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, 2000
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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.
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(Exact name of registrant as specified in its charter)
Delaware 22-2640650
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(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
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(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, 2000
---------------------- -----------------
$1 par value 801,050,908 shares
<PAGE>
Honeywell International Inc.
Index
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Page No.
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Part I. - Financial Information
---------------------
Item 1. Condensed Financial Statements:
Consolidated Balance Sheet -
June 30, 2000 and December 31, 1999 3
Consolidated Statement of Income -
Three and Six Months Ended June 30, 2000
and 1999 4
Consolidated Statement of Cash Flows -
Six Months Ended June 30, 2000 and 1999 5
Notes to Financial Statements 6
Report on Review by Independent
Accountants 16
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 24
Part II. - Other Information
------------------
Item 1. Legal Proceedings 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 27
2
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Honeywell International Inc.
Consolidated Balance Sheet
(Unaudited)
June 30, December 31,
2000 1999
--------------- ---------------
(Dollars in millions)
ASSETS
Current assets:
Cash and cash equivalents $ 959 $ 1,991
Accounts and notes receivable 4,039 3,896
Inventories 3,744 3,436
Other current assets 1,109 1,099
------ ------
Total current assets 9,851 10,422
Investments and long-term receivables 1,061 782
Property, plant and equipment - net 5,502 5,630
Goodwill and other intangible
assets - net 6,232 4,660
Other assets 2,290 2,033
------- -------
Total assets $24,936 $23,527
======= =======
LIABILITIES
Current liabilities:
Accounts payable $ 2,256 $ 2,129
Short-term borrowings 157 302
Commercial paper 2,097 2,023
Current maturities of long-term debt 346 284
Accrued liabilities 3,139 3,534
------- -------
Total current liabilities 7,995 8,272
Long-term debt 3,444 2,457
Deferred income taxes 878 864
Postretirement benefit obligations
other than pensions 1,943 1,968
Other liabilities 1,224 1,367
SHAREOWNERS' EQUITY
Capital - common stock issued 958 958
- additional paid-in capital 2,486 2,318
Common stock held in treasury, at cost (4,237) (4,254)
Accumulated other nonowner changes (512) (355)
Retained earnings 10,757 9,932
------- -------
Total shareowners' equity 9,452 8,599
------- -------
Total liabilities and shareowners' equity $24,936 $23,527
======= =======
The Notes to Financial Statements are an integral part of this statement.
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Honeywell International Inc.
Consolidated Statement of Income
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
----------------- ----------------
2000 1999 2000 1999
---- ---- ---- ----
(Dollars in millions
except per share amounts)
Net sales $6,309 $5,958 $12,353 $11,540
------ ------ ------- -------
Costs, expenses and other
Cost of goods sold 4,671 4,625 9,121 8,817
Selling, general and administrative
expenses 763 745 1,521 1,444
Gain on sale of non-strategic
businesses (112) - (112) -
Equity in (income) loss of
affiliated companies (14) 12 (18) 2
Other (income) expense (3) (279) (13) (297)
Interest and other financial charges 129 59 240 132
------ ------ ------- -------
5,434 5,162 10,739 10,098
------ ------ ------- -------
Income before taxes on income 875 796 1,614 1,442
Taxes on income 258 256 491 462
------ ------ ------- ------
Net income $ 617 $ 540 $ 1,123 $ 980
====== ====== ======= ======
Earnings per share of common
stock - basic $ 0.77 $ 0.68 $ 1.41 $ 1.24
====== ====== ======= ======
Earnings per share of common
stock - assuming dilution $ 0.76 $ 0.67 $ 1.39 $ 1.22
====== ====== ======= ======
Cash dividends per share of
common stock $.1875 $ .17 $ .3750 $ .34
====== ====== ======= ======
The Notes to Financial Statements are an integral part of this statement.
4
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Honeywell International Inc.
Consolidated Statement of Cash Flows
(Unaudited)
Six Months Ended
June 30,
-----------------
2000 1999
---- ----
(Dollars in millions)
Cash flows from operating activities:
Net income $1,123 $ 980
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on sale of non-strategic businesses (112) -
Gain on disposition of investment in AMP Incorporated - (268)
Repositioning and other charges 96 258
Depreciation and amortization 529 441
Equity income, net of distributions 20 (9)
Deferred income taxes 39 67
Net taxes paid on sales of businesses and investments (62) (87)
Other (356) 23
Changes in assets and liabilities, net of the effects
of acquisitions and divestitures:
Accounts and notes receivable 98 128
Inventories (3) (91)
Other current assets (61) 17
Accounts payable 31 (97)
Accrued liabilities (504) (364)
------ ------
Net cash provided by operating activities 838 998
------ ------
Cash flows from investing activities:
Expenditures for property, plant and equipment (355) (430)
Proceeds from disposals of property, plant and
equipment 61 43
(Increase) in investments (2) (15)
Disposition of investment in AMP Incorporated - 1,164
Cash paid for acquisitions (2,466) (117)
Proceeds from sales of businesses 296 199
(Increase) decrease in short-term investments (16) 4
-------- ------
Net cash (used for) provided by investing activities (2,482) 848
-------- ------
Cash flows from financing activities:
Net increase (decrease) in commercial paper 74 (794)
Net (decrease) in short-term borrowings (145) (36)
Proceeds from issuance of common stock 81 273
Proceeds from issuance of long-term debt 1,051 7
Payments of long-term debt (151) (197)
Repurchases of common stock - (1,058)
Cash dividends on common stock (298) (263)
------- ------
Net cash provided by (used for) financing activities 612 (2,068)
------- ------
Net (decrease) in cash and cash equivalents (1,032) (222)
Cash and cash equivalents at beginning of year 1,991 1,018
------- ------
Cash and cash equivalents at end of period $ 959 $ 796
======= =======
The Notes to Financial Statements are an integral part of this statement.
5
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Honeywell International Inc.
Notes to Financial Statements
(Unaudited)
(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, 2000 and the results of
operations for the three and six months ended June 30, 2000 and 1999
and cash flows for the six months ended June 30, 2000 and 1999. The
results of operations for the three- and six-month periods ended
June 30, 2000 should not necessarily be taken as indicative of the
results of operations that may be expected for the entire year 2000.
The financial information as of June 30, 2000 should be read in
conjunction with the financial statements contained in our Form 10-K
Annual Report for 1999.
Note 2. Accounts and notes receivable consist of the following:
June 30, December 31,
2000 1999
-------- ------------
Trade $3,702 $3,545
Other 430 435
------ ------
4,132 3,980
Less - Allowance for doubtful
accounts and refunds (93) (84)
------ ------
$4,039 $3,896
====== ======
Note 3. Inventories consist of the following:
June 30, December 31,
2000 1999
---------- ------------
Raw materials $1,094 $1,027
Work in process 978 973
Finished products 1,826 1,589
------ ------
3,898 3,589
Less-Progress payments (44) (44)
Reduction to LIFO cost basis (110) (109)
------ ------
$3,744 $3,436
====== ======
Note 4. Total nonowner changes in shareowners' equity for the three
and six months ended June 30, 2000 and 1999 were $496 and $966
million and $400 and $714 million, respectively. Nonowner changes
in shareowners' equity consist of net income, foreign exchange
translation adjustments and unrealized holding gains and losses on
marketable securities.
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Note 5. Segment financial data follows:
Periods Ended June 30,
---------------------------------------------------------
Net Sales Three Months Six Months
-------- ---------------------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
Aerospace Solutions $2,454 $2,534 $ 4,850 $ 4,862
Automation & Control 1,880 1,501 3,580 2,891
Performance Materials 1,061 986 2,086 1,969
Power & Transportation
Products 895 904 1,799 1,763
Corporate 19 33 38 55
------ ------ ------- -------
$6,309 $5,958 $12,353 $11,540
====== ====== ======= =======
Periods Ended June 30,
---------------------------------------------------------
Segment Profit Three Months Six Months
-------------- ---------------------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
Aerospace Solutions $ 546 $ 475 $1,039 $ 870
Automation & Control 275 161 465 281
Performance Materials 107 145 202 294
Power & Transportation
Products 82 83 170 153
Corporate (39) (54) (69) (97)
------ ----- ------ ------
Segment profit 971 810 1,807 1,501
------ ----- ------ ------
Gain on sale of non-
strategic businesses 112 - 112 -
Equity in income (loss)
of affiliated
companies 14 24 18 34
Other income (expense) 3 11 13 29
Interest and other
financial charges (129) (59) (240) (132)
Repositioning and other
charges (96) (258) (96) (258)
Gain on disposition of
investment in AMP Inc. - 268 - 268
------- ----- ----- ------
Income before taxes
on income $ 875 $ 796 $1,614 $1,442
====== ====== ====== ======
7
<PAGE>
Note 6. The details of the earnings per share calculations for the
three- and six-month periods ended June 30, 2000 and 1999 follow:
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 $.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 $.76 $1,123 808.7 $1.39
==== ===== ==== ====== ===== =====
Three Months Six Months
-----------------------------------------------
Per Per
Average Share Average Share
Income Shares Amount Income Shares Amount
------ ------- ------ ------ ------- ------
1999
----
Earnings per share of
common stock - basic $540 789.5 $.68 $980 791.4 $1.24
Dilutive securities issuable
in connection with stock
plans 17.3 15.8
----- ----- ----- ----- ----- -----
Earnings per share of common
stock - assuming dilution $540 806.8 $.67 $980 807.2 $1.22
==== ===== ==== ==== ===== =====
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, 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 June 30,
2000. For the three- and six-month periods ended June 30, 1999, all
stock options were included in the computations.
Note 7. In June 2000, we recognized a pretax charge of $96 million
for the costs of closing a chip packaging manufacturing plant and
related workforce reductions in our Electronic Materials business
and for workforce reductions in our Industrial Control,
Turbocharging Systems and Commercial Vehicle Systems businesses.
The components of the charge included severance costs of $24 million
and asset impairments of $72 million, and are included in cost of
goods sold. The workforce reductions are expected to be completed
by December 31, 2000 and consisted of approximately 600
manufacturing positions. The pretax impact of the repositioning
charge by reportable segment is as follows: Performance Materials -
$74 million; Automation & Control - $17 million; and Power &
Transportation Products - $5 million.
In December 1999, upon completion of the merger between AlliedSignal
Inc and Honeywell Inc (former Honeywell), we recognized a pretax
charge of $642 million for the costs of actions designed to improve
our combined competitiveness and
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<PAGE>
productivity and improve future profitability. The merger-related
actions included the elimination of redundant corporate offices and
functional administrative overhead; elimination of redundant and
excess facilities and workforce in our combined aerospace businesses;
adoption of six sigma productivity initiatives at the former Honeywell
businesses; and, the transition to a global shared services model. The
components of the charge included severance costs of $342 million,
asset impairments of $108 million, other exit costs of $57 million
and merger-related transaction and period expenses of $135 million.
Planned global workforce reductions consisted of approximately 6,500
administrative and manufacturing positions of which approximately
2,600 positions have been eliminated as of June 30, 2000. Asset
impairments principally related to the elimination of redundant or
excess corporate and aerospace facilities and equipment. Other exit
costs were related to lease terminations and contract cancellation
losses negotiated or subject to reasonable estimation at year-end.
Merger-related transaction and period expenses consisted of
investment banking and legal fees, former Honeywell deferred
compensation vested upon change in control and other direct merger-
related expenses incurred in the period the merger was completed.
All merger-related actions are expected to be completed by December
31, 2000.
In 1999, we also recognized a pretax charge of $321 million ($75
million in the second quarter) for the costs of actions designed to
reposition principally the AlliedSignal Inc business units for
improved productivity and future profitability. These repositioning
actions included the organizational realignment of our aerospace
businesses to strengthen market focus and simplify business
structure; elimination of an unprofitable product line and
rationalization of manufacturing capacity and infrastructure in our
Performance Polymers business; a reduction in the infrastructure in
our Turbocharging Systems business; closing of a wax refinery and
carbon materials plant and rationalization of manufacturing capacity
in our Specialty Chemicals business; elimination of two
manufacturing facilities in our Electronic Materials business; a
plant closure and outsourcing activity in our automotive Consumer
Products Group business; and related and general workforce
reductions in all AlliedSignal Inc businesses and our Industrial
Control business. The components of the charge included severance
costs of $140 million, asset impairments of $149 million, and other
exit costs of $32 million. Global workforce reductions consisted of
approximately 5,100 manufacturing, administrative, and sales
positions of which approximately 3,500 positions have been
eliminated as of June 30, 2000. Asset impairments 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. Other exit costs principally consisted of
environmental exit costs associated with chemical plant shutdowns.
All repositioning actions, excluding environmental remediation, are
being completed throughout 2000.
The following table summarizes the status of the total merger and
repositioning actions:
Balance Balance
1999 1999 at 2000 2000 at
Charges Usage 12/31/99 Charges Usage 6/30/2000
------- ----- -------- ------- ----- ---------
Severance costs $482 $ (58) $424 $24 $(157) $291
Asset impairments 257 (257) - 72 (72) -
Exit costs 89 (4) 85 - (28) 57
Merger fees & expenses 135 (77) 58 - (47) 11
---- ----- ---- --- ----- ----
Total $963 $(396) $567 $96 $(304) $359
==== ====== ==== === ====== ====
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In the second quarter of 1999, we also recognized other charges
consisting of losses on aerospace engine maintenance contracts and a
contract cancellation penalty totaling $45 million, customer and
employee claims of $29 million, and other write-offs principally
related to tangible and intangible assets removed from service,
including inventory, of $73 million.
In the second quarter of 1999, repositioning and other charges
totaled $222 million and were included in cost of goods sold.
Equity in income of affiliated companies also included a $36 million
charge resulting from an other than temporary decline in the value
of an equity investment due to a significant deterioration in market
conditions. The total impact of repositioning and other charges on
second quarter 1999 pretax income was $258 million.
Note 8. In the second quarter of 2000, as a result of a government
mandate in connection with the merger of AlliedSignal Inc and former
Honeywell, we sold the former Honeywell's TCAS product line. We
received approximately $215 million in cash resulting in a pretax
gain of $112 million. The TCAS product line had annual sales of
approximately $100 million.
Note 9. In April 1999, we reached an agreement with Tyco
International Ltd. (Tyco) and AMP Incorporated (AMP), settling AMP's
claim to the gain we would realize on the disposition of our
investment in AMP common stock. We made a payment to AMP of $50
million, and the parties released all claims that they had against
each other relating to AMP. Subsequently, we converted our
investment in AMP common stock into Tyco common stock and sold the
Tyco common stock for net cash proceeds of $1.2 billion. The
resulting pretax gain of $268 million, net of the settlement
payment, is included in other (income) expense.
Note 10. In February 2000, we acquired all of the outstanding
shares of Pittway Corporation (Pittway) Common Stock and Class A
Stock for approximately $2.2 billion, including the assumption of
the net debt of Pittway of approximately $167 million. Pittway
designs, manufactures and distributes security and fire systems for
homes and buildings and had 1999 sales of $1.6 billion. The
acquisition was funded through the issuance of long-term debt (see
Note 11) and commercial paper.
The acquisition was accounted for under the purchase method of
accounting. The assets acquired and liabilities assumed of Pittway
were recorded at their estimated fair values at the acquisition
date, and are subject to adjustment when additional information
concerning asset and liability valuations is finalized. The excess
of purchase price over the estimated fair values of the net assets
acquired of approximately $1.6 billion was recorded as goodwill.
The pro forma results for the six months ended June 30, 2000,
assuming the acquisition had been made at the beginning of the year,
would not be materially different from reported results.
Note 11. In February 2000, we issued $1 billion of 7.50% Notes,
which will mature in 2010. Interest on the Notes is payable semi-
annually in arrears on March 1 and September 1 of each year,
beginning in September 2000. In February 2000, we also entered into
interest rate swap agreements, which effectively changed $750
million of this fixed rate debt to LIBOR based floating rate debt.
Note 12. On July 21, 2000, our Board of Directors authorized a
share repurchase program to purchase up to 40 million shares of our
common stock in the open market or in privately negotiated
transactions, depending on market conditions and other factors. The
share repurchase program is expected to be substantially completed
by December 31, 2001.
10
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Note 13. Litton Litigation - On March 13, 1990, Litton Systems,
Inc. (Litton) filed a legal action against the 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 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
11
<PAGE>
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.
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.
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
believe that our ion-beam processes do not infringe Litton's patent,
and further that Litton's damage study remains flawed and
speculative for a number of reasons. We expect that the trial
court's latest rulings in the case will eventually be affirmed since
they are consistent with the Federal Circuit's most recent opinions
in this case and others which deal with alleged patent infringement
under the doctrine of equivalents, and since, absent any patent
infringement, Litton has not proven any tortious behavior by the
former Honeywell which interfered with its contracts or business
prospects. We also believe that it is reasonably possible that no
damages will ultimately be awarded to Litton.
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<PAGE>
Although it is not possible at this time to predict the result of
Litton's appeal, 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 the 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
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.
13
<PAGE>
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 will be
stayed pending resolution of the former Honeywell's post-judgment
motions and the disposition of the appeals filed by the parties.
We expect to obtain substantial relief from the current adverse
judgment in the antitrust case by an appeal to the Ninth Circuit,
based upon sound substantive and procedural legal grounds. We
believe that there was no factual or legal basis for the magnitude
of the jury's award in the damages retrial and that, as was the case
in the first trial, the jury's award should be overturned. We also
believe there are serious questions concerning the identity and
nature of the business arrangements and conduct which were found by
the first antitrust jury in 1996 to be anti-competitive and damaging
to Litton, and the verdict of liability should be overturned as a
matter of law.
Although it is not possible at this time to predict the result of
the appeals, potential remains for an adverse outcome which could be
material to our financial position or results of operations. As a
result of the uncertainty regarding the outcome of this matter, no
provision has been made in the financial statements with respect to
this contingent liability. We also believe that it would be
inappropriate for Litton to obtain recovery of the same damages,
e.g. losses it suffered due to the former Honeywell's sales of ring
laser gyroscope-based inertial systems to OEMs and airline
customers, under multiple legal theories, claims, and cases, and
that eventually any duplicative recovery would be eliminated from
the antitrust and patent/tort cases.
Shareowner Litigation - Honeywell and seven of its officers were
named as defendants in a purported class action lawsuit filed in the
United States District Court for the District of New Jersey on July
25, 2000 by Local 144 Nursing Home Employees Pension Fund (the Complaint).
The Complaint principally alleges 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.
14
<PAGE>
We believe that there is no factual or legal basis for the
allegations in the Complaint. Although it is not possible at this
time to predict the result of this case, we expect to prevail.
However, an adverse outcome could be material to our financial
position or results of operations. No provision has been made in
our financial statements with respect to this contingent liability.
15
<PAGE>
Report on Review by Independent Accountants
-------------------------------------------
To the Shareowners and Directors
of Honeywell International Inc.
We have reviewed the accompanying consolidated balance sheet of
Honeywell International Inc. and its subsidiaries as of June 30,
2000, and the related consolidated statements of income for each of
the three-month and six-month periods ended June 30, 2000 and 1999
and the consolidated statements of cash flows for the six-month
period ended June 30, 2000 and 1999. 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 generally
accepted accounting principles.
We previously audited in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1999,
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 January 27, 2000, except as to
Note 25 which is as of February 4, 2000, 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, 1999,
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
July 28, 2000
16
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
----------------------------------------------
A. Results of Operations-Second Quarter 2000 Compared with Second Quarter 1999
---------------------------------------------------------------------------
Net sales in the second quarter of 2000 were $6,309 million, an
increase of $351 million, or 6 percent compared with the second
quarter of 1999. Excluding the effects of acquisitions and
divestitures, and foreign exchange, sales decreased by approximately
1 percent. The impact of foreign exchange decreased sales by
approximately 2 percent.
Segment profit in the second quarter of 2000 was $971 million, an
increase of $161 million, or 20 percent compared with the second
quarter of 1999. Segment profit margin for the second quarter of
2000 was 15.4 percent compared with 13.6 percent for the second
quarter of 1999. The increase in segment profit in the second
quarter of 2000 was led by a significant improvement by the
Automation & Control and Aerospace Solutions segments. Lower
Corporate expenses also contributed to the increase. A decrease in
segment profit for the Performance Materials and Power &
Transportation Products segments was a partial offset. 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.
See Note 8 on page 10 of this Form 10-Q for further details.
Equity in income of affiliated companies of $14 million in the
second quarter of 2000 increased by $26 million compared with the
second quarter of 1999. The increase primarily reflects that the
prior year included a charge of $36 million related to the writedown
of an equity investment. See Note 7 on page 8 of this Form 10-Q for
further details.
Other (income) expense, $3 million of income in the second
quarter of 2000, decreased by $276 million compared with the second
quarter of 1999. The decrease principally reflects that the prior
year included the net gain of $268 million on our disposition of our
investment in AMP Incorporated (AMP) common stock. See Note 9 on
page 10 of this Form 10-Q for further details.
Interest and other financial charges of $129 million in the
second quarter of 2000 increased by $70 million compared with the
second quarter of 1999. The increase results from higher average
levels of debt during the current quarter due principally to the
acquisition of Pittway Corporation (Pittway) and higher interest
rates and the impact of tax interest expense.
The effective tax rate in the second quarter of 2000 decreased to
29.5 percent compared with 32.2 percent in the second quarter of
1999 due to tax synergies in Europe associated with the merger of
AlliedSignal Inc and the former Honeywell.
Net income of $617 million, or $0.76 per share, in the second
quarter of 2000 was 14 percent higher than the prior year's second
quarter net income of $540 million, or $0.67 per share. Net income
in the second quarter of 2000 included the gain on the disposition
of the former Honeywell's TCAS product line and repositioning
charges. Adjusted for these items, 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 1999 included the gain on our
disposition of our investment in AMP and repositioning and other
charges. Adjusted for these items, net income
17
<PAGE>
in the second quarter of 1999 was $5 million, or $0.01 per share,
lower than reported. Net income in the second quarter of 2000
increased by 13 percent compared with the second quarter of 1999 if
both periods are adjusted for these items. The higher net income in
the second quarter of 2000 was the result of improved earnings for the
Automation & Control and Aerospace Solutions segments. The Performance
Materials and Power & Transportation Products segments had lower earnings.
Review of Business Segments
---------------------------
Aerospace Solutions sales of $2,454 million in the second
quarter of 2000 were $80 million, or 3 percent lower compared with
the second quarter of 1999. Excluding the effects of government-
mandated divestitures and a supplier parts shortage in our avionics
business, sales increased slightly. This increase was led by
continued growth in our aftermarket businesses. Our aftermarket
businesses continue to benefit from increases in air transport and
regional flying hours, as well as strong ongoing global demand for
our commercial and military repair and overhaul services. This
increase was partially offset by lower sales to air transport
original equipment manufacturers and a decline in engineering
services revenue.
Aerospace Solutions segment profit of $546 million in the
second quarter of 2000 increased by $71 million, or 15 percent
compared with the second quarter of 1999 due principally to cost
structure improvements, primarily from workforce and benefit cost
reductions, and merger-related savings. Increased sales of higher
margin aftermarket products and services also contributed to the
improvement in segment profit.
Automation & Control sales of $1,880 million in the second
quarter of 2000 increased by $379 million, or 25 percent compared
with the second quarter of 1999. Sales for our Home & Building
Control business were significantly higher due to our acquisition in
February 2000 of Pittway, a manufacturer and distributor of security
and fire systems for homes and buildings. Sales for our Industrial
Control business decreased moderately as growth in our sensing &
control business was more than offset by continued weakness in our
industrial automation & control business. Our industrial automation
& control business continues to be adversely affected by weakness in
the hydrocarbon processing industry. Although there were some signs
of recovery in this key industry in early 2000, a full recovery is
not expected until at least the latter part of 2000.
Automation & Control segment profit of $275 million in the
second quarter of 2000 increased by $114 million, or 71 percent
compared with the second quarter of 1999. Segment profit for both
our Home & Building Control and Industrial Control businesses
improved primarily as a result of lower costs due to workforce and
benefit cost reductions and merger-related savings. The acquisition
of Pittway and other portfolio changes also contributed to the
improvement in segment profit.
Performance Materials sales of $1,061 million in the second
quarter of 2000 increased by $75 million, or 8 percent compared with
the second quarter of 1999. Sales increased due to our acquisition
in August 1999 of Johnson Matthey Electronics, a supplier of wafer
fabrication materials and interconnect products to the electronics
and telecommunications industries. Sales growth in our fluorines
and chemical specialties businesses also contributed to the
increase. The effect of divestitures, principally the Laminate
Systems business in September 1999, was a partial offset.
18
<PAGE>
Performance Materials segment profit of $107 million in the
second quarter of 2000 was lower by $38 million, or 26 percent
compared with the second quarter of 1999. The decrease results from
higher raw material costs in our Performance Polymers businesses.
Higher operating losses in our chip packaging and pharmaceutical
chemicals businesses and the impact of recent divestitures also
contributed to the decrease. Cost structure improvements, higher
sales volume in our flourines and chemical specialties businesses
and price increases in certain Performance Polymers businesses were
partial offsets.
Power & Transportation Products sales of $895 million in the
second quarter of 2000 decreased by $9 million, or 1 percent
compared with the second quarter of 1999. Sales for our Commercial
Vehicle Systems business decreased due primarily to lower heavy-duty
truck builds in North America. Sales for our Friction Materials
business were also lower primarily due to the impact of foreign
exchange. Higher sales for our Turbocharging Systems business due
primarily to continued strong demand in Europe reflecting the
turbodiesel's increased penetration of the passenger car market was
a partial offset.
Power & Transportation Products segment profit of $82 million
in the second quarter of 2000 decreased by $1 million, or 1 percent
compared with the second quarter of 1999. Costs related to the ramp-
up of our Turbogenerator product line were primarily responsible for
the decrease. Lower sales in our Commercial Vehicle Systems
business and the effects of supplier issues in our Turbocharging
Systems business also contributed to the decrease. Cost structure
improvements in our Turbocharging Systems, Commercial Vehicle
Systems and Friction Materials businesses resulting from six sigma
initiatives, material procurement savings and workforce reductions
were a partial offset.
B. Results of Operations - Six Months 2000 Compared with Six Months 1999
---------------------------------------------------------------------
Net sales in the first six months of 2000 were $12,353 million,
an increase of $813 million, or 7 percent compared with the first
six months of 1999. Excluding the effects of acquisitions and
divestitures, and foreign exchange, sales increased by approximately
2 percent. The impact of foreign exchange decreased sales by
approximately 2 percent.
Segment profit in the first six months of 2000 was $1,807
million, an increase of $306 million, or 20 percent compared with
the first six months of 1999. Segment profit margin for the first
six months of 2000 was 14.6 percent compared with 13.0 percent for
the first six months of 1999. The increase in segment profit in the
first six months of 2000 was led by a significant improvement by the
Automation & Control and Aerospace Solutions segments. The Power &
Transportation Products segment and lower Corporate expenses also
contributed to the increase. A substantial decrease in segment
profit for the Performance Materials segment was a partial offset.
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. See Note 8 on page 10 of this Form 10-Q for further
details.
Equity in income of affiliated companies of $18 million in the
first six months of 2000 increased by $20 million compared with the
first six months of 1999. The increase primarily reflects that the
prior year included a charge of $36 million related to the writedown
of an equity investment. See Note 7 on page 8 of this Form 10-Q for
further details.
19
<PAGE>
Other (income) expense, $13 million of income in the first six
months of 2000, decreased by $284 million compared with the first
six months of 1999. The decrease principally reflects that
the prior year included the net gain of $268 million on our
disposition of our investment in AMP common stock. See Note 9 on
page 10 of this Form 10-Q for further details. Reduced benefits
from foreign exchange hedging also contributed to the decrease.
Interest and other financial charges of $240 million in the first
six months of 2000 increased by $108 million compared with the first
six months of 1999. The increase results from higher average levels
of debt during the first six months of the current year due
principally to the Pittway acquisition and higher interest rates and
the impact of tax interest expense.
The effective tax rate in the first six months of 2000 decreased
to 30.4 percent compared with 32.0 percent in the first six months
of 1999 due to tax synergies in Europe associated with the merger of
AlliedSignal Inc and the former Honeywell.
Net income of $1,123 million, or $1.39 per share, in the first
six months of 2000 was 15 percent higher than the prior year's first
six months net income of $980 million, or $1.22 per share. Net
income in the first six months of 2000 included the gain on the
disposition of the former Honeywell's TCAS product line and
repositioning charges. Adjusted for these items, 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 1999 included
the gain on our disposition of our investment in AMP and
repositioning and other charges. Adjusted for these items, net
income in the first six months of 1999 was $5 million, or $0.01 per
share, lower than reported. Net income in the first six months of
2000 increased by 14 percent compared with the first six months of
1999 if both periods are adjusted for these items. The higher net
income in the first six months of 2000 was the result of improved
earnings for the Automation & Control, Aerospace Solutions and Power
& Transportation Products segments. The Performance Materials segment had
lower earnings.
Review of Business Segments
---------------------------
Aerospace Solutions sales of $4,850 million in the first six
months of 2000 were $12 million lower compared with the first six
months of 1999. Sales decreased primarily due to lower original
equipment sales to air transport manufacturers and a decline in
engineering services revenue. The effects of government-mandated
divestitures and a supplier parts shortage in our avionics business
in the second quarter also contributed to the decrease. Continued
strength in our aftermarket businesses and higher original equipment
sales to business, regional and general aviation customers were
partial offsets.
Aerospace Solutions segment profit of $1,039 million in the
first six months of 2000 increased by $169 million, or 19 percent
compared with the first six months of 1999 due principally to cost
structure improvements, primarily from workforce and benefit cost
reductions, and merger-related savings. Increased sales of higher
margin aftermarket products and services also contributed to the
improvement in segment profit.
Automation & Control sales of $3,580 million in the first six
months of 2000 increased by $689 million, or 24 percent compared
with the first six months of 1999. Sales for our Home & Building
Control business were substantially higher due principally to the
acquisition of Pittway. Sales for our Industrial Control business
declined slightly as growth in our sensing & control business
20
<PAGE>
was more than offset by continued weakness in our industrial automation
& control business.
Automation & Control segment profit of $465 million in the
first six months of 2000 increased by $184 million, or 65 percent
compared with the first six months of 1999. Segment profit for both
our Home & Building Control and Industrial Control businesses
improved primarily as a result of lower costs due to workforce and
benefit cost reductions and merger-related savings. The acquisition
of Pittway and other portfolio changes also contributed to the
improvement in segment profit.
Performance Materials sales of $2,086 million in the first six
months of 2000 increased by $117 million, or 6 percent compared with
the first six months of 1999. Sales increased primarily due to the
acquisition of Johnson Matthey Electronics. Sales growth in our
fluorines business also contributed to the increase. The effect of
divestitures, principally the Laminate Systems business, was a
partial offset.
Performance Materials segment profit of $202 million in the
first six months of 2000 was lower by $92 million, or 31 percent
compared with the first six months of 1999. The decrease reflects
higher raw material costs in our Performance Polymers businesses.
Higher operating losses in our chip packaging and pharmaceutical
chemicals businesses and the impact of recent acquisitions and
divestitures also contributed to the decrease. Cost structure
improvements, higher sales volume in our flourines business and
price increases in certain Performance Polymers businesses were
partial offsets.
Power & Transportation Products sales of $1,799 million in the
first six months of 2000 increased by $36 million, or 2 percent
compared with the first six months of 1999. Sales for our
Turbocharging Systems business were significantly higher due
primarily to continued strong demand in Europe. Lower sales for our
Commercial Vehicle Systems business, due primarily to decreased
heavy-duty truck builds in North America, and our Friction Materials
business were a partial offset.
Power & Transportation Products segment profit of $170 million
in the first six months of 2000 increased by $17 million, or 11
percent compared with the first six months of 1999. The increase
results primarily from cost structure improvements in our Friction
Materials and Consumer Products Group businesses resulting from six
sigma initiatives, material procurement savings and workforce
reductions. Higher sales in our Turbocharging Systems business also
contributed to the increase. Costs related to the ramp-up of our
Turbogenerator product line was a partial offset.
C. Financial Condition, Liquidity and Capital Resources
----------------------------------------------------
Total assets at June 30, 2000 were $24,936 million, an increase
of $1,409 million, or 6 percent from December 31, 1999. The
increase relates principally to our acquisition of Pittway.
Cash provided by operating activities of $838 million during
the first six months of 2000 decreased by $160 million compared with
the first six months of 1999 due principally to spending related to
the merger and repositioning actions. Higher net income and
improved working capital were partial offsets.
Cash used for investing activities of $2,482 million during the
first six months of 2000 increased by $3,330 million compared with
the first six months of
21
<PAGE>
1999 due principally to the acquisition of Pittway and the fact that
the prior year included the net proceeds from our disposition of our
investment in AMP. See Notes 9 and 10 on page 10 of this Form 10-Q
for further details. Higher proceeds from the sales of businesses
and lower capital spending were partial offsets. We expect that our
total capital spending in 2000 will be approximately $870 million
compared with our previous estimate as of December 31, 1999 of
approximately $1,050 million.
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. In July 2000, we identified certain
businesses in our Performance Materials and Power & Transportation
Products segments that we consider to be non-core.
Cash provided by financing activities of $612 million during
the first six months of 2000 increased by $2,680 million compared
with the first six months of 1999. The increase relates to issuance
of $1 billion of 7.50% Notes in February 2000. See Note 11 on page
10 of this Form 10-Q for further details. Total debt of $6,044
million at June 30, 2000 was $978 million, or 19 percent higher than
at December 31, 1999 due principally to the Pittway acquisition. The
increase also reflects that the first six months of 1999 included the
repayment of debt with the net proceeds from our disposition of our
investment in AMP. The absence of stock repurchases in the current
year also contributed to the increase in cash provided by financing
activities.
On July 21, 2000, our Board of Directors authorized a share
repurchase program to purchase up to 40 million shares of our common
stock in the open market or in privately negotiated transactions,
depending on market conditions and other factors. The share
repurchase program is expected to be substantially completed by
December 31, 2001 and will be funded with operating cash flows and
some of the proceeds from the sales of non-core businesses.
Merger and Repositioning Charges
--------------------------------
In June 2000, we recognized a pretax charge of $96 million for
the costs of closing a chip packaging manufacturing plant and
related workforce reductions in our Electronic Materials business
and for workforce reductions in our Industrial Control,
Turbocharging Systems and Commercial Vehicle Systems businesses. The
components of the charge included severance costs of $24 million and
asset impairments of $72 million, and are included in cost of goods
sold. The workforce reductions are expected to be completed by
December 31, 2000 and consisted of approximately 600 manufacturing
positions. The pretax impact of the repositioning charge by
reportable segments is as follows: Performance Materials - $74
million; Automation & Control - $17 million; and Power &
Transportation Products - $5 million.
In December 1999, upon completion of the merger between
AlliedSignal Inc and the former Honeywell, we recognized a pretax
charge of $642 million for the costs of actions designed to improve
our combined competitiveness and productivity and improve future
profitability. The merger-related actions included the elimination
of redundant corporate offices and functional administrative
22
<PAGE>
overhead; elimination of redundant and excess facilities and
workforce in our combined aerospace businesses; adoption of six
sigma productivity initiatives at the former Honeywell businesses;
and, the transition to a global shared services model. The
components of the charge included severance costs of $342 million,
asset impairments of $108 million, other exit costs of $57 million
and merger-related transaction and period expenses of $135 million.
Planned global workforce reductions consisted of approximately 6,500
administrative and manufacturing positions of which approximately
2,600 positions have been eliminated as of June 30, 2000. Asset
impairments principally related to the elimination of redundant or
excess corporate and aerospace facilities and equipment. Other exit
costs were related to lease terminations and contract cancellation
losses negotiated or subject to reasonable estimation at year-end.
Merger-related transaction and period expenses consisted of
investment banking and legal fees, former Honeywell deferred
compensation vested upon change in control and other direct merger-
related expenses incurred in the period the merger was completed.
All merger-related actions are expected to be completed by December
31, 2000.
In 1999, we also recognized a pretax charge of $321 million
($75 million in the second quarter) for the costs of actions
designed to reposition principally the AlliedSignal Inc business
units for improved productivity and future profitability. These
repositioning actions included the organizational realignment of our
aerospace businesses to strengthen market focus and simplify
business structure; elimination of an unprofitable product line and
rationalization of manufacturing capacity and infrastructure in our
Performance Polymers business; a reduction in the infrastructure in
our Turbocharging Systems business; closing of a wax refinery and
carbon materials plant and rationalization of manufacturing capacity
in our Specialty Chemicals business; elimination of two
manufacturing facilities in our Electronic Materials business; a
plant closure and outsourcing activity in our automotive Consumer
Products Group business; and related and general workforce
reductions in all AlliedSignal Inc businesses and our Industrial
Control business. The components of the charge included severance
costs of $140 million, asset impairments of $149 million, and other
exit costs of $32 million. Global workforce reductions consisted of
approximately 5,100 manufacturing, administrative, and sales
positions of which approximately 3,500 positions have been
eliminated as of June 30, 2000. Asset impairments 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. Other exit costs principally consisted of
environmental exit costs associated with chemical plant shutdowns.
All repositioning actions, excluding environmental remediation, are
being completed throughout 2000.
We expect that the merger and repositioning actions committed
to in 2000 and 1999 will generate incremental pretax savings of $270
million in 2000, $605 million in 2001 and $780 million in 2002
principally from planned workforce reductions and facility
consolidations. Cash expenditures for severance, other exit costs,
and future period expenses necessary to execute these actions will
exceed $500 million and will principally be incurred in 2000. Cash
expenditures for severance, other exit costs and merger fees and
expenses were $232 million for the six-month period ended June 30,
2000 and were funded principally through operating cash flows.
In July 2000, we announced plans to consolidate our Performance
Polymers and Specialty Chemicals strategic business units into a
single business unit. We also announced additional census
reductions of approximately 5 percent expected to occur over the
next four quarters. These census reductions are expected to be
effected through a combination of a hiring freeze, attrition and
layoffs. We are currently formulating a detailed plan to effect
these and other actions, which will result in a significant charge
against future earnings.
23
<PAGE>
D. Other Matters
-------------
Euro Conversion
---------------
On January 1, 1999, certain member countries of the European
Union established fixed conversion rates between their existing
currencies and the European Union's common currency (Euro). The
transition period for the introduction of the Euro is between
January 1, 1999 and January 1, 2002. We have identified and are
ensuring that all Euro conversion compliance issues are addressed.
Although we cannot predict the impact of the Euro conversion at this
time, we do not expect that the Euro conversion will have a material
adverse effect on our consolidated results of operations.
Review by Independent Accountants
---------------------------------
The "Report on Review by 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 Honeywell's most recent annual report filed on Form 10-K
(Item 7A). At June 30, 2000, except for the issuance of $1 billion
of 7.50% Notes and the related interest rate swap agreements entered
into in February 2000, as described in Note 11 on page 10 of this
Form 10-Q, there has been no material change in this information. At
June 30, 2000, the market risk associated with the $1 billion of
7.50% Notes was substantially offset by the related interest rate
swap agreements.
24
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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Honeywell and seven of its officers were named as defendants in
a purported class action lawsuit filed in the United States
District Court for the District of New Jersey on July 25, 2000
by Local 144 Nursing Home Employees Pension Fund (the Complaint).
The Complaint principally alleges 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.
We believe that there is no factual or legal basis for the
allegations in the Complaint. Although it is not possible at
this time to predict the result of this case, we expect to
prevail. However, an adverse outcome could be material to our
financial position or results of operations. No provision has
been made in our financial statements with respect to this
contingent liability.
Item 5. Other Information
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(a) Andrew C. Sigler retired as a member of Honeywell's Board of
Directors effective May 25, 2000.
(b) On May 26, 2000, the Board of Directors approved an amendment
to Honeywell's by-laws to provide for 90-day advance notice period
for the nomination of a director or the presentation of a proposal
at an annual meeting of shareowners. The prior by-law provided for
a 60-day advance notice period for a director nomination to be
presented at an annual meeting but did not require similar advance
notice for a shareowner proposal.
The admended by-laws are being filed as an exhibit to this
Report on Form 10-Q. In order to be considered timely
under the revised by-laws, a director nomination or
shareowner proposal to be submitted at an annual meeting
must be received by the Secretary at Honeywell's principal
executive offices no earlier than 120 days nor later than
90 days prior to the anniversary of the prior year's annual
meeting. The date by which a director nomination or
shareowner proposal must be received for the 2001 annual
meeting is January 31, 2001.
Item 6. Exhibits and Reports on Form 8-K
---------------------------------
(a) Exhibits. The following exhibits are filed with this
Form 10-Q:
3(ii) By-laws of Honeywell, as amended.
15 Independent Accountants' Acknowledgment Letter
as to the incorporation of their report relating
to unaudited interim financial statements
27 Financial Data Schedule
25
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(b) Reports on Form 8-K. There were no reports on Form 8-K
filed during the three months ended June 30, 2000.
26
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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 11, 2000 By: /s/ Philip M. Palazzari
------------------------
Philip M. Palazzari
Vice President and Controller
(on behalf of the Registrant
and as the Registrant's
Principal Accounting Officer)
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EXHIBIT INDEX
Exhibit Number Description
2 Omitted (Inapplicable)
3(ii) By-laws of Honeywell, as amended
4 Omitted (Inapplicable)
10 Omitted (Inapplicable)
11 Omitted (Inapplicable)
15 Independent Accountants'
Acknowledgment Letter as to
the incorporation of their
report relating to unaudited
interim financial statements
18 Omitted (Inapplicable)
19 Omitted (Inapplicable)
22 Omitted (Inapplicable)
23 Omitted (Inapplicable)
24 Omitted (Inapplicable)
27 Financial Data Schedule
99 Omitted (Inapplicable)
28
