Honeywell 2003 Annual Report Download - page 393

We continually monitor the creditworthiness of our customers to which we grant
credit terms in the normal course of business. While concentrations of credit
risk associated with our trade accounts and notes receivable are considered
minimal due to our diverse customer base, a significant portion of our customers
are in the commercial air transport industry (aircraft manufacturers and
airlines) accounting for approximately 12 percent of our consolidated sales in
2003. Following the abrupt downturn in the aviation industry after the terrorist
attacks on September 11, 2001 and the already weak economy, we modified terms
and conditions of our credit sales 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 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.
We hedge monetary assets and liabilities denominated in foreign 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 hedge our exposure to changes in foreign exchange
rates principally with forward contracts. Forward contracts are marked-to-market
with the resulting gains and losses similarly recognized in earnings offsetting
the gains and losses on the foreign currency denominated monetary assets and
liabilities being hedged.
We partially hedge forecasted 2004 sales and purchases denominated in foreign
currencies with currency forward contracts. When the dollar strengthens against
foreign currencies, the decline in value of forecasted foreign currency cash
inflows (sales) or outflows (purchases) is partially offset by the recognition
of gains (sales) and losses (purchases), respectively, in the value of the
forward contracts designated as hedges. Conversely, when the dollar weakens
against foreign currencies, the increase in value of forecasted foreign currency
cash inflows (sales) or outflows (purchases) is partially offset by the
recognition of losses (sales) and gains (purchases), respectively, in the value
of the forward contracts designated as hedges. Market value gains and losses on
these contracts are recognized in earnings when the hedged transaction is
recognized. All open forward contracts mature by December 31, 2004.
At December 31, 2003 and 2002, we had contracts with notional amounts of $641
and $1,203 million, respectively, to exchange foreign currencies, principally in
the Euro countries and Great Britain.
Commodity Price Risk Management
Our exposure to market risk for commodity prices arises from changes in our cost
of production. We mitigate our exposure to commodity price risk through the use
of long-term, firm-price contracts with our suppliers and forward commodity
purchase agreements with third parties hedging anticipated purchases of several
commodities (principally natural gas). Forward commodity purchase agreements
are marked-to-market, with the resulting gains and losses recognized in earnings
when the hedged transaction is recognized.
Interest Rate Risk Management
We use a combination of financial instruments, including 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 December 31, 2003 and 2002, interest rate swap agreements
designated as fair value hedges effectively changed $1,189 and $1,132 million,
respectively, of fixed rate debt at an average rate of 6.45 and 6.51 percent,
respectively, to LIBOR based floating rate debt. Our interest rate swaps mature
through 2007.
Fair Value of Financial Instruments
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 value. Summarized below are the
carrying values and fair values of our other financial instruments at December
31, 2003 and 2002. The fair values are based on the quoted market prices for the
issues (if traded), current rates offered to us for debt of the same remaining
maturity and characteristics, or other valuation techniques, as appropriate.