HON

Honeywell International Inc. - 10-Q Summary (Period Ended September 30, 2003)

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for Honeywell International Inc. covering the three and nine months ended September 30, 2003. The company operates through four primary reportable segments: Aerospace, Automation and Control Solutions, Specialty Materials, and Transportation Systems. The financial statements are unaudited but reflect all normal recurring adjustments.

Key Financial Metrics

Note: Net income for the nine-month period includes a cumulative effect of an accounting change (SFAS No. 143) of $20 million ($0.02 per share) related to asset retirement obligations.

Material Changes vs. Prior Period

• Revenue: Net sales increased 4% ($199 million) in Q3 2003 and 3% ($497 million) for the nine months ended Sep 30, 2003, compared to the prior year. Growth was driven by acquisitions and favorable foreign exchange, partially offset by divestitures and lower volumes in commercial aerospace.
• Profitability: Net income decreased 17% ($68 million) in Q3 and 27% ($330 million) for the nine months compared to the prior year. The decline was primarily driven by significantly higher pension expenses (due to a reduction in the assumed rate of return on plan assets from 10% to 9%) and lower sales of higher-margin products.
• Segment Performance:
  • Aerospace: Sales were flat in Q3 but down 1% for the nine months due to weakness in commercial original equipment and aftermarket sales, offset by growth in defense and space.
  • Automation and Control Solutions: Sales increased 9% in Q3 and 7% for the nine months, driven by acquisitions and foreign exchange.
  • Specialty Materials: Sales decreased 3% in Q3 and 2% for the nine months due to divestitures and temporary plant shutdowns.
  • Transportation Systems: Sales increased 8% in Q3 and 13% for the nine months, driven by strong demand for turbochargers.
• Charges: Repositioning and other charges totaled $30 million in Q3 and $64 million for the nine months of 2003, a significant decrease from $233 million in the prior year's nine-month period.

Guidance, Outlook, and Risks

• Outlook: Management expects full-year 2003 sales to air transport and business/general aviation original equipment customers to decline by 15% and 20%, respectively. Commercial aftermarket sales are expected to be down 3% for the full year. Total capital spending for 2003 is projected at approximately $650 million.
• Share Repurchase: In November 2003, the company announced a plan to repurchase 7-10 million shares annually to offset dilution from employee plans, with initiation expected in Q4 2003.
• Asbestos Litigation: Significant contingencies remain regarding asbestos claims related to former businesses (Bendix and NARCO).
  • Bendix: A letter of intent exists to sell the business to Federal-Mogul Corp. to channel liabilities to a trust. However, a lawsuit by DaimlerChrysler, Ford, and GM challenges this transaction. Honeywell has approximately $1.9 billion in remaining insurance coverage.
  • NARCO: Honeywell has recorded a $1.4 billion liability (net of insurance) for current and future claims. Settlement negotiations cover over 90% of current claimants. The company received $477 million in insurance recoveries in the first nine months of 2003.
• Environmental Matters: A court order regarding a Jersey City site requires excavation of chromium residue. Honeywell is appealing; plaintiff experts estimated costs at $400 million, though the company believes costs under the existing Administrative Consent Order will be significantly lower.
• Pension Assumptions: Future pension expense is sensitive to the assumed rate of return on assets and discount rates. A decrease in the discount rate to 6.25% could increase 2004 pension expense by approximately $0.30 per share.

Investor Verification Checklist

• Verify the status of the Federal-Mogul transaction and the ongoing lawsuit by major automakers regarding the Bendix asbestos channeling injunction.
• Monitor the progress of NARCO asbestos settlement negotiations and the confirmation of the reorganization plan to ensure the channeling injunction is granted.
• Review the outcome of the appeal regarding the Jersey City chromium residue court order and potential cost implications beyond the $60 million ACO cap.
• Assess the impact of the reduced assumed rate of return (9%) on future pension expenses and potential cash contributions required in 2004.
• Confirm the execution of the announced share repurchase program in Q4 2003.