UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
---------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 June 30, 2001
- --------------------- ----------------------
$1 par value 811,615,947 shares
Honeywell International Inc.
Index
Page No.
--------
Part I. - Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheet - June 30, 2001 and December 31, 2000 3
Consolidated Statement of Income - Three and Six Months Ended
June 30, 2001 and 2000 4
Consolidated Statement of Cash Flows - Six Months Ended June 30,
2001 and 2000 5
Notes to Financial Statements 6
Report of Independent Accountants 17
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
Part II. - Other Information
Item 1. Legal Proceedings 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
- ------------
This report contains certain statements that may be deemed
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934. All statements, other than statements of historical fact,
that address activities, events or developments that we or our management
intends, expects, projects, believes or anticipates will or may occur in the
future are forward-looking statements. Such statements are based upon certain
assumptions and assessments made by our management in light of their experience
and their perception of historical trends, current conditions, expected future
developments and other factors they believe to be appropriate. The
forward-looking statements included in this report are also subject to a number
of material risks and uncertainties, including but not limited to economic,
competitive, governmental and technological factors affecting our operations,
markets, products, services and prices. Such forward-looking statements are not
guarantees of future performance and actual results, developments and business
decisions may differ from those envisaged by such forward-looking statements.
2
ITEM 1. FINANCIAL STATEMENTS
Honeywell International Inc.
Consolidated Balance Sheet
(Unaudited)
June 30, December 31,
2001 2000
-------------- -----------
(Dollars in millions)
ASSETS
Current assets:
Cash and cash equivalents $ 1,230 $ 1,196
Accounts and notes receivable 4,122 4,623
Inventories 3,740 3,734
Other current assets 1,224 1,108
------- -------
Total current assets 10,316 10,661
Investments and long-term receivables 606 748
Property, plant and equipment - net 5,111 5,230
Goodwill and other intangible
assets - net 5,874 5,898
Other assets 3,028 2,638
------- -------
Total assets $24,935 $25,175
======= =======
LIABILITIES
Current liabilities:
Accounts payable $ 2,130 $ 2,364
Short-term borrowings 364 110
Commercial paper 1,168 1,192
Current maturities of long-term debt 405 380
Accrued liabilities 3,579 3,168
------- -------
Total current liabilities 7,646 7,214
Long-term debt 3,503 3,941
Deferred income taxes 1,065 1,173
Postretirement benefit obligations
other than pensions 1,885 1,887
Other liabilities 1,316 1,253
SHAREOWNERS' EQUITY
Capital - common stock issued 958 958
- additional paid-in capital 2,930 2,782
Common stock held in treasury, at cost (4,281) (4,296)
Accumulated other nonowner changes (866) (729)
Retained earnings 10,779 10,992
------- -------
Total shareowners' equity 9,520 9,707
------- -------
Total liabilities and shareowners' equity $24,935 $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 Six Months Ended
June 30, June 30,
------------------ ---------------------
2001 2000 2001 2000
---- ---- ---- ----
(Dollars in millions,
except per share amounts)
Net sales $6,066 $6,309 $12,010 $12,353
------ ------ ------- -------
Costs, expenses and other
Cost of goods sold 5,067 4,671 10,040 9,121
Selling, general and administrative
expenses 837 763 1,605 1,521
(Gain) on sale of non-strategic
businesses - (112) - (112)
Equity in (income) loss of affiliated
companies 85 (14) 188 (18)
Other (income) expense (14) (3) (18) (13)
Interest and other financial charges 103 129 214 240
------ ------ ------ ------
6,078 5,434 12,029 10,739
------ ------ ------ ------
Income (loss) before taxes on income (12) 875 (19) 1,614
Taxes (benefit) on income (62) 258 (110) 491
------ ------ ------ ------
Net income $ 50 $ 617 $ 91 $ 1,123
====== ======= ======= =======
Earnings per share of common
stock - basic $ 0.06 $ 0.77 $ 0.11 $ 1.41
====== ====== ======= =======
Earnings per share of common
stock - assuming dilution $ 0.06 $ 0.76 $ 0.11 $ 1.39
====== ====== ======= =======
Cash dividends per share of
common stock $.1875 $.1875 $ .3750 $ .3750
====== ====== ======= =======
The Notes to Financial Statements are an integral part of this statement.
4
Honeywell International Inc.
Consolidated Statement of Cash Flows
(Unaudited)
Six Months Ended
June 30,
---------------------
2001 2000
--------- --------
(Dollars in millions)
Cash flows from operating activities:
Net income $ 91 $ 1,123
Adjustments to reconcile net income to net
cash provided by operating activities:
(Gain) on sale of non-strategic businesses -- (112)
Repositioning and other charges 1,247 96
Depreciation and amortization 477 529
Undistributed earnings of equity affiliates 17 20
Deferred income taxes (265) 39
Net taxes paid on sales of businesses (12) (62)
Other (455) (356)
Changes in assets and liabilities, net of the effects
of acquisitions and divestitures:
Accounts and notes receivable 393 98
Inventories (61) (3)
Other current assets 48 (61)
Accounts payable (218) 31
Accrued liabilities (485) (504)
------- -------
Net cash provided by operating activities 777 838
------- -------
Cash flows from investing activities:
Expenditures for property, plant and equipment (385) (355)
Proceeds from disposals of property, plant and
equipment 45 61
(Increase) in investments -- (2)
Cash paid for acquisitions (110) (2,466)
Proceeds from sales of businesses -- 296
(Increase) in short-term investments -- (16)
------- -------
Net cash (used for) investing activities (450) (2,482)
------- -------
Cash flows from financing activities:
Net (decrease) increase in commercial paper (24) 74
Net increase (decrease) in short-term borrowings 253 (145)
Proceeds from issuance of common stock 62 81
Proceeds from issuance of long-term debt -- 1,051
Payments of long-term debt (401) (151)
Repurchases of common stock (30) --
Cash dividends on common stock (153) (298)
------- -------
Net cash (used for) provided by financing activities (293) 612
------- -------
Net increase (decrease) in cash and cash equivalents 34 (1,032)
Cash and cash equivalents at beginning of year 1,196 1,991
------- -------
Cash and cash equivalents at end of period $ 1,230 $ 959
======= =======
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 June 30, 2001 and the
results of operations for the three and six months ended June 30, 2001 and 2000
and cash flows for the six months ended June 30, 2001 and 2000. The results of
operations for the three- and six-month periods ended June 30, 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 June 30, 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:
June 30, December 31,
2001 2000
-------- -----------
Trade $3,613 $3,967
Other 621 755
------ ------
4,234 4,722
Less - Allowance for doubtful
accounts and refunds (112) (99)
------ ------
$4,122 $4,623
====== ======
NOTE 3. Inventories consist of the following:
June 30, December 31,
2001 2000
-------- -----------
Raw materials $1,174 $1,262
Work in process 915 809
Finished products 1,827 1,797
------ -----
3,916 3,868
Less - Progress payments (38) (5)
Reduction to LIFO cost basis (138) (129)
------ ------
$3,740 $3,734
====== ======
NOTE 4. Total nonowner changes in shareowners' equity consist of the following:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- --------------------
2001 2000 2001 2000
---- ---- ---- ----
Net income $ 50 $ 617 $ 91 $1,123
Foreign exchange translation
adjustments (59) (133) (133) (159)
Derivatives qualifying as
hedges -- -- (4) --
Unrealized holding gains on
securities available for sale -- 12 -- 2
---- ----- ---- -----
$ (9) $ 496 $(46) $ 966
==== ===== ==== =====
6
NOTE 5. Segment financial data follows:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- --------------------
2001 2000 2001 2000
---- ---- ---- ----
Net sales
- ---------
Aerospace Solutions $2,532 $2,454 $ 4,943 $ 4,850
Automation & Control 1,781 1,880 3,529 3,580
Performance Materials 875 1,061 1,788 2,086
Power & Transportation
Products 866 895 1,726 1,799
Corporate 12 19 24 38
------ ------ ------ ------
$6,066 $6,309 $12,010 $12,353
====== ====== ======= =======
Segment profit
- --------------
Aerospace Solutions $ 504 $ 546 $ 955 $ 1,039
Automation & Control 186 275 374 465
Performance Materials 38 107 76 202
Power & Transportation
Products 63 82 113 170
Corporate (56) (39) (85) (69)
----- ----- ------- -----
Total Segment Profit 735 971 1,433 1,807
----- ----- ------- -----
Gain on sale of non-
strategic businesses -- 112 -- 112
Equity in income (loss)
of affiliated companies (7) 14 (15) 18
Other income 14 3 23 13
Interest and other
financial charges (103) (129) (214) (240)
Cumulative effect of
accounting change -- -- 1 --
Repositioning and other
charges (651) (96) (1,247) (96)
----- ----- ------- -------
Income (loss) before taxes
on income $ (12) $ 875 $ (19) $ 1,614
===== ===== ======= =======
7
NOTE 6. The details of the earnings per share calculations for the three- and
six-month periods ended June 30, 2001 and 2000 follow:
Three Months Six Months
------------------------------------ -------------------------------------
Per Per
Average Share Average Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
2001
Earnings per share of
common stock - basic $50 811.4 $0.06 $91 810.4 $0.11
Dilutive securities issuable
in connection with stock
plans 5.3 5.5
--- ----- ---- --- ----- ----
Earnings per share of common
stock - assuming dilution $50 816.7 $0.06 $91 815.9 $0.11
=== ===== ==== === ===== ====
Three Months Six Months
------------------------------------ -------------------------------------
Per Per
Average Share Average Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
2000
Earnings per share of
common stock - basic $617 799.8 $0.77 $1,123 798.2 $1.41
Dilutive securities issuable
in connection with stock
plans 10.7 10.5
----- ---- ---- ----- ---- -----
Earnings per share of common
stock - assuming dilution $617 810.5 $0.76 $1,123 808.7 $1.39
==== ===== ==== ====== ===== =====
The diluted earnings per share calculation excludes the effect of stock options
when the options' exercise prices exceed the average market price of the common
shares during the period. For the three- and six-month periods ended June 30,
2001, the number of stock options not included in the computations were 15.4 and
15.5 million, respectively. For the three- and six-month periods ended June 30,
2000, the number of stock options not included in the computations were 13.0 and
13.1 million, respectively. These stock options were outstanding at the end of
each of the respective periods.
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. On July 3, 2001, the European Commission
issued its decision prohibiting the proposed merger. Approval by the European
Commission was a condition for completion of the merger. Honeywell and GE have
given their consent that each may engage in certain activities prior to any
termination of the Merger Agreement without violating its terms. The consent
covers employment-related issues, acquisitions or dispositions of businesses and
the issuance or acquisition of securities. The consent otherwise preserves the
parties' rights under the Merger Agreement.
8
Under the terms of the Merger Agreement, a wholly-owned subsidiary of
GE was to be merged with and into Honeywell, and Honeywell would become a
wholly-owned subsidiary of GE and each issued and outstanding share of common
stock of Honeywell would have been converted into the right to receive 1.055
shares of common stock of GE, with fractional shares paid in cash. 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- and six-month periods ended June 30,
2001 and is not expected to significantly impact future operating results.
NOTE 9. In the second quarter of 2001, we recognized a repositioning charge of
$151 million for the impairment of three manufacturing facilities and related
workforce reductions in our Performance Materials business segment. The
repositioning charge also included workforce reductions principally in our
Aerospace Electronic Systems, Home & Building Control and Transportation and
Power Systems businesses. The announced workforce reductions consisted of
approximately 1,700 manufacturing and administrative positions which are
expected to be substantially completed by December 31, 2001. The components of
the charge included severance costs of $54 million, asset impairments of $84
million and other exit costs of $13 million. Also, $28 million of accruals
established in prior periods, principally for severance, were returned to income
in the second quarter of 2001 due to higher than expected voluntary attrition in
the Aerospace Solutions, Performance Materials and Corporate reportable
segments.
In the first quarter of 2001, we recognized a repositioning charge of
$297 million for the costs of actions designed to reduce our cost structure and
improve
9
our future profitability. These actions consisted of announced global workforce
reductions of approximately 6,500 manufacturing and administrative positions
across all of our reportable segments which are expected to be substantially
completed by December 31, 2001. 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 and other exit costs of $14 million.
As disclosed in our 2000 Annual Report on Form 10-K, we recognized
repositioning charges totaling $338 million in 2000 ($96 million were recognized
in the three- and six-month periods ended June 30, 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
substantially complete. 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 313 108 27 448
2001 usage (155) (108) (18) (281)
Adjustments (27) - (1) (28)
---- ----- --- ----
Balance at June 30, 2001 $367 $ - $88 $455
==== === === ====
In the second quarter of 2001, we recognized other charges consisting
of $42 million of transaction expenses related to the proposed merger with GE,
customer and employee claims and loss contracts of $140 million, probable and
reasonably estimable legal and environmental claims of $162 million, and $167
million of other write-offs principally related to tangible and intangible asset
impairments, including receivables and inventory. We also recognized a charge of
$17 million related to an other than temporary decline in value of an equity
investment.
In the first quarter of 2001, we recognized other charges consisting
of customer claims and settlements of contracts and contingent liabilities of
$148 million and write-offs of customer receivables and inventories of $50
million. We also recognized charges of $95 million related to an other than
temporary decline in value of an equity investment and an equity investee's loss
contract. We also redeemed our $200 million 5 3/4% dealer remarketable
securities due 2011, resulting in a loss of $6 million.
10
The following table summarizes the pretax impact of repositioning and
other charges by reportable business segment:
Periods Ended June 30,
--------------------------------------------------------
Three Months Six Months
------------------------- ---------------------------
2001 2000 2001 2000
---- ---- ---- ----
Aerospace Solutions $ 72 $ - $ 152 $ -
Automation & Control 195 17 468 17
Performance Materials 126 74 210 74
Power & Transportation
Products 33 5 127 5
Corporate 225 - 290 -
----- ---- ------ -----
$651 $ 96 $1,247 $ 96
===== ==== ====== =====
The following table summarizes the pretax distribution of repositioning
and other charges by income statement classification.
Periods Ended June 30,
--------------------------------------------------------
Three Months Six Months
------------------------- ---------------------------
2001 2000 2001 2000
---- ---- ---- ----
Cost of goods sold $508 $96 $ 982 $96
Selling, general and
administrative expense 65 - 86 -
Equity in (income) loss of
affiliated companies 78 - 173 -
Other (income) expense - - 6 -
----- ---- ------ ---
$651 $96 $1,247 $96
===== ==== ====== ===
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 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
11
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; (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.
12
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.
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
13
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 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.
14
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 current and former
officers were named as defendants in several purported class action lawsuits
filed in the United States District Court for the District of New Jersey (the
Securities Law Complaints). The Securities Law Complaints principally allege
that the defendants violated federal securities laws by purportedly making false
and misleading statements and by failing to disclose material information
concerning Honeywell's financial performance, thereby allegedly causing the
value of Honeywell's stock to be artificially inflated. The purported class
period for which damages are sought is December 20, 1999 to June 19, 2000.
In addition, Honeywell, seven of its current and former officers and
its Board of Directors 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 provision has been made in our financial statements with
respect to this contingent liability.
ENVIRONMENTAL MATTERS - We are subject to various federal, state and
local government requirements relating to the protection of employee health and
safety and the environment. We believe that, as a general matter, our policies,
practices and procedures are properly designed to prevent unreasonable risk of
environmental damage and personal injury to our employees and employees of our
customers and that our handling, manufacture, use and disposal of hazardous or
toxic substances are in accord with environmental laws and regulations. However,
mainly because of past operations and operations of predecessor companies, we,
like other companies engaged in similar businesses, have incurred remedial
response and voluntary cleanup costs for site contamination and are a party to
lawsuits and claims associated with environmental matters, including past
production of products containing asbestos and other toxic substances.
Additional lawsuits, claims and
15
costs involving environmental matters are likely to continue to arise in the
future.
With respect to environmental matters involving site contamination, we
continually conduct studies, individually at our owned sites, and jointly as a
member of industry groups at non-owned sites, to determine the feasibility of
various remedial techniques to address environmental matters. With respect to
environmental matters involving the production of products containing asbestos
and other toxic substances, we believe that the costs of defending and resolving
such matters will be largely covered by insurance, subject to deductibles,
exclusions, retentions and policy limits. It is our policy to record appropriate
liabilities for environmental matters when environmental assessments are made or
remedial efforts or damage claim payments are probable and the costs can be
reasonably estimated. With respect to site contamination, the timing of these
accruals is generally no later than the completion of feasibility studies. We
expect that we will be able to fund expenditures for these matters from
operating cash flow. The timing of cash expenditures depends on a number of
factors, including the timing of litigation and settlements of personal injury
and property damage claims, insurance recoveries, regulatory approval of cleanup
projects, remedial techniques to be utilized and agreements with other parties.
A charge against pretax earnings of $162 million for legal and
environmental claims is included in the charge for the three-month period ended
June 30, 2001 described in Note 9 on page 9 of this Form 10-Q. Although we do
not currently possess sufficient information to reasonably estimate the amounts
of liabilities to be recorded upon future completion of studies, litigation or
settlements, and neither the timing nor the amount of the ultimate costs
associated with environmental matters can be determined, they could be material
to our consolidated results of operations. However, considering our past
experience, insurance coverage and reserves, we do not expect that these matters
will have a material adverse effect on our consolidated financial position.
16
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 June 30, 2001, and the related
consolidated statements of income for each of the three-month and six-month
periods ended June 30, 2001 and 2000 and the consolidated statements of cash
flows for the six-month periods ended June 30, 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
August 7, 2001
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
A. RESULTS OF OPERATIONS - SECOND QUARTER 2001 COMPARED WITH SECOND QUARTER 2000
Net sales in the second quarter of 2001 were $6,066 million, a decrease
of $243 million, or 4 percent compared with the second quarter of 2000. The
decrease in sales is attributable to the following:
Acquisitions - %
Divestitures (2)
Volume/price -
Foreign exchange (2)
---
(4)%
===
Segment profit in the second quarter of 2001 was $735 million, a
decrease of $236 million, or 24 percent compared with the second quarter of
2000. Segment profit margin for the second quarter of 2001 was 12.1 percent
compared with 15.4 percent for the second quarter of 2000. The decrease in
segment profit in the second quarter of 2001 was principally the result of a
substantial decline in segment profit for the Automation & Control, Performance
Materials and Power & Transportation Products segments. The Aerospace Solutions
segment and Corporate also had lower segment profit. Segment profit is discussed
in detail by segment in the Review of Business Segments section below.
(Gain) on sale of non-strategic businesses of $112 million in the
second quarter of 2000 represents the pretax gain on the government-mandated
divestiture of the former Honeywell's TCAS product line in connection with the
merger of AlliedSignal and Honeywell Inc. in December 1999.
Equity in (income) loss of affiliated companies was a loss of $85
million in the second quarter of 2001 compared with income of $14 million in the
second quarter of 2000. The second quarter of 2001 included a charge of $78
million related to an other than temporary decline in value of an equity
investment, impairment of an equity investee's manufacturing facility and an
equity investee's severance charges. Excluding this charge, equity in (income)
loss of affiliated companies was a loss of $7 million in the second quarter of
2001 compared with income of $14 million in the second quarter of 2000. The
decrease of $21 million in equity income was due mainly to lower earnings from
joint ventures in our Performance Polymers & Chemicals and Home & Building
Control businesses.
Other (income) expense, $14 million of income in the second quarter of
2001, increased by $11 million compared with the second quarter of 2000 due
principally to lower minority interest expense.
Interest and other financial charges of $103 million in the second
quarter of 2001 decreased by $26 million, or 20 percent compared with the second
quarter of 2000 due principally to lower average debt outstanding and lower
average interest rates in the current period.
The effective tax rate in both the second quarter of 2001 and 2000
includes the impact of repositioning and other charges, while the effective tax
rate in the second quarter of 2000 also includes the impact of the gain on the
disposition of the TCAS product line of the former Honeywell. Excluding the
impact of these items in both periods, the effective tax rate was 29.6
percent in both the second quarter of 2001 and 2000.
18
Net income of $50 million, or $0.06 per share, in the second quarter of
2001 compared with net income of $617 million, or $0.76 per share, in the second
quarter of 2000. Adjusted for repositioning and other charges, net income in the
second quarter of 2001 was $400 million, or $0.49 per share, higher than
reported. Adjusted for repositioning and other charges and the gain on the
disposition of the TCAS product line of the former Honeywell, net income in the
second quarter of 2000 was $12 million, or $0.01 per share, lower than reported.
Net income in the second quarter of 2001 decreased by 26 percent compared with
the second quarter of 2000 if both periods are adjusted for these items.
Review of Business Segments
Aerospace Solutions sales of $2,532 million in the second quarter of
2001 increased by $78 million, or 3 percent compared with the second quarter of
2000. The increase principally relates to significantly higher sales of avionics
original equipment to air transport manufacturers and regional and business jet
customers. Sales to the aftermarket also increased slightly due principally to
higher sales of avionics products.
Aerospace Solutions segment profit of $504 million in the second
quarter of 2001 decreased by $42 million, or 8 percent compared with the second
quarter of 2000. The decrease relates principally to higher sales of
lower-margin original equipment products, higher postretirement benefit costs
and engineering and development costs related to new products.
Automation & Control sales of $1,781 million in the second quarter of
2001 decreased by $99 million, or 5 percent compared with the second quarter of
2000. This decrease includes the negative impact of foreign exchange of
approximately 3 percent. Sales for our Home & Building Control business
decreased slightly as both our products and solutions & services businesses had
lower sales due principally to weakness in key end-markets partially offset by
improved sales for our fire and security products business. Sales for our
Industrial Control business decreased moderately due principally to the impact
of prior year divestitures.
Automation & Control segment profit of $186 million in the second
quarter of 2001 was lower by $89 million, or 32 percent compared with the second
quarter of 2000. Segment profit for both our Home & Building Control and
Industrial Control businesses decreased substantially due to lower sales and
prior year divestitures partially offset by lower costs due to workforce
reductions.
Performance Materials sales of $875 million in the second quarter of
2001 decreased by $186 million, or 18 percent compared with the second quarter
of 2000. Electronic Materials sales declined substantially due to weakness in
the semiconductor and telecommunications markets, including the effects of a
broad inventory correction, and prior year divestitures. Sales decreased
significantly in our Performance Polymers & Chemicals business due principally
to lower volumes in our fibers, plastics and nylon businesses driven by weakness
in the automotive end-markets.
Performance Materials segment profit of $38 million in the second
quarter of 2001 was lower by $69 million, or 64 percent compared with the second
quarter of 2000. The decrease results primarily from continued high energy and
raw material costs, lower sales volumes and price declines in certain
Performance Polymers & Chemicals businesses.
19
Power & Transportation Products sales of $866 million in the second
quarter of 2001 decreased by $29 million, or 3 percent compared with the second
quarter of 2000. Excluding the negative impact of foreign exchange, sales
increased 1 percent. Sales were significantly higher for our Turbocharging
Systems business as strong demand continues in the European diesel-powered
passenger car market. This increase was offset by lower sales for our Commercial
Vehicle Systems business due to the ongoing decline in heavy-duty truck builds
in North America. Sales for our Friction Materials and Consumer Products Group
businesses also declined due to weakness in automotive end-markets.
Power & Transportation Products segment profit of $63 million in the
second quarter of 2001 decreased by $19 million, or 23 percent compared with the
second quarter of 2000 due principally to lower sales in our Commercial Vehicle
Systems, Friction Materials and Consumer Products Group businesses.
B. RESULTS OF OPERATIONS - SIX MONTHS 2001 COMPARED WITH SIX MONTHS 2000
Net sales in the first six months of 2001 were $12,010 million, a
decrease of $343 million, or 3 percent compared with the first six months of
2000. The decrease in sales is attributable to the following:
Acquisitions 1 %
Divestitures (2)
Volume/price -
Foreign exchange (2)
---
(3)%
===
Segment profit in the first six months of 2001 was $1,433 million, a
decrease of $374 million, or 21 percent compared with the first six months of
2000. Segment profit margin for the first six months of 2001 was 11.9 percent
compared with 14.6 percent for the first six months of 2000. The decrease in
segment profit in the first six months of 2001 was principally the result of a
substantial decline in segment profit for the Performance Materials, Automation
& Control and Power & Transportation Products segments. The Aerospace Solutions
segment also had lower segment profit. Segment profit is discussed in detail by
segment in the Review of Business Segments section below.
(Gain) on sale of non-strategic businesses of $112 million in the first
six months of 2000 represents the pretax gain on the government-mandated
divestiture of the former Honeywell's TCAS product line in connection with the
merger of AlliedSignal and Honeywell Inc. in December 1999.
Equity in (income) loss of affiliated companies was a loss of $188
million in the first six months of 2001 compared with income of $18 million in
the first six months of 2000. The first six months of 2001 included charges of
$173 million related to an other than temporary decline in value of an equity
investment, impairment of an equity investee's manufacturing facility and an
equity investee's loss contract and severance charges. Excluding these charges,
equity in (income) loss of affiliated companies was a loss of $15 million in the
first six months of 2001 compared with income of $18 million in the first six
months of 2000. The decrease of $33 million in equity income was due mainly to
lower earnings from joint ventures in our Performance Polymers & Chemicals and
Home & Building Control businesses.
Other (income) expense, $18 million of income in the first six months
of 2001, increased by $5 million compared with the first six months of 2000. The
first six months of 2001 included a net provision of $5 million consisting of a
$6
20
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. Excluding this net provision,
other (income) expense was $23 million of income in the first six months of
2001, an increase of $10 million compared with the first six months of 2000 due
principally to lower minority interest expense.
Interest and other financial charges of $214 million in the first six
months of 2001 decreased by $26 million, or 11 percent compared with the first
six months of 2000 due principally to lower average debt outstanding and lower
average interest rates in the current period.
The effective tax rate in both the first six months of 2001 and 2000
includes the impact of repositioning and other charges, while the effective tax
rate in the first six months of 2000 also includes the impact of the gain on
the disposition of the TCAS product line of the former Honeywell. Excluding the
impact of these items in both periods, the effective tax rate was 29.5 percent
in the first six months of 2001 compared with 30.5 percent in the first six
months of 2000. The decrease in the effective tax rate relates principally to
incremental tax synergies associated with the AlliedSignal and Honeywell Inc.
merger in December 1999 and favorable tax audit results.
Net income of $91 million, or $0.11 per share, in the first six months
of 2001 compared with net income of $1,123 million, or $1.39 per share, in the
first six months of 2000. Adjusted for repositioning and other charges, net
income in the first six months of 2001 was $774 million, or $0.95 per share,
higher than reported. Adjusted for repositioning and other charges and the gain
on the disposition of the TCAS product line of the former Honeywell, net income
in the first six months of 2000 was $12 million, or $0.02 per share, lower than
reported. Net income in the first six months of 2001 decreased by 22 percent
compared with the first six months of 2000 if both periods are adjusted for
these items.
Review of Business Segments
Aerospace Solutions sales of 4,943 million in the first six months of
2001 increased by $93 million, or 2 percent compared with the first six months
of 2000. Sales of avionics original equipment to air transport manufacturers and
regional and business jet customers increased significantly. Sales to the
aftermarket, particularly the military, were slightly higher. This increase was
partially offset by the effects of prior year government-mandated divestitures
in connection with the merger of AlliedSignal and Honeywell Inc.
Aerospace Solutions segment profit of $955 million in the first six
months of 2001 decreased by $84 million, or 8 percent compared with the first
six months of 2000. The decrease relates principally to higher sales of
lower-margin original equipment products, higher postretirement benefit costs,
engineering and development costs related to new products, and
government-mandated divestitures.
Automation & Control sales of $3,529 million in the first six months of
2001 decreased by $51 million, or 1 percent compared with the first six months
of 2000. This decrease includes the negative impact of foreign exchange of
approximately 3 percent. Sales for our Industrial Control business decreased
moderately, as sales in both our industrial automation & control and sensing and
control businesses were lower due to weakness in key end-markets. Sales for our
Home & Building Control business were slightly higher due to our acquisition of
Pittway in the prior year.
21
Automation & Control segment profit of $374 million in the first six
months of 2001 was lower by $91 million, or 20 percent compared with the first
six months of 2000. Segment profit for both our Home & Building Control and
Industrial Control businesses decreased significantly due to lower sales volume
and price decreases in certain product lines and prior year divestitures
partially offset by lower costs due to workforce reductions.
Performance Materials sales of $1,788 million in the first six months
of 2001 decreased by $298 million, or 14 percent compared with the first six
months of 2000. Electronic Materials sales declined substantially due to prior
year divestitures and lower sales volumes due to weakness in the semiconductor
and telecommunications markets. Sales were moderately lower in our Performance
Polymers & Chemicals business due principally to lower volumes in businesses
impacted by weakness in the automotive end-markets.
Performance Materials segment profit of $76 million in the first six
months of 2001 was lower by $126 million, or 62 percent compared with the first
six months of 2000. The decrease results primarily from our Performance Polymers
& Chemicals businesses due to lower sales volumes and higher energy and raw
material costs.
Power & Transportation Products sales of $1,726 million in the first
six months of 2001 decreased by $73 million, or 4 percent compared with the
first six months of 2000. Excluding the negative impact of foreign exchange,
sales were flat. Sales were significantly higher for our Turbocharging Systems
business due to continued strong demand in Europe. This increase was offset by
lower sales for our Commercial Vehicle Systems business due to decreased
heavy-duty truck builds in North America and lower sales for our Friction
Materials and Consumer Products Group businesses due to weakness in automotive
end-markets.
Power & Transportation Products segment profit of $113 million in the
first six months of 2001 decreased by $57 million, or 34 percent compared
with the first six months of 2000. The decrease principally reflects lower sales
in our Commercial Vehicle Systems, Friction Materials and Consumer Products
Group businesses.
C. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Total assets at June 30, 2001 were $24,935 million, a decrease of $240
million, or 1 percent from December 31, 2000.
Cash provided by operating activities of $777 million during the first
six months of 2001 decreased by $61 million compared with the first six months
of 2000 due principally to decreased earnings and higher spending for
repositioning actions.
Cash used for investing activities of $450 million during the first six
months of 2001 decreased by $2,032 million compared with the first six months of
2000 due principally to the acquisition of Pittway in the prior year.
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
22
operating units are considered for potential divestiture, restructuring or other
repositioning action subject to regulatory constraints.
Cash used for financing activities of $293 million during the first six
months of 2001 increased by $905 million compared with the first six months of
2000 due principally to the issuance of $1 billion of 7.50% Notes in February
2000. Total debt of $5,440 million at June 30, 2001 was $183 million, or 3
percent lower than at December 31, 2000. The increase in cash used for financing
activities was partially offset by lower dividend payments in the current period
as payment of the normal second quarter dividend was deferred until the third
quarter in connection with the proposed merger with GE.
Repositioning Charges
In the second quarter of 2001, we recognized a repositioning charge of
$151 million for the impairment of three manufacturing facilities and related
workforce reductions in our Performance Materials business segment. The
repositioning charge also included workforce reductions principally in our
Aerospace Electronic Systems, Home & Building Control and Transportation and
Power Systems businesses. The announced workforce reductions consisted of
approximately 1,700 manufacturing and administrative positions which are
expected to be substantially completed by December 31, 2001. The components of
the charge included severance costs of $54 million, asset impairments of $84
million and other exit costs of $13 million. Also, $28 million of accruals
established in prior periods, principally for severance, were returned to income
in the second quarter of 2001 due to higher than expected voluntary attrition in
the Aerospace Solutions, Performance Materials and Corporate reportable
segments. The net pretax impact of the repositioning charge by reportable
segment was as follows: Performance Materials - $96 million; Corporate - $22
million; Automation & Control - $8 million; Power & Transportation Products - $3
million; and Aerospace Solutions - ($6) million.
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 of approximately 6,500 manufacturing and administrative
positions across all of our reportable segments which are expected to be
substantially completed by December 31, 2001. 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 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 ($96 million were recognized
in the three- and six-month periods ended June 30, 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
substantially complete. 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.
23
We expect that the repositioning actions committed to in 2001 will
generate pretax savings in excess of $300 million in 2001 and $550 million in
2002. Cash expenditures for severance and other exit costs necessary to execute
these actions will exceed $300 million and will be incurred principally in 2001.
Cash spending for severance and other exit costs for 2001 and 2000 repositioning
actions were $173 million for the six months ended June 30, 2001 and were funded
principally through operating cash flows.
D. OTHER MATTERS
In July 2001, The Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 141, "Business Combinations" (SFAS No.
141), and Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets" (SFAS No. 142). SFAS No. 141 requires that all business
combinations initiated after June 30, 2001 be accounted for using the purchase
method only and that certain acquired intangible assets in a business
combination be recognized as assets apart from goodwill. SFAS No. 142 requires
that ratable amortization of goodwill be replaced with periodic tests of
goodwill's impairment and that intangible assets other than goodwill be
amortized over their useful lives. The amortization provisions of SFAS No. 142
apply to goodwill and intangible assets acquired after June 30, 2001. With
respect to goodwill and intangible assets acquired prior to July 1, 2001, we are
required to adopt SFAS No. 142 effective January 1, 2002. We are currently
evaluating the effect that the adoption of the provisions of SFAS No. 142,
effective January 1, 2002, will have on our results of operations and financial
position.
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 June 30, 2001,
there has been no material change in this information.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 10 on page 11 of this Form 10-Q.
ITEM 5. OTHER INFORMATION
We set December 7, 2001 as the date for our 2001 Annual Shareowner
Meeting, to be held at 10:00 a.m. at our headquarters in Morris Township, New
Jersey. Shareowners of record at the close of business on October 19, 2001 will
be entitled to vote at the 2001 Annual Meeting.
To be considered for inclusion in our proxy materials for the 2001
Annual Meeting pursuant to Rule 14a-8 of the Securities and Exchange Commission
(SEC),
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shareowner proposals must be received a reasonable time before we begin to print
and mail our proxy materials. We set the deadline for receipt of such proposals
as the close of business on September 7, 2001. Proposals submitted thereafter
will be opposed as not timely filed.
Shareowners intending to present a proposal for consideration at the
2001 Annual Meeting outside the processes of SEC Rule 14a-8 must notify us on or
before the close of business on September 7, 2001. Otherwise the proposal will
be considered untimely under our by-laws. In addition, our proxies will have
discretionary voting authority on any vote with respect to such proposal, if
presented at the meeting, without including information regarding the proposal
in our proxy materials.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibits are filed with this
Form 10-Q:
10.21 Agreement dated as of July 3, 2001 between Honeywell and
Lawrence A. Bossidy
10.22 Early Retirement Agreement dated as of July 3, 2001 between
Honeywell and Michael R. Bonsignore
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 June 30, 2001.
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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: August 13, 2001 By: /s/ John J. Tus
---------------------
John J. Tus
Vice President and Controller
(on behalf of the Registrant
and as the Registrant's
Principal Accounting Officer)
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EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
2 Omitted (Inapplicable)
3 Omitted (Inapplicable)
4 Omitted (Inapplicable)
10.21* Agreement dated as of July 3, 2001
between Honeywell and Lawrence A.
Bossidy
10.22* Early Retirement Agreement dated as
of July 3, 2001 between Honeywell and
Michael R. Bonsignore
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)
- ----------------
The Exhibits identified above with an asterisk (*) are management
contracts or compensatory plans or arrangements.
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