|
| | | | | | | |
| Three Months Ended March 31, |
Basic | 2020 | | 2019 |
Net income attributable to Honeywell | $ | 1,581 |
| | $ | 1,416 |
|
Weighted average shares outstanding | 709.6 |
| | 729.7 |
|
Earnings per share of common stock | $ | 2.23 |
| | $ | 1.94 |
|
11 Honeywell International Inc.
Honeywell International Inc.HONEYWELL INTERNATIONAL INC.
Notes to Consolidated Financial StatementsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
(Dollars in tables in millions, except per share amounts)
The following table summarizes the status of the Company's total repositioning reserves:
|
| | | | | | | |
| Three Months Ended March 31, |
Assuming Dilution | 2020 | | 2019 |
Net income attributable to Honeywell | $ | 1,581 |
| | $ | 1,416 |
|
Average Shares | | | |
Weighted average shares outstanding | 709.6 |
| | 729.7 |
|
Dilutive securities issuable - stock plans | 7.4 |
| | 9.1 |
|
Total weighted average shares outstanding | 717.0 |
| | 738.8 |
|
Earnings per share of common stock | $ | 2.21 |
| | $ | 1.92 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Severance Costs | | Asset Impairments | | Exit Costs | | Total |
Balance at December 31, 2020 | $ | 527 | | | $ | 0 | | | $ | 74 | | | $ | 601 | |
Charges | 28 | | | 42 | | | 49 | | | 119 | |
Usage - cash | (84) | | | 0 | | | (21) | | | (105) | |
Usage - noncash | 0 | | | (42) | | | 0 | | | (42) | |
Foreign currency translation | (3) | | | 0 | | | (2) | | | (5) | |
Adjustments | 1 | | | 0 | | | 0 | | | 1 | |
Balance at March 31, 2021 | $ | 469 | | | $ | 0 | | | $ | 100 | | | $ | 569 | |
The diluted earnings per share calculations exclude the effect of stock optionsCertain repositioning projects will recognize exit costs in future periods when the options’ assumed proceeds exceed the average market price of the common shares during the period. Foractual liability is incurred. Such exit costs incurred in the three months ended March 31, 2021 and 2020 were $10 million and $11 million, respectively.
NOTE 6. INCOME TAXES
The effective tax rate increased for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 primarily from tax benefits realized in the prior year as a result of tax law changes in India and the resolution of certain U.S. tax matters. Other changes to the tax rate include tax benefits for employee share-based compensation and the resolution of certain foreign tax matters in the current year.
The effective tax rate for the three months ended March 31, 2021 was higher than the U.S. federal statutory rate of 21% primarily due to incremental tax reserves and states taxes, partially offset by tax benefits for employee share based compensation and the resolution of certain foreign tax matters.
NOTE 7. ACCOUNTS RECEIVABLE - NET and 2019, the weighted average number of stock options excluded from the computations were 4.3 million and 3.7 million. These stock options were outstanding at the end of each of the respective periods.
As | | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
Trade | $ | 6,874 | | | $ | 7,029 | |
Less - Allowance for doubtful accounts | (199) | | | (202) | |
| $ | 6,675 | | | $ | 6,827 | |
Trade receivables include $1,750 million and $1,589 million of unbilled balances under long-term contracts as of March 31, 20202021 and 2019, total shares outstanding were 701.8 million and 727.7 million and as of MarchDecember 31, 2020 and 2019, total shares issued were 957.6 million.
Note 7. Revenue Recognition and Contracts with Customers
Honeywell has a comprehensive offering of products and services, including software and technologies, that2020. These amounts 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 March 31, |
| 2020 | | 2019 |
Aerospace | | | |
Commercial Aviation Original Equipment | $ | 672 |
| | $ | 759 |
|
Commercial Aviation Aftermarket | 1,380 |
| | 1,361 |
|
Defense and Space | 1,309 |
| | 1,221 |
|
| 3,361 |
| | 3,341 |
|
Honeywell Building Technologies | | | |
Products | 748 |
| | 810 |
|
Building Solutions | 533 |
| | 579 |
|
| 1,281 |
| | 1,389 |
|
Performance Materials and Technologies | | | |
UOP | 594 |
| | 610 |
|
Process Solutions | 1,151 |
| | 1,246 |
|
Specialty Products | 253 |
| | 269 |
|
Fluorine Products | 399 |
| | 447 |
|
| 2,397 |
| | 2,572 |
|
Safety and Productivity Solutions | | | |
Safety and Retail | 502 |
| | 538 |
|
Productivity Products | 251 |
| | 271 |
|
Warehouse and Workflow Solutions | 494 |
| | 558 |
|
Sensing & Internet-of-Things (IoT) | 177 |
| | 215 |
|
| 1,424 |
| | 1,582 |
|
Net sales | $ | 8,463 |
| | $ | 8,884 |
|
Honeywell International Inc.
Notes to Consolidated Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)
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.
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.
Honeywell International Inc.
Notes to Consolidated Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)
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 March 31, |
| 2020 | | 2019 |
Products, transferred point in time | 61 | % | | 61 | % |
Products, transferred over time | 14 |
| | 15 |
|
Net product sales | 75 |
| | 76 |
|
Services, transferred point in time | 9 |
| | 9 |
|
Services, transferred over time | 16 |
| | 15 |
|
Net service sales | 25 |
| | 24 |
|
Net sales | 100 | % | | 100 | % |
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 obligationscustomer contracts 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.which they relate.
Contract balances are classified as assets or liabilities on a contract-by-contract basis at the end of each reporting period.NOTE 8. INVENTORIES
| | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
Raw materials | $ | 1,152 | | | $ | 1,079 | |
Work in process | 811 | | | 798 | |
Finished products | 2,644 | | | 2,612 | |
| $ | 4,607 | | | $ | 4,489 | |
The following table summarizes the Company's contract assets and liabilities balances:
|
| | | | | | | |
| 2020 | | 2019 |
Contract assets - January 1 | $ | 1,602 |
| | $ | 1,548 |
|
Contract assets - March 31 | 1,699 |
| | 1,700 |
|
Change in contract assets - increase (decrease) | $ | 97 |
| | $ | 152 |
|
| | | |
Contract liabilities - January 1 | $ | (3,501 | ) | | $ | (3,378 | ) |
Contract liabilities - March 31 | (3,506 | ) | | (3,426 | ) |
Change in contract liabilities - decrease (increase) | $ | (5 | ) | | $ | (48 | ) |
| | | |
Net change | $ | 92 |
| | $ | 104 |
|
The net change for the three months ended March 31, 202012 and 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 months ended March 31, 2020 and 2019, we recognized revenue of $888 million and $720 million that was previously included in the beginning balance of contract liabilities.
Honeywell International Inc.
Notes to Consolidated Financial Statements
HONEYWELL INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
(Dollars in tables in millions, except per share amounts)
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.
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 stand alone 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:
|
| | | |
| March 31, 2020 |
Aerospace | $ | 10,849 |
|
Honeywell Building Technologies | 5,146 |
|
Performance Materials and Technologies | 6,686 |
|
Safety and Productivity Solutions | 2,603 |
|
| $ | 25,284 |
|
Performance obligations recognized as of March 31, 2020 will be satisfied over the course of future periods. Our disclosure of the timing for satisfying the performance obligation is based on the requirements of contracts with customers. However, from time to time, these contracts may be subject to modifications, impacting the timing of satisfying the performance obligations. Performance obligations expected to be satisfied within one year and greater than one year are 58% and 42%, respectively.
The timing of satisfaction of the Company's performance obligations does not significantly vary from the typical timing of payment. Typical payment terms of our fixed-price over time contracts include progress payments based on specified events or milestones, or based on project progress. For some contracts we may be entitled to receive an advance payment.
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.
Note 8. Accounts Receivable - NetNOTE 9. LONG-TERM DEBT AND CREDIT AGREEMENTS
| | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| | | |
4.25% notes due 2021 | $ | 0 | | | $ | 800 | |
1.85% notes due 2021 | 1,500 | | | 1,500 | |
0.483% notes due 2022 | 2,500 | | | 2,500 | |
2.15% notes due 2022 | 600 | | | 600 | |
Floating rate notes due 2022 | 1,100 | | | 1,100 | |
1.30% Euro notes due 2023 | 1,471 | | | 1,534 | |
3.35% notes due 2023 | 300 | | | 300 | |
0.00% Euro notes due 2024 | 589 | | | 614 | |
2.30% notes due 2024 | 750 | | | 750 | |
1.35% notes due 2025 | 1,250 | | | 1,250 | |
2.50% notes due 2026 | 1,500 | | | 1,500 | |
2.25% Euro notes due 2028 | 883 | | | 920 | |
2.70% notes due 2029 | 750 | | | 750 | |
1.95% notes due 2030 | 1,000 | | | 1,000 | |
0.75% Euro notes due 2032 | 589 | | | 614 | |
5.70% notes due 2036 | 441 | | | 441 | |
5.70% notes due 2037 | 462 | | | 462 | |
5.375% notes due 2041 | 417 | | | 417 | |
3.812% notes due 2047 | 445 | | | 445 | |
2.80% notes due 2050 | 750 | | | 750 | |
Industrial development bond obligations, floating rate maturing at various dates through 2037 | 22 | | | 22 | |
6.625% debentures due 2028 | 201 | | | 201 | |
9.065% debentures due 2033 | 51 | | | 51 | |
Other (including capitalized leases and debt issuance costs), 8.2% weighted average interest rate maturing at various dates through 2025 | 188 | | | 266 | |
| 17,759 | | | 18,787 | |
Less-current portion | (1,635) | | | (2,445) | |
| $ | 16,124 | | | $ | 16,342 | |
|
| | | | | | | |
| March 31, 2020 | | December 31, 2019 |
Trade | $ | 7,600 |
| | $ | 7,639 |
|
Less - Allowance for doubtful accounts | (148 | ) | | (146 | ) |
| $ | 7,452 |
| | $ | 7,493 |
|
Trade receivables include $1,660On August 19, 2020, the Company issued $2.5 billion 0.483% Senior Notes due 2022 and $500 million Floating Rate Senior Notes due 2022 (collectively, the 2022 Callable Notes). The $500 million Floating Rate Senior Notes due 2022 were issued at a variable interest rate equal to the three-month LIBOR plus the applicable margin of 0.23%. The Company may redeem the 2022 fixed rate notes at any time, in whole or in part, at the Company's option. The Company may redeem the 2022 floating rate notes at any time, in whole or in part, on or after August 19, 2021. The offering provided gross proceeds of $3.0 billion, offset by $10 million in discount and $1,586 million of unbilled balances under long-term contracts as of March 31, 2020 and December 31, 2019. These amounts are billed in accordance withclosing costs related to the termsoffering. The Company used the proceeds of the customer contractsoffering to which they relate. repay $3.0 billion of borrowings under the Term Loan Agreement (defined below).
Note 9. InventoriesOn 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 and, accordingly, permanently reduce $3.0 billion of undrawn commitments under the Term Loan Agreement, referenced below. The Company may redeem the 2020 Notes at any time, in whole or in part, at the Company's option. The offering provided gross proceeds of $3.0 billion, offset by $27 million in discount and closing costs related to the offering.
|
| | | | | | | |
| March 31, 2020 | | December 31, 2019 |
Raw materials | $ | 1,079 |
| | $ | 1,056 |
|
Work in process | 859 |
| | 817 |
|
Finished products | 2,681 |
| | 2,593 |
|
| 4,619 |
| | 4,466 |
|
Reduction to LIFO cost basis | (35 | ) | | (45 | ) |
| $ | 4,584 |
| | $ | 4,421 |
|
13
Honeywell International Inc.
Notes to Consolidated Financial Statements
HONEYWELL INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
(Dollars in tables 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.
Supplemental cash flow information related to leases was as follows:
|
| | | | | | |
| Three Months Ended March 31, |
| 2020 | | 2019 |
Net right-of-use assets obtained in exchange for lease obligations: | | | |
Operating leases | 68 |
| | $ | 10 |
|
Finance leases | 3 |
| | 4 |
|
Supplemental balance sheet information related to leases was as follows:
|
| | | | | | | |
| March 31, 2020 | | December 31, 2019 |
Operating leases | | | |
Other assets | $ | 699 |
| | $ | 673 |
|
Accrued liabilities | 169 |
| | 171 |
|
Other liabilities | 575 |
| | 534 |
|
Total operating lease liabilities | $ | 744 |
| | $ | 705 |
|
Financing leases | | | |
Property, plant and equipment | $ | 351 |
| | $ | 361 |
|
Accumulated depreciation | (155 | ) | | (152 | ) |
Property, plant and equipment - net | $ | 196 |
| | $ | 209 |
|
Current maturities of long-term debt | 57 |
| | 59 |
|
Long-term debt | 144 |
| | 156 |
|
Total financing lease liabilities | $ | 201 |
| | $ | 215 |
|
Honeywell International Inc.
Notes to Consolidated Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)
Note 11. Long-term Debt and Credit Agreements
|
| | | | | | | |
| March 31, 2020 | | December 31, 2019 |
0.65% Euro notes due 2020 | — |
| | 1,123 |
|
4.25% notes due 2021 | 800 |
| | 800 |
|
1.85% notes due 2021 | 1,500 |
| | 1,500 |
|
2.15% notes due 2022 | 600 |
| | 600 |
|
Floating rate notes due 2022 | 600 |
| | 600 |
|
1.30% Euro notes due 2023 | 1,376 |
| | 1,404 |
|
3.35% notes due 2023 | 300 |
| | 300 |
|
0.00% Euro notes due 2024 | 550 |
| | — |
|
2.30% notes due 2024 | 750 |
| | 750 |
|
2.50% notes due 2026 | 1,500 |
| | 1,500 |
|
2.25% Euro notes due 2028 | 825 |
| | 842 |
|
2.70% notes due 2029 | 750 |
| | 750 |
|
0.75% Euro notes due 2032 | 550 |
| | — |
|
5.70% notes due 2036 | 441 |
| | 441 |
|
5.70% notes due 2037 | 462 |
| | 462 |
|
5.375% notes due 2041 | 417 |
| | 417 |
|
3.812% notes due 2047 | 445 |
| | 445 |
|
Industrial development bond obligations, floating rate maturing at various dates through 2037 | 22 |
| | 22 |
|
6.625% debentures due 2028 | 201 |
| | 201 |
|
9.065% debentures due 2033 | 51 |
| | 51 |
|
Other (including capitalized leases and debt issuance costs), 7.0% weighted average maturing at various dates through 2025 | 444 |
| | 278 |
|
| 12,584 |
| | 12,486 |
|
Less: current portion | (1,042 | ) | | (1,376 | ) |
| $ | 11,542 |
| | $ | 11,110 |
|
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 "20202020 Euro Notes")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 inprovided gross proceeds of $1,136 million,$1.1 billion, offset by $9 million in discount and closing costs related to the offering.
On August 8, 2019, the Company issued $600 million 2.15% SeniorThe 2022 Callable Notes, due 2022, $600 million Floating Rate Senior2020 Notes, due 2022, $750 million 2.30% Senior Notes due 2024 and $750 million 2.70% Senior Notes due 2029 (collectively, the "2019 Notes"). The 20192020 Euro Notes are senior unsecured and unsubordinated obligations of Honeywellthe Company and rank equally with each other and with all of Honeywell'sthe Company's existing and future senior unsecured debt and senior to all of Honeywell'sthe Company's subordinated debt. The offering resulted in gross proceeds of $2,700 million, offset by $18 million in discount and closing costs related to
On March 1, 2021, 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.
Company paid its 4.25% notes due 2021.
On February 21, 2020, the Company paid its 0.65% Euro notes due 2020.
On October 30, 2019, the Company paid its 1.40% notes due 2019, Three year floating-rate notes due 2019, Two year floating rate notes due 2019 and 1.80% notes due 2019.
Honeywell International Inc.
Notes to Consolidated Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)
On April 10, 2020, the Company entered into a $1.5 billion 364-Day Credit Agreement (the "364-Day Credit Agreement") with a syndicate of banks. 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.
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 provides for a two-year, delayed draw term loan facility in the aggregate principal amount of up to $6.0 billion and is maintained for general corporate purposes. 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. Advances may be made on up to three different business days during the period from March 26, 2020 to the date that is the earlier of (a) June 26, 2020 and (b) such date on which the Term Loan Agreement is terminated pursuant to its terms (the earlier of such date). The amounts borrowed under the Term Loan Agreement are required to be repaid no later than March 26, 2022, unless the Term Loan Agreement is terminated earlier pursuant to its terms and may not be reborrowed.
On April 26, 2019,31, 2021, the Company entered into a $4.0 billion Amended and Restated Five Year Credit Agreement (the “5-Year5-Year Credit Agreement”)Agreement) with a syndicate of banks. The 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. The 5-Year Credit Agreement amendsamended and restatesrestated the previously reported $4.0 billion amended and restated five-yearfive year credit agreement dated as of April 27, 201826, 2019 (the "Prior Agreement")Prior 5-Year Agreement).
On March 31, 2021, the Company entered into a $1.5 billion 364-Day Credit Agreement (the 364-Day Credit Agreement) with a syndicate of banks. Amounts borrowed under the 364-Day Credit Agreement are required to be repaid no later than March 30, 2022, unless (i) Honeywell elects to convert all then outstanding amounts into a term loan, upon which such amounts shall be repaid in full on March 30, 2023, or (ii) the 364-Day Credit Agreement is terminated earlier pursuant to its terms. The 364-Day Credit Agreement is maintained for general corporate purposes and replaces the previously reported $1.5 billion 364-day credit agreement dated as of April 10, 2020 (the Prior 364-Day Agreement), which was terminated in accordance with its terms effective March 31, 2021.
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 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 5-Year Credit Agreement has substantiallydraw provided gross proceeds of $3.0 billion, offset by $7 million in closing costs related to the same material terms and conditionsborrowing. On August 20, 2020 the Company prepaid the outstanding principal amount of $3.0 billion, using the proceeds from the offering of the Prior2022 Callable Notes. As of August 21, 2020, there were no borrowings outstanding or commitments remaining under the Term Loan Agreement.
As of March 31, 2020,2021, there arewere no outstanding borrowings under anythe 5-Year Credit Agreement or the 364-Day Credit Agreement.
14 Honeywell International Inc.
HONEYWELL INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
(Dollars in tables in millions, except per share amounts)
NOTE 10. LEASES
The Company's operating and finance lease portfolio is described in Note 11 Leases of Notes to Consolidated Financial Statements in our credit agreements.2020 Annual Report on Form 10-K.
Supplemental cash flow information related to leases was as follows:
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2021 | | 2020 |
Net right-of-use assets obtained in exchange for lease obligations: | | | | | | | |
Operating leases | | | | | $ | 33 | | | $ | 68 | |
Finance leases | | | | | 3 | | | 3 | |
Supplemental balance sheet information related to leases was as follows:
| | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
Operating leases | | | |
Other assets | $ | 774 | | | $ | 773 | |
Accrued liabilities | 187 | | | 187 | |
Other liabilities | 640 | | | 641 | |
Total operating lease liabilities | $ | 827 | | | $ | 828 | |
Finance leases | | | |
Property, plant and equipment | $ | 351 | | | $ | 357 | |
Accumulated depreciation | (185) | | | (180) | |
Property, plant and equipment - net | $ | 166 | | | $ | 177 | |
Current maturities of long-term debt | 59 | | | 60 | |
Long-term debt | 114 | | | 124 | |
Total finance lease liabilities | $ | 173 | | | $ | 184 | |
Note 12. Financial Instruments and Fair Value Measures
15 Honeywell International Inc.
HONEYWELL INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
(Dollars in tables in millions, except per share amounts)
NOTE 11. DERIVATIVE INSTRUMENTS AND HEDGING TRANSACTIONS
Our credit, market, foreign currency and interest rate risk management policies are described in Note 15, Financial12 Derivative Instruments and Fair Value MeasuresHedging Transactions of Notes to Consolidated Financial Statements in our 20192020 Annual Report on Form 10-K. All derivative assets are presented in Other current assets or Other assets. All derivative liabilities are presented in Accrued liabilities or Other liabilities.
The following table summarizes the notional amounts and fair values of the Company’s outstanding derivatives by risk category and instrument type within the Consolidated Balance Sheet as of March 31, 2021 and December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Notional | | Fair Value Asset | | Fair Value (Liability) |
March 31, 2021 | | December 31, 2020 | | March 31, 2021 | | December 31, 2020 | | March 31, 2021 | | December 31, 2020 |
Derivatives in Fair Value Hedging Relationships: | | | | | | | | | | | |
Interest rate swap agreements | $ | 3,150 | | | $ | 3,950 | | | $ | 100 | | | $ | 194 | | | $ | 0 | | | $ | 0 | |
Derivatives in Cash Flow Hedging Relationships: | | | | | | | | | | | |
Foreign currency exchange contracts | 422 | | | 488 | | | 15 | | | 65 | | | 0 | | | (58) | |
Derivatives in Net Investment Hedging Relationships: | | | | | | | | | | | |
Foreign currency exchange contracts | 792 | | | 806 | | | 49 | | | 45 | | | (3) | | | (1) | |
Cross currency swap agreements | 1,200 | | | 1,200 | | | 0 | | | 0 | | | (5) | | | (50) | |
Total Derivatives Designated as Hedging Instruments | 5,564 | | | 6,444 | | | 164 | | | 304 | | | (8) | | | (109) | |
Derivatives Not Designated as Hedging Instruments: | | | | | | | | | | | |
Foreign currency exchange contracts | 13,403 | | | 14,829 | | | 161 | | | 92 | | | (163) | | | (91) | |
Total Derivatives at Fair Value | $ | 18,967 | | | $ | 21,273 | | | $ | 325 | | | $ | 396 | | | $ | (171) | | | $ | (200) | |
In addition to the derivative instruments listed above, certain of the Company's foreign currency denominated debt instruments are designated as net investment hedges. The carrying value of those debt instruments designated as net investment hedges, which includes the adjustment for the foreign currency transaction gain or loss on those instruments, was $4,235 million and $4,414 million as of March 31, 2021 and December 31, 2020.
The following table sets forth the amounts recorded 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 |
March 31, 2021 | | December 31, 2020 | | March 31, 2021 | | December 31, 2020 |
Long-term debt | $ | 3,250 | | | $ | 4,144 | | | $ | 100 | | | $ | 194 | |
16 Honeywell International Inc.
HONEYWELL INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
(Dollars in tables in millions, except per share amounts)
The following tables summarize the location and impact to the Consolidated Statement of Operations related to derivative instruments:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2021 |
Revenue | | Cost of Products and Services Sold | | SG&A | | Other (Income) Expense | | Interest and Other Financial Charges |
| $ | 8,454 | | | $ | 5,709 | | | $ | 1,236 | | | $ | (442) | | | $ | 90 | |
Gain or (loss) on cash flow hedges: | | | | | | | | | |
Foreign Currency Exchange Contracts: | | | | | | | | | |
Amount reclassified from accumulated other comprehensive income into income | 1 | | | 1 | | | 2 | | | 0 | | | 0 | |
Amount excluded from effectiveness testing recognized in earnings using an amortization approach | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Gain or (loss) on fair value hedges: | | | | | | | | | |
Interest Rate Swap Agreements: | | | | | | | | | |
Hedged items | 0 | | | 0 | | | 0 | | | 0 | | | 94 | |
Derivatives designated as hedges | 0 | | | 0 | | | 0 | | | 0 | | | (94) | |
Gain or (loss) on net investment hedges: | | | | | | | | | |
Foreign Currency Exchange Contracts: | | | | | | | | | |
Amount excluded from effectiveness testing recognized in earnings using an amortization approach | 0 | | | 0 | | | 0 | | | 0 | | | 4 | |
Gain or (loss) on derivatives not designated as hedging instruments: | | | | | | | | | |
Foreign currency exchange contracts | 0 | | | 0 | | | 0 | | | 60 | | | 0 | |
17 Honeywell International Inc.
HONEYWELL INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
(Dollars in tables in millions, except per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2020 |
Revenue | | Cost of Products and Services Sold | | SG&A | | Other (Income) Expense | | Interest and Other Financial Charges |
| $ | 8,463 | | | $ | 5,534 | | | $ | 1,238 | | | $ | (317) | | | $ | 73 | |
Gain or (loss) on cash flow hedges: | | | | | | | | | |
Foreign Currency Exchange Contracts: | | | | | | | | | |
Amount reclassified from accumulated other comprehensive income into income | 0 | | | 27 | | | 0 | | | 40 | | | 0 | |
Amount excluded from effectiveness testing recognized in earnings using an amortization approach | 0 | | | 4 | | | 0 | | | 8 | | | 0 | |
Gain or (loss) on fair value hedges: | | | | | | | | | |
Interest Rate Swap Agreements: | | | | | | | | | |
Hedged items | 0 | | | 0 | | | 0 | | | 0 | | | (205) | |
Derivatives designated as hedges | 0 | | | 0 | | | 0 | | | 0 | | | 205 | |
Gain or (loss) on net investment hedges: | | | | | | | | | |
Foreign Currency Exchange Contracts: | | | | | | | | | |
Amount excluded from effectiveness testing recognized in earnings using an amortization approach | 0 | | | 0 | | | 0 | | | 0 | | | 5 | |
Gain or (loss) on derivatives not designated as hedging instruments: | | | | | | | | | |
Foreign currency exchange contracts | 0 | | | 0 | | | 0 | | | 284 | | | 0 | |
The following table summarizes the amounts of gain or (loss) on net investment hedges recognized in Accumulated other comprehensive income (loss):
| | | | | | | | | | | |
Derivatives Net Investment Hedging Relationships | Three Months Ended March 31, |
2021 | | 2020 |
Euro-denominated long-term debt | $ | 150 | | | $ | 124 | |
Euro-denominated commercial paper | 30 | | | 70 | |
Cross currency swap | 44 | | | (26) | |
Foreign currency exchange contracts | (2) | | | 84 | |
18 Honeywell International Inc.
HONEYWELL INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
(Dollars in tables in millions, except per share amounts)
NOTE 12. FAIR VALUE MEASUREMENTS
The accounting guidance for fair value measurements and disclosures establishes a three-level fair value hierarchy.
•Level 1 - Inputs are based on quoted prices in active markets for identical assets and liabilities.
•Level 2 - Inputs are based on observable inputs other than quoted prices in active markets for identical or similar assets and liabilities.
•Level 3 - One or more inputs are unobservable and significant.
Financial and nonfinancial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis:
|
| | | | | | | |
| March 31, 2020 | | December 31, 2019 |
Assets: | | | |
Foreign currency exchange contracts | $ | 647 |
| | $ | 291 |
|
Available for sale investments | 1,241 |
| | 1,523 |
|
Interest rate swap agreements | 230 |
| | 38 |
|
Cross currency swap agreements | 60 |
| | 51 |
|
Liabilities: | | | |
Foreign currency exchange contracts | $ | 74 |
| | $ | 21 |
|
Interest rate swap agreements | — |
| | 13 |
|
| | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
Assets: | | | |
Foreign currency exchange contracts | $ | 225 | | | $ | 202 | |
Available for sale investments | 1,122 | | | 1,118 | |
Interest rate swap agreements | 100 | | | 194 | |
| | | |
Liabilities: | | | |
Foreign currency exchange contracts | $ | 166 | | | $ | 150 | |
| | | |
Cross currency swap agreements | 5 | | | 50 | |
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.
Honeywell International Inc.
Notes to Consolidated Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)
The carrying value of cash and cash equivalents, trade accounts and notes receivables, payables, commercial paper, (of which $3,119 million and $3,513 million was Euro denominated as of March 31, 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:
|
| | | | | | | | | | | | | | | |
| March 31, 2020 | | December 31, 2019 |
| Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Assets | | | | | | | |
Long-term receivables | $ | 145 |
| | $ | 138 |
| | $ | 129 |
| | $ | 127 |
|
Liabilities | | | | | | | |
Long-term debt and related current maturities | $ | 12,584 |
| | $ | 13,238 |
| | $ | 12,486 |
| | $ | 13,578 |
|
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 |
| March 31, 2020 | | December 31, 2019 | | March 31, 2020 | | December 31, 2019 |
Long-term debt | | $ | 4,180 |
| | $ | 3,975 |
| | $ | 230 |
| | $ | 25 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Assets | | | | | | | |
Long-term receivables | $ | 161 | | | $ | 155 | | | $ | 137 | | | $ | 132 | |
Liabilities | | | | | | | |
Long-term debt and related current maturities | $ | 17,759 | | | $ | 18,861 | | | $ | 18,787 | | | $ | 20,176 | |
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
19 Honeywell International Inc.
HONEYWELL INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
(Dollars in tables in millions, except per share amounts)
NOTE 13. EARNINGS PER SHARE
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
Basic | 2021 | | 2020 | | | | |
Net income attributable to Honeywell | $ | 1,427 | | | $ | 1,581 | | | | | |
Weighted average shares outstanding | 696.2 | | | 709.6 | | | | | |
Earnings per share of common stock - basic | $ | 2.05 | | | $ | 2.23 | | | | | |
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
Assuming Dilution | 2021 | | 2020 | | | | |
Net income attributable to Honeywell | $ | 1,427 | | | $ | 1,581 | | | | | |
Average Shares | | | | | | | |
Weighted average shares outstanding | 696.2 | | | 709.6 | | | | | |
Dilutive securities issuable - stock plans | 8.3 | | | 7.4 | | | | | |
Total weighted average diluted shares outstanding | 704.5 | | | 717.0 | | | | | |
Earnings per share of common stock - assuming dilution | $ | 2.03 | | | $ | 2.21 | | | | | |
The diluted earnings per share calculations exclude the derivative recognized in Interest and other financial charges offsettingeffect of stock options when the gains and losses onoptions’ exercise price exceed the underlying debt being hedged. Foraverage market price of the three months ended March 31, 2020, we recognized $205 million of gains in earnings on interest rate swap agreements.common shares during the period. For the three months ended March 31, 2019, we recognized $242021 and 2020, the weighted average number of stock options excluded from the computations were 1.0 million and 4.3 million. These stock options were outstanding at the end of gains in earnings on interest rate swap agreements. Gains and losses are fully offset by losses and gains oneach of the underlying debt being hedged.respective periods.
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 months ended As of March 31, 2021 and 2020,, we recognized $284 total shares outstanding were 694.6 million and 701.8 million and as of income in Other (income) expense. For the three months ended March 31, 2019, we recognized $47 million of expense in Other (income) expense. As of March 31, 2020, cash collateral received that has not been offset against our derivatives of $591 million was recorded in Accrued liabilities2021 and Other Assets.2020, total shares issued were 957.6 million.
20Honeywell International Inc.
Notes to Consolidated Financial Statements
Honeywell International Inc.
Notes to Consolidated Financial Statements in our 2020 Annual Report on Form 10-K.
The following table summarizes information concerning our recorded liabilities for environmental costs:
| | | | | |
Balance at December 31, 2020 | $ | 660 | |
Accruals for environmental matters deemed probable and reasonably estimable | 41 | |
Environmental liability payments | (79) | |
Other | 1 | |
Balance at March 31, 2021 | $ | 623 | |
21 Honeywell International Inc.
HONEYWELL INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
(Dollars in tables in millions, except per share amounts)
(c) AmountsEnvironmental liabilities are included in Costthe following balance sheet accounts:
| | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
Accrued liabilities | $ | 225 | | | $ | 225 | |
Other liabilities | 398 | | | 435 | |
| $ | 623 | | | $ | 660 | |
The Company does not currently possess sufficient information to reasonably estimate the amounts of productsenvironmental liabilities to be recorded upon future completion of studies, litigation or settlements, and services sold, Selling, generalneither 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 administrative expenses,operating cash flows in the periods recognized or paid. However, considering our past experience and existing reserves, the Company does not expect that environmental matters will have a material adverse effect on its 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% 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 three months ended March 31, 2021 and offset operating cash outflows incurred by the Company. 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% of such costs is also recorded. This receivable amount recorded in the three months ended March 31, 2021 was $36 million. As of March 31, 2021, Other Current Assets and Other income/expense.Assets included $140 million and $452 million, respectively, for the short-term and long-term portion of the receivable amount due from Resideo under the indemnification and reimbursement agreement.
(d) AmountsASBESTOS MATTERS
Honeywell is named in asbestos-related personal injury claims related to North American Refractories Company (NARCO), which was sold in 1986, and the 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, 2020 | $ | 1,441 | | | $ | 779 | | | $ | 2,220 | |
Accrual for update to estimated liability | 10 | | | 8 | | | 18 | |
Asbestos-related liability payments | (35) | | | (30) | | | (65) | |
March 31, 2021 | $ | 1,416 | | | $ | 757 | | | $ | 2,173 | |
INSURANCE RECOVERIES FOR ASBESTOS RELATED LIABILITIES
| | | | | | | | | | | | | | | | | |
| Bendix | | NARCO | | Total |
December 31, 2020 | $ | 148 | | | $ | 254 | | | $ | 402 | |
Probable insurance recoveries related to estimated liability | 0 | | | 0 | | | 0 | |
Insurance receipts for asbestos-related liabilities | (5) | | | (14) | | | (19) | |
Insurance receivables settlements | 0 | | | 0 | | | 0 | |
March 31, 2021 | $ | 143 | | | $ | 240 | | | $ | 383 | |
22 Honeywell International Inc.
HONEYWELL INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
(Dollars in tables in millions, except per share amounts)
NARCO and Bendix asbestos-related balances are included in the following balance sheet accounts:
| | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
Other current assets | $ | 36 | | | $ | 36 | |
Insurance recoveries for asbestos related liabilities | 347 | | | 366 | |
| $ | 383 | | | $ | 402 | |
Accrued liabilities | $ | 300 | | | $ | 300 | |
Asbestos-related liabilities | 1,873 | | | 1,920 | |
| $ | 2,173 | | | $ | 2,220 | |
NARCO Products – NARCO manufactured high-grade, heat-resistant, refractory products for various industries. Honeywell’s predecessor, Allied Corporation, owned NARCO from 1979 to 1986. Allied Corporation sold the NARCO business in 1986 and entered into a cross-indemnity agreement 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 ultimately filed for bankruptcy in January 2002, at which point in time all then current and future NARCO asbestos claims were stayed against both NARCO and Honeywell pending the reorganization of NARCO. The Company established its initial liability for NARCO asbestos claims in 2002.
NARCO emerged from bankruptcy in April 2013, at which time a federally authorized 524(g) trust was established to evaluate and resolve all existing NARCO asbestos claims (the Trust). 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 Trust. The NARCO Trust Agreement (TA) and the NARCO Trust Distribution Procedures (TDP) are the principal documents setting forth the structure of the Trust, establishing Honeywell’s evergreen funding obligations and the material operating rules for the Trust.
Per the TA, the 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 cash dividends are required to be used to pay claims which qualify for payment under the TDP (Annual Contribution Claims) until those funds are exhausted, at which point Honeywell’s funding obligation, subject to an annual cap of $145 million, is triggered. The Company is also required to fund 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 Trust subject to qualification under the terms of the settlement agreements and TDP (Pre-Established Unliquidated Claims), as well as fund the annual operating costs of the Trust. There is no annual funding cap relative to Pre-Established Unliquidated Claims. Dividends from HWI were exhausted during the fourth quarter of 2019 and there have been no further dividends from HWI to date.
The operating rules per the TDP include Honeywell’s audit rights and the criteria claimants must meet for a claim to be considered valid and paid, which include adequate medical evidence of the claimant’s asbestos-related condition and credible evidence of exposure to a specific NARCO asbestos-containing product. Once operational in 2014, the Trust began to receive, process and pay claims, at which point the Company began to assert its audit rights to review and monitor the claims processor’s adherence to the established requirements of the TDP. While doing so, the Company identified several issues with the way the Trust was adhering to the TDP and the Company continues to identify and dispute these matters as further claims are processed. Although the Company is attempting to resolve instances where it believes the Trust is not processing claims in accordance with the established TDP, the Company reserves the right to seek judicial intervention should it fail to resolve the disputed issues.
Due to the bankruptcy filing in 2002, claimants were not permitted to file additional claims until the Trust became operative in 2014. As a consequence, there was a large backlog of claims that were filed with the Trust upon becoming operative through December 31, 2017, the date by which these claims had to be filed or else be barred by the statute of limitations (subject to tolling exceptions in the TDP). Therefore, the claims filing rate did not start to normalize until 2018 and thereafter. As a result, between 2002 and 2018, the Company lacked a history of sufficiently reliable claims data to derive a reasonable estimate and the Company continued to update its original NARCO asbestos liability, as appropriate, using all available information.
23 Honeywell International Inc.
HONEYWELL INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
(Dollars in tables in millions, except per share amounts)
With three years of sufficiently reliable claims data, the Company updated its estimate of the NARCO asbestos liability utilizing claims data from January 1, 2018 through December 31, 2020. The Company utilized an asbestos liability valuation specialist to support our preparation of the NARCO asbestos liability estimates. Our estimates, which involve significant management judgment, include consideration of multiple scenarios, including a scenario adjusting for the impact of the COVID-19 pandemic on the Trust's ability to process claims during 2020. The estimate for the resolution of asserted Annual Contribution Claims and Pre-Established Unliquidated Claims uses average payment values for the relevant historical period. For unasserted claims, the estimate is based on historic and anticipated claims filing experience and payment rates, disease classifications and type of claim, and average payment values by the Trust for the relevant historical period. The Company's estimate also includes all years of epidemiological disease projection through 2059.
The liability reflects an estimate for the resolution of Annual Contribution Claims and Pre-Established Unliquidated Claims filed with the Trust, as well as for unasserted Annual Contribution Claims and Pre-Established Unliquidated Claims. The NARCO asbestos liability excludes the annual operating expenses of the Trust which are expensed as they are incurred.
The Company's NARCO related insurance receivable reflects coverage which reimburses Honeywell for portions of NARCO-related claims and defense costs. This coverage 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. Honeywell's NARCO related insurance receivable is an estimate of the probable amount of insurance that is recoverable for asbestos claims. Most of our insurance carriers remain solvent. However, select individual insurance carriers are now insolvent, which we have considered in our analysis of probable recoveries. Our judgments related to our insurance carriers and insurance coverages are reasonable and consistent with Honeywell's historical dealings and Honeywell's 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:
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Years Ended December 31, |
Claims Activity | 2021 | | 2020 | | 2019 |
Claims unresolved at the beginning of period | 6,242 | | | 6,480 | | | 6,209 | |
Claims filed | 617 | | | 2,233 | | | 2,659 | |
Claims resolved | (486) | | | (2,471) | | | (2,388) | |
Claims unresolved at the end of period | 6,373 | | | 6,242 | | | 6,480 | |
| | | | | | | | | | | | | | | | | |
| March 31, | | December 31, |
Disease Distribution of Unresolved Claims | 2021 | | 2020 | | 2019 |
Mesothelioma and other cancer claims | 3,566 | | | 3,422 | | | 3,399 | |
Nonmalignant claims | 2,807 | | | 2,820 | | | 3,081 | |
Total claims | 6,373 | | | 6,242 | | | 6,480 | |
Honeywell has experienced average resolution values per claim excluding legal costs as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| (in whole dollars) |
Malignant claims | $ | 61,500 | | | $ | 50,200 | | | $ | 55,300 | | | $ | 56,000 | | | $ | 44,000 | |
Nonmalignant claims | $ | 550 | | | $ | 3,900 | | | $ | 4,700 | | | $ | 2,800 | | | $ | 4,485 | |
It is not possible to predict whether resolution values for Bendix-related asbestos claims will increase, decrease or stabilize in the future.
24 Honeywell International Inc.
HONEYWELL INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
(Dollars in tables in millions, except per share amounts)
The 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, which exclude the Company’s ongoing legal fees to defend such asbestos claims which will continue to be expensed as they are incurred.
The Company 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. The Company has valued Bendix asserted and unasserted claims using average resolution values for the previous five years. The Company updates the resolution values used to estimate the cost of Bendix asserted and unasserted claims during the fourth quarter each year.
The Company's 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.
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.
GARRETT MATTER
In conjunction with the Garrett spin-off, the Company entered into a binding indemnification and reimbursement agreement (Garrett Indemnity) with a Garrett subsidiary, pursuant to which Garrett’s subsidiary has an ongoing 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 componentsrecoveries 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 Garrett Indemnity was entered into). The obligation under the terms of the Garrett Indemnity continues 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 Garrett Indemnity was entered into, of $25 million.
On June 12, 2020, the Company and Garrett entered into an amendment of the Garrett Indemnity in connection with Garrett’s amendment of its 2018 credit agreement. These amendments provided 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 Garrett Indemnity were 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 were to be paid to the extent Garrett was in compliance with such original financial covenants and had available capacity to make such payments pursuant to the terms of the Garrett Indemnity and its current credit agreement.
In conjunction with the spin-off, Honeywell also entered into a binding tax matters agreement with Garrett and a Garrett subsidiary (the Tax Matters Agreement). The Tax Matters Agreement generally provides that Garrett is responsible and must indemnify Honeywell for all ordinary operating taxes, including income taxes, sales taxes, value-added taxes and payroll taxes, relating to Garrett for all periods, including periods prior to the spin-off, to the extent not paid prior to the spin-off date. In addition, among other items, as a result of the mandatory transition tax imposed by the U.S. Tax Cuts and Jobs Act, Garrett is required to make payments to Honeywell in the amount representing the net tax liability of Honeywell under the mandatory transition tax attributable to Garrett.
25 Honeywell International Inc.
HONEYWELL INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
(Dollars in tables in millions, except per share amounts)
GARRETT LITIGATION AND BANKRUPTCY PROCEEDINGS
On December 2, 2019, Garrett 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 (the State Court), seeking to invalidate the Garrett Indemnity. Garrett sought 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, given the challenges of operating in the COVID-19 environment, 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 Garrett Indemnity and the $18 million payment owed by Garrett to the Company on April 1, 2020 under the Tax Matters Agreement 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.
On September 20, 2020, Garrett and 36 of its affiliates filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York (the Bankruptcy Court). On September 24, 2020, Garrett moved the existing State Court litigation against Honeywell to the Bankruptcy Court. Honeywell again moved to dismiss all of Garrett’s claims on October 13, 2020. On November 2, 2020, Garrett filed a motion seeking to establish procedures to estimate the value of Honeywell’s claims. Honeywell objected to the motion. On November 18, 2020, the Bankruptcy Court held a hearing on the motion to establish procedures with respect to Honeywell’s claims and the motion to dismiss. The Bankruptcy Court did not rule on the motion to dismiss but suggested that two weeks be set aside in February 2021 for an evidentiary hearing to establish the actual allowed amount or net amount of Honeywell’s claim against Garrett. Honeywell and Garrett agreed to proceed with the estimation of Honeywell’s claims but later agreed to suspend the estimation process pending the settlement and release of Honeywell’s claims in connection with the confirmation of a plan of reorganization as discussed below. We continue to believe we have fully complied with our obligations under the Garrett Indemnity and the Tax Matters Agreement and that both agreements are valid and enforceable.
Garrett’s operations have and are expected to continue, without interruption, throughout the bankruptcy proceedings. Garrett initially proposed to sell its business while in bankruptcy, and entered into a Share and Asset Purchase Agreement, dated as of September 20, 2020, with KPS Capital Partners, LP (the Stalking Horse Agreement) and filed proposed bidding procedures for a marketing and sale process, auction and other procedures related to the proposed sale. In October 2020, Honeywell signed a coordination agreement with Oaktree Capital Management, L.P. (Oaktree) and Centerbridge Partners, L.P. (Centerbridge), which was subsequently signed by additional equity holders that, collectively with Honeywell, Centerbridge and Oaktree, represent approximately 58% of Garrett’s outstanding common stock and noteholders representing approximately 88% of the principal amount of Garrett’s outstanding senior notes (the Coordination Agreement). The Coordination Agreement and related term sheet set forth the terms of a proposed plan of reorganization (the Initial COH Proposal).
In October 2020, the Bankruptcy Court approved the bidding procedures and the Stalking Horse Agreement (as amended), and Garrett conducted a marketing and auction process through January 8, 2021. On January 11, 2021, after further revisions to the Initial COH Proposal, Garrett determined that the revised proposal (the Final COH Proposal) was higher and better than all other proposals received and entered into a plan support agreement (the Plan Support Agreement), pursuant to which all parties agreed to pursue Bankruptcy Court confirmation of the Final COH Proposal. KPS Capital Partners, LP subsequently terminated the Stalking Horse Agreement with Garrett.
As set forth in the Plan Support Agreement, the Final COH Proposal, which will be implemented through Garrett’s chapter 11 plan (the Plan) provides that, if the Plan is confirmed by the Bankruptcy Court (scheduled Plan confirmation hearing date is April 23, 2021), Honeywell will receive from Garrett on the effective date of the Plan an initial payment of $375 million in cash and Series B Preferred Stock, which will provide for cash payments to Honeywell of approximately $35 million in 2022 and $100 million per year from 2023 to 2030 (inclusive), subject to various put and call rights set forth therein. The initial cash payment, together with the Series B Preferred Stock, would be paid/issued in full and final satisfaction of Garrett’s obligations to Honeywell under the Garrett Indemnity and the Tax Matters Agreement. Upon Garrett’s emergence from bankruptcy, both agreements would be terminated, Honeywell and Garrett would mutually release each other from the claims asserted in all pending legal actions, and all pending litigation with Garrett in connection with those agreements will be resolved. In light of these developments, the hearing scheduled to estimate Honeywell’s claims and the adversary proceeding seeking to
26 Honeywell International Inc.
HONEYWELL INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
(Dollars in tables in millions, except per share amounts)
invalidate the Indemnity Agreement have been stayed and all related litigation suspended. If the Plan is confirmed by the Bankruptcy Court, both proceedings will be dismissed with prejudice on the effective date of the Plan.
We regularly review the aggregate carrying value of the receivable amounts due in connection with the Garrett Indemnity and the Tax Matters Agreement. Because Garrett is now a party to the Plan Support Agreement, we believe the present value of payments to Honeywell under the Plan, discounted at a rate reflective of the terms of the agreement, is an appropriate estimate of receivable amounts. As of December 31, 2020, Other income/expenseCurrent Assets and Other Assets included $10 million and $949 million, respectively, for the short-term and long-term portion of the receivable amount due from the Garrett Indemnity and Tax Matters Agreement. During the three months ended March 31, 2021, there were no adjustments to the carrying value of the receivable.
There can be no assurance that the Plan will be confirmed by the Bankruptcy Court or that Garrett will be able to substantially consummate the restructuring transactions contemplated in the Plan. The ultimate outcome of the bankruptcy process is uncertain. Depending on the transaction and/or plan of reorganization ultimately approved and confirmed by the Bankruptcy Court, the amount collected could differ from the receivable amounts currently recorded in our financial statements. There can be no assurance that recording an additional adjustment (positive or negative) against the remaining receivable amounts in whole or in part (together with a related statement of operations charge) will not included within other categoriesbe necessary in a future period or periods. Honeywell will continue to participate in the Bankruptcy Court proceedings in order to appropriately assess and enforce our rights in this reconciliation. Equity income/matter. Should the Plan not be confirmed in the form currently contemplated, Honeywell intends to vigorously defend its rights to collect amounts due under the Garrett Indemnity and Tax Matters Agreement with Garrett.
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 or 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 is the following:
Petrobras and Unaoil – We are cooperating with certain investigations by the U.S. Department of Justice (DOJ), the Securities and Exchange Commission (SEC) and the 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.
Given the uncertainty inherent in litigation and investigations (including the specific matter referenced above), we do not believe it is possible to develop estimates of reasonably possible loss in excess of affiliated companies is includedcurrent 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 segment profit. 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 consolidated results of operations or operating cash flows in the periods recognized or paid.
27 Honeywell International Inc.
HONEYWELL INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
(Dollars in tables in millions, except per share amounts)
Note 15. Pension Benefits
NOTE 16. PENSION BENEFITS
Net periodic pension benefit costs for ourthe Company's significant defined benefit plans include the following components:
| | | | | | | | | | | | | | | |
| U.S. Plans |
| Three Months Ended March 31, | | |
| 2021 | | 2020 | | | | |
Service cost | $ | 26 | | | $ | 25 | | | | | |
Interest cost | 77 | | | 115 | | | | | |
Expected return on plan assets | (305) | | | (284) | | | | | |
Amortization of prior service (credit) | (11) | | | (11) | | | | | |
| $ | (213) | | | $ | (155) | | | | | |
|
| | | | | | | |
| U.S. Plans |
| Three Months Ended March 31, |
| 2020 | | 2019 |
Service cost | $ | 25 |
| | $ | 21 |
|
Interest cost | 115 |
| | 153 |
|
Expected return on plan assets | (284 | ) | | (279 | ) |
Amortization of prior service (credit) | (11 | ) | | (11 | ) |
| $ | (155 | ) | | $ | (116 | ) |
|
| | | | | | | |
| Non-U.S. Plans |
| Three Months Ended March 31, |
| 2020 | | 2019 |
Service cost | $ | 6 |
| | $ | 6 |
|
Interest cost | 26 |
| | 36 |
|
Expected return on plan assets | (84 | ) | | (84 | ) |
Amortization of prior service (credit) | — |
| | — |
|
| $ | (52 | ) | | $ | (42 | ) |
During the three months ended March 31, 2020 and 2019, the Company repurchased $100 million and $100 million, respectively, of outstanding Honeywell shares from the Honeywell U.S. Pension Plan Master Trust. | | | | | | | | | | | | | | | |
| Non-U.S. Plans |
| Three Months Ended March 31, | | |
| 2021 | | 2020 | | | | |
Service cost | $ | 7 | | | $ | 6 | | | | | |
Interest cost | 19 | | | 26 | | | | | |
Expected return on plan assets | (87) | | | (84) | | | | | |
Amortization of prior service (credit) | 0 | | | 0 | | | | | |
| $ | (61) | | | $ | (52) | | | | | |
Note 16. Commitments and ContingenciesNOTE 17. OTHER (INCOME) EXPENSE
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2021 | | 2020 | | | | |
Interest income | $ | (19) | | | $ | (44) | | | | | |
Pension ongoing income – non-service | (310) | | | (237) | | | | | |
Other postretirement income – non-service | (17) | | | (13) | | | | | |
Equity income of affiliated companies | (14) | | | (12) | | | | | |
| | | | | | | |
Gain on sale of non-strategic business and assets | (90) | | | 0 | | | | | |
Foreign exchange | 5 | | | (12) | | | | | |
| | | | | | | |
Other (net) | 3 | | | 1 | | | | | |
| $ | (442) | | | $ | (317) | | | | | |
Environmental Matters
NOTE 18. SEGMENT FINANCIAL DATA
Our environmental matters are described in Note 20 CommitmentsHoneywell globally manages its business operations through 4 reportable operating segments. Segment information is consistent with how management reviews the businesses, makes investing and Contingenciesresource 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.
28 of Notes to Consolidated Financial Statements in our 2019 Annual Report on Form 10-K.Honeywell International Inc.
The following table summarizes information concerning our recorded liabilities for environmental costs:
|
| | | |
December 31, 2019 | $ | 709 |
|
Accruals for environmental matters deemed probable and reasonably estimable | 42 |
|
Environmental liability payments | (34 | ) |
Other | (2 | ) |
March 31, 2020 | $ | 715 |
|
Honeywell International Inc.HONEYWELL INTERNATIONAL INC.
Notes to Consolidated Financial StatementsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
(Dollars in tables in millions, except per share amounts)
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2021 | | 2020 | | | | |
Net sales | | | | | | | |
Aerospace | | | | | | | |
Products | $ | 1,515 | | | $ | 2,079 | | | | | |
Services | 1,117 | | | 1,282 | | | | | |
Total | 2,632 | | | 3,361 | | | | | |
Honeywell Building Technologies | | | | | | | |
Products | 1,009 | | | 970 | | | | | |
Services | 349 | | | 311 | | | | | |
Total | 1,358 | | | 1,281 | | | | | |
Performance Materials and Technologies | | | | | | | |
Products | 1,869 | | | 1,914 | | | | | |
Services | 477 | | | 483 | | | | | |
Total | 2,346 | | | 2,397 | | | | | |
Safety and Productivity Solutions | | | | | | | |
Products | 2,016 | | | 1,342 | | | | | |
Services | 102 | | | 82 | | | | | |
Total | 2,118 | | | 1,424 | | | | | |
| $ | 8,454 | | | $ | 8,463 | | | | | |
Segment profit | | | | | | | |
Aerospace | $ | 762 | | | $ | 937 | | | | | |
Honeywell Building Technologies | 305 | | | 262 | | | | | |
Performance Materials and Technologies | 434 | | | 512 | | | | | |
Safety and Productivity Solutions | 303 | | | 178 | | | | | |
Corporate | (29) | | | (41) | | | | | |
Total segment profit | 1,775 | | | 1,848 | | | | | |
Interest and other financial charges | (90) | | | (73) | | | | | |
Stock compensation expense(a) | (77) | | | (44) | | | | | |
Pension ongoing income(b) | 276 | | | 198 | | | | | |
Other postretirement income(b) | 17 | | | 13 | | | | | |
Repositioning and other charges(c) | (141) | | | (62) | | | | | |
Other(d) | 101 | | | 55 | | | | | |
Income before taxes | $ | 1,861 | | | $ | 1,935 | | | | | |
Environmental liabilities are(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 cost component) and Other (income) expense (non-service cost component).
(c) Amounts included in Cost of products and services sold, Selling, general and administrative expenses, and Other (income) expense.
(d) Amounts include the following balance sheet accounts:other components of Other (income) expense not included within other categories in this reconciliation. Equity income of affiliated companies is included in segment profit.
|
| | | | | | | |
| March 31, 2020 | | December 31, 2019 |
Accrued liabilities | $ | 222 |
| | $ | 222 |
|
Other liabilities | 493 |
| | 487 |
|
| $ | 715 |
| | $ | 709 |
|
29 Honeywell International Inc.
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 has been less than $25 million. Reimbursements associated with this agreement with a Resideo subsidiary were $35 million in the three months ended March 31, 2020 and offset operating cash outflows incurred by the Company. The Company agreed to extend the payment due date from April 30, 2020 to July 30, 2020 for the next reimbursement amount of $35 million while also agreeing to extend the payment due date from May 30, 2020 to July 30, 2020 for royalty payments of approximately $7 million owed to the Company under the Trademark License Agreement that the parties executed in connection with the spin-off. As the Company records the accruals 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 accruals is also recorded. This receivable amount recorded in the three months ended March 31, 2020 was $34 million. As of March 31, 2020, Other Current Assets and Other Assets includes $140 million and $444 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 | $ | 1,499 |
| | $ | 858 |
| | $ | 2,357 |
|
Accrual for update to estimated liability | 16 |
| | 5 |
| | 21 |
|
Asbestos related liability payments | (50 | ) | | (19 | ) | | (69 | ) |
March 31, 2020 | $ | 1,465 |
| | $ | 844 |
| | $ | 2,309 |
|
|
| | | | | | | | | | | |
Insurance Recoveries for Asbestos-Related Liabilities | |
| | |
| | |
|
| Bendix | | NARCO | | Total |
December 31, 2019 | $ | 153 |
| | $ | 281 |
| | $ | 434 |
|
Insurance receipts for asbestos-related liabilities | (3 | ) | | (6 | ) | | (9 | ) |
Insurance receivables settlements | — |
| | — |
| | — |
|
March 31, 2020 | $ | 150 |
| | $ | 275 |
| | $ | 425 |
|
Honeywell International Inc.
Notes to Consolidated Financial Statements
(Unaudited)ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in millions, except per share amounts)tables and graphs in millions)
NARCO and Bendix asbestos-related balances are included in the following balance sheet accounts:
|
| | | | | | | |
| March 31, 2020 | | December 31, 2019 |
Other current assets | $ | 42 |
| | $ | 42 |
|
Insurance recoveries for asbestos-related liabilities | 383 |
| | 392 |
|
| $ | 425 |
| | $ | 434 |
|
Accrued liabilities | $ | 361 |
| | $ | 361 |
|
Asbestos-related liabilities | 1,948 |
| | 1,996 |
|
| $ | 2,309 |
| | $ | 2,357 |
|
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.
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), 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 first quarter of 2020, Honeywell funded $18 million to the NARCO Trust for the payment of Annual Contribution Claims.
Honeywell International Inc.
Notes to Consolidated Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)
As of March 31, 2020, the Company's total NARCO asbestos liability of $844 million reflects Pre-bankruptcy NARCO Liability of $148 million and NARCO Trust Liability of $696 million (the $743 million accrual for the 2006 NARCO Trust Liability Estimate was reduced by $47 million of payments by Honeywell to the NARCO Trust for Annual Contribution Claims since HWI cash dividend funding had been fully exhausted in the fourth quarter of 2019 and there have been no further dividends from HWI). Through March 31, 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 $275 million as of March 31, 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:
|
| | | | | | | | |
| Three Months Ended March 31, | | Years Ended December 31, |
Claims Activity | 2020 | | 2019 | | 2018 |
Claims unresolved at the beginning of period | 6,480 |
| | 6,209 |
| | 6,280 |
|
Claims filed | 509 |
| | 2,659 |
| | 2,430 |
|
Claims resolved | (708 | ) | | (2,388 | ) | | (2,501 | ) |
Claims unresolved at the end of period | 6,281 |
| | 6,480 |
| | 6,209 |
|
|
| | | | | | | | |
Disease Distribution of Unresolved Claims | March 31, | | December 31, |
| 2020 | | 2019 | | 2018 |
Mesothelioma and other cancer claims | 3,221 |
| | 3,399 |
| | 2,949 |
|
Nonmalignant claims | 3,060 |
| | 3,081 |
| | 3,260 |
|
Total claims | 6,281 |
| | 6,480 |
| | 6,209 |
|
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 | $ | 50,200 |
| | $ | 55,300 |
| | $ | 56,000 |
| | $ | 44,000 |
| | $ | 44,000 |
|
Nonmalignant claims | $ | 3,900 |
| | $ | 4,700 |
| | $ | 2,800 |
| | $ | 4,485 |
| | $ | 100 |
|
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, in each case related to legacy elements of the Garrett business, 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 will be 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 has been less than the Euro equivalent, at the fixed exchange rate at time of the indemnification and reimbursement agreement was entered into, of $25 million. Reimbursements associated with this agreement were $36 million for the three months ended March 31, 2020 and offset operating cash outflows incurred by the Company. The Company agreed to extend the payment due date from May 1, 2020 to May 31, 2020 for the next reimbursement amount of $2 million while also agreeing to extend the payment due date from April 1, 2020 to May 31, 2020 for the mandatory transition tax reimbursement of $18 million owed by Garrett to the Company under the tax matters agreement that the parties executed in connection with the spin-off. As the Company records the accruals for matters covered by the agreement, a corresponding receivable from Garrett is recorded for 90 percent of that accrual as determined by the terms of the agreement. This receivable amount recorded was $13 million in the three months ended March 31, 2020. As of March 31, 2020, Other Current Assets and Other Assets includes $112 million and $901 million representing the short-term and long-term portion of the receivable amount due from Garrett under the indemnification and reimbursement agreement.
Honeywell International Inc.
Notes to Consolidated Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)
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. 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 Agreement and that the Agreement is 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. We believe the claims have no merit.
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.
Honeywell International Inc.
Notes to Consolidated Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)
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 have the option to seek rehearing en banc and file 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 those filings, Honeywell does not believe they will be successful.
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.
|
| |
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”(Honeywell or “the Company”)the Company) for the three months (quarter) ended March 31, 2020.2021. The financial information as of March 31, 20202021 should be read in conjunction with the Consolidated Financial Statements for the year ended December 31, 20192020 contained in our 20192020 Annual Report on Form 10-K.
See Note 1 Basis of Presentation of Notes to Financial Statements for discussion on the estimated impact from additional reporting days resulting from our normal quarterly closing procedures. See Note 3 Acquisitions and Divestitures of Notes to Consolidated Financial Statements for a discussion of acquisition and divestiture activity during the quarter ended March 31, 2021.
COVID-19 UPDATE
The markets around the world continue to experienceOur business faced significant volatilitydisruptions due to the COVID-19 pandemic. pandemic in 2020 and the resulting global recession, causing a slow-down in demand for many of our products and services. Although many jurisdictions worldwide authorized the emergency use of vaccines as a method to limit and control infections, as of March 31, 2021, the pandemic continues to impact our business as vaccination efforts continue to face challenges and new variants of the virus continue to emerge. When compared to the three months ended March 31, 2020, the pandemic resulted in a decline of sales for the Aerospace and Performance Materials and Technologies segments. Sales for the Safety and Productivity Solutions segment continue to benefit from significant demand for our respiratory PPE and warehouse automation services, and the Honeywell Building Technologies segment is showing early signs of improvement as our customers prepare to safely return to the office, school, and travel.
We areremain cautious as many factors remain unpredictable. We actively managing our businesses tomonitor and respond to its impacts. We cannot reasonably estimate the duration and severity of thischanging conditions created by the pandemic, which could have a material adverse impactwith focus on our business, result of operations, financial position and cash flows. See Item Part II, 1A Risk Factors for discussion of risks related to the COVID-19 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 foremployees, dedicating resources to support our communities, and innovating to address our customers’ needs. During the health ofthree months ended March 31, 2021, we made the following commitments to our employees and communities:
•In January 2021, Honeywell, Atrium Health, Tepper Sports & Entertainment and Charlotte Motor Speedway launched a unique public-private initiative, with support from North Carolina Governor Roy Cooper, Charlotte Mayor Vi Lyles and leaders from Mecklenburg County, to support local government initiatives to stem the spread of the virus,optimize mass vaccination events. The partnership has fully vaccinated more than 46,000 people.
•In February 2021, 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 possible;
Continuously updating travel guidance, according to latest developments;
Complying with all local health authority guidance or regulations and our own protocols, including requesting employees to comply with self-quarantine requirements whenever advisable; and
Reimbursing employees for COVID-19 testing and out-of-pocket treatment costs.
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 rolesponsored a week-long vaccination program in the health and well-being of people and economies, andPhoenix area, supported by volunteers from our customers and communities are depending on us more than ever to deliver for them. Aerospace business.
•We are committed to supporting the safety of our employees, customers and fellow citizens around the world.
We are investing in new production facilities andannounced that we will continue to expand existing facilities to increase productionpay out-of-pocket prescribed coronavirus testing costs for all employees worldwide and treatment costs incurred by employees and their dependents enrolled in Honeywell medical plans through December 31, 2021. This is an extension beyond our previously communicated end date of essential Personal Protective Equipment ("PPE") products. We will bring these products to market as quickly as possible. We are committed to healthcare professionals, first responders, distributors and other stakeholders in an effort to ensure our PPE products are being placed quickly and cost-effectively in the hands of those most in need.
We announced our new capacity in the U.S. to make N95 masks, with production lines being added in Rhode Island and Arizona that will collectively produce 20 million masks each month to support health, safety, and response workers globally.
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.
Plant Productivity and Safety
March 31.
We continue to provide essential servicesmonitor COVID-19 infection rates globally and produce essential goods aroundacknowledge the world. We employ standards such as screening checks, userisk of masks, face coverings and other safety equipment and social distancing practices along production linesnew surges 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 may adversely affect our customers’ or suppliers’ ability to operate or obtain financing, particularlyinfections. Please see section titled Risk Factors in our airline, oil & gas,2020 Annual Report on Form 10-K for discussion of risks associated with the COVID-19 pandemic. A discussion of the impact of COVID-19 can also be found in the Review of Business Segments section of this Management Discussion and 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.Analysis.
30 Honeywell International Inc.
|
| |
A. | Results of Operations – three months ended March 31, 2020 compared with the three months ended March 31, 2019 |
RESULTS OF OPERATIONSConsolidated Financial Results
Net Sales by Segment
31 Honeywell International Inc.
|
| | | | | | | |
Net Sales | |
| Three Months Ended March 31, |
| 2020 | | 2019 |
Net sales | $ | 8,463 |
| | $ | 8,884 |
|
% change compared with prior period | (5 | )% | | |
|
Segment Profit by Segment
32 Honeywell International Inc.
CONSOLIDATED OPERATING RESULTS
Net Sales
The change in net sales compared to the prior year period iswas attributable to the following:
|
| | | | | | | | |
| Three MonthsQ1 2021 vs. Q1 2020 | | | | |
Volume | (5(4) | )% | | | | |
Price | 12 | % | | | | |
Foreign Currency Translation | (12 | )% | | | | |
Acquisitions/Divestitures | — | % | | | | |
| (5— | )% | | | | |
Q1 2021 compared to Q1 2020
A discussion of net sales by segment can be found in the Review of Business Segments section of this Management Discussion and Analysis.
Net sales is largely unchanged. The unfavorable volume impact isoverall mix of sales between our business segments changed, driven by lowerthe following:
•Lower sales in certain productsvolumes across our businesses, partiallyAerospace segment due to the impactsimpact of COVID-19. the global recession attributable to COVID-19,
•Offset by increased demand for our respiratory PPE and warehouse automation businesses in the Safety and Productivity Solutions segment.
The unfavorablefavorable impact of foreign currency translation in the quarter is driven by the strengtheningweakening 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 British Pound.Canadian Dollar.
3133 Honeywell International Inc.
Cost of Products and Services Sold
|
| | | | | | | |
Cost of Products and Services Sold | | | |
| Three Months Ended March 31, |
| 2020 | | 2019 |
Cost of products and services sold | $ | 5,534 |
| | $ | 5,879 |
|
% change compared with prior period | (6 | )% | | |
|
Gross margin percentage | 34.6 | % | | 33.8 | % |
Q1 2021 compared to Q1 2020
Cost of products and services sold decreased in the quarter primarilyincreased due to lowerthe following:
•Higher direct and indirect material costs of approximately $130$170 million and higher repositioning and other charges of approximately $80 million, and
•Partially offset by lower labor costs of approximately $100 million (primarily driven by lower sales volumes).million.
Gross Margin
Q1 2021 compared to Q1 2020
Gross margin and Gross margin as a percentage increased in the quarter primarilyof net sales decreased due to higherthe following:
•A larger portion of our sales was driven by our Safety and Productivity Solutions segment,
•Higher repositioning and other charges of approximately $80 million, and
•Lower gross margins in our Performance Materials and Technologies segment,
•Partially offset by gross margin expansion in our Aerospace and Honeywell Building Technologies segment gross margins, and due to the lower costs within cost of products and services sold for repositioning and other charges.segments.
34 Honeywell International Inc.
Selling, General and Administrative Expenses
|
| | | | | | | |
| Three Months Ended March 31, |
| 2020 | | 2019 |
Selling, general and administrative expense | $ | 1,238 |
| | $ | 1,363 |
|
% of sales | 14.6 | % | | 15.3 | % |
Q1 2021 compared to Q1 2020
Selling, general and administrative expenses decreased $125 millionand Selling, general and administrative expenses as a percentage of net sales were largely unchanged.
•Cost savings from repositioning actions resulted in the quarter primarily due to productivity, partially offset by labor inflation.lower expenses,
•Offset by the unfavorable impact of foreign currency translation and higher share-based compensation expense. |
| | | | | | | |
Other (Income) Expense | | | |
| Three Months Ended March 31, |
| 2020 | | 2019 |
Other (income) expense | $ | (317 | ) | | $ | (285 | ) |
Other (Income) Expense
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2021 | | 2020 | | | | |
Other (income) expense | $ | (442) | | | $ | (317) | | | | | |
Q1 2021 compared to Q1 2020
Other income increased for the quarter primarily due to the following:
•Gain on sale of the retail footwear business and higher pension non-service income, partially
•Partially offset by lower interest income and lower foreign exchange income.
35 Honeywell International Inc.
Tax Expense (Benefit)
|
| | | | | | | |
| Three Months Ended March 31, |
| 2020 | | 2019 |
Tax expense (benefit) | $ | 329 |
| | $ | 406 |
|
Effective tax rate | 17.0 | % | | 22.0 | % |
Q1 2021 compared to Q1 2020
The effective tax rate decreased forincreased primarily from tax benefits realized in the quarter ended March 31, 2020 compared to the quarter ended March 31, 2019prior year as a result of tax law changes in India and the resolution of certain U.S. tax matters, partially offset by decreased tax benefits for employee share-based compensation.
matters.
The effective tax rate for the quarterthree months ended March 31, 2021 was higher than the U.S. federal statutory rate of 21% primarily due to incremental tax reserves and states taxes, partially offset by tax benefits for employee share-based compensation and the resolution of certain foreign tax matters.
The effective tax rate for the three months ended March 31, 2020 was lower than the U.S. federal statutory rate of 21% primarily from foreign earnings taxed at lower foreign tax rates, tax law changes in India and the resolution of certain U.S. tax matters, partially offset by incremental tax reserves and state taxes.
The effective tax rate for the quarter ended March 31, 2019 was higher than the U.S. federal statutory rate of 21% primarily due to incremental tax reserves and state taxes, partially offset by foreign earnings taxed at lower foreign tax rates.
Net Income Attributable to Honeywell
|
| | | | | | | |
| Three Months Ended March 31, |
| 2020 | | 2019 |
Net income attributable to Honeywell | $ | 1,581 |
| | $ | 1,416 |
|
Earnings per share of common stock – assuming dilution | $ | 2.21 |
| | $ | 1.92 |
|
Q1 2021 compared to Q1 2020
Earnings per share of common stock – stock–assuming dilution increased in the quarter primarilydecreased, driven by lower income tax expense, higherthe following:
•Higher repositioning and other charges,
•Lower segment profit,
•Higher income taxes,
•Higher share-based compensation expense and lower interest income,
•Partially offset by a gain on sale of the favorable impact of lower share count,retail footwear business and higher pension ongoing income.
3336 Honeywell International Inc.
REVIEW OF BUSINESS SEGMENTS
We globally manage our business operations through four segments: Aerospace, Honeywell Building Technologies, Performance Materials and Technologies, and Safety and Productivity Solutions.
AEROSPACE
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2021 | | 2020 | | % Change | | | | | | |
Net sales | $ | 2,632 | | | $ | 3,361 | | | (22) | % | | | | | | |
Cost of products and services sold | 1,656 | | | 2,199 | | | | | | | | | |
Selling, general and administrative and other expenses | 214 | | | 225 | | | | | | | | | |
Segment profit | $ | 762 | | | $ | 937 | | | (19) | % | | | | | | |
| | | | | | | | | | | | | | | |
| 2021 vs. 2020 |
| Three Months Ended March 31, | | |
Factors Contributing to Year-Over-Year Change | Sales | | Segment Profit | | | | |
Organic(1) | (22) | % | | (19) | % | | | | |
Foreign currency translation | — | % | | — | % | | | | |
Acquisitions, divestitures and other, net | — | % | | — | % | | | | |
Total % change | (22) | % | | (19) | % | | | | |
(1) Organic sales % change is defined as the change in net sales, excluding the impact on sales from foreign currency translation and acquisitions, net of divestitures. We believe this measure is useful to investors and management in understanding our ongoing operations and in analysis of ongoing operating trends.
37 Honeywell International Inc.
Review of Business Segments
|
| | | | | | | | | | |
| Three Months Ended March 31, |
| 2020 | | 2019 | | % Change |
Aerospace sales | | | | | |
Commercial Aviation Original Equipment | $ | 672 |
| | $ | 759 |
| | (11 | )% |
Commercial Aviation Aftermarket | 1,380 |
| | 1,361 |
| | 1 | % |
Defense and Space | 1,309 |
| | 1,221 |
| | 7 | % |
Total Aerospace sales | 3,361 |
| | 3,341 |
| | |
Honeywell Building Technologies sales | | | | | |
Buildings | 1,281 |
| | 1,389 |
| | (8 | )% |
Total Honeywell Building Technologies sales | 1,281 |
| | 1,389 |
| | |
Performance Materials and Technologies sales | | | | | |
UOP | 594 |
| | 610 |
| | (3 | )% |
Process Solutions | 1,151 |
| | 1,246 |
| | (8 | )% |
Advanced Materials | 652 |
| | 716 |
| | (9 | )% |
Total Performance Materials and Technologies sales | 2,397 |
| | 2,572 |
| | |
Safety and Productivity Solutions sales | | | | | |
Safety | 502 |
| | 538 |
| | (7 | )% |
Productivity Solutions | 922 |
| | 1,044 |
| | (12 | )% |
Total Safety and Productivity Solutions sales | 1,424 |
| | 1,582 |
| | |
Net sales | $ | 8,463 |
| | $ | 8,884 |
| | |
Q1 2021 compared to Q1 2020
Aerospace
|
| | | | | | | | | | |
| Three Months Ended March 31, |
| 2020 | | 2019 | | % Change |
Net sales | $ | 3,361 |
| | $ | 3,341 |
| | 1 | % |
Cost of products and services sold | 2,199 |
| | 2,232 |
| | |
Selling, general and administrative and other expenses | 225 |
| | 271 |
| | |
Segment profit | $ | 937 |
| | $ | 838 |
| | 12 | % |
|
| | | | | |
| 2020 vs. 2019 |
| Three Months Ended March 31, |
Factors Contributing to Year-Over-Year Change | Sales | | Segment Profit |
Organic | 1 | % | | 12 | % |
Foreign currency translation | — | % | | — | % |
Acquisitions, divestitures and other, net | — | % | | — | % |
Total % change | 1 | % | | 12 | % |
Aerospace sales increased for the quarter ended March 31, 2020Sales decreased due to organic growth.lower sales volumes as the decline in global travel and flight hours negatively impacted many of our customers, resulting in lower demand for our products from OEMs and reduced demand for our aftermarket products and services.
•Commercial Aviation Original Equipment sales decreased 11%36% (decreased 11%37% organic) primarilyin the quarter due to lower demand from airportair transport and regional original equipment manufacturers (OEM), partially offset by growth inand business aviation OEM.aviation.
•Commercial Aviation Aftermarket sales increased 1% (increased 1%decreased 34% (decreased 34% organic) primarilyin the quarter due to growthlower demand in air transport and regional partially offset by lower demand inand business aviation.
•Defense and Space sales increased 7% (increased 7%decreased 1% (decreased 2% organic) driven by growth in U.S. and international defense.
Aerospace segment profit increased primarilythe quarter driven by lower sales ofvolumes in international defense.
Segment profit decreased in the quarter driven by lower margin products andsales volumes partially offset by favorable pricing. Cost of products and services sold decreased in the quarter due to lower sales of lower margin products.volumes.
HONEYWELL BUILDING TECHNOLOGIES
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2021 | | 2020 | | % Change | | | | | | |
Net sales | $ | 1,358 | | | $ | 1,281 | | | 6 | % | | | | | | |
Cost of products and services sold | 789 | | | 754 | | | | | | | | | |
Selling, general and administrative and other expenses | 264 | | | 265 | | | | | | | | | |
Segment profit | $ | 305 | | | $ | 262 | | | 16 | % | | | | | | |
| | | | | | | | | | | | | | | |
| 2021 vs. 2020 |
| Three Months Ended March 31, | | |
Factors Contributing to Year-Over-Year Change | Sales | | Segment Profit | | | | |
Organic | 2 | % | | 12 | % | | | | |
Foreign currency translation | 4 | % | | 4 | % | | | | |
Acquisitions, divestitures and other, net | — | % | | — | % | | | | |
Total % change | 6 | % | | 16 | % | | | | |
3538 Honeywell International Inc.
Q1 2021 compared to Q1 2020
Honeywell Building Technologies
|
| | | | | | | | | | |
| Three Months Ended March 31, |
| 2020 | | 2019 | | % Change |
Net sales | $ | 1,281 |
| | $ | 1,389 |
| | (8 | )% |
Cost of products and services sold | 754 |
| | 846 |
| | |
Selling, general and administrative and other expenses | 265 |
| | 272 |
| | |
Segment profit | $ | 262 |
| | $ | 271 |
| | (3 | )% |
|
| | | | | |
| 2020 vs. 2019 |
| Three Months Ended March 31, |
Factors Contributing to Year-Over-Year Change | Sales | | Segment Profit |
Organic | (6 | )% | | (2 | )% |
Foreign currency translation | (2 | )% | | (1 | )% |
Acquisitions, divestitures and other, net | — | % | | — | % |
Total % change | (8 | )% | | (3 | )% |
Honeywell Building Technologies sales decreased for the quarter ended March 31, 2020Sales increased due to the favorable impact of foreign currency translation and organic growth. Demand increased in the current quarter compared to the prior year as the global economy recovers from the recession resulting from the COVID-19 pandemic.
•Sales in Products increased 8% (increased 4% organic) due to the favorable impact of foreign currency translation, higher sales volumes and pricing.
•Sales in Building Solutions increased 4% (decreased 1% organic) due to the favorable impact of foreign currency translation, partially offset by lower organic sales volumes due to the timing of projects.
Segment profit increased primarily due to higher productivity, pricing and the favorable impact of foreign currency translation. Cost of products and services sold increased primarily due to the unfavorable impact of foreign currency translation.translation, partially offset by higher productivity.
PERFORMANCE MATERIALS AND TECHNOLOGIES
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2021 | | 2020 | | % Change | | | | | | |
Net sales | $ | 2,346 | | | $ | 2,397 | | | (2) | % | | | | | | |
Cost of products and services sold | 1,591 | | | 1,559 | | | | | | | | | |
Selling, general and administrative and other expenses | 321 | | | 326 | | | | | | | | | |
Segment profit | $ | 434 | | | $ | 512 | | | (15) | % | | | | | | |
39 Honeywell International Inc.
| | | | | | | | | | | | | | | |
| 2021 vs. 2020 |
| Three Months Ended March 31, | | |
Factors Contributing to Year-Over-Year Change | Sales | | Segment Profit | | | | |
Organic | (6) | % | | (17) | % | | | | |
Foreign currency translation | 3 | % | | 3 | % | | | | |
Acquisitions, divestitures, and other, net | 1 | % | | (1) | % | | | | |
Total % change | (2) | % | | (15) | % | | | | |
Q1 2021 compared to Q1 2020
Sales in Building Technologies decreased 8% (decreased 6% organic) primarily due to lower sales volumes partially offset by the favorable impact of foreign currency translation. The decline in both Productsglobal travel, coupled with reduced investment in the oil and Buildinggas industry, negatively impacted many of our customers resulting in lower demand for our products and services.
•UOP sales decreased 11% (decreased 14% organic) in the quarter due to lower demand for oil and gas products and services partially offset by the favorable impact of foreign currency translation.
•Process Solutions sales decreased 5% (decreased 9% organic) in the quarter driven by delays in automation projects and lower demand for products and services partially offset by the favorable impact of foreign currency translation.
•Advanced Materials sales increased 11% (increased 8% organic) in the quarter driven by increased demand in fluorine and specialty products and the favorable impact of foreign currency translation.
Segment profit decreased due to lower sales of higher margin products. Cost of products and services sold increased due to lower sales of higher margin products and services within UOP and the unfavorable impact of foreign currency translation, partially offset by favorable pricing.a decrease in sales volumes.
SAFETY AND PRODUCTIVITY SOLUTIONS
40Honeywell Building Technologies segment profit decreased primarilyInternational Inc.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2021 | | 2020 | | % Change | | | | | | |
Net sales | $ | 2,118 | | | $ | 1,424 | | | 49 | % | | | | | | |
Cost of products and services sold | 1,550 | | | 972 | | | | | | | | | |
Selling, general and administrative and other expenses | 265 | | | 274 | | | | | | | | | |
Segment profit | $ | 303 | | | $ | 178 | | | 70 | % | | | | | | |
| | | | | | | | | | | | | | | |
| 2021 vs. 2020 |
| Three Months Ended March 31, | | |
Factors Contributing to Year-Over-Year Change | Sales | | Segment Profit | | | | |
Organic | 47 | % | | 67 | % | | | | |
Foreign currency translation | 3 | % | | 4 | % | | | | |
Acquisitions, divestitures, and other, net | (1) | % | | (1) | % | | | | |
Total % change | 49 | % | | 70 | % | | | | |
Q1 2021 compared to Q1 2020
Sales increased due to lower sales volumes, inflation and the unfavorable impact of foreign currency translation, partially offset by favorable pricing and higher productivity. Cost of products and services sold decreased due to lower sales volumesorganic growth and the favorable impact of foreign currency translation, partially offset by inflation.
Performance Materialsa divestiture. The segment continues to benefit from increased demand for respiratory PPE and Technologies
|
| | | | | | | | | | |
| Three Months Ended March 31, |
| 2020 | | 2019 | | % Change |
Net sales | $ | 2,397 |
| | $ | 2,572 |
| | (7 | )% |
Cost of products and services sold | 1,559 |
| | 1,648 |
| | |
|
Selling, general and administrative and other expenses | 326 |
| | 360 |
| | |
|
Segment profit | $ | 512 |
| | $ | 564 |
| | (9 | )% |
|
| | | | | |
| 2020 vs. 2019 |
| Three Months Ended March 31, |
Factors Contributing to Year-Over-Year Change | Sales | | Segment Profit |
Organic | (5 | )% | | (8 | )% |
Foreign currency translation | (2 | )% | | (1 | )% |
Acquisitions, divestitures, and other, net | — | % | | — | % |
Total % change | (7 | )% | | (9 | )% |
Performance Materials and Technologies sales decreased forwarehouse automation services. Demand increased across other verticals in the segment in the quarter ended March 31, 2020 primarilycompared to the prior year as the global economy recovers from the recession attributable to the COVID-19 pandemic.
•Sales in Safety and Retail increased 48% (increased 47% organic) in the quarter due to lowerorganic sales volumesgrowth and the unfavorable impact of foreign currency translation.
UOP sales decreased 3% (decreased 2% organic) driven primarily by a decrease in gas processing volumes due to volatility in oil and gas end markets, and the unfavorablefavorable impact of foreign currency translation, partially offset by growtha divestiture. Safety experienced a significant increase in equipment sales.sales volumes for respiratory PPE in the quarter due to the COVID-19 pandemic.
Process•Sales in Productivity Solutions sales decreased 8% (decreased 6%and Services increased 19% (increased 16% organic) primarily driven by decreases in thermal solutions, automation projects, field productsdue to higher organic sales volumes and the unfavorablefavorable impact of foreign currency translation, partially offset by increasestranslation.
•Sales in software sales.
Advanced Materials sales decreased 9% (decreased 8%Warehouse and Workflow Solutions increased 84% (increased 84% organic) for the quarter driven primarily by decreased volumes in fluorine products due to lowerstrong demand for our warehouse automation services.
•Sales in automotive refrigerantsAdvanced Sensing Technologies (formerly Sensing & Internet-of-Things) increased 6% (increased 4% organic) due to higher organic sales volumes and the unfavorablefavorable impact of foreign currency translation.
Performance Materials and Technologies segmentSegment profit decreasedincreased in the quarter primarily due to higher sales volumes, improved productivity, and favorable pricing, partially offset by higher sales of lower margin products. Cost of products and services sold increased in the quarter due to higher sales volumes, higher sales of lower margin products, and the unfavorable impact of foreign currency translation, partially offset by favorable pricingtranslation.
REPOSITIONING CHARGES
See Note 5 Repositioning and productivity, netOther Charges of inflation. CostNotes to Consolidated Financial Statements for a discussion of productsour repositioning actions and services sold decreased primarily due to lower sales volumes andrelated charges incurred in the favorable impact of foreign currency translation.
Safety and Productivity Solutions
|
| | | | | | | | | | |
| Three Months Ended March 31, |
| 2020 | | 2019 | | % Change |
Net sales | $ | 1,424 |
| | $ | 1,582 |
| | (10 | )% |
Cost of products and services sold | 972 |
| | 1,079 |
| | |
|
Selling, general and administrative and other expenses | 274 |
| | 291 |
| | |
|
Segment profit | $ | 178 |
| | $ | 212 |
| | (16 | )% |
|
| | | | | |
| 2020 vs. 2019 |
| Three Months Ended March 31, |
Factors Contributing to Year-Over-Year Change | Sales | | Segment Profit |
Organic | (9 | )% | | (15 | )% |
Foreign currency translation | (1 | )% | | (1 | )% |
Acquisitions, divestitures, and other, net | — | % | | — | % |
Total % change | (10 | )% | | (16 | )% |
Safety and Productivity Solutions sales decreased for the quarterthree months ended March 31, 2020 primarily due to lower organic sales2021 and the unfavorable impact of foreign currency translation.
Sales in Safety decreased 7% (decreased 5% organic) primarily due to lower sales volumes and the unfavorable impact of foreign currency translation. Safety experienced a significant increase in order volume for worker safety equipment in the first quarter due to COVID-19.
Sales in Productivity Solutions decreased 12% (decreased 11% organic) primarily attributable to lower sales volumes in Intelligrated and Sensing and IoT, and the unfavorable impact of foreign currency translation.
Safety and Productivity Solutions segment profit decreased primarily due to lower sales volumes, partially offset by higher productivity, net of inflation. Cost of products and services sold decreased for the quarter primarily due to lower sales volume and higher productivity, net of inflation.
Repositioning and Other Charges
2020. Cash spending related to our repositioning actions was $88$105 million in the three months ended March 31, 20202021 and was funded through operating cash flows. We expect cash spending for repositioning actions to be approximately $300 million
41 Honeywell International Inc.
LIQUIDITY AND CAPITAL RESOURCES
(Dollars in 2020 and to be funded through operating cash flows.
|
| |
B. | Liquidity and Capital Resources |
tables in millions)
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:
|
| | | | | | | |
| Three Months Ended March 31, |
| 2020 | | 2019 |
Cash provided by (used for): | |
| | |
|
Operating activities | $ | 939 |
| | $ | 1,134 |
|
Investing activities | 350 |
| | (609 | ) |
Financing activities | (2,446 | ) | | (1,235 | ) |
Effect of exchange rate changes on cash | (189 | ) | | 48 |
|
Net increase (decrease) in cash and cash equivalents | $ | (1,346 | ) | | $ | (662 | ) |
Cash provided by operating activities decreased by $195 million primarily due to a $124 million unfavorable impact from working capital and a $77 million increase in net payments for repositioning and other charges, partially offset by a decrease in cash tax payments of $183 million.
Cash provided by investing activities increased by $959 million primarily due to a net $625 million decrease in investments, primarily short term marketable securities, and an increase in cash provided by other investing activities of $327 million.
Cash used for financing activities increased by $1,211 million primarily due to an increase in repurchases of common stock of $1,173 million and a decrease in proceeds from the issuance of common stock of $79 million, partially offset by an increase in net proceeds from the issuance of commercial paper of $83 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, additionalAdditional sources of liquidity include committed credit lines, short-term debt from the commercial paper markets,market, long-term borrowings, and access to the public debt and equity markets. To date,markets, U.S. cash balances and the Company has not experienced any limitations in our ability to access these sourcesnon-U.S. cash as a result of liquidity. Also, considering the current economic environment in which each of our businesses operate, our business strategiesU.S. Tax Cuts and our productivity initiatives, we believe that our cash balances and operating cash flows will remain our principal source of liquidity.Jobs Act.
CASH
We monitor the third-party depository institutions that hold our cash and cash equivalents on a daily basis. Our emphasis is primarily safety of principal and secondarily maximizing yield of those funds. We diversify our cash and cash equivalents among counterparties to minimize exposure to any one of these entities. As of March 31, 2021 and December 31, 2020, we held $8.8$12.7 billion and $15.2 billion, respectively, of cash and cash equivalents, andincluding our short-term investments.
BORROWINGS
Consolidated total borrowings were $21.3 billion and $22.4 billion as of March 31, 2021 and December 31, 2020. In response to COVID-19, the Company took several actions during 2020 to secure liquidity in light of the uncertainty in economic conditions and the credit markets. See Note 9 Long-term Debt and Credit Agreements of Notes to Consolidated Financial Statements for a summary of the actions taken by the Company to improve its short-term and long-term liquidity position in response to COVID-19.
| | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
Commercial paper and other short-term borrowings | $ | 3,568 | | | $ | 3,597 | |
Variable rate notes | 1,122 | | 1,122 |
Fixed rate notes | 16,449 | | 17,399 |
Other | 188 | | | 266 | |
Total borrowings | $ | 21,327 | | | $ | 22,384 | |
A source of liquidity is our ability to access the commercial paper market. Commercial paper notes are sold at a discount or premium and have a maturity of not more than 365 days from date of issuance. Borrowings under the commercial paper program are available for general corporate purposes as well as for financing acquisitions. As of March 31, 2020, we had $3.5 billion of commercial paper notes outstanding.
On March 26, 2020, we entered into a Delayed Draw Term Loan Agreement (the “Term Loan Agreement”) with a syndicate of banks. The Term Loan Agreement provides for a two-year, delayed draw term loan facility inWe also have the aggregate principal amount of up to $6.0 billion and is maintainedfollowing revolving credit agreements, which can provide financing for general corporate purposes. We elected to enter into the Term Loan Agreement to maximize financial flexibility, further bolster liquidity, and further strengthen resilience in uncertain times. In addition, on April 10, 2020, the Company entered into apurposes:
•A $1.5 billion 364-Day Credit Agreement (the "364-Day364-Day Credit Agreement")Agreement) with a syndicate of banks. Thisbanks, dated March 31, 2021. Amounts borrowed under the 364-Day Credit Agreement are required to be repaid no later than March 30, 2022, unless (i) we elect to convert all then outstanding amounts into a term loan, upon which such amounts shall be repaid in full on March 30, 2023, or (ii) the 364-Day Credit Agreement is maintained for general corporate purposes.terminated earlier pursuant to its terms. The 364-Day Credit Agreement replaces the previously reported $1.5 billion 364-day credit agreement dated as of April 10, 2020 (the Prior 364-Day Agreement), which was terminated in accordance with its terms effective March 31, 2021. As of March 31, 2021, there were no outstanding borrowings under our 364-Day Credit Agreement.
•A $4.0 billion Five Year Credit Agreement (the 5-Year Credit Agreement) with a syndicate of banks, dated March 31, 2021. Commitments under the 5-Year Credit Agreement can be increased pursuant to the terms of the 5-Year Credit Agreement to an aggregate amount not to exceed $4.5 billion. The 5-Year Credit Agreement amended and restated the previously reported $4.0 billion amended and restated five year credit agreement dated as of April 26, 2019 which was terminated on April 10, 2020.(the Prior 5-Year Agreement). As of March 31, 2021, there were no outstanding borrowings under our 5-Year Credit Agreement.
42 Honeywell International Inc.
We continuouslyalso have a current shelf registration statement with the SEC under which we may issue additional debt securities, common stock and preferred stock that may be offered in one or more offerings on terms to be determined at the time of the offering. We anticipate that net proceeds of any offering would be used for general corporate purposes, including repayment of existing indebtedness, share repurchases, capital expenditures and acquisitions.
CREDIT RATINGS
Our ability to access the global debt capital markets and the related cost of these borrowings, is affected by the strength of our credit rating and market conditions. Our credit ratings are periodically reviewed by the major independent debt-rating agencies. As of March 31, 2021, S&P, Fitch, and Moody’s have ratings on our debt set forth in the table below:
| | | | | | | | | | | | | | | | | |
| S&P | | Fitch | | Moody's |
Outlook | Stable | | Stable | | Stable |
Short-term | A-1 | | F1 | | P1 |
Long-term | A | | A | | A2 |
CASH FLOW SUMMARY
Our cash flows from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows, are summarized as follows:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2021 | | 2020 |
Cash provided by (used for): | | | |
Operating activities | $ | 978 | | | $ | 939 | |
Investing activities | (1,304) | | | 350 | |
Financing activities | (2,217) | | | (2,446) | |
Effect of exchange rate changes on cash | (14) | | | (189) | |
Net increase (decrease) in cash and cash equivalents | $ | (2,557) | | | $ | (1,346) | |
Cash provided by operating activities increased by $39 million primarily due to a favorable impact from working capital of $218 million (favorable accounts payable, accounts receivable, and inventories), partially offset by a decrease in net income of $154 million.
Cash used for investing activities increased by $1,654 million primarily due to $1,303 million in cash paid for an acquisition, a $319 million increase in investments and a $147 million decrease in receipts related to settlements of derivative contracts, partially offset by $190 million in proceeds from the sale of the retail footwear business.
Cash used for financing activities decreased by $229 million primarily due to a decrease in share repurchases of $1,101 million, partially offset by an increase of $796 million due to net repayments of long-term debt during the three months ended March 31, 2021.
CASH REQUIREMENTS AND ASSESSMENT OF CURRENT LIQUIDITY
In addition to our normal operating cash requirements, our principal future cash requirements will be to fund capital expenditures, share repurchases, dividends, strategic acquisitions and debt repayments. On February 12, 2021, the Board of Directors authorized the repurchase of up to a total of $10 billion of Honeywell common stock, which included amounts remaining under, and replaced, the previously approved share repurchase program. During the three months ended March 31, 2021, the Company repurchased common stock of $822 million. Please refer to the section titled Liquidity and Capital Resources of our 2020 Form 10-K for a discussion of our expected capital expenditures, share repurchases and dividends for 2021.
We continue to identify opportunities to improve our liquidity and working capital efficiency, which includes the extension of payment terms with our suppliers and sales of our trade receivables to unaffiliated financial institutions without recourse. The impact of these programs are not material to our overall liquidity.
43 Honeywell International Inc.
We continue to assess the relative strength of each business in our portfolio as to strategic fit, market position, profit and cash flow contribution in order to identify target investment and acquisition opportunities in order to upgrade our combined portfolio and identify business units that will most benefit from increased investment.portfolio. We identify acquisition candidates that will further our strategic plan and strengthen our existing core businesses. We also identify business unitsbusinesses 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 three months ended March 31, 2020, the Company repurchased $1,923 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 March 31, 2020, $5.1 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 9 Long-term Debt and Credit Agreements of Notes to Consolidated Financial Statements for additional discussion of items impacting our liquidity.
C. Other MattersLITIGATION
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 Item 3. Legal Proceedings in our 2019 Annual Report on Form 10-K and Note 16 15 Commitments and Contingencies of Notes to Consolidated Financial Statements for further discussion of environmental, asbestos and other litigation matters.
Critical Accounting Policies
CRITICAL ACCOUNTING ESTIMATES
The financial information as of March 31, 20202021 should be read in conjunction with the Consolidated Financial Statements for the year ended December 31, 20192020 contained in our 20192020 Annual Report on Form 10-K.
For a discussion of the Company’s critical accounting policies,estimates, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operationsthe section titled Critical Accounting Estimates in our 20192020 Annual Report on Form 10-K.
RECENT ACCOUNTING PRONOUNCEMENTS
Recent Accounting Pronouncements
See Note 2 Summary of Significant Accounting Policies of Notes to Consolidated Financial Statements for a discussion of recent accounting pronouncements.
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| |
Item 3. | Quantitative and Qualitative Disclosures About Market Risks |
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.the section titled Quantitative and Qualitative Disclosures About Market Risks, in our 20192020 Annual Report on Form 10-K. As of March 31, 2020,2021, there has been no material change in this information.information.
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Item 4. | Controls and Procedures |
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 CommissionCommission's 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 beenwere 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.
44 Honeywell International Inc.
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.
PartPART II. Other InformationOTHER INFORMATION
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Item 1. | Legal Proceedings |
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| General Legal Matters |
ITEM 1. LEGAL PROCEEDINGS
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 15 Commitments and Contingencies of Notes to Consolidated Financial Statements for a discussion of environmental, asbestos and other litigation matters. There were no matters requiring disclosure pursuant to the requirement to disclose certain environmental matters involving potential monetary sanctions in excess of $300,000.
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| Environmental Matters Involving Potential Monetary Sanctions in Excess of $100,000 |
See Item 3. Legal Proceedings in our 2019 Annual Report on Form 10-K for a discussion of a matter settled in the period covered by this Quarterly Report on Form 10-Q.
ITEM 1A. RISK FACTORS
Other than as noted below, thereThere have been no material changes to the disclosure presented in our 20192020 Annual Report on Form 10-K under Item 1A.the section titled Risk Factors. For a further discussion of our Risk Factors, refer to the “Risk Factors” discussion containedsection titled Risk Factors in our 20192020 Annual Report on Form 10-K.
The global COVID-19 coronavirus pandemic and related impacts may 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. The extent to which the COVID-19 pandemic impacts 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, disrupt the purchasing and payment behaviors of our customers and their end-users; our operations, including our manufacturing activities, the shipment of our products, and the performance of our suppliers and service providers; and our liquidity and cash flow.
Customer Risk. Existing and potential customers and their end-users may choose to reduce or delay spending. In particular, lower demand for air travel may continue to cause our customers to delay spending in connection with the manufacturing, repair, overhaul or servicing of aircraft. Customers may also 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, all of which may materially and negatively impact our operating results, financial condition and prospects. 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 limit our ability to sell products and 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 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. 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, and additional impacts may arise. A sustained or prolonged COVID-19 outbreak could exacerbate the negative impacts described above, and the resumption of normal business operations may be delayed or constrained by lingering effects on our suppliers, third-party service providers, and/or customers. These effects, alone or taken together, could further impact each of the risks described above.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Honeywell purchased 11,652,2144,000,000 shares of its common stock, par value $1 per share, in the quarter ended March 31, 2020.2021. On April 29, 2019,February 12, 2021, the Board of Directors authorized the repurchase of up to a total of $10 billion of Honeywell common stock, which included amountsapproximately $2.8 billion remaining under, and replaced, the previously approved share repurchase program. program, which was approved in April 2019 and authorized repurchases of up to $10 billion.
Repurchases may be made through a variety of methods, which could include open market purchases, accelerated share repurchase transactions, negotiated block transactions, 10b5-1 plans, other transactions that may be structured through investment banking institutions or privately negotiated, or a combination of the foregoing. Honeywell presently expects to repurchase outstanding shares from time to time (i) to offset the dilutive impact of employee stock-based compensation plans, including option exercises, restricted unit vesting and matching contributions under our savings plans, and (ii) 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.
As of March 31, 2020, $5.12021, $9.7 billion remained available for additional share repurchases. The following table summarizes Honeywell’s purchase of its common stock for the quarter ended March 31, 2020:2021:
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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) |
January 1-31, 2021 | 2,305,713 | | | $ | 203.99 | | | 2,305,713 | | | $ | 2,804 | |
February 1-28, 2021 | 464,368 | | | $ | 204.23 | | | 464,368 | | | $ | 9,920 | |
March 1-31, 2021 | 1,229,919 | | | $ | 208.44 | | | 1,229,919 | | | $ | 9,664 | |
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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) |
January 2020 | — |
| | $ | — |
| | — |
| | $ | 6,989 |
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February 2020 | 3,922,888 |
| | $ | 178.55 |
| | 3,922,888 |
| | $ | 6,289 |
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March 2020 | 7,729,326 |
| | $ | 158.20 |
| | 7,729,326 |
| | $ | 5,066 |
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Item 4. | Mine Safety Disclosures |
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.
45 Honeywell International Inc.
ITEM 5. OTHER INFORMATION
On November 16, 2020 and February 12, 2021, the Company entered into amendments to the indemnification and reimbursement agreement with Resideo, which are filed herewith as Exhibits 10.2 and 10.3, respectively. The amendments modified the affirmative and negative covenants set forth in Exhibit G of the indemnification and reimbursement agreement, including to substantially conform the covenants with those contained in Resideo's credit agreement (as amended in connection with Resideo's debt refinancing).
46 Honeywell International Inc.
The Company has determined that in order to maximize financial flexibility, further bolster liquidity, and further strengthen resilience in uncertain times, it will fully utilize and draw on the $6.0 billion aggregate principal amount available under the Delayed Draw Term Loan Agreement described in Note 11
Long-term Debt and Credit Agreements of Notes to Consolidated Financial Statements on or prior to June 26, 2020.
EXHIBIT INDEX
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Exhibit No.
| | Description |
10.110.1* |
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Delayed Draw Term Loan10.2 | | |
10.3 | | |
10.4 | | 364-Day Credit Agreement, dated as of March 31, 2021, among Honeywell International Inc., the banks, financial institutions, and other institutional lenders parties thereto, Bank of America, N.A., as administrative agent, and JPMorgan Chase Bank, N.A. and Wells Fargo Bank, National Association, as syndication agents(incorporated by reference to Exhibit 10.1 to Honeywell’s Form 8-K filed on April 2, 2021) |
10.5 | | Amended and Restated Five Year Credit Agreement, dated as of March 26, 2020,31, 2021, among Honeywell International Inc., the initialbanks, financial institutions, and other institutional lenders named therein, Citibank,parties thereto, Bank of America, N.A., as administrative agent, and Citibank, N.A., Bank of America N.A.,Europe Designated Activity Company, London Branch, as swing line agent and JPMorgan Chase Bank, N.A., and Wells Fargo Bank, National Association, as syndication agents (incorporated by reference to Exhibit 10.1 to Honeywell’s Form 8-K filed on March 31, 2020.
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10.2 |
| | 364-Day Credit Agreement, dated as of April 10, 2020, among Honeywell International Inc., the banks, financial institutions, and other institutional lenders parties thereto, Citibank, N.A., as administrative agent, and JPMorgan Chase Bank, N.A., as syndication agent (incorporated by reference to Exhibit 10.1 to Honeywell’s Form 8-K filed on April 10, 2020). 2, 2021) |
10.6* | | |
31.110.7* |
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10.8* | | |
10.9* | | |
10.10* | | |
10.11* | | |
10.12* | | |
31.1 | | |
31.2 |
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31.2 |
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32.1 |
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32.1 |
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32.2 |
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32.2 |
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95 |
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95 |
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47 Honeywell International Inc.
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Exhibit No. | | Description |
101.INS |
| | The following financial statements from the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2020,2021, formatted in Inline XBRL:XBRL (iXBRL): (i) Consolidated Statements of Cash Flows, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Balance Sheets, (v) Consolidated Statements of Shareowners' Equity and (v)(vi) Notes to Consolidated Financial Statements, tagged as blocks of text and including detailed tags.tags |
101.SCH |
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101.SCH |
| | Inline XBRLiXBRL Taxonomy Extension Schema (filed herewith) |
101.CAL |
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101.CAL |
| | Inline XBRLiXBRL Taxonomy Extension Calculation Linkbase (filed herewith) |
101.DEF |
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101.DEF |
| | Inline XBRLiXBRL Taxonomy Extension Definition Linkbase (filed herewith) |
101.LAB |
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101.LAB |
| | Inline XBRLiXBRL Taxonomy Extension Label Linkbase (filed herewith) |
101.PRE |
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101.PRE |
| | Inline XBRLiXBRL Taxonomy Extension Presentation Linkbase (filed herewith) |
104 | | |
104 |
| | Cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020,2021, formatted in Inline XBRL (and contained in Exhibit 101) |
The Exhibits identified with an asterisk (*) are management contracts or compensatory plans or arrangements.
4448 Honeywell International Inc.
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.
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| Honeywell International Inc. |
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Date: April 23, 2021 | 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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| Honeywell International Inc. |
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Date: May 1, 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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49 Honeywell International Inc.