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 September 29, 1996
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 September 29, 1996, the number of shares outstanding of the
registrant's common stock, $1.50 par value, was 126,499,066.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
INCOME STATEMENT
Honeywell Inc. and Subsidiaries
(Unaudited)
(Dollars in Millions Except Per Share Amounts)
<TABLE>
<CAPTION>
Third Quarter Ended
-------------------------------------
September 29, 1996 October 1, 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
SALES $ 1,803.1 $ 1,680.3
---------- ---------
COSTS AND EXPENSES
Cost of sales 1,221.7 1,148.1
Research and development 84.5 75.0
Selling, general and administrative 323.4 312.5
Interest - net 19.3 16.8
Equity loss 1.0 0.2
---------- ---------
1,649.9 1,552.6
---------- ---------
INCOME BEFORE INCOME TAXES 153.2 127.7
PROVISION FOR INCOME TAXES 52.1 43.5
---------- ---------
NET INCOME $ 101.1 $ 84.2
---------- ---------
---------- ---------
EARNINGS PER COMMON SHARE $ 0.80 $ 0.66
---------- ---------
---------- ---------
</TABLE>
INCOME STATEMENT
Honeywell Inc. and Subsidiaries
(Unaudited)
(Dollars in Millions Except Per Share Amounts)
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------------------
September 29, 1996 October 1, 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
SALES $ 5,194.2 $ 4,814.6
---------- ----------
COSTS AND EXPENSES
Cost of sales 3,553.3 3,299.1
Research and development 252.1 237.2
Selling, general and administrative 962.7 917.9
Interest - net 55.1 52.4
Equity income (7.0) (6.9)
---------- ----------
4,816.2 4,499.7
---------- ----------
INCOME BEFORE INCOME TAXES 378.0 314.9
PROVISION FOR INCOME TAXES 128.5 107.1
---------- ----------
NET INCOME $ 249.5 $ 207.8
---------- ----------
---------- ----------
EARNINGS PER COMMON SHARE $ 1.97 $ 1.63
---------- ----------
---------- ----------
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 126,667,672 127,222,511
</TABLE>
STATEMENT OF CASH FLOWS
Honeywell Inc. and Subsidiaries
(Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------------------
September 29, 1996 October 1, 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 249.5 $ 207.8
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation 176.2 178.1
Amortization of intangibles 37.8 42.7
Deferred income taxes 7.9 17.7
Equity income, net of dividends received (5.6) (5.6)
Loss on sale of assets 0.4 3.6
Contributions to employee stock plans 32.3 21.2
Increase in receivables (38.6) (30.8)
Increase in inventories (104.2) (44.2)
Decrease in accounts payable (62.2) (49.1)
Increase (decrease) in accrued income taxes and interest 55.8 (16.9)
Other changes in working capital, excluding short-term
investments and short-term debt (21.1) (29.4)
Other noncurrent items - net 5.1 (7.7)
---------- ---------
Net cash flows from operating activities 333.3 287.4
---------- ---------
Cash Flows from Investing Activities
Proceeds from sale of assets 50.2 12.3
Capital expenditures (212.4) (173.5)
Investment in acquisitions, net of cash acquired (352.3) (41.5)
Increase in short-term investments (1.4)
Other - net (0.7) (0.9)
---------- ---------
Net cash flows from investing activities (515.2) (205.0)
---------- ---------
Cash Flows from Financing Activities
Net decrease in short-term debt (4.1) (11.5)
Proceeds from issuance of long-term debt 300.0 147.7
Repayment of long-term debt (104.3) (130.8)
Purchase of treasury stock (127.7) (104.2)
Proceeds from exercise of stock options 40.3 54.0
Dividends paid (100.8) (95.4)
---------- ---------
Net cash flows from financing activities 3.4 (140.2)
---------- ---------
Effect of Exchange Rate Changes on Cash (4.9) 9.9
---------- ---------
Decrease in Cash and Cash Equivalents (183.4) (47.9)
Cash and Cash Equivalents at Beginning of Year 291.6 267.4
---------- ---------
Cash and Cash Equivalents at End of Nine Months $ 108.2 $ 219.5
---------- ---------
---------- ---------
</TABLE>
STATEMENT OF FINANCIAL POSITION
Honeywell Inc. and Subsidiaries
(Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
September 29, 1996 October 1, 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 108.2 $ 291.6
Short-term investments 8.8 9.0
Receivables (less allowance for doubtful accounts:
1996, $32.5; 1995, $34.5) 1,567.0 1,477.3
Inventories (less progress billing on uncompleted
contracts: 1996, $59.4; 1995, $56.4) 953.1 794.4
Deferred income taxes 193.2 194.6
------------ ------------
2,830.3 2,766.9
Investments and Advances 233.8 244.8
Property, Plant and Equipment
Property, plant and equipment 2,999.3 2,857.1
Less accumulated depreciation 1,868.8 1,758.2
------------ ------------
1,130.5 1,098.9
Other Assets
Long-term receivables (less allowance for doubtful
accounts: 1996, $0.7; 1995, $0.7) 27.9 46.8
Intangible assets 869.7 624.2
Deferred income taxes 73.5 71.8
Other 223.3 206.8
------------ ------------
Total Assets $ 5,389.0 $ 5,060.2
------------ ------------
------------ ------------
Liabilities and Stockholders' Equity
Current Liabilities
Short-term debt $ 315.3 $ 312.4
Accounts payable 472.1 491.5
Customer advances 178.9 158.2
Accrued income taxes 320.0 274.8
Deferred income taxes 21.8 20.4
Other accrued liabilities 770.6 765.2
------------ ------------
2,078.7 2,022.5
Long-Term Debt 675.1 481.0
Deferred Income Taxes 53.6 39.2
Other Liabilities 496.6 477.4
Stockholders' Equity
Common stock - $1.50 par value
Authorized - 250,000,000 shares
Issued - 1996 - 187,848,521 shares 281.8
1995 - 188,126,704 shares 282.2
Additional paid-in capital 507.6 481.3
Retained earnings 2,955.5 2,805.8
Treasury stock - 1996 - 61,349,455 shares (1,746.3)
1995 - 61,306,251 shares (1,650.2)
Accumulated foreign currency translation 105.9 140.9
Pension liability adjustment (19.5) (19.9)
------------ ------------
2,085.0 2,040.1
------------ ------------
Total Liabilities and Stockholders' Equity $ 5,389.0 $ 5,060.2
------------ ------------
------------ ------------
</TABLE>
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:
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
------------------- -----------------
September 29, 1996 October 1, 1995 September 29, 1996 October 1, 1995
------------------- --------------- ------------------ ---------------
<S> <C> <C> <C> <C>
Interest expense $20.7 $20.2 $60.9 $63.4
Interest income (1.4) (3.4) (5.8) (11.0)
----- ----- ----- -----
Total $19.3 $16.8 $55.1 $52.4
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
Interest paid amounted to $4.9 and $47.1 for the third quarter and nine
months of 1996 and $17.8 and $61.5 for the third quarter and nine months of
1995, 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 ($34.7)
and $58.5 for the third quarter and nine months of 1996 and $21.4 and $93.6
for the third quarter and nine months of 1995, respectively.
(4) Dividends per share of common stock were $0.27 and $0.79 for the third
quarter and nine months of 1996 and $0.25 and $0.75 for the third quarter
and nine months of 1995, respectively.
(5) Inventories consist of the following:
<TABLE>
<CAPTION>
September 29, December 31,
1996 1995
------------ -----------
<S> <C> <C>
Finished goods $ 470.1 $ 356.6
Inventories related to long-term contracts 78.7 73.6
Work in process 170.2 159.5
Raw materials and supplies 234.1 204.7
-------- --------
Total $ 953.1 $ 794.4
-------- --------
-------- --------
</TABLE>
(6) Litigation.
On March 13, 1990, Litton Systems, Inc. (`Litton') filed suit against
Honeywell in U.S. District Court, Central District of California, alleging
Honeywell patent infringement relating to the process used by Honeywell to
coat mirrors incorporated in its ring laser gyroscopes; attempted
monopolization and predatory pricing by Honeywell in certain alleged markets
for products containing ring laser gyroscopes; and intentional interference
by Honeywell with Litton's prospective advantage and with its contractual
relationships with Ojai Research, Inc., a California corporation. Honeywell
generally denied Litton's allegations, contested both the validity and
infringement of the patent; and alleged that the patent had been obtained by
Litton's inequitable conduct before the United States Patent and Trademark
Office. Honeywell also filed counterclaims against Litton alleging, among
other things, that Litton's business and litigation conduct violated federal
and state laws, causing Honeywell considerable damage and expense.
On January 9, 1995, Judge Mariana Pfaelzer of the U.S. District Court set
aside an August 1993 jury verdict and damage award of $1.2 billion against
Honeywell in the patent and interference with contract case. She ruled,
among other things, that the Litton patent was unenforceable because it was
obtained by inequitable conduct and invalid because it was an invention that
would have been obvious from combining existing processes. She further
ruled that if her judgment were ever subsequently vacated or reversed on
appeal, Honeywell would be granted a new trial on the issue of damages
because the jury's 1993 award was inconsistent with the clear weight of the
evidence and permitting it to stand would constitute a miscarriage of
justice. Litton appealed all of Judge Pfaelzer's rulings to the Court of
Appeals for the Federal Circuit, Washington, D.C.
On July 3, 1996, a three judge panel of the Federal Circuit Court of
Appeals, in a split 2 to 1 decision, overruled the District Court's rulings
of patent invalidity, unenforceability and non-infringement, and also
found Honeywell liable under Litton's interference with contract claims.
However, the panel upheld the District 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 Court of Appeals, which was denied on September 11,
1996. Honeywell is petitioning the U.S. Supreme Court for review of that
decision.
On September 9, 1996, the U.S. District Court had Litton and Honeywell agree
to mediate the above patent state tort claims, along with the antitrust
claim described below, before retired California Supreme Court Chief Justice
Malcolm Lucas, and this process has commenced. The case will conclude only
when the U.S. Supreme Court, if review is granted, resolves certain legal
issues that could reduce or eliminate the verdict; or, if and when mediation
leads to a settlement of the parties' claims; or, if mediation fails and
there is a new trial on the issue of damages, when the new trial for damages
ends; and thereafter, if either party appeals the result thereof, when all
legal issues arising from such appeal are resolved. As a result, no
provision has been made in the financial statements with respect to this
contingent liability.
The jury trial for the antitrust case began November 20, 1995 before Judge
Mariana R. Pfaelzer. After the parties presented their evidence, the court
dismissed, for failure of proof, Litton's contentions that Honeywell engaged
in below-cost predatory pricing, illegal tying and bundling, and illegally
acquired Sperry Avionics in 1986. On February 2, 1996, the case was
submitted to the jury on two claims, monopolization and attempt to
monopolize, both based on Litton's allegations that Honeywell entered into
certain 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 ASCB interface
information. On February 29, 1996, the jury returned a $234 million verdict
against Honeywell for the monopolization claim. 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 with the trial court, 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.
On July 24, 1996, the U.S. District Court issued an Order denying
Honeywell's Motion for Judgment as a Matter of Law, Litton's Motion for
Injunctive Relief and Litton's Motion for Entry of Judgment. The court
concluded, however, that the aggregated damage study Litton presented to the
jury was seriously flawed and granted Honeywell's Motion for a New Trial as
to the issue of damages only.
As noted above, on September 9, 1996, the U.S. District Court ordered Litton
and Honeywell to mediate the antitrust claim, and this process has
commenced. No date has been set for a new trial on the issue of damages.
The case will conclude only when mediation leads to a settlement of the
parties' claims, if mediation is successful; or if mediation fails, when the
trial for damages ends and other legal issues relating to this matter are
resolved. As a result, no provision has been made in the financial
statements with respect to this contingent liability.
On September 12, 1994, Honeywell filed a declaratory judgment action against
American Flywheel Systems, Inc. (`AFS') in the Superior Court of Maricopa
County, Arizona, seeking a declaration as to the rights and obligations of
the parties under an agreement regarding the development of an electro-
mechanical flywheel battery. In October 1994, Honeywell ceased work under
the project as a result of AFS's failure to make payments under the
agreement. On July 21, 1995, AFS filed an answer and counterclaim alleging
breach of contract and related tort claims, including fraud. Honeywell
denied AFS's allegations and amended its complaint to seek damages for
nonpayment of monies owed under the agreement. A jury trial in this case
commenced October 7, 1996 and is expected to conclude in late November.
Honeywell believes that there is no merit to the claims asserted by AFS and
as a result, that it will prevail based on the merits of its case, and in
any event, an adverse decision if any, is not likely to be material to
Honeywell's net income financial position or liquidity.
(7) As of September 29, 1996, Honeywell had reserved 8,710,652 shares of common
stock for the issuance of shares in connection with stock option and stock
bonus plans.
(8) In 1996, Honeywell adopted Statement of Financial Accounting Standards No.
121 (SFAS 121), `Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets To Be Disposed Of'. SFAS 121 requires that (i) assets to
be held and used be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable; (ii) an impairment loss be recognized when the estimated
future cash flows from the asset are less than the carrying value of the
asset; and (iii) assets to be disposed of be reported at the lower of their
carrying amount or their fair value, less cost to sell. Adoption of SFAS
121 did not have any effect on results of operations or financial position
in the third quarter and nine months of 1996.
In 1996, Honeywell adopted Statement of Financial Accounting Standards No.
123 (SFAS 123), `Accounting for Stock-Based Compensation'. SFAS 123
requires expanded disclosures of stock-based compensation arrangements with
employees and nonemployees and encourages a new method of accounting for
employee stock compensation awards based on their estimated fair value at
the date of grant and the recognition of associated compensation expense
over the service period in the income statement. Companies are permitted
to continue following Accounting Principles Board Opinion No. 25 (APB 25),
`Accounting for Stock Issued to Employees', but must disclose pro forma net
income and pro forma earnings per share, as if the fair value method of
SFAS 123 had been applied, in a footnote to the financial statements. The
fair value measurement and recognition provisions of SFAS 123 must be
applied to all stock-based arrangements with nonemployees. As permitted by
SFAS 123, Honeywell has elected to continue following the guidance of APB
25 for measurement and recognition of stock-based transactions with
employees. SFAS 123 disclosures are not required on an interim reporting
basis unless a complete set of financial statements is presented.
(9) On April 24, 1996, Honeywell issued $300 million of long-term debt through
an underwritten offering with maturities of 5 and 12 years. Honeywell
subsequently entered into interest rate swap agreements effectively
converting this debt from fixed-rate debt to floating-rate debt.
(10)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 three-month and nine-
month periods ended September 29, 1996, and October 1, 1995, respectively.
Honeywell's accounting policies are described in the notes to financial
statements in its 1995 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 was $101.1 million ($0.80 per share) and $249.5 million ($1.97 per
share) for the third quarter and nine months of 1996 compared with $84.2 million
($0.66 per share) and $207.8 million ($1.63 per share) for the third quarter and
nine months of 1995.
Worldwide sales increased 7 percent to $1,803 million for the third quarter and
8 percent to $5,194 million for the nine months of 1996. Operating profit
increased 13 percent to $190.0 million for the third quarter and 14 percent to
$498.7 million for the nine months of 1996. Orders increased 2 percent for the
third quarter and 6 percent for the nine months when compared with last year. A
stronger U.S. dollar in the third quarter had a negative translation effect on
total orders and sales of approximately 1 percent and minimal effect on profits
for the quarter and nine months of 1996. Cost of sales improved to 67.8 percent
of sales for the third quarter compared with 68.3 percent in the third quarter
of 1995, largely due to margin improvement in Space and Aviation Control.
Home and Building Control sales and operating profit each increased 11 percent
for the third quarter and 9 percent and 8 percent, respectively, for the nine
months of 1996. Orders were up 15 percent for the third quarter and 11 percent
for the nine months of 1996. Currency translation negatively impacted sales and
orders by 1 percent for the quarter and year-to-date. Home Control sales were
up sharply for the third quarter and year-to-date. Margins in Home Control
declined slightly in the third quarter due to integration costs and the
amortization of goodwill associated with the Duracraft acquisition. Adjusted
for Duracraft orders, Home Control orders were up modestly for the third quarter
and year-to-date. Building Control sales increased moderately for the third
quarter and nine months of 1996; operating profit was up moderately in the third
quarter and nine months of 1996, due to continued profitability improvement in
installed systems and building security. Building Control orders increased
moderately in the third quarter with growth in installed systems and
strengthening in the energy retrofit market. The strategy of market expansion
through selective acquisitions continued. During the quarter, Home and Building
Control announced the acquisition of four companies in Europe, including the
Swiss manufacturer Satronic Holding A.G., an acquisition that will help
Honeywell expand its global boiler controls business. In the United States, the
business acquired the assets of Applied Product Technology, a privately held
company that designs, manufactures and assembles compressed air control systems.
Applied Product Technology's capabilities will allow Honeywell to offer enhanced
energy retrofit solutions to growing industrial markets.
Industrial Control sales and operating profit increased 5 percent and 8
percent, respectively, for the third quarter of 1996. Sales and operating
profit increased 9 percent and 10 percent, respectively, for the nine months of
1996. Orders declined 5 percent for the third quarter and were up 2 percent
for the nine months of 1996. Currency translation had a 2 percent negative
impact on sales and orders for the quarter and a 1 percent negative impact for
the nine months of 1996. Industrial Automation and Control sales and operating
profit were up moderately in the third quarter. Sales were up moderately and
operating profit was up sharply for the nine months of 1996. Margin
improvements continued in the third quarter as lower overhead, coupled with
better project execution, lower product cost and improved mix from higher profit
field instruments, more than offset planned Leeds and Northrup costs, including
facility consolidation expenses. Industrial Automation and Control orders
declined in the third quarter as a result of order delays when compared to a
strong third quarter in 1995. Orders are up slightly on a year-to-date basis.
During the quarter, Industrial Automation and Control celebrated a major
milestone with the first customer shipments of the new TotalPlant-Registered
Trademark- Solution System (TPS-TM-) Global User Station. In addition,
capitalizing on a long and beneficial relationship, Amoco and Honeywell
announced a business alliance to provide automation solutions for Amoco
facilities worldwide. The agreement is Amoco's first global business alliance
and reflects the company's desire to standardize its worldwide hardware,
software and services for industrial automation. Under the alliance, Honeywell
and Amoco will jointly develop automation solutions to help Amoco reduce
production costs and increase yields in its plants. Sensing and Control sales
increased modestly for the third quarter and nine months of 1996. Operating
profit increased moderately during the third quarter due to cost control
measures implemented earlier in the year. Operating profit on a year-to-date
basis declined moderately due to low sales volume in the first six months in the
industrial distribution business which carries high margins. Sensing and
control orders were up moderately in the third quarter of 1996 with strength in
electro-mechanical and opto-electronic products.
Space and Aviation Control sales and operating profit increased 1 percent and 21
percent, respectively, for the third quarter and 5 percent and 30 percent,
respectively, for the nine months of 1996. Space and Aviation margins increased
from 8 to 10 percent in the quarter and year-to-date driven by Commercial
Aviation. Orders declined 10 percent for the third quarter compared to 1995
when Military Avionics booked several large multi-year orders. Orders are up 1
percent for the nine months of 1996. Commercial Aviation Systems sales
increased modestly for the third quarter and nine months. Operating profit was
up sharply for the third quarter and nine months of 1996 as a result of
continued productivity improvement in both the business and commuter and
commercial transport businesses. Military Avionics sales and operating profit
declined in the third quarter. Sales increased for the nine months of 1996 and
operating profit declined. The operating profit decline was due primarily to
increased development expenses related to new programs. Space Systems sales and
operating profit declined for the third quarter of 1996. Sales are up on a
year-to-date basis though operating profit has declined. The profit decline is
a result of the timing and lower margin mix of programs. The Space business
won a key NASA contract to develop an Integrated GPS/Inertial Navigation System
for space use. The initial contract is worth $7.2 million, with excellent
potential for significant follow-on contracts in programs such as the Space
Shuttle and International Space Station.
Sales from other operations, which include Solid State Electronics and the
Honeywell Technology research and development centers, increased for the third
quarter and nine months of 1996. These units had operating profits of $6.8
million and $5.9 million for the nine months of 1996 and 1995, respectively.
Financial Condition
Stockholders' equity increased to $2,085 million from $2,040 million at the end
of 1995. Stockholders' equity includes an increase of $150 million in retained
earnings from current year earnings net of dividends, a $35 million decrease in
the accumulated foreign currency translation balance, and $70 million of net
treasury stock transactions.
Common shares outstanding decreased from 126.8 million at the end of 1995 to
126.5 million. Shares repurchased during the first nine months of 1996 totaled
2.5 million at a cost of $135 million. Shares issued through stock option and
stock bonus plans totaled 2.1 million shares and yielded $40 million in
proceeds.
Debt as a percentage of total capital at the end of the third quarter was 32.2
percent compared with 28.0 percent at the end of 1995. Total debt increased
$197 million from 1995 year end. The proceeds from the debt increase, along
with the reduction of cash balances, was used to finance general corporate
requirements, including capital expenditures, working capital, and $352 million
of acquisitions (net of cash acquired).
Cash flows used by investing activities exceeded cash flows from operating
activities by $182 million in the first nine months of 1996, primarily due to
acquisition activities and capital expenditures reduced by proceeds from asset
sales.
On September 29, 1996, Honeywell had $725 million of revolving committed credit
lines with 21 banks. There were no outstanding borrowings under these lines.
In addition, certain foreign units had $340 million in credit lines available at
the end of the third 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 September 29, 1996, Honeywell's credit rating 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 A3/P-2 by Moody's Investors Service, Inc.
On October 7, 1996, Moody's Investors Service, Inc. raised Honeywell's credit
rating to A2/P1.
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 September 29, 1996, the notional amount of
outstanding foreign exchange contracts was approximately $1,006 million. The
amount of hedging gains and losses deferred was not material at September 29,
1996. The notional amount of outstanding interest rate swaps was $495 million
at September 29, 1996.
Cautionary Statement
Honeywell may occasionally make statements regarding its businesses and the
markets therefor, 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,' `is anticipated,' `estimate,'
`project' or similar expressions, which may appear herein or 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, all forward-looking
statements are qualified in their entirety by reference to, and are accompanied
by, the factors listed in Exhibit 99(i) to this report, which could cause
Honeywell's actual results to differ materially from those projected in such
forward-looking statements.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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 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.
On September 12, 1994, Honeywell filed a declaratory judgment action
against American Flywheel Systems, Inc. (`AFS') in the Superior Court of
Maricopa County, Arizona, seeking a declaration as to the rights and
obligations of the parties under an agreement regarding the development of
an electro-mechanical flywheel battery. In October 1994, Honeywell ceased
work under the project as a result of AFS's failure to make payments under
the agreement. On July 21, 1995, AFS filed an answer and counterclaim
alleging breach of contract and related tort claims, including fraud.
Honeywell denied AFS's allegations and amended its complaint to seek
damages for nonpayment of monies owed under the agreement. A jury trial in
this case commenced October 7, 1996 and is expected to conclude in late
November. Honeywell believes that there is no merit to the claims asserted
by AFS and that it will prevail based on the merits of its case.
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.
(b) Reports on Form 8-K:
(i) Report dated July 16, 1996, regarding the results of the
registrant's operations for the fiscal quarter ended June 30,
1996.
(ii) Report dated July 18, 1996, regarding a Distribution Agreement
entered into by Honeywell Inc., Honeywell Finance B.V. and
Honeywell Canada Limited with Goldman, Sachs & Co., Bear,
Stearns & Co. Inc., Chase Securities Inc., Citicorp Securities,
Inc., Dillon, Read & Co. Inc. and J.P. Morgan Securities Inc.,
for the public offering of up to U.S. $500,000,000 aggregate
initial offering price of their Medium-Term Notes.
(iii) Report dated July 24, 1996, regarding the court's disposition of
several motions in an antitrust trial involving Litton Systems
Inc., in which the registrant is a defendant.
(iv) Report dated September 13, 1996, regarding developments in the
patent and antitrust cases involving Litton Systems Inc., in
which the registrant is a defendant.
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: November 13, 1996 By: /s/ E. D. Grayson
-------------------------
E. D. Grayson
Vice President and General Counsel
Date: November 13, 1996 By: /s/ P.M. Palazzari
-------------------------
P. M. Palazzari
Vice President and Controller
(Chief Accounting Officer)
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Page No.
- ----------- --------
<S> <C> <C>
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
</TABLE>
EXHIBIT (11)
HONEYWELL INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
------------------------------ -------------------------------
September 29, October 1, September 29, October 1,
1996 1995 1996 1995
-------------- ----------- --------------- ----------
<S> <C> <C> <C> <C>
Primary:
Income:
Net income $ 101.1 $ 84.2 $ 249.5 $ 207.8
-------------- ----------- --------------- -----------
-------------- ----------- --------------- -----------
Shares:
Weighted average of shares outstanding during the year 126,518,538 127,263,618 126,667,672 127,222,511
-------------- ----------- --------------- -----------
-------------- ----------- --------------- -----------
Earnings per share:
Net income $ 0.80 $ .66 $ 1.97 $ 1.63
-------------- ----------- --------------- -----------
-------------- ----------- --------------- -----------
Assuming full dilution:
Income:
Net income $ 101.1 $ 84.2 $ 249.5 $ 207.8
-------------- ----------- --------------- -----------
-------------- ----------- --------------- -----------
Shares:
Weighted average of shares outstanding during the year 126,518,538 127,263,618 126,667,672 127,222,511
Shares issuable in connection with stock plans
less shares purchasable from proceeds 2,638,374 1,653,849 2,848,464 1,812,115
-------------- ----------- --------------- -----------
Total Shares 129,156,912 128,917,467 129,516,136 129,034,626
-------------- ----------- --------------- -----------
-------------- ----------- --------------- -----------
Earnings per share:
Net income $ 0.78 $ 0.65 $ 1.93 $ 1.61
-------------- ----------- --------------- -----------
-------------- ----------- --------------- -----------
</TABLE>
i
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)
<TABLE>
<CAPTION>
Nine Months Ended
September 29, 1996
------------------
<S> <C>
Income before Income Taxes $ 378.00
Deduct:
Equity income (loss) 7.00
---------
Subtotal 371.00
Add (deduct):
Dividends from less than 50% owned companies 1.02
Proportional share of income (loss) before
income taxes of 50% owned companies (0.31)
---------
Adjusted income 371.71
---------
Fixed Charges
Interest on indebtedness 57.44
Amortization of debt expense 3.50
Interest portion of rent expense 37.35
---------
Total Fixed Charges 98.29
---------
Total Available Income $ 470.00
---------
---------
Ratio of Earnings to Fixed Charges 4.78
---------
---------
</TABLE>
ii
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-29-1996
<CASH> 108
<SECURITIES> 9
<RECEIVABLES> 1600
<ALLOWANCES> 33
<INVENTORY> 953
<CURRENT-ASSETS> 2830
<PP&E> 2999
<DEPRECIATION> 1869
<TOTAL-ASSETS> 5389
<CURRENT-LIABILITIES> 2079
<BONDS> 675
<COMMON> 282
0
0
<OTHER-SE> 1803
<TOTAL-LIABILITY-AND-EQUITY> 5389
<SALES> 5194
<TOTAL-REVENUES> 5194
<CGS> 3553
<TOTAL-COSTS> 3553
<OTHER-EXPENSES> 252
<LOSS-PROVISION> 2
<INTEREST-EXPENSE> 61
<INCOME-PRETAX> 378
<INCOME-TAX> 129
<INCOME-CONTINUING> 250
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 250
<EPS-PRIMARY> 1.97
<EPS-DILUTED> 1.93
</TABLE>
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 the
markets therefor, 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,' `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 and the ability of
Honeywell to hedge against such exchange rate risks 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 third party 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.
Government Regulation. In many of the markets in which Honeywell competes,
such as aviation, 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; and growth in
certain industrial sector markets may increase the demand for new or modernized
processing plants which in turn can provide opportunities for 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.
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.
