GE, Honeywell ramped up SCF programmes during the pandemic
The industrial arms of General Electric and Honeywell boosted days payable outstanding with a $1 billion increase in supply chain finance, analysis of disclosures shows.
After experiencing unprecedented working capital pressures at the height of the pandemic, large US companies began to normalise relationships with suppliers in the last quarter of 2020, showing a reduction in days payables outstanding (DPO) according to analysis by EuroFinance.
But two industrial giants bucked the trend, helped by supply chain finance, a technique now in the regulatory crosshairs after the collapse of Greensill.
DPO at General Electric (GE) and Honeywell surged during 2020 by 25.3% and 8.1% respectively, representing a drastic rise from 2019 levels on the back of negotiated terms of payment with suppliers of these companies.
In February 2021, Honeywell mentioned in its annual 10-K filing that it continues to identify opportunities to improve liquidity and working capital efficiency, which includes the extension of payment terms with its suppliers.
“Rebalancing our relationship with our partners and suppliers and significantly, structurally increasing DPO as well as significant strengthening the processes that we still on DSOs and how we both bill, collect, including over dues, that’s really gotten us to a positive cash flow already in 2020” said Carolina Dybeck Happe Chief Financial Officer at GE, during a January earnings call.
In urgent need of liquidity, suppliers of these companies have tapped the supply chain finance (SCF) facility offered by third party financial institutions, to sell their receivables to these financial institutions.
GE and Honeywell said that third party financing to suppliers increased by $500 million apiece during 2020, according to filings. Boeing showed the opposite trend, reducing SCF usage by $1.9 billion to $3.8 billion during the same period.
“The decline for the year ended December 31, 2020 was primarily due to reductions in commercial purchases from suppliers”, Boeing said in its annual filing published in February 2021. Even before the pandemic, Boeing was challenged by the grounding of its 737 MAX aircraft, which has since returned to service.
Honeywell said in its annual filing that the increase in 2020 reflected a combination of extension of payment terms with suppliers and increased utilization of its SCF program. It also indicated “while access to SCF could decrease if our credit ratings are downgraded, we do not believe that changes in the availability of SCF will have a significant impact on our liquidity.”
The US government has stepped in to support its industrial sector. In January 2021, the government-owned Export-Import Bank voted to guarantee a loan of A$85 million to Australian airline Qantas to purchase spare engines manufactured by GE aviation.
For the full year, amongst industrial companies, Boeing and 3M saw a jump in their respective DPO with Boeing’s increase of 14 days being the largest. Meanwhile Lockheed Martin’s DPO dipped from 13 days in 2019 to 7 days in 2020. Lockheed and 3M didn’t provide any supply chain finance disclosures.
A similar annual trend was seen with consumer goods company Coca-Cola, whose DPO increased from 79 days in 2019 to 99 days in 2020 mainly due to changes in payment terms with suppliers which stands at 120 days as of 2020. Coca-Cola reported $703 million use of SCF by its suppliers at the end of 2020.
Meanwhile Coca-Cola’s rival PepsiCo also saw a jump in DPO. It went up from 90 days in 2019 to 93 days in 2020, peaking at 103 days in September 2020. “We have been informed by the participating financial institutions that as of December 26, 2020, $1.2 billion of our accounts payable to suppliers who participate in these financing arrangements are outstanding,” Pepsi said in its annual filing.
Download the Supply Chain Finance special report, a compilation of key articles from the past year documenting SCF’s rise and subsequent growing pains.