Back to GetFilings.com
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, 2004
--------------------
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
Morris Township, New Jersey 07962
- ----------------------------------------- -----------
(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, 2004
- --------------------- ------------------------
$1 par value 860,167,821 shares
Honeywell International Inc.
Index
Page No.
--------
Part I. - Financial Information
---------------------
Item 1. Financial Statements:
Consolidated Statement of Operations -
Three and Nine Months Ended September 30, 2004 and 2003 3
Consolidated Balance Sheet -
September 30, 2004 and December 31, 2003 4
Consolidated Statement of Cash Flows -
Nine Months Ended September 30, 2004 and 2003 5
Notes to Financial Statements 6
Report of Independent Registered Public
Accounting Firm 23
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 24
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 42
Item 4. Controls and Procedures 43
Part II. - Other Information
-----------------
Item 1. Legal Proceedings 43
Item 2. Changes in Securities and Use of Proceeds 44
Item 6. Exhibits and Reports on Form 8-K 44
Signatures 45
- -----------
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 Statement of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2004 2003 2004 2003
---- ---- ---- ----
(Dollars in millions,
except per share amounts)
Net sales $6,395 $5,768 $18,961 $16,916
------ ------ ------- -------
Costs, expenses and other
Cost of goods sold 5,087 4,509 15,245 13,263
Selling, general and administrative
expenses 820 729 2,451 2,194
(Gain) loss on sale of non-strategic
businesses (5) (9) (270) (40)
Equity in (income) loss of affiliated
companies (24) (7) (48) (11)
Other (income) expense (50) 11 (78) (16)
Interest and other financial charges 81 82 247 253
------ ------ ------- -------
5,909 5,315 17,547 15,643
------ ------ ------- -------
Income before taxes and cumulative
effect of accounting change 486 453 1,414 1,273
Tax expense 114 109 386 336
------ ------ ------- -------
Income before cumulative effect of
accounting change 372 344 1,028 937
Cumulative effect of accounting change - - - (20)
------ ------ ------- -------
Net income $ 372 $ 344 $ 1,028 $ 917
====== ====== ======= =======
Earnings per share of common stock -
basic:
Income before cumulative effect of
accounting change $ 0.43 $ 0.40 $ 1.19 $ 1.09
Cumulative effect of accounting
change - - - (0.02)
------ ------ ------- -------
Net income $ 0.43 $ 0.40 $ 1.19 $ 1.07
====== ====== ======= =======
Earnings per share of common stock -
assuming dilution:
Income before cumulative effect of
accounting change $ 0.43 $ 0.40 $ 1.19 $ 1.09
Cumulative effect of accounting
change - - - (0.02)
------ ------ ------- -------
Net income $ 0.43 $ 0.40 $ 1.19 $ 1.07
====== ====== ======= =======
Cash dividends per share of common
stock $.1875 $.1875 $ .5625 $ .5625
====== ====== ======= =======
The Notes to Financial Statements are an integral part of this statement.
3
Honeywell International Inc.
Consolidated Balance Sheet
(Unaudited)
September 30, December 31,
2004 2003
------------- ------------
(Dollars in millions)
ASSETS
Current assets:
Cash and cash equivalents $ 3,433 $ 2,950
Accounts, notes and other receivables 4,074 3,643
Inventories 3,074 3,040
Deferred income taxes 1,231 1,526
Other current assets 543 465
------- -------
Total current assets 12,355 11,624
Investments and long-term receivables 414 569
Property, plant and equipment - net 4,186 4,295
Goodwill 5,909 5,789
Other intangible assets - net 1,130 1,098
Insurance recoveries for asbestos
related liabilities 1,436 1,317
Deferred income taxes 476 342
Prepaid pension benefit cost 3,000 3,173
Other assets 1,082 1,107
------- -------
Total assets $29,988 $29,314
======= =======
LIABILITIES
Current liabilities:
Accounts payable $ 2,346 $ 2,240
Short-term borrowings 33 152
Commercial paper 20 -
Current maturities of long-term debt 145 47
Accrued liabilities 4,686 4,314
------- -------
Total current liabilities 7,230 6,753
Long-term debt 4,839 4,961
Deferred income taxes 358 316
Postretirement benefit obligations
other than pensions 1,697 1,683
Asbestos related liabilities 2,067 2,279
Other liabilities 2,592 2,593
SHAREOWNERS' EQUITY
Capital - common stock issued 958 958
- additional paid-in capital 3,568 3,486
Common stock held in treasury, at cost (3,828) (3,655)
Accumulated other nonowner changes (167) (189)
Retained earnings 10,674 10,129
------- -------
Total shareowners' equity 11,205 10,729
------- -------
Total liabilities and shareowners' equity $29,988 $29,314
======= =======
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,
-----------------
2004 2003
---- ----
(Dollars in millions)
Cash flows from operating activities:
Net income $1,028 $ 917
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of accounting change - 20
(Gain) loss on sale of non-strategic businesses (270) (40)
Repositioning, environmental, litigation and
business impairment charges 399 64
Severance and exit cost payments (123) (147)
Environmental and non-asbestos litigation payments (131) (59)
Asbestos related liability payments (424) (467)
Insurance receipts for asbestos related liabilities 61 477
Depreciation 428 437
Undistributed earnings of equity affiliates (53) (11)
Deferred income taxes 152 355
Pension and other postretirement benefits expense 482 247
Pension contributions - U.S. Plans (10) (170)
Other postretirement benefit payments (152) (143)
Other (36) (87)
Changes in assets and liabilities, net of the effects
of acquisitions and divestitures:
Accounts, notes and other receivables (318) (72)
Inventories (42) 17
Other current assets 1 (21)
Accounts payable 186 118
Accrued liabilities 309 261
------ ------
Net cash provided by operating activities 1,487 1,696
------ ------
Cash flows from investing activities:
Expenditures for property, plant and equipment (403) (407)
Proceeds from disposals of property, plant and equipment 12 13
Decrease in investments 80 -
Cash paid for acquisitions (220) (124)
Proceeds from sales of businesses 391 137
------ ------
Net cash (used for) investing activities (140) (381)
------ ------
Cash flows from financing activities:
Net increase (decrease) in commercial paper 20 (201)
Net (decrease) increase in short-term borrowings (126) 81
Proceeds from issuance of common stock 62 39
Payments of long-term debt (23) (81)
Repurchases of common stock (342) -
Cash dividends on common stock (483) (483)
------ ------
Net cash (used for) financing activities (892) (645)
------ ------
Effect of foreign exchange rate changes
on cash and cash equivalents 28 179
------ ------
Net increase in cash and cash equivalents 483 849
Cash and cash equivalents at beginning of year 2,950 2,021
------ ------
Cash and cash equivalents at end of period $3,433 $2,870
====== ======
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
recurring adjustments, necessary to present fairly the financial position of
Honeywell International Inc. and its consolidated subsidiaries at September 30,
2004 and the results of operations for the three and nine months ended September
30, 2004 and 2003 and cash flows for the nine months ended September 30, 2004
and 2003. The results of operations for the three- and nine-month periods ended
September 30, 2004 should not necessarily be taken as indicative of the results
of operations that may be expected for the entire year 2004. We reclassified
certain prior period amounts to conform to the current period presentation.
We report our quarterly financial information using a calendar
convention; that is, the first, second and third quarters are consistently
reported as ending on March 31, June 30 and September 30, respectively. It has
been our practice to establish actual quarterly closing dates using a
predetermined "fiscal" calendar, which requires our businesses to close their
books on a Saturday in order to minimize the potentially disruptive effects of
quarterly closing on our business processes. The effects of this practice are
generally not significant to reported results for any quarter and only exist
within a reporting year. In the event that differences in actual closing dates
are material to year-over-year comparisons of quarterly or year-to-date results,
we will provide appropriate disclosures. Our actual closing dates for the three-
and nine-month periods ended September 30, 2004 and 2003 were October 2, 2004
and September 27, 2003, respectively. Our fiscal closing calendar for the years
2000 through 2012 is available on our website at www.honeywell.com under the
heading "Investor Relations".
The financial information as of September 30, 2004 should be read in
conjunction with the financial statements contained in our Annual Report on Form
10-K for 2003.
NOTE 2. In May 2004, the Financial Accounting Standards Board (FASB) issued FASB
Staff Position No. 106-2, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003" (FSP No.
106-2) which provides guidance on accounting for the effects of the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 (the Act) for
employers that sponsor postretirement health care plans that provide
prescription drug coverage that is at least actuarially equivalent to that
offered by Medicare Part D. We have determined that the enactment of the Act
does not have a material impact on our accumulated postretirement benefit
obligation and, therefore, is not a "significant event" as defined in FSP No.
106-2 for our postretirement health care plans. Accordingly, as permitted, we
will defer adoption of FSP No. 106-2 until December 31, 2004. Such adoption is
not expected to have a material effect on our consolidated financial statements.
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 December 2003, the FASB
deferred the effective date of FIN 46 for certain variable interest entities
(i.e., non-special purpose entities) until the first quarter of 2004. Our full
adoption of the provisions of FIN 46 in the first quarter of 2004 did not have a
material effect on our consolidated financial statements.
On January 1, 2003, in connection with our adoption of Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations", we recorded an increase in net property, plant and equipment of
$16
6
million and recognized an asset retirement obligation of $47 million primarily
related to costs associated with the future retirement of nuclear fuel
conversion facilities in our Specialty Materials reportable segment. This
resulted in the recognition of a non-cash charge of $31 million ($20 million
after-tax, or $0.02 per share) that was reported as a cumulative effect of an
accounting change.
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 no compensation cost recognized for our fixed stock
option plans, because the options granted under these plans have an exercise
price equal to the market value of the underlying stock at the grant date.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123) allows, but does not require, companies to record
compensation cost for fixed stock option plans using a fair value based method.
As permitted by SFAS No. 123, we elected to continue to account for compensation
cost for our fixed stock option plans using the intrinsic value based method
under APB No. 25. The following table sets forth pro forma information as if
compensation cost had been determined consistent with the requirements of SFAS
No. 123.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ---------------
2004 2003 2004 2003
---- ---- ---- ----
Net income, as reported $ 372 $ 344 $1,028 $ 917
Deduct: Total stock-based employee
compensation cost determined under fair
value method for fixed stock option
plans, net of related tax effects (13) (12) (31) (37)
----- ----- ----- -----
Pro forma net income $ 359 $ 332 $ 997 $ 880
===== ===== ===== =====
Earnings per share of common stock:
Basic - as reported $0.43 $0.40 $1.19 $1.07
===== ===== ===== =====
Basic - pro forma $0.42 $0.38 $1.16 $1.02
===== ===== ===== =====
Earnings per share of common stock:
Assuming dilution - as reported $0.43 $0.40 $1.19 $1.07
===== ===== ===== =====
Assuming dilution - pro forma $0.42 $0.38 $1.16 $1.02
===== ===== ===== =====
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) $12.17 - $10.71 $8.80
Assumptions:
Historical dividend yield 1.4% - 2.1% 2.0%
Historical volatility 37.0% - 37.9% 46.7%
Risk-free rate of return 3.6% - 2.8% 2.9%
Expected life (years) 5.0 - 5.0 5.0
7
NOTE 4. A summary of repositioning and other charges follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ---------------
2004 2003 2004 2003
---- ---- ---- ----
Severance $ 31 $ 9 $ 78 $ 31
Asset impairments 7 2 17 2
Exit costs 2 1 8 4
Reserve adjustments (3) (14) (26) (37)
---- ----- ---- -----
Total net repositioning charge 37 (2) 77 -
---- ----- ---- ----
Other probable and reasonably estimable
legal and environmental liabilities 39 28 230 60
Business impairment charges - - 40 -
Investment impairment charges - 2 - 2
Asbestos related litigation charges, net
of insurance 24 - 44 -
Write-offs of other assets 1 2 8 2
---- ---- ---- ----
Total net repositioning and other charges $101 $ 30 $399 $ 64
==== ==== ==== =====
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,
------------------ ---------------
2004 2003 2004 2003
---- ---- ---- ----
Cost of goods sold $100 $ 26 $384 $ 55
Selling, general and administrative
expenses 1 2 9 7
Equity in (income) loss of affiliated
companies - 2 6 2
---- ---- ---- ----
$101 $ 30 $399 $ 64
===== ==== ===== ====
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,
-------------------- -----------------
2004 2003 2004 2003
---- ---- ---- ----
Aerospace $ - $ - $ 4 $ (2)
Automation and Control Solutions 24 (8) 27 (16)
Specialty Materials 24 5 78 12
Transportation Systems 27 3 114 3
Corporate 26 30 176 67
---- ---- ---- ----
$101 $ 30 $399 $ 64
===== ==== ===== ====
In the third quarter of 2004, we recognized a repositioning charge of
$40 million primarily for severance costs related to workforce reductions of 866
manufacturing and administrative positions principally in our Specialty
Materials and Automation and Control Solutions reportable segments. Also, $3
million of previously established accruals for severance were returned to income
in the third quarter of 2004, due to fewer employee separations than originally
planned associated with certain prior repositioning actions, resulting in
reduced severance liabilities in our Automation and Control Solutions and
Corporate reportable segments.
8
In the second quarter of 2004, we recognized a repositioning charge of
$41 million primarily for severance costs related to workforce reductions of 761
manufacturing and administrative positions principally in our Automation and
Control Solutions, Transportation Systems and Aerospace reportable segments.
Also, $16 million of previously established accruals, primarily for severance,
were returned to income in the second quarter of 2004, due to fewer employee
separations than originally planned associated with certain prior repositioning
actions, resulting in reduced severance liabilities in our Automation and
Control Solutions reportable segment.
In the first quarter of 2004, we recognized a repositioning charge of
$22 million primarily for severance costs related to workforce reductions of 587
manufacturing and administrative positions principally in our Automation and
Control Solutions and Transportation Systems reportable segments. Also, $7
million of previously established accruals for severance and other exit costs
were returned to income in the first quarter of 2004. Severance liabilities were
reduced by $4 million mainly in our Automation and Control Solutions reportable
segment due to fewer employee separations than originally planned associated
with certain prior repositioning actions. Other exit costs liabilities were
reduced by $3 million related primarily to excess environmental remediation
reserves for a closed facility in our Specialty Materials reportable segment.
In the third quarter of 2003, we recognized a repositioning 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 planned
associated with certain prior 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 repositioning 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
planned associated with certain prior repositioning actions, resulting in
reduced severance liabilities in our Automation and Control Solutions, Aerospace
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, 2003 $171 $ - $ 42 $213
2004 charges 78 17 8 103
2004 usage (104) (17) (19) (140)
Adjustments (20) - (6) (26)
---- --- ---- ----
Balance at September 30, 2004 $125 $ - $ 25 $150
==== === ==== ====
In the third quarter of 2004, we recognized a charge of $24 million for
Bendix related asbestos claims filed and defense costs incurred during the third
quarter of 2004, net of probable Bendix related insurance recoveries. See Note
13 for further discussion. We recognized a charge of $25 million for legacy
environmental matters deemed probable and reasonably estimable in the quarter.
We recognized a charge of $14 million for legal settlements primarily related to
9
property damage claims in our Automation and Control Solutions reportable
segment. We also recognized a charge of $1 million for the write-off of
property, plant and equipment.
In the second quarter of 2004, we recognized a charge of $161 million
for legacy environmental matters deemed probable and reasonably estimable in the
quarter. This charge principally related to an increase in our estimate of
design and study costs likely to be incurred during the pendency of our appeal
of the matter entitled Interfaith Community Organization, et al. v. Honeywell
International Inc., et al. and to estimated costs related to our decision in the
second quarter of 2004 to seek a potential resolution of the principal issues in
dispute in such matter. See Note 13 for further discussion. We recognized an
impairment charge of $40 million related principally to the write-down of
property, plant and equipment of our Performance Fibers (Polyester) business in
our Specialty Materials reportable segment, which was classified as assets held
for disposal as of June 30, 2004. We recognized a charge of $9 million for
Bendix related asbestos claims filed and defense costs incurred during the
second quarter of 2004 including an update of expected resolution values with
respect to claims pending as of June 30, 2004. The charge was net of probable
Bendix related insurance recoveries and an additional $47 million of NARCO
insurance deemed probable of recovery. See Note 13 for further discussion. We
also recognized a charge of $7 million principally for the write-off of
property, plant and equipment.
In the first quarter of 2004, we recognized a charge of $30 million for
legacy environmental matters deemed probable and reasonably estimable in the
quarter, including liabilities for environmental conditions around Onondaga Lake
in New York. We also recognized a charge of $11 million for Bendix related
asbestos claims filed and defense costs incurred during the first quarter of
2004, net of probable insurance recoveries. See Note 13 for further discussion.
In the third quarter of 2003, we recognized a charge of $28 million for
legacy environmental matters deemed probable and reasonably estimable in the
quarter. We also recognized a charge of $4 million in our Specialty Materials
reportable segment including a loss on sale of an investment owned by an equity
investee.
In the second quarter of 2003, we recognized a charge of $32 million
for legacy environmental matters deemed probable and reasonably estimable in the
quarter including the matter entitled Interfaith Community Organization, et al.
v. Honeywell International Inc., et al. See Note 13 for further discussion.
NOTE 5. In the third quarter of 2004, we recognized a pretax gain of $5 million
(after-tax $3 million) for post-closing adjustments related to the divestitures
of our Security Monitoring and VCSEL Optical Products businesses in prior
quarters in 2004.
In the second quarter of 2004, we sold our Security Monitoring business
in our Automation and Control Solutions reportable segment for cash proceeds of
approximately $315 million resulting in a pretax gain of $212 million (after-tax
$115 million). The Security Monitoring business had annual sales and pretax
income in 2003 of $168 and $37 million, respectively.
In the first quarter of 2004, we sold our VCSEL Optical Products
business in our Automation and Control Solutions reportable segment for cash
proceeds of $74 million resulting in a pretax gain of $32 million (after-tax $14
million).
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).
10
In the second quarter of 2003, we sold Specialty Materials' Engineering
Plastics business to BASF in exchange for BASF's nylon fiber business and
$90 million in cash. The sale of the Engineering Plastics business resulted
in a pretax gain of $31 million, after-tax $9 million, including the tax
benefits associated with prior capital losses.
NOTE 6. The details of the earnings per share calculations for the three- and
nine-month periods ended September 30, 2004 and 2003 follow:
Three Months 2004 Nine Months 2004
--------------------------- ----------------------
Per Per
Average Share Average Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Net Income
- ----------
Earnings per share of common
stock - basic $372 860.6 $0.43 $1,028 860.4 $1.19
==== ===== ====== =====
Dilutive securities issuable in
connection with stock plans 3.7 3.4
--- ---
Earnings per share of common
stock - assuming dilution $372 864.3 $0.43 $1,028 863.8 $1.19
==== ===== ===== ====== ===== =====
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
==== ===== ===== ==== ===== =====
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, 2004, the number of stock options not included in the computations
were 32.4 and 41.4 million, respectively. 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. These stock options were
outstanding at the end of each of the respective periods.
11
NOTE 7. Accounts, notes and other receivables consist of the following:
September 30, December 31,
2004 2003
------------- ------------
Trade $3,558 $3,230
Other 657 563
------ ------
4,215 3,793
Less - Allowance for doubtful accounts (141) (150)
------ ------
$4,074 $3,643
====== ======
NOTE 8. Inventories consist of the following:
September 30, December 31,
2004 2003
------------- ------------
Raw materials $1,123 $ 972
Work in process 788 802
Finished products 1,302 1,412
------ ------
3,213 3,186
Less - Progress payments (22) (20)
- Reduction to LIFO cost basis (117) (126)
------ ------
$3,074 $3,040
====== ======
NOTE 9. The change in the carrying amount of goodwill for the nine months ended
September 30, 2004 by reportable segment is as follows:
Currency
Translation
Dec. 31, 2003 Acquisitions (Divestitures) Adjustment Sept 30, 2004
------------- ------------ -------------- ----------- -------------
Aerospace $1,641 $ 98 $ - $ 3 $1,742
Automation and
Control Solutions 2,832 71 (61) 4 2,846
Specialty Materials 781 (4) - 1 778
Transportation Systems 535 - - 8 543
------ ---- ---- --- ------
$5,789 $165 $(61) $16 $5,909
====== ==== ==== === ======
Intangible assets are comprised of:
September 30, 2004 December 31, 2003
------------------------------------------ --------------------------------------
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 $ 934 $(177) $ 757 $ 860 $(141) $ 719
Patents and trademarks 444 (307) 137 425 (295) 130
Other 405 (206) 199 398 (186) 212
------ ------ ------ ------ ------ ------
1,783 (690) 1,093 1,683 (622) 1,061
Trademark with indefinite
life 46 (9) 37 46 (9) 37
------ ------ ------ ------ ------ ------
$1,829 $(699) $1,130 $1,729 $(631) $1,098
====== ====== ====== ====== ====== ======
Amortization expense related to intangible assets was $66 and $48
million for the nine months ended September 30, 2004 and 2003, respectively.
Amortization expense related to intangible assets for 2004 to 2008 is expected
to approximate $85 million each year.
12
We completed our goodwill and intangible assets impairment testing for
our reporting units as of March 31, 2004 and determined that there was no
impairment as of that date.
NOTE 10. Total nonowner changes in shareowners' equity consist of the following:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ---------------------
2004 2003 2004 2003
---- ---- ---- ----
Net income $372 $344 $1,028 $ 917
Foreign exchange translation
adjustments 89 (10) 35 353
Change in fair value of
effective cash flow hedges (1) (82) (13) (25)
---- ---- ------ ------
$460 $252 $1,050 $1,245
==== ==== ====== ======
NOTE 11. Segment financial data follows:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2004 2003 2004 2003
---- ---- ---- ----
Net Sales
- ---------
Aerospace $2,468 $2,231 $ 7,225 $ 6,454
Automation and Control Solutions 1,994 1,875 5,909 5,429
Specialty Materials 876 777 2,633 2,377
Transportation Systems 1,057 885 3,193 2,650
Corporate - - 1 6
------ ------ ------ ------
$6,395 $5,768 $18,961 $16,916
====== ====== ======= =======
Segment Profit
- --------------
Aerospace $ 379 $ 326 $ 1,053 $ 847
Automation and Control Solutions 235 208 637 592
Specialty Materials 38 17 137 99
Transportation Systems 137 109 430 329
Corporate (40) (33) (117) (99)
------ ------ ------ ------
Total segment profit 749 627 2,140 1,768
------- ------- ------- ------
Gain on sale of non-strategic
businesses 5 9 270 40
Equity in income of
affiliated companies 24 7 48 11
Other income (expense) 50 (11) 78 16
Interest and other financial
charges (81) (82) (247) (253)
Pension and other postretirement
benefits (expense) (A) (160) (69) (482) (247)
Repositioning, environmental,
business impairment and
litigation charges (A) (101) (28) (393) (62)
------ ------ ------ ------
Income before taxes and
cumulative effect of accounting
change $ 486 $ 453 $1,414 $1,273
====== ====== ======= ======
(A) Amounts included in cost of goods sold and selling, general and
administrative expenses.
13
NOTE 12. Net periodic pension and other postretirement benefits costs for our
significant plans include the following components.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ --------------------
2004 2003 2004 2003
---- ---- ---- ----
Pension Benefits
- ----------------
Service cost $ 60 $ 38 $ 180 $ 158
Interest cost 189 190 567 569
Expected return on plan assets (261) (260) (784) (773)
Amortization of transition asset - (1) - (5)
Amortization of prior service cost 9 9 27 28
Recognition of actuarial losses 101 51 304 136
----- ----- ----- -----
$ 98 $ 27 $ 294 $ 113
===== ====== ===== =====
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ --------------------
2004 2003 2004 2003
---- ---- ---- ----
Other Postretirement Benefits
- -----------------------------
Service cost $ 6 $ 1 $ 16 $ 13
Interest cost 36 33 107 106
Expected return on plan assets - - - -
Amortization of prior service (credit) (9) (9) (26) (21)
Recognition of actuarial losses 24 18 73 39
--- --- --- ---
$57 $43 $170 $137
=== === ==== ====
NOTE 13. COMMITMENTS AND CONTINGENCIES
Shareowner Litigation -- Honeywell and three of its former officers
were defendants in a class action lawsuit filed in the United States District
Court for the District of New Jersey. Plaintiffs alleged, among other things,
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. The Court certified a
class consisting of all purchasers of Honeywell stock between December 20, 1999
and June 19, 2000. On June 4, 2004 Honeywell and the lead plaintiffs agreed to a
settlement of this matter which required a payment to the class of $100 million.
Honeywell's contribution to the settlement was $15 million, which amount had
previously been fully reserved. Honeywell's insurance carriers paid the
remainder of the settlement. The settlement was approved by the Court on August
16, 2004. A small number of class members, including the Florida State Board of
Administration (FSBA), opted out of the settlement. FSBA has agreed to mediation
of its claim. Honeywell believes that all opt-out claims, including that of the
FSBA, are fully insured.
ERISA Class Action Lawsuit -- Honeywell and several of its current and
former officers and directors are defendants in a purported class action lawsuit
filed in the United States District Court for the District of New Jersey. The
complaint principally alleges that the defendants breached their fiduciary
duties to participants in the Honeywell Savings and Ownership Plan (the "Savings
Plan") by purportedly making false and misleading statements, failing to
disclose material information concerning Honeywell's financial performance, and
failing to diversify the Savings Plan's assets and monitor the prudence of
Honeywell stock as a Savings Plan investment. In September 2004, Honeywell
reached an agreement in principle to settle this matter for $14 million plus an
agreement to permit Savings Plan participants greater diversification rights.
The settlement will be
14
paid in full by Honeywell's insurers. The settlement will require Court
approval, which is expected in late 2004 or early 2005.
Environmental Matters - We are subject to various federal, state and
local government requirements relating to the protection of 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 and that our handling, manufacture, use and disposal of
hazardous or toxic substances are in accord with environmental and safety 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 and safety 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 or
operating cash flows in the periods recognized or paid. However, considering our
past experience and existing reserves, we do not expect that these environmental
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.
Honeywell's motions for a stay pending appeal were denied. In September 2004,
Honeywell reached a settlement with W.R. Grace and ECARG Inc., two of the
parties in the case, by which Honeywell will pay $62.5 million to acquire the
site and to settle all other claims of W.R. Grace and ECARG Inc. The settlement
has been approved in the W. R. Grace bankruptcy proceeding. However, the claims
of Interfaith Community Organization have not been resolved. 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
15
regarding site cleanups should be made by the 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
submitted a remedial action plan for the excavation and offsite disposal
directed under the Court's order to the Special Master appointed by the Court,
for which the estimated cost of implementing such plan would be approximately
$328 million. 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 made in our financial statements for remedial costs consistent with
the ACO, additional costs which are likely to be incurred during the pendency of
our appeal and a potential resolution of the principal issues in dispute related
to such matter. Such provisions do not assume excavation and offsite removal of
chromium. 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.
We do not expect that this matter will have a material adverse effect on our
consolidated financial position.
In accordance with a 1992 consent decree with the State of New York,
Honeywell is studying environmental conditions in and around Onondaga Lake (the
Lake) in Syracuse, New York. The purpose of the study is to identify, evaluate
and propose remedial measures that can be taken to remedy historic industrial
contamination in the Lake. A predecessor company to Honeywell operated a
chemical plant which is alleged to have contributed mercury and other
contaminants to the Lake. In May 2003, Honeywell submitted to the New York State
Department of Environmental Conservation (DEC) a draft Feasibility Study for the
Lake. In November 2003, the DEC issued formal comments on the Feasibility Study.
Those comments included a request for further evaluation of remedies for the
Lake. Pursuant to the consent decree, Honeywell submitted a revised Feasibility
Study on May 3, 2004 (the May 2004 Feasibility Study). Provisions have been made
in our financial statements based on the remedy proposed by Honeywell in the May
2004 Feasibility Study. On July 30, 2004, the DEC requested that Honeywell
provide certain additional information regarding alternative remedial
approaches, site modeling and other technical questions raised by DEC, and
advised Honeywell that, upon receipt of such information, the May 2004
Feasibility Study would be sufficiently complete for DEC to prepare its proposed
remedial action plan for the Lake. When DEC issues its proposed remedial action
plan for the Lake, which is expected to occur in the fourth quarter of 2004,
there will be a public comment period of at least sixty days during which time
Honeywell can also submit comments. Subsequent to this public comment period,
DEC will issue its record of decision. Should Honeywell be required to undertake
a substantially more extensive remedy than proposed in the May 2004 Feasibility
Study, the additional costs of the more extensive remedy could have a material
adverse impact on our consolidated results of operations and operating cash
flows in the periods recognized or paid. However, we do not expect that this
matter will have a material adverse effect on our consolidated financial
position.
Asbestos Matters -- Like many other industrial companies, Honeywell is
a defendant in personal injury actions related to asbestos. We did not mine or
produce asbestos, nor did we make or sell insulation products or other
construction materials that have been identified as the primary cause of
asbestos related disease in the vast majority of claimants. Products containing
asbestos
16
previously manufactured by Honeywell or by previously owned subsidiaries fall
into two general categories; refractory products and friction products.
Refractory Products -- Honeywell owned North American Refractories
Company (NARCO) from 1979 to 1986. NARCO produced refractory products (high
temperature bricks and cement) which were sold largely to the steel industry in
the East and Midwest. 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.
As a result of the NARCO bankruptcy filing, all of the claims pending
against NARCO are automatically stayed pending the reorganization of NARCO.
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, except one claim which is not material as to which
the stay was lifted in August 2003. Although the stay has remained in effect
continuously 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 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
with approximately 260,000 claimants, which represents in excess of 90 percent
of the anticipated current claimants who are expected to file a claim as part of
the NARCO reorganization process. We are also in discussions with the NARCO
Committee of Asbestos Creditors and the Court-appointed legal representative for
future asbestos claimants 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. NARCO has deferred filing its plan of reorganization pending resolution
of the bankruptcy proceedings related to one of its sister companies. We now
expect the NARCO plan of reorganization and the NARCO trust to be approved by
the Court in 2005. 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
17
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 and recorded a charge of
$1.4 billion for NARCO related asbestos litigation charges, net of insurance
recoveries. This charge consisted 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 with in
excess of 90 percent of current claimants. Substantially all settlement payments
with respect to current claims are expected to be made by the end of 2007.
The liability for future claims estimates the probable value of future
asbestos related bodily injury claims asserted against NARCO through 2018 and
obligations to NARCO's parent as discussed above. The estimate is based upon the
disease criteria and payment values contained in the NARCO Trust Distribution
Procedures negotiated with the NARCO Committee of Asbestos Creditors and the
NARCO future claimants representative. 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 Standards No. 5. 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
based upon historical experience with similar trusts. 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, the pending inventory of NARCO asbestos
related claims and payment rates expected to be established by the NARCO trust.
Honeywell has approximately $1.4 billion in insurance limits remaining
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, 2004, a significant portion of this coverage is with insurance companies
with whom we have agreements to pay full policy limits based on corresponding
Honeywell claims costs. This includes agreements with a substantial majority of
the London-based insurance companies entered into primarily in the first quarter
of 2004. We conduct analyses 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. In the second quarter of
2004, based on our ongoing evaluation of our ability to enforce our rights under
the various insurance policies, we concluded that we had additional probable
insurance recoveries of $47 million, net of solvency reserves, which has been
reflected in insurance receivables. 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.
18
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 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 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.
Friction Products -- Honeywell's Bendix Friction Materials (Bendix)
business manufactured automotive brake pads that contained chrysotile asbestos
in an encapsulated form. There is a group of existing and potential claimants
consisting largely of individuals that allege to have performed brake
replacements.
From 1981 through September 30, 2004, we have resolved approximately
70,000 Bendix related asbestos claims including trials covering 120 plaintiffs,
which resulted in 115 favorable verdicts. Trials covering five individuals
resulted in adverse verdicts; however, two of these verdicts were reversed on
appeal and the remaining three claims were settled.
Through the second quarter of 2002, Honeywell had no out-of-pocket
costs for Bendix related asbestos claims 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.
During the first nine months of 2004, those indemnity and defense costs were
approximately $95 million. During the years ended December 31, 2003 and 2002,
those indemnity and defense costs amounted to approximately $112 and $70
million, respectively. Approximately 50 percent of these amounts are deemed
probable to be reimbursed by insurance. During the year ended December 31, 2003
Honeywell collected $90 million in insurance reimbursements and settlements
related to asbestos claims. See further discussion of insurance coverage below.
The following tables present information regarding Bendix related
asbestos claims activity:
Years Ended
December 31,
Nine Months Ended -------------------
Claims Activity September 30, 2004 2003 2002
--------------- ------------------ ---- ----
Claims Unresolved at the beginning of period 72,976 50,821 47,000
Claims Filed 8,071 25,765 10,000
Claims Resolved (5,942) (3,610) (6,179)
------ ------ ------
Claims Unresolved at the end of period 75,105 72,976 50,821
====== ====== ======
December 31,
--------------------
Disease Distribution of Unresolved Claims September 30, 2004 2003 2002
----------------------------------------- ------------------ ---- ----
Mesothelioma and Other Cancer Claims 3,644 3,277 3,810
Other Claims 71,461 69,699 47,011
------ ------ ------
Total Claims 75,105 72,976 50,821
====== ====== ======
Approximately 30 percent of the 75,000 pending claims at September 30,
2004 are on the inactive, deferred, or similar dockets established in some
jurisdictions for claimants who allege minimal or no impairment. The
approximately 75,000 pending claims also include claims filed in jurisdictions
such as Texas, Virginia and Mississippi that allow for consolidated filings. In
these jurisdictions, plaintiffs are permitted to file complaints against a
pre-
19
determined master list of defendants, regardless of whether they have claims
against each individual defendant. Many of these plaintiffs may not actually
have claims against Honeywell. Based on state rules and prior experience in
these jurisdictions, we anticipate that many of these claims will ultimately be
dismissed. During 2003, Honeywell was served with numerous complaints filed in
Mississippi in advance of the January 1, 2003 effective date for tort reform in
that state. Also during 2003, Honeywell experienced an increase in nonmalignancy
filings that we believe were in response to the possibility of federal
legislation. Based on prior experience, we anticipate that many of these claims
will be placed on deferred, inactive or similar dockets or be dismissed.
Honeywell has experienced average resolution values excluding legal costs for
malignant claims of approximately ninety five thousand and one hundred sixty six
thousand dollars in 2003 and 2002, respectively. Honeywell has experienced
average resolution values excluding legal costs for nonmalignant claims of
approximately three thousand five hundred and one thousand three hundred dollars
in 2003 and 2002, respectively. It is not possible to predict whether resolution
values for Bendix related asbestos claims will increase, decrease or stabilize
in the future.
We have accrued for the estimated cost of pending asbestos related
claims. The estimate is based on the number of pending claims at September 30,
2004, disease classifications, expected settlement values and historic dismissal
rates. Honeywell retained the expert services of HR&A (see discussion of HR&A
under Refractory products above) to assist in developing the estimated expected
settlement values and historic dismissal rates. We cannot reasonably estimate
losses which could arise from future Bendix related asbestos claims because we
cannot predict how many additional claims may be brought against us, the
allegations in such claims or their probable outcomes and resulting settlement
values in the tort system.
Honeywell presently has approximately $1.9 billion of insurance
coverage remaining with respect to pending Bendix related asbestos claims as
well as claims which may be filed against us in the future. 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.
Although Honeywell has approximately $1.9 billion in insurance, there are gaps
in our coverage due to insurance company insolvencies, a comprehensive policy
buy-back settlement with Equitas in 2003 and certain uninsured periods. We
analyzed the amount of insurance that we estimate is probable that we will
recover in relation to payment of asbestos related claims and determined that
approximately 50 percent of expenditures for such claims are recoverable by
insurance. 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. 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, at September 30, 2004 we had amounts receivable from our
insurers of approximately $327 million representing probable reimbursements
associated with our liability for pending claims as well as amounts due to us
for previously settled and paid claims related to the estimated liabilities for
pending claims.
Honeywell believes it has sufficient insurance coverage and reserves to
cover all pending Bendix related asbestos claims. Although it is impossible to
predict the outcome of pending claims or to reasonably estimate losses which
could arise from future Bendix related asbestos claims, we do not believe that
such claims would have a material adverse effect on our consolidated financial
position in light of our insurance coverage and our prior experience in
resolving such claims. If the rate and types of claims filed, the average
indemnity cost of such claims and the period of time over which claim
settlements are paid
20
(collectively, the "Variable Claims Factors") do not substantially change,
Honeywell would not expect future Bendix related asbestos claims to have a
material adverse effect on our results of operations or operating cash flows in
any fiscal year. No assurances can be given, however, that the Variable Claims
Factors will not substantially change.
Refractory and Friction Products -- NARCO and Bendix asbestos related
balances are included in the following balance sheet accounts:
September 30, December 31,
2004 2003
------------- ------------
Other current assets $ 118 $ 130
Insurance recoveries for asbestos related liabilities 1,436 1,317
----- ------
$1,554 $1,447
====== ======
Accrued liabilities $ 730 $ 730
Asbestos related liabilities 2,067 2,279
------ ------
$2,797 $3,009
====== ======
During the first nine months of 2004, we paid $424 million in indemnity
and defense costs related to NARCO and Bendix claims. Additionally, we
recognized charges totaling $44 million for Bendix related asbestos claims filed
and defense costs incurred during the first nine months of 2004, net of probable
insurance recoveries. The charges include an update of expected resolution
values for pending Bendix claims and are net of an additional $47 million of
NARCO insurance deemed probable of recovery.
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 or our asbestos
liabilities and related insurance recoveries.
Warranties and Guarantees - As disclosed in Note 21 to our consolidated
financial statements in our 2003 Annual Report on Form 10-K, we have issued or
are a party to certain direct and indirect guarantees. As of September 30, 2004,
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,
-------------------------------
2004 2003
--- ----
Beginning of period $275 $217
Accruals for warranties/guarantees
issued during the period 181 149
Adjustments of pre-existing
warranties/guarantees (13) (7)
Settlement of warranty/guarantee claims (151) (134)
---- ----
End of period $292 $225
==== ====
21
Other Matters - We are subject to a number of other lawsuits,
investigations and claims (some of which involve substantial amounts) arising
out of the conduct of our business. With respect to all these other matters,
including those relating to commercial transactions, government contracts,
product liability and non-environmental health and safety matters, while the
ultimate results of these lawsuits, investigations and claims cannot be
determined, we do not expect that these matters will have a material adverse
effect on our consolidated results of operations, operating cash flows or
financial position.
NOTE 14. SUBSEQUENT EVENTS
On October 22, 2004, we replaced our $1 billion 364-Day Credit
Agreement, which was expiring on November 24, 2004, with a $1 billion Five-Year
Credit Agreement. The new Five-Year Credit Agreement includes a $200 million
sub-limit for the potential issuance of letters of credit. The terms and
conditions of the new $1 billion Five-Year Credit Agreement do not restrict
our ability to pay dividends and do not contain any financial covenants and
these terms and conditions are not significantly different from those present
in our $1.3 billion Five-Year Credit Agreement as described in Note 15 in Notes
to Financial Statements in our 2003 Annual Report on Form 10-K.
In November 2004, we entered into a definitive agreement to sell our
Performance Fibers (Polyester) business. The sale is expected to close in the
fourth quarter of 2004. The Polyester business had 2003 net sales of $368
million. See Note 4 for a discussion of an impairment charge recorded in the
second quarter of 2004 related to the Polyester business.
22
Report of Independent Registered Public Accounting Firm
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, 2004, and the
related consolidated statement of operations for each of the three-month and
nine-month periods ended September 30, 2004 and 2003 and the consolidated
statement of cash flows for the nine-month periods ended September 30, 2004 and
2003. These interim financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 the
standards of the Public Company Accounting Oversight Board, 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 the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet as of
December 31, 2003, 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 5, 2004, 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, 2003, 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
November 1, 2004
- -----------------------
The "Report of Independent Registered Public Accounting Firm" 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.
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(Dollars in millions, except per share amounts)
A. RESULTS OF OPERATIONS - THIRD QUARTER 2004 COMPARED WITH THIRD QUARTER 2003
---------------------------------------------------------------------------
Net Sales
- ---------
2004 2003
-------- ------
Net sales $6,395 $5,768
% change compared with prior period 11%
The increase in net sales in the third quarter of 2004 compared with
the third quarter of 2003 is attributable to the following:
Acquisitions 1%
Divestitures (1)
Price 1
Volume 8
Foreign Exchange 2
--
11%
====
A discussion of net sales by reportable segment can be found in the
Review of Business Segments section of this MD&A.
Cost of Goods Sold
- ------------------
2004 2003
-------- ------
Cost of goods sold $5,087 $4,509
Gross margin % 20.5% 21.8%
Gross margin decreased by 1.3 percentage points in the third quarter of
2004 compared with the third quarter of 2003 due primarily to higher pension and
other postretirement benefits expense of $76 million and an increase in
environmental, litigation, and net repositioning charges of $74 million.
Selling, General and Administrative Expenses
- --------------------------------------------
2004 2003
------ ------
Selling, general and administrative expenses $820 $729
Percent of sales 12.8% 12.6%
Selling, general and administrative expenses increased by $91 million,
or 12 percent, in the third quarter of 2004 compared with the third quarter of
2003 due to an increase in general and administrative expenses of $52 million
due in part to higher spending for information technology systems, an increase
in selling expenses of $25 million from higher sales and an increase in pension
and other postretirement benefits expense of $15 million.
24
2004 2003
------ ------
Pension and other postretirement benefits
expense included in cost of goods sold
and selling, general and administrative expenses $160 $69
Increase compared with prior period $ 91
Pension expense increased by $77 million in the third quarter of 2004
compared with the third quarter of 2003 due primarily to the following:
o A systematic recognition of higher losses resulting principally
from actual plan asset returns below the expected rate of return
during the period 2000 to 2002.
o A decrease in the discount rate from 6.75 percent in 2003 to 6.00
percent in 2004.
(Gain) Loss on Sale of Non-Strategic Businesses
- -----------------------------------------------
2004 2003
------ ------
(Gain) loss on sale of non-strategic businesses $(5) $(9)
Gain on sale of non-strategic businesses of $5 million in the third
quarter of 2004 represents post-closing adjustments related to the divestitures
of our Security Monitoring and VCSEL businesses in prior periods in 2004. Gain
on sale of non-strategic businesses of $9 million in the third quarter of 2003
represented the net pretax gain on the sale of three businesses in our Specialty
Materials and Aerospace reportable segments.
Equity in (Income) Loss of Affiliated Companies
- -----------------------------------------------
2004 2003
------ ------
Equity in (income) loss of affiliated companies $(24) $(7)
Equity income increased by $17 million in the third quarter of 2004
compared with the third quarter of 2003 due primarily to an improvement in
earnings from our UOP joint venture (UOP). The prior year's equity income also
included a charge of $2 million related to repositioning actions at UOP.
Other (Income) Expense
- ----------------------
2004 2003
------ ------
Other (income) expense $(50) $11
Other income increased by $61 million in the third quarter of 2004
compared with the third quarter of 2003 due principally to a gain of $27 million
related to the settlement of a patent infringement lawsuit and a decrease in
foreign exchange losses of $22 million in the current quarter.
25
Tax Expense
- -----------
2004 2003
------ ------
Tax expense $114 $109
Effective tax rate 23.5% 24.1%
The effective tax rate in both periods was lower than the statutory
rate of 35 percent due in part to tax benefits from export sales and foreign tax
planning strategies. The effective tax rate in the third quarter of 2003 also
benefited from tax benefits associated with favorable tax audit settlements.
Net Income
- ----------
2004 2003
------ ------
Net income $372 $344
Earnings per share of common stock -- assuming
dilution $0.43 $0.40
The increase of $0.03 per share in the third quarter of 2004 compared
with the third quarter of 2003 relates primarily to an increase in segment
profit from strong volume conversion across all reportable segments partially
offset by higher pension and other postretirement benefits expense.
26
Review of Business Segments
- ---------------------------
Three Months Ended
September 30,
------------------
2004 2003
---- ----
Net Sales
- ---------
Aerospace $2,468 $2,231
Automation and Control Solutions 1,994 1,875
Specialty Materials 876 777
Transportation Systems 1,057 885
Corporate - -
------ ------
$6,395 $5,768
====== ======
Segment Profit
- --------------
Aerospace $ 379 $ 326
Automation and Control Solutions 235 208
Specialty Materials 38 17
Transportation Systems 137 109
Corporate (40) (33)
------ ------
Total segment profit 749 627
------ ------
Gain on sale of non-strategic businesses 5 9
Equity in income of affiliated companies 24 7
Other income (expense) 50 (11)
Interest and other financial charges (81) (82)
Pension and other postretirement benefits (expense) (A) (160) (69)
Repositioning, environmental and litigation charges (A) (101) (28)
------ ------
Income before taxes and cumulative effect
of accounting change $ 486 $ 453
====== ======
(A) Amounts included in cost of goods sold and selling, general and
administrative expenses.
Aerospace
- ---------
2004 2003
------ ------
Net sales $2,468 $2,231
% change compared with prior period 11%
Segment profit $379 $326
% change compared with prior period 16%
27
Aerospace sales by major customer end-market for the three months ended
September 30, 2004 and 2003 were as follows:
% of Aerospace % Change in
Sales Sales
-------------- -----------
2004
Versus
Customer End-Market 2004 2003 2003
------------------- ---- ---- ----
Commercial:
Air transport aftermarket 23% 21% 22%
Air transport original equipment 8 9 6
Regional transport aftermarket 8 8 10
Regional transport original equipment 3 2 83
Business and general aviation aftermarket 8 9 7
Business and general aviation original equipment 8 6 35
Defense and Space:
Defense and space aftermarket 12 13 (1)
Defense and space original equipment 30 32 5
--- ---
Total 100% 100% 11%
=== ===
Aerospace sales increased by 11 percent in the third quarter of 2004
compared with the third quarter of 2003 due primarily to higher volumes. Details
by customer end-markets driving the increase in sales are as follows:
o Air transport aftermarket sales improved substantially in 2004
primarily related to a 10 percent increase in global flying hours, the
reintroduction of aircraft into service which were previously parked
in the desert and a replenishment of spare parts inventories by the
airlines. Sales also improved due to an increase in upgrades and
retrofits of avionics equipment (ground proximity warning systems) to
meet new regulatory standards.
o Air transport original equipment (OE) sales increased in 2004
primarily reflecting higher aircraft deliveries by our OE customers
(primarily Airbus and Boeing).
o Regional transport aftermarket sales increased in 2004 primarily due
to an increase in fleet sizes and routes of regional carriers and the
introduction of the Primus Epic integrated avionics system.
o Regional transport original equipment sales increased in 2004 largely
due to increases in builds on Embraer's 170 regional jet.
o Business and general aviation aftermarket sales were higher in 2004
due primarily to an increase in upgrade activity in avionics equipment
(Reduced Vertical Separation Minimums (RVSM)) to meet new regulatory
standards.
o Business and general aviation original equipment sales improved in
2004 due primarily to deliveries of the Primus Epic integrated
avionics system and the HTF7000 engine to business jet original
equipment manufacturers.
o Defense and space aftermarket sales were slightly lower in 2004
principally due to a difficult comparison to a strong prior year
quarter driven by war-related activities.
o Defense and space original equipment sales increased in 2004 due
principally to increases in restricted space programs.
28
Aerospace segment profit increased by 16 percent in the third quarter
of 2004 compared with the third quarter of 2003 due primarily to an increase in
sales of higher margin commercial aftermarket products and services and volume
growth. This increase was partially offset by higher development expense
associated with new programs and an increase in spending for information
technology systems.
Automation and Control Solutions
- --------------------------------
2004 2003
---- ----
Net sales $1,994 $1,875
% change compared with prior period 6%
Segment profit $235 $208
% change compared with prior period 13%
Automation and Control Solutions sales increased by 6 percent in the
third quarter of 2004 compared with the third quarter of 2003 due to higher
volumes of 5 percent and the favorable effect of foreign exchange of 3 percent,
partially offset by divestitures, net of acquisitions, of 1 percent and the
impact of lower prices of 1 percent. Sales increased by 9 percent for our
Automation and Control Products business driven principally by strong volume
growth and acquisitions in our fire and security solutions businesses, demand
for new environmental controls products such as our VisionPro touch screen
programmable thermostat, and increased demand for our sensor products in the
industrial and recreational vehicles end-markets. Sales for our Building
Solutions business were essentially flat as volume growth due primarily to
installations and energy retrofit wins and the favorable effect of foreign
exchange were offset by the divestiture of our Security Monitoring business.
Sales for our Process Solutions business increased by 4 percent due primarily to
the favorable effect of foreign exchange.
Automation and Control Solutions segment profit increased by 13 percent
in the third quarter of 2004 compared with the third quarter of 2003 due to the
favorable effect of higher sales volumes partially offset by increased
investments in sales and marketing initiatives and higher research and
development costs to support new product introductions.
Specialty Materials
- -------------------
2004 2003
---- ----
Net sales $876 $777
% change compared with prior period 13%
Segment profit $38 $17
% change compared with prior period 124%
Specialty Materials sales increased by 13 percent in the third quarter
of 2004 compared with the third quarter of 2003 due to higher volumes of 7
percent, the impact of higher prices of 7 percent (mainly in our Nylon System
business) and the favorable effect of foreign exchange of 2 percent, partially
offset by prior year divestitures of 3 percent. Sales for our Chemicals business
improved by 22 percent principally driven by continuing strong demand for our
non-ozone depleting HFC products for refrigeration and air conditioning
applications, as well as for blowing agents for insulation applications. Sales
for our Performance Fibers business increased by 21 percent due primarily to
strong demand and higher prices. Sales for our Electronic Materials business
increased by 18 percent driven by improvement in the semiconductor industry.
Sales for our Performance Products business also were higher by 13 percent as
demand for our Spectra fiber, principally from the U.S. military, remained
strong.
29
Specialty Materials segment profit increased by 124 percent in the
third quarter of 2004 compared with the third quarter of 2003 due principally to
higher sales volumes and price increases, partially offset by higher raw
material costs (principally phenol resulting from increases in benzene prices).
Additionally, segment profit in the third quarter of 2003 was adversely impacted
by temporary plant shutdowns in our Fluorocarbons and Nylon System businesses.
Transportation Systems
- ----------------------
2004 2003
---- ----
Net sales $1,057 $885
% change compared with prior period 19%
Segment profit $137 $109
% change compared with prior period 26%
Transportation Systems sales increased by 19 percent in the third
quarter of 2004 compared with the third quarter of 2003 due primarily to higher
volumes of 13 percent and the favorable effect of foreign exchange of 6 percent.
The increase in sales for the segment resulted principally from a 34 percent
increase in sales in our Honeywell Turbo Technologies business due to a
favorable sales mix and volume growth driven by increasing diesel penetration in
Europe and continued strength in the North American truck segment, and the
favorable effect of foreign exchange. Sales for our Consumer Products Group
business increased by 8 percent driven by recent introductions of new Autolite,
FRAM and Prestone products and higher prices. Sales for our Friction Materials
business improved by 3 percent due to the favorable effect of foreign exchange.
Transportation Systems segment profit increased by 26 percent in the third
quarter of 2004 compared with the third quarter of 2003 due primarily to the
effect of favorable sales mix and volume growth in our Honeywell Turbo
Technologies business partially offset by higher raw material costs (mostly
steel and other metals in each of the segment's businesses and ethylene glycol
in our Consumer Products Group business).
B. RESULTS OF OPERATIONS - NINE MONTHS 2004 COMPARED WITH NINE MONTHS 2003
-----------------------------------------------------------------------
Net Sales
- ---------
2004 2003
-------- ------
Net sales $18,961 $16,916
% change compared with prior period 12%
The increase in net sales in the first nine months of 2004 compared
with the first nine months of 2003 is attributable to the following:
Acquisitions 1%
Divestitures (2)
Price -
Volume 10
Foreign Exchange 3
---
12%
===
We estimate that approximately 2 percentage points of the increase in
sales volume (both on a consolidated basis and for each reportable segment) in
the first nine months of 2004 compared with the first nine months of 2003
relates to additional reporting days in the current year's first quarter
resulting from our normal quarterly closing practice. See Note 1 of Notes to
Financial Statements
30
for further discussion. A discussion of net sales by reportable segment can be
found in the Review of Business Segments section of this MD&A.
Cost of Goods Sold
- ------------------
2004 2003
-------- -------
Cost of goods sold $15,245 $13,263
Gross margin % 19.6% 21.6%
Gross margin decreased by 2.0 percentage points in the first nine months
of 2004 compared with the first nine months of 2003 due primarily to an increase
in net repositioning, environmental, business impairment and litigation charges
of $329 million and higher pension and other postretirement benefits expense of
$197 million.
Selling, General and Administrative Expenses
- --------------------------------------------
2004 2003
------- ------
Selling, general and administrative expenses $2,451 $2,194
Percent of sales 12.9% 13.0%
Selling, general and administrative expenses increased by $257 million,
or 12 percent, in the first nine months of 2004 compared with the first nine
months of 2003 due to an increase in general and administrative expenses of $121
million due in part to higher spending for information technology systems, an
increase in selling expenses of $96 million from higher sales and an increase in
pension and other postretirement benefits expense of $38 million.
2004 2003
------ ----
Pension and other postretirement benefits expense included in cost of
goods sold and selling, general and administrative expenses $482 $247
Increase compared with prior period $235
Pension expense increased by $202 million in the first nine months of
2004 compared with the first nine months of 2003 due primarily to the following:
o A systematic recognition of higher losses resulting principally from
actual plan asset returns below the expected rate of return during the
period 2000 to 2002.
o A decrease in the discount rate from 6.75 percent in 2003 to 6.00
percent in 2004.
(Gain) Loss on Sale of Non-Strategic Businesses
- -----------------------------------------------
2004 2003
------ -----
(Gain) loss on sale of non-strategic businesses $(270) $(40)
Gain on sale of non-strategic businesses of $270 million in the first
nine months of 2004 represents the pretax gains on the sales of our Security
31
Monitoring and VCSEL Optical Products businesses in our Automation and Control
Solutions reportable segment of $215 and $34 million, respectively, and
adjustments of $21 million related to businesses sold in prior periods. Gain on
sale of non-strategic businesses of $40 million in the first nine months of 2003
represented the pretax gain of $31 million on the sale of our Engineering
Plastics business in our Specialty Materials reportable segment and a net pretax
gain of $9 million on the sale of three businesses in our Specialty Materials
and Aerospace reportable segments.
Equity in (Income) Loss of Affiliated Companies
- -----------------------------------------------
2004 2003
----- -----
Equity in (income) loss of affiliated companies $(48) $(11)
Equity income increased by $37 million in the first nine months of 2004
compared with the first nine months of 2003 due primarily to an improvement in
earnings from UOP.
Other (Income) Expense
- ----------------------
2004 2003
------ -----
Other (income) expense $(78) $(16)
Other income increased by $62 million in the first nine months of 2004
compared with the first nine months of 2003 due primarily to a gain of $27
million related to the settlement of a patent infringement lawsuit and a
decrease in foreign exchange losses of $48 million in the current year partially
offset by the inclusion of a gain of $20 million in the prior year related to
the settlement of a patent infringement lawsuit.
Interest and Other Financial Charges
- ------------------------------------
2004 2003
------ -----
Interest and other financial charges $247 $253
% change compared with prior period (2)%
Interest and other financial charges decreased by 2 percent in the
first nine months of 2004 compared with the first nine months of 2003 due
principally to lower average debt outstanding in the current period.
Tax Expense
- -----------
2004 2003
------ -----
Tax expense $386 $336
Effective tax rate 27.3% 26.4%
The effective tax rate in both periods was lower than the statutory
rate of 35 percent due in part to tax benefits from export sales and foreign tax
planning strategies. The effective tax rate in the first nine months of 2003
also benefited from tax benefits associated with favorable tax audit
settlements.
32
The American Jobs Creation Act of 2004, signed into law in October
2004, provides for a variety of changes in the tax law including incentives to
repatriate undistributed earnings of foreign subsidiaries, phased elimination of
the Foreign Sales Corporation/Extraterritorial Income benefit and a domestic
manufacturing benefit. We are currently evaluating the potential impact of this
legislation, including assessing the details of the Act, analyzing the funds
available for repatriation and the economic cost of doing so, assessing the
qualified uses of repatriated funds and assessing the domestic manufacturing
benefit. However, given the preliminary stage of our evaluation, it is not
possible at this time to determine what impact this legislation will have on our
consolidated tax accruals or our effective tax rate.
Net Income
- ----------
2004 2003
------ -----
Net income $1,028 $917
Earnings per share of common stock -- assuming
dilution $1.19 $1.07
The increase of $0.12 per share in the first nine months of 2004
compared with the first nine months of 2003 relates primarily to an increase in
segment profit from strong volume conversion across all reportable segments
partially offset by higher pension and other postretirement benefits expense.
33
Review of Business Segments
- ---------------------------
Nine Months Ended
September 30,
-----------------------
2004 2003
---- ----
Net Sales
- ---------
Aerospace $ 7,225 $ 6,454
Automation and Control Solutions 5,909 5,429
Specialty Materials 2,633 2,377
Transportation Systems 3,193 2,650
Corporate 1 6
------- -------
$18,961 $16,916
======== =======
Segment Profit
- --------------
Aerospace $1,053 $ 847
Automation and Control Solutions 637 592
Specialty Materials 137 99
Transportation Systems 430 329
Corporate (117) (99)
------ ------
Total segment profit 2,140 1,768
------ -----
Gain on sale of non-strategic businesses 270 40
Equity in income of affiliated companies 48 11
Other income 78 16
Interest and other financial charges (247) (253)
Pension and other postretirement benefits (expense) (A) (482) (247)
Repositioning, environmental, business impairment
and litigation charges (A) (393) (62)
----- -----
Income before taxes and cumulative effect
of accounting change $1,414 $1,273
======= ======
(A) Amounts included in cost of goods sold and selling, general and
administrative expenses.
Aerospace
- ---------
2004 2003
------ -----
Net sales $7,225 $6,454
% change compared with prior period 12%
Segment profit $1,053 $847
% change compared with prior period 24%
34
Aerospace sales by major customer end-market for the nine months ended
September 30, 2004 and 2003 were as follows:
% of Aerospace % Change in
Sales Sales
-------------- -----------
2004
Versus
Customer End-Market 2004 2003 2003
------------------- ---- ---- ----
Commercial:
Air transport aftermarket 22% 21% 20%
Air transport original equipment 9 10 5
Regional transport aftermarket 8 8 14
Regional transport original equipment 3 2 58
Business and general aviation aftermarket 8 8 15
Business and general aviation original equipment 7 7 25
Defense and Space:
Defense and space aftermarket 12 12 7
Defense and space original equipment 31 32 7
--- ---
Total 100% 100% 12%
=== ===
Aerospace sales increased by 12 percent in the first nine months of 2004
compared with the first nine months of 2003 due primarily to higher volumes
(including the impact of additional reporting days in the period). Details by
customer end-markets driving the increase in sales are as follows:
o Air transport aftermarket sales improved substantially in 2004
primarily related to a 10 percent increase in global flying hours,
the reintroduction of aircraft into service which were previously
parked in the desert, a replenishment of spare parts inventories by
the airlines and growth in low cost carriers. Additionally, global
flying hours in 2003 were adversely impacted as a result of the SARS
epidemic. Sales also improved due to an increase in upgrades and
retrofits of avionics equipment (ground proximity warning systems) to
meet new regulatory standards.
o Air transport original equipment (OE) sales increased in 2004
primarily reflecting higher aircraft deliveries by our OE customers
(primarily Airbus and Boeing).
o Regional transport aftermarket sales increased in 2004 due primarily
to an increase in fleet sizes and routes of regional carriers and the
introduction of the Primus Epic integrated avionics system.
o Regional transport original equipment sales increased in 2004 largely
due to increases in builds on Embraer's 170 regional jet.
o Business and general aviation aftermarket sales were higher in 2004
as an improving economy drove increased utilization of corporate
aircraft. Also, there was an increase in upgrade activity in avionics
equipment (RVSM) to meet new regulatory standards.
o Business and general aviation original equipment sales improved in
2004 due primarily to deliveries of the Primus Epic integrated
avionics system and the HTF7000 engine to business jet original
equipment manufacturers.
35
o Defense and space aftermarket sales were higher in 2004 driven by
war-related activities resulting in increases in repairs, upgrades
and modifications for fixed, rotary wing and ground vehicles.
o Defense and space original equipment sales increased in 2004 due
principally to war-related activities, continued growth in precision
munitions and increases in restricted space programs.
Aerospace segment profit increased by 24 percent in the first nine
months of 2004 compared with the first nine months of 2003 due primarily to an
increase in sales of higher margin commercial aftermarket products and services
and volume growth. This increase was partially offset by higher development
expense associated with new programs and an increase in spending for information
technology systems.
Automation and Control Solutions
- --------------------------------
2004 2003
---- ----
Net sales $5,909 $5,429
% change compared with prior period 9%
Segment profit $ 637 $ 592
% change compared with prior period 8%
Automation and Control Solutions sales increased by 9 percent in the
first nine months of 2004 compared with the first nine months of 2003 due to
higher volumes of 6 percent (including the impact of additional reporting days
in the current period) and the favorable effect of foreign exchange of 4
percent, partially offset by the impact of lower prices of 1 percent. Sales
increased by 10 percent for our Automation and Control Products business due
principally to strong sales of fire solutions, environmental controls and sensor
products and the favorable effect of foreign exchange. Sales for our Building
Solutions business increased by 8 percent due primarily to the favorable effect
of foreign exchange, improvement in the overall economy and the impact of
investments in sales and marketing capacity, partially offset by the divestiture
of our Security Monitoring business. Sales for our Process Solutions business
increased by 6 percent due primarily to the favorable effect of foreign exchange
and improvement in industrial production and capital spending.
Automation and Control Solutions segment profit increased by 8 percent
in the first nine months of 2004 compared with the first nine months of 2003 due
to the favorable effect of higher sales volumes partially offset by increased
investments in sales and marketing initiatives and higher research and
development costs to support new product introductions.
Specialty Materials
- -------------------
2004 2003
---- ----
Net sales $2,633 $2,377
% change compared with prior period 11%
Segment profit $ 137 $ 99
% change compared with prior period 38%
Specialty Materials sales increased by 11 percent in the first nine
months of 2004 compared with the first nine months of 2003 due to higher volumes
of 8 percent (including the impact of additional reporting days in the current
period), the impact of higher prices of 5 percent (mainly in our Nylon System
business) and the favorable effect of foreign exchange of 1 percent, partially
offset by prior year divestitures, net of acquisitions, of 3 percent. Sales for
our Chemicals business improved by 21 percent principally driven by continuing
strong demand for our non-ozone depleting HFC products for refrigeration and air
36
conditioning applications, as well as for blowing agents for insulation
applications. Sales for our Electronic Materials business increased by 19
percent driven by improvement in the semiconductor industry. Sales for our
Performance Products business were also higher by 15 percent due to strong
demand for our Spectra fiber, principally from the U.S. military.
Specialty Materials segment profit increased by 38 percent in the first
nine months of 2004 compared with the first nine months of 2003 due principally
to higher sales volumes and price increases, partially offset by higher raw
material costs (principally phenol resulting from increases in benzene prices)
mainly in our Nylon System business. Additionally, segment profit in the first
nine months of 2003 was adversely impacted by temporary plant shutdowns in our
Fluorocarbons and Nylon System businesses. The Nylon System business did not
perform in accordance with our operating plan in the first nine months of 2004.
Honeywell has taken certain repositioning actions in 2004 (see Note 4 in Notes
to Financial Statements) and is evaluating other alternatives to improve the
cost structure of our Nylon System business. Additionally, Honeywell continues
to evaluate strategic alternatives to maximize the value of this business.
Transportation Systems
- ----------------------
2004 2003
---- ----
Net sales $3,193 $2,650
% change compared with prior period 20%
Segment profit $ 430 $ 329
% change compared with prior period 31%
Transportation Systems sales increased by 20 percent in the first nine
months of 2004 compared with the first nine months of 2003 due primarily to
higher volumes of 14 percent (including the impact of additional reporting days
in the current period) and the favorable effect of foreign exchange of 7
percent. The increase in sales for the segment resulted principally from a 31
percent increase in sales in our Honeywell Turbo Technologies business due to a
favorable sales mix and volume growth driven by increasing diesel penetration in
Europe and strength in the North American truck segment, and the favorable
effect of foreign exchange. Sales for our Consumer Products Group business
increased by 9 percent driven by strong retail demand for our high-end products
and recent introductions of new Autolite, FRAM and Prestone products and the
favorable effect of foreign exchange and higher prices. Sales for our Friction
Materials business increased by 9 percent largely due to the favorable effect of
foreign exchange.
Transportation Systems segment profit increased by 31 percent in the first
nine months of 2004 compared with the first nine months of 2003 due primarily to
the effect of favorable sales mix and volume growth in our Honeywell Turbo
Technologies business partially offset by higher raw material costs (mostly
steel and other metals in each of the segment's businesses and ethylene glycol
in our Consumer Products Group business).
37
Repositioning and Other Charges
- -------------------------------
A summary of repositioning and other charges follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2004 2003 2004 2003
---- ---- ---- ----
Severance $ 31 $ 9 $ 78 $ 31
Asset impairments 7 2 17 2
Exit costs 2 1 8 4
Reserve adjustments (3) (14) (26) (37)
---- ---- ---- ----
Total net repositioning charge 37 (2) 77 -
---- ---- ---- ----
Other probable and reasonably estimable
environmental liabilities 39 28 230 60
Business impairment charges - - 40 -
Investment impairment charges - 2 - 2
Asbestos related litigation charges, net
of insurance 24 - 44 -
Write-offs of other assets 1 2 8 2
---- ---- ---- ----
Total net repositioning and other charges $101 $ 30 $399 $ 64
==== ==== ==== ====
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,
------------------ -----------------
2004 2003 2004 2003
---- ---- ---- ----
Cost of goods sold $100 $ 26 $384 $ 55
Selling, general and administrative
expenses 1 2 9 7
Equity in (income) loss of affiliated
companies - 2 6 2
---- ---- ---- ----
$101 $ 30 $399 $ 64
==== ==== ==== ====
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,
------------------ -----------------
2004 2003 2004 2003
---- ---- ---- ----
Aerospace $ - $ - $ 4 $ (2)
Automation and Control Solutions 24 (8) 27 (16)
Specialty Materials 24 5 78 12
Transportation Systems 27 3 114 3
Corporate 26 30 176 67
---- ---- ---- ----
$101 $ 30 $399 $ 64
==== ==== ==== ====
In the third quarter of 2004, we recognized a repositioning charge of
$40 million primarily for severance costs related to workforce reductions of 866
manufacturing and administrative positions principally in our Specialty
Materials and Automation and Control Solutions reportable segments. Also, $3
million of previously established accruals for severance were returned to income
in the third quarter of 2004, due to fewer employee separations than originally
planned associated with certain prior repositioning actions, resulting in
reduced severance
38
liabilities in our Automation and Control Solutions and Corporate reportable
segments.
In the second quarter of 2004, we recognized a repositioning charge of
$41 million primarily for severance costs related to workforce reductions of 761
manufacturing and administrative positions principally in our Automation and
Control Solutions, Transportation Systems and Aerospace reportable segments.
Also, $16 million of previously established accruals, primarily for severance,
were returned to income in the second quarter of 2004, due to fewer employee
separations than originally planned associated with certain prior repositioning
actions, resulting in reduced severance liabilities in our Automation and
Control Solutions reportable segment.
In the first quarter of 2004, we recognized a repositioning charge of
$22 million primarily for severance costs related to workforce reductions of 587
manufacturing and administrative positions principally in our Automation and
Control Solutions and Transportation Systems reportable segments. Also, $7
million of previously established accruals for severance and other exit costs
were returned to income in the first quarter of 2004. Severance liabilities were
reduced by $4 million mainly in our Automation and Control Solutions reportable
segment due to fewer employee separations than originally planned associated
with certain prior repositioning actions. Other exit costs liabilities were
reduced by $3 million related primarily to excess environmental remediation
reserves for a closed facility in our Specialty Materials reportable segment.
In the third quarter of 2003, we recognized a repositioning 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 planned
associated with certain prior 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 repositioning 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
planned associated with certain prior repositioning actions, resulting in
reduced severance liabilities in our Automation and Control Solutions, Aerospace
and Specialty Materials reportable segments.
The 2003 and 2004 repositioning actions will generate incremental pretax
savings of approximately $90 million in 2004 compared with 2003 principally from
planned workforce reductions. Cash spending for severance and other exit costs
necessary to execute these actions were $123 million in the nine months ended
September 30, 2004 and were funded through operating cash flows. Cash spending
for severance and other exit costs necessary to execute these actions will
approximate $160 million for the full year 2004 and will be funded primarily
though operating cash flows.
In the third quarter of 2004, we recognized a charge of $24 million for
Bendix related asbestos claims filed and defense costs incurred during the third
quarter of 2004, net of probable Bendix related insurance recoveries. See Note
13 for further discussion. We recognized a charge of $25 million for legacy
environmental matters deemed probable and reasonably estimable in the quarter.
We recognized a charge of $14 million for legal settlements primarily related to
39
property damage claims in our Automation and Control Solutions reportable
segment. We also recognized a charge of $1 million for the write-off of
property, plant and equipment.
In the second quarter of 2004, we recognized a charge of $161 million
for legacy environmental matters deemed probable and reasonably estimable in the
quarter. This charge principally related to an increase in our estimate of
design and study costs likely to be incurred during the pendency of our appeal
of the matter entitled Interfaith Community Organization, et al. v. Honeywell
International Inc., et al. and to estimated costs related to our decision in the
second quarter of 2004 to seek a potential resolution of the principal issues in
dispute in such matter. See Note 13 for further discussion. We recognized an
impairment charge of $40 million related principally to the write-down of
property, plant and equipment of our Performance Fibers (Polyester) business in
our Specialty Materials reportable segment, which was classified as assets held
for disposal as of June 30, 2004. We recognized a charge of $9 million for
Bendix related asbestos claims filed and defense costs incurred during the
second quarter of 2004 including an update of expected resolution values with
respect to claims pending as of June 30, 2004. The charge was net of probable
Bendix related insurance recoveries and an additional $47 million of NARCO
insurance deemed probable of recovery. See Note 13 for further discussion. We
also recognized a charge of $7 million principally for the write-off of
property, plant and equipment.
In the first quarter of 2004, we recognized a charge of $30 million for
legacy environmental matters deemed probable and reasonably estimable in the
quarter, including liabilities for environmental conditions around Onondaga Lake
in New York. We also recognized a charge of $11 million for Bendix related
asbestos claims filed and defense costs incurred during the first quarter of
2004, net of probable insurance recoveries. See Note 13 for further discussion.
In the third quarter of 2003, we recognized a charge of $28 million for
legacy environmental matters deemed probable and reasonably estimable in the
quarter. We also recognized a charge of $4 million in our Specialty Materials
reportable segment including a loss on sale of an investment owned by an equity
investee.
In the second quarter of 2003, we recognized a charge of $32 million for
legacy environmental matters deemed probable and reasonably estimable in the
quarter including the matter entitled Interfaith Community Organization, et al.
v. Honeywell International Inc., et al. See Note 13 for further discussion.
40
C. LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Cash Flow Summary
- -----------------
Our cash flows from operating, investing and financing activities, as
reflected in the Consolidated Statement of Cash Flows for the nine months ended
September 30, 2004 and 2003, are summarized as follows:
2004 2003
---- ----
Cash provided by (used for):
Operating activities $1,487 $1,696
Investing activities (140) (381)
Financing activities (892) (645)
Effect of exchange rate changes on cash 28 179
------ -----
Net increase in cash and cash equivalents $ 483 $ 849
====== ======
Cash provided by operating activities decreased by $209 million during the
first nine months of 2004 compared with the first nine months of 2003 due
primarily to an increase in net asbestos related liability payments of $373
million as the prior period included $472 million in cash received from Equitas
related to a comprehensive policy buy-back settlement, and an increase in
working capital (receivables, inventories and accounts payable) usage of $237
million principally related to higher sales. This decrease in cash provided by
operating activities was partially offset by increased earnings and a decrease
in voluntary U.S. pension contributions of $160 million.
We made asbestos related payments of $424 million, including legal fees, in
the first nine months of 2004 and expect to make additional asbestos related
payments of approximately $180 million during the remainder of 2004. This
estimate is based on our experience in the first nine months of 2004 regarding
the timing of submissions of required evidential data by plaintiff firms. We had
$61 million of asbestos related insurance recoveries during the first nine
months of 2004. We expect to receive approximately $73 million in asbestos
related insurance recoveries during the remainder of 2004. These cash flow
projections are consistent with our existing asbestos reserves and anticipated
insurance recoveries for asbestos related liabilities. See Note 13 of Notes to
Financial Statements for further details.
Cash used for investing activities decreased by $241 million during the
first nine months of 2004 compared with the first nine months of 2003 due
primarily to an increase in proceeds from sales of businesses of $254 million
largely from the dispositions of our Security Monitoring and VCSEL Optical
Products businesses in the current year. Additionally, proceeds from the
maturity of investment securities were $80 million in the first nine months of
2004. This decrease in cash used for investing activities was partially offset
by an increase in spending for acquisitions of $96 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 business units are considered for potential divestiture,
restructuring or other repositioning actions subject to regulatory constraints.
Cash used for financing activities increased by $247 million during the
first nine months of 2004 compared with the first nine months of 2003 due
41
primarily to repurchases of common stock of $342 million in connection with our
stock repurchase program announced in November 2003 partially offset by lower
repayments of long-term debt of $58 million. Total debt of $5,037 million at
September 30, 2004 was $123 million, or 2 percent lower than at December 31,
2003 principally due to lower short-term borrowings.
Liquidity
- ---------
See our 2003 Annual Report on Form 10-K for a detailed discussion of our
liquidity. As of September 30, 2004, there have been no material changes in our
liquidity.
On October 22, 2004, we replaced our $1 billion 364-Day Credit Agreement,
which was expiring on November 24, 2004, with a $1 billion Five-Year Credit
Agreement. The new Five-Year Credit Agreement includes a $200 million sub-limit
for the potential issuance of letters of credit. The terms and conditions of
the new $1 billion Five-Year Credit Agreement do not restrict our ability to
pay dividends and do not contain any financial covenants and these terms and
conditions are not significantly different from those present in our $1.3
billion Five-Year Credit Agreement as described in Note 15 in Notes to Financial
Statements in our 2003 Annual Report on Form 10-K. Also in October 2004,
Standard and Poor's Rating Services affirmed its corporate credit rating on
our long-term and short-term debt of A and A-1, respectively, and revised
Honeywell's outlook from negative to stable.
D. OTHER MATTERS
-------------
Litigation
- ----------
We are subject to a number of lawsuits, investigations and claims (some of
which involve substantial amounts) arising out of the conduct of our business.
See a discussion of environmental, asbestos and other litigation matters in Note
13 of Notes to Financial Statements.
Critical Accounting Policies
- ----------------------------
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
December 31, 2004 (the end of the plan year). Assuming interest rates and Plan
asset returns remain essentially unchanged in the 2004 fourth quarter from the
2004 third quarter, we would be required to increase our Additional Minimum
Pension Liability which would result in a decrease in Accumulated Other Nonowner
Changes within Shareowners' Equity of approximately $1.0 billion after-tax at
December 31, 2004. The actual amount of required adjustment, if any, remains
highly dependent upon the market conditions at December 31, 2004 and the
required adjustment could be significantly higher or lower than this amount.
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 2003 Annual Report on Form 10-K (Item 7A). As of September 30,
2004, there has been no material change in this information.
42
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
-----------------
General Legal Matters
---------------------
We are subject to a number of lawsuits, investigations and claims (some of
which involve substantial amounts) arising out of the conduct of our business.
See a discussion of environmental, asbestos and other litigation matters in Note
13 of Notes to Financial Statements.
Environmental Matters Involving Potential Monetary Sanctions
------------------------------------------------------------
in Excess of $100,000
---------------------
Honeywell is a defendant in a lawsuit filed by the Arizona Attorney
General's Office on behalf of the Arizona Department of Environmental Quality
(ADEQ). The complaint alleges various environmental violations and failure to
make required disclosures. Honeywell believes that the allegations in this
matter are without merit and intends to vigorously defend against this lawsuit.
In September 2004, the Court partially dismissed several of the ADEQ's
significant allegations. In any event, we do not believe that this matter could
have a material adverse effect on our consolidated financial position,
consolidated results of operations or operating cash flows.
43
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
-----------------------------------------
The following table summarizes Honeywell's purchases of its common
stock, par value $1 per share, for the three months ended September 30, 2004:
Issuer Purchases of Equity Securities
(a) (b) (c) (d)
Total Maximum Number
Number of (or Approximate
Shares Dollar Value) of
Total Purchased as Shares that May
Number of Average Price Part of Publicly Yet be Purchased
Shares Paid Announced Plans Under Plans or
Period Purchased per Share or Programs Programs
------ --------- ------------- ---------------- ----------------
July 2004 200,000 $36.56 200,000 (A)
August 2004 1,202,550 $35.73 1,202,550 (A)
September 2004 - - - (A)
(A) In November 2003 Honeywell announced its intention to repurchase
sufficient outstanding shares of its common stock to offset the
dilutive impact of employee stock based compensation plans, including
future option exercises, restricted unit vesting and matching
contributions under our savings plans. We estimate the issuance of
approximately 10 million shares annually under such plans. We have
repurchased 9,072,650 shares during the nine months ended September
30, 2004. Total repurchases may vary depending on market conditions
and the level of other investing activities.
In response to market conditions, subsequent to the end of the third
quarter of 2004, we began to repurchase shares to offset the
anticipated 2005 dilutive impact of employee stock based compensation
plans. As of November 4, 2004, we have repurchased 7.7 million shares
since September 30, 2004.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits. See the Exhibit Index on page 46 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, 2004.
1. On September 27, 2004, a report was filed announcing the election
of Bradley T. Sheares, President, U.S. Human Health of Merck &
Co., Inc. to Honeywell's Board of Directors.
2. On July 21, 2004, a report was filed which furnished, under Item
12, a press release reporting our earnings for the second quarter
of 2004.
44
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 5, 2004 By: /s/ Thomas A. Szlosek
------------------------------
Thomas A. Szlosek
Vice President and Controller
(on behalf of the Registrant
and as the Registrant's
Principal Accounting Officer)
45
EXHIBIT INDEX
-------------
Exhibit Number Description
- -------------- -----------
2 Omitted (Inapplicable)
3 Omitted (Inapplicable)
4 Omitted (Inapplicable)
10 Omitted (Inapplicable)
11 Computation of Per Share Earnings*
12 Computation of Ratio of Earnings to Fixed
Charges (filed herewith)
15 Independent Accountants' Acknowledgment
Letter as to the incorporation of their
report relating to unaudited interim
financial statements (filed herewith)
18 Omitted (Inapplicable)
19 Omitted (Inapplicable)
22 Omitted (Inapplicable)
23 Omitted (Inapplicable)
24 Omitted (Inapplicable)
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)
- -------------------
*Data required by Statement of Financial Accounting Standards No. 128,
"Earnings per Share", is provided in Note 6 to the condensed consolidated
financial statements in this report.
46