HON 10-Q
Honeywell International Inc (HON)
10-Q
2020-07-24
For: 2020-06-30
View Original
Added on
April 10, 2026
United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
__________________
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
OR
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to _____
Commission file number 1-8974
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||
| (Registrant’s telephone number, including area code) | |||||||||||
| Not Applicable | |||||||||||
| (Former name, former address and former fiscal year, if changed since last report) | |||||||||||
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
* The common stock is also listed on the London Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| x | Accelerated filer | ☐ | |||||||||
| Non-Accelerated filer | ☐ | Smaller reporting company | |||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
There were 701,783,165 shares of Common Stock outstanding at June 30, 2020.
Honeywell International Inc.
Index
| Page No. | |||||||||||
Cautionary Statement about Forward-Looking Statements
This report contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are those that address activities, events or developments that we or our management intends, expects, projects, believes or anticipates will or may occur in the future. They are based on management’s assumptions and assessments in the light of past experience and trends, current economic and industry conditions, expected future developments and other relevant factors. They are not guarantees of future performance, and actual results, developments and business decisions may differ from those envisaged by our forward-looking statements. Our forward-looking statements are also subject to risks and uncertainties, including the impact of the coronavirus pandemic (COVID-19), which can affect our performance and financial results in both the near- and long-term. These forward-looking statements should be considered in the light of the information included in this report and our other filings with the Securities and Exchange Commission, including, without limitation, the Risk Factors, as well as the description of trends and other factors in Management’s Discussion and Analysis of Financial Condition and Results of Operations, set forth in this report and our 2019 Annual Report on Form 10-K.
2
PART I. FINANCIAL INFORMATION
The financial statements and related footnotes as of June 30, 2020 should be read in conjunction with the financial statements for the year ended December 31, 2019 contained in our 2019 Annual Report on Form 10-K.
ITEM 1. FINANCIAL STATEMENTS
Honeywell International Inc.
Consolidated Statement of Operations
(Unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| (Dollars in millions, except per share amounts) | |||||||||||||||||||||||
| Product sales | $ | $ | $ | $ | |||||||||||||||||||
| Service sales | |||||||||||||||||||||||
| Net sales | |||||||||||||||||||||||
| Costs, expenses and other | |||||||||||||||||||||||
| Cost of products sold | |||||||||||||||||||||||
| Cost of services sold | |||||||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||
| Other (income) expense | ( | ( | ( | ( | |||||||||||||||||||
| Interest and other financial charges | |||||||||||||||||||||||
| Income before taxes | |||||||||||||||||||||||
| Tax expense (benefit) | |||||||||||||||||||||||
| Net income | |||||||||||||||||||||||
Less: Net income attributable to the noncontrolling interest | |||||||||||||||||||||||
| Net income attributable to Honeywell | $ | $ | $ | $ | |||||||||||||||||||
| Earnings per share of common stock - basic | $ | $ | $ | $ | |||||||||||||||||||
| Earnings per share of common stock - assuming dilution | $ | $ | $ | $ | |||||||||||||||||||
The Notes to Consolidated Financial Statements are an integral part of this statement.
3
Honeywell International Inc.
Consolidated Statement of Comprehensive Income
(Unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Other comprehensive income (loss), net of tax | |||||||||||||||||||||||
| Foreign exchange translation adjustment | ( | ( | |||||||||||||||||||||
| Prior service (credit) cost recognized | ( | ( | ( | ( | |||||||||||||||||||
| Pension and other postretirement benefits adjustments | ( | ( | ( | ( | |||||||||||||||||||
| Cash flow hedges recognized in other comprehensive income (loss) | ( | ||||||||||||||||||||||
| Less: Reclassification adjustment for gains (losses) included in net income | ( | ||||||||||||||||||||||
| Changes in fair value of effective cash flow hedges | ( | ||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | ( | ( | ( | ||||||||||||||||||||
| Comprehensive income | |||||||||||||||||||||||
| Less: Comprehensive income attributable to the noncontrolling interest | |||||||||||||||||||||||
| Comprehensive income attributable to Honeywell | $ | $ | $ | $ | |||||||||||||||||||
The Notes to Consolidated Financial Statements are an integral part of this statement.
4
Honeywell International Inc.
Consolidated Balance Sheet
(Unaudited)
| June 30, 2020 | December 31, 2019 | ||||||||||
| (Dollars in millions) | |||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Short-term investments | |||||||||||
| Accounts receivable - net | |||||||||||
| Inventories | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| Investments and long-term receivables | |||||||||||
| Property, plant and equipment - net | |||||||||||
| Goodwill | |||||||||||
| Other intangible assets - net | |||||||||||
| Insurance recoveries for asbestos related liabilities | |||||||||||
| Deferred income taxes | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Commercial paper and other short-term borrowings | |||||||||||
| Current maturities of long-term debt | |||||||||||
| Accrued liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt | |||||||||||
| Deferred income taxes | |||||||||||
| Postretirement benefit obligations other than pensions | |||||||||||
| Asbestos related liabilities | |||||||||||
| Other liabilities | |||||||||||
| Redeemable noncontrolling interest | |||||||||||
| SHAREOWNERS’ EQUITY | |||||||||||
| Capital - common stock issued | |||||||||||
| - additional paid-in capital | |||||||||||
| Common stock held in treasury, at cost | ( | ( | |||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Retained earnings | |||||||||||
| Total Honeywell shareowners’ equity | |||||||||||
| Noncontrolling interest | |||||||||||
| Total shareowners’ equity | |||||||||||
| Total liabilities, redeemable noncontrolling interest and shareowners’ equity | $ | $ | |||||||||
The Notes to Consolidated Financial Statements are an integral part of this statement.
5
Honeywell International Inc.
Consolidated Statement of Cash Flows
(Unaudited)
| Six Months Ended June 30, | |||||||||||
| 2020 | 2019 | ||||||||||
| (Dollars in millions) | |||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Less: Net income attributable to the noncontrolling interest | |||||||||||
| Net income attributable to Honeywell | |||||||||||
Adjustments to reconcile net income attributable to Honeywell to net cash provided by operating activities: | |||||||||||
| Depreciation | |||||||||||
| Amortization | |||||||||||
| Repositioning and other charges | |||||||||||
| Net payments for repositioning and other charges | ( | ( | |||||||||
| Pension and other postretirement income | ( | ( | |||||||||
| Pension and other postretirement benefit payments | ( | ( | |||||||||
| Stock compensation expense | |||||||||||
| Deferred income taxes | ( | ||||||||||
| Other | ( | ||||||||||
Changes in assets and liabilities, net of the effects of acquisitions and divestitures: | |||||||||||
| Accounts receivable | |||||||||||
| Inventories | ( | ( | |||||||||
| Other current assets | ( | ||||||||||
| Accounts payable | ( | ( | |||||||||
| Accrued liabilities | ( | ( | |||||||||
| Net cash provided by (used for) operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Expenditures for property, plant and equipment | ( | ( | |||||||||
| Proceeds from disposals of property, plant and equipment | |||||||||||
| Increase in investments | ( | ( | |||||||||
| Decrease in investments | |||||||||||
| Receipts (payments) from settlements of derivative contracts | |||||||||||
| Net cash provided by (used for) investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from issuance of commercial paper and other short-term borrowings | |||||||||||
| Payments of commercial paper and other short-term borrowings | ( | ( | |||||||||
| Proceeds from issuance of common stock | |||||||||||
| Proceeds from issuance of long-term debt | |||||||||||
| Payments of long-term debt | ( | ( | |||||||||
| Repurchases of common stock | ( | ( | |||||||||
| Cash dividends paid | ( | ( | |||||||||
| Other | ( | ( | |||||||||
| Net cash provided by (used for) financing activities | ( | ||||||||||
| Effect of foreign exchange rate changes on cash and cash equivalents | ( | ||||||||||
| Net increase (decrease) in cash and cash equivalents | ( | ||||||||||
| Cash and cash equivalents at beginning of period | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
The Notes to Consolidated Financial Statements are an integral part of this statement.
6
Honeywell International Inc.
Consolidated Statement of Shareowners' Equity
(Unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||||||
| Shares | $ | Shares | $ | Shares | $ | Shares | $ | ||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions, except per share amounts) | |||||||||||||||||||||||||||||||||||||||||||||||
| Common stock, par value | |||||||||||||||||||||||||||||||||||||||||||||||
| Additional paid-in capital | |||||||||||||||||||||||||||||||||||||||||||||||
| Beginning balance | |||||||||||||||||||||||||||||||||||||||||||||||
| Issued for employee savings and option plans | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | |||||||||||||||||||||||||||||||||||||||||||||||
| Ending balance | |||||||||||||||||||||||||||||||||||||||||||||||
| Treasury stock | |||||||||||||||||||||||||||||||||||||||||||||||
| Beginning balance | ( | ( | ( | ( | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Reacquired stock or repurchases of common stock | ( | ( | ( | ( | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Issued for employee savings and option plans | |||||||||||||||||||||||||||||||||||||||||||||||
| Ending balance | ( | ( | ( | ( | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Retained earnings | |||||||||||||||||||||||||||||||||||||||||||||||
| Beginning balance | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income attributable to Honeywell | |||||||||||||||||||||||||||||||||||||||||||||||
| Dividends on common stock | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||
| Ending balance | |||||||||||||||||||||||||||||||||||||||||||||||
| Accumulated other comprehensive income (loss) | |||||||||||||||||||||||||||||||||||||||||||||||
| Beginning balance | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||
| Foreign exchange translation adjustment | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Pensions and other postretirement benefit adjustments | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||
| Changes in fair value of effective cash flow hedges | ( | ||||||||||||||||||||||||||||||||||||||||||||||
| Ending balance | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||
| Noncontrolling interest | |||||||||||||||||||||||||||||||||||||||||||||||
| Beginning balance | |||||||||||||||||||||||||||||||||||||||||||||||
| Acquisitions, divestitures, and other | ( | ||||||||||||||||||||||||||||||||||||||||||||||
| Net income attributable to noncontrolling interest | |||||||||||||||||||||||||||||||||||||||||||||||
| Foreign exchange translation adjustment | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Dividends paid | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||
| Ending balance | |||||||||||||||||||||||||||||||||||||||||||||||
| Total shareowners' equity | |||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividends per share of common stock | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
Notes to Consolidated Financial Statements are an integral part of this statement.
7
Honeywell International Inc.
Notes to Consolidated Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)
Note 1. Basis of Presentation
In the opinion of management, the accompanying unaudited Consolidated Financial Statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of Honeywell International Inc. and its consolidated subsidiaries (“Honeywell” or “the Company”) at June 30, 2020 and December 31, 2019, the cash flows for the six months ended June 30, 2020 and June 30, 2019 and the results of operations for the three and six months ended June 30, 2020 and June 30, 2019. The results of operations for the three and six months ended June 30, 2020 and cash flows for the six months ended June 30, 2020 should not necessarily be taken as indicative of the entire year.
Note 2. Summary of Significant Accounting Policies
The accounting policies of the Company are set forth in Note 1 to Consolidated Financial Statements contained in the Company’s 2019 Annual Report on Form 10-K. We include herein certain updates to those policies.
Recent Accounting Pronouncements—The Company considers the applicability and impact of all Accounting Standards Updates (ASUs) issued by the Financial Accounting Standards Board (FASB). ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated results of operations, financial position and cash flows (Consolidated Financial Statements).
In December 2019, the FASB issued an accounting standard update to simplify the accounting for income taxes. The standard's amendments include changes in various subtopics of accounting for income taxes including, but not limited to, accounting for "hybrid" tax regimes, tax basis step-up in goodwill obtained in a transaction that is not a business combination, intraperiod tax allocation exception to incremental approach, ownership changes in investments, interim-period accounting for enacted changes in tax law, and year-to-date loss limitation in interim-period tax accounting. The guidance is effective for fiscal years beginning after December 15, 2020 with early adoption permitted, including the interim periods within those years. We are currently evaluating impacts of these amendments on our Consolidated Financial Statements, and related notes to the Financial Statements. We do not expect the adoption of this standard to have a material impact on our Consolidated Financial Statements.
In June 2016, the FASB issued an accounting standard that requires companies to utilize an impairment model (current expected credit loss, or CECL) for most financial assets measured at amortized cost and certain other financial instruments, which include, but are not limited to, trade and other receivables. This accounting standard replaced the incurred loss model with a model that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to estimate those losses. Effective January 1, 2020, the Company adopted this standard. The adoption of this standard did not have a material impact on our Consolidated Financial Statements.
8
Honeywell International Inc.
Notes to Consolidated Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)
Note 3. Repositioning and Other Charges
A summary of repositioning and other charges follows:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Severance | $ | $ | $ | $ | |||||||||||||||||||
| Asset impairments | |||||||||||||||||||||||
| Exit costs | |||||||||||||||||||||||
| Reserve adjustments | ( | ( | ( | ( | |||||||||||||||||||
| Total net repositioning charge | |||||||||||||||||||||||
| Asbestos related litigation charges, net of insurance and reimbursements | |||||||||||||||||||||||
| Probable and reasonably estimable environmental liabilities, net of reimbursements | |||||||||||||||||||||||
| Other | ( | ( | ( | ||||||||||||||||||||
| Total net repositioning and other charges | $ | $ | $ | $ | |||||||||||||||||||
The following table summarizes the pretax distribution of total net repositioning and other charges by classification:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Cost of products and services sold | $ | $ | $ | $ | |||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
The following table summarizes the pretax impact of total net repositioning and other charges by segment:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Aerospace | $ | $ | $ | $ | |||||||||||||||||||
| Honeywell Building Technologies | |||||||||||||||||||||||
| Performance Materials and Technologies | |||||||||||||||||||||||
| Safety and Productivity Solutions | |||||||||||||||||||||||
| Corporate | |||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
In the three months ended June 30, 2020, we recognized gross repositioning charges totaling $273 million including severance costs of $254 million related to workforce reductions of 7,805 manufacturing and administrative positions across all of our segments, with a majority of the workforce reductions in Aerospace and Performance Materials and Technologies. The workforce reductions primarily related to the Company aligning its cost structure with the current and anticipated slowdown in demand for many of our products and services due to the global recession, and our ongoing productivity and functional transformation initiatives.
In the three months ended June 30, 2019, we recognized gross repositioning charges totaling $86 million including severance costs of $75 million related to workforce reductions of 1,266 manufacturing and administrative positions mainly in Performance Materials and Technologies and Safety and Productivity Solutions. The workforce reductions related to our productivity and ongoing functional transformation initiatives.
9
Honeywell International Inc.
Notes to Consolidated Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)
In the six months ended June 30, 2020, we recognized gross repositioning charges totaling $356 million including severance costs of $320 million related to workforce reductions of 9,929 manufacturing and administrative positions across our segments, with a majority of the reductions in Aerospace and Performance Materials and Technologies. The workforce reductions primarily related to the Company aligning its cost structure with the current and anticipated slowdown in demand for many of our products and services due to the global recession, and our ongoing productivity and functional transformation initiatives. Also, $31 million of previously established reserves, primarily for severance, were returned to income mainly as a result of higher attrition than anticipated in prior severance programs resulting in lower severance payments.
In the six months ended June 30, 2019, we recognized gross repositioning charges totaling $146 million including severance costs of $106 million related to workforce reductions of 2,313 manufacturing and administrative positions across all segments. The workforce reductions related to our productivity and ongoing functional transformation initiatives and to site transitions in Aerospace to more cost-effective locations.
The following table summarizes the status of our total repositioning reserves:
| Severance Costs | Asset Impairments | Exit Costs | Total | ||||||||||||||||||||
| December 31, 2019 | $ | $ | $ | $ | |||||||||||||||||||
| Charges | |||||||||||||||||||||||
| Usage - cash | ( | ( | ( | ||||||||||||||||||||
| Usage - noncash | ( | ( | |||||||||||||||||||||
| Foreign currency translation | |||||||||||||||||||||||
| Adjustments | ( | ( | ( | ||||||||||||||||||||
| June 30, 2020 | $ | $ | $ | $ | |||||||||||||||||||
Certain repositioning projects will recognize exit costs in future periods when the actual liability is incurred. Such exit costs incurred in the six months ended June 30, 2020 and 2019 were $19 million and $11 million, respectively.
Note 4. Other (Income) Expense
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Interest income | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Pension ongoing income – non-service | ( | ( | ( | ( | |||||||||||||||||||
| Other postretirement income – non-service | ( | ( | ( | ( | |||||||||||||||||||
| Equity income of affiliated companies | ( | ( | ( | ( | |||||||||||||||||||
| Loss (gain) on sale of non-strategic business and assets | ( | ( | |||||||||||||||||||||
| Foreign exchange | ( | ( | ( | ( | |||||||||||||||||||
| Other (net) | ( | ||||||||||||||||||||||
| $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||
Note 5. Income Taxes
The effective tax rate was lower than the U.S. federal statutory rate of 21% and decreased during 2020 compared to 2019 primarily due to the favorable resolution of a foreign tax matter related to the previously completed spin-off transactions, tax law changes in India, and the resolution of certain U.S. tax matters.
10
Honeywell International Inc.
Notes to Consolidated Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)
Note 6. Earnings Per Share
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| Basic | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
| Net income attributable to Honeywell | $ | $ | $ | $ | |||||||||||||||||||
| Weighted average shares outstanding | |||||||||||||||||||||||
| Earnings per share of common stock | $ | $ | $ | $ | |||||||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| Assuming Dilution | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
| Net income attributable to Honeywell | $ | $ | $ | $ | |||||||||||||||||||
| Average Shares | |||||||||||||||||||||||
| Weighted average shares outstanding | |||||||||||||||||||||||
| Dilutive securities issuable - stock plans | |||||||||||||||||||||||
| Total weighted average shares outstanding | |||||||||||||||||||||||
| Earnings per share of common stock | $ | $ | $ | $ | |||||||||||||||||||
The diluted earnings per share calculations exclude the effect of stock options when the options’ assumed proceeds exceed the average market price of the common shares during the period. For the three and six months ended June 30, 2020, the weighted average number of stock options excluded from the computations were 7.8 million and 6.1 million. For the three and six months ended June 30, 2019, the weighted average number of stock options excluded from the computations were 3.0 million and 3.0 million. These stock options were outstanding at the end of each of the respective periods.
As of June 30, 2020 and 2019, total shares outstanding were 701.8 million and 719.5 million and as of June 30, 2020 and 2019, total shares issued were 957.6
11
Honeywell International Inc.
Notes to Consolidated Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)
Note 7. Revenue Recognition and Contracts with Customers
Honeywell has a comprehensive offering of products and services, including software and technologies, that are sold to a variety of customers in multiple end markets. See the following table and related discussions by operating segment for details.
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Aerospace | |||||||||||||||||||||||
| Commercial Aviation Original Equipment | $ | $ | $ | $ | |||||||||||||||||||
| Commercial Aviation Aftermarket | |||||||||||||||||||||||
| Defense and Space | |||||||||||||||||||||||
| Honeywell Building Technologies | |||||||||||||||||||||||
| Products | $ | $ | |||||||||||||||||||||
| Building Solutions | |||||||||||||||||||||||
| Performance Materials and Technologies | |||||||||||||||||||||||
| UOP | |||||||||||||||||||||||
| Process Solutions | |||||||||||||||||||||||
| Specialty Products | |||||||||||||||||||||||
| Fluorine Products | |||||||||||||||||||||||
| Safety and Productivity Solutions | |||||||||||||||||||||||
| Safety and Retail | |||||||||||||||||||||||
| Productivity Products | |||||||||||||||||||||||
| Warehouse and Workflow Solutions | |||||||||||||||||||||||
| Sensing & Internet-of-Things (IoT) | |||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||||||||
Aerospace – A global supplier of products, software and services for aircrafts that it sells to original equipment manufacturers (OEM) and other customers in a variety of end markets including: air transport, regional, business and general aviation aircraft, airlines, aircraft operators and defense and space contractors. Aerospace products and services include auxiliary power units, propulsion engines, environmental control systems, integrated avionics, wireless connectivity services, electric power systems, engine controls, flight safety, communications, navigation hardware, data and software applications, radar and surveillance systems, aircraft lighting, management and technical services, advanced systems and instruments, satellite and space components, aircraft wheels and brakes, repair and overhaul services and thermal systems. Aerospace also provides spare parts, repair, overhaul and maintenance services (principally to aircraft operators) for the aftermarket. Honeywell Forge solutions are designed to identify and resolve problems faster, making fleet management and flight operations more efficient.
Honeywell Building Technologies – A global provider of products, software, solutions and technologies that enable building owners and occupants to ensure their facilities are safe, energy efficient, sustainable and productive. Honeywell Building Technologies products and services include advanced software applications for building control and optimization; sensors, switches, control systems and instruments for energy management; access control; video surveillance; fire products; remote patient monitoring systems; and installation, maintenance and upgrades of systems. Honeywell Forge solutions are designed to digitally manage buildings to use space intelligently, cut operating expenses and reduce maintenance.
12
Honeywell International Inc.
Notes to Consolidated Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)
Performance Materials and Technologies – A global provider in developing and manufacturing high-quality performance chemicals and materials, process technologies and automation solutions, including Honeywell Forge connected solutions. The segment comprises Process Solutions, UOP and Advanced Materials. Process Solutions provides automation control, instrumentation, advanced software and related services for the oil and gas, refining, pulp and paper, industrial power generation, chemicals and petrochemicals, biofuels, life sciences, and metals, minerals and mining industries. Through its smart energy products, Process Solutions enables utilities and distribution companies to deploy advanced capabilities to improve operations, reliability and environmental sustainability. UOP provides process technology, products, including catalysts and adsorbents, equipment, and consulting services that enable customers to efficiently produce gasoline, diesel, jet fuel, petrochemicals and renewable fuels for the petroleum refining, gas processing, petrochemical, and other industries. Advanced Materials manufactures a wide variety of high-performance products, including materials used to manufacture end products such as bullet-resistant armor, nylon, computer chips and pharmaceutical packaging, and provides reduced and low global-warming-potential (GWP) materials based on hydrofluoro-olefin technology. In the industrial environment, Honeywell Forge solutions enable integration and connectivity to provide a holistic view of operations and turn data into clear actions to maximize productivity and efficiency. Honeywell Forge's cybersecurity capabilities help identify risks and act on cyber-related incidents, together enabling improved operations and protecting processes, people and assets.
Safety and Productivity Solutions – A global provider of products and software that improve productivity, workplace safety and asset performance to customers around the globe. Safety products include personal protection equipment, apparel, gear, and footwear designed for work, play and outdoor activities; gas detection technology; and cloud-based notification and emergency messaging. Productivity Solutions products and services include mobile devices and software for computing, data collection and thermal printing; supply chain and warehouse automation equipment, software and solutions; custom-engineered sensors, switches and controls for sensing and productivity solutions; and software-based data and asset management productivity solutions. Honeywell Forge solutions digitally automate processes to improve efficiency while reducing downtime and safety costs.
For a summary by disaggregated product and services sales for each segment, refer to Note 14 Segment Financial Data of Notes to Consolidated Financial Statements.
The Company recognizes revenue arising from performance obligations outlined in contracts with its customers that are satisfied at a point in time and over time. The disaggregation of our revenue based off timing of recognition is as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Products, transferred point in time | % | % | % | % | |||||||||||||||||||
| Products, transferred over time | |||||||||||||||||||||||
| Net product sales | |||||||||||||||||||||||
| Services, transferred point in time | |||||||||||||||||||||||
| Services, transferred over time | |||||||||||||||||||||||
| Net service sales | |||||||||||||||||||||||
| Net sales | % | % | % | % | |||||||||||||||||||
13
Honeywell International Inc.
Notes to Consolidated Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)
Contract Balances
Progress on satisfying performance obligations under contracts with customers and the related billings and cash collections are recorded on the Consolidated Balance Sheet in Accounts receivable - net and Other assets (unbilled receivables (contract assets) and billed receivables) and Accrued liabilities and Other liabilities (customer advances and deposits (contract liabilities)). Unbilled receivables (contract assets) arise when the timing of cash collected from customers differs from the timing of revenue recognition, such as when contract provisions require specific milestones to be met before a customer can be billed. Those assets are recognized when the revenue associated with the contract is recognized prior to billing and derecognized when billed in accordance with the terms of the contract. Contract liabilities are recorded when customers remit contractual cash payments in advance of us satisfying performance obligations under contractual arrangements, including those with performance obligations to be satisfied over a period of time. Contract liabilities are derecognized when revenue is recorded, either when a milestone is met triggering the contractual right to bill or when the performance obligation is satisfied.
Contract balances are classified as assets or liabilities on a contract-by-contract basis at the end of each reporting period.
The following table summarizes the Company's contract assets and liabilities balances:
| 2020 | 2019 | ||||||||||
| Contract assets - January 1 | $ | $ | |||||||||
| Contract assets - June 30 | |||||||||||
| Change in contract assets - increase (decrease) | $ | $ | |||||||||
| Contract liabilities - January 1 | $ | ( | $ | ( | |||||||
| Contract liabilities - June 30 | ( | ( | |||||||||
| Change in contract liabilities - decrease (increase) | $ | ( | $ | ||||||||
| Net change | $ | $ | |||||||||
The net change for the six months ended June 30, 2020 and June 30, 2019 was primarily driven by the recognition of revenue as performance obligations were satisfied prior to billing exceeding receipt of advance payments from customers.
For the three and six months ended June 30, 2020, we recognized revenue of $315 million and $1,203 million that was previously included in the beginning balance of contract liabilities. For the three and six months ended June 30, 2019, we recognized revenue of $260 million and $980 million that was previously included in the beginning balance of contract liabilities.
When contracts are modified to account for changes in contract specifications and requirements, we consider whether the modification either creates new or changes the existing enforceable rights and obligations. Contract modifications that are for goods or services that are not distinct from the existing contract, due to the significant integration with the original good or service provided, are accounted for as if they were part of that existing contract. The effect of a contract modification on the transaction price and our measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis. When the modifications include additional performance obligations that are distinct and at relative stand-alone selling price, they are accounted for as a new contract and performance obligation, which are recognized prospectively.
14
Honeywell International Inc.
Notes to Consolidated Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is defined as the unit of account. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. When our contracts with customers require highly complex integration or manufacturing services that are not separately identifiable from other promises in the contracts and, therefore, not distinct, then the entire contract is accounted for as a single performance obligation. In situations when our contract includes distinct goods or services that are substantially the same and have the same pattern of transfer to the customer over time, they are recognized as a series of distinct goods or services. For any contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation based on the estimated relative standalone selling price of each distinct good or service in the contract. For product sales, each product sold to a customer typically represents a distinct performance obligation. In such cases, the observable standalone sales are used to determine the standalone selling price.
Performance obligations are satisfied as of a point in time or over time. Performance obligations are supported by contracts with customers, providing a framework for the nature of the distinct goods, services or bundle of goods and services. The timing of satisfying the performance obligation is typically indicated by the terms of the contract.
The following table outlines the Company's remaining performance obligations disaggregated by segment:
| June 30, 2020 | |||||
| Aerospace | $ | ||||
| Honeywell Building Technologies | |||||
| Performance Materials and Technologies | |||||
| Safety and Productivity Solutions | |||||
| $ | |||||
The Company has applied the practical expedient for certain revenue streams to exclude the value of remaining performance obligations for (i) contracts with an original expected term of one year or less or (ii) contracts for which we recognize revenue in proportion to the amount we have the right to invoice for services performed.
15
Honeywell International Inc.
Notes to Consolidated Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)
Note 8. Accounts Receivable - Net
| June 30, 2020 | December 31, 2019 | ||||||||||
| Trade | $ | $ | |||||||||
| Less - Allowance for doubtful accounts | ( | ( | |||||||||
| $ | $ | ||||||||||
Note 9. Inventories
| June 30, 2020 | December 31, 2019 | ||||||||||
| Raw materials | $ | $ | |||||||||
| Work in process | |||||||||||
| Finished products | |||||||||||
| Reduction to LIFO cost basis | ( | ( | |||||||||
| $ | $ | ||||||||||
16
Honeywell International Inc.
Notes to Consolidated Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)
Note 10. Leases
The Company's operating and finance lease portfolio is described in Note 14, Leases of the Notes to the Consolidated Financial Statements in our 2019 Annual Report on Form 10-K.
| Six Months Ended June 30, | |||||||||||
| 2020 | 2019 | ||||||||||
Net right-of-use assets obtained in exchange for lease obligations: | |||||||||||
Operating leases | |||||||||||
Finance leases | |||||||||||
Supplemental balance sheet information related to leases was as follows:
| June 30, 2020 | December 31, 2019 | ||||||||||
| Operating leases | |||||||||||
| Other assets | $ | $ | |||||||||
| Accrued liabilities | |||||||||||
| Other liabilities | |||||||||||
| Total operating lease liabilities | $ | $ | |||||||||
| Financing leases | |||||||||||
| Property, plant and equipment | $ | $ | |||||||||
| Accumulated depreciation | ( | ( | |||||||||
| Property, plant and equipment - net | $ | $ | |||||||||
| Current maturities of long-term debt | |||||||||||
| Long-term debt | |||||||||||
| Total financing lease liabilities | $ | $ | |||||||||
17
Honeywell International Inc.
Notes to Consolidated Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)
Note 11. Long-term Debt and Credit Agreements
| June 30, 2020 | December 31, 2019 | ||||||||||
Floating rate notes due 2022 | |||||||||||
Term Loan due 2022 | |||||||||||
Industrial development bond obligations, floating rate maturing at various dates through 2037 | |||||||||||
Other (including capitalized leases and debt issuance costs), | |||||||||||
Less: current portion | ( | ( | |||||||||
| $ | $ | ||||||||||
On May 18, 2020, the Company issued $1.25 billion 1.35 % Senior Notes due 2025, $1.0 billion 1.95 % Senior Notes due 2030, and $750 million 2.80 % Senior Notes due 2050 (collectively, the "2020 Notes") to replace $3.0 billion of undrawn commitments under the $6.0 billion delayed draw term loan facility, referenced below. The 2020 Notes are senior unsecured and unsubordinated obligations of Honeywell and rank equally with all of Honeywell's existing and future senior unsecured debt and senior to all of Honeywell's subordinated debt. The offering resulted in gross proceeds of $3.0 billion, offset by $27 million in discount and closing costs related to the offering.
18
Honeywell International Inc.
Notes to Consolidated Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)
On March 26, 2020, the Company entered into a Delayed Draw Term Loan Agreement (the “Term Loan Agreement”) with a syndicate of banks. The Term Loan Agreement provided for a two-year, delayed draw term loan facility in the aggregate principal amount of $6.0 billion. Effective May 22, 2020, the Company permanently reduced the undrawn commitments under the Term Loan Agreement by an aggregate amount of $3.0 billion. On June 24, 2020, the Company fully drew on the remaining $3.0 billion of commitments under the Term Loan Agreement at a variable interest rate equal to the one-month LIBOR plus the applicable margin of 1.25 %. The draw resulted in gross proceeds of $3.0 billion offset by $7 million in closing costs related to the borrowing. The amount borrowed under the Term Loan Agreement may not be reborrowed and is required to be repaid no later than March 26, 2022, unless the Term Loan Agreement is terminated earlier pursuant to its terms. Commitments under the Term Loan Agreement can be increased pursuant to the terms of the Term Loan Agreement by an aggregate amount not to exceed $2.0 billion. As of June 30, 2020, there were $3.0 billion of borrowings outstanding under the Term Loan Agreement, and there were no undrawn commitments remaining under the Term Loan Agreement.
On March 10, 2020, the Company issued €500 million 0.00 % Senior Notes due 2024 and €500 million 0.75 % Senior Notes due 2032 (collectively, the "2020 Euro Notes"). The 2020 Euro Notes are senior unsecured and unsubordinated obligations of Honeywell and rank equally with all of Honeywell's existing and future senior unsecured debt and senior to all of Honeywell's subordinated debt. The offering resulted in gross proceeds of $1,136 million, offset by $9 million in discount and closing costs related to the offering.
For issuances described above, unless otherwise noted, all debt issuance costs are deferred and recognized as a direct deduction to the related debt liability and are amortized to interest expense over the debt term.
On February 21, 2020, the Company paid its 0.65 % Euro notes due 2020.
On April 10, 2020, the Company entered into a $1.5
Note 12. Financial Instruments and Fair Value Measures
Our credit, market, foreign currency and interest rate risk management policies are described in Note 15, Financial Instruments and Fair Value Measures of Notes to Consolidated Financial Statements in our 2019 Annual Report on Form 10-K.
The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis:
| June 30, 2020 | December 31, 2019 | ||||||||||
| Assets: | |||||||||||
| Foreign currency exchange contracts | $ | $ | |||||||||
| Available for sale investments | |||||||||||
| Interest rate swap agreements | |||||||||||
| Cross currency swap agreements | |||||||||||
| Liabilities: | |||||||||||
| Foreign currency exchange contracts | $ | $ | |||||||||
| Interest rate swap agreements | |||||||||||
19
Honeywell International Inc.
Notes to Consolidated Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)
The foreign currency exchange contracts, interest rate swap agreements, and cross currency swap agreements are valued using broker quotations, or market transactions in either the listed or over-the-counter markets. As such, these derivative instruments are classified within level 2. The Company also holds investments in commercial paper, certificates of deposits, and time deposits that are designated as available for sale and are valued using published prices based off observable market data. As such, these investments are classified within level 2. The Company also holds available for sale investments in U.S. government and corporate debt securities valued utilizing published prices based on quoted market pricing, which are classified within level 1.
The carrying value of cash and cash equivalents, trade accounts and notes receivables, payables, commercial paper (of which $669 million and $3,513 million was Euro denominated as of June 30, 2020 and December 31, 2019) and short-term borrowings contained in the Consolidated Balance Sheet approximates fair value.
The following table sets forth the Company’s financial assets and liabilities that were not carried at fair value:
| June 30, 2020 | December 31, 2019 | ||||||||||||||||||||||
| Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Long-term receivables | $ | $ | $ | $ | |||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Long-term debt and related current maturities | $ | $ | $ | $ | |||||||||||||||||||
The following table sets forth the amounts on the Consolidated Balance Sheet related to cumulative basis adjustments for fair value hedges:
| Line in the Consolidated Balance Sheet of Hedged Item | Carrying Amount of the Hedged Item | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Item | ||||||||||||||||||||||||
| June 30, 2020 | December 31, 2019 | June 30, 2020 | December 31, 2019 | |||||||||||||||||||||||
| Long-term debt | $ | $ | $ | $ | ||||||||||||||||||||||
The Company determined the fair value of the long-term receivables by utilizing transactions in the listed markets for identical or similar assets. As such, the fair value of these receivables is considered level 2. The Company determined the fair value of the long-term debt and related current maturities utilizing transactions in the listed markets for identical or similar liabilities. As such, the fair value of the long-term debt and related current maturities is considered level 2.
Interest rate swap agreements are designated as hedge relationships with gains or losses on the derivative recognized in Interest and other financial charges offsetting the gains and losses on the underlying debt being hedged. For the three and six months ended June 30, 2020, we recognized $14 million and $219 million of gains in earnings on interest rate swap agreements. For the three and six months ended June 30, 2019, we recognized $37 million and $63 million of gains in earnings on interest rate swap agreements. Gains and losses are fully offset by losses and gains on the underlying debt being hedged.
The Company economically hedges its exposure to changes in foreign exchange rates principally with forward contracts. These contracts are marked-to-market with the resulting gains and losses recognized in earnings offsetting the gains and losses on the non-functional currency denominated monetary assets and liabilities being hedged. For the three and six months ended June 30, 2020, we recognized $217 million of expense and $67 million of income in Other (income) expense. For the three and six months ended June 30, 2019, we recognized $96 million and $49 million of income in Other (income) expense. As of June 30, 2020, cash collateral received that has not been offset against our derivatives of $420 million was recorded in Accrued liabilities and Other assets.
20
Honeywell International Inc.
Notes to Consolidated Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)
The following tables summarize the location and impact to the Consolidated Statement of Operations related to fair value and cash flow hedging relationships:
| Three Months Ended June 30, 2020 | |||||||||||||||||||||||||||||
| Revenue | Cost of Products Sold | SG&A | Other (Income) Expense | Interest and Other Financial Charges | |||||||||||||||||||||||||
| $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
| Gain or (loss) on cash flow hedges: | |||||||||||||||||||||||||||||
| Foreign Currency Exchange Contracts: | |||||||||||||||||||||||||||||
| Amount reclassified from accumulated other comprehensive income into income | ( | ( | ( | ||||||||||||||||||||||||||
| Amount excluded from effectiveness testing recognized in earnings using an amortization approach | |||||||||||||||||||||||||||||
| Gain or (loss) on fair value hedges: | |||||||||||||||||||||||||||||
| Interest Rate Swap Agreements: | |||||||||||||||||||||||||||||
| Hedged items | ( | ||||||||||||||||||||||||||||
| Derivatives designated as hedges | |||||||||||||||||||||||||||||
| Three Months Ended June 30, 2019 | |||||||||||||||||||||||||||||
| Revenue | Cost of Products Sold | SG&A | Other (Income) Expense | Interest and Other Financial Charges | |||||||||||||||||||||||||
| $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
| Gain or (loss) on cash flow hedges: | |||||||||||||||||||||||||||||
| Foreign Currency Exchange Contracts: | |||||||||||||||||||||||||||||
| Amount reclassified from accumulated other comprehensive income into income | |||||||||||||||||||||||||||||
| Amount excluded from effectiveness testing recognized in earnings using an amortization approach | |||||||||||||||||||||||||||||
| Gain or (loss) on fair value hedges: | |||||||||||||||||||||||||||||
| Interest Rate Swap Agreements: | |||||||||||||||||||||||||||||
| Hedged items | ( | ||||||||||||||||||||||||||||
| Derivatives designated as hedges | |||||||||||||||||||||||||||||
21
Honeywell International Inc.
Notes to Consolidated Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)
| Six Months Ended June 30, 2020 | |||||||||||||||||||||||||||||
| Revenue | Cost of Products Sold | SG&A | Other (Income) Expense | Interest and Other Financial Charges | |||||||||||||||||||||||||
| $ | $ | $ | ( | $ | |||||||||||||||||||||||||
| Gain or (loss) on cash flow hedges: | |||||||||||||||||||||||||||||
| Foreign currency exchange contracts: | |||||||||||||||||||||||||||||
| Amount reclassified from accumulated other comprehensive income into income | ( | ( | ( | ||||||||||||||||||||||||||
| Amount excluded from effectiveness testing recognized in earnings using an amortization approach | |||||||||||||||||||||||||||||
| Gain or (loss) on fair value hedges: | |||||||||||||||||||||||||||||
| Interest rate swap agreements: | |||||||||||||||||||||||||||||
| Hedged items | ( | ||||||||||||||||||||||||||||
| Derivatives designated as hedges | |||||||||||||||||||||||||||||
| Six Months Ended June 30, 2019 | |||||||||||||||||||||||||||||
| Revenue | Cost of Products Sold | SG&A | Other (Income) Expense | Interest and Other Financial Charges | |||||||||||||||||||||||||
| $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
| Gain or (loss) on cash flow hedges: | |||||||||||||||||||||||||||||
| Foreign currency exchange contracts: | |||||||||||||||||||||||||||||
| Amount reclassified from accumulated other comprehensive income into income | |||||||||||||||||||||||||||||
| Amount excluded from effectiveness testing recognized in earnings using an amortization approach | |||||||||||||||||||||||||||||
| Gain or (loss) on fair value hedges: | |||||||||||||||||||||||||||||
| Interest rate swap agreements: | |||||||||||||||||||||||||||||
| Hedged items | ( | ||||||||||||||||||||||||||||
| Derivatives designated as hedges | |||||||||||||||||||||||||||||
The following table summarizes the amounts of gain or (loss) on net investment hedges recognized in Accumulated other comprehensive income (loss):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| Derivatives Net Investment Hedging Relationships | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
| Euro-denominated long-term debt | $ | ( | $ | ( | $ | $ | |||||||||||||||||
| Euro-denominated commercial paper | ( | ( | |||||||||||||||||||||
| Cross currency swap | ( | ( | |||||||||||||||||||||
| Foreign currency exchange contracts | ( | ( | ( | ||||||||||||||||||||
22
Honeywell International Inc.
Notes to Consolidated Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)
Note 13. Accumulated Other Comprehensive Income (Loss)
Changes in Accumulated Other Comprehensive Income (Loss) by Component
| Foreign Exchange Translation Adjustment | Pension and Other Postretirement Benefits Adjustments | Changes in Fair Value of Cash Flow Hedges | Total | ||||||||||||||||||||
| Balance at December 31, 2019 | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||
Other comprehensive income (loss) before reclassifications | ( | ( | |||||||||||||||||||||
Amounts reclassified from accumulated other comprehensive income | ( | ( | ( | ( | |||||||||||||||||||
Net current period other comprehensive income (loss) | ( | ( | ( | ||||||||||||||||||||
| Balance at June 30, 2020 | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||
| Foreign Exchange Translation Adjustment | Pension and Other Postretirement Benefits Adjustments | Changes in Fair Value of Cash Flow Hedges | Total | ||||||||||||||||||||
| Balance at December 31, 2018 | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||
Other comprehensive income (loss) before reclassifications | |||||||||||||||||||||||
Amounts reclassified from accumulated other comprehensive income | ( | ( | ( | ( | |||||||||||||||||||
Net current period other comprehensive income (loss) | ( | ( | |||||||||||||||||||||
| Balance at June 30, 2019 | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||
23
Honeywell International Inc.
Notes to Consolidated Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)
Note 14. Segment Financial Data
We globally manage our business operations through four reportable operating segments. Segment information is consistent with how management reviews the businesses, makes investing and resource allocation decisions and assesses operating performance.
Honeywell’s senior management evaluates segment performance based on segment profit. Each segment’s profit is measured as segment income (loss) before taxes excluding general corporate unallocated expense, interest and other financial charges, stock compensation expense, pension and other postretirement income (expense), repositioning and other charges, and other items within Other (income) expense.
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Net sales | |||||||||||||||||||||||
| Aerospace | |||||||||||||||||||||||
| Products | $ | $ | $ | $ | |||||||||||||||||||
| Services | |||||||||||||||||||||||
| Total | |||||||||||||||||||||||
| Honeywell Building Technologies | |||||||||||||||||||||||
| Products | |||||||||||||||||||||||
| Services | |||||||||||||||||||||||
| Total | |||||||||||||||||||||||
| Performance Materials and Technologies | |||||||||||||||||||||||
| Products | |||||||||||||||||||||||
| Services | |||||||||||||||||||||||
| Total | |||||||||||||||||||||||
| Safety and Productivity Solutions | |||||||||||||||||||||||
| Products | |||||||||||||||||||||||
| Services | |||||||||||||||||||||||
| Total | |||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
| Segment profit | |||||||||||||||||||||||
| Aerospace | $ | $ | $ | $ | |||||||||||||||||||
| Honeywell Building Technologies | |||||||||||||||||||||||
| Performance Materials and Technologies | |||||||||||||||||||||||
| Safety and Productivity Solutions | |||||||||||||||||||||||
| Corporate | ( | ( | ( | ( | |||||||||||||||||||
| Total segment profit | |||||||||||||||||||||||
| Interest and other financial charges | ( | ( | ( | ( | |||||||||||||||||||
Stock compensation expense(a) | ( | ( | ( | ( | |||||||||||||||||||
Pension ongoing income(b) | |||||||||||||||||||||||
Other postretirement income(b) | |||||||||||||||||||||||
Repositioning and other charges(c) | ( | ( | ( | ( | |||||||||||||||||||
Other(d) | |||||||||||||||||||||||
| Income before taxes | $ | $ | $ | $ | |||||||||||||||||||
(a) Amounts included in Selling, general and administrative expenses.
(b) Amounts included in Cost of products and services sold and Selling, general and administrative expenses (service costs) and Other income/expense (non-service cost components).
24
Honeywell International Inc.
Notes to Consolidated Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)
Note 15. Pension Benefits
Net periodic pension benefit costs for our significant defined benefit plans include the following components:
| U.S. Plans | |||||||||||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Service cost | $ | $ | $ | $ | |||||||||||||||||||
| Interest cost | |||||||||||||||||||||||
| Expected return on plan assets | ( | ( | ( | ( | |||||||||||||||||||
| Amortization of prior service (credit) | ( | ( | ( | ( | |||||||||||||||||||
| $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||
| Non-U.S. Plans | |||||||||||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Service cost | $ | $ | $ | $ | |||||||||||||||||||
| Interest cost | |||||||||||||||||||||||
| Expected return on plan assets | ( | ( | ( | ( | |||||||||||||||||||
| Amortization of prior service (credit) | |||||||||||||||||||||||
| $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||
During the three months ended June 30, 2020, the Company did not purchase any Honeywell shares from the Honeywell U.S. Pension Plan Master Trust. During the six months ended June 30, 2020, the Company repurchased $100 million of outstanding Honeywell shares from the Honeywell U.S. Pension Plan Master Trust. During the three and six months ended June 30, 2019, the Company repurchased $100 million and $200 million of outstanding Honeywell shares from the Honeywell U.S. Pension Plan Master Trust.
Note 16. Commitments and Contingencies
Environmental Matters
Our environmental matters are described in Note 20 Commitments and Contingencies of Notes to Consolidated Financial Statements in our 2019 Annual Report on Form 10-K.
The following table summarizes information concerning our recorded liabilities for environmental costs:
| December 31, 2019 | $ | ||||
| Accruals for environmental matters deemed probable and reasonably estimable | |||||
| Environmental liability payments | ( | ||||
| Other | ( | ||||
| June 30, 2020 | $ | ||||
25
Honeywell International Inc.
Notes to Consolidated Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)
Environmental liabilities are included in the following balance sheet accounts:
| June 30, 2020 | December 31, 2019 | ||||||||||
| Accrued liabilities | $ | $ | |||||||||
| Other liabilities | |||||||||||
| $ | $ | ||||||||||
The Company does not currently possess sufficient information to reasonably estimate the amounts of environmental liabilities to be recorded upon future completion of studies, litigation or settlements, and neither the timing nor the amount of the ultimate costs associated with environmental matters can be determined although they could be material to our consolidated results of operations and operating cash flows in the periods recognized or paid. However, considering our past experience and existing reserves, we do not expect that environmental matters will have a material adverse effect on our consolidated financial position.
In conjunction with the Resideo Technologies, Inc. ("Resideo") spin-off, the Company entered into an indemnification and reimbursement agreement with a Resideo subsidiary, pursuant to which Resideo’s subsidiary has an ongoing obligation to make cash payments to Honeywell in amounts equal to 90 percent of Honeywell’s annual net spending for environmental matters at certain sites as defined in the agreement. The amount payable to Honeywell in any given year is subject to a cap of $140 million, and the obligation will continue until the earlier of December 31, 2043, or December 31 of the third consecutive year during which the annual payment obligation is less than $25 million.
Reimbursements associated with this agreement are collected from Resideo quarterly and were $35 million in the six months ended June 30, 2020. On April 21, 2020, the Company and Resideo agreed to amend certain agreements, including the indemnification and reimbursement agreement, to among other things extend the payment due dates to July 30, 2020 for both the reimbursement amount of $35 million (originally due on April 30, 2020) and the royalty payments of approximately $7 million (originally due on May 30, 2020 under the Trademark License Agreement). As the Company incurs costs for environmental matters deemed probable and reasonably estimable related to the sites covered by the indemnification and reimbursement agreement, a corresponding receivable from Resideo for 90 percent of such costs is also recorded. This receivable amount recorded in the six months ended June 30, 2020 was $69 million. As of June 30, 2020, Other Current Assets and Other Assets includes $140 million and $479 million representing the short-term and long-term portion of the receivable amount due from Resideo under the indemnification and reimbursement agreement.
Asbestos Matters
Honeywell is named in asbestos related personal injury claims related to North American Refractories Company (“NARCO”), which was sold in 1986, and Bendix Friction Materials (“Bendix”) business, which was sold in 2014.
The following tables summarize information concerning NARCO and Bendix asbestos-related balances:
| Asbestos-Related Liabilities | |||||||||||||||||
| Bendix | NARCO | Total | |||||||||||||||
| December 31, 2019 | $ | $ | $ | ||||||||||||||
| Accrual for update to estimated liability | |||||||||||||||||
| Asbestos related liability payments | ( | ( | ( | ||||||||||||||
| June 30, 2020 | $ | $ | $ | ||||||||||||||
| Insurance Recoveries for Asbestos-Related Liabilities | |||||||||||||||||
| Bendix | NARCO | Total | |||||||||||||||
| December 31, 2019 | $ | $ | $ | ||||||||||||||
| Insurance receipts for asbestos-related liabilities | ( | ( | ( | ||||||||||||||
| Insurance receivables settlements | |||||||||||||||||
| June 30, 2020 | $ | $ | $ | ||||||||||||||
26
Honeywell International Inc.
Notes to Consolidated Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)
| June 30, 2020 | December 31, 2019 | ||||||||||
| Other current assets | $ | $ | |||||||||
| Insurance recoveries for asbestos-related liabilities | |||||||||||
| $ | $ | ||||||||||
| Accrued liabilities | $ | $ | |||||||||
| Asbestos-related liabilities | |||||||||||
| $ | $ | ||||||||||
NARCO Products – Honeywell’s predecessor, Allied Corporation owned NARCO from 1979 to 1986. When the NARCO business was sold, Honeywell’s predecessor entered into a cross-indemnity agreement with NARCO which included an obligation to indemnify the purchaser for asbestos claims. Such claims arise primarily from alleged occupational exposure to asbestos-containing refractory brick and mortar for high-temperature applications. NARCO ceased manufacturing these products in 1980, and the first asbestos claims were filed in the tort system against NARCO in 1983. Claims filings and related costs increased dramatically in the late 1990s through 2001, which led to NARCO filing for bankruptcy in January 2002. Once NARCO filed for bankruptcy, all then current and future NARCO asbestos claims were stayed against both NARCO and Honeywell pending the reorganization of NARCO.
Following the bankruptcy filing, in December 2002 Honeywell recorded a total NARCO asbestos liability of $3.2 billion, which was comprised of three components: (i) the estimated liability to settle pre-bankruptcy petition NARCO claims and certain post-petition settlements ($2.2 billion, referred to as “Pre-bankruptcy NARCO Liability”), (ii) the estimated liability related to then unasserted NARCO claims for the period 2004 through 2018 ($950 million, referred to as “NARCO Trust Liability”), and (iii) other NARCO bankruptcy-related obligations totaling $73 million.
When the NARCO Trust Liability of $950 million was established in 2002, the methodology for estimating the potential liability was based primarily on: (a) epidemiological projections of the future incidence of disease for the period 2004 through 2018, a fifteen-year period; (b) historical claims rates in the tort system for the five-year period prior to the bankruptcy filing date; and (c) anticipated NARCO Trust payment values set forth in the then current draft of the NARCO Trust Distribution Procedures. The methodology required estimating, by disease, three critical inputs: (i) likely number of claims to be asserted against the NARCO Trust in the future, (ii) percentage of those claims likely to receive payment, and (iii) payment values. The Company utilized outside asbestos liability valuation specialists to support its preparation of the NARCO Trust Liability estimate, which was based on a commonly accepted methodology used by numerous bankruptcy courts addressing 524(g) trusts.
In 2002, when the Company first established its initial liability, NARCO asbestos claims resolution shifted from the tort system to an anticipated NARCO Trust framework, where claims would be processed in accordance with established NARCO Trust Distribution Procedures, including strict medical and exposure criteria for a plaintiff to receive compensation. We believed at the time that the NARCO Trust’s claims filing and resolution experience after the NARCO Trust became operational would be significantly different from pre-bankruptcy tort system experience in light of these more rigorous claims processing requirements in the NARCO Trust Distribution Procedures and Honeywell’s active oversight of claims processing and approval. Given these anticipated differences, we believed that a 15-year time period was the appropriate horizon for establishing a probable and reasonably estimable liability for then unasserted NARCO claims as it represented our best estimate of the time period it would take for the NARCO Trust to be approved by the Bankruptcy Court, become fully operational and generate sufficiently reliable claims data (i.e., a data set which is statistically representative) to enable us to update our NARCO Trust Liability.
The NARCO Trust Distribution Procedures were finalized in 2006, and the Company updated its NARCO Trust Liability to reflect the final terms and payment values. The original 15-year period (from 2004 through 2018) for unasserted claims did not change as asbestos claims filings continued to be stayed against both Honeywell and NARCO. The 2006 update resulted in a range of the estimated liability for unasserted claims of $743 million to $961 million, and we believed that no amount within this range was a better estimate than any other amount. In accordance with ASC 450 – Contingencies (“ASC 450”), we recorded the low end of the range of $743 million (the "2006 NARCO Trust Liability Estimate") which resulted in a reduction of $207 million in our NARCO Trust Liability.
27
Honeywell International Inc.
Notes to Consolidated Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)
NARCO emerged from bankruptcy on April 30, 2013, at which time a federally authorized 524(g) trust was established for the evaluation and resolution of all existing and future NARCO asbestos claims. Both Honeywell and NARCO are protected by a permanent channeling injunction barring all present and future individual actions in state or federal courts and requiring all asbestos-related claims based on exposure to NARCO asbestos-containing products to be made against the NARCO Trust.
The NARCO Trust Agreement and the NARCO Trust Distribution Procedures are the principal documents setting forth the structure of the NARCO Trust. These documents establish Honeywell’s evergreen funding obligations. Honeywell is obligated to fund NARCO asbestos claims submitted to the NARCO Trust which qualify for payment under the Trust Distribution Procedures (Annual Contribution Claims), subject to an annual cap of $145 million. However, the initial $100 million of claims processed through the NARCO Trust (the "Initial Claims Amount") will not count against the annual cap and any unused portion of the Initial Claims Amount will roll over to subsequent years until fully utilized. These documents also establish the material operating rules for the NARCO Trust, including Honeywell audit rights and the criteria claimants must meet to have a valid claim paid. These claims payment criteria include providing the NARCO Trust with adequate medical evidence of the claimant’s asbestos-related condition and credible evidence of exposure to a specific NARCO asbestos-containing product. Further, the NARCO Trust is eligible to receive cash dividends from Harbison-Walker International Inc (“HWI”), the reorganized and renamed entity that emerged, fully operational, from the NARCO bankruptcy. The NARCO Trust is required to use any funding received from HWI to pay Annual Contribution Claims until those funds are exhausted. It is only at this point that Honeywell’s funding obligation to the Trust is triggered. Thus, there is an unrelated primary source for funding that affects Honeywell’s funding of the NARCO Trust Liability.
Once operational, the NARCO Trust began to receive, process and pay claims that had been previously stayed pending the Trust becoming operational. As the NARCO Trust began to pay claims in 2014, we began to assert our on-going audit rights to review and monitor the claims processor’s adherence to the established requirements of the NARCO Trust Distribution Procedures. While doing so, we identified several issues with the way the Trust was implementing the NARCO Trust Distribution Procedures. In 2015, Honeywell filed suit against the NARCO Trust in Bankruptcy Court alleging breach of certain provisions of the NARCO Trust Agreement and NARCO Trust Distribution Procedures. The parties agreed to dismiss the proceeding without prejudice pursuant to an 18-month Standstill Agreement, which expired in October 2017. Notwithstanding its expiration, claims processing continues, and Honeywell continues to negotiate and attempt to resolve remaining disputed issues (that is, instances where Honeywell believes the NARCO Trust is not processing claims in accordance with established NARCO Trust Distribution Procedures). Honeywell reserves the right to seek judicial intervention should negotiations fail.
After the NARCO Trust became effective in 2013, the $743 million NARCO Trust Liability was then comprised of:
(i)liability for unasserted claims; and
(ii)liability for claims asserted after the NARCO Trust became operational but not yet paid.
Although we know the number of claims filed with the NARCO Trust each year, we are not able to determine at this time the portion of the NARCO Trust Liability which represents asserted versus unasserted claims due to the lack of sufficiently reliable claims data because of the claims processing issues described previously.
Honeywell continues to maintain the 2006 NARCO Trust Liability Estimate (the $743 million accrual less payments made by Honeywell to the NARCO Trust for Annual Contribution Claims since the beginning of the fourth quarter of 2019), as there has not been sufficiently reliable claims data history to enable the Company to update that liability.
As of December 31, 2019, all cash dividends paid to the NARCO Trust by HWI had been used to pay Annual Contribution Claims. In the six months ended June 30, 2020, Honeywell funded $35 million to the NARCO Trust for the payment of Annual Contribution Claims.
28
Honeywell International Inc.
Notes to Consolidated Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)
As of June 30, 2020, the Company's total NARCO asbestos liability of $826 million reflects Pre-bankruptcy NARCO Liability of $147 million and NARCO Trust Liability of $679 million (the $743 million accrual for the 2006 NARCO Trust Liability Estimate was reduced by $64 million of payments by Honeywell to the NARCO Trust for Annual Contribution Claims since HWI cash dividend funding was fully exhausted in the fourth quarter of 2019 and there have been no further dividends from HWI). Through June 30, 2020, Pre-bankruptcy NARCO Liability has been reduced by approximately $2 billion since first established in 2002, largely related to settlement payments. The remaining Pre-bankruptcy NARCO Liability principally represents estimated amounts owed pursuant to settlement agreements reached during the pendency of the NARCO bankruptcy proceedings that provide for the right to submit claims to the NARCO Trust subject to qualification under the terms of the settlement agreements and Trust Distribution Procedures. The other NARCO bankruptcy related obligations were paid in 2013 and no further liability is recorded.
Honeywell continues to evaluate the appropriateness of the 2006 NARCO Trust Liability Estimate. Despite becoming effective in 2013, the NARCO Trust has experienced delays in becoming fully operational. Violations of the Trust Distribution Procedures and the resulting disputes and challenges, a standstill pending dispute resolution, and limited claims payments, have all contributed to the lack of sufficient normalized data based on actual claims processing experience in the Trust since it became operational. As a result, we have not been able to further update the NARCO Trust Liability aside from deducting Honeywell payments to the NARCO Trust for Annual Contribution Claims. The 2006 NARCO Trust Liability Estimate continues to be appropriate because of the unresolved pending claims in the Trust, some portion of which will result in payouts in the future, and because new claims continue to be filed with the NARCO Trust. When sufficiently reliable claims data exists, we will update our estimate of the NARCO Trust Liability and it is possible that a material change may need to be recognized.
Our insurance receivable of $274 million as of June 30, 2020, corresponding to the estimated liability for asserted and unasserted NARCO asbestos claims, reflects coverage which reimburses Honeywell for portions of NARCO-related indemnity and defense costs and is provided by a large number of insurance policies written by dozens of insurance companies in both the domestic insurance market and the London excess market. We conduct analyses to estimate the probable amount of insurance that is recoverable for asbestos claims. While the substantial majority of our insurance carriers are solvent, some of our individual carriers are insolvent, which has been considered in our analysis of probable recoveries. We made judgments concerning insurance coverage that we believe are reasonable and consistent with our historical dealings and our knowledge of any pertinent solvency issues surrounding insurers.
Bendix Products—Bendix manufactured automotive brake linings that contained chrysotile asbestos in an encapsulated form. Claimants consist largely of individuals who allege exposure to asbestos from brakes from either performing or being in the vicinity of individuals who performed brake replacements. The following tables present information regarding Bendix-related asbestos claims activity:
| Six Months Ended June 30, | Years Ended December 31, | ||||||||||||||||
| Claims Activity | 2020 | 2019 | 2018 | ||||||||||||||
| Claims unresolved at the beginning of period | |||||||||||||||||
| Claims filed | |||||||||||||||||
| Claims resolved | ( | ( | ( | ||||||||||||||
| Claims unresolved at the end of period | |||||||||||||||||
| Disease Distribution of Unresolved Claims | June 30, | December 31, | |||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Mesothelioma and other cancer claims | |||||||||||||||||
| Nonmalignant claims | |||||||||||||||||
| Total claims | |||||||||||||||||
29
Honeywell International Inc.
Notes to Consolidated Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)
Honeywell has experienced average resolution values per claim excluding legal costs as follows:
| Years Ended December 31, | |||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||||||||||||
| (in whole dollars) | |||||||||||||||||||||||||||||
| Malignant claims | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Nonmalignant claims | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
It is not possible to predict whether resolution values for Bendix-related asbestos claims will increase, decrease or stabilize in the future.
The Company's Consolidated Financial Statements reflect an estimated liability for resolution of asserted (claims filed as of the financial statement date) and unasserted Bendix-related asbestos claims and excludes the Company’s legal fees to defend such asbestos claims which will continue to be expensed by the Company as they are incurred. We have valued Bendix asserted and unasserted claims using average resolution values for the previous five years. We update the resolution values used to estimate the cost of Bendix asserted and unasserted claims during the fourth quarter each year.
Honeywell reflects the inclusion of all years of epidemiological disease projection through 2059 when estimating the liability for unasserted Bendix-related asbestos claims. Such liability for unasserted Bendix-related asbestos claims is based on historic and anticipated claims filing experience and dismissal rates, disease classifications, and resolution values in the tort system for the previous five years.
Our insurance receivable corresponding to the liability for settlement of asserted and unasserted Bendix asbestos claims reflects coverage which is provided by a large number of insurance policies written by dozens of insurance companies in both the domestic insurance market and the London excess market. Based on our ongoing analysis of the probable insurance recovery, insurance receivables are recorded in the financial statements simultaneous with the recording of the estimated liability for the underlying asbestos claims. This determination is based on our analysis of the underlying insurance policies, our historical experience with our insurers, our ongoing review of the solvency of our insurers, judicial determinations relevant to our insurance programs, and our consideration of the impacts of any settlements reached with our insurers.
In conjunction with the Garrett Motion, Inc. ("Garrett") spin-off, the Company entered into an indemnification and reimbursement agreement with a Garrett subsidiary, pursuant to which Garrett’s subsidiary will have an obligation to make cash payments to Honeywell in amounts equal to (i) 90% of Honeywell’s asbestos-related liability payments primarily related to the Bendix business in the United States, as well as certain environmental-related liability payments and accounts payable and non-United States asbestos-related liability payments, including the legal costs of defending and resolving such liabilities, less (ii) 90% of Honeywell’s net insurance receipts and, as may be applicable, certain other recoveries associated with such liabilities. The amount payable to Honeywell in respect of such liabilities arising in any given year is subject to a cap of approximately Euro 150 million (equivalent to $175 million at the time the indemnification and reimbursement agreement was entered into). The obligation will continue until the earlier of December 31, 2048, or December 31 of the third consecutive year during which the annual obligation is less than the Euro equivalent, at the fixed exchange rate at the time the indemnification and reimbursement agreement was entered into, of $25 million.
As the Company incurs costs for matters covered by the indemnification and reimbursement agreement, a corresponding receivable from Garrett is recorded for 90 percent of those costs as determined by the terms of the agreement.
In Garrett’s Quarterly Report on Form 10-Q, filed with the SEC on May 11, 2020, Garrett disclosed certain conditions and events which it indicated raise substantial doubt as to Garrett’s ability to continue as a going concern.
30
Honeywell International Inc.
Notes to Consolidated Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)
On June 12, 2020, the Company and Garrett entered into an amendment of the indemnification and reimbursement agreement in connection with Garrett’s amendment of its 2018 credit agreement. These amendments provide Garrett with temporary financial covenant relief with respect to the total leverage and interest coverage ratios, for a period that could extend to as late as June 30, 2022. Garrett’s payments to the Company under the indemnification and reimbursement agreement are deferred to the extent Garrett is (or to the extent such payments would cause Garrett to be) out of compliance with the original financial covenants and resume to the extent Garrett is in compliance with such original financial covenants. Any deferred amounts will be paid to the extent Garrett is in compliance with such original financial covenants and has available capacity to make such payments pursuant to the terms of the indemnification and reimbursement agreement and its current credit agreement. The Company and Garrett also concurrently entered into the litigation status agreement discussed below.
The receivable amount recorded in connection with the indemnification and reimbursement agreement in the six months ended June 30, 2020 was $26 million. Amounts associated with the indemnification and reimbursement agreement are collected from Garrett quarterly, and as a consequence of the extension referenced below, such amounts were $36 million in the six months ended June 30, 2020.
As of June 30, 2020, Other Current Assets and Other Assets includes $2 million and $1,068 million representing the short-term and long-term portion of the receivable amount due from Garrett under the indemnification and reimbursement agreement.
We continue to closely monitor changes in Garrett’s financial condition using available information, including the amendment to its 2018 credit agreement, to estimate future cash flows and assess collectability of outstanding receivables under the indemnification and reimbursement agreement. We believe the receivable due from Garrett as of June 30, 2020 is collectable.
On December 2, 2019, Garrett Motion Inc. and Garrett ASASCO Inc. filed a Summons with Notice and commenced a lawsuit in the Commercial Division of the Supreme Court of the State of New York, County of New York, seeking to invalidate the indemnification and reimbursement agreement between Garrett and Honeywell. Garrett seeks damages and a declaratory judgment based on various claims set forth in the Summons with Notice. On January 15, 2020, Garrett filed its complaint in the action, which asserted the same claims, and on March 5, 2020, we filed a Motion to Dismiss. On June 12, 2020, Honeywell and Garrett entered into a litigation status agreement pursuant to which (i) the parties agreed to make good faith efforts to limit near-term litigation spend on this matter, and (ii) the Company agreed to extend both the $2 million payment owed by Garrett to the Company on May 1, 2020 under the indemnification and reimbursement agreement and the $18 million payment owed by Garrett to the Company on April 1, 2020 under the tax matters agreement that the parties executed in connection with the spin-off until December 31, 2020 (which amounts, as previously disclosed, had been deferred to May 31, 2020). On July 17, 2020, the Company received a notice from Garrett asserting that Honeywell has caused material breaches of the tax matters agreement and that the tax matters agreement is unenforceable. We strongly believe that Garrett's allegations have no merit, nor are they material to Honeywell. We believe we have fully complied with our obligations under the indemnification and reimbursement agreement and the tax matters agreement and that both agreements are enforceable.
On October 31, 2018, David Kanefsky, a Honeywell shareholder, filed a putative class action complaint in the U.S. District Court for the District of New Jersey alleging violations of the Securities Exchange Act of 1934 and Rule 10b-5 related to the prior accounting for Bendix asbestos claims. An Amended Complaint was filed on December 30, 2019, and on February 7, 2020, we filed a Motion to Dismiss. On May 18, 2020, the court denied our Motion to Dismiss. We believe the claims have no merit.
31
Honeywell International Inc.
Notes to Consolidated Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)
Other Matters
The Company is subject to a number of other lawsuits, investigations and disputes (some of which involve substantial amounts claimed) arising out of the conduct of our business, including matters relating to commercial transactions, government contracts, product liability, prior acquisitions and divestitures, employee benefit plans, intellectual property, and environmental, health and safety matters. We recognize a liability for any contingency that is probable of occurrence and reasonably estimable. We continually assess the likelihood of adverse judgments of outcomes in these matters, as well as potential ranges of possible losses (taking into consideration any insurance recoveries), based on a careful analysis of each matter with the assistance of outside legal counsel and, if applicable, other experts. Included in these other matters are the following:
Honeywell v. United Auto Workers (UAW) et. al—In September 2011, the UAW and certain Honeywell retirees (Plaintiffs) filed a suit in the Eastern District of Michigan (the District Court) alleging that a series of Master Collective Bargaining Agreements (MCBAs) between Honeywell and the UAW provided the retirees with rights to lifetime, vested healthcare benefits that could never be changed or reduced. Plaintiffs alleged that Honeywell had violated those vested rights by implementing express limitations (CAPS) on the amount Honeywell contributed toward healthcare coverage for the retirees. Honeywell subsequently answered the UAW’s complaint and asserted counterclaims, including for breach of implied warranty.
Between 2014 and 2015, Honeywell began enforcing the CAPS against former employees. In response, the UAW and certain of the Plaintiffs filed a motion seeking a ruling that the MCBAs do not limit Honeywell’s obligation to contribute to healthcare coverage for those retirees.
On March 29, 2018, the District Court issued its opinion resolving all pending summary judgment motions, except for Honeywell’s counterclaim for breach of implied warranty, which has since been dismissed without prejudice.
In the opinion, the District Court held that the MCBAs do not promise retirees vested, lifetime benefits that survive expiration of the MCBAs. Based on this ruling, Honeywell terminated the retirees healthcare coverage benefits altogether as of July 31, 2018. In response, the UAW filed a motion to enjoin Honeywell from completely terminating coverage as of July 31, 2018, arguing that the CAPS themselves are vested and that Honeywell must continue to provide retiree medical benefits at the capped level. On July 28, 2018, the District Court denied the UAW’s motion and entered a final judgment consistent with its March 2018 ruling. The UAW appealed this decision to the Sixth Circuit Court of Appeals.
In the March 2018 opinion, the District Court also held that Honeywell is obligated under the MCBAs to pay the “full premium” for retiree healthcare rather than the capped amount. Based on this ruling, Honeywell would be required to pay monetary damages to retirees for any past years in which Honeywell paid less than the “full premium” of their healthcare coverage. Such damages would be limited, depending on the retiree group, to a two to three-year period ending when the 2017 MCBA expired, and Honeywell would have no ongoing obligation to continue funding healthcare coverage for subsequent periods. Honeywell appealed the District Court’s ruling on this “full premium” damages issue.
On April 3, 2020, the Sixth Circuit Court of Appeals issued an opinion ruling for Honeywell in all respects. The Court of Appeals affirmed the District Court's ruling that the MCBAs do not promise retirees vested, lifetime benefits that survive expiration of the MCBAs. In addition, the Court of Appeals reversed the District Court's ruling that Honeywell was obligated under the MCBAs to pay the "full premium" for retiree healthcare, rather than the capped amount. As a result of these rulings, Honeywell is not required to pay any monetary damages to the Plaintiffs.
Plaintiffs sought rehearing en banc from the Sixth Circuit Court of Appeals, which petition was denied. Plaintiffs last avenue of appeal is a petition for certiorari with the Supreme Court of the United States, but it is unknown at this time whether they will do so. If plaintiffs choose to make that filing, Honeywell does not believe they will be successful.
32
Honeywell International Inc.
Notes to Consolidated Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)
Petrobras and Unaoil—We are cooperating with certain investigations by the U.S. Department of Justice (DOJ), the SEC and Brazilian authorities relating to our use of third parties who previously worked for our UOP business in Brazil in relation to Petróleo Brasileiro S.A. (Petrobras). The investigations are focused on compliance with the U.S. Foreign Corrupt Practices Act and similar Brazilian laws, and involve, among other things, document production and interviews with former and current management and employees. The DOJ and the SEC are also examining a matter involving a foreign subsidiary’s prior engagement of Unaoil S.A.M. in Algeria. We are cooperating with the authorities in each of the above matters. While we cannot predict the outcome of these matters, based on the facts currently known to us, we do not anticipate that these matters will have a material adverse effect on our financial condition, results of operations, or cash flows.
In re Resideo Technologies, Inc. Securities Litigation—On January 7, 2020, The Gabelli Asset Fund and certain related parties filed a putative class action complaint against Resideo and Honeywell in the U.S. District Court for the District of Minnesota alleging violations of the Securities Exchange Act of 1934 and Rule 10b-5 related to Resideo's spinoff from Honeywell in October 2018. On January 27, 2020, this putative class action was consolidated with certain previously-filed actions asserting claims relating to substantially the same matters into a single class action under the title In re Resideo Technologies, Inc. Securities Litigation. We believe the allegations against Honeywell regarding the Resideo spinoff have no merit. On April 10, 2020, the plaintiffs filed an Amended Consolidated Class Action Complaint and did not name Honeywell. Accordingly, Honeywell is no longer party to this matter. However, it is possible that Honeywell could be named as a defendant in the future.
Given the uncertainty inherent in litigation and investigations (including the specific matters referenced above), we do not believe it is possible to develop estimates of reasonably possible loss in excess of current accruals for these matters (other than as specifically set forth above). Considering our past experience and existing accruals, we do not expect the outcome of these matters, either individually or in the aggregate, to have a material adverse effect on our consolidated financial position. Because most contingencies are resolved over long periods of time, potential liabilities are subject to change due to new developments, changes in settlement strategy or the impact of evidentiary requirements, which could cause us to pay damage awards or settlements (or become subject to equitable remedies) that could have a material adverse effect on our results of operations or operating cash flows in the periods recognized or paid.
33
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF | ||||
| FINANCIAL CONDITION AND RESULTS OF OPERATIONS | |||||
| (Dollars in millions, except per share amounts) | |||||
The following Management Discussion and Analysis is intended to help the reader understand the results of operations and financial condition of Honeywell International Inc. and its consolidated subsidiaries (“Honeywell” or “the Company”) for the three months (quarter) and six months ended June 30, 2020. The financial information as of June 30, 2020 should be read in conjunction with the Consolidated Financial Statements for the year ended December 31, 2019 contained in our 2019 Annual Report on Form 10-K.
COVID-19 UPDATE
In December 2019, a novel strain of coronavirus (“COVID-19”) was identified in Asia. Over the next several months, COVID-19 quickly spread across the world. In March 2020, the WHO declared COVID-19 a worldwide pandemic. As of June 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. In January 2020, we implemented policies in select countries within Asia to restrict travel and require employees to work from home for all roles that allow for remote work. In March 2020, we expanded this work from home policy to include our employees worldwide. We actively monitored the changing government rules and regulations for each of our locations worldwide.
We developed a “return to workplace” program. We prepared procedures for the eventual return of our employees to office sites and trained our local site leaders. We initiated a phased program to return our employees to the workplace. As of June 30, 2020, outside of India, most of our employees in Asia have returned to the workplace. We also returned workers to select office sites within Europe. In most countries in the world, including the U.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 ended June 30, 2020, compared to the three months ended March 31, 2020.
•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 ended June 30, 2020, compared to the three months ended March 31, 2020.
•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 ended June 30, 2020, compared to the three months ended March 31, ,2020.
•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 ended June 30, 2020, compared to the three months ended March 31, 2020.
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As a result of the slowdown in demand for our products, we implemented several cost reduction programs across each of our businesses. We canceled our 2020 merit increases and reduced executive and Board 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. In March 2020, we entered into a Delayed Draw Term Loan Agreement, which provided $6 billion of available liquidity. In May 2020, we completed a public Senior Notes offering, which provided $3 billion of available liquidity and we permanently reduced the available proceeds under the Delayed Draw Term Loan Agreement by $3 billion. In June 2020, we fully drew on the remaining $3 billion of proceeds under the Delayed Draw Term Loan Agreement. As of June 30, 2020, we held $15.1 billion of available cash and short-term investments.
We continue to monitor and respond to the changing conditions created by the pandemic.
Employee Health, Safety, and Economic Wellness
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 and Centers 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 our U.S. company medical plans, we are also covering treatment costs. In Mexico, we introduced a medical benefit for employees at lower compensation levels to ensure access to private medical treatment. In the U.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 hours who 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 about 4 million meals and a month’s supply of hygiene kits to more than 12,500 families in India suffering hardships due to the crisis.
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.
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We announced our new capacity in the U.S. to make N95 masks, with production lines added in Rhode Island and Arizona that will collectively produce 20 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 the U.K that is expected to produce 4.5 million masks each month. Separately, we are collaborating with Mubadala Investment Company's subsidiary, Strata Manufacturing, in the UAE 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, an ultraviolet cleaning system for airlines, 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 personal protective equipment that was in short supply around the world. As of June 30, 2020, more than 95% of our manufacturing sites continued to operate at near capacity 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 and CDC guidelines. We take appropriate actions including disinfecting and quarantine procedures when a suspected COVID-19 case is identified.
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 Item Part II, 1A. Risk Factors for discussion of risks associated to the COVID-19 pandemic.
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| A. | Results of Operations – three and six months ended June 30, 2020 compared with the three and six months ended June 30, 2019 | ||||
| Net Sales | |||||||||||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Net sales | $ | 7,477 | $ | 9,243 | $ | 15,940 | $ | 18,127 | |||||||||||||||
| % change compared with prior period | (19) | % | (12) | % | |||||||||||||||||||
The change in net sales compared to the prior year period is attributable to the following:
| Three Months | Year to Date | ||||||||||
| Volume | (20) | % | (12) | % | |||||||
| Price | 2 | % | 1 | % | |||||||
| Foreign Currency Translation | (1) | % | (1) | % | |||||||
| (19) | % | (12) | % | ||||||||
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 six 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 quarter and six months is driven by the strengthening 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.
| Cost of Products and Services Sold | |||||||||||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Cost of products and services sold | $ | 5,276 | $ | 6,094 | $ | 10,810 | $ | 11,973 | |||||||||||||||
| % change compared with prior period | (13) | % | (10) | % | |||||||||||||||||||
| Gross margin percentage | 29.4 | % | 34.1 | % | 32.2 | % | 33.9 | % | |||||||||||||||
Cost of products and services sold decreased in the quarter primarily due to lower direct and indirect material costs of approximately $620 million and $80 million and lower labor costs of approximately $230 million (both driven by lower sales volumes and other cost actions to improve productivity), partially offset by higher repositioning and other charges of approximately $100 million.
Cost of products and services sold decreased in the six months primarily due to lower direct and indirect material costs of approximately $950 million and $120 million and lower labor costs of approximately $160 million (both driven by lower sales volumes and other cost actions to improve productivity), partially offset by higher repositioning and other charges of approximately $70 million.
Gross margin percentage decreased in the quarter and six months primarily due to lower sales volumes across each of our businesses.
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Selling, General and Administrative Expenses
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Selling, general and administrative expense | $ | 1,183 | $ | 1,387 | $ | 2,421 | $ | 2,750 | |||||||||||||||
| % of sales | 15.8 | % | 15.0 | % | 15.2 | % | 15.2 | % | |||||||||||||||
Selling, general and administrative expenses decreased $204 million in the quarter primarily due to productivity and lower sales volume, partially offset by higher repositioning and other charges.
Selling, general and administrative expenses decreased $329 million in the six months primarily due to productivity and lower sales volume, partially offset by higher repositioning and other charges.
| Other (Income) Expense | |||||||||||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Other (income) expense | $ | (291) | $ | (305) | $ | (608) | $ | (590) | |||||||||||||||
Other income decreased for the quarter primarily due lower interest income and lower foreign exchange income, partially offset by higher pension income.
Other income increased for the six months primarily due to higher pension income, partially offset by lower interest income and lower foreign exchange income.
Tax Expense (Benefit)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Tax expense (benefit) | $ | 120 | $ | 426 | $ | 449 | $ | 832 | |||||||||||||||
| Effective tax rate | 9.8 | % | 21.5 | % | 14.2 | % | 21.8 | % | |||||||||||||||
The effective tax rate decreased for the quarter ended June 30, 2020 compared to the quarter ended June 30, 2019 primarily from the favorable resolution of a foreign tax matter related to the spin-off transactions. The effective tax rate decreased for the six months ended June 30, 2020 compared to the six months ended June 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.
The effective tax rate for the three months ended June 30, 2020 was lower than the U.S. federal statutory rate of 21% primarily from foreign earnings taxed at lower foreign tax rates and the favorable resolution of a foreign tax matter related to the spin-off transactions, partially offset by incremental tax reserves and state taxes. The effective tax rate for the six months ended June 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 partially offset by incremental tax reserves and state taxes.
The effective tax rate for the quarter and six months ended June 30, 2019 was higher than the U.S. federal statutory rate of 21% primarily from incremental tax reserves and state taxes, partially offset by foreign earnings taxed at lower foreign tax rates.
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Net Income Attributable to Honeywell
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Net income attributable to Honeywell | $ | 1,081 | $ | 1,541 | $ | 2,662 | $ | 2,957 | |||||||||||||||
| Earnings per share of common stock – assuming dilution | $ | 1.53 | $ | 2.10 | $ | 3.74 | $ | 4.02 | |||||||||||||||
Earnings per share of common stock – assuming dilution decreased in the quarter and six months primarily driven by lower segment profit and higher repositioning and other charges, partially offset by lower income tax expense and higher pension income.
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Review of Business Segments
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | % Change | 2020 | 2019 | % Change | ||||||||||||||||||||||||||||||
| Aerospace sales | |||||||||||||||||||||||||||||||||||
| Commercial Aviation Original Equipment | $ | 449 | $ | 734 | (39) | % | $ | 1,121 | $ | 1,493 | (25) | % | |||||||||||||||||||||||
| Commercial Aviation Aftermarket | 653 | 1,421 | (54) | % | 2,033 | 2,782 | (27) | % | |||||||||||||||||||||||||||
| Defense and Space | 1,441 | 1,353 | 7 | % | 2,750 | 2,574 | 7 | % | |||||||||||||||||||||||||||
| Total Aerospace sales | 2,543 | 3,508 | 5,904 | 6,849 | |||||||||||||||||||||||||||||||
| Honeywell Building Technologies sales | |||||||||||||||||||||||||||||||||||
| Buildings | 1,177 | 1,450 | (19) | % | 2,458 | 2,839 | (13) | % | |||||||||||||||||||||||||||
| Total Honeywell Building Technologies sales | 1,177 | 1,450 | 2,458 | 2,839 | |||||||||||||||||||||||||||||||
| Performance Materials and Technologies sales | |||||||||||||||||||||||||||||||||||
| UOP | 517 | 703 | (26) | % | 1,111 | 1,313 | (15) | % | |||||||||||||||||||||||||||
| Process Solutions | 1,093 | 1,289 | (15) | % | 2,244 | 2,535 | (11) | % | |||||||||||||||||||||||||||
| Advanced Materials | 608 | 743 | (18) | % | 1,260 | 1,459 | (14) | % | |||||||||||||||||||||||||||
| Total Performance Materials and Technologies sales | 2,218 | 2,735 | 4,615 | 5,307 | |||||||||||||||||||||||||||||||
| Safety and Productivity Solutions sales | |||||||||||||||||||||||||||||||||||
| Safety | 511 | 557 | (8) | % | 1,013 | 1,095 | (7) | % | |||||||||||||||||||||||||||
| Productivity Solutions | 1,028 | 993 | 4 | % | 1,950 | 2,037 | (4) | % | |||||||||||||||||||||||||||
| Total Safety and Productivity Solutions sales | 1,539 | 1,550 | 2,963 | 3,132 | |||||||||||||||||||||||||||||||
| Net sales | $ | 7,477 | $ | 9,243 | $ | 15,940 | $ | 18,127 | |||||||||||||||||||||||||||
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Aerospace
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | % Change | 2020 | 2019 | % Change | ||||||||||||||||||||||||||||||
| Net sales | $ | 2,543 | $ | 3,508 | (28) | % | $ | 5,904 | $ | 6,849 | (14) | % | |||||||||||||||||||||||
| Cost of products and services sold | 1,795 | 2,337 | 3,994 | 4,569 | |||||||||||||||||||||||||||||||
| Selling, general and administrative and other expenses | 220 | 264 | 445 | 535 | |||||||||||||||||||||||||||||||
| Segment profit | $ | 528 | $ | 907 | (42) | % | $ | 1,465 | $ | 1,745 | (16) | % | |||||||||||||||||||||||
| 2020 vs. 2019 | |||||||||||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| Factors Contributing to Year-Over-Year Change | Sales | Segment Profit | Sales | Segment Profit | |||||||||||||||||||
| Organic | (27) | % | (42) | % | (13) | % | (16) | % | |||||||||||||||
| Foreign currency translation | — | % | — | % | — | % | — | % | |||||||||||||||
| Acquisitions, divestitures and other, net | (1) | % | — | % | (1) | % | — | % | |||||||||||||||
| Total % change | (28) | % | (42) | % | (14) | % | (16) | % | |||||||||||||||
Aerospace sales decreased for the quarter and six months ended June 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 services.
•Commercial Aviation Original Equipment sales decreased 39% (decreased 39% organic) in the quarter and decreased 25% (decreased 25% organic) in the six months primarily due to lower demand from airport transport and regional and business aviation OEMs.
•Commercial Aviation Aftermarket sales decreased 54% (decreased 54% organic) in the quarter and decreased 27% (decreased 27% organic) in the six months primarily due to lower demand in air transport and regional and business aviation.
•Defense and Space sales increased 7% (increased 7% organic) in the quarter and six months driven by growth in U.S. and international defense.
Aerospace segment profit decreased in the quarter and six months primarily driven by lower sales volume and lower sales of higher margin products. Cost of products and services sold decreased in the quarter and six months due to lower volumes.
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Honeywell Building Technologies
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | % Change | 2020 | 2019 | % Change | ||||||||||||||||||||||||||||||
| Net sales | $ | 1,177 | $ | 1,450 | (19) | % | $ | 2,458 | $ | 2,839 | (13) | % | |||||||||||||||||||||||
| Cost of products and services sold | 699 | 876 | 1,453 | 1,722 | |||||||||||||||||||||||||||||||
| Selling, general and administrative and other expenses | 228 | 274 | 493 | 546 | |||||||||||||||||||||||||||||||
| Segment profit | $ | 250 | $ | 300 | (17) | % | $ | 512 | $ | 571 | (10) | % | |||||||||||||||||||||||
| 2020 vs. 2019 | |||||||||||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| Factors Contributing to Year-Over-Year Change | Sales | Segment Profit | Sales | Segment Profit | |||||||||||||||||||
| Organic | (17) | % | (15) | % | (12) | % | (8) | % | |||||||||||||||
| Foreign currency translation | (2) | % | (2) | % | (1) | % | (2) | % | |||||||||||||||
| Acquisitions, divestitures and other, net | — | % | — | % | — | % | — | % | |||||||||||||||
| Total % change | (19) | % | (17) | % | (13) | % | (10) | % | |||||||||||||||
Honeywell Building Technologies sales decreased in the quarter and six months ended June 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 19% (decreased 17% organic) in the quarter and decreased 13% (decreased 12% organic) in the six months primarily due to lower sales volumes in both Products and Building Solutions and the unfavorable impact of foreign currency translation, partially offset by favorable pricing.
Honeywell Building Technologies segment profit decreased in the quarter primarily due to lower sales volumes, partially offset by other productivity actions and favorable pricing. Segment profit decreased in the six months primarily due to lower sales volumes, inflation and the unfavorable impact of foreign currency translation, partially offset by other productivity actions and favorable pricing. Cost of products and services sold decreased in the quarter and six months due to lower sales volumes and the favorable impact of foreign currency translation.
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Performance Materials and Technologies
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | % Change | 2020 | 2019 | % Change | ||||||||||||||||||||||||||||||
| Net sales | $ | 2,218 | $ | 2,735 | (19) | % | $ | 4,615 | $ | 5,307 | (13) | % | |||||||||||||||||||||||
| Cost of products and services sold | 1,490 | 1,731 | 3,049 | 3,379 | |||||||||||||||||||||||||||||||
| Selling, general and administrative and other expenses | 309 | 360 | 635 | 720 | |||||||||||||||||||||||||||||||
| Segment profit | $ | 419 | $ | 644 | (35) | % | $ | 931 | $ | 1,208 | (23) | % | |||||||||||||||||||||||
| 2020 vs. 2019 | |||||||||||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| Factors Contributing to Year-Over-Year Change | Sales | Segment Profit | Sales | Segment Profit | |||||||||||||||||||
| Organic | (17) | % | (34) | % | (12) | % | (22) | % | |||||||||||||||
| Foreign currency translation | (2) | % | (1) | % | (1) | % | (1) | % | |||||||||||||||
| Acquisitions, divestitures, and other, net | — | % | — | % | — | % | — | % | |||||||||||||||
| Total % change | (19) | % | (35) | % | (13) | % | (23) | % | |||||||||||||||
Performance Materials and Technologies sales decreased for the quarter and six months ended June 30, 2020 primarily 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 26% (decreased 25% organic) in the quarter primarily due to deferrals in catalyst shipments, decreases in licensing driven by project delays, and the unfavorable impact of foreign currency translation. UOP sales decreased 15% (decreased 14% organic) in the six months driven primarily by decreases in catalyst volumes and licensing.
•Process Solutions sales decreased 15% (decreased 13% organic) in the quarter primarily driven by decreases in products businesses, migration services and automation projects volumes and the unfavorable impact of foreign currency translation. Process Solutions sales decreased 11% (decreased 9% organic) in the six 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 18% (decreased 18% organic) in the quarter and decreased 14% (decreased 13% organic) in the six 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 six months due to operating leverage on lower sales volumes, partially offset by other productivity actions. Cost of products and services sold decreased in the quarter and six months primarily due to lower sales volumes.
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Safety and Productivity Solutions
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | % Change | 2020 | 2019 | % Change | ||||||||||||||||||||||||||||||
| Net sales | $ | 1,539 | $ | 1,550 | (1) | % | $ | 2,963 | $ | 3,132 | (5) | % | |||||||||||||||||||||||
| Cost of products and services sold | 1,079 | 1,065 | 2,051 | 2,144 | |||||||||||||||||||||||||||||||
| Selling, general and administrative and other expenses | 247 | 294 | 521 | 585 | |||||||||||||||||||||||||||||||
| Segment profit | $ | 213 | $ | 191 | 12 | % | $ | 391 | $ | 403 | (3) | % | |||||||||||||||||||||||
| 2020 vs. 2019 | |||||||||||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| Factors Contributing to Year-Over-Year Change | Sales | Segment Profit | Sales | Segment Profit | |||||||||||||||||||
| Organic | 1 | % | 16 | % | (4) | % | — | % | |||||||||||||||
| Foreign currency translation | (2) | % | (3) | % | (1) | % | (3) | % | |||||||||||||||
| Acquisitions, divestitures, and other, net | — | % | (1) | % | — | % | — | % | |||||||||||||||
| Total % change | (1) | % | 12 | % | (5) | % | (3) | % | |||||||||||||||
Safety and Productivity Solutions sales decreased in the quarter ended June 30, 2020 due to the unfavorable impact of foreign currency translation, partially offset by organic growth. The global pandemic created significant demand for our respiratory personal protective equipment and additional demand for on-line shopping services, providing continued support for our warehouse automation services. Sales decreased in the six months ended June 30, 2020 due to lower organic sales and the unfavorable impact of foreign currency translation.
•Sales in Safety decreased 8% (decreased 7% organic) in the quarter and decreased 7% (decreased 6% organic) in the six months, primarily due to lower organic sales and the unfavorable impact of foreign currency translation. Safety experienced a significant increase in order volume for respiratory personal protective equipment in the quarter due to the global pandemic, partially offset by lower demand for gas sensing and detection equipment.
•Sales in Productivity Solutions increased 4% (increased 5% organic) in the quarter due to organic sales growth in our Warehouse and Workflow Solutions business, partially offset by lower demand in Productivity Products and the unfavorable impact of foreign currency translation. Sales decreased 4% (decreased 3% organic) in the six months primarily due to lower sales in Productivity Products and Sensing and IoT and the unfavorable impact of foreign currency translation.
Safety and Productivity Solutions segment profit increased in the quarter primarily due to improved productivity and favorable pricing, partially offset by higher sales of lower margin products and the unfavorable impact of foreign currency translation. Segment profit decreased in the six months primarily due to lower organic sales and the unfavorable impact of foreign currency translation, partially offset by productivity, net of inflation, and favorable pricing. Cost of products and services sold increased in the quarter due to higher organic sales volume, partially offset by the favorable impact of foreign currency translation. Cost of products and services sold decreased in the six months primarily due to lower organic sales volume and the favorable impact of foreign currency translation.
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Repositioning and Other Charges
Cash spending related to our repositioning actions was $172 million in the six months ended June 30, 2020 and was funded through operating cash flows.
| 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 of U.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:
| Six Months Ended June 30, | |||||||||||
| 2020 | 2019 | ||||||||||
| Cash provided by (used for): | |||||||||||
| Operating activities | $ | 2,419 | $ | 2,812 | |||||||
| Investing activities | (358) | (343) | |||||||||
| Financing activities | 2,741 | (3,563) | |||||||||
| Effect of exchange rate changes on cash | (91) | 32 | |||||||||
| Net increase (decrease) in cash and cash equivalents | $ | 4,711 | $ | (1,062) | |||||||
Cash provided by operating activities decreased by $393 million primarily due to lower net income of $295 million and an unfavorable impact from changes in other assets and liabilities of $362 million, partially offset by a favorable impact from working capital of $264 million.
Cash used for investing activities increased by $15 million primarily due to a $54 million increase in capital expenditures, partially offset by a net decrease in investments of $29 million and an increase in cash received from the settlement of derivative contracts of $13 million.
Cash provided by financing activities increased by $6,304 million primarily due to an increase in proceeds from the issuance of long-term debt of $7,072 million and decrease in share repurchases of $665 million, partially offset by an increase in payments of long-term debt of $1,134 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.
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 June 30, 2020, we held $15.1 billion of cash and cash equivalents and short-term investments.
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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 June 30, 2020, we had $3.5 billion of commercial paper notes outstanding.
We have also entered into the following loan and credit agreements:
•A Delayed Draw Term Loan Agreement (the “Term Loan Agreement”) with a syndicate of banks, dated March 26, 2020. As of June 30, 2020, there were $3 billion of borrowings outstanding under the Term Loan Agreement, and there were no undrawn commitments remaining under the Term Loan Agreement. Commitments under the Term Loan Agreement can be increased pursuant to the terms of the Term Loan Agreement by an aggregate amount not to exceed $2.0 billion.
•A $1.5 billion 364-Day Credit Agreement (the "364-Day Credit Agreement") with a syndicate of banks, dated April 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 of April 26, 2019, which was terminated on April 10, 2020. As of June 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, dated April 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 of June 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 six months ended June 30, 2020, the Company repurchased $1,985 million of outstanding shares. In April 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 of June 30, 2020, $5.0 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.
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 Item Part II, 1A Risk Factors for discussion of risks related to the COVID-19 pandemic.
The Company increased the quarterly dividend rate by 10% to $.90 per share of common stock effective with the fourth quarter 2019 dividend.
See Note 11 Long-term Debt and Credit Agreements of Notes to Consolidated Financial Statements for additional discussion of items impacting our liquidity.
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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 of June 30, 2020 should be read in conjunction with the Consolidated Financial Statements for the year ended December 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.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risks | ||||
For a discussion of the Company’s quantitative and qualitative disclosures about market risks, see Item 7A. Quantitative and Qualitative Disclosures About Market Risks, in our 2019 Annual Report on Form 10-K. As of June 30, 2020, there has been no material change in this information.
| Item 4. | Controls and Procedures | ||||
Honeywell management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that such disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q to ensure information required to be disclosed in the reports that Honeywell files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that it is accumulated and communicated to our management, including our Chief Executive Officer, our Chief Financial Officer, and our Controller, as appropriate, to allow timely decisions regarding required disclosure. There have been no changes that materially affected, or are reasonably likely to materially affect, Honeywell’s internal control over financial reporting that have occurred during the period covered by this Quarterly Report on Form 10-Q.
We have not experienced any material impact to our internal control over financial reporting during the COVID-19 pandemic. Most of our employees worked remotely during the period in which we prepared these financial statements due to the impact of COVID-19. We enhanced our oversight and monitoring during the close and reporting process, including investments in expanded VPN capabilities and higher scrutiny and monitoring of cybersecurity threats. Other than enhancing our oversight and monitoring processes, we did not alter or compromise our disclosure controls and procedures. We are continually monitoring and assessing the need to modify or enhance our disclosure controls to ensure disclosure controls and procedures continue to be effective.
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Part II. Other Information
| Item 1. | Legal Proceedings | ||||
| General Legal Matters | |||||
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 a discussion of environmental, asbestos and other litigation matters.
| Environmental Matters Involving Potential Monetary Sanctions in Excess of $100,000 | |||||
None.
| Item 1A. | Risk Factors | ||||
Other than as noted below, there have been no material changes to the disclosure presented in our 2019 Annual Report on Form 10-K under Item 1A. Risk Factors. For a further discussion of our Risk Factors, refer to the “Risk Factors” discussion contained in our 2019 Annual Report on Form 10-K.
The global COVID-19 coronavirus pandemic and related impacts have adversely affected and may continue to adversely affect our business, financial condition, results of operations, liquidity, and cash flow.
The global spread of the coronavirus (COVID-19) has created significant volatility, uncertainty and economic disruption that have negatively impacted our business, operations and financial results. The extent to which the COVID-19 pandemic will continue to impact our business, operations and financial results will depend on numerous evolving factors that we may not be able to accurately predict, including: the duration, scope and severity of the pandemic; governmental, business and individual decisions and actions; the impact of the pandemic on economic activity; and the extent to which we or our employees, customers, suppliers, service providers or other business partners may be prevented from conducting normal business activities for an indefinite period of time, including due to shutdowns that may be requested or mandated by governmental authorities. These factors could, among other things, continue to disrupt (i) the purchasing, contracting and payment behaviors of our customers and their end-users; (ii) our operations, including our manufacturing activities, the shipment of our products, and the performance of our suppliers and service providers; and (iii) our liquidity and cash flow.
Risks arising from the COVID-19 pandemic that have impacted and that may continue to impact our business, financial condition, results of operations and prospects include, among other things:
•Customer Risk. Existing and potential customers and their end-users have taken and may continue to take actions to reduce or suspend operations, reduce or delay spending, cancel contracts, or cut costs in a manner that reduces demand for our products and services. In particular, lower demand for air travel may continue to cause our customers to delay or suspend spending in connection with the manufacturing, repair, overhaul or servicing of aircraft, and there may be long-term deterioration in demand for air travel that could impact our business beyond the current COVID-19 health crisis. Customers may also continue to attempt to renegotiate contracts and obtain concessions, face financial constraints on their ability to make payments to us on a timely basis or at all, or discontinue their business operations, and we may be required to discount the pricing of our products. In addition, unfavorable customer site conditions, such as closure of or access restrictions to customer facilities, and disruptions to our customers’ third-party logistics, warehousing, inventory management and distribution services may continue to limit our ability to sell products, meet billing milestones or provide services.
•Operations Risk. The closure of our facilities, restrictions inhibiting our employees’ ability to access those facilities, and disruptions to the ability of our suppliers or service providers to deliver goods or services to us (including as a result of supplier facility closures or access restrictions, disruptions to their supply chains, and supplier liquidity or bankruptcy risk) could disrupt our ability to provide our services and solutions and result in, among other things, terminations of customer contracts and losses of revenue. Because the COVID-19 pandemic could adversely affect our near-term and long-term revenues, earnings, liquidity and
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cash flows, we have begun to take and may be required to continue taking significant cost actions, including but not limited to reducing discretionary expenses (such as non-essential travel, contractors, and consultants), reducing hiring, canceling annual merit increases; reducing executive and board of director pay, reducing work schedules across the enterprise, shortening or staggering work schedules to match production with demand, and reducing staffing levels as well as increasing supplier-based productivity and enhancing spending-limit controls. However, our costs may not decrease at the same pace as revenue declines as many of our costs are less variable in nature, and we may not be able to or may not chose to significantly reduce them in an effort to remain focused on long-term outlook and growth opportunities. Remote work and increased frequency of cybersecurity attacks, including phishing and malware attempts that utilize COVID-19-related strategies, increase the risk of a material cybersecurity incident that could result in the loss of proprietary or personal data, render us more vulnerable to future cybersecurity attacks, disrupt our operations, or otherwise cause us reputational or financial harm.
•Liquidity and Cash Flow Risk. Because of the customer and operations risk described above, our business may not continue to generate sufficient cash flow from operations in the future to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may need to use existing cash balances to service our debt, and if such balances are insufficient, then we may be required to adopt one or more alternatives, such as selling assets, restructuring of existing debt, issuing new debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time.
The scope and impact of the COVID-19 pandemic is changing rapidly, additional impacts may arise, and resumption of normal business operations may be delayed or constrained by lingering effects on our suppliers, third-party service providers, and/or customers. A sustained or prolonged COVID-19 pandemic would exacerbate the negative impacts described above and below as well as other risks disclosed in our 2019 Annual Report on Form 10-K under Item 1A. Risk Factors.
Concentrations of credit, counterparty and market risk may adversely affect our results of operations and financial condition.
We maintain long-term contract relationships with many of our customers, suppliers and other counterparties. While we monitor the financial health of these counterparties, we are exposed to credit and market risks of such counterparties, including those concentrated in the same or similar industries and geographic regions. Changes in economic conditions could also lead to concerns about the creditworthiness of counterparties in the same or similar industry or geography, impacting our ability to renew our long-term contract arrangements or collect amounts due under these arrangements. Among other factors, changes in economic conditions could also result in the credit deterioration or insolvency of a significant counterparty. For example, in Note 1 to its Consolidated Interim Financial Statements and elsewhere in its Quarterly Report on Form 10-Q, filed with the Securities and Exchange Commission on May 11, 2020, Garrett Motion Inc. (“Garrett”) disclosed certain conditions and events which it indicated raise substantial doubt as to Garrett’s ability to continue as a going concern. Should any of these occur, it could adversely impact Garrett’s ability to perform under the indemnification and reimbursement agreement between Honeywell and a Garrett subsidiary. See Note 16 Commitments and Contingencies of Notes to Consolidated Financial Statements for a discussion of the indemnification and reimbursement agreement.
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| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | ||||
Honeywell purchased 455,825 shares of its common stock, par value $1 per share, in the quarter ended June 30, 2020. On April 29, 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 of June 30, 2020, $5.0 billion remained available for additional share repurchases. The following table summarizes Honeywell’s purchase of its common stock for the quarter ended June 30, 2020:
| Issuer Purchases of Equity Securities | |||||||||||||||||||||||
| (a) | (b) | (c) | (d) | ||||||||||||||||||||
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet be Purchased Under Plans or Programs (Dollars in millions) | |||||||||||||||||||
| April 2020 | 455,825 | $ | 136.08 | 455,825 | $ | 5,004 | |||||||||||||||||
| May 2020 | — | $ | — | — | $ | 5,004 | |||||||||||||||||
| June 2020 | — | $ | — | — | $ | 5,004 | |||||||||||||||||
| Item 4. | Mine Safety Disclosures | ||||
One of our wholly-owned subsidiaries has a placer claim for and operates a chabazite ore surface mine in Arizona. Information concerning mine safety and other regulatory matters associated with this mine is required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K and is included in Exhibit 95 to this quarterly report.
| Item 5. | Other Information | ||||
As previously disclosed, on June 5, 2020, Mark R. James, Senior Vice President, Human Resources and Communications of the Company, communicated his intention to retire from the Company. On July 20, 2020, in consideration for Mr. James’ agreement to (1) provide transition services following his retirement through January 31, 2021 (the “Transition Services Period”), and (2) extend the time period of his existing non-solicitation and non-compete covenants from two years to three years, the Company and Mr. James entered into a Retirement Agreement that provides Mr. James with the following benefits notwithstanding his voluntary retirement: (i) the outstanding restricted stock units previously awarded to Mr. James that are unvested at the time of his retirement shall remain outstanding and continue to vest as scheduled pursuant to their existing terms and conditions, including the satisfaction of any applicable Company performance requirements, (ii) all outstanding stock options that are unvested at the time of his retirement shall continue to vest as scheduled and shall remain exercisable for three (3) years from the vesting date of each tranche of such options, (iii) Mr. James shall be entitled to vest in the performance stock units (“PSUs”) granted to him for the 2019–2021 PSU performance cycle, and (iv) notwithstanding any agreement that Mr. James may have executed to the contrary, Mr. James shall not be obligated to repay any relocation expenses incurred by the Company in connection with his relocation from New Jersey to North Carolina. The foregoing description of Mr. James’ Retirement Agreement is not intended to be complete and is qualified in its entirety by reference to the Retirement Agreement, a copy of which is filed herewith.
In the quarter ended June 30, 2020, the Company entered into amendments to the respective indemnification and reimbursement agreements with Garrett and Resideo, copies of which are filed herewith as Exhibit 10.6 and Exhibit 10.7 hereto. See Note 16 Commitments and Contingencies of Notes to Consolidated Financial Statements for further discussion of such amendments.
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| Item 6. | Exhibits | ||||
EXHIBIT INDEX
| Exhibit No. | Description | ||||||||||
| 10.1* | |||||||||||
| 10.2* | |||||||||||
| 10.3* | |||||||||||
| 10.4* | |||||||||||
| 10.5 | |||||||||||
| 10.6 | |||||||||||
| 10.7 | |||||||||||
| 31.1 | |||||||||||
| 31.2 | |||||||||||
| 32.1 | Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith) Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith) | ||||||||||
| 32.2 | |||||||||||
| 95 | |||||||||||
| 101.INS | The following financial statements from the Company's Quarterly Report on Form 10-Q for the quarter and six months ended June 30, 2020, formatted in Inline XBRL: (i) Consolidated Statements of Cash Flows, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Balance Sheets, and (v) Notes to Consolidated Financial Statements, tagged as blocks of text and including detailed tags. | ||||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema (filed herewith) | ||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase (filed herewith) | ||||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase (filed herewith) | ||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase (filed herewith) | ||||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase (filed herewith) | ||||||||||
| 104 | Cover page from the Company’s Quarterly Report on Form 10-Q for the quarter and six months ended June 30, 2020, formatted in Inline XBRL (and contained in Exhibit 101) | ||||||||||
The Exhibits identified above with an asterisk (*) are management contracts or compensatory plans or arrangements.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Honeywell International Inc. | ||||||||
| Date: July 24, 2020 | By: | /s/ Robert D. Mailloux | ||||||
| Robert D. Mailloux Vice President and Controller (on behalf of the Registrant and as the Registrant’s Principal Accounting Officer) | ||||||||
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