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, 2002
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 1-8974
Honeywell International Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-2640650
- -------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 Columbia Road
P.O. Box 4000
Morristown, New Jersey 07962-2497
- ---------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
(973) 455-2000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
- --------------------------------------------------------------------------------
(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, 2002
- --------------------- ------------------
$1 par value 817,610,376 shares
Honeywell International Inc.
Index
Page No.
--------
Part I. - Financial Information
---------------------
Item 1. Financial Statements:
Consolidated Balance Sheet -
March 31, 2002 and December 31, 2001 3
Consolidated Statement of Income -
Three Months Ended March 31, 2002 and 2001 4
Consolidated Statement of Cash Flows -
Three Months Ended March 31, 2002 and 2001 5
Notes to Financial Statements 6
Report of Independent Accountants 14
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 21
Part II. - Other Information
-----------------
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
This report contains certain statements that may be deemed
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934. All statements, other than statements of historical fact,
that address activities, events or developments that we or our management
intends, expects, projects, believes or anticipates will or may occur in the
future are forward-looking statements. Such statements are based upon certain
assumptions and assessments made by our management in light of their experience
and their perception of historical trends, current conditions, expected future
developments and other factors they believe to be appropriate. The
forward-looking statements included in this report are also subject to a number
of material risks and uncertainties, including but not limited to economic,
competitive, governmental and technological factors affecting our operations,
markets, products, services and prices. Such forward-looking statements are not
guarantees of future performance and actual results, developments and business
decisions may differ from those envisaged by such forward-looking statements.
2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Honeywell International Inc.
Consolidated Balance Sheet
(Unaudited)
March 31, December 31,
2002 2001
--------- -----------
(Dollars in millions)
ASSETS
Current assets:
Cash and cash equivalents $ 1,592 $ 1,393
Accounts and notes receivable 3,430 3,620
Inventories 3,351 3,355
Other current assets 1,364 1,526
------- -------
Total current assets 9,737 9,894
Investments and long-term receivables 680 466
Property, plant and equipment - net 4,812 4,933
Goodwill - net 5,439 5,441
Other intangible assets - net 923 915
Other assets 2,602 2,577
------- -------
Total assets $24,193 $24,226
======= =======
LIABILITIES
Current liabilities:
Accounts payable $ 1,801 $ 1,862
Short-term borrowings 75 120
Commercial paper 240 3
Current maturities of long-term debt 278 416
Accrued liabilities 3,609 3,819
------- -------
Total current liabilities 6,003 6,220
Long-term debt 4,653 4,731
Deferred income taxes 947 875
Postretirement benefit obligations
other than pensions 1,803 1,845
Other liabilities 1,304 1,385
SHAREOWNERS' EQUITY
Capital - common stock issued 958 958
- additional paid-in capital 3,077 3,015
Common stock held in treasury, at cost (4,232) (4,252)
Accumulated other nonowner changes (827) (835)
Retained earnings 10,507 10,284
------- -------
Total shareowners' equity 9,483 9,170
------- -------
Total liabilities and shareowners' equity $24,193 $24,226
======= =======
The Notes to Financial Statements are an integral part of this statement.
3
Honeywell International Inc.
Consolidated Statement of Income
(Unaudited)
Three Months Ended
March 31,
-----------------------
2002 2001
---- ----
(Dollars in millions,
except per share amounts)
Net sales $5,199 $5,944
------ ------
Costs, expenses and other
Cost of goods sold 4,116 4,973
Selling, general and administrative
expenses 617 768
(Gain) on sale of non-strategic
businesses (125) -
Equity in (income) loss of affiliated
companies (7) 103
Other (income) expense (16) (4)
Interest and other financial charges 87 111
------ ------
4,672 5,951
------ ------
Income (loss) before taxes 527 (7)
Tax expense (benefit) 151 (48)
------ -------
Net income $ 376 $ 41
====== ======
Earnings per share of common
stock - basic $ 0.46 $ 0.05
====== ======
Earnings per share of common
stock - assuming dilution $ 0.46 $ 0.05
====== ======
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,
-------------------
2002 2001
---- ----
(Dollars in millions)
Cash flows from operating activities:
Net income $ 376 $ 41
Adjustments to reconcile net income to net cash
provided by operating activities:
(Gain) on sale of non-strategic businesses (125) --
Repositioning and other charges 96 596
Depreciation 176 188
Goodwill and indefinite-lived intangible assets
amortization -- 51
Undistributed earnings of equity affiliates (10) 9
Deferred income taxes 121 (137)
Net taxes paid on sales of businesses -- (12)
Other (136) (182)
Changes in assets and liabilities, net of the effects
of acquisitions and divestitures:
Accounts and notes receivable 190 365
Inventories (9) (160)
Other current assets 6 (22)
Accounts payable (48) (143)
Accrued liabilities (232) (347)
------- -------
Net cash provided by operating activities 405 247
------- -------
Cash flows from investing activities:
Expenditures for property, plant and equipment (147) (173)
proceeds from disposals of property, plant and
equipment 8 26
(Increase) in investments -- (1)
Cash paid for acquisitions (16) (85)
Proceeds from sales of businesses 96 --
Decrease in short-term investments 7 --
------- -------
Net cash (used for) investing activities (52) (233)
------- -------
Cash flows from financing activities:
Net increase in commercial paper 237 48
Net increase (decrease) in short-term borrowings (60) 243
Proceeds from issuance of common stock 22 19
Payments of long-term debt (200) (278)
Repurchases of common stock -- (15)
Cash dividends on common stock (153) (153)
------- -------
Net cash (used for) financing activities (154) (136)
------- -------
Net increase (decrease) in cash and cash equivalents 199 (122)
Cash and cash equivalents at beginning of year 1,393 1,196
------- -------
Cash and cash equivalents at end of period $ 1,592 $ 1,074
======= =======
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, 2002 and the
results of operations and cash flows for the three months ended March 31, 2002
and 2001. The results of operations for the three-month period ended March 31,
2002 should not necessarily be taken as indicative of the results of operations
that may be expected for the entire year 2002.
The financial information as of March 31, 2002 should be read in
conjunction with the financial statements contained in our Annual Report on Form
10-K for 2001.
NOTE 2. Accounts and notes receivable consist of the following:
March 31, December 31,
2002 2001
-------- -----------
Trade $3,002 $3,168
Other 550 580
------ ------
3,552 3,748
Less - Allowance for doubtful
accounts (122) (128)
------ ------
$3,430 $3,620
====== ======
NOTE 3. Inventories consist of the following:
March 31, December 31,
2002 2001
-------- -----------
Raw materials $1,207 $1,024
Work in process 835 869
Finished products 1,457 1,603
------ ------
3,499 3,496
Less - Progress payments (20) (25)
Reduction to LIFO cost basis (128) (116)
------ ------
$3,351 $3,355
====== ======
NOTE 4. Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142). SFAS
No. 142 requires that goodwill and certain other intangible assets having
indefinite lives no longer be amortized to income, but instead be replaced with
periodic testing for impairment. Intangible assets determined to have definite
lives will continue to be amortized over their useful lives. The amortization
and non-amortization provisions of SFAS No. 142 have been applied to any
goodwill and intangible assets acquired after June 30, 2001. With the adoption
of SFAS No. 142, we reassessed the useful lives and residual values of all
acquired intangible assets to make any necessary amortization period
adjustments. Based on that assessment, an amount related to a trademark in our
automotive consumer products business was determined to be an indefinite-life
intangible asset because it is expected to generate cash flows indefinitely.
There were no other adjustments made to the amortization period or residual
values of other intangible assets. We also completed our goodwill impairment
testing during the
6
three months ended March 31, 2002 and have determined that there was no
impairment as of January 1, 2002.
In accordance with SFAS No. 142, prior period amounts were not
restated. A reconciliation of the previously reported net income and earnings
per share for the three months ended March 31, 2001 to the amounts adjusted
for the reduction of amortization expense, net of the related income tax
effect, is as follows:
Earnings Per Share
---------------------
Net Assuming
Income Basic Dilution
------ ----- --------
Net income - as reported $41 $0.05 $0.05
Add: amortization adjustment 49 0.06 0.06
--- ----- -----
Net income - as adjusted $90 $0.11 $0.11
=== ===== =====
Changes in the carrying amount of goodwill for the three months ended
March 31, 2002 by reportable segment are as follows:
Currency
Translation
Dec. 31, 2001 Acquisitions Adjustment Mar. 31, 2002
------------- ------------ ------------ -------------
Aerospace $1,595 $7 $(1) $1,601
Automation and
Control Solutions 2,461 - - 2,461
Specialty Materials 861 - (3) 858
Transportation and
Power Systems 524 - (5) 519
------ -- --- ------
$5,441 $7 $(9) $5,439
====== == === ======
Amortizable intangible assets at March 31, 2002 and December 31, 2001
consist of investments in long-term contracts and customer relationships of
$624 and $607 million, respectively, and patents, technology and other
finite-lived intangible assets of $262 and $271 million, respectively.
Intangible assets amortization expense was $13 million for the three months
ended March 31, 2002. Estimated intangible assets amortization expense for
the full year 2002 and for each of the five succeeding years approximates
$50 million, respectively. Intangible assets with indefinite lives consist
of a trademark with a carrying value of $37 million.
NOTE 5. Total nonowner changes in shareowners' equity consist of the following:
Three Months Ended
March 31,
--------------------------
2002 2001
---- ----
Net income $376 $ 41
Foreign exchange translation adjustments 4 (74)
Change in fair value of effective cash
flow hedges 4 (4)
---- ----
$384 $(37)
==== ====
7
NOTE 6. Segment financial data follows:
Three Months Ended March 31,
--------------------------------------------------------------
Net Sales Segment Profit
------------------------------ ---------------------------
2002 2001 2002 2001(2)
---- ---- ---- ----
Aerospace $2,089 $2,411 $307 $451
Automation and Control Solutions 1,609 1,748 207 188
Specialty Materials 758 913 8 38
Transportation and Power Systems 726 860 73 50
Corporate 17 12 (36) (29)
------ ------ ---- ----
$5,199 $5,944 559 698
====== ====== ---- ----
Gain on sale of non-
strategic businesses 125 -
Equity in income (loss)
of affiliated companies 10 (8)
Other income 16 9
Interest and other
financial charges (87) (111)
Repositioning and other
charges (1) (96) (595)
---- ----
Income (loss) before taxes $527 $ (7)
==== ====
(1) In 2001 included cumulative effect adjustment of $1 million of
income related to adoption of SFAS No. 133.
(2) Segment profit in the first quarter of 2001 included the pretax
amortization of goodwill and indefinite-lived intangible assets of
$51 million (Aerospace - $15 million, Automation and Control
Solutions - $23 million, Specialty Materials - $8 million and
Transportation and Power Systems - $5 million). Such amortization
expense was excluded from segment profit for the first quarter of
2002, in conformity with the provisions of SFAS No. 142.
NOTE 6. The details of the earnings per share calculations for the three-month
periods ended March 31, 2002 and 2001 follow:
2002 2001
------------------------------------- -------------------------------------
Per Per
Average Share Average Share
Income Shares Amount Income Shares Amount
------ ------- ------ ------ ------ ------
Earnings per share of
common stock - basic $376 817.0 $0.46 $41 809.4 $0.05
Dilutive securities issuable
in connection with stock
plans 3.4 5.8
---- ----- ----- --- ----- -----
Earnings per share of
common stock - assuming
dilution $376 820.4 $0.46 $41 815.2 $0.05
==== ===== ===== === ===== =====
8
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, 2002 and 2001, the number of stock options not included in the
computations were 42.5 and 15.6 million, respectively. These stock options
were outstanding at the end of each of the respective periods.
NOTE 7. In the first quarter of 2002, we recognized a repositioning charge of
$65 million for the costs of actions designed to reduce our cost structure and
improve our future profitability. The components of the charge included
severance costs of $41 million, asset impairments of $11 million and other exit
costs of $13 million. Severance costs were related to announced workforce
reductions of approximately 1,100 manufacturing and administrative positions
principally in our Automation and Control Solutions and Specialty Materials
reportable segments. Asset impairments were principally related to manufacturing
plant and equipment held for sale and capable of being taken out of service and
actively marketed in the period of impairment, mainly in our Specialty Materials
reportable segment. Other exit costs principally consisted of lease termination
losses negotiated or subject to reasonable estimation mainly related to closed
facilities in our Automation and Control Solutions and Specialty Materials
reportable segments. These repositioning actions are expected to be completed by
December 31, 2002. Also, $12 million of previously established severance
accruals were returned to income in the first quarter of 2002, due principally
to higher than expected voluntary employee attrition resulting in reduced
severance liabilities in our Specialty Materials reportable segment.
As disclosed in our 2001 Annual Report on Form 10-K, we recognized
repositioning charges totaling $1,016 million in 2001 ($297 million were
recognized in the three months ended March 31, 2001). The components of the
charges included severance costs of $727 million, asset impairments of $194
million and other exit costs of $95 million. Severance costs were related to
announced global workforce reductions of approximately 20,000 manufacturing and
administrative positions across all of our reportable segments of which
approximately 17,000 positions have been eliminated as of March 31, 2002. Also,
$119 million of previously established accruals, mainly for severance, were
returned to income in 2001 due principally to higher than expected voluntary
employee attrition resulting in reduced severance liabilities, principally in
our Aerospace and Automation and Control Solutions reportable segments.
The following table summarizes the status of our total repositioning
costs:
Severance Asset Exit
Costs Impairments Costs Total
----- ----------- ----- -----
Balance at December 31, 2001 $ 484 $ - $113 $ 597
2002 charges 41 11 13 65
2002 usage (110) (11) (50) (171)
Adjustments (12) - - (12)
----- ---- ---- -----
Balance at March 31, 2002 $403 $ - $ 76 $ 479
===== ==== ==== =====
In the first quarter of 2002, we recognized charges of $43 million
related to our Friction Materials business and a chemical manufacturing
facility. In 2001, we adopted a plan to dispose of our Friction Materials
business and held discussions with a potential acquiror of the business. As part
of these discussions we continued to evaluate the business for possible
impairment. As a result of this
9
evaluation, we recognized an impairment charge of $27 million in the first
quarter of 2002 related to the write-down of property, plant and equipment
(classified as assets held for disposal in Other Current Assets). We also
recognized an asset impairment charge of $16 million related to the planned
shutdown of a chemical manufacturing facility in our Specialty Materials
reportable segment.
In the 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 receivables and inventories of $50 million. We also
recognized charges of $95 million related to an other than temporary decline in
value of an equity investment and an equity investee's loss contract. We also
redeemed our $200 million 5 3/4% dealer remarketable securities due 2011,
resulting in a loss of $6 million.
The following table summarizes the pretax impact of total repositioning
and other charges by reportable business segment:
Three Months Ended March 31,
----------------------------
2002 2001
---- ----
Aerospace $ - $ 80
Automation and Control Solutions 39 273
Specialty Materials 25 84
Transportation and Power Systems 28 94
Corporate 4 65
--- ----
$96 $596
==== ====
The following table summarizes the pretax distribution of total
repositioning and other charges by income statement classification:
Three Months Ended March 31,
----------------------------
2002 2001
---- ----
Cost of goods sold $89 $474
Selling, general and
administrative expenses 4 21
Equity in (income) loss of
affiliated companies 3 95
Other (income) expense - 6
---- ----
$96 $596
=== ====
NOTE 8. In March 2002, we completed the disposition of our Bendix Commercial
Vehicle Systems (BCVS) business for approximately $350 million in cash and
securities resulting in a pretax gain of $125 million. In January 2002, we had
reached an agreement with Knorr-Bremse AG (Knorr) to transfer control of our
global interests in BCVS to Knorr. BCVS had sales and segment profit of
approximately $375 and $57 million, respectively, in 2001.
NOTE 9. SHAREOWNER LITIGATION - Honeywell and seven of its current and former
officers were named as defendants in several purported class action lawsuits
filed in the United States District Court for the District of New Jersey (the
Securities Law Complaints). The Securities Law Complaints principally allege
that the defendants violated federal securities laws by purportedly making false
and misleading statements and by failing to disclose material information
concerning Honeywell's financial performance, thereby allegedly causing the
value of Honeywell's stock to be artificially inflated. The purported class
period for which damages are sought is December 20, 1999 to June 19, 2000. On
January 15, 2002, the
10
District Court dismissed the consolidated complaint against four of Honeywell's
current and former officers.
In addition, Honeywell, seven of its current and former officers and
its Board of Directors were 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 alleged a single claim for breach of fiduciary duty based
on nearly identical allegations to those set forth in the Securities Law
Complaints. The District Court dismissed the Derivative Complaint with prejudice
on April 17, 2002.
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 consolidated
financial position or results of operations. As a result of the uncertainty
regarding the outcome of this matter, no provision has been made in our
financial statements with respect to this contingent liability.
ENVIRONMENTAL MATTERS - We are subject to various federal, state and
local government requirements relating to the protection of employee health and
safety and the environment. We believe that, as a general matter, our policies,
practices and procedures are properly designed to prevent unreasonable risk of
environmental damage and personal injury to our employees and employees of our
customers and that our handling, manufacture, use and disposal of hazardous or
toxic substances are in accord with environmental laws and regulations. However,
mainly because of past operations and operations of predecessor companies, we,
like other companies engaged in similar businesses, have incurred remedial
response and voluntary cleanup costs for site contamination and are a party to
lawsuits and claims associated with environmental matters, including past
production of products containing toxic substances. Additional lawsuits, claims
and costs involving environmental matters are likely to continue to arise in the
future.
With respect to environmental matters involving site contamination, we
continually conduct studies, individually at our owned sites, and jointly as a
member of industry groups at non-owned sites, to determine the feasibility of
various remedial techniques to address environmental matters. With respect to
environmental matters involving the production of products containing 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.
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.
11
ASBESTOS MATTERS - Like more than a thousand other industial companies,
Honeywell is a defendant in personal injury actions related to asbestos. Our
involvement is limited because we did not mine or produce asbestos, nor did we
make or sell insulation products or other construction materials that have been
identified as the primary cause of asbestos-related disease in the vast majority
of claimants. Rather, we made several products that contained small amounts of
asbestos.
Honeywell's Bendix Friction Materials business manufactured automotive
brake pads that included asbestos in an encapsulated form. There is a limited
group of potential claimants consisting largely of professional brake mechanics.
During the twenty-year period from 1981 through 2001, we have resolved
approximately 53,000 Bendix claims at an average cost per claim of one thousand
dollars. Honeywell has had no out-of-pocket costs for these cases since its
insurance deductible was satisfied many years ago. There are currently
approximately 48,000 claims pending and we have no reason to believe that the
historic rate of dismissal will change. We have $2 billion of insurance
remaining.
Another source of claims is refractory products (high temperature
bricks and cement) sold largely to the steel industry in the East and Midwest by
North American Refractories Company (NARCO), a business we owned from 1979 to
1986. Less than 2 percent of NARCO's products contained asbestos.
When we sold the NARCO business in 1986, we agreed to indemnify NARCO
with respect to personal injury claims for products that had been discontinued
prior to the sale (as defined in the sale agreement). NARCO retained all
liability for all other claims. NARCO has resolved approximately 176,000 claims
in the past 18 years at an average cost per claim of two thousand two hundred
dollars. Of those claims, 43 percent were dismissed on the ground that there was
insufficient evidence that NARCO was responsible for the claimant's asbestos
exposure. There are approximately 116,000 claims currently pending against
NARCO, including approximately 7 percent in which Honeywell is also named as a
defendant. During the past 18 years, Honeywell and our insurers have contributed
to the cost of the NARCO defense. We have in excess of $1.2 billion of insurance
remaining that can be specifically allocated to NARCO-related liability.
On January 4, 2002, NARCO filed for reorganization under Chapter 11 of
the U.S. Bankruptcy Code. As a result, all of the claims pending against NARCO
are automatically stayed pending the reorganization of NARCO. In addition,
because the claims pending against Honeywell necessarily will impact the
liabilities of NARCO, because the insurance policies held by Honeywell are
essential to a successful NARCO reorganization, and because Honeywell has
offered to commit those policies to the reorganization, the bankruptcy court has
temporarily enjoined any claims against Honeywell, current or future, related to
NARCO. In connection with NARCO's bankruptcy filing, we paid NARCO's parent
company $40 million and have agreed to provide NARCO with up to $20 million in
financing. We have also agreed to pay $20 million to NARCO's parent company upon
the filing of a plan of reorganization for NARCO acceptable to Honeywell, and to
pay NARCO's parent company $40 million, and to forgive any outstanding NARCO
indebtedness, upon the confirmation and consummation of such a plan.
We believe that, as part of the NARCO plan of reorganization, a trust
will be established for the benefit of all asbestos claimants, current and
future. Honeywell intends to contribute its insurance coverage (which is in
excess of $1.2 billion) to the trust in exchange for its indemnity obligation to
NARCO. If that trust is put in place and approved by the court as fair and
equitable, Honeywell as well as NARCO will be entitled to a permanent channeling
injunction barring all
12
present and future individual actions in state or federal courts and requiring
all asbestos-related claims based on exposure to NARCO products to be made
against the federally-supervised trust. In our view, our existing insurance plus
the existing NARCO assets should be sufficient to fund the trust. There is no
assurance that a stay will remain in effect, that a plan of reorganization will
be proposed or confirmed, or that any plan that is confirmed will provide relief
to Honeywell.
Although it is impossible to predict the outcome of pending or future
claims or the NARCO bankruptcy, in light of the nature of the potential
exposure, our experience over the past 20 years in resolving asbestos-related
claims, our insurance coverage, our existing reserves and the NARCO bankruptcy
proceeding, we do not believe that asbestos-related claims will have a material
adverse effect on our consolidated results of operations or financial position.
13
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, 2002, and the related
consolidated statements of income for each of the three-month periods ended
March 31, 2002 and 2001 and the consolidated statements of cash flows for the
three-month periods ended March 31, 2002 and 2001. These financial statements
are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated interim financial statements for them
to be in conformity with accounting principles generally accepted in the United
States of America.
We previously audited in accordance with auditing standards generally accepted
in the United States of America, the consolidated balance sheet as of December
31, 2001, and the related consolidated statements of operations, of shareowners'
equity, and of cash flows for the year then ended (not presented herein), and in
our report dated February 7, 2002, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying consolidated balance sheet information as of December 31, 2001,
is fairly stated in all material respects in relation to the consolidated
balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Florham Park, NJ
May 7, 2002
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
A. RESULTS OF OPERATIONS - FIRST QUARTER 2002 COMPARED WITH FIRST QUARTER 2001
---------------------------------------------------------------------------
Net sales in the first quarter of 2002 were $5,199 million, a decrease of
$745 million, or 13 percent compared with the first quarter of 2001. The
decrease in sales is attributable to the following:
Acquisitions - %
Divestitures (2)
Price (2)
Volume (8)
Foreign exchange (1)
---
(13)%
===
A discussion of net sales by reportable segment can be found in the Review
of Business Segments section below.
Cost of goods sold of $4,116 and $4,973 million included repositioning and
other charges of $89 and $474 million in the first quarter of 2002 and 2001,
respectively. Cost of goods sold in the first quarter of 2001 also included $51
million of amortization of goodwill and indefinite-lived intangible assets. Such
amortization expense was excluded from cost of goods sold in the first quarter
of 2002 in conformity with SFAS No. 142, which we adopted effective January 1,
2002. Excluding such amortization expense and repositioning and other charges,
cost of goods sold was $4,027 and $4,448 million or 77.5 and 74.8 percent of
sales in the first quarter of 2002 and 2001, respectively. The increase in cost
of goods sold as a percent of sales in the first quarter of 2002 compared with
the first quarter of 2001 primarily resulted from substantially lower sales of
higher-margin commercial aftermarket products and services in our Aerospace
segment and lower volumes in our Specialty Materials segment. This increase was
partially offset by lower costs due to workforce reductions.
Selling, general and administrative expenses of $617 and $768 million
included repositioning and other charges of $4 and $21 million in the first
quarter of 2002 and 2001, respectively. Excluding these charges, selling,
general and administrative expenses were $613 and $747 million or 11.8 and 12.6
percent of sales in the first quarter of 2002 and 2001, respectively. The
decrease in selling, general and administrative expenses as a percent of sales
in the first quarter of 2002 compared with the first quarter of 2001 principally
resulted from the impact of workforce reductions and a decline in discretionary
spending including travel and overtime.
Retirement benefit (pension and other post retirement) plans cost increased
by $51 million in the first quarter of 2002 compared with the first quarter of
2001 due principally to the funding status of our pension plans. Future effects
on operating results will principally depend on pension plan investment
performance and other economic conditions.
(Gain) on sale of non-strategic businesses of $125 million in the first
quarter of 2002 represented the pretax gain on the disposition of our Bendix
Commercial Vehicle Systems business.
Equity in (income) loss of affiliated companies was income of $7 million in
the first quarter of 2002 compared with a loss of $103 million in the first
quarter of 2001. Equity in (income) loss of affiliated companies included
15
repositioning and other charges of $3 and $95 million in the first quarter of
2002 and 2001, respectively. Excluding these charges, equity in (income) loss of
affiliated companies was income of $10 million in the first quarter of 2002
compared with a loss of $8 million in the first quarter of 2001. The increase of
$18 million in equity income in the first quarter of 2002 compared with the
first quarter of 2001 was due mainly to an improvement in earnings from our UOP
process technology joint venture and the accounting for the current quarter's
operating results of our Bendix Commercial Vehicle Systems business using the
equity method since control of the business was transferred to Knorr-Bremse AG
in January 2002.
Other (income) expense, $16 million of income in the first quarter of 2002,
compared with income of $4 million in the first quarter of 2001. The first
quarter of 2001 included a net provision of $5 million consisting of a $6
million charge related to the redemption of our $200 million 5 3/4% dealer
remarketable securities and a $1 million credit recognized upon the adoption of
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended. Excluding this net provision,
other (income) expense was $9 million of income in the first quarter of 2001.
The increase of $7 million in other income in the first quarter of 2002 compared
with the first quarter of 2001 was due principally to lower minority interests.
Interest and other financial charges of $87 million in the first quarter of
2002 decreased by $24 million, or 22 percent compared with the first quarter of
2001 due mainly to lower average debt outstanding and lower average interest
rates in the current period.
The effective tax rate in both the first quarter of 2002 and 2001 included
the impact of repositioning and other charges. The effective tax rate in the
first quarter of 2002 also included the impact of the gain on the disposition of
our Bendix Commercial Vehicle Systems business. Excluding the impact of
repositioning and other charges in both periods and the gain on the disposition
of our Bendix Commercial Vehicle Systems business in the current quarter, the
effective tax rate was 26.5 percent in the first quarter of 2002 compared with
29.4 percent in the first quarter of 2001. The decrease in the effective tax
rate in the first quarter of 2002 related to the absence of non-deductible
goodwill amortization expense in the current quarter, foreign tax planning
strategies and favorable settlements of world-wide tax audits.
Net income of $376 million, or $0.46 per share, in the first quarter of
2002 compared with net income of $41 million, or $0.05 per share, in the first
quarter of 2001. Adjusted for repositioning and other charges and the gain on
the disposition of our Bendix Commercial Vehicle Systems business, net income in
the first quarter of 2002 was $10 million, or $0.01 per share, lower than
reported. Adjusted for repositioning and other charges, net income in the first
quarter of 2001 was $374 million, or $0.46 per share, higher than reported. Net
income in the first quarter of 2002 decreased by 12 percent compared with the
first quarter of 2001 if both periods are adjusted to exclude the impact of
repositioning and other charges and the gain on the disposition of our Bendix
Commercial Vehicle Systems business. Assuming the provisions of SFAS No. 142 had
been adopted on January 1, 2001, adjusted net income in the first quarter of
2002 would have been 21 percent lower compared with the first quarter of 2001.
16
Review of Business Segments
- ---------------------------
Three Months Ended March 31,
----------------------------------------------------------------
Net Sales Segment Profit
------------------------------ -----------------------------
2002 2001 2002 2001(2)
---- ---- ---- ----
Aerospace $2,089 $2,411 $307 $451
Automation and Control Solutions 1,609 1,748 207 188
Specialty Materials 758 913 8 38
Transportation and Power Systems 726 860 73 50
Corporate 17 12 (36) (29)
------ ------ ---- ----
$5,199 $5,944 559 698
====== ====== ---- ----
Gain on sale of non-
strategic businesses 125 -
Equity in income (loss)
of affiliated companies 10 (8)
Other income 16 9
Interest and other
financial charges (87) (111)
Repositioning and other
charges (1) (96) (595)
---- ----
Income (loss) before taxes $527 $ (7)
==== ====
(1) In 2001 included cumulative effect adjustment of $1 million of
income related to adoption of SFAS No. 133.
(2) Segment profit in the first quarter of 2001 included the pretax
amortization of goodwill and indefinite-lived intangible assets of
$51 million (Aerospace - $15 million, Automation and Control
Solutions - $23 million, Specialty Materials - $8 million and
Transportation and Power Systems - $5 million). Such amortization
expense was excluded from segment profit for the first quarter of
2002, in conformity with the provisions of SFAS No. 142.
Aerospace sales of $2,089 million in the first quarter of 2002
decreased by $322 million, or 13 percent compared with the first quarter of
2001. This decrease principally resulted from substantially lower sales to both
commercial air transport aftermarket and original equipment (OE) customers as
the commercial aviation market continued to be adversely impacted by the
terrorist attacks on September 11, 2001 and general weakness in the economy.
Lower airplane deliveries by our OE customers, reduced flying hours by the
airlines, increased numbers of older parked airplanes and the airlines attempt
to preserve cash all contributed to lower sales by our commercial air transport
segment. Sales to our business and general aviation aftermarket customers
decreased substantially due mainly to a reduction in flying hours in the latter
part of 2001. Sales to our business and general aviation OE customers also
decreased substantially reflecting a decline in deliveries of regional and
business jet airplanes. This decrease was partially offset by higher sales to
military original equipment customers.
Aerospace segment profit of $307 million in the first quarter of 2002
decreased by $144 million, or 32 percent compared with the first quarter of 2001
due mainly to substantially lower sales of higher-margin commercial aftermarket
products and services. This decrease was partially offset by lower costs
primarily from workforce reductions and a decline in discretionary spending.
17
Automation and Control Solutions sales of $1,609 million in the first
quarter of 2002 decreased by $139 million, or 8 percent compared with the first
quarter of 2001. Excluding the effects of foreign exchange, sales decreased by 7
percent. This decrease resulted primarily from significantly lower sales for our
Control Products business due mainly to weakness in industrial production. Sales
for our Service business were also moderately lower due primarily to general
weakness in the economy.
Automation and Control Solutions segment profit of $207 million in the
first quarter of 2002 increased by $19 million, or 10 percent compared with the
first quarter of 2001. Excluding goodwill amortization expense in the first
quarter of 2001, segment profit in the first quarter of 2002 decreased by 2
percent compared with the first quarter of 2001. This decrease resulted
principally from the impact of lower sales volumes, mainly in our Control
Products and Service businesses, and higher raw material costs and pricing
pressures in all the segment's businesses. This decrease was partially offset by
the benefits of repositioning actions, mainly workforce reductions.
Specialty Materials sales of $758 million in the first quarter of 2002
decreased by $155 million, or 17 percent compared with the first quarter of 2001
due to weakness in most of the segment's businesses. This decrease was driven by
a substantial decline in sales for our Electronic Materials and Advanced
Circuits businesses due to continued weakness in the electronics, semiconductors
and telecommunications markets. Sales also declined in our Nylon System and
Fluorines businesses due to lower demand and pricing pressures.
Specialty Materials segment profit of $8 million in the first quarter
of 2002 decreased by $30 million, or 79 percent compared with the first quarter
of 2001. This decrease resulted primarily from lower sales volumes in our
Electronic Materials, Advanced Circuits and Nylon System businesses, and pricing
pressures mainly in our Nylon System and Performance Fibers businesses. This
decrease was partially offset by lower costs resulting from plant shutdowns and
workforce reductions.
Transportation and Power Systems sales of $726 million in the first
quarter of 2002 decreased by $134 million, or 16 percent compared with the first
quarter of 2001. Excluding the effects of foreign exchange and the disposition
of our Bendix Commercial Vehicle Systems business, sales decreased by 2 percent.
This decrease was due mainly to lower sales for our Garrett Engine Boosting
Systems business due principally to a decline in automotive builds in Europe
partially offset by increased demand in Asia.
Transportation and Power Systems segment profit of $73 million in the
first quarter of 2002 increased by $23 million, or 46 percent compared with the
first quarter of 2001 due principally to the effects of cost-structure
improvements, mainly workforce reductions, and other productivity actions across
all businesses in the segment.
B. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
----------------------------------------------------
Total assets at March 31, 2002 were $24,193 million, a decrease of $33
million from December 31, 2001.
We manage our businesses to maximize operating cash flows as the
principal source of our liquidity. Cash provided by operating activities of $405
million during the first quarter of 2002 increased by $158 million compared with
the
18
first quarter of 2001. This increase was driven by an improvement in working
capital performance and lower pension income partially offset by higher spending
for repositioning actions, mainly severance.
Cash used for investing activities of $52 million during the first
quarter of 2002 decreased by $181 million compared with the first quarter of
2001 due to a decrease in acquisition spending and the proceeds from the
disposition of our Bendix Commercial Vehicle Systems business. This decrease was
also driven by lower capital spending reflecting our intention to limit capital
spending at non-strategic businesses.
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 $154 million during the first
quarter of 2002 increased by $18 million compared with the first quarter of 2001
due principally to higher net debt repayments in the current quarter. This
increase was partially offset by the absence of stock repurchases in the first
quarter of 2002. Total debt of $5,246 million at March 31, 2002 was $24 million
lower than at December 31, 2001.
Repositioning and Other Charges
- -------------------------------
In the first quarter of 2002, we recognized a repositioning charge of
$65 million for the costs of actions designed to reduce our cost structure and
improve our future profitability. The components of the charge included
severance costs of $41 million, asset impairments of $11 million and other exit
costs of $13 million. Severance costs were related to announced workforce
reductions of approximately 1,100 manufacturing and administrative positions
principally in our Automation and Control Solutions and Specialty Materials
reportable segments. Asset impairments were principally related to manufacturing
plant and equipment held for sale and capable of being taken out of service and
actively marketed in the period of impairment, mainly in our Specialty Materials
reportable segment. Other exit costs principally consisted of lease termination
losses negotiated or subject to reasonable estimation mainly related to closed
facilities in our Automation and Control Solutions and Specialty Materials
reportable segments. These repositioning actions are expected to be completed by
December 31, 2002. Also, $12 million of previously established severance
accruals were returned to income in the first quarter of 2002, due principally
to higher than expected voluntary employee attrition resulting in reduced
severance liabilities in our Specialty Materials reportable segment.
As disclosed in our 2001 Annual Report on Form 10-K, we recognized
repositioning charges totaling $1,016 million in 2001 ($297 million were
recognized in the three months ended March 31, 2001). The components of the
charges included severance costs of $727 million, asset impairments of $194
million and other exit costs of $95 million. Severance costs were related to
announced global workforce reductions of approximately 20,000 manufacturing and
administrative positions across all of our reportable segments of which
approximately 17,000 positions have been eliminated as of March 31, 2002. Also,
$119 million of previously established accruals, mainly for severance, were
returned to income in 2001 due principally to
19
higher than expected voluntary employee attrition resulting in reduced severance
liabilities, principally in our Aerospace and Automation and Control Solutions
reportable segments.
These repositioning actions are expected to generate incremental pretax
savings of over $760 million in 2002 compared with 2001 principally from planned
workforce reductions and facility consolidations. Cash expenditures for
severance and other exit costs necessary to execute these actions were $160
million in the first quarter of 2002 and were funded through operating cash
flows. Cash spending for severance and other exit costs necessary to execute the
repositioning actions will approximate $500 million in 2002 and will be funded
mainly though operating cash flows.
In the first quarter of 2002, we recognized charges of $43 million
related to our Friction Materials business and a chemical manufacturing
facility. In 2001, we adopted a plan to dispose of our Friction Materials
business and held discussions with a potential acquiror of the business. As part
of these discussions we continued to evaluate the business for possible
impairment. As a result of this evaluation, we recognized an impairment charge
of $27 million in the first quarter of 2002 related to the write-down of
property, plant and equipment (classified as assets held for disposal in Other
Current Assets). We also recognized an asset impairment charge of $16 million
related to the planned shutdown of a chemical manufacturing facility in our
Specialty Materials reportable segment.
In the 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 receivables and inventories of $50 million. We also
recognized charges of $95 million related to an other than temporary decline in
value of an equity investment and an equity investee's loss contract. We also
redeemed our $200 million 5 3/4% dealer remarketable securities due 2011,
resulting in a loss of $6 million.
The following table summarizes the pretax impact of total repositioning
and other charges by reportable business segment:
Three Months
Ended March 31,
-------------------
2002 2001
---- ----
Aerospace $ - $ 80
Automation and Control Solutions 39 273
Specialty Materials 25 84
Transportation and Power Systems 28 94
Corporate 4 65
--- ----
$96 $596
=== ====
20
Report of Independent Accountants
- ---------------------------------
The "Report of Independent Accountants'" included herein is not a "report"
or "part of a Registration Statement" prepared or certified by an independent
accountant within the meanings of Section 7 and 11 of the Securities Act of
1933, and the accountants' Section 11 liability does not extend to such report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
See our 2001 Annual Report on Form 10-K (Item 7A). At March 31, 2002, there
has been no material change in this information.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
See Note 9 on page 10 of this Form 10-Q.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits. The following exhibits are filed with this
Form 10-Q:
10.25 Employment Separation Agreement and Release dated
February 18, 2002, between Honeywell and Dr. Barry
C. Johnson
15 Independent Accountants' Acknowledgment Letter
as to the incorporation of their report relating
to unaudited interim financial statements
(b) Reports on Form 8-K. The following reports on Form 8-K were filed
during the three months ended March 31, 2002.
1. On February 19, 2002, a report was filed reporting the election
of David M. Cote, as President, Chief Executive Officer and a
member of the Board of Directors effective immediately, and the
fact that Mr. Cote will become Chairman of the Board on June 30,
2002.
2. On March 4, 2002, a report was filed reporting an employment
contract between Honeywell and Mr. Cote.
21
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 8, 2002 By: /s/ John J. Tus
--------------------------------
John J. Tus
Vice President and Controller
(on behalf of the Registrant
and as the Registrant's
Principal Accounting Officer)
22
EXHIBIT INDEX
Exhibit Number Description
2 Omitted (Inapplicable)
3 Omitted (Inapplicable)
4 Omitted (Inapplicable)
10.25* Employment Separation Agreement
and Release dated February
18, 2002, between Honeywell
and Dr. Barry C. Johnson
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.
23