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 June 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 June 30, 2004
--------------------- ------------------
$1 par value 859,571,945 shares
Honeywell International Inc.
Index
Page No.
--------
Part I. - Financial Information
Item 1. Financial Statements:
Consolidated Statement of Operations -
Three and Six Months Ended June 30, 2004 and 2003 3
Consolidated Balance Sheet -
June 30, 2004 and December 31, 2003 4
Consolidated Statement of Cash Flows -
Six Months Ended June 30, 2004 and 2003 5
Notes to Financial Statements 6
Report of Independent Registered Public
Accounting Firm 21
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 38
Item 4. Controls and Procedures 38
Part II. - Other Information
Item 1. Legal Proceedings 39
Item 2. Changes in Securities and Use of Proceeds 39
Item 6. Exhibits and Reports on Form 8-K 40
Signatures 41
----------
This report contains certain statements that may be deemed "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934. All statements, other than statements of historical fact, that address
activities, events or developments that we or our management intends, expects,
projects, believes or anticipates will or may occur in the future are
forward-looking statements. Such statements are based upon certain assumptions
and assessments made by our management in light of their experience and their
perception of historical trends, current conditions, expected future
developments and other factors they believe to be appropriate. The
forward-looking statements included in this report are also subject to a number
of material risks and uncertainties, including but not limited to economic,
competitive, governmental and technological factors affecting our operations,
markets, products, services and prices. Such forward-looking statements are not
guarantees of future performance and actual results, developments and business
decisions may differ from those envisaged by such forward-looking statements.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Honeywell International Inc.
Consolidated Statement of Operations
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
2004 2003 2004 2003
------ ------ ------- -------
(Dollars in millions,
except per share amounts)
Net sales $6,388 $5,749 $12,566 $11,148
------ ------ ------- -------
Costs, expenses and other
Cost of goods sold 5,228 4,514 10,158 8,754
Selling, general and administrative
expenses 823 762 1,631 1,465
(Gain) loss on sale of non-strategic
businesses (233) (31) (265) (31)
Equity in (income) loss of affiliated
companies (17) (6) (24) (4)
Other (income) expense (18) (24) (28) (27)
Interest and other financial charges 82 87 166 171
------ ------ ------- -------
5,865 5,302 11,638 10,328
------ ------ ------- -------
Income before taxes and cumulative
effect of accounting change 523 447 928 820
Tax expense 162 128 272 227
------ ------ ------- -------
Income before cumulative effect of
accounting change 361 319 656 593
Cumulative effect of accounting change -- -- -- (20)
------ ------ ------- -------
Net income $ 361 $ 319 $ 656 $ 573
====== ====== ======= =======
Earnings per share of common stock -
basic:
Income before cumulative effect of
accounting change $ 0.42 $ 0.37 $ 0.76 $ 0.69
Cumulative effect of accounting
change -- -- -- (0.02)
------ ------ ------- -------
Net income $ 0.42 $ 0.37 $ 0.76 $ 0.67
====== ====== ======= =======
Earnings per share of common stock -
assuming dilution:
Income before cumulative effect of
accounting change $ 0.42 $ 0.37 $ 0.76 $ 0.69
Cumulative effect of accounting
change -- -- -- (0.02)
------ ------ ------- -------
Net income $ 0.42 $ 0.37 $ 0.76 $ 0.67
====== ====== ======= =======
Cash dividends per share of common stock $.1875 $.1875 $ .3750 $ .3750
====== ====== ======= =======
The Notes to Financial Statements are an integral part of this statement.
3
Honeywell International Inc.
Consolidated Balance Sheet
(Unaudited)
June 30, December 31,
2004 2003
-------- ------------
(Dollars in millions)
ASSETS
Current assets:
Cash and cash equivalents $ 3,232 $ 2,950
Accounts, notes and other receivables 3,905 3,643
Inventories 3,003 3,040
Deferred income taxes 1,311 1,526
Other current assets 566 465
------- -------
Total current assets 12,017 11,624
Investments and long-term receivables 414 569
Property, plant and equipment - net 4,185 4,295
Goodwill 5,837 5,789
Other intangible assets - net 1,110 1,098
Insurance recoveries for asbestos
related liabilities 1,401 1,317
Deferred income taxes 447 342
Prepaid pension benefit cost 3,063 3,173
Other assets 1,077 1,107
------- -------
Total assets $29,551 $29,314
======= =======
LIABILITIES
Current liabilities:
Accounts payable $ 2,273 $ 2,240
Short-term borrowings 44 152
Commercial paper 95 --
Current maturities of long-term debt 146 47
Accrued liabilities 4,495 4,314
------- -------
Total current liabilities 7,053 6,753
Long-term debt 4,825 4,961
Deferred income taxes 313 316
Postretirement benefit obligations
other than pensions 1,695 1,683
Asbestos related liabilities 2,096 2,279
Other liabilities 2,683 2,593
SHAREOWNERS' EQUITY
Capital - common stock issued 958 958
- additional paid-in capital 3,547 3,486
Common stock held in treasury, at cost (3,827) (3,655)
Accumulated other nonowner changes (255) (189)
Retained earnings 10,463 10,129
------- -------
Total shareowners' equity 10,886 10,729
------- -------
Total liabilities and shareowners' equity $29,551 $29,314
======= =======
The Notes to Financial Statements are an integral part of this statement.
4
Honeywell International Inc.
Consolidated Statement of Cash Flows
(Unaudited)
Six Months Ended
June 30,
------------------------
2004 2003
------ ------
(Dollars in millions)
Cash flows from operating activities:
Net income $ 656 $ 573
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 (265) (31)
Repositioning, environmental, litigation and
business impairment charges 298 34
Severance and exit cost payments (82) (93)
Environmental and non-asbestos litigation payments (92) (36)
Asbestos related liability payments (323) (388)
Insurance receipts for asbestos related liabilities 48 477
Depreciation 288 290
Undistributed earnings of equity affiliates (29) (4)
Deferred income taxes 82 134
Pension and other postretirement benefits expense 322 178
Pension contributions - U.S. Plans (5) (170)
Other postretirement benefit payments (99) (99)
Other (40) (3)
Changes in assets and liabilities, net of the effects
of acquisitions and divestitures:
Accounts, notes and other receivables (243) (80)
Inventories 12 (95)
Other current assets (7) 18
Accounts payable 117 175
Accrued liabilities 204 126
------ ------
Net cash provided by operating activities 842 1,026
------ ------
Cash flows from investing activities:
Expenditures for property, plant and equipment (283) (276)
Proceeds from disposals of property, plant and equipment 2 --
Decrease in investments 80 --
Cash paid for acquisitions (109) (122)
Proceeds from sales of businesses 394 90
------ ------
Net cash provided by (used for) investing activities 84 (308)
------ ------
Cash flows from financing activities:
Net increase (decrease) in commercial paper 95 (13)
Net (decrease) increase in short-term borrowings (124) 78
Proceeds from issuance of common stock 45 31
Payments of long-term debt (23) (70)
Repurchases of common stock (292) --
Cash dividends on common stock (322) (322)
------ ------
Net cash (used for) financing activities (621) (296)
------ ------
Effect of foreign exchange rate changes
on cash and cash equivalents (23) 183
------ ------
Net increase in cash and cash equivalents 282 605
Cash and cash equivalents at beginning of year 2,950 2,021
------ ------
Cash and cash equivalents at end of period $3,232 $2,626
====== ======
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 June 30, 2004
and the results of operations for the three and six months ended June 30, 2004
and 2003 and cash flows for the six months ended June 30, 2004 and 2003. The
results of operations for the three- and six-month periods ended June 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 six-month periods ended June 30, 2004 and 2003 were July 3, 2004 and June
28, 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 June 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. The adoption of FSP No. 106-2 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 property, plant and equipment, net of
$16 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
6
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 Six Months Ended
June 30, June 30,
------------------ -----------------
2004 2003 2004 2003
---- ---- ---- ----
Net income, as reported $ 361 $ 319 $ 656 $ 573
Deduct: Total stock-based employee
compensation cost determined under fair
value method for fixed stock option
plans, net of related tax effects (9) (12) (18) (25)
------ ----- ------ -----
Pro forma net income $ 352 $ 307 $ 638 $ 548
====== ===== ====== =====
Earnings per share of common stock:
Basic - as reported $ 0.42 $0.37 $ 0.76 $0.67
====== ===== ====== =====
Basic - pro forma $ 0.41 $0.36 $ 0.74 $0.64
====== ===== ====== =====
Earnings per share of common stock:
Assuming dilution - as reported $ 0.42 $0.37 $ 0.76 $0.67
====== ===== ====== =====
Assuming dilution - pro forma $ 0.41 $0.36 $ 0.74 $0.64
====== ===== ====== =====
The following sets forth fair value per
share information, including related
assumptions, used to determine
compensation cost consistent with the
requirements of SFAS No. 123:
Weighted average fair value per share of
options granted during the period
(estimated on grant date using
Black-Scholes option-pricing model) $11.04 $8.12 $10.45 $8.80
Assumptions:
Historical dividend yield 1.7% 2.2% 2.2% 2.0%
Historical volatility 37.5% 46.9% 38.1% 46.7%
Risk-free rate of return 3.5% 2.9% 2.4% 2.9%
Expected life (years) 5.0 5.0 5.0 5.0
7
NOTE 4. A summary of repositioning and other charges follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2004 2003 2004 2003
---- ---- ---- ----
Severance $ 32 $ 22 $ 47 $ 22
Asset impairments 6 -- 10 --
Exit costs 3 3 6 3
Reserve adjustments (16) (23) (23) (23)
---- ---- ---- ----
Total net repositioning charge 25 2 40 2
---- ---- ---- ----
Probable and reasonably estimable
environmental liabilities 161 32 191 32
Business impairment charges 40 -- 40 --
Asbestos related litigation charges, net
of insurance 9 -- 20 --
Write-offs of other assets 7 -- 7 --
---- ---- ---- ----
Total net repositioning and other
charges $242 $ 34 $298 $ 34
==== ==== ==== ====
The following table summarizes the pretax distribution of total net
repositioning and other charges by income statement classification:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2004 2003 2004 2003
---- ---- ---- ----
Cost of goods sold $232 $29 $284 $29
Selling, general and administrative
expenses 6 5 8 5
Equity in (income) loss of affiliated
companies 4 -- 6 --
---- --- ---- ---
$242 $34 $298 $34
==== === ==== ===
The following table summarizes the pretax impact of total net repositioning
and other charges by reportable segment:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2004 2003 2004 2003
---- ---- ---- ----
Aerospace $ 3 $(2) $ 4 $(2)
Automation and Control Solutions -- (8) 3 (8)
Specialty Materials 50 7 54 7
Transportation Systems 69 -- 87 --
Corporate 120 37 150 37
---- --- ---- ---
$242 $34 $298 $34
==== === ==== ===
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.
8
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 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 47 10 6 63
2004 usage (66) (10) (16) (92)
Adjustments (17) -- (6) (23)
---- ---- ---- ----
Balance at June 30, 2004 $135 $ -- $ 26 $161
==== ==== ==== ====
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 relates 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 is 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.
9
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 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).
NOTE 6. The details of the earnings per share calculations for the three- and
six-month periods ended June 30, 2004 and 2003 follow:
Three Months 2004 Six Months 2004
------------------------- -------------------------
Per Per
Average Share Average Share
Income Shares Amount Income Shares Amount
------ ------- ------ ------ ------- ------
Net Income
----------
Earnings per share of common
stock - basic $361 860.0 $0.42 $656 860.3 $0.76
Dilutive securities issuable in
connection with stock plans 3.4 3.4
---- ----- ----- ---- ----- -----
Earnings per share of common
stock - assuming dilution $361 863.4 $0.42 $656 863.7 $0.76
==== ===== ===== ==== ===== =====
Three Months 2003 Six 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 $319 859.9 $0.37 $593 858.4 $0.69
Dilutive securities issuable in
connection with stock plans 1.0 0.8
---- ----- ----- ---- ----- -----
Earnings per share of common
stock - assuming dilution $319 860.9 $0.37 $593 859.2 $0.69
==== ===== ===== ==== ===== =====
Net Income
----------
Earnings per share of common
stock - basic $319 859.9 $0.37 $573 858.4 $0.67
Dilutive securities issuable in
connection with stock plans 1.0 0.8
---- ----- ----- ---- ----- -----
Earnings per share of common
stock - assuming dilution $319 860.9 $0.37 $573 859.2 $0.67
==== ===== ===== ==== ===== =====
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 six-month periods ended June
30, 2004, the number of stock options not included in the computations were 43.5
and 40.8 million, respectively. For the three- and six-month periods ended June
30, 2003, the number of stock options not included in the computations were 43.7
and 44.3 million, respectively. These stock options were outstanding at the end
of each of the respective periods.
10
NOTE 7. Accounts, notes and other receivables consist of the following:
June 30, December 31,
2004 2003
-------- ------------
Trade $3,398 $3,230
Other 645 563
------ ------
4,043 3,793
Less - Allowance for doubtful accounts (138) (150)
------ ------
$3,905 $3,643
====== ======
NOTE 8. Inventories consist of the following:
June 30, December 31,
2004 2003
-------- ------------
Raw materials $ 996 $ 972
Work in process 747 802
Finished products 1,404 1,412
------ ------
3,147 3,186
Less - Progress payments (27) (20)
- Reduction to LIFO cost basis (117) (126)
------ ------
$3,003 $3,040
====== ======
NOTE 9. The change in the carrying amount of goodwill for the six months ended
June 30, 2004 by reportable segment is as follows:
Currency
Translation
Dec. 31, 2003 Acquisitions (Divestitures) Adjustment June 30, 2004
------------- ------------ -------------- ----------- -------------
Aerospace $1,641 $ 98 $ -- $ 3 $1,742
Automation and Control Solutions 2,832 1 (61) -- 2,772
Specialty Materials 781 -- -- (1) 780
Transportation Systems 535 -- -- 8 543
------ ---- ---- --- ------
$5,789 $ 99 $(61) $10 $5,837
====== ==== ==== === ======
Intangible assets are comprised of:
June 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 $ 913 $(164) $ 749 $ 860 $(141) $ 719
Patents and trademarks 425 (299) 126 425 (295) 130
Other 397 (199) 198 398 (186) 212
------ ----- ------ ------ ----- ------
1,735 (662) 1,073 1,683 (622) 1,061
Trademark with indefinite
life 46 (9) 37 46 (9) 37
------ ----- ------ ------ ----- ------
$1,781 $(671) $1,110 $1,729 $(631) $1,098
====== ===== ====== ====== ===== ======
Amortization expense related to intangible assets was $40 and $31 million
for the six months ended June 30, 2004 and 2003, respectively. Amortization
expense related to intangible assets for 2004 to 2008 is expected to approximate
$80 million each year.
11
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 Six Months Ended
June 30, June 30,
------------------ ----------------
2004 2003 2004 2003
---- ---- ---- ----
Net income $361 $319 $656 $573
Foreign exchange translation
adjustments (69) 270 (54) 363
Change in fair value of
effective cash flow hedges (11) 29 (12) 57
---- ---- ---- ----
$281 $618 $590 $993
==== ==== ==== ====
NOTE 11. Segment financial data follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
2004 2003 2004 2003
------ ------ ------- -------
Net Sales
Aerospace $2,453 $2,161 $ 4,757 $ 4,223
Automation and Control Solutions 1,968 1,837 3,915 3,554
Specialty Materials 901 823 1,757 1,600
Transportation Systems 1,065 925 2,136 1,765
Corporate 1 3 1 6
------ ------ ------- -------
$6,388 $5,749 $12,566 $11,148
====== ====== ======= =======
Segment Profit
Aerospace $ 367 $ 264 $ 674 $ 521
Automation and Control Solutions 207 187 402 384
Specialty Materials 51 51 99 82
Transportation Systems 150 128 293 220
Corporate (38) (34) (77) (66)
------ ------ ------- -------
Total segment profit 737 596 1,391 1,141
------ ------ ------- -------
Gain on sale of non-strategic
businesses 233 31 265 31
Equity in income of
affiliated companies 17 6 24 4
Other income 18 24 28 27
Interest and other financial charges (82) (87) (166) (171)
Pension and other postretirement
benefits (expense) (A) (162) (89) (322) (178)
Repositioning, environmental, business
impairment and litigation charges (A) (238) (34) (292) (34)
------ ------ ------- -------
Income before taxes and cumulative
effect of accounting change $ 523 $ 447 $ 928 $ 820
====== ====== ======= =======
(A) Amounts included in cost of goods sold and selling, general and
administrative expenses.
12
NOTE 12. Net periodic pension and other postretirement benefits costs for our
significant plans include the following components.
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2004 2003 2004 2003
----- ----- ----- -----
Pension Benefits
Service cost $ 60 $ 60 $ 120 $ 120
Interest cost 189 190 378 379
Expected return on plan assets (261) (257) (523) (513)
Amortization of transition asset -- (2) -- (4)
Amortization of prior service cost 9 9 18 19
Recognition of actuarial losses 101 43 203 85
----- ----- ----- -----
$ 98 $ 43 $ 196 $ 86
===== ===== ===== =====
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2004 2003 2004 2003
---- ---- ---- ----
Other Postretirement Benefits
Service cost $ 5 $ 6 $ 10 $ 12
Interest cost 35 37 71 73
Expected return on plan assets -- -- -- --
Amortization of prior service (credit) (8) (6) (17) (12)
Recognition of actuarial losses 25 10 49 21
--- --- ---- ----
$57 $47 $113 $ 94
=== === ==== ====
NOTE 13. COMMITMENTS AND CONTINGENCIES
Shareowner Litigation -- Honeywell and three of its former officers are
defendants in a class action lawsuit filed in the United States District Court
for the District of New Jersey. Plaintiffs allege, 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 has 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 requires a payment to the class of $100 million.
Honeywell's contribution to the settlement is $15 million, which amount had
previously been fully reserved. Honeywell's insurance carriers will pay the
remainder of the settlement. The settlement is subject to court approval and
other contingencies. A court hearing on the terms of the settlement is scheduled
for August 16, 2004. Although members of the class may opt out of the
settlement, Honeywell believes that any such claims would be 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 2003, Honeywell filed
a motion to dismiss this matter.
13
Although it is not possible at this time to predict the outcome of this
matter, we believe that the allegations in this matter are without merit and we
expect to prevail. An adverse litigation outcome could, however, be material to
our consolidated financial position or results of operations. As a result of the
uncertainty regarding the outcome of this matter, no provision has been made in
our financial statements with respect to this contingent liability.
Environmental Matters - We are subject to various federal, state and local
government requirements relating to the protection of 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. In
October 2003, the District Court denied Honeywell's motion for a stay of certain
aspects of its May 2003 order, and we have appealed the ruling to the Third
Circuit. The site at issue is one of twenty-one sites located in Jersey City,
New Jersey which are the subject of an Administrative Consent Order (ACO)
entered into with the New Jersey Department of Environmental Protection (NJDEP)
in 1993. Under the ACO, Honeywell agreed to study and remediate these sites in
accordance with NJDEP's directions, provided that the total costs of such
studies and remediation do not exceed $60 million. Honeywell has cooperated with
the NJDEP under the ACO and believes that decisions regarding site cleanups
should be made by the NJDEP under
14
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 $316 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, there will be a public comment period of at least sixty days
during which time Honeywell can also submit comments. Should Honeywell be
required to undertake a substantially more extensive remedy than that which we
proposed in the May 2004 Feasibility Study, such outcome 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 previously manufactured by Honeywell or by previously owned
subsidiaries fall into two general categories; refractory products and friction
products.
15
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,
except one claim which is not material as to which the stay was lifted in August
2003. Because the claims pending against Honeywell necessarily will impact the
liabilities of NARCO, because the insurance policies held by Honeywell are
essential to a successful NARCO reorganization, and because Honeywell has
offered to commit the value of those policies to the reorganization, the
bankruptcy court has temporarily enjoined any claims against Honeywell, current
or future, related to NARCO. Although the stay has been extended twenty-nine
times since January 4, 2002, there is no assurance that such stay will remain in
effect. In connection with NARCO's bankruptcy filing, we paid NARCO's parent
company $40 million and agreed to provide NARCO with up to $20 million in
financing. We also agreed to pay $20 million to NARCO's parent company upon the
filing of a plan of reorganization for NARCO acceptable to Honeywell, and to pay
NARCO's parent company $40 million, and to forgive any outstanding NARCO
indebtedness, upon the confirmation and consummation of such a plan.
As a result of 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 approximately 275,000 current claimants who are now expected to file a
claim as part of the NARCO reorganization process. We are also in discussions
with the NARCO Committee of Asbestos Creditors on Trust Distribution Procedures
for NARCO. We believe that, as part of the NARCO plan of reorganization, a trust
will be established pursuant to these Trust Distribution Procedures for the
benefit of all asbestos claimants, current and future. If the trust is put in
place and approved by the Court as fair and equitable, Honeywell as well as
NARCO will be entitled to a permanent channeling injunction barring all present
and future individual actions in state or federal courts and requiring all
asbestos related claims based on exposure to NARCO products to be made against
the federally-supervised trust. We expect the NARCO plan of reorganization and
the NARCO trust to be approved by the Court in 2004. As part of its ongoing
settlement negotiations, Honeywell has reached agreement in principle with the
representative for future NARCO claimants to cap its annual contributions to the
trust with respect to future claims at a level that would not have a material
impact on Honeywell's operating cash flows. Given the substantial progress of
negotiations between Honeywell and NARCO related asbestos claimants and between
Honeywell and the Committee of Asbestos Creditors during the fourth quarter of
2002, Honeywell developed an estimated liability for settlement of pending and
future asbestos claims and recorded a charge of $1.4 billion for NARCO related
16
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. Settlement payments with respect to
current claims are expected to be made through 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 June 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.
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,
17
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 June 30, 2004, we have resolved approximately 69,000
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
six months of 2004, those indemnity and defense costs were approximately $72
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,
Six Months Ended ---------------
Claims Activity June 30, 2004 2003 2002
--------------- ---------------- ------ ------
Claims Unresolved at the beginning of period 72,976 50,821 47,000
Claims Filed 5,999 25,765 10,000
Claims Resolved (4,797) (3,610) (6,179)
------ ------ ------
Claims Unresolved at the end of period 74,178 72,976 50,821
====== ====== ======
December 31,
---------------
Disease Distribution of Unresolved Claims June 30, 2004 2003 2002
----------------------------------------- ------------- ------ ------
Mesothelioma and Other Cancer Claims 3,731 3,277 3,810
Other Claims 70,447 69,699 47,011
------ ------ ------
Total Claims 74,178 72,976 50,821
====== ====== ======
Approximately 30 percent of the 74,000 pending claims at June 30, 2004 are
on the inactive, deferred, or similar dockets established in some jurisdictions
for claimants who allege minimal or no impairment. The approximately 74,000
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-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
18
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 June 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 June 30, 2004 we had amounts receivable from our insurers of
approximately $300 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 (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.
19
Refractory and Friction Products -- NARCO and Bendix asbestos related
balances are included in the following balance sheet accounts:
June 30, December 31,
2004 2003
-------- ------------
Other current assets $ 145 $ 130
Insurance recoveries for asbestos related liabilities 1,401 1,317
------ ------
$1,546 $1,447
====== ======
Accrued liabilities $ 756 $ 730
Asbestos related liabilities 2,096 2,279
------ ------
$2,852 $3,009
====== ======
During the first six months of 2004, we paid $323 million in indemnity and
defense costs related to NARCO and Bendix claims. Additionally, 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
is net of probable Bendix related insurance recoveries and 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 June 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:
Six Months Ended June 30,
-------------------------
2004 2003
----- -----
Beginning of period $ 275 $217
Accruals for warranties/guarantees issued during the
period 126 104
Adjustments of pre-existing warranties/guarantees (8) 11
Settlement of warranty/guarantee claims (116) (80)
----- ----
End of period $ 277 $252
===== ====
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.
20
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 June 30, 2004, and the related
consolidated statement of operations for each of the three-month and six-month
periods ended June 30, 2004 and 2003 and the consolidated statement of cash
flows for the six-month periods ended June 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
July 30, 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.
21
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 - SECOND QUARTER 2004 COMPARED WITH SECOND QUARTER 2003
Net Sales
2004 2003
------ ------
Net sales $6,388 $5,749
% change compared with prior period 11%
The increase in net sales in the second quarter of 2004 compared with the
second quarter of 2003 is attributable to the following:
Acquisitions 1%
Divestitures (1)
Price --
Volume 9
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 $5,228 $4,514
Gross margin % 18.2% 21.5%
Gross margin decreased by 3.3 percentage points in the second quarter of
2004 compared with the second quarter of 2003 due primarily to an increase in
environmental, business impairment, net repositioning and litigation charges of
$203 million and higher pension and other postretirement benefits expense of $61
million.
Selling, General and Administrative Expenses
2004 2003
----- -----
Selling, general and administrative expenses $ 823 $ 762
Percent of sales 12.9% 13.3%
Selling, general and administrative expenses increased by $61 million, or 8
percent, in the second quarter of 2004 compared with the second quarter of 2003
due primarily to an increase in selling expenses of $37 million from higher
sales, and an increase in pension and other postretirement benefits expense of
$12 million.
22
2004 2003
---- ----
Pension and other postretirement benefits expense included in cost
of goods sold and selling, general and administrative expenses $162 $89
Increase compared with prior period $ 73
Pension expense increased by $64 million, or 149 percent, in the second
quarter of 2004 compared with the second 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 $(233) $(31)
Gain on sale of non-strategic businesses of $233 million in the second
quarter of 2004 represents the pretax gain of $212 million on the sale of our
Security Monitoring business in our Automation and Control Solutions reportable
segment and adjustments of $21 million related to businesses sold in prior
periods. Gain on sale of non-strategic businesses of $31 million in the second
quarter of 2003 represented the pretax gain on the sale of our Engineering
Plastics business in our Specialty Materials reportable segment.
Equity in (Income) Loss of Affiliated Companies
2004 2003
---- ----
Equity in (income) loss of affiliated companies $(17) $(6)
Equity income increased by $11 million in the second quarter of 2004
compared with the second quarter of 2003 due primarily to an improvement in
earnings from our UOP joint venture (UOP). The current year's equity income
includes a charge of $4 million related to repositioning actions at UOP.
Other (Income) Expense
2004 2003
---- ----
Other (income) expense $(18) $(24)
Other income decreased by $6 million in the second quarter of 2004 compared
with the second quarter of 2003 as the prior year included a gain of $20 million
related to the settlement of a patent infringement lawsuit partially offset by a
decrease in foreign exchange losses of $14 million in the current quarter.
23
Interest and Other Financial Charges
2004 2003
---- ----
Interest and other financial charges $82 $87
% change compared with prior period (6)%
Interest and other financial charges decreased by 6 percent in the second
quarter of 2004 compared with the second quarter of 2003 due principally to
lower average debt outstanding in the current quarter.
Tax Expense
2004 2003
----- -----
Tax expense $ 162 $ 128
Effective tax rate 31.0% 28.6%
The effective tax rate increased by 2.4 percentage points in the second
quarter of 2004 compared with the second quarter of 2003 due principally to tax
benefits associated with favorable tax audit settlements in the prior year. 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 second quarter of 2003 also benefited
from tax benefits associated with favorable tax audit settlements.
Net Income
2004 2003
----- -----
Net income $ 361 $ 319
Earnings per share of common stock -- assuming dilution $0.42 $0.37
The increase of $0.05 per share in the second quarter of 2004 compared with
the second 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.
24
Review of Business Segments
Three Months Ended
June 30,
------------------
2004 2003
------ ------
Net Sales
Aerospace $2,453 $2,161
Automation and Control Solutions 1,968 1,837
Specialty Materials 901 823
Transportation Systems 1,065 925
Corporate 1 3
------ ------
$6,388 $5,749
====== ======
Segment Profit
Aerospace $ 367 $ 264
Automation and Control Solutions 207 187
Specialty Materials 51 51
Transportation Systems 150 128
Corporate (38) (34)
------ ------
Total segment profit 737 596
------ ------
Gain on sale of non-strategic businesses 233 31
Equity in income of affiliated companies 17 6
Other income 18 24
Interest and other financial charges (82) (87)
Pension and other postretirement benefits (expense) (A) (162) (89)
Repositioning, environmental, business impairment
and litigation charges (A) (238) (34)
------ ------
Income before taxes and cumulative effect
of accounting change $ 523 $ 447
====== ======
(A) Amounts included in cost of goods sold and selling, general and
administrative expenses.
Aerospace
2004 2003
------ ------
Net sales $2,453 $2,161
% change compared with prior period 14%
Segment profit $ 367 $ 264
% change compared with prior period 39%
25
Aerospace sales by major customer end-market for the three months ended
June 30, 2004 and 2003 were as follows:
% of Aerospace % Change
Sales in Sales
-------------- ---------
2004
Versus
Customer End-Market 2004 2003 2003
------------------- ---- ---- ------
Commercial:
Air transport aftermarket 22% 20% 25%
Air transport original equipment 9 10 2
Regional transport aftermarket 8 7 23
Regional transport original equipment 3 2 84
Business and general aviation aftermarket 8 8 18
Business and general aviation original equipment 7 7 28
Defense and Space:
Defense and space aftermarket 12 13 6
Defense and space original equipment 31 33 7
--- ---
Total 100% 100% 14%
=== ===
Aerospace sales increased by 14 percent in the second quarter of 2004
compared with the second quarter of 2003 due to higher volumes of 13 percent and
an acquisition of 1 percent. Details by customer end-markets driving the
increase in sales are as follows:
o Air transport aftermarket sales improved substantially in 2004
primarily reflecting a continued increase in maintenance activity
largely related to a 14 percent increase in global flying hours
(driven mainly by the reintroduction of aircraft into service which
were grounded as a result of the SARS epidemic and growth in low cost
carriers) and an increase in upgrades and retrofits of avionics
equipment (ground proximity systems) to meet new regulatory standards.
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 as
an improving economy drove increased utilization of corporate
aircraft. Also, there was 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 higher in 2004 driven by
war-related activities resulting in increases in repair, 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 the acquisition of Hymatic in the prior year.
26
Aerospace segment profit increased by 39 percent in the second quarter of
2004 compared with the second quarter of 2003 due primarily to an increase in
sales of higher margin commercial aftermarket products and services, volume
growth and an increase in licensing income driven by intellectual property
enforcement activities. This increase was partially offset by higher spending
for information technology systems.
Automation and Control Solutions
2004 2003
------ ------
Net sales $1,968 $1,837
% change compared with prior period 7%
Segment profit $ 207 $ 187
% change compared with prior period 11%
Automation and Control Solutions sales increased by 7 percent in the second
quarter of 2004 compared with the second quarter of 2003 due to higher volumes
of 5 percent and the favorable effect of foreign exchange of 3 percent,
partially offset by the impact of lower prices of 1 percent. Sales increased by
8 percent for our Automation and Control Products business driven principally by
successful marketing programs and 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 increased by 6 percent due primarily
to installations and energy retrofit wins as we begin to see the impact of our
investments in sales and marketing capacity, the favorable effect of foreign
exchange and improvement in the overall economy. Sales for our Process Solutions
business increased by 6 percent due primarily to improvement in industrial
production and capital spending and the favorable effect of foreign exchange.
Automation and Control Solutions segment profit increased by 11 percent in
the second quarter of 2004 compared with the second quarter of 2003 due to the
favorable effect of higher sales despite the increased investments in sales and
marketing capacity, principally in our Building Solutions business, and the
adverse impact of pricing pressures principally in our Automation and Control
Products and Process Solutions businesses.
Specialty Materials
2004 2003
----- ----
Net sales $901 $823
% change compared with prior period 9%
Segment profit $ 51 $ 51
% change compared with prior period --%
Specialty Materials sales increased by 9 percent in the second quarter of
2004 compared with the second quarter of 2003 due to higher volumes of 8
percent, the impact of higher prices of 4 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 4 percent. Sales for
our Chemicals business improved by 25 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 Products business were higher by 14
percent as demand for our Spectra fiber, principally from the U.S. military,
remained strong. Sales for our Electronic Materials business also increased by
14 percent driven by improvement in the semiconductor industry.
27
Specialty Materials segment profit in the second quarter of 2004 was flat
compared with the second quarter of 2003 due principally to higher sales volumes
and price increases, offset by higher raw material costs (principally phenol
resulting from increases in benzene prices).
Transportation Systems
2004 2003
------ ----
Net sales $1,065 $925
% change compared with prior period 15%
Segment profit $ 150 $128
% change compared with prior period 17%
Transportation Systems sales increased by 15 percent in the second quarter
of 2004 compared with the second quarter of 2003 due primarily to higher volumes
of 12 percent and the favorable effect of foreign exchange of 4 percent. The
increase in sales for the segment resulted principally from a 23 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 8 percent driven by strong retail demand for our high-end products
and recent introductions of new Autolite, FRAM and Prestone products. Sales for
our Friction Materials business improved by 6 percent principally due to the
favorable effect of foreign exchange.
Transportation Systems segment profit increased by 17 percent in the second
quarter of 2004 compared with the second quarter of 2003 due primarily to the
effect of favorable sales mix and volume growth in our Honeywell Turbo
Technologies business.
B. RESULTS OF OPERATIONS - SIX MONTHS 2004 COMPARED WITH SIX MONTHS 2003
Net Sales
2004 2003
------- -------
Net sales $12,566 $11,148
% change compared with prior period 13%
The increase in net sales in the first six months of 2004 compared with the
first six months of 2003 is attributable to the following:
Acquisitions 2%
Divestitures (2)
Price --
Volume 10
Foreign Exchange 3
---
13%
===
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 six months of 2004 compared with the first six months of 2003 relates to
additional reporting days in the current period's first quarter resulting from
our normal quarterly closing practice. See Note 1 of Notes to Financial
Statements 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.
28
Cost of Goods Sold
2004 2003
-------- -------
Cost of goods sold $10,158 $8,754
Gross margin % 19.2% 21.5%
Gross margin decreased by 2.3 percentage points in the first six months of
2004 compared with the first six months of 2003 due primarily to an increase in
net repositioning, environmental, business impairment and litigation charges of
$255 million and higher pension and other postretirement benefits expense of
$121 million.
Selling, General and Administrative Expenses
2004 2003
------ -------
Selling, general and administrative expenses $1,631 $1,465
Percent of sales 13.0% 13.1%
Selling, general and administrative expenses increased by $166 million, or
11 percent, in the first six months of 2004 compared with the first six months
of 2003 due primarily to an increase in selling expenses of $95 million from
higher sales, and an increase in pension and other postretirement benefits
expense of $23 million.
2004 2003
---- ----
Pension and other postretirement benefits expense included
in cost of goods sold and selling, general and
administrative expenses $322 $178
Increase compared with prior period $144
Pension expense increased by $126 million, or 147 percent, in the first six
months of 2004 compared with the first six 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 $(265) $(31)
Gain on sale of non-strategic businesses of $265 million in the first six
months of 2004 represents the pretax gains on the sales of our Security
Monitoring and VCSEL Optical Products businesses in our Automation and Control
Solutions reportable segment of $212 and $32 million, respectively, and
29
adjustments of $21 million related to businesses sold in prior periods. Gain on
sale of non-strategic businesses of $31 million in the first six months of 2003
represented the pretax gain on the sale of our Engineering Plastics business in
our Specialty Materials reportable segment.
Equity in (Income) Loss of Affiliated Companies
2004 2003
---- ----
Equity in (income) loss of affiliated companies $(24) $(4)
Equity income increased by $20 million in the first six months of 2004
compared with the first six months of 2003 due primarily to an improvement in
earnings from UOP. The current year's equity income includes a charge of $6
million related to repositioning actions at UOP.
Other (Income) Expense
2004 2003
---- -----
Other (income) expense $(28) $(27)
Other income increased by $1 million in the first six months of 2004
compared with the first six months of 2003 due primarily to a decrease in
foreign exchange losses of $25 million in the current period offset by the
inclusion of a gain of $20 million in the prior year related to the settlement
of a patent infringement lawsuit.
Tax Expense
2004 2003
----- -----
Tax expense $ 272 $ 227
Effective tax rate 29.3% 27.7%
The effective tax rate increased by 1.6 percentage points in the first six
months of 2004 compared with the first six months of 2003 due principally to tax
benefits associated with favorable tax audit settlements in the prior year. 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 six months of 2003 also
benefited from tax benefits associated with favorable tax audit settlements.
Net Income
2004 2003
----- -----
Net income $ 656 $ 573
Earnings per share of common stock-- assuming
dilution $0.76 $0.67
The increase of $0.09 per share in the first six months of 2004 compared
with the first six 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.
30
Review of Business Segments
Six Months Ended
June 30,
-----------------
2004 2003
------- -------
Net Sales
Aerospace $ 4,757 $ 4,223
Automation and Control Solutions 3,915 3,554
Specialty Materials 1,757 1,600
Transportation Systems 2,136 1,765
Corporate 1 6
------- -------
$12,566 $11,148
======= =======
Segment Profit
Aerospace $ 674 $ 521
Automation and Control Solutions 402 384
Specialty Materials 99 82
Transportation Systems 293 220
Corporate (77) (66)
------- -------
Total segment profit 1,391 1,141
------- -------
Gain on sale of non-strategic businesses 265 31
Equity in income of affiliated companies 24 4
Other income 28 27
Interest and other financial charges (166) (171)
Pension and other postretirement benefits (expense) (A) (322) (178)
Repositioning, environmental, business impairment
and litigation charges (A) (292) (34)
------- -------
Income before taxes and cumulative effect
of accounting change $ 928 $ 820
======= =======
(A) Amounts included in cost of goods sold and selling, general and
administrative expenses.
Aerospace
2004 2003
------ ------
Net sales $4,757 $4,223
% change compared with prior period 13%
Segment profit $ 674 $ 521
% change compared with prior period 29%
31
Aerospace sales by major customer end-market for the six months ended June
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 18
Regional transport original equipment 3 2 48
Business and general aviation aftermarket 8 8 19
Business and general aviation original equipment 7 7 20
Defense and Space:
Defense and space aftermarket 12 12 11
Defense and space original equipment 31 32 8
--- ---
Total 100% 100% 13%
=== ===
Aerospace sales increased by 13 percent in the first six months of 2004
compared with the first six months of 2003 due to higher volumes of 12 percent
(including the impact of additional reporting days in the period) and an
acquisition of 1 percent. Details by customer end-markets driving the increase
in sales are as follows:
o Air transport aftermarket sales improved substantially in 2004
primarily reflecting a continued increase in maintenance activity
largely related to a 10 percent increase in global flying hours
(driven mainly by the reintroduction of aircraft into service which
were grounded as a result of the SARS epidemic and growth in low cost
carriers) and an increase in upgrades and retrofits of avionics
equipment (ground proximity systems) to meet new regulatory standards.
o Air transport original equipment (OE) sales increased in 2004
primarily reflecting the timing of certain product deliveries.
Overall, aircraft deliveries by our OE customers (primarily Airbus and
Boeing) were slightly higher compared with the prior period.
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.
32
o Defense and space aftermarket sales were higher in 2004 driven by
war-related activities resulting in increases in repair, 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 and continued growth in
precision munitions.
Aerospace segment profit increased by 29 percent in the first six months of
2004 compared with the first six 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 an increase in spending for
information technology systems and higher development expense associated with
new programs.
Automation and Control Solutions
2004 2003
------ ------
Net sales $3,915 $3,554
% change compared with prior period 10%
Segment profit $ 402 $ 384
% change compared with prior period 5%
Automation and Control Solutions sales increased by 10 percent in the first
six months of 2004 compared with the first six months of 2003 due to higher
volumes of 6 percent (including the impact of additional reporting days in the
current period), the favorable effect of foreign exchange of 4 percent and
acquisitions, net of divestitures, of 1 percent, partially offset by the impact
of lower prices of 1 percent. Sales increased by 11 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 11 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.
Sales for our Process Solutions business increased by 7 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 5 percent in
the first six months of 2004 compared with the first six months of 2003 due to
the favorable impact of higher sales across all businesses despite increased
investments in sales and marketing capacity, principally in our Building
Solutions business, and the adverse impact of pricing pressures principally in
our Automation and Control Products and Process Solutions businesses.
Specialty Materials
2004 2003
------ ------
Net sales $1,757 $1,600
% change compared with prior period 10%
Segment profit $ 99 $ 82
% change compared with prior period 21%
Specialty Materials sales increased by 10 percent in the first six months
of 2004 compared with the first six 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 3 percent (mainly in our Nylon System
business) and the favorable effect of foreign exchange of 2 percent, partially
offset by prior year divestitures, net of acquisitions, of 3 percent. Sales for
our Chemicals business improved by 23 percent principally driven by continuing
33
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 Electronic Materials business increased by 20
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 21 percent in the first six
months of 2004 compared with the first six 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. The Nylon System business did not perform
in accordance with our operating plan in the first six months of 2004. Honeywell
continues to evaluate strategic alternatives to maximize the value of this
business.
Transportation Systems
2004 2003
------ ------
Net sales $2,136 $1,765
% change compared with prior period 21%
Segment profit $ 293 $ 220
% change compared with prior period 33%
Transportation Systems sales increased by 21 percent in the first six
months of 2004 compared with the first six months of 2003 due primarily to
higher volumes of 15 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 30
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 10 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. Sales for our Friction Materials business
increased by 12 percent largely due to the favorable effect of foreign exchange.
Transportation Systems segment profit increased by 33 percent in the first
six months of 2004 compared with the first six months of 2003 due primarily to
the effect of favorable sales mix and volume growth in our Honeywell Turbo
Technologies business.
34
Repositioning and Other Charges
A summary of repositioning and other charges follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2004 2003 2004 2003
---- ---- ---- ----
Severance $ 32 $ 22 $ 47 $ 22
Asset impairments 6 -- 10 --
Exit costs 3 3 6 3
Reserve adjustments (16) (23) (23) (23)
---- ---- ---- ----
Total net repositioning charge 25 2 40 2
---- ---- ---- ----
Probable and reasonably estimable
environmental liabilities 161 32 191 32
Business impairment charges 40 -- 40 --
Asbestos related litigation charges, net
of insurance 9 -- 20 --
Write-offs of other assets 7 -- 7 --
---- ---- ---- ----
Total net repositioning and other charges $242 $ 34 $298 $ 34
==== ==== ==== ====
The following table summarizes the pretax distribution of total net
repositioning and other charges by income statement classification:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2004 2003 2004 2003
---- ---- ---- ----
Cost of goods sold $232 $29 $284 $29
Selling, general and administrative
expenses 6 5 8 5
Equity in (income) loss of affiliated
companies 4 -- 6 --
---- --- ---- ---
$242 $34 $298 $34
==== === ==== ===
The following table summarizes the pretax impact of total net repositioning
and other charges by reportable segment:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2004 2003 2004 2003
---- ---- ---- ----
Aerospace $ 3 $(2) $ 4 $(2)
Automation and Control Solutions -- (8) 3 (8)
Specialty Materials 50 7 54 7
Transportation Systems 69 -- 87 --
Corporate 120 37 150 37
---- --- ---- ---
$242 $34 $298 $34
==== === ==== ===
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,
35
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 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 $85 million in 2004 compared with 2003 principally from
planned workforce reductions. Cash expenditures for severance and other exit
costs necessary to execute these actions were $82 million in the six months
ended June 30, 2004 and were funded through operating cash flows. Cash spending
for severance and other exit costs necessary to execute the remaining
repositioning actions will approximate $200 million in 2004 and will be funded
primarily though operating cash flows.
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 relates 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 is 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.
36
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.
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 six months ended
June 30, 2004 and 2003, are summarized as follows:
2004 2003
----- ------
Cash provided by (used for):
Operating activities $ 842 $1,026
Investing activities 84 (308)
Financing activities (621) (296)
Effect of exchange rate changes on cash (23) 183
----- ------
Net increase in cash and cash equivalents $ 282 $ 605
===== ======
Cash provided by operating activities decreased by $184 million during the
first six months of 2004 compared with the first six months of 2003 due
primarily to an increase in net asbestos related liability payments of $364
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 $114
million 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 $165 million.
We made asbestos related payments of $323 million, including legal fees, in
the first six months of 2004 and expect to make additional asbestos related
payments of approximately $370 million during the remainder of 2004. This
estimate is based on our experience in the first six months of 2004 regarding
the timing of submissions of required evidential data by plaintiff firms. We had
$48 million of asbestos related insurance recoveries during the first six months
of 2004. We expect to receive approximately $80 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 provided by investing activities increased by $392 million during the
first six months of 2004 compared with the first six months of 2003 due
primarily to an increase in proceeds from sales of businesses of $304 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 six months of
2004.
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.
37
Cash used for financing activities increased by $325 million during the
first six months of 2004 compared with the first six months of 2003 due
primarily to repurchases of common stock of $292 million in connection with our
stock repurchase program announced in November 2003. Total debt of $5,110
million at June 30, 2004 was $50 million, or 1 percent lower than at December
31, 2003.
Liquidity
See our 2003 Annual Report on Form 10-K for a detailed discussion of our
liquidity. As of June 30, 2004, there have been no material changes in our
liquidity.
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.
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 June 30, 2004,
there has been no material change in this information.
ITEM 4. CONTROLS AND PROCEDURES
Honeywell management, including the Chief Executive Officer and Chief
Financial Officer, conducted an evaluation of the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this
Quarterly Report on Form 10-Q. Based upon that evaluation, the Chief Executive
Officer and the Chief Financial Officer concluded that such disclosure controls
and procedures were effective as of the end of the period covered by this
Quarterly Report on Form 10-Q in alerting them on a timely basis to material
information relating to Honeywell required to be included in Honeywell's
periodic filings under the Exchange Act. There have been no changes that have
materially affected, or are reasonably likely to materially affect, Honeywell's
internal control over financial reporting that have occurred during the period
covered by this Quarterly Report on Form 10-Q.
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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 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.
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 June 30, 2004:
Issuer Purchases of Equity Securities
(c) (d)
Total Maximum Number
Number of (or Approximate
(a) Shares Dollar Value) of
Total (b) Purchased as Shares that May
Number of Average Part of Publicly Yet be Purchased
Shares Price Paid Announced Plans Under Plans or
Period Purchased per Share or Programs Programs
----------------- --------- ---------- ---------------- ----------------
April 2004 420,000 $35.03 420,000 (A)
May 2004 1,430,500 $33.54 1,430,500 (A)
June 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 share repurchases of approximately 10 million shares annually.
We have repurchased 7,670,100 shares during the six months ended June 30,
2004.
39
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. See the Exhibit Index on page 42 of this Quarterly Report on
Form 10-Q.
(b) Reports on Form 8-K. The following reports on Form 8-K were filed
during the three months ended June 30, 2004.
1. On April 21, 2004, a report was filed which furnished, under Item
12, a press release reporting our earnings for the first quarter
of 2004.
40
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: August 2, 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)
41
EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
2 Omitted (Inapplicable)
3(i) Restated Certificate of Incorporation of Honeywell
International Inc. (incorporated by reference to Exhibit 3 (i)
to Honeywell's Form 8-K filed December 3, 1999) modified by
Certificate of Change of Registered Agent and Registered Office
filed with the Secretary of State of Delaware on June 14, 2004
(filed herewith)
4 Omitted (Inapplicable)
10.6 Supplemental Non-Qualified Savings Plan for Highly Compensated
Employees of Honeywell International Inc. and its Subsidiaries,
as amended and restated (filed herewith)
10.7 Honeywell International Inc. Severance Plan for Senior
Executives, as amended (incorporated by reference to Exhibit
10.7 to Honeywell's Form 10-K for the year ended December 31,
2003) (amendment filed herewith)
10.8 Salary and Incentive Award Deferral Plan for Selected Employees
of Honeywell International Inc. and its Affiliates, as amended
and restated (filed herewith)
10.14 Honeywell International Inc. Supplemental Executive Retirement
Plan for Executives in Career Band 6 and Above, as amended and
restated (filed herewith)
10.15 Honeywell Supplemental Defined Benefit Retirement Plan, as
amended and restated (filed herewith)
11 Computation of Per Share Earnings*
12 Computation of Ratio of Earnings to Fixed Charges (filed
herewith)
15 Independent Accountants' Acknowledgment Letter as to the
incorporation of their report relating to unaudited interim
financial statements (filed herewith)
18 Omitted (Inapplicable)
19 Omitted (Inapplicable)
22 Omitted (Inapplicable)
42
EXHIBIT INDEX (continued)
Exhibit Number Description
-------------- -----------
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.
43