Page 2
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 April 5, 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) dentification 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 April 3, 1998, the number of shares outstanding of the registrant's common
stock, $1.50 par value, was 126,141,171.
<PAGE>
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PART I. FINANCIAL INFORMATION
--------------------------------
Item 1. Financial Statements
INCOME STATEMENT
Honeywell Inc. and Subsidiaries
(Unaudited)
<TABLE>
<CAPTION>
First Quarter Ended
------------------------------
(Dollars in Millions Except Per Share Amounts) April 5, 1998 March 30, 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
SALES $1,923.3 $1,685.7
-------- --------
COSTS AND EXPENSES
Cost of sales 1,326.8 1,149.7
Research and development 113.5 93.2
Selling, general and administrative 314.7 310.7
Interest - net 24.2 18.6
Equity (income) loss 0.3 (1.1)
-------- --------
TOTAL COSTS AND EXPENSES 1,779.5 1,571.1
-------- --------
INCOME BEFORE INCOME TAXES 143.8 114.6
PROVISION FOR INCOME TAXES 47.5 39.0
-------- --------
NET INCOME $ 96.3 $ 75.6
======== ========
BASIC EARNINGS PER COMMON SHARE $ 0.76 $ 0.60
======== ========
AVERAGE COMMON SHARES OUTSTANDING 126,189,575 126,782,640
DILUTED EARNINGS PER COMMON SHARE $ 0.75 $ 0.59
======== ========
AVERAGE COMMON AND DILUTED SHARES OUTSTANDING 127,961,579 129,172,386
</TABLE>
<PAGE>
Page 3
STATEMENT OF CASH FLOWS
Honeywell Inc. and Subsidiaries
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------
(Dollars in Millions) April 5, 1998 March 30, 1997
------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 96.3 $ 75.6
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation 62.6 58.5
Amortization of intangibles 18.3 15.8
Deferred income taxes (0.8) 1.9
Equity (income) loss, net of dividends received 0.3 (1.1)
(Gain) loss on sale of assets 0.3 (0.4)
Contributions to employee stock plans 15.7 15.6
Decrease in receivables 107.3 92.9
Increase in inventories (85.5) (65.0)
Decrease in accounts payable (55.1) (132.9)
Decrease in accrued income taxes and interest (73.5) (66.1)
Other changes in working capital, excluding
short-term investments and short-term debt (44.2) 85.8
Other noncurrent items - net (38.5) (64.5)
------ ------
NET CASH FLOWS FROM OPERATING ACTIVITIES 3.2 16.1
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of assets 3.4 1.5
Capital expenditures (81.8) (66.3)
Investment in acquisitions, net of cash acquired (87.3) (567.7)
Decrease in short-term investments 0.6 0.3
Other - net (1.8) 3.9
------ ------
NET CASH FLOWS FROM INVESTING ACTIVITIES (166.9) (628.3)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in short-term debt 182.1 63.3
Proceeds from issuance of long-term debt - 574.6
Repayment of long-term debt (30.5) (94.8)
Proceeds from issuance of preferred shares of subsidiary - 121.3
Purchase of treasury stock (66.5) (0.7)
Proceeds from exercise of stock options 26.5 16.0
Dividends paid (34.9) (33.5)
------ ------
NET CASH FLOWS FROM FINANCING ACTIVITIES 76.7 646.2
------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (0.3) (9.0)
------ ------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (87.3) 25.0
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 134.3 127.1
------ ------
CASH AND CASH EQUIVALENTS AT END OF THREE MONTHS $ 47.0 $152.1
====== ======
</TABLE>
<PAGE>
Page 4
STATEMENT OF FINANCIAL POSITION
Honeywell Inc. and Subsidiaries
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in Millions except Per Share Amounts) April 5, December 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 47.0 $ 134.3
Short-term investments 37.3 24.9
Receivables (less allowance for doubtful accounts:
1998, $37.1; 1997, $38.5) 1,713.4 1,837.8
Inventories (less progress billing on uncompleted
contracts: 1998, $44.5; 1997, $43.5) 1,107.3 1,028.0
Deferred income taxes 234.0 233.2
-------- --------
TOTAL CURRENT ASSETS 3,139.0 3,258.2
INVESTMENTS AND ADVANCES 236.4 243.8
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment 3,089.6 3,045.0
Less accumulated depreciation 1,941.8 1,916.3
-------- --------
TOTAL PROPERTY, PLANT AND EQUIPMENT 1,147.8 1,128.7
OTHER ASSETS
Long-term receivables (less allowance for doubtful accounts:
1998, $2.2; 1997, $2.7) 47.3 39.2
Goodwill 843.1 786.0
Intangible assets 366.4 376.0
Deferred income taxes 42.2 41.7
Other 583.7 537.8
-------- --------
TOTAL ASSETS $6,405.9 $6,411.4
======== ========
LIABILITIES AND SHAREOWNERS' EQUITY
CURRENT LIABILITIES
Short-term debt $ 301.0 $ 146.4
Accounts payable 520.1 572.9
Customer advances 326.5 269.7
Accrued income taxes 264.9 344.2
Deferred income taxes 10.9 11.3
Other accrued liabilities 893.6 974.4
-------- --------
TOTAL CURRENT LIABILITIES 2,317.0 2,318.9
LONG-TERM DEBT 1,172.8 1,176.8
DEFERRED INCOME TAXES 50.4 51.4
OTHER LIABILITIES 485.5 475.1
-------- --------
TOTAL LIABILITIES 4,025.7 4,022.2
-------- --------
SHAREOWNERS' EQUITY
Common stock - $1.50 par value
Authorized - 250,000,000 shares
Issued - 1998 - 187,591,204 shares 281.4
1997 - 187,633,023 shares 281.5
Additional paid-in-capital 634.9 608.4
Retained earnings 3,467.8 3,407.0
Treasury stock - 1998 - 61,450,033 shares; (1,943.8)
1997 - 61,433,075 shares (1,879.3)
Accumulated foreign currency translation (53.2) (21.4)
Pension liability adjustment (6.9) (7.0)
-------- --------
TOTAL SHAREOWNERS' EQUITY 2,380.2 2,389.2
-------- --------
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY $6,405.9 $6,411.4
======== ========
</TABLE>
<PAGE>
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NOTES TO FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
(1) The financial information and statements of companies owned 20 percent to
50 percent, accounted for using the equity method, are omitted pursuant to
Rule 10-01 of Regulation S-X.
(2) Interest consists of the following:
<TABLE>
<CAPTION>
First Quarter
----------------------
1998 1997
---- ----
<S> <C> <C>
Interest expense $26.4 $20.9
Interest income (2.2) (2.3)
----- -----
Total $24.2 $18.6
===== =====
</TABLE>
Interest paid amounted to $22.9 and $11.4 for the first quarters of 1998
and 1997, respectively. The increase in 1998 first quarter interest
payments is largely due to $550.0 of long-term debt established in March
1997.
(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 $125.3
and $112.0 for the first quarters of 1998 and 1997, respectively.
(4) Dividends per share of common stock were $.28 and $.27 for the first
quarters of 1998 and 1997, respectively.
(5) Inventories consist of the following:
<TABLE>
<CAPTION>
April 5, December 31,
1998 1997
------- -----------
<S> <C> <C>
Finished goods $ 398.9 $ 379.3
Inventories related to long-term contracts 171.8 151.4
Work in process 231.7 211.3
Raw materials and supplies 304.9 286.0
-------- --------
Total $1,107.3 $1,028.0
======== ========
</TABLE>
(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
<PAGE>
Page 6
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.
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
<PAGE>
Page 7
obviousness; and viii) reversing the trial court's determination that
Litton had obtained its `849 reissue patent through inequitable conduct.
Litton has requested an `en banc' rehearing of the panel's decision by the
full Federal Circuit appellate court, and has indicated that it will seek
further appellate review by the U.S. Supreme Court if necessary. Honeywell
intends to vigorously oppose Litton's appellate actions and will file
motions with the trial court to dispose of the remanded issues by motion
practice. 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.
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 a motion 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.
<PAGE>
Page 8
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 has tentatively scheduled the
trial to commence in the fourth quarter of 1998, and reopened limited
discovery and other pretrial preparations for this matter.
Honeywell 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-ompetitive and damaging to Litton, and that
consequently the damages retrial will also require a reappraisal of
liability in some respects by the next antitrust 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 April 5, 1998, Honeywell had reserved 14,191,473 shares of common
stock for the issuance of shares in connection with stock option and stock
bonus plans.
(8) In 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-1, `Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use,' which is effective in
fiscal years beginning after December 15, 1998. Honeywell has elected to
adopt this SOP effective January 1, 1998. The accounting change had a
positive impact on Income before Income Taxes and Net Income of $7.4 and
$5.0, respectively, in the first quarter. Basic and Diluted Earnings per
share increased $0.04 as a result of the change.
(9) In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, `Reporting Comprehensive
Income,' which was adopted by Honeywell beginning January 1, 1998. SFAS No.
130 requires the reporting of comprehensive income and its components in
the general purpose financial statements. This Statement also requires that
an entity classify items of other comprehensive income by their nature in
an annual financial statement. Honeywell's total comprehensive income is as
follows:
<TABLE>
<CAPTION>
First Quarter Ended
----------------------
1998 1997
---- ----
<S> <C> <C>
Net income $96.3 $75.6
Foreign currency translation adjustments (19.9) (36.0)
----- -----
Total comprehensive income $76.4 $39.6
===== =====
</TABLE>
(10) 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
the current reportable segments are consistent with the `management
approach' methodology outlined in SFAS 131.
(11) 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.
<PAGE>
Page 9
(12) In April 1998, Honeywell's shareowners approved the Honeywell Employee
Stock Purchase Plan, which allows U.S. employees of Honeywell and its U.S.
subsidiaries and affiliates to purchase shares of Honeywell common stock at
a discount of 15 percent of their lowest fair market value on the first or
last day of quarterly purchase periods. Up to one million shares may be
issued under this plan.
Honeywell has also authorized up to 150,000 shares for issuance pursuant to
the Honeywell Employee Stock Purchase Plan (Canada) which is substantially
the same as the U.S. plan, and up to 350,000 shares for similar employee
stock purchase plans internationally. Shareowner approval was not required
for these plans. Shares issued pursuant to the Canadian plan may be
treasury shares or authorized and unissued shares. Shares issued pursuant
to the other plans may be treasury shares, authorized and unissued shares,
or any combination of shares purchased in the open market, treasury shares
or authorized and unissued shares.
(13) The amounts set forth in this quarterly report are unaudited but, in the
opinion of the registrant, include all adjustments necessary for a fair
presentation of the results of operations for the three-month periods ended
April 5, 1998 and March 30, 1997, respectively. Honeywell's accounting
policies are described in the notes to financial statements in its 1997
Annual Report on Form 10-K.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
- ---------------------
Net income in the first quarter of 1998 was $96.3 million ($0.75 per diluted
share) compared with $75.6 million ($0.59 per diluted share) in the first
quarter of 1997. Earnings per share increased 27 percent over the previous
year's results. During the quarter, Honeywell adopted Statement of Position 98-
1 issued by the American Institute of Certified Public Accountants concerning
the capitalization of internal-use software. The impact of the accounting
change on operating profit and net income is $7.4 million and $5.0 million,
respectively, or 4 cents per diluted share. Also effective January 1, 1998,
Honeywell adopted Statement of Financial Accounting Standards No. 130,
`Reporting Comprehensive Income,' (see Note (9) to the Financial Statements).
The primary difference between Net Income and Comprehensive Income was due to
the effect of foreign currency translation amounts.
Worldwide sales increased 14.1 percent to $1.923 billion in the first quarter of
1998, compared with $1.686 billion in 1997. Operating profit margins improved
60 basis points to 9.9 percent in 1998 from 9.3 percent in 1997. Improved
margins in Space and Aviation Control and Industrial Control attributed 20 basis
points to this increase while the remaining 40 basis point improvement was a
result of capitalization of software costs. Orders increased 11.4 percent and
backlogs improved four percent. Translation of the U.S. dollar had a negative
four percent effect on sales and orders.
Home and Building Control sales increased to $778.7 million, up 6.4 percent from
$731.7 million during the first quarter a year earlier. Operating profit, which
was positively affected by $3.0 million from the capitalization of software, was
$56.8 million, compared to $57.9 million last year. Orders decreased slightly.
The decline in operating profit was a result of lower than expected sales in the
Products business due to warm winter weather in North America and Europe which
offset improved margin rates in Home and Building Control's Solutions business.
Industrial Control sales increased to $580.6 million, up 11.5 percent from
$520.8 million during the first quarter of last year. Operating profit was
$60.4 million compared with $45.0 million the previous year. The capitalization
of software costs had a $3.0 million favorable impact on operating profit.
Orders increased 18.8 percent for the quarter compared with 1997. The increases
in orders and sales were partially attributable to the acquisition of Measurex
which occurred in March 1997. Industrial Automation and Control (IAC) sales
increased 19.4 percent over the previous year. Additionally, IAC signed a
multi-year global maintenance agreement with Exxon Corporation which gives all
Exxon sites around the world access to the entire portfolio of Honeywell
TotalPlant Services. Operating margins improved as a result of reduced overhead
costs and strong volume.
<PAGE>
Page 10
Space and Aviation Control sales increased from $407.2 million to $536.7 million
in the first quarter. Operating profit increased more than 30 percent to $69.7
million, compared to $51.9 million a year earlier. First quarter earnings were
positively impacted by $1.2 million as a result of software capitalization.
Orders increased by more than 30 percent, led by growth in commercial and
military avionics. During the first quarter, Space and Aviation Control also
received a $22 million contract from Boeing Electronics Systems & Missile
Defense for missile guidance computers.
Sales from other operations which do not correspond with Honeywell's primary
business segments, including the activities of various units such as the Solid
State Electronics and the Honeywell Technology research and development centers,
were $27.3 and $26.0 in the first quarter of 1998 and 1997, respectively.
Operating profit increased to $3.9 million, from $1.7 million in 1997. Operating
profit was $0.2 million higher due to the capitalization of software.
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;
- economic conditions, including changes in trade and monetary
policies, and customer demand for products and services, in
regions throughout the world in which Honeywell does business;
- 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 availability of intellectual property rights for newly
developed products or key technologies; and
- significant acquisitions or divestitures.
Please refer to Exhibit 99(i) of this report for a more detailed discussion
of these and other factors that could cause Honeywell's actual results in future
periods to differ materially from those projected in any forward-looking
statements.
Financial Condition
- -------------------
Shareowners' equity decreased to $2,380 million from $2,389 million at the end
of 1997. Shareowners' equity includes an increase of $61 million in retained
earnings from current year earnings net of dividends, a $32 million decrease in
the accumulated foreign currency translation balance, and a $38 million net
decrease in stock balances driven by the repurchase of treasury shares.
Common shares outstanding decreased from 126.2 million at the end of 1997 to
126.1 million. During the first three months of 1998, 977,000 shares were
repurchased at a cost of $76 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 516,435 shares
and yielded $18 million in proceeds.
<PAGE>
Page 11
Debt as a percentage of total capital at the end of the first quarter was 38
percent compared with 36 percent at the end of 1997. Total debt increased $151
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 $15.4 in the first quarter of 1998 included $10.2 million for
work force reduction, $4.5 million for facilities consolidations and $0.7
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 $164 million in the first three months of 1998, primarily as a
result of expenditures related to the special charges recorded in 1997 and
investments in capital expenditures and acquisitions.
On April 5, 1998, Honeywell had $1,325 million of revolving committed credit
lines with 17 banks. In addition, certain foreign units had $342 million in
credit lines available at the end of the first quarter. There were no
outstanding borrowings under these lines. 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 April 5, 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 April 5, 1998, the notional amount of outstanding
foreign exchange contracts was approximately $1,014 million. The amount of
hedging gains and losses deferred was not material at April 5, 1998. The
notional amount of outstanding interest rate swaps was $1,440 million at April
5, 1998.
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.
<PAGE>
Page 12
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:
No reports on Form 8-K were filed during the quarter, however, on
April 7, 1998, Honeywell filed a report on Form 8-K regarding recent
developments in the litigation with Litton Systems, Inc. which are discussed in
Note 6 above.
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: May 15, 1998 By: /s/ E. D. Grayson
-----------------------------------
E. D. Grayson
Vice President and General Counsel
Date: May 15, 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 iii
of the Private Securities Litigation Reform Act of 1995
<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>
Three Months Ended
(Dollars in Millions) April 5, 1998
-------------
<S> <C>
Income before Income Taxes $143.8
Deduct:
Equity income (loss) (0.3)
------
Subtotal 144.1
Add:
Dividends from less than 50% owned
companies 0.0
Proportional share of income before
income taxes of 50% owned companies (0.3)
------
Adjusted income 143.8
Fixed charges
Interest on Indebtedness 26.4
Amortization of Debt Expense 0.4
Interest Portion of Rent Expense 12.1
------
Total Fixed Charges 38.9
Total Available Income $182.7
======
Ratio of Earnings to Fixed Charges 4.70
</TABLE>
i
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> APR-05-1998
<CASH> 47
<SECURITIES> 37
<RECEIVABLES> 1751
<ALLOWANCES> 37
<INVENTORY> 1107
<CURRENT-ASSETS> 3139
<PP&E> 3090
<DEPRECIATION> 1942
<TOTAL-ASSETS> 6406
<CURRENT-LIABILITIES> 2317
<BONDS> 1173
0
0
<COMMON> 281
<OTHER-SE> 2099
<TOTAL-LIABILITY-AND-EQUITY> 6406
<SALES> 1923
<TOTAL-REVENUES> 1923
<CGS> 1327
<TOTAL-COSTS> 1327
<OTHER-EXPENSES> 453
<LOSS-PROVISION> 7
<INTEREST-EXPENSE> 24
<INCOME-PRETAX> 144
<INCOME-TAX> 48
<INCOME-CONTINUING> 96
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 96
<EPS-PRIMARY> 0.76
<EPS-DILUTED> 0.75
</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.
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, increase or
decrease its investments, and divest assets (e.g., buildings, product lines,
etc.) and existing businesses which are no longer considered a strategic fit or
do not continue to create value consistent with the Company's objectives.
Decisions to sell assets or divest businesses could result in future gains or
charges depending on the circumstances.
The foregoing factors are not exhaustive and new factors may emerge which
impact Honeywell's businesses. It is impossible for management to predict such
factors, therefore, forward-looking statements should not be relied upon as a
prediction of actual future results.
iv
