SEC Company Response from HONEYWELL INTERNATIONAL INC (HON) (CIK 0000773840) (HON) — Dec 16, 2005
HONEYWELL INTERNATIONAL INC (HON) (CIK 0000773840)
Date: Dec. 16, 2005 · CIK: 0000773840 · Accession: 0000950117-05-004792
AI Filing Summary & Sentiment
Reasoning
Letter
Securities and Exchange Commission Honeywell International Inc. Form 10-K: For the Year Ended December 31, 2004 Form 10-Q: For the Quarter Ended September 30, 2005 File Number: 001- 08974
Dear Mr. Fay:
This letter provides Honeywell International Inc.’s (Honeywell) response to your letter to David M. Cote, dated November 18, 2005, setting forth the Staff’s comments on the above-referenced Form 10-K and Form 10-Q. The numbered paragraphs below correspond to the numbered paragraphs in your letter.
Form 10-K: For the Year Ended December 31, 2004
Management’s Discussion and Analysis .... page 15
Critical Accounting Policies, page 18
1.
Staff’s Comment: It appears for the most part that the disclosure here provides information that is already available in the notes to the financial statements. Your disclosure here should provide greater insight into the quality, sensitivity and variability regarding all key assumptions, judgments, uncertainties and estimates that have or may materially affect financial condition and operating performance. Your disclosure should be explicit as to which of these factors identified here and in your notes to the financial statements are most sensitive to change with a material effect on your financial statements and that have caused or may cause material differences between estimated amounts and actual results. To the extent practicable and meaningful, you should provide quantitative disclosures of these factors. Your disclosure here in regard to the expected rate of return and discount rate associated with defined benefit pension plans is an
example of this. Refer to Section V of FR-72 for further guidance. Please revise as indicated. Provide us with a copy of your intended disclosure.
Response: In our 2005 Form 10-K to be filed in February 2006 we will provide the following revised disclosure for our critical accounting policies. For illustrative purposes, the text below reflects 2004 information which will be updated when we file our 2005 Form 10-K.
•
Long-Lived Assets (including Tangible and Definite-Lived Intangible Assets) – To conduct our global business operations and execute our business strategy, we acquire tangible and intangible assets, including property, plant and equipment and definite-lived intangible assets. At December 31, 2004, the net carrying amount of these long-lived assets totaled $5,535 million. The determination of useful lives (for depreciation/amortization purposes) and whether or not these assets are impaired involves the use of accounting estimates and assumptions which bear the risk of change which could materially impact our financial condition or operating performance if actual results differ from such estimates and assumptions. We periodically evaluate the recoverability of the carrying amount of our long-lived assets whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset group may not be fully recoverable. The principal factors we consider in deciding when to perform an impairment review are as follows:
•
significant under-performance (i.e., declines in sales, earnings or cash flows) of a business or product line in relation to expectations;
•
annual operating plans or five-year strategic plans that indicate an unfavorable trend in operating performance of a business or product line;
•
significant negative industry or economic trends; and
•
significant changes or planned changes in our use of the assets.
Once it is determined that an impairment review is necessary, recoverability of assets is measured by comparing the carrying amount of the asset grouping to the estimated future undiscounted cash flows. If the carrying amount exceeds the estimated future undiscounted cash flows, the asset grouping is considered to be impaired. The impairment is then measured as the difference between the carrying amount of the asset grouping and its fair value. We use the best information available to determine fair value, which are usually either market prices (if available) or an estimate of the future discounted cash flow. The key estimates in our discounted cash flow analysis include expected industry growth rates, our assumptions as to volume, selling prices and costs, and the discount rate selected. As described in more detail in the repositioning and other charges section of our MD&A, we have recorded impairment charges related to long-lived assets of $42 and $877 million in 2004 and 2002, respectively, principally related to our Performance Fibers, Nylon and Metglas Specialty Materials businesses and our Friction Materials business. These businesses were significantly under-performing or were in industries with negative economic trends and subsequently these businesses were sold or significantly restructured.
•
Income Taxes – As of December 31, 2004, we recognized a net deferred tax asset of $1,671 million, less a valuation allowance of $338 million. Net deferred tax assets are primarily comprised of net deductible temporary differences, net operating loss carryforwards and tax credit carryforwards that are available to reduce taxable income in future periods. The determination of the amount of valuation allowance to be provided on recorded deferred tax assets involves estimates regarding (1) the timing and amount of the reversal of taxable temporary differences, (2) future taxable income, and (3) the impact of tax planning strategies. A valuation allowance is required when it is more likely than not that all or a portion of a deferred tax asset will not be realized. In assessing the need for a valuation allowance, we consider all available positive and negative evidence, including past operating results, projections of future taxable income and the feasibility of ongoing tax planning strategies. The projections of future taxable income include a number of estimates and assumptions regarding our volume, pricing and costs. Additionally, valuation allowances related to deferred tax assets can be impacted by changes to tax laws.
Our net deferred tax asset of $1,671 million is comprised of $1,334 million related to U.S. operations and $337 million related to non-U.S. operations. The U.S. deferred tax asset of $1,334 million is comprised of net deductible temporary differences, tax credit carryforwards and state tax net operating losses which we believe will more likely than not be realized through the generation of future taxable income in the U.S. and tax planning strategies. We maintain a valuation allowance of $88 million against such asset primarily related to state tax net operating losses. The non-U.S. deferred tax asset of $337 million is comprised principally of net operating loss carryforwards, mainly in Germany, France and the Netherlands. We maintain a valuation allowance of $250 million against such asset reflecting our historical experience and lower expectations of taxable income over the applicable carryforward periods. As more fully described in Note 7 to our consolidated financial statements, we have increased our valuation allowance by $39, $108 and $80 million in 2004, 2003 and 2002, respectively. In the event we determine that we will not be able to realize our deferred tax assets in the future, we will reduce such amounts through a charge to income in the period such determination is made. Conversely, if we determine that we will be able to realize deferred tax assets in excess of the carrying amounts, we will decrease the recorded valuation allowance through a credit to income in the period that such determination is made.
•
Sales Recognition on Long-Term Contracts – In 2004, we recognized approximately 8 percent of our total net sales using the percentage-of-completion method for long-term contracts in our Automation and Control Solutions and Aerospace reportable segments. These long-term contracts are measured on the cost-to-cost basis for engineering-type contracts and the units-of-delivery basis for production-type contracts. Accounting for these contracts involves management judgment in estimating total contract revenue and cost. Contract revenues are largely determined by negotiated contract prices and quantities, modified by our assumptions regarding contract options, change orders, incentive and award provisions associated with technical performance and price adjustment clauses (such as inflation or index-based clauses). Contract costs are incurred over a period of time, which can be several years, and the estimation of these costs
requires management judgment. Cost estimates are largely based on negotiated or estimated purchase contract terms, historical performance trends and other economic projections. Significant factors that influence these estimates include inflationary trends, technical and schedule risk, internal and subcontractor performance trends, business volume assumptions, asset utilization, and anticipated labor agreements. Revenue and cost estimates are regularly monitored and revised based on changes in circumstances. Anticipated losses on long-term contracts are recognized when such losses become evident. We maintain financial controls over the customer qualification, contract pricing and estimation processes to reduce the risk of contract losses.
We believe that our existing disclosure of critical accounting policies relating to Contingent Liabilities, Insurance for Asbestos Related Liabilities, Defined Benefit Pension Plans and Aerospace Customer Incentives currently includes an appropriate level of detail (including information in related footnotes in our financial statements which are specifically cross-referenced) and clearly identifies those factors that are most sensitive to change and that have resulted or may result in material differences between estimates and actual results.
Aerospace Customer Incentives, page 21
2.
Staff’s Comment: Please provide us with an analysis of the components of the customer incentives capitalized for 2004 and 2003. As part of your analysis, identify the party that received the incentive, identify the incentive provided to the customer, quantify the value attributed to the incentive, identify the aircraft to which the incentive relates, and tell us the date in which you were contractually selected as the source provider.
Our Response: As stated in our January 24, 2005 letter to the Staff, our capitalized sales incentives relate to two product categories: aircraft wheel and braking system hardware and aircraft auxiliary power units (APUs). The table below is a summary of the customer incentives capitalized in 2004 and 2003 for these two product categories (dollars in millions):
*
*
*
Confidential Treatment Requested By Honeywell
(entire page omitted)
*** designates confidential portions omitted from Honeywell’s public filing. Such portion is the subject of a Confidential Treatment Request and has been filed separately with the Commission.
3.
Staff’s Comment: Please identify in future filings the significant projects underlying the capitalized consumer incentives. In addition, discuss the approximate time frame between the capitalization of the customer incentive and the initial generation of cash flows.
Our Response: In our 2005 Form 10-K to be filed in February 2006, and in all future periodic filings, we will disclose the aircraft platforms underlying the significant capitalized customer incentives for the current period and the time frame between the capitalization of the customer incentives and the initial generation of aftermarket revenues. This time frame principally depends upon the terms of the negotiated contract with either the aircraft manufacturer or airline and could be as short as a few months where a maintenance service agreement exists with an airline, or as long as five years where aftermarket revenues will commence only after expiration of the warranty service period. Generally, capitalized customer incentives are expected to begin generating aftermarket revenues and cash flows within 2 to 5 years for APUs and within 2 to 3 years for Wheel & Braking Systems.
4.
Staff’s Comment: Please clarify the reason why you provide sales incentives to both commercial aircraft manufacturers and airlines, and not solely the manufacturers. In addition, explain to us when you would provide the incentive to one and not the other, and tell us whether you would ever provide a sales incentive to both for the same type of aircraft.
Our Response: Sales incentives are offered to commercial aircraft manufacturers and/or airlines in order for our products to be selected for installation on newly introduced aircraft platforms. This selection is critical to participation in the significant aftermarket for the related consumable products. The value of the incentives is relatively small in comparison to the value of the aftermarket revenue stream.
The decision to offer a sales incentive to the commercial aircraft manufacturer, the airlines or both is dependent on how the aircraft manufacturer intends to source the component. If the component is to be sourced from only one vendor, then we may offer a sales incentive to the aircraft manufacturer. As we stated in our January 24, 2005 letter to the Staff, this is typically the case with our APUs. If the component is to be sourced from multiple vendors (as in the case of our wheel and braking system hardware), then, in addition to the sales incentives provided to the aircraft manufacturer, we may also offer incentives to the airlines to induce them to specify our equipment in their aircraft order.
Notes to Financial Statements, page 47
Note 17 – Financial Instruments, page 66
Commodity Price Risk Management, page 67
5.
Staff’s Comment: We note your disclosure about the use of long term contracts with suppliers and purchase agreements for commodities but could not locate related disclosures in accordance with paragraph 7 of FAS 47. Please advise or revise accordingly.
Our Response: While we do use long term contracts and forward purchase agreements with our third party suppliers for certain commodities such as natural gas used in our Specialty Materials segment, these agreements do not meet all of the criteria of unconditional purchase obligations as defined in paragraph 6 of FAS 47 (principally the criteria in paragraph 6b) and, accordingly, the disclosure requirements in paragraph 7 of FAS 47 are not applicable.
Note 31 – Commitments and Contingencies, page 71
6.
Staff’s Comment: Please tell us and clearly disclose in future filings the respective liabilities accrued for NARCO and Bendix at each period ended date.
Our Response: As of September 30, 2005, the total asbestos related liability balances for NARCO and Bendix were $2,144 and $274 million, respectively. As of December 31, 2004, the total asbestos related liability balances for NARCO and Bendix were $2,395 and $355 million, respectively. In our 2005 Form 10-K to be filed in February 2006, and in all future periodic filings, we will disclose
Show Raw Text
CORRESP
1
filename1.htm
Honeywell
Thomas A. Szlosek
Honeywell
Vice President and Controller
P. O. Box 1219
Morristown, NJ 07962-1219
973-455-2215
973-455-6904 Fax
December 16, 2005
Michael Fay
Accounting Branch Chief
Securities and Exchange Commission
CF/AD5
100 F Street, NE
Washington, D.C. 20549
RE:
Honeywell International Inc.
Form 10-K: For the Year Ended December 31, 2004
Form 10-Q: For the Quarter Ended September 30, 2005
File Number: 001- 08974
Dear Mr. Fay:
This
letter provides Honeywell International Inc.’s (Honeywell) response to
your letter to David M. Cote, dated November 18, 2005, setting forth the Staff’s
comments on the above-referenced Form 10-K and Form 10-Q. The numbered paragraphs
below correspond to the numbered paragraphs in your letter.
Form 10-K: For the Year Ended December 31, 2004
Management’s Discussion and Analysis .... page 15
Critical Accounting Policies, page 18
1.
Staff’s Comment: It appears for the most part that the disclosure here provides information that is already available in the notes to the financial statements. Your disclosure here should provide greater insight into the quality, sensitivity and variability regarding all key assumptions, judgments, uncertainties and estimates that have or may materially affect financial condition and operating performance. Your disclosure should be explicit as to which of these factors identified here and in your notes to the financial statements are most sensitive to change with a material effect on your financial statements and that have caused or may cause material differences between estimated amounts and actual results. To the extent practicable and meaningful, you should provide quantitative disclosures of
these factors. Your disclosure here in regard to the expected rate of return and discount rate associated with defined benefit pension plans is an
example of this. Refer to Section V of FR-72 for further guidance. Please revise as indicated. Provide us with a copy of your intended disclosure.
Response: In our 2005 Form 10-K to be filed in February 2006 we will provide the following revised disclosure for our critical accounting policies. For illustrative purposes, the text below reflects 2004 information which will be updated when we file our 2005 Form 10-K.
•
Long-Lived Assets (including Tangible and Definite-Lived Intangible Assets) – To conduct our global business operations and execute our business strategy, we acquire tangible and intangible assets, including property, plant and equipment and definite-lived intangible assets. At December 31, 2004, the net carrying amount of these long-lived assets totaled $5,535 million. The determination of useful lives (for depreciation/amortization purposes) and whether or not these assets are impaired involves the use of accounting estimates and assumptions which bear the risk of change which could materially impact our financial condition or operating performance if actual results differ from such estimates and assumptions. We periodically evaluate the recoverability of the carrying amount of
our long-lived assets whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset group may not be fully recoverable. The principal factors we consider in deciding when to perform an impairment review are as follows:
•
significant under-performance (i.e., declines in sales, earnings or cash flows) of a business or product line in relation to expectations;
•
annual operating plans or five-year strategic plans that indicate an unfavorable trend in operating performance of a business or product line;
•
significant negative industry or economic trends; and
•
significant changes or planned changes in our use of the assets.
Once it is determined that an impairment review is necessary, recoverability of assets is measured by comparing the carrying amount of the asset grouping to the estimated future undiscounted cash flows. If the carrying amount exceeds the estimated future undiscounted cash flows, the asset grouping is considered to be impaired. The impairment is then measured as the difference between the carrying amount of the asset grouping and its fair value. We use the best information available to determine fair value, which are usually either market prices (if available) or an estimate of the future discounted cash flow. The key estimates in our discounted cash flow analysis include expected industry growth rates, our assumptions as to volume, selling prices and costs, and the discount rate selected. As described in more detail in the repositioning and other charges section of our MD&A, we have
recorded impairment charges related to long-lived assets of $42 and $877 million in 2004 and 2002, respectively, principally related to our Performance Fibers, Nylon and Metglas Specialty Materials businesses and our Friction Materials business. These businesses were significantly under-performing or were in industries with negative economic trends and subsequently these businesses were sold or significantly restructured.
2
•
Income Taxes – As of December 31, 2004, we recognized a net deferred tax asset of $1,671 million, less a valuation allowance of $338 million. Net deferred tax assets are primarily comprised of net deductible temporary differences, net operating loss carryforwards and tax credit carryforwards that are available to reduce taxable income in future periods. The determination of the amount of valuation allowance to be provided on recorded deferred tax assets involves estimates regarding (1) the timing and amount of the reversal of taxable temporary differences, (2) future taxable income, and (3) the impact of tax planning strategies. A valuation allowance is required when it is more likely than not that all or a portion of a deferred tax asset will not be realized. In assessing the need for a valuation allowance, we consider all
available positive and negative evidence, including past operating results, projections of future taxable income and the feasibility of ongoing tax planning strategies. The projections of future taxable income include a number of estimates and assumptions regarding our volume, pricing and costs. Additionally, valuation allowances related to deferred tax assets can be impacted by changes to tax laws.
Our
net deferred tax asset of $1,671 million is comprised of $1,334 million related
to U.S. operations and $337 million related to non-U.S. operations. The U.S.
deferred tax asset of $1,334 million is comprised of net deductible temporary
differences, tax credit carryforwards and state tax net operating losses which
we believe will more likely than not be realized through the generation of future
taxable income in the U.S. and tax planning strategies. We maintain a valuation
allowance of $88 million against such asset primarily related to state tax net
operating losses. The non-U.S. deferred tax asset of $337 million is comprised
principally of net operating loss carryforwards, mainly in Germany, France and
the Netherlands. We maintain a valuation allowance of $250 million against such
asset reflecting our historical experience and lower expectations of taxable
income over the applicable carryforward periods. As more fully described in
Note 7 to our consolidated financial statements, we have increased our valuation
allowance by $39, $108 and $80 million in 2004, 2003 and 2002, respectively.
In the event we determine that we will not be able to realize our deferred tax
assets in the future, we will reduce such amounts through a charge to income
in the period such determination is made. Conversely, if we determine that we
will be able to realize deferred tax assets in excess of the carrying amounts,
we will decrease the recorded valuation allowance through a credit to income
in the period that such determination is made.
•
Sales Recognition on Long-Term Contracts – In 2004, we recognized approximately 8 percent of our total net sales using the percentage-of-completion method for long-term contracts in our Automation and Control Solutions and Aerospace reportable segments. These long-term contracts are measured on the cost-to-cost basis for engineering-type contracts and the units-of-delivery basis for production-type contracts. Accounting for these contracts involves management judgment in estimating total contract revenue and cost. Contract revenues are largely determined by negotiated contract prices and quantities, modified by our assumptions regarding contract options, change orders, incentive and award provisions associated with technical performance and price adjustment clauses (such as inflation or index-based clauses). Contract costs
are incurred over a period of time, which can be several years, and the estimation of these costs
3
requires management judgment. Cost estimates are largely based on negotiated or estimated purchase contract terms, historical performance trends and other economic projections. Significant factors that influence these estimates include inflationary trends, technical and schedule risk, internal and subcontractor performance trends, business volume assumptions, asset utilization, and anticipated labor agreements. Revenue and cost estimates are regularly monitored and revised based on changes in circumstances. Anticipated losses on long-term contracts are recognized when such losses become evident. We maintain financial controls over the customer qualification, contract pricing and estimation processes to reduce the risk of contract losses.
We believe that our existing disclosure of critical accounting policies relating to Contingent Liabilities, Insurance for Asbestos Related Liabilities, Defined Benefit Pension Plans and Aerospace Customer Incentives currently includes an appropriate level of detail (including information in related footnotes in our financial statements which are specifically cross-referenced) and clearly identifies those factors that are most sensitive to change and that have resulted or may result in material differences between estimates and actual results.
Aerospace Customer Incentives, page 21
2.
Staff’s Comment: Please provide us with an analysis of the components of the customer incentives capitalized for 2004 and 2003. As part of your analysis, identify the party that received the incentive, identify the incentive provided to the customer, quantify the value attributed to the incentive, identify the aircraft to which the incentive relates, and tell us the date in which you were contractually selected as the source provider.
Our
Response: As stated in our January 24, 2005 letter to
the Staff, our capitalized sales incentives relate to two product categories:
aircraft wheel and braking system hardware and aircraft auxiliary power units
(APUs). The table below is a summary of the customer incentives capitalized
in 2004 and 2003 for these two product categories (dollars in millions):
4
*
*
*
Confidential
Treatment Requested By Honeywell
(entire
page omitted)
*** designates confidential portions omitted from Honeywell’s public filing. Such portion is the subject of a Confidential Treatment Request and has been filed separately with the Commission.
5
3.
Staff’s Comment: Please identify in future filings the significant projects underlying the capitalized consumer incentives. In addition, discuss the approximate time frame between the capitalization of the customer incentive and the initial generation of cash flows.
Our
Response: In our 2005 Form 10-K to be filed in February
2006, and in all future periodic filings, we will disclose the aircraft platforms
underlying the significant capitalized customer incentives for the current period
and the time frame between the capitalization of the customer incentives and
the initial generation of aftermarket revenues. This time frame principally
depends upon the terms of the negotiated contract with either the aircraft manufacturer
or airline and could be as short as a few months where a maintenance service
agreement exists with an airline, or as long as five years where aftermarket
revenues will commence only after expiration of the warranty service period.
Generally, capitalized customer incentives are expected to begin generating
aftermarket revenues and cash flows within 2 to 5 years for APUs and within
2 to 3 years for Wheel & Braking Systems.
4.
Staff’s Comment: Please clarify the reason why you provide sales incentives to both commercial aircraft manufacturers and airlines, and not solely the manufacturers. In addition, explain to us when you would provide the incentive to one and not the other, and tell us whether you would ever provide a sales incentive to both for the same type of aircraft.
Our Response: Sales incentives are offered to commercial aircraft manufacturers and/or airlines in order for our products to be selected for installation on newly introduced aircraft platforms. This selection is critical to participation in the significant aftermarket for the related consumable products. The value of the incentives is relatively small in comparison to the value of the aftermarket revenue stream.
The decision to offer a sales incentive to the commercial aircraft manufacturer, the airlines or both is dependent on how the aircraft manufacturer intends to source the component. If the component is to be sourced from only one vendor, then we may offer a sales incentive to the aircraft manufacturer. As we stated in our January 24, 2005 letter to the Staff, this is typically the case with our APUs. If the component is to be sourced from multiple vendors (as in the case of our wheel and braking system hardware), then, in addition to the sales incentives provided to the aircraft manufacturer, we may also offer incentives to the airlines to induce them to specify our equipment in their aircraft order.
6
Notes to Financial Statements, page 47
Note 17 – Financial Instruments, page 66
Commodity Price Risk Management, page 67
5.
Staff’s Comment: We note your disclosure about the use of long term contracts with suppliers and purchase agreements for commodities but could not locate related disclosures in accordance with paragraph 7 of FAS 47. Please advise or revise accordingly.
Our
Response: While we do use long term contracts and forward
purchase agreements with our third party suppliers for certain commodities such
as natural gas used in our Specialty Materials segment, these agreements do
not meet all of the criteria of unconditional purchase obligations as defined
in paragraph 6 of FAS 47 (principally the criteria in paragraph 6b) and, accordingly,
the disclosure requirements in paragraph 7 of FAS 47 are not applicable.
Note 31 – Commitments and Contingencies, page 71
6.
Staff’s Comment: Please tell us and clearly disclose in future filings the respective liabilities accrued for NARCO and Bendix at each period ended date.
Our Response: As of September 30, 2005, the total asbestos related liability balances for NARCO and Bendix were $2,144 and $274 million, respectively. As of December 31, 2004, the total asbestos related liability balances for NARCO and Bendix were $2,395 and $355 million, respectively. In our 2005 Form 10-K to be filed in February 2006, and in all future periodic filings, we will disclose