-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EA7LDLKfENtY15gUnWQdN6hL39l1M+N4cRQ/nMuKRrcoODTmWSsZefpz4QEehTN7 GFHPz+n9RaBSUsyuEiEfng== 0000048305-97-000013.txt : 19970814 0000048305-97-000013.hdr.sgml : 19970814 ACCESSION NUMBER: 0000048305-97-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970629 FILED AS OF DATE: 19970813 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HONEYWELL INC CENTRAL INDEX KEY: 0000048305 STANDARD INDUSTRIAL CLASSIFICATION: AUTO CONTROLS FOR REGULATING RESIDENTIAL & COMML ENVIRONMENT [3822] IRS NUMBER: 410415010 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-20629 FILM NUMBER: 97659687 BUSINESS ADDRESS: STREET 1: HONEYWELL PLZ STREET 2: 2701 4TH AVE S CITY: MINNEAPOLIS STATE: MN ZIP: 55408 BUSINESS PHONE: 6129511000 MAIL ADDRESS: STREET 1: PO BOX 524 CITY: MINEAPOLIS STATE: MN ZIP: 55440-0524 FORMER COMPANY: FORMER CONFORMED NAME: MINNEAPOLIS HONEYWELL REGULATOR CO DATE OF NAME CHANGE: 19670213 10-Q 1 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (MARK ONE) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 29, 1997 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from: NOT APPLICABLE Commission File No. 1-971 HONEYWELL INC. (Exact name of registrant as specified in its charter) DELAWARE 41-0415010 (State or other jurisdiction (I.R.S. Employer of incorporation) Identification No.) Honeywell Plaza, Minneapolis, Minnesota 55408 (Address of principal executive offices) (Zip Code) (612) 951-1000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No --- --- As of June 29, 1997, the number of shares outstanding of the registrant's common stock, $1.50 par value, was 127,509,281. Page 2 PART I. FINANCIAL INFORMATION -------------------------------- Item 1. Financial Statements
INCOME STATEMENT Honeywell Inc. and Subsidiaries (Unaudited) Second Quarter Ended ---------------------------- (Dollars in Millions Except Per Share Amounts) June 29, 1997 June 30, 1996 .............................................................................. SALES $1,977.3 $1,771.6 ------- ------- COSTS AND EXPENSES Cost of sales 1,359.1 1,222.6 Research and development 102.7 82.5 Selling, general and administrative 347.0 330.0 Interest - net 26.7 18.7 Equity income (7.4) (8.3) ------- ------- 1,828.1 1,645.5 ------- ------- INCOME BEFORE INCOME TAXES 149.2 126.1 PROVISION FOR INCOME TAXES 50.8 42.8 ------- ------- NET INCOME $ 98.4 $ 83.3 ======= ======= EARNINGS PER COMMON SHARE $ 0.77 $ 0.66 ======= ======= See accompanying Notes to Financial Statements
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INCOME STATEMENT Honeywell Inc. and Subsidiaries (Unaudited) Six Months Ended ---------------------------- (Dollars in Millions Except Per Share Amounts) June 29, 1997 June 30, 1996 .............................................................................. SALES $3,663.0 $3,391.1 ------- ------- COSTS AND EXPENSES Cost of sales 2,508.8 2,331.6 Research and development 195.9 167.6 Selling, general and administrative 657.7 639.3 Interest - net 45.3 35.8 Equity income (8.5) (8.0) ------- ------- 3,399.2 3,166.3 ------- ------- INCOME BEFORE INCOME TAXES 263.8 224.8 PROVISION FOR INCOME TAXES 89.8 76.4 ------- ------- NET INCOME $ 174.0 $ 148.4 ======= ======= EARNINGS PER COMMON SHARE $ 1.37 $ 1.17 ======= ======= AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 127,011,691 126,738,415 See accompanying Notes to Financial Statements
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STATEMENT OF CASH FLOWS Honeywell Inc. and Subsidiaries (Unaudited) Six Months Ended ----------------------------- (Dollars in Millions) June 29, 1997 June 30, 1996 ........................................................................................... Cash Flows from Operating Activities Net income $ 174.0 $ 148.4 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation 120.0 112.0 Amortization of intangibles 35.0 24.5 Deferred income taxes 11.0 1.7 Equity income, net of dividends received (8.3) (6.6) Gain on sale of assets (3.5) (4.1) Contributions to employee stock plans 29.1 20.3 Decrease in receivables 114.4 86.0 Increase in inventories (59.1) (78.7) Decrease in accounts payable (110.5) (52.3) Decrease in accrued income taxes and interest (60.0) (25.3) Other changes in working capital, excluding short-term investments and short-term debt 56.1 (61.0) Other noncurrent items - net (82.4) 6.1 ------- ------- Net cash flows from operating activities 215.8 171.0 ------- ------- Cash Flows from Investing Activities Proceeds from sale of assets 55.6 39.2 Capital expenditures (143.1) (144.5) Investment in acquisitions, net of cash acquired (591.0) (316.6) Decrease in short-term investments 1.2 - Other - net (3.5) (2.0) ------- ------- Net cash flows from investing activities (680.8) (423.9) ------- ------- Cash Flows from Financing Activities Net increase (decrease) in short-term debt (105.4) 1.8 Proceeds from issuance of long-term debt 592.1 299.8 Repayment of long-term debt (130.9) (104.0) Proceeds from issuance of preferred stock of subsidiary 123.2 - Repayment of capital to preferred shareholders of subsidiary (2.6) - Purchase of treasury stock (0.7) (98.9) Proceeds from exercise of stock options 24.8 28.5 Dividends paid (68.6) (66.0) ------- ------- Net cash flows from financing activities 431.9 61.2 ------- ------- Effect of Exchange Rate Changes on Cash (14.0) (5.5) ------- ------- Decrease in Cash and Cash Equivalents (47.1) (197.2) Cash and Cash Equivalents at Beginning of Period 127.1 291.6 ------- ------- Cash and Cash Equivalents at End of Period $ 80.0 $ 94.4 ======= ======= See accompanying Notes to Financial Statements
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STATEMENT OF FINANCIAL POSITION Honeywell Inc. and Subsidiaries (Unaudited) (Dollars in Millions) June 29, 1997 December 31, 1996 .............................................................................................. ASSETS Current Assets Cash and cash equivalents $ 80.0 $ 127.1 Short-term investments 7.4 8.6 Receivables (less allowance for doubtful accounts: 1997, $39.7; 1996, $33.5) 1,691.4 1,714.7 Inventories (less progress billing on uncompleted contracts: 1997, $42.9; 1996, $60.7) 1,048.1 937.6 Deferred income taxes 205.9 193.2 --------- -------- 3,032.8 2,981.2 Investments and Advances 243.9 247.6 Property, Plant and Equipment Property, plant and equipment 3,100.4 2,973.6 Less accumulated depreciation 1,942.5 1,839.4 -------- -------- 1,157.9 1,134.2 Other Assets Long-term receivables (less allowance for doubtful accounts: 1997, $1.4; 1996, $0.7) 37.0 25.7 Intangible assets 1,140.0 690.9 Deferred income taxes 35.6 33.0 Other 457.7 380.7 -------- -------- Total Assets $ 6,104.9 $ 5,493.3 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Short-term debt $ 101.2 $252.4 Accounts payable 492.4 584.8 Customer advances 241.8 202.0 Accrued income taxes 240.5 316.9 Deferred income taxes 17.9 21.9 Other accrued liabilities 949.6 688.9 -------- -------- 2,043.4 2,066.9 Long-Term Debt 1,236.0 715.3 Deferred Income Taxes 51.8 46.0 Other Liabilities 461.8 460.2 Stockholders' Equity Common stock - $1.50 par value Authorized - 250,000,000 shares Issued - 1997 - 187,677,578 shares 281.5 1996 - 187,809,512 shares 281.7 Additional paid-in capital 573.1 528.8 Retained earnings 3,181.2 3,074.7 Treasury stock - 1997 - 60,168,297 shares (1,742.8) 1996 - 61,360,813 shares (1,763.5) Accumulated foreign currency translation 23.9 88.2 Pension liability adjustment (5.0) (5.0) -------- -------- 2,311.9 2,204.9 -------- -------- Total Liabilities and Stockholders' Equity $ 6,104.9 $ 5,493.3 ======== ======== See accompanying Notes to Financial Statements
Page 6 NOTES TO FINANCIAL STATEMENTS (Dollars in Millions Except Per Share Amounts) (Unaudited) (1) The financial information and statements of companies owned 20 percent to 50 percent accounted for using the equity method are omitted pursuant to Rule 10-01 of Regulation S-X. (2) Interest consists of the following:
Second Quarter Ended Six Months Ended ---------------------------- ---------------------------- June 29, 1997 June 30, 1996 June 29, 1997 June 30, 1996 ------------- ------------- ------------- ------------- Interest expense $29.5 $19.3 $50.4 $40.2 Interest income ( 2.8) ( 0.6) ( 5.1) ( 4.4) ---- ---- ---- ---- Total $26.7 $18.7 $45.3 $35.8 ==== ==== ==== ====
Interest paid amounted to $33.9 and $45.3 for the second quarter and six months of 1997 and $30.0 and $42.2 for the second quarter and six months of 1996, respectively. (3) Income tax provisions for interim periods are based on estimated effective annual income tax rates. Income tax expense varies from the normal U.S. statutory tax rate primarily because of state taxes and variations in the tax rates on foreign source income. While a portion of the annual tax provisions will be deferred income taxes, it is not practicable to determine the amount or composition of deferred income taxes for interim periods. Income taxes paid, net of refunds received, amounted to $31.9 and $143.9 for the second quarter and six months of 1997 and $74.1 and $93.2 for the second quarter and six months of 1996, respectively. The increase in income taxes paid in 1997 over 1996 for the first six months is attributable to the close and payment of prior year audits and current year income tax payments. (4) Dividends per share of common stock were $0.27 and $0.54 for the second quarter and six months of 1997 and $0.26 and $0.52 for the second quarter and six months of 1996, respectively. (5) Inventories consist of the following:
June 29, December 31, 1997 1996 -------- -------- Finished goods $ 427.2 $ 386.5 Inventories related to long-term contracts 135.4 122.7 Work in process 200.6 185.8 Raw materials and supplies 284.9 242.6 -------- -------- Total $ 1,048.1 $ 937.6 ======== ========
(6) Litton Litigation. On March 13, 1990, Litton Systems, Inc. filed suit against Honeywell in U.S. District Court, Central District of California, alleging patent infringement relating to a process used by Honeywell to coat mirrors incorporated in its ring laser gyroscopes; intentional interference by Honeywell with Litton's prospective advantage with customers and with its contractual relationships with Ojai Research, Inc.; and attempted monopolization and predatory pricing by Honeywell in certain alleged markets for products containing ring laser gyroscopes. Honeywell denied Litton's allegations; contested both the validity and infringement of the Page 7 patent; and alleged that the patent had been obtained by Litton's inequitable conduct before the United States Patent and Trademark Office. U.S. District Court Judge Mariana Pfaelzer presided over the first trial of the patent and two state tort claims and on August 31, 1993, a jury returned a verdict in favor of Litton and awarded damages against Honeywell in the amount of $1.2 billion for these claims. On January 9, 1995, the trial court set aside the jury verdict and damage award, ruling, among other things, that the Litton patent was unenforceable and invalid. The trial court also ruled that if its rulings were vacated or reversed on appeal, Honeywell would be granted a new trial on the issue of damages because the jury's award was inconsistent with the clear weight of the evidence and based upon a speculative damage study. Litton appealed to the U.S. Court of Appeals for the Federal Circuit, and on July 3, 1996, a three judge panel of that court overruled the trial court's rulings of patent invalidity, unenforceability and non- infringement, and also found Honeywell liable under Litton's state tort claims. However, the panel upheld the trial court's ruling that Honeywell is entitled to a new trial for damages on all claims, as well as its granting to Honeywell of certain intervening patent rights. Honeywell requested a rehearing by the full U.S.Court of Appeals, which was denied on September 11, 1996. On November 26, 1996, Honeywell petitioned the U.S. Supreme Court for review of the panel's decision. In the interim, Litton filed a motion with the trial court seeking injunctive relief, which was denied on December 23, 1996. On March 17, 1997, the U.S. Supreme Court granted Honeywell's petition for certiorari in the patent/tort case and vacated the July 3, 1996 decision of the U.S. Court of Appeals. The case was remanded to the U.S. Court of Appeals for reconsideration in light of the U.S. Supreme Court's recent decision in the WARNER-JENKINSON V. HILTON DAVIS case which refined the law concerning patent infringement under the doctrine of equivalents. At a hearing held March 31, 1997, on intervening rights, Judge Pfaelzer indicated that the retrial of the patent and tort damages would not commence on May 6, 1997, as previously scheduled, because the trial court will lose jurisdiction while these appellate matters are before the U.S. Court of Appeals. The parties are briefing the appeal in July and August, and oral argument is scheduled for September 30, 1997 with a final decision by the U.S. Court of Appeals to follow some undetermined time thereafter. On March 21, 1997 Litton filed a notice of appeal of the trial court's December 23, 1996 decision to deny injunctive relief, but the U.S. Court of Appeals has stayed the matter until such time as it completes its review of the main appeal concerning infringement. In preparing for the retrial of patent and tort damages, Litton submitted a revised damage study to the trial court on February 7, 1997, seeking damages as high as $1.9 billion. Honeywell believes that Litton's damage study remains flawed and speculative for a number of reasons. Depending upon the outcome of the main appeal concerning infringement, it may be necessary for Litton to further revise its study. The first jury trial for the antitrust case did not begin until November 20, 1995, but also was held before Judge Pfaelzer. The trial court dismissed, for failure of proof, Litton's contentions that Honeywell engaged in below-cost predatory pricing, illegal tying and bundling, misrepresentation and disparagement, and an illegal acquisition of Sperry Avionics in 1986. On February 2, 1996, the case was submitted to the jury on claims of monopolization and attempt to monopolize, both based on the remaining allegations that Honeywell entered into certain long-term exclusive dealing and penalty arrangements with aircraft manufacturers and airlines to exclude Litton from the commercial aircraft market, and that Honeywell failed to provide Litton with access to certain proprietary software. On February 29, 1996, the jury returned a $234 million single damages verdict against Honeywell for the monopolization claim, which would have been automatically trebled. On March 1, 1996, the jury indicated that it was unable to reach a verdict on damages for the attempted monopolization claim, and a mistrial was declared on that claim. Following the verdict, Honeywell filed a Motion for Judgment as a Matter of Law and a Motion for a New Trial, contending that the jury's partial verdict should be overturned because Litton (i) failed to prove essential elements of liability and (ii) failed to submit competent evidence to support its claim for damages by offering only a speculative, all-or-nothing $298.5 million damage study. Litton filed a Motion for Injunctive Relief and a Motion for Entry of Judgment. Page 8 On July 24, 1996, the trial court denied Honeywell's Motion for Judgment as a Matter of Law, but concluded that Litton's damage study was seriously flawed and granted Honeywell a retrial on damages only. The court also denied Litton's Motion for Injunctive Relief and Litton's Motion for Entry of Judgment. No date has been set for the retrial of antitrust damages. Honeywell believes there are questions concerning what conduct the original jury found anti-competitive that may give rise to damages in a retrial, and consequently a damages retrial should also require a retrial of liability issues in some respects. Following the damages retrial, Honeywell will have the right to appeal both the liability and damages verdicts to the U.S. Court of Appeals for the Ninth Circuit. No provision has been made in the financial statements with respect to this contingent antitrust liability. Honeywell further believes that it is inappropriate for Litton to seek duplicative recovery of damages in the separate patent and tort, and antitrust cases, and that eventually none will be permitted to stand. In the fall of 1996, Litton and Honeywell commenced court ordered mediation of the patent, tort and antitrust claims. No resolution of claims has occurred and the mediation is currently in recess. (7) As of June 29, 1997, Honeywell had reserved 15,156,707 shares of common stock for the issuance of shares in connection with stock option and stock bonus plans. (8) On February 26, 1997, Honeywell established Kenwood Properties Inc., a wholly-owned real estate investment trust subsidiary which issued 125,000 shares of $1,000 par value step down preferred stock to accredited investors. The step down preferred shares are shown on the consolidated statement of financial position as minority interest which is included in other current accrued liabilities. In the statement of cash flows, the minority interest is included in the financing section as proceeds from the issuance of preferred shares of subsidiary. On July 16, 1997, the preferred shares were redeemed at cost by Kenwood Properties Inc. (9) On March 12, 1997, Honeywell issued $550 million of long-term debt through an underwritten offering with maturities of five and ten years. Honeywell subsequently entered into interest rate swap agreements effectively converting $450 million of this debt from fixed-rate debt to floating-rate debt. (10) On March 7, 1997, Honeywell acquired Measurex Corporation, for approximately $600 million in cash. Measurex is a supplier of computer- integrated measurement, control and information systems and services. The acquisition has been accounted for under the purchase method of accounting and, accordingly, the consolidated financial statements reflect a preliminary allocation of the purchase price to the assets, liabilities and intangibles acquired, based upon their estimated fair values. This current allocation of the purchase price is preliminary, pending completion of valuation studies and other determinations of fair values presently in process. The current allocation of the purchase price will result in intangibles, including goodwill, of approximately $475 million which will be amortized on a straight-line basis over an average of 25 years. Management does not expect that the final allocation of the purchase price will differ materially from the preliminary allocations and expects the allocation to be finalized in the fourth quarter of 1997. In connection with the acquisition, Honeywell assumed approximately 1.8 million options to purchase Measurex common stock and converted such options to Honeywell options to acquire approximately 670,000 shares of Honeywell stock with an average exercise price of $52.24 and a range of exercise prices from $34.58 to $72.85. The value of the options assumed is included in the purchase price and as a component of stockholders equity in the consolidated financial statements. Proceeds from the debt issuance described in Note 9 were used to partially fund the acquisition of Measurex Corporation. (11) The Financial Accounting Standards Board recently issued Statement of Financial Accounting Standards No. 128 `Earnings Per Share,' which is effective for financial statements for both interim and annual periods ending after December 15, 1997. Early adoption of the statement is not permitted. If the statement would have been applied to earnings for the second quarter of 1997, the Basic and Diluted Earnings Per Share would not have differed materially from the Primary and Fully Diluted Per Share calculations in Exhibit 11. Page 9 Financial Accounting Standard No. 130, `Reporting Comprehensive Income,' and Financial Accounting Standard No. 131, `Disclosures About Segments of an Enterprise and Related Information,' which are effective for financial statements for both interim and annual periods beginning after December 15, 1997 will be adopted, as require, in 1998. (12) The amounts set forth in this quarterly report are unaudited but, in the opinion of the registrant, include all normal recurring adjustments necessary for a fair presentation of the results of operations for the three-month and six-month periods ended June 29, 1997, and June 30, 1996, respectively. Honeywell's accounting policies are described in the notes to financial statements in its 1996 Annual Report on Form 10-K. Certain amounts in prior year's statement of financial position have been reclassified to conform to the current year presentation. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations - --------------------- Net income in the second quarter of 1997 was $98.4 million ($0.77 per share) compared with $83.3 million ($0.66 per share) in the second quarter of 1996. Earnings per share increased 17 percent over the previous year's results. Worldwide sales increased 12 percent to $1.977 billion in the second quarter of 1997, compared with $1.771 billion in 1996. Operating profit margins improved 40 basis points to 9.7 percent in 1997 from 9.3 percent in 1996 primarily as a result of our continuing efforts to reduce Selling, General, and Administrative expenses. Orders increased 9 percent, driven by Industrial Control and Space and Aviation Control. Translation of the U.S. dollar had approximately a 2-3 percentage point negative effect on sales and orders and minimal effect on profits. Home and Building Control sales and orders were flat in the second quarter due primarily to cool weather in North America which reduces demand for consumer products and delays in booking North American building projects. For the first six months, sales increased 3 percent and orders increased 5 percent. Operating profit improved 7 percent with margins up 50 basis points to 7 percent for the quarter. Year to date operating margins have improved 30 basis points to 7.4 percent. HOME CONTROL orders were down slightly against second quarter 1996 comparisons with North America down sharply, Europe up sharply, and Asia Pacific up moderately. The late spring and cool weather drove soft demand in the OEM, distribution and consumer products businesses in North America. This soft demand on our short cycle business also limited sales growth to slight improvement in the quarter. Operating profit increased moderately during the quarter. Year to date, orders, sales and earnings are up significantly with sharp growth in orders in North America and Europe. BUILDING CONTROL orders for the quarter were up slightly. Solutions orders in North America (including energy retrofit and installed systems) were off due primarily to timing delays on large projects. Sales in the second quarter were up slightly, with profits up sharply. Honeywell made significant inroads in supporting the strategic initiative to grow the energy retrofit business with several key awards and contracts during the quarter. Honeywell was selected by the Department of Energy as one of five vendors who will upgrade energy systems in hundreds of federal buildings in the southwest U.S. The selected companies will be eligible for up to $750 million of business over the next few years. The European Bank for Reconstruction and Redevelopment signed a `multi-project facility' contract worth up to $70 million to help Honeywell establish and operate energy service companies to provide retrofits for industrial buildings and district heating plants in Poland, the Czech Republic, Slovakia and Hungary. This represents a key win in the industrial marketplace. Year to date, Building Control orders were flat, with North America down moderately, Europe and Asia Pacific up sharply. Sales were down slightly for the first six months and earnings were up moderately. Industrial Control sales increased 20 percent to $667.3 million, up from $554.3 million during second quarter last year. Profits were up 1 percent compared to second quarter 1996, with margins down from 12 percent to 10.1 percent. Orders increased over 20 percent for the second quarter compared with 1996. For the first six months, Industrial Control experienced a 13 percent increase in sales while profits declined slightly due primarily to the goodwill amortization and integration costs associated with the Measurex transaction. Industrial Control orders for Page 10 the first half of 1997 increased 17 percent. INDUSTRIAL AUTOMATION AND CONTROL sales and orders increased over 20 percent in the second quarter compared with last year, and profits were up modestly. In addition to the Measurex integration costs, profitability was also affected by the expenses associated with new product and solution introductions, such as Plantscape - a new state of the art open hybrid control system. Market reception for the new TPS system remains strong worldwide and Plantscape extends the TPS solution family into industries where Honeywell traditionally has not had a large presence, such as fine chemicals; pharmaceuticals; food and beverage; mining, metals & minerals; power and semiconductors. Year to date, sales and orders for Industrial Automation and Control are up sharply while profits are down slightly due to the impact of the Measurex acquisition costs. SENSING AND CONTROL sales and profits were up slightly in the quarter. Orders were up modestly in the second quarter compared to 1996, driven by growth in the consumer, avionics and information technology markets. European orders also improved in the quarter after a slow start. Year to date, SENSING AND CONTROL orders were up slightly and sales were down slightly. Earnings grew moderately compared to the first half of 1996 due to the mix of higher margin electro-mechanical products as well as improvement in the industrial distribution business. Space and Aviation Control second quarter orders were up 7 percent from 1996 and sales increased 22 percent driven by strong growth in commercial avionics as well as strengthening in the military and space businesses. Operating profit increased 39 percent to $61.8 million, compared to $44.4 million a year earlier. Operating margins improved from 11.1 percent to 12.6 percent for the quarter. This improvement was driven by the mix of higher margin commercial avionics which totaled nearly 57 percent of the Space and Aviation Control business in the quarter, coupled with high profit programs in military avionics. During the quarter, the business announced the world's first integrated solution to support the communications, navigation, surveillance and air traffic management necessary for free flight. The solution, World NAV, which combines Honeywell systems and expertise in integrating GPS, flight management and landing systems, will be targeted for both the commercial and military markets. Space and Aviation Control orders for the first six months increased 13 percent from the same period last year. Year to date sales have increased 12 percent while earnings increased over 36 percent. Orders were up slightly for COMMERCIAL AVIATION in the second quarter, against very strong comparisons last year when orders in Air Transport and Business & Commuter Aviation were up nearly 50 percent. Sales and profits experienced sharp growth in the quarter. The sales increase is driven primarily by the increase in air transport deliveries which coincide with expected 1997 build rates and a strong increase in the business jet market. The profit improvement resulted from the volume increase in Air Transport coupled with continued productivity improvements. Year to date, Commercial Avionics orders were up moderately, and sales and earnings were up sharply. In the second quarter, MILITARY AVIONICS SYSTEMS orders grew sharply, driven by guidance and navigation system retrofits and tactical `smart guidance' munitions programs. Sales were up moderately and profits were up sharply, due primarily to varied timing and profitability of production contracts and decreased development expenses related to new programs. Year to date, orders and earnings for Military Avionics were up sharply while sales were down slightly. SPACE SYSTEMS orders for the quarter were down modestly against a strong second quarter last year. Sales and earnings were up sharply compared to the second quarter of 1996. For the first six months, orders for Space Systems were up significantly driven by the SBIRS program. Sales were down modestly and earnings were down sharply due to low volume and project profitability. Sales from other operations which do not correspond with Honeywell's primary business segments, including the Corporate research centers, were flat from the second quarter of 1996 with sharply improved margins. Financial Condition - ------------------- Stockholders' equity increased to $2,312 million from $2,205 million at the end of 1996. Stockholders' equity includes an increase of $106 million to retained earnings resulting from current year earnings less dividends offset by a $64 million decrease in the accumulated foreign currency translation balance and a $65 million increase in stock balances. Common shares outstanding increased from 126.4 million at the end of 1996 to 127.5 million. Shares repurchased during the first six months of 1997 totaled 10 thousand at a cost of $0.7 million. Shares issued through stock option and stock bonus plans totaled 1.1 million shares and yielded $25 million in proceeds. Page 11 Debt as a percentage of total capital at the end of the second quarter was 36.6 percent compared with 30.5 percent at the end of 1996. Total debt increased $370 million from 1996 year end. The proceeds from the debt increase along with the reduction of cash balances were used to finance general corporate requirements, including capital expenditures, working capital, and acquisitions. Cash flows used by investing activities exceeded cash flows from operating activities by $465 million in the first six months of 1997, primarily due to acquisition activities and capital expenditures offset by proceeds from asset sales. On June 29, 1997, Honeywell had $1,325 million of revolving committed credit lines with 17 banks. There were no outstanding borrowings under these lines. In addition, certain foreign units had $372 million in credit lines available at the end of the second quarter. Honeywell believes its available cash, committed credit lines and access to the public debt markets through commercial paper and medium-term note programs provide adequate short-term and long-term liquidity. As of June 29, 1997, Honeywell's credit ratings for long-term and short-term debt were, respectively, A/A-1 by Standard and Poor's Corporation, A/Duff1 by Duff and Phelps Credit Rating Co. and A2/P-1 by Moody's Investors Service, Inc. Honeywell has entered into various foreign currency exchange contracts and interest rate swaps to manage its net exposure to changes in currency and interest rate fluctuation. At June 29, 1997, the notional amount of outstanding foreign exchange contracts was approximately $990 million. The amount of hedging gains and losses deferred was not material at June 29, 1997. The notional amount of outstanding interest rate swaps was $1,020 million at June 29, 1997. During the first quarter of 1997, Honeywell established Kenwood Properties Inc., a wholly-owned real estate investment trust subsidiary, which issued preferred stock to third party investors in exchange for $125 million. The preferred shares were redeemed on July 16, 1997. Honeywell continually evaluates the growth potential and profitability of its existing businesses and investments. When deemed appropriate, Honeywell will acquire new businesses to expand its product offerings or divest existing businesses which are no longer considered a strategic fit. Writedowns or provisions for selling or divesting units could result in future charges. PART II. OTHER INFORMATION ----------------------------- Item 1. Legal Proceedings As previously reported in Item 3. `Legal Proceedings' of Part I of Honeywell's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, Honeywell is a defendant in a lawsuit filed by Litton Systems, Inc. alleging patent infringement relating to the process used by Honeywell to coat mirrors incorporated in its ring laser gyroscopes; attempted monopolization by Honeywell of certain alleged markets for products containing ring laser gyroscopes; and intentional interference by Honeywell with Litton's prospective advantage in European markets and with its contractual relationships with Ojai Research, Inc., a California corporation. The information reported in Note (6) to the Financial Statements set forth in Item 1 of Part I of this report with respect to recent developments in this litigation is incorporated by reference into this Item 1. Item 4. Submission of Matters to a Vote of Security Holders At the Annual Meeting of Shareholders of Honeywell Inc. in Phoenix, Arizona on April 15, 1997, four proposals were submitted to a vote of the shareholders. Page 12 The first was a proposal to elect directors for the year commencing April 16, 1997. A majority of the shares represented by proxy or in person at the meeting were voted in favor of electing management's nominees for directors as follows: For Withheld --- -------- Albert J. Baciocco, Jr. 106,878,383 659,789 Elizabeth E. Bailey 106,903,565 634,607 Michael R. Bonsignore 106,891,479 646,693 William H. Donaldson 106,892,826 645,346 Giannantonio Ferrari 106,899,738 638,434 R. Donald Fullerton 106,836,089 702,083 James J. Howard 106,865,731 672,441 Bruce E. Karatz 106,870,755 667,417 A. Barry Rand 106,932,851 605,321 Steven G. Rothmeier 106,847,908 690,264 Michael W. Wright 106,839,582 698,590 The second was a proposal to ratify the selection of Deloitte & Touche LLP as the auditors of the company. 106,655,825 shares voted in favor of the proposal, 447,311 shares voted against the proposal and 435,036 shares abstained from voting. The third was a proposal to adopt the 1997 Honeywell Stock and Incentive Plan. 88,456,397 shares voted in favor of the proposal, 9,300,625 shares voted against the proposal and 972,333 shares abstained from voting. The fourth was a proposal to approve the elimination of Article XII of the Honeywell's By-laws, which provided for a maximum amount of incentive compensation. 102,003,478 shares voted in favor of the proposal, 3,699,030 shares voted against the proposal and 1,309,520 shares abstained from voting. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: (11) Computation of Earnings Per Share. (12) Computation of Ratio of Earnings to Fixed Charges. (27) Financial Data Schedule. (99)(I) Cautionary Statements For Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. (b) Reports on form 8-K: None Page 13 SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HONEYWELL INC. Date: August 13, 1997 By: /s/ E. D. Grayson ---------------------------------- E. D. Grayson Vice President and General Counsel Date: August 13, 1997 By: /s/ P.M. Palazzari ---------------------------------- P. M. Palazzari Vice President and Controller (Chief Accounting Officer) INDEX TO EXHIBITS Exhibit No. Page No. - ---------- ------- 11 Computation of Earnings Per Share i 12 Computation of Ratio of Earnings to Fixed Charges ii 27 Financial Data Schedule iii 99(i) Cautionary Statements For Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995 iv EX-11 2 EXHIBIT (11)
HONEYWELL INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE (Dollars in Millions Except Per Share Amounts) (Unaudited) Second Quarter Ended Six Months Ended ------------------------------ ------------------------------ June 29, June 30, June 29, June 30, 1997 1996 1997 1996 ------------ ------------ ------------ ----------- Primary: Income: Net income............................................ $ 98.4 $ 83.3 $ 174.0 $ 148.4 =========== =========== =========== =========== Shares: Weighted average of shares outstanding during the year.. 127,267,612 126,607,966 127,011,691 126,738,415 =========== =========== =========== =========== Earnings per share: Net income.............................................. $ 0.77 $ 0.66 $ 1.37 $ 1.17 =========== =========== =========== =========== Assuming full dilution: Income: Net income.............................................. $ 98.4 $ 83.3 $ 174.0 $ 148.4 =========== =========== =========== =========== Shares: Weighted average of shares outstanding during the year.. 127,267,612 126,607,966 127,011,691 126,738,415 Shares issuable in connection with stock plans less shares purchasable from proceeds.................. 2,274,346 2,179,291 2,281,026 2,339,746 ----------- ----------- ----------- ----------- Total Shares.......................................... 129,541,958 128,787,257 129,292,717 129,078,161 =========== =========== =========== =========== Earnings per share: Net income................................................ $ 0.76 $ 0.65 $ 1.35 $ 1.15 =========== =========== =========== ===========
i EX-12 3 EXHIBIT (12)
HONEYWELL INC. AND SUBSIDIARIES COMBINED WITH PROPORTIONAL SHARES OF 50% OWNED COMPANIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES (Unaudited) (Dollars in Millions) Six Months Ended June 29, 1997 ------------- Income before Income Taxes $ 263.76 Deduct: Equity income (loss) 8.45 --------- Subtotal 255.31 Add (deduct): Dividends from less than 50% owned companies 0.13 Proportional share of income (loss) before income taxes of 50% owned companies 0.08 --------- Adjusted income 255.52 --------- Fixed Charges Interest on indebtedness 49.84 Amortization of debt expense 0.66 Interest portion of rent expense 26.95 --------- Total Fixed Charges 77.45 --------- Total Available Income $332.97 ========= Ratio of Earnings to Fixed Charges 4.30 =========
ii EX-27 4
5 1000000 6-MOS DEC-31-1997 JAN-01-1997 JUN-29-1997 80 7 1731 40 1048 3033 3100 1943 6105 1923 1236 0 0 282 2030 6105 3663 3663 2509 2509 196 5 50 264 90 174 0 0 0 174 1.37 1.35
EX-99 5 EXHIBIT 99(i) CAUTIONARY STATEMENTS FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Honeywell may occasionally make statements regarding its businesses and their respective markets, such as projections of future performance, statements of management's plans and objectives, forecasts of market trends and other matters, which to the extent they are not historical fact, may constitute `forward- looking statements' within the meaning of the Private Securities Litigation Reform Act of 1995. Statements containing the words or phrases `will likely result', `are expected to,' `will continue,' `outlook,' `is anticipated,' `estimate,' `project' or similar expressions, which may appear in certain documents, reports (including but not limited to those filed with the Securities and Exchange Commission), press releases, and written or oral presentations made by officers of the company to analysts, shareholders, investors, news organizations and others, identify such forward-looking statements. No assurance can be given that the results in any forward-looking statements will be achieved and actual results could be affected by one or more factors which could cause them to differ materially. Therefore, Honeywell wishes to ensure that any written or oral forward-looking statements made by it or on its behalf, are accompanied by, or referenced to, meaningful cautionary statements in order to maximize to the fullest extent possible the protections of the safe harbor established in the Private Securities Litigation Reform Act of 1995. All forward-looking statements made by or on behalf of Honeywell are hereby qualified in their entirety by reference to the following important factors, among others, that could affect the company's businesses and cause actual results to differ materially from those projected. Any forward-looking statement speaks only as of the date on which such statement is made, and Honeywell undertakes no obligation to update such statement to reflect events or circumstances arising after such date. FOREIGN SALES. A significant portion of Honeywell's revenues are generated from international business operations. Changes in trade, monetary policies and regulatory requirements of the United States and other nations, as well as political instability in certain regions may affect Honeywell's international business. Many of Honeywell's sales outside the United States are denominated in local currencies; therefore, exchange rate fluctuations may affect overall financial performance. PROJECT MANAGEMENT. Performance related programs and retrofit projects have increasingly become an integral part of Honeywell's businesses. The success of some of these programs may depend in part on the performance of third parties. Honeywell manages its businesses in such a manner as to minimize the potential impact of performance; nonetheless, bid variances, third party labor disputes, and the availability, quality and timely delivery of supplies are factors that could affect the company's ability to manage these programs within their budgetary guidelines. COMPETITION. Honeywell's businesses are subject to various competitive pressures, including but not limited to, the introduction of new competitive technologies, industry consolidation, the growing acceptance of open systems environments and the deregulation of certain industries. Developments in these areas may influence Honeywell's strategies in certain markets and create new challenges or opportunities. HUMAN RESOURCES. Innovative products and solutions are continuously developed by Honeywell's businesses for application in the markets they serve. Highly trained technical and managerial employees are required for this effort, and Honeywell's ability to manage its businesses successfully depends, in part, on its ability to attract and retain such people. Shortages of skilled personnel or negative compensation trends are factors that can affect the availability of such people or increase Honeywell's costs in attracting and retaining same. In certain foreign markets, local labor rates and practices may affect Honeywell's operating costs or its ability to conduct business in such areas. iv GOVERNMENT REGULATION. In many of the markets in which Honeywell competes, such as aviation, building control, processing and refining, government regulation is extensive. Compliance with safety or environmental standards, may impact Honeywell in those markets by increasing Honeywell's costs or alternately, by providing opportunities for Honeywell to provide solutions for customers affected thereby. TECHNOLOGY. Honeywell's products and services are based on innovative technologies developed by the company or licensed from others. To the extent the company can secure intellectual property protection for products it develops, it may be able to enhance its competitive position in certain markets. Honeywell's ability to obtain licenses from third parties for other key technologies, or to develop new technologies or solutions independently or through collaborative efforts can impact the company's businesses. CUSTOMER TRENDS. The demand for Honeywell's products is subject to the demands in major customer markets. For example, the requirements of major airlines for new aircraft may affect the demand for avionics and cockpit controls produced by Honeywell's Space and Aviation Control business; new construction or modernization activity may influence the demand for products and services provided by the Home and Building Control business; the demand for new or modernized processing plants in certain industrial sector markets may affect Honeywell's Industrial Control business. The company endeavors to forecast such demands, but unforeseen general economic conditions in the United States and internationally, as well as industry specific factors, may affect such forecasts. CHARGES RESULTING FROM ACQUISITIONS AND DIVESTITURES. Honeywell continually evaluates the growth potential and profitability of its existing businesses and investments. When deemed appropriate, Honeywell will acquire new businesses to expand its product offerings or divest existing businesses which are no longer considered a strategic fit. Writedowns or provisions for selling or divesting units could result in future charges which may affect earnings. The foregoing factors are not exhaustive and new factors may emerge which impact Honeywell's businesses. It is impossible for management to predict such factors, therefore, forward-looking statements should not be relied upon as a prediction of actual future results. v -----END PRIVACY-ENHANCED MESSAGE-----