<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 September 28, 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 September 28, 1997, the number of shares outstanding of the
registrant's common stock, $1.50 par value, was 127,289,759.
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Page 2
PART I. FINANCIAL INFORMATION
--------------------------------
Item 1. Financial Statements
INCOME STATEMENT
Honeywell Inc. and Subsidiaries
(Unaudited)
<TABLE>
<CAPTION>
Third Quarter
Ended
---------------
- - ----
(Dollars in Millions Except Per Share Amounts) September 28, 1997
September 29, 1996
................................................................................
..............
<S> <C> <C>
SALES $2,038.7 $1,803.1
-------- --------
COSTS AND EXPENSES
Cost of sales 1,390.3 1,221.7
Research and development 121.0 84.5
Selling, general and administrative 322.3 323.4
Special charges 60.4 --
Interest - net 24.3 19.3
Gain on sale of discontinued business (60.3) --
Equity loss 0.6 1.0
-------- --------
1,858.6 1,649.9
-------- --------
INCOME BEFORE INCOME TAXES 180.1 153.2
PROVISION FOR INCOME TAXES 61.2 52.1
-------- --------
NET INCOME $ 118.9 $ 101.1
======== ========
EARNINGS PER COMMON SHARE $ 0.93 $ 0.80
======== ========
See accompanying Notes to Financial Statements
</TABLE>
<PAGE>
Page 3
INCOME STATEMENT
Honeywell Inc. and Subsidiaries
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
(Dollars in Millions Except Per Share Amounts) September 28, 1997 September 29, 1996
..............................................................................................
<S> <C> <C>
SALES $5,701.7 $5,194.2
-------- --------
COSTS AND EXPENSES
Cost of sales 3,899.1 3,553.3
Research and development 316.9 252.1
Selling, general and administrative 980.0 962.7
Special charges 60.4 --
Interest - net 69.6 55.1
Gain on sale of discontinued business (60.3) --
Equity income (7.9) (7.0)
-------- --------
5,257.8 4,816.2
-------- --------
INCOME BEFORE INCOME TAXES 443.9 378.0
PROVISION FOR INCOME TAXES 151.0 128.5
-------- --------
NET INCOME $ 292.9 $ 249.5
======== ========
EARNINGS PER COMMON SHARE $ 2.30 $ 1.97
======== ========
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 127,167,849 126,667,672
See accompanying Notes to Financial Statements
</TABLE>
<PAGE>
Page 4
STATEMENT OF CASH FLOWS
Honeywell Inc. and Subsidiaries
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
(Dollars in Millions) September 28, 1997 September 29, 1996
..................................................................................................
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 292.9 $ 249.5
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation 183.8 176.2
Amortization of intangibles 53.5 37.8
Deferred income taxes 18.0 7.9
Equity income, net of dividends received (6.4) (5.6)
(Gain) loss on sale of assets (7.3) 0.4
Gain on sale of discontinued business (60.3) --
Contributions to employee stock plans 45.7 32.3
Increase in receivables (37.5) (38.6)
Increase in inventories (37.5) (104.2)
Decrease in accounts payable (116.5) (62.2)
Increase (decrease) in accrued income taxes and interest (8.4) 55.8
Other changes in working capital, excluding short-term
investments and short-term debt 180.4 (21.1)
Other noncurrent items - net (169.6) 5.1
-------- --------
Net cash flows from operating activities 330.8 333.3
-------- --------
Cash Flows from Investing Activities
Proceeds from sale of assets 71.3 50.2
Proceeds from sale of discontinued business 96.3 --
Capital expenditures (213.7) (212.4)
Investment in acquisitions, net of cash acquired (596.6) (352.3)
Decrease in short-term investments 1.9 --
Other - net (3.2) (0.7)
-------- --------
Net cash flows from investing activities (644.0) (515.2)
-------- --------
Cash Flows from Financing Activities
Net decrease in short-term debt (14.7) (4.1)
Proceeds from issuance of long-term debt 592.1 300.0
Repayment of long-term debt (178.4) (104.3)
Proceeds from issuance of preferred stock of subsidiary 123.2 --
Repayment of capital to preferred shareholders of subsidiary (123.2) --
Purchase of treasury stock (37.9) (127.7)
Proceeds from exercise of stock options 31.6 40.3
Dividends paid (103.2) (100.8)
-------- --------
Net cash flows from financing activities 289.5 3.4
-------- --------
Effect of Exchange Rate Changes on Cash (13.9) (4.9)
-------- --------
Decrease in Cash and Cash Equivalents (37.6) (183.4)
Cash and Cash Equivalents at Beginning of Period 127.1 291.6
-------- --------
Cash and Cash Equivalents at End of Period $ 89.5 $ 108.2
======== ========
See accompanying Notes to Financial Statements
</TABLE>
<PAGE>
Page 5
STATEMENT OF FINANCIAL POSITION
Honeywell Inc. and Subsidiaries
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in Millions) September 28, 1997 December 31, 1996
...............................................................................................
<S> <C>
<C>
Assets
Current Assets
Cash and cash equivalents $ 89.5 $ 127.1
Short-term investments 6.5 8.6
Receivables (less allowance for doubtful accounts:
1997, $39.4; 1996, $33.5) 1,814.3 1,714.7
Inventories (less progress billing on uncompleted
contracts: 1997, $65.2; 1996, $60.7) 1,006.7 937.6
Deferred income taxes 206.1 193.2
-------- --------
3,123.1 2,981.2
Investments and Advances 255.9 247.6
Property, Plant and Equipment
Property, plant and equipment 3,083.2 2,973.6
Less accumulated depreciation 1,968.8 1,839.4
-------- --------
1,114.4 1,134.2
Other Assets
Long-term receivables (less allowance for doubtful
accounts: 1997, $1.4; 1996, $0.7) 37.1 25.7
Intangible assets 1,113.4 690.9
Deferred income taxes 35.2 33.0
Other 558.6 380.7
-------- --------
Total Assets $6,237.7 $5,493.3
======== ========
Liabilities and Stockholders' Equity
Current Liabilities
Short-term debt $ 190.9 $ 252.4
Accounts payable 529.7 584.8
Customer advances 256.6 202.0
Accrued income taxes 287.6 316.9
Deferred income taxes 17.9 21.9
Other accrued liabilities 893.6 688.9
-------- --------
2,176.3 2,066.9
Long-Term Debt 1,186.4 715.3
Deferred Income Taxes 56.9 46.0
Other Liabilities 464.3 460.2
Stockholders' Equity
Common stock - $1.50 par value
Authorized - 250,000,000 shares
Issued - 1997 - 187,650,027 shares 281.5
1996 - 187,809,512 shares 281.7
Additional paid-in capital 580.1 528.8
Retained earnings 3,265.6 3,074.7
Treasury stock - 1997 - 60,360,268 shares (1,774.7)
1996 - 61,360,813 shares (1,763.5)
Accumulated foreign currency translation 6.2 88.2
Pension liability adjustment (4.9) (5.0)
-------- --------
2,353.8 2,204.9
-------- --------
Total Liabilities and Stockholders' Equity $6,237.7 $5,493.3
======== ========
See accompanying Notes to Financial Statements
</TABLE>
<PAGE>
Page 6
NOTES TO FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
(1) The financial information and statements of companies owned 20 percent to
50 percent accounted for using the equity method are omitted pursuant to
Rule 10-01 of Regulation S-X.
(2) Interest consists of the following:
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
------------------- -----------------
September 28, 1997 September 29, 1996 September 28, 1997 September 29, 1996
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Interest expense $26.2 $20.7 $76.6 $60.9
Interest income ( 1.9) (1.4) (7.0) (5.8)
----- ----- ----- -----
Total $24.3 $19.3 $69.6 $55.1
===== ===== ===== =====
</TABLE>
Interest paid amounted to $23.2 and $68.5 for the third quarter and nine
months of 1997 and $4.9 and $47.1 for the third quarter and nine 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 $5.8 and
$149.7 for the third quarter and nine months of 1997 and ($34.7) and $58.5
for the third quarter and nine months of 1996, respectively. The increase
in income taxes paid in 1997 over 1996 for the first nine 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 $0.81 for the third
quarter and nine months of 1997 and $0.27 and $0.79 for the third quarter
and nine months of 1996, respectively. In October 1997, the Board of
Directors approved an increase in the common dividend to $0.28 per share
beginning in the fourth quarter of 1997.
(5) Inventories consist of the following:
<TABLE>
<CAPTION>
September 28, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Finished goods $ 374.4 $ 386.5
Inventories related to long-term contracts 121.1 122.7
Work in process 214.1 185.8
Raw materials and supplies 297.1 242.6
--------- --------
Total $ 1,006.7 $ 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
<PAGE>
Page 7
laser gyroscopes. Honeywell 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.
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. The
parties submitted briefs to the U.S. Court of Appeals in July and August,
and oral arguments were held on September 30, 1997. The Court of Appeals
did not indicate when it will issue a decision. 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.
The retrial of the patent and tort damages claims which was originally
scheduled to commence May 6, 1997, has been postponed indefinitely pending
the decision of the U.S Court of Appeals on the matters currently before
it. In preparing for the patent and tort damages retrial, 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>
Page 8
On July 24, 1996, the trial court denied Honeywell's Motion for Judgment as
a Matter of Law, but concluded that Litton's damage study was seriously
flawed and granted Honeywell a retrial on damages only. The court also
denied Litton's Motion for Injunctive Relief and Litton's Motion for Entry
of Judgment. No date has been set for the retrial of antitrust damages.
Honeywell believes there are questions concerning what conduct the original
jury found anti-competitive that may give rise to damages in a retrial, and
consequently a damages retrial should also require a retrial of liability
issues in some respects. Following the damages retrial, Honeywell will
have the right to appeal both the liability and damages verdicts to the
U.S. Court of Appeals for the Ninth Circuit. No provision has been made in
the financial statements with respect to this contingent antitrust
liability. Honeywell further believes that it is inappropriate for Litton
to seek duplicative recovery of damages in the separate patent and tort,
and antitrust cases, and that eventually none will be permitted to stand.
In the fall of 1996, Litton and Honeywell commenced court ordered mediation
of the patent, tort and antitrust claims. No resolution of claims has
occurred and the mediation is currently in recess.
(7) As of September 28, 1997, Honeywell had reserved 14,875,288 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. 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 fixed-rate long-term
debt through an underwritten offering with maturities of five and ten
years.
(10) On September 27, 1997, Honeywell sold the net assets ($41.8 million) of its
solenoid valve business to Parker-Hannifin for $102.1 million in cash. As
of September 28, 1997, $96.3 million had been received from Parker-Hannifin
and the remaining balance will be collected in the fourth quarter. A $60.3
million gain resulted from the sale which is included as a gain on sale of
discontinued business on the Income Statement. The solenoid valve business
was an operation in the Industrial Control business segment.
(11) 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 being
finalized. The current and expected allocation of the purchase price will
result in intangibles, including goodwill, patents/developed technology,
workforce value, and customer lists, of approximately $470 million which
will be amortized on a straight-line basis over an average of approximately
25 years. Management does not expect that the final allocation of the
purchase price will differ materially from the preliminary allocation 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.
<PAGE>
Page 9
(12) The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards (SFAS) 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.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, `Reporting Comprehensive
Income', which will be effective for the Company beginning January 1, 1998.
SFAS No. 130 requires the disclosure of comprehensive income and its
components in the Company's general-purpose financial statements.
Honeywell anticipates the effect of SFAS No. 130 will result in the
disclosure of foreign currency translation adjustments, unrealized gains in
securities, minimum pension liability adjustments and other comprehensive
income on the face of the income statement.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 131, `Disclosures about Segments
of an Enterprise and Related Information', which will be effective for the
Company beginning January 1, 1998. SFAS No. 131 redefines how operating
segments are determined and requires disclosure of certain financial and
descriptive information about a company's operating segments. Honeywell
has not yet completed its analysis of operating segments on which it will
report. However, a preliminary analysis has concluded the current
reporting structure under SFAS No. 14 continues to be appropriate under
SFAS No. 131.
(13) In September 1997, Honeywell's management, with the approval of the board
of directors, committed itself to a plan of action and recorded special
charges of $60.4 million intended to reduce operating costs and improve
margins. The actions to be undertaken include productivity initiatives and
the rationalization of the Honeywell and Measurex product lines. The
special charges were recorded by the Home and Building Control business
segment ($30.4 million) to maintain competitiveness in a rapidly changing
marketplace and the Industrial Control business segment ($30.0 million) to
rationalize product lines, R&D facilities, and the work force to streamline
the Industrial Automation and Control business after the Measurex
integration. Special charges include costs for work force reductions,
worldwide facilities consolidations, organizational changes, and other cost
accruals. The work force reduction costs of $43.9 million primarily
include severance costs related to involuntary termination programs
instituted to improve efficiency and reduce costs. Approximately 750
employees will be terminated. Facility consolidation costs amounting to
$8.3 million are primarily associated with the closing of facilities in
California and Germany. Other cost accruals totaling $8.2 million include
costs of inventory write offs resulting from the integration of product
lines. The charges are included as Special charges on the Income Statement
and will be funded with cash generated by operations.
(14) 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 nine-month periods ended September 28, 1997, and September
29, 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.
<PAGE>
Page 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
- - ---------------------
Net income in the third quarter of 1997 was $118.9 million ($0.93 per share)
compared with $101.1 million ($0.80 per share) in the third quarter of 1996.
Earnings per share increased 16 percent compared to the third quarter of 1996.
In the first nine months of 1997, Honeywell's net income was $292.9 million, up
17 percent from $249.5 million a year earlier. Earnings per share were $2.30, up
17 percent from $1.97 in the first nine months of 1996.
Worldwide sales increased 13 percent to $2.04 billion in the third quarter of
1997, compared with $1.80 billion in the third quarter of 1996. Year to date,
sales were $5.70 billion, up 10 percent, compared with $5.19 billion during the
same period in 1996. Operating profit was $226.6 million, up 19 percent
compared with $190.0 million in the third quarter of 1996. For the first nine
months of 1997, operating profit was $574.0 million, up 15 percent from the
$498.7 million recorded during the same period a year earlier. Orders increased
15 percent in the quarter and 12 percent for the year, driven by Industrial
Control and Space and Aviation Control. A stronger U.S. dollar had a negative
translation effect on total orders and sales of approximately four percent for
the quarter and three percent year to date, but had a minimal effect on profits
due to the Company's hedging strategies.
HOME AND BUILDING CONTROL sales were $870.9 million and $2,388.7 million for the
quarter and year to date, respectively, up from $852.3 million and $2,328.0
million for the same periods in 1996. Foreign currency translation had a
negative four percent impact on sales in the quarter and three percent year to
date. Operating profit was $91.6 million, excluding special charges of $30.4
million (discussed below), compared to $95.3 million in the third quarter of
1996. This decline of four percent was due to the mix of lower margin products
business and lower than expected volume in building control. Year to date
earnings grew to $204.2 million, excluding special charges, from $200.3 million
for the first nine months of 1996. Orders for Home and Building Control were
flat from third quarter 1996 levels as growth in the international market
offset soft North American demand. During the quarter, Honeywell was chosen
to be the provider on an upcoming energy savings contract at Ft. Bragg, North
Carolina, as well as several other energy savings projects which are expected
to be worth from $150 million to $300 million over a multi-year implementation
period. Year to date orders were up three percent. During the quarter, Home
and Building Control also completed the acquisition of Lincold Holdings, a U.K.
based refrigeration services company.
Late in the third quarter, Honeywell announced a restructuring of the Home and
Building Control business into two business units, Solutions and Services, and
Products, to refocus American operations and improve financial results. The new
structure will allow greater business focus, establishing specific
responsibility for each portion of the business. The special non-recurring
restructuring charges totaling $30.4 million are to further improve worldwide
competitiveness.
Third quarter sales in the Home and Building Control Products business increased
modestly compared to 1996 while profits were flat. Year to date, sales and
profits have increased between five and 10 percent. Orders for the Products
business have increased moderately on a quarterly and year to date basis
compared with 1996.
The Home and Building Solutions and Service business achieved slight sales
growth in the quarter while year to date sales were relatively flat. Profits
were down on a quarterly and year to date basis compared with 1996 due to lower
than expected volume and weaker margins in performance contracting. Third
quarter and year to date orders were also down compared to 1996 due to lower
installed and energy retrofit projects driven by competitive pricing pressures
and the extended selling cycle on large energy retrofit programs such as the
Federal Government upgrade program.
<PAGE>
Page 11
INDUSTRIAL CONTROL sales were $629.0 million, up 23 percent from $512.6 million
during the third quarter of 1996. Foreign currency translation had a negative
six point impact on these results. The sales growth was impacted by slow
backlog conversion in the quarter. Year to date sales grew 16 percent to
$1,817.1 from $1,568.8 for the first nine months of 1996. Operating profit was
$57.5 million, excluding special charges of $30.0 million and a gain on the sale
of the solenoid valve business (discussed below) of $60.3 million, an increase
of 11 percent compared with $51.6 million during the third quarter of 1996.
Orders for the third quarter increased 26 percent and year to date orders were
up 19 percent. During the quarter, Industrial Control booked $30.0 million in
non-recurring restructuring costs to rationalize product lines, R&D facilities,
and the work force to streamline the Industrial Automation and Control business
after the Measurex integration. The charges include the costs to consolidate
customer support operations, close two facilities, and write off redundant
inventory resulting from the integration of product lines. On September 26,
Honeywell sold its solenoid valve business, with major facilities in Connecticut
and Geneva, Switzerland, to Parker - Hannifin for $102.1 million. While this
business has made considerable contributions to Honeywell's success over the
years, it was not closely aligned with future strategies and ambitions for the
core business.
Sales in the Industrial Automation and Control business were up sharply in the
quarter and year to date driven by the addition of Measurex. Without Measurex,
sales grew modestly impacted by six percent negative currency translation in the
quarter. Profits were up moderately in the quarter but were down year to date
compared to 1996 due to the integration costs and goodwill amortization of the
Measurex acquisition. Orders for the quarter and year to date were up over 20
percent from the prior year. During the quarter, Honeywell entered into a global
agreement with Shell International to provide control technology and advanced
solutions to Shell operating units around the world. Honeywell also agreed to a
five year business alliance with British Petroleum Oil to supply advanced
control, training and optimization software in as many as eleven British
Petroleum Oil refineries worldwide.
Sensing and Control sales were up modestly for the quarter and first nine months
of 1997. Profits grew moderately as a result of growth in the higher margin
electro-mechanical products and on-going productivity initiatives. Orders grew
modestly in the quarter and year to date compared to 1996 results for the same
periods.
SPACE AND AVIATION CONTROL sales for the third quarter of 1997 were up 26
percent to $505.3 million from $401.1 million in the third quarter of 1996,
primarily driven by strong growth in Commercial Avionics and strengthening in
the Military and Space businesses. Year to date sales were up 17 percent to
$1.40 billion from $1.20 billion for the comparable period in 1996. Foreign
currency translation had minimal impact on these results. Profits for the third
quarter were 70.8 million, a 77 percent increase from the $39.9 million recorded
in the third quarter of 1996, with margins improving from 9.9 percent to 14.0
percent. This improvement is driven by the mix of higher margin Commercial
Avionics which totaled nearly 60 percent of the business in the quarter, coupled
with high profit programs in Military Avionics. Year to date earnings were up 49
percent from $123.4 million in the first nine months of 1996 to $184.5 million
in 1997. Orders for Space and Aviation Control were up 39 percent for the
quarter and 21 percent year to date from comparable periods in 1996. During the
quarter, Space and Aviation Control received certification for the differential
GPS landing system, opening the door for landing system sales in North America.
Commercial Avionics sales and profits were up over 20 percent for the quarter
and the first nine months of 1997. The sales increase was driven by both 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
was the result of volume increase in air transport coupled with continued
productivity improvements. Orders for Commercial Avionics were also up over 20
percent for the quarter and first nine months compared to 1996.
Sales in the Military Avionics business were up over 20 percent for the quarter
and up moderately for the first nine months of 1997, compared to 1996. Profits
were also up over 20 percent in the third quarter and year to date, compared to
the prior year, due primarily to varied timing and profitability of production
contracts. Military Avionics orders were relatively flat in the quarter, but
were up moderately for the first nine months of the year, compared to 1996.
<PAGE>
Page 12
Space Systems sales were up moderately in the third quarter and were relatively
flat year to date compared to 1996. Profits were up over 20 percent for the
quarter and were down modestly for the first nine months, compared to the prior
year, due to low volume and project profitability. Orders for the quarter and
year to date were up over 20 percent compared to 1996.
OTHER remaining operations of Honeywell, which include corporate research
centers, reported sales of $33.5 million and earnings of $6.8 million for the
third quarter compared to $37.1 million and $3.2 million respectively, for the
third quarter of 1996. The earnings improvement was driven by better program
profitability in the research labs. Equity loss was $0.6 million for the
quarter, due primarily to typical third quarter softness in earnings at
Yamatake-Honeywell, our Japanese joint-venture.
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, divest
existing businesses which are no longer considered a strategic fit, or increase
or decrease its investments. Currently, no decisions have been made regarding
any significant acquisitions, divestitures, or sale of investments.
Financial Condition
- - -------------------
Stockholders' equity increased to $2,354 million from $2,205 million at the end
of 1996. The increase in stockholders' equity includes an increase of $191
million to retained earnings resulting from current year earnings less
dividends, and a $40 million increase in stock balances, which amounts were
offset by a $82 million decrease in the accumulated foreign currency translation
balance.
Common shares outstanding increased from 126.4 million shares at the end of 1996
to 127.3 million. During the first nine months of 1997 totaled 557 thousand
shares were repurchased at a cost of $38 million, essentially completing the
July 1995 Board of Directors authorization to repurchase up to approximately
$250 million in shares. A new $350 million repurchase program was authorized by
the Board in October of 1997. Shares repurchased were in connection with
planned issuances under existing employee stock and incentive programs.
During the quarter, shares issued through all stock option and stock bonus plans
totaled 1.4 million shares and yielded $32 million in proceeds. In 1997,
Honeywell Shareholders and the Board of Directors approved the 1997 Honeywell
Stock and Incentive Plan which provides for issuance up to 7.5 million shares
for employee stock programs. In addition, the Board of Directors approved
certain other employee stock plans which provide for issuances up to 2.35
million shares.
Debt as a percentage of total capital at the end of the third quarter was 36.9
percent compared with 30.5 percent at the end of 1996. Total debt increased
$410 million from 1996 year end. The proceeds from the debt increase along with
the reduction of cash balances were used to finance acquisitions and general
corporate requirements, including capital expenditures and working capital.
Cash flows used by investing activities exceeded cash flows from operating
activities by $313 million in the first nine months of 1997. The cash used for
investing activities relates primarily to acquisitions and capital expenditures,
partially offset by proceeds from asset sales and the sale of the Solenoid Valve
business.
On September 28, 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 $357 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.
<PAGE>
Page 13
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 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 28, 1997, the notional amount of
outstanding foreign exchange contracts was approximately $1,006.9 million. The
amount of hedging gains and losses deferred was not material at September 28,
1997. The notional amount of outstanding interest rate swaps was $1,340.0
million at September 28, 1997.
As of September 28, 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.
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
None.
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 14
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: November 12, 1997 By: /s/ E. D. Grayson
------------------------------------
E. D. Grayson
Vice President and General Counsel
Date: November 12, 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
<PAGE>
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 28, September 29, September 28, September 29,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Primary:
Income:
Net income...............................................$ 118.9 $ 101.1 $ 292.9 $ 249.5
=========== =========== =========== ===========
Shares:
Weighted average of shares outstanding during the year...127,526,537 126,518,538 127,167,849 126,667,672
=========== =========== =========== ===========
Earnings per share:
Net income...............................................$ 0.93 $ 0.80 $ 2.30 $ 1.97
=========== =========== =========== ===========
Assuming full dilution:
Income:
Net income...............................................$ 118.9 $ 101.1 $ 292.9 $ 249.5
=========== =========== =========== ===========
Shares:
Weighted average of shares outstanding during the year...127,526,537 126,518,538 127,167,849 126,667,672
Shares issuable in connection with stock plans
less shares purchasable from proceeds.................. 2,179,428 2,638,374 2,244,696 2,848,464
----------- ----------- ----------- -----------
Total Shares.........................................129,705,965 129,156,912 129,412,545 129,516,136
=========== =========== =========== ===========
Earnings per share:
Net income...............................................$ 0.92 $ 0.78 $ 2.26 $ 1.93
=========== =========== =========== ===========
</TABLE>
i
<PAGE>
EXHIBIT
(12)
HONEYWELL INC. AND SUBSIDIARIES
COMBINED WITH PROPORTIONAL SHARES OF 50% OWNED COMPANIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in Millions)
Nine Months Ended
September 28, 1997
------------------
<S> <C>
Income before Income Taxes......................... $443.95
Deduct:
Equity income (loss)............................ 7.95
-------
Subtotal........................................ 436.00
Add (deduct):
Dividends from less than 50% owned companies.... 1.46
Proportional share of income (loss) before
income taxes of 50% owned companies........... (0.02)
-------
Adjusted income.................................... 437.44
-------
Fixed Charges
Interest on indebtedness........................ 75.59
Amortization of debt expense.................... 1.09
Interest portion of rent expense................ 40.42
-------
Total Fixed Charges................................ 117.10
-------
Total Available Income............................. $554.54
=======
Ratio of Earnings to Fixed Charges................. 4.74
=======
</TABLE>
ii
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-28-1997
<CASH> 89
<SECURITIES> 6
<RECEIVABLES> 1,854
<ALLOWANCES> 39
<INVENTORY> 1,007
<CURRENT-ASSETS> 3,123
<PP&E> 3,083
<DEPRECIATION> 1,969
<TOTAL-ASSETS> 6,238
<CURRENT-LIABILITIES> 2,176
<BONDS> 1,186
0
0
<COMMON> 281
<OTHER-SE> 2,072
<TOTAL-LIABILITY-AND-EQUITY> 6,238
<SALES> 5,702
<TOTAL-REVENUES> 5,702
<CGS> 3,899
<TOTAL-COSTS> 3,899
<OTHER-EXPENSES> 317
<LOSS-PROVISION> 8
<INTEREST-EXPENSE> 77
<INCOME-PRETAX> 444
<INCOME-TAX> 151
<INCOME-CONTINUING> 293
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 293
<EPS-PRIMARY> 2.30
<EPS-DILUTED> 2.26
</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 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.
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 equity and other investments. When deemed appropriate, Honeywell
will acquire new businesses to expand its product offerings, divest existing
businesses which are no longer considered a strategic fit, or increase or
decrease its investments. 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.
v
