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, 2011

 

OR

 

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______ to _____

 

Commission file number 1-8974

 

Honeywell International Inc.


(Exact name of registrant as specified in its charter)


 

 

 

 

 

 

Delaware

 

22-2640650

 

 


 


 

 

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

 

 

 

 

101 Columbia Road
Morris Township, New Jersey

 

07962

 

 


 


 

 

(Address of principal executive offices)

 

(Zip Code)

 


 

 

 

 

(973) 455-2000

 

 


 

 

(Registrant’s telephone number, including area code)

 

 

 

 

 

Not Applicable

 

 


 

 

(Former name, former address and former fiscal year,
if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. See definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x Accelerated filer o Non-Accelerated filer o Smaller reporting company o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x

There were 782,425,252 shares of Common Stock outstanding at June 30, 2011.


Honeywell International Inc.
Index

 

 

 

 

 

 

 

 

 

Page No.

 

 

 

 


Part I.

Financial Information

 

 

 

 

 

 

 

Item 1.

 

Financial Statements:

 

 

 

 

 

 

 

 

 

Consolidated Statement of Operations (unaudited) –
Three and Six Months Ended June 30, 2011 and 2010

3

 

 

 

 

 

 

 

 

Consolidated Balance Sheet (unaudited) –
June 30, 2011 and December 31, 2010

4

 

 

 

 

 

 

 

 

Consolidated Statement of Cash Flows (unaudited) –
Six Months Ended June 30, 2011 and 2010

5

 

 

 

 

 

 

 

 

Notes to Financial Statements (unaudited)

6

 

 

 

 

 

 

 

 

Report of Independent Registered Public
Accounting Firm

32

 

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial
Condition and Results of Operations

33

 

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About
Market Risk

46

 

 

 

 

 

 

Item 4.

 

Controls and Procedures

46

 

 

 

 

 

Part II.

 

Other Information

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

46

 

 

 

 

 

 

Item 2.

 

Change in Securities and Use of Proceeds

47

 

 

 

 

 

 

Item 6.

 

Exhibits

47

 

 

 

 

 

Signatures

48

Cautionary Statement about Forward-Looking Statements

This report contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are those that address activities, events or developments that we or our management intends, expects, projects, believes or anticipates will or may occur in the future. They are based on management’s assumptions and assessments in the light of past experience and trends, current economic and industry conditions, expected future developments and other relevant factors. They are not guarantees of future performance, and actual results, developments and business decisions may differ from those envisaged by our forward-looking statements. Our forward-looking statements are also subject to risks and uncertainties, which can affect our performance in both the near- and long-term. These forward-looking statements should be considered in the light of the information included in this report and our other filings with the Securities and Exchange Commission, including, without limitation, the Risk Factors, as well as the description of trends and other factors in Management’s Discussion and Analysis of Financial Condition and Results of Operations, set forth in our Form 10-K for the year ended December 31, 2010.

2


PART I. FINANCIAL INFORMATION

The financial information as of June 30, 2011 should be read in conjunction with the financial statements for the year ended December 31, 2010 contained in our Form 10-K filed on February 11, 2011.

ITEM 1. FINANCIAL STATEMENTS

Honeywell International Inc.
Consolidated Statement of Operations
(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 


 


 

 

 

2011 

 

2010 

 

2011 

 

2010 

 

 

 




 




 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in millions, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

Product sales

 

$

7,146

 

$

6,184

 

$

13,959

 

$

11,991

 

Service sales

 

 

1,940

 

 

1,742

 

 

3,799

 

 

3,471

 

 

 



 



 



 



 

Net sales

 

 

9,086

 

 

7,926

 

 

17,758

 

 

15,462

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs, expenses and other

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of products sold

 

 

5,425

 

 

4,783

 

 

10,619

 

 

9,279

 

Cost of services sold

 

 

1,239

 

 

1,184

 

 

2,469

 

 

2,355

 

 

 



 



 



 



 

 

 

 

6,664

 

 

5,967

 

 

13,088

 

 

11,634

 

Selling, general and administrative expenses

 

 

1,248

 

 

1,110

 

 

2,480

 

 

2,200

 

Other (income) expense

 

 

(22

)

 

(9

)

 

(51

)

 

(11

)

Interest and other financial charges

 

 

96

 

 

91

 

 

195

 

 

198

 

 

 



 



 



 



 

 

 

 

7,986

 

 

7,159

 

 

15,712

 

 

14,021

 

 

 



 



 



 



 

Income from continuing operations before taxes

 

 

1,100

 

 

767

 

 

2,046

 

 

1,441

 

Tax expense

 

 

304

 

 

209

 

 

560

 

 

405

 

 

 



 



 



 



 

Income from continuing operations after taxes

 

 

796

 

 

558

 

 

1,486

 

 

1,036

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income from discontinued operations after taxes

 

 

14

 

 

16

 

 

32

 

 

34

 

 

 



 



 



 



 

Net income

 

 

810

 

 

574

 

 

1,518

 

 

1,070

 

Less: Net income attributable to the noncontrolling interest

 

 

 

 

8

 

 

3

 

 

15

 

 

 



 



 



 



 

Net income attributable to Honeywell

 

$

810

 

$

566

 

$

1,515

 

$

1,055

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts attributable to Honeywell:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations less net income attributable to the noncontrolling interest

 

 

796

 

 

550

 

 

1,483

 

 

1,021

 

Income from discontinued operations

 

 

14

 

 

16

 

 

32

 

 

34

 

 

 



 



 



 



 

Net income attributable to Honeywell

 

$

810

 

$

566

 

$

1,515

 

$

1,055

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share of common stock - basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

 

1.01

 

 

0.72

 

 

1.89

 

 

1.33

 

Income from discontinuing operations

 

 

0.02

 

 

0.02

 

 

0.04

 

 

0.04

 

 

 



 



 



 



 

Net income attributable to Honeywell

 

$

1.03

 

$

0.74

 

$

1.93

 

$

1.37

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share of common stock - assuming dilution:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

 

1.00

 

 

0.71

 

 

1.86

 

 

1.32

 

Income from discontinuing operations

 

 

0.02

 

 

0.02

 

 

0.04

 

 

0.04

 

 

 



 



 



 



 

Net income attributable to Honeywell

 

$

1.02

 

$

0.73

 

$

1.90

 

$

1.36

 

 

 



 



 



 



 

 

Cash dividends per share of common stock

 

$

0.3325

 

$

0.3025

 

$

0.6650

 

$

0.6050

 

 

 



 



 



 



 

The Notes to Financial Statements are an integral part of this statement.

3



 

Honeywell International Inc.

Consolidated Balance Sheet

(Unaudited)


 

 

 

 

 

 

 

 

 

 

June 30,
2011 

 

December 31,
2010 

 

 

 


 


 

 

 

 

(Dollars in millions)

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

3,548

 

$

2,650

 

Accounts, notes and other receivables

 

 

7,344

 

 

6,841

 

Inventories

 

 

4,197

 

 

3,822

 

Deferred income taxes

 

 

926

 

 

877

 

Investments and other current assets

 

 

545

 

 

455

 

Assets held for sale

 

 

826

 

 

841

 

 

 



 



 

Total current assets

 

 

17,386

 

 

15,486

 

 

 

 

 

 

 

 

 

Investments and long-term receivables

 

 

516

 

 

616

 

Property, plant and equipment - net

 

 

4,718

 

 

4,724

 

Goodwill

 

 

11,492

 

 

11,275

 

Other intangible assets - net

 

 

2,347

 

 

2,537

 

Insurance recoveries for asbestos related liabilities

 

 

802

 

 

825

 

Deferred income taxes

 

 

1,115

 

 

1,221

 

Other assets

 

 

1,274

 

 

1,150

 

 

 



 



 

Total assets

 

$

39,650

 

$

37,834

 

 

 



 



 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

4,442

 

$

4,199

 

Short-term borrowings

 

 

68

 

 

67

 

Commercial paper

 

 

350

 

 

299

 

Current maturities of long-term debt

 

 

514

 

 

523

 

Accrued liabilities

 

 

6,555

 

 

6,446

 

Liabilities related to assets held for sale

 

 

182

 

 

190

 

 

 



 



 

Total current liabilities

 

 

12,111

 

 

11,724

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

6,790

 

 

5,755

 

Deferred income taxes

 

 

661

 

 

636

 

Postretirement benefit obligations other than pensions

 

 

1,411

 

 

1,477

 

Asbestos related liabilities

 

 

1,565

 

 

1,557

 

Other liabilities

 

 

4,928

 

 

5,898

 

 

 

 

 

 

 

 

 

SHAREOWNERS’ EQUITY

 

 

 

 

 

 

 

Capital - common stock issued

 

 

958

 

 

958

 

- additional paid-in capital

 

 

4,089

 

 

3,977

 

Common stock held in treasury, at cost

 

 

(8,524

)

 

(8,299

)

Accumulated other comprehensive income (loss)

 

 

(536

)

 

(1,067

)

Retained earnings

 

 

16,085

 

 

15,097

 

 

 



 



 

Total Honeywell shareowners’ equity

 

 

12,072

 

 

10,666

 

Noncontrolling interest

 

 

112

 

 

121

 

 

 



 



 

Total shareowners’ equity

 

 

12,184

 

 

10,787

 

 

 



 



 

Total liabilities and shareowners’ equity

 

$

39,650

 

$

37,834

 

 

 



 



 

The Notes to Financial Statements are an integral part of this statement.

4



 

Honeywell International Inc.

Consolidated Statement of Cash Flows

(Unaudited)


 

 

 

 

 

 

 

 

 

 

Six Months Ended
June 30,

 

 

 


 

 

 

2011 

 

2010 

 

 

 


 


 

 

 

(Dollars in millions)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income attributable to Honeywell

 

$

1,515

 

$

1,055

 

Adjustments to reconcile net income attributable to Honeywell to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

478

 

 

474

 

Gain on sale of non-strategic businesses and assets

 

 

(46

)

 

 

Repositioning and other charges

 

 

227

 

 

270

 

Net payments for repositioning and other charges

 

 

(207

)

 

(221

)

Pension and other postretirement expense

 

 

32

 

 

92

 

Pension and other postretirement benefit payments

 

 

(1,047

)

 

(89

)

Stock compensation expense

 

 

91

 

 

86

 

Deferred income taxes

 

 

158

 

 

487

 

Excess tax benefits from share based payment arrangements

 

 

(30

)

 

(4

)

Other

 

 

105

 

 

(194

)

Changes in assets and liabilities, net of the effects of acquisitions and divestitures:

 

 

 

 

 

 

 

Accounts, notes and other receivables

 

 

(537

)

 

(188

)

Inventories

 

 

(389

)

 

(131

)

Other current assets

 

 

(23

)

 

(3

)

Accounts payable

 

 

260

 

 

97

 

Accrued liabilities

 

 

108

 

 

102

 

 

 



 



 

Net cash provided by operating activities

 

 

695

 

 

1,833

 

 

 



 



 

Cash flows from investing activities:

 

 

 

 

 

 

 

Expenditures for property, plant and equipment

 

 

(289

)

 

(185

)

Proceeds from disposals of property, plant and equipment

 

 

3

 

 

2

 

Increase in investments

 

 

(229

)

 

(311

)

Decrease in investments

 

 

176

 

 

10

 

Cash paid for acquisitions, net of cash acquired

 

 

(8

)

 

(996

)

Proceeds from sales of businesses, net of fees paid

 

 

215

 

 

 

Other

 

 

58

 

 

(12

)

 

 



 



 

Net cash used for investing activities

 

 

(74

)

 

(1,492

)

 

 



 



 

Cash flows from financing activities:

 

 

 

 

 

 

 

Net increase in commercial paper

 

 

51

 

 

850

 

Net (decrease)/increase in short-term borrowings

 

 

(2

)

 

12

 

Proceeds from issuance of common stock

 

 

200

 

 

55

 

Proceeds from issuance of long-term debt

 

 

1,384

 

 

 

Payments of long-term debt

 

 

(439

)

 

(1,001

)

Excess tax benefits from share based payment arrangements

 

 

30

 

 

4

 

Repurchases of common stock

 

 

(504

)

 

 

Cash dividends paid

 

 

(530

)

 

(464

)

 

 



 



 

Net cash provided by/(used for) financing activities

 

 

190

 

 

(544

)

 

 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of foreign exchange rate changes on cash and cash equivalents

 

 

87

 

 

(147

)

 

 



 



 

Net increase/(decrease) in cash and cash equivalents

 

 

898

 

 

(350

)

Cash and cash equivalents at beginning of period

 

 

2,650

 

 

2,801

 

 

 



 



 

Cash and cash equivalents at end of period

 

$

3,548

 

$

2,451

 

 

 



 



 

The Notes to Financial Statements are an integral part of this statement.

5


Honeywell International Inc.
Notes to Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)

Note 1. Basis of Presentation

          In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of Honeywell International Inc. and its consolidated subsidiaries at June 30, 2011 and the results of operations for the three and six months ended June 30, 2011 and 2010 and cash flows for the six months ended June 30, 2011 and 2010. The results of operations for the three and six months ended June 30, 2011 should not necessarily be taken as indicative of the results of operations that may be expected for the entire year. We have evaluated subsequent events through the date of issuance of our consolidated financial statements.

          We report our quarterly financial information using a calendar convention; that is, the first, second and third quarters are consistently reported as ending on March 31, June 30 and September 30, respectively. It has been our practice to establish actual quarterly closing dates using a predetermined “fiscal” calendar, which requires our businesses to close their books on a Saturday in order to minimize the potentially disruptive effects of quarterly closing on our business processes. The effects of this practice are generally not significant to reported results for any quarter and only exist within a reporting year. In the event that differences in actual closing dates are material to year-over-year comparisons of quarterly or year-to-date results, we provide appropriate disclosures. Our actual closing dates for the three and six months ended June 30, 2011 and 2010 were July 2, 2011 and July 3, 2010, respectively.

          The financial information as of June 30, 2011 should be read in conjunction with the financial statements for the year ended December 31, 2010 contained in our Form 10-K filed on February 11, 2011.

          Certain prior year amounts have been reclassified to conform to current year presentation.

          The Company has reported its Consumer Products Group business (CPG) as a discontinued operation as of June 30, 2011. Accordingly, the results of operations for all periods presented have been reclassified to reflect the business as a discontinued operation and the assets and liabilities of the business have been reclassified as held for sale for the periods presented. The net income attributable to the non-controlling interest for the discontinued operations is insignificant.

Note 2. Recent Accounting Pronouncements

          Changes to accounting principles generally accepted in the United States of America (U.S. GAAP) are established by the Financial Accounting Standards Board (FASB) in the form of accounting standards updates (ASU’s) to the FASB’s Accounting Standards Codification.

          The Company considers the applicability and impact of all ASU’s. ASU’s not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial position and results of operations.

          In May 2011, the FASB issued amendments to disclosure requirements for common fair value measurement. These amendments, effective for the interim and annual periods beginning on or after December 15, 2011 (early adoption is prohibited), result in common definition of fair value and common requirements for measurement of and disclosure requirements between U.S. GAAP and IFRS. Consequently, the amendments change some fair value measurement principles and disclosure requirements. The implementation of this amended accounting guidance is not expected to have a material impact on our consolidated financial position and results of operations.

          In June 2011, the FASB issued amendments to disclosure requirements for presentation of comprehensive income. This guidance, effective retrospectively for the interim and annual periods beginning on or after December 15, 2011 (early adoption is permitted), requires presentation of total comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The implementation of this

6


Honeywell International Inc.
Notes to Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)

amended accounting guidance is not expected to have a material impact on our consolidated financial position and results of operations.

Note 3. Acquisitions and Divestitures

          In June 2011, the Company entered into a definitive agreement to acquire EMS Technologies, Inc. (EMS), a leading provider of connectivity solutions for mobile networking, rugged mobile computers, and satellite communications for $33 per share in cash (or an aggregate purchase price of approximately $491 million, net of cash acquired) pursuant to a tender offer. EMS is a US public company which operates globally and had reported 2010 revenues of approximately $355 million. EMS’s board has unanimously recommended the tender offer. The completion of the tender offer is subject to certain conditions, including, among others, the valid tendering without withdrawal of EMS shares representing at least a majority of the outstanding shares of EMS common stock on a fully-diluted basis and the receipt of regulatory approvals. We expect to complete the acquisition of EMS in the third quarter of 2011 and to fund the acquisition with available cash and the issuance of commercial paper. EMS will be integrated into our Automation and Control Solutions and Aerospace Segments.

          In January 2011, the Company entered into a definitive agreement to sell its Consumer Products Group business to Rank Group Limited for approximately $950 million. The Company has received all necessary regulatory approvals for the transaction, which is expected to close in the third quarter of 2011. We currently estimate that the transaction will result in a pre-tax gain of approximately $300 million, approximately $150 million net of tax. The sale of CPG, within the Transportation Systems segment, is consistent with the Company’s strategic focus on its portfolio of differentiated global technologies.

          The Company has reported CPG as a discontinued operation as of June 30, 2011. Accordingly, the results of operations for all periods presented have been reclassified to reflect the business as a discontinued operation and the assets and liabilities of the business have been reclassified as held for sale for the periods presented. The net income attributable to the non-controlling interest for the discontinued operations is insignificant.

          The key components of income from discontinued operations related to CPG were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 


 


 

 

 

2011

 

2010

 

2011

 

2010

 

 

 


 


 


 


 

Net sales

 

$

234

 

$

235

 

$

470

 

$

475

 

Costs, expenses and other

 

 

184

 

 

182

 

 

370

 

 

373

 

Selling, general and administrative expense

 

 

28

 

 

27

 

 

49

 

 

48

 

Other expense

 

 

1

 

 

1

 

 

1

 

 

1

 

 

 



 



 



 



 

Income before taxes

 

 

21

 

 

25

 

 

50

 

 

53

 

 

 



 



 



 



 

Tax expense

 

 

7

 

 

9

 

 

18

 

 

19

 

 

 



 



 



 



 

Net income from discontinued operations after taxes

 

$

14

 

$

16

 

$

32

 

$

34

 

 

 



 



 



 



 

7


Honeywell International Inc.
Notes to Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)

          The components of assets and liabilities classified as discontinued operations and included in other current assets and other current liabilities related to the CPG business consisted of the following:

 

 

 

 

 

 

 

 

 

 

June 30,
2011

 

December 31,
2010

 

 

 


 


 

Accounts, notes and other receivables

 

$

195

 

$

227

 

Inventories

 

 

156

 

 

136

 

Property, plant and equipment - net

 

 

111

 

 

116

 

Goodwill and other intangibles - net

 

 

359

 

 

359

 

Other

 

 

5

 

 

3

 

 

 



 



 

Total assets

 

$

826

 

$

841

 

 

 



 



 

Accounts payable

 

$

145

 

$

145

 

Accrued and other liabilities

 

 

37

 

 

45

 

 

 



 



 

Total liabilities

 

$

182

 

$

190

 

 

 



 



 

Note 4. Repositioning and Other Charges

          A summary of repositioning and other charges follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 


 


 

 

 

2011

 

2010

 

2011

 

2010

 

 

 


 


 


 


 

Severance

 

$

16

 

$

25

 

$

43

 

$

57

 

Asset impairments

 

 

 

 

1

 

 

10

 

 

9

 

Exit costs

 

 

1

 

 

 

 

12

 

 

4

 

Adjustments

 

 

(10

)

 

(3

)

 

(14

)

 

(8

)

 

 



 



 



 



 

Total net repositioning charge

 

 

7

 

 

23

 

 

51

 

 

62

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asbestos related litigation charges, net of insurance

 

 

40

 

 

49

 

 

78

 

 

87

 

Probable and reasonably estimable environmental liabilities

 

 

50

 

 

55

 

 

101

 

 

101

 

Other

 

 

(3

)

 

 

 

(3

)

 

18

 

 

 



 



 



 



 

Total net repositioning and other charges

 

$

94

 

$

127

 

$

227

 

$

268

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

          The following table summarizes the pretax classification of total net repositioning and other charges by income statement caption:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 


 


 

 

 

2011

 

2010

 

2011

 

2010

 

 

 


 


 


 


 

Cost of products and services sold

 

$

84

 

$

122

 

$

202

 

$

260

 

Selling, general and administrative expenses

 

 

10

 

 

5

 

 

25

 

 

8

 

 

 



 



 



 



 

 

 

$

94

 

$

127

 

$

227

 

$

268

 

 

 



 



 



 



 

8


Honeywell International Inc.
Notes to Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)

          The following table summarizes the pretax impact of total net repositioning and other charges by segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 


 


 

 

 

2011

 

2010

 

2011

 

2010

 

 

 


 


 


 


 

Aerospace

 

$

(6

)

$

6

 

$

(6

)

$

6

 

Automation and Control Solutions

 

 

12

 

 

5

 

 

45

 

 

29

 

Specialty Materials

 

 

 

 

 

 

13

 

 

11

 

Transportation Systems

 

 

40

 

 

47

 

 

76

 

 

105

 

Corporate

 

 

48

 

 

69

 

 

99

 

 

117

 

 

 



 



 



 



 

 

 

$

94

 

$

127

 

$

227

 

$

268

 

 

 



 



 



 



 

          In the quarter ended June 30, 2011, we recognized repositioning charges totaling $17 million primarily for severance costs related to workforce reductions of 360 manufacturing and administrative positions in our Automation and Control Solutions and Aerospace segments. The workforce reductions were related to cost savings actions taken in connection with our ongoing functional transformation and productivity initiatives and the consolidation of U.S. repair facilities in our Aerospace segment. Also, $10 million of previously established accruals for severance at our Aerospace segment were returned to income in the second quarter of 2011 due to fewer employee separations than originally planned associated with prior severance programs.

          In the quarter ended June 30, 2010, we recognized repositioning charges totaling $26 million primarily for severance costs related to workforce reductions of 350 manufacturing and administrative positions in our Aerospace, Transportation Systems and Automation and Control Solutions segments. The workforce reductions were related to cost savings actions taken in connection with our ongoing functional transformation and productivity initiatives and factory transitions in our Aerospace segment to more cost-effective locations.

          In the six months ended June 30, 2011, we recognized repositioning charges totaling $65 million including severance costs of $43 million related to workforce reductions of 946 manufacturing and administrative positions in our Automation and Control Solutions, Aerospace and Specialty Materials segments. The workforce reductions were primarily related to cost savings actions taken in connection with our ongoing functional transformation and productivity initiatives, factory transitions in connection with acquisition-related synergies in our Automation and Control Solutions segment, the exit from and/or rationalization of certain product lines and markets in our Specialty Materials and Automation and Control Solutions segments, the consolidation of U.S. repair facilities in our Aerospace segment, and an organizational realignment of a business in our Automation and Control Solutions segment. The repositioning charge also included asset impairments of $10 million principally related to manufacturing plant and equipment associated with the exit of a product line and a factory transition as discussed above. The repositioning charge also included exit costs of $12 million principally for costs to terminate contracts, including an operating lease, related to the exit of a market and a factory transition as discussed above. Also, $14 million of previously established accruals, primarily for severance at our Aerospace and Automation and Control Solutions segments, were returned to income in the first six months of 2011 due principally to fewer employee separations than originally planned associated with prior severance programs.

          In the six months ended June 30, 2010, we recognized repositioning charges totaling $70 million including severance costs of $57 million related to workforce reductions of 967 manufacturing and administrative positions primarily in our Automation and Control Solutions, Transportation Systems and Aerospace segments. The workforce reductions were primarily related to the planned shutdown of certain manufacturing facilities in our Automation and Control Solutions and Transportation Systems segments, cost savings actions taken in connection with our ongoing functional transformation and productivity initiatives and factory transitions in our Aerospace segment to more cost-effective locations. The repositioning charge also included asset impairments of $9 million principally related to manufacturing plant and equipment in facilities scheduled to close.

9


Honeywell International Inc.
Notes to Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)

          The following table summarizes the status of our total repositioning reserves:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Severance
Costs

 

Asset
Impairments

 

Exit
Costs

 

Total

 

 

 


 


 


 


 

December 31, 2010

 

$

276

 

$

 

$

34

 

$

310

 

Charges

 

 

43

 

 

10

 

 

12

 

 

65

 

Usage - cash

 

 

(72

)

 

 

 

(9

)

 

(81

)

Usage - noncash

 

 

 

 

(10

)

 

 

 

(10

)

Foreign currency translation

 

 

3

 

 

 

 

 

 

3

 

Adjustments

 

 

(14

)

 

 

 

 

 

(14

)

 

 



 



 



 



 

June 30, 2011

 

$

236

 

$

 

$

37

 

$

273

 

 

 



 



 



 



 

          Certain repositioning projects in our Aerospace, Automation and Control Solutions and Transportation Systems segments included exit or disposal activities, the costs related to which will be recognized in future periods when the actual liability is incurred. The nature of these exit or disposal costs includes asset set-up and moving, product recertification and requalification, and employee retention, training and travel. The following tables summarize by segment, expected, incurred and remaining exit and disposal costs related to 2011 and 2010 repositioning actions which we were not able to recognize at the time the actions were initiated.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2011 Repositioning Actions

 

Aerospace

 

Automation and
Control Solutions

 

Total

 

 

 

 


 


 


 


 

 

 

 

Expected exit and disposal costs

 

$

5

 

$

2

 

$

7

 

 

 

 

 

Costs incurred during

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      Current year-to-date

 

 

 

 

 

 

 

 

 

 

 

 

 



 



 



 

 

 

 

 

Remaining exit and disposal costs

 

$

5

 

$

2

 

$

7

 

 

 

 

 

 

 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2010 Repositioning Actions

 

Aerospace

 

Automation and
Control Solutions

 

Transportation
Systems

 

 

Total

 


 


 


 


 

 


 

Expected exit and disposal costs

 

$

9

 

$

10

 

$

3

 

 

$

22

 

Costs incurred during

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      Year ended December 31, 2010

 

 

 

 

 

 

 

 

 

 

      Current year-to-date

 

 

 

 

(3

)

 

 

 

 

(3

)

 

 



 



 



 

 



 

Remaining exit and disposal costs

 

$

9

 

$

7

 

$

3

 

 

$

19

 

 

 



 



 



 

 



 

          In the quarter ended June 30, 2011, we recognized a charge of $50 million for environmental liabilities deemed probable and reasonably estimable in the quarter. We also recognized a charge of $40 million primarily representing an update to our estimated liability for the resolution of Bendix related asbestos claims as of June 30, 2011, net of probable insurance recoveries. Environmental and Asbestos matters are discussed in detail in Note 15, Commitments and Contingencies.

          In the quarter ended June 30, 2010, we recognized a charge of $55 million for environmental liabilities deemed probable and reasonably estimable in the quarter. We also recognized a charge of $49 million primarily representing an update to our estimated liability for the resolution of Bendix related asbestos claims as of June 30, 2010, net of probable insurance recoveries.

          In the six months ended June 30, 2011, we recognized a charge of $101 million for environmental liabilities deemed probable and reasonably estimable in the period. We also recognized a charge of $78 million primarily representing an update to our estimated liability for the resolution of Bendix related asbestos claims as of June 30, 2011, net of probable insurance recoveries.

10


Honeywell International Inc.
Notes to Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)

          In the six months ended June 30, 2010, we recognized a charge of $101 million for environmental liabilities deemed probable and reasonably estimable in the period. We also recognized a charge of $87 million primarily representing an update to our estimated liability for the resolution of Bendix related asbestos claims as of June 30, 2010, net of probable insurance recoveries. We also recognized other charges of $18 million in connection with the evaluation of potential settlements of certain legal matters.

Note 5. Other (income) expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 


 


 

 

 

2011

 

2010

 

2011

 

2010

 

 

 


 


 


 


 

Equity (income)/loss of affiliated companies

 

$

(14

)

$

(9

)

$

(23

)

$

(13

)

Gain on sale of non-strategic businesses and assets

 

 

(2

)

 

 

 

(46

)

 

 

Interest income

 

 

(14

)

 

(7

)

 

(27

)

 

(16

)

Foreign exchange

 

 

10

 

 

(3

)

 

18

 

 

8

 

Other, net

 

 

(2

)

 

10

 

 

27

 

 

10

 

 

 



 



 



 



 

 

 

$

(22

)

$

(9

)

$

(51

)

$

(11

)

 

 



 



 



 



 

          Gain on non-strategic businesses and assets in the six months ended June 30, 2011 includes a $41 million pre-tax gain, $25 million net of tax, related to the divestiture of the automotive on-board sensor products business within our Automation and Control Solutions segment.

          Other, net in the six months ended June 30, 2011 includes a loss of $29 million resulting from early redemption of debt in the first quarter of 2011. See Note 10 Long-term Debt and Credit Agreements for further details.

Note 6. Earnings Per Share

          The details of the earnings per share calculations for the three and six months ended June 30, 2011 and 2010 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
June 30

 

Six Months Ended
June 30

 

 

 


 


 

 

 

2011

 

2010

 

2011

 

2010

 

 

 


 


 


 


 

Basic

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

796

 

$

550

 

$

1,483

 

$

1,021

 

Income from discontinued operations

 

 

14

 

 

16

 

 

32

 

 

34

 

 

 



 



 



 



 

Net income attributable to Honeywell

 

 

810

 

 

566

 

 

1,515

 

 

1,055

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

785.0

 

 

769.6

 

 

785.2

 

 

767.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

 

1.01

 

 

0.72

 

 

1.89

 

 

1.33

 

Income from discontinued operations

 

 

0.02

 

 

0.02

 

 

0.04

 

 

0.04

 

 

 



 



 



 



 

Net income attributable to Honeywell

 

$

1.03

 

$

0.74

 

$

1.93

 

$

1.37

 

 

 



 



 



 



 

11


Honeywell International Inc.
Notes to Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
June 30

 

Six Months Ended
June 30

 

 

 


 


 

 

 

2011

 

2010

 

2011

 

2010

 

 

 


 


 


 


 

Assuming Dilution

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

796

 

$

550

 

$

1,483

 

$

1,021

 

Income from discontinued operations

 

 

14

 

 

16

 

 

32

 

 

34

 

 

 



 



 



 



 

Net income attributable to Honeywell

 

 

810

 

 

566

 

 

1,515

 

 

1,055

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Shares

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

785.0

 

 

769.6

 

 

785.2

 

 

767.7

 

Dilutive securities issuable - stock plans

 

 

12.3

 

 

7.7

 

 

12.3

 

 

6.8

 

 

 



 



 



 



 

Total weighted average shares outstanding

 

 

797.3

 

 

777.3

 

 

797.5

 

 

774.5

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

 

1.00

 

 

0.71

 

 

1.86

 

 

1.32

 

Income from discontinued operations

 

 

0.02

 

 

0.02

 

 

0.04

 

 

0.04

 

 

 



 



 



 



 

Net income attributable to Honeywell

 

$

1.02

 

$

0.73

 

$

1.90

 

$

1.36

 

 

 



 



 



 



 

          The diluted earnings per share calculations exclude the effect of stock options when the options’ assumed proceeds exceed the average market price of the common shares during the period. For the three and six months ended June 30, 2011, the weighted average number of stock options excluded from the computations were 7.9 and 7.5 million, respectively. For the three and six months ended June 30, 2010, the weighted average number of stock options excluded from the computations were 14.8 and 16.6 million, respectively. These stock options were outstanding at the end of each of the respective periods.

Note 7. Accounts, Notes and Other Receivables

 

 

 

 

 

 

 

 

 

 

June 30,
2011

 

December 31,
2010

 

 

 


 


 

 

 

 

 

 

 

 

 

Trade

 

$

6,961

 

$

6,471

 

Other

 

 

645

 

 

647

 

 

 



 



 

 

 

 

7,606

 

 

7,118

 

Less - Allowance for doubtful accounts

 

 

(262

)

 

(277

)

 

 



 



 

 

 

$

7,344

 

$

6,841

 

 

 



 



 

          Trade Receivables includes $1,391, and $1,307 million of unbilled balances under long-term contracts as of June 30, 2011 and December 31, 2010, respectively. These amounts are billed in accordance with the terms of customer contracts to which they relate.

Note 8. Inventories

 

 

 

 

 

 

 

 

 

 

June 30,
2011

 

December 31,
2010

 

 

 


 


 

Raw materials

 

$

1,225

 

$

1,139

 

Work in process

 

 

861

 

 

792

 

Finished products

 

 

2,276

 

 

2,045

 

 

 



 



 

 

 

 

4,362

 

 

3,976

 

Reduction to LIFO cost basis

 

 

(165

)

 

(154

)

 

 



 



 

 

 

$

4,197

 

$

3,822

 

 

 



 



 

12


Honeywell International Inc.
Notes to Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)

Note 9. Goodwill and Other Intangible Assets - Net

          The change in the carrying amount of goodwill for the six months ended June 30, 2011 by segment is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,
2010

 

Acquisitions

 

Divestitures

 

Currency
Translation
Adjustment

 

June 30,
2011

 

 

 


 


 


 


 


 

Aerospace

 

$

1,883

 

$

 

$

 

$

8

 

$

1,891

 

Automation and Control Solutions

 

 

7,907

 

 

32

 

 

(12

)

 

175

 

 

8,102

 

Specialty Materials

 

 

1,291

 

 

 

 

 

 

10

 

 

1,301

 

Transportation Systems

 

 

194

 

 

 

 

 

 

4

 

 

198

 

 

 



 



 



 



 



 

 

 

$

11,275

 

$

32

 

$

(12

)

$

197

 

$

11,492

 

 

 



 



 



 



 



 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2011

 

December 31, 2010

 

 

 


 


 

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

 

 


 


 


 


 


 


 

Determinable life intangibles:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Patents and technology

 

$

1,122

 

$

(729

)

$

393

 

$

1,101

 

$

(676

)

$

425

 

Customer relationships

 

 

1,610

 

 

(453

)

 

1,157

 

 

1,688

 

 

(399

)

 

1,289

 

Trademarks

 

 

266

 

 

(89

)

 

177

 

 

186

 

 

(84

)

 

102

 

Other

 

 

203

 

 

(137

)

 

66

 

 

512

 

 

(404

)

 

108

 

 

 



 



 



 



 



 



 

 

 

 

3,201

 

 

(1,408

)

 

1,793

 

 

3,487

 

 

(1,563

)

 

1,924

 

 

 



 



 



 



 



 



 

Indefinite life intangibles:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks

 

 

554

 

 

 

 

554

 

 

613

 

 

 

 

613

 

 

 



 



 



 



 



 



 

 

 

$

3,755

 

$

(1,408

)

$

2,347

 

$

4,100

 

$

(1,563

)

$

2,537

 

 

 



 



 



 



 



 



 

          Amortization expense related to intangible assets for the six months ended June 30, 2011 and 2010 was $125 and $119 million, respectively.

          We completed our annual impairment testing of goodwill and indefinite-lived intangibles as of March 31, 2011 and determined that there was no impairment as of that date.

13


Honeywell International Inc.
Notes to Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)

Note 10. Long-term Debt and Credit Agreements

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

 

 

2011

 

 

2010

 

 

 



 



 

6.125% notes due 2011

 

$

500

 

$

500

 

5.625% notes due 2012

 

 

 

 

400

 

4.25% notes due 2013

 

 

600

 

 

600

 

3.875% notes due 2014

 

 

600

 

 

600

 

5.40% notes due 2016

 

 

400

 

 

400

 

5.30% notes due 2017

 

 

400

 

 

400

 

5.30% notes due 2018

 

 

900

 

 

900

 

5.00% notes due 2019

 

 

900

 

 

900

 

4.25% notes due 2021

 

 

800

 

 

 

5.375% notes due 2041

 

 

600

 

 

 

Industrial development bond obligations, floating rate maturing at various dates through 2037

 

 

37

 

 

46

 

6.625% debentures due 2028

 

 

216

 

 

216

 

9.065% debentures due 2033

 

 

51

 

 

51

 

5.70% notes due 2036

 

 

550

 

 

550

 

5.70% notes due 2037

 

 

600

 

 

600

 

Other (including capitalized leases), 0.6%-15.5% maturing at various dates through 2023

 

 

150

 

 

115

 

 

 



 



 

 

 

 

7,304

 

 

6,278

 

 

 



 



 

Less current portion

 

 

(514

)

 

(523

)

 

 



 



 

 

 

$

6,790

 

$

5,755

 

 

 



 



 


 

 

 

 

 

 

 

June 30, 2011

 

 

 


 

2011

 

$

514

 

2012

 

 

14

 

2013

 

 

610

 

2014

 

 

607

 

2015

 

 

1

 

Thereafter

 

 

5,558

 

 

 



 

 

 

 

7,304

 

Less-current portion

 

 

(514

)

 

 



 

 

 

$

6,790

 

 

 



 

          In February 2011, the Company issued $800 million 4.25% Senior Notes due 2021 and $600 million 5.375% Senior Notes due 2041 (collectively, the “Notes”). The Notes are senior unsecured and unsubordinated obligations of Honeywell and rank equally with all of Honeywell’s existing and future senior unsecured debt and senior to all of Honeywell’s subordinated debt. The offering resulted in gross proceeds of $1,400 million, offset by $19 million in discount and closing costs related to the offering.

           In the first quarter of 2011, the Company repurchased the entire outstanding principal amount of its $400 million 5.625% Notes due 2012 via a cash tender offer and a subsequent optional redemption. The cost relating to the early redemption of the Notes, including the “make-whole premium”, was $29 million.

           In March 2011, the Company entered into a $2,800 million Five Year Credit Agreement (“Credit Agreement”) with a syndicate of banks. Commitments under the Credit Agreement can be increased pursuant to the terms of the Credit Agreement to an aggregate amount not to exceed $3,500 million. The Credit Agreement is maintained for general corporate purposes, including support for the issuance of commercial paper, and replaces the previous $2,800 million five year credit agreement dated May 14, 2007 (“Prior Agreement”). There have been no

14


Honeywell International Inc.
Notes to Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)

borrowings under the Credit Agreement or the Prior Agreement. The Credit Agreement does not restrict the Company’s ability to pay dividends, nor does it contain financial covenants.

          As a source of liquidity, we may periodically sell interests in designated pools of trade accounts receivables to third parties. As of June 30, 2011 and December 31, 2010 none of the receivables in the designated pools had been sold to third parties. When we sell receivables, they are over-collateralized and we retain a subordinated interest in the pool of receivables representing that over-collateralization as well as an undivided interest in the balance of the receivables pools. The terms of the trade accounts receivable program permit the repurchase of receivables from the third parties at our discretion, providing us with an additional source of revolving credit. As a result, program receivables remain on the Company’s balance sheet with a corresponding amount recorded as either Short-term borrowings or Long-term debt.

Note 11. Financial Instruments and Fair Value Measures

          Credit and Market Risk—Financial instruments, including derivatives, expose us to counterparty credit risk for nonperformance and to market risk related to changes in interest and currency exchange rates and commodity prices. We manage our exposure to counterparty credit risk through specific minimum credit standards, diversification of counterparties, and procedures to monitor concentrations of credit risk. Our counterparties in derivative transactions are substantial investment and commercial banks with significant experience using such derivative instruments. We monitor the impact of market risk on the fair value and cash flows of our derivative and other financial instruments considering reasonably possible changes in interest rates, currency exchange rates and commodity prices and restrict the use of derivative financial instruments to hedging activities.

          We continually monitor the creditworthiness of our customers to which we grant credit terms in the normal course of business. The terms and conditions of our credit sales are designed to mitigate or eliminate concentrations of credit risk with any single customer. Our sales are not materially dependent on a single customer or a small group of customers.

          Foreign Currency Risk Management—We conduct our business on a multinational basis in a wide variety of foreign currencies. Our exposure to market risk for changes in foreign currency exchange rates arises from international financing activities between subsidiaries, foreign currency denominated monetary assets and liabilities and transactions arising from international trade. Our objective is to preserve the economic value of non-functional currency denominated cash flows. We attempt to hedge transaction exposures with natural offsets to the fullest extent possible and, once these opportunities have been exhausted, through foreign currency exchange forward and option contracts with third parties.

          We hedge monetary assets and liabilities denominated in non-functional currencies. Prior to conversion into U.S. dollars, these assets and liabilities are remeasured at spot exchange rates in effect on the balance sheet date. The effects of changes in spot rates are recognized in earnings and included in Other (Income) Expense. We partially hedge forecasted sales and purchases, which predominantly occur in the next twelve months and are denominated in non-functional currencies, with currency forward contracts. Changes in the forecasted non-functional currency cash flows due to movements in exchange rates are substantially offset by changes in the fair value of the currency forward contracts designated as hedges. Market value gains and losses on these contracts are recognized in earnings when the hedged transaction is recognized. Open foreign currency exchange forward contracts mature predominantly in the next twelve months. At June 30, 2011 and December 31, 2010, we had contracts with notional amounts of $5,684 million and $5,733 million respectively, to exchange foreign currencies, principally the U.S. dollar, Euro, British pound, Canadian dollar, Hong Kong dollar, Mexican peso, Swiss franc, Czech koruna, Chinese renminbi, Indian rupee, Singapore dollar, Swedish krona, Korean won and Thai baht.

         Commodity Price Risk Management— Our exposure to market risk for commodity prices can result in changes in our cost of production. We primarily mitigate our exposure to commodity price risk through the use of long-term, fixed-price contracts with our suppliers and formula price agreements with suppliers and customers. We also enter into forward commodity contracts with third parties designated as hedges of anticipated purchases of several commodities. Forward commodity contracts are marked-to-market, with the resulting gains and losses recognized in earnings when the hedged transaction is recognized. At June 30, 2011 and December 31, 2010, we had contracts with notional amounts of $27 million and $23 million, respectively, related to forward commodity agreements, principally base metals and natural gas.

15


Honeywell International Inc.
Notes to Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)

          Interest Rate Risk Management— We use a combination of financial instruments, including long-term, medium-term and short-term financing, variable-rate commercial paper, and interest rate swaps to manage the interest rate mix of our total debt portfolio and related overall cost of borrowing. At June 30, 2011 and December 31, 2010, interest rate swap agreements designated as fair value hedges effectively changed $1,400 and $600 million, respectively, of fixed rate debt at an average rate of 4.09 and 3.88 percent, respectively, to LIBOR based floating rate debt. Our interest rate swaps mature at various dates through 2021.

          Fair Value of Financial Instruments— The FASB’s accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The FASB’s guidance classifies the inputs used to measure fair value into the following hierarchy:

 

 

 

 

Level 1

Unadjusted quoted prices in active markets for identical assets or liabilities

 

 

 

 

Level 2

Unadjusted quoted prices in active markets for similar assets or liabilities, or

 

 

 

 

 

Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or

 

 

 

 

 

Inputs other than quoted prices that are observable for the asset or liability

 

 

 

 

Level 3

Unobservable inputs for the asset or liability

          The Company endeavors to utilize the best available information in measuring fair value. Financial and nonfinancial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company has determined that our available for sale investments in marketable equity securities are level 1 and our remaining financial assets and liabilities are level 2 in the fair value hierarchy. The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of June 30, 2011 and December 31, 2010:

 

 

 

 

 

 

 

 

 

 

June 30,
2011

 

December 31,
2010

 

 

 


 


 

Assets:

 

 

 

 

 

 

 

Foreign currency exchange contracts

 

$

56

 

$

16

 

Available for sale investments

 

 

399

 

 

322

 

Interest rate swap agreements

 

 

55

 

 

22

 

Forward commodity contracts

 

 

3

 

 

2

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Foreign currency exchange contracts

 

$

48

 

$

14

 

Forward commodity contracts

 

 

 

 

2

 

          The foreign currency exchange contracts, interest rate swap agreements, and forward commodity contracts are valued using broker quotations, or market transactions in either the listed or over-the-counter markets. As such, these derivative instruments are classified within level 2. The Company also holds investments in commercial paper, certificates of deposits, and time deposits that are designated as available for sale and are valued using market transactions in over-the-counter markets. As such, these investments are classified within level 2.

          The carrying value of cash and cash equivalents, trade accounts and notes receivables, payables, commercial paper and short-term borrowings contained in the Consolidated Balance Sheet approximates fair

16


Honeywell International Inc.
Notes to Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)

value. The following table sets forth the Company’s financial assets and liabilities that were not carried at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2011

 

December 31, 2010

 

 

 


 


 

 

 

Carrying
Value

 

Fair
Value

 

Carrying
Value

 

Fair
Value

 

 

 


 


 


 


 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term receivables

 

$

136

 

$

130

 

$

203

 

$

199

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt and related current maturities

 

$

7,304

 

$

7,864

 

$

6,278

 

$

6,835

 

          In the three and six months ended June 30, 2011, the Company had nonfinancial assets, specifically property, plant and equipment, with a net book value of $5 million and $15 million, respectively, which were accounted for at fair value on a nonrecurring basis. These assets were tested for impairment and based on the fair value of these assets the Company recognized losses of $2 million and $12 million, respectively, in the three and six months ended June 30, 2011. The Company has determined that the fair value measurements of these nonfinancial assets are level 3 in the fair value hierarchy. In the three and six months ended June 30, 2010, the Company had nonfinancial assets, specifically property, plant and equipment, software and intangible assets, with a net book value of $4 million and $18 million, respectively, that were accounted for at fair value on a nonrecurring basis. Based on the fair value of these assets the Company recognized losses of $4 million and $17 million, respectively, in the three and six months ended June 30, 2010.

          The derivatives utilized for risk management purposes as detailed above are included on the Consolidated Balance Sheet and impacted the Statement of Operations as follows:

Fair value of derivatives classified as assets consist of the following:

 

 

 

 

 

 

 

 

 

 

Designated as a Hedge

 

Balance Sheet Classification

 

June 30,
2011

 

December 31,
2010

 


 


 


 


 

Foreign currency exchange contracts

 

Accounts, notes, and other receivables

 

$

53

 

$

10

 

Interest rate swap agreements

 

Other assets

 

 

55

 

 

22

 

Commodity contracts

 

Accounts, notes, and other receivables

 

 

3

 

 

2

 

 

 

 

 

 

 

 

 

 

 

Not Designated as a Hedge

 

Balance Sheet Classification

 

June 30,
2011

 

December 31,
2010

 


 


 



 



 

Foreign currency exchange contracts

 

Accounts, notes, and other receivables

 

$

3

 

$

6

 

 

 

 

 

 

 

 

 

 

 

Fair value of derivatives classified as liabilities consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

Designated as a Hedge

 

Balance Sheet Classification

 

2011

 

2010

 


 


 



 



 

Foreign currency exchange contracts

 

Accrued liabilities

 

$

43

 

$

9

 

Commodity contracts

 

Accrued liabilities

 

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

Not Designated as a Hedge

 

Balance Sheet Classification

 

2011

 

2010

 


 


 


 


 

Foreign currency exchange contracts

 

Accrued liabilities

 

$

5

 

$

5

 

17


Honeywell International Inc.
Notes to Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)

          Gains (losses) recognized in OCI (effective portions) consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
June, 30

 

Six Months Ended
June, 30

 

 

 


 


 

Designated Cash Flow Hedge

 

2011

 

2010

 

2011

 

2010

 


 


 


 


 


 

Foreign currency exchange contracts

 

$

8

 

$

(12

)

$

16

 

$

8

 

Commodity contracts

 

 

(1

)

 

(1

)

 

2

 

 

(3

)

Gains (losses) reclassified from AOCI to income consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Designated
Cash Flow Hedge

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

Income Statement Location

 

2011

 

2010

 

2011

 

2010

 


 


 




 




 

Foreign currency

 

Product sales

 

$

10

 

$

(3

)

$

16

 

$

(6

)

exchange contracts

 

Cost of products sold

 

 

(11

)

 

7

 

 

(16

)

 

9

 

 

 

Sales & general administrative

 

 

4

 

 

(4

)

 

6

 

 

(3

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity contracts

 

Cost of products sold

 

$

1

 

$

(2

)

$

 

$

(3

)

          Ineffective portions of commodity derivative instruments designated in cash flow hedge relationships were insignificant in the three and six months ended June 30, 2011 and 2010 and are classified within cost of products sold. Foreign currency exchange contracts in cash flow hedge relationships qualify as critical matched terms hedge relationships and as a result have no ineffectiveness.

          Interest rate swap agreements are designated as hedge relationships with gains or (losses) on the derivative recognized in Interest and other financial charges offsetting the gains and losses on the underlying debt being hedged. Gains on interest rate swap agreements recognized in earnings were $24 and $33 million in the three and six months ended June 30, 2011. Gains on interest rate swap agreements recognized in earnings were $16 million and $20 million in both the three and six months ended June 30, 2010. These gains were fully offset by losses on the underlying debt being hedged.

          We also economically hedge our exposure to changes in foreign exchange rates principally with forward contracts. These contracts are marked-to-market with the resulting gains and losses recognized in earnings offsetting the gains and losses on the non-functional currency denominated monetary assets and liabilities being hedged. For the three and six months ended June 30, 2011, we recognized $15 million and $38 million of income, respectively, in Other (Income) Expense. For the three and six months ended June 30, 2010, we recognized $6 million of income and $16 million of expense, respectively, in Other (Income) Expense.

18


Honeywell International Inc.
Notes to Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)

Note 12. Comprehensive Income/(Loss)

Comprehensive income/(loss) consists of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 


 


 

 

 

2011

 

2010

 

2011

 

2010

 

 

 


 


 


 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

810

 

$

574

 

$

1,518

 

$

1,070

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange translation adjustments

 

 

116

 

 

(421

)

 

507

 

 

(705

)

Pension and postretirement benefit adjustments

 

 

4

 

 

(139

)

 

7

 

 

(128

)

Change in fair value of effective cash flow hedges

 

 

3

 

 

(6

)

 

9

 

 

1

 

Change in unrealized gains on available for sale investments(a)

 

 

28

 

 

(21

)

 

8

 

 

28

 

 

 



 



 



 



 

 

 

 

961

 

 

(13

)

 

2,049

 

 

266

 

Less: Comprehensive Income/(Loss) attributable to noncontrolling interest(b)

 

 

 

 

9

 

 

3

 

 

16

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income/(Loss) attributable to Honeywell

 

$

961

 

$

(22

)

$

2,046

 

$

250

 

 

 



 



 



 



 


 

(a) Includes reclassification adjustment for losses included in net income.

(b) Comprehensive Income/(Loss) attributable to noncontrolling interest consisted predominately of net income.


 

 

 

 

 

Changes in Noncontrolling Interest consist of the following:

 

 

 

 

 

 

 

 

 

December 31, 2010

 

$

121

 

Comprehensive Income/(Loss) attributable to noncontrolling interest

 

 

3

 

Acquisitions

 

 

(1

)

Dividends paid

 

 

(10

)

Other owner changes

 

 

(1

)

 

 



 

June 30, 2011

 

$

112

 

 

 



 

          In the six months ended June 30, 2011 there were no increases or decreases to Honeywell additional paid in capital for purchases or sales of existing noncontrolling interests.

19


Honeywell International Inc.
Notes to Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)

Note 13. Segment Financial Data

          Honeywell’s senior management evaluates segment performance based on segment profit. Segment profit is measured as business unit income (loss) before taxes excluding general corporate unallocated expense, other income (expense), interest and other financial charges, pension and other postretirement benefits (expense), stock compensation expense, repositioning and other charges and accounting changes.

          The Consumer Products Group business had historically been part of the Transportation Systems reportable segment. In accordance with the presentation of CPG as discontinued operations, results for current periods presented as well as all future periods include Turbo Technologies and Friction Materials only. See Note 3 Acquisitions and Divestitures for further details.

20


Honeywell International Inc.
Notes to Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 


 


 

 

 

2011

 

2010

 

2011

 

2010

 

 

 


 


 


 


 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

$

1,559

 

$

1,464

 

$

3,025

 

$

2,781

 

Services

 

 

1,251

 

 

1,183

 

 

2,481

 

 

2,372

 

 

 



 



 



 



 

Total

 

 

2,810

 

 

2,647

 

 

5,506

 

 

5,153

 

Automation and Control Solutions

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

 

3,331

 

 

2,747

 

 

6,467

 

 

5,394

 

Services

 

 

549

 

 

490

 

 

1,069

 

 

967

 

 

 



 



 



 



 

Total

 

 

3,880

 

 

3,237

 

 

7,536

 

 

6,361

 

Specialty Materials

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

 

1,266

 

 

1,190

 

 

2,512

 

 

2,266

 

Services

 

 

140

 

 

69

 

 

249

 

 

132

 

 

 



 



 



 



 

Total

 

 

1,406

 

 

1,259

 

 

2,761

 

 

2,398

 

Transportation Systems

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

 

990

 

 

783

 

 

1,955

 

 

1,550

 

Services

 

 

 

 

 

 

 

 

 

 

 



 



 



 



 

Total

 

 

990

 

 

783

 

 

1,955

 

 

1,550

 

Corporate

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

 

 

 

 

 

 

 

 

Services

 

 

 

 

 

 

 

 

 

 

 



 



 



 



 

Total

 

 

 

 

 

 

 

 

 

 

 



 



 



 



 

 

 

$

9,086

 

$

7,926

 

$

17,758

 

$

15,462

 

 

 



 



 



 



 

 

Segment Profit

 

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace

 

$

451

 

$

443

 

$

918

 

$

856

 

Automation and Control Solutions

 

 

496

 

 

401

 

 

955

 

 

787

 

Specialty Materials

 

 

281

 

 

214

 

 

565

 

 

384

 

Transportation Systems

 

 

129

 

 

89

 

 

247

 

 

158

 

Corporate

 

 

(56

)

 

(68

)

 

(124

)

 

(100

)

 

 



 



 



 



 

Total Segment Profit

 

 

1,301

 

 

1,079

 

 

2,561

 

 

2,085

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income/ (expense)(a)

 

 

8

 

 

 

 

28

 

 

(2

)

Interest and other financial charges

 

 

(96

)

 

(91

)

 

(195

)

 

(198

)

Stock compensation expense(b)

 

 

(42

)

 

(36

)

 

(91

)

 

(86

)

Pension expense(b)

 

 

(22

)

 

(46

)

 

(57

)

 

(96

)

Other postretirement income/(expense)(b)

 

 

45

 

 

(12

)

 

27

 

 

6

 

Repositioning and other charges (b)

 

 

(94

)

 

(127

)

 

(227

)

 

(268

)

 

 



 



 



 



 

Income before taxes

 

$

1,100

 

$

767

 

$

2,046

 

$

1,441

 

 

 



 



 



 



 

(a) Equity income/(loss) of affiliated companies is included in Segment Profit.

(b) Amounts included in cost of products and services sold and selling, general and administrative expenses.

21


Honeywell International Inc.
Notes to Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)

Note 14. Pension and Other Postretirement Benefits

          Net periodic pension and other postretirement benefits costs for our significant defined benefit plans include the following components:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Plans

 

 

 


 

Pension Benefits

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 


 


 


 

 

 

2011

 

2010

 

2011

 

2010

 

 

 


 


 


 


 

Service cost

 

$

53

 

$

51

 

$

116

 

$

111

 

Interest cost

 

 

191

 

 

195

 

 

381

 

 

384

 

Expected return on plan assets

 

 

(254

)

 

(226

)

 

(507

)

 

(451

)

Amortization of prior service cost

 

 

9

 

 

11

 

 

17

 

 

16

 

Settlements and curtailments

 

 

9

 

 

 

 

24

 

 

 

 

 



 



 



 



 

 

 

$

8

 

$

31

 

$

31

 

$

60

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-U.S. Plans

 

 

 


 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 


 


 

 

 

2011

 

2010

 

2011

 

2010

 

 

 


 


 


 


 

Service cost

 

$

15

 

$

13

 

$

30

 

$

26

 

Interest cost

 

 

60

 

 

55

 

 

120

 

 

113

 

Expected return on plan assets

 

 

(72

)

 

(59

)

 

(143

)

 

(118

)

Amortization of transition obligation

 

 

1

 

 

 

 

1

 

 

 

Amortization of prior service (credit)

 

 

(1

)

 

 

 

(1

)

 

 

Settlements and curtailments

 

 

1

 

 

 

 

1

 

 

4

 

 

 



 



 



 



 

 

 

$

4

 

$

9

 

$

8

 

$

25

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Postretirement Benefits

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 


 


 


 

 

 

2011

 

2010

 

2011

 

2010

 

 

 


 


 


 


 

Service cost

 

$

 

$

 

$

1

 

$

1

 

Interest cost

 

 

17

 

 

19

 

 

35

 

 

43

 

Amortization of prior service (credit)

 

 

(9

)

 

(8

)

 

(22

)

 

(18

)

Recognition of actuarial losses

 

 

6

 

 

10

 

 

18

 

 

14

 

Settlements and curtailments

 

 

(61

)

 

(9

)

 

(61

)

 

(46

)

 

 



 



 



 



 

 

 

$

(47

)

$

12

 

$

(29

)

$

(6

)

 

 



 



 



 



 

          In January 2011, Honeywell made a voluntary cash contribution of $1 billion to our U.S. pension plans to improve the funded status of the plans.

          If required, a mark to market adjustment will be recorded in the fourth quarter of 2011 in accordance with our pension accounting method as described in Note 1 to our financial statements for the year ended December 31, 2010 contained in our Form 10-K filed on February 11, 2011.

          During the second quarter of 2011, in connection with new collective bargaining agreements reached with several of its union groups, Honeywell amended its U.S. retiree medical plan eliminating the subsidy for those

22


Honeywell International Inc.
Notes to Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)

union employees. These plan amendments reduced the accumulated postretirement benefit obligation by $18 million which will be recognized as part of net periodic postretirement benefit cost over the average future service period to full eligibility of the remaining active union employees still eligible for a retiree medical subsidy. These plan amendments also resulted in curtailment gains totaling $61 million in the second quarter of 2011 which was included as part of net periodic postretirement benefit cost. The curtailment gains represent the recognition of previously unrecognized prior service credits attributable to the future years of service of the union groups for which future accrual of benefits has been eliminated.

Note 15. Commitments and Contingencies

Environmental Matters

          We are subject to various federal, state, local and foreign government requirements relating to the protection of the environment. We believe that, as a general matter, our policies, practices and procedures are properly designed to prevent unreasonable risk of environmental damage and personal injury and that our handling, manufacture, use and disposal of hazardous substances are in accordance with environmental and safety laws and regulations. However, mainly because of past operations and operations of predecessor companies, we, like other companies engaged in similar businesses, have incurred remedial response and voluntary cleanup costs for site contamination and are a party to lawsuits and claims associated with environmental and safety matters, including past production of products containing hazardous substances. Additional lawsuits, claims and costs involving environmental matters are likely to continue to arise in the future.

          With respect to environmental matters involving site contamination, we continually conduct studies, individually or jointly with other potentially responsible parties, to determine the feasibility of various remedial techniques. It is our policy to record appropriate liabilities for environmental matters when remedial efforts or damage claim payments are probable and the costs can be reasonably estimated. Such liabilities are based on our best estimate of the undiscounted future costs required to complete the remedial work. The recorded liabilities are adjusted periodically as remediation efforts progress or as additional technical, regulatory or legal information becomes available. Given the uncertainties regarding the status of laws, regulations, enforcement policies, the impact of other potentially responsible parties, technology and information related to individual sites, we do not believe it is possible to develop an estimate of the range of reasonably possible environmental loss in excess of our recorded liabilities. We expect to fund expenditures for these matters from operating cash flow. The timing of cash expenditures depends on a number of factors, including the timing of remedial investigations and feasibility studies, the timing of litigation and settlements of remediation liability, personal injury and property damage claims, regulatory approval of cleanup projects, remedial techniques to be utilized and agreements with other parties.

          The following table summarizes information concerning our recorded liabilities for environmental costs:

 

 

 

 

 

 

 

 

December 31, 2010

 

$

753

 

 

 

 

Accruals for environmental matters deemed probable and reasonably estimable

 

 

101

 

 

 

 

Environmental liability payments

 

 

(80

)

 

 

 

Other

 

 

1

 

 

 

 

 

 



 

 

 

 

June 30, 2011

 

$

775

 

 

 

 

 

 



 

 

 

 

          Environmental liabilities are included in the following balance sheet accounts:

 

 

 

 

 

 

 

 

 

 

June 30,
2011

 

December 31,
2010

 

 

 


 


 

Accrued liabilities

 

$

306

 

$

328

 

Other liabilities

 

 

469

 

 

425

 

 

 



 



 

 

 

$

775

 

$

753

 

 

 



 



 

23


Honeywell International Inc.
Notes to Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)

          Although we do not currently possess sufficient information to reasonably estimate the amounts of liabilities to be recorded upon future completion of studies, litigation or settlements, and neither the timing nor the amount of the ultimate costs associated with environmental matters can be determined, they could be material to our consolidated results of operations or operating cash flows in the periods recognized or paid. However, considering our past experience and existing reserves, we do not expect that these environmental matters will have a material adverse effect on our consolidated financial position.

          New Jersey Chrome Sites—The excavation and offsite disposal of approximately one million tons of chromium residue present at a predecessor Honeywell site located in Jersey City, New Jersey, known as Study Area 7 was completed in January 2010. We have also received approval of the United States District Court for the District of New Jersey for the implementation of related groundwater and sediment remedial actions, and are seeking the appropriate permits from state and federal agencies. Provisions have been made in our financial statements for the estimated cost of these remedies.

          The above-referenced site is the most significant of the 21 sites located in Hudson County, New Jersey that are the subject of an Administrative Consent Order (ACO) entered into with the New Jersey Department of Environmental Protection (NJDEP) in 1993 (the “Honeywell ACO Sites”). Remedial investigations and activities consistent with the ACO have also been conducted and are underway at the other Honeywell ACO Sites. We have recorded reserves for the Honeywell ACO Sites where appropriate under the accounting policy described above.

          We have entered into court-approved settlements of litigation filed in federal court against Honeywell and other landowners seeking the cleanup of chrome residue at groups of properties known as Study Areas 5, 6 South and 6 North of the Honeywell ACO Sites. The required remedial actions are consistent with our recorded reserves.

          On May 3, 2005, NJDEP filed a lawsuit in New Jersey Superior Court against Honeywell and two other companies seeking declaratory and injunctive relief, unspecified damages, and the reimbursement of unspecified total costs relating to sites in New Jersey allegedly contaminated with chrome ore processing residue. The claims against Honeywell relate to the activities of a predecessor company which ceased its New Jersey manufacturing operations in the mid-1950’s. Honeywell and the two other companies have agreed to settle this litigation with NJDEP, subject to Court approval. Under the settlement, Honeywell would pay $5 million of NJDEP’s past costs, as well as accept sole responsibility to remediate 24 of the 53 “Publicly Funded Sites” (i.e., those sites for which none of the three companies had previously accepted responsibility). Honeywell would also bear 50% of the costs at another 10 Publicly Funded Sites. We have recorded reserves for the Publicly Funded Sites where appropriate under the accounting policy described above.

          Dundalk Marine Terminal, Baltimore, MD—Chrome residue from legacy chrome plant operations in Baltimore was deposited as fill at the Dundalk Marine Terminal (“DMT”), which is owned and operated by the Maryland Port Administration (“MPA”). Honeywell and the MPA have been sharing costs to investigate and mitigate related environmental issues, and have entered into a cost sharing agreement under which Honeywell will bear 77 percent of the costs of developing and implementing permanent remedies for the DMT facility. In January 2011, the MPA and Honeywell submitted to the Maryland Department of the Environment (“MDE”) a Corrective Measures Alternatives Analysis (“CMAA”) of certain potential remedies for DMT to assist MDE in selection of a final remedy, which has not yet occurred. Provision has been made in our financial statements for the CMAA consistent with the accounting policy described above. We have negotiated a Consent Decree with the MPA and MDE with respect to the investigation and remediation of the DMT facility. The Consent Decree is being challenged in federal court by BUILD, a Baltimore community group, together with a local church and two individuals (collectively “BUILD”). In October 2007, the Court dismissed with prejudice BUILD’s state law claims and dismissed without prejudice BUILD’s RCRA claims regarding neighborhoods near the DMT facility. In August 2008, the Court held a hearing on the Company’s motion to dismiss BUILD’s remaining claims on the grounds that MDE is diligently prosecuting the investigation and remediation of the DMT. We are awaiting the Court’s decision. We do not believe that this matter will have a material adverse impact on our consolidated financial position or operating cash flows. Given the scope and complexity of this project, it is possible that the cost of remediation, when determinable, could have a material adverse impact on our results of operations in the periods recognized.

          Onondaga Lake, Syracuse, NY—We are implementing a combined dredging/capping remedy of

24


Honeywell International Inc.
Notes to Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)

Onondaga Lake pursuant to a consent decree approved by the United States District Court for the Northern District of New York in January 2007. We have accrued for our estimated cost of remediating Onondaga Lake based on currently available information and analysis performed by our engineering consultants. Honeywell is also conducting remedial investigations and activities at other sites in Syracuse. We have recorded reserves for these investigations and activities where appropriate under the accounting policy described above.

          Honeywell has entered into a cooperative agreement with potential natural resource trustees to assess alleged natural resource damages relating to this site. It is not possible to predict the outcome or duration of this assessment, or the amounts of, or responsibility for, any damages.

Asbestos Matters

          Like many other industrial companies, Honeywell is a defendant in personal injury actions related to asbestos. We did not mine or produce asbestos, nor did we make or sell insulation products or other construction materials that have been identified as the primary cause of asbestos related disease in the vast majority of claimants. Products containing asbestos previously manufactured by Honeywell or by previously owned subsidiaries primarily fall into two general categories: refractory products and friction products.

          Refractory Products—Honeywell owned North American Refractories Company (NARCO) from 1979 to 1986. NARCO produced refractory products (high temperature bricks and cement) that were sold largely to the steel industry in the East and Midwest. Less than 2 percent of NARCO’S products contained asbestos.

          When we sold the NARCO business in 1986, we agreed to indemnify NARCO with respect to personal injury claims for products that had been discontinued prior to the sale (as defined in the sale agreement). NARCO retained all liability for all other claims. On January 4, 2002, NARCO filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code.

          As a result of the NARCO bankruptcy filing, all of the claims pending against NARCO are automatically stayed pending the reorganization of NARCO. In addition, the bankruptcy court enjoined both the filing and prosecution of NARCO-related asbestos claims against Honeywell. The stay has remained in effect continuously since January 4, 2002. In connection with NARCO’s bankruptcy filing, we paid NARCO’s parent company $40 million and agreed to provide NARCO with up to $20 million in financing. We also agreed to pay $20 million to NARCO’s parent company upon the filing of a plan of reorganization for NARCO acceptable to Honeywell (which amount was paid in December 2005 following the filing of NARCO’s Third Amended Plan of Reorganization), and to pay NARCO’s parent company $40 million, and to forgive any outstanding NARCO indebtedness to Honeywell, upon the effective date of the plan of reorganization.

          We believe that, as part of the NARCO plan of reorganization, a trust will be established for the benefit of all asbestos claimants, current and future, pursuant to Trust Distribution Procedures negotiated with the NARCO Asbestos Claimants Committee and the Court-appointed legal representative for future asbestos claimants. If the trust is put in place and approved by the Court as fair and equitable, Honeywell as well as NARCO will be entitled to a permanent channeling injunction barring all present and future individual actions in state or federal courts and requiring all asbestos related claims based on exposure to NARCO products to be made against the federally-supervised trust. Honeywell has reached agreement with the representative for future NARCO claimants and the Asbestos Claimants Committee to cap its annual contributions to the trust with respect to future claims at a level that would not have a material impact on Honeywell’s operating cash flows.

          In November 2007, the Bankruptcy Court entered an amended order confirming the NARCO Plan without modification and approving the 524(g) trust and channeling injunction in favor of NARCO and Honeywell. In December 2007, certain insurers filed an appeal of the Bankruptcy Court Order in the United States District Court for the Western District of Pennsylvania. The District Court affirmed the Bankruptcy Court Order in July 2008. In August 2008, insurers filed a notice of appeal to the Third Circuit Court of Appeals. Oral argument took place on May 21, 2009 and the matter was submitted for decision. In connection with the settlement of an insurance coverage litigation matter, the insurer appellants withdrew their appeal regarding the NARCO Plan. On August 3, 2010 the Third Circuit Court of Appeals entered an order formally dismissing the NARCO appeal. The NARCO Plan of Reorganization cannot become effective, however, until the resolution of an appeal of the Chapter 11 proceedings of NARCO affiliates. The Third Circuit reheard the affiliates’ appeal en banc on October 13, 2010 and, on May 4, 2011, reversed the Bankruptcy Court’s confirmation order and remanded for further proceedings.

25


Honeywell International Inc.
Notes to Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)

The affiliates’ case has been returned to the Bankruptcy Court where the parties are working to resolve their disputes. The time for the affiliates to seek review of the Third Circuit decision in the U.S. Supreme Court has not yet expired. It is not possible to predict the timing or outcome of the Bankruptcy Court proceedings in the affiliates’ case or of Supreme Court proceedings, if any, although the result in the affiliates’ case will have no direct substantive impact on the NARCO case. We expect that the stay enjoining litigation against NARCO and Honeywell will remain in effect until the effective date of the NARCO Plan of Reorganization.

          Our consolidated financial statements reflect an estimated liability for settlement of pending and future NARCO-related asbestos claims of $1,124 million and $1,125 million as of June 30, 2011 and December 31, 2010, respectively. The estimated liability for pending claims is based on terms and conditions, including evidentiary requirements, in definitive agreements with approximately 260,000 current claimants, and an estimate of the unsettled claims pending as of the time NARCO filed for bankruptcy protection. Substantially all settlement payments with respect to current claims have been made. Approximately $100 million of payments due pursuant to these settlements is due only upon establishment of the NARCO trust.

          The estimated liability for future claims represents the estimated value of future asbestos related bodily injury claims expected to be asserted against NARCO through 2018 and the aforementioned obligations to NARCO’s parent. In light of the uncertainties inherent in making long-term projections we do not believe that we have a reasonable basis for estimating asbestos claims beyond 2018. The estimate is based upon the disease criteria and payment values contained in the NARCO Trust Distribution Procedures negotiated with the NARCO Asbestos Claimants Committee and the NARCO future claimants’ representative. Honeywell projected the probable number and value, including trust claim handling costs, of asbestos related future liabilities based upon experience of asbestos claims filing rates in the tort system and in certain operating asbestos trusts, and the claims experience in those forums. The valuation methodology also includes an analysis of the population likely to have been exposed to asbestos containing products, epidemiological studies to estimate the number of people likely to develop asbestos related diseases, NARCO claims filing history, the pending inventory of NARCO asbestos related claims and payment rates expected to be established by the NARCO trust. This methodology used to estimate the liability for future claims has been commonly accepted by numerous courts and resulted in a range of estimated liability for future claims of $743 to $961 million. We believe that no amount within this range is a better estimate than any other amount and accordingly, we have recorded the minimum amount in the range.

          As of June 30, 2011 and December 31, 2010, our consolidated financial statements reflect an insurance receivable corresponding to the liability for settlement of pending and future NARCO-related asbestos claims of $691 and $718 million, respectively. This coverage reimburses Honeywell for portions of the costs incurred to settle NARCO related claims and court judgments as well as defense costs and is provided by a large number of insurance policies written by dozens of insurance companies in both the domestic insurance market and the London excess market. At June 30, 2011, a significant portion of this coverage is with insurance companies with whom we have agreements to pay full policy limits based on corresponding Honeywell claims costs. We conduct analyses to determine the amount of insurance that we estimate is probable of recovery in relation to payment of current and estimated future claims. While the substantial majority of our insurance carriers are solvent, some of our individual carriers are insolvent, which has been considered in our analysis of probable recoveries. We made judgments concerning insurance coverage that we believe are reasonable and consistent with our historical dealings with our insurers, our knowledge of any pertinent solvency issues surrounding insurers and various judicial determinations relevant to our insurance programs.

          In the second quarter of 2006, Travelers Casualty and Insurance Company (“Travelers”) filed a lawsuit against Honeywell and other insurance carriers in the Supreme Court of New York, County of New York, disputing obligations for NARCO-related asbestos claims under high excess insurance coverage issued by Travelers and other insurance carriers. In July 2010, the Company entered into a settlement agreement resolving all asbestos coverage issues with certain plaintiffs. Approximately $180 million of remaining unsettled coverage is included in our NARCO-related insurance receivable at June 30, 2011. Honeywell believes it is entitled to the coverage at issue and expects to prevail in this matter. In the third quarter of 2007, Honeywell prevailed on a critical choice of law issue concerning the appropriate method of allocating NARCO-related asbestos liabilities to triggered policies. The plaintiffs appealed and the trial court’s ruling was upheld by the intermediate appellate court in the second quarter of 2009. Plaintiffs’ further appeal to the New York Court of Appeals, the highest court in New York, was denied in October 2009. A related New Jersey action brought by Honeywell has been dismissed, but all coverage claims against plaintiffs have been preserved in the New York action. Based upon (i) our understanding of relevant facts and applicable law, (ii) the terms of insurance policies at issue, (iii) our experience on matters of this

26


Honeywell International Inc.
Notes to Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)

nature, and (iv) the advice of counsel, we believe that the amount due from Travelers and other insurance carriers is probable of recovery. While Honeywell expects to prevail in this matter, an adverse outcome could have a material impact on our results of operations in the period recognized but would not be material to our consolidated financial position or operating cash flows.

          Projecting future events is subject to many uncertainties that could cause the NARCO related asbestos liabilities or assets to be higher or lower than those projected and recorded. There is no assurance that the plan of reorganization will become final, that insurance recoveries will be timely or whether there will be any NARCO related asbestos claims beyond 2018. Given the inherent uncertainty in predicting future events, we review our estimates periodically, and update them based on our experience and other relevant factors. Similarly, we will reevaluate our projections concerning our probable insurance recoveries in light of any changes to the projected liability or other developments that may impact insurance recoveries.

          Friction Products—Honeywell’s Bendix friction materials (Bendix) business manufactured automotive brake parts that contained chrysotile asbestos in an encapsulated form. Existing and potential claimants consist largely of individuals who allege exposure to asbestos from brakes from either performing or being in the vicinity of individuals who performed brake replacements.

          From 1981 through June 30, 2011, we have resolved approximately 157,000 Bendix related asbestos claims. We had 132 trials resulting in favorable verdicts and 21 trials resulting in adverse verdicts. Five of these adverse verdicts were reversed on appeal, five verdicts were vacated on post-trial motions, three claims were settled and the remaining have been or will be appealed. The claims portfolio was reduced in 2009 due to settlements, dismissals and the elimination of significantly aged (i.e., pending for more than six years), inactive (including claims for which the required medical and exposure showings have not been made) and duplicate claims.

          The following tables present information regarding Bendix related asbestos claims activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended
June 30,

 

Year Ended
December 31,

 

Claims Activity

 

2011

 

2010

 

2009

 


 


 


 


 

Claims Unresolved at the beginning of period

 

 

22,480

 

 

19,940

 

 

51,951

 

Claims Filed during the period (a)

 

 

1,917

 

 

4,302

 

 

2,697

 

Claims Resolved during the period(b)

 

 

(1,366

)

 

(1,762

)

 

(34,708

)

 

 



 



 



 

Claims Unresolved at the end of period

 

 

23,031

 

 

22,480

 

 

19,940

 

 

 



 



 



 


 

(a) The number of claims filed in 2010 includes approximately 1,541 non-malignant claims (with an accrued liability of approximately $575 thousand in the aggregate), a majority of which had previously been dismissed in Mississippi and re-filed in Arkansas.

 

(b) The number of claims resolved in 2010 includes approximately 1,300 claims previously classified as inactive (95% non-malignant and accrued liability of approximately $2.0 million) which were activated during 2010.


 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

Disease Distribution of Unresolved Claims

 

2011

 

2010

 

2009

 


 


 


 


 

Mesothelioma and Other Cancer Claims

 

 

5,069

 

 

4,856

 

 

4,727 

 

Other Claims

 

 

17,962

 

 

17,624

 

 

15,213 

 

 

 



 



 



 

    Total Claims

 

 

23,031

 

 

22,480

 

 

19,940 

 

 

 



 



 



 

27


Honeywell International Inc.
Notes to Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)

          Honeywell has experienced average resolution values per claim excluding legal costs as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

 


 

 

 

2010

 

2009

 

2008

 

2007

 

2006

 

 

 


 


 


 


 


 

 

 

(in whole dollars)

 

Malignant claims

 

$

54,000

 

$

50,000

 

$

65,000

 

$

33,000

 

$

33,000 

 

Nonmalignant claims

 

$

1,300

 

$

200

 

$

1,500

 

$

500

 

$

250 

 

          It is not possible to predict whether resolution values for Bendix related asbestos claims will increase, decrease or stabilize in the future.

          Our consolidated financial statements reflect an estimated liability for resolution of pending and future Bendix related asbestos claims of $603 and $594 million at June 30, 2011 and December 31, 2010, respectively. Our liability for the estimated cost of future Bendix related asbestos claims is based on historic claims filing experience, disease classifications, expected resolution values, and historic dismissal rates. In the fourth quarter of each year, we update our analysis of the estimated cost of future Bendix related asbestos claims. We have valued Bendix pending and future claims using average resolution values for the previous five years. Changes in the tort system, which began in 2006, refocused asbestos litigation on mesothelioma cases, making the five year period 2006 through 2010 representative for forecasting purposes. We will continue to update the expected resolution values used to estimate the cost of pending and future Bendix claims during the fourth quarter each year.

          The estimated liability for future claims represents the estimated value of future asbestos related bodily injury claims expected to be asserted against Bendix over the next five years. In light of the uncertainties inherent in making long-term projections, as well as certain factors unique to friction product asbestos claims, we do not believe that we have a reasonable basis for estimating asbestos claims beyond the next five years. The estimate is based upon Bendix historical experience in the tort system for the five years ended December 31, 2010 with respect to claims filing and resolution values. The methodology used to estimate the liability for future claims has been commonly accepted by numerous courts. It is similar to that used to estimate the future NARCO related asbestos claims liability.

          Honeywell currently has approximately $1.9 billion of insurance coverage remaining with respect to pending and potential future Bendix related asbestos claims, of which $161 and $157 million are reflected as receivables in our consolidated balance sheet at June 30, 2011 and December 31, 2010, respectively. This coverage is provided by a large number of insurance policies written by dozens of insurance companies in both the domestic insurance market and the London excess market. Insurance receivables are recorded in the financial statements simultaneous with the recording of the liability for the estimated value of the underlying asbestos claims. The amount of the insurance receivable recorded is based on our ongoing analysis of the insurance that we estimate is probable of recovery. This determination is based on our analysis of the underlying insurance policies, our historical experience with our insurers, our ongoing review of the solvency of our insurers, our interpretation of judicial determinations relevant to our insurance programs, and our consideration of the impacts of any settlements reached with our insurers. Insurance receivables are also recorded when structured insurance settlements provide for future fixed payment streams that are not contingent upon future claims or other events. Such amounts are recorded at the net present value of the fixed payment stream.

          On a cumulative historical basis, Honeywell has recorded insurance receivables equal to approximately 40 percent of the value of the underlying asbestos claims recorded. However, because there are gaps in our coverage due to insurance company insolvencies, certain uninsured periods, and insurance settlements, this rate is expected to decline for any future Bendix related asbestos liabilities that may be recorded. Future recoverability rates may also be impacted by numerous other factors, such as future insurance settlements, insolvencies and judicial determinations relevant to our coverage program, which are difficult to predict. Assuming continued defense and indemnity spending at current levels, we estimate that the cumulative recoverability rate could decline over the next five years to approximately 35 percent.

          Honeywell believes it has sufficient insurance coverage and reserves to cover all pending Bendix related

28


Honeywell International Inc.
Notes to Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)

asbestos claims and Bendix related asbestos claims estimated to be filed within the next five years. Although it is impossible to predict the outcome of either pending or future Bendix related asbestos claims, we do not believe that such claims would have a material adverse effect on our consolidated financial position in light of our insurance coverage and our prior experience in resolving such claims. If the rate and types of claims filed, the average resolution value of such claims and the period of time over which claim settlements are paid (collectively, the “Variable Claims Factors”) do not substantially change, Honeywell would not expect future Bendix related asbestos claims to have a material adverse effect on our results of operations or operating cash flows in any fiscal year. No assurances can be given, however, that the Variable Claims Factors will not change.

          Refractory and Friction Products — The following tables summarize information concerning NARCO and Bendix asbestos related balances:

 

 

 

 

 

 

 

 

 

 

 

Asbestos Related Liabilities

 

 

 

 

 

 

 

 

 

 


 

 

 

 

 

 

 

 

 

 

 

 

Bendix

 

NARCO

 

Total

 

 

 


 


 


 

December 31, 2010

 

$

594

 

$

1,125

 

$

1,719

 

Accrual for update to estimated liability

 

 

90

 

 

 

 

90

 

Asbestos related liability payments

 

 

(81

)

 

(1

)

 

(82

)

 

 



 



 



 

June 30, 2011

 

$

603

 

$

1,124

 

$

1,727

 

 

 



 



 



 


 

 

 

 

 

 

 

 

 

 

 

Insurance Recoveries for Asbestos Related Liabilities

 

 

 

 

 

 

 

 

 

 


 

 

 

 

 

 

 

 

 

 

 

 

Bendix

 

NARCO

 

Total

 

 

 


 


 


 

December 31, 2010

 

$

157

 

$

718

 

$

875

 

Probable insurance recoveries related to estimated liability

 

 

13

 

 

 

 

13

 

Insurance receipts for asbestos related liabilities

 

 

(9

)

 

(27

)

 

(36

)

 

 



 



 



 

June 30, 2011

 

$

161

 

$

691

 

$

852

 

 

 



 



 



 

          NARCO and Bendix asbestos related balances are included in the following balance sheet accounts:

 

 

 

 

 

 

 

 

 

 

June 30,
2011

 

December 31,
2010 

 

 

 


 


 

Other current assets

 

$

50

 

$

50

 

Insurance recoveries for asbestos related liabilities

 

 

802

 

 

825

 

 

 



 



 

 

 

$

852

 

$

875

 

 

 



 



 

 

 

 

 

 

 

 

 

Accrued liabilities

 

$

162

 

$

162

 

Asbestos related liabilities

 

 

1,565

 

 

1,557

 

 

 



 



 

 

 

$

1,727

 

$

1,719

 

 

 



 



 

Other Matters

          We are subject to a number of other lawsuits, investigations and disputes (some of which involve substantial amounts claimed) arising out of the conduct of our business, including matters relating to commercial transactions, government contracts, product liability, prior acquisitions and divestitures, employee benefit plans, intellectual property, and environmental, health and safety matters. We recognize a liability for any contingency

29


Honeywell International Inc.
Notes to Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)

that is probable of occurrence and reasonably estimable. We continually assess the likelihood of adverse judgments of outcomes in these matters, as well as potential ranges of possible losses (taking into consideration any insurance recoveries), based on a careful analysis of each matter with the assistance of outside legal counsel and, if applicable, other experts. Included in these other matters are the following:

          Allen, et al. v. Honeywell Retirement Earnings Plan—Pursuant to a settlement approved by the U.S. District Court for the District of Arizona in February 2008, 18 of 21 claims alleged by plaintiffs in this class action lawsuit were dismissed with prejudice in exchange for approximately $35 million (paid from the Company’s pension plan) and the maximum aggregate liability for the remaining three claims (alleging that Honeywell impermissibly reduced the pension benefits of certain employees of a predecessor entity when the plan was amended in 1983 and failed to calculate benefits in accordance with the terms of the plan) was capped at $500 million. In October 2009, the Court granted summary judgment in favor of the Honeywell Retirement Earnings Plan with respect to the claim regarding the calculation of benefits. In May 2011, the parties engaged in mediation and reached an agreement in principle to settle the three remaining claims for $23.8 million (also to be paid from the Company’s pension plan). We expect to submit settlement documents to the court for classwide approval in the third quarter of 2011 and anticipate a fairness hearing on the settlement in the fourth quarter of 2011. Upon court approval of the settlement, all claims in this matter will be fully resolved.

          Quick Lube—On March 31, 2008, S&E Quick Lube, a filter distributor, filed suit in U.S. District Court for the District of Connecticut alleging that twelve filter manufacturers, including Honeywell, engaged in a conspiracy to fix prices, rig bids and allocate U.S. customers for aftermarket automotive filters. This suit is a purported class action on behalf of direct purchasers of filters from the defendants. Parallel purported class actions, including on behalf of indirect purchasers of filters, have been filed by other plaintiffs in a variety of jurisdictions in the United States and Canada. The U.S cases have been consolidated into a single multi-district litigation in the Northern District of Illinois. In April 2011, the multi-district litigation was stayed pending an investigation by the U.S. Attorney for the Eastern District of Pennsylvania relating to plaintiff’s principal witness for possible violations of federal law. In June 2011, plaintiff’s principal witness pled guilty to a felony count of having made false statements to federal investigators. We believe the claims against Honeywell are without merit and we will vigorously defend against the claims raised in these actions. As previously reported, the Antitrust Division of the Department of Justice notified Honeywell in January 2010 that it had officially closed its investigation into possible collusion in the replacement auto filters industry.

          BorgWarner v. Honeywell—In this patent infringement suit in the District Court for the Western District of North Carolina, plaintiff BorgWarner claimed that Honeywell’s manufacture and sale of cast titanium compressor wheels for turbochargers infringed three BorgWarner patents and sought damages of up to approximately $120 million, which plaintiff asserted should be trebled for willful infringement. Because the process claimed in BorgWarner’s patents had already been described in detail in printed publications and had been offered for sale before BorgWarner’s alleged invention, in violation of statutory requirements for patentability, Honeywell asked the Court to enter summary judgment of invalidity of BorgWarner’s patents. The Court declined to enter summary judgment in September 2010, finding that the question should be decided by a jury. Trial was scheduled for May 2011. Honeywell and BorgWarner reached a settlement prior to the start of trial by which BorgWarner granted Honeywell a license to the patents-in-suit and a release of all claims for past damages in exchange for a one-time payment of $32.5 million. 

          Solvay v. Honeywell— In this patent infringement suit in the District Court for the District of Delaware, plaintiff Solvay, S.A. claims that Honeywell’s manufacture and sale of HFC-245fa infringes a Solvay patent and seeks damages of approximately $50 million, which plaintiff asserts should be trebled for willful infringement. Because Honeywell does not believe that Solvay was the first to conceive of the process claimed in the patent, and because that process had already been carried out by others before Solvay’s claimed invention, Honeywell asked the Court to enter summary judgment motion of invalidity of Solvay’s patent claims under several alternative theories based on different provisions of the patent statutes. Solvay also moved for summary judgment motion of infringement of the same claims. The Court entered a summary judgment motion finding that Honeywell’s process infringed the asserted patent claims, but also finding that those claims were not valid based on one of Honeywell’s invalidity theories and thus entered judgment for Honeywell on Solvay’s claims. Solvay appealed the District Court’s invalidity ruling to the Federal Circuit and Honeywell challenged the infringement rulings. The Federal Circuit reversed the District Court’s ruling on invalidity and affirmed the rulings on infringement. The District Court has scheduled the case for trial beginning on September 21, 2011. Honeywell

30


Honeywell International Inc.
Notes to Financial Statements
(Unaudited)
(Dollars in millions, except per share amounts)

filed a renewed summary judgment motion, with leave of the Court, based on the invalidity theories that have not been previously ruled upon by the Court. The parties participated in a court-ordered mediation in June 2011, which was not successful. Honeywell will continue its vigorous defense of this claim and expects to prevail at trial. In the event the Company is found liable, we do not believe that the evidence supports damages of the magnitude claimed or any finding of willfulness.

          Given the uncertainty inherent in litigation and investigations (including the specific matters referenced above), we do not believe it is possible to develop estimates of reasonably possible loss in excess of current accruals for these matters. Considering our past experience and existing accruals, we do not expect the outcome of these matters, either individually or in the aggregate, to have a material adverse effect on our consolidated financial position. Because most contingencies are resolved over long periods of time, potential liabilities are subject to change due to new developments, changes in settlement strategy or the impact of evidentiary requirements, which could cause us to pay damage awards or settlements (or become subject to equitable remedies) that could have a material adverse effect on our results of operations or operating cash flows in the periods recognized or paid.

31


Report of Independent Registered Public Accounting Firm

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 June 30, 2011 and the related consolidated statement of operations for the three-month and six-month periods ended June 30, 2011 and 2010 and the consolidated statement of cash flows for the three-month and six-month periods ended June 30, 2011 and 2010. These interim financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), 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 the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2010, and the related consolidated statements of operations, of shareowners’ equity, and of cash flows for the year then ended (not presented herein), and in our report dated February 11, 2011, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2010, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

 

 

/s/ PricewaterhouseCoopers LLP

 

Florham Park, New Jersey

 

July 22, 2011

 

 

 


 

The “Report of Independent Registered Public Accounting Firm” included above is not a “report” or “part of a Registration Statement” prepared or certified by an independent accountant within the meanings of Sections 7 and 11 of the Securities Act of 1933, and the accountants’ Section 11 liability does not extend to such report.

32



 

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

 

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)

 

(Dollars in millions, except per share amounts)

The following MD&A is intended to help the reader understand the results of operations and financial condition of Honeywell International Inc. (“Honeywell”) for the three and six months ended June 30, 2011. The financial information as of June 30, 2011 should be read in conjunction with the financial statements for the year ended December 31, 2010 contained in our Form 10-K filed on February 11, 2011.

The Consumer Products Group business had historically been part of the Transportation Systems reportable segment. In accordance with the applicable accounting guidance for the disposal of long-lived assets, the results of our Consumer Products Group business are presented as discontinued operations and, as such, have been excluded from continuing operations and from segment results for all periods presented. See Note 3 Acquisitions and Divestitures for further details.

 

 

A.

Results of Operations – three and six months ended June 30, 2011 compared with the three and six months ended June 30, 2011


 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 


 


 

 

 

2011 

 

2010 

 

2011 

 

2010 

 

 

 


 


 


 


 

Net sales

 

$

9,086

 

$

7,926

 

$

17,758

 

$

15,462

 

% change compared with prior period

 

 

15

%

 

 

 

 

15

%

 

 

 

The change in net sales compared to the prior year period is attributable to the following:

 

 

 

 

 

 

 

 

 

 

Three Months

 

Year to Date

 

 

 


 


 

Volume

 

 

5

%

 

6

%

Price

 

 

3

%

 

3

%

Acquisitions/Divestitures

 

 

3

%

 

4

%

Foreign Exchange

 

 

4

%

 

2

%

 

 



 



 

 

 

 

15

%

 

15

%

 

 



 



 

A discussion of net sales by segment can be found in the Review of Business Segments section of this MD&A.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of Products and Services Sold

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
June, 30

 

Six Months Ended
June, 30

 

 

 


 


 

 

 

2011 

 

2010 

 

2011 

 

2010 

 

 

 


 


 


 


 

Cost of products and services sold

 

$

6,664

 

$

5,967

 

$

13,088

 

$

11,634

 

% change compared with prior period

 

 

12

%

 

 

 

 

12

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Margin percentage

 

 

26.7

%

 

24.7

%

 

26.3

%

 

24.8

%

          Cost of products and services sold increased by $697 million or 12 percent in the quarter ended June 30, 2011 compared with the quarter ended June 30, 2010 principally due to an estimated increase in direct material costs and labor costs of approximately $500 million and $200 million respectively, driven substantially by a 12 percent increase in sales as a result of the factors (excluding price) discussed above and in the Review of Business Segments section of this MD&A, partially offset by a $60 million decrease in pension and other postretirement expense.

          Cost of products and services sold increased by $1,454 million or 12 percent in the six months ended June 30, 2011 compared with the six months ended June 30, 2010 principally due to i) an estimated increase in direct material costs, labor costs and indirect costs of approximately $1 billion, $300 million and $200 million,

33


respectively, driven substantially by a 12 percent increase in sales as a result of the factors (excluding price) discussed above and in the Review of Business Segments section of this MD&A, partially offset by a $50 million decrease in pension and other postretirement expense.

          Gross margin percentage increased by 2.0 percentage points in the quarter ended June 30, 2011 compared with the quarter ended June 30, 2010 primarily due to higher segment gross margin driven by our Specialty Materials segment, Automation & Control segment and Transportation Systems segment (approximately 0.6 percentage point impact collectively), lower other postretirement and pension expense (approximately 0.8 percentage point impact), and lower repositioning and other charges (approximately 0.5 percentage point impact).

          Gross margin percentage increased by 1.5 percentage points in the six months ended June 30, 2011 compared with the six months ended June 30, 2010 primarily due to higher segment gross margin driven by our Specialty Materials segment, Transportation Systems segment and Automation & Control segment (approximately 0.7 percentage point impact collectively) and lower repositioning and other charges (approximately 0.4 percentage point impact), and lower postretirement and pension expense (approximately 0.3 percentage point impact).

          For further discussion of segment results see “Review of Business Segments”.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, General and Administrative Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 


 


 

 

 

2011

 

2010

 

2011

 

2010

 

 

 


 


 


 


 

Selling, general and administrative expense

 

$

1,248

 

$

1,110

 

$

2,480

 

$

2,200

 

Percent of sales

 

 

13.7

%

 

14.0

%

 

14.0

%

 

14.2

%

          Selling, general and administrative expenses (SG&A) decreased as a percentage of sales by 0.3 percent in the quarter ended June 30, 2011 compared to the quarter ended June 30, 2010 driven by the impact of higher sales volumes as a result of the factors discussed in the Review of Business Segments section of this MD&A, partially offset by the impact of an estimated $130 million increase in labor costs resulting from acquisitions, investment for growth and merit increase.

          SG&A decreased as a percentage of sales by 0.2 percent in the six months ended June 30, 2011 compared with the six months ended June 30, 2010 driven by the impact of higher sales volumes as a result of the factors discussed in the Review of Business Segments section of this MD&A, partially offset by primarily due to an estimated $220 million increase in labor costs resulting from acquisitions, investment for growth and merit increase.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other (Income) Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 


 


 

 

 

2011

 

2010

 

2011

 

2010

 

 

 


 


 


 


 

Equity (income)/loss of affiliated companies

 

$

(14

)

$

(9

)

$

(23

)

$

(13

)

Gain on sale of non-strategic businesses and assets

 

 

(2

)

 

 

 

(46

)

 

 

Interest income

 

 

(14

)

 

(7

)

 

(27

)

 

(16

)

Foreign exchange

 

 

10

 

 

(3

)

 

18

 

 

8

 

Other, net

 

 

(2

)

 

10

 

 

27

 

 

10

 

 

 



 



 



 



 

 

 

$

(22

)

$

(9

)

$

(51

)

$

(11

)

 

 



 



 



 



 

          Other income of $51 million for the six months ended June 30, 2011 compared with other income of $11 million for the six months ended June 30, 2010 is due primarily to a $39 million pre-tax gain related to the divestiture of the automotive on-board sensor products business within our Automation and Control Solutions segment in the first quarter of 2011.

34



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and Other Financial Charges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 


 


 

 

 

2011

 

2010

 

2011

 

2010

 

 

 


 


 


 


 

Interest and other financial charges

 

$

96

 

$

91

 

$

195

 

$

198 

 

% change compared with prior period

 

 

5

%

 

 

 

 

(2

)%

 

 

 

          Interest and other financial charges increased by $5 million in the quarter ended June 30, 2011 compared with the quarter ended June 30, 2010 primarily due to higher debt balances. Interest and other financial charges were lower by $3 million in the six months ended 2011 compared with the six months ended June 30, 2010 primarily due to lower borrowing costs in the first quarter of 2011.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 


 


 

 

 

2011 

 

2010 

 

2011 

 

2010 

 

 

 


 


 


 


 

Tax expense

 

$

304

 

$

209

 

$

560

 

$

405

 

Effective tax rate

 

 

27.6

%

 

27.2

%

 

27.4

%

 

28.1

%

          The effective tax rate increased by 0.4 percent in the quarter ended June 30, 2011 compared with the quarter ended June 30, 2010 due to increased tax expense due primarily to audit related reserves in various jurisdictions partially offset by a lower tax rate imposed on income from ongoing operations.

          The effective tax rate decreased by 0.7 percent in the six months ended June 30, 2011 compared with the six months ended June 30, 2010 due to a lower tax rate on income from ongoing operations and absence of an impact from enacted change in the tax treatment of the Medical Part D program, partially offset by increased tax expense related to divestitures and audit related reserves in various jurisdictions.

          The effective tax rate for the periods ending in 2011 was lower than the statutory rate of 35 percent due, in part, to foreign earnings taxed at lower tax rates and benefits from U.S. manufacturing incentives and U.S. tax credits.

          The effective tax rate for the periods ending in 2010 was lower than the statutory rate of 35 percent due, in part, to foreign earnings taxed at lower tax rates and benefits from U.S. manufacturing incentives.

35


Net Income Attributable to Honeywell

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 


 


 

 

 

2011

 

2010

 

2011

 

2010

 

 

 


 


 


 


 

Amounts attributable to Honeywell

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

 

796

 

 

550

 

 

1,483

 

 

1,021

 

Income from discontinued operations

 

 

14

 

 

16

 

 

32

 

 

34

 

 

 



 



 



 



 

Net income attributable to Honeywell

 

$

810

 

$

566

 

$

1,515

 

$

1,055

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share of common stock – assuming dilution

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

1.00

 

$

0.71

 

$

1.86

 

$

1.32

 

Income from discontinued operations

 

 

0.02

 

 

0.02

 

 

0.04

 

 

0.04

 

 

 



 



 



 



 

Net Income

 

 

1.02

 

 

0.73

 

 

1.90

 

 

1.36

 

          Earnings per share of common stock – assuming dilution increased by $0.29 per share in the quarter ended June 30, 2011 compared with the quarter ended June 30, 2010 primarily due to increased segment profit in each of our Business Segments and lower other postretirement and pension expense and repositioning and other charges, partially offset by increased tax expense and an increase in the number of shares outstanding.

          Earnings per share of common stock – assuming dilution increased by $0.54 per share in the six months ended June 30, 2011 compared with the six months ended June 30, 2010, primarily due to increased segment profit in each of our Business Segments and lower repositioning and other charges, and pension and other postretirement expense, partially offset by increased tax expense and an increase in the number of shares outstanding.

36


Review of Business Segments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 


 


 

 

 

2011

 

2010

 

2011

 

2010

 

 

 


 


 


 


 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

$

1,559

 

$

1,464

 

$

3,025

 

$

2,781

 

Services

 

 

1,251

 

 

1,183

 

 

2,481

 

 

2,372

 

 

 



 



 



 



 

Total

 

 

2,810

 

 

2,647

 

 

5,506

 

 

5,153

 

Automation and Control Solutions

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

 

3,331

 

 

2,747

 

 

6,467

 

 

5,394

 

Services

 

 

549

 

 

490

 

 

1,069

 

 

967

 

 

 



 



 



 



 

Total

 

 

3,880

 

 

3,237

 

 

7,536

 

 

6,361

 

Specialty Materials

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

 

1,266

 

 

1,190

 

 

2,512

 

 

2,266

 

Services

 

 

140

 

 

69

 

 

249

 

 

132

 

 

 



 



 



 



 

Total

 

 

1,406

 

 

1,259

 

 

2,761

 

 

2,398

 

Transportation Systems

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

 

990

 

 

783

 

 

1,955

 

 

1,550

 

Services

 

 

 

 

 

 

 

 

 

 

 



 



 



 



 

Total

 

 

990

 

 

783

 

 

1,955

 

 

1,550

 

Corporate

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

 

 

 

 

 

 

 

 

Services

 

 

 

 

 

 

 

 

 

 

 



 



 



 



 

Total

 

 

 

 

 

 

 

 

 

 

 



 



 



 



 

 

 

$

9,086

 

$

7,926

 

$

17,758

 

$

15,462

 

 

 



 



 



 



 

Segment Profit

 

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace

 

$

451

 

$

443

 

$

918

 

$

856

 

Automation and Control Solutions

 

 

496

 

 

401

 

 

955

 

 

787

 

Specialty Materials

 

 

281

 

 

214

 

 

565

 

 

384

 

Transportation Systems

 

 

129

 

 

89

 

 

247

 

 

158

 

Corporate

 

 

(56

)

 

(68

)

 

(124

)

 

(100

)

 

 



 



 



 



 

Total Segment Profit

 

 

1,301

 

 

1,079

 

 

2,561

 

 

2,085

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income/ (expense)(a)

 

 

8

 

 

 

 

28

 

 

(2

)

Interest and other financial charges

 

 

(96

)

 

(91

)

 

(195

)

 

(198

)

Stock compensation expense(b)

 

 

(42

)

 

(36

)

 

(91

)

 

(86

)

Pension expense(b)

 

 

(22

)

 

(46

)

 

(57

)

 

(96

)

Other postretirement income/(expense)(b)

 

 

45

 

 

(12

)

 

27

 

 

6

 

Repositioning and other charges (b)

 

 

(94

)

 

(127

)

 

(227

)

 

(268

)

 

 



 



 



 



 

Income before taxes

 

$

1,100

 

$

767

 

$

2,046

 

$

1,441

 

 

 



 



 



 



 

(a) Equity income/(loss) of affiliated companies is included in Segment Profit.

(b) Amounts included in cost of products and services sold and selling, general and administrative expenses.

37



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
June 30,

 

 

 

 

Six Months Ended
June 30,

 

 

 

 

 

 


 

%
change

 


 

%
change

 

 

 

2011

 

2010

 

 

2011

 

2010

 

 

 

 


 


 


 


 


 


 

Aerospace Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Air transport and regional

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Original equipment

 

$

363

 

$

361

 

0

%

 

$

732

 

$

684

 

7

%

 

Aftermarket

 

 

694

 

 

591

 

17

%

 

 

1,352

 

 

1,175

 

15

%

 

Business and general aviation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Original equipment

 

 

102

 

 

130

 

(21

)%

 

 

283

 

 

248

 

14

%

 

Aftermarket

 

 

299

 

 

232

 

29

%

 

 

565

 

 

458

 

24

%

 

Defense and Space Sales

 

 

1,352

 

 

1,333

 

1

%

 

 

2,574

 

 

2,588

 

(1

)%

 

 

 



 



 

 

 

 



 



 

 

 

 

Total Aerospace Sales

 

 

2,810

 

 

2,647

 

 

 

 

 

5,506

 

 

5,153

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Automation and Control Solutions Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

 

2,433

 

 

1,986

 

23

%

 

 

4,798

 

 

3,933

 

22

%

 

Solutions

 

 

1,447

 

 

1,251

 

16

%

 

 

2,738

 

 

2,428

 

13

%

 

 

 



 



 

 

 

 



 



 

 

 

 

Total Automation and Control Solutions Sales

 

 

3,880

 

 

3,237

 

 

 

 

 

7,536

 

 

6,361

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Specialty Materials Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

UOP

 

 

460

 

 

412

 

12

%

 

 

874

 

 

778

 

12

%

 

Advanced Materials

 

 

946

 

 

847

 

12

%

 

 

1,887

 

 

1,620

 

16

%

 

 

 



 



 

 

 

 



 



 

 

 

 

Total Specialty Materials Sales

 

 

1,406

 

 

1,259

 

 

 

 

 

2,761

 

 

2,398

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transportation Systems Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Turbo Technologies

 

 

990

 

 

783

 

26

%

 

 

1,955

 

 

1,550

 

26

%

 

 

 



 



 

 

 

 



 



 

 

 

 

Total Transportation Systems Sales

 

 

990

 

 

783

 

 

 

 

 

1,955

 

 

1,550

 

 

 

 

 

 



 



 

 

 

 



 



 

 

 

 

Net Sales

 

$

9,086

 

$

7,926

 

 

 

 

$

17,758

 

$

15,462

 

 

 

 

 

 



 



 

 

 

 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 


 


 

 

 

2011

 

2010

 

% change

 

2011

 

2010

 

% change

 

 

 


 


 


 


 


 


 

Net sales

 

$

2,810

 

$

2,647

 

6

%

 

$

5,506

 

$

5,153

 

7

%

 

Cost of products and services sold

 

 

2,170

 

 

2,024

 

 

 

 

 

4,204

 

 

3,933

 

 

 

 

Selling, general and administrative expenses

 

 

138

 

 

132

 

 

 

 

 

282

 

 

265

 

 

 

 

Other

 

 

51

 

 

48

 

 

 

 

 

102

 

 

99

 

 

 

 

 

 



 



 

 

 

 



 



 

 

 

 

Segment profit

 

$

451

 

$

443

 

2

%

 

$

918

 

$

856

 

7

%

 

 

 



 



 

 

 

 



 



 

 

 

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2011 vs. 2010

 

 

 


 

Factors Contributing to Year-Over-Year Change

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 


 


 


 

 

 

Sales

 

Segment
Profit

 

Sales

 

Segment
Profit

 

 

 


 


 


 


 

Organic growth/ Operational segment profit

 

 

7

%

 

9

%

 

8

%

 

11

%

Other

 

 

(1

)%

 

(7

)%

 

(1

)%

 

(4

)%

 

 



 



 



 



 

Total % Change

 

 

6

%

 

2

%

 

7

%

 

7

%

 

 



 



 



 



 

38


Aerospace sales by major customer end-markets were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

 


 


 

 

 

 

% of Aerospace
Sales

 

%
Dollar
Change

 

% of Aerospace
Sales

 

%
Dollar
Change

 

Customer End-Markets

 

 

 

 

 

 


 

 

2011

 

2010

 

 

2011

 

2010

 

 

 

 


 


 


 


 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Air transport and regional

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Original equipment

 

 

13

%

 

14

%

 

0

%

 

13

%

 

13

%

 

7

%

Aftermarket

 

 

24

%

 

22

%

 

17

%

 

25

%

 

23

%

 

15

%

Business and general aviation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Original equipment

 

 

4

%

 

5

%

 

(21

)%

 

5

%

 

5

%

 

14

%

Aftermarket

 

 

11

%

 

9

%

 

29

%

 

10

%

 

9

%

 

24

%

Defense and Space

 

 

48

%

 

50

%

 

1

%

 

47

%

 

50

%

 

(1

)%

 

 



 



 



 



 



 



 

Total

 

 

100

%

 

100

%

 

6

%

 

100

%

 

100

%

 

7

%

 

 



 



 



 



 



 



 

          Aerospace sales increased by 6 percent in the quarter ended June 30, 2011 compared with the quarter ended June 30, 2010 due to a 7 percent increase in organic growth primarily due to increased commercial sales volume, partially offset by a 1 percent reduction of revenue related to amounts recognized for payments to business and general aviation original equipment manufacturers (OEM payments of $80 million) to partially offset their pre-production costs associated with new aircraft platforms. These amounts principally reflect a re-alignment of contract milestones and related payments to more closely align with customers’ development schedules.

          Aerospace sales increased by 7 percent for the six months ended June 30, 2011 compared with the six months ended June 30, 2010 due principally to an 8 percent increase in organic growth and a 1 percent reduction in revenue as a result of the OEM Payments, discussed above.

          Details regarding the changes in sales by customer end-markets are as follows:

 

 

 

 

Air transport and regional original equipment (OE) sales were flat for the three months ended June 30, 2011 and increased by 7 percent for the six months ended June 30, 2011, driven by higher sales to our OE customers, consistent with higher production rates, platform mix and a higher win rate on selectables (components selected by purchasers of new aircraft), partially offset by lower avionics licensing in the second quarter.

 

 

 

 

Air transport and regional aftermarket sales increased for both three and six months ended June 30, 2011 by 17 and 15 percent respectively, primarily due to increased sales of spare parts and higher maintenance activity driven by the impact of increased flying hours of approximately 6 percent for both the three and six months ended, June 30, 2011.

 

 

 

 

Business and general aviation OE sales decreased by 21 percent in the quarter ended June 30, 2011 due to the unfavorable 26 percent impact of the OEM Payments discussed above. Sales increased by 14 percent in the six months ended June 30, 2011 due to a rebound from near trough levels in 2010 and strong demand in the business jet end market partially offset by the OEM Payments discussed above.

 

 

 

 

Business and general aviation aftermarket sales increased by 29 percent in the quarter ended June 30, 2011 and 24 percent in the six months ended June 30, 2011 primarily due to increased sales of avionic upgrades and spare parts, revenue associated with maintenance service agreements and licensing.

 

 

 

 

Defense and space sales increased by 1 percent in the quarter ended June 30, 2011 primarily due to higher aftermarket demand. Consistent with anticipated program ramp downs, sales for the six months ended June 30, 2010 decreased 1 percent due to lower T-55 helicopter sales internationally and, partially offset by increased engineering sales.

39


          Aerospace segment profit increased by 2 percent in the quarter ended June 30, 2011 compared with quarter ended June 30, 2010 due to a 9 percent increase in operational segment profit partially offset by a negative 7 percent impact from the OEM payments, discussed above. The increase in operational segment profit is comprised of the positive impact from higher commercial aftermarket demand, favorable aftermarket mix, price and productivity, net of inflation, partially offset by research, development and engineering (RD&E) investments. Cost of goods sold totaled $2 billion for the quarter ended June 30, 2011, an increase of approximately $146 million which is primarily as a result of the factors discussed above.

          Aerospace segment profit increased by 7 percent for the six months ended June 30, 2011 compared with the six months ended June 30, 2010 due to an increase in operational segment profit comprised of an approximate 11 percent positive impact from higher sales volume, partially offset by a negative 4 percent impact from the OEM payments, discussed above. The increase in operational segment profit is comprised of the positive impact from higher commercial aftermarket demand, favorable aftermarket mix, higher price and productivity, net of inflation, partially offset by RD&E investments. Cost of goods sold totaled $4 billion for the six months ended June 30, 2011, an increase of approximately $271 million which is primarily as a result of the factors discussed above.

Automation and Control Solutions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 


 


 

 

 

2011

 

2010

 

% Change

 

2011

 

2010

 

% Change

 

 

 


 


 


 


 


 


 

Net sales

 

$

3,880

 

$

3,237

 

 

20

%

$

7,536

 

$

6,361

 

 

18

%

Cost of products and services sold

 

 

2,612

 

 

2,198

 

 

 

 

 

5,070

 

 

4,289

 

 

 

 

Selling, general and administrative expenses

 

 

723

 

 

593

 

 

 

 

 

1,411

 

 

1,196

 

 

 

 

Other

 

 

49

 

 

45

 

 

 

 

 

100

 

 

89

 

 

 

 

 

 



 



 

 

 

 



 



 

 

 

 

Segment profit

 

$

496

 

$

401

 

 

24

%

$

955

 

$

787

 

 

21

%

 

 



 



 

 

 

 



 



 

 

 

 


 

 

 

 

 

 

 

 

 

 

 

 

2011 vs. 2010

 

 

 


 

Factors Contributing to Year-Over-Year Change

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 


 


 


 

 

 

Sales

 

Segment
Profit

 

Sales

 

Segment
Profit

 

 

 


 


 


 


 

Organic growth/ Operational segment profit

 

6

%

7

%

6

%

7

%

Foreign exchange

 

6

%

8

%

3

%

5

%

Acquisitions and divestitures, net

 

8

%

9

%

9

%

9

%

 

 


 


 


 


 

Total % Change

 

20

%

24

%

18

%

21

%

 

 


 


 


 


 

          Automation and Control Solutions (“ACS”) sales increased by 20 percent in the quarter ended June 30, 2011 compared with the quarter ended June 30, 2010, primarily due to a 8 percent growth from acquisitions, net of divestitures, 6 percent increase in organic revenue driven by increased sales volume and 6 percent favorable impact of foreign exchange.

          ACS sales increased by 18 percent in the six months ended June 30, 2011 compared with the six months ended June 30, 2010, primarily due to a 9 percent growth from acquisitions, net of divestitures, 6 percent increase in organic revenue driven by increased sales volume, and a 3 percent favorable impact of foreign exchange.

 

 

 

 

Sales in our Products businesses increased by 23 percent in the quarter ended June 30, 2011 and 22 percent in the six months ended June 30, 2011, principally due to (i) positive impact of acquisitions (most significantly Sperian), net of divestitures (ii) higher sales volume in each of our businesses due to general industrial recovery and new product introductions and (iii) the favorable impact of foreign exchange.

40



 

 

 

 

Sales in our Solutions businesses increased by 16 percent in the quarter ended June 30, 2011 and 13 percent in the six months ended June 30, 2011 primarily driven by the favorable impact of foreign exchange, volume growth in our Process Solutions business reflecting conversion to sales from backlog, and the impact of acquisitions. Orders increased in the six months ended June 30, 2011 compared to the corresponding period in 2010, and backlog increased as of June 30, 2011, primarily driven by positive impact of foreign exchange, continued favorable macro trends in energy efficiency, oil and gas infrastructure projects, and growth in emerging regions.

          ACS segment profit increased by 24 percent in the quarter ended June 30, 2011 compared with the quarter ended June 30, 2010 due to a 9 percent increase from acquisitions, 8 percent positive impact of foreign exchange and 7 percent increase in operational segment profit. The increase in operational segment profit is comprised of an approximate 5 percent positive impact from higher sales volume and 2 percent positive impact from price and productivity, net of inflation and investment for growth. Cost of goods sold totaled $2.6 billion for the quarter ended June 30, 2011, an increase of $414 million which is primarily due to acquisitions, net of divestitures, foreign exchange, higher sales volumes and inflation, partially offset by positive impact from productivity.

          ACS segment profit increased by 21 percent in the six months ended June 30, 2011 compared with the six months ended June 30, 2010 primarily due to a 9 percent increase from acquisitions, 7 percent increase in operational segment profit and 5 percent positive impact of foreign exchange. The increase in operational segment profit is comprised of an approximate 7 percent positive impact from higher sales volume. Cost of goods sold totaled $5.1 billion for the six months ended June 30, 2011, an increase of $781 million which is primarily due to acquisitions, net of divestitures, foreign exchange, higher sales volumes and inflation, partially offset by positive impact from productivity.

Specialty Materials

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 


 


 

 

 

2011

 

2010

 

Change

 

2011

 

2010

 

Change

 

 

 


 


 


 


 


 


 

Net sales

 

$

1,406

 

$

1,259

 

 

12

%

$

2,761

 

$

2,398

 

 

15

%

Cost of products and services sold

 

 

1,014

 

 

929

 

 

 

 

 

1,974

 

 

1,795

 

 

 

 

Selling, general and administrative expenses

 

 

101

 

 

97

 

 

 

 

 

198

 

 

181

 

 

 

 

Other

 

 

10

 

 

19

 

 

 

 

 

24

 

 

38

 

 

 

 

 

 



 



 

 

 

 



 



 

 

 

 

Segment profit

 

$

281

 

$

214

 

 

31

%

$

565

 

$

384

 

 

47

%

 

 



 



 

 

 

 



 



 

 

 

 


 

 

 

 

 

 

 

 

 

 

 

 

2011 vs. 2010

 

 

 


 

Factors Contributing to Year-Over-Year Change

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 


 


 


 

 

 

Sales

 

Segment
Profit

 

Sales

 

Segment
Profit

 

 

 


 


 


 


 

Organic growth/ Operational segment profit

 

10

%

29

%

14

%

46

%

Foreign exchange

 

2

%

2

%

1

%

1

%

 

 


 


 


 


 

Total % Change

 

12

%

31

%

15

%

47

%

 

&