Honeywell 2004 Annual Report Download - page 68

HONEYWELL INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share amounts)
underlying stock at the grant date. Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based
Compensation” (SFAS No. 123), as amended, allows, but does not require, companies to record compensation cost for fixed stock
option plans using a fair value based method. As permitted by SFAS No. 123, we elected to continue to account for compensation cost
for our fixed stock option plans using the intrinsic value based method under APB No. 25. See Recent Accounting Pronouncements
section of this Note for discussion of recently issued rules regarding accounting for share-based payments. The following table sets
forth pro forma information as if compensation cost had been determined consistent with the requirements of SFAS No. 123.
2004 2003 2002
Net income (loss), as reported $1,281 $1,324 $ (220)
Deduct: Total stock-based employee compensation cost determined under fair value method for
fixed stock option plans, net of related tax effects (42) (48) (64)
Pro forma net income (loss) $1,239 $1,276 $ (284)
Earnings (loss) per share of common stock:
Basic—as reported $ 1.49 $ 1.54 $(0.27)
Basic—pro forma $ 1.44 $ 1.48 $(0.35)
Earnings (loss) per share of common stock:
Assuming dilution—as reported 1.49 $ 1.54 $(0.27)
Assuming dilution—pro forma $ 1.44 $ 1.48 $(0.35)
The following table sets forth fair value per share information, including related assumptions, used to determine compensation cost
consistent with the requirements of SFAS No. 123.
2004 2003 2002
Weighted average fair value per share of options granted during the year(1) $ 10.97 $ 8.82 $ 12.64
Assumptions:
Historical dividend yield 2.1% 2.0% 1.9%
Historical volatility 37.9% 46.7% 43.8%
Risk-free rate of return 3.3% 2.9% 4.2%
Expected life (years) 5.0 5.0 5.0
(1) Estimated on date of grant using Black-Scholes option-pricing model.
Foreign Currency Translation—Assets and liabilities of subsidiaries operating outside the United States with a functional
currency other than U.S. dollars are translated into U.S. dollars using year-end exchange rates. Sales, costs and expenses are translated
at the average exchange rates effective during the year. Foreign currency translation gains and losses are included as a component of
Accumulated Other Nonowner Changes. For subsidiaries operating in highly inflationary environments, inventories and property,
plant and equipment, including related expenses, are remeasured at the exchange rate in effect on the date the assets were acquired,
while monetary assets and liabilities are remeasured at year-end exchange rates. Remeasurement adjustments for these subsidiaries are
included in earnings.
Derivative Financial Instruments—Derivative financial instruments are accounted for under Statement of Financial Accounting
Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended (SFAS No. 133). Under SFAS No.
133, all derivatives are recorded on the balance sheet as assets or liabilities and measured at fair value. For derivatives designated as
hedges of the fair value of assets or liabilities, the changes in fair values of both the derivatives and the
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