<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 October 4, 1998
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 October 4, 1998, the number of shares outstanding of the registrant's
common stock, $1.50 par value, was 125,937,041.
<PAGE>
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) OCTOBER 4, September 28,
1998 1997
---- ----
- --------------------------------------------------------------------------------
<S> <C> <C>
SALES $2,119.5 $2,038.7
-------- --------
COSTS AND EXPENSES
Cost of sales 1,412.0 1,390.3
Research and development 119.9 121.0
Selling, general and administrative 344.8 322.3
Special charges -- 60.4
Interest - net 25.1 24.3
Gain on sale of business -- (60.3)
Equity loss 0.6 0.6
-------- --------
TOTAL COSTS AND EXPENSES 1,902.4 1,858.6
-------- --------
INCOME BEFORE INCOME TAXES 217.1 180.1
PROVISION FOR INCOME TAXES 71.7 61.2
-------- --------
NET INCOME $ 145.4 $ 118.9
-------- --------
-------- --------
BASIC EARNINGS PER COMMON SHARE $ 1.15 $ 0.93
-------- --------
-------- --------
AVERAGE COMMON SHARES OUTSTANDING 125,975,532 127,526,537
DILUTED EARNINGS PER COMMON SHARE $ 1.14 $ 0.92
-------- --------
-------- --------
AVERAGE COMMON AND DILUTED SHARES OUTSTANDING 127,638,675 129,705,965
</TABLE>
See accompanying Notes to Financial Statements
<PAGE>
Page 3
INCOME STATEMENT
HONEYWELL INC. AND SUBSIDIARIES
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------------------
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) OCTOBER 4, September 28,
1998 1997
---- ----
- --------------------------------------------------------------------------------
<S> <C> <C>
SALES $6,077.9 $5,701.7
-------- --------
COSTS AND EXPENSES
Cost of sales 4,121.7 3,899.1
Research and development 351.8 316.9
Selling, general and administrative 985.3 980.0
Special charges -- 60.4
Interest - net 75.3 69.6
Gain on sale of business -- (60.3)
Equity income (4.9) (7.9)
-------- --------
TOTAL COSTS AND EXPENSES 5,529.2 5,257.8
-------- --------
INCOME BEFORE INCOME TAXES 548.7 443.9
PROVISION FOR INCOME TAXES 181.2 151.0
-------- --------
NET INCOME $ 367.5 $ 292.9
-------- --------
-------- --------
BASIC EARNINGS PER COMMON SHARE $ 2.91 $ 2.30
-------- --------
-------- --------
AVERAGE COMMON SHARES OUTSTANDING 126,082,223 127,167,849
DILUTED EARNINGS PER COMMON SHARE $ 2.87 $ 2.27
-------- --------
-------- --------
AVERAGE COMMON AND DILUTED SHARES OUTSTANDING 127,876,564 129,412,545
</TABLE>
See accompanying Notes to Financial Statements
<PAGE>
Page 4
STATEMENT OF CASH FLOWS
HONEYWELL INC. AND SUBSIDIARIES
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------------------
(DOLLARS IN MILLIONS) OCTOBER 4, 1998 September 28, 1997
--------------- ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $367.5 $292.9
-------- --------
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation 184.4 183.8
Amortization of intangibles 57.8 53.5
Deferred income taxes (12.5) 18.0
Equity (income), net of dividends received (4.0) (6.4)
Gain on sale of assets (5.7) (7.3)
Gain on sale of discontinued business -- (60.3)
Contributions to employee stock plans 45.2 45.7
(Increase) decrease in receivables 21.6 (37.5)
Increase in inventories (138.4) (37.5)
Decrease in accounts payable (28.1) (62.5)
Increase in customer advances 48.0 32.6
Decrease in accrued income taxes and interest (21.0) (8.4)
Increase (decrease) in accrued liabilities (83.3) 93.8
Other noncurrent items - net (124.5) (169.6)
-------- --------
NET CASH FLOWS FROM OPERATING ACTIVITIES 307.0 330.8
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of assets 56.8 71.3
Proceeds from sale of business 29.0 96.3
Capital expenditures (250.0) (213.7)
Investment in acquisitions, net of cash acquired (181.2) (596.6)
Decrease in short-term investments 0.4 1.9
Other - net 0.1 (3.2)
-------- --------
NET CASH FLOWS FROM INVESTING ACTIVITIES (344.9) (644.0)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in short-term debt 2.4 (14.7)
Proceeds from issuance of long-term debt 252.0 592.1
Repayment of long-term debt (68.9) (178.4)
Purchase of treasury stock (156.5) (37.9)
Proceeds from exercise of stock options 47.7 31.6
Dividends paid (105.3) (103.2)
-------- --------
NET CASH FLOWS FROM FINANCING ACTIVITIES (28.6) 289.5
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1.6) (13.9)
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (68.1) (37.6)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 134.3 127.1
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 66.2 $ 89.5
-------- --------
-------- --------
</TABLE>
See accompanying Notes to Financial Statements
<PAGE>
Page 5
STATEMENT OF FINANCIAL POSITION
HONEYWELL INC. AND SUBSIDIARIES
(UNAUDITED)
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS) OCTOBER 4, December 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 66.2 $ 134.3
Short-term investments 7.9 24.9
Receivables (less allowance for doubtful accounts:
1998, $41.3; 1997, $38.5) 1,862.9 1,837.8
Inventories (less progress billing on uncompleted
contracts: 1998, $36.2; 1997, $43.5) 1,201.2 1,028.0
Deferred income taxes 241.3 233.2
-------- --------
TOTAL CURRENT ASSETS 3,379.5 3,258.2
INVESTMENTS AND ADVANCES 235.2 243.8
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment 3,313.0 3,045.0
Less accumulated depreciation 2,101.7 1,916.3
-------- --------
TOTAL PROPERTY, PLANT AND EQUIPMENT 1,211.3 1,128.7
OTHER ASSETS
Long-term receivables (less allowance for doubtful accounts:
1998, $1.5; 1997, $2.7) 35.1 39.2
Goodwill 898.0 786.0
Intangible assets 346.0 376.0
Deferred income taxes 41.9 41.7
Other 700.0 537.8
-------- --------
TOTAL ASSETS $6,847.0 $6,411.4
-------- --------
-------- --------
LIABILITIES AND SHAREOWNERS' EQUITY
CURRENT LIABILITIES
Short-term debt $ 175.2 $ 146.4
Accounts payable 574.6 572.9
Customer advances 338.8 269.7
Accrued income taxes 314.6 344.2
Deferred income taxes 10.1 11.3
Other accrued liabilities 955.3 974.4
-------- --------
TOTAL CURRENT LIABILITIES 2,368.6 2,318.9
LONG-TERM DEBT 1,335.7 1,176.8
DEFERRED INCOME TAXES 51.2 51.4
OTHER LIABILITIES 525.2 475.1
-------- --------
TOTAL LIABILITIES 4,280.7 4,022.2
-------- --------
SHAREOWNERS' EQUITY
Common stock - $1.50 par value
Authorized - 250,000,000 shares
Issued - 1998 - 187,547,885 shares 281.3
- 1997 - 187,633,023 shares 281.5
Additional paid-in-capital 666.5 608.4
Retained earnings 3,669.4 3,407.0
Treasury stock - 1998 - 61,610,844 shares (2,011.7)
- 1997 - 61,433,075 shares (1,879.3)
Accumulated foreign currency translation (32.2) (21.4)
Pension liability adjustment (7.0) (7.0)
-------- --------
TOTAL SHAREOWNERS' EQUITY 2,566.3 2,389.2
-------- --------
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY $6,847.0 $6,411.4
-------- --------
-------- --------
</TABLE>
See accompanying Notes to Financial Statements
<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
----------------------- ---------------------
October 4, 1998 September 28, 1997 October 4, 1998 September 28, 1997
--------------- ------------------ --------------- ------------------
<S> <C> <C> <C> <C>
Interest expense $27.5 $26.2 $83.7 $76.6
Interest income (2.4) (1.9) (8.4) (7.0)
----- ----- ----- -----
Total $25.1 $24.3 $75.3 $69.6
----- ----- ----- -----
----- ----- ----- -----
Interest paid $20.1 $23.2 $73.0 $68.5
</TABLE>
The increase in 1998 year to date interest payments compared to 1997 is
largely due to $550.0 of long-term debt established in March 1997 and an
additional $250.0 of long-term debt established in June 1998.
(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 $62.9 and
$5.8 for the third quarters of 1998 and 1997 and $225.4 and $149.7 for the
first nine months of 1998 and 1997, respectively. Income taxes paid
increased in the third quarter due to additional estimated income tax
payments.
(4) Dividends per share of common stock were $0.28 and $0.27 for the third
quarters of 1998 and 1997 and $0.84 and $0.81 for the first nine months of
1998 and 1997, respectively. In October 1998, the Board of Directors
approved an increase in the common dividend to $0.29 per share beginning in
the fourth quarter of 1998.
(5) Inventories consist of the following:
<TABLE>
<CAPTION>
October 4, December 31,
1998 1997
---------- ------------
<S> <C> <C>
Finished goods $ 398.9 $ 379.3
Inventories related to long-term contracts 212.5 151.4
Work in process 224.0 211.3
Raw materials and supplies 365.8 286.0
---------- ------------
Total $ 1,201.2 $ 1,028.0
---------- ------------
---------- ------------
</TABLE>
<PAGE>
Page 7
(6) Litton Litigation.
On March 13, 1990, Litton Systems, Inc. filed a legal action against
Honeywell in U.S. District Court, Central District of California, Los
Angeles (the "trial court") with claims that were subsequently split into
two separate cases. One alleges patent infringement under federal law for
using an ion-beam process to coat mirrors incorporated in Honeywell's ring
laser gyroscopes, and tortious interference under state law for interfering
with Litton's prospective advantage with customers and contractual
relationships with an inventor and his company, Ojai Research, Inc. The
other case alleges monopolization and attempted monopolization under
federal antitrust laws by Honeywell in the sale of inertial reference
systems containing ring laser gyroscopes into the commercial aircraft
market. Honeywell generally denied Litton's allegations in both cases. In
the patent/tort case, Honeywell also contested the validity as well as the
infringement of the patent, alleging, among other things, that the patent
had been obtained by Litton's inequitable conduct before the United States
Patent and Trademark Office.
PATENT/TORT CASE
U.S. District Court Judge Mariana Pfaelzer presided over the patent
infringement and tortious interference trial and on August 31, 1993, a jury
returned a verdict in favor of Litton, awarding damages against Honeywell
in the amount of $1.2 billion. Honeywell filed post-trial motions
contesting the verdict and damage award. On January 9, 1995, the trial
court set them aside, ruling, among other things, that the Litton patent
was invalid due to obviousness, unenforceable because of Litton's
inequitable conduct before the Patent and Trademark Office, and in any
case, not infringed by Honeywell's current process. It further ruled that
the state tort claims were not supported by sufficient evidence. The trial
court also held that if its rulings concerning liability were vacated or
reversed on appeal, Honeywell should 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 (the
"Federal Circuit"), and on July 3, 1996, in a two to one split decision, a
three judge panel of that court reversed the trial court's rulings of
patent invalidity, unenforceability and non-infringement, and also found
Honeywell to have violated California law by intentionally interfering with
Litton's consultant contracts and customer prospects. However, the panel
upheld two trial court rulings favorable to Honeywell, namely that
Honeywell was entitled to a new trial for damages on all claims and also to
a grant of intervening patent rights which are to be defined and quantified
by the trial court. After unsuccessfully requesting an "en banc" rehearing
of the panel's decision by the full Federal Circuit appellate court,
Honeywell filed a petition for "certiorari" with the U.S. Supreme Court on
November 26, 1996, seeking review of the panel's decision. In the interim,
Litton filed a motion and briefs with the trial court seeking injunctive
relief. After Honeywell and certain aircraft manufacturers filed briefs and
made oral arguments opposing the injunction, the trial court denied
Litton's motion on public interest grounds on December 23, 1996, and then
scheduled the patent/tort damages retrial for May 6, 1997.
On March 17, 1997, the U.S. Supreme Court granted Honeywell's petition for
review, and vacated the July 3, 1996 Federal Circuit panel decision. The
case was remanded to the Federal Circuit panel for reconsideration in light
of a recent decision by the U.S. Supreme Court in the WARNER-JENKINSON V.
HILTON DAVIS case, which refined the law concerning patent infringement
under the doctrine of equivalents. On March 21, 1997, Litton also filed a
notice of appeal to the Federal Circuit of the trial court's December 23,
1996 decision to deny injunctive relief, but the Federal Circuit stayed any
briefing or consideration of that matter until such time as it completed
its reconsideration of liability issues ordered by the U.S. Supreme Court.
<PAGE>
Page 8
The liability issues were argued before the same three judge Federal
Circuit panel on September 30, 1997. On April 7, 1998, the panel issued
its decision: i) affirming the trial court's grant of Judgement As a Matter
of Law ("JMOL") that Honeywell's hollow cathode and RF ion beam processes
do not literally infringe the asserted claims of Litton's '849 reissue
patent ("Litton's patent"); ii) vacating the trial court's grant of JMOL
that Honeywell's RF ion beam process does not infringe the asserted claims
of Litton's patent under the doctrine of equivalents, vacating the jury's
verdict on that issue, and remanding that issue to the trial court for
further proceedings; iii) vacating the jury's verdict that Honeywell's
hollow cathode process infringes the asserted claims of Litton's patent
under the doctrine of equivalents and remanding that issue to the trial
court for further proceedings; iv) reversing the trial court's grant of
JMOL with respect to the torts of intentional interference with contractual
relations and intentional interference with prospective economic advantage,
vacating the jury's verdict on that issue, and remanding the issue to the
trial court for further proceedings; v) affirming the trial court's grant
of a new trial to Honeywell on damages, if necessary; vi) affirming the
trial court's order granting intervening rights to Honeywell; vii)
reversing the trial court's grant of JMOL and reinstating the jury's
verdict that the asserted claims of Litton's patent are not invalid for
obviousness; and viii) reversing the trial court's determination that
Litton had obtained its '849 reissue patent through inequitable conduct.
Litton's request for an "en banc" rehearing of the panel's decision by the
full Federal Circuit appellate court was denied and the case remanded to
the trial court where a status conference was held on August 17, 1998.
Litton has indicated that it might seek further appellate review by the
U.S. Supreme Court. Honeywell intends to vigorously oppose Litton's
appellate actions and will file motions with the trial court to dispose of
the remanded issues. If some of the remanded issues are not disposed of by
legal motions, a jury trial of the remaining issues may be necessary.
In preparing for the patent/tort damages retrial that was scheduled for
1997, Litton submitted a revised damage study to the trial court, seeking
damages as high as $1.9 billion. Honeywell believes that Litton's damage
study remains flawed and speculative for a number of reasons, and in view
of the recent Federal Circuit panel's decision, there is no basis for any
claim.
It is not possible at this time to predict the outcome of the issues
remanded to the trial court or any further appeals in this case, but some
potential remains for judgments which could be material to Honeywell's
financial position or results of operations. Honeywell believes however,
that any potential award of damages for infringement or interference should
be based upon a reasonable royalty reflecting the value of the ion-beam
coating process, and further that such an award would not be material to
Honeywell's financial position or results of operations. No provision has
been made in the financial statements with respect to this contingent
liability.
ANTITRUST CASE
Preparations for, and conduct of, the antitrust case have generally
followed the completion of comparable proceedings in the patent/tort case.
Trial did not begin in the antitrust case until November 20, 1995. Judge
Pfaelzer also presided over this trial, but it was held before a different
jury. At the close of evidence and before jury deliberations began, the
trial court dismissed, for failure of proof, Litton's contentions that
Honeywell had illegally monopolized and attempted to monopolize by engaging
in below-cost predatory pricing; tying and bundling product offerings under
packaged pricing; misrepresenting its products and disparaging Litton
products; and acquiring the Sperry Avionics business in 1986. On
February 2, 1996, the case was submitted to the jury on the remaining
allegations that Honeywell had illegally monopolized and attempted to
monopolize by entering into certain long-term exclusive dealing and penalty
arrangements with aircraft manufacturers and airlines to exclude Litton
from the commercial aircraft market, and by failing to provide Litton with
access to proprietary software used in the cockpits of certain business
jets. On February 29, 1996, the jury returned a $234 million single damages
verdict against Honeywell for illegal monopolization which verdict would
have been automatically trebled. On March 1, 1996, the jury indicated that
it was unable to reach a verdict on damages for attempted monopolization,
and a mistrial was declared as to that claim.
<PAGE>
Page 9
Honeywell subsequently filed a motion for judgment as a matter of law and a
motion for a new trial, contending, among other things, that the jury's
partial verdict should be overturned because Honeywell was prejudiced at
trial, and Litton failed to prove essential elements of liability or submit
competent evidence to support its speculative, all-or-nothing
$298.5 million damage claim. Litton filed motions for entry of judgment and
injunctive relief. On July 24, 1996, the trial court denied Honeywell's
alternative motions for judgment as a matter of law or a complete new
trial, but concluded that Litton's damage study was seriously flawed and
granted Honeywell a retrial on damages only. The court also denied
Litton's two motions. At that time, Judge Pfaelzer was expected to conduct
the retrial of antitrust damages sometime following the retrial of
patent/tort damages. However, after the U.S. Supreme Court remanded the
patent/tort case to the Federal Circuit in March 1997, Litton moved to have
the trial court expeditiously schedule the antitrust damages retrial. In
September 1997, the trial court rejected that motion, indicating that it
wished to know the outcome of the current patent/tort appeal before
scheduling retrials of any type.
Following the April 7, 1998 Federal Circuit panel decision in the
patent/tort case, Litton again petitioned the trial court to schedule the
retrial of antitrust damages. The trial court tentatively scheduled the
trial to commence in the fourth quarter of 1998, and reopened limited
discovery and other pretrial preparations for this matter. Litton then
filed another antitrust damage claim of nearly $300 million which Honeywell
believes is legally deficient since it remains speculative, not
disaggregable and non-responsive to the trial court's July 24, 1996 ruling.
The retrial of antitrust damages commenced October 29, 1998 and is expected
to last for several weeks.
Honeywell also believes there are questions concerning the identity and
nature of the business arrangements and conduct which were found by the
antitrust jury in 1996 to be anti-competitive and damaging to Litton,
and that consequently the damages retrial also requires a reappraisal of
liability in some respects by the jury. Following the retrial, Honeywell
will have the right to appeal the eventual judgment, as to both
liability and damages, to the U.S. Court of Appeals for the Ninth
Circuit. As a result of the uncertainty regarding the outcome of this
matter, no provision has been made in the financial statements with
respect to this contingent liability. Honeywell further believes that it
would be inappropriate for Litton to obtain recovery of the same
damages, e.g. losses it suffered due to Honeywell's sales of ring laser
gyroscope-based inertial systems to OEMs and airline customers, under
multiple legal theories and claims, and that eventually no duplicative
recovery will be permitted in and among the patent/tort and antitrust
cases.
In the fall of 1996, Litton and Honeywell commenced a court ordered
mediation of the patent, tort and antitrust claims. No claim was resolved
or settled, and the mediation is currently in recess.
(7) As of October 4, 1998, Honeywell had reserved 13,735,489 shares of common
stock for the issuance of shares in connection with stock option and stock
bonus plans.
(8) On June 15, 1998, Honeywell issued $250.0 in debentures with a coupon rate
of 6 5/8%. The debentures mature on June 15, 2028.
(9) In the second quarter of 1998, Honeywell changed its method of calculating
the market-related value of plan assets for purposes of determining net
periodic pension cost. The new method limits deferred investment gains and
losses to 10% of the fair value of the plan assets. Deferred gains and
losses are recognized in the market-related value of plan assets over 5
years. The effect of this change is immaterial.
(10) On July 5, 1998, Honeywell sold Honeywell-Measurex Data Measurement
Corporation located in Gaithersburg, MD to Metrika Systems Corporation for
$29.0 in cash. The gain on the sale of this business and the impact on the
financial statements and results of operation are immaterial.
<PAGE>
Page 10
(11) In June, Honeywell entered into a sale/leaseback agreement on a facility in
Cupertino, CA which generated cash proceeds of $50.4. The majority of the
gain on the transaction was deferred and will be recognized over the term
of the lease. The annual impact of the deferred gain on the results of
operations will be immaterial. The gain recorded in the second quarter of
1998 was $5.6 or $0.03 per basic and diluted shares.
(12) In 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," which is effective for
fiscal years beginning after December 15, 1998. Honeywell has elected to
adopt this SOP effective January 1, 1998. The accounting change has a
positive impact on Income before Income Taxes and Net Income. The planned
impact of the change to Income before Income Taxes and Net Income was $13.1
and $8.8, respectively, in the third quarter, and $32.0 and $21.4,
respectively, for the first nine months. Basic and Diluted Earnings per
share were planned to increase $0.07 in the third quarter and $0.17 in the
first nine months as a result of the change. Since the effect of the
accounting change is to account for software in a manner similar to other
capital items such as property, plant, and equipment, management chose to
divert other capital expenditures to software related expenditures in 1998.
This increased the amount spent on capitalized software from the planned
level of $13.1 to $15.1 for the quarter and from $32.0 to $35.5 for the
first nine months.
(13) In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 97-2, "Software Revenue Recognition."
This SOP provides guidance on specific accounting issues that are present
in the recognition and measurement of software revenue. Honeywell has
adopted this SOP effective January 1, 1998, and the impact on results of
operations and financial position is immaterial.
(14) In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income," which was adopted by Honeywell beginning January 1, 1998. SFAS No.
130 requires the reporting of comprehensive income and its components in
the general purpose financial statements. This Statement also requires that
an entity classify items of other comprehensive income by their nature in
an annual financial statement. Honeywell intends to disclose this
information through a Statement of Changes in Equity in its Annual
Report on Form 10-K for the period ending December 31, 1998. Honeywell's
total comprehensive income is as follows:
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
----------------------- ---------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income $ 145.4 $ 118.9 $ 367.5 $ 292.9
Foreign currency translation adjustments 28.2 (17.7) (10.8) (82.0)
------- ------- ------- -------
Total comprehensive income $ 173.6 $ 101.2 $ 356.7 $ 210.9
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
(15) 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 was adopted by
Honeywell 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 concluded that the current reportable segments
are consistent with the "management approach" methodology outlined in
SFAS 131.
(16) In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which is effective for
fiscal years beginning after December 15, 1997. SFAS 132 revises and
standardizes disclosures required by SFAS 87, SFAS 88 and SFAS 106.
Honeywell has adopted this standard for its 1998 fiscal year and will
provide the required disclosures in its 1998 Annual Report on Form 10K.
<PAGE>
Page 11
(17) In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which is effective for fiscal years
beginning after June 15, 1999. SFAS 133 requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. Honeywell is currently
reviewing the standard and its effect on the financial statements.
(18) The amounts set forth in this quarterly report are unaudited but, in the
opinion of the registrant, include all adjustments necessary for a fair
presentation of the results of operations for the nine-month periods
ended October 4, 1998 and September 28, 1997, respectively. Honeywell's
accounting policies are further described in the notes to financial
statements in its 1997 Annual Report on Form 10-K. Certain prior year
amounts have been reclassified to conform with 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 third quarter of 1998 was $145.4 million, up 22 percent from
$118.9 million in the third quarter of 1997. Earnings per diluted share were
$1.14 for the quarter, up 24 percent from 92 cents in third quarter of 1997.
Third quarter earnings per diluted share include a 7 cent increase due to
planned level of expenditures for capitalized software costs in accordance with
the adoption of Statement of Position (SOP) 98-1 issued by the American
Institute of Certified Public Accountants (See Note 12). Excluding the
accounting change, earnings per diluted share grew 16 percent.
Sales in the third quarter were $2.12 billion, up 4 percent, compared with $2.04
billion a year earlier. Operating profit was $275.0 million, compared with
$226.6 million in the 1997 third quarter. Total orders for the quarter were up
3 percent. Currency translation had a 1 percent negative impact on orders and
sales in the third quarter.
THIRD-QUARTER BUSINESS UNIT RESULTS
SPACE AND AVIATION CONTROL. Operating profit was $94.4 million, compared to
$70.8 million a year earlier. Profits increased 33 percent, with margins
improving from 14.0 percent to 15.8 percent, including a 70 basis point benefit
from the planned levels of software capitalization. Space and Aviation Control
profit growth resulted from volume leverage and favorable mix primarily in the
commercial and military markets.
Sales for Space and Aviation Control grew 18 percent to $598.5 million,
compared with $505.3 million in the third quarter of 1997. Orders for the
quarter were up 13 percent on strong growth in commercial avionics. Space
and Aviation Control's Primus Epic-TM- integrated avionics system was chosen
for the Fairchild Aerospace 728JET family of regional airliners. In
addition, Space Systems received an additional $18 million in orders for the
new International Space Station.
Space and Aviation Control continued to progress on its key growth initiatives
in the quarter. Honeywell Aviation Services and Matsushita Avionics Systems
signed an agreement to integrate Matsushita's airborne in-flight entertainment
products with Honeywell's cockpit-based communications products and provide an
integrated technology and service solution to support passenger communications
and airline operational requirements. On September 21st, Continental Airlines
completed the first commercial global positioning system controlled landing
(GLS) using the Honeywell/Pelorus satellite landing system and Honeywell's
flight management systems and communications technology. This is the first GLS
system to receive FAA approval for use in commercial flights.
<PAGE>
Page 12
During the quarter, Honeywell acquired Daimler-Benz Aerospace AG's airport
systems business, continuing the company's strategy of broadening its global
portfolio in the growing airport systems market. The acquisition expands
Honeywell's offering of airport lighting products and airport information
management systems.
HOME AND BUILDING CONTROL. Operating profit for the business was $101.9 million
compared with $61.2 million last year, which includes $30.4 million in 1997
special charges. Excluding the special charges, operating profits increased 11
percent compared to the third quarter of 1997, and margin rates improved
90 basis points to 11.4 percent including a 50 basis point impact from the
planned level of software capitalization. Home and Building Control products
operating profits were up slightly in the quarter, and profits for solutions and
services were up significantly. Margin rates improved globally in solutions and
services as a result of improved booked margins, restructuring benefits, and
ongoing cost reductions.
Sales for Home and Building Control were $895.7 million compared to $870.9
million in the 1997 third quarter. Strong growth in Home and Building
Control product sales were offset by the expected decline in solutions and
services sales as the transformation of that product line continues.
Currency translation had a 2 percent negative impact on sales and orders.
Home and Building Control orders were flat, with slight growth in products
orders offset by selectivity in North American solutions and services bookings.
Home and Building Control's expansion into industrial facility energy and
compressed air management resulted in a third quarter agreement with Anheuser
Busch to provide energy retrofit solutions throughout Anheuser Busch's North
American facilities.
INDUSTRIAL CONTROL. Operating profit for Industrial Control was $77.4 million
compared with $87.8 million a year earlier. The 1997 third quarter operating
profit includes the impact of special charges of $30.0 million and the gain on
the sale of a business of $60.3 million. Excluding the impact of these one time
events, profits were up 35 percent compared to third quarter 1997, with margins
increasing 4 percentage points from 9.1 percent to 13.1 percent. Excluding the
benefit of planned software capitalization, earnings grew 28 percent with
margins increasing 330 basis points. The increase in earnings and margins was
driven by Industrial Automation and Control and reflects benefits from
restructuring, earnings contributions from Honeywell-Measurex, and ongoing
operational excellence programs improving product cost competitiveness. Sensing
and Control profits were down moderately in the quarter driven by the 1997
divestitures.
Industrial Control sales in the third quarter were $591.4 million, compared with
$629.0 million last year. Net of divested units, Industrial Control revenue
decreased 2 percent as a result of weaker performance in short-cycle product
businesses and reduced capital spending in the pulp and paper market.
Industrial Control orders were down 6 percent for the quarter, but were down
only slightly after excluding the impact of currency translations and divested
units. Honeywell's global presence and unique technology-based value
propositions resulted in a number of significant alliances and partnerships in
the quarter, including long-term preferred supplier agreements with Mobil, Citgo
and Phillips. These alliances are expected to provide Industrial Control
several hundred million dollars in revenue over the next three to five years.
Key contract wins for the quarter include a multi-million dollar contract to
supply the automation solutions for the $2 billion Saudi Yanbu Petrochemical
Company (YANPET) complex in Yanbu, Saudi Arabia.
NINE-MONTH SUMMARY
In the first nine months of 1998, Honeywell's net income was $367.5 million, up
26 percent from $292.9 million a year earlier. Sales were $6.08 billion,
compared with $5.70 billion last year. Earnings per diluted share were $2.87,
up 26 percent from $2.27 in the first nine months of 1997.
SPACE AND AVIATION CONTROL. Operating profits generated by Space and Aviation
Control increased 31 percent to $241.9 million from $184.5 million for the first
nine months of the prior year, driven by improvements across all product lines.
Orders were up 15 percent, and revenue grew to $1.71 billion, up 22 percent from
$1.4 billion a year earlier.
<PAGE>
Page 13
HOME AND BUILDING CONTROL. Home and Building Control operating profits for
the first nine months of 1998 increased to $227.8 million from $173.8 million
a year earlier, driven by solutions and services. Excluding $30.4 million in
special charges taken in 1997, operating profits increased 12 percent. Sales
were $2.46 billion compared to $2.39 billion last year. Year to date, orders
were down slightly from the same period a year ago.
INDUSTRIAL CONTROL. Operating profits for Industrial Control were $222.3
million, up from $200.3 million a year earlier. Excluding $30.0 million in
special charges and a $60.3 million gain on the sale of a business taken in
1997, operating profits increased 31 percent from the first nine months of
1997. The profit improvements were largely driven by Industrial Automation
and Control. Year to date, orders were up 3 percent, and revenue was $1.81
billion compared to $1.82 billion in the first nine months of 1997.
YEAR 2000 READINESS DISCLOSURES
BACKGROUND. Computer programs which were written using two digits (rather than
four) to define the applicable year may recognize a date using "00" as the year
1900 rather than the year 2000. This is generally referred to as the "year 2000
issue", which may affect the performance of computer programs, hardware,
software and other products with embedded computer technology that is date
sensitive. Unless corrective action is taken to ensure that such items are
"year 2000 ready", which means that they will be able to process dates and times
in such a manner that their technical and functional requirements will continue
to be met without interruption for the year 2000, they may generate erroneous
data or cause systems, equipment or other products to fail.
HONEYWELL'S YEAR 2000 PROGRAM. In the fourth quarter of 1995, Honeywell
initiated a program to determine whether or not its business systems, operations
and products are year 2000 ready. This program addresses the company's
information technology systems and other systems with embedded computer
technology; products provided to customers; products purchased from suppliers;
and most recently, the year 2000 readiness of its significant customers.
PRODUCT READINESS. Substantially all of Honeywell's current products have
been tested internally to ascertain if they are year 2000 ready.
Approximately 99% of these products are year 2000 ready and the remainder are
expected to be so by the end of January 1999. The company expects to
complete its tests by the end of 1998. In some areas of its businesses,
Honeywell is conducting external integration tests of year 2000 ready
products in existing customer systems to verify that they are compatible with
such systems.
Certain older products that are still in use by Honeywell customers and
subject to warranties or service contracts, may not be year 2000 ready.
Honeywell is formally communicating with customers to make them aware of any
potential problems that may result from the use of such products and
encouraging them to modify or replace same, or providing warranty or contract
service as appropriate. The company expects to complete this process by the
end of 1998. For older products which are not year 2000 ready, but are no
longer under warranty or service contracts, various means are being employed
to raise the awareness of any potential year 2000 problems, including
advertising and contracting with external service providers to help identify
current owners.
SUPPLIER READINESS. Honeywell has sent questionaires to substantially all
suppliers who furnish products or services to the company, to ascertain
whether products or services supplied are year 2000 ready, as well as the
effect the year 2000 issue may have on their ability to continue supplying
same. Approximately 300 of these suppliers have been identified by the
company as being critical to its businesses. Honeywell is conducting
symposiums, telephone interviews and site visits with these critical
suppliers in an attempt to verify that their products or services are year
2000 ready and that their ability to continue supplying same will not be
affected by the year 2000 issue. This process is expected to be completed
during the third quarter of 1999.
<PAGE>
Page 14
INTERNAL SYSTEMS READINESS. In 1993, prior to the commencement of
Honeywell's year 2000 program, the company implemented a program to upgrade
most of its key information technology systems to common applications
software, with completion scheduled prior to the year 2000. Honeywell
expects all of its critical internal business systems to be year 2000 ready
by July 1999, except for those of Honeywell - Measurex Corporation, a company
acquired in March 1997. Critical business systems of Honeywell - Measurex
Corporation are expected to be year 2000 ready by the end of the third
quarter of 1999. The remainder of Honeywell's business systems which are
considered to have a financial or operational impact on its businesses, are
expected to be year 2000 ready by the end of 1999.
The company is still assessing the status of its non-IT systems and making
repairs or upgrades to such systems as necessary. It expects to conclude
this effort during the third quarter of 1999 for critical non-IT systems, and
by the end of 1999 for other non-IT systems which are considered to have a
financial or operational impact on its businesses. Honeywell does not expect
the costs associated with the remediation of non-IT systems to be material,
and such costs are included in the amounts forecasted for contingencies in
1999 as discussed below under the caption "Costs".
CUSTOMER READINESS. Honeywell recently expanded its year 2000 program to
evaluate the readiness of its significant customers to deal with the year
2000 issue and the effect, if any, that it may have on their requirements for
Honeywell's products and services. Though Honeywell does not foresee any
significant problems in this area, the information collected to date as part
of this effort is not sufficient to form a basis for any conclusions
regarding customer readiness and its effect, if any, on customer demand for
the company's products and services. Honeywell expects to complete its
assessment of the readiness of significant customers by July 1999, though no
assurance can be given that all customers will respond to its inquiries or
that all responses will be accurate.
RISKS/CONTINGENCY PLANS. Honeywell's products are used in a wide variety of
control applications including, but not limited to, industrial processing
control systems, home and building products and automation control systems, and
space and aviation control systems. In a most likely worst case scenario, if
Honeywell's products are not year 2000 ready, a control application could be
disrupted, which could affect the ability of the system in which it is installed
to function properly, depending on other safeguards. Similarly, if customers
are unable to conduct adequate integration testing of Honeywell's year 2000
ready products within their equipment or systems, they could experience
temporary equipment or systems failure if compatibility problems arise. While
the company does not expect any worst case scenario to occur, it is working
closely with customers of critical systems to advise them of potential problems
and the need to complete systems integration testing.
If a critical supplier cannot supply products or services to Honeywell that
are year 2000 ready, or if the supplier is adversely affected by the year
2000 issue, that source of supply could be interrupted. This could affect
the ability of Honeywell to supply other products or services, or disrupt a
business operation which is dependent thereon. Furthermore, if a year 2000
issue affecting a component is not detected by a supplier, it could affect
the performance of the product or system of which it becomes a part and
possibly cause one or more of the scenarios discussed above to occur. To
reduce the risk of such occurrences, Honeywell is taking steps to verify the
year 2000 readiness of all critical suppliers as discussed above under the
caption "Supplier Readiness". In addition, each of Honeywell's business
units is developing contingency plans to provide direct support to critical
suppliers with year 2000 issues, and to identify substitute materials,
services and alternate suppliers.
Honeywell expects that all of its internal applications systems will be year
2000 ready by the end of 1999. However, if its strategy to replace its order
management systems in some European countries is not completely executed prior
to the year 2000, there may be difficulty in processing customer orders in such
countries. Contingency plans have been developed to mitigate such risks and
will be implemented if necessary.
Honeywell acquires other companies from time to time as part of its business
development strategy, and it anticipates that acquisitions will continue
through the year 2000. In the course of conducting due diligence
investigations of acquisition candidates, Honeywell endeavors to ascertain
whether or not their products or services, or those of their critical
suppliers, are year 2000 ready, and whether or not such suppliers and key
customers, if any, will be adversely affected by the year 2000 issue. While
acquisition candidates may provide certain information or make
representations and warranties regarding year 2000 readiness, in some cases,
Honeywell may be unable to verify same until the acquisition is completed and
the steps outlined herein as part of Honeywell's year 2000 program are
undertaken.
<PAGE>
Page 15
COSTS. Honeywell estimates that historical and future costs associated with
its year 2000 program will not exceed $60 million for fiscal years 1995
through 1999. Approximately $20 million in costs will be incurred in fiscal
year 1998, and $30 million has been forecasted for the 1999 fiscal year to
cover additional costs and contingencies. Funding for the 1998 and 1999
costs was previously forecasted as part of Honeywell's operating expenditures
and included in the company's budgets. Management believes that such costs
will not have a material impact on the operations, cash flows or financial
condition of Honeywell and its subsidiaries, taken as a whole, in future
periods.
The preceding "Year 2000 Readiness Disclosures" contain forward-looking
statements of Honeywell's expectations regarding the ability of its products
and systems to be year 2000 ready, as well as its ability to assess the
readiness of its suppliers and customers, and related risks. These
statements relate to future events, the outcome of which is uncertain, and
should be read in conjunction with the cautionary factors listed below and in
Exhibit 99(i) to this report.
SAFE HARBOR CAUTIONARY STATEMENT
Any statements in this report regarding Honeywell's outlook for its businesses
and their respective markets, such as projections of future performance,
statements of management's plans and objectives, forecasts of market trends and
other matters, are forward-looking statements, some of which may be identified
by such words or phrases as "will likely result," "are expected to," "will
continue," "outlook," "is anticipated," "estimate," "project" or similar
expressions. No assurance can be given that the results in any forward-looking
statement will be achieved and actual results could be affected by one or more
factors which could cause them to differ materially. For these statements,
Honeywell claims the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995.
The following is a summary of certain factors, the results of which, if markedly
different from Honeywell's planning assumptions, could cause Honeywell's future
results to differ materially from those expressed in any forward-looking
statements contained in this report:
- foreign currency translations of sales denominated in other currencies
which may fluctuate adversely based on local currency valuations;
- changes in macroeconomic conditions in those regions throughout the
world in which Honeywell does business, such as those which have
recently occurred in Asia, Latin America and eastern Europe, or
changes in trade or monetary policies, any of which may affect
customer demand for the company's products and services;
- risks pertaining to performance and energy retrofit contracts,
including dependence on the performance of third parties;
- various competitive pressures, such as new technologies, industry
consolidation and deregulation of certain industries;
- the ability of material suppliers or key customers of the company to
reduce or eliminate risks to their businesses or operations arising
from the year 2000 issue;
- availability of intellectual property rights for newly developed
products or key technologies; and
- significant acquisitions or divestitures.
Please refer to Exhibit 99(i) of this report for a more detailed discussion of
these and other factors that could cause Honeywell's actual results in future
periods to differ materially from those projected in any forward-looking
statements.
<PAGE>
Page 16
FINANCIAL CONDITION
Shareowners' equity increased to $2,566 million from $2,389 million at the end
of 1997. Shareowners' equity includes an increase of $263 million in retained
earnings from current year earnings net of dividends, an $11 million decrease in
the accumulated foreign currency translation balance, and a $75 million net
decrease in stock balances driven by the repurchase of treasury shares.
Basic common shares outstanding decreased from 126.2 million at the end of 1997
to 125.9 million. Diluted shares outstanding decreased from 128.0 million at
year end 1997 to 127.1 million at the end of September. During the first nine
months of 1998, 2,054,500 shares were repurchased at a cost of $160 million. The
repurchased shares are intended to offset planned issuances under existing
employee stock and incentive programs. Shares issued through stock option and
stock bonus plans totaled 1,106,768 shares and yielded $39 million in proceeds.
Debt as a percentage of total capital at the end of the third quarter was 37
percent compared with 36 percent at the end of 1997. In June 1998, Honeywell
issued $250 million of 30-year debentures at a coupon rate of 6 5/8 percent.
Total debt has increased $188 million from 1997 year end.
During 1997, Honeywell committed itself to a plan of action and recorded special
charges of $90.7 million intended to reduce operating costs and improve margins.
Expenditures of $11.1 million in the third quarter of 1998 included $7.9 million
for work force reduction, $1.4 million for facilities consolidations and $1.8
million for other restructuring activities. For the first nine months,
expenditures totaled $38.4 million, consisting of $27.5 million for work force
reduction, $6.4 million for facilities consolidations and $4.5 million for other
restructuring activities. Accrued costs remaining will be funded with cash
flows from operating activities in 1998.
Net cash flows used by investing activities exceeded net cash generated from
operations by $38 million in the first nine months of 1998. The primary
investing activities of investments in capital and acquisitions were funded by
the proceeds from the sale of assets and businesses, cash generated by
operations, and debt.
On October 4, 1998, Honeywell had $1,325 million of committed revolving
credit lines with 17 banks. There were no outstanding borrowings against
these lines on October 4, 1998. In addition, certain foreign units had $371
million in credit lines available at the end of the third quarter. Honeywell
believes its available cash, committed credit lines and access to the public
debt markets through commercial paper and medium-term note programs provide
adequate short-term and long-term liquidity.
As of October 4, 1998, Honeywell's credit ratings for long-term and short-term
debt were 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 October 4, 1998, the notional amount of
outstanding foreign exchange contracts was approximately $1.0 billion. The
amount of hedging gains and losses deferred was not material at October 4, 1998.
The notional amount of outstanding interest rate swaps was $1.0 billion at
October 4, 1998.
<PAGE>
Page 17
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, 1997, 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:
(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 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HONEYWELL INC.
Date: November 12, 1998 By: /s/ E.D. Grayson
----------------------------------
E.D. Grayson
Vice President and General Counsel
Date: November 12, 1998 By: /s/ P.M. Palazzari
----------------------------------
P.M. Palazzari
Vice President and Controller
(Chief Accounting Officer)
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Page No.
- ----------- --------
12 Computation of Ratio of Earnings to Fixed Charges i
27 Financial Data Schedule ii
99(i) Cautionary Statements For Purposes of the Safe
Harbor Provisions of the Private Securities Litigation
Reform Act of 1995 iii
<PAGE>
EXHIBIT (12)
HONEYWELL INC. AND SUBSIDIARIES
COMBINED WITH PROPORTIONAL SHARES OF 50% OWNED COMPANIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
Nine Months Ended
October 4, 1998
---------------
<S> <C>
Income before Income Taxes. . . . . . . . . . . . . . $ 548.71
Deduct:
Equity income. . . . . . . . . . . . . . . . . . . 4.89
--------
Subtotal . . . . . . . . . . . . . . . . . . . . . 543.82
Add (deduct):
Dividends from less than 50% owned companies . . . 0.94
Proportional share of income (loss) before
income taxes of 50% owned companies . . . . . . (1.90)
--------
Adjusted income . . . . . . . . . . . . . . . . . . . 542.86
--------
Fixed Charges
Interest on indebtedness . . . . . . . . . . . . . 85.86
Amortization of debt expense . . . . . . . . . . . 1.26
Interest portion of rent expense . . . . . . . . . 36.16
--------
Total Fixed Charges . . . . . . . . . . . . . . . . . 123.28
--------
Total Available Income. . . . . . . . . . . . . . . . $ 666.14
--------
--------
Ratio of Earnings to Fixed Charges. . . . . . . . . . 5.40
--------
--------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> OCT-04-1998
<CASH> 66
<SECURITIES> 8
<RECEIVABLES> 1,904
<ALLOWANCES> 41
<INVENTORY> 1,201
<CURRENT-ASSETS> 3,380
<PP&E> 3,313
<DEPRECIATION> 2,102
<TOTAL-ASSETS> 6,847
<CURRENT-LIABILITIES> 2,369
<BONDS> 1,336
0
0
<COMMON> 281
<OTHER-SE> 2,285
<TOTAL-LIABILITY-AND-EQUITY> 6,847
<SALES> 6,078
<TOTAL-REVENUES> 6,078
<CGS> 4,122
<TOTAL-COSTS> 4,122
<OTHER-EXPENSES> 1,322
<LOSS-PROVISION> 15
<INTEREST-EXPENSE> 84
<INCOME-PRETAX> 549
<INCOME-TAX> 181
<INCOME-CONTINUING> 368
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 368
<EPS-PRIMARY> 2.91
<EPS-DILUTED> 2.87
</TABLE>
<PAGE>
EXHIBIT 99(i)
CAUTIONARY STATEMENTS
FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Honeywell Inc. ("Honeywell" or the "Company") may occasionally make statements
regarding its businesses and their respective markets, such as projections of
future performance, statements of management's plans and objectives, future
contracts, forecasts of market trends and other matters, which to the extent
they are not historical fact, may constitute "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Statements
containing the words or phrases "will likely result", "are expected to," "will
continue," "outlook," "is anticipated," "estimate," "project" or similar
expressions, which may appear in certain documents, reports (including but not
limited to those filed with the Securities and Exchange Commission), press
releases, and written or oral presentations made by officers of the Company to
analysts, shareholders, investors, news organizations and others, identify such
forward-looking statements. No assurance can be given that the results in any
forward-looking statements will be achieved and actual results could be affected
by one or more factors which could cause them to differ materially. Therefore,
Honeywell wishes to ensure that any written or oral forward-looking statements
made by it or on its behalf, are accompanied by, or referenced to, meaningful
cautionary statements in order to maximize to the fullest extent possible the
protections of the safe harbor established in the Private Securities Litigation
Reform Act of 1995.
All forward-looking statements made by or on behalf of Honeywell are hereby
qualified in their entirety by reference to the following important factors,
among others, that could affect the Company's businesses and cause actual
results to differ materially from those projected. Any forward-looking statement
speaks only as of the date on which such statement is made, and Honeywell
undertakes no obligation to update such statement to reflect events or
circumstances arising after such date.
FOREIGN SALES. A significant portion of Honeywell's revenues are generated from
international business operations. Changes in trade, monetary policies and
regulatory requirements of the United States and other nations (e.g. the
adoption of the EURO currency by the European Monetary Union), as well as
political instability in certain regions may affect Honeywell's international
business. Many of Honeywell's sales outside the United States are denominated in
local currencies; therefore, exchange rate fluctuations may affect overall
financial performance.
PROJECT MANAGEMENT. Performance related programs and retrofit projects have
increasingly become an integral part of Honeywell's businesses. The success of
some of these programs may depend in part on the performance of third parties.
Honeywell manages its businesses in such a manner as to minimize the potential
impact of performance; nonetheless, bid variances, third party labor disputes,
and the availability, quality and timely delivery of supplies are factors that
could affect the Company's ability to manage these programs within their
budgetary guidelines.
COMPETITION. Honeywell's businesses are subject to various competitive
pressures, including but not limited to, the introduction of new competitive
technologies, industry consolidation, the growing acceptance of open systems
environments and the deregulation of certain industries. Developments in these
areas may influence Honeywell's strategies in certain markets and create new
challenges or opportunities.
HUMAN RESOURCES. Innovative products and solutions are continuously developed
by Honeywell's businesses for application in the markets they serve. Highly
trained technical and managerial employees are required for this effort, and
Honeywell's ability to manage its businesses successfully depends, in part, on
its ability to attract and retain such people. Shortages of skilled personnel or
negative compensation trends are factors that can affect the availability of
such people or increase Honeywell's costs in attracting and retaining employees.
In certain foreign markets, local labor rates and practices may affect
Honeywell's operating costs or its ability to conduct business in such areas.
iii
<PAGE>
REGULATORY ORGANIZATIONS. In many of the domestic and foreign markets in which
Honeywell competes, such as aviation, building control, processing and refining,
government regulation is extensive. Compliance with safety or environmental
standards may impact Honeywell in those markets by increasing Honeywell's costs
or alternately, by providing opportunities for Honeywell to provide solutions
for customers affected thereby.
Also, certain other regulatory organizations such as the Financial Accounting
Standards Board and the American Institute of Certified Public Accountants, may
from time to time, promulgate rules and regulations which may impact Honeywell's
accounting policies in the U.S. and abroad.
TECHNOLOGY. Honeywell's products and services are based on innovative
technologies developed by the Company or licensed from others. To the extent the
Company can secure intellectual property protection for products it develops, it
may be able to enhance its competitive position in certain markets. Honeywell's
ability to obtain licenses from third parties for other key technologies, or to
develop new technologies or solutions independently or through collaborative
efforts can impact the Company's businesses.
YEAR 2000 READINESS DISCLOSURES. Honeywell has established a year 2000
program to evaluate and deal with issues which may arise and affect its
products, services, businesses and operations as a result of the year 2000
issue. To the extent Honeywell is unable to successfully execute the
strategies set forth in that program, or if one or more of such efforts fail,
the Company could face product liability claims from certain customers, or
disruption of its businesses or operations. Similarly, it a critical supplier
is unable to remedy its year 2000 issues, that source of supply for a product
or service critical to a particular Honeywell business, could be disrupted
and affect the ability of that business to conduct its operations or provide
certain products or services to customers.
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. Similarly, the availability of credit
markets in the United States and other regions of the world to the Company's
customers may affect their ability to purchase its products and services. The
Company endeavors to forecast such demands, but unforeseen general economic
conditions in the United States and internationally, such as those which have
recently occurred in Asia, Latin America and eastern Europe, as well as industry
specific factors, may affect such forecasts.
To the extent a key customer of Honeywell is affected by the year 2000 issue,
that customer's demand for the products or services of Honeywell could also
be affected.
CHARGES RESULTING FROM ACQUISITIONS AND DIVESTITURES. Honeywell continually
evaluates the growth potential and profitability of its existing businesses, and
equity and other investments. When deemed appropriate, Honeywell will acquire
new businesses to expand its product offerings, increase or decrease its
investments, and divest assets (e.g., buildings, product lines, etc.) and
existing businesses which are no longer considered a strategic fit or do not
continue to create value consistent with the Company's objectives. Decisions to
sell assets or divest businesses could result in future gains or charges
depending on the circumstances.
The foregoing factors are not exhaustive and new factors may emerge which impact
Honeywell's businesses. It is impossible for management to predict such factors,
therefore, forward-looking statements should not be relied upon as a prediction
of actual future results.
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