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 July 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) 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 July 5, 1998, the number of shares outstanding of the registrant's common
stock, $1.50 par value, was 126,145,359.
<PAGE>
Page 2
PART I. FINANCIAL INFORMATION
--------------------------------
Item 1. Financial Statements
INCOME STATEMENT
Honeywell Inc. and Subsidiaries
(Unaudited)
<TABLE>
<CAPTION>
Second Quarter Ended
-----------------------------
(Dollars in Millions Except Per Share Amounts) July 5, 1998 June 29, 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Sales $2,035.2 $1,977.3
------- -------
Costs and Expenses
Cost of sales 1,383.0 1,359.1
Research and development 118.4 102.7
Selling, general and administrative 325.8 347.0
Interest - net 26.0 26.7
Equity income (5.8) (7.4)
------- -------
Total Costs and Expenses 1,847.4 1,828.1
------- -------
Income before Income Taxes 187.8 149.2
Provision for Income Taxes 62.0 50.8
------- -------
Net Income $ 125.8 $ 98.4
======= =======
Basic Earnings per Common Share $ 1.00 $ 0.77
======= =======
Average Common Shares Outstanding 126,112,084 127,267,612
Diluted Earnings per Common Share $ 0.98 $ 0.76
======= =======
Average Common and Diluted Shares Outstanding 128,093,164 129,541,958
</TABLE>
See accompanying Notes to Financial Statements
<PAGE>
Page 3
INCOME STATEMENT
Honeywell Inc. and Subsidiaries
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
------------------------------
(Dollars in Millions Except Per Share Amounts) July 5, 1998 June 29, 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Sales $3,958.5 $3,663.0
------- -------
Costs and Expenses
Cost of sales 2,709.8 2,508.8
Research and development 231.8 195.9
Selling, general and administrative 640.6 657.7
Interest - net 50.2 45.3
Equity income (5.5) (8.5)
------- -------
Total Costs and Expenses 3,626.9 3,399.2
------- -------
Income before Income Taxes 331.6 263.8
Provision for Income Taxes 109.5 89.8
------- -------
Net Income $ 222.1 $ 174.0
======= =======
Basic Earnings per Common Share $ 1.76 $ 1.37
======= =======
Average Common Shares Outstanding 126,152,209 127,011,691
Diluted Earnings per Common Share $ 1.73 $ 1.35
======= =======
Average Common and Diluted Shares Outstanding 128,065,830 129,292,717
</TABLE>
See accompanying Notes to Financial Statements
<PAGE>
Page 4
STATEMENT OF CASH FLOWS
Honeywell Inc. and Subsidiaries
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
-------------------------------
(Dollars in Millions) July 5, 1998 June 29, 1997
-------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $222.1 $174.0
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation 122.8 120.0
Amortization of intangibles 37.7 35.0
Deferred income taxes (0.1) 11.0
Equity income, net of dividends received (4.7) (8.3)
Gain on sale of assets (6.5) (3.5)
Contributions to employee stock plans 32.6 29.1
Decrease in receivables 114.8 114.4
Increase in inventories (134.6) (59.1)
Decrease in accounts payable (72.6) (110.5)
Decrease in accrued income taxes and interest (50.7) (60.0)
Other changes in working capital, excluding
Short-term investments and short-term debt (40.7) 56.1
Other noncurrent items - net (70.4) (82.4)
----- -----
NET CASH FLOWS FROM OPERATING ACTIVITIES 149.7 215.8
----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of assets 56.3 55.6
Proceeds from sale of business 29.0 -
Capital expenditures (162.9) (143.1)
Investment in acquisitions, net of cash acquired (131.8) (591.0)
Increase (decrease) in short-term investments (0.8) 1.2
Other - net (5.3) (3.5)
----- -----
NET CASH FLOWS FROM INVESTING ACTIVITIES (215.5) (680.8)
----- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in short-term debt (36.3) (105.4)
Proceeds from issuance of long-term debt 252.0 592.1
Repayment of long-term debt (67.2) (130.9)
Net proceeds from issuance of preferred stock of subsidiary - 120.6
Purchase of treasury stock (118.6) (0.7)
Proceeds from exercise of stock options 38.0 24.8
Dividends paid (70.9) (68.6)
----- -----
NET CASH FLOWS FROM FINANCING ACTIVITIES (3.0) 431.9
----- -----
EFFECT OF EXCHANGE RATE CHANGES ON CASH (2.4) (14.0)
----- -----
DECREASE IN CASH AND CASH EQUIVALENTS (71.2) (47.1)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 134.3 127.1
----- -----
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 63.1 $ 80.0
===== =====
</TABLE>
See accompanying Notes to Financial Statements
<PAGE>
Page 5
STATEMENT OF FINANCIAL POSITION
Honeywell Inc. and Subsidiaries
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in Millions) July 5, December 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 63.1 $ 134.3
Short-term investments 8.6 24.9
Receivables (less allowance for doubtful accounts:
1998, $39.1; 1997, $38.5) 1,716.3 1,837.8
Inventories (less progress billing on uncompleted
contracts: 1998, $37.0; 1997, $43.5) 1,158.5 1,028.0
Deferred income taxes 227.2 233.2
------- -------
TOTAL CURRENT ASSETS 3,173.7 3,258.2
INVESTMENTS AND ADVANCES 234.0 243.8
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment 3,208.8 3,045.0
Less accumulated depreciation 2,034.4 1,916.3
------- -------
TOTAL PROPERTY, PLANT AND EQUIPMENT 1,174.4 1,128.7
OTHER ASSETS
Long-term receivables (less allowance for doubtful accounts:
1998, $1.2; 1997, $2.7) 34.2 39.2
Goodwill 869.7 786.0
Intangible assets 355.1 376.0
Deferred income taxes 41.6 41.7
Other 622.1 537.8
------- -------
TOTAL ASSETS $6,504.8 $6,411.4
======= =======
LIABILITIES AND SHAREOWNERS' EQUITY
CURRENT LIABILITIES
Short-term debt $ 50.7 $ 146.4
Accounts payable 508.1 572.9
Customer advances 316.9 269.7
Accrued income taxes 289.9 344.2
Deferred income taxes 9.1 11.3
Other accrued liabilities 907.6 974.4
------- -------
TOTAL CURRENT LIABILITIES 2,082.3 2,318.9
LONG-TERM DEBT 1,420.2 1,176.8
DEFERRED INCOME TAXES 47.6 51.4
OTHER LIABILITIES 509.0 475.1
------- -------
TOTAL LIABILITIES 4,059.1 4,022.2
------- -------
SHAREOWNERS' EQUITY
Common stock - $1.50 par value
Authorized - 250,000,000 shares
Issued - 1998 - 187,553,075 shares 281.3
- 1997 - 187,633,023 shares 281.5
Additional paid-in-capital 651.2 608.4
Retained earnings 3,558.3 3,407.0
Treasury stock - 1998 - 61,407,716 shares (1,977.8)
- 1997 - 61,433,075 shares (1,879.3)
Accumulated foreign currency translation (60.4) (21.4)
Pension liability adjustment (6.9) (7.0)
------- -------
TOTAL SHAREOWNERS' EQUITY 2,445.7 2,389.2
------- -------
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY $6,504.8 $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>
Second Quarter Ended Six Months Ended
--------------------------- ---------------------------
July 5, 1998 June 29,1997 July 5, 1998 June 29,1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest expense $29.8 $29.5 $56.2 $50.4
Interest income (3.8) (2.8) (6.0) (5.1)
---- ---- ---- ----
Total $26.0 $26.7 $50.2 $45.3
==== ==== ==== ====
Interest paid $30.0 $33.9 $52.9 $45.3
</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.
(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 $37.2 and
$31.9 for the second quarters of 1998 and 1997 and $162.5 and $143.9 for
the first six months of 1998 and 1997, respectively.
(4) Dividends per share of common stock were $0.28 and $0.27 for the second
quarters of 1998 and 1997 and $0.56 and $0.54 for the first six months of
1998 and 1997, respectively.
(5) Inventories consist of the following:
<TABLE>
<CAPTION>
July 5, December 31,
1998 1997
-------- --------
<S> <C> <C>
Finished goods $ 392.5 $ 379.3
Inventories related to long-term contracts 196.0 151.4
Work in process 217.3 211.3
Raw materials and supplies 352.6 286.0
------- -------
Total $1,158.4 $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
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
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 will be 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.
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 should be stricken as legally deficient since it remains
speculative, not disaggregable and non-responsive to the trial court's July
24, 1996 ruling.
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 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 July 5, 1998, Honeywell had reserved 13,862,465 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.
(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 had a
positive impact on Income before Income Taxes and Net Income of $13.0 and
$8.7 in the second quarter and $20.4 and $13.6 for the first six months,
respectively. Basic and Diluted Earnings per share increased $0.06 in the
second quarter and $0.10 in the first six months as a result of the change.
(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's total comprehensive income is as
follows:
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
-------------------- ----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $125.8 $ 98.4 $222.1 $174.0
Foreign currency translation adjustments (4.3) (3.9) (24.2) (39.9)
----- ----- ----- -----
Total comprehensive income $121.5 $ 94.5 $197.9 $134.1
===== ===== ===== =====
</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
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 and on Form 10K.
(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) 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 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.
(19) 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 six-month periods ended
July 5, 1998 and June 29, 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 second quarter of 1998 was $125.8 million, up 28 percent from
$98.4 million in the second quarter of 1997. Earnings per diluted share were 98
cents for the quarter, up 29 percent from 76 cents in the second quarter of
1997. Second quarter earnings per diluted share include a 6 cent increase due
to accounting changes related to capitalization of internal-use software in
accordance with the adoption of new accounting rules. Excluding the accounting
change, earnings per diluted share grew 21 percent.
Sales in the second quarter were $2.04 billion, up 3 percent, compared with
$1.98 billion a year earlier. Operating profit was $234.0 million, compared
with $190.9 million in the 1997 second quarter. Total orders for the quarter
were flat, but remain up 6 percent for the year. Currency translation had a 2
percent negative impact on orders and sales in the second quarter.
SECOND-QUARTER BUSINESS UNIT RESULTS
SPACE AND AVIATION CONTROL. Operating profit was $77.8 million, compared to
$61.8 million a year earlier. Profits increased 26 percent, with margins
improving from 12.6 percent to 13.4 percent, including a 40 basis point benefit
from software capitalization. Commercial Avionics' margin rates continued at
high levels despite the impacts from initial deliveries of Boeing 737 avionics
and accelerated R&D expenditures in support of the Pegasus certification
schedule and Primus Epic development. Profits in Military Avionics and Space
Systems were up sharply compared to the second quarter of 1997 due to varied
timing and profitability of production contracts.
Sales for Space and Aviation Control grew 18 percent to $579.2 million, compared
with $488.8 million in the second quarter of 1997. Commercial Avionics sales
were up significantly in the quarter due to the increase in Boeing 737 and
Airbus A320 avionics deliveries, TCAS volume, and strong business jet and
commuter aircraft avionics shipments. Military Avionics sales were
significantly higher than the same period a year earlier. Space Systems
experienced a decline in sales for the quarter.
Space and Aviation Control orders for the quarter were up 4 percent on strong
growth in the Military Avionics Systems business which included a $20 million
contract from the Department of Defense to develop a common flat panel display
avionics configuration for F16 aircraft, and follow-on orders worth $39 million
for advanced navigation products for the Department of Defense. The modest
orders growth in the quarter is affected by the sporadic booking of large orders
in the Space and Aviation Control business. Year to date, orders have grown 17
percent from the same period a year earlier.
Subsequent to the end of 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 $69.1 million,
up 26 percent from $54.7 million last year. Margin rates improved 180 basis
points to 8.8 percent including an 80 basis point impact from software
capitalization. Control Products operating profits were down moderately in the
quarter, but profits for Solutions and Services were up significantly. Margin
rates improved globally in both Solutions and Services as a result of improved
booked margins, restructuring benefits, and ongoing cost reductions.
Sales for Home and Building Control were $788.0 million compared to $786.1
million in the 1997 second quarter. Control Products sales in the second
quarter were down slightly due to weak bookings in the first quarter,
particularly in Consumer Products. Solutions and Services sales were up
modestly in the quarter driven by strength in Services, primarily in Europe.
Currency translation had a 3 percent negative impact on sales and orders.
Home and Building Control orders were down slightly due to selectivity in North
American Solutions bookings and a slow start in second quarter Products orders.
In the quarter, Honeywell won a $6.9 million energy retrofit contract for the
U.S. Army base, Fort Bragg, the first contract ever awarded as part of the
federal government's 1992 mandate to reduce energy use in federal facilities 30
percent by the year 2005. Other orders include a $2.7 million contract to
integrate fire, security, access and environmental controls for the world-
renowned Bolshoi Theatre in Moscow. In addition, Honeywell won a five-year
contract with a leading European gas boiler manufacturer.
Also in the quarter, Honeywell acquired INECO of Italy, one of Europe's leading
manufacturers of boiler electronics, modulators and accessories for use in
residential central heating boilers.
INDUSTRIAL CONTROL. Operating profit for Industrial Control was $84.5 million
compared with $67.5 million a year earlier. Profits were up 25 percent compared
to second quarter 1997, with margins increasing from 10.1 percent to 13.3
percent. Excluding the benefit of the Cupertino building sale and software
capitalization, earnings grew 12 percent with margins increasing 170 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, but the business is moving quickly to reduce cost levels and
improve efficiency to mitigate the profit impacts of lower than planned revenue.
During the quarter Honeywell sold several non-strategic assets related to
Honeywell-Measurex, including Honeywell-Measurex Data Measurement Corporation,
and entered into a sale/leaseback agreement for a facility in Cupertino, CA.
The transactions contributed approximately $100 million in cash and added 3
cents per diluted share to the quarterly earnings.
Industrial Control sales in the second quarter were $637.1 million, compared
with $667.3 million last year. Industrial Control orders were down 3 percent
for the quarter, but are up 7 percent in the first half of 1998. While
Industrial orders grew significantly in June, this growth was not sufficient to
surpass the extraordinarily strong second quarter of 1997. Quarterly orders
growth was also negatively impacted by Asia, timing of large project bookings
and divestiture of the solenoid valve, oil refining models, and control valves
businesses. Revenue growth was impacted by similar factors in addition to a
slowing in product revenues.
Key orders in the quarter for Industrial Automation and Control included a $17.5
million order from YPF, Argentina's largest refiner. The contract includes
Total Plant Solutions systems for 12 process units, advanced Hi-Spec solutions,
and upgrade of several control rooms. Honeywell-Measurex continued to see
strong business growth in newspaper press controls with a $7.4 million order
from Goss Graphics for Honeywell-Measurex's Printa system. In the second
quarter, Honeywell and Flowserve, a leading manufacturer of flow control valves,
signed a global marketing and technology alliance, providing an expanded
portfolio of control solutions for Honeywell's global industrial customers.
Orders growth for Sensing and Control has been negatively impacted by weakness
in the infotech market, increased Asian competition, inventory reduction by
distribution channels, and a strike at General Motors Corporation. Orders for
the quarter did include a $3.5 million order from the Vixel Corporation for
Vertical Cavity Surface-Emitting Lasers (VCSEL) to be used in their state-of-the
- -art 1.06 gigabyte fiber optic router for high speed data transmission. During
the quarter Sensing and Control established the industry's broadest product line
in the fast growing market for machine safety products including safety mats,
light curtains, laser scanners, and safety interlocks. Sensing and Control also
continues to be recognized for its world-class quality performance with awards
from Boeing and Eastman Kodak.
SIX-MONTH SUMMARY
In the first six months of 1998 Honeywell's net income was $222.1 million, up 28
percent from $174.0 million a year earlier. Sales were $3.96 billion, compared
with $3.66 billion last year. Earnings per diluted share were $1.73, up 28
percent from $1.35 in the first six months of 1997.
SPACE AND AVIATION CONTROL. Operating profits generated by Space and Aviation
Control increased 30 percent to $147.5 million from $113.7 million for the first
six months of the prior year driven by improvements across all product lines.
Orders were up 17 percent, and revenue grew to $1.12 billion, up 25 percent from
$0.9 billion a year earlier.
HOME AND BUILDING CONTROL. Home and Building Control operating profits for the
first six months of 1998 increased 6 percent to $125.9 from $112.6 a year
earlier driven by Solutions and Services. Sales were $1.57 billion compared to
$1.52 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 $144.9
million, up 29 percent for the first six months of 1998 compared to $112.5
million a year earlier. The profit improvements were largely driven by
Industrial Automation and Control. Year to date, orders were up 7 percent, and
revenue was $1.22 billion, up 3 percent from $1.19 billion in the first half of
1997.
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;
- 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 increased to $2,446 million from $2,389 million at the end
of 1997. Shareowners' equity includes an increase of $151 million in retained
earnings from current year earnings net of dividends, a $39 million decrease in
the accumulated foreign currency translation balance, and a $56 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 126.1 million. Diluted shares outstanding decreased from 129.2 million at
year end 1997 to 128.1 million at the end of June. During the first six months
of 1998, 1,467,000 shares were repurchased at a cost of $119 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 865,151 shares and yielded $29 million in proceeds.
Debt as a percentage of total capital at the end of the second quarter was 38
percent compared with 36 percent at the end of 1997. In June, Honeywell issued
$250 million of 30-year debentures at a coupon rate of 6 5/8 percent. This
issuance was partially offset by a decrease in short term debt as the debt total
balance increased $148 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 $11.9 million in the second quarter of 1998 included $9.4
million for work force reduction, $0.5 million for facilities consolidations and
$2.0 million for other restructuring activities. For the first six months,
expenditures totaled $27.3 million, consisting of $19.6 million for work force
reduction, $5.0 million for facilities consolidations and $2.7 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 $66 million in the first six 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 July 5, 1998, Honeywell had $1,325 million of committed revolving credit
lines with 17 banks. In addition, certain foreign units had $350 million in
credit lines available at the end of the second 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 July 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 July 5, 1998, the notional amount of outstanding
foreign exchange contracts was approximately $1,015 million. The amount of
hedging gains and losses deferred was not material at July 5, 1998. The
notional amount of outstanding interest rate swaps was $1.4 billion at July 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.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Shareowners of Honeywell Inc. in Minneapolis
on April 21, 1998, three proposals were submitted to a vote of the
shareowners.
The first was a proposal to elect directors for the year commencing
April 22, 1998. A majority of the shares represented by proxy or in
person at the meeting were voted in favor of electing management's
nominees for directors as follows:
For Withheld
--- --------
Albert J. Baciocco, Jr. 109,889,180 1,699,941
Elizabeth E. Bailey 109,915,420 1,673,701
Michael R. Bonsignore 109,960,022 1,629,099
Giannantonio Ferrari 110,004,077 1,585,044
R. Donald Fullerton 109,986,877 1,602,244
James J. Howard 109,927,105 1,662,016
Katherine M. Hudson 109,983,457 1,605,664
Bruce E. Karatz 109,976,828 1,612,293
A. Barry Rand 109,916,105 1,673,016
Steven G. Rothmeier 109,868,389 1,720,732
Michael W. Wright 109,919,353 1,669,768
The second was a proposal to ratify the selection of Deloitte & Touche
LLP as the auditors of the company. 110,750,960 shares voted in favor
of the proposal, 443,317 shares voted against the proposal and 394,844
shares abstained from voting.
The third was a proposal to adopt the Honeywell Employee Stock
Purchase Plan. 109,172,524 shares voted in favor of the proposal,
1,907,115 shares voted against the proposal and 509,482 shares
abstained from voting.
Item 5. Other Information - Submission of Shareowner Proposals
The Company plans to hold the next Annual Meeting of Shareowners on
April 20, 1999.
- In order for a shareowner proposal to be considered for inclusion
in Honeywell's proxy statement for the 1999 Annual Meeting, the
proposal must be received at the Company's offices no later than
November 3, 1998. Securities and Exchange Commission rules
contain standards as to what shareowner proposals are required to
be included in a proxy statement.
- In addition, the Company's By-laws provide that any shareowner
wishing to make a nomination for director, or wishing to
introduce a proposal at the Company's Annual Meeting of
Shareowners must notify the Company not more than 75 days and not
less than 50 days prior to the meeting, and that notice must meet
other requirements contained in the By-laws.
Any shareowner who wishes to submit a shareowner proposal or a
nomination for director, or who would like to receive a copy of the
relevant section of the By-laws, should contact the Vice President and
Corporate Secretary, Honeywell Plaza, Minneapolis, Minnesota, 55408.
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:
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.
On June 11, 1998, Honeywell filed a report on Form 8-K regarding the
sale of $250 million principal amount of its Debentures due June 15,
2028.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HONEYWELL INC.
Date: August 12, 1998 By: /s/ E. D. Grayson
----------------------------------
E. D. Grayson
Vice President and General Counsel
Date: August 12, 1998 By: /s/ P.M. Palazzari
---------------------------------
P. M. Palazzari
Vice President and Controller
(Chief Accounting Officer)
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
EXHIBIT (12)
HONEYWELL INC. AND SUBSIDIARIES
COMBINED WITH PROPORTIONAL SHARES OF 50% OWNED COMPANIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in Millions)
Six Months Ended
July 5, 1998
------------
<S> <C>
Income before Income Taxes $331.66
Deduct:
Equity income 5.54
------
Subtotal 326.12
Add (deduct):
Dividends from less than 50% owned companies 0.86
Proportional share of income (loss) before
income taxes of 50% owned companies (2.28)
------
Adjusted income 324.70
------
Fixed Charges
Interest on indebtedness 57.63
Amortization of debt expense 0.84
Interest portion of rent expense 24.11
------
Total Fixed Charges 82.58
------
Total Available Income $407.28
======
Ratio of Earnings to Fixed Charges 4.93
======
</TABLE>
i
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUL-05-1998
<CASH> 63
<SECURITIES> 9
<RECEIVABLES> 1755
<ALLOWANCES> 39
<INVENTORY> 1159
<CURRENT-ASSETS> 3174
<PP&E> 3209
<DEPRECIATION> 2034
<TOTAL-ASSETS> 6505
<CURRENT-LIABILITIES> 2082
<BONDS> 1420
0
0
<COMMON> 281
<OTHER-SE> 2164
<TOTAL-LIABILITY-AND-EQUITY> 6505
<SALES> 3959
<TOTAL-REVENUES> 3959
<CGS> 2710
<TOTAL-COSTS> 2710
<OTHER-EXPENSES> 865
<LOSS-PROVISION> 7
<INTEREST-EXPENSE> 56
<INCOME-PRETAX> 332
<INCOME-TAX> 110
<INCOME-CONTINUING> 222
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 222
<EPS-PRIMARY> 1.76
<EPS-DILUTED> 1.73
</TABLE>
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
iii
<PAGE>
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.
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
