What does the pending General Electric merger mean for Honeywell shareholders?

Each Honeywell common share will convert into 1.055 shares of GE common stock at closing, with fractional shares paid in cash. Shareowners approved the merger on January 10, 2001 (592 million votes for, 8 million against). Closing depends on remaining regulatory approvals, and the company expects it as early as 2001. Honeywell would then become a wholly owned GE subsidiary. The agreement includes a $1.35 billion termination fee payable by Honeywell in certain circumstances, and GE holds an option on up to 19.9% of Honeywell's shares exercisable in the same circumstances.

Why did reported earnings grow while underlying performance was more modest?

Reported 2000 net income of $1.66 billion included a net after-tax charge of $634 million ($0.78 per share) for asset impairments, repositioning, environmental and other items, partly offset by a gain on the TCAS divestiture. The 1999 comparison also carried a $624 million net charge. Adjusting for both years, net income grew about 6%, not 8%. Segment profit, which excludes these items, rose 11%.

How much of the growth came from acquisitions versus the core business?

Acquisitions and divestitures added 6 percentage points to 2000 sales growth, mainly from the $2.2 billion Pittway acquisition, which supported Automation & Control. Foreign exchange cut 2 points, and volume and price added 1 point. Organic growth was therefore roughly flat to modestly positive, so investors should view the top-line increase as largely acquisition-driven.

What are the major litigation risks?

The largest is the Litton antitrust case. A retrial produced a $250 million verdict, which the court reduced to a $660 million judgment plus about $35 million in fees. Honeywell and Litton have both appealed to the Ninth Circuit, and execution is stayed. Honeywell says the verdict should be overturned and has recorded no provision, but notes that an adverse outcome could be material. Separately, class action and derivative suits over alleged misstatements from December 1999 to June 2000 are pending; management expects to prevail but acknowledges a possible material outcome. A patent/tort claim was also remanded, and management believes a reasonable royalty award would not be material.

Is Honeywell's cash flow and balance sheet under pressure?

Operating cash flow declined 16% to $1.99 billion, due to merger and repositioning spending, lower working capital and higher non-cash pension income. Investing outflows of $2.71 billion were driven by acquisitions ($2.52 billion cash paid, mainly Pittway). Financing was nearly neutral at $70 million net outflow because of new long-term debt of $1.81 billion offsetting commercial paper repayments. Total debt rose to $5.62 billion, and shareowners' equity increased to $9.71 billion. Management believes available cash and committed credit lines provide adequate liquidity. Cash fell to $1.20 billion from $1.99 billion.

HON 10-K FY2000 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 30, 2001. Cited figures are marked; the original filing is the authoritative source.

Honeywell International's fiscal 2000 10-K (filed March 30, 2001) reports net sales of $25.0 billion^a, up 5% from $23.7 billion in 1999, with growth driven mainly by the Pittway acquisition (6 points) partially offset by foreign exchange (-2 points).

Reported net income rose 8% to $1.66 billion^b, or $2.05 per diluted share, from $1.54 billion ($1.90). Excluding one-time items in both years (2000 included a $634 million net after-tax charge from asset impairments, repositioning and environmental charges, partly offset by a gain on the TCAS divestiture; 1999 included a $624 million net charge), underlying earnings grew about 6%. Segment profit rose 11% to $3.63 billion, with Aerospace Solutions and Automation & Control leading and Performance Materials declining 24% on higher raw material costs.

The most important context for investors is that the company is being acquired by General Electric. Under the October 2000 merger agreement, each Honeywell share converts into 1.055 GE shares, and shareowners approved the deal on January 10, 2001. The deal remains subject to regulatory review, with closing targeted for as early as 2001.

Honeywell also rescinded its share repurchase program, and the agreement carries a $1.35 billion^c termination fee plus a GE option on 19.9% of outstanding shares. Management expects over $600 million of pretax savings from 2000-2001 actions in 2001, rising to $780 million in 2002, and plans a further restructuring charge in Q1 2001.

Balance sheet leverage increased, with total debt rising 11% to $5.6 billion^d following the $2.2 billion Pittway acquisition, while cash used in investing activities was $2.7 billion. Material legal exposure remains in the Litton antitrust case, where a $660 million judgment plus about $35 million in fees is under appeal and no provision has been recorded, and in shareowner securities suits that management believes lack merit.

02—Key points

Key Highlights

Net sales grew 5% to $25.02 billion; reported diluted EPS rose 8% to $2.05, though 2000 included net after-tax charges of $0.78 per share.
Pending GE merger: each Honeywell share exchangeable for 1.055 GE shares; approved by shareowners January 10, 2001; subject to regulatory review, with a $1.35 billion termination fee.
Automation & Control sales rose 21% to $7.38 billion (largely the Pittway acquisition), and segment profit rose 29% to $986 million.
Aerospace Solutions remained the largest segment at $9.99 billion in sales and $2.20 billion in segment profit (up 14%), with aerospace sales at 40% of total sales.
Performance Materials segment profit fell 24% to $334 million on higher raw material costs and chip packaging and pharmaceutical chemical losses.
Total debt increased 11% to $5.62 billion; the company rescinded its share buyback program in October 2000 and repurchased only $166 million of stock during the year.
Litton antitrust judgment of $660 million plus about $35 million in fees is on appeal to the Ninth Circuit; no provision has been recorded, and management says the award should be overturned.

03—Questions

Frequently Asked Questions

What does the pending General Electric merger mean for Honeywell shareholders?
Each Honeywell common share will convert into 1.055 shares of GE common stock at closing, with fractional shares paid in cash. Shareowners approved the merger on January 10, 2001 (592 million votes for, 8 million against). Closing depends on remaining regulatory approvals, and the company expects it as early as 2001. Honeywell would then become a wholly owned GE subsidiary. The agreement includes a $1.35 billion termination fee payable by Honeywell in certain circumstances, and GE holds an option on up to 19.9% of Honeywell's shares exercisable in the same circumstances.
Why did reported earnings grow while underlying performance was more modest?
Reported 2000 net income of $1.66 billion included a net after-tax charge of $634 million ($0.78 per share) for asset impairments, repositioning, environmental and other items, partly offset by a gain on the TCAS divestiture. The 1999 comparison also carried a $624 million net charge. Adjusting for both years, net income grew about 6%, not 8%. Segment profit, which excludes these items, rose 11%.
How much of the growth came from acquisitions versus the core business?
Acquisitions and divestitures added 6 percentage points to 2000 sales growth, mainly from the $2.2 billion Pittway acquisition, which supported Automation & Control. Foreign exchange cut 2 points, and volume and price added 1 point. Organic growth was therefore roughly flat to modestly positive, so investors should view the top-line increase as largely acquisition-driven.
What are the major litigation risks?
The largest is the Litton antitrust case. A retrial produced a $250 million verdict, which the court reduced to a $660 million judgment plus about $35 million in fees. Honeywell and Litton have both appealed to the Ninth Circuit, and execution is stayed. Honeywell says the verdict should be overturned and has recorded no provision, but notes that an adverse outcome could be material. Separately, class action and derivative suits over alleged misstatements from December 1999 to June 2000 are pending; management expects to prevail but acknowledges a possible material outcome. A patent/tort claim was also remanded, and management believes a reasonable royalty award would not be material.
Is Honeywell's cash flow and balance sheet under pressure?
Operating cash flow declined 16% to $1.99 billion, due to merger and repositioning spending, lower working capital and higher non-cash pension income. Investing outflows of $2.71 billion were driven by acquisitions ($2.52 billion cash paid, mainly Pittway). Financing was nearly neutral at $70 million net outflow because of new long-term debt of $1.81 billion offsetting commercial paper repayments. Total debt rose to $5.62 billion, and shareowners' equity increased to $9.71 billion. Management believes available cash and committed credit lines provide adequate liquidity. Cash fell to $1.20 billion from $1.99 billion.

04—Continue

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