Honeywell Reports Q1 Earnings

On Friday before the opening bell, Honeywell (HON)  reported mixed results with its first quarter earnings. Revenues of $8.46 billion (-5% YoY and -4% an organic basis) missed expectations of $8.59 billion, on the other hand, earnings per share of $2.21 (+15% YoY) exceeded expectations of $1.96 per share and the high end of management's prior guidance of $2.02 to $2.07 per share.

Before getting to the results, we want to note that Honeywell, unsurprisingly, suspended full-year financial guidance, however, noted that that it does expect ongoing challenges to the top-line as a result of the current environment, "particularly in the aerospace and oil and gas sectors."

Looking to some other firm-wide metrics segment, margin expansion of 140bps was better than management's prior guidance for a 20-50bps expansion. Additionally, despite the difficult macroeconomic environment around the world, Honeywell generated $900 million of operating cash flow and $800 million in free cash flow, helping to further strengthen the company's already strong balance sheet.

Aerospace

Aerospace revenues of $3.361 billion was better than the $3.272 billion expected, with organic sales ticking up 1% YoY "driven by continued strength in the Defense and Space business and growth in air transport commercial aftermarket, partially offset by lower air transport original equipment demand," with CFO Gregory Lewis specifically (and unsurprisingly) calling out lower Boeing (BA) 737 MAX deliveries on the conference

Meanwhile, segment margins improved by 280bps to 27.9%, benefiting from a favorable sales mix.

Within the segment, on an organic basis, sales declined 11% in Commercial Aviation Original Equipment, however, increased elsewhere, advancing 1% in Commercial Aviation Aftermarket, and 7% in Defense and Space.

Honeywell Building Technologies

Honeywell Building Technologies (HBT) revenue was $1.281 billion, missing expectations of $1.358 billion, with sales declining 6% on an organic basis "as flat sales in commercial fire were offset by softness in building solutions projects and volume declines in security and building management products."

Driving the segment, strong commercial fire orders growth was offset by lower volumes in security and building management products and softness in building solutions products in China and the Americas.

On a more positive note, segment margins expanded 100bps annually to 20.5%.

Performance Materials and Technologies

Performance Materials and Technologies (PMT) sales of $2.397 billion was a miss versus expectations of $2.551 billion. Organic sales decreased 5% driven in part by supply chain disruptions as a result of the Covid-19 pandemic and sharp drop in oil prices.

Additionally, segment margins contracted 50 basis points to 21.4%.

Within the segment, organic sales were down across the board, declining 2% at UOP, 6% at Honeywell Process Solutions, and 8% at Advanced Materials.

Safety and Productivity Solutions

Looking to Safety and Productivity Solutions (SPS), sales of $1.424 billion missed the consensus of $1.459 billion with organic sales falling by 9%, as demand for respiratory personal protective equipment (PPE) in Safety was more than offset by declines in gas sensing and retail.

Also speaking to the organic sales decline, Intelligrated went up against a tough 1Q19 (when the division saw 50% annual growth), impacted by project timing. However, this was expected and more importantly the backlog was up roughly 40% annually and management continues to expect growth to reaccelerate in the second quarter.

Segment margins contracted 90bps versus the year ago period, coming in at 12.5%.

Breaking the segment down further, on an organic basis, Safety sales fell 5% and Productivity Solutions fell 11%.

Guidance

Looking ahead, as we noted, management suspended full-year guidance. However, we did get some color on the second quarter. Unfortunately, given that Honeywell is a global industrial company tied to a great extent to GDP, the upcoming quarter doesn't look great (though that is not a surprise) with management expecting company-wide sales to decline more than 15%, driven by a greater 25% decline in Aero, a greater than 15% decline in PMT, a greater than 10% decline in HBT and a greater than 5% decline in SPS.

Additional commentary on second-quarter drivers can be found below.

On the capital allocation front, management continued putting the company's strong balance sheet to work, repurchasing $1.9 billion worth of shares, paying out another $600 million via dividends and investing another $100 million on capital expenditures, which included investments that will allow the company to "produce millions more N95 masks to help the coronavirus relief effort."

Thinking through the company's ability to work through this difficult time, we believe management to be executing as well as we could ask for given the circumstance.

From a financial standpoint, the company remains in a strong position to weather the storm and continue investing in the long-term. Looking at the balance sheet, Honeywell is already well positioned to cover near-term expenses thanks in large part to the $8.8 billion of cash and short-term investments on hand. Furthermore, from a leverage perspective, the net-debt-EBITDA ratio stands well below one. Moreover, compounding the strong balance sheet, management was also sure to call out that the pension plan remains overfunded (so no need for additional funding), no remaining bond maturities in 2020 (only $800 million in 2021), and total undrawn sources of liquidity amounting to $11.5 billion. Add this all up and we're looking at a financial profile where there is over $20 billion cash, short-term investments and undrawn sources of liquidity readily available versus $800 million in longer-term debt maturities, and $3.5 billion in commercial paper coming due within the next year.

On the call, Lewis commented, "Though operational disruptions have caused headwinds, our integrated supply chain team's efforts under Torsten's leadership have been able to keep us running," adding that the team is monitoring its suppliers to ensure they remain operational and that as of today "well over 90%" of the company's suppliers remain operational. Additionally, the company's logistics are proactively securing transportation and freight.

Bottom line, we aren't here to sugar coat anything, to be clear, we fully expect volatility ahead and pressure on the stock as the company's aerospace and energy end markets remain hamstrung as a result of the Covid-19 pandemic. However, despite these near-term pressures, we believe the management team to be best in class and ready to adjust for whatever comes next. Combined with the current financial standing (not to mention management's proven history of managing costs), we believe that longer-term Honeywell remains a best-in-class company that will bounce back from this ready to regain momentum. The way we see it, if you're going to own an industrial, which we want to do given that we expect this sector to rebound strong once we defeat the virus and the global economy can begin recovering, Honeywell is the one to own. That said, given the noted near-term pressures, we will maintain our Two rating and will reexamine our price target.

Action Alerts PLUS, which Cramer co-manages as a charitable trust, is long HON.