-----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, A0PqRkHKD7lFSQ9Bx9ebmiIohr/Iq4asRkZ6KO3lo02uXOVbwF/zcJgVNv1bmh3v 1DOGDoZuLbRT6nNmVwu72A== 0001047469-99-032694.txt : 19990818 0001047469-99-032694.hdr.sgml : 19990818 ACCESSION NUMBER: 0001047469-99-032694 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990704 FILED AS OF DATE: 19990817 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: SEC FILE NUMBER: 000-20629 FILM NUMBER: 99694322 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 July 4, 1999 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 July 4, 1999, the number of shares outstanding of the registrant's common stock, $1.50 par value, was 127,473,269. 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) JULY 4, 1999 July 5, 1998 ------------ ------------ - ----------------------------------------------------------------------------------------------------------- SALES $2,139.6 $2,035.2 COSTS AND EXPENSES Cost of sales 1,467.2 1,383.0 Research and development 112.9 118.4 Selling, general and administrative 327.3 325.8 Interest - net 27.3 26.0 Equity income (4.6) (5.8) --------- ---------- TOTAL COSTS AND EXPENSES 1,930.1 1,847.4 --------- ---------- INCOME BEFORE INCOME TAXES 209.5 187.8 PROVISION FOR INCOME TAXES 69.2 62.0 --------- ---------- NET INCOME $ 140.3 $ 125.8 --------- ---------- --------- ---------- BASIC EARNINGS PER COMMON SHARE $ 1.11 $ 1.00 --------- ---------- --------- ---------- AVERAGE COMMON SHARES OUTSTANDING 126,715,587 126,112,084 DILUTED EARNINGS PER COMMON SHARE $ 1.09 $ 0.98 --------- ---------- --------- ---------- AVERAGE COMMON AND DILUTIVE SHARES OUTSTANDING 128,986,872 128,093,164
See accompanying Notes to Financial Statements Page 3 INCOME STATEMENT HONEYWELL INC. AND SUBSIDIARIES (UNAUDITED)
SIX MONTHS ENDED ---------------------------------- (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) JULY 4, 1999 July 5, 1998 ------------ ------------ - ----------------------------------------------------------------------------------------------------------- SALES $4,125.7 $3,958.5 COSTS AND EXPENSES Cost of sales 2,833.2 2,709.8 Research and development 229.8 231.8 Selling, general and administrative 645.4 640.6 Interest - net 53.3 50.2 Equity income (3.0) (5.5) ---------- ---------- TOTAL COSTS AND EXPENSES 3,758.7 3,626.9 ---------- ---------- INCOME BEFORE INCOME TAXES 367.0 331.6 PROVISION FOR INCOME TAXES 121.2 109.5 ---------- ---------- NET INCOME $ 245.8 $ 222.1 ========== ========== BASIC EARNINGS PER COMMON SHARE $ 1.94 $ 1.76 ========== ========== AVERAGE COMMON SHARES OUTSTANDING 126,480,406 126,152,209 DILUTED EARNINGS PER COMMON SHARE $ 1.92 $ 1.73 ========== ========== AVERAGE COMMON AND DILUTIVE SHARES OUTSTANDING 128,342,264 128,065,830
See accompanying Notes to Financial Statements Page 4 STATEMENT OF CASH FLOWS HONEYWELL INC. AND SUBSIDIARIES (UNAUDITED)
SIX MONTHS ENDED ------------------------------ (DOLLARS IN MILLIONS) JULY 4, 1999 July 5, 1998 -------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 245.8 $ 222.1 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation 126.0 122.8 Amortization of intangibles 43.5 37.7 Deferred income taxes (4.0) (0.1) Equity income, net of dividends received (2.0) (4.7) Gain on sale of assets (1.7) (6.5) Contributions to employee stock plans 32.9 32.6 Decrease in receivables 95.2 114.8 Increase in inventories (45.8) (134.6) Decrease in accounts payable (46.8) (72.6) Increase in customer advances 25.2 51.2 Decrease in accrued income taxes and interest (98.7) (50.7) Decrease in accrued liabilities (106.6) (91.9) Other noncurrent items - net (8.4) (70.4) -------------- ------------- NET CASH FLOWS FROM OPERATING ACTIVITIES 254.6 149.7 -------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of assets 11.6 56.3 Proceeds from sale of discontinued business -- 29.0 Capital expenditures (182.4) (162.9) Investment in acquisitions, net of cash acquired (107.8) (131.8) Decrease (increase) in short-term investments 4.6 (0.8) Other - net (12.5) (5.3) -------------- ------------- NET CASH FLOWS FROM INVESTING ACTIVITIES (286.5) (215.5) -------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES Net decrease in short-term debt (38.2) (36.3) Proceeds from issuance of long-term debt 4.4 252.0 Repayment of long-term debt (43.6) (67.2) Purchase of treasury stock (51.8) (118.6) Proceeds from exercise of stock options 80.0 38.0 Dividends paid (73.8) (70.9) -------------- ------------- NET CASH FLOWS FROM FINANCING ACTIVITIES (123.0) (3.0) -------------- ------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (3.2) (2.4) -------------- ------------- DECREASE IN CASH AND CASH EQUIVALENTS (158.1) (71.2) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 306.0 134.3 -------------- ------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 147.9 $ 63.1 =============== =============
See accompanying Notes to Financial Statements Page 5 STATEMENT OF FINANCIAL POSITION HONEYWELL INC. AND SUBSIDIARIES (UNAUDITED)
(DOLLARS IN MILLIONS) JULY 4, 1999 December 31, 1998 -------------- ------------------ ASSETS CURRENT ASSETS Cash and cash equivalents $ 147.9 $ 306.0 Short-term investments 7.6 7.2 Receivables (less allowance for doubtful accounts: 1999, $40.3; 1998, $41.1) 1,809.8 1,906.7 Inventories (less progress billing on uncompleted contracts: 1999, $31.5; 1998, $43.5) 1,162.2 1,116.0 Deferred income taxes 283.1 285.9 ------------ ------------ TOTAL CURRENT ASSETS 3,410.6 3,621.8 INVESTMENTS AND ADVANCES 279.3 269.9 PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment 3,383.9 3,355.8 Less accumulated depreciation 2,084.5 2,097.4 ------------ ------------ 1,299.4 1,258.4 OTHER ASSETS Long-term receivables (less allowance for doubtful accounts: 1999, $0.5; 1998, $1.8) 27.0 34.0 Goodwill 981.1 952.2 Intangible assets 329.0 343.0 Deferred income taxes 19.2 18.9 Other 725.8 672.2 ------------ ------------ TOTAL ASSETS $ 7,071.4 $ 7,170.4 ============ ============ LIABILITIES AND SHAREOWNERS' EQUITY CURRENT LIABILITIES Short-term debt $ 209.0 $ 178.9 Accounts payable 622.0 676.6 Customer advances 361.3 340.2 Accrued income taxes 236.6 334.4 Deferred income taxes 13.9 18.0 Other accrued liabilities 799.6 904.6 ------------ ------------ TOTAL CURRENT LIABILITIES 2,242.4 2,452.7 LONG-TERM DEBT 1,223.8 1,299.3 DEFERRED INCOME TAXES 51.4 66.2 OTHER LIABILITIES 597.2 566.7 ------------ ------------ TOTAL LIABILITIES 4,114.8 4,384.9 ------------ ------------ SHAREOWNERS' EQUITY Common stock - $1.50 par value Authorized - 1999- 375,000,000 shares - 1998- 250,000,000 shares 281.1 Issued - 1999 - 187,407,152 shares 281.3 - 1998 - 187,536,597 shares Additional paid-in-capital 775.8 697.6 Retained earnings 4,008.0 3,835.9 Treasury stock - 1999 - 59,933,883 shares (2,023.6) - 1998 - 61,206,715 shares (2,005.5) Other comprehensive income (84.7) (23.8) ------------ ------------ TOTAL SHAREOWNERS' EQUITY 2,956.6 2,785.5 ------------ ------------ Page 6 TOTAL LIABILITIES AND SHAREOWNERS' EQUITY $ 7,071.4 $ 7,170.4 ============ ============
See accompanying Notes to Financial Statements Page 7 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 ------------------------- ---------------- July 4, 1999 July 5, 1998 July 4, 1999 July 5, 1998 ------------ ------------ ----------------------------- Interest expense $29.0 $29.8 $57.9 $56.2 Interest income (1.7) (3.8) (4.6) (6.0) ----- ------ ----- ----- Total $27.3 $26.0 $53.3 $50.2 ===== ===== ===== ===== Interest paid $35.4 $30.0 $57.8 $52.9
(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 $29.7 and $37.2 for the second quarters of 1999 and 1998, and $221.8 and $162.5 for the first six months of 1999 and 1998, respectively. Income taxes paid increased in 1999 due to additional estimated income tax payments during the first quarter. (4) Dividends per share of common stock were $0.29 and $0.28 for the second quarters of 1999 and 1998 and $0.58 and $0.56 for the first six months of 1999 and 1998, respectively. (5) Inventories consist of the following:
July 4, December 31, 1999 1998 ---------- ------------- Finished goods $ 395.2 $ 373.2 Inventories related to long-term contracts 217.3 186.1 Work in process 241.3 224.9 Raw materials and supplies 308.3 331.8 ------ ------ Total $ 1,162.1 $ 1,116.0 ========= =========
Page 8 (6) LITTON LITIGATION. On March 13, 1990, Litton Systems, Inc. filed a legal action against Honeywell in U.S. District Court, Central District of California, Los Angeles (the "trial court") with claims that were subsequently split into two separate cases. One alleges patent infringement under federal law for using an ion-beam process to coat mirrors incorporated in Honeywell's ring laser gyroscopes, and tortious interference under state law for interfering with Litton's prospective advantage with customers and contractual relationships with an inventor and his company, Ojai Research, Inc. The other case alleges monopolization and attempted monopolization under federal antitrust laws by Honeywell in the sale of inertial reference systems containing ring laser gyroscopes into the commercial aircraft market. Honeywell generally denied Litton's allegations in both cases. In the patent/tort case, Honeywell also contested the validity as well as the infringement of the patent, alleging, among other things, that the patent had been obtained by Litton's inequitable conduct before the United States Patent and Trademark Office. PATENT/TORT CASE U.S. District Court Judge Mariana Pfaelzer presided over a three month patent infringement and tortious interference trial in 1993. On August 31, 1993 a jury returned a verdict in favor of Litton, awarding damages against Honeywell in the amount of $1.2 billion on three claims. Honeywell filed post-trial motions contesting the verdict and damage award. On January 9, 1995, the trial court set them all aside, ruling, among other things, that the Litton patent was invalid due to obviousness, unenforceable because of Litton's inequitable conduct before the Patent and Trademark Office, and in any case, not infringed by Honeywell's current process. It further ruled that Litton's state tort claims were not supported by sufficient evidence. The trial court also held that if its rulings concerning liability were vacated or reversed on appeal, Honeywell should at least 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. The trial court's rulings were appealed to the U.S. Court of Appeals for the Federal Circuit (the "Federal Circuit"), and on July 3, 1996, in a two to one split decision, a three judge panel of that court reversed the trial court's rulings of patent invalidity, unenforceability and non-infringement, and also found Honeywell to have violated California law by intentionally interfering with Litton's consultant contracts and customer prospects. However, the panel upheld two trial court rulings favorable to Honeywell, namely that Honeywell was entitled to a new trial for damages on all claims, and also to a grant of intervening patent rights which are to be defined and quantified by the trial court. After unsuccessfully requesting a rehearing of the panel's decision by the full Federal Circuit appellate court, Honeywell filed a petition with the U.S. Supreme Court on November 26, 1996, seeking review of the panel's decision. In the interim, Litton filed a motion and briefs with the trial court seeking injunctive relief against Honeywell's commercial ring laser gyroscope sales. After Honeywell and certain aircraft manufacturers filed briefs and made oral arguments opposing the injunction, the trial court denied Litton's motion on public interest grounds on December 23, 1996, and then scheduled the patent/tort damages retrial for May 6, 1997. On March 17, 1997, the U.S. Supreme Court granted Honeywell's petition for review and vacated the July 3, 1996, Federal Circuit panel decision. The case was remanded to the Federal Circuit panel for reconsideration in light of a recent decision by the U.S. Supreme Court in the WARNER-JENKINSON VS. HILTON DAVIS case, which refined the law concerning patent infringement under the doctrine of equivalents. On March 21, 1997, Litton filed a notice of appeal to the Federal Circuit of the trial court's December 23, 1996 decision to deny injunctive relief, but the Federal Circuit stayed any briefing or consideration of that matter until such time as it completed its reconsideration of liability issues ordered by the U.S. Supreme Court. The liability issues were argued before the same three judge Federal Circuit panel on September 30, 1997. On April 7, 1998, the panel issued its decision: (i) affirming the trial court's ruling that Honeywell's hollow cathode and RF ion-beam processes do not literally infringe the asserted claims of Litton's `849 reissue patent ("Litton's patent"); Page 9 (ii) vacating the trial court's ruling that Honeywell's RF ion-beam process does not infringe the asserted claims of Litton's patent under the doctrine of equivalents, but also vacating the jury's verdict on that issue and remanding that issue to the trial court for further proceedings in accordance with the WARNER-JENKINSON decision; (iii) vacating the jury's verdict that Honeywell's hollow cathode process infringes the asserted claims of Litton's patent under the doctrine of equivalents and remanding that issue to the trial court for further proceedings; (iv) reversing the trial court's ruling with respect to the torts of intentional interference with contractual relations and intentional interference with prospective economic advantage, but also vacating the jury's verdict on that issue, and remanding the issue to the trial court for further proceedings in accordance with California state law; (v) affirming the trial court's grant of a new trial to Honeywell on damages for all claims, if necessary; (vi) affirming the trial court's order granting intervening rights to Honeywell in the patent claim; (vii) reversing the trial court's ruling that the asserted claims of Litton's patent were invalid due to obviousness and reinstating the jury's verdict on that issue; and (viii)reversing the trial court's determination that Litton had obtained its `849 reissue patent through inequitable conduct. Litton's request for a rehearing of the panel's decision by the full Federal Circuit court was denied and its appeal of the denial of an injunction was dismissed. The case was remanded to the trial court for further legal and perhaps factual review. The parties filed motions with the trial court to dispose of the remanded issues as matters of law, which were argued before the trial court on July 26, 1999. The court took the matters under advisement without indicating when a decision will be forthcoming. If some of the remanded issues are not disposed of by legal motions, a jury trial of the remaining issues may be necessary. When preparing for the patent/tort damages retrial that was scheduled for May 1997, Litton had submitted a revised damage study to the trial court, seeking damages as high as $1.9 billion. Honeywell believes that its ion-beam processes do not infringe Litton's patent, and further, that Litton's damage study remains flawed and speculative for a number of reasons. Based on the U.S. Supreme Court's decision in the WARNER-JENKINSON VS. HILTON DAVIS case, which refined the law concerning patent infringement under the doctrine of equivalents, and the Federal Circuit panel's recent decision remanding certain issues in the patent/tort case to the trial court, Honeywell also believes that it is reasonably possible that the trial court will conclude that Honeywell did not infringe Litton's patent or interfere with its contractual relationships, and that no damages will ultimately be awarded to Litton. Although is not possible at this time to predict the outcome of the issues remanded to the trial court or any further appeals in this case, some potential does remain for adverse judgments which could be material to Honeywell's financial position or results of operations. Honeywell believes however, that any potential award of damages for an adverse judgment of infringement or interference should be based upon a reasonable royalty reflecting the value of the ion-beam coating process, and further that such an award would not be material to Honeywell's financial position or results of operations. As a result of the uncertainty regarding the outcome of this matter, no provision has been made in the financial statements with respect to this contingent liability. ANTITRUST CASE Preparations for, and conduct of, the trial in the antitrust case have generally followed the completion of comparable proceedings in the patent/tort case. The antitrust trial did not begin until November 20, 1995. Judge Pfaelzer also presided over the trial, but it was held before a different jury. At the close of evidence and Page 10 before jury deliberations began, the trial court dismissed, for failure of proof, Litton's contentions that Honeywell had illegally monopolized and attempted to monopolize by: (i) engaging in below-cost predatory pricing; (ii) tying and bundling product offerings under packaged pricing; (iii) misrepresenting its products and disparaging Litton products; and (iv) acquiring the Sperry Avionics business in 1986. On February 2, 1996, the case was submitted to the jury on the remaining allegations that Honeywell had illegally monopolized and attempted to monopolize by: (i) entering into certain long-term exclusive dealing and penalty arrangements with aircraft manufacturers and airlines to exclude Litton from the commercial aircraft market, and (ii) failing to provide Litton with access to proprietary software used in the cockpits of certain business jets. On February 29, 1996, the jury returned a $234 million single damages verdict against Honeywell for illegal monopolization, which verdict would have been automatically trebled. On March 1, 1996, the jury indicated that it was unable to reach a verdict on damages for the attempt to monopolize claim, and a mistrial was declared as to that claim. Honeywell subsequently filed a motion for judgment as a matter of law and a motion for a new trial, contending, among other things, that the jury's partial verdict should be overturned because Honeywell was prejudiced at trial, and Litton failed to prove essential elements of liability or submit competent evidence to support its speculative, all-or-nothing $298.5 million damage claim. Litton filed motions for entry of judgment and injunctive relief. On July 24, 1996, the trial court denied Honeywell's alternative motions for judgment as a matter of law or a complete new trial, but concluded that Litton's damage study was seriously flawed and granted Honeywell a retrial on damages only. The court also denied Litton's two motions. At that time, Judge Pfaelzer was expected to conduct the retrial of antitrust damages sometime following the retrial of patent/tort damages. However, after the U.S. Supreme Court remanded the patent/tort case to the Federal Circuit in March 1997, Litton moved to have the trial court expeditiously schedule the antitrust damages retrial. In September 1997, the trial court rejected that motion, indicating that it wished to know the outcome of the current patent/tort appeal before scheduling retrials of any type. Following the April 7, 1998 Federal Circuit panel decision in the patent/tort case, Litton again petitioned the trial court to schedule the retrial of antitrust damages. The trial court tentatively scheduled the trial to commence in the fourth quarter of 1998, and reopened limited discovery and other pretrial preparations. Litton then filed another antitrust damage claim of nearly $300 million. The damages only retrial began October 29, 1998, before Judge Pfaelzer, but a different jury. On December 9, 1998, the jury returned verdicts against Honeywell totaling $250 million, $220 million of which is in favor of Litton Systems Inc. and $30 million of which is in favor of its sister corporation LSL, Canada. On January 27, 1999, the court vacated its prior mistrial ruling with respect to the attempt to monopolize claim and entered a treble damages judgment in the total amount of $750 million for actual and attempted monopolization. Honeywell believes that there was no factual or legal basis for the magnitude of the jury's award in the damages retrial and that, as was the case in the first trial, the jury's award should be overturned. Honeywell also believes there are serious questions concerning the identity and nature of the business arrangements and conduct which were found by the first antitrust jury in 1996 to be anti-competitive and damaging to Litton, Page 11 and there are very strong grounds to overturn the verdict of liability as a matter of law. Honeywell has filed appropriate post-judgment motions with the trial court and Litton has filed motions seeking to add substantial attorney's fees and costs to the judgment. A hearing on the post-judgment was held before the trial court on May 20, 1999. The court took the matters under advisement without indicating when a decision will be forthcoming. Once the trial court has ruled on those motions, the parties will have the right to appeal the eventual judgment, as to both liability and damages, to the U.S. Court of Appeals for the Ninth Circuit. Execution of the trial court's judgment will be stayed pending resolution of Honeywell's post-judgment motions and the disposition of any appeals filed by the parties. Although is not possible at this time to predict the outcome of the motions before the trial court or any eventual appeals in this case, some potential remains for adverse judgments which could be material to Honeywell's financial position or results of operations. As a result of the uncertainty regarding the outcome of this matter, no provision has been made in the financial statements with respect to this contingent liability. Honeywell also believes that it would be inappropriate for Litton to obtain recovery of the same damages, e.g. losses it suffered due to Honeywell's sales of ring laser gyroscope-based inertial systems to OEMs and airline customers, under multiple legal theories, claims, and cases, and that eventually any duplicative recovery would be eliminated from the antitrust and patent/tort cases. In the fall of 1996, Litton and Honeywell commenced a court ordered mediation of the patent, tort and antitrust claims. No claim was resolved or settled, and the mediation is currently in recess. (7) As of July 4, 1999, Honeywell had reserved 10,857,849 shares of common stock for the issuance of shares in connection with stock option and stock bonus plans. (8) In 1998, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," which is effective for fiscal years beginning after December 15, 1998. Honeywell elected to adopt this SOP effective January 1, 1998. The accounting change has a positive impact on Income and is included in both 1998 and 1999's results for comparative purposes. (9) In 1998, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up Activities," which is effective for fiscal years beginning after December 15, 1998. This SOP requires that companies expense start-up costs and organizational costs as they are incurred. Honeywell has adopted this SOP effective January 1, 1999, and the impact on results of operations and financial position was immaterial. (10) In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," which was adopted by Honeywell beginning January 1, 1998. SFAS No. 130 requires the reporting of comprehensive income and its components in the general purpose financial statements. This Statement also requires that an entity classify items of other comprehensive income by their nature in an annual financial statement. Honeywell's total comprehensive income for the quarter is as follows:
Second Quarter Ended Six Months Ended -------------------- ---------------- 1999 1998 1999 1998 ---- ---- ---- ---- Net income $ 140.3 $ 125.8 $245.8 $222.1 Foreign currency translation adjustments (1.1) (4.3) (60.9) (24.2) ------ ------ ------ -------- Total comprehensive income $ 139.2 $ 121.5 $184.9 $197.9 ======= ======= ====== ======
(11) In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" which is effective for fiscal years beginning after June 15, 2000. SFAS 133 requires companies to record derivatives Page 12 on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. Honeywell is currently reviewing the standard and its effect on the financial statements. (12) The amounts set forth in this quarterly report are unaudited but, in the opinion of the registrant, include all adjustments necessary for a fair presentation of the results of operations for the six month periods ended July 4, 1999 and July 5, 1998, respectively. Honeywell's accounting policies are further described in the notes to financial statements in its Annual Report on Form 10-K for the fiscal year ended December 31, 1998. (13) On June 4, 1999, AlliedSignal Inc. ("AlliedSignal") and Honeywell Inc. entered into an Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which each outstanding share of Honeywell common stock ("Honeywell Common Stock") will be converted into the right to receive 1.875 shares of common stock of AlliedSignal (the "AlliedSignal Common Stock"). When the merger is effective, Honeywell will become a wholly-owned subsidiary of AlliedSignal. At the end of the second quarter of 1999, based on approximately 127 million Honeywell shares outstanding and AlliedSignal's stock price, the transaction is valued at approximately $15 billion and is expected to be accounted for as a pooling of interests. The new company will have annual revenues of about $25 billion and will assume approximately $1.5 billion of Honeywell debt. The merger, which is subject to shareowner approval, regulatory reviews and other conditions, is expected to close in the fourth quarter of 1999. The Merger Agreement provides for payment of termination fees of up to $350 million under certain circumstances. In connection with the execution of the Merger Agreement, AlliedSignal and Honeywell entered into (i) a Stock Option Agreement pursuant to which AlliedSignal granted Honeywell an option (the "Honeywell Option") to purchase up to approximately 19.9% of the outstanding shares of AlliedSignal Common Stock (after giving effect to the Honeywell Option) exercisable in the circumstances specified therein, and (ii) a Stock Option Agreement pursuant to which Honeywell granted AlliedSignal an option (the "AlliedSignal Option") to purchase up to approximately 19.9% of the outstanding shares of Honeywell Common Stock (after giving effect to the AlliedSignal Option) exercisable in the circumstances specified therein. For further information regarding the merger, see the Joint Proxy Statement-Prospectus dated July 23, 1999, of Allied Signal Inc. and Honeywell Inc. as filed with the Securities and Exchange Commission on July 29, 1999. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS Net income in the second quarter of 1999 was $140.3 million, up 12 percent from $125.8 million in the second quarter of 1998. Earnings per diluted share were $1.09 for the quarter, up 11 percent from $0.98 cents in second quarter of 1998. In 1998, second quarter earnings per share included a one-time gain of $5.6, or $0.03 per diluted share, related to the sale of assets. Sales in the second quarter were $2.14 billion, up 5 percent, compared with $2.04 billion a year earlier. Operating profit for the second quarter of 1999 was $252.0 million, compared with $234.0 million in the second quarter of 1998. Total orders for the second quarter were up 5 percent over the second quarter of 1998. SECOND QUARTER BUSINESS UNIT RESULTS SPACE AND AVIATION CONTROL. Operating profit was $88.9 million, compared to $78.7 million a year earlier. Profits increased 13 percent, with operating margins improving from 13.3 percent to 14.4 percent. Space and Aviation Control's profit growth resulted from a favorable shift in revenue mix toward business and regional jets and reduced research and development expenditures. Page 13 Sales for Space and Aviation Control grew 5 percent to $619.4 million, compared with $590.2 million in the second quarter of 1998. The increase in sales resulted from growth in Commercial Avionics, partly offset by continued weakness in Space Systems. Orders for the quarter were down 9 percent from an unusually strong second quarter in 1998. During the quarter, Space and Aviation was awarded a key engineering and development contract to retrofit commercial off the shelf display technology for the C17 military transport aircraft. This order continues to strengthen our effort to expand commercial technology into upgrade contracts for military transport aircraft. Also in the quarter, at the Paris Air Show, Embraer announced that it had received firm option orders for regional aircraft worth $7 billion and that it would equip those jets with Honeywell Primus Epic avionics. Raytheon also announced orders for up to 100 Honeywell controlled Hawker Horizon business jets. The acquisition of MEMS, or micro-mechanical, gyroscope technology from Boeing was completed in April. This technology will aid us in the development of future inertial guidance products. HOME AND BUILDING CONTROL. Operating profit for the business was $88.3 million compared with $69.1 million last year, a 28 percent increase. Home and Building Control products, solutions and services' operating profits were up significantly in the quarter as a result of improved booked margins, restructuring benefits, and Honeywell Quality Value Operational Excellence activities. Sales for Home and Building Control were $855.3 million compared to $788.0 million in the second quarter of 1998. The 9 percent growth in Home and Building Control's sales was driven by solid growth in control products, consumer products, building services and total security, offset by a decline in solutions business. Home and Building Control orders increased 14 percent, with double-digit growth in control products, consumer products, building services and total security, offset by flat performance in the remaining businesses. During the quarter, Home and Building Control announced the intent to acquire certain property and assets of C&K Systems business. C&K, a global distributor of residential and commercial security products with distribution in sixty one countries and a low cost manufacturing facility in China, has annual revenues of $100 million. C&K has developed state-of-the-art spread spectrum RF (radio-frequency) wireless communication technology which is a key element in developing low cost asset tracking capabilities. The acquisition is expected to close in September. INDUSTRIAL CONTROL. Operating profit for Industrial Control was $72.5 million for the quarter compared with $84.5 million a year earlier. The decrease was primarily the result of an unfavorable mix of project revenues and price competition in weak end markets, including pulp and paper, and refining, where substantial industry consolidation has slowed capital spending. Additionally, there was a higher than normal mix of large-scale international projects which tend to carry lower margins than do projects from the more developed European and North American customer base. Recognizing this increasingly competitive environment, the Honeywell Measurex worldwide sales and operating organization will be merged into Industrial Control's existing global infrastructure. Honeywell anticipates recording charges for severance and facility consolidations in the third quarter. Substantially all of these costs are expected to be offset by one-time gains on pending sales of assets. Industrial Control sales in the second quarter were $645.5 million, compared with $637.1 million last year. Industrial Control revenue increased 1 percent as a result of the revenues from acquisitions, offset by a decrease in industrial automation and control. Industrial Control orders increased 6 percent during the quarter compared to last year. While orders in both the sensing and control, and industrial automation and control businesses increased, growth in industrial automation and control was partially offset by a decline in Honeywell Measurex orders. Key strategic events include two new product offerings from the Hi-Spec Solutions advanced software business in industrial control and automation, Business.FLEX Goalsetter and MyPlant.com. Business.FLEX Goalsetter is a software application for advanced scheduling and real time supply chain automation in complex manufacturing environments. MyPlant.com is a web-based community of interests for process industry customers that will connect Honeywell customers and a broad range of non-Honeywell suppliers and consultants. SIX MONTH SUMMARY Page 14 In the first six months of 1999 Honeywell's net income was $ 245.8 million, up 11 percent from $222.1 million a year earlier. Sales were $ 4.13 billion, compared with $3.96 billion last year. Earnings per diluted share were $1.92, up 11 percent from $1.73 in the first six months of 1998. SPACE AND AVIATION CONTROL. Operating Profits generated by Space and Aviation Control increased 16 percent to $172.2 from $149.0 for the first six months of the prior year, driven by improvement in commercial aviation businesses. Orders were down 10 percent, and revenue grew to $1.20 billion, up 6 percent from $1.14 a year earlier. HOME AND BUILDING CONTROL. Operating profits for the first six months of 1999 increased 18 percent to $148.5 million from $125.9 million a year earlier, as a result of increases in the control products and building services businesses. Sales were $1.66 billion compared to $1.57 billion last year. Year to date orders were up 11 percent, primarily in the products business, from a year earlier. INDUSTRIAL CONTROL. Operating profits were $132.8 million, down 8 percent for the first six months of 1999 compared to $144.9 million a year earlier. The profit decrease was driven by the industrial automation and control business, offset by improvement in the sensing and control business. Year to date, orders were up 5 percent, and revenue was $1.23 billion, up slightly from $1.22 billion in the first half of 1998. PROPOSED MERGER On June 4, 1999, Honeywell and AlliedSignal Inc. entered into a merger agreement. Under the terms of the merger agreement, each share of Honeywell common stock will be exchanged for 1.875 shares of AlliedSignal Inc. common stock. At the end of the second quarter of 1999, based on approximately 127 million Honeywell shares outstanding and AlliedSignal's stock price, the transaction is valued at approximately $15 billion and is expected to be accounted for as a pooling of interests. The new company will have annual revenues of about $25 billion and will assume approximately $1.5 billion of Honeywell debt. The merger agreement is subject to shareowner approval, regulatory reviews and other conditions, and is expected to close in the fourth quarter of 1999. The merger agreement provides for payment of termination fees of up to $350 million under certain circumstances. Honeywell and AlliedSignal Inc. also have entered into option agreements pursuant to which, under certain circumstances, AlliedSignal Inc. may purchase approximately 19.9% of Honeywell's outstanding common stock for $109.453 per share and Honeywell may purchase approximately 19.9% of AlliedSignal Inc.'s outstanding common stock for $58.375 per share. Please refer to Note (13 ) to the Financial Statements set forth in Item 1 of Part I of this report as well as the Joint Proxy Statement-Prospectus dated July 23, 1999, of Allied Signal Inc. and Honeywell Inc. filed with the Securities and Exchange Commission on July 29, 1999, for further information regarding this matter. YEAR 2000 READINESS DISCLOSURES BACKGROUND Computer programs which were written using two digits (rather than four) to define the applicable year may recognize a date using "00" as the year 1900 rather than the year 2000. This is generally referred to as the "year 2000 issue," which may affect the performance of computer programs, hardware, software and other products with embedded computer technology that is date sensitive. Unless corrective action is taken to ensure that such items are "year 2000 ready," which means that they will be able to process dates and times in such a manner that their technical and functional requirements will continue to be met without interruption for the year 2000, they may generate erroneous data or cause systems, equipment or other products to fail. HONEYWELL'S YEAR 2000 PROGRAM Page 15 In the fourth quarter of 1995, Honeywell initiated a program to determine whether or not its business systems, operations and products are year 2000 ready. This program addresses the company's information technology systems and other systems with embedded computer technology; products provided to customers; products purchased from suppliers; and most recently, the year 2000 readiness of its significant customers. PRODUCT READINESS Substantially all of Honeywell's current products have been evaluated or tested internally to ascertain if they are year 2000 ready. Over 99 percent of these products are year 2000 ready and the remainder will be repaired prior to the end of the year. In some areas of its businesses, Honeywell is conducting external integration tests of year 2000 ready products in existing customer systems to verify that they are compatible with such systems. Certain older products that are still in use by Honeywell customers and subject to warranties or service contracts, may not be year 2000 ready. Honeywell has formally communicated with distributors and direct customers to make them aware of any potential problems that may result from the use of such products and encouraging them to modify or replace same, or is providing warranty or contract service as appropriate. For older products which are not year 2000 ready, and were sold through distributors or are no longer under warranty or service contracts, various means are being employed to raise the awareness of any potential year 2000 problems, including advertising and contracting with external service providers to help identify current owners. Honeywell has found a few new year 2000 issues with products previously identified as ready, however these issues have been resolved and none of them are considered to be materially significant. Where possible, customers have been notified directly of any issues and the information has been posted on Honeywell's web sites. SUPPLIER READINESS Honeywell has sent questionnaires to substantially all suppliers who furnish products or services to the company, to ascertain whether products or services supplied are year 2000 ready, as well as the effect the year 2000 issue may have on their ability to continue supplying same. Approximately 3000 suppliers have been identified by the company as critical to its business and the various business units are investigating a greater number to verify that critical supplier products or services will be year 2000 ready. Various methods are being used to validate supplier readiness, including symposiums, site visits and telephone interviews. The verification process is expected to be completed during the third quarter of 1999 and contingency plans will be implemented for critical suppliers identified to be at risk. INTERNAL SYSTEMS READINESS In 1993, prior to the commencement of the Honeywell year 2000 program, the company implemented a program to upgrade most of its key information technology (IT) systems to common applications software packages, with completion scheduled prior to the year 2000. Recent revisions of these packages are marketed as year 2000 ready, however, Honeywell has decided it is necessary to validate that is true in our environment. While Honeywell expects its critical internal business systems to be year 2000 ready by third quarter 1999, integration testing of the software packages may extend beyond that date. The remainder of Honeywell's business systems which are considered to have a financial or operational impact on its businesses, are expected to be year 2000 ready by the end of 1999. The company is still assessing the status of its non-IT systems and making repairs or upgrades to such systems as necessary. It expects to conclude this effort during the third quarter of 1999 for critical non-IT systems, and by the end of 1999 for other non-IT systems which are considered to have a financial or operational impact on its businesses. Honeywell does not expect the costs associated with the remediation of non-IT systems to be material, and such costs are included in the amounts forecasted for contingencies in 1999 as discussed below under the caption "Costs." Page 16 CUSTOMER READINESS Honeywell has evaluated the year 2000 readiness of its most significant customers, based on volume of business, and is considering the effect, if any, that the year 2000 issue may have on their requirements for Honeywell's products and services. Honeywell does not foresee any significant problems in this area, though no assurance can be given that all information from customers regarding their readiness and plans is accurate. RISKS/CONTINGENCY PLANS Honeywell's products are used in a wide variety of control applications including, but not limited to, industrial processing control systems, home and building products and automation control systems, and space and aviation control systems. In a most likely worst case scenario, if Honeywell's products are not year 2000 ready, a control application could be disrupted, which could affect the ability of the system in which it is installed to function properly, depending on other safeguards. Similarly, if customers are unable to conduct adequate integration testing of Honeywell's year 2000 ready products within their equipment or systems, they could experience temporary equipment or systems failure if compatibility problems arise. While the company does not expect any worst case scenario to occur, it is working closely with customers of critical systems to advise them of potential problems and the need to complete systems integration testing. If a critical supplier cannot supply products or services to Honeywell that are year 2000 ready, or if the supplier is adversely affected by the year 2000 issue, that source of supply could be interrupted. This could affect the ability of Honeywell to supply other products or services, or disrupt a business operation which is dependent thereon. Furthermore, if a year 2000 issue affecting a component is not detected by a supplier, it could affect the performance of the product or system of which it becomes a part and possibly cause one or more of the scenarios discussed above to occur. To reduce the risk of such occurrences, Honeywell is taking steps to verify the year 2000 readiness of all critical suppliers as discussed above under the caption "Supplier Readiness." In addition, each of Honeywell's business units is developing contingency plans to identify substitute materials, services and alternate suppliers. Honeywell expects that all of its internal applications systems that are considered to have a financial or operational impact on its businesses, will be year 2000 ready by the end of 1999. However, if strategy to replace order management systems in some European countries is not completely executed prior to the year 2000, there may be difficulty in processing customer orders in such countries. Contingency plans have been developed to mitigate such risks and will be implemented if necessary. Honeywell acquires other companies from time to time as part of its business development strategy, and it anticipates that acquisitions will continue through the year 2000. In the course of conducting due diligence investigations of acquisition candidates, Honeywell endeavors to ascertain whether or not their products or services, or those of their critical suppliers, are year 2000 ready, and whether or not such suppliers and key customers, if any, will be adversely affected by the year 2000 issue. While acquisition candidates may provide certain information or make representations and warranties regarding year 2000 readiness, in some cases, Honeywell may be unable to verify same until the acquisition is completed and the steps outlined herein as part of Honeywell's year 2000 program are undertaken. COSTS Honeywell estimates that historical and future costs associated with its year 2000 program will not exceed $60 million for fiscal years 1995 through 1999. Approximately $20 million in costs have been incurred in fiscal year 1998, and $30 million has been forecasted for the 1999 fiscal year to cover additional costs and contingencies. Funding for the 1998 and 1999 costs was previously forecasted as part of Honeywell's operating expenditures and included in the company's budgets. Management believes that such costs will not have a material impact on the operations, cash flows or financial condition of Honeywell and its subsidiaries, taken as a whole, in future periods. Page 17 The preceding "Year 2000 Readiness Disclosures" contain forward-looking statements of Honeywell's expectations regarding the ability of its products and systems to be year 2000 ready, as well as its ability to assess the readiness of its suppliers and customers, and related risks. These statements relate to future events, the outcome of which is uncertain, and should be read in conjunction with the cautionary factors listed in Exhibit 99(i) to this report. EURO CURRENCY In January 1999, the European Monetary Union (EMU) entered into a three-year transition phase during which a common currency called the Euro was introduced in participating countries. Initially, this new currency is being used for financial transactions, and progressively, it will replace the old national currencies that will be withdrawn by July 2002. The transition to the Euro currency will involve changing budgetary, accounting and fiscal systems in companies and public administrations, as well as the simultaneous handling of parallel currencies and conversion of legacy data. UNCERTAINTIES RELATED TO THE EURO CONVERSION In 1996, Honeywell began studying the ongoing process of European integration, focussing on issues and opportunities created by the EMU. Task teams were established to develop Honeywell's Euro strategies and policies. The findings of these teams have been integrated into our strategic and operational plans. At this time, there are no significant remaining uncertainties related to the Euro conversion and no material impact has been identified. COMPETITIVE IMPLICATIONS Making a broader European market requires product lines to become more international and less local. In 1993, Honeywell restructured and its market focus was changed from a country basis to a European line-of-business approach. Today, our pricing strategies are largely European, except in those instances where technical or cultural market characteristics warrant price differentiation. The expectations of our customers, with respect to the currency to be used in the transition period have been reflected in our changeover strategies, resulting in a pro-active dual currency capability since January 1, 1999. The same approach with our suppliers will allow us to benefit from the increased price transparency on the cost side. Plans are in place, including shared service centers and consolidation of operations, to pursue the economies of scale offered by the single European market. We believe converting to the Euro has no material impact on Honeywell's competitive position. INFORMATION TECHNOLOGY AND OTHER SYSTEMS Compliance with European Commission regulations concerning conversion, triangulation and rounding rules related to the Euro introduction, have been addressed in detailed action plans involving all information systems in all Honeywell units, both for in-house and purchased systems. The cost of modification is insignificant, as the action plan builds on new systems implementation required for shared services and Year 2000 readiness. Timelines for implementation have been established, adequate resources are available and contingency plans are in place. We believe converting the information technology and other systems to the Euro has no material impact on Honeywell. CURRENCY RISK With the convergence of short-term interest rates in the EMU countries, observed during the last two years, the foreign exchange exposure between the currencies of these countries has diminished considerably. Our foreign exchange exposure management has systematically been adapted to this evolution, thereby benefiting from reduced hedging cost. The definitive fixing of the exchange rates will only make this benefit permanent without creating any other issue or opportunity other than eliminating the spread on the spot exchange. All balance sheet exposures between EMU currencies and non-EMU currencies are systematically hedged from month to month. The functional currency will not change to Euro in 1999 in any of the Honeywell units concerned. Current plans call for functional currency conversion by year-end 2001. We do not anticipate this change will have a material impact on Page 18 Honeywell. We believe converting to the Euro has no material impact on Honeywell's currency exchange cost and/or risk exposure. SAFE HARBOR CAUTIONARY STATEMENT Any statements in this report regarding Honeywell's outlook for 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, are forward-looking statements, some of which may be identified by such words or phrases as "will likely result," "are expected to," "will continue," "outlook," "is anticipated," "estimate," "project" or similar expressions. No assurance can be given that the results in any forward-looking statement will be achieved and actual results could be affected by one or more factors which could cause them to differ materially. For these statements, Honeywell claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. The following is a summary of certain factors, the results of which, if markedly different from Honeywell's planning assumptions, could cause Honeywell's future results to differ materially from those expressed in any forward-looking statements contained in this report: foreign currency translations of sales denominated in other currencies, which may fluctuate adversely based on local currency valuations; changes in macroeconomic conditions in those regions throughout the world in which Honeywell does business, such as those which have recently occurred in Asia, Latin America and Eastern Europe, or changes in trade or monetary policies, any of which may affect customer demand for the company's products and services; risks pertaining to performance and energy retrofit contracts, including dependence on the performance of third parties; various competitive pressures, such as new technologies, industry consolidation and deregulation of certain industries; the ability of material suppliers or key customers of the Company to reduce or eliminate risks to their businesses or operations arising from the year 2000 issue; availability of intellectual property rights for newly developed products or key technologies; and significant acquisitions or divestitures. Please refer to Exhibit 99(i) of this report for a more detailed discussion of these and other factors that could cause Honeywell's actual results in future periods to differ materially from those projected in any forward-looking statements. FINANCIAL CONDITION Shareowners' equity increased to $2,957 million from $2,786 million at the end of 1998. Shareowners' equity includes an increase of $172 million in retained earnings from current year earnings net of dividends, a $61 million decrease in the accumulated foreign currency translation balance, a $78 million increase in additional paid in capital, and a $18 million net decrease in treasury stock, driven by the repurchase of treasury shares. Page 19 Basic common shares outstanding increased from 126.3 million at the end of 1998 to 127.5 million, primarily as a result of the decrease in the number of shares repurchased under the company's share repurchase program, since the announcement of the intended merger between Honeywell and AlliedSignal. During the first six months of 1999, 715,000 shares were repurchased at a cost of $52 million. Diluted shares outstanding increased from 127.7 million at year-end 1998 to 130.6 million at the end of June. The repurchased shares are intended to offset planned issuances under existing employee stock and incentive programs. Shares issued through stock option and stock bonus plans totaled 1,576,118, up significantly from 1998, as a number of options are being converted to common stock as a result of a higher stock price. Proceeds from stock options yielded $80 million. Debt as a percentage of total capital at the end of the second quarter was 33 percent, down two percent from the end of 1998. The primary driver of the change was an increase in additional paid in capital and retained earnings. During 1998, Honeywell committed itself to a plan of action and recorded special charges of $53.7 million intended to reduce operating costs and improve margins. Expenditures of $17.3 million in the second quarter of 1999 included $13.1 million for work force reduction, $0.1 million for facilities consolidations and $4.1 million for other restructuring activities. For the first six months, expenditures totaled $30.4, consisting of $24.0 million for work force reduction, $ 1.3 for facility consolidations and $5.1 million for other restructuring activities. Additionally in 1997, special charges of $90.7 million were recorded. Expenditures of $3.1 million in the second quarter of 1999 included $1.7 million for work force reduction, $0.3 million for facilities consolidations and $1.1 million for other restructuring activities. For the first six months, expenditures totaled $10.9, consisting of $3.7 million for work force reduction, $ 6.0 for facility consolidations and $1.2 million for other restructuring activities. The remaining balance of restructuring reserves is $19.8 million for the 1998 charges and $5.9 million for the 1997 charges. Accrued costs remaining will be funded with cash flows from operating activities in 1999. Net cash flow generated by operating activities for the first six months was $254.6 million. Net cash flows used by investing activities exceeded net cash generated by $31.9 million, primarily due to capital expenditures and investments in acquisitions. The primary investing activities of investments in capital and acquisitions were funded by cash generated from operations and proceeds from the sale of assets. At the end of the quarter, Honeywell had $1,325 million of committed revolving credit lines with 17 banks. There were no outstanding borrowings against these lines on July 4, 1999. In addition, certain foreign units had $277 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 July 4, 1999, Honeywell's credit ratings for long-term and short-term debt, respectively, were A/A-1 by Standard and Poor's Corporation, A/D-1 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. As of July 4, 1999, the notional amount of outstanding foreign exchange contracts was approximately $1.1 billion. The amount of hedging gains and losses deferred was not material at July 4, 1999. The notional amount of outstanding interest rate swaps was $1.25 billion at July 4, 1999. Page 20 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, 1998, 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 Shareowners of Honeywell Inc. in Minneapolis on April 20, 1999, three proposals were submitted to a vote of the shareowners. The first was a proposal to elect directors for the year commencing April 21, 1999. 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. 106,193,359 1,697,040 Elizabeth E. Bailey 106,220,486 1,651,913 Gordon M. Bethune 104,852,199 3,020,200 Michael R. Bonsignore 106,129,540 1,742,859 Jaime Chico Pardo 104,836,616 3,035,783 Giannantonio Ferrari 106,175,218 1,679,181 R. Donald Fullerton 106,280,206 1,592,193 James J. Howard 106,267,842 1,604,557 Katherine M. Hudson 106,255,774 1,616,625 Bruce E. Karatz 106,283,941 1,588,458 A. Barry Rand 106,254,132 1,618,267 Steven G. Rothmeier 106,211,434 1,660,965 Michael W. Wright 106,225,923 1,646,476
The second was a proposal to ratify the selection of Deloitte & Touche LLP as the auditors of the company. 106,614,521 shares voted in favor of the proposal, 530,375 shares voted against the proposal and 727,503 shares abstained from voting. The third was a proposal to approve the amendment to Honeywell's Restated Certificate of Incorporation, to increase the authorized common shares. 101,115,876 shares voted in favor of the proposal, 5,960,311 shares voted against the proposal and 796,212 shares abstained from voting. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Page 21 (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: On June 7, 1999, Honeywell filed a report on Form 8-K regarding an Agreement and Plan of Merger entered into on June 4, 1999, with AlliedSignal Inc. As a result of the merger, which is subject to shareowner approval, regulatory reviews and other conditions, Honeywell Inc. will become a wholly-owned subsidiary of AlliedSignal Inc. On June 16, 1999, Honeywell filed a report on Form 8-K regarding an employment agreement which will be entered into between Michael R. Bonsignore and AlliedSignal Inc. pursuant to Section 6.7 of the Agreement and Plan of Merger entered into by AlliedSignal Inc., Honeywell Inc. dated June 4, 1999. Page 22 SIGNATURES 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 17, 1999 By: /s/ E. D. Grayson --- -------------------------------------- E. D. Grayson Vice President and General Counsel Date: August 17, 1999 By: /s/ P.M. Palazzari --- -------------------------------------- P. M. Palazzari Vice President and Controller (Chief Accounting Officer) INDEX TO EXHIBITS
Exhibit No. Page No. - ----------- -------- 12 Computation of Ratio of Earnings to Fixed Charges i 27 Financial Data Schedule ii 99(i) Cautionary Statements For Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995 iii
EX-12 2 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 July 4, 1999 ------------ Income before Income Taxes.................. $ 367.4 Deduct: Equity income(loss)...................... 3.0 -------- Subtotal................................. 364.4 Add (deduct): Dividends from less than 50% owned companies 2.7 Proportional share of income (loss) before income taxes of 50% owned companies .7 -------- Adjusted income............................. 367.8 -------- Fixed Charges Interest on indebtedness................. 58.0 Amortization of debt expense............. 0.9 Interest portion of rent expense......... 23.9 -------- Total Fixed Charges......................... 82.8 -------- Total Available Income...................... $450.6 -------- -------- Ratio of Earnings to Fixed Charges.......... 5.4 -------- --------
ii EX-27 3 EXHIBIT 27
5 1,000,000 6-MOS DEC-31-1999 JUL-04-1999 148 8 1,850 40 1,162 3,411 3,384 2,085 7,071 2,242 1,224 0 0 281 2,676 7,071 4,126 4,126 2,833 2,833 827 40 58 367 121 246 0 0 0 246 1.94 1.92
EX-99.(I) 4 EXHIBIT 99(I) EXHIBIT 99(i) CAUTIONARY STATEMENTS FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Honeywell Inc. ("Honeywell" or the "Company") may occasionally make statements regarding its businesses and their respective markets, such as projections of future performance, statements of management's plans and objectives, future contracts, 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 (e.g. the adoption of the EURO currency by the European Monetary Union), 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 employees. In certain foreign markets, local labor rates and practices may affect Honeywell's operating costs or its ability to conduct business in such areas. iii Page 2 REGULATORY ORGANIZATIONS. In many of the domestic and foreign 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. Also, certain other regulatory organizations such as the Financial Accounting Standards Board and the American Institute of Certified Public Accountants, may from time to time, promulgate rules and regulations which may impact Honeywell's accounting policies in the U.S. and abroad. 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. YEAR 2000 READINESS DISCLOSURES. Honeywell has established a year 2000 program to evaluate and deal with issues which may arise and affect its products, services, businesses and operations as a result of the year 2000 issue. To the extent Honeywell is unable to successfully execute the strategies set forth in that program, or if one or more of such efforts fail, the Company could face product liability claims from certain customers, or disruption of its businesses or operations. Similarly, if a critical supplier is unable to remedy its year 2000 issues, that source of supply for a product or service critical to a particular Honeywell business, could be disrupted and affect the ability of that business to conduct its operations or provide certain products or services to customers. Please refer to the information set forth under the caption "Year 2000 Readiness Disclosures" in Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, for a more in-depth discussion of year 2000 risks and uncertainties which could affect 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, or unseasonable weather patterns 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. Adverse fluctuations in the prices of commodities produced or used by the Honeywell's customers in their operations, as well as the availability of credit markets in the United States and other regions of the world to the Company's customers, may affect their ability to purchase Honeywell's products and services. The Company endeavors to forecast such trends, but unforeseen general economic conditions in the United States and internationally, such as those which have recently occurred in Asia, Latin America and eastern Europe, as well as industry specific factors, may affect such forecasts. To the extent a key customer of Honeywell is affected by the year 2000 issue, that customer's demand for the products or services of Honeywell could also be affected. CHARGES RESULTING FROM ACQUISITIONS AND DIVESTITURES. Honeywell continually evaluates the growth potential and profitability of its existing businesses, and equity and other investments. When deemed appropriate, Honeywell will acquire new businesses to expand its product offerings, increase or decrease its investments, and divest assets (e.g., buildings, product lines, etc.) and existing businesses which are no longer considered a strategic fit or do not continue to create value consistent with the Company's objectives. Decisions to sell assets or divest businesses could result in future gains or charges depending on the circumstances. 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. iv -----END PRIVACY-ENHANCED MESSAGE-----