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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 September 30, 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 September 30, 2003
- --------------------- ------------------
$1 par value 862,050,799 shares
Honeywell International Inc.
----------------------------
Index
-----
Page No.
--------
Part I. - Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheet -
September 30, 2003 and December 31, 2002 3
Consolidated Statement of Operations -
Three and Nine Months Ended September 30, 2003 and 2002 4
Consolidated Statement of Cash Flows -
Nine Months Ended September 30, 2003 and 2002 5
Notes to Financial Statements 6
Report of Independent Accountants 21
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 34
Item 4. Controls and Procedures 34
Part II. - Other Information
Item 1. Legal Proceedings 34
Item 6. Exhibits and Reports on Form 8-K 40
Signatures 41
- ----------
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)
September 30, December 31,
2003 2002
------- -------
(Dollars in millions)
ASSETS
Current assets:
Cash and cash equivalents $ 2,870 $ 2,021
Accounts, notes and other receivables 3,354 3,264
Inventories 2,930 2,953
Deferred income taxes 1,424 1,296
Other current assets 645 661
------- -------
Total current assets 11,223 10,195
Investments and long-term receivables 643 624
Property, plant and equipment - net 4,168 4,055
Goodwill 5,712 5,698
Other intangible assets - net 1,101 1,074
Insurance recoveries for asbestos
related liabilities 1,253 1,636
Deferred income taxes 321 533
Prepaid pension benefit cost 2,767 2,675
Other assets 1,197 1,069
------- -------
Total assets $28,385 $27,559
======= =======
LIABILITIES
Current liabilities:
Accounts payable $ 2,032 $ 1,912
Short-term borrowings 149 60
Commercial paper - 201
Current maturities of long-term debt 52 109
Accrued liabilities 4,361 4,292
------- -------
Total current liabilities 6,594 6,574
Long-term debt 5,006 4,719
Deferred income taxes 510 419
Postretirement benefit obligations
other than pensions 1,684 1,684
Asbestos related liabilities 2,217 2,700
Other liabilities 2,490 2,538
SHAREOWNERS' EQUITY
Capital - common stock issued 958 958
- additional paid-in capital 3,459 3,409
Common stock held in treasury, at cost (3,636) (3,783)
Accumulated other nonowner changes (781) (1,109)
Retained earnings 9,884 9,450
------- -------
Total shareowners' equity 9,884 8,925
------- -------
Total liabilities and shareowners' equity $28,385 $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 Nine Months Ended
September 30, September 30,
--------------------- -----------------------
2003 2002 2003 2002
------ ------ ------- -------
(Dollars in millions,
except per share amounts)
Net sales $5,768 $5,569 $16,916 $16,419
------ ------ ------- -------
Costs, expenses and other
Cost of goods sold 4,509 4,236 13,263 12,740
Selling, general and administrative
expenses 729 698 2,194 1,975
(Gain) loss on sale of non-strategic
businesses (9) - (40) 41
Business impairment charges - - - 43
Equity in (income) loss of
affiliated companies (7) (7) (11) (17)
Other (income) expense 11 (4) (16) (26)
Interest and other financial charges 82 86 253 261
------ ------ ------- -------
5,315 5,009 15,643 15,017
------ ------ ------- -------
Income before taxes and cumulative
effect of accounting change 453 560 1,273 1,402
Tax expense 109 148 336 155
------ ------ ------- -------
Income before cumulative effect of
accounting change 344 412 937 1,247
Cumulative effect of accounting change - - (20) -
------ ------ ------- -------
Net income $ 344 $ 412 $ 917 $ 1,247
====== ====== ====== =======
Earnings per share of common stock -
basic:
Income before cumulative effect of
accounting change $ 0.40 $ 0.50 $ 1.09 $ 1.52
Cumulative effect of accounting
change - - (0.02) -
------ ------ ------- -------
Net income $ 0.40 $ 0.50 $ 1.07 $ 1.52
====== ====== ====== =======
Earnings per share of common stock -
assuming dilution:
Income before cumulative effect of
accounting change $ 0.40 $ 0.50 $ 1.09 $ 1.52
Cumulative effect of accounting
change - - (0.02) -
------ ------ ------- -------
Net income $ 0.40 $ 0.50 $ 1.07 $ 1.52
====== ====== ====== =======
Cash dividends per share of common
stock $.1875 $.1875 $.5625 $.5625
====== ====== ====== =======
The Notes to Financial Statements are an integral part of this statement.
4
Honeywell International Inc.
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
--------------------------
2003 2002
------ ------
(Dollars in millions)
Cash flows from operating activities:
Net income $917 $1,247
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of accounting change 31 -
(Gain) loss on sale of non-strategic businesses (40) 41
Repositioning and other charges 64 190
Litton settlement payment, net of tax refund - (162)
Business impairment charges - 43
Insurance receipts for asbestos related liabilities 477 73
Asbestos related liability payments (467) (64)
Depreciation 437 510
Undistributed earnings of equity affiliates (11) (30)
Deferred income taxes 279 131
Pension contributions - U.S. plans (170) (100)
Other 82 (311)
Changes in assets and liabilities, net of the effects
of acquisitions and divestitures:
Accounts, notes and other receivables (72) 31
Inventories 17 120
Other current assets (21) 6
Accounts payable 118 (17)
Accrued liabilities 55 (82)
------ ------
Net cash provided by operating activities 1,696 1,626
------ ------
Cash flows from investing activities:
Expenditures for property, plant and equipment (407) (444)
Proceeds from disposals of property, plant and
equipment 13 22
Decrease in investments - 91
Cash paid for acquisitions (124) (32)
Proceeds from sales of businesses 137 183
Decrease in short-term investments - 7
------ ------
Net cash (used for) investing activities (381) (173)
------ ------
Cash flows from financing activities:
Net (decrease) in commercial paper (201) (3)
Net increase (decrease) in short-term borrowings 81 (71)
Proceeds from issuance of common stock 39 37
Payments of long-term debt (81) (382)
Cash dividends on common stock (483) (460)
------ ------
Net cash (used for) financing activities (645) (879)
------ ------
Effect of foreign exchange rate changes
on cash and cash equivalents 179 35
------ ------
Net increase in cash and cash equivalents 849 609
Cash and cash equivalents at beginning of year 2,021 1,393
------ ------
Cash and cash equivalents at end of period $2,870 $2,002
====== ======
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 September 30, 2003 and
the results of operations for the three and nine months ended September 30, 2003
and 2002 and cash flows for the nine months ended September 30, 2003 and 2002.
The results of operations for the three- and nine-month periods ended September
30, 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 September 30, 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 reportable 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- and nine-month periods ended
September 30, 2002, assuming adoption of SFAS No. 143 as of January 1, 2002,
were not material to net income or per share amounts.
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" (FIN 46) which provides guidance
on consolidation of variable interest entities. In October 2003, the FASB
deferred the effective date of FIN 46 for all variable interest entities to the
first reporting period ending after December 15, 2003. We do not expect that the
adoption of FIN 46 will have a material effect on our consolidated results of
operations or financial position.
In November 2002, the Emerging Issues Task Force (EITF) reached a
consensus on EITF Issue No. 00-21, "Accounting for Revenue Arrangements with
Multiple Deliverables." EITF Issue No. 00-21 provides guidance on when and how
to separate elements of an arrangement that may involve the delivery or
performance of multiple products, services and rights to use assets into
separate units of accounting. The guidance in the consensus is effective for
revenue arrangements entered into in fiscal periods beginning after June 15,
2003. We adopted EITF Issue No. 00-21 prospectively in the quarter beginning
July 1, 2003. The adoption of EITF Issue No. 00-21 did not have a material
effect on our consolidated results of operations or financial position.
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
6
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. The adoption of FIN 45 did not have a material effect on our consolidated
financial position as of September 30, 2003 or our consolidated results of
operations for the three and nine months ended September 30, 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 September 30, 2003, except for the fact that we no longer
guarantee the debt of Bendix Commercial Vehicle Systems of $172 million, there
has been no material change to these guarantees.
The following table summarizes information concerning our recorded
obligations for product warranties and product performance guarantees:
Nine Months Ended
September 30, 2003
------------------
Beginning of period $217
Accruals for warranties/guarantees issued during
the period 149
Adjustments of pre-existing warranties/guarantees (7)
Settlement of warranty/guarantee claims (134)
----
End of period $225
====
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. There were no fixed stock option grants during the
three months ended September 30, 2003.
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------------------
2003 2002 2003 2002
----- ----- ----- -----
Net income, as reported $ 344 $ 412 $ 917 $1,247
Deduct: Total stock-based employee
compensation cost determined under fair
value method for fixed stock option
plans, net of related tax effects (12) (16) (37) (48)
----- ----- ----- -----
Pro forma net income $ 332 $ 396 $ 880 $1,199
===== ===== ===== =====
Earnings per share of common stock:
Basic - as reported $0.40 $0.50 $1.07 $1.52
===== ===== ===== =====
Basic - pro forma $0.38 $0.48 $1.02 $1.46
===== ===== ===== =====
Earnings per share of common stock:
Assuming dilution - as reported $0.40 $0.50 $1.07 $1.52
===== ===== ===== =====
Assuming dilution - pro forma $0.38 $0.48 $1.02 $1.46
===== ===== ===== =====
7
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ------------------
2003 2002 2003 2002
---- ---- ---- ----
The following sets forth fair value per
share information, including related
assumptions, used to determine
compensation cost consistent with the
requirements of SFAS No. 123:
Weighted average fair value per share of
options granted during the period
(estimated on grant date using
Black-Scholes option-pricing model) - $11.17 $8.80 $12.70
Assumptions:
Historical dividend yield - 1.9% 2.0% 1.9%
Historical volatility - 44.9% 46.7% 43.7%
Risk-free rate of return - 3.3% 2.9% 4.2%
Expected life (years) - 5.0 5.0 5.0
NOTE 4. Accounts, notes and other receivables consist of the following:
September 30, December 31,
2003 2002
------------- ------------
Trade $3,156 $3,064
Other 353 347
------ ------
3,509 3,411
Less - Allowance for doubtful
accounts (155) (147)
------ ------
$3,354 $3,264
====== ======
NOTE 5. Inventories consist of the following:
September 30, December 31,
2003 2002
------------- ------------
Raw materials $1,000 $ 936
Work in process 832 804
Finished products 1,235 1,361
------ ------
3,067 3,101
Less - Progress payments (17) (28)
Reduction to LIFO cost basis (120) (120)
------ ------
$2,930 $2,953
====== ======
8
NOTE 6. The change in the carrying amount of goodwill for the nine months ended
September 30, 2003 by reportable segment is as follows:
Currency
Translation
Dec. 31, 2002 Acquisitions (Divestitures) Adjustment Sept. 30, 2003
------------- ------------ -------------- ---------- --------------
Aerospace $1,644 $ - $ (2) $ 5 $1,647
Automation and
Control Solutions 2,678 74 - 11 2,763
Specialty Materials 849 5 (90) 10 774
Transportation Systems 527 - - 1 528
------ --- ---- --- ------
$5,698 $79 $(92) $27 $5,712
====== === ==== === ======
Intangible assets are comprised of:
September 30, 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 $ 837 $(132) $ 705 $ 769 $(107) $ 662
Patents and trademarks 416 (292) 124 411 (286) 125
Other 417 (182) 235 433 (183) 250
------ ----- ------ ------ ----- ------
1,670 (606) 1,064 1,613 (576) 1,037
Trademark with indefinite
life 46 (9) 37 46 (9) 37
------ ----- ------ ------ ----- ------
$1,716 $(615) $1,101 $1,659 $(585) $1,074
====== ===== ====== ====== ===== ======
Amortization expense related to intangible assets was $48 and $43
million for the nine months ended September 30, 2003 and 2002, respectively.
Amortization expense related to intangible assets for 2003 to 2007 is expected
to approximate $60 million each year.
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 Nine Months Ended
September 30, September 30,
-------------------- -------------------
2003 2002 2003 2002
---- ---- ---- ----
Net income $344 $412 $ 917 $1,247
Foreign exchange translation
adjustments (10) (19) 353 227
Change in fair value of effective
cash flow hedges (82) 12 (25) (7)
---- ---- ------ ------
$252 $405 $1,245 $1,467
==== ==== ====== ======
9
NOTE 8. Segment financial data follows:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- -----------------------
2003 2002 2003 2002
---- ---- ---- ----
Net Sales
- ---------
Aerospace $2,231 $2,206 $ 6,454 $ 6,499
Automation and Control Solutions 1,875 1,727 5,429 5,094
Specialty Materials 777 797 2,377 2,425
Transportation Systems 885 818 2,650 2,349
Corporate - 21 6 52
------ ------ ------- -------
$5,768 $5,569 $16,916 $16,419
====== ====== ======= =======
Segment Profit
- --------------
Aerospace $ 303 $ 338 $ 745 $ 1,009
Automation and Control Solutions 205 233 567 660
Specialty Materials (8) 10 30 52
Transportation Systems 91 92 278 269
Corporate (33) (38) (99) (109)
------ ------ ------- -------
Total segment profit 558 635 1,521 1,881
------ ------ ------- -------
Gain (loss) on sale of non-strategic
businesses 9 - 40 (41)
Business impairment charges - - - (43)
Equity in income of affiliated companies 7 7 11 17
Other income (expense) (11) 4 16 26
Interest and other financial charges (82) (86) (253) (261)
Repositioning, environmental and other
charges included in cost of goods sold
and selling, general and administrative
expenses (28) - (62) (177)
------ ------ ------- -------
Income before taxes and cumulative
effect of accounting change $ 453 $ 560 $ 1,273 $ 1,402
====== ====== ======= =======
10
NOTE 9. The details of the earnings per share calculations for the three- and
nine-month periods ended September 30, 2003 and 2002 follow:
Three Months 2003 Nine Months 2003
-------------------------------- --------------------------------
Per Per
Average Share Average Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Income Before Cumulative
- ------------------------
Effect of Accounting Change
---------------------------
Earnings per share of common
stock - basic $344 862.0 $0.40 $937 859.6 $1.09
Dilutive securities issuable
in connection with stock
plans 2.6 1.1
---- ----- ----- ---- ----- -----
Earnings per share of common
stock - assuming dilution $344 864.6 $0.40 $937 860.7 $1.09
==== ===== ===== ==== ===== =====
Net Income
- ----------
Earnings per share of common
stock - basic $344 862.0 $0.40 $917 859.6 $1.07
Dilutive securities issuable
in connection with stock
plans 2.6 1.1
---- ----- ----- ---- ----- -----
Earnings per share of common
stock - assuming dilution $344 864.6 $0.40 $917 860.7 $1.07
==== ===== ===== ==== ===== =====
Three Months 2002 Nine Months 2002
-------------------------------- --------------------------------
Per Per
Average Share Average Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Net Income
- ----------
Earnings per share of common
stock - basic $412 821.1 $0.50 $1,247 819.2 $1.52
Dilutive securities issuable
in connection with stock
plans 2.2 2.8
---- ----- ----- ------ ----- -----
Earnings per share of common
stock - assuming dilution $412 823.3 $0.50 $1,247 822.0 $1.52
==== ===== ===== ====== ===== =====
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- and nine-month periods ended
September 30, 2003, the number of stock options not included in the computations
were 40.9 and 42.3 million, respectively. For the three- and nine-month periods
ended September 30, 2002, the number of stock options not included in the
computations were 44.1 and 42.0 million, respectively. These stock options were
outstanding at the end of each of the respective periods.
11
NOTE 10. A summary of repositioning and other charges follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ --------------------
2003 2002 2003 2002
---- ---- ---- ----
Severance $ 9 $- $ 31 $ 73
Asset impairments 2 - 2 68
Exit costs 1 - 4 23
Reserve adjustments (14) - (37) (43)
---- --- ---- ----
Total net repositioning charge (2) - - 121
---- --- ---- ----
Probable and reasonably estimable
environmental liabilities 28 - 60 -
Business impairment charges - - - 43
Investment impairment charges 2 - 2 -
Customer claims and settlements
of contract liabilities - - - 29
Write-offs of receivables,
inventories and other assets 2 - 2 40
---- --- ---- ----
Total net repositioning and other
charges $ 30 $- $ 64 $233
==== === ==== ====
The following table summarizes the pretax distribution of total net
repositioning and other charges by income statement classification:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- -----------------
2003 2002 2003 2002
---- ---- ---- ----
Cost of goods sold $ 26 $ - $ 55 $173
Selling, general and administrative
expenses 2 - 7 4
Business impairment charges - - - 43
Equity in (income) loss of affiliated
companies 2 - 2 13
---- --- ---- ----
$ 30 $ - $ 64 $233
==== === ==== ====
The following table summarizes the pretax impact of total net
repositioning and other charges by reportable segment:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -----------------
2003 2002 2003 2002
---- ---- ---- ----
Aerospace $ - $ - $ (2) $ 6
Automation and Control Solutions (8) - (16) 61
Specialty Materials 5 - 12 132
Transportation Systems 3 - 3 30
Corporate 30 - 67 4
---- --- --- ----
$ 30 $ - $64 $233
==== === === ====
In the third quarter of 2003, we recognized a charge of $12 million
mainly for severance costs related to workforce reductions of 141 manufacturing
and administrative positions principally in our Aerospace and Specialty
Materials reportable segments. Also, $14 million of previously established
accruals, mainly for severance, were returned to income in the third quarter of
2003, due to fewer employee separations than originally anticipated associated
with certain 2002 repositioning actions, resulting in reduced severance
liabilities in our Automation and Control Solutions, Aerospace and Specialty
Materials reportable segments.
12
In the second quarter of 2003, we recognized a charge of $25 million
mainly for severance costs related to workforce reductions of 448 manufacturing
and administrative positions principally in our Specialty Materials and
Aerospace reportable segments. Also, $23 million of previously established
accruals, mainly for severance, were returned to income in the second quarter of
2003, due to fewer employee separations than originally anticipated associated
with certain 2002 repositioning actions, resulting in reduced severance
liabilities in our Automation and Control Solutions, Aerospace and Specialty
Materials reportable segments.
As disclosed in our 2002 Annual Report on Form 10-K, we recognized
repositioning charges totaling $453 million in 2002 ($0 and $164 million were
recognized in the three- and nine-month periods ended September 30, 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 6,000
positions have been eliminated as of September 30, 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.
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 charges 31 2 4 37
2003 usage (121) (2) (26) (149)
Adjustments (32) - (5) (37)
---- --- ---- ----
Balance at September 30, 2003 $203 $ - $ 54 $257
==== === ==== ====
In the third quarter of 2003, we recognized other charges consisting of
legacy environmental matters deemed probable and reasonably estimable in the
third quarter of 2003 of $28 million, the write-off of equipment in our
Specialty Materials reportable segment of $2 million and a charge related to an
impairment of a Specialty Materials' joint venture's investment of $2 million.
In the second quarter of 2003, we recognized other charges of $32
million for legacy environmental matters deemed probable and reasonably
estimable in the second quarter of 2003 including the matter entitled Interfaith
Community Organization, et al. v. Honeywell International Inc., et al. as
discussed in Note 12.
In the second quarter of 2002, we recognized other charges consisting
of customer claims and settlements of contract liabilities of $29 million and
write-offs of receivables, inventories and other assets of $40 million. Such
charges related mainly to our Advanced Circuits business which was sold in the
fourth quarter of 2002, bankruptcy of a customer in our Aerospace reportable
segment, and customer claims in our Industry Solutions business.
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
13
asset impairment charge of $16 million related to the shutdown of a chemical
manufacturing facility in our Specialty Materials reportable segment.
NOTE 11. In the third quarter of 2003, we sold three non-strategic businesses in
our Specialty Materials and Aerospace reportable segments for cash proceeds
totaling $47 million resulting in a net pretax gain of $9 million (after-tax
loss of $3 million).
In May 2003, we completed the sale of Specialty Materials' Engineering
Plastics (Engineering Plastics) business to BASF in exchange for BASF's nylon
fiber business and $90 million in cash. This transaction is not expected to have
a material impact on Specialty Materials' sales or segment profit in 2003. The
sale of Engineering Plastics resulted in a pretax gain of $31 million, after-tax
$9 million, including the tax benefits associated with prior capital losses.
In June 2002, we sold Specialty Materials' Pharmaceutical Fine
Chemicals (PFC) and Automation and Control's Consumer Products (Consumer
Products) businesses for proceeds of approximately $105 million, mainly cash,
resulting in a pretax loss of $166 million (after-tax gain of $98 million). The
businesses sold had a higher deductible tax basis than book basis which resulted
in an after-tax gain. 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 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. Discovery in the cases, which had
been stayed pending completion of the mediation, has resumed. A further
mediation session is planned for the fourth quarter of 2003.
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
14
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. In July 2003, an amended complaint making
similar allegations and naming several current and former officers and directors
as defendants was filed in the same district. In September 2003, Honeywell filed
a motion to dismiss the amended complaint.
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.
In the matter entitled Interfaith Community Organization, et al. v.
Honeywell International Inc., et al., the United States District Court for the
District of New Jersey held in May 2003 that a predecessor Honeywell site
located in Jersey City, New Jersey constituted an imminent and substantial
endangerment and ordered Honeywell to conduct the excavation and transport for
offsite disposal of approximately one million tons of chromium residue present
at the site. Honeywell strongly disagrees with the court's determinations and
has appealed the court's decision to the Third Circuit Court of Appeals. The
Third Circuit Court of Appeals has referred the case for mediation. In October
2003, the District Court denied Honeywell's motion for a stay of certain aspects
of its May 2003 order, and we are
15
considering whether to appeal such ruling. The site at issue is one of
twenty-one sites located in Jersey City, New Jersey which are the subject of an
Administrative Consent Order (ACO) entered into with the New Jersey Department
of Environmental Protection (NJDEP) in 1993. Under the ACO, Honeywell agreed to
study and remediate these sites in accordance with NJDEP's directions, provided
that the total costs of such studies and remediation do not exceed $60 million.
Honeywell has cooperated with the NJDEP under the ACO and believes that
decisions regarding site cleanups should be made by NJDEP under the ACO. We are
confident that proceeding under the ACO will ensure a safe remediation and allow
the property to be placed back into productive use much faster and at a cost
significantly less than the remedies required by the court's order. We have not
completed development of a remedial action plan for the excavation and offsite
disposal directed under the court's order and therefore are unable to estimate
the cost of such actions. At trial, plaintiff's expert testified that the
excavation and offsite disposal cost might be $400 million. However, there are
significant variables in the implementation of the court's order and depending
on the method of implementation chosen, the estimate could increase or decrease.
Provisions have been previously made in our financial statements as to remedial
costs consistent with the ACO and during the three months ended June 30, 2003 we
provided for additional costs which are likely to be incurred during the
pendency of our appeal, which provisions do not assume excavation and offsite
removal of chromium from the site. There are alternative outcomes and remedies
beyond the scope of the ACO that could result from the remanding, reversal or
replacement of the Court's decision and order. At this time, we can neither
identify a probable alternative outcome nor reasonably estimate the cost of an
alternative remedy. Although we expect the court's decision and order to be
remanded, reversed or replaced, should the remedies prescribed in the court's
decision and order ultimately be upheld, such outcome could have a material
adverse impact on our consolidated results of operations or operating cash flows
in the periods recognized or paid.
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 September 30, 2003, we have resolved about 62,500 Bendix claims at
an average indemnity cost per claim of approximately two thousand nine 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 that amounted to approximately
$75 million in payments in the nine months ended September 30, 2003. A
substantial portion of this amount is expected to be reimbursed by insurance.
There are currently approximately 71,000 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
16
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 as contemplated under the LOI would
have a material adverse impact on our consolidated results of operations or
financial position.
During the third quarter of 2003, DaimlerChrysler AG, Ford Motor Co.
and General Motors Corp. filed a lawsuit in the U.S. Bankruptcy Court, against
Honeywell and Federal-Mogul seeking a declaration that Honeywell's Bendix unit
cannot be sold to Federal-Mogul and receive protection from asbestos claims
under Section 524(g) of the U.S. Bankruptcy Code. Honeywell believes the lawsuit
is without merit and intends to vigorously defend against the allegations in the
complaint.
There can be no assurance, however, that the transaction contemplated
by the LOI will be completed. Honeywell presently has approximately $1.9 billion
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 $1.3 billion
(excluding insurance recoveries in October 2003 - see discussion below) of
insurance remaining that can be specifically allocated to NARCO related
liability.
17
As a result of the NARCO bankruptcy filing, all of the claims pending
against NARCO are automatically stayed pending the reorganization of NARCO
except one claim which is not material as to which the stay was lifted in
August 2003. 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 nineteen 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 256,000 claimants,
which represents in excess of 90 percent of the approximately 275,000 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 has reached
agreement in principle with the representative for future NARCO claimants 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 in excess of 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
18
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 September 30, 2003, a significant portion of
this coverage is with London-based insurance companies under a coverage-in-place
agreement. 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 September 30, 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. A portion of this insurance has been received, primarily from
Equitas, as discussed below.
During the nine months ended September 30, 2003, we made asbestos
related payments of $467 million, including legal fees. During the nine months
ended September 30, 2003, we received $477 million in insurance reimbursements
including $472 million in cash received from Equitas 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.
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
19
of any changes to the projected liability or other developments that may impact
insurance recoveries.
NARCO and Bendix asbestos related balances are included in the
following balance sheet accounts:
September 30, December 31,
2003 2002
---- ----
Other current assets $ 287 $ 320
Insurance recoveries for asbestos related liabilities 1,253 1,636
------ ------
$1,540 $1,956
====== ======
Accrued liabilities $ 825 $ 741
Asbestos related liabilities 2,217 2,700
------ ------
$3,042 $3,441
====== ======
In October 2003, we received approximately $150 million in cash from
various insurance companies related to our NARCO asbestos claims.
We are monitoring proposals for federal asbestos legislation pending in
the United States Congress. Due to the uncertainty surrounding the proposed
legislation, it is not possible at this point in time to determine what impact
such legislation would have on the NARCO bankruptcy strategy, the proposed
transaction with Federal-Mogul, or our asbestos liabilities and related
insurance recoveries.
20
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 September 30, 2003, and the
related consolidated statement of operations for each of the three-month and
nine-month periods ended September 30, 2003 and 2002 and the consolidated
statement of cash flows for the nine-month periods ended September 30, 2003 and
2002. These interim 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
October 31, 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.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
A. RESULTS OF OPERATIONS - THIRD QUARTER 2003 COMPARED WITH THIRD QUARTER 2002
Net sales in the third quarter of 2003 were $5,768 million, an increase of
$199 million, or 4 percent compared with the third quarter of 2002. The increase
in sales is attributable to the following:
Acquisitions 3 %
Divestitures (2)
Price -
Volume -
Foreign exchange 3
--
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 $4,509 million in the third quarter of 2003 increased
by $273 million, or 6 percent compared with the third quarter of 2002. This
increase resulted mainly from 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 and environmental expenses.
Selling, general and administrative expenses of $729 million in the third
quarter of 2003 increased by $31 million, or 4 percent compared with the third
quarter of 2002 due mainly to higher pension costs and the unfavorable impact of
foreign exchange.
Pension expense was $28 million in the third quarter of 2003 compared with
pension income of $41 million in the third quarter of 2002. The increase of $69
million in pension expense in the third quarter of 2003 compared with the third
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 during the period 2000 to 2002 and the
systematic recognition of higher net losses. These losses resulted mainly from
actual pension plan asset returns below the assumed rate of return during the
period 2000 to 2002.
Gain on sale of non-strategic businesses of $9 million in the third quarter
of 2003 represents the net pretax gain on the dispositions of three businesses
in our Specialty Materials and Aerospace reportable segments.
Equity in (income) loss of affiliated companies was income of $7 million in
both the third quarters of 2003 and 2002. The current year's quarter includes a
charge of $2 million related to an impairment of a Specialty Materials' joint
venture's investment.
Other (income) expense, $11 million of expense in the third quarter of
2003, compared with $4 million of income in the third quarter of 2002. The
decrease of $15 million in other income in the third quarter of 2003 compared
with the third quarter of 2002 was due mainly to the inclusion of income of $12
million in the prior year's quarter related to the settlement of a patent
infringement lawsuit with an automotive supplier.
22
Interest and other financial charges of $82 million in the third quarter of
2003 decreased by $4 million, or 5 percent compared with the third quarter of
2002 due mainly to lower interest rates in the current period.
Tax expense was $109 million in the third quarter of 2003 resulting in an
effective tax rate of 24.1 percent. Tax expense was $148 million in the third
quarter of 2002 resulting in an effective tax rate of 26.5 percent. The
effective tax rate was lower than the statutory rate of 35 percent in both the
current and prior year quarter principally due to tax benefits on export sales,
favorable tax audit settlements and foreign tax planning strategies.
Additionally, tax expense in the third quarter of 2003 includes a tax benefit of
$17 million from a tax settlement related to a prior year asset impairment.
Net income was $344 million, or $0.40 per share, in the third quarter of
2003 compared with net income of $412 million, or $0.50 per share, in the third
quarter of 2002. The decrease of $0.10 per share in the third quarter of 2003
compared with the third quarter of 2002 was primarily due to higher pension
expense, including the impact of dilution from the prior year contribution of
Honeywell common stock to our U.S. pension plans.
23
Review of Business Segments
Three Months Ended
September 30,
---------------------------
2003 2002
---- ----
Net Sales
Aerospace $2,231 $2,206
Automation and Control Solutions 1,875 1,727
Specialty Materials 777 797
Transportation Systems 885 818
Corporate - 21
------ ------
$5,768 $5,569
====== ======
Segment Profit
Aerospace $303 $338
Automation and Control Solutions 205 233
Specialty Materials (8) 10
Transportation Systems 91 92
Corporate (33) (38)
------ ------
Total segment profit 558 635
------ ------
Gain (loss) on sale of non-strategic businesses 9 -
Equity in income of affiliated companies 7 7
Other income (expense) (11) 4
Interest and other financial charges (82) (86)
Repositioning, environmental and other charges
included in cost of goods sold and selling,
general and administrative expenses (28) -
------ ------
Income before taxes and cumulative effect
of accounting change $453 $560
====== ======
Aerospace sales of $2,231 million in the third quarter of 2003
increased by $25 million, or 1 percent compared with the third quarter of 2002
as strong sales to our defense and space customers offset continued weakness in
sales to our commercial original equipment (OE) and aftermarket customers. Sales
to our defense and space customers increased by 11 percent with aftermarket
sales up by 23 percent and OE sales higher by 6 percent, resulting principally
from increased military replenishment, platform upgrades and growth in precision
guidance munitions. Sales to our air transport OE customers decreased by 7
percent reflecting scheduled production declines by our OE customers (primarily
Boeing and Airbus) due to reduced aircraft orders by commercial airlines. 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 also decreased
by 23 percent reflecting a decline in projected deliveries of business jet
airplanes due to weakness in fractional demand and corporate profitability.
Sales to our commercial air transport aftermarket customers were lower by 3
percent as a decline in sales of commercial spare parts of 12 percent due to
lower discretionary spending by the airlines was partially offset by higher
sales of repair and overhaul services of 8 percent. Sales to our regional
transport aftermarket customers declined by 5 percent also due primarily to
lower sales of spare parts. The continued weakness in sales of spare parts to
our commercial aftermarket customers primarily results from the discretionary
nature of these sales as the airlines continue to reduce spending. Sales to our
business and general aviation aftermarket customers improved by 6 percent
largely due to strong repair and overhaul activity.
24
Aerospace segment profit of $303 million in the third quarter of 2003
decreased by $35 million, or 10 percent compared with the third quarter of 2002
due mainly to lower sales of higher-margin commercial aftermarket spare parts
and higher pension expense.
Automation and Control Solutions sales of $1,875 million in the third
quarter of 2003 increased by $148 million, or 9 percent compared with the third
quarter of 2002 due to acquisitions of 6 percent and the favorable effect of
foreign exchange of 4 percent, partially offset by the impact of lower prices of
1 percent. Sales increased by 14 percent for our Automation and Control Products
business due to acquisitions, mainly Invensys Sensor Systems, and strong sales
of fire solutions products. Sales for our Process Solutions business (previously
Industry Solutions and Industrial Service businesses) increased by 7 percent
mainly due to the favorable effect of foreign exchange. Sales for our Building
Solutions business (previously Service business excluding the Industrial Service
business) decreased by 1 percent as lower volumes due to continued softness in
the non-residential construction market were partially offset by the favorable
effect of foreign exchange.
Automation and Control Solutions segment profit of $205 million in the
third quarter of 2003 decreased by $28 million, or 12 percent compared with the
third quarter of 2002 due mainly to higher pension expense, the decline in
higher-margin energy-retrofit and discretionary spot sales in our Building
Solutions business, and increased research and development and investments in
sales and marketing capacity, mainly in our Automation and Control Products and
Building Solutions businesses, respectively. Segment profit was also adversely
impacted by pricing pressures mainly in our Automation and Control Products and
Process Solutions businesses.
Specialty Materials sales of $777 million in the third quarter of 2003
decreased by $20 million, or 3 percent compared with the third quarter of 2002
due largely to the impact from the prior year divestiture of our Advanced
Circuits business. Lower sales resulting from temporary plant shutdowns in our
Fluorocarbons and Nylon Systems businesses offset the favorable effects of
foreign exchange and higher volumes in our refrigerants business.
Specialty Materials segment loss of ($8) million in the third quarter
of 2003 compared with segment profit of $10 million in the third quarter of
2002. This decrease of $18 million in segment profit mainly resulted from the
impact of the temporary plant shutdowns in our Fluorocarbons and Nylon Systems
businesses, higher raw material costs (principally natural gas) and higher
pension expense. This decrease was partially offset by the impact of the prior
year write-down of property, plant and equipment in several businesses, the
benefits of cost actions and divestitures of non-strategic businesses.
Transportation Systems sales of $885 million in the third quarter of
2003 increased by $67 million, or 8 percent compared with the third quarter of
2002 due mainly to the favorable effect of foreign exchange of 6 percent and a
favorable sales mix at our Garrett Engine Boosting Systems business. Sales at
our Garrett Engine Boosting Systems business increased by 16 percent due to a
favorable sales mix of 9 percent as worldwide demand for our turbochargers
continued to be strong, and the favorable effect of foreign exchange of 8
percent, partially offset by lower prices of 1 percent.
Transportation Systems segment profit of $91 million in the third quarter
of 2003 decreased by $1 million, or 1 percent compared with the third quarter of
2002 due mainly to higher pension expense and lower aftermarket sales at our
Friction Materials business offset by the effect of higher sales at our Garrett
Engine Boosting Systems business.
25
B. RESULTS OF OPERATIONS - NINE MONTHS 2003 COMPARED WITH NINE MONTHS 2002
Net sales in the first nine months of 2003 were $16,916 million, an
increase of $497 million, or 3 percent compared with the first nine months of
2002. The increase in sales is attributable to the following:
Acquisitions 3 %
Divestitures (2)
Price -
Volume (1)
Foreign exchange 3
---
3 %
===
A discussion of net sales by reportable segment can be found in the Review
of Business Segments section below.
Cost of goods sold of $13,263 million in the first nine months of 2003
increased by $523 million, or 4 percent compared with the first nine months of
2002. This increase resulted from a $641 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, product development and other
expenses. This increase was partially offset by a decrease of $118 million in
repositioning and other charges.
Selling, general and administrative expenses of $2,194 million in the first
nine months of 2003 increased by $219 million, or 11 percent compared with the
first nine months of 2002 due mainly to higher pension and other employee
benefit costs and the unfavorable impact of foreign exchange.
Pension expense was $116 million in the first nine months of 2003 compared
with pension income of $119 million in the first nine months of 2002. The
increase of $235 million in pension expense in the first nine months of 2003
compared with the first nine months 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 during the
period 2000 to 2002 and the systematic recognition of higher net losses. These
losses resulted mainly from actual pension plan asset returns below the assumed
rate of return during the period 2000 to 2002.
Gain on sale of non-strategic businesses of $40 million in the first nine
months of 2003 represents the net pretax gain on the dispositions of our
Engineering Plastics business and three other businesses in our Specialty
Materials and Aerospace reportable segments. Loss on sale of non-strategic
businesses of net $41 million in the first nine months of 2002 represented the
pretax loss on the dispositions of Specialty Materials' Pharmaceutical Fine
Chemicals (PFC) and Automation and Control's Consumer Products (Consumer
Products) businesses of $166 million partially offset by the pretax gain on the
disposition of our Bendix Commercial Vehicle Systems (BCVS) business of
$125 million.
Business impairment charges of $43 million in the first nine months of 2002
related to the write-down of property, plant and equipment in our Friction
Materials business and the shutdown of a manufacturing facility in our Specialty
Materials reportable segment. See the repositioning and other charges section of
this Management's Discussion and Analysis for further details.
26
Equity in (income) loss of affiliated companies was income of $11 million
in the first nine months of 2003 compared with income of $17 million in the
first nine months of 2002. The decrease of $6 million in equity income in the
first nine months of 2003 compared with the first nine months of 2002 was due to
a charge of $2 million in the first nine months of 2003 related to the
impairment of a Specialty Materials' joint venture's investment. Also, the prior
year's first nine months included a charge of $13 million for severance actions
by our UOP joint venture offset by income of $15 million resulting from exiting
joint ventures in our Aerospace and Transportation Systems reportable segments.
Other (income) expense, $16 million of income in the first nine months of
2003, compared with $26 million of income in the first nine months of 2002. The
decrease of $10 million in other income in the first nine months of 2003
compared with the first nine months of 2002 was due mainly to a decrease of $33
million in benefits from foreign exchange hedging resulting from the weakness in
the U.S. dollar partially offset by a gain of $20 million related to the
settlement of a patent infringement lawsuit.
Interest and other financial charges of $253 million in the first nine
months of 2003 decreased by $8 million, or 3 percent compared with the first
nine months of 2002 due mainly to lower interest rates in the current period.
Tax expense was $336 million in the first nine months of 2003 resulting in
an effective tax rate of 26.4 percent. Tax expense was $155 million in the first
nine months of 2002 resulting in an effective tax rate of 11.1 percent. The
effective tax rate was lower than the statutory rate of 35 percent in both the
current and prior year nine-month periods principally due to tax benefits on
export sales, favorable tax audit settlements and foreign tax planning
strategies. Tax expense in the first nine months of 2002 included the tax
benefit related to repositioning, business impairment and other charges, the
gain on the sale of our BCVS business, and the loss on the dispositions of our
PFC and Consumer Products businesses. The PFC and Consumer Products businesses
had a higher deductible tax basis than book basis that resulted in a tax
benefit.
Net income was $917 million, or $1.07 per share, in the first nine months
of 2003 compared with net income of $1,247 million, or $1.52 per share, in the
first nine months of 2002. The decrease of $0.45 per share in the first nine
months of 2003 compared with the first nine months of 2002 was primarily due to
higher pension expense, including the impact of dilution from the prior year
contribution of Honeywell common stock to our U.S. pension plans, lower sales of
higher margin products and services, principally in our Aerospace and Automation
and Control Solutions reportable segments, higher product development and other
expenses and the cumulative effect of a change in accounting related to our
adoption of SFAS No. 143 on January 1, 2003.
27
Review of Business Segments
Nine Months Ended
September 30,
-----------------------
2003 2002
---- ----
Net Sales
Aerospace $ 6,454 $ 6,499
Automation and Control Solutions 5,429 5,094
Specialty Materials 2,377 2,425
Transportation Systems 2,650 2,349
Corporate 6 52
------- -------
$16,916 $16,419
======= =======
Segment Profit
Aerospace $ 745 $ 1,009
Automation and Control Solutions 567 660
Specialty Materials 30 52
Transportation Systems 278 269
Corporate (99) (109)
------- -------
Total segment profit 1,521 1,881
------- -------
Gain (loss) on sale of non-strategic businesses 40 (41)
Business impairment charges - (43)
Equity in income of affiliated companies 11 17
Other income 16 26
Interest and other financial charges (253) (261)
Repositioning, environmental and other charges included
in cost of goods sold and selling, general and
administrative expenses (62) (177)
------- -------
Income before taxes and cumulative effect
of accounting change $ 1,273 $ 1,402
======= =======
Aerospace sales of $6,454 million in the first nine months of 2003
decreased by $45 million, or 1 percent compared with the first nine months of
2002 due to continued weakness in sales to our commercial OE and aftermarket
customers. Sales to our air transport OE customers declined by 18 percent
reflecting dramatically lower projected deliveries by our OE customers
(primarily Boeing and Airbus) due to reduced aircraft orders by commercial
airlines. 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 24 percent reflecting a decline in projected deliveries of business
jet airplanes due to weakness in fractional demand and corporate profitability.
Sales to our commercial air transport and regional aftermarket customers were
lower by 2 and 10 percent, respectively, mainly due to weakness in sales of
spare parts. The decrease in Aerospace sales in the first nine months of 2003
compared with the first nine months of 2002 was partially offset by an increase
in sales to our defense and space customers, with aftermarket sales up by 17
percent and OE sales higher by 6 percent, resulting principally from increased
military replenishment, platform upgrades and growth in precision guidance
munitions. Sales to our business and general aviation aftermarket customers were
higher by 7 percent largely due to increases in repair and overhaul activity. We
currently expect full year 2003 sales to our air transport and business and
general aviation OE customers to decline by 15 and 20 percent, respectively,
compared with the prior year due to reduced aircraft orders. 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 the financial
difficulties being experienced by the airlines and reduced flying hours.
28
Aerospace segment profit of $745 million in the first nine months of 2003
decreased by $264 million, or 26 percent compared with the first nine months of
2002 due mainly to lower sales of commercial original equipment and
higher-margin commercial aftermarket spare parts as well as higher pension
expense.
Automation and Control Solutions sales of $5,429 million in the first nine
months of 2003 increased by $335 million, or 7 percent compared with the first
nine months of 2002 due to the favorable effects of foreign exchange of
5 percent and acquisitions, net of the prior year disposition of our Consumer
Products business, of 4 percent, partially offset by the impact of lower prices
and volumes of 1 percent each. Sales increased by 10 percent for our Automation
and Control Products business as the favorable effects of foreign exchange and
prior year acquisitions, mainly Invensys Sensor Systems, more than offset the
impact of the prior year disposition of our Consumer Products business and lower
volumes. Sales for our Process Solutions business increased by 6 percent mainly
due to the favorable effect of foreign exchange. Sales for our Building
Solutions business decreased by 1 percent as lower volumes due to continued
softness in the non-residential construction market were partially offset by the
favorable effect of foreign exchange.
Automation and Control Solutions segment profit of $567 million in the
first nine months of 2003 decreased by $93 million, or 14 percent compared with
the first nine months of 2002 due mainly to higher pension expense, the decline
in higher-margin energy-retrofit and discretionary spot sales in our Building
Solutions business, and increased research and development and investments in
sales and marketing capacity, mainly in our Automation and Control Products and
Building Solutions businesses, respectively. Segment profit was also adversely
impacted by pricing pressures mainly in our Automation and Control Products and
Process Solutions businesses.
Specialty Materials sales of $2,377 million in the first nine months of
2003 decreased by $48 million, or 2 percent compared with the first nine months
of 2002 due to the impact of the divestitures of our Advanced Circuits, PFC and
Engineering Plastics businesses, net of the current year acquisition of BASF's
nylon fiber business, of 5 percent, and lower prices of 1 percent partially
offset by the favorable effects of foreign exchange of 3 percent and higher
volumes of 1 percent.
Specialty Materials segment profit of $30 million in the first nine months
of 2003 decreased by $22 million, or 42 percent compared with the first nine
months of 2002. This decrease resulted mainly from higher raw material costs
(principally natural gas) and higher pension expense, and the impact of the
temporary plant shutdowns in our Fluorocarbons and Nylon Systems businesses.
This decrease was partially offset by the impact of the prior year write-down of
property, plant and equipment in several businesses, the benefits of cost
actions and divestitures of non-strategic businesses.
Transportation Systems sales of $2,650 million in the first nine months of
2003 increased by $301 million, or 13 percent compared with the first nine
months of 2002 due mainly to the favorable effect of foreign exchange of 9
percent, a favorable sales mix and volume growth of 3 percent and higher prices
of 1 percent. This increase resulted mainly from a 25 percent increase in sales
for our Garrett Engine Boosting Systems business due to a favorable sales mix
and volume growth of 14 percent as worldwide demand for our turbochargers
continued to be strong, and the favorable effect of foreign exchange of 12
percent, partially offset by lower prices of 1 percent.
Transportation Systems segment profit of $278 million in the first nine
months of 2003 increased by $9 million, or 3 percent compared with the first
nine
29
months of 2002 as the effect of higher sales in our Garrett Engine Boosting
Systems business was partially offset by higher pension, new product development
and introduction, facility relocations and other expenses, and lower aftermarket
sales at our Friction Materials business.
C. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Total assets at September 30, 2003 were $28,385 million, an increase of
$826 million, or 3 percent from December 31, 2002 mainly due to an increase in
cash of $849 million. See details in Consolidated Statement of Cash Flows.
Cash provided by operating activities of $1,696 million during the first
nine months of 2003 increased by $70 million compared with the first nine months
of 2002. This increase was due mainly to lower spending for repositioning
actions of $206 million and the inclusion of the final net payment to settle the
Litton legal action of $162 million in the first nine months of 2002. This
increase was partially offset by lower earnings and an increase in contributions
to our U.S. defined benefit pension plans of $70 million.
We made asbestos related payments of $467 million, including legal fees, in
the first nine months of 2003 and expect to make additional asbestos related
payments of approximately $110 million during the fourth quarter of 2003. This
estimate is based on our experience in the first nine months of 2003 regarding
the timing of submissions of required evidential data by plaintiff firms. We had
$477 million of asbestos related insurance recoveries during the first nine
months of 2003 due primarily to the buyout of the NARCO and Bendix Equitas
insurance policies in April 2003 of $472 million. We previously anticipated
receiving the Equitas payments primarily during the period 2003 through 2007. We
expect to receive approximately $185 million in asbestos related insurance
recoveries during the fourth quarter of 2003. These cash flow projections are
consistent with our existing asbestos reserves. See Note 12 of Notes to
Financial Statements for further details.
Cash used for investing activities of $381 million during the first nine
months of 2003 increased by $208 million compared with the first nine months of
2002 due mainly to an increase in spending for acquisitions of $92 million, the
inclusion of the proceeds from the disposition of a cost investment in our
Automation and Control Solutions reportable segment of $91 million in the first
nine months of 2002, and lower proceeds from sales of businesses of $46 million.
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 and a
nylon films business by our Specialty Materials reportable segment. The first
nine months of 2003 included the proceeds of $137 million from our dispositions
of our Engineering Plastics business and several other businesses in our
Aerospace and Specialty Materials reportable segments, whereas the first nine
months of 2002 included the proceeds of $183 million from the dispositions of
our BCVS, PFC and Consumer Products businesses. This increase in cash used for
investing activities was partially offset by lower capital spending of
$37 million 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 approximately $650 million.
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
30
business units are considered for potential divestiture, restructuring or other
repositioning actions subject to regulatory constraints.
Cash used for financing activities of $645 million during the first nine
months of 2003 decreased by $234 million compared with the first nine months of
2002 due mainly to a decrease in scheduled repayments of long-term debt in the
current period partially offset by higher net repayments of short-term debt and
higher dividend payments. Total debt of $5,207 million at September 30, 2003 was
$118 million, or 2 percent higher than at December 31, 2002 principally
reflecting the assumption of $268 million of debt associated with the purchase
of assets under leases qualifying as variable interest entities partially offset
by lower short-term borrowings.
In November 2003, Honeywell announced its intention to repurchase
sufficient outstanding shares of its common stock to offset the dilutive
impact of employee plans, including future option exercises, restricted unit
vesting and matching contributions under our savings plans. We currently
expect to repurchase approximately 7-10 million shares on an annual basis
and to initiate the program in the fourth quarter of 2003.
Repositioning and Other Charges
A summary of repositioning and other charges follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2003 2002 2003 2002
---- ---- ---- ----
Severance $ 9 $ - $ 31 $ 73
Asset impairments 2 - 2 68
Exit costs 1 - 4 23
Reserve adjustments (14) - (37) (43)
---- ---- ---- ----
Total net repositioning charge (2) - - 121
---- ---- ---- ----
Probable and reasonably estimable
environmental liabilities 28 - 60 -
Business impairment charges - - - 43
Investment impairment charges 2 - 2 -
Customer claims and settlements
of contract liabilities - - - 29
Write-offs of receivables,
inventories and other assets 2 - 2 40
---- ---- ---- ----
Total net repositioning and other
charges $ 30 $ - $ 64 $233
==== ==== ==== ====
The following table summarizes the pretax distribution of total net
repositioning and other charges by income statement classification:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2003 2002 2003 2002
---- ---- ---- ----
Cost of goods sold $26 $ - $55 $173
Selling, general and administrative
expenses 2 - 7 4
Business impairment charges - - - 43
Equity in (income) loss of
affiliated companies 2 - 2 13
---- ---- ---- ----
$30 $ - $64 $233
==== ==== ==== ====
31
The following table summarizes the pretax impact of total net
repositioning and other charges by reportable segment:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2003 2002 2003 2002
---- ---- ---- ----
Aerospace $ - $ - $ (2) $ 6
Automation and Control Solutions (8) - (16) 61
Specialty Materials 5 - 12 132
Transportation Systems 3 - 3 30
Corporate 30 - 67 4
--- --- ---- ----
$30 $ - $ 64 $233
=== === ==== ====
In the third quarter of 2003, we recognized a charge of $12 million mainly
for severance costs related to workforce reductions of 141 manufacturing and
administrative positions principally in our Aerospace and Specialty Materials
reportable segments. Also, $14 million of previously established accruals,
mainly for severance, were returned to income in the third quarter of 2003, due
to fewer employee separations than originally anticipated associated with
certain 2002 repositioning actions, resulting in reduced severance liabilities
in our Automation and Control Solutions, Aerospace and Specialty Materials
reportable segments.
In the second quarter of 2003, we recognized a charge of $25 million
mainly for severance costs related to workforce reductions of 448 manufacturing
and administrative positions principally in our Specialty Materials and
Aerospace reportable segments. Also, $23 million of previously established
accruals, mainly for severance, were returned to income in the second quarter of
2003, due to fewer employee separations than originally anticipated associated
with certain 2002 repositioning actions, resulting in reduced severance
liabilities in our Automation and Control Solutions, Aerospace and Specialty
Materials reportable segments.
As disclosed in our 2002 Annual Report on Form 10-K, we recognized
repositioning charges totaling $453 million in 2002 ($0 and $164 million were
recognized in the three- and nine-month periods ended September 30, 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 6,000
positions have been eliminated as of September 30, 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
$147 million in the nine months ended September 30, 2003 and were funded through
operating cash flows. Cash spending for severance and other exit costs necessary
to execute the 2003 and remaining 2002 repositioning actions will approximate
$200 million in 2003 and will be funded mainly though operating cash flows.
In the third quarter of 2003, we recognized other charges consisting of
legacy environmental matters deemed probable and reasonably estimable in the
third quarter of 2003 of $28 million, the write-off of equipment in our
Specialty
32
Materials reportable segment of $2 million and a charge related to an impairment
of a Specialty Materials' joint venture's investment of $2 million.
In the second quarter of 2003, we recognized other charges of $32 million
for legacy environmental matters deemed probable and reasonably estimable in the
second quarter of 2003 including the matter entitled Interfaith Community
Organization, et al. v. Honeywell International Inc., et al. as discussed in
Note 12 of Notes to Financial Statements.
In the second quarter of 2002, we recognized other charges consisting of
customer claims and settlements of contract liabilities of $29 million and
write-offs of receivables, inventories and other assets of $40 million. Such
charges related mainly to our Advanced Circuits business which was sold in the
fourth quarter of 2002, bankruptcy of a customer in our Aerospace reportable
segment, and customer claims in our Industry Solutions business.
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 of Notes to Financial Statements). In the
first quarter of 2002, we also recognized an asset impairment charge of $16
million related to the shutdown of a chemical manufacturing facility in our
Specialty Materials reportable segment.
D. OTHER MATTERS
Critical Accounting Policies
As disclosed in the Defined Benefit Pension Plans section of our Critical
Accounting Policies in Management's Discussion and Analysis of Financial
Condition and Results of Operations of our 2002 Annual Report on Form 10-K, the
key assumptions in determining pension expense are our expected return on plan
assets and the discount rate on plan liabilities. Assuming our pension fund
assets earn a 9 percent rate of return in the year ending December 31, 2003, the
discount rate decreases to 6.25 percent at December 31, 2003 (assumed rate based
on current market conditions), and there are no additional plan contributions
beyond the $170 million contributed in April 2003, pension expense would
increase by approximately $0.30 per share for the year ending December 31, 2004.
Such increase in pension expense in 2004 compared with 2003 would be principally
due to a decrease in the market-related value of pension plan assets and the
systematic recognition of unrecognized net losses mainly resulting from actual
pension plan asset returns below the assumed rate of return during the period
2000 to 2002, as well as lower interest rates.
Future pension plan contributions are dependent upon actual plan asset
returns and interest rates. Assuming that actual plan returns are consistent
with our assumed plan return rate of 9 percent in 2003 and beyond, and the
discount rate is 6.25 percent, we would not be required to make any
contributions in 2003 or 2004.
Statement of Financial Accounting Standards No. 87, "Employers' Accounting
For Pensions" requires recognition of an Additional Minimum Pension Liability if
the fair value of plan assets is less than the accumulated benefit obligation at
the end of the plan year. Based on September 30, 2003 actual plan asset values
and a discount rate of 6.25 percent (based on current market interest rates), we
would not expect a significant increase in our Additional Minimum Pension
Liability as of December 31, 2003.
33
Recent Accounting Pronouncements
See Note 2 of Notes to Financial Statements for a discussion of recent
accounting pronouncements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See our 2002 Annual Report on Form 10-K (Item 7A). At September 30, 2003,
there has been no material change in this information.
ITEM 4. CONTROLS AND PROCEDURES
Honeywell management, including the Chief Executive Officer and Chief
Financial Officer, conducted an evaluation of the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this
Quarterly Report on Form 10-Q. Based upon that evaluation, the Chief Executive
Officer and the Chief Financial Officer concluded that such disclosure controls
and procedures were effective as of the end of the period covered by this
Quarterly Report on Form 10-Q 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 changes that have
materially affected, or are reasonably likely to materially affect, Honeywell's
internal control over financial reporting that have occurred during the period
covered by this Quarterly Report on Form 10-Q.
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 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. Discovery in the cases, which had been
stayed pending completion of the mediation, has resumed. A further mediation
session is planned for the fourth quarter of 2003.
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
34
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. In July 2003, an
amended complaint making similar allegations and naming several current and
former officers and directors as defendants was filed in the same district. In
September 2003, Honeywell filed a motion to dismiss the amended complaint.
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.
In the matter entitled Interfaith Community Organization, et al. v.
Honeywell International Inc., et al., the United States District Court for the
District of New Jersey held in May 2003 that a predecessor Honeywell site
located in Jersey City, New Jersey constituted an imminent and substantial
endangerment and ordered Honeywell to conduct the excavation and transport for
offsite disposal of approximately one million tons of chromium residue present
at the site. Honeywell
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strongly disagrees with the court's determinations and has appealed the court's
decision to the Third Circuit Court of Appeals. The Third Circuit Court of
Appeals has referred the case for mediation. In October 2003, the District Court
denied Honeywell's motion for a stay of certain aspects of its May 2003 order,
and we are considering whether to appeal such ruling. The site at issue is one
of twenty-one sites located in Jersey City, New Jersey which are the subject of
an Administrative Consent Order (ACO) entered into with the New Jersey
Department of Environmental Protection (NJDEP) in 1993. Under the ACO, Honeywell
agreed to study and remediate these sites in accordance with NJDEP's directions,
provided that the total costs of such studies and remediation do not exceed $60
million. Honeywell has cooperated with the NJDEP under the ACO and believes that
decisions regarding site cleanups should be made by NJDEP under the ACO. We are
confident that proceeding under the ACO will ensure a safe remediation and allow
the property to be placed back into productive use much faster and at a cost
significantly less than the remedies required by the court's order. We have not
completed development of a remedial action plan for the excavation and offsite
disposal directed under the court's order and therefore are unable to estimate
the cost of such actions. At trial, plaintiff's expert testified that the
excavation and offsite disposal cost might be $400 million. However, there are
significant variables in the implementation of the court's order and depending
on the method of implementation chosen, the estimate could increase or decrease.
Provisions have been previously made in our financial statements as to remedial
costs consistent with the ACO and during the three months ended June 30, 2003 we
provided for additional costs which are likely to be incurred during the
pendency of our appeal, which provisions do not assume excavation and offsite
removal of chromium from the site. There are alternative outcomes and remedies
beyond the scope of the ACO that could result from the remanding, reversal or
replacement of the Court's decision and order. At this time, we can neither
identify a probable alternative outcome nor reasonably estimate the cost of an
alternative remedy. Although we expect the court's decision and order to be
remanded, reversed or replaced, should the remedies prescribed in the court's
decision and order ultimately be upheld, such outcome could have a material
adverse impact on our consolidated results of operations or operating cash flows
in the periods recognized or paid.
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 September 30, 2003, we have resolved about 62,500 Bendix claims at
an average indemnity cost per claim of approximately two thousand nine 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 that amounted to approximately
$75 million in payments in the nine months ended September 30, 2003. A
substantial portion of this amount is expected to be reimbursed by insurance.
There are currently approximately 71,000 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.
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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 as contemplated under the LOI would
have a material adverse impact on our consolidated results of operations or
financial position.
During the third quarter of 2003, DaimlerChrysler AG, Ford Motor Co. and
General Motors Corp. filed a lawsuit in the U.S. Bankruptcy Court, against
Honeywell and Federal-Mogul seeking a declaration that Honeywell's Bendix unit
cannot be sold to Federal-Mogul and receive protection from asbestos claims
under Section 524(g) of the U.S. Bankruptcy Code. Honeywell believes the lawsuit
is without merit and intends to vigorously defend against the allegations in the
complaint.
There can be no assurance, however, that the transaction contemplated by
the LOI will be completed. Honeywell presently has approximately $1.9 billion 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
37
NARCO claims. We have approximately $1.3 billion (excluding insurance recoveries
in October 2003 - 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
except one claim which is not material as to which the stay was lifted in
August 2003. 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 nineteen 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 256,000 claimants, which
represents in excess of 90 percent of the approximately 275,000 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 has reached
agreement in principle with the representative for future NARCO claimants 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 in excess of 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.
38
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 September 30, 2003, a significant portion of
this coverage is with London-based insurance companies under a coverage-in-place
agreement. 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 September 30, 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. A portion of this insurance has been received, primarily from
Equitas, as discussed below.
During the nine months ended September 30, 2003, we made asbestos related
payments of $467 million, including legal fees. During the nine months ended
September 30, 2003, we received $477 million in insurance reimbursements
including $472 million in cash received from Equitas 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.
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
39
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 October 2003, we received approximately $150 million in cash from
various insurance companies related to our NARCO asbestos claims.
We are monitoring proposals for federal asbestos legislation pending in the
United States Congress. Due to the uncertainty surrounding the proposed
legislation, it is not possible at this point in time to determine what impact
such legislation would have on the NARCO bankruptcy strategy, the proposed
transaction with Federal-Mogul, or our asbestos liabilities and related
insurance recoveries.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. See the Exhibit Index on page 42 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 September 30, 2003.
1. On July 17, 2003, a report was filed which furnished, under Item 12,
a press release reporting our earnings for the second quarter of
2003.
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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: November 7, 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)
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EXHIBIT INDEX
Exhibit Number Description
- -------------- ------------
2 Omitted (Inapplicable)
3 Omitted (Inapplicable)
4 Omitted (Inapplicable)
10.2* Employment Separation Agreement and Release
between Richard F. Wallman and Honeywell
International Inc. dated July 17, 2003 (filed
herewith)
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)
31.1 Certification of Principal Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (filed herewith)
31.2 Certification of Principal Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (filed herewith)
32.1 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)
32.2 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)
99 Omitted (Inapplicable)
- ----------
* The Exhibits identified above with an asterisk (*) are management contracts
or compensatory plans or arrangements.
** 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.
42
STATEMENT OF DIFFERENCES
The section symbol shall be expressed as.................................. 'SS'