Honeywell International (HON 0.27%) is one of the largest industrial companies in the world. Its reach extends from Internet of Things (IoT) solutions that monitor lighting and temperature controls to aerospace, home generators, heaters, fans, cybersecurity, and a whole lot more.
But with the economy, and especially the industrial economy, taking a hit from the COVID-19 pandemic, Honeywell's business may be at risk in the short term. Let's take a look at Honeywell's second-quarter earnings to see how the company is doing and where it is headed.
Image source: Getty Images.
Aerospace is a problem
Honeywell's Aerospace division, its top-performing business segment, has gone from being one of its crown jewels to its biggest problem. Honeywell components and technology are involved in the majority of commercial, defense, and space-related aircraft, giving the company an industry-leading position while at the same time amplifying the impact of lower air traffic on Honeywell's earnings.
|
Business Segment |
Q2 2020 Sales |
Q2 2019 Sales |
Organic Growth Comparison |
|---|---|---|---|
|
Aerospace |
$2.54 billion |
$3.51 billion |
(27%) |
|
Performance Materials & Technologies (PMT) |
$2.22 billion |
$2.74 billion |
(18.9%) |
|
Safety & Productivity Solutions (SPS) |
$1.54 billion |
$1.55 billion |
1% |
|
Building Technologies (BT) |
$1.12 billion |
$1.45 billion |
(17%) |
|
Total |
$7.5 billion |
$9.2 billion |
(18%) |
Data Source: Honeywell Presentations.
Aerospace made up nearly 40% of the company's second-quarter earnings last year and was the largest growth driver, with 11% organic growth. The narrative has done a complete 180 as aerospace organic growth fell 27% in this year's second quarter, becoming the worst-performing segment from a growth perspective. Honeywell expects the third quarter to be similar, with a 25% decrease in aerospace sales compared to the same quarter last year and an overall sales decline of 15%.
Effective cost reduction and strong cash flow
Considering this was expected to be one of the worst quarters in recent memory, an 18% decrease in sales really isn't that bad. It's actually quite good given Honeywell's exposure to aerospace, the construction and real estate market through its BT segment, and oil and gas through its PMT segment.
Honeywell's free cash flow (FCF) was barely down at $1.3 billion and was more than enough to cover $900 million in mostly dividends and capital expenditures.
Although sales and earnings will likely be down for the rest of the year, Honeywell is expecting to reduce 2020 costs by $1.4 billion to $1.6 billion -- 60% to 70% of which is likely to be permanent. During its second quarter, Honeywell reduced costs by $500 million. Cost reductions of this magnitude shouldn't go unnoticed. They are already giving Honeywell the vital breathing room it needs to run its business without dipping into its treasure trove of cash.
Balance sheet remains healthy
Speaking of cash, Honeywell ended the quarter with a whopping $15 billion in cash. Its balance sheet continues to be less leveraged and more liquid than other industrials its size. What little debt Honeywell did take on in the second quarter ($3 billion) the company was able to stagger over 2025, 2030, and 2050 at a weighted average interest rate of 1.9%.
HON Debt To Capital (Quarterly) data by YCharts
Honeywell's balance sheet has the capacity to take on more debt if needed without getting overly leveraged. By spreading debt out over long periods of time at a low interest rate combined with cost-cutting measures, Honeywell has ensured that it will retain its rock-solid balance sheet.
The "prove-it" quarter
Despite its business being highly vulnerable to many of the negative impacts of the pandemic, Honeywell just proved to investors why it is an elite industrial stock. The company was able to mitigate revenue losses while keeping cash flow strong and effectively cutting costs. Its reserve cash hoard remains strong, and what debt it did take on is low-interest rate, long-term debt.
Industrial stocks tend to ebb and flow with the economy, so it's only natural that many of them will have lower year-over-year results. Honeywell was able to deliver manageable results and only an 18% loss in revenue during what is expected to be one of the worst quarters for a long time. With a premier balance sheet, leading position across multiple industries, and a dividend that currently yields 2.3%, Honeywell looks to be one of the best industrials on the market today.
