Honeywell International Inc. Q1 2003 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2003. Honeywell International Inc. operates through four primary segments: Aerospace, Automation and Control Solutions, Specialty Materials, and Transportation and Power Systems. The company is an accelerated filer with 857,902,339 shares of common stock outstanding as of the reporting date.
Key Financial Metrics
| Metric | Q1 2003 | Q1 2002 |
|---|---|---|
| Net Sales | $5,399 million | $5,199 million |
| Net Income | $254 million | $376 million |
| Earnings Per Share (Diluted) | $0.30 | $0.46 |
| Operating Cash Flow | $473 million | $405 million |
| Total Assets | $27,961 million | $27,559 million (Dec 31, 2002) |
| Total Debt | $5,204 million | $5,089 million (Dec 31, 2002) |
| Cash and Equivalents | $2,290 million | $2,021 million (Dec 31, 2002) |
Margins: The effective tax rate was 26.5% in Q1 2003 compared to 28.6% in Q1 2002. Net income margin decreased due to higher pension expenses and the absence of prior-year gains.
Material Changes vs. Prior Period
- Revenue: Net sales increased 4% ($200 million) driven by acquisitions (2%), foreign exchange (4%), and volume (1%), partially offset by price decreases (-1%) and divestitures (-2%).
- Profitability: Net income declined 32% ($122 million) year-over-year. Key drivers included:
- Higher pension expense ($83 million increase) due to a reduction in the assumed rate of return on plan assets from 10% to 9%.
- Absence of a $125 million pretax gain from the sale of the Bendix Commercial Vehicle Systems (BCVS) business in Q1 2002.
- A $20 million after-tax charge ($31 million pretax) for the cumulative effect of adopting SFAS No. 143 (Asset Retirement Obligations).
- Lower sales of higher-margin products in Aerospace and Automation segments.
- Segment Performance:
- Aerospace: Sales down 1%; profit down 29% due to weak commercial aircraft orders and higher pension costs.
- Automation and Control Solutions: Sales up 7%; profit down 11% due to pension costs and lower discretionary sales.
- Specialty Materials: Sales up 3%; profit up 25% driven by organic growth in Fluorines and Nylon Systems.
- Transportation and Power Systems: Sales up 16%; profit up 3% driven by strong turbocharger demand.
Guidance, Outlook, Risks, and Unusual Items
Outlook and Guidance:
- Full-year 2003 capital spending is projected at $700 million.
- Aerospace sales to air transport and business/general aviation original equipment customers are expected to decline 14% and 19%, respectively, for the full year.
- Repositioning actions are expected to generate approximately $400 million in incremental pretax savings in 2003.
Risks and Contingencies:
- Asbestos Litigation: Significant exposure remains regarding Bendix Friction Materials and North American Refractories Company (NARCO). The company recorded a $1.4 billion charge in Q4 2002 for NARCO liabilities. In April 2003, Honeywell received $472 million from an Equitas insurance settlement. Approximately 57,000 Bendix claims and 260,000 NARCO claims are pending. The company expects to make $625 million in asbestos payments for the remainder of 2003 and receive $650 million in insurance recoveries.
- Legal Proceedings: Shareowner class action lawsuits regarding securities laws and ERISA fiduciary duties are ongoing. Mediation in April 2003 was unsuccessful; discovery is expected to resume. Management believes allegations are without merit but notes an adverse outcome could be material.
- Environmental Matters: Ongoing remedial costs and potential lawsuits related to past operations and toxic substances.
Unusual Items:
- Accounting Change: Adoption of SFAS No. 143 resulted in a non-cash charge of $31 million ($20 million after-tax) recorded as a cumulative effect of an accounting change.
- Divestiture: In May 2003 (post-period), the company completed the sale of its engineering plastics business to BASF for $90 million cash and a nylon fiber business swap.
Investor Verification Checklist
- Asbestos Liability Resolution: Verify the status of the Federal-Mogul transaction for Bendix assets and the NARCO bankruptcy reorganization plan, as these are critical to capping future asbestos liabilities.
- Pension Assumptions: Review the impact of the reduced assumed rate of return (10% to 9%) on future pension expense and cash contribution requirements.
- Aerospace Demand: Monitor commercial airline order books and Boeing/Airbus delivery schedules, as these directly impact Honeywell's largest segment.
- Insurance Recoveries: Track the timing and realization of the projected $650 million in asbestos insurance recoveries for the remainder of 2003.
- Legal Settlements: Monitor developments in the shareowner securities and ERISA class action lawsuits for potential settlement costs.