01—Abstract
Summary
Summary of the 10-K filed March 6, 2003. Cited figures are marked; the original filing is the authoritative source.
Honeywell's 2002 Form 10-K shows a company in a difficult year: net sales fell 6% to $22,274 milliona, and the company posted a net loss of $220 million ($0.27 per share), compared with net income of $1,659 million in 2000.
The loss was driven almost entirely by $3,059 millionb of pretax repositioning, litigation, business impairment and other charges, most notably a $1,548 million asbestos charge tied to NARCO and a $877 million business impairment charge. Excluding these items, the core business remained profitable, with segment profit of $2,508 million, though it declined from $2,748 million in 2001. Operating cash flow was solid at $2,380 million, up from $1,996 million.
The Aerospace segment, roughly 40% of sales, was the main pressure point. Its sales fell 8% and segment profit fell 22%, reflecting the post-September 11 collapse in commercial air transport, including a 32% drop in OE sales to air transport customers. Automation and Control Solutions was the most resilient segment, with segment profit up 9% to $890 millionc.
Specialty Materials earned only $57 milliond, hurt by pricing pressure and a 44% decline in Advanced Circuits sales. Management guided to roughly $400 million of incremental pretax savings from repositioning actions in 2003. For investors, the central issue is the asbestos exposure.
Honeywell recorded $2.0 billion of probable insurance recoveries against an accrued asbestos liability, and it is negotiating settlements covering about 90% of current NARCO claimants. The outcome depends on court approval of a trust structure and on the Bendix sale to Federal-Mogul, which remains subject to definitive agreements and bankruptcy court confirmation.
The balance sheet remains sound, with a $2 billion revolving credit facility undrawn at year-end and total debt of $5,089 million. Ratings agencies, however, carry negative outlooks due to Aerospace weakness.
02—Key points
Key Highlights
- Net sales declined 6% to $22,274 million in 2002, from $23,652 million in 2001, reflecting divestitures, price and volume pressure.
- Net loss of $220 million ($0.27 per share) versus a net loss of $99 million in 2001, driven by $3,059 million of pretax repositioning, litigation, impairment and other charges.
- A $1,548 million asbestos charge (net of insurance) related mainly to NARCO claims, with approximately $1.8 billion in probable insurance recoveries recorded through 2018.
- Aerospace, about 40% of sales, saw sales fall 8% and segment profit fall 22% to $1,358 million as commercial air transport remained depressed after September 11, 2001.
- Automation and Control Solutions was the strongest segment, with segment profit up 9% to $890 million despite a 3% sales decline.
- Operating cash flow rose to $2,380 million from $1,996 million, supported by working capital improvements, and the company made a voluntary $830 million pension contribution.
- Dividend held at $0.75 per share and debt of $5,089 million is manageable, though all three rating agencies maintain negative outlooks.
03—Questions
Frequently Asked Questions
Why did Honeywell report a net loss in 2002?
The net loss of $220 million was caused by $3,059 million in pretax charges, including a $1,548 million asbestos-related litigation charge tied to NARCO, $877 million in business impairments mainly in Specialty Materials, and $634 million in repositioning and other charges. Excluding these items, segment profit was $2,508 million.
How serious is the asbestos exposure, and how is it being addressed?
Honeywell has agreements or agreements in principle with about 236,000 claimants, roughly 90% of expected current NARCO claimants, and is pursuing a federally supervised trust with a permanent channeling injunction. The company recorded about $1.8 billion in probable insurance recoveries and has a separate Bendix asbestos exposure addressed through a proposed sale to Federal-Mogul. Settlement is not final, and the filing acknowledges that an adverse outcome could be material.
What is the outlook for the Aerospace segment?
The filing indicates continued weakness in commercial air transport, with aftermarket sales and OE sales to airlines and manufacturers declining sharply in 2002. Defense and space sales rose, and U.S. defense spending is expected to increase in 2003. The company has accelerated cost-reduction actions to offset the downturn, and backlog stood at $7,332 million, with $6,194 million expected to convert to sales in 2003.
Is Honeywell's liquidity and balance sheet strong enough to handle these obligations?
Management states that operating cash flow and existing cash of $2,021 million should cover 2003 needs, including roughly $610 million of expected asbestos payments before insurance, about $350 million of remaining severance costs and approximately $700 million of capital expenditures. The company has a $2 billion undrawn revolving credit facility, no significant long-term debt maturities scheduled for 2003, and no required U.S. pension contributions in 2003 if returns meet assumptions.
04—Continue