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