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 March 31, 2001
______________
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
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(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 March 31, 2001
- --------------------- ----------------
$1 par value 809,281,480 shares
Honeywell International Inc.
Index
Page No.
--------
Part I. - Financial Information
---------------------
Item 1. Condensed Financial Statements:
Consolidated Balance Sheet -
March 31, 2001 and December 31, 2000 3
Consolidated Statement of Income -
Three Months Ended March 31, 2001 and 2000 4
Consolidated Statement of Cash Flows -
Three Months Ended March 31, 2001 and 2000 5
Notes to Financial Statements 6
Report of Independent Accountants 15
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 19
Part II.- Other Information
-----------------
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
2
ITEM 1. CONDENSED FINANCIAL STATEMENTS
------------------------------
Honeywell International Inc.
Consolidated Balance Sheet
(Unaudited)
March 31, December 31,
2001 2000
---------- ------------
(Dollars in millions)
ASSETS
Current assets:
Cash and cash equivalents $ 1,074 $ 1,196
Accounts and notes receivable 4,153 4,623
Inventories 3,830 3,734
Other current assets 1,234 1,108
------- -------
Total current assets 10,291 10,661
Investments and long-term receivables 653 748
Property, plant and equipment - net 5,128 5,230
Goodwill and other intangible
assets - net 5,921 5,898
Other assets 2,795 2,638
------- -------
Total assets $24,788 $25,175
======= =======
LIABILITIES
Current liabilities:
Accounts payable $ 2,189 $ 2,364
Short-term borrowings 353 110
Commercial paper 1,240 1,192
Current maturities of long-term debt 148 380
Accrued liabilities 3,148 3,168
------- -------
Total current liabilities 7,078 7,214
Long-term debt 3,906 3,941
Deferred income taxes 1,182 1,173
Postretirement benefit obligations
other than pensions 1,878 1,887
Other liabilities 1,152 1,253
SHAREOWNERS' EQUITY
Capital - common stock issued 958 958
- additional paid-in capital 2,852 2,782
Common stock held in treasury, at cost (4,291) (4,296)
Accumulated other nonowner changes (807) (729)
Retained earnings 10,880 10,992
------ ------
Total shareowners' equity 9,592 9,707
------ ------
Total liabilities and shareowners'equity $24,788 $25,175
======= =======
The Notes to Financial Statements are an integral part of this statement.
3
Honeywell International Inc.
Consolidated Statement of Income
(Unaudited)
Three Months Ended
March 31,
------------------
2001 2000
---- ----
(Dollars in millions,
except per share amounts)
Net sales $5,944 $6,044
Costs, expenses and other ------ ------
Cost of goods sold 4,973 4,450
Selling, general and administrative
expenses 768 758
Equity in (income) loss of affiliated
companies 103 (4)
Other (income) expense (4) (10)
Interest and other financial charges 111 111
------ ------
5,951 5,305
------ ------
Income (loss) before taxes on income (7) 739
Taxes (benefit) on income (48) 233
------ ------
Net income $ 41 $ 506
====== ======
Earnings per share of common
stock - basic $ 0.05 $ 0.64
====== ======
Earnings per share of common
stock - assuming dilution $ 0.05 $ 0.63
====== ======
Cash dividends per share of
common stock $.1875 $.1875
====== ======
The Notes to Financial Statements are an integral part of this statement.
4
Honeywell International Inc.
Consolidated Statement of Cash Flows
(Unaudited)
Three Months Ended
March 31,
------------------
2001 2000
---- ----
(Dollars in millions)
Cash flows from operating activities:
Net income $ 41 $506
Adjustments to reconcile net income to net
cash provided by operating activities:
Repositioning and other charges 596 -
Depreciation and amortization 239 262
Equity income, net of distributions 9 17
Deferred income taxes (137) 4
Net taxes paid on sales of businesses (12) -
Other (182) (196)
Changes in assets and liabilities, net of the effects
of acquisitions and divestitures:
Accounts and notes receivable 365 208
Inventories (160) 23
Other current assets (22) (41)
Accounts payable (143) (57)
Accrued liabilities (347) (339)
----- -----
Net cash provided by operating activities 247 387
----- -----
Cash flows from investing activities:
Expenditures for property, plant and equipment (173) (164)
Proceeds from disposals of property, plant and
equipment 26 42
(Increase) in investments (1) -
Cash paid for acquisitions (85) (2,313)
Proceeds from sales of businesses - 21
Decrease in short-term investments - 1
----- -----
Net cash (used for) investing activities (233) (2,413)
----- ------
Cash flows from financing activities:
Net increase in commercial paper 48 297
Net increase (decrease) in short-term borrowins 243 (173)
Proceeds from issuance of common stock 19 33
Proceeds from issuance of long-term debt - 1,051
Payments of long-term debt (278) (24)
Repurchases of common stock (15) -
Cash dividends on common stock (153) (149)
----- -----
Net cash (used for) provided by financing activities (136) 1,035
----- -----
Net (decrease) in cash and cash equivalents (122) (991)
Cash and cash equivalents at beginning of year 1,196 1,991
----- -----
Cash and cash equivalents at end of period $1,074 $1,000
====== ======
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 March 31, 2001 and the results of
operations and cash flows for the three months ended March 31, 2001
and 2000. The results of operations for the three-month period
ended March 31, 2001 should not necessarily be taken as indicative
of the results of operations that may be expected for the entire
year 2001.
The financial information as of March 31, 2001 should be read in
conjunction with the financial statements contained in our Annual
Report on Form 10-K for 2000.
NOTE 2. Accounts and notes receivable consist of the following:
March 31, December 31,
2001 2000
---------- -----------
Trade $3,744 $3,967
Other 523 755
------ ------
4,267 4,722
Less - Allowance for doubtful
accounts and refunds (114) (99)
----- -----
$4,153 $4,623
====== ======
NOTE 3. Inventories consist of the following:
March 31, December 31,
2001 2000
--------- -----------
Raw materials $1,218 $1,262
Work in process 906 809
Finished products 1,888 1,797
------ -----
4,012 3,868
Less - Progress payments (47) (5)
Reduction to LIFO cost basis (135) (129)
----- ----
$3,830 $3,734
====== ======
NOTE 4. Total nonowner changes in shareowners' equity consist of the following:
Three Months Ended
March 31,
----------------------
2001 2000
---- ----
Net income $ 41 $506
Foreign exchange translation
adjustments (74) (26)
Derivatives qualifying as
hedges (4) -
Unrealized holding (losses)
on securities available - (10)
for sale ----- ----
$(37) $470
===== ====
6
NOTE 5. Segment financial data follows:
Three Months Ended March 31,
--------------------------------------------------
Net Sales Segment Profit
--------------------------- ---------------------
2001 2000 2001 2000
---- ---- ---- ----
Aerospace Solutions $2,411 $2,396 $ 451 $ 493
Automation & Control 1,748 1,700 188 190
Performance Materials 913 1,025 38 95
Power & Transportation
Products 860 904 50 88
Corporate 12 19 (29) (30)
------ ----- ----- -----
$5,944 $6,044 698 836
====== ====== ----- -----
Equity in income (loss)
of affiliated companies (8) 4
Other income 9 10
Interest and other
financial charges (111) (111)
Cumulative effect of
accounting change 1 -
Repositioning and other
charges (596) -
----- -----
Income (loss) before taxes $ (7) $ 739
on income ===== =====
NOTE 6 The details of the earnings per share calculations for the three-month
periods ended March 31, 2001 and 2000 follow:
2001 2000
------------------------- -----------------------
Per Per
Average Share Average Share
Income Shares Amount Income Shares Amount
------ ------- ------ ------ ------ ------
Earnings per share of
common stock - basic $41 809.4 $ .05 $506 796.6 $ .64
Dilutive securities issuable
in connection with stock 5.8 10.1
plans ---- ----- ----- ---- ----- -----
Earnings per share of common
stock - assuming dilution $41 815.2 $ .05 $506 806.7 $ .63
=== ===== ===== ===== ===== =====
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-
month periods ended March 31, 2001 and 2000, the number of stock
options not included in the computations were 15.6 and 13.2 million,
respectively. These stock options were outstanding at the end of
each of the respective periods.
7
NOTE 7. On October 22, 2000, Honeywell and General Electric Company
(GE) entered into an Agreement and Plan of Merger (Merger Agreement)
providing for a business combination between Honeywell and GE. When
the merger is effective, a wholly-owned subsidiary of GE will be
merged with and into Honeywell, and Honeywell will become a
wholly-owned subsidiary of GE and each issued and outstanding share
of common stock of Honeywell will be converted into the right to
receive 1.055 shares of common stock of GE, with fractional shares
paid in cash. The merger, which was approved by Honeywell
shareowners on January 10, 2001, is subject to certain remaining
conditions, which include review or approval of the transaction by
various governmental authorities. GE and Honeywell are working with
regulatory agencies to complete the required reviews or obtain
required approvals so that the transaction can close as early as
possible in 2001. The Merger Agreement provides for payment of a
$1.35 billion termination fee by Honeywell under certain
circumstances. In connection with the execution of the Merger
Agreement, Honeywell and GE entered into a stock option agreement
pursuant to which Honeywell granted to GE an option to purchase up
to 19.9 percent of Honeywell's outstanding shares of common stock.
The option is exercisable in the same circumstances under which
Honeywell is required to pay to GE the $1.35 billion termination
fee.
NOTE 8. Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities", as
amended (SFAS No. 133), was adopted by Honeywell as of January 1,
2001. SFAS No. 133 requires all derivatives to be recorded on the
balance sheet as assets or liabilities, measured at fair value. For
derivatives designated as hedging the value of assets or
liabilities, the changes in the fair values of both the derivatives
and the hedged items are recorded in current earnings. For
derivatives designated as cash flow hedges, the effective portion
of the changes in fair value of the derivatives are recorded in
other nonowner changes and subsequently recognized in earnings when
the hedged items impact income. Changes in the fair value of
derivatives not designated as hedges and the ineffective portion of
cash flow hedges are recorded in current earnings.
As a result of our global operating and financing activities,
we are exposed to market risks from changes in interest and foreign
currency exchange rates, which may adversely affect our operating
results and financial position. As discussed more fully in Note 18
of our 2000 Annual Report on Form 10-K, we minimize our risks from
interest and foreign currency exchange rate fluctuations through our
normal operating and financing activities and, when deemed
appropriate, through the use of derivative financial instruments.
The January 1, 2001 accounting change described above affected only
the pattern and timing of non-cash accounting recognition.
The adoption of SFAS No. 133 as of January 1, 2001 resulted in
a cumulative effect adjustment of $1 million of income that is
included in other (income) expense. Additionally, this accounting
change did not significantly impact operating results for the three
months ended March 31, 2001 and is not expected to significantly
impact future operating results.
NOTE 9. In the first quarter of 2001, we recognized a repositioning
charge of $297 million for the cost of actions designed to reduce
our cost structure and improve our future profitability. These
actions consisted of announced global workforce reductions totaling
approximately 6,500 manufacturing and administrative positions
across all of our reportable segments. The repositioning charge
also included asset impairments and other exit costs related to
plant closures and the rationalization of manufacturing capacity and
infrastructure principally in our Performance Polymers & Chemicals,
Electronic Materials, Transportation and Power Systems and
Automotive Consumer Products Group businesses. The components of the
8
charge included severance costs of $259 million, asset impairments
of $24 million and other exit costs of $14 million. The pretax
impact of the repositioning charge by reportable segment was as
follows: Automation & Control - $132 million; Aerospace Solutions -
$64 million; Performance Materials - $44 million; Power &
Transportation Products - $37 million; and Corporate - $20 million.
As disclosed in our 2000 Annual Report on Form 10-K, we
recognized repositioning charges totaling $338 million in 2000 (none
were recognized in the first quarter of 2000). The components of
the charges included severance costs of $157 million, asset
impairments of $141 million and other exit costs of $40 million.
The workforce reductions consisted of approximately 2,800
manufacturing and administrative positions and are expected to be
substantially completed by the end of the second quarter of 2001.
Also, $46 million of accruals established in 1999, principally for
severance, were returned to income in 2000 due to higher than
expected voluntary employee attrition resulting in reduced severance
liabilities.
The following table summarizes the status of our total repositioning costs.
Severance Asset Exit
Costs Impairments Costs Total
----- ----------- ----- -----
Balance at December 31, 2000 $236 $ - $80 $316
2001 charges 259 24 14 297
2001 usage (53) (24) (6) (83)
---- ---- ---- -----
Balance at March 31, 2001 $442 $ - $88 $530
==== ==== === ====
In the first quarter of 2001, we recognized in cost of goods
sold other charges consisting of customer claims and settlements of
contracts and contingent liabilities totaling $148 million and write-
offs of customer receivables and inventories totaling $50 million.
We also recognized in equity in (income) loss of affiliated
companies charges totaling $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 that is included in other (income) expense.
The total impact of repositioning and other charges was $596
million for the three months ended March 31, 2001. The pretax
distribution of the repositioning and other charges by income
statement classification was as follows: cost of goods sold - $474
million; selling, general and administrative expenses - $21 million;
equity in (income) loss of affiliated companies - $95 million; and
other (income) expense - $6 million.
NOTE 10. LITTON LITIGATION - On March 13, 1990, Litton Systems,
Inc. (Litton) filed a legal action against Honeywell Inc. (former
Honeywell) in U.S. District Court, Central District of California,
Los Angeles (the trial court) with claims that were subsequently
split into two separate cases. One alleges patent infringement under
federal law for using an ion-beam process to coat mirrors
incorporated in the former Honeywell's ring laser gyroscopes, and
tortious interference under state law for interfering with Litton's
prospective advantage with customers and contractual relationships
with an inventor and his company, Ojai Research, Inc. The other case
alleges monopolization and attempted monopolization under federal
antitrust laws by the former Honeywell in the sale of inertial
reference systems containing ring laser gyroscopes into the
commercial aircraft market. The former Honeywell generally denied
Litton's allegations in both cases. In the patent/tort case, the
former Honeywell also contested the validity as well
9
as the infringement of the patent, alleging, among other things,that
the patent had been obtained by Litton's inequitable conduct before
the United States Patent and Trademark Office.
Patent/Tort Case - U.S. District Court Judge Mariana Pfaelzer
presided over a three-month patent infringement and tortious
interference trial in 1993. On August 31, 1993, a jury returned a
verdict in favor of Litton, awarding damages against the former
Honeywell in the amount of $1.2 billion on three claims. The former
Honeywell filed post-trial motions contesting the verdict and damage
award. On January 9, 1995, the trial court set them all aside,
ruling, among other things, that the Litton patent was invalid due
to obviousness, unenforceable because of Litton's inequitable
conduct before the Patent and Trademark Office, and in any case, not
infringed by the former Honeywell's current process. It further
ruled that Litton's state tort claims were not supported by
sufficient evidence. The trial court also held that if its rulings
concerning liability were vacated or reversed on appeal, the former
Honeywell should at least be granted a new trial on the issue of
damages because the jury's award was inconsistent with the clear
weight of the evidence and based upon a speculative damage study.
The trial court's rulings were appealed to the U.S. Court of
Appeals for the Federal Circuit, and on July 3, 1996, in a two to
one split decision, a three judge panel of that court reversed the
trial court's rulings of patent invalidity, unenforceability and non-
infringement, and also found the former Honeywell to have violated
California law by intentionally interfering with Litton's consultant
contracts and customer prospects. However, the panel upheld two
trial court rulings favorable to the former Honeywell, namely that
the former Honeywell was entitled to a new trial for damages on all
claims, and also to a grant of intervening patent rights which are
to be defined and quantified by the trial court. After
unsuccessfully requesting a rehearing of the panel's decision by the
full Federal Circuit appellate court, the former Honeywell filed a
petition with the U.S. Supreme Court on November 26, 1996, seeking
review of the panel's decision. In the interim, Litton filed a
motion and briefs with the trial court seeking injunctive relief
against the former Honeywell's commercial ring laser gyroscope
sales. After the former Honeywell and certain aircraft
manufacturers filed briefs and made oral arguments opposing the
injunction, the trial court denied Litton's motion on public
interest grounds on December 23, 1996, and then scheduled the
patent/tort damages retrial for May 6, 1997.
On March 17, 1997, the U.S. Supreme Court granted the former
Honeywell's petition for review and vacated the July 3, 1996 Federal
Circuit panel decision. The case was remanded to the Federal
Circuit panel for reconsideration in light of a recent decision by
the U.S. Supreme Court in the Warner-Jenkinson vs. Hilton Davis
case, which refined the law concerning patent infringement under the
doctrine of equivalents. On March 21, 1997, Litton filed a notice
of appeal to the Federal Circuit of the trial court's December 23,
1996 decision to deny injunctive relief, but the Federal Circuit
stayed any briefing or consideration of that matter until such time
as it completed its reconsideration of liability issues ordered by
the U.S. Supreme Court.
The liability issues were argued before the same three-judge
Federal Circuit panel on September 30, 1997. On April 7, 1998, the
panel issued its decision:(i) affirming the trial court's ruling that
the former Honeywell's hollow cathode and RF ion-beam processes do not
literally infringe the asserted claims of Litton's '849 reissue patent
(Litton's patent); (ii) vacating the trial court's ruling that the
former Honeywell's RF ion-beam process does not infringe the asserted
claims of Litton's patent under the doctrine of equivalents, but
also vacating the jury's verdict on that issue and remanding that
issue to the trial court for further proceedings in accordance with
the Warner-Jenkinson decision;
10
(iii) vacating the jury's verdict that the former Honeywell's hollow
cathode process infringes the asserted claims of Litton's patent under
the doctrine of equivalents and remanding that issue to the trial court
for further proceedings; (iv) reversing the trial court's ruling with
respect to the torts of intentional interference with contractual
relations and intentional interference with prospective economic
advantage, but also vacating the jury's verdict on that issue,
and remanding the issue to the trial court for further proceedings
in accordance with California state law; (v) affirming the trial
court's grant of a new trial to the former Honeywell on damages for
all claims, if necessary; (vi) affirming the trial court's order
granting intervening rights to the former Honeywell in the patent
claim; (vii) reversing the trial court's ruling that the asserted
claims of Litton's patent were invalid due to obviousness and
reinstating the jury's verdict on that issue; and (viii) reversing
the trial court's determination that Litton had obtained Litton's
patent through inequitable conduct.
Litton's request for a rehearing of the panel's decision by
the full Federal Circuit court was denied and its appeal of the
denial of an injunction was dismissed. The case was remanded to the
trial court for further legal and perhaps factual review. The
parties filed motions with the trial court to dispose of the
remanded issues as matters of law, which were argued before the
trial court on July 26, 1999. On September 23, 1999, the trial court
issued dispositive rulings in the case, granting the former
Honeywell's Motion for Judgment as a Matter of Law and Summary
Judgment on the patent claims on various grounds; granting the
former Honeywell's Motion for Judgment as a Matter of Law on the
state law claims on the grounds of insufficient evidence; and
denying Litton's Motion for Partial Summary Judgment. The trial
court entered a final judgment in Honeywell's favor on January 31,
2000, and Litton filed a timely notice of appeal from that judgment
with the U.S. Court of Appeals for the Federal Circuit.
On February 5, 2001, a three judge panel of the Federal Circuit
court affirmed the trial court's rulings granting the former
Honeywell's Motion for Judgment as a Matter of Law and Summary
Judgment on the patent claims, agreeing that the former Honeywell
did not infringe. On the state law claims, the panel vacated the
jury's verdict in favor of Litton, reversed the trial court's grant
of judgment as a matter of law for the former Honeywell, and
remanded the case to the trial court for further proceedings under
state law to resolve certain factual issues that it held should have
been submitted to the jury. Litton has sought review of this
decision by the U.S. Supreme Court.
When preparing for the patent/tort damages retrial that was
scheduled for May 1997, Litton had submitted a revised damage study
to the trial court, seeking damages as high as $1.9 billion. We do
not expect that in the absence of any patent infringement Litton
will be able to prove any tortious conduct by the former Honeywell
under state law that interfered with Litton's contracts or business
prospects. We believe that it is reasonably possible that no damages
will ultimately be awarded to Litton.
Although it is not possible at this time to predict whether
Litton's appeal to the U.S. Supreme Court will succeed, potential
does remain for an adverse outcome which could be material to our
financial position or results of operations. We believe however,
that any potential award of damages for an adverse judgment of
infringement or interference should be based upon a reasonable
royalty reflecting the value of the ion-beam coating process, and
further that such an award would not be material to our 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.
11
Antitrust Case - Preparations for, and conduct of, the trial in
the antitrust case have generally followed the completion of
comparable proceedings in the patent/tort case. The antitrust trial
did not begin until November 20, 1995. Judge Pfaelzer also presided
over the trial, but it was held before a different jury. At the
close of evidence and before jury deliberations began, the trial
court dismissed, for failure of proof, Litton's contentions that the
former Honeywell had illegally monopolized and attempted to
monopolize by: (i) engaging in below-cost predatory pricing;
(ii) tying and bundling product offerings under packaged pricing;
(iii) misrepresenting its products and disparaging Litton products;
and (iv) acquiring the Sperry Avionics business in 1986.
On February 2, 1996, the case was submitted to the jury on the
remaining allegations that the former Honeywell had illegally
monopolized and attempted to monopolize by: (i) entering into
certain long-term exclusive dealing and penalty arrangements with
aircraft manufacturers and airlines to exclude Litton from the
commercial aircraft market, and (ii) failing to provide Litton with
access to proprietary software used in the cockpits of certain
business jets.
On February 29, 1996, the jury returned a $234 million single
damages verdict against the former Honeywell for illegal
monopolization, which verdict would have been automatically trebled.
On March 1, 1996, the jury indicated that it was unable to reach a
verdict on damages for the attempt to monopolize claim, and a
mistrial was declared as to that claim.
The former Honeywell subsequently filed a motion for judgment
as a matter of law and a motion for a new trial, contending, among
other things, that the jury's partial verdict should be overturned
because the former Honeywell was prejudiced at trial, and Litton
failed to prove essential elements of liability or submit competent
evidence to support its speculative, all-or-nothing $298.5 million
damage claim. Litton filed motions for entry of judgment and
injunctive relief. On July 24, 1996, the trial court denied the
former Honeywell's alternative motions for judgment as a matter of
law or a complete new trial, but concluded that Litton's damage
study was seriously flawed and granted the former Honeywell a
retrial on damages only. The court also denied Litton's two motions.
At that time, Judge Pfaelzer was expected to conduct the retrial of
antitrust damages sometime following the retrial of patent/tort
damages. However, after the U.S. Supreme Court remanded the
patent/tort case to the Federal Circuit in March 1997, Litton moved
to have the trial court expeditiously schedule the antitrust damages
retrial. In September 1997, the trial court rejected that motion,
indicating that it wished to know the outcome of the current
patent/tort appeal before scheduling retrials of any type.
Following the April 7, 1998 Federal Circuit panel decision in
the patent/tort case, Litton again petitioned the trial court to
schedule the retrial of antitrust damages. The trial court
tentatively scheduled the trial to commence in the fourth quarter of
1998, and reopened limited discovery and other pretrial
preparations. Litton then filed another antitrust damage claim of
nearly $300 million.
The damages only retrial began October 29, 1998 before Judge
Pfaelzer and a new jury. On December 9, 1998, the jury returned
verdicts against the former Honeywell totaling $250 million, $220
million of which is in favor of Litton and $30 million of which is
in favor of its sister corporation, Litton Systems, Canada, Limited.
On January 27, 1999, the court vacated its prior mistrial
ruling with respect to the attempt to monopolize claim and entered a
treble damages judgment in the total amount of $750 million for
actual and attempted monopolization. The former Honeywell filed
appropriate post-judgment motions with the trial court and Litton
12
filed motions seeking to add substantial attorney's fees and costs
to the judgment. A hearing on the post-judgment motions was held
before the trial court on May 20, 1999. On September 24, 1999, the
trial court issued rulings denying the former Honeywell's Motion for
Judgment as a Matter of Law and Motion for New Trial and Remittitur
as they related to Litton Systems Inc., but granting the former
Honeywell's Motion for Judgment as a Matter of Law as it relates to
Litton Systems, Canada, Limited. The net effect of these rulings was
to reduce the existing judgment against the former Honeywell of $750
million to $660 million, plus attorney fees and costs of
approximately $35 million. Both parties have appealed the judgment,
as to both liability and damages, to the U.S. Court of
Appeals for the Ninth Circuit. Execution of the trial court's
judgment is stayed pending resolution of the former Honeywell's
post-judgment motions and the disposition of any appeals filed by
the parties.
We expect to obtain substantial relief from the current adverse
judgment in the antitrust case by an appeal to the Ninth Circuit,
based upon sound substantive and procedural legal grounds. We
believe that there was no factual or legal basis for the magnitude
of the jury's award in the damages retrial and that, as was the case
in the first trial, the jury's award should be overturned. We also
believe there are serious questions concerning the identity and
nature of the business arrangements and conduct which were found by
the first antitrust jury in 1996 to be anti-competitive and damaging
to Litton, and the verdict of liability should be overturned as a
matter of law.
Although it is not possible at this time to predict the result
of the appeals, potential remains for an adverse outcome which could
be material to our 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. We also believe that it would be
inappropriate for Litton to obtain recovery of the same damages,
e.g. losses it suffered due to the former Honeywell's sales of ring
laser gyroscope-based inertial systems to OEMs and airline
customers, under multiple legal theories, claims, and cases, and
that eventually any duplicative recovery would be eliminated from
the antitrust and patent/tort cases.
SHAREOWNER LITIGATION - Honeywell and seven of its 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.
In addition, Honeywell, seven of its officers and its Board
have been named as defendants in a purported shareowner derivative
action which was filed on November 27, 2000 in the United States
District Court for the District of New Jersey (the Derivative
Complaint). The Derivative Complaint alleges a single claim for
breach of fiduciary duty based on nearly identical allegations to
those set forth in the Securities Law Complaints.
We believe that there is no factual or legal basis for the
allegations in the Securities Law Complaints and the Derivative
Complaint. 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 financial position or results of
operations. As a result of the uncertainty regarding the outcome of
this matter, no
13
provision has been made in our financial statements with respect to
this contingent liability.
14
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 March 31,
2001, and the related consolidated statements of income for each of
the three-month periods ended March 31, 2001 and 2000 and the
consolidated statements of cash flows for the three-month periods
ended March 31, 2001 and 2000. 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, 2000, and the related consolidated
statements of income, of shareowners' equity, and of cash flows for
the year then ended (not presented herein), and in our report dated
February 9, 2001, 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, 2000, 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
May 8, 2001
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
A. RESULTS OF OPERATIONS - FIRST QUARTER 2001 COMPARED WITH FIRST QUARTER 2000
---------------------------------------------------------------------------
Net sales in the first quarter of 2001 were $5,944 million, a
decrease of $100 million, or 2 percent compared with the first
quarter of 2000. The decrease in sales is attributable to the
following:
Acquisitions 2 %
Divestitures (2)
Volume/price -
Foreign exchange (2)
---
(2)%
===
Segment profit in the first quarter of 2001 was $698 million, a
decrease of $138 million, or 17 percent compared with the first
quarter of 2000. Segment profit margin for the first quarter of 2001
was 11.7 percent compared with 13.8 percent for the first quarter of
2000. The decrease in segment profit in the first quarter of 2001
was principally the result of a substantial decline in segment
profit for both the Performance Materials and Power & Transportation
Products segments. The Aerospace Solutions and Automation & Control
segments also had slightly lower segment profit. Segment profit is
discussed in detail by segment in the Review of Business Segments
section below.
Equity in (income) loss of affiliated companies was a loss of
$103 million in the first quarter of 2001 compared with income of $4
million in the first quarter of 2000. The first quarter of 2001
includes a charge of $95 million related to an other than temporary
decline in value of an equity investment and an equity investee's
loss contract. Excluding this charge, equity in (income) loss of
affiliated companies in the first quarter of 2001 was a loss of $8
million, a decrease of $12 million compared with the first quarter
of 2000 due mainly to lower earnings from our UOP process technology
(UOP) joint venture.
Other (income) expense, $4 million of income in the first quarter
of 2001, decreased by $6 million compared with the first quarter of
2000. The first quarter of 2001 includes 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 benefit recognized upon the adoption of Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended. See Notes 8 and 9
on page 8 of this Form 10-Q for further details. Excluding this net
provision, other (income) expense was $9 million of income in the
first quarter of 2001 compared with $10 million of income in the
first quarter of 2000.
The effective tax rate in the first quarter of 2001 includes the
impact of repositioning and other charges. Excluding the impact of
these charges, the effective tax rate was 29.4 percent in the first
quarter of 2001 compared with 31.5 percent in the first quarter of
2000. The decrease in the effective tax rate relates principally to
incremental tax synergies associated with the AlliedSignal Inc. and
Honeywell Inc. merger in December 1999 and favorable tax audit
results.
Net income of $41 million, or $0.05 per share, in the first
quarter of 2001 compared with net income of $506 million, or $0.63
per share in the first quarter of 2000. Adjusted for repositioning
and other charges, net income in the first
16
quarter of 2001 was $374 million, or $0.46 per share, higher than reported.
Net income in the first quarter of 2001 decreased by 18 percent compared
with the first quarter of 2000 if the current period is adjusted for these
repositioning and other charges.
Review of Business Segments
- ---------------------------
Aerospace Solutions sales of $2,411 million in the first
quarter of 2001 increased by $15 million, or 1 percent compared with
the first quarter of 2000. The increase relates to higher sales to
the aftermarket, particularly repair and overhaul and the military.
Sales of original equipment to air transport manufacturers and
business customers were also higher. This increase was partially
offset by the effects of prior year government-mandated divestitures
in connection with the merger of AlliedSignal Inc and Honeywell Inc.
Aerospace Solutions segment profit of $451 million in the first
quarter of 2001 decreased by $42 million, or 9 percent compared with
the first quarter of 2000. The decrease relates principally to a
less profitable sales mix, engineering and development costs related
to new products and government-mandated divestitures.
Automation & Control sales of $1,748 million in the first
quarter of 2001 increased by $48 million, or 3 percent compared with
the first quarter of 2000. This increase includes the negative
impact of foreign exchange of approximately 3 percent. Sales for
our Home & Building Control business were moderately higher due to
our acquisition of Pittway in the prior year. Sales for our security
business also improved slightly. Sales for our Industrial Control
business decreased moderately as growth in our sensing & control
business was more than offset by a decline in our industrial
automation & control business due to a shift to longer lead-time
order activity in the hydrocarbon processing industry.
Automation & Control segment profit of $188 million in the
first quarter of 2001 was lower by $2 million, or 1 percent compared
with the first quarter of 2000. Segment profit for our Home &
Building Control business increased moderately as lower costs due to
workforce reductions more than offset the negative impact of price
decreases in certain product lines. This increase was more than
offset by lower segment profit for our Industrial Control business
due to lower sales volume and price decreases in certain product
lines partially offset by lower costs due to workforce reductions.
Performance Materials sales of $913 million in the first
quarter of 2001 decreased by $112 million, or 11 percent compared
with the first quarter of 2000. Sales were moderately lower in our
Performance Polymers & Chemicals business due principally to lower
volumes in businesses impacted by weakness in the automotive end-
market. Electronic Materials sales declined substantially due to
prior year divestitures and lower sales volume in the wafer
fabrication business due to weakness in the semiconductor end-
market. This decrease was partially offset by sales growth in our
advanced circuits business due to growth in broadband and telecom
devices and applications.
Performance Materials segment profit of $38 million in the
first quarter of 2001 was lower by $57 million, or 60 percent
compared with the first quarter of 2000. The decrease results
primarily from high energy and raw material costs, primarily natural
gas, and lower sales volumes in certain Performance Polymers &
Chemicals businesses partially offset by cost structure improvements
from recent repositioning actions and the impact of prior year
divestitures.
17
Power & Transportation Products sales of $860 million in the
first quarter of 2001 decreased by $44 million, or 5 percent
compared with the first quarter of 2000. Excluding the negative
impact of foreign exchange, sales decreased 1 percent. Sales were
higher for our Turbocharging Systems business due to continued
strong demand in Europe. This increase was more than offset by
lower sales for our Commercial Vehicle Systems business due to
decreased heavy-duty truck builds in North America and our Friction
Materials and Consumer Products Group businesses due to weakness in
the automotive industry.
Power & Transportation Products segment profit of $50 million
in the first quarter of 2001 decreased by $38 million, or 43 percent
compared with the first quarter of 2000. The decrease principally
reflects lower sales in our Commercial Vehicle Systems, Friction
Materials and Consumer Products Group businesses and costs related
to our Turbogenerator product line.
B. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
----------------------------------------------------
Total assets at March 31, 2001 were $24,788 million, a decrease
of $387 million, or 2 percent from December 31, 2000.
Cash provided by operating activities of $247 million during
the first three months of 2001 decreased by $140 million compared
with the first three months of 2000 due principally to lower net
income, excluding repositioning and other charges as previously
described, and higher working capital.
Cash used for investing activities of $233 million during the
first three months of 2001 decreased by $2,180 million compared with
the first three months of 2000. The decrease relates principally to
the fact that the prior year included the acquisition of Pittway.
We continuously assess the relative strength of each business
in our portfolio as to strategic fit, market position and profit
contribution in order to upgrade our combined portfolio and identify
operating 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
operating units that do not fit into our long-term strategic plan
based on their market position, relative profitability or growth
potential. These operating units are considered for potential
divestiture, restructuring or other repositioning action subject to
regulatory constraints.
Cash used for financing activities of $136 million during the
first three months of 2001 increased by $1,171 million compared with
the first three months of 2000. The increase principally relates to
the fact that we issued $1 billion of 7.50% Notes in February 2000.
Total debt of $5,647 million at March 31, 2001 was $24 million
higher than at December 31, 2000.
Merger and Repositioning Charges
- --------------------------------
In the first quarter of 2001, we recognized a repositioning
charge of $297 million for the cost of actions designed to reduce
our cost structure and improve our future profitability. These
actions consisted of announced global workforce reductions totaling
approximately 6,500 manufacturing and administrative positions
across all of our reportable segments. The repositioning charge
also included asset impairments and other exit costs related to
plant closures and the rationalization of manufacturing capacity and
infrastructure principally in our Performance Polymers & Chemicals,
Electronic Materials, Transportation and Power Systems and
Automotive Consumer Products Group businesses. The components of the
charge included severance costs of $259 million, asset impairments
of $24 million
18
and other exit costs of $14 million. The pretax impact of the
repositioning charge by reportable segment was as follows:
Automation & Control - $132 million; Aerospace Solutions - $64
million; Performance Materials - $44 million; Power &
Transportation Products - $37 million; and Corporate - $20 million.
As disclosed in our 2000 Annual Report on Form 10-K, we
recognized repositioning charges totaling $338 million in 2000 (none
were recognized in the first quarter of 2000). The components of
the charges included severance costs of $157 million, asset
impairments of $141 million and other exit costs of $40 million.
The workforce reductions consisted of approximately 2,800
manufacturing and administrative positions and are expected to be
substantially completed by the end of the second quarter of 2001.
Also, $46 million of accruals established in 1999, principally for
severance, were returned to income in 2000 due to higher than
expected voluntary employee attrition resulting in reduced severance
liabilities.
We expect that the repositioning actions committed to in 2001
will generate pretax savings in excess of $250 million in 2001 and
$450 million in 2002. Cash expenditures for severance and other
exit costs necessary to execute these actions will exceed $250
million and will be incurred principally in 2001. Cash spending for
severance and other exit costs for 2001 and 2000 repositioning
actions were $59 million for the three months ended March 31, 2001
and were funded principally through operating cash flows.
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 2000 Annual Report on Form 10-K (Item 7A). At March 31,
2001, there has been no material change in this information.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits. The following exhibits are filed with this
Form 10-Q:
15 Independent Accountants' Acknowledgment Letter
as to the incorporation of their report relating
to unaudited interim financial statements
(b) Reports on Form 8-K. There were no reports on Form 8-K filed
during the three months ended March 31, 2001.
19
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: May 11, 2001 By: /s/ Philip M. Palazzari
------------------------
Philip M. Palazzari
Vice President and Controller
(on behalf of the Registrant
and as the Registrant's
Principal Accounting Officer)
20
EXHIBIT INDEX
Exhibit Number Description
2 Omitted (Inapplicable)
3 Omitted (Inapplicable)
4 Omitted (Inapplicable)
10 Omitted (Inapplicable)
11 Omitted (Inapplicable)
15 Independent Accountants'
Acknowledgment Letter as to
the incorporation of their
report relating to unaudited
interim financial statements
18 Omitted (Inapplicable)
19 Omitted (Inapplicable)
22 Omitted (Inapplicable)
23 Omitted (Inapplicable)
24 Omitted (Inapplicable)
99 Omitted (Inapplicable)
21