Environmental liabilities are included in the following balance sheet accounts:
Although we do not currently possess sufficient information to reasonably estimate the amounts of liabilities to be recorded upon future completion of studies, litigation or settlements, and neither the timing nor the amount of the ultimate costs associated with environmental matters can be determined, they could be material to our consolidated results of operations or operating cash flows in the periods recognized or paid. However, considering our past experience and existing reserves, we do not expect that these environmental matters will have a material adverse effect on our consolidated financial position.
The above-referenced site is the most significant of the 21 sites located in Hudson County, New Jersey that are the subject of an Administrative Consent Order (ACO) entered into with the New Jersey Department of Environmental Protection (NJDEP) in 1993 (the “Honeywell ACO Sites”). Remedial investigations and activities consistent with the ACO have also been conducted and are underway at the other Honeywell ACO Sites. We have recorded reserves for the Honeywell ACO Sites where appropriate under the accounting policy described above.
On May 3, 2005, NJDEP filed a lawsuit in New Jersey Superior Court against Honeywell and two other companies seeking declaratory and injunctive relief, unspecified damages, and the reimbursement of unspecified total costs relating to sites in New Jersey allegedly contaminated with chrome ore processing residue. The claims against Honeywell relate to the activities of a predecessor company which ceased its New Jersey manufacturing operations in the mid-1950’s. Honeywell and the two other companies have agreed to settle this litigation with NJDEP, subject to Court approval. Under the settlement, Honeywell would pay $5 million of NJDEP’s past costs, as well as accept sole responsibility to remediate 24 of the 53 “Publicly Funded Sites” (i.e., those sites for which none of the three companies had previously accepted responsibility). Honeywell would also bear 50% of the costs at another 10 Publicly Funded Sites. We have recorded reserves for the Publicly Funded Sites where appropriate under the accounting policy described above.
We have entered into court-approved settlements of litigation filed in federal court against Honeywell and other landowners seeking the cleanup of chrome residue at groups of properties known as Study Areas 5, 6 South and 6 North of the Honeywell ACO Sites. The required remedial actions are consistent with our recorded reserves.
Honeywell International Inc.
Notes to Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)
negotiated a Consent Decree with the MPA and Maryland Department of the Environment (“MDE”) with respect to the investigation and remediation of the DMT facility. The Consent Decree is being challenged in federal court by BUILD, a Baltimore community group, together with a local church and two individuals (collectively “BUILD”). In October 2007, the Court dismissed with prejudice BUILD’s state law claims and dismissed without prejudice BUILD’s RCRA claims regarding neighborhoods near the DMT facility. In August 2008, the Court held a hearing on the Company’s motion to dismiss BUILD’s remaining claims on the grounds that MDE is diligently prosecuting the investigation and remediation of the DMT. We are awaiting the Court’s decision. We do not believe that this matter will have a material adverse impact on our consolidated financial position or operating cash flows. Given the scope and complexity of this project, it is possible that the cost of remediation, when determinable, could have a material adverse impact on our results of operations in the periods recognized.
Onondaga Lake, Syracuse, NY—We are implementing a combined dredging/capping remedy of Onondaga Lake pursuant to a consent decree approved by the United States District Court for the Northern District of New York in January 2007. We have accrued for our estimated cost of remediating Onondaga Lake based on currently available information and analysis performed by our engineering consultants. Honeywell is also conducting remedial investigations and activities at other sites in Syracuse. We have recorded reserves for these investigations and activities where appropriate under the accounting policy described above.
Honeywell has entered into a cooperative agreement with potential natural resource trustees to assess alleged natural resource damages relating to this site. It is not possible to predict the outcome or duration of this assessment, or the amounts of, or responsibility for, any damages.
Asbestos Matters
Like many other industrial companies, Honeywell is a defendant in personal injury actions related to asbestos. We did not mine or produce asbestos, nor did we make or sell insulation products or other construction materials that have been identified as the primary cause of asbestos related disease in the vast majority of claimants. Products containing asbestos previously manufactured by Honeywell or by previously owned subsidiaries primarily fall into two general categories: refractory products and friction products.
Refractory Products—Honeywell owned North American Refractories Company (NARCO) from 1979 to 1986. NARCO produced refractory products (high temperature bricks and cement) that were sold largely to the steel industry in the East and Midwest. Less than 2 percent of NARCO’S products contained asbestos.
When we sold the NARCO business in 1986, we agreed to indemnify NARCO with respect to personal injury claims for products that had been discontinued prior to the sale (as defined in the sale agreement). NARCO retained all liability for all other claims. On January 4, 2002, NARCO filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code.
As a result of the NARCO bankruptcy filing, all of the claims pending against NARCO are automatically stayed pending the reorganization of NARCO. In addition, the bankruptcy court enjoined both the filing and prosecution of NARCO-related asbestos claims against Honeywell. The stay has remained in effect continuously since January 4, 2002. 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 (which amount was paid in December 2005 following the filing of NARCO’s Third Amended Plan of Reorganization), and to pay NARCO’s parent company $40 million, and to forgive any outstanding NARCO indebtedness to Honeywell, upon the effective date of the plan of reorganization.
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, pursuant to Trust Distribution Procedures negotiated with the NARCO Asbestos Claimants Committee and the Court-appointed legal representative for future asbestos claimants. 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
25
Honeywell International Inc.
Notes to Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)
requiring all asbestos related claims based on exposure to NARCO products to be made against the federally-supervised trust. Honeywell has reached agreement with the representative for future NARCO claimants and the Asbestos Claimants Committee 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.
In November 2007, the Bankruptcy Court entered an amended order confirming the NARCO Plan without modification and approving the 524(g) trust and channeling injunction in favor of NARCO and Honeywell. In December 2007, certain insurers filed an appeal of the Bankruptcy Court Order in the United States District Court for the Western District of Pennsylvania. The District Court affirmed the Bankruptcy Court Order in July 2008. In August 2008, insurers filed a notice of appeal to the Third Circuit Court of Appeals. The appeal is fully briefed, oral argument took place on May 21, 2009, and the matter was submitted for decision. In connection with the settlement of an insurance coverage litigation matter, the insurer appellants withdrew their appeal regarding the NARCO Plan. On August 3, 2010 the Third Circuit Court of Appeals entered an order formally dismissing the NARCO appeal. The NARCO Plan of Reorganization cannot become effective, however, until the resolution of an appeal of the Chapter 11 proceedings of NARCO affiliates. The Third Circuit reheard this appeal en banc on October 13, 2010. It is not possible to predict when the Court will rule on this appeal. We expect that the stay enjoining litigation against NARCO and Honeywell will remain in effect until the effective date of the NARCO Plan of Reorganization.
Our consolidated financial statements reflect an estimated liability for settlement of pending and future NARCO-related asbestos claims of $1,126 million and $1,128 million as of September 30, 2010 and December 31, 2009, respectively. The estimated liability for pending claims is based on terms and conditions, including evidentiary requirements, in definitive agreements with approximately 260,000 current claimants, and an estimate of the unsettled claims pending as of the time NARCO filed for bankruptcy protection. Substantially all settlement payments with respect to current claims have been made. Approximately $100 million of payments due pursuant to these settlements is due only upon establishment of the NARCO trust.
The estimated liability for future claims represents the estimated value of future asbestos related bodily injury claims expected to be asserted against NARCO through 2018 and the aforementioned obligations to NARCO’s parent. In light of the uncertainties inherent in making long-term projections we do not believe that we have a reasonable basis for estimating asbestos claims beyond 2018. The estimate is based upon the disease criteria and payment values contained in the NARCO Trust Distribution Procedures negotiated with the NARCO Asbestos Claimants Committee and the NARCO future claimants’ representative. Honeywell projected the probable number and value, including trust claim handling costs, of asbestos related future liabilities based upon experience of asbestos claims filing rates in the tort system and in certain operating asbestos trusts, and the claims experience in those forums. The valuation methodology also includes an analysis of the population likely to have been exposed to asbestos containing products, epidemiological studies to estimate the number of people likely to develop asbestos related diseases, NARCO claims filing history, the pending inventory of NARCO asbestos related claims and payment rates expected to be established by the NARCO trust. This methodology used to estimate the liability for future claims has been commonly accepted by numerous courts and resulted in a range of estimated liability for future claims of $743 to $961 million. We believe that no amount within this range is a better estimate than any other amount and accordingly, we have recorded the minimum amount in the range.
As of September 30, 2010 and December 31, 2009, our consolidated financial statements reflect an insurance receivable corresponding to the liability for settlement of pending and future NARCO-related asbestos claims of $724 and $831 million, respectively. This coverage reimburses Honeywell for portions of the costs incurred to settle NARCO related claims and court judgments as well as defense costs and is provided by a large number of insurance policies written by dozens of insurance companies in both the domestic insurance market and the London excess market. At September 30, 2010, a significant portion of this coverage is with insurance companies with whom we have agreements to pay full policy limits based on corresponding Honeywell claims costs. We conduct analyses to determine the amount of insurance that we estimate is probable of recovery in relation to payment of current and estimated future claims. While the substantial majority of our insurance carriers are solvent, some of our individual carriers are insolvent, which has been considered in our analysis of probable
26
Honeywell International Inc.
Notes to Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)
recoveries. We made judgments concerning insurance coverage that we believe are reasonable and consistent with our historical dealings with our insurers, our knowledge of any pertinent solvency issues surrounding insurers and various judicial determinations relevant to our insurance programs.
In the second quarter of 2006, Travelers Casualty and Insurance Company (“Travelers”) filed a lawsuit against Honeywell and other insurance carriers in the Supreme Court of New York, County of New York, disputing obligations for NARCO-related asbestos claims under high excess insurance coverage issued by Travelers and other insurance carriers. In July 2010, the Company entered into a settlement agreement resolving all asbestos coverage issues with certain plaintiffs. Approximately $200 million of unsettled coverage under these policies is included in our NARCO-related insurance receivable at September 30, 2010. Honeywell believes it is entitled to the coverage at issue and expects to prevail in this matter. In the third quarter of 2007, Honeywell prevailed on a critical choice of law issue concerning the appropriate method of allocating NARCO-related asbestos liabilities to triggered policies. The plaintiffs appealed and the trial court’s ruling was upheld by the intermediate appellate court in the second quarter of 2009. Plaintiffs’ further appeal to the New York Court of Appeals, the highest court in New York, was denied in October 2009. A related New Jersey action brought by Honeywell has been dismissed, but all coverage claims against plaintiffs have been preserved in the New York action. Based upon (i) our understanding of relevant facts and applicable law, (ii) the terms of insurance policies at issue, (iii) our experience on matters of this nature, and (iv) the advice of counsel, we believe that the amount due from Travelers and other insurance carriers is probable of recovery. While Honeywell expects to prevail in this matter, an adverse outcome could have a material impact on our results of operations in the period recognized but would not be material to our consolidated financial position or operating cash flows.
Projecting future events is subject to many uncertainties that could cause the NARCO related asbestos liabilities or assets to be higher or lower than those projected and recorded. There is no assurance that the plan of reorganization will become final, that insurance recoveries will be timely or whether there will be any NARCO related asbestos claims beyond 2018. Given the inherent uncertainty in predicting future events, we review our estimates periodically, and update them based on our experience and other relevant factors. Similarly, we will reevaluate our projections concerning our probable insurance recoveries in light of any changes to the projected liability or other developments that may impact insurance recoveries.
Friction Products—Honeywell’s Bendix friction materials (Bendix) business manufactured automotive brake parts that contained chrysotile asbestos in an encapsulated form. Existing and potential claimants consist largely of individuals who allege exposure to asbestos from brakes from either performing or being in the vicinity of individuals who performed brake replacements.
From 1981 through September 30, 2010, we have resolved approximately 154,000 Bendix related asbestos claims. We had 130 trials resulting in favorable verdicts and 17 trials resulting in adverse verdicts. Four of these adverse verdicts were reversed on appeal, five verdicts were vacated on post-trial motions, three claims were settled and the remaining five have been or will be appealed. The claims portfolio was reduced in 2009 due to settlements, dismissals and the elimination of significantly aged (i.e., pending for more than six years), inactive (including claims for which the required medical and exposure showings have not been made) and duplicate claims.
The following tables present information regarding Bendix related asbestos claims activity:
27
Honeywell International Inc.
Notes to Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)
| | | | | | | | | | |
| | Nine Months Ended | | Year Ended | |
| | September 30, | | December 31, | |
Claims Activity | | 2010 | | 2009 | | 2008 | |
| |
| |
| |
| |
Claims Unresolved at the beginning of period | | | 19,940 | | | 51,951 | | | 51,658 | |
Claims Filed during the period | | | 1,964 | | | 2,697 | | | 4,003 | |
Claims Resolved and Reactivated during the period(a) | | | (578 | ) | | (34,708 | ) | | (3,710 | ) |
| |
|
| |
|
| |
|
| |
Claims Unresolved at the end of period | | | 21,326 | | | 19,940 | | | 51,951 | |
| |
|
| |
|
| |
|
| |
(a) Includes approximately 1,400 claims previously classified as inactive (91% non-malignant and accrued liability of approximately $2.8 million) which were activated during the current period.
| | | | | | | | | | |
| | | | | | | |
| | September 30, | | December 31, | |
Disease Distribution of Unresolved Claims | | 2010 | | 2009 | | 2008 | |
| |
| |
| |
| |
Mesothelioma and Other Cancer Claims | | | 4,994 | | | 4,727 | | | 5,575 | |
Other Claims | | | 16,332 | | | 15,213 | | | 46,376 | |
| |
|
| |
|
| |
|
| |
Total Claims | | | 21,326 | | | 19,940 | | | 51,951 | |
| |
|
| |
|
| |
|
| |
Honeywell has experienced average resolution values per claim excluding legal costs as follows:
| | | | | | | | | | | | | |
| | Year Ended December 31, | |
| |
| |
| | 2009 | | 2008 | | 2007 | | 2006 | |
| |
| |
| |
| |
| |
| | (in whole dollars) | |
Malignant claims | | $ | 50,000 | | $ | 65,000 | | $ | 33,000 | | $ | 33,000 | |
Nonmalignant claims | | $ | 200 | | $ | 1,500 | | $ | 500 | | $ | 250 | |
It is not possible to predict whether resolution values for Bendix related asbestos claims will increase, decrease or stabilize in the future.
Our consolidated financial statements reflect an estimated liability for resolution of pending and future Bendix related asbestos claims of $589 and $566 million at September 30, 2010 and December 31, 2009, respectively. Our liability for the estimated cost of future Bendix related asbestos claims is based on historic claims filing experience, disease classifications, expected resolution values, and historic dismissal rates. In the fourth quarter of each year, we update our analysis of the estimated cost of future Bendix related asbestos claims. We have valued Bendix pending and future claims using average resolution values for the previous four years. Changes in the tort system, which began in 2006, refocused asbestos litigation on mesothelioma cases, making the four year period 2006 through 2009 representative for forecasting purposes. We will continue to update the expected resolution values used to estimate the cost of pending and future Bendix claims during the fourth quarter each year.
The estimated liability for future claims represents the estimated value of future asbestos related bodily injury claims expected to be asserted against Bendix over the next five years. In light of the uncertainties inherent in making long-term projections, as well as certain factors unique to friction product asbestos claims, we do not
28
Honeywell International Inc.
Notes to Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)
believe that we have a reasonable basis for estimating asbestos claims beyond the next five years. The estimate is based upon Bendix historical experience in the tort system for the four years ended December 31, 2009 with respect to claims filing and resolution values. The methodology used to estimate the liability for future claims has been commonly accepted by numerous courts. It is similar to that used to estimate the future NARCO related asbestos claims liability.
Honeywell currently has approximately $1,900 million of insurance coverage remaining with respect to pending and potential future Bendix related asbestos claims, of which $146 and $172 million are reflected as receivables in our consolidated balance sheet at September 30, 2010 and December 31, 2009, respectively. This coverage is provided by a large number of insurance policies written by dozens of insurance companies in both the domestic insurance market and the London excess market. Insurance receivables are recorded in the financial statements simultaneous with the recording of the liability for the estimated value of the underlying asbestos claims. The amount of the insurance receivable recorded is based on our ongoing analysis of the insurance that we estimate is probable of recovery. This determination is based on our analysis of the underlying insurance policies, our historical experience with our insurers, our ongoing review of the solvency of our insurers, our interpretation of judicial determinations relevant to our insurance programs, and our consideration of the impacts of any settlements reached with our insurers. Insurance receivables are also recorded when structured insurance settlements provide for future fixed payment streams that are not contingent upon future claims or other events. Such amounts are recorded at the net present value of the fixed payment stream.
On a cumulative historical basis, Honeywell has recorded insurance receivables equal to approximately 41 percent of the value of the underlying asbestos claims recorded. However, because there are gaps in our coverage due to insurance company insolvencies, certain uninsured periods, and insurance settlements, this rate is expected to decline for any future Bendix related asbestos liabilities that may be recorded. Future recoverability rates may also be impacted by numerous other factors, such as future insurance settlements, insolvencies and judicial determinations relevant to our coverage program, which are difficult to predict. Assuming continued defense and indemnity spending at current levels, we estimate that the cumulative recoverability rate could decline over the next five years to approximately 35 percent.
Honeywell believes it has sufficient insurance coverage and reserves to cover all pending Bendix related asbestos claims and Bendix related asbestos claims estimated to be filed within the next five years. Although it is impossible to predict the outcome of either pending or future Bendix related asbestos claims, we do not believe that such claims would have a material adverse effect on our consolidated financial position in light of our insurance coverage and our prior experience in resolving such claims. If the rate and types of claims filed, the average resolution value of such claims and the period of time over which claim settlements are paid (collectively, the “Variable Claims Factors”) do not substantially change, Honeywell would not expect future Bendix related asbestos claims to have a material adverse effect on our results of operations or operating cash flows in any fiscal year. No assurances can be given, however, that the Variable Claims Factors will not change.
Refractory and Friction Products— The following tables summarize information concerning NARCO and Bendix asbestos related balances:
| | | | | | | | | | | |
Asbestos Related Liabilities | | | | | | | | | | | |
| | | | | | | | |
| | Bendix | | NARCO | | Total | |
| |
| |
| |
| |
December 31, 2009 | | $ | 566 | | $ | 1,128 | | $ | 1,694 | |
Accrual for update to estimated liability | | | 133 | | | 3 | | | 136 | |
Asbestos related liability payments | | | (110 | ) | | (5 | ) | | (115 | ) |
| |
|
| |
|
| |
|
| |
September 30, 2010 | | $ | 589 | | $ | 1,126 | | $ | 1,715 | |
| |
|
| |
|
| |
|
| |
29
Honeywell International Inc.
Notes to Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)
| | | | | | | | | | | |
Insurance Recoveries for Asbestos Related Liabilities | | | | | | | | | | | |
| | | | | | | | | | |
| | Bendix | | NARCO | | Total | |
| |
| |
| |
| |
December 31, 2009 | | $ | 172 | | $ | 831 | | $ | 1,003 | |
Probable insurance recoveries related to estimated liability | | | 14 | | | — | | | 14 | |
Insurance receipts for asbestos related liabilities | | | (40 | ) | | (94 | ) | | (134 | ) |
Insurance receivables settlements and write-offs | | | — | | | (13 | ) | | (13 | ) |
| |
|
| |
|
| |
|
| |
September 30, 2010 | | $ | 146 | | $ | 724 | | $ | 870 | |
| |
|
| |
|
| |
|
| |
NARCO and Bendix asbestos related balances are included in the following balance sheet accounts:
| | | | | | | |
| | September 30,
2010 | | December 31,
2009 | |
| |
| |
| |
Other current assets | | $ | 40 | | $ | 62 | |
Insurance recoveries for asbestos related liabilities | | | 830 | | | 941 | |
| |
|
| |
|
| |
| | $ | 870 | | $ | 1,003 | |
| |
|
| |
|
| |
| | | | | | | |
Accrued liabilities | | $ | 372 | | $ | 654 | |
Asbestos related liabilities | | | 1,343 | | | 1,040 | |
| |
|
| |
|
| |
| | $ | 1,715 | | $ | 1,694 | |
| |
|
| |
|
| |
| |
| The change in accrued liabilities and asbestos related liabilities from December 31, 2009 to September 30, 2010 primarily reflects our best estimate of the timing of expected payments related to the effective date of the NARCO trust. |
Other Matters
We are subject to a number of other lawsuits, investigations and disputes (some of which involve substantial amounts claimed) arising out of the conduct of our business, including matters relating to commercial transactions, government contracts, product liability, prior acquisitions and divestitures, employee benefit plans, intellectual property, and health and safety matters. We recognize a liability for any contingency that is probable of occurrence and reasonably estimable. We continually assess the likelihood of adverse judgments of outcomes in these matters, as well as potential ranges of possible losses (taking into consideration any insurance recoveries), based on a careful analysis of each matter with the assistance of outside legal counsel and, if applicable, other experts. Included in these other matters are the following:
Allen, et al. v. Honeywell Retirement Earnings Plan—Pursuant to a settlement approved by the U.S. District Court for the District of Arizona in February 2008, 18 of 21 claims alleged by plaintiffs in this class action lawsuit were dismissed with prejudice in exchange for approximately $35 million and the maximum aggregate liability for the remaining three claims (alleging that Honeywell impermissibly reduced the pension benefits of certain employees of a predecessor entity when the plan was amended in 1983 and failed to calculate benefits in accordance with the terms of the plan) was capped at $500 million. Any amounts payable, including the settlement amount, have or will be paid from the Company’s pension plan. In October 2009, the Court granted summary judgment in favor of the Honeywell Retirement Earnings Plan with respect to the claim regarding the calculation of benefits. We continue to expect to prevail on the remaining claims in light of applicable law and our substantial affirmative defenses, which have not yet been considered fully by the Court. Accordingly, we do not believe that a liability is probable of occurrence and reasonably estimable with respect to these claims and we
30
Honeywell International Inc.
Notes to Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)
have not recorded a provision for the remaining claims in our financial statements.
Quick Lube—On March 31, 2008, S&E Quick Lube, a filter distributor, filed suit in U.S. District Court for the District of Connecticut alleging that twelve filter manufacturers, including Honeywell, engaged in a conspiracy to fix prices, rig bids and allocate U.S. customers for aftermarket automotive filters. This suit is a purported class action on behalf of direct purchasers of filters from the defendants. Parallel purported class actions, including on behalf of indirect purchasers of filters, have been filed by other plaintiffs in a variety of jurisdictions in the United States and Canada. The U.S cases have been consolidated into a single multi-district litigation in the Northern District of Illinois. We intend to vigorously defend the claims raised in these actions. The Antitrust Division of the Department of Justice notified Honeywell on January 21, 2010 that it has officially closed its investigation into possible collusion in the replacement auto filters industry.
BorgWarner v. Honeywell—In this patent infringement suit in the District Court for the Western District of North Carolina, plaintiff BorgWarner is claiming that Honeywell’s manufacture and sale of cast titanium compressor wheels for turbochargers infringes three BorgWarner patents and is seeking damages of up to approximately $120 million, which plaintiff asserts should be trebled for willful infringement. Honeywell does not believe that the evidence supports damages of this magnitude or any finding of willfulness. Because the process claimed in BorgWarner’s patents had already been described in detail in printed publications and had been offered for sale before BorgWarner’s alleged invention, in violation of statutory requirements for patentability, Honeywell asked the Court to enter summary judgment of invalidity of BorgWarner’s patents. The Court declined to enter summary judgment in September 2010, finding that the question should be decided by a jury. Trial is scheduled for May 2011. Honeywell will continue its vigorous defense of this claim and expects to prevail at trial. Honeywell has also asked the United States Patent and Trademark Office to reexamine all three of BorgWarner’s patents in light of the prior art publications. If the Patent Office ultimately invalidates the BorgWarner patents at issue prior to final adjudication of the patent infringement litigation, plaintiff would not be entitled to recover damages.
Given the uncertainty inherent in litigation and investigations (including the specific matters referenced above), we do not believe it is possible to develop estimates of reasonably possible loss in excess of current accruals for these matters. Considering our past experience and existing accruals, we do not expect the outcome of these matters, either individually or in the aggregate, to have a material adverse effect on our consolidated financial position. Because most contingencies are resolved over long periods of time, potential liabilities are subject to change due to new developments, changes in settlement strategy or the impact of evidentiary requirements, which could cause us to pay damage awards or settlements (or become subject to equitable remedies) that could have a material adverse effect on our results of operations or operating cash flows in the periods recognized or paid.
31
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareowners
of Honeywell International Inc.:
We have reviewed the accompanying consolidated balance sheet of Honeywell International Inc. and its subsidiaries as of September 30, 2010, and the related consolidated statement of operations for each of the three-month and nine-month periods ended September 30, 2010 and 2009 and the consolidated statement of cash flows for the nine-month periods ended September 30, 2010 and 2009. These interim financial statements are the responsibility of the Company’s management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2009, 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 11, 2010, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2009, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.
| |
/s/ PricewaterhouseCoopers LLP
Florham Park, New Jersey
October 21, 2010 | |
| |
| |
The “Report of Independent Registered Public Accounting Firm” included above is not a “report” or “part of a Registration Statement” prepared or certified by an independent accountant within the meanings of Sections 7 and 11 of the Securities Act of 1933, and the accountants’ Section 11 liability does not extend to such report.
32
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF |
| FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A) |
| (Dollars in millions, except per share amounts) |
The following MD&A is intended to help the reader understand the results of operations and financial condition of Honeywell International Inc. (“Honeywell”) for the three and nine months ended September 30, 2010. The financial information as of September 30, 2010 should be read in conjunction with the financial statements for the year ended December 31, 2009 contained in our Form 10-K filed on February 12, 2010.
| |
A. | Results of Operations – three and nine months ended September 30, 2010 compared with the three and nine months ended September 30, 2009 |
Net Sales
| | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, | |
| |
| |
| |
| | 2010 | | 2009 | | 2010 | | 2009 | |
| |
| |
| |
| |
| |
Net sales | | $ | 8,392 | | $ | 7,700 | | $ | 24,329 | | $ | 22,836 | |
% change compared with prior period | | | 9 | % | | | | | 7 | % | | | |
The change in net sales compared to the prior year period is attributable to the following:
| | | | | | | |
| | | | | | | |
| | Three Months | | Year to Date | |
| |
| |
| |
Volume | | | 8 | % | | 4 | % |
Price | | | 1 | % | | 2 | % |
Acquisitions/Divestitures | | | 1 | % | | 1 | % |
Foreign Exchange | | | (1 | )% | | 0 | % |
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|
| |
|
| |
| | | 9 | % | | 7 | % |
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|
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|
| |
A discussion of net sales by segment can be found in the Review of Business Segments section of this MD&A.
Cost of Products and Services Sold
| | | | | | | | | | | | | |
| | Three Months Ended
September, 30 | | Nine Months Ended
September, 30 | |
| |
| |
| |
| | 2010 | | 2009 | | 2010 | | 2009 | |
| |
| |
| |
| |
| |
Cost of products and services sold | | $ | 6,490 | | $ | 5,797 | | $ | 18,740 | | $ | 17,235 | |
% change compared with prior period | | | 12 | % | | 9 | % | | | | | | |
| | | | | | | | | | | | | |
Gross Margin percentage | | | 22.7 | % | | 24.7 | % | | 23.0 | % | | 24.5 | % |
Cost of products and services sold increased by $693 million or 12 percent in the quarter ended September 30, 2010 compared with the quarter ended September 30, 2009 principally due to i) an estimated increase in direct material costs and indirect costs of approximately $370 million and $70 million, respectively, driven substantially by a 9 percent increase in sales as a result of the factors discussed above and in the Review of Business Segments section of this MD&A, ii) a $130 million increase in non-cash pension expense and iii) an $85 million increase in Repositioning and Other Charges (see Note 4 of Notes to Financial Statements).
Cost of products and services sold increased by $1,505 million or 9 percent in the nine months ended September 30, 2010 compared with the nine months ended September 30, 2009 principally due to i) an estimated increase in direct material costs and indirect costs of approximately $850 million and $150 million, respectively, driven substantially by a 7 percent increase in sales as a result of the factors discussed above and in the Review of Business Segments section of this MD&A, ii) a $410 million increase in non-cash pension expense, iii) a $139 million increase in Repositioning and Other Charges (see Note 4 of Notes to Financial Statements).
33
Gross margin percentage decreased by 2.0 percentage points in the quarter ended September 30, 2010 compared with the quarter ended September 30, 2009 primarily due to higher pension expense (approximate 1.6 percentage point impact) and higher repositioning and other charges (approximate 1.0 percentage point impact), partially offset by a 0.4 percentage point positive impact from higher segment gross margins (most significantly driven by an 0.4 percentage point impact from increased sales volume in our Transportation Systems segment).
Gross margin percentage decreased by 1.5 percentage points in the nine months ended September 30, 2010 compared with the nine months ended September 30, 2009 primarily due to higher pension expense (approximate 1.7 percentage point impact) and higher repositioning and other charges (approximate 0.6 percentage point impact) partially offset by a 0.7 percentage point positive impact from higher segment gross margins (most significantly driven by an 0.5 percentage point impact from increased sales volume in our Transportation Systems segment).
For further discussion of segment results see “Review of Business Segments”.
Selling, General and Administrative Expenses
| | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, | |
| |
| |
| |
| | 2010 | | 2009 | | 2010 | | 2009 | |
| |
| |
| |
| |
| |
Selling, general and administrative expense | | $ | 1,177 | | $ | 1,034 | | $ | 3,475 | | $ | 3,270 | |
| | | | | | | | | | | | | |
Percent of sales | | | 14.0 | % | | 13.4 | % | | 14.3 | % | | 14.3 | % |
Selling, general and administrative expenses (SG&A) increased as a percentage of sales by 0.6 percent in the quarter ended September 30, 2010 compared to the quarter ended September 30, 2009 driven by an estimated $100 million increase in labor costs (reflecting the absence of prior period labor costs actions) and a $30 million increase in pension expense, partially offset by the impact of higher sales volumes.
SG&A was flat as a percentage of sales in the nine months ended September 30, 2010 compared with the nine months ended September 30, 2009 primarily due to an estimated $150 million increase in labor costs (reflecting the absence of prior period labor costs actions) and an approximate $90 million increase in pension expense, offset by the impact of higher sales volumes.
Other (Income) Expense
| | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, | |
| |
| |
| |
| | 2010 | | 2009 | | 2010 | | 2009 | |
| |
| |
| |
| |
| |
Equity (income)/loss of affiliated companies | | $ | (3 | ) | $ | (8 | ) | $ | (16 | ) | $ | (23 | ) |
Gain on sale of non-strategic businesses and assets | | | — | | | (15 | ) | | — | | | (15 | ) |
Interest income | | | (13 | ) | | (7 | ) | | (29 | ) | | (25 | ) |
Foreign exchange | | | (1 | ) | | 5 | | | 7 | | | 32 | |
Other, net | | | (58 | ) | | (14 | ) | | (48 | ) | | 45 | |
| |
|
| |
|
| |
|
| |
|
| |
| | $ | (75 | ) | $ | (39 | ) | $ | (86 | ) | $ | 14 | |
| |
|
| |
|
| |
|
| |
|
| |
Other income of ($75) for the three months ended September 30, 2010 compared with other income of ($39) million for the three months ended September 30, 2009 is due primarily to a $62 million pre-tax gain related to the consolidation of a joint venture within our Specialty Materials segment in the third quarter of 2010 (see Note 5 of Notes to Financial Statements), partially offset by $14 million of acquisition related costs.
34
Other income of ($86) million for the nine months ended September 30, 2010 compared with other expense of $14 million for the nine months ended September 30, 2009 is due primarily to a $62 million pre-tax gain related to the consolidation of a joint venture within our Specialty Materials segment in the third quarter of 2010 (see Note 5 of Notes to Financial) statements for further details and an other-than-temporary impairment charge of$62 million in the second quarter of 2009, partially offset by $22 million of acquisition related costs.
Interest and Other Financial Charges
| | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, | |
| |
| |
| |
| | 2010 | | 2009 | | 2010 | | 2009 | |
| |
| |
| |
| |
| |
Interest and other financial charges | | $ | 95 | | $ | 110 | | $ | 294 | | $ | 350 | |
Interest and other financial charges decreased by $15 million in the quarter ended September 30, 2010 compared with the quarter ended September 30, 2009 and by $56 million in the nine months ended 2010 compared with the nine months ended September 30, 2009 primarily due to lower debt balances and lower borrowing costs.
Tax Expense
| | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, | |
| |
| |
| |
| | 2010 | | 2009 | | 2010 | | 2009 | |
| |
| |
| |
| |
| |
Tax expense | | $ | 208 | | $ | 179 | | $ | 540 | | $ | 489 | |
Effective tax rate | | | 29.5 | % | | 22.4 | % | | 28.3 | % | | 24.9 | % |
The effective tax rate increased by 7.1 percent in the quarter ended September 30, 2010 compared with the quarter ended September 30, 2009 primarily due to i) decreased benefits from manufacturing incentives, ii) the consolidation of a joint venture within our Specialty Materials segment (see Note 5 of Notes to Financial Statements) and iii) increased expense due to changes in enacted tax rates in the United Kingdom.
The effective tax rate increased by 3.4 percent in the nine months ended September 30, 2010 compared with the nine months ended September 30, 2009 primarily due to i) decreased benefits from manufacturing incentives, ii) the consolidation of a joint venture within our Specialty Materials segment (see Note 5 of Notes to Financial Statements), iii) the impact of an enacted change in the tax treatment of the Medicare Part D program in the first quarter of 2010 (see Note 14 of Notes to Financial Statements) and iv) increased expense due to changes in enacted tax rates in the United Kingdom.
The effective tax rate in both periods was lower than the statutory rate of 35 percent primarily due to foreign earnings taxed at lower tax rates.
Net Income Attributable to Honeywell
| | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, | |
| |
| |
| |
| | 2010 | | 2009 | | 2010 | | 2009 | |
| |
| |
| |
| |
| |
Net income attributable to Honeywell | | $ | 499 | | $ | 608 | | $ | 1,353 | | $ | 1,455 | |
Earnings per share of common stock – assuming dilution | | $ | 0.64 | | $ | 0.80 | | $ | 1.74 | | $ | 1.94 | |
Earnings per share of common stock – assuming dilution decreased by $0.16 per share in the quarter ended September 30, 2010 compared with the quarter ended September 30, 2009 primarily due to higher,
35
pension expense, repositioning and other charges and tax expense, partially offset by increased segment profit in each of our Business Segments and increased Other (Income) Expense, as discussed above.
Earnings per share of common stock – assuming dilution decreased by $0.20 per share in the nine months ended September 30, 2010 compared with the nine months ended September 30, 2009, primarily due to higher pension expense, repositioning and other charges, tax expense and lower segment profit in our Aerospace segment, partially offset by increased segment profit in our Automation and Control Solutions, Specialty Materials and Transportation Systems segments and increased Other (Income) Expense, as discussed above.
36
Review of Business Segments
| | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, | |
| |
| |
| |
| | 2010 | | 2009 | | 2010 | | 2009 | |
| |
| |
| |
| |
| |
Net Sales | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Aerospace | | $ | 2,704 | | $ | 2,622 | | $ | 7,857 | | $ | 8,100 | |
| | | | | | | | | | | | | |
Automation and Control Solutions | | | 3,474 | | | 3,188 | | | 9,835 | | | 9,202 | |
| | | | | | | | | | | | | |
Specialty Materials | | | 1,175 | | | 1,015 | | | 3,573 | | | 3,117 | |
| | | | | | | | | | | | | |
Transportation Systems | | | 1,039 | | | 875 | | | 3,064 | | | 2,417 | |
Corporate | | | — | | | — | | | — | | | — | |
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | |
| | $ | 8,392 | | $ | 7,700 | | $ | 24,329 | | $ | 22,836 | |
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | |
Segment Profit | | | | | | | | | | | | | |
Aerospace | | $ | 458 | | $ | 455 | | $ | 1,314 | | $ | 1,397 | |
Automation and Control Solutions | | | 471 | | | 431 | | | 1,258 | | | 1,088 | |
Specialty Materials | | | 194 | | | 155 | | | 578 | | | 430 | |
Transportation Systems | | | 122 | | | 62 | | | 333 | | | 84 | |
Corporate | | | (53 | ) | | (43 | ) | | (148 | ) | | (133 | ) |
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | |
Total Segment Profit | | | 1,192 | | | 1,060 | | | 3,335 | | | 2,866 | |
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | |
Other income/ (expense)(a) | | | 72 | | | 31 | | | 70 | | | (37 | ) |
Interest and other financial charges | | | (95 | ) | | (110 | ) | | (294 | ) | | (350 | ) |
Stock compensation expense(b) | | | (37 | ) | | (18 | ) | | (123 | ) | | (95 | ) |
Pension (expense)(b) | | | (197 | ) | | (30 | ) | | (588 | ) | | (86 | ) |
Other postretirement income/(expense)(b) | | | (18 | ) | | (21 | ) | | (12 | ) | | 38 | |
Repositioning and other charges(b) | | | (212 | ) | | (114 | ) | | (482 | ) | | (369 | ) |
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | |
Income before taxes | | $ | 705 | | $ | 798 | | $ | 1,906 | | $ | 1,967 | |
| |
|
| |
|
| |
|
| |
|
| |
| |
(a) | Equity income/(loss) of affiliated companies is included in Segment Profit. |
| |
(b) | Amounts included in cost of products and services sold and selling, general and administrative expenses. |
37
| | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | %
change | | Nine Months Ended
September 30, | | %
change | |
| |
| | |
| | |
| | 2010 | | 2009 | | | 2010 | | 2009 | | |
| |
| |
| |
| |
| |
| |
| |
Aerospace Sales | | | | | | | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | | | | | |
Air transport and regional | | | | | | | | | | | | | | | | | | | |
Original equipment | | $ | 332 | | $ | 324 | | | 2 | % | $ | 1,017 | | $ | 1,044 | | | (3 | )% |
Aftermarket | | | 635 | | | 609 | | | 4 | % | | 1,811 | | | 1,835 | | | (1 | )% |
Business and general aviation | | | | | | | | | | | | | | | | | | | |
Original equipment | | | 126 | | | 114 | | | 11 | % | | 374 | | | 603 | | | (38 | )% |
Aftermarket | | | 251 | | | 229 | | | 10 | % | | 709 | | | 668 | | | 6 | % |
Defense and Space Sales | | | 1,360 | | | 1,346 | | | 1 | % | | 3,946 | | | 3,950 | | | (0 | )% |
| |
|
| |
|
| | | | |
|
| |
|
| | | | |
Total Aerospace Sales | | | 2,704 | | | 2,622 | | | | | | 7,857 | | | 8,100 | | | | |
| | | | | | | | | | | | | | | | | | | |
Automation and Control Solutions Sales | | | | | | | | | | | | | | | | | | | |
Products | | | 2,149 | | | 1,954 | | | 10 | % | | 6,074 | | | 5,626 | | | 8 | % |
Solutions | | | 1,325 | | | 1,234 | | | 7 | % | | 3,761 | | | 3,576 | | | 5 | % |
| |
|
| |
|
| | | | |
|
| |
|
| | | | |
Total Automation and Control Solutions Sales | | | 3,474 | | | 3,188 | | | | | | 9,835 | | | 9,202 | | | | |
| | | | | | | | | | | | | | | | | | | |
Specialty Materials Sales | | | | | | | | | | | | | | | | | | | |
UOP | | | 372 | | | 359 | | | 4 | % | | 1,150 | | | 1,182 | | | (3 | )% |
Advanced Materials | | | 803 | | | 656 | | | 22 | % | | 2,423 | | | 1,935 | | | 25 | % |
| |
|
| |
|
| | | | |
|
| |
|
| | | | |
Total Specialty Materials Sales | | | 1,175 | | | 1,015 | | | | | | 3,573 | | | 3,117 | | | | |
| | | | | | | | | | | | | | | | | | | |
Transportation Systems Sales | | | | | | | | | | | | | | | | | | | |
Turbo Technologies | | | 786 | | | 630 | | | 25 | % | | 2,336 | | | 1,715 | | | 36 | % |
Consumer Products Group | | | 253 | | | 245 | | | 3 | % | | 728 | | | 702 | | | 4 | % |
| |
|
| |
|
| | | | |
|
| |
|
| | | | |
Total Transportation Systems Sales | | | 1,039 | | | 875 | | | | | | 3,064 | | | 2,417 | | | | |
| |
|
| |
|
| | | | |
|
| |
|
| | | | |
Net Sales | | $ | 8,392 | | $ | 7,700 | | | | | $ | 24,329 | | $ | 22,836 | | | | |
| |
|
| |
|
| | | | |
|
| |
|
| | | | |
38
Aerospace
| | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, | |
| |
| |
| |
| | 2010 | | 2009 | | 2010 | | 2009 | |
| |
| |
| |
| |
| |
Net sales | | $ | 2,704 | | $ | 2,622 | | $ | 7,857 | | $ | 8,100 | |
% change compared with prior period | | | 3 | % | | | | | (3 | )% | | | |
| | | | | | | | | | | | | |
Segment profit | | $ | 458 | | $ | 455 | | $ | 1,314 | | $ | 1,397 | |
% change compared with prior period | | | 1 | % | | | | | (6 | )% | | | |
| | | | | | | | | | | | | |
| | 2010 vs. 2009 | |
| |
| |
Factors Contributing to Year-Over-Year Change | | Three Months Ended
September, 30 | | Nine Months Ended
September, 30 | |
| |
| |
| |
| | Sales | | Segment
Profit | | Sales | | Segment
Profit | |
| |
| |
| |
| |
| |
Organic growth/ Operational segment profit | | | 4 | % | | 5 | % | | (2 | )% | | (2 | )% |
Other | | | (1 | )% | | (4 | )% | | (1 | )% | | (4 | )% |
| |
|
| |
|
| |
|
| |
|
| |
Total % Change | | | 3 | % | | 1 | % | | (3 | )% | | (6 | )% |
| |
|
| |
|
| |
|
| |
|
| |
Aerospace sales by major customer end-markets were as follows:
| | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, | |
| |
| |
| |
Customer End-Markets | | % of Aerospace
Sales | | | | % of Aerospace
Sales | | | |
| | 2010 | | 2009 | | % Change | | 2010 | | 2009 | | % Change | |
| |
|
|
| |
| |
|
|
| |
| |
Commercial: | | | | | | | | | | | | | | | | | | | |
Air transport and regional | | | | | | | | | | | | | | | | | | | |
Original equipment | | | 12 | % | | 12 | % | | 2 | % | | 13 | % | | 13 | % | | (3 | )% |
Aftermarket | | | 24 | % | | 23 | % | | 4 | % | | 23 | % | | 23 | % | | (1 | )% |
Business and general aviation | | | | | | | | | | | | | | | | | | | |
Original equipment | | | 5 | % | | 5 | % | | 11 | % | | 5 | % | | 7 | % | | (38 | )% |
Aftermarket | | | 9 | % | | 9 | % | | 10 | % | | 9 | % | | 8 | % | | 6 | % |
Defense and Space | | | 50 | % | | 51 | % | | 1 | % | | 50 | % | | 49 | % | | 0 | % |
| |
| |
| |
| |
| |
| |
| |
Total | | | 100 | % | | 100 | % | | 3 | % | | 100 | % | | 100 | % | | (3 | )% |
| |
| |
| |
| |
| |
| |
| |
Aerospace sales increased by 3 percent in the quarter ended September 30, 2010 compared with the quarter ended September 30, 2009 due to a 4 percent increase in organic growth primarily due to increased Commercial sales volume and Defense and Space services revenue, partially offset by a 1 percent reduction of revenue related to amounts recognized for payments to business and general aviation original equipment manufacturers (OEM Payments) to partially offset their pre-production costs associated with new aircraft platforms.
Aerospace sales decreased by 3 percent for the nine months ended September 30, 2010 compared with the nine months ended September 30, 2009 due principally to a 2 percent decrease in organic growth and a 1 percent reduction in revenue as a result of the OEM Payments, discussed above.
Details regarding the changes in sales by customer end-markets are as follows:
| | |
| • | Air transport and regional original equipment (OE) sales increased by 2 percent in the quarter ended September 30, 2010 primarily due to higher sales to our OE customers. Sales for the nine months |
39
| | |
| | ended September 30, 2010 decreased by 3 percent primarily driven by lower sales to our air transport OE customers consistent with our expectations for the full year. |
| | |
| • | Air transport and regional aftermarket sales increased by 4 percent for quarter ended September 30, 2010 primarily as a result of increased sales of spare parts and higher maintenance activity driven by the impact of increased flying hours of approximately 7 percent in the third quarter, which is expected to continue in the fourth quarter. Sales for the nine months ended September 30, 2010 decreased by 1 percent as a result of decreased sales of spare parts driven by the impact of higher parked aircraft and customer deferral of maintenance events, partially offset by the impact of increased flying hours of approximately 5 percent in the first nine months. |
| | |
| • | Business and general aviation OE sales increased by 11 percent in the quarter ended September 30, 2010 due to increased new business jet deliveries, partially offset by the impact of the OEM Payments discussed above. Sales decreased by 38 percent in the nine months ended September 30, 2010 due to decreases in new business jet deliveries reflecting rescheduling and cancellation of deliveries by OE customers in the first six months and the impact of the OEM Payments discussed above. |
| | |
| • | Business and general aviation aftermarket sales increased by 10 percent in the quarter ended September 30, 2010 and 6 percent in the nine months ended September 30, 2010 primarily due to increased sales of spare parts due to higher engine utilization, partially offset by lower revenue associated with maintenance service agreements in the nine month period. |
| | |
| • | Defense and space sales increased by 1 percent in the quarter ended September 30, 2010 and were flat for the nine months ended September 30, 2010 primarily due to higher sales of logistics services offset by program wind-downs and completions and lower sales related to commercial helicopters (for nine months ended September 30, 2010). Delays in defense and space programs have impacted the timing of sales in this end-market over the course of 2010. |
Aerospace segment profit increased by 1 percent in the quarter ended September 30, 2010 compared with quarter ended September 30, 2009 due to a 5 percent increase in operational segment profit partially offset by a negative 4 percent impact from the OEM payments, discussed above. The increase in operational segment profit is comprised of an approximate 9 percent positive impact from higher sales volume, partially offset by a negative 4 percent impact from inflation, net of price and productivity (including the absence of prior year cost actions partially offset by the benefits from prior repositioning actions). Cost of goods sold totaled $2 billion for the quarter ended September 30, 2010, an increase of approximately $50 million which is primarily as a result of the factors discussed above.
Aerospace segment profit decreased by 6 percent for the nine months ended September 30, 2010 compared with the nine months ended September 30, 2009 due to a negative 4 percent impact from the OEM payments, discussed above and a 2 percent decrease in operational segment. The decrease in operational segment profit is comprised of an approximate 8 percent negative impact from lower sales volume, partially offset by a positive 5 percent impact from price and productivity, net of inflation (including the absence of prior year cost actions partially offset by the benefits from prior repositioning actions). Cost of goods sold totaled $6 billion for the nine months ended September 30, 2010, an increase of approximately $150 million which is primarily as a result of the factors discussed above.
40
Automation and Control Solutions
| | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, | |
| |
| |
| |
| | 2010 | | 2009 | | 2010 | | 2009 | |
| |
| |
| |
| |
| |
Net sales | | $ | 3,474 | | $ | 3,188 | | $ | 9,835 | | $ | 9,202 | |
% change compared with prior period | | | 9 | % | | | | | 7 | % | | | |
| | | | | | | | | | | | | |
Segment profit | | $ | 471 | | $ | 431 | | $ | 1,258 | | $ | 1,088 | |
% change compared with prior period | | | 9 | % | | | | | 16 | % | | | |
| | | | | | | | | | | | | |
| | 2010 vs. 2009 | |
| |
| |
Factors Contributing to Year-Over-Year Change | | Three Months Ended
September, 30 | | Nine Months Ended
September, 30 | |
| |
| |
| |
| | Sales | | Segment
Profit | | Sales | | Segment
Profit | |
| |
| |
| |
| |
| |
Organic growth/ Operational segment profit | | | 8 | % | | 11 | % | | 5 | % | | 14 | % |
Foreign exchange | | | (2 | )% | | (2 | )% | | 1 | % | | 1 | % |
Acquisitions and divestitures, net | | | 3 | % | | 0 | % | | 1 | % | | 1 | % |
| |
|
| |
|
| |
|
| |
|
| |
Total % Change | | | 9 | % | | 9 | % | | 7 | % | | 16 | % |
| |
|
| |
|
| |
|
| |
|
| |
Automation and Control Solutions (“ACS”) sales increased by 9 percent in the quarter ended September 30, 2010 compared with the quarter ended September 30, 2009, primarily due to an 8 percent increase in organic revenue driven by increased sales volume. Growth from acquisitions of 3 percent was partially offset by a 2 percent unfavorable impact of foreign exchange.
ACS sales increased by 7 percent in the nine months ended September 30, 2010 compared with the nine months ended September 30, 2009, primarily due to a 5 percent increase in organic revenue driven by increased sales volume, 1 percent growth from acquisitions and a 1 percent favorable impact of foreign exchange.
| | |
| • | Sales in our Products businesses increased by 10 percent in the quarter ended September 30, 2010 and 8 percent in the nine months ended September 30, 2010, primarily reflecting higher sales volumes in our businesses tied to industrial production (environmental and combustion controls, sensing and control, gas detection, personal protective equipment and scanning and mobility products), new product introductions and acquisitions, most significantly Sperian, partially offset by the negative impact of foreign exchange in the three months ended September 30, 2010. |
| | |
| • | Sales in our Solutions businesses increased by 7 percent in the quarter ended September 30, 2010 and 5 percent in the nine months ended September 30, 2010 primarily due to the positive impact of foreign exchange (in the first nine months), acquisitions, net of divestitures, most significantly the RMG Group, higher prices and growth in energy efficiency projects and industrial field solutions driven by orders growth and conversion to sales from order backlog. Orders and backlog increased in the third quarter and first nine months compared to the corresponding periods in 2009 primarily driven by energy efficiency projects, refining and natural gas infrastructure projects and growth in emerging regions. |
ACS segment profit increased by 9 percent in the quarter ended September 30, 2010 compared with the quarter ended September 30, 2009 due to an 11 percent increase in operational segment profit, partially offset by a negative 2 percent impact from foreign exchange. The increase in operational segment profit is comprised of an approximate 24 percent positive impact from higher sales volume, partially offset by a negative 13 percent impact from inflation, net of price and productivity (including the absence of prior period cost actions, partially offset by the benefits of prior repositioning actions). Cost of goods sold totaled $2.4 billion for the quarter ended September 30, 2010, an increase of approximately $200 million which is primarily as a result of the factors discussed above.
41
ACS segment profit increased by 16 percent in the nine months ended September 30, 2010 compared with the nine months ended September 30, 2009 primarily due to a 14 percent increase in operational segment profit. The increase in operational segment profit is comprised of an approximate 16 percent positive impact from higher sales volume, partially offset by a negative 2 percent impact from inflation, net of price and productivity (including the absence of prior period cost actions, partially offset by the benefits of prior repositioning actions). Cost of goods sold totaled $6.6 billion for the nine months ended September 30, 2010, an increase of approximately $350 million which is primarily as a result of the factors discussed above.
Specialty Materials
| | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, | |
| |
| |
| |
| | 2010 | | 2009 | | 2010 | | 2009 | |
| |
| |
| |
| |
| |
Net sales | | $ | 1,175 | | $ | 1,015 | | $ | 3,573 | | $ | 3,117 | |
% change compared with prior period | | | 16 | % | | | | | 15 | % | | | |
| | | | | | | | | | | | | |
Segment profit | | $ | 194 | | $ | 155 | | $ | 578 | | $ | 430 | |
% change compared with prior period | | | 25 | % | | | | | 34 | % | | | |
| | | | | | | | | | | | | |
| | 2010 vs. 2009 | |
| |
| |
Factors Contributing to Year-Over-Year Change | | Three Months Ended
September, 30 | | Nine Months Ended
September, 30 | |
| |
| |
| |
| | Sales | | Segment
Profit | | Sales | | Segment
Profit | |
| |
| |
| |
| |
| |
Organic growth/ Operational segment profit | | | 16 | % | | 27 | % | | 15 | % | | 34 | % |
Foreign exchange | | | 0 | % | | (2 | )% | | 0 | % | | 0 | % |
| |
|
| |
|
| |
|
| |
|
| |
Total % Change | | | 16 | % | | 25 | % | | 15 | % | | 34 | % |
| |
|
| |
|
| |
|
| |
|
| |
Specialty Materials sales increased by 16 percent in the quarter ended September 30, 2010 compared with the quarter ended September 30, 2009 due to a 16 percent increase in organic growth. Specialty Materials sales increased by 15 percent for the nine months ended September 30, 2010 compared with the nine months ended September 30, 2009 due to a 15 percent increase in organic growth.
| | |
| • | Advanced Materials sales increased by 22 percent in the quarter ended September 30, 2010 compared with the quarter ended September 30, 2009 and 25 percent for the first nine months driven by (i) a 28 percent third quarter and 30 percent first nine months increase in Resins and Chemicals sales primarily due to higher prices driven by strong Asia demand and formula pricing arrangements (for the nine month period), (ii) a 21 percent third quarter and 24 percent first nine months increase in Specialty Products sales most significantly due to higher sales volume to our semiconductor, specialty additives, advanced fiber industrial applications and specialty chemicals customers, (iii) a 18 percent third quarter and 22 percent first nine months increase in our Fluorine Products business due to higher sales volume from increased demand for our refrigerants and insulating materials. |
| | |
| • | UOP sales increased by 4 percent in the quarter ended September 30, 2010 compared with the quarter ended September 30. 2009 driven primarily by increased gas processing equipment sales, partially offset by lower licensing revenue. UOP sales for the first nine months decreased by 3 percent primarily due to lower new unit refining catalyst sales and timing of project activity in the refining and petrochemical industries. |
Specialty Materials segment profit increased by 25 percent in the quarter ended September 30, 2010 compared with the quarter ended September 30, 2009 due to a 27 percent increase in operational segment profit, partially offset by a negative 2 percent impact from foreign exchange. The increase in operational segment profit is comprised of an approximate 30 percent positive impact from higher sales volume, partially offset by a negative 2 percent impact from inflation, net of price and productivity (including the absence or prior period cost actions).
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Cost of goods sold totaled $900 million for the quarter ended September 30, 2010, an increase of approximately $130 million which is primarily as a result of the factors discussed above.
Segment profit for the nine months ended September 30, 2010 increased 34 percent compared with the nine months ended September 30, 2009 due to increased operational segment profit, comprised of an approximate 28 percent positive impact from higher sales volume and a 7 percent positive impact from price and productivity, net of inflation (including the absence or prior period cost actions). Cost of goods sold totaled $2.7 billion for the nine months ended September 30, 2010, an increase of approximately $300 million which is primarily as a result of the factors discussed above.
Transportation Systems
| | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, | |
| |
| |
| |
| | 2010 | | 2009 | | 2010 | | 2009 | |
| |
| |
| |
| |
| |
Net sales | | $ | 1,039 | | $ | 875 | | $ | 3,064 | | $ | 2,417 | |
% change compared with prior period | | | 19 | % | | | | | 27 | % | | | |
| | | | | | | | | | | | | |
Segment profit | | $ | 122 | | $ | 62 | | $ | 333 | | $ | 84 | |
% change compared with prior period | | | 97 | % | | | | | 296 | % | | | |
| | | | | | | | | | | | | |
| | 2010 vs. 2009 | |
| |
| |
Factors Contributing to Year-Over-Year Change | | Three Months Ended
September, 30 | | Nine Months Ended
September, 30 | |
| |
| |
| |
| | Sales | | Segment
Profit | | Sales | | Segment
Profit | |
| |
| |
| |
| |
| |
|
Organic growth/ Operational segment profit | | | 24 | % | | 103 | % | | 27 | % | | 297 | % |
Foreign exchange | | | (5 | )% | | (6 | )% | | 0 | % | | (1 | )% |
| |
|
| |
|
| |
|
| |
|
| |
Total % Change | | | 19 | % | | 97 | % | | 27 | % | | 296 | % |
| |
|
| |
|
| |
|
| |
|
| |
Transportation Systems sales increased by 19 percent in the quarter ended September 30, 2010 compared with the quarter ended September 30, 2009 primarily due to a 24 percent increase in organic revenue driven by increased sales volume, partially offset by an unfavorable impact of foreign exchange of 5 percent.
Transportation Systems sales increased by 27 percent in the nine months ended September 30, 2010 compared with the nine months ended September 30, 2009 due to a 27 percent increase in organic revenue driven by increased sales volume.
| | |
| • | Turbo Technologies sales increased 25 percent in the third quarter and 36 percent in the first nine months, primarily due to increased turbocharger sales to both light vehicle and commercial vehicle engine manufacturers partially offset by the negative impacts of foreign exchange. We expect increased volume to continue as we benefit from new platform launches and improved diesel penetration rates in Western Europe. |
| | |
| • | Consumer Products Group (“CPG”) sales increased 3 percent in the third quarter and 4 percent in the first nine months, primarily due to higher prices (primarily pass through of ethylene glycol cost increases), partially offset by lower volume of antifreeze products. |
Transportation Systems segment profit increased by $60 million in the quarter ended September 30, 2010 compared with the quarter ended September 30, 2009 predominantly due to the positive impact from increased
43
sales volume. Cost of goods sold totaled $840 million for the quarter ended September 30, 2010, an increase of approximately $90 million which is also primarily a result of increased sales volume.
Transportation Systems segment profit increased by $249 million in the nine months ended September 30, 2010 compared with the nine months ended September 30, 2009 predominantly due to the positive impact from increased sales volume. Cost of goods sold totaled $2.5 billion for the nine months ended September 30, 2010, an increase of approximately $400 million which is also primarily a result of increased sales volume.
Repositioning and Other Charges
See Note 4 of Notes to Financial Statements for a discussion of repositioning and other charges incurred in the three and nine months ended September 30, 2010 and 2009. Our repositioning actions are expected to generate incremental pretax savings of approximately $275 million in 2010 compared with 2009 principally from planned workforce reductions. Cash expenditures for severance and other exit costs necessary to execute these actions were $120 million in the nine months ended September 30, 2010 and were funded through operating cash flows. Cash expenditures for severance and other costs necessary to execute the remaining actions will approximate a total of $200 million in 2010 and will be funded through operating cash flows.
| | |
| B. | Liquidity and capital resources |
Cash flow summary
Our cash flows from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows for the nine months ended September 30, 2010 and 2009, are summarized as follows:
| | | | | | | |
| | 2010 | | 2009 | |
| |
| |
| |
Cash provided by (used for): | | | | | | | |
Operating activities | | $ | 3,158 | | $ | 2,615 | |
| | | | | | | |
Investing activities | | | (1,980 | ) | | (850 | ) |
Financing activities | | | (1,301 | ) | | (1,328 | ) |
Effect of exchange rate changes on cash | | | (38 | ) | | 102 | |
| |
|
| |
|
| |
Net (decrease)/increase in cash and cash equivalents | | $ | (161 | ) | $ | 539 | |
| |
|
| |
|
| |
Cash provided by operating activities increased by $543 million during the nine months ended September 30, 2010 compared with the nine months ended September 30, 2009 primarily due to i) accrued expenses impact of $480 million (primarily increased customer advances and higher benefit and other employee related accruals), ii) higher pension expense of approximately $550 million, iii) lower payments for Repositioning and other charges of $218 million and iv) a $117 million impact from increased deferred income taxes (excluding the impact of cash taxes noted below), partially offset by i) a $560 million increase in cash used by working capital (increased inventory purchases and accounts receivable partially offset by higher accounts payable, each consistent with increased sales volume and demand), ii) the absence of $155 million sale of long-term receivables in 2009 and iii) higher cash taxes of $118 million.
Cash used for investing activities increased by $1,130 million during the nine months ended September 30, 2010 compared with the nine months ended September 30, 2009 primarily due to an increase in cash paid for acquisitions of $850 million (most significantly Sperian Protection, discussed below), and a net $341 million increase in investments in short-term marketable securities.
Cash used for financing activities decreased by $27 million during the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009 primarily due to a decrease in the net repayment of debt (including commercial paper) of $277 million and an increase in the proceeds from the issuance of
44
common stock, primarily related to stock option exercises of $90 million, partially offset by the repayment of $326 million of debt assumed in the acquisition of Sperian Protection (see below).
Liquidity
The Company continues to manage its businesses to maximize operating cash flows as the primary source of liquidity. In addition to our available cash and operating cash flows, additional sources of liquidity include committed credit lines, short-term debt from the commercial paper market, long-term borrowings, access to the public debt and equity markets as well as the ability to sell trade accounts receivables. We continue to balance our cash and financing uses through investment in our existing core businesses, debt reduction, acquisition activity, share repurchases and dividends.
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.
In the first quarter of 2010, the Company repaid $1,000 million of its 7.50% notes. The repayment was funded with the issuance of commercial paper and cash provided by operating activities.
In September 2010, we completed the acquisition of approximately 98% of the issued and outstanding shares of Sperian Protection (Sperian), a French company that operates globally in the personal protection equipment design and manufacturing industry. The aggregate value, net of cash acquired, was approximately $1,475 million, including the assumption of approximately $326 million of outstanding debt. During the second quarter of 2010, $859 million in cash was held in escrow. The purchase price was funded using these escrow funds and available cash. In October 2010, we acquired the remaining 2% of the issued and outstanding shares of Sperian for approximately $16 million.
We made voluntary contributions of Honeywell common stock to our U.S. pension plans of $400 million to improve the funded status of our plans in the first nine months of 2010. In addition, in light of year to date asset returns and current interest rates, the Company is evaluating additional voluntary contributions in 2010 and currently anticipates contributing $600 million of cash to our U.S. pension plans in the fourth quarter. The timing and amount of contributions may be impacted by a number of factors, including the rate of return on plan assets and discount rates. We also contributed $179 million of marketable securities to our non-U.S. pension plans during the first nine months of 2010.
Current global economic conditions or the current tightening of credit could adversely affect our customers’ or suppliers’ ability to obtain financing, particularly in our long-cycle businesses and airline and automotive end markets. Customer or supplier bankruptcies, delays in their ability to obtain financing, or the unavailability of financing could adversely affect our cash flow or results of operations. To date we have not experienced material impacts from customer or supplier bankruptcy or liquidity issues. We continue to monitor and take measures to limit our exposure.
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C. Other Matters
Litigation
We are subject to a number of lawsuits, investigations and claims (some of which involve substantial amounts) arising out of the conduct of our business. See a discussion of environmental, asbestos and other litigation matters in Note 15 of Notes to Financial Statements.
Critical Accounting Policies
The financial information as of September 30, 2010 should be read in conjunction with the financial statements for the year ended December 31, 2009 contained in our Form 10-K filed on February 12, 2010.
For a discussion of the Company’s critical accounting policies, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Form 10-K filed on February 12, 2010.
Recent Accounting Pronouncements
See Note 2 of Notes to Financial Statements for a discussion of recent accounting pronouncements.
| |
Item 3. | Quantitative and Qualitative Disclosures about Market Risks |
See our 2009 Annual Report on Form 10-K (Item 7A). As of September 30, 2010, there has been no material change in this information.
46
| |
Item 4. | Control and Procedures |
Honeywell management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that such disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q to ensure information required to be disclosed in the reports that Honeywell files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that it is accumulated and communicated to our management, including our CEO, our CFO, and our Controller, as appropriate, to allow timely decisions regarding required disclosure. There have been no changes that have materially affected, or are reasonably likely to materially affect, Honeywell’s internal control over financial reporting that have occurred during the period covered by this Quarterly Report on Form 10-Q.
Part II. Other Information
General Legal Matters
We are subject to a number of lawsuits, investigations and claims (some of which involve substantial amounts) arising out of the conduct of our business. See a discussion of environmental, asbestos and other litigation matters in Note 15 of Notes to Financial Statements.
Environmental Matters Involving Potential Monetary Sanctions in Excess of $100,000
Although the outcome of the matters discussed below cannot be predicted with certainty, we do not believe that any of them, individually or in the aggregate, will have a material adverse effect on our consolidated financial position, consolidated results of operations or operating cash flows.
The United States Environmental Protection Agency and the United States Department of Justice (“federal authorities”) are investigating whether the storage of certain sludges generated during uranium hexafluoride production at our Metropolis, Illinois facility has been in compliance with the requirements of the Resource Conservation and Recovery Act. The federal authorities have convened a grand jury in this matter. This storage issue was previously voluntarily disclosed to the Illinois Environmental Protection Agency, with whom Honeywell has been working to resolve the matter. The Company has met with the federal authorities and is cooperating fully with the investigation. Although the outcome of this matter cannot be predicted with certainty, we do not believe that it will have a material adverse effect on our consolidated financial position, consolidated results of operations or operating cash flows.
Honeywell is negotiating with the New York State Department of Environmental Conservation to settle allegations that Honeywell failed to properly close out waste storage areas associated with the legacy operations in Syracuse, New York, which areas are known as the Solvay Settling Basins.
The United States Environmental Protection Agency and the United States Department of Justice are investigating whether the Company’s manufacturing facility in Hopewell, Virginia is in compliance with the requirements of the Clean Air Act and the facility’s air operating permit. Based on these investigations, the federal authorities have issued notices of violation with respect to the facility’s benzene waste operations, leak detection and repair program, emissions of nitrogen oxides and emissions of particulate matter. The Company has entered into negotiations with federal authorities to resolve the alleged violations.
| | |
| (a) | Exhibits. See the Exhibit Index on page 49 of this Quarterly Report on Form 10-Q. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | |
| Honeywell International Inc. |
| |
Date: October 22, 2010 | By: | /s/ Kathleen A. Winters | |
| |
| |
| | Kathleen A. Winters |
| | Vice President and Controller |
| | (on behalf of the Registrant |
| | and as the Registrant’s |
| | Principal Accounting Officer) |
48
EXHIBIT INDEX
| | | | |
Exhibit Number | | Description | |
| |
| |
| | | |
| 11 | | Computation of Per Share Earnings (1) |
| | | |
| 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) |
| | | |
| 31.1 | | Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith) |
| | | |
| 31.2 | | Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith) |
| | | |
| 32.1 | | Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith) |
| | | |
| 32.2 | | Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith) |
| | | |
| 101.INS | | XBRL Instance Document (furnished herewith) |
| | | |
| 101.SCH | | XBRL Taxonomy Extension Schema (furnished herewith) |
| | | |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase (furnished herewith) |
| | | |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase (furnished herewith) |
| | | |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase (furnished herewith) |
| | | |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase (furnished herewith) |
| | |
| |
(1) | Data required is provided in Note 6 to the consolidated financial statements in this report. |
49
