UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 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
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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 September 30, 2000
--------------------- ---------------------
$1 par value 797,485,994 shares
<PAGE>
Honeywell International Inc.
Index
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Page No.
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Part I. - Financial Information
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Item 1. Condensed Financial Statements:
Consolidated Balance Sheet -
September 30, 2000 and December 31, 1999 3
Consolidated Statement of Income -
Three and Nine Months Ended September 30, 2000
and 1999 4
Consolidated Statement of Cash Flows -
Nine Months Ended September 30, 2000 and 1999 5
Notes to Financial Statements 6
Report of Independent Accountants 17
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 25
Part II.- Other Information
-----------------
Item 1. Legal Proceedings 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
2
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Honeywell International Inc.
Consolidated Balance Sheet
(Unaudited)
September 30, December 31,
2000 1999
-------------- -------------
(Dollars in millions)
ASSETS
Current assets:
Cash and cash equivalents $ 2,065 $ 1,991
Accounts and notes receivable 4,162 3,896
Inventories 3,848 3,436
Other current assets 1,111 1,099
------- -------
Total current assets 11,186 10,422
Investments and long-term receivables 999 782
Property, plant and equipment - net 5,194 5,630
Goodwill and other intangible
assets - net 6,120 4,660
Other assets 2,418 2,033
------ -------
Total assets $25,917 $23,527
======= =======
LIABILITIES
Current liabilities:
Accounts payable $ 2,243 $ 2,129
Short-term borrowings 105 302
Commercial paper 2,553 2,023
Current maturities of long-term debt 181 284
Accrued liabilities 3,187 3,534
------- -------
Total current liabilities 8,269 8,272
Long-term debt 4,155 2,457
Deferred income taxes 998 864
Postretirement benefit obligations
other than pensions 1,952 1,968
Other liabilities 1,207 1,367
SHAREOWNERS' EQUITY
Capital - common stock issued 958 958
- additional paid-in capital 2,523 2,318
Common stock held in treasury, at cost (4,382) (4,254)
Accumulated other nonowner changes (652) (355)
Retained earnings 10,889 9,932
------- ------
Total shareowners' equity 9,336 8,599
------- ------
Total liabilities and shareowners' equity $25,917 $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 Nine Months Ended
September 30, September 30,
------------------ ----------------
2000 1999 2000 1999
---- ---- ---- ----
(Dollars in millions
except per share amounts)
Net sales $6,216 $6,036 $18,569 $17,576
------ ------ ------- -------
Costs, expenses and other
Cost of goods sold 4,845 4,574 13,966 13,391
Selling, general and aministrative
expenses 791 699 2,312 2,143
(Gain) on sale of non-strategic
businesses - (106) (112) (106)
Equity in (income) loss of affiliated
companies 68 (16) 50 (14)
Other (income) expense (35) 2 (48) (295)
Interest and other financial charges 125 60 365 192
------ ------ ------- -------
5,794 5,213 16,533 15,311
------ ------ ------- -------
Income before taxes on income 422 823 2,036 2,265
Taxes on income 140 269 631 731
------ ------ ------- -------
Net income $ 282 $ 554 $ 1,405 $ 1,534
====== ====== ======= =======
Earnings per share of common
stock - basic $ 0.35 $ 0.70 $ 1.76 $ 1.94
====== ====== ======= =======
Earnings per share of common
stock - assuming dilution $ 0.35 $ 0.68 $ 1.74 $ 1.90
====== ====== ======= =======
Cash dividends per share of
common stock $.1875 $ .17 $ .5625 $ .51
====== ====== ======= =======
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)
Nine Months Ended
September 30,
-----------------------
2000 1999
---- ----
(Dollars in millions)
Cash flows from operating activities:
Net income $1,405 $1,534
Adjustments to reconcile net income to net
cash provided by operating activities:
(Gain) on sale of non-strategic businesses (112) (106)
(Gain) on disposition of investment in AMP Incorporated - (268)
Repositioning and other charges 311 365
Charge for the impairment of long-lived assets 245 -
Depreciation and amortization 767 665
Equity income, net of distributions (7) (13)
Deferred income taxes 217 128
Net taxes paid on sales of businesses and investments (62) (185)
Other (644) (63)
Changes in assets and liabilities, net of the effects
of acquisitions and divestitures:
Accounts and notes receivable (64) (6)
Inventories (133) (12)
Other current assets (87) (21)
Accounts payable 41 (169)
Accrued liabilities (524) (332)
----- -----
Net cash provided by operating activities 1,353 1,517
------ ------
Cash flows from investing activities:
Expenditures for property, plant and equipment (578) (684)
Proceeds from disposals of property, plant and
equipment 107 66
(Increase) in investments (3) (6)
Disposition of investment in AMP Incorporated - 1,164
Cash paid for acquisitions (2,499) (866)
Proceeds from sales of businesses 431 642
(Increase) decrease in short-term investments (16) 4
------- ------
Net cash (used for) provided by investing activities (2,558) 320
------- ------
Cash flows from financing activities:
Net increase (decrease) in commercial paper 530 (260)
Net (decrease) in short-term borrowings (197) (68)
Proceeds from issuance of common stock 93 377
Proceeds from issuance of long-term debt 1,825 13
Payments of long-term debt (372) (339)
Repurchases of common stock (152) (1,058)
Cash dividends on common stock (448) (395)
------- ------
Net cash provided by (used for) financing activities 1,279 (1,730)
------- ------
Net increase in cash and cash equivalents 74 107
Cash and cash equivalents at beginning of year 1,991 1,018
------- ------
Cash and cash equivalents at end of period $2,065 $1,125
======= ======
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 September 30, 2000 and the results of
operations for the three and nine months ended September 30, 2000
and 1999 and cash flows for the nine months ended September 30, 2000
and 1999. The results of operations for the three- and nine-month
periods ended September 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 September 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:
September 30, December 31,
2000 1999
-------- ------------
Trade $3,725 $3,545
Other 528 435
------ ------
4,253 3,980
Less - Allowance for doubtful
accounts and refunds (91) (84)
------ ------
$4,162 $3,896
====== ======
NOTE 3. Inventories consist of the following:
September 30, December 31,
2000 1999
---------- ------------
Raw materials $1,244 $1,027
Work in process 910 973
Finished products 1,854 1,589
------ ------
4,008 3,589
Less - Progress payments (46) (44)
Reduction to LIFO cost basis (114) (109)
------ ------
$3,848 $3,436
====== ======
NOTE 4. Total nonowner changes in shareowners' equity consist of the following:
Periods Ended September 30,
--------------------------------------------------
Three Months Nine Months
--------------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
Net income $282 $554 $1,405 $1,534
Foreign exchange translation
adjustments (106) 47 (265) (127)
Unrealized holding (losses)
on securities available
for sale (34) -- (32) (92)
---- ---- ------ ------
$142 $601 $1,108 $1,315
==== ==== ====== ======
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NOTE 5. Segment financial data follows:
Periods Ended September 30,
----------------------------------------------
Net Sales Three Months Nine Months
--------- ----------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
Aerospace Solutions $2,458 $2,527 $ 7,308 $ 7,389
Automation & Control 1,861 1,559 5,441 4,450
Performance Materials 1,014 1,027 3,100 2,996
Power & Transportation
Products 866 895 2,665 2,658
Corporate 17 28 55 83
------ ------ ------- -------
$6,216 $6,036 $18,569 $17,576
====== ====== ======= =======
Periods Ended September 30,
--------------------------------------------------
Segment Profit Three Months Nine Months
-------------- --------------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
Aerospace Solutions $ 565 $ 531 $1,604 $1,401
Automation & Control 277 202 742 483
Performance Materials 98 88 300 382
Power & Transportation
Products 41 78 211 231
Corporate (40) (33) (109) (130)
----- ----- ------ ------
Segment profit 941 866 2,748 2,367
----- ----- ------ ------
Gain on sale of
non-strategic businesses - 106 112 106
Equity in income (loss)
of affiliated
companies 31 20 49 54
Other income (expense) 35 (2) 48 27
Interest and other
financial charges (125) (60) (365) (192)
Repositioning and other
charges (215) (107) (311) (365)
Charge for the impairment of
long-lived assets (245) - (245) -
Gain on disposition of
investment in AMP Inc. - - - 268
----- ----- ---- -----
Income before taxes
on income $ 422 $ 823 $2,036 $2,265
===== ===== ====== ======
7
<PAGE>
NOTE 6. The details of the earnings per share calculations for the three- and
nine-month periods ended September 30, 2000 and 1999 follow:
Three Months Nine Months
------------------------------------------------
Per Per
Average Share Average Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------- ------
2000
----
Earnings per share of
common stock - basic $282 800.7 $.35 $1,405 799.1 $1.76
Dilutive securities issuable
in connection with stock
plans 5.7 8.9
----- ----- ---- ----- ----- -----
Earnings per share of common
stock - assuming dilution $282 806.4 $.35 $1,405 808.0 $1.74
==== ===== ==== ====== ===== =====
Three Months Nine Months
----------------------------------------------
Per Per
Average Share Average Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------- ------
1999
----
Earnings per share of
common stock - basic $554 791.4 $.70 $1,534 791.4 $1.94
Dilutive securities issuable
in connection with stock
plans 17.9 16.6
---- ----- ---- ------ ----- -----
Earnings per share of common
stock - assuming dilution $554 809.3 $.68 $1,534 808.0 $1.90
==== ===== ==== ====== ===== =====
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 nine-month periods ended September 30, 2000, the number of stock
options not included in the computations were 30.4 and 15.9 million,
respectively. These stock options were outstanding at September 30,
2000. For the three- and nine-month periods ended September 30,
1999, all stock options were included in the computations.
NOTE 7. In the third quarter of 2000, we recognized a net pretax
charge of $116 million for the costs of repositioning and other
actions. We recognized a repositioning charge of $132 million
related to announced global workforce reductions in each of our
reportable segments and asset impairments principally associated
with the completion of previously announced plant shut-downs in our
Performance Polymers and Chemicals business. The components of the
repositioning charge included severance costs of $116 million and
asset impairments of $16 million, and are included in cost of goods
sold. The workforce reductions are expected to be substantially
completed by December 31, 2000 and consist of approximately 1,750
manufacturing and administrative positions of which approximately
200 positions have been eliminated as of September 30, 2000. The
pretax impact of the repositioning charge by reportable segment was
as follows: Automation & Control - $84 million; Performance
Materials - $17 million;
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Aerospace Solutions - $16 million; Corporate - $10 million; and Power &
Transportation Products - $5 million. We also recognized in cost of goods
sold other charges of $30 million principally related to write-offs of
tangible and intangible assets removed from service, including inventory.
During the third quarter of 2000, $46 million of reserves established in
1999, principally for severance, were returned to income due to higher
than expected voluntary employee attrition (approximately 650 positions)
resulting in reduced severance liabilities principally in our Automation
& Control and Aerospace Solutions reportable segments. In the third quarter
of 2000, we also recognized a pretax repositioning charge of $99 million
in equity in (income) loss of affiliated companies for costs associated
with closing an affiliate's chemical manufacturing operations.
The components of the charge included severance costs of $6 million, asset
impairments of $53 million, and other environmental exit costs and period
expenses of $40 million.
In the second quarter of 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 substantially
completed by December 31, 2000 and consisted of approximately 600
manufacturing positions of which approximately 130 positions have
been eliminated as of September 30, 2000. The pretax impact of the
repositioning charge by reportable segment was as follows:
Performance Materials - $74 million; Automation & Control - $17
million; and Power & Transportation Products - $5 million.
The total net pretax impact of repositioning and other charges was
$215 million for the three months ended September 30, 2000 and $311
million for the nine months ended September 30, 2000.
In December 1999, as disclosed in our 1999 Form 10-K Annual Report,
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 productivity and improve future profitability.
The merger-related actions included planned global workforce
reductions of approximately 6,500 administrative and manufacturing
positions of which approximately 3,000 positions have been
eliminated as of September 30, 2000. All merger-related actions are
expected to be completed by December 31, 2000.
In 1999, we also recognized a pretax charge of $321 million ($96
million in the third quarter and $171 million in the first nine
months) for the costs of actions designed to reposition principally
the AlliedSignal Inc businesses 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, closing of a wax refinery and carbon
materials plant and rationalization of manufacturing capacity and
infrastructure in our Performance Polymers and Chemicals business; a
reduction in the infrastructure in our Turbocharging Systems
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,
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administrative, and sales positions of which approximately 3,800 positions
have been eliminated as of September 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.
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 third quarter of 1999,
other charges of $7 million related to asset impairments were also
recorded.
Repositioning and other charges totaling $222 million in the second
quarter of 1999 and $103 million in the third quarter of 1999 were
included in cost of goods sold. Equity in (income) loss of
affiliated companies in the second quarter of 1999 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. Equity in (income) loss of affiliated companies
in the third quarter of 1999 included a $4 million charge related to
an equity investee's severance actions. The total pretax impact of
repositioning and other charges was $107 million for the three
months ended September 30, 1999 and $365 million for the nine months
ended September 30, 1999.
The following table summarizes the status of our total merger and
repositioning costs:
Balance
1999 1999 at 2000 2000 Balance at
Charges Usage 12/31/99 Charges Usage Adjustments 9/30/2000
------- ----- -------- ------- ----- ----------- ---------
Severance costs $482 $ (58) $424 $146 $(199) $(42) $329
Asset impairments 257 (257) - 141 (141) - -
Exit costs 89 (4) 85 40 (35) (4) 86
Merger fees
& expenses 135 (77) 58 - (53) - 5
---- ------ ---- ---- ------ ----- ----
Total $963 $(396) $567 $327 $(428) $(46) $420
==== ====== ==== ==== ====== ===== ====
NOTE 8. In the third quarter of 2000, we identified our Friction Materials
business as non-core. As a result of this assessment, we implemented cost
reduction initiatives and conducted discussions with potential acquirors of
the business. As part of this process, we obtained third party indications
of value and evaluated the business for possible asset impairment. In the
third quarter of 2000, we recognized an impairment charge of $245 million
principally related to the write-down of property, plant and equipment,
goodwill and other intangible assets. The impairment charge is included as
part of cost of goods sold.
NOTE 9. 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. In the third quarter of 1999, we sold our
Laminate Systems business for approximately $425 million in cash resulting
in a pretax gain of $106 million. The Laminate Systems business had annual
sales of about $400 million.
10
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NOTE 10. 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, was included in other (income) expense in the nine months
ended September 30, 1999.
NOTE 11. 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 12) 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 nine months ended September 30, 2000,
assuming the acquisition had been made at the beginning of the year,
would not be materially different from reported results.
NOTE 12. In September 2000, we issued $750 million of 6.875% Notes,
which are due in 2005. Interest on the Notes is payable semi-
annually in arrears on April 3 and October 3 of each year, beginning
on April 3, 2001.
In February 2000, we issued $1 billion of 7.50% Notes, which are due
in 2010. Interest on the Notes is payable semi-annually in arrears
on March 1 and September 1 of each year, beginning on September 1,
2000. In February 2000, we also entered into interest rate swap
agreements, which effectively changed $750 million of the 7.50%
fixed rate Notes to LIBOR based floating rate debt.
NOTE 13. 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.
During the three months ended September 30, 2000, we repurchased 4.2
million shares of our common stock for $160 million in connection
with our share repurchase program. As a result of the pending merger
with General Electric Company (see Note 15), Honeywell rescinded its
share repurchase program effective October 21, 2000.
NOTE 14. 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
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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 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
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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.
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
13
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patent/tort case. The antitrust trial did not begin until November 20, 1995.
Judge Pfaelzer also presided over the trial, but it was held before a different
jury. At the close of evidence and before jury deliberations began, the trial
court dismissed, for failure of proof, Litton's contentions that the
former Honeywell had illegally monopolized and attempted to
monopolize by: (i) engaging in below-cost predatory pricing; (ii)
tying and bundling product offerings under packaged pricing; (iii)
misrepresenting its products and disparaging Litton products; and
(iv) acquiring the Sperry Avionics business in 1986.
On February 2, 1996, the case was submitted to the jury on the
remaining allegations that the former Honeywell had illegally
monopolized and attempted to monopolize by: (i) entering into
certain long-term exclusive dealing and penalty arrangements with
aircraft manufacturers and airlines to exclude Litton from the
commercial aircraft market, and (ii) failing to provide Litton with
access to proprietary software used in the cockpits of certain
business jets.
On February 29, 1996, the jury returned a $234 million single
damages verdict against the former Honeywell for illegal
monopolization, which verdict would have been automatically trebled.
On March 1, 1996, the jury indicated that it was unable to reach a
verdict on damages for the attempt to monopolize claim, and a
mistrial was declared as to that claim.
The former Honeywell subsequently filed a motion for judgment as a
matter of law and a motion for a new trial, contending, among other
things, that the jury's partial verdict should be overturned because
the former Honeywell was prejudiced at trial, and Litton failed to
prove essential elements of liability or submit competent evidence
to support its speculative, all-or-nothing $298.5 million damage
claim. Litton filed motions for entry of judgment and injunctive
relief. On July 24, 1996, the trial court denied the former
Honeywell's alternative motions for judgment as a matter of law or a
complete new trial, but concluded that Litton's damage study was
seriously flawed and granted the former Honeywell a retrial on
damages only. The court also denied Litton's two motions. At that
time, Judge Pfaelzer was expected to conduct the retrial of
antitrust damages sometime following the retrial of patent/tort
damages. However, after the U.S. Supreme Court remanded the
patent/tort case to the Federal Circuit in March 1997, Litton moved
to have the trial court expeditiously schedule the antitrust damages
retrial. In September 1997, the trial court rejected that motion,
indicating that it wished to know the outcome of the current
patent/tort appeal before scheduling retrials of any type.
Following the April 7, 1998 Federal Circuit panel decision in the
patent/tort case, Litton again petitioned the trial court to
schedule the retrial of antitrust damages. The trial court
tentatively scheduled the trial to commence in the fourth quarter of
1998, and reopened limited discovery and other pretrial
preparations. Litton then filed another antitrust damage claim of
nearly $300 million.
The damages only retrial began October 29, 1998 before Judge
Pfaelzer and a new jury. On December 9, 1998, the jury returned
verdicts against the former Honeywell totaling $250 million, $220
million of which is in favor of Litton and $30 million of which is
in favor of its sister corporation, Litton Systems, Canada, Limited.
On January 27, 1999, the court vacated its prior mistrial ruling
with respect to the attempt to monopolize claim and entered a treble
damages judgment in the total amount of $750 million for actual and
attempted monopolization. The former Honeywell filed appropriate
post-judgment motions with the trial court and Litton filed motions
seeking to add substantial attorney's fees and costs to the
14
<PAGE>
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 thirteen class action lawsuits filed in the
United States District Court for the District of New Jersey (the
Complaints). The 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.
We believe that there is no factual or legal basis for the
allegations in the Complaints. Although it is not possible at this
time to predict the result of these cases, we expect to prevail.
However, an adverse outcome could be material to our financial
position or results of operations. No provision has been made in
our financial statements with respect to this contingent liability.
NOTE 15 - Subsequent Event - On October 22, 2000, Honeywell and
General Electric Company (GE) entered into an Agreement and Plan of
Merger (Merger Agreement) providing for a business combination
between GE and Honeywell. Under the Merger Agreement, a wholly-
owned subsidiary of GE will be merged with and into Honeywell, and
Honeywell will become a wholly-owned subdidiary of GE. Upon
consummation of the merger, each issued and outstanding share of
common stock of Honeywell will be converted into the right to
receive 1.055 shares of common
15
<PAGE>
stock of GE. The details of this transaction are discussed in our Form 8-K
filing dated October 25, 2000.
16
<PAGE>
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 September
30, 2000, and the related consolidated statements of income for each
of the three-month and nine-month periods ended September 30, 2000
and 1999 and the consolidated statements of cash flows for the nine-
month period ended September 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 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, 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.
PricewaterhouseCoopers LLP
Florham Park, NJ
November 13, 2000
17
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
A. Results of Operations - Third Quarter 2000 Compared with Third Quarter 1999
---------------------------------------------------------------------------
Net sales in the third quarter of 2000 were $6,216 million, an
increase of $180 million, or 3 percent compared with the third
quarter of 1999. The perecentage increase is attributable to the
following:
Acquisitions/Divestitures 6 %
Foreign Exchange (2)%
Volume/Price (1)%
----
3 %
====
Segment profit in the third quarter of 2000 was $941 million, an
increase of $75 million, or 9 percent compared with the third
quarter of 1999. Segment profit margin for the third quarter of 2000
was 15.1 percent compared with 14.3 percent for the third quarter of
1999. The increase in segment profit in the third quarter of 2000
was led by a significant improvement by the Automation & Control
segment and a moderate improvement by the Aerospace Solutions and
Performance Materials segments partially offset by a significant
decrease by the Power & Transportation Products segment. Segment
profit is discussed in detail by segment in the Review of Business
Segments section below.
(Gain) on sale of non-strategic businesses of $106 million in the
third quarter of 1999 related to the pretax gain on the sale of our
Laminate Systems business in September 1999. See Note 9 on page 10
of this Form 10-Q for further details.
Equity in (income) loss of affiliated companies was a loss of $68
million in the third quarter of 2000 compared with income of $16
million in the third quarter of 1999. The decrease of $84 million
in equity income primarily reflects that the current quarter
included a charge of $99 million for costs associated with closing
an affiliate's chemical manufacturing operations. The prior year's
quarter also included a charge of $4 million related to an equity
investee's severance actions. See Note 7 on page 8 of this Form 10-
Q for further details. Excluding these charges in both periods,
equity in (income) loss of affiliated companies in the third quarter
of 2000 was income of $31 million, an increase of $11 million
compared with the third quarter of 1999 due mainly to the gain on
the sale of our interest in an automotive aftermarket joint venture
partially offset by lower earnings from our UOP process technology
(UOP) joint venture.
Other (income) expense, $35 million of income in the third
quarter of 2000, increased by $37 million compared with the third
quarter of 1999 due principally to increased benefits from foreign
exchange hedging and lower minority interest expense.
Interest and other financial charges of $125 million in the third
quarter of 2000 increased by $65 million compared with the third
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 our share repurchase program,
higher average interest rates and the impact of tax interest
expense.
The effective tax rate in the third quarter of 2000 was 33.2
percent compared with 32.7 percent in the third quarter of 1999.
The effective tax rate in both periods includes the impact of one-
time items such as the gain on sale of
18
<PAGE>
non-strategic businesses and repositioning and other charges. Excluding
the impact of these one-time items in both periods, the effective
tax rate was 30.5 percent in the third quarter of 2000 compared with
32.0 percent in the third quarter of 1999. The decrease in the rate
relates principally to tax synergies in Europe associated with the
merger of AlliedSignal Inc and the former Honeywell.
Net income of $282 million, or $0.35 per share, in the third
quarter of 2000 was 49 percent lower than the prior year's third
quarter net income of $554 million, or $0.68 per share. Net income
in the third quarter of 2000 included an impairment charge related
to our Friction Materials business and repositioning and other charges.
Adjusted for these items, net income in the third quarter of 2000 was
$331 million, or $0.41 per share, higher than reported. Net income in
the third quarter of 1999 included the gain on our disposition of our
Laminate Systems business and repositioning and other charges. Adjusted
for these items, net income in the third quarter of 1999 was $6 million,
or $0.01 per share, higher than reported. Net income in the third
quarter of 2000 increased by 9 percent compared with the third
quarter of 1999 if both periods are adjusted for these items.
Review of Business Segments
---------------------------
Aerospace Solutions sales of $2,458 million in the third
quarter of 2000 were $69 million, or 3 percent lower compared with
the third quarter of 1999. The decrease relates primarily to the
effects of government-mandated divestitures in connection with the
merger of AlliedSignal Inc and the former Honeywell and the impact
of a supplier parts shortage in our avionics business. The avionics
supplier issue originated in the second quarter of this year and is
expected to be substantially resolved by year-end. The decrease was
partially offset by higher sales to the commercial repair and
overhaul and military aftermarket.
Aerospace Solutions segment profit of $565 million in the third
quarter of 2000 increased by $34 million, or 6 percent compared with
the third quarter of 1999 due principally to cost structure
improvements, primarily from workforce and benefit cost reductions,
and merger-related savings.
Automation & Control sales of $1,861 million in the third
quarter of 2000 increased by $302 million, or 19 percent compared
with the third quarter of 1999. This increase includes the negative
impact of foreign exchange of approximately 4 percent. 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
strong growth in our sensing & control business which is
experiencing solid demand for its full range of products 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.
Automation & Control segment profit of $277 million in the
third quarter of 2000 increased by $75 million, or 37 percent
compared with the third 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 $1,014 million in the third
quarter of 2000 decreased by $13 million, or 1 percent compared with
the third quarter of 1999.
19
<PAGE>
Excluding the impact of the divestiture of our Laminate Systems business in
September 1999, sales increased moderately due to strong demand for advance
circuitry and wafer-fabrication products supplied by Johnson Matthey
Electronics, a company acquired by our Electronic Materials business in August
1999.
Performance Materials segment profit of $98 million in the
third quarter of 2000 increased by $10 million, or 11 percent
compared with the third quarter of 1999. The increase mainly
reflects portfolio changes and cost structure improvements which
more than offset the impact of continued higher raw material costs
in our Performance Polymers and Chemicals business.
Power & Transportation Products sales of $866 million in the
third quarter of 2000 decreased by $29 million, or 3 percent
compared with the third quarter of 1999 due principally to the
negative impact of foreign exchange of approximately 5 percent.
Higher sales for our Turbocharging Systems business due to strong
world-wide demand was more than offset by lower sales for our
Commercial Vehicle Systems business due to decreased heavy-duty
truck builds in North America.
Power & Transportation Products segment profit of $41 million
in the third quarter of 2000 decreased by $37 million, or 47 percent
compared with the third quarter of 1999. The decrease principally
reflects costs associated with a product recall and lower sales in
our Commercial Vehicle Systems business and costs related to the
ramp-up of our Turbogenerator product line.
B. Results of Operations - Nine Months 2000 Compared with Nine Months 1999
-----------------------------------------------------------------------
Net sales in the first nine months of 2000 were $18,569 million,
an increase of $993 million, or 6 percent compared with the first
nine months of 1999. The percentage increase is attributable to the
following:
Acquisitions/Divestitures 7 %
Foreign Exchange (2)%
Volume/Price 1 %
-
6 %
===
Segment profit in the first nine months of 2000 was $2,748
million, an increase of $381 million, or 16 percent compared with
the first nine months of 1999. Segment profit margin for the first
nine months of 2000 was 14.8 percent compared with 13.5 percent for
the first nine months of 1999. The increase in segment profit in the
first nine months of 2000 was led by a significant improvement by
the Automation & Control and Aerospace Solutions segments and lower
Corporate expenses. The increase was partially offset by lower
segment profit by the Performance Materials and Power &
Transportation Products segments. 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 nine months of 2000 represents the pretax gain on the
government-mandated divestiture of the former Honeywell's TCAS
product line. (Gain) on sale of non-strategic businesses of $106
million in the first nine months of 1999 related to the pretax gain
on the sale of our Laminate Systems business in September 1999.
See Note 9 on page 10 of this Form 10-Q for further details.
Equity in (income) loss of affiliated companies was a loss of $50
million in the first nine months of 2000 compared with income of $14
million in the first nine months of 1999. The decrease of $64
million in equity income primarily reflects that the current year
included a charge of $99 million for costs
20
<PAGE>
associated with closing an affiliate's chemical manufacturing operations.
The prior year also included a charge of $40 million related to the writedown
of an equity investment and an equity investee's severance actions. See
Note 7 on page 8 of this Form 10-Q for further details. Excluding
these charges in both periods, equity in (income) loss of affiliated
companies in the first nine months of 2000 was income of $49 million, a
decrease of $5 million compared with the first nine months of 1999
due mainly to lower earnings from UOP partially offset by the gain
on the sale of our interest in an automotive aftermarket joint
venture.
Other (income) expense, $48 million of income in the first nine
months of 2000, decreased by $247 million compared with the first
nine 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 10 on page 11 of this
Form 10-Q for further details. Excluding this net gain, other
(income) expense, $48 million of income in the first nine months
of 2000, compared with $27 million of income in the first nine months
of 1999. This increase in other income of $21 million was due
principally to lower minority interest expense and increased
benefits from foreign exchange hedging.
Interest and other financial charges of $365 million in the first
nine months of 2000 increased by $173 million compared with the
first nine months of 1999. The increase results from higher average
levels of debt during the first nine months of the current year due
principally to the Pittway acquisition and our share repurchase
program, higher average interest rates and the impact of tax
interest expense.
The effective tax rate in the first nine months of 2000 was 31.0
percent compared with 32.3 percent in the first nine months of 1999.
The effective tax rate in both periods includes the impact of one-
time items such as the gain on sale of non-strategic businesses, the
gain on the disposition of our investment in AMP and repositioning and
other charges. Excluding the impact of these one-time items in both
periods, the effective tax rate was 30.5 percent in the first nine months
of 2000 compared with 32.0 percent in the first nine months of 1999.
The decrease in the rate relates principally to tax synergies in Europe
associated with the merger of AlliedSignal Inc and the former Honeywell.
Net income of $1,405 million, or $1.74 per share, in the first
nine months of 2000 was 8 percent lower than the prior year's first
nine months net income of $1,534 million, or $1.90 per share. Net
income in the first nine months of 2000 included an impairment
charge related to our Friction Materials business, the gain on the
disposition of the former Honeywell's TCAS product line and repositioning
and other charges. Adjusted for these items, net income in the first nine
months of 2000 was $319 million, or $0.40 per share, higher than reported.
Net income in the first nine months of 1999 included the gain on our
disposition of our investment in AMP, the gain on the sale of our Laminate
Systems business and repositioning and other charges. Adjusted for these
items, net income in the first nine months of 1999 was $1 million
higher than reported. Net income in the first nine months of 2000
increased by 12 percent compared with the first nine months of 1999
if both periods are adjusted for these items.
Review of Business Segments
---------------------------
Aerospace Solutions sales of $7,308 million in the first nine
months of 2000 were $81 million, or 1 percent lower compared with
the first nine months of 1999. Growth in our aftermarket business
and higher original equipment sales to business, regional and
general aviation customers were offset by lower original equipment
sales to air transport manufacturers and a decline in engineering
21
<PAGE>
services revenues. Sales also decreased due to the effects of
government-mandated divestitures.
Aerospace Solutions segment profit of $1,604 million in the
first nine months of 2000 increased by $203 million, or 14 percent
compared with the first nine 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 $5,441 million in the first nine
months of 2000 increased by $991 million, or 22 percent compared
with the first nine 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 moderately as growth in our sensing & control business was
more than offset by continued weakness in our industrial automation
& control business.
Automation & Control segment profit of $742 million in the
first nine months of 2000 increased by $259 million, or 54 percent
compared with the first nine 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 $3,100 million in the first nine
months of 2000 were higher by $104 million, or 3 percent compared
with the first nine months of 1999. Increased sales of advance
circuitry and wafer-fabrication products by our Electronic Materials
business were partially offset by the effect of divestitures,
principally our Laminate Systems business.
Performance Materials segment profit of $300 million in the
first nine months of 2000 was lower by $82 million, or 21 percent
compared with the first nine months of 1999. The decrease
principally reflects higher raw material costs in certain
Performance Polymers and Chemicals businesses and higher operating
losses in our chip packaging and pharmaceutical chemicals
businesses. The decrease was partially offset by cost structure
improvements and price increases in certain Performance Polymers and
Chemicals businesses.
Power & Transportation Products sales of $2,665 million in the
first nine months of 2000 increased by $7 million compared with the
first nine months of 1999. Higher sales for our Turbocharging
Systems business due to continued strong world-wide demand was
partially offset by the impact of foreign exchange and lower sales
for our Commercial Vehicle Systems business due to decreased heavy-
duty truck builds.
Power & Transportation Products segment profit of $211 million
in the first nine months of 2000 was lower by $20 million, or 9
percent compared with the first nine months of 1999. The decrease
primarily reflects costs associated with a product recall and lower
sales in our Commercial Vehicle Systems business, costs related to
the ramp-up of our Turbogenerator product line and costs associated
with a supplier issue in our Turbocharging Systems business. The
decrease was partially offset by the effects of cost structure
improvements in our Friction Materials and Consumer Products Group
businesses resulting from six sigma initiatives, material
procurement savings and workforce reductions and higher sales in our
Turbocharging Systems business.
22
<PAGE>
C. Financial Condition, Liquidity and Capital Resources
----------------------------------------------------
Total assets at September 30, 2000 were $25,917 million, an
increase of $2,390 million, or 10 percent from December 31, 1999.
The increase relates principally to our acquisition of Pittway.
Cash provided by operating activities of $1,353 million during
the first nine months of 2000 decreased by $164 million compared
with the first nine months of 1999 due principally to spending
related to the merger and repositioning actions partially offset by
higher net income, excluding one-time items, and lower taxes paid on
sales of businesses and investments.
Cash used for investing activities of $2,558 million during the
first nine months of 2000 increased by $2,878 million compared with
the first nine months of 1999. The acquisition of Pittway, the fact
that the prior year included the net proceeds from our disposition
of our investment in AMP and lower proceeds from the sales of
businesses were principally responsible for the increase. See Notes
10 and 11 on page 11 of this Form 10-Q for further details. Lower
capital spending was a partial offset as we expect our total
capital spending in 2000 will be approximately $900 million compared
with our previous estimate as of December 31, 1999 of about
$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. In August 2000,
we initiated an auction process to find a buyer for our Consumer
Products Group business and in September 2000 we executed a letter
of intent to sell our Friction Materials business. Both of these
automotive businesses are part of our Power & Transportation
Products segment. In November 2000, we discontinued efforts to
divest our Consumer Products Group and Friction Materials businesses.
Cash provided by financing activities of $1,279 million during
the first nine months of 2000 increased by $3,009 million compared
with the first nine months of 1999. The increase principally
relates to higher levels of debt in the current year including the
issuance of $1 billion of 7.50% Notes in February 2000 and $750
million of 6.875% Notes in September 2000. See Note 12 on page 11
of this Form 10-Q for further details. Total debt of $6,994 million
at September 30, 2000 was $1,928 million, or 38 percent higher than
at December 31, 1999 due principally to the Pittway acquisition. A
decrease in stock repurchases in the current year also contributed
to the increase in cash provided by financing activities.
Merger and Repositioning Charges
--------------------------------
In the third quarter of 2000, we recognized a pretax charge of
$132 million for announced global workforce reductions in each of
our reportable segments and asset impairments principally associated
with the completion of previously announced plant shut-downs in our
Performance Polymers and Chemicals business. The components of the
charge included severance costs of $116 million and asset
impairments of $16 million, and are included in cost of goods sold.
The
23
<PAGE>
workforce reductions are expected to be substantially completed
by December 31, 2000 and consist of approximately 1,750 manufacturing
and administrative positions of which approximately 200 positions have
been eliminated as of September 30, 2000. The pretax impact of the
repositioning charge by reportable segment was as follows: Automation &
Control - $84 million; Performance Materials - $17 million; Aerospace
Solutions - $16 million; Corporate - $10 million; and Power & Transportation
Products - $5 million. In the third quarter of 2000, we also recognized
a pretax repositioning charge of $99 million in equity in (income) loss of
affiliated companies for costs associated with closing an
affiliate's chemical manufacturing operations. The components of
the charge included severance costs of $6 million, asset impairments
of $53 million, and other environmental exit costs and period
expenses of $40 million. During the third quarter of 2000, $46
million of reserves established in 1999, principally for severance,
were returned to income due to higher than expected voluntary
employee attrition (approximately 650 positions) resulting in reduced
severance liabilities principally in our Automation & Control and
Aerospace Solutions reportable segments.
In the second quarter of 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 substantially
completed by December 31, 2000 and consisted of approximately 600
manufacturing positions of which approximately 130 positions have
been eliminated as of September 30, 2000. The pretax impact of the
repositioning charge by reportable segments was as follows: Performance
Materials - $74 million; Automation & Control - $17 million; and Power &
Transportation Products - $5 million.
In December 1999, as disclosed in our 1999 Form 10-K Annual
Report, 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 planned global workforce
reductions of approximately 6,500 administrative and manufacturing
positions of which approximately 3,000 positions have been
eliminated as of September 30, 2000. All merger-related actions are
expected to be completed by December 31, 2000.
In 1999, we also recognized a pretax charge of $321 million
($96 million in the third quarter and $171 million in the first nine
months) for the costs of actions designed to reposition principally
the AlliedSignal Inc businesses 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,
closing of a wax refinery and carbon materials plant and rationalization
of manufacturing capacity and infrastructure in our Performance Polymers
and Chemicals business; a reduction in the infrastructure in our Turbocharging
Systems 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 3,800 positions have
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been eliminated as of September 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 over
$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 $287 million for the nine-month period ended September
30, 2000 and were funded principally through operating cash flows.
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.
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 Honeywell's most recent annual report filed on Form 10-K
(Item 7A). At September 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 and the issuance of $750 million of 6.875%
Notes in September 2000, as described in Note 12 on page 11 of this
Form 10-Q, there has been no material change in this information.
At September 30, 2000, the market risk associated with the $1 billion
of 7.50% Notes and $750 million of 6.875% Notes was not considered material.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Honeywell and seven of its officers were named as defendants in
thirteen class action lawsuits filed in the United States
District Court for the District of New Jersey (the Complaints).
The 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.
We believe that there is no factual or legal basis for the
allegations in the Complaints. Although it is not possible at
this time to predict the result of these cases, we expect to
prevail. However, an adverse outcome could be material to our
financial position or results of operations. No provision has
been made in our financial statements with respect to this
contingent liability.
Item 5 Other Information
-----------------
On November 9, 2000, Honeywell announced that it has discontinued the
previously announced divestitures of its Friction Materials, Automotive
Consumer Products Group, U.S. Security Monitoring and Pharmacuetical
Fine Chemicals businesses.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits. The following exhibits are filed with this
Form 10-Q:
15 Independent Accountants' Acknowledgment Letter
as to the incorporation of their report relating
to unaudited interim financial statements
27 Financial Data Schedule
(b) Reports on Form 8-K. The following reports on Form 8-K were
filed during the three months ended September 30, 2000:
1. On September 8, 2000, a report was filed reporting our plans to
exit certain non-core businesses.
2. On October 25, 2000, a report was filed reporting that
Honeywell and General Electric Company entered into an
Agreement and Plan of Merger.
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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: November 13, 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 Omitted (Inapplicable)
4 Omitted (Inapplicable)
10 Omitted (Inapplicable)
11 Omitted (Inapplicable)
15 Independent Accountants'
Acknowledgment Letter as to
the incorporation of their
report relating to unaudited
interim financial statements
18 Omitted (Inapplicable)
19 Omitted (Inapplicable)
22 Omitted (Inapplicable)
23 Omitted (Inapplicable)
24 Omitted (Inapplicable)
27 Financial Data Schedule
99 Omitted (Inapplicable)
28
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