UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
---------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 1-8974
Honeywell International Inc.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-2640650
---------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 Columbia Road
P.O. Box 4000
Morristown, New Jersey 07962-2497
-------------------------------------------- ---------------------
(Address of principal executive offices) (Zip Code)
(973)455-2000
------------------------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
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(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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock September 30, 2002
--------------------- ------------------------
$1 par value 821,050,798 shares
Honeywell International Inc.
Index
Page No.
--------
Part I. - Financial Information
---------------------
Item 1. Financial Statements:
Consolidated Balance Sheet -
September 30, 2002 and December 31, 2001 3
Consolidated Statement of Income -
Three and Nine Months Ended September 30, 2002
and 2001 4
Consolidated Statement of Cash Flows -
Nine Months Ended September 30, 2002 and 2001 5
Notes to Financial Statements 6
Report of Independent Accountants 16
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 29
Item 4. Controls and Procedures 30
Part II. - Other Information
-----------------
Item 1. Legal Proceedings 30
Item 6. Exhibits and Reports on Form 8-K 33
Signatures 34
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 35
--------------------
This report contains certain statements that may be deemed
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934. All statements, other than statements of historical fact,
that address activities, events or developments that we or our management
intends, expects, projects, believes or anticipates will or may occur in the
future are forward-looking statements. Such statements are based upon certain
assumptions and assessments made by our management in light of their experience
and their perception of historical trends, current conditions, expected future
developments and other factors they believe to be appropriate. The
forward-looking statements included in this report are also subject to a number
of material risks and uncertainties, including but not limited to economic,
competitive, governmental and technological factors affecting our operations,
markets, products, services and prices. Such forward-looking statements are not
guarantees of future performance and actual results, developments and business
decisions may differ from those envisaged by such forward-looking statements.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
------ --------------------
Honeywell International Inc.
Consolidated Balance Sheet
(Unaudited)
September 30, December 31,
2002 2001
-------- ------------
(Dollars in millions)
ASSETS
Current assets:
Cash and cash equivalents $ 2,002 $ 1,393
Accounts and notes receivable 3,476 3,620
Inventories 3,132 3,355
Other current assets 1,366 1,526
------- -------
Total current assets 9,976 9,894
Investments and long-term receivables 610 466
Property, plant and equipment - net 4,689 4,933
Goodwill - net 5,453 5,441
Other intangible assets - net 947 915
Other assets 2,872 2,577
------- -------
Total assets $24,547 $24,226
======= =======
LIABILITIES
Current liabilities:
Accounts payable $ 1,786 $ 1,862
Short-term borrowings 59 120
Commercial paper - 3
Current maturities of long-term debt 121 416
Accrued liabilities 3,400 3,819
------- -------
Total current liabilities 5,366 6,220
Long-term debt 4,708 4,731
Deferred income taxes 914 875
Postretirement benefit obligations
other than pensions 1,821 1,845
Other liabilities 1,366 1,385
SHAREOWNERS' EQUITY
Capital - common stock issued 958 958
- additional paid-in capital 3,168 3,015
Common stock held in treasury, at cost (4,210) (4,252)
Accumulated other nonowner changes (615) (835)
Retained earnings 11,071 10,284
------- -------
Total shareowners' equity 10,372 9,170
------- -------
Total liabilities and shareowners' equity $24,547 $24,226
======= =======
The Notes to Financial Statements are an integral part of this statement.
3
Honeywell International Inc.
Consolidated Statement of Income
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------- --------------
2002 2001 2002 2001
---- ---- ---- ----
(Dollars in millions,
except per share amounts)
Net sales $5,569 $5,789 $16,419 $17,799
------ ------ ------- -------
Costs, expenses and other
Cost of goods sold 4,236 5,368 12,783 15,408
Selling, general and administrative
expenses 698 803 1,975 2,408
Loss on sale of non-strategic
businesses - net - - 41 -
Equity in (income) loss of affiliated
companies (7) 17 (17) 205
Other (income) expense (4) - (26) (18)
Interest and other financial charges 86 99 261 313
------ ------ ------- -------
5,009 6,287 15,017 18,316
------ ------ ------- -------
Income (loss) before taxes 560 (498) 1,402 (517)
Tax expense (benefit) 148 (190) 155 (300)
------ ------ ------- -------
Net income (loss) $ 412 $ (308) $ 1,247 $ (217)
====== ======= ======= ========
Earnings (loss) per share of common
stock - basic $ 0.50 $(0.38) $ 1.52 $ (0.27)
====== ======= ======= ========
Earnings (loss) per share of common
stock - assuming dilution $ 0.50 $(0.38) $ 1.52 $ (0.27)
====== ======= ======= ========
Cash dividends per share of
common stock $.1875 $.1875 $ .5625 $ .5625
====== ====== ======= =======
The Notes to Financial Statements are an integral part of this statement.
4
Honeywell International Inc.
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
---------------------
2002 2001
---- ----
(Dollars in millions)
Cash flows from operating activities:
Net income (loss) $ 1,247 $ (217)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Loss on sale of non-strategic businesses - net 41 --
Repositioning and other charges 233 2,255
Depreciation 510 546
Goodwill and indefinite-lived intangible assets
amortization -- 153
Undistributed earnings of equity affiliates (30) 11
Deferred income taxes 131 (565)
Net taxes paid on sales of businesses -- (12)
Litton settlement payment net of tax refund (162) --
Other (411) (433)
Changes in assets and liabilities, net of the effects
of acquisitions and divestitures:
Accounts and notes receivable 104 525
Inventories 120 (132)
Other current assets 6 13
Accounts payable (17) (264)
Accrued liabilities (146) (523)
------- -------
Net cash provided by operating activities 1,626 1,357
------- -------
Cash flows from investing activities:
Expenditures for property, plant and equipment (444) (612)
Proceeds from disposals of property, plant and
equipment 22 45
Decrease in investments 91 --
Cash paid for acquisitions (32) (113)
Proceeds from sales of businesses 183 --
Decrease in short-term investments 7 --
------- -------
Net cash (used for) investing activities (173) (680)
------- -------
Cash flows from financing activities:
Net (decrease) in commercial paper (3) (3)
Net increase (decrease) in short-term borrowings (36) 271
Proceeds from issuance of common stock 37 71
Payments of long-term debt (382) (401)
Repurchases of common stock -- (30)
Cash dividends on common stock (460) (457)
------- -------
Net cash (used for) financing activities (844) (549)
------- -------
Net increase in cash and cash equivalents 609 128
Cash and cash equivalents at beginning of year 1,393 1,196
------- -------
Cash and cash equivalents at end of period $ 2,002 $ 1,324
======= =======
The Notes to Financial Statements are an integral part of this statement.
5
Honeywell International Inc.
Notes to Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)
NOTE 1. In the opinion of management, the accompanying unaudited consolidated
financial statements reflect all adjustments, consisting only of normal
adjustments, necessary to present fairly the financial position of Honeywell
International Inc. and its consolidated subsidiaries at September 30, 2002 and
the results of operations for the three and nine months ended September 30, 2002
and 2001 and cash flows for the nine months ended September 30, 2002 and 2001.
The results of operations for the three- and nine-month periods ended September
30, 2002 should not necessarily be taken as indicative of the results of
operations that may be expected for the entire year 2002.
The financial information as of September 30, 2002 should be read in
conjunction with the financial statements contained in our Annual Report on Form
10-K for 2001.
NOTE 2. Accounts and notes receivable consist of the following:
September 30, December 31,
2002 2001
-------- ------------
Trade $3,120 $3,168
Other 505 580
------ ------
3,625 3,748
Less - Allowance for doubtful
accounts (149) (128)
------ ------
$3,476 $3,620
====== ======
NOTE 3. Inventories consist of the following:
September 30, December 31,
2002 2001
-------- -------
Raw materials $ 971 $1,024
Work in process 911 869
Finished products 1,404 1,603
------ ------
3,286 3,496
Less - Progress payments (29) (25)
Reduction to LIFO cost basis (125) (116)
------ ------
$3,132 $3,355
====== ======
NOTE 4. Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142). SFAS
No. 142 requires that goodwill and certain other intangible assets having
indefinite lives no longer be amortized to income, but instead be replaced with
periodic testing for impairment. Intangible assets determined to have definite
lives will continue to be amortized over their useful lives. The amortization
and non-amortization provisions of SFAS No. 142 have been applied to any
goodwill and intangible assets acquired after June 30, 2001. With the adoption
of SFAS No. 142, we reassessed the useful lives and residual values of all
acquired intangible assets to make any necessary amortization period
adjustments. Based on that assessment, an amount related to a trademark in our
automotive consumer products business was determined to be an indefinite-life
intangible asset because it is expected to generate cash flows indefinitely.
There were no other adjustments made to the amortization period or residual
values of other intangible assets. We also completed our goodwill impairment
testing during the
6
three months ended March 31, 2002 and determined that there was no impairment as
of January 1, 2002.
In accordance with SFAS No. 142, prior period amounts were not
restated. A reconciliation of the previously reported net income and earnings
per share to the amounts adjusted for the reduction of amortization expense, net
of the related income tax effect, is as follows:
Three Months Nine Months Year Ended December 31,
Ended Ended -----------------------
September 30, 2001 September 30, 2001 2001 2000 1999
------------------ ------------------ ------ ------ -----
Net Income
----------
Reported net income (loss) $(308) $(217) $ (99) $1,659 $1,541
Amortization adjustment 49 147 196 197 147
------- ------- ------ ------ ------
Adjusted net income (loss) $(259) $ (70) $ 97 $1,856 $1,688
======= ======= ====== ====== ======
Earnings per share of
common stock - basic
----------------------
Reported earnings (loss)
per share - basic $(0.38) $(0.27) $(0.12) $2.07 $ 1.95
Amortization adjustment 0.06 0.18 0.24 0.25 0.19
------- ------- ------ ----- ------
Adjusted earnings (loss)
per share - basic $(0.32) $(0.09) $ 0.12 $2.32 $ 2.14
======= ======= ====== ===== ======
Earnings per share of common
stock - assuming dilution
---------------------------
Reported earnings (loss) per
share - assuming dilution $(0.38) $(0.27) $(0.12) $2.05 $ 1.90
Amortization adjustment 0.06 0.18 0.24 0.24 0.18
------- ------- ------ ----- ------
Adjusted earnings (loss) per
share - assuming dilution $(0.32) $(0.09) $ 0.12 $2.29 $ 2.08
======= ======= ====== ===== ======
Changes in the carrying amount of goodwill for the nine months ended
September 30, 2002 by reportable segment are as follows:
Currency
Acquisitions/ Translation
Dec. 31, 2001 (Divestitures) Adjustment Sept. 30, 2002
-------------- --------------- ------------ --------------
Aerospace $1,595 $ 13 $ 2 $1,610
Automation and
Control Solutions 2,461 (5) 13 2,469
Specialty Materials 861 (20) 8 849
Transportation and
Power Systems 524 - 1 525
------ ----- ------- ------
$5,441 $(12) $ 24 $5,453
====== ===== ======= ======
Amortizable intangible assets at September 30, 2002 and December 31,
2001 consist of investments in long-term contracts and customer relationships of
$652 and $607 million, respectively, and patents, technology and other
finite-lived intangible assets of $258 and $271 million, respectively.
Intangible assets amortization expense was $43 million for the nine months ended
September 30, 2002. Estimated intangible assets amortization expense for the
full year 2002 and for each of the five succeeding years approximates $60
million. Intangible assets with indefinite lives consist of a trademark with a
carrying value of $37 million.
7
NOTE 5. Total nonowner changes in shareowners' equity consist of the following:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ------------------------
2002 2001 2002 2001
---- ---- ---- ----
Net income (loss) $412 $(308) $1,247 $(217)
Foreign exchange translation adjustments (19) 138 227 5
Change in fair value of effective
cash flow hedges 12 2 (7) (2)
---- ---- ------ ----
$405 $(168) $1,467 $(214)
==== ===== ====== =====
NOTE 6. Segment financial data follows:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- --------------------------------
2002 2001(2) 2002 2001(2)
---- ---- ---- ----
Net sales
---------
Aerospace $2,206 $2,372 $ 6,499 $ 7,315
Automation and Control Solutions 1,727 1,780 5,094 5,309
Specialty Materials 797 775 2,425 2,563
Transportation and Power Systems 818 851 2,349 2,577
Corporate 21 11 52 35
------ ------ ------- -------
$5,569 $5,789 $16,419 $17,799
====== ====== ======= =======
Segment profit
--------------
Aerospace $338 $ 393 $1,009 $1,348
Automation and Control Solutions 233 192 660 566
Specialty Materials 10 (19) 52 57
Transportation and Power Systems 92 65 269 178
Corporate (38) (32) (109) (117)
---- ---- ----- -----
635 599 1,881 2,032
---- ---- ----- -----
(Loss) on sale of non-
strategic businesses - net - - (41) -
Equity in income (loss)
of affiliated companies 7 10 30 (5)
Other income 4 - 26 23
Interest and other
financial charges (86) (99) (261) (313)
Repositioning and other
charges (1) - (1,008) (233) (2,254)
---- ------ ------- ------
Income (loss) before taxes $560 $ (498) $ 1,402 $ (517)
==== ====== ======= ======
(1) Included cumulative effect adjustment of $1 million of income
related to adoption of SFAS No. 133 in first quarter of 2001.
(2) Segment profit included the pretax amortization of goodwill and
indefinite-lived intangible assets of $51 and $153 million, for
the three and nine months of 2001, respectively (Aerospace - $15
and $45 million, Automation and Control Solutions - $23 and $69
million, Specialty Materials - $8 and $24 million and
Transportation and Power Systems - $5 and $15 million). Such
amortization expense was excluded from segment profit for the
three and nine months of 2002, in conformity with the provisions
of SFAS No. 142.
8
NOTE 7. The details of the earnings per share calculations for the three- and
nine-month periods ended September 30, 2002 and 2001 follow:
Three Months Nine Months
------------------------------------- --------------------------------------
Per Per
Average Share Average Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
2002
----
Earnings per share of
common stock - basic $412 821.1 $0.50 $1,247 819.2 $1.52
Dilutive securities issuable
in connection with stock
plans 2.2 2.8
----- ----- ---- ----- ----- -----
Earnings per share of
common stock - assuming
dilution $412 823.3 $0.50 $1,247 822.0 $1.52
==== ===== ===== ====== ===== =====
2001
----
Earnings (loss) per share of
common stock - basic $(308) 813.3 $(0.38) $(217) 811.4 $(0.27)
Dilutive securities issuable
in connection with stock
plans - -
----- ----- ---- ----- ----- -----
Earnings (loss) per share of
common stock - assuming
dilution $(308) 813.3 $(0.38) $(217) 811.4 $(0.27)
===== ===== ====== ===== ===== ======
The diluted earnings per share calculation excludes the effect of stock
options when the options' exercise prices exceed the average market price of the
common shares during the period. For the three- and nine-month periods ended
September 30, 2002, the number of stock options not included in the computations
were 44.1 and 42.0 million, respectively. For the three- and nine-month periods
ended September 30, 2001, the number of stock options not included in the
computations were 40.8 and 16.9 million, respectively. These stock options were
outstanding at the end of each of the respective periods. In addition, as a
result of the net loss for the three and nine months ended September 30, 2001,
approximately 3.1 and 4.9 million, respectively, of dilutive securities issuable
in connection with stock plans have been excluded from the calculation of
diluted loss per share because their effect would reduce the loss per share.
9
NOTE 8. A summary of repositioning and other charges follows:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- -------------------------------
2002 2001 2002 2001
---- ---- ---- ----
Severance $ - $ 414 $ 73 $ 727
Asset impairments - 86 68 194
Exit costs - 68 23 95
Adjustments - (31) (43) (59)
--- ---- ---- ------
Total net repositioning charge - 537 121 957
--- ---- ---- ------
Business impairment charges - 145 43 145
Customer claims and settlements
of contract liabilities - 39 29 327
Probable and reasonably estimable
legal and environmental claims - 181 - 343
Write-offs principally related to
asset impairments, including
receivables and inventories - 106 40 323
Equity investment impairment
charges - - - 112
General Electric merger expenses - - - 42
Debt extinguishment loss - - - 6
--- ---- ---- ------
Total other charges - 471 112 1,298
--- ---- ---- ------
Total net repositioning and other
charges $- $1,008 $233 $2,255
== ====== ==== ======
In the second quarter of 2002, we recognized a repositioning charge of
$99 million principally related to costs for the planned shutdown of two
manufacturing plants and related workforce reductions in our Advanced Circuits
business. The planned shutdown of these plants also included charges for asset
impairments principally related to plant and equipment held for sale and capable
of being taken out of service and actively marketed in the period of impairment,
and exit costs mainly related to incremental costs to exit facilities, including
lease termination losses negotiated or subject to reasonable estimation. The
repositioning charge also included workforce reductions in our Automation and
Control Solutions reportable segment and in our UOP process technology joint
venture and costs associated with a shutdown of a product line in our Specialty
Materials reportable segment. Severance costs were related to announced
workforce reductions of approximately 1,300 manufacturing and administrative
positions of which approximately 550 positions have been eliminated as of
September 30, 2002. These repositioning actions are expected to be completed by
March 31, 2003. Also, $31 million of previously established severance accruals
were returned to income in the second quarter of 2002, due principally to higher
than expected voluntary employee attrition resulting in reduced severance
liabilities in our Aerospace and Automation and Control Solutions reportable
segments.
In the first quarter of 2002, we recognized a repositioning charge of
$65 million for the costs of actions designed to reduce our cost structure and
improve our future profitability. Severance costs were related to announced
workforce reductions of approximately 1,100 manufacturing and administrative
positions principally in our Automation and Control Solutions and Specialty
Materials reportable segments of which approximately 1,000 positions have been
eliminated as of September 30, 2002. Asset impairments were principally related
to manufacturing plant and equipment held for sale and capable of being taken
out of service and actively marketed in the period of impairment, mainly in our
Specialty Materials
10
reportable segment. Other exit costs principally consisted of lease termination
losses negotiated or subject to reasonable estimation mainly related to closed
facilities in our Automation and Control Solutions and Specialty Materials
reportable segments. These repositioning actions are expected to be completed by
December 31, 2002. Also, $12 million of previously established severance
accruals were returned to income in the first quarter of 2002, due principally
to higher than expected voluntary employee attrition resulting in reduced
severance liabilities in our Specialty Materials reportable segment.
As disclosed in our 2001 Annual Report on Form 10-K, we recognized
repositioning charges totaling $1,016 million in 2001 ($568 and $1,016 million
were recognized in the three- and nine-month periods ended September 30, 2001,
respectively). The components of the charges included severance costs of $727
million, asset impairments of $194 million and other exit costs of $95 million.
Severance costs were related to announced global workforce reductions of
approximately 20,000 manufacturing and administrative positions across all of
our reportable segments of which approximately 17,300 positions have been
eliminated as of September 30, 2002. These actions are expected to be
substantially completed by December 31, 2002. Also, $119 million of previously
established accruals, mainly for severance, were returned to income in 2001 due
principally to higher than expected voluntary employee attrition resulting in
reduced severance liabilities, principally in our Aerospace and Automation and
Control Solutions reportable segments.
The following table summarizes the status of our total repositioning
costs:
Severance Asset Exit
Costs Impairments Costs Total
---------- ----------- ----------- -----
Balance at December 31, 2001 $484 $ - $113 $ 597
2002 charges 73 68 23 164
2002 usage (280) (68) (73) (421)
Adjustments (43) - - (43)
---- ---- ---- -----
Balance at September 30, 2002 $234 $ - $ 63 $ 297
==== ==== ==== =====
In the second quarter of 2002, we recognized other charges consisting
of customer claims and settlements of contract liabilities of $29 million and
write-offs principally related to asset impairments, including receivables and
inventories, of $40 million. The other charges related mainly to our Advanced
Circuits business, bankruptcy of a customer in our Aerospace reportable segment,
and customer claims in our Industry Solutions business.
In the first quarter of 2002, we recognized charges of $43 million
related to our Friction Materials business and a chemical manufacturing
facility. In the third quarter of 2001, we adopted a plan to dispose of our
Friction Materials business and held discussions with a potential acquirer of
the business. As part of these discussions we continued to evaluate the business
for possible impairment. As a result of this evaluation, we recognized an
impairment charge of $27 million in the first quarter of 2002 related to the
write-down of property, plant and equipment (classified as assets held for
disposal in Other Current Assets). We also recognized an asset impairment charge
of $16 million related to the planned shutdown of a chemical manufacturing
facility in our Specialty Materials reportable segment.
In the third quarter of 2001, we recognized other charges consisting of
probable and reasonably estimable legal and environmental claims of $181
million, write-offs principally related to asset impairments, including
receivables and inventories, of $106 million and loss contracts of $39 million.
Our Friction
11
Materials business was designated as held for disposal, and we recognized an
impairment charge of $145 million related to the write-down of property, plant
and equipment, goodwill and other identifiable intangible assets to their fair
value less costs to sell.
In the second quarter of 2001, we recognized other charges consisting
of $42 million of transaction expenses related to the proposed merger with
General Electric, customer claims and settlements of contract liabilities of
$140 million, probable and reasonably estimable legal and environmental claims
of $162 million, and write-offs principally related to asset impairments,
including receivables and inventories, of $167 million. We also recognized a
charge of $17 million related to an other than temporary decline in value of an
equity investment.
In the first quarter of 2001, we recognized other charges consisting of
customer claims and settlements of contract liabilities of $148 million and
write-offs of customer receivables and inventories of $50 million. We also
recognized charges of $95 million related to an other than temporary decline in
value of an equity investment and an equity investee's loss contract. We also
redeemed our $200 million 5 3/4% dealer remarketable securities due 2011,
resulting in a loss of $6 million.
The following table summarizes the pretax impact of total net
repositioning and other charges by reportable business segment:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2002 2001 2002 2001
---- ---- ---- ----
Aerospace $ - $ 203 $ 6 $ 355
Automation and Control Solutions - 317 61 785
Specialty Materials - 32 132 242
Transportation and Power Systems - 240 30 367
Corporate - 216 4 506
----- ------ ---- ------
$ - $1,008 $233 $2,255
===== ====== ==== ======
The following table summarizes the pretax distribution of total net
repositioning and other charges by income statement classification:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- --------------------------
2002 2001 2002 2001
---- ---- ---- ----
Cost of goods sold $ - $ 916 $216 $1,898
Selling, general and
administrative expenses - 65 4 151
Equity in (income) loss of
affiliated companies - 27 13 200
Other (income) expense - - - 6
----- ------ ---- ------
$ - $1,008 $233 $2,255
===== ====== ==== ======
NOTE 9. In June 2002, we sold Specialty Material's Pharmaceutical Fine Chemicals
(PFC) and Automation and Control's Consumer Products (Consumer Products)
businesses for proceeds of approximately $105 million, mainly cash, resulting in
a pretax loss of $166 million (after-tax gain of $98 million). The businesses
sold had a higher deductible tax basis than book basis which resulted in an
after-tax gain. PFC and Consumer Products had sales of approximately $60 and
$200 million, respectively, in 2001. In March 2002, we completed the disposition
of our Bendix Commercial Vehicle Systems (BCVS) business for approximately $350
million in cash and securities resulting in a pretax gain of $125 million. In
January 2002, we had reached an
12
agreement with Knorr-Bremse AG (Knorr) to transfer control of our global
interests in BCVS to Knorr. BCVS had sales and segment profit of approximately
$375 and $57 million, respectively, in 2001.
NOTE 10. In October 2002, we purchased Invensys Sensor Systems (ISS), a unit of
Invensys plc, for approximately $415 million in cash. ISS is a global supplier
of sensors and controls used in the medical, office automation, aerospace, HVAC,
automotive, off-road vehicle and consumer appliance industries. ISS will become
part of our Control Products business in our Automation and Control Solutions
reportable segment and is expected to strengthen our product offerings in the
high-growth medical and automotive-on-board segments.
NOTE 11. SHAREOWNER LITIGATION - Honeywell and seven of its current and former
officers were named as defendants in several purported class action lawsuits
filed in the United States District Court for the District of New Jersey (the
Securities Law Complaints). The Securities Law Complaints principally allege
that the defendants violated federal securities laws by purportedly making false
and misleading statements and by failing to disclose material information
concerning Honeywell's financial performance, thereby allegedly causing the
value of Honeywell's stock to be artificially inflated. The purported class
period for which damages are sought is December 20, 1999 to June 19, 2000. On
January 15, 2002, the District Court dismissed the consolidated complaint
against four of Honeywell's current and former officers.
We believe that there is no factual or legal basis for the allegations
in the Securities Law Complaints. Although it is not possible at this time to
predict the result of these cases, we expect to prevail. However, an adverse
outcome could be material to our consolidated financial position or results of
operations. As a result of the uncertainty regarding the outcome of this matter,
no provision has been made in our financial statements with respect to this
contingent liability.
ENVIRONMENTAL MATTERS - We are subject to various federal, state and
local government requirements relating to the protection of employee health and
safety and the environment. We believe that, as a general matter, our policies,
practices and procedures are properly designed to prevent unreasonable risk of
environmental damage and personal injury to our employees and employees of our
customers and that our handling, manufacture, use and disposal of hazardous or
toxic substances are in accord with environmental laws and regulations. However,
mainly because of past operations and operations of predecessor companies, we,
like other companies engaged in similar businesses, have incurred remedial
response and voluntary cleanup costs for site contamination and are a party to
lawsuits and claims associated with environmental matters, including past
production of products containing toxic substances. Additional lawsuits, claims
and costs involving environmental matters are likely to continue to arise in the
future.
With respect to environmental matters involving site contamination, we
continually conduct studies, individually at our owned sites, and jointly as a
member of industry groups at non-owned sites, to determine the feasibility of
various remedial techniques to address environmental matters. It is our policy
to record appropriate liabilities for environmental matters when environmental
assessments are made or remedial efforts or damage claim payments are probable
and the costs can be reasonably estimated. With respect to site contamination,
the timing of these accruals is generally no later than the completion of
feasibility studies. We expect that we will be able 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.
13
Although we do not currently possess sufficient information to
reasonably estimate the amounts of liabilities to be recorded upon future
completion of studies, litigation or settlements, and neither the timing nor the
amount of the ultimate costs associated with environmental matters can be
determined, they could be material to our consolidated results of operations.
However, considering our past experience and existing reserves, we do not expect
that these matters will have a material adverse effect on our consolidated
financial position.
ASBESTOS MATTERS - Like more than a thousand other industrial
companies, Honeywell is a defendant in personal injury actions related to
asbestos. Our involvement is limited because we did not mine or produce
asbestos, nor did we make or sell insulation products or other construction
materials that have been identified as the primary cause of asbestos-related
disease in the vast majority of claimants. Rather, we made several products that
contained small amounts of asbestos.
Honeywell's Bendix Friction Materials business manufactured automotive
brake pads that included asbestos in an encapsulated form. There is a limited
group of potential claimants consisting largely of professional brake mechanics.
From 1981 through September 30, 2002, we have resolved approximately 56,000
Bendix claims at an average cost per claim of approximately one thousand two
hundred dollars. Through the second quarter of 2002, Honeywell had no
out-of-pocket costs for these cases since its insurance deductible was satisfied
many years ago. There are currently approximately 50,000 claims pending and we
have no reason to believe that the historic rate of dismissal will change. We
have $2 billion of insurance remaining, which we expect to cover the vast
majority of claims. Although it is impossible to predict the outcome of pending
or future claims, in light of our potential exposure, our prior experience in
resolving these claims, and our insurance coverage, we do not believe that the
Bendix asbestos-related claims will have a material adverse effect on our
consolidated results of operations or financial position.
Another source of claims is refractory products (high temperature
bricks and cement) sold largely to the steel industry in the East and Midwest by
North American Refractories Company (NARCO), a business we owned from 1979 to
1986. Less than 2 percent of NARCO's products contained asbestos.
When we sold the NARCO business in 1986, we agreed to indemnify NARCO
with respect to personal injury claims for products that had been discontinued
prior to the sale (as defined in the sale agreement). NARCO retained all
liability for all other claims. NARCO has resolved approximately 176,000 claims
through January 4, 2002 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. There are approximately 116,000 claims currently pending against
NARCO, including approximately 7 percent in which Honeywell is also named as a
defendant. During the past 18 years, Honeywell and our insurers have contributed
to the cost of the NARCO defense. We have approximately $2 billion of insurance
remaining that can be specifically allocated to NARCO-related liability.
On January 4, 2002, NARCO filed for reorganization under Chapter 11 of
the U.S. Bankruptcy Code. As a result, all of the claims pending against NARCO
are automatically stayed pending the reorganization of NARCO. In addition,
because the claims pending against Honeywell necessarily will impact the
liabilities of NARCO, because the insurance policies held by Honeywell are
essential to a successful NARCO reorganization, and because Honeywell has
offered to commit the value of
14
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 eight 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.
We are involved in ongoing negotiations with counsel representing more
than 75% of the NARCO-related asbestos claimants regarding settlement of all
pending and potential NARCO-related asbestos claims against Honeywell. We
believe that, as part of the NARCO plan of reorganization, a trust will be
established for the benefit of all asbestos claimants, current and future. If
the trust is put in place and approved by the court as fair and equitable,
Honeywell as well as NARCO will be entitled to a permanent channeling injunction
barring all present and future individual actions in state or federal courts and
requiring all asbestos-related claims based on exposure to NARCO products to be
made against the federally-supervised trust. As part of its ongoing settlement
negotiations, Honeywell is seeking to cap its annual contributions to the trust
with respect to future claims at a level that would not have a material impact
on Honeywell's operating cash flows. Although there is no assurance that ongoing
settlement negotiations will be successfully completed or that a plan of
reorganization will be proposed or confirmed, the cost of securing a settlement
which would resolve all future, as well as all pending, NARCO-related asbestos
claims could exceed the value of our existing insurance and reserves plus the
existing NARCO assets. While any such settlement could have a material adverse
impact on our consolidated operating results or operating cash flows in the
periods recognized or paid, we do not believe that it would have a material
adverse impact on our consolidated financial position.
15
Report of Independent Accountants
---------------------------------
To the Board of Directors and Shareowners
of Honeywell International Inc.
We have reviewed the accompanying consolidated balance sheet of Honeywell
International Inc. and its subsidiaries as of September 30, 2002, and the
related consolidated statements of income for each of the three-month and
nine-month periods ended September 30, 2002 and 2001 and the consolidated
statements of cash flows for the nine-month periods ended September 30, 2002 and
2001. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated interim financial statements for them
to be in conformity with accounting principles generally accepted in the United
States of America.
We previously audited in accordance with auditing standards generally accepted
in the United States of America, the consolidated balance sheet as of December
31, 2001, 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 7, 2002, 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, 2001,
is fairly stated in all material respects in relation to the consolidated
balance sheet from which it has been derived.
PricewaterhouseCoopers LLP
Florham Park, NJ
November 13, 2002
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
A. RESULTS OF OPERATIONS - THIRD QUARTER 2002 COMPARED WITH THIRD QUARTER 2001
---------------------------------------------------------------------------
Net sales in the third quarter of 2002 were $5,569 million, a decrease of
$220 million, or 4 percent compared with the third quarter of 2001. The decrease
in sales is attributable to the following:
Acquisitions - %
Divestitures (3)
Price (2)
Volume -
Foreign exchange 1
--
(4)%
===
A discussion of net sales by reportable segment can be found in the Review
of Business Segments section below.
Cost of goods sold was $4,236 million in the third quarter of 2002 compared
with $5,368 million in the third quarter of 2001. Cost of goods sold in the
third quarter of 2001 included $916 million of net repositioning and other
charges and $51 million of amortization of goodwill and indefinite-lived
intangible assets. Such amortization expense was excluded from cost of goods
sold in the third quarter of 2002 in conformity with SFAS No. 142, which we
adopted effective January 1, 2002. Excluding such amortization expense and net
repositioning and other charges, cost of goods sold was $4,401 million in the
third quarter of 2001. The decrease in cost of goods sold of $165 million in the
third quarter of 2002 compared with the third quarter of 2001 resulted primarily
from the benefits of repositioning actions, mainly workforce reductions.
Selling, general and administrative expenses were $698 million in the third
quarter of 2002 compared with $803 million in the third quarter of 2001.
Selling, general and administrative expenses in the third quarter of 2001
included net repositioning and other charges of $65 million. Excluding these
charges, selling, general and administrative expenses were $738 million in the
third quarter of 2001. The decrease in selling, general and administrative
expenses of $40 million in the third quarter of 2002 compared with the third
quarter of 2001 resulted principally from the impact of workforce reductions and
a decline in discretionary spending.
Retirement benefit (pension and other post retirement) plans cost increased
by $25 million in the third quarter of 2002 compared with the third quarter of
2001 due principally to the funding status of our U.S. defined benefit pension
plans (pension plans). Future effects on operating results will principally
depend on pension plan investment performance and other economic conditions. See
Critical Accounting Policies section of this Form 10-Q for a further discussion
of our pension plans.
Equity in (income) loss of affiliated companies was income of $7 million in
the third quarter of 2002 compared with a loss of $17 million in the third
quarter of 2001. Equity in (income) loss of affiliated companies included
repositioning charges of $27 million in the third quarter of 2001. Excluding
these charges, equity in (income) loss of affiliated companies was income of $10
million in the third quarter of 2001. The decrease of $3 million in equity
income in the third quarter of 2002 compared with the third quarter of 2001 was
due mainly to lower earnings from our UOP process technology joint venture.
17
Other (income) expense, $4 million of income in the third quarter of 2002,
compared with no income in the third quarter of 2001. The increase of $4 million
in other income in the third quarter of 2002 compared with the third quarter of
2001 was due mainly to income from the partial settlement of a patent
infringement lawsuit with an automotive supplier ($12 million), higher interest
income ($5 million) and lower minority interests ($3 million) partially offset
by a decrease in benefits from foreign exchange hedging resulting from the
weakness in the U.S. dollar ($18 million).
Interest and other financial charges of $86 million in the third quarter of
2002 decreased by $13 million, or 13 percent compared with the third quarter of
2001 due mainly to lower average debt outstanding and lower average interest
rates in the current period.
The effective tax rate was 26.5 percent in the third quarter of 2002.
Excluding the impact of net repositioning and other charges, the effective tax
rate was 29.5 percent in the third quarter of 2001. The decrease in the
effective tax rate in the third quarter of 2002 compared with the third quarter
of 2001 related mainly to the absence of non-deductible goodwill amortization
expense in the current quarter.
Net income of $412 million, or $0.50 per share, in the third quarter of
2002 compared with a net loss of ($308) million, or ($0.38) per share, in the
third quarter of 2001. Excluding net repositioning and other charges, net income
in the third quarter of 2001 was $668 million, or $0.82 per share, higher than
reported. Net income in the third quarter of 2002 increased by 14 percent
compared with the third quarter of 2001 if the third quarter of 2001 is adjusted
to exclude the impact of net repositioning and other charges. Assuming the
provisions of SFAS No. 142 had been adopted on January 1, 2001, net income in
the third quarter of 2002 would have increased by 1 percent compared with
adjusted net income in the third quarter of 2001.
18
Review of Business Segments
---------------------------
Three Months Ended September 30,
------------------------------------------------------------------------
Net Sales Segment Profit
------------------------------ -------------------------------------
2002 2001 2002 2001 (1)
---- ---- ---- ----
Aerospace $2,206 $2,372 $338 $ 393
Automation and Control Solutions 1,727 1,780 233 192
Specialty Materials 797 775 10 (19)
Transportation and Power Systems 818 851 92 65
Corporate 21 11 (38) (32)
------ ------ --- ----
$5,569 $5,789 635 599
======= ====== --- ----
Equity in income (loss)
of affiliated companies 7 10
Other income 4 -
Interest and other
financial charges (86) (99)
Repositioning and other
charges - (1,008)
---- ------
Income (loss) before taxes $560 $ (498)
==== =======
(1) Segment profit in the third quarter of 2001 included the pretax
amortization of goodwill and indefinite-lived intangible assets
of $51 million (Aerospace - $15 million, Automation and Control
Solutions - $23 million, Specialty Materials - $8 million and
Transportation and Power Systems - $5 million). Such amortization
expense was excluded from segment profit for the third quarter of
2002, in conformity with the provisions of SFAS No. 142.
Aerospace sales of $2,206 million in the third quarter of 2002
decreased by $166 million, or 7 percent compared with the third quarter of 2001.
This decrease resulted mainly from a decline of 23 percent in sales by our
commercial air transport segment due primarily to continued general weakness in
the economy and the financial difficulties being encountered by the airline
industry. Sales to our commercial air transport aftermarket customers declined
by 9 percent due to reduced flying hours by the airlines and the airlines'
attempt to preserve cash by limiting discretionary spending and reducing
capacity. Sales to our air transport original equipment (OE) customers declined
by 45 percent reflecting dramatically lower projected deliveries by our OE
customers (primarily Boeing and Airbus). Sales to our business and general
aviation OE customers decreased by 19 percent reflecting a decline in deliveries
of regional and business jet airplanes. This decrease was partially offset by
higher sales in our defense and space segment, with OE sales up by 12 percent
and aftermarket sales higher by 16 percent, resulting principally from increased
military activity and growth in precision guidance and spare parts. Also, sales
to our business and general aviation aftermarket customers increased by 15
percent largely due to increases in engines maintenance because of higher flying
hours by fractional jets.
Aerospace segment profit of $338 million in the third quarter of 2002
decreased by $55 million, or 14 percent compared with the third quarter of 2001
due mainly to substantially lower sales of higher-margin commercial aftermarket
products such as avionics upgrades and spare parts and contract losses. This
decrease was partially offset by lower costs primarily from workforce reductions
and a decline in discretionary spending.
19
Automation and Control Solutions sales of $1,727 million in the third
quarter of 2002 decreased by $53 million, or 3 percent compared with the third
quarter of 2001. Excluding the effects of foreign exchange and the disposition
of our Consumer Products business, sales decreased by 1 percent. Sales declined
by 5 percent for our Industry Solutions business due to ongoing softness in
industrial production and capital spending. Excluding the effect of foreign
exchange, sales for our Service business also decreased by 2 percent due
primarily to general weakness in the economy. Excluding the effects of foreign
exchange and the disposition of our Consumer Products business, sales for our
Control Products business were flat. Sales for our Security & Fire Solutions
business increased by 2 percent due mainly to increased demand for
security-related products.
Automation and Control Solutions segment profit of $233 million in the
third quarter of 2002 increased by $41 million, or 21 percent compared with the
third quarter of 2001. Excluding goodwill amortization expense in the third
quarter of 2001, segment profit in the third quarter of 2002 increased by 8
percent compared with the third quarter of 2001. All of the segment's businesses
had higher segment profit as the benefits of repositioning and other cost
productivity actions more than offset the impact of higher raw material costs,
pricing pressures and lower sales volume.
Specialty Materials sales of $797 million in the third quarter of 2002
increased by $22 million, or 3 percent compared with the third quarter of 2001.
This increase was due mainly to higher sales for our Electronic Materials, Nylon
System and Specialty Chemicals businesses of 52, 11 and 7 percent, respectively,
due mainly to increased demand. This increase was partially offset by a 40
percent decline in sales for our Advanced Circuits business due to continued
weakness in the telecommunications industry and pricing pressures mainly in our
Nylon System business.
Specialty Materials segment profit of $10 million in the third quarter
of 2002 compared with a segment loss of ($19) million in the third quarter of
2001. This increase of $29 million in segment profit was primarily due to lower
costs resulting from plant shutdowns and workforce reductions and increased
sales volume in our Electronic Materials and Nylon System businesses, partially
offset by the effect of pricing pressures, mainly in our Nylon System business.
Transportation and Power Systems sales of $818 million in the third
quarter of 2002 decreased by $33 million, or 4 percent compared with the third
quarter of 2001. Excluding the effects of foreign exchange and the disposition
of our BCVS business, sales increased by 4 percent. This increase was due mainly
to a 13 percent increase in sales for our Garrett Engine Boosting Systems
business, or 7 percent excluding the impact of foreign exchange, due to higher
build rates for medium and heavy-duty vehicles in Asia and North America. Sales
for our Friction Materials and Consumer Products businesses also increased by 6
and 3 percent, respectively, due to higher demand.
Transportation and Power Systems segment profit of $92 million in the
third quarter of 2002 increased by $27 million, or 42 percent compared with the
third quarter of 2001 due primarily to the effects of cost-structure
improvements, mainly workforce reductions and low-cost sourcing, and higher
sales.
20
B. RESULTS OF OPERATIONS - NINE MONTHS 2002 COMPARED WITH NINE MONTHS 2001
-----------------------------------------------------------------------
Net sales in the first nine months of 2002 were $16,419 million, a decrease
of $1,380 million, or 8 percent compared with the first nine months of 2001. The
decrease in sales is attributable to the following:
Acquisitions - %
Divestitures (2)
Price (2)
Volume (4)
Foreign exchange -
---
(8)%
===
A discussion of net sales by reportable segment can be found in the Review
of Business Segments section below.
Cost of goods sold of $12,783 and $15,408 million included net
repositioning and other charges of $216 and $1,898 million in the first nine
months of 2002 and 2001, respectively. Cost of goods sold in the first nine
months of 2001 also included $153 million of amortization of goodwill and
indefinite-lived intangible assets. Such amortization expense was excluded from
cost of goods sold in the first nine months of 2002 in conformity with SFAS No.
142, which we adopted effective January 1, 2002. Excluding such amortization
expense and net repositioning and other charges, cost of goods sold was $12,567
and $13,357 million in the first nine months of 2002 and 2001, respectively. The
decrease in cost of goods sold of $790 million in the first nine months of 2002
compared with the first nine months of 2001 resulted primarily from
lower sales volume, principally in our Aerospace reportable segment, and
the benefits of repositioning actions, mainly workforce reductions.
Selling, general and administrative expenses of $1,975 and $2,408 million
included net repositioning and other charges of $4 and $151 million in the first
nine months of 2002 and 2001, respectively. Excluding these charges, selling,
general and administrative expenses were $1,971 and $2,257 million in the first
nine months of 2002 and 2001, respectively. The decrease in selling, general and
administrative expenses of $286 million in the first nine months of 2002
compared with the first nine months of 2001 resulted principally from the impact
of workforce reductions and a decline in discretionary spending.
Retirement benefit (pension and other post retirement) plans cost
increased by $123 million in the first nine months of 2002 compared with the
first nine months of 2001 due principally to the funding status of our pension
plans. Future effects on operating results will principally depend on pension
plan investment performance and other economic conditions. See Critical
Accounting Policies section of this Form 10-Q for a further discussion of our
pension plans.
Loss on sale of non-strategic businesses of net $41 million in the first
nine months of 2002 represented the pretax loss on the dispositions of our PFC
and Consumer Products businesses of $166 million partially offset by the pretax
gain on the disposition of our BCVS business of $125 million.
Equity in (income) loss of affiliated companies was income of $17 million
in the first nine months of 2002 compared with a loss of $205 million in the
first
21
nine months of 2001. Equity in (income) loss of affiliated companies included
repositioning and other charges of $13 and $200 million in the first nine months
of 2002 and 2001, respectively. Excluding these charges, equity in (income) loss
of affiliated companies was income of $30 million in the first nine months of
2002 compared with a loss of $5 million in the first nine months of 2001. The
increase of $35 million in equity income in the first nine months of 2002
compared with the first nine months of 2001 was due mainly to exiting a joint
venture in our Aerospace reportable segment ($9 million), an improvement in
earnings from joint ventures in our Specialty Materials and Automation and
Control Solutions reportable segments ($11 million) and the accounting for the
first quarter of 2002 operating results of our BCVS business using the equity
method since control of the business was transferred to Knorr-Bremse AG in
January 2002 ($6 million).
Other (income) expense, $26 million of income in the first nine months of
2002, compared with income of $18 million in the first nine months of 2001. The
first nine months of 2001 included a net provision of $5 million consisting of a
$6 million charge related to the redemption of our $200 million 5 3/4% dealer
remarketable securities and a $1 million credit recognized upon the adoption of
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended. Excluding this net provision,
other (income) expense was $23 million of income in the first nine months of
2001. The increase of $3 million in other income in the first nine months of
2002 compared with the first nine months of 2001 was due mainly to income from
the partial settlement of a patent infringement lawsuit with an automotive
supplier ($12 million), lower minority interests ($11 million) and higher
interest income ($10 million) largely offset by a decrease in benefits from
foreign exchange hedging ($33 million).
Interest and other financial charges of $261 million in the first nine
months of 2002 decreased by $52 million, or 17 percent compared with the first
nine months of 2001 due mainly to lower average debt outstanding and lower
average interest rates in the current period.
The effective tax rate of 11.1 percent in the first nine months of 2002
resulted from the impact of net repositioning and other charges and the loss on
the dispositions of our PFC and Consumer Products businesses. The businesses
sold had a higher deductible tax basis than book basis which resulted in a tax
benefit. The effective tax rate in the first nine months of 2002 also included
the impact of the gain on the disposition of our BCVS business. Excluding the
impact of net repositioning and other charges in both periods and the gain on
the dispositions of our BCVS, PFC and Consumer Products businesses in the first
nine months of 2002, the effective tax rate was 26.5 percent in the first nine
months of 2002 compared with 29.5 percent in the first nine months of 2001. The
decrease in the effective tax rate in the first nine months of 2002 compared
with the first nine months of 2001 related mainly to the absence of
non-deductible goodwill amortization expense in the current nine months.
Net income of $1,247 million, or $1.52 per share, in the first nine months
of 2002 compared with a net loss of ($217) million, or ($0.27) per share, in the
first nine months of 2001. Excluding net repositioning and other charges and the
gain on the dispositions of our BCVS, PFC and Consumer Products businesses, net
income in the first nine months of 2002 was $15 million, or $0.02 per share,
lower than reported. Excluding net repositioning and other charges, net income
in the first nine months of 2001 was $1,442 million, or $1.77 per share, higher
than reported. Net income in the first nine months of 2002 increased by 1
percent compared with the first nine months of 2001 if both periods are adjusted
to exclude the impact of net repositioning and other charges and the gain on the
22
dispositions of our BCVS, PFC and Consumer Products businesses. Assuming the
provisions of SFAS No. 142 had been adopted on January 1, 2001, adjusted net
income in the first nine months of 2002 would have decreased by 10 percent
compared with the first nine months of 2001.
Review of Business Segments
---------------------------
Nine Months Ended September 30,
-------------------------------------------------------------------
Net Sales Segment Profit
------------------------------ -------------------------------
2002 2001 2002 2001(2)
---- ---- ---- ----
Aerospace $ 6,499 $ 7,315 $1,009 $1,348
Automation and Control Solutions 5,094 5,309 660 566
Specialty Materials 2,425 2,563 52 57
Transportation and Power Systems 2,349 2,577 269 178
Corporate 52 35 (109) (117)
------- ------- ----- -----
$16,419 $17,799 1,881 2,032
======= ======= ----- -----
(Loss) on sale of non-
strategic businesses - net (41) -
Equity in income (loss)
of affiliated companies 30 (5)
Other income 26 23
Interest and other
financial charges (261) (313)
Repositioning and other
charges (1) (233) (2,254)
------ ------
Income (loss) before taxes $1,402 $ (517)
====== ======
(1) Included cumulative effect adjustment of $1 million of income
related to adoption of SFAS No. 133 in first quarter of 2001.
(2) Segment profit in the first nine months of 2001 included the
pretax amortization of goodwill and indefinite-lived intangible
assets of $153 million (Aerospace - $45 million, Automation and
Control Solutions - $69 million, Specialty Materials - $24
million and Transportation and Power Systems - $15 million). Such
amortization expense was excluded from segment profit for the
first nine months of 2002, in conformity with the provisions of
SFAS No. 142.
Aerospace sales of $6,499 million in the first nine months of 2002
decreased by $816 million, or 11 percent compared with the first nine months of
2001. This decrease resulted principally from a decline of 25 percent in sales
by our commercial air transport segment due mainly to continued general weakness
in the economy and the financial difficulties being encountered by the airline
industry. Sales to our commercial air transport aftermarket and OE customers
declined by 19 and 34 percent, respectively. Sales to our business and general
aviation aftermarket customers decreased by 2 percent. Sales to our business and
general aviation OE customers decreased by 22 percent reflecting a decline in
deliveries of regional and business jet airplanes. This decrease was partially
offset by higher sales in our defense and space segment, with OE and aftermarket
sales both up by 12 percent resulting mainly from increased military activity.
Aerospace segment profit of $1,009 million in the first nine months of
2002 decreased by $339 million, or 25 percent compared with the first nine
months of 2001 due mainly to substantially lower sales of higher-margin
commercial aftermarket products and services. This decrease was partially offset
by lower
23
costs primarily from workforce reductions and a decline in discretionary
spending.
Automation and Control Solutions sales of $5,094 million in the first
nine months of 2002 decreased by $215 million, or 4 percent compared with the
first nine months of 2001. Sales declined by 9 percent for our Control Products
business and by 4 percent for our Industry Solutions business resulting from
ongoing softness in industrial production and capital spending and the
disposition of our Consumer Products business. Sales for our Service business
also decreased by 3 percent due primarily to general weakness in the economy.
Sales for our Security & Fire Solutions business were basically flat.
Automation and Control Solutions segment profit of $660 million in the
first nine months of 2002 increased by $94 million, or 17 percent compared with
the first nine months of 2001. Excluding goodwill amortization expense in the
first nine months of 2001, segment profit in the first nine months of 2002
increased by 4 percent compared with the first nine months of 2001. This
increase resulted principally from the benefits of repositioning actions, mainly
workforce reductions, across all of the segment's businesses.
Specialty Materials sales of $2,425 million in the first nine months of
2002 decreased by $138 million, or 5 percent compared with the first nine months
of 2001 driven by a 44 percent decline in sales for our Advanced Circuits
business due to weakness in the telecommunications industry and by a 9 percent
decrease in sales for our Performance Fibers business due mainly to weak demand.
Sales for our Fluorines business also declined by 5 percent generally due to
lower demand and pricing pressures. This decrease was partially offset by
slightly higher sales for our Nylon System business due principally to increased
demand.
Specialty Materials segment profit of $52 million in the first nine
months of 2002 decreased by $5 million, or 9 percent compared with the first
nine months of 2001 due primarily to lower sales in our Advanced Circuits and
Fluorines businesses. This decrease was partially offset by lower costs
resulting from plant shutdowns and workforce reductions.
Transportation and Power Systems sales of $2,349 million in the first
nine months of 2002 decreased by $228 million, or 9 percent compared with the
first nine months of 2001. Excluding the effect of the disposition of our BCVS
business, sales increased by 2 percent due mainly to higher sales for our
Garrett Engine Boosting Systems business.
Transportation and Power Systems segment profit of $269 million in the
first nine months of 2002 increased by $91 million, or 51 percent compared with
the first nine months of 2001 due principally to the effects of cost-structure
improvements, mainly workforce reductions and low-cost sourcing.
24
C. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
----------------------------------------------------
Total assets at September 30, 2002 were $24,547 million, an increase of
$321 million, or 1 percent from December 31, 2001.
We manage our businesses to maximize operating cash flows as the
principal source of our liquidity. Cash provided by operating activities of
$1,626 million during the first nine months of 2002 increased by $269 million
compared with the first nine months of 2001 mainly due to higher earnings, an
improvement in working capital performance and lower tax payments. This increase
was partially offset by higher spending for repositioning actions, principally
severance, the final net payment to settle the Litton legal action of $162
million and a contribution to our defined benefit pension plans of $100
million. See Critical Accounting Policies section of this Form 10-Q for a
further discussion of our pension plans.
Cash used for investing activities of $173 million during the first
nine months of 2002 decreased by $507 million compared with the first nine
months of 2001 due mainly to the proceeds from the dispositions of our BCVS, PFC
and Consumer Products businesses and lower capital spending. The decrease in
capital spending reflects our intention to limit capital spending at
non-strategic businesses. This decrease in cash used for investing activities
also reflects the proceeds from the disposition of a cost investment in our
Automation and Control Solutions reportable segment and lower acquisition
spending in 2002.
In October 2002, we purchased Invensys Sensor Systems (ISS), a unit of
Invensys plc, for approximately $415 million in cash. ISS is a global supplier
of sensors and controls used in the medical, office automation, aerospace, HVAC,
automotive, off-road vehicle and consumer appliance industries. ISS will become
part of our Control Products business in our Automation and Control Solutions
reportable segment and is expected to strengthen our product offerings in the
high-growth medical and automotive-on-board segments.
We continuously assess the relative strength of each business in our
portfolio as to strategic fit, market position, profit and cash flow
contribution in order to upgrade our combined portfolio and identify business
units that will most benefit from increased investment. We identify acquisition
candidates that will further our strategic plan and strengthen our existing core
businesses. We also identify business units that do not fit into our long-term
strategic plan based on their market position, relative profitability or growth
potential. These business units are considered for potential divestiture,
restructuring or other repositioning actions subject to regulatory constraints.
Cash used for financing activities of $844 million during the first
nine months of 2002 increased by $295 million compared with the first nine
months of 2001 due mainly to higher net debt repayments in the current period.
Total debt of $4,888 million at September 30, 2002 was $382 million, or 7
percent lower than at December 31, 2001 principally reflecting scheduled
repayments of long-term debt.
25
Repositioning and Other Charges
-------------------------------
A summary of repositioning and other charges follows:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- --------------------------
2002 2001 2002 2001
---- ---- ---- ----
Severance $ - $ 414 $ 73 $ 727
Asset impairments - 86 68 194
Exit costs - 68 23 95
Adjustments - (31) (43) (59)
---- ---- ---- ----
Total net repositioning charge - 537 121 957
---- ---- ---- ---
Business impairment charges - 145 43 145
Customer claims and settlements
of contract liabilities - 39 29 327
Probable and reasonably estimable
legal and environmental claims - 181 - 343
Write-offs principally related to
asset impairments, including
receivables and inventories - 106 40 323
Equity investment impairment
charges - - - 112
General Electric merger expenses - - - 42
Debt extinguishment loss - - - 6
---- ---- ---- -----
Total other charges - 471 112 1,298
---- ---- ---- -----
Total net repositioning and other
charges $ - $1,008 $233 $2,255
==== ====== ==== ======
In the second quarter of 2002, we recognized a repositioning charge of
$99 million principally related to costs for the planned shutdown of two
manufacturing plants and related workforce reductions in our Advanced Circuits
business. The planned shutdown of these plants also included charges for asset
impairments principally related to plant and equipment held for sale and capable
of being taken out of service and actively marketed in the period of impairment,
and exit costs mainly related to incremental costs to exit facilities, including
lease termination losses negotiated or subject to reasonable estimation. The
repositioning charge also included workforce reductions in our Automation and
Control Solutions reportable segment and in our UOP process technology joint
venture and costs associated with a shutdown of a product line in our Specialty
Materials reportable segment. Severance costs were related to announced
workforce reductions of approximately 1,300 manufacturing and administrative
positions of which approximately 550 positions have been eliminated as of
September 30, 2002. These repositioning actions are expected to be completed by
March 31, 2003. Also, $31 million of previously established severance accruals
were returned to income in the second quarter of 2002, due principally to higher
than expected voluntary employee attrition resulting in reduced severance
liabilities in our Aerospace and Automation and Control Solutions reportable
segments.
In the first quarter of 2002, we recognized a repositioning charge of
$65 million for the costs of actions designed to reduce our cost structure and
improve our future profitability. Severance costs were related to announced
workforce reductions of approximately 1,100 manufacturing and administrative
positions principally in our Automation and Control Solutions and Specialty
Materials reportable segments of which approximately 1,000 positions have been
eliminated as of September 30, 2002. Asset impairments were principally related
to manufacturing plant and equipment held for sale and capable of being taken
out of service and
26
actively marketed in the period of impairment, mainly in our Specialty Materials
reportable segment. Other exit costs principally consisted of lease termination
losses negotiated or subject to reasonable estimation mainly related to closed
facilities in our Automation and Control Solutions and Specialty Materials
reportable segments. These repositioning actions are expected to be completed by
December 31, 2002. Also, $12 million of previously established severance
accruals were returned to income in the first quarter of 2002, due principally
to higher than expected voluntary employee attrition resulting in reduced
severance liabilities in our Specialty Materials reportable segment.
As disclosed in our 2001 Annual Report on Form 10-K, we recognized
repositioning charges totaling $1,016 million in 2001 ($568 and $1,016 million
were recognized in the three- and nine-month periods ended September 30, 2001,
respectively). The components of the charges included severance costs of $727
million, asset impairments of $194 million and other exit costs of $95 million.
Severance costs were related to announced global workforce reductions of
approximately 20,000 manufacturing and administrative positions across all of
our reportable segments of which approximately 17,300 positions have been
eliminated as of September 30, 2002. These actions are expected to be
substantially completed by December 31, 2002. Also, $119 million of previously
established accruals, mainly for severance, were returned to income in 2001 due
principally to higher than expected voluntary employee attrition resulting in
reduced severance liabilities, principally in our Aerospace and Automation and
Control Solutions reportable segments.
These repositioning actions are expected to generate incremental pretax
savings of over $800 million in 2002 compared with 2001 principally from planned
workforce reductions and facility consolidations. Cash expenditures for
severance and other exit costs necessary to execute these actions were $353
million in the first nine months of 2002 and were funded through operating cash
flows. Cash spending for severance and other exit costs necessary to execute the
repositioning actions will approximate $500 million in 2002 and will be funded
mainly though operating cash flows.
In the second quarter of 2002, we recognized other charges consisting
of customer claims and settlements of contract liabilities of $29 million and
write-offs principally related to asset impairments, including receivables and
inventories, of $40 million. The other charges related mainly to our Advanced
Circuits business, bankruptcy of a customer in our Aerospace reportable segment,
and customer claims in our Industry Solutions business.
In the first quarter of 2002, we recognized charges of $43 million
related to our Friction Materials business and a chemical manufacturing
facility. In the third quarter of 2001, we adopted a plan to dispose of our
Friction Materials business and held discussions with a potential acquirer of
the business. As part of these discussions we continued to evaluate the business
for possible impairment. As a result of this evaluation, we recognized an
impairment charge of $27 million in the first quarter of 2002 related to the
write-down of property, plant and equipment (classified as assets held for
disposal in Other Current Assets). We also recognized an asset impairment charge
of $16 million related to the planned shutdown of a chemical manufacturing
facility in our Specialty Materials reportable segment.
In the third quarter of 2001, we recognized other charges consisting of
probable and reasonably estimable legal and environmental claims of $181
million, write-offs principally related to asset impairments, including
receivables and inventories, of $106 million and loss contracts of $39 million.
Our Friction Materials business was designated as held for disposal, and we
recognized an
27
impairment charge of $145 million related to the write-down of property, plant
and equipment, goodwill and other identifiable intangible assets to their fair
value less costs to sell.
In the second quarter of 2001, we recognized other charges consisting
of $42 million of transaction expenses related to the proposed merger with
General Electric, customer claims and settlements of contract liabilities of
$140 million, probable and reasonably estimable legal and environmental claims
of $162 million, and write-offs principally related to asset impairments,
including receivables and inventories, of $167 million. We also recognized a
charge of $17 million related to an other than temporary decline in value of an
equity investment.
In the first quarter of 2001, we recognized other charges consisting of
customer claims and settlements of contract liabilities of $148 million and
write-offs of customer receivables and inventories of $50 million. We also
recognized charges of $95 million related to an other than temporary decline in
value of an equity investment and an equity investee's loss contract. We also
redeemed our $200 million 5 3/4% dealer remarketable securities due 2011,
resulting in a loss of $6 million.
The following table summarizes the pretax impact of total net
repositioning and other charges by reportable business segment:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------
2002 2001 2002 2001
---- ---- ---- ----
Aerospace $ - $ 203 $ 6 $ 355
Automation and Control Solutions - 317 61 785
Specialty Materials - 32 132 242
Transportation and Power Systems - 240 30 367
Corporate - 216 4 506
---- ---- ---- ------
$ - $1,008 $233 $2,255
===== ===== ==== ======
We are currently formulating a detailed plan to effect further actions
designed to improve our cost structure and productivity in response to
lower-than-expected sales volumes across many of our businesses. These actions
will include plant shutdowns and a reduction in headcount by an incremental
3,000 to 5,000. The cost of these actions will result in a charge against
earnings in the fourth quarter of 2002. As noted in our discussion of Specialty
Materials and Aerospace segment results, weak chemical and aerospace industry
environments are adversely impacting our operating results. Continued
deterioration in market conditions within these industries may impact the
recoverability of long-lived assets.
28
D. OTHER MATTERS
-------------
Critical Accounting Policies
----------------------------
See Management's Discussion and Analysis of Financial Condition and
Results of Operations of our 2001 Annual Report on Form 10-K for a discussion of
our Critical Accounting Policies. As disclosed in Note 23 to the consolidated
financial statements contained therein, our net periodic pension income is
calculated based upon a number of actuarial assumptions including a long-term
assumed rate of return on plan assets of 10 percent. Since the year 2000, actual
plan asset returns have been less than our assumed rate of return contributing
to unrecognized losses of $1,118 million at December 31, 2001. These
unrecognized losses will be recognized prospectively as a reduction of future
pension income or an increase in future pension expense in accordance with
Statement of Financial Accounting Standards No. 87, "Employers' Accounting for
Pensions" (SFAS No. 87).
Due to the continued poor performance of the equity markets, the value
of our pension fund assets has declined to approximately $9.4 billion at
September 30, 2002. To improve the funded status of our defined benefit pension
plans, we contributed $100 million in cash in the third quarter of 2002. We have
been authorized by our Board of Directors to make voluntary contributions of up
to an additional $900 million of Honeywell stock and cash. We presently
anticipate that a substantial portion of any such contributions would consist of
Honeywell stock. An independent fiduciary will be designated to hold and make
all investment decisions with respect to any contributed shares.
We expect pension income of approximately $140 million in the year
ending December 31, 2002. Based on the current state of the financial markets
and the expected market performance of our pension fund assets in 2002 and our
anticipated reduction in our assumptions regarding the assumed rate of return
on plan assets and discount rate, we would expect pension expense ranging from
approximately $235 to $335 million in the year ending December 31, 2003,
excluding the mitigating impact of any further contributions of stock or cash.
SFAS No. 87 requires recognition of an Additional Minimum Pension
Liability if the fair value of plan assets is less than the accumulated benefit
obligation at the end of the plan year. Based on September 30, 2002 plan asset
values and an anticipated reduction in the discount rate, we would be
required to increase our Additional Minimum Pension Liability which would result
in a decrease in Accumulated Other Nonowner Changes within Shareowners' Equity
of approximately $1.7 billion after-tax at December 31, 2002. Additional
contributions of stock or cash in 2002 could substantially decrease our
Additional Minimum Pension Liability.
Report of Independent Accountants
---------------------------------
The "Report of Independent Accountants'" included herein is not a "report"
or "part of a Registration Statement" prepared or certified by an independent
accountant within the meanings of Section 7 and 11 of the Securities Act of
1933, and the accountants' Section 11 liability does not extend to such report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
See our 2001 Annual Report on Form 10-K (Item 7A). At September 30, 2002,
there has been no material change in this information.
29
ITEM 4. CONTROLS AND PROCEDURES
-----------------------
Within the 90 days prior to the filing of this report, Honeywell
management, including the Chief Executive Officer and Chief Financial Officer,
conducted an evaluation of the effectiveness of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the
Chief Executive Officer and the Chief Financial Officer concluded that such
disclosure controls and procedures are effective in alerting them on a timely
basis to material information relating to Honeywell required to be included in
Honeywell's periodic filings under the Exchange Act. There have been no
significant changes in internal controls, or in factors that could significantly
affect internal controls, subsequent to the date the Chief Executive Officer and
Chief Financial Officer completed their evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
SHAREOWNER LITIGATION - Honeywell and seven of its current and former
officers were named as defendants in several purported class action lawsuits
filed in the United States District Court for the District of New Jersey (the
Securities Law Complaints). The Securities Law Complaints principally allege
that the defendants violated federal securities laws by purportedly making false
and misleading statements and by failing to disclose material information
concerning Honeywell's financial performance, thereby allegedly causing the
value of Honeywell's stock to be artificially inflated. The purported class
period for which damages are sought is December 20, 1999 to June 19, 2000. On
January 15, 2002, the District Court dismissed the consolidated complaint
against four of Honeywell's current and former officers.
We believe that there is no factual or legal basis for the allegations
in the Securities Law Complaints. Although it is not possible at this time to
predict the result of these cases, we expect to prevail. However, an adverse
outcome could be material to our consolidated financial position or results of
operations. As a result of the uncertainty regarding the outcome of this matter,
no provision has been made in our financial statements with respect to this
contingent liability.
ENVIRONMENTAL MATTERS - We are subject to various federal, state and
local government requirements relating to the protection of employee health and
safety and the environment. We believe that, as a general matter, our policies,
practices and procedures are properly designed to prevent unreasonable risk of
environmental damage and personal injury to our employees and employees of our
customers and that our handling, manufacture, use and disposal of hazardous or
toxic substances are in accord with environmental laws and regulations. However,
mainly because of past operations and operations of predecessor companies, we,
like other companies engaged in similar businesses, have incurred remedial
response and voluntary cleanup costs for site contamination and are a party to
lawsuits and claims associated with environmental matters, including past
production of products containing toxic substances. Additional lawsuits, claims
and costs involving environmental matters are likely to continue to arise in the
future.
With respect to environmental matters involving site contamination, we
continually conduct studies, individually at our owned sites, and jointly as a
member of industry groups at non-owned sites, to determine the feasibility of
various remedial techniques to address environmental matters. It is our policy
to record appropriate liabilities for environmental matters when environmental
30
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 that we will be able to fund expenditures for
these matters from operating cash flow. The timing of cash expenditures depends
on a number of factors, including the timing of litigation and settlements of
personal injury and property damage claims, regulatory approval of cleanup
projects, remedial techniques to be utilized and agreements with other parties.
Although we do not currently possess sufficient information to
reasonably estimate the amounts of liabilities to be recorded upon future
completion of studies, litigation or settlements, and neither the timing nor the
amount of the ultimate costs associated with environmental matters can be
determined, they could be material to our consolidated results of operations.
However, considering our past experience and existing reserves, we do not expect
that these matters will have a material adverse effect on our consolidated
financial position.
ASBESTOS MATTERS - Like more than a thousand other industrial
companies, Honeywell is a defendant in personal injury actions related to
asbestos. Our involvement is limited because we did not mine or produce
asbestos, nor did we make or sell insulation products or other construction
materials that have been identified as the primary cause of asbestos-related
disease in the vast majority of claimants. Rather, we made several products that
contained small amounts of asbestos.
Honeywell's Bendix Friction Materials business manufactured automotive
brake pads that included asbestos in an encapsulated form. There is a limited
group of potential claimants consisting largely of professional brake mechanics.
From 1981 through September 30, 2002, we have resolved approximately 56,000
Bendix claims at an average cost per claim of approximately one thousand two
hundred dollars. Through the second quarter of 2002, Honeywell had no
out-of-pocket costs for these cases since its insurance deductible was satisfied
many years ago. There are currently approximately 50,000 claims pending and we
have no reason to believe that the historic rate of dismissal will change. We
have $2 billion of insurance remaining, which we expect to cover the vast
majority of claims. Although it is impossible to predict the outcome of pending
or future claims, in light of our potential exposure, our prior experience in
resolving these claims, and our insurance coverage, we do not believe that the
Bendix asbestos-related claims will have a material adverse effect on our
consolidated results of operations or financial position.
Another source of claims is refractory products (high temperature
bricks and cement) sold largely to the steel industry in the East and Midwest by
North American Refractories Company (NARCO), a business we owned from 1979 to
1986. Less than 2 percent of NARCO's products contained asbestos.
When we sold the NARCO business in 1986, we agreed to indemnify NARCO
with respect to personal injury claims for products that had been discontinued
prior to the sale (as defined in the sale agreement). NARCO retained all
liability for all other claims. NARCO has resolved approximately 176,000 claims
through January 4, 2002 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. There are approximately 116,000 claims currently pending against
NARCO, including approximately 7 percent in which Honeywell is also named as a
defendant. During the past 18 years, Honeywell and our insurers have contributed
to the cost of the
31
NARCO defense. We have approximately $2 billion of insurance remaining that can
be specifically allocated to NARCO-related liability.
On January 4, 2002, NARCO filed for reorganization under Chapter 11 of
the U.S. Bankruptcy Code. As a result, all of the claims pending against NARCO
are automatically stayed pending the reorganization of NARCO. In addition,
because the claims pending against Honeywell necessarily will impact the
liabilities of NARCO, because the insurance policies held by Honeywell are
essential to a successful NARCO reorganization, and because Honeywell has
offered to commit the value of those policies to the reorganization, the
bankruptcy court has temporarily enjoined any claims against Honeywell, current
or future, related to NARCO. Although the stay has been extended eight 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.
We are involved in ongoing negotiations with counsel representing more
than 75% of the NARCO-related asbestos claimants regarding settlement of all
pending and potential NARCO-related asbestos claims against Honeywell. We
believe that, as part of the NARCO plan of reorganization, a trust will be
established for the benefit of all asbestos claimants, current and future. If
the trust is put in place and approved by the court as fair and equitable,
Honeywell as well as NARCO will be entitled to a permanent channeling injunction
barring all present and future individual actions in state or federal courts and
requiring all asbestos-related claims based on exposure to NARCO products to be
made against the federally-supervised trust. As part of its ongoing settlement
negotiations, Honeywell is seeking to cap its annual contributions to the trust
with respect to future claims at a level that would not have a material impact
on Honeywell's operating cash flows. Although there is no assurance that ongoing
settlement negotiations will be successfully completed or that a plan of
reorganization will be proposed or confirmed, the cost of securing a settlement
which would resolve all future, as well as all pending, NARCO-related asbestos
claims could exceed the value of our existing insurance and reserves plus the
existing NARCO assets. While any such settlement could have a material adverse
impact on our consolidated operating results or operating cash flows in the
periods recognized or paid, we do not believe that it would have a material
adverse impact on our consolidated financial position.
32
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits. See the Exhibit Index on page 39 of this Form 10-Q
Quarterly Report.
(b) Reports on Form 8-K. The following reports on Form 8-K were filed
during the three months ended September 30, 2002.
1. On August 7, 2002, a report was filed reporting that each of the
Principal Executive Officer, David M. Cote, and Principal
Financial Officer, Richard F. Wallman, of Honeywell International
Inc. submitted to the SEC sworn statements pursuant to SEC Order
No. 4-460.
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Honeywell International Inc.
Date: November 13, 2002 By: /s/ John J. Tus
------------------------
John J. Tus
Vice President and Controller
(on behalf of the Registrant
and as the Registrant's
Principal Accounting Officer)
34
CERTIFICATION PURSUANT TO
SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, David M. Cote, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Honeywell
International Inc;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
35
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 13, 2002 By: /s/ David M. Cote
------------------------------
David M. Cote
Chief Executive Officer
36
CERTIFICATION PURSUANT TO
SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Richard F. Wallman, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Honeywell
International Inc;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
37
6. The registrant's certifying officers and I have indicated in this quarterly
report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002 By: /s/ Richard F. Wallman
------------------------------
Richard F. Wallman
Chief Financial Officer
38
EXHIBIT INDEX
Exhibit Number Description
2 Omitted (Inapplicable)
3 Omitted (Inapplicable)
4 Omitted (Inapplicable)
10 Omitted (Inapplicable)
11 Computation of Per Share Earnings*
12 Computation of Ratio of Earnings to Fixed Charges
(filed herewith)
15 Independent Accountants' Acknowledgment Letter as to the
incorporation of their report relating to unaudited interim
financial statements (filed herewith)
18 Omitted (Inapplicable)
19 Omitted (Inapplicable)
22 Omitted (Inapplicable)
23 Omitted (Inapplicable)
24 Omitted (Inapplicable)
99.1 Certification of Principal Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (filed herewith)
99.2 Certification of Principal Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (filed herewith)
--------------
* Data required by Statement of Financial Accounting Standards No. 128,
"Earnings per Share", is provided in Note 7 to the condensed consolidated
financial statements in this report.
39