Even though the North Carolina-based conglomerate suffered a sharp decline in revenue in the second quarter and a decrease in demand in some business of its units because of the COVID-19 pandemic, Honeywell International still says it will use its liquidity to acquire companies with lower valuations.
Darius Adamczyk, Chairman and Chief Executive Officer of Honeywell, said on the Q2 2020 earnings call that “[t]he second quarter was one of the most challenging quarters Honeywell has ever faced. The widespread repercussions of the COVID-19 pandemic and oil price volatility impacted many of our businesses and end markets.”
However, Honeywell’s Senior Vice President and Chief Financial Officer Greg Lewis told The Wall Street Journal, “We absolutely want to go and deploy capital,” he said in an interview. “This is truly an opportunity for us to go do that.”
Honeywell is targeting companies that could broaden its capabilities, including connected industrial software, known as “connected enterprise” offerings. This may mean looking at artificial intelligence or technical solutions, Lewis said. Rather than building the technology itself, making outside investments frequently is better because of speed, he said.
Honeywell acquired Rebellion Photonics, a visual gas-monitoring service that caters to oil companies. That deal was closed in December for an undisclosed amount.
CFO Lewis said that Honeywell is planning to reduce inventories for business lines that include its aerospace and materials engineering that have seen a lower demand.
Honeywell had $15.1 billion in cash at the end of Q2, and it issued $3 billion in long-term debt. The company also drew down on a term loan to access $3 billion to strengthen its liquidity position. In addition, Honeywell looked to preserve capital during the past few months, saving $750 million in the first half of the year through initiatives such as cutting general and administrative expenses in its administrative functions. The company said it anticipates cost cuts to be about $1.4 billion to $1.6 billion for the year.
In structurally reducing its costs, Honeywell has the resources to look at new acquisitions, said Nicholas Heymann, an analyst at William Blair & Co in an interview with The Wall Street Journal.
“They have opportunities to grow, but I would almost think they would buy some stock before they spend a lot of money on an acquisition,” Heymann said.
Lewis added that overall, the uncertainty concerning the pandemic has made overseeing finances for a massive company particularly hard.
“Just managing through the challenges of the safety and well-being of your employees and the objectives of your business—that’s been at a level of intensity that I’ve not experienced before,” the CFO said.
Honeywell recently added Emily McNeal as its new senior vice president, corporate development, and global head of M&A. McNeal will be responsible for maintaining and building the company’s pipeline of acquisition opportunities “that are strategically well positioned to accelerate Honeywell’s growth,” Adamczyk said on the Q2 earnings call.
McNeal formerly was CFO of e-commerce firm Flipkart. She started there in 2018 after Walmart’s acquisition of Flipkart. Walmart acquired a majority stake in Flipkart for $16 billion.
The most recent global head of M&A at Honeywell, Brian Cook, left the company in 2019. George Koutsaftes served as interim M&A leader before the hiring of McNeal.
The company’s sales dropped 19% in the second quarter ending June 30th, with the greater call for the company’s personal protective equipment (PPE) failing to cancel out the dramatic declines in the aerospace business due to restricted air travel caused by the pandemic.
“The M&A function is open for business,” Adamczyk said on the earnings call.