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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
----------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 1-8974
Honeywell International Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-2640650
------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 Columbia Road
P.O. Box 4000
Morristown, New Jersey 07962-2497
--------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(973) 455-2000
----------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes X No __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock March 31, 2003
- --------------------- ------------------
$1 par value 857,902,339 shares
Honeywell International Inc.
Index
Page No.
--------
Part I. - Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheet -
March 31, 2003 and December 31, 2002 3
Consolidated Statement of Operations -
Three Months Ended March 31, 2003 and 2002 4
Consolidated Statement of Cash Flows -
Three Months Ended March 31, 2003 and 2002 5
Notes to Financial Statements 6
Report of Independent Accountants 18
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 25
Item 4. Controls and Procedures 25
Part II. - Other Information
Item 1. Legal Proceedings 26
Item 4. Submission of Matters to a Vote of Security
Holders 31
Item 6. Exhibits and Reports on Form 8-K 32
Signatures 33
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 34
- ----------
This report contains certain statements that may be deemed "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934. All statements, other than statements of historical fact, that address
activities, events or developments that we or our management intends, expects,
projects, believes or anticipates will or may occur in the future are
forward-looking statements. Such statements are based upon certain assumptions
and assessments made by our management in light of their experience and their
perception of historical trends, current conditions, expected future
developments and other factors they believe to be appropriate. The
forward-looking statements included in this report are also subject to a number
of material risks and uncertainties, including but not limited to economic,
competitive, governmental and technological factors affecting our operations,
markets, products, services and prices. Such forward-looking statements are not
guarantees of future performance and actual results, developments and business
decisions may differ from those envisaged by such forward-looking statements.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Honeywell International Inc.
Consolidated Balance Sheet
(Unaudited)
March 31, December 31,
2003 2002
--------- ------------
(Dollars in millions)
ASSETS
Current assets:
Cash and cash equivalents $ 2,290 $ 2,021
Accounts, notes and other receivables 3,297 3,264
Inventories 3,049 2,953
Deferred income taxes 1,297 1,296
Other current assets 887 661
------- -------
Total current assets 10,820 10,195
Investments and long-term receivables 626 624
Property, plant and equipment - net 4,080 4,055
Goodwill 5,752 5,698
Other intangible assets - net 1,080 1,074
Insurance recoveries for asbestos
related liabilities 1,360 1,636
Deferred income taxes 511 533
Prepaid pension benefit cost 2,646 2,675
Other assets 1,086 1,069
------- -------
Total assets $27,961 $27,559
======= =======
LIABILITIES
Current liabilities:
Accounts payable $ 2,023 $ 1,912
Short-term borrowings 58 60
Commercial paper 378 201
Current maturities of long-term debt 47 109
Accrued liabilities 4,383 4,292
------- -------
Total current liabilities 6,889 6,574
Long-term debt 4,721 4,719
Deferred income taxes 416 419
Postretirement benefit obligations
other than pensions 1,688 1,684
Asbestos related liabilities 2,490 2,700
Other liabilities 2,533 2,538
SHAREOWNERS' EQUITY
Capital - common stock issued 958 958
- additional paid-in capital 3,427 3,409
Common stock held in treasury, at cost (3,716) (3,783)
Accumulated other nonowner changes (988) (1,109)
Retained earnings 9,543 9,450
------- -------
Total shareowners' equity 9,224 8,925
------- -------
Total liabilities and shareowners' equity $27,961 $27,559
======= =======
The Notes to Financial Statements are an integral part of this statement.
3
Honeywell International Inc.
Consolidated Statement of Operations
(Unaudited)
Three Months Ended
March 31,
-------------------------
2003 2002
------ ------
(Dollars in millions,
except per share amounts)
Net sales $5,399 $5,199
------ ------
Costs, expenses and other
Cost of goods sold 4,240 4,073
Selling, general and administrative expenses 703 617
(Gain) on sale of non-strategic businesses -- (125)
Business impairment charges -- 43
Equity in (income) loss of affiliated
companies 2 (7)
Other (income) expense (3) (16)
Interest and other financial charges 84 87
------ ------
5,026 4,672
------ ------
Income before taxes and cumulative effect
of accounting change 373 527
Tax expense 99 151
------ ------
Income before cumulative effect of accounting
change 274 376
Cumulative effect of accounting change (20) --
------ ------
Net income $ 254 $ 376
====== ======
Earnings per share of common stock-basic:
Income before cumulative effect of
accounting change $ 0.32 $ 0.46
Cumulative effect of accounting change (0.02) --
------ ------
Net income $ 0.30 $ 0.46
====== ======
Earnings per share of common stock-assuming
dilution:
Income before cumulative effect of
accounting change $ 0.32 $ 0.46
Cumulative effect of accounting change (0.02) --
------ ------
Net income $ 0.30 $ 0.46
====== ======
Cash dividends per share of common stock $.1875 $.1875
====== ======
The Notes to Financial Statements are an integral part of this statement.
4
Honeywell International Inc.
Consolidated Statement of Cash Flows
(Unaudited)
Three Months Ended
March 31,
---------------------
2003 2002
------ ------
(Dollars in millions)
Cash flows from operating activities:
Net income $ 254 $ 376
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of accounting change 31 --
(Gain) on sale of non-strategic businesses -- (125)
Repositioning charges -- 53
Business impairment charges -- 43
Insurance receipts for asbestos related liabilities 2 20
Asbestos related liability payments (31) (8)
Depreciation 142 176
Undistributed earnings of equity affiliates 2 (10)
Deferred income taxes 49 121
Other (25) (136)
Changes in assets and liabilities, net of the effects
of acquisitions and divestitures:
Accounts, notes and other receivables (29) 170
Inventories (90) (9)
Other current assets 42 6
Accounts payable 110 (48)
Accrued liabilities 16 (224)
------ ------
Net cash provided by operating activities 473 405
------ ------
Cash flows from investing activities:
Expenditures for property, plant and equipment (105) (147)
Proceeds from disposals of property, plant and
equipment -- 8
Cash paid for acquisitions (90) (16)
Proceeds from sales of businesses -- 96
Decrease in short-term investments -- 7
------ ------
Net cash (used for) investing activities (195) (52)
------ ------
Cash flows from financing activities:
Net increase in commercial paper 177 237
Net (decrease) in short-term borrowings (2) (60)
Proceeds from issuance of common stock 24 22
Payments of long-term debt (47) (200)
Cash dividends on common stock (161) (153)
------ ------
Net cash (used for) financing activities (9) (154)
------ ------
Net increase in cash and cash equivalents 269 199
Cash and cash equivalents at beginning of year 2,021 1,393
------ ------
Cash and cash equivalents at end of period $2,290 $1,592
====== ======
The Notes to Financial Statements are an integral part of this statement.
5
Honeywell International Inc.
Notes to Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)
NOTE 1. In the opinion of management, the accompanying unaudited consolidated
financial statements reflect all adjustments, consisting only of normal
adjustments, necessary to present fairly the financial position of Honeywell
International Inc. and its consolidated subsidiaries at March 31, 2003 and the
results of operations for the three months ended March 31, 2003 and 2002 and
cash flows for the three months ended March 31, 2003 and 2002. The results of
operations for the three-month period ended March 31, 2003 should not
necessarily be taken as indicative of the results of operations that may be
expected for the entire year 2003. Certain prior year amounts have been
reclassified to conform with the current year presentation.
The financial information as of March 31, 2003 should be read in
conjunction with the financial statements contained in our Annual Report on Form
10-K for 2002.
NOTE 2. In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations" (SFAS No. 143). SFAS No. 143 requires recognition of the
fair value of obligations associated with the retirement of tangible long-lived
assets when there is a legal obligation to incur such costs. Upon initial
recognition of a liability the cost is capitalized as part of the related
long-lived asset and depreciated over the corresponding asset's useful life.
SFAS No. 143 primarily impacts our accounting for costs associated with the
future retirement of nuclear fuel conversion facilities in our Specialty
Materials segment. Upon adoption on January 1, 2003, we recorded an increase in
property, plant and equipment, net of $16 million and recognized an asset
retirement obligation of $47 million. This resulted in the recognition of a
non-cash charge of $31 million ($20 million after-tax, or $0.02 per share) that
is reported as a cumulative effect of an accounting change. This accounting
change is not expected to have a material impact on future results of
operations. Pro forma effects for the three months ended March 31, 2002,
assuming adoption of SFAS No. 143 as of January 1, 2002, were not material to
net income or per share amounts.
In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" (FIN 45), which requires us to
recognize a liability for the fair value of an obligation assumed by issuing a
guarantee. FIN 45 became effective for guarantees issued or modified on or after
January 1, 2003, and did not have a material effect on our consolidated
financial position as of March 31, 2003 or our consolidated results of
operations for the three months ended March 31, 2003. As disclosed in Note 21
to our consolidated financial statements in our 2002 Annual Report on Form 10-K,
we have issued or are a party to certain direct and indirect guarantees. At
March 31, 2003, except for the fact that we no longer guarantee the debt of BCVS
of $172 million, there has been no material change to these guarantees.
6
The following table summarizes information concerning our recorded
obligations for product warranties and product performance guarantees:
Three Months Ended
March 31, 2003
------------------
Beginning of period $217
Accruals for warranties/guarantees issued during period 43
Adjustments of pre-existing warranties/guarantees (3)
Settlement of warranty/guarantee claims (35)
----
End of period $222
====
NOTE 3. We account for our fixed stock option plans under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25).
Under APB No. 25, there is generally no compensation cost recognized for our
fixed stock option plans, because the options granted under these plans have an
exercise price equal to the market value of the underlying stock at the grant
date. Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123) allows, but does not require, companies
to record compensation cost for fixed stock option plans using a fair value
based method. As permitted by SFAS No. 123, we elected to continue to account
for compensation cost for our fixed stock option plans using the intrinsic value
based method under APB No. 25. The following table sets forth pro forma
information as if compensation cost had been determined consistent with the
requirements of SFAS No. 123.
Three Months Ended
March 31,
------------------
2003 2002
----- ------
Net income, as reported $ 254 $ 376
Deduct: Total stock-based employee compensation
cost determined under fair value method for
fixed stock option plans, net of related
tax effects (13) (16)
----- ------
Pro forma net income $ 241 $ 360
===== ======
Earnings per share of common stock:
Basic - as reported $0.30 $ 0.46
===== ======
Basic - pro forma $0.28 $ 0.44
===== ======
Earnings per share of common stock:
Assuming dilution - as reported $0.30 $ 0.46
===== ======
Assuming dilution - pro forma $0.28 $ 0.44
===== ======
Weighted average fair value per share of
options granted during the period (estimated
on grant date using Black-Scholes option-
pricing model) $8.98 $13.08
Assumptions used to determine compensation cost
consistent with requirements of SFAS No. 123:
Historical dividend yield 1.9% 1.9%
Historical volatility 46.7% 43.6%
Risk-free rate of return 2.9% 4.2%
Expected life (years) 5.0 5.0
7
NOTE 4. Accounts, notes and other receivables consist of the following:
March 31, December 31,
2003 2002
--------- ------------
Trade $3,091 $3,064
Other 362 347
------ ------
3,453 3,411
Less - Allowance for doubtful
accounts (156) (147)
------ ------
$3,297 $3,264
====== ======
NOTE 5. Inventories consist of the following:
March 31, December 31,
2003 2002
-------- ------------
Raw materials $ 939 $ 936
Work in process 844 804
Finished products 1,401 1,361
------ ------
3,184 3,101
Less - Progress payments (15) (28)
Reduction to LIFO cost basis (120) (120)
------ ------
$3,049 $2,953
====== ======
NOTE 6. The change in the carrying amount of goodwill for the three months ended
March 31, 2003 by reportable segment is as follows:
Currency
Translation
Dec. 31, 2002 Acquisitions (Divestitures) Adjustment Mar 31, 2003
-------------- ------------ -------------- ----------- ------------
Aerospace $1,644 $-- $-- $-- $1,644
Automation and
Control Solutions 2,678 51 -- 2 2,731
Specialty Materials 849 -- -- 2 851
Transportation and
Power Systems 527 -- -- (1) 526
------ --- --- --- ------
$5,698 $51 $-- $ 3 $5,752
====== === === === ======
Intangible assets are comprised of:
March 31, 2003 December 31, 2002
---------------------------------- ----------------------------------
Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
-------- ------------ -------- -------- ------------ --------
Intangible assets with
determinable lives:
Investments in Aerospace
customer incentives $ 792 $(114) $ 678 $ 769 $(107) $ 662
Patents and trademarks 411 (287) 124 411 (286) 125
Other 426 (185) 241 433 (183) 250
------ ----- ------ ------ ----- ------
1,629 (586) 1,043 1,613 (576) 1,037
Trademark with indefinite
life 46 (9) 37 46 (9) 37
------ ----- ------ ------ ----- ------
$1,675 $(595) $1,080 $1,659 $(585) $1,074
====== ===== ====== ====== ===== ======
Amortization expense related to intangible assets was $15 and $13
million for the three months ended March 31, 2003 and 2002, respectively.
Amortization expense related to intangible assets for 2003 to 2007 is expected
to approximate $60 million each year.
8
We completed our goodwill and intangible assets impairment testing for
our reporting units as of March 31, 2003 and determined that there was no
impairment as of that date.
NOTE 7. Total nonowner changes in shareowners' equity consist of the following:
Three Months Ended
March 31,
------------------
2003 2002
---- ----
Net income $254 $376
Foreign exchange translation adjustments 93 4
Change in fair value of effective cash flow hedges 28 4
---- ----
$375 $384
==== ====
NOTE 8. Segment financial data follows:
Three Months Ended
March 31,
------------------
2003 2002
------ ------
Net Sales
Aerospace $2,062 $2,089
Automation and Control Solutions 1,717 1,609
Specialty Materials 777 758
Transportation and Power Systems 840 726
Corporate 3 17
------ ------
$5,399 $5,199
====== ======
Segment Profit
Aerospace $ 218 $ 307
Automation and Control Solutions 185 207
Specialty Materials 10 8
Transportation and Power Systems 75 73
Corporate (32) (36)
------ ------
Total segment profit 456 559
------ ------
Gain on sale of non-strategic businesses -- 125
Business impairment charges -- (43)
Equity in income (loss) of affiliated companies (2) 7
Other income 3 16
Interest and other financial charges (84) (87)
Repositioning charges included in cost of goods sold
and selling, general and administrative expenses -- (50)
------ ------
Income before taxes and cumulative effect
of accounting change $ 373 $ 527
====== ======
9
NOTE 9. The details of the earnings per share calculations for the three-month
periods ended March 31, 2003 and 2002 follow:
2003
-------------------------
Per
Average Share
Income Shares Amount
------ ------- ------
Income Before Cumulative Effect
of Accounting Change
Earnings per share of common stock - basic $274 856.8 $0.32
Dilutive securities issuable in connection
with stock plans 0.7
---- ----- -----
Earnings per share of common stock -
assuming dilution $274 857.5 $0.32
==== ===== =====
Net Income
Earnings per share of common stock - basic $254 856.8 $0.30
Dilutive securities issuable in connection
with stock plans 0.7
---- ----- -----
Earnings per share of common stock -
assuming dilution $254 857.5 $0.30
==== ===== =====
2002
-------------------------
Per
Average Share
Income Shares Amount
------ ------- ------
Net Income
Earnings per share of common stock - basic $376 817.0 $0.46
Dilutive securities issuable in connection
with stock plans 3.4
---- ----- -----
Earnings per share of common stock -
assuming dilution $376 820.4 $0.46
==== ===== =====
The diluted earnings per share calculation excludes the effect of
stock options when the options' exercise prices exceed the average market price
of the common shares during the period. For the three-month periods ended March
31, 2003 and 2002, the number of stock options not included in the computations
were 46.2 and 42.5 million, respectively. These stock options were outstanding
at the end of each of the respective periods.
10
NOTE 10. A summary of repositioning and business impairment charges follows:
Three Months Ended
March 31,
------------------
2003 2002
---- ----
Severance $-- $ 41
Asset impairments -- 11
Exit costs -- 13
Reserve adjustments -- (12)
--- ----
Total net repositioning charge -- 53
--- ----
Business impairment charges -- 43
--- ----
Total net repositioning and business impairment
charges $-- $ 96
=== ====
The following table summarizes the pretax distribution of total net
repositioning and business impairment charges by income statement
classification:
Three Months Ended
March 31,
------------------
2003 2002
---- ----
Cost of goods sold $-- $46
Selling, general and administrative expenses -- 4
Business impairment charges -- 43
Equity in (income) loss of affiliated companies -- 3
--- ---
$-- $96
=== ===
The following table summarizes the pretax impact of total net
repositioning and business impairment charges by reportable segment:
Three Months Ended
March 31,
------------------
2003 2002
---- ----
Aerospace $-- $--
Automation and Control Solutions -- 39
Specialty Materials -- 25
Transportation and Power Systems -- 28
Corporate -- 4
--- ---
$-- $96
=== ===
As disclosed in our 2002 Annual Report on Form 10-K, we recognized
repositioning charges totaling $453 million in 2002 ($65 million was recognized
in the three months ended March 31, 2002). The components of the charges
included severance costs of $270 million, asset impairments of $121 million and
other exit costs of $62 million. Severance costs were related to announced
workforce reductions of approximately 8,100 manufacturing and administrative
positions across all of our reportable segments and our UOP process technology
joint venture, of which approximately 3,424 positions have been eliminated as of
March 31, 2003. These actions are expected to be substantially completed by
December 31, 2003. Also, $76 million of previously established severance
accruals were returned to income in 2002, due to fewer employee separations than
originally anticipated and higher than expected voluntary employee attrition
resulting in reduced severance liabilities in our Aerospace, Automation and
Control Solutions and Specialty Materials reportable segments.
11
The following table summarizes the status of our total repositioning
costs:
Severance Asset Exit
Costs Impairments Costs Total
--------- ----------- ----- -----
Balance at December 31, 2002 $325 $-- $81 $406
2003 usage (43) -- (7) (50)
---- --- --- ----
Balance at March 31, 2003 $282 $-- $74 $356
==== === === ====
In the first quarter of 2002, we recognized an impairment charge of
$27 million related to the write-down of property, plant and equipment of our
Friction Materials business, which is classified as assets held for disposal in
Other Current Assets (a plan of disposal of Friction Materials was adopted in
2001; in January 2003, we entered into a letter of intent to sell this business
to Federal-Mogul Corp. - See Note 12). In the first quarter of 2002, we also
recognized an asset impairment charge of $16 million related to the planned
shutdown of a chemical manufacturing facility in our Specialty Materials
reportable segment.
NOTE 11. In March 2002, we completed the disposition of our Bendix Commercial
Vehicle Systems (BCVS) business for approximately $350 million in cash and
investment securities resulting in a pretax gain of $125 million. In January
2002, we had reached an agreement with Knorr-Bremse AG (Knorr) to transfer
control of our global interests in BCVS to Knorr.
NOTE 12. COMMITMENTS AND CONTINGENCIES
Shareowner Litigation - Honeywell and seven of its current and former
officers were named as defendants in several purported class action lawsuits
filed in the United States District Court for the District of New Jersey (the
Securities Law Complaints). The Securities Law Complaints principally allege
that the defendants violated federal securities laws by purportedly making false
and misleading statements and by failing to disclose material information
concerning Honeywell's financial performance, thereby allegedly causing the
value of Honeywell's stock to be artificially inflated. On January 15, 2002, the
District Court dismissed the consolidated complaint against four of Honeywell's
current and former officers. The Court has granted plaintiffs' motion for class
certification defining the purported class as all purchasers of Honeywell stock
between December 20, 1999 and June 19, 2000.
The parties participated in a two day settlement mediation in April
2003 in an attempt to resolve the cases without resort to a trial. The mediation
proved unsuccessful in resolving the cases. As all significant discovery in the
cases had been stayed pending completion of the mediation, we expect discovery
to resume immediately.
We continue to believe that the allegations in the Securities Law
Complaints are without merit. Although it is not possible at this time to
predict the outcome of these cases, we expect to prevail. However, an adverse
outcome could be material to our consolidated financial position or results of
operations. As a result of the uncertainty regarding the outcome of this matter
no provision has been made in our financial statements with respect to this
contingent liability.
ERISA Class Action Lawsuit - In April 2003, Honeywell and several of
its current and former officers were named as defendants in a purported class
action lawsuit filed in the United States District Court for the District of New
Jersey. The complaint principally alleges that the defendants breached their
fiduciary duties to participants in the Honeywell Savings and Ownership Plan
(the "Savings Plan") by purportedly making false and misleading statements,
failing to disclose material information concerning Honeywell's financial
performance, and failing to
12
diversify the Savings Plan's assets and monitor the prudence of Honeywell stock
as a Savings Plan investment. Honeywell has been advised that a second complaint
making similar allegations has been filed in the same district, which complaint
is likely to be consolidated with the original one. No answers have been filed
and discovery has not commenced. Although it is not possible at this time to
predict the outcome of this litigation, we believe that the allegations in these
complaints are without merit and we expect to prevail. An adverse litigation
outcome could, however, be material to our consolidated financial position or
results of operations. As a result of the uncertainty regarding the outcome of
this matter, no provision has been made in our financial statements with respect
to this contingent liability.
Environmental Matters - We are subject to various federal, state and
local government requirements relating to the protection of employee health and
safety and the environment. We believe that, as a general matter, our policies,
practices and procedures are properly designed to prevent unreasonable risk of
environmental damage and personal injury to our employees and employees of our
customers and that our handling, manufacture, use and disposal of hazardous or
toxic substances are in accord with environmental laws and regulations. However,
mainly because of past operations and operations of predecessor companies, we,
like other companies engaged in similar businesses, have incurred remedial
response and voluntary cleanup costs for site contamination and are a party to
lawsuits and claims associated with environmental matters, including past
production of products containing toxic substances. Additional lawsuits, claims
and costs involving environmental matters are likely to continue to arise in the
future.
With respect to environmental matters involving site contamination, we
continually conduct studies, individually at our owned sites, and jointly as a
member of industry groups at non-owned sites, to determine the feasibility of
various remedial techniques to address environmental matters. It is our policy
to record appropriate liabilities for environmental matters when environmental
assessments are made or remedial efforts or damage claim payments are probable
and the costs can be reasonably estimated. With respect to site contamination,
the timing of these accruals is generally no later than the completion of
feasibility studies. We expect to fund expenditures for these matters from
operating cash flow. The timing of cash expenditures depends on a number of
factors, including the timing of litigation and settlements of personal injury
and property damage claims, regulatory approval of cleanup projects, remedial
techniques to be utilized and agreements with other parties.
Although we do not currently possess sufficient information to
reasonably estimate the amounts of 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, they could be material to our consolidated results of operations.
However, considering our past experience and existing reserves, we do not expect
that these matters will have a material adverse effect on our consolidated
financial position.
Asbestos Matters - Like many other industrial companies, Honeywell is
a defendant in personal injury actions related to asbestos. We did not mine or
produce asbestos, nor did we make or sell insulation products or other
construction materials that have been identified as the primary cause of
asbestos related disease in the vast majority of claimants. Rather, we made
several products that contained small amounts of asbestos.
Honeywell's Bendix Friction Materials business manufactured automotive
brake pads that included asbestos in an encapsulated form. There is a group of
potential claimants consisting largely of professional brake mechanics. From
1981 through March 31, 2003, we have resolved over 61,000 Bendix claims at an
average indemnity cost per claim of approximately two thousand four hundred
dollars.
13
Through the second quarter of 2002, Honeywell had no out-of-pocket costs for
these cases since its insurance deductible was satisfied many years ago.
Beginning with claim payments made in the third quarter of 2002, Honeywell began
advancing indemnity and defense claim costs which amounted to approximately $25
million in payments in the three months ended March 31, 2003. A substantial
portion of this amount is expected to be reimbursed by insurance. There are
currently approximately 57,000 claims pending.
On January 30, 2003, Honeywell and Federal-Mogul Corp. (Federal-Mogul)
entered into a letter of intent (LOI) pursuant to which Federal-Mogul would
acquire Honeywell's automotive Bendix Friction Materials (Bendix) business, with
the exception of certain U.S. based assets. In exchange, Honeywell would receive
a permanent channeling injunction shielding it from all current and future
personal injury asbestos liabilities related to Honeywell's Bendix business.
Federal-Mogul, its U.S. subsidiaries and certain of its United Kingdom
subsidiaries voluntarily filed for financial restructuring under Chapter 11 of
the U.S. Bankruptcy Code in October 2001. Federal-Mogul will seek to establish
one or more trusts under Section 524(g) of the U.S. Bankruptcy Code as part of
its reorganization plan, including a trust for the benefit of Bendix asbestos
claimants. The reorganization plan to be submitted to the Bankruptcy Court for
approval will contemplate that the U.S. Bankruptcy Court in Delaware would issue
an injunction in favor of Honeywell that would channel to the Bendix 524(g)
trust all present and future asbestos claims relating to Honeywell's Bendix
business. The 524(g) trust created for the benefit of the Bendix claimants would
receive the rights to proceeds from Honeywell's Bendix related insurance
policies and would make these proceeds available to the Bendix claimants.
Honeywell would have no obligation to contribute any additional amounts toward
the settlement or resolution of Bendix related asbestos claims.
In the fourth quarter of 2002, we recorded a charge of $167 million
consisting of a $131 million reserve for the sale of Bendix to Federal-Mogul,
our estimate of asbestos related liability net of insurance recoveries and costs
to complete the anticipated transaction with Federal-Mogul. Completion of the
transaction contemplated by the LOI is subject to the negotiation of definitive
agreements, the confirmation of Federal-Mogul's plan of reorganization by the
Bankruptcy Court, the issuance of a final, non-appealable 524(g) channeling
injunction permanently enjoining any Bendix related asbestos claims against
Honeywell, and the receipt of all required governmental approvals. We do not
believe that completion of such transaction would have a material adverse impact
on our consolidated results of operations or financial position. There can be no
assurance, however, that the transaction contemplated by the LOI will be
completed. Honeywell presently has approximately $1.9 billion (excluding
coverage previously available from Equitas; see discussion below) of insurance
coverage remaining with respect to Bendix related asbestos claims. Although it
is impossible to predict the outcome of pending or future claims, in light of
our potential exposure, our prior experience in resolving these claims, and our
insurance coverage, we do not believe that the Bendix related asbestos claims
will have a material adverse effect on our consolidated financial position.
Another source of claims is refractory products (high temperature
bricks and cement) sold largely to the steel industry in the East and Midwest by
North American Refractories Company (NARCO), a business we owned from 1979 to
1986. Less than 2 percent of NARCO's products contained asbestos.
When we sold the NARCO business in 1986, we agreed to indemnify NARCO
with respect to personal injury claims for products that had been discontinued
prior to the sale (as defined in the sale agreement). NARCO retained all
liability for all other claims. NARCO had resolved approximately 176,000 claims
through January 4, 2002, the date NARCO filed for reorganization under Chapter
11 of the U.S. Bankruptcy Code, at an average cost per claim of two thousand two
hundred dollars. Of those claims, 43 percent were dismissed on the ground that
there was
14
insufficient evidence that NARCO was responsible for the claimant's asbestos
exposure. As of the date of NARCO's bankruptcy filing, there were approximately
116,000 remaining claims pending against NARCO, including approximately 7
percent in which Honeywell was also named as a defendant. Since 1983, Honeywell
and our insurers have contributed to the defense and settlement costs associated
with NARCO claims. We have approximately $1.5 billion (excluding coverage
previously available from Equitas; see discussion below) of insurance remaining
that can be specifically allocated to NARCO related liability.
As a result of the NARCO bankruptcy filing, all of the claims pending
against NARCO are automatically stayed pending the reorganization of NARCO. In
addition, because the claims pending against Honeywell necessarily will impact
the liabilities of NARCO, because the insurance policies held by Honeywell are
essential to a successful NARCO reorganization, and because Honeywell has
offered to commit the value of those policies to the reorganization, the
bankruptcy court has temporarily enjoined any claims against Honeywell, current
or future, related to NARCO. Although the stay has been extended thirteen times
since January 4, 2002, there is no assurance that such stay will remain in
effect. In connection with NARCO's bankruptcy filing, we paid NARCO's parent
company $40 million and agreed to provide NARCO with up to $20 million in
financing. We also agreed to pay $20 million to NARCO's parent company upon the
filing of a plan of reorganization for NARCO acceptable to Honeywell, and to pay
NARCO's parent company $40 million, and to forgive any outstanding NARCO
indebtedness, upon the confirmation and consummation of such a plan.
As a result of ongoing negotiations with counsel representing NARCO
related asbestos claimants regarding settlement of all pending and potential
NARCO related asbestos claims against Honeywell, we have reached definitive
agreements or agreements in principle with approximately 236,000 claimants,
which represents approximately 90 percent of the approximately 260,000 current
claimants who are now expected to file a claim as part of the NARCO
reorganization process. We are also in discussions with the NARCO Committee of
Asbestos Creditors on Trust Distribution Procedures for NARCO. We believe that,
as part of the NARCO plan of reorganization, a trust will be established
pursuant to these Trust Distribution Procedures for the benefit of all asbestos
claimants, current and future. If the trust is put in place and approved by the
court as fair and equitable, Honeywell as well as NARCO will be entitled to 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 products to be made against the federally-supervised
trust. As part of its ongoing settlement negotiations, Honeywell is seeking to
cap its annual contributions to the trust with respect to future claims at a
level that would not have a material impact on Honeywell's operating cash flows.
Given the substantial progress of negotiations between Honeywell and NARCO
related asbestos claimants and between Honeywell and the Committee of Asbestos
Creditors during the fourth quarter of 2002, Honeywell developed an estimated
liability for settlement of pending and future asbestos claims.
During the fourth quarter of 2002, Honeywell recorded a charge of $1.4
billion for NARCO related asbestos litigation charges, net of insurance
recoveries. This charge consists of the estimated liability to settle current
asbestos related claims, the estimated liability related to future asbestos
related claims through 2018 and obligations to NARCO's parent, net of insurance
recoveries of $1.8 billion.
The estimated liability for current claims is based on terms and
conditions, including evidentiary requirements, in definitive agreements or
agreements in principle with approximately 90 percent of current claimants. Once
finalized, settlement payments with respect to current claims are expected to be
made over approximately a four-year period.
15
The liability for future claims estimates the probable value of future
asbestos related bodily injury claims asserted against NARCO over a 15 year
period and obligations to NARCO's parent as discussed above. In light of the
uncertainties inherent in making long-term projections we do not believe that we
have a reasonable basis for estimating asbestos claims beyond 2018 under
Statement of Financial Accounting Standard No. 5 "Accounting for Contingencies."
Honeywell retained the expert services of Hamilton, Rabinovitz and Alschuler,
Inc. (HR&A) to project the probable number and value, including trust claim
handling costs, of asbestos related future liabilities. The methodology used to
estimate the liability for future claims has been commonly accepted by numerous
courts and is the same methodology that is utilized by an expert who is
routinely retained by the asbestos claimants committee in asbestos related
bankruptcies. The valuation methodology includes an analysis of the population
likely to have been exposed to asbestos containing products, epidemiological
studies to estimate the number of people likely to develop asbestos related
diseases, NARCO claims filing history and the pending inventory of NARCO
asbestos related claims.
Honeywell has substantial insurance that reimburses it for portions of
the costs incurred to settle NARCO related claims and court judgments as well as
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. At March 31, 2003, a significant portion of this
coverage is with London-based insurance companies under a coverage-in-place
agreement. See below for discussion of separate Equitas settlement.
Coverage-in-place agreements are settlement agreements between policyholders and
the insurers specifying the terms and conditions under which coverage will be
applied as claims are presented for payment. These agreements govern such things
as what events will be deemed to trigger coverage, how liability for a claim
will be allocated among insurers and what procedures the policyholder must
follow in order to obligate the insurer to pay claims. We conducted an analysis
to determine the amount of insurance that we estimate is probable that we will
recover in relation to payment of current and projected future 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. Some of our insurance carriers have challenged our right to
enter into settlement agreements resolving all NARCO related asbestos claims
against Honeywell. However, we believe there is no factual or legal basis for
such challenges and we believe that it is probable that we will prevail in the
resolution of, or in any litigation that is brought regarding these disputes and
as of March 31, 2003, we have recognized approximately $550 million in probable
insurance recoveries from these carriers. We made judgments concerning insurance
coverage that we believe are reasonable and consistent with our historical
dealings with our insurers, our knowledge of any pertinent solvency issues
surrounding insurers and various judicial determinations relevant to our
insurance programs. Based on our analysis, we recorded insurance recoveries that
are deemed probable through 2018 of $1.8 billion.
Projecting future events is subject to many uncertainties that could
cause the NARCO related asbestos liabilities to be higher or lower than those
projected and recorded. There is no assurance that ongoing settlement
negotiations will be successfully completed, that a plan of reorganization will
be proposed or confirmed, that insurance recoveries will be timely or whether
there will be any NARCO related asbestos claims beyond 2018. Given the inherent
uncertainty in predicting future events, we plan to review our estimates
periodically, and update them based on our experience and other relevant
factors. Similarly we will reevaluate our projections concerning our probable
insurance recoveries in light of any changes to the projected liability or other
developments that may impact insurance recoveries.
16
NARCO and Bendix asbestos related balances are included in the
following balance sheet accounts:
March 31, December 31,
2003 2002
--------- ------------
Other current assets $ 594 $ 320
Insurance recoveries for asbestos related liabilities 1,360 1,636
------ ------
$1,954 $1,956
====== ======
Accrued liabilities $ 926 $ 741
Asbestos related liabilities 2,490 2,700
------ ------
$3,416 $3,441
====== ======
In April 2003, we received $472 million in cash related to a
comprehensive policy buy-back settlement of all insurance claims by Honeywell
against Equitas. The settlement resolves all claims by Honeywell against Equitas
arising from asbestos claims related to NARCO and Bendix. The coverage amounts
discussed above for NARCO and Bendix do not include coverage previously
available from Equitas.
17
Report of Independent Accountants
To the Board of Directors and Shareowners
of Honeywell International Inc.
We have reviewed the accompanying consolidated balance sheet of Honeywell
International Inc. and its subsidiaries as of March 31, 2003, and the related
consolidated statement of operations for the three-month periods ended March 31,
2003 and 2002 and the consolidated statement of cash flows for the three-month
periods ended March 31, 2003 and 2002. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with generally
accepted auditing standards, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated interim financial statements for them
to be in conformity with accounting principles generally accepted in the United
States of America.
We previously audited in accordance with auditing standards generally accepted
in the United States of America, the consolidated balance sheet as of December
31, 2002, and the related consolidated statements of operations, of shareowners'
equity, and of cash flows for the year then ended (not presented herein), and in
our report dated February 6, 2003, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying consolidated balance sheet information as of December 31, 2002,
is fairly stated in all material respects in relation to the consolidated
balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Florham Park, NJ
May 5, 2003
- ------------------------------
The "Report of Independent Accountants" included above is not a "report" or
"part of a Registration Statement" prepared or certified by an independent
accountant within the meanings of Sections 7 and 11 of the Securities Act of
1933, and the accountants' Section 11 liability does not extend to such report.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
A. RESULTS OF OPERATIONS - FIRST QUARTER 2003 COMPARED WITH FIRST QUARTER 2002
Net sales in the first quarter of 2003 were $5,399 million, an increase of
$200 million, or 4 percent compared with the first quarter of 2002. The increase
in sales is attributable to the following:
Acquisitions 2%
Divestitures (2)
Price (1)
Volume 1
Foreign exchange 4
---
4%
===
A discussion of net sales by reportable segment can be found in the Review
of Business Segments section below.
Cost of goods sold of $4,240 million in the first quarter of 2003 increased
by $167 million, or 4 percent compared with the first quarter of 2002. This
increase resulted from a $213 million increase due primarily to the unfavorable
impact of foreign exchange, a decrease in sales of higher-margin products and
services, primarily in our Aerospace and Automation and Control Solutions
reportable segments, and higher pension expense. This increase was partially
offset by a decrease of $46 million in repositioning and business impairment
charges.
Selling, general and administrative expenses of $703 million in the first
quarter of 2003 increased by $86 million, or 14 percent compared with the first
quarter of 2002 due mainly to higher pension and other employee benefit costs
and the unfavorable impact of foreign exchange.
Pension expense was $44 million in the first quarter of 2003 compared with
pension income of $39 million in the first quarter of 2002. The increase of $83
million in pension expense in the first quarter of 2003 compared with the first
quarter of 2002 was due principally to a reduction in 2003 in the assumed rate
of return on plan assets from 10 to 9 percent, a decrease in the market-related
value of our pension plan assets and the systematic recognition of higher net
losses. These losses resulted mainly from actual pension plan asset returns
below the assumed rate of return since the year 2000.
(Gain) on sale of non-strategic businesses of $125 million in the first
quarter of 2002 represented the pretax gain on the disposition of our Bendix
Commercial Vehicle Systems (BCVS) business.
Business impairment charges of $43 million in the first quarter of 2002
related to the write-down of property, plant and equipment in our Friction
Materials business and the planned shutdown of a manufacturing facility in our
Specialty Materials reportable segment. See the repositioning and business
impairment charges section of this MD&A for further details.
Equity in (income) loss of affiliated companies was a loss of $2 million in
the first quarter of 2003 compared with income of $7 million in the first
quarter of 2002. The decrease of $9 million in equity income in the first
quarter of 2003 compared with the first quarter of 2002 was due mainly to equity
income of $8 million in the prior year's first quarter from our divested BCVS
business.
19
Other (income) expense, $3 million of income in the first quarter of 2003,
compared with $16 million of income in the first quarter of 2002. The decrease
of $13 million in other income in the first quarter of 2003 compared with the
first quarter of 2002 was due mainly to a decrease of $17 million in benefits
from foreign exchange hedging resulting from the weakness in the U.S. dollar
partially offset by higher interest income of $2 million.
Interest and other financial charges of $84 million in the first quarter of
2003 decreased by $3 million, or 3 percent compared with the first quarter of
2002 due mainly to lower average debt outstanding in the current period.
The effective tax rate was 26.5 percent in the first quarter of 2003
compared with 28.6 percent in the first quarter of 2002. This decrease in the
effective tax rate of 2.1 percentage points in the first quarter of 2003
compared with the first quarter of 2002 related to the tax impact of the gain on
the sale of our BCVS business and repositioning and business impairment charges
in the prior year. The effective tax rate in both periods was lower than the
statutory tax rate of 35 percent principally due to tax benefits on export
sales, favorable tax audit settlements and foreign tax planning strategies.
Net income was $254 million, or $0.30 per share, in the first quarter of
2003 compared with net income of $376 million, or $0.46 per share, in the first
quarter of 2002. The decrease of $0.16 per share in the first quarter of 2003
compared with the first quarter of 2002 was due to the following:
o Higher pension expense, including the impact of dilution from the prior
year contribution of Honeywell common stock to our U.S. pension plans ($0.09)
o Cumulative effect of a change in accounting related to our adoption of
SFAS No. 143 on January 1, 2003 - See Note 2 (0.02)
o Gain on the sale of BCVS business in the first quarter of 2002 (0.09)
o Equity income in the first quarter of 2002 related to BCVS business (0.01)
o Repositioning and business impairment charges in the first quarter of
2002 0.08
o Lower sales of higher margin products and services, principally in our
Aerospace and Automation and Control Solutions reportable segments (0.02)
o Increased spending for facility relocations and new programs (0.01)
------
($0.16)
======
20
Review of Business Segments
Three Months Ended
March 31,
------------------
2003 2002
------- ------
Net Sales
Aerospace $2,062 $2,089
Automation and Control Solutions 1,717 1,609
Specialty Materials 777 758
Transportation and Power Systems 840 726
Corporate 3 17
------ ------
$5,399 $5,199
====== ======
Segment Profit
Aerospace $ 218 $ 307
Automation and Control Solutions 185 207
Specialty Materials 10 8
Transportation and Power Systems 75 73
Corporate (32) (36)
------ ------
Total segment profit 456 559
------ ------
Gain on sale of non-strategic businesses -- 125
Business impairment charges -- (43)
Equity in income (loss) of affiliated companies (2) 7
Other income 3 16
Interest and other financial charges (84) (87)
Repositioning charges included in cost of goods sold
and selling, general and administrative expenses -- (50)
------ ------
Income before taxes and cumulative effect
of accounting change $ 373 $ 527
====== ======
Aerospace sales of $2,062 million in the first quarter of 2003
decreased by $27 million, or 1 percent compared with the first quarter of 2002
due to continued weakness in sales to our commercial original equipment (OE)
customers. Sales to our air transport OE customers declined by 26 percent
reflecting dramatically lower projected deliveries by our OE customers
(primarily Boeing and Airbus) as commercial airlines continued to reduce
aircraft orders. The airline industry continues to be negatively impacted by
general weakness in the economy and the financial difficulties being encountered
by certain major carriers. Sales to our business and general aviation OE
customers decreased by 31 percent reflecting a decline in projected deliveries
of business jet airplanes due to weakness in fractional demand and corporate
profitability. We currently expect full year 2003 sales to our air transport and
business and general aviation OE customers to decline by 14 and 19 percent,
respectively, compared with the prior year due to reduced aircraft orders. The
decrease in Aerospace sales in the first quarter of 2003 compared with the first
quarter of 2002 was partially offset by an increase in sales to our commercial
air transport aftermarket customers of 4 percent as strength in repair and
overhaul services more than offset weakness in sales of commercial spares. Sales
increased to our defense and space customers, with OE sales up by 8 percent and
aftermarket sales higher by 18 percent, resulting principally from increased
military activity and growth in precision guidance and spare parts. Also, sales
to our business and general aviation aftermarket customers were higher by 8
percent largely due to increases in engine maintenance related to business jets.
We currently expect that sales to our commercial aftermarket customers will be
down by 3 percent for the full year 2003 compared with the prior year due mainly
to reduced flying hours.
21
Aerospace segment profit of $218 million in the first quarter of 2003
decreased by $89 million, or 29 percent compared with the first quarter of 2002
due mainly to higher pension expense and lower sales of higher-margin commercial
aftermarket spare parts.
Automation and Control Solutions sales of $1,717 million in the first
quarter of 2003 increased by $108 million, or 7 percent compared with the first
quarter of 2002 due to the favorable effects of foreign exchange of 6 percent
and acquisitions, net of the prior year disposition of our Consumer Products
business of 3 percent, partially offset by a decline in organic sales of 2
percent. Sales increased by 9 percent for our Automation and Control Products
business as the effects of foreign exchange and the prior year acquisitions of
Invensys Sensor Systems and Ultrak's closed-circuit television businesses more
than offset the impact of the prior year disposition of our Consumer Products
business and general weakness in the enconomy. Sales for our Service business
were basically flat as the favorable impact from foreign exchange was offset by
a decline in organic sales due to softness in capital spending as well as
commercial and residential construction. Sales for our Industry Solutions
business increased by 12 percent due to the favorable impact of foreign exchange
and sales of our new Experion PKS product.
Automation and Control Solutions segment profit of $185 million in the
first quarter of 2003 decreased by $22 million, or 11 percent compared with the
first quarter of 2002 due mainly to higher pension expense and the decline in
higher-margin energy-retrofit and discretionary spot sales in our Service
business.
Specialty Materials sales of $777 million in the first quarter of 2003
increased by $19 million, or 3 percent compared with the first quarter of 2002
due to organic growth of 7 percent and the favorable impact of foreign exchange
of 4 percent, partially offset by the impact of the prior year divestitures of
our Advanced Circuits and Pharmaceutical Fine Chemicals businesses of 8 percent.
The strong organic sales growth was led by an increase of 11 percent for our
Fluorines business. Fluorines experienced strong sales of non-ozone depleting
hydrofluorocarbons as a result of conversions to next-generation refrigerants
and foam-blowing agents. Organic sales also increased for our Nylon System
business by 9 percent due mainly to increased demand in our carpet fibers
business.
Specialty Materials segment profit of $10 million in the first quarter
of 2003 increased by $2 million, or 25 percent compared with the first quarter
of 2002. This increase resulted from organic sales growth in all businesses and
the impact of the prior year write-down of property, plant and equipment in
several businesses partially offset by higher raw material costs (principally
natural gas and phenol) and pension expense. We currently expect higher raw
material costs to negatively impact our segment profit throughout 2003.
Transportation and Power Systems sales of $840 million in the first
quarter of 2003 increased by $114 million, or 16 percent compared with the first
quarter of 2002 due to the favorable impact of foreign exchange of 10 percent
and organic growth of 6 percent. This increase resulted mainly from a 29 percent
increase in sales for our Garrett Engine Boosting Systems business due to
organic growth of 17 percent as worldwide demand for our turbochargers continued
to be strong, particularly in Asia and North America, and the favorable impact
of foreign exchange of 12 percent.
Transportation and Power Systems segment profit of $75 million in the
first quarter of 2003 increased by $2 million, or 3 percent compared with the
first quarter of 2002 as the effect of higher sales in our Garrett Engine
Boosting Systems business was offset by higher pension expense and increased
spending for
22
facility relocations and new programs, such as our new turbocharger technology
for commercial diesel vehicles.
B. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Total assets at March 31, 2003 were $27,961 million, an increase of
$402 million, or 1 percent from December 31, 2002 mainly due to an increase in
cash of $269 million. See details in Consolidated Statement of Cash Flows.
Cash provided by operating activities of $473 million during the first
three months of 2003 increased by $68 million compared with the first three
months of 2002 mainly due to lower spending for repositioning and other charges
partially offset by lower earnings.
We made asbestos related payments of $31 million, including legal
fees, in the first three months of 2003 and expect to make additional asbestos
related payments of approximately $625 million during the remainder of 2003.
This estimate is based on our experience in the first three months of 2003
regarding the timing of submissions of required evidential data by plantiffs
firms. We expect to receive approximately $650 million in asbestos related
insurance recoveries during the remainder of 2003. This includes the buyout of
the NARCO and Bendix Equitas insurance policies in April 2003 of $472 million.
We had previously anticipated receiving the Equitas payments primarily during
the period 2003 through 2007. These cash flow projections are consistent with
our existing asbestos reserves. See Note 12 for further details.
In April 2003, we made a voluntary cash contribution of $170 million
to our U.S. defined benefit pension plans.
Cash used for investing activities of $195 million during the first
three months of 2003 increased by $143 million compared with the first three
months of 2002 due mainly to lower proceeds from sales of businesses and an
increase in spending for acquisitions. The first three months of 2002 included
the proceeds from our disposition of our BCVS business. The increase in spending
for acquisitions in the current period mainly relates to the acquisitions of a
fire controls and detection technology business and a sensor business by our
Automation and Control Solutions reportable segment. This increase in cash used
for investing activities was partially offset by lower capital spending mainly
reflecting the completion in 2002 of a major plant in our Fluorines business.
Our total capital spending for the full year 2003 is projected to be $700
million.
In May 2003, we completed the sale of Specialty Materials' engineering
plastics business to BASF in exchange for BASF's nylon fiber business and $90
million in cash.
We continuously assess the relative strength of each business in our
portfolio as to strategic fit, market position, profit and cash flow
contribution in order to upgrade our combined portfolio and identify business
units that will most benefit from increased investment. We identify acquisition
candidates that will further our strategic plan and strengthen our existing core
businesses. We also identify business units that do not fit into our long-term
strategic plan based on their market position, relative profitability or growth
potential. These business units are considered for potential divestiture,
restructuring or other repositioning actions subject to regulatory constraints.
Cash used for financing activities of $9 million during the first
three months of 2003 decreased by $145 million compared with the first three
months of 2002 due mainly to a decrease in scheduled repayments of long-term
debt in the current period. Total debt of $5,204 million at March 31, 2003 was
$115 million,
23
or 2 percent higher than at December 31, 2002 principally reflecting increased
commercial paper borrowings.
Repositioning and Business Impairment Charges
A summary of repositioning and business impairment charges follows:
Three Months Ended
March 31,
------------------
2003 2002
---- ----
Severance $-- $ 41
Asset impairments -- 11
Exit costs -- 13
Reserve adjustments -- (12)
--- ----
Total net repositioning charge -- 53
--- ----
Business impairment charges -- 43
--- ----
Total net repositioning and business impairment
charges $-- $ 96
=== ====
The following table summarizes the pretax distribution of total net
repositioning and business impairment charges by income statement
classification:
Three Months Ended
March 31,
------------------
2003 2002
---- ----
Cost of goods sold $-- $46
Selling, general and administrative expenses -- 4
Business impairment charges -- 43
Equity in (income) loss of affiliated companies -- 3
--- ---
$-- $96
=== ===
As disclosed in our 2002 Annual Report on Form 10-K, we recognized
repositioning charges totaling $453 million in 2002 ($65 million was recognized
in the three months ended March 31, 2002). The components of the charges
included severance costs of $270 million, asset impairments of $121 million and
other exit costs of $62 million. Severance costs were related to announced
workforce reductions of approximately 8,100 manufacturing and administrative
positions across all of our reportable segments and our UOP process technology
joint venture, of which approximately 3,424 positions have been eliminated as of
March 31, 2003. These actions are expected to be substantially completed by
December 31, 2003. Also, $76 million of previously established severance
accruals were returned to income in 2002, due to fewer employee separations than
originally anticipated and higher than expected voluntary employee attrition
resulting in reduced severance liabilities in our Aerospace, Automation and
Control Solutions and Specialty Materials reportable segments.
These repositioning actions are expected to generate incremental
pretax savings of approximately $400 million in 2003 compared with 2002
principally from planned workforce reductions and facility consolidations. Cash
expenditures for severance and other exit costs necessary to execute these
actions were $50 million in the three months ended March 31, 2003 and were
funded through operating cash flows. Cash spending for severance and other exit
costs necessary to execute the remaining 2002 repositioning actions will
approximate $350 million in 2003 and will be funded mainly though operating cash
flows.
24
In the first quarter of 2002, we recognized an impairment charge of
$27 million related to the write-down of property, plant and equipment of our
Friction Materials business, which is classified as assets held for disposal in
Other Current Assets (a plan of disposal of Friction Materials was adopted in
2001; in January 2003, we entered into a letter of intent to sell this business
to Federal-Mogul Corp. - See Note 12). In the first quarter of 2002, we also
recognized an asset impairment charge of $16 million related to the planned
shutdown of a chemical manufacturing facility in our Specialty Materials
reportable segment.
The following table summarizes the pretax impact of total net
repositioning and business impairment charges by reportable segment:
Three Months Ended
March 31,
------------------
2003 2002
---- ----
Aerospace $-- $--
Automation and Control Solutions -- 39
Specialty Materials -- 25
Transportation and Power Systems -- 28
Corporate -- 4
--- ---
$-- $96
=== ===
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See our 2002 Annual Report on Form 10-K (Item 7A). At March 31, 2003, there
has been no material change in this information.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, Honeywell
management, including the Chief Executive Officer and Chief Financial Officer,
conducted an evaluation of the effectiveness of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the
Chief Executive Officer and the Chief Financial Officer concluded that such
disclosure controls and procedures are effective in alerting them on a timely
basis to material information relating to Honeywell required to be included in
Honeywell's periodic filings under the Exchange Act. There have been no
significant changes in internal controls, or in factors that could significantly
affect internal controls, subsequent to the date the Chief Executive Officer and
Chief Financial Officer completed their evaluation.
25
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Shareowner Litigation - Honeywell and seven of its current and former
officers were named as defendants in several purported class action lawsuits
filed in the United States District Court for the District of New Jersey (the
Securities Law Complaints). The Securities Law Complaints principally allege
that the defendants violated federal securities laws by purportedly making false
and misleading statements and by failing to disclose material information
concerning Honeywell's financial performance, thereby allegedly causing the
value of Honeywell's stock to be artificially inflated. On January 15, 2002, the
District Court dismissed the consolidated complaint against four of Honeywell's
current and former officers. The Court has granted plaintiffs' motion for class
certification defining the purported class as all purchasers of Honeywell stock
between December 20, 1999 and June 19, 2000.
The parties participated in a two day settlement mediation in April
2003 in an attempt to resolve the cases without resort to a trial. The mediation
proved unsuccessful in resolving the cases. As all significant discovery in the
cases had been stayed pending completion of the mediation, we expect discovery
to resume immediately.
We continue to believe that the allegations in the Securities Law
Complaints are without merit. Although it is not possible at this time to
predict the outcome of these cases, we expect to prevail. However, an adverse
outcome could be material to our consolidated financial position or results of
operations. As a result of the uncertainty regarding the outcome of this matter
no provision has been made in our financial statements with respect to this
contingent liability.
ERISA Class Action Lawsuit - In April 2003, Honeywell and several of
its current and former officers were named as defendants in a purported class
action lawsuit filed in the United States District Court for the District of New
Jersey. The complaint principally alleges that the defendants breached their
fiduciary duties to participants in the Honeywell Savings and Ownership Plan
(the "Savings Plan") by purportedly making false and misleading statements,
failing to disclose material information concerning Honeywell's financial
performance, and failing to diversify the Savings Plan's assets and monitor the
prudence of Honeywell stock as a Savings Plan investment. Honeywell has been
advised that a second complaint making similar allegations has been filed in the
same district, which complaint is likely to be consolidated with the original
one. No answers have been filed and discovery has not commenced. Although it is
not possible at this time to predict the outcome of this litigation, we believe
that the allegations in these complaints are without merit and we expect to
prevail. An adverse litigation outcome could, however, be material to our
consolidated financial position or results of operations. As a result of the
uncertainty regarding the outcome of this matter, no provision has been made in
our financial statements with respect to this contingent liability.
Environmental Matters - We are subject to various federal, state and
local government requirements relating to the protection of employee health and
safety and the environment. We believe that, as a general matter, our policies,
practices and procedures are properly designed to prevent unreasonable risk of
environmental damage and personal injury to our employees and employees of our
customers and that our handling, manufacture, use and disposal of hazardous or
toxic substances are in accord with environmental laws and regulations. However,
mainly because of past operations and operations of predecessor companies, we,
like other companies engaged in similar businesses, have incurred remedial
response and voluntary cleanup costs for site contamination and are a party to
lawsuits and claims associated with environmental matters, including past
production of products containing toxic substances. Additional lawsuits, claims
26
and costs involving environmental matters are likely to continue to arise in the
future.
With respect to environmental matters involving site contamination, we
continually conduct studies, individually at our owned sites, and jointly as a
member of industry groups at non-owned sites, to determine the feasibility of
various remedial techniques to address environmental matters. It is our policy
to record appropriate liabilities for environmental matters when environmental
assessments are made or remedial efforts or damage claim payments are probable
and the costs can be reasonably estimated. With respect to site contamination,
the timing of these accruals is generally no later than the completion of
feasibility studies. We expect to fund expenditures for these matters from
operating cash flow. The timing of cash expenditures depends on a number of
factors, including the timing of litigation and settlements of personal injury
and property damage claims, regulatory approval of cleanup projects, remedial
techniques to be utilized and agreements with other parties.
Although we do not currently possess sufficient information to
reasonably estimate the amounts of 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, they could be material to our consolidated results of operations.
However, considering our past experience and existing reserves, we do not expect
that these matters will have a material adverse effect on our consolidated
financial position.
Asbestos Matters - Like many other industrial companies, Honeywell is
a defendant in personal injury actions related to asbestos. We did not mine or
produce asbestos, nor did we make or sell insulation products or other
construction materials that have been identified as the primary cause of
asbestos related disease in the vast majority of claimants. Rather, we made
several products that contained small amounts of asbestos.
Honeywell's Bendix Friction Materials business manufactured automotive
brake pads that included asbestos in an encapsulated form. There is a group of
potential claimants consisting largely of professional brake mechanics. From
1981 through March 31, 2003, we have resolved over 61,000 Bendix claims at an
average indemnity cost per claim of approximately two thousand four hundred
dollars. Through the second quarter of 2002, Honeywell had no out-of-pocket
costs for these cases since its insurance deductible was satisfied many years
ago. Beginning with claim payments made in the third quarter of 2002, Honeywell
began advancing indemnity and defense claim costs which amounted to
approximately $25 million in payments in the three months ended March 31, 2003.
A substantial portion of this amount is expected to be reimbursed by insurance.
There are currently approximately 57,000 claims pending.
On January 30, 2003, Honeywell and Federal-Mogul Corp. (Federal-Mogul)
entered into a letter of intent (LOI) pursuant to which Federal-Mogul would
acquire Honeywell's automotive Bendix Friction Materials (Bendix) business, with
the exception of certain U.S. based assets. In exchange, Honeywell would receive
a permanent channeling injunction shielding it from all current and future
personal injury asbestos liabilities related to Honeywell's Bendix business.
Federal-Mogul, its U.S. subsidiaries and certain of its United Kingdom
subsidiaries voluntarily filed for financial restructuring under Chapter 11 of
the U.S. Bankruptcy Code in October 2001. Federal-Mogul will seek to establish
one or more trusts under Section 524(g) of the U.S. Bankruptcy Code as part of
its reorganization plan, including a trust for the benefit of Bendix asbestos
claimants. The reorganization plan to be submitted to the Bankruptcy Court for
approval will contemplate that the U.S. Bankruptcy Court in Delaware would issue
an injunction in favor of Honeywell that would channel to the Bendix 524(g)
trust all present and future asbestos claims relating to Honeywell's Bendix
business.
27
The 524(g) trust created for the benefit of the Bendix claimants would receive
the rights to proceeds from Honeywell's Bendix related insurance policies and
would make these proceeds available to the Bendix claimants. Honeywell would
have no obligation to contribute any additional amounts toward the settlement or
resolution of Bendix related asbestos claims.
In the fourth quarter of 2002, we recorded a charge of $167 million
consisting of a $131 million reserve for the sale of Bendix to Federal-Mogul,
our estimate of asbestos related liability net of insurance recoveries and costs
to complete the anticipated transaction with Federal-Mogul. Completion of the
transaction contemplated by the LOI is subject to the negotiation of definitive
agreements, the confirmation of Federal-Mogul's plan of reorganization by the
Bankruptcy Court, the issuance of a final, non-appealable 524(g) channeling
injunction permanently enjoining any Bendix related asbestos claims against
Honeywell, and the receipt of all required governmental approvals. We do not
believe that completion of such transaction would have a material adverse impact
on our consolidated results of operations or financial position. There can be no
assurance, however, that the transaction contemplated by the LOI will be
completed. Honeywell presently has approximately $1.9 billion (excluding
coverage previously available from Equitas; see discussion below) of insurance
coverage remaining with respect to Bendix related asbestos claims. Although it
is impossible to predict the outcome of pending or future claims, in light of
our potential exposure, our prior experience in resolving these claims, and our
insurance coverage, we do not believe that the Bendix related asbestos claims
will have a material adverse effect on our consolidated financial position.
Another source of claims is refractory products (high temperature
bricks and cement) sold largely to the steel industry in the East and Midwest by
North American Refractories Company (NARCO), a business we owned from 1979 to
1986. Less than 2 percent of NARCO's products contained asbestos.
When we sold the NARCO business in 1986, we agreed to indemnify NARCO
with respect to personal injury claims for products that had been discontinued
prior to the sale (as defined in the sale agreement). NARCO retained all
liability for all other claims. NARCO had resolved approximately 176,000 claims
through January 4, 2002, the date NARCO filed for reorganization under Chapter
11 of the U.S. Bankruptcy Code, at an average cost per claim of two thousand two
hundred dollars. Of those claims, 43 percent were dismissed on the ground that
there was insufficient evidence that NARCO was responsible for the claimant's
asbestos exposure. As of the date of NARCO's bankruptcy filing, there were
approximately 116,000 remaining claims pending against NARCO, including
approximately 7 percent in which Honeywell was also named as a defendant. Since
1983, Honeywell and our insurers have contributed to the defense and settlement
costs associated with NARCO claims. We have approximately $1.5 billion
(excluding coverage previously available from Equitas; see discussion below) of
insurance remaining that can be specifically allocated to NARCO related
liability.
As a result of the NARCO bankruptcy filing, all of the claims pending
against NARCO are automatically stayed pending the reorganization of NARCO. In
addition, because the claims pending against Honeywell necessarily will impact
the liabilities of NARCO, because the insurance policies held by Honeywell are
essential to a successful NARCO reorganization, and because Honeywell has
offered to commit the value of those policies to the reorganization, the
bankruptcy court has temporarily enjoined any claims against Honeywell, current
or future, related to NARCO. Although the stay has been extended thirteen times
since January 4, 2002, there is no assurance that such stay will remain in
effect. In connection with NARCO's bankruptcy filing, we paid NARCO's parent
company $40 million and agreed to provide NARCO with up to $20 million in
financing. We also agreed to pay $20 million to NARCO's parent company upon the
filing of a plan of reorganization for NARCO acceptable to Honeywell, and to pay
NARCO's parent company $40 million, and to forgive any outstanding NARCO
indebtedness, upon the confirmation and consummation of such a plan.
28
As a result of ongoing negotiations with counsel representing NARCO
related asbestos claimants regarding settlement of all pending and potential
NARCO related asbestos claims against Honeywell, we have reached definitive
agreements or agreements in principle with approximately 236,000 claimants,
which represents approximately 90 percent of the approximately 260,000 current
claimants who are now expected to file a claim as part of the NARCO
reorganization process. We are also in discussions with the NARCO Committee of
Asbestos Creditors on Trust Distribution Procedures for NARCO. We believe that,
as part of the NARCO plan of reorganization, a trust will be established
pursuant to these Trust Distribution Procedures for the benefit of all asbestos
claimants, current and future. If the trust is put in place and approved by the
court as fair and equitable, Honeywell as well as NARCO will be entitled to 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 products to be made against the federally-supervised
trust. As part of its ongoing settlement negotiations, Honeywell is seeking to
cap its annual contributions to the trust with respect to future claims at a
level that would not have a material impact on Honeywell's operating cash flows.
Given the substantial progress of negotiations between Honeywell and NARCO
related asbestos claimants and between Honeywell and the Committee of Asbestos
Creditors during the fourth quarter of 2002, Honeywell developed an estimated
liability for settlement of pending and future asbestos claims.
During the fourth quarter of 2002, Honeywell recorded a charge of $1.4
billion for NARCO related asbestos litigation charges, net of insurance
recoveries. This charge consists of the estimated liability to settle current
asbestos related claims, the estimated liability related to future asbestos
related claims through 2018 and obligations to NARCO's parent, net of insurance
recoveries of $1.8 billion.
The estimated liability for current claims is based on terms and
conditions, including evidentiary requirements, in definitive agreements or
agreements in principle with approximately 90 percent of current claimants. Once
finalized, settlement payments with respect to current claims are expected to be
made over approximately a four-year period.
The liability for future claims estimates the probable value of future
asbestos related bodily injury claims asserted against NARCO over a 15 year
period and obligations to NARCO's parent as discussed above. In light of the
uncertainties inherent in making long-term projections we do not believe that we
have a reasonable basis for estimating asbestos claims beyond 2018 under
Statement of Financial Accounting Standard No. 5 "Accounting for Contingencies."
Honeywell retained the expert services of Hamilton, Rabinovitz and Alschuler,
Inc. (HR&A) to project the probable number and value, including trust claim
handling costs, of asbestos related future liabilities. The methodology used to
estimate the liability for future claims has been commonly accepted by numerous
courts and is the same methodology that is utilized by an expert who is
routinely retained by the asbestos claimants committee in asbestos related
bankruptcies. The valuation methodology includes an analysis of the population
likely to have been exposed to asbestos containing products, epidemiological
studies to estimate the number of people likely to develop asbestos related
diseases, NARCO claims filing history and the pending inventory of NARCO
asbestos related claims.
Honeywell has substantial insurance that reimburses it for portions of
the costs incurred to settle NARCO related claims and court judgments as well as
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. At March 31, 2003, a significant portion of this
coverage is with London-based insurance companies under a coverage-in-place
agreement. See below for discussion of separate Equitas settlement.
Coverage-in-place agreements are settlement agreements between policyholders and
the insurers specifying the terms and conditions under which coverage will be
applied as
29
claims are presented for payment. These agreements govern such things as what
events will be deemed to trigger coverage, how liability for a claim will be
allocated among insurers and what procedures the policyholder must follow in
order to obligate the insurer to pay claims. We conducted an analysis to
determine the amount of insurance that we estimate is probable that we will
recover in relation to payment of current and projected future 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. Some of our insurance carriers have challenged our right to
enter into settlement agreements resolving all NARCO related asbestos claims
against Honeywell. However, we believe there is no factual or legal basis for
such challenges and we believe that it is probable that we will prevail in the
resolution of, or in any litigation that is brought regarding these disputes and
as of March 31, 2003, we have recognized approximately $550 million in probable
insurance recoveries from these carriers. We made judgments concerning insurance
coverage that we believe are reasonable and consistent with our historical
dealings with our insurers, our knowledge of any pertinent solvency issues
surrounding insurers and various judicial determinations relevant to our
insurance programs. Based on our analysis, we recorded insurance recoveries that
are deemed probable through 2018 of $1.8 billion.
Projecting future events is subject to many uncertainties that could
cause the NARCO related asbestos liabilities to be higher or lower than those
projected and recorded. There is no assurance that ongoing settlement
negotiations will be successfully completed, that a plan of reorganization will
be proposed or confirmed, that insurance recoveries will be timely or whether
there will be any NARCO related asbestos claims beyond 2018. Given the inherent
uncertainty in predicting future events, we plan to review our estimates
periodically, and update them based on our experience and other relevant
factors. Similarly we will reevaluate our projections concerning our probable
insurance recoveries in light of any changes to the projected liability or other
developments that may impact insurance recoveries.
In April 2003, we received $472 million in cash related to a
comprehensive policy buy-back settlement of all insurance claims by Honeywell
against Equitas. The settlement resolves all claims by Honeywell against Equitas
arising from asbestos claims related to NARCO and Bendix. The coverage amounts
discussed above for NARCO and Bendix do not include coverage previously
available from Equitas.
30
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareowners of Honeywell held on April 28, 2003,
the following matters set forth in our Proxy Statement dated March 17, 2003,
which was filed with the Securities and Exchange Commission pursuant to
Regulation 14A under the Securities Exchange Act of 1934, were voted upon with
the results indicated below.
(1) The nominees listed below were elected directors for a three-year term
ending at the 2006 Annual Meeting with the respective votes set forth
opposite their names:
FOR WITHHELD
----------- ----------
Hans W. Becherer 708,829,857 39,867,357
Gordon M. Bethune 707,882,222 40,814,993
Jaime Chico Pardo 709,081,469 39,615,745
Ann M. Fudge 707,903,486 40,793,727
(2) A proposal seeking approval of the appointment of
PricewaterhouseCoopers LLP as independent accountants for 2003 was
approved, with 713,476,991 votes cast FOR, 25,145,928 votes cast
AGAINST, and 10,074,032 abstentions;
(3) A proposal seeking approval of the 2003 Stock Incentive Plan was
approved, with 553,271,502 votes cast FOR, 58,469,585 votes cast
AGAINST, 14,853,321 abstentions and 122,102,806 broker non-votes;
(4) A shareowner proposal regarding shareowner voting provisions was
approved, with 406,223,818 votes cast FOR, 206,160,819 votes cast
AGAINST, 14,221,480 abstentions and 122,091,097 broker non-votes;
(5) A shareowner proposal regarding shareowner cumulative voting was not
approved, with 281,023,369 votes cast FOR, 330,421,087 votes cast
AGAINST, 15,156,466 abstentions and 122,096,292 broker non-votes;
(6) A shareowner proposal regarding annual election of directors was
approved, with 371,086,462 votes cast FOR, 241,582,658 votes cast
AGAINST, 13,937,800 abstentions and 122,090,294 broker non-votes;
(7) A shareowner proposal regarding separation of the office of Chairman
and Chief Executive Officer was not approved, with 208,747,197 votes
cast FOR, 402,414,675 votes cast AGAINST, 15,465,342 abstentions and
122,070,000 broker non-votes;
(8) A shareowner proposal regarding pay disparity was not approved, with
83,798,409 votes cast FOR, 523,879,603 votes cast AGAINST, 18,944,204
abstentions and 122,074,998 broker non-votes.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. See the Exhibit Index on page 38 of this Quarterly Report on
Form 10-Q.
(b) Reports on Form 8-K. The following reports on Form 8-K were filed
during the three months ended March 31, 2003.
1. On January 30, 2003, a report was filed reporting that we had
entered into a letter of intent with Federal-Mogul Corp. for them
to acquire our Bendix Friction Materials business.
2. On January 31, 2003, a report was filed which furnished, under
Item 9, a press release reporting our earnings for the year 2002.
32
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.
Honeywell International Inc.
Date: May 9, 2003 By: /s/ John J. Tus
--------------------------------
John J. Tus
Vice President and Controller
(on behalf of the Registrant
and as the Registrant's
Principal Accounting Officer)
33
CERTIFICATION PURSUANT TO
SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, David M. Cote, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Honeywell
International Inc;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
34
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 9, 2003 By: /s/ David M. Cote
--------------------------------
David M. Cote
Chief Executive Officer
35
CERTIFICATION PURSUANT TO
SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Richard F. Wallman, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Honeywell
International Inc;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
36
6. The registrant's certifying officers and I have indicated in this quarterly
report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 9, 2003 By: /s/ Richard F. Wallman
--------------------------------
Richard F. Wallman
Chief Financial Officer
37
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
2 Omitted (Inapplicable)
3 Omitted (Inapplicable)
4 Omitted (Inapplicable)
10 Omitted (Inapplicable)
11 Computation of Per Share Earnings*
12 Computation of Ratio of Earnings to Fixed Charges (filed herewith)
15 Independent Accountants' Acknowledgment Letter as to the
incorporation of their report relating to unaudited interim
financial statements (filed herewith)
18 Omitted (Inapplicable)
19 Omitted (Inapplicable)
22 Omitted (Inapplicable)
23 Omitted (Inapplicable)
24 Omitted (Inapplicable)
99.1 Certification of Principal Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
99.2 Certification of Principal Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
- ----------
* Data required by Statement of Financial Accounting Standards No. 128,
"Earnings per Share", is provided in Note 9 to the condensed consolidated
financial statements in this report.
38