Honeywell 2003 Annual Report Download - page 360

handling, manufacture, use and disposal of hazardous or toxic substances are in
accord 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 toxic 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 at our owned sites, and jointly as a
member of industry groups at non-owned sites, to determine the feasibility of
various remedial techniques to address environmental matters. It is our policy
(see Note 1 of Notes to Financial Statements) to record appropriate liabilities
for environmental matters when environmental assessments are made or remedial
efforts or damage claim payments are probable and the costs can be reasonably
estimated. With respect to site contamination, the timing of these accruals is
generally no later than the completion of feasibility studies. 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 litigation
and settlements of personal injury and property damage claims, regulatory
approval of cleanup projects, remedial techniques to be utilized and agreements
with other parties.
Remedial response and voluntary cleanup expenditures were $77, $81 and $82
million in 2003, 2002, and 2001, respectively, and are currently estimated to be
approximately $90 million in 2004. We expect to fund such expenditures from
operating cash flow.
Remedial response and voluntary cleanup costs charged against pretax earnings
were $235, $60 and $152 million in 2003, 2002 and 2001, respectively. At
December 31, 2003 and 2002, the recorded liability for environmental matters was
$593 and $435 million, respectively. In addition, in 2003 and 2002 we incurred
operating costs for ongoing businesses of approximately $80 and $75 million,
respectively, relating to compliance with environmental regulations.
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 environmental matters
will have a material adverse effect on our consolidated financial position.
See Note 3 of Notes to Financial Statements for a discussion of our legal and
environmental charges and Note 21 of Notes to Financial Statements for a
discussion of our commitments and contingencies, including those related to
environmental matters and toxic tort litigation.
Financial Instruments
As a result of our global operating and financing activities, we are exposed to
market risks from changes in interest and foreign currency exchange rates and
commodity prices, which may adversely affect our operating results and financial
position. We minimize our risks from interest and foreign currency exchange rate
and commodity price fluctuations through our normal operating and financing
activities and, when deemed appropriate, through the use of derivative financial
instruments. We do not use derivative financial instruments for trading or other
speculative purposes and do not use leveraged derivative financial instruments.
A summary of our accounting policies for derivative financial instruments is
included in Note 1 of Notes to Financial Statements.
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 anticipated
transactions arising from international trade. Our objective is to preserve the
economic value of cash flows in non-functional currencies. We attempt to have
all transaction exposures hedged with natural offsets to the fullest extent
possible and, once these opportunities have been exhausted, through foreign
currency forward and option agreements with third parties. Our principal
currency exposures relate to the Euro, the British pound, the Canadian dollar,
and the U.S. dollar.
Our exposure to market risk from changes in interest rates relates primarily to
our debt obligations. As described in Notes 15 and 17 of Notes to Financial
Statements, we issue both fixed and variable rate debt and use interest rate
swaps to manage our exposure to interest rate movements and reduce overall
borrowing costs.
Financial instruments, including derivatives, expose us to counterparty credit