net sales decreased due to the
following:
•A larger portion of our sales was driven by our Safety and Productivity
Solutions segment,
•Higher repositioning and other charges of approximately $80 million , and
•Lower gross margins in our Performance Materials and Technologies segment,
•Partially offset by gross margin expansion in our Aerospace and Honeywell
Building Technologies segments.
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Selling, General and Administrative Expenses
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Q1 2021 compared to Q1 2020
Selling, general and administrative expenses and Selling, general and
administrative expenses as a percentage of net sales were largely unchanged.
•Cost savings from repositioning actions resulted in lower expenses,
•Offset by the unfavorable impact of foreign currency translation and higher
share-based compensation expense.
Other (Income) Expense
Three Months Ended March 31,
2021 2020
Other (income) expense $ (442) $ (317)
Q1 2021 compared to Q1 2020
Other income increased due to the following:
•Gain on sale of the retail footwear business and higher pension income,
•Partially offset by lower interest income and lower foreign exchange income.
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Q1 2021 compared to Q1 2020
The effective tax rate increased primarily from tax benefits realized in the
prior year as a result of tax law changes in India and the resolution of certain
U.S. tax matters.
The effective tax rate for the three months ended March 31, 2021 was higher than
the U.S. federal statutory rate of 21% primarily due to incremental tax reserves
and states taxes, partially offset by tax benefits for employee share-based
compensation and the resolution of certain foreign tax matters.
The effective tax rate for the three months ended March 31, 2020 was lower than
the U.S. federal statutory rate of 21% primarily from foreign earnings taxed at
lower foreign tax rates, tax law changes in India and the resolution of certain
U.S. tax matters, partially offset by incremental tax reserves and state taxes.
Net Income Attributable to Honeywell
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Q1 2021 compared to Q1 2020
Earnings per share of common stock-assuming dilution decreased, driven by the
following:
•Higher repositioning and other charges,
•Lower segment profit,
•Higher income taxes,
•Higher share-based compensation expense and lower interest income,
•Partially offset by a gain on sale of the retail footwear business and higher
pension income.
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REVIEW OF BUSINESS SEGMENTS
We globally manage our business operations through four segments: Aerospace,
Honeywell Building Technologies, Performance Materials and Technologies, and
Safety and Productivity Solutions.
AEROSPACE
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Three Months Ended
March 31,
%
2021 2020 Change
Net sales $ 2,632 $ 3,361 (22) %
Cost of products and services sold 1,656 2,199
Selling, general and administrative and other expenses 214
225 Segment profit$ 762 $ 937 (19) % 2021 vs. 2020 Three Months Ended March 31, Segment
Factors Contributing to Year-Over-Year Change Sales
Profit
Organic(1) (22) % (19) %
Foreign currency translation - % - %
Acquisitions, divestitures and other, net - % - %
Total % change (22) % (19) %
(1) Organic sales % change is defined as the change in net sales, excluding the
impact on sales from foreign currency translation and acquisitions, net of
divestitures. We believe this measure is useful to investors and management in
understanding our ongoing operations and in analysis of ongoing operating
trends.
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Q1 2021 compared to Q1 2020
Sales decreased due to lower sales volumes as the decline in global travel and
flight hours 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 36% (decreased 37%
organic) in the quarter due to lower demand from air transport and regional and
business aviation.
•Commercial Aviation Aftermarket sales decreased 34% (decreased 34% organic) in
the quarter due to lower demand in air transport and regional and business
aviation.
•Defense and Space sales decreased 1% (decreased 2% organic) in the quarter
driven by lower sales volumes in international defense.
Segment profit decreased in the quarter driven by lower sales volumes partially
offset by favorable pricing. Cost of products and services sold decreased in the
quarter due to lower sales volumes.
HONEYWELL BUILDING TECHNOLOGIES
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Three Months Ended
March 31,
2021 2020 % Change
Net sales $ 1,358 $ 1,281 6 %
Cost of products and services sold 789 754
Selling, general and administrative and other expenses 264
265 Segment profit$ 305 $ 262 16 % 2021 vs. 2020 Three Months Ended March 31, Segment Factors Contributing to Year-Over-Year Change Sales Profit Organic 2 % 12 % Foreign currency translation 4 % 4 % Acquisitions, divestitures and other, net - % - % Total % change 6 % 16 %
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Q1 2021 compared to Q1 2020 Sales increased due to the favorable impact of foreign currency translation and organic growth. Demand increased in the current quarter compared to the prior year as the global economy recovers from the recession resulting from the COVID-19 pandemic. •Sales in Products increased 8% (increased 4% organic) due to the favorable impact of foreign currency translation, higher sales volumes and pricing. •Sales inBuilding Solutions increased 4% (decreased 1% organic) due to the favorable impact of foreign currency translation, partially offset by lower sales volumes due to the timing of projects. Segment profit increased primarily due to higher productivity, pricing and the favorable impact of foreign currency translation. Cost of products and services sold increased primarily due to the unfavorable impact of foreign currency translation, partially offset by higher productivity. PERFORMANCE MATERIALS AND TECHNOLOGIES [[Image Removed: hon-20210331_g13.jpg]] Three Months Ended March 31, % 2021 2020 Change Net sales$ 2,346 $ 2,397 (2) % Cost of products and services sold 1,591
1,559
Selling, general and administrative and other expenses 321
326 Segment profit$ 434 $ 512 (15) %
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2021 vs. 2020
Three Months Ended March 31,
Segment
Factors Contributing to Year-Over-Year Change Sales Profit
Organic (6) % (17) %
Foreign currency translation 3 % 3 %
Acquisitions, divestitures, and other, net 1 % (1) %
Total % change (2) % (15) %
Q1 2021 compared to Q1 2020
Sales decreased due to lower sales volumes partially offset by the favorable
impact of foreign currency translation. The decline in global travel, coupled
with reduced investment in the oil and gas industry, negatively impacted many of
our customers resulting in lower demand for our products and services.
•UOP sales decreased 11% (decreased 14% organic) in the quarter due to lower
demand for oil and gas products and services partially offset by the favorable
impact of foreign currency translation.
•Process Solutions sales decreased 5% (decreased 9% organic) in the quarter
driven by delays in automation projects and lower demand for products and
services partially offset by the favorable impact of foreign currency
translation.
•Advanced Materials sales increased 11% (increased 8% organic) in the quarter
driven by increased demand in fluorine and specialty products and the favorable
impact of foreign currency translation.
Segment profit decreased due to lower sales of higher margin products. Cost of
products and services sold increased due to lower sales of higher margin
products and services within UOP and the unfavorable impact of foreign currency
translation, partially offset by a decrease in sales volumes.
SAFETY AND PRODUCTIVITY SOLUTIONS
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Three Months Ended
March 31,
%
2021 2020 Change
Net sales $ 2,118 $ 1,424 49 %
Cost of products and services sold 1,550 972
Selling, general and administrative and other expenses 265
274 Segment profit$ 303 $ 178 70 % 2021 vs. 2020 Three Months Ended March 31, Segment Factors Contributing to Year-Over-Year Change Sales Profit Organic 47 % 67 % Foreign currency translation 3 % 4 % Acquisitions, divestitures, and other, net (1) % (1) % Total % change 49 % 70 % Q1 2021 compared to Q1 2020 Sales increased due to organic growth and the favorable impact of foreign currency translation, partially offset by a divestiture. The segment continues to benefit from increased demand for respiratory PPE and warehouse automation services. Demand increased across other verticals in the segment in the quarter compared to the prior year as the global economy recovers from the recession attributable to the COVID-19 pandemic. •Sales in Safety and Retail increased 48% (increased 47% organic) in the quarter due to organic sales growth and the favorable impact of foreign currency translation, partially offset by a divestiture. Safety experienced a significant increase in sales volumes for respiratory PPE in the quarter due to the COVID-19 pandemic. •Sales in Productivity Solutions and Services increased 19% (increased 16% organic) due to higher organic sales volumes and the favorable impact of foreign currency translation. •Sales in Warehouse and Workflow Solutions increased 84% (increased 84% organic) due to strong demand for our warehouse automation services. •Sales in Advanced Sensing Technologies (formerly Sensing & Internet-of-Things) increased 6% (increased 4% organic) due to higher organic sales volumes and the favorable impact of foreign currency translation. Segment profit increased in the quarter primarily due to higher sales volumes, improved productivity, and favorable pricing, partially offset by higher sales of lower margin products. Cost of products and services sold increased in the quarter due to higher sales volumes, higher sales of lower margin products, and the unfavorable impact of foreign currency translation. REPOSITIONING CHARGES See Note 5 Repositioning and Other Charges of Notes to Consolidated Financial Statements for a discussion of our repositioning actions and related charges incurred in the three months endedMarch 31, 2021 and 2020. Cash spending related to our repositioning actions was$105 million in the three months endedMarch 31, 2021 and was funded through operating cash flows. 41Honeywell International Inc. --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
(Dollars in tables in millions)
We continue to manage our businesses to maximize operating cash flows as the
primary source of liquidity. Each of our businesses is focused on increasing
operating cash flows through revenue growth, margin expansion and improved
working capital turnover. Additional sources of liquidity include committed
credit lines, short-term debt from the commercial paper market, long-term
borrowings, access to the public debt and equity markets, U.S. cash balances and
the ability to access non-U.S. cash as a result of the U.S. Tax Cuts and Jobs
Act.
CASH
We monitor the third-party depository institutions that hold our cash and cash
equivalents on a daily basis. 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 March 31, 2021 and December 31, 2020 , we held $12.7 billion and
$15.2 billion , respectively, of cash and cash equivalents, including our
short-term investments.
BORROWINGS
Consolidated total borrowings were $21.3 billion and $22.4 billion as of March
31, 2021 and December 31, 2020 . In response to COVID-19, the Company took
several actions during 2020 to secure liquidity in light of the uncertainty in
economic conditions and the credit markets. See Note 9 Long-term Debt and Credit
Agreements of Notes to Consolidated Financial Statements for a summary of the
actions taken by the Company to improve its short-term and long-term liquidity
position in response to COVID-19.
March 31, 2021 December 31, 2020
Commercial paper and other short-term borrowings $ 3,568 $ 3,597
Variable rate notes 1,122 1,122
Fixed rate notes 16,449 17,399
Other 188 266
Total borrowings $ 21,327 $ 22,384
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.
We also have the following revolving credit agreements, which can provide
financing for general corporate purposes:
•A $1.5 billion 364-Day Credit Agreement (the 364-Day Credit Agreement) with a
syndicate of banks, dated March 31, 2021 . Amounts borrowed under the 364-Day
Credit Agreement are required to be repaid no later than March 30, 2022 , unless
(i) we elect to convert all then outstanding amounts into a term loan, upon
which such amounts shall be repaid in full on March 30, 2023 , or (ii) the
364-Day Credit Agreement is terminated earlier pursuant to its terms. The
364-Day Credit Agreement replaces the previously reported $1.5 billion 364-day
credit agreement dated as of April 10, 2020 (the Prior 364-Day Agreement), which
was terminated in accordance with its terms effective March 31, 2021 . As of
March 31, 2021 , 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, dated March 31, 2021 . 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 . The 5-Year Credit Agreement
amended and restated the previously reported $4.0 billion amended and restated
five year credit agreement dated as of April 26, 2019 (the Prior 5-Year
Agreement). As of March 31, 2021 , there were no outstanding borrowings under our
5-Year Credit Agreement.
42 Honeywell International Inc.
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We also have a current shelf registration statement with the SEC under which we
may issue additional debt securities, common stock and preferred stock that may
be offered in one or more offerings on terms to be determined at the time of the
offering. We anticipate that net proceeds of any offering would be used for
general corporate purposes, including repayment of existing indebtedness, share
repurchases, capital expenditures and acquisitions.
CREDIT RATINGS
Our ability to access the global debt capital markets and the related cost of
these borrowings, is affected by the strength of our credit rating and market
conditions. Our credit ratings are periodically reviewed by the major
independent debt-rating agencies. As of March 31, 2021 , S&P, Fitch, and Moody's
have ratings on our debt set forth in the table below:
S&P Fitch Moody's
Outlook Stable Stable Stable
Short-term A-1 F1 P1
Long-term A A A2
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:
Three Months Ended
2021 2020
Cash provided by (used for):
Operating activities $ 978 $ 939
Investing activities (1,304) 350
Financing activities (2,217) (2,446)
Effect of exchange rate changes on cash (14) (189)
Net increase (decrease) in cash and cash equivalents $
(2,557)
Cash provided by operating activities increased by$39 million primarily due to a favorable impact from working capital of$218 million (favorable accounts payable, accounts receivable, and inventories), partially offset by a decrease in net income of$154 million . Cash used for investing activities increased by$1,654 million primarily due to$1,303 million in cash paid for an acquisition, a$319 million increase in investments and a$147 million decrease in receipts related to settlements of derivative contracts, partially offset by$190 million in proceeds from the sale of the retail footwear business. Cash used for financing activities decreased by$229 million primarily due to a decrease in share repurchases of$1,101 million , partially offset by an increase of$796 million due to net repayments of long-term debt during the three months endedMarch 31, 2021 . CASH REQUIREMENTS AND ASSESSMENT OF CURRENT LIQUIDITY In addition to our normal operating cash requirements, our principal future cash requirements will be to fund capital expenditures, share repurchases, dividends, strategic acquisitions and debt repayments. OnFebruary 12, 2021 , 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. During the three months endedMarch 31, 2021 , the Company repurchased common stock of$822 million . Please refer to the section titled Liquidity and Capital Resources of our 2020 Form 10-K for a discussion of our expected capital expenditures, share repurchases and dividends for 2021. We continue to identify opportunities to improve our liquidity and working capital efficiency, which includes the extension of payment terms with our suppliers and sales of our trade receivables to unaffiliated financial institutions without recourse. The impact of these programs are not material to our overall liquidity. 43Honeywell International Inc.
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We continue to assess the relative strength of each business in our portfolio as to strategic fit, market position, profit and cash flow contribution in order to identify target investment and acquisition opportunities in order to upgrade our combined portfolio. We identify acquisition candidates that will further our strategic plan and strengthen our existing core businesses. We also identify businesses 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. 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 Note 9 Long-term Debt and Credit Agreements of Notes to Consolidated Financial Statements for additional discussion of items impacting our liquidity. 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 15 Commitments and Contingencies of Notes to Consolidated Financial Statements for further discussion of environmental, asbestos and other litigation matters. CRITICAL ACCOUNTING ESTIMATES The financial information as ofMarch 31, 2021 should be read in conjunction with the Consolidated Financial Statements for the year endedDecember 31, 2020 contained in our 2020 Annual Report on Form 10-K. For a discussion of the Company's critical accounting estimates, see the section titled Critical Accounting Estimates in our 2020 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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