Document/Exhibit Description Pages Size
1: 10-K Annual Report 50 273K
2: EX-3.B Articles of Incorporation/Organization or By-Laws 46 129K
3: EX-10.(III)(F) Material Contract 5 18K
4: EX-10.(III)(G) Material Contract 21 51K
5: EX-11 Statement re: Computation of Earnings Per Share 2± 13K
6: EX-12 Statement re: Computation of Ratios 1 9K
7: EX-21 Subsidiaries of the Registrant 3 28K
8: EX-23 Consent of Experts or Counsel 1 7K
9: EX-24 Power of Attorney 15 33K
10: EX-27 Financial Data Schedule (Pre-XBRL) 2 7K
1995
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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [ FEE REQUIRED ]
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [ NO FEE REQUIRED ]
For the transition period from.......... to....................................
Commission file number 1-971
HONEYWELL INC.
(Exact name of registrant as specified in its charter)
DELAWARE 41-0415010
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
HONEYWELL PLAZA, MINNEAPOLIS, MINNESOTA 55408
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 612-951-1000
Securities registered pursuant to section 12(b) of the act:
Name of each exchange
Title of each class on which registered
Common Stock, par value $1.50 New York Stock Exchange
per share
Preferred Stock Purchase Rights New York Stock Exchange
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 ___.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. / /
Based on the closing sales price of $51.875 on March 1, 1996, the aggregate
market value of the voting stock held by nonaffiliates of the registrant was
$6,569,271,238.
As of March 1, 1996, the number of shares outstanding of the registrant's
common stock, par value $1.50 per share, was 127,223,965 shares.
DOCUMENTS INCORPORATED IN PART BY REFERENCE
Incorporated Documents Location in Form 10-K
-------------------------------------------------------- ---------------------
Honeywell Notice of 1996 Annual Meeting and Proxy Part III
Statement
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PART I
ITEM 1. BUSINESS
Honeywell Inc., a Delaware corporation incorporated in 1927, is a
Minneapolis-based international controls corporation that supplies automation
and control systems, components, software, products and services for homes and
buildings, industry, and space and aviation. The purpose of the company is to
develop and apply advanced-technology products, systems and services to conserve
energy, improve productivity, protect the environment, enhance comfort and
increase safety. Development and modification occur continuously in Honeywell's
business as new or improved products and services are introduced, new markets
are created or entered, distribution methods are revised, and products and
services are discontinued.
INDUSTRY SEGMENT INFORMATION
Honeywell's products and services are classified by management into three
industry segments: (i) Home and Building Control, (ii) Industrial Control, and
(iii) Space and Aviation Control. Financial information relating to these
industry segments is set forth in Part II, Item 6 at page 10.
HOME AND BUILDING CONTROL
Honeywell's Home and Building Control business provides controls and systems
for building automation, energy management, fire and security, as well as
thermostats, air cleaners and other environmental controls and services for
buildings and homes.
Honeywell manufactures, markets and installs mechanical, pneumatic,
electrical and electronic control products and systems for heating, ventilation
and air conditioning in homes and commercial, industrial and public buildings.
The systems, which may be generic or specifically designed for each application,
may include panels and control systems to centralize mechanical and electrical
functions.
Honeywell also produces building management systems for commercial
buildings, burner and boiler controls, lighting controls, thermostatic radiator
valves, pressure regulators for water systems, thermostats, actuators,
humidistats, relays, contactors, transformers, air-quality products, and gas
valves and ignition controls for homes and commercial buildings. Sales of these
products are made directly to original equipment manufacturers, including
manufacturers of heating and air conditioning equipment; through wholesalers,
distributors, dealers, contractors, hardware stores and home-care centers; and
also through the company's nationwide sales and service organization.
Services provided include indoor air-quality services, central-station
burglary and fire protection services for homes and commercial buildings, video
surveillance, access control and entry management services for commercial
buildings, contract maintenance services for commercial building mechanical and
control systems, automated management of building operations for building
complexes, energy management services, energy retrofit services and training.
INDUSTRIAL CONTROL
The Industrial Control business serves the automation and control needs of
its worldwide industrial customers as a major supplier of products, systems and
services ranging from sensors to integrated systems designed for specific
applications.
Honeywell's Industrial Control segment supplies process control systems and
associated application software and services to customers in the process
industries such as refining, petrochemical, bulk and fine chemical, pulp and
paper, electric utility, food and consumer goods, pharmaceutical, metals and
transportation markets, as well as other industries. Honeywell also designs and
manufactures process instruments, process controllers, recorders, programmers,
programmable controllers, transmitters and other field instruments that may be
sold as stand-alone products or integrated into systems. These products are
generally used in indicating, recording and automatically controlling process
variables.
1
Under the MICRO SWITCH trademark, Honeywell manufactures solid-state sensors
(including position, pressure, airflow, temperature and current sensors), sensor
interface devices, manual controls, explosion-proof switches and precision
snap-acting switches, as well as proximity, photoelectric and mercury switches
and lighted/unlighted pushbuttons. These products are used in industrial,
commercial and business equipment, and in consumer, medical, automotive,
aerospace and computer applications.
Other products include solenoid valves, optoelectronic devices, fiber-optic
systems and components, as well as microcircuits, sensors, transducers and
high-accuracy, noncontact measurement and detection products for factory
automation, quality inspection and robotics applications.
Honeywell also furnishes services, including product and component testing,
instrument maintenance, repair and calibration, contract services for industrial
control equipment and third-party maintenance for CAD/CAM and other industrial
control equipment, training, applications service and a range of customer
support services.
Services are generally sold directly to users on a monthly or annual
contract basis. Products are customarily sold by Honeywell on a delivered,
supervised or installed basis directly to end users, to equipment manufacturers
and contractors, or through third-party channels such as distributors and
systems houses.
SPACE AND AVIATION CONTROL
Honeywell's Space and Aviation Control business supplies avionics for the
commercial, military and space markets. The company designs, manufactures,
services and markets a variety of sophisticated electronic control systems and
components that are used on commercial and business aircraft, military aircraft
and spacecraft.
Products manufactured for aircraft use include ring laser gyro-based
inertial reference systems, navigation and guidance systems, flight control
systems, flight management systems, inertial sensors, air data computers, radar
altimeters, automatic test equipment, cockpit display systems and other
communication and flight instrumentation.
Honeywell products and services have been involved in every major U.S. space
mission since the mid-1960s. Products include guidance systems for launch and
re-entry vehicles, flight and engine control systems for manned spacecraft, and
precision components for strategic missiles and on-board data processing. Other
products include spacecraft attitude and positioning systems, and precision
pointing and isolation systems.
Space and Aviation Control products are sold through an integrated
international marketing organization, with customer service centers providing
international service for commercial and business aviation users.
OTHER PRODUCTS
Products and services not included in the foregoing segment information are
described below.
The Honeywell Technology Center provides systems analysis and applied
research and development on systems and products, including, application
software, sensors and advanced electronics.
Solid State Electronics Center, a semiconductor facility in Minnesota,
designs and manufactures integrated circuits and sensors for Honeywell,
government customers and selected external customers.
Honeywell, through its operations in Germany, develops, markets and sells to
European countries, among other things, military avionics and electro-optic
devices for flight control and nautical systems, including sonar transducers and
echo sounders.
2
GENERAL INFORMATION
RAW MATERIALS
Honeywell experienced no significant or unusual problems in the purchase of
raw materials and commodities in 1995. Although it is impossible to predict what
effects shortages or price increases may have in the future, at present
management has no reason to believe a shortage of raw materials will cause any
material adverse impact during 1996.
PATENTS, TRADEMARKS, LICENSES AND DISTRIBUTION RIGHTS
Honeywell owns, or is licensed under, a large number of patents, patent
applications and trademarks acquired over a period of many years, which relate
to many of its products or improvements thereon and are of importance to its
business. From time to time, new patents and trademarks are obtained, and patent
and trademark licenses and rights are acquired from others. In addition,
Honeywell has distribution rights of varying terms in a number of products and
services produced by other companies. In the judgment of management, such rights
are adequate for the conduct of the business being done by Honeywell. See Item 3
at page 7 for information concerning litigation relating to patents in which
Honeywell is involved.
SEASONALITY
Although Honeywell's business is not seasonal in the traditional sense,
revenues and earnings have tended to concentrate to some degree in the fourth
quarter of each calendar year, reflecting the tendency of customers to increase
ordering and spending for capital goods late in the year.
MAJOR CUSTOMER
Honeywell provides products and services to the United States government as
a prime contractor or subcontractor, the majority of which are described under
the heading "Space and Aviation Control" on page 2. Such business is significant
because of its volume and its contribution to Honeywell's technical
capabilities, but Honeywell's dependence upon individual programs is minimized
by the large variety of products and services it provides. Contracts and
subcontracts for all of such sales are subject to the standard provisions
permitting the government to terminate for convenience or default.
BACKLOG
The total dollar amount of backlog of Honeywell's orders believed to be firm
was approximately $3,676 million at December 31, 1995, and $3,340 million at
December 31, 1994. All but approximately $706 million of the 1995 backlog is
expected to be delivered within the current fiscal year. Backlog is not a
reliable indicator of Honeywell's future revenues because a substantial portion
of backlog represents the value of orders can be canceled at the customer's
option.
COMPETITION
Honeywell is subject to active competition in substantially all products and
services. Competitors generally are engaged in business on a nationwide or an
international scale. Honeywell is the largest producer of control systems and
products used to regulate and control heating and air conditioning in commercial
buildings, and of systems to control industrial processes worldwide. Honeywell
is also a leading supplier of commercial aviation, space and avionics systems.
Honeywell's automation and control businesses compete worldwide, supported by a
strong distribution network with manufacturing and/or marketing capabilities,
for at least a portion of these businesses, in 95 countries.
Competitive conditions vary widely among the thousands of products and
services provided by Honeywell, and vary as well from country to country.
Markets, customers and competitors are becoming more international in their
outlook. In those areas of environmental and industrial components and controls
where sales are primarily to equipment manufacturers, price/performance is
probably the most significant competitive factor, but customer service and
applied technology are also important. Competition is increasingly being applied
to government procurements to improve price and product performance. In service
businesses, quality, reliability and promptness of service are the most
important competitive factors. Service must be offered from many areas because
of the localized
3
nature of such business. In engineering, construction, consulting and research
activities, technological capability and a record of proven reliability are
generally the principal competitive factors. Although in a small number of
highly specialized products and services Honeywell may have relatively few
significant competitors, in most markets there are many competitors.
RESEARCH AND DEVELOPMENT
During 1995 Honeywell spent approximately $659.8 million on research and
development activities, including $336.6 million in customer-funded research,
relating to the development of new products or services, or the improvement of
existing products or services. Honeywell spent $659.5 million in 1994 and $742.2
million in 1993 on research and development activities, including $340.5 million
and $404.8 million, respectively, in customer-funded research.
ENVIRONMENTAL PROTECTION
Compliance with current federal, state and local provisions regulating the
discharge of materials into the environment, or otherwise relating to the
protection of the environment, has not had, and in the opinion of management
will not have, a material effect on Honeywell's financial position, net income,
capital expenditures or competitive position. See Item 7 at page 13 for further
information concerning environmental matters.
EMPLOYEES
Honeywell employed approximately 50,100 persons in total operations as of
December 31, 1995.
GEOGRAPHIC AREAS
Honeywell engages in material operations in foreign countries. A large
majority of Honeywell's foreign business is in Western Europe, Canada and the
Asian Pacific Rim.
Although there are risks attendant to foreign operations, such as potential
nationalization of facilities, currency fluctuation and restrictions on movement
of funds, Honeywell has taken action to mitigate such risks.
Financial information related to geographic areas is included in Note 19 to
the financial statements in Part II, Item 8 at page 37.
4
EXECUTIVE OFFICERS OF THE REGISTRANT
[Enlarge/Download Table]
POSITION AGE AT
NAME OFFICE HELD SINCE 3/1/96
------------------------- ------------------------------------------------------------- ------------- -------------
M. R. Bonsignore (1) Chairman of the Board and Chief Executive Officer 1993 54
D. L. Moore (2) President and Chief Operating Officer 1993 59
J. R. Dewane (3) President, Space & Aviation Control 1993 61
E. D. Grayson (4) Vice President and General Counsel 1992 57
W. M. Hjerpe (5) Vice President and Chief Financial Officer 1994 44
B. M. McGourty (6) President, Home and Building Control 1994 58
P. M. Palazzari (7) Vice President and Controller 1994 48
M. I. Tambakeras (8) President, Industrial Automation and Control 1995 45
Officers are elected by the Board of Directors to terms of one year and until their successors are elected and
qualified.
------------------------
(1) Mr. Bonsignore was elected to this position on February 16, 1993, effective
April 20, 1993. For more than five years prior thereto, he was an executive
officer of the company.
(2) Dr. Moore was elected to this position on February 16, 1993, effective April
20, 1993. From November 1990 to April 1993, he was Executive Vice President
and Chief Operating Officer, Space and Aviation, and Industrial.
(3) Mr. Dewane was elected to this position on April 20, 1993, effective March
15, 1993. From April 1989 to March 1993, he was Group Vice President of
Honeywell's Commercial Flight Systems Group.
(4) Mr. Grayson was elected to this position on April 21, 1992, effective April
1, 1992, when he joined the company. For more than five years prior thereto,
he was Senior Vice President, General Counsel, Corporate Secretary and Clerk
of Wang Laboratories.
(5) Mr. Hjerpe was elected to this position on October 16, 1994. From February
1992 to October 1994, he was Vice President and Controller of the company.
From July 1990 to February 1992, he was Vice President and Treasurer of the
company.
(6) Mr. McGourty was elected to this position on April 19, 1994, effective April
1, 1994. From December 1991 to April 1994, he was Vice President, Field
Operations for Home and Building Control. From January 1990 to December
1991, he was Chairman, President and Chief Executive Officer of Honeywell
Limited, Canada.
(7) Mr. Palazzari was elected to this position on October 16, 1994. From May
1993 to October 1994, he was Vice President, Finance for Home and Building
Control. From March 1992 to April 1993, he was Vice President and Assistant
Controller of Operations for the company. From January 1990 to February
1992, he was Vice President for Financial Planning and Reporting for the
company.
(8) Mr. Tambakeras was elected to this position on February 21, 1995, effective
March 1, 1995. From January 1992 to February 1995, he was President of
Honeywell Asia Pacific. From February 1988 to December 1991, he was Vice
President of Business Operations for Industrial Automation Control.
ITEM 2. PROPERTIES
Honeywell and its subsidiaries operate facilities worldwide comprising
approximately 20,050,300 square feet of space for use as manufacturing, office
and warehouse space, of which approximately 12,528,000 square feet is owned and
approximately 7,522,300 square feet is leased. In the judgment of management,
the facilities used by Honeywell are adequate and suitable for the purposes they
serve.
5
Facilities allocated for corporate use in the United States, including sales
offices, comprise approximately 3,380,300 square feet of space, of which
approximately 1,674,400 square feet is owned and approximately 1,705,900 square
feet is leased. These figures include Honeywell's principal executive offices in
Minneapolis, Minnesota which comprise approximately 957,400 square feet, all of
which is owned.
A summary of properties held by each segment of Honeywell is set forth
below, showing major plants, their location, size and type of holding. The
descriptions include approximately 533,400 square feet of space owned or leased
by Honeywell's operations in the United States that has been leased or subleased
to third parties. In addition, approximately 4,138,100 square feet of previously
leased space in the United States is under assignment to third parties
(including 2,417,000 square feet, 441,100 square feet and 102,600 square feet
which is assigned to Alliant Techsystems Inc., Federal Systems Inc. and Bull HN
Information Systems, Inc., respectively, all of which were formerly affiliates
of the company).
HOME AND BUILDING CONTROL
Home and Building Control occupies approximately 2,619,300 square feet of
space for operations in the United States, of which approximately 1,887,900
square feet is owned and approximately 731,400 square feet is leased.
Outside the United States, Home and Building Control operations occupy
approximately 4,450,800 square feet, of which approximately 1,665,800 square
feet is owned and approximately 2,785,000 square feet is leased. Principal
facilities operated outside the United States are located in Canada, Germany,
The Netherlands, the United Kingdom and Australia.
Facilities in the United States comprising 300,000 square feet or more are
listed below.
[Download Table]
MAJOR USE OF APPROXIMATE OWNED OR
LOCATION FACILITY SQUARE FEET LEASED
-------------------------- ------------------- ------------ ---------
Arlington Heights, Ill. Manufacturing 494,600 Owned
Golden Valley, Minn. Manufacturing 1,185,300 Owned
INDUSTRIAL CONTROL
Industrial Control occupies approximately 2,905,000 square feet of space for
operations in the United States, of which approximately 2,233,200 square feet is
owned and approximately 671,800 square feet is leased.
Outside the United States, Industrial Control operations occupy
approximately 2,277,700 square feet, of which approximately 846,900 square feet
is owned and approximately 1,430,800 square feet is leased. Principal facilities
operated outside the United States are located in the United Kingdom, Australia,
Canada, Switzerland, France, Germany, Belgium and The Netherlands.
Facilities in the United States comprising 300,000 square feet or more are
listed below.
[Download Table]
MAJOR USE OF APPROXIMATE OWNED OR
LOCATION FACILITY SQUARE FEET LEASED
-------------------------- ------------------- ------------ ---------
Freeport, Ill. Manufacturing 316,000 Owned
Phoenix, Az. Manufacturing 550,000 Owned
SPACE AND AVIATION CONTROL
Space and Aviation Control occupies approximately 5,130,400 square feet of
space for operations in the United States, of which approximately 3,819,100
square feet is owned and approximately 1,311,300 square feet is leased.
Outside the United States, Space and Aviation Control operations occupy
approximately 537,800 square feet, of which approximately 309,300 square feet is
owned and approximately 228,500 square feet is leased. Principal facilities
operated outside the United States are located in Canada, the United Kingdom and
Singapore.
6
Facilities in the United States comprising 300,000 square feet or more are
listed below.
[Download Table]
MAJOR USE OF APPROXIMATE OWNED OR
LOCATION FACILITY SQUARE FEET LEASED
-------------------------- ------------------- ------------ ---------
Phoenix, Ariz. Manufacturing 939,000 Owned
St. Louis Park, Minn. Manufacturing 559,000 Owned
Albuquerque, N.M. Manufacturing 526,600 Owned
Minneapolis, Minn. Manufacturing 525,100 Owned
Clearwater, Fla. Manufacturing 914,800 Owned
St. Petersburg, Fla. Manufacturing 304,000 Leased
ITEM 3. LEGAL PROCEEDINGS
On March 13, 1990, Litton Systems, Inc. filed suit against Honeywell Inc. in
U.S. District Court, Central District of California, alleging Honeywell patent
infringement relating to the process used by Honeywell to coat mirrors
incorporated in its ring laser gyroscopes; attempted monopolization and
predatory pricing 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. Honeywell
generally denied Litton's allegations, contested both the validity and
infringement of the patent, and alleged that the patent had been obtained by
Litton's inequitable conduct before the United States Patent and Trademark
Office. Honeywell also filed counterclaims against Litton alleging, among other
things, that Litton's business and litigation conduct violated federal and state
laws, causing Honeywell considerable damage and expense.
On January 9, 1995, Judge Mariana Pfaelzer of the U.S. District Court set
aside an August 1993 jury verdict and damage award of $1.2 billion against
Honeywell in the patent and interference with contract case. She ruled, among
other things, that the Litton patent was unenforceable because it was obtained
by inequitable conduct and invalid because it was an invention that would have
been obvious from combining existing processes. She further ruled that if her
judgment were ever subsequently vacated or reversed on appeal, Honeywell would
be granted a new trial on the issue of damages because the jury's 1993 award was
inconsistent with the clear weight of the evidence and permitting it to stand
would constitute a miscarriage of justice. Litton has appealed to the Court of
Appeals for the Federal Circuit, Washington, D.C. Briefs for the appeal have
been submitted by the parties and oral arguments were presented December 8,
1995. Honeywell believes that Judge Pfaelzer's rulings will be upheld on appeal.
As a result, no provision has been made in the financial statements with respect
to this contingent liability.
The trial for the antitrust case began on November 20, 1995, before Judge
Pfaelzer and a different jury. Prior to the jury's deliberations in the
antitrust trial, the court dismissed, for failure of proof, Litton's contentions
that Honeywell engaged in below-cost predatory pricing, illegal tying, bundling
and illegally acquiring Sperry Avionics in 1986. The case was submitted to the
jury on two claims, monopolization and attempt to monopolize, both based on
Litton's allegations that Honeywell entered into certain exclusive dealings and
penalty arrangements with aircraft manufacturers and airlines to exclude Litton
from the commercial aircraft market. On February 29, 1996, the jury returned a
$234 million verdict against Honeywell for the monopolization claim. On March 1,
1996, the jury indicated that it was unable to reach a verdict on damages for
the attempted monopolization claim, and a mistrial was declared on that claim.
Honeywell continues to maintain that it competed vigorously and lawfully in
the inertial navigation business and will continue to defend itself against
Litton's allegations. Honeywell believes that the jury's partial verdict should
be overturned because Litton (i) failed to prove essential elements of liability
and (ii) failed to submit competent evidence to support its claim for damages by
offering only a speculative, all-or-nothing $298.5 million damage study.
Honeywell will file post-verdict motions with the trial court asking that
judgment be granted in favor of Honeywell as a matter of law or, in the
alternative, for a new trial, and will argue important procedural and other
matters which could
7
dispose of this case. If the $234 million jury verdict withstands post-verdict
motions, in whole or in part, any dollar judgment will be trebled under federal
antitrust laws and will be appealed by Honeywell. The case will conclude only
when the trial and appellate courts resolve all of the legal issues that could
reduce or eliminate the jury verdict. As a result, no provision has been made in
the financial statements with respect to this contingent liability.
Honeywell is a party to other various claims, legal and governmental
proceedings, including claims relating to previously reported environmental
matters. It is the opinion of management that any losses in connection with
these matters and the resolution of the environmental claims will not have a
material effect on net income, financial position or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1995.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The principal U.S. market for Honeywell's common stock is the New York Stock
Exchange. The high and low sales prices for the stock as reported by the
consolidated transaction reporting system, of the two most recent fiscal years
is set forth in Note 23 to the financial statements in Part II, Item 8 at page
44.
Information regarding the frequency and amount of dividends paid by
Honeywell on its common stock during the two most recent years is set forth in
Note 23 to the financial statements in Part II, Item 8 at page 44. Further
information regarding the company's payment of dividends is set forth in Part
II, Item 7 at page 17.
Information regarding Honeywell's share repurchase plans is set forth in
Part II, Item 7 at page 17.
Stockholders of record on March 1, 1996 totaled 32,392, excluding individual
participants in security position listings.
8
ITEM 6. SELECTED FINANCIAL DATA
HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS AND SHARES IN MILLIONS EXCEPT PER SHARE AMOUNTS)
[Enlarge/Download Table]
1995 1994 1993 1992 1991 1990
-------- -------- -------- -------- -------- --------
Results of Operations
Sales................................................... $6,731.3 $6,057.0 $5,963.0 $6,222.6 $6,192.9 $6,309.1
-------- -------- -------- -------- -------- --------
Cost of sales........................................... 4,584.2 4,082.1 4,019.6 4,195.3 4,185.1 4,308.7
Research and development................................ 323.2 319.0 337.4 312.6 300.7 279.6
Selling, general and administrative..................... 1,263.1 1,173.8 1,075.7 1,196.8 1,150.9 1,170.0
Litigation settlements (1).............................. (32.6) (287.9)
Special charges......................................... 62.7 51.2 128.4
Interest -- net......................................... 68.9 60.2 51.0 58.5 61.4 67.6
Gain on sale of assets.................................. (21.7)
Equity income........................................... (13.6) (10.5) (17.8) (15.8) (14.6) (11.5)
-------- -------- -------- -------- -------- --------
6,225.8 5,687.3 5,484.5 5,587.9 5,683.5 5,792.7
-------- -------- -------- -------- -------- --------
Income from continuing operations before income taxes... 505.5 369.7 478.5 634.7 509.4 516.4
Provision for income taxes.............................. 171.9 90.8 156.3 234.8 178.3 144.6
-------- -------- -------- -------- -------- --------
Income from continuing operations....................... 333.6 278.9 322.2 399.9 331.1 371.8
Income from discontinued operations..................... 10.1
Extraordinary item (2).................................. (8.6)
Cumulative effect of accounting changes (3)............. (144.5)
-------- -------- -------- -------- -------- --------
Net income.............................................. $ 333.6 $ 278.9 $ 322.2 $ 246.8 $ 331.1 $ 381.9
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Earnings Per Common Share
Continuing operations................................... $ 2.62 $ 2.15 $ 2.40 $ 2.88 $ 2.35 $ 2.45
Discontinued operations................................. 0.07
Extraordinary item (2).................................. (0.06)
Cumulative effect of accounting changes (3)............. (1.04)
-------- -------- -------- -------- -------- --------
Net income.............................................. $ 2.62 $ 2.15 $ 2.40 $ 1.78 $ 2.35 $ 2.52
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Cash Dividends Per Common Share........................... $ 1.01 $ 0.97 $ 0.91 $ 0.84 $ 0.77 $ 0.70
Financial Position
Current assets.......................................... $2,766.9 $2,649.4 $2,550.2 $2,707.8 $2,698.9 $2,582.2
Current liabilities..................................... 2,022.5 2,071.8 1,856.1 1,969.2 2,095.0 2,175.1
-------- -------- -------- -------- -------- --------
Working capital......................................... $ 744.4 $ 577.6 $ 694.1 $ 738.6 $ 603.9 $ 407.1
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Short-term debt......................................... $ 312.4 $ 360.6 $ 187.9 $ 188.4 $ 168.4 $ 109.0
Long-term debt.......................................... 481.0 501.5 504.0 512.1 639.8 616.3
-------- -------- -------- -------- -------- --------
Total debt.............................................. 793.4 862.1 691.9 700.5 808.2 725.3
Stockholders' equity.................................... 2,040.1 1,854.7 1,773.0 1,790.4 1,850.8 1,696.9
-------- -------- -------- -------- -------- --------
Capitalization.......................................... $2,833.5 $2,716.8 $2,464.9 $2,490.9 $2,659.0 $2,422.2
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
--------------------------
(1) Litigation settlements in 1992 are one-time settlements, after associated
expenses, reached with various camera manufacturers for their use of
Honeywell's patented automatic focus camera technology and amounted to
$171.4 ($1.24 per share) after income taxes.
(2) Extraordinary item resulting from the loss on early redemption of debt.
(3) The cumulative effect of accounting changes is the result of adopting
Statement of Financial Accounting Standards (SFAS) No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," which reduced
net income by $151.3 ($1.09 per share); SFAS No. 109, "Accounting for Income
Taxes," which increased net income by $31.4 ($0.23 per share); and SFAS No.
112, "Employers' Accounting for Postemployment Benefits," which reduced net
income by $24.6 ($0.18 per share).
9
HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS AND SHARES IN MILLIONS EXCEPT PER SHARE AMOUNTS)
[Enlarge/Download Table]
1995 1994 1993 1992 1991 1990
-------- -------- -------- -------- -------- --------
Sales
Home and Building Control............................... $3,034.7 $2,664.5 $2,424.3 $2,393.6 $2,249.1 $2,196.7
Industrial Control...................................... 2,035.9 1,835.3 1,691.5 1,743.9 1,626.8 1,653.5
Space and Aviation Control.............................. 1,527.4 1,432.0 1,674.9 1,933.1 2,132.3 2,071.3
Other................................................... 133.3 125.2 172.3 152.0 184.7 387.6
-------- -------- -------- -------- -------- --------
$6,731.3 $6,057.0 $5,963.0 $6,222.6 $6,192.9 $6,309.1
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Operating Profit (1)(2)
Home and Building Control............................... $ 308.6 $ 236.5 $ 232.7 $ 193.4 $ 229.1 $ 237.0
Industrial Control...................................... 233.8 206.6 189.7 156.9 224.0 219.5
Space and Aviation Control.............................. 127.6 80.9 148.1 175.8 226.1 200.4
Other................................................... 2.8 (1.8) (9.5) (3.1) 18.8
-------- -------- -------- -------- -------- --------
Total operating profit.................................. 672.8 524.0 568.7 516.6 676.1 675.7
Interest expense........................................ (83.3) (75.5) (68.0) (89.9) (89.4) (106.0)
Litigation settlements.................................. 32.6 287.9
Gain on sale of assets.................................. 21.7
Equity income........................................... 13.6 10.5 17.8 15.8 14.6 11.5
General corporate expense............................... (97.6) (89.3) (72.6) (95.7) (91.9) (86.5)
-------- -------- -------- -------- -------- --------
Income before income taxes.............................. $ 505.5 $ 369.7 $ 478.5 $ 634.7 $ 509.4 $ 516.4
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Assets
Home and Building Control............................... $1,727.2 $1,529.8 $1,327.3 $1,302.4 $1,282.8 $1,228.7
Industrial Control...................................... 1,307.2 1,273.3 1,059.8 1,057.5 1,001.7 955.3
Space and Aviation Control.............................. 971.1 1,174.9 1,219.6 1,403.6 1,594.5 1,684.7
Corporate and Other..................................... 1,054.7 907.9 991.4 1,106.6 927.7 877.5
-------- -------- -------- -------- -------- --------
$5,060.2 $4,885.9 $4,598.1 $4,870.1 $4,806.7 $4,746.2
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Additional information
Average number of common shares outstanding............. 127.1 129.4 134.2 138.5 140.9 151.8
Return on average stockholders' equity.................. 17.1% 15.6% 18.4% 13.8% 19.2% 20.6%
Stockholders' equity per common share................... $ 16.09 $ 14.57 $ 13.48 $ 13.10 $ 13.25 $ 11.99
Percent of debt to total capitalization................. 28% 32% 28% 28% 30% 30%
Research and development
Honeywell-funded...................................... $ 323.2 $ 319.0 $ 337.4 $ 312.6 $ 300.7 $ 279.6
Customer-funded....................................... 336.6 340.5 404.8 390.5 373.5 417.5
Capital expenditures.................................... 238.1 262.4 232.1 244.1 240.2 251.5
Depreciation............................................ 236.1 235.3 235.3 242.8 238.5 236.1
Employees at year end................................... 50,100 50,800 52,300 55,400 58,200 60,300
--------------------------
(1) Operating profit is net of special charges amounting to $62.7, $51.2 and
$128.4 in 1994, 1993 and 1992, respectively, (see Note 4 to Financial
Statements) as follows: Home and Building Control, $28.7, $9.9 and $42.7;
Industrial Control, $14.4, $9.0 and $38.6; Space and Aviation Control,
$19.6, $7.4 and $34.9; Other, $--, $16.4 and $2.6; and General Corporate
Expense, $--, $8.5 and $9.6.
(2) Operating profit is net of the additional operating expense impact of
adopting SFAS 106 and SFAS 112 amounting to $16.4 and $3.8, respectively, in
1992 as follows: Home and Building Control, $4.3 and $1.0; Industrial
Control, $4.0 and $0.9; Space and Aviation Control, $7.0 and $1.6; Other,
$0.5 and $0.1; and General Corporate Expense, $0.6 and $0.2.
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OPERATIONS
SALES
Honeywell's 1995 sales were $6.731 billion, compared with $6.057 billion in
1994 and $5.963 billion in 1993. Sales in the United States of $4.087 billion
were up seven percent, as a result of increased volume in Home and Building
Control and Industrial Control, as well as an improved commercial aviation
market for Space and Aviation Control. International sales, which represent 39
percent of total sales, increased 18 percent to $2.644 billion in 1995. Sales
were particularly strong in Europe and Asia Pacific, increasing 22 percent and
24 percent respectively. The international sales increase was the result of
positive sales growth of 12 percent measured in local currency, along with
positive currency effects as the U.S. dollar weakened an average of six percent
against local currencies in countries where Honeywell does business. U.S. export
sales, including exports to foreign affiliates, were $839 million in 1995,
compared with $780 million in 1994 and $769 million in 1993.
COST OF SALES
Cost of sales was $4.584 billion in 1995, or 68.1 percent of sales, compared
with $4.082 billion (67.4 percent) in 1994 and $4.020 billion (67.4 percent) in
1993. Cost as a percentage of sales was higher in 1995 due to increased sales in
Space and Aviation Control at lower gross margins and an increase in lower
gross-margin service business in Industrial Control.
RESEARCH AND DEVELOPMENT
Honeywell spent $323 million, or 4.8 percent of sales, on research and
development in 1995, compared with $319 million (5.3 percent) in 1994 and $337
million (5.7 percent) in 1993. The higher 1993 and 1994 percentages reflect
significant investments in integrated avionics for the new Boeing 777 aircraft.
Honeywell expects to maintain its current rate of R&D spending in 1996.
Honeywell also received $337 million in funds for customer-funded research and
development in 1995, compared with $340 million in 1994 and $405 million in
1993.
OTHER EXPENSES AND INCOME
Selling, general and administrative expenses were $1.263 billion, or 18.8
percent of sales in 1995, compared with $1.174 billion (19.4 percent) in 1994
and $1.076 billion (18.0 percent) in 1993. Excluding royalties from autofocus
licensees (see Note 3 to Financial Statements on page 27), the percent of sales
would have been 19.5 percent and 18.6 percent in 1994 and 1993 respectively. The
higher percentage in 1994 was primarily due to increased legal costs.
On April 16, 1993, Honeywell announced the settlement of its lawsuits
against the Unisys Corporation and other parties in connection with Honeywell's
1986 purchase of the Sperry Aerospace Group. Honeywell received $70 million in
cash and notes, and recorded a gain of $22 million, or $14 million ($0.10 per
share) after income taxes (see Note 3 to Financial Statements on page 27).
Honeywell filed suits and reached agreement with various major camera
manufacturers for their use of Honeywell's patented automatic focus camera
technology. The total of all autofocus settlements recorded, after associated
expenses, was $10 million, or $6 million ($0.05 per share) after income taxes,
in 1993 (see Note 3 to Financial Statements on page 27).
Honeywell remains committed to efforts to reduce operating costs and improve
margins. As a result of identifying opportunities to restructure and streamline
operations, Honeywell recorded special charges of $63 million, or $38 million
($0.29 per share) after income taxes in 1994. The actions undertaken included a
continuation of right-sizing the Space and Aviation Control business segment, a
worldwide consolidation of manufacturing capacity, a streamlining and
realignment of the overhead structure and reductions in corporate expense.
Special charges of $51 million, or $29 million ($0.22 per share) after income
taxes, were recorded in 1993 for productivity initiatives to strengthen the
company's competitiveness.
11
Special charges include costs for work force reductions, worldwide
facilities consolidation and other cost accruals. Work force reduction costs
primarily include severance costs related to involuntary termination programs
instituted to improve efficiency and reduce costs. These costs amounted to $53
million in 1994 and $44 million in 1993. Facilities consolidation costs are
primarily associated with consolidations of branch office space and product
lines to restructure and streamline Honeywell's operations. These costs amounted
to $10 million in 1994 and $2 million in 1993. Other cost accruals include costs
of exiting several product lines no longer considered complementary to
Honeywell's businesses, which amounted to $5 million in 1993.
The estimated cost savings of the restructuring actions in 1994 will exceed
$30 million annually, when fully realized. Special-charge accruals remaining to
be paid were $12 million, $74 million and $79 million at December 31, 1995, 1994
and 1993 respectively. Total expenditures amounted to $54 million in 1995, $50
million in 1994 and $93 million in 1993. Cash flows from operating activities
have funded and are expected to fund all special charges. Further information
about special charges is provided in Note 4 to Financial Statements on page 27.
Net interest expense was $69 million in 1995, $60 million in 1994 and $51
million in 1993. Net interest expense increased in 1995 as a result of higher
average debt. Net interest expense increased in 1994 as a result of a
combination of higher market interest rates and higher average debt compared
with 1993. Information concerning Honeywell's exposure to and management of
interest rate risk through the use of derivative financial instruments is
provided on page 18 and in Notes 14 and 15 to Financial Statements on pages 32
and 34 respectively.
Earnings of companies owned 20 percent to 50 percent (primarily
Yamatake-Honeywell Co., Ltd), which are accounted for using the equity method,
were $14 million in 1995, $11 million in 1994 and $18 million in 1993. The
decline in 1994 primarily resulted from a decline in earnings, the writedown of
assets and a bad-debt reserve increase.
INCOME TAXES
The provision for income taxes was $172 million in 1995, compared with $91
million in 1994 and $156 million in 1993. The 1994 income tax provision was
reduced by $38 million ($0.29 per share) as a result of a favorable tax
settlement. The enactment by Congress of the Omnibus Budget Reconciliation Act
of 1993, which raised the U.S. federal statutory income tax rate for
corporations from 34 percent to 35 percent retroactive to January 1, 1993, did
not have a material impact on the 1993 provision, but did result in the
recognition of a one-time gain of $9 million ($0.07 per share) in 1993 from the
revaluation of deferred tax assets. Further information about income taxes is
provided in Note 5 to Financial Statements on page 28.
NET INCOME
Honeywell's net income increased 20 percent in 1995, primarily due to
increased sales volume and improved operating margins. Net income was $334
million ($2.62 per share) in 1995, compared with $279 million ($2.15 per share)
in 1994 and $322 million ($2.40 per share) in 1993. Net income in 1994 includes
an after-tax provision for special charges of $38 million ($0.29 per share) and
a reduction of the provision for income taxes of $38 million ($0.29 per share)
from a favorable tax settlement. Net income in 1993 includes an after-tax gain
from litigation settlements, after associated expenses, of $20 million ($0.15
per share); an after-tax provision for special charges of $29 million ($0.22 per
share); and a gain of $9 million ($0.07 per share) from the revaluation of
deferred tax assets.
RETURN ON EQUITY AND INVESTMENT
Return on equity (ROE) was 17.1 percent in 1995, 15.6 percent in 1994 and
18.4 percent in 1993. Return on investment (ROI) was 13.5 percent in 1995, 12.3
percent in 1994 and 14.6 percent in 1993.
CURRENCY
The U.S. dollar weakened an average of six percent in 1995 compared with
1994, in relation to the principal foreign currencies in countries where
Honeywell products are sold. A weaker dollar has a
12
positive effect on international results because foreign-exchange denominated
profits translate into more U.S. dollars of profit. Information about
Honeywell's exposure to and management of currency risk through the use of
derivative financial instruments is provided on page 18 and in Notes 6, 14 and
15 to Financial Statements on pages 29, 32 and 34 respectively.
INFLATION
Highly competitive market conditions have minimized inflation's impact on
the selling prices of Honeywell's products and the cost of its purchased
materials. Productivity improvements and cost-reduction programs have largely
offset the effects of inflation on other costs and expenses.
EMPLOYMENT
Honeywell employed 50,100 people worldwide at year-end 1995, compared with
50,800 people in 1994 and 52,300 people in 1993. Approximately 30,600 employees
work in the United States, with 19,500 employed outside the country, primarily
in Europe. Total compensation and benefits in 1995 were $2.8 billion, or 45
percent of total costs and expenses. Sales per employee were $132,800 in 1995,
compared with $118,600 in 1994 and $110,900 in 1993.
ENVIRONMENTAL MATTERS
Honeywell is committed to protecting the environment, a commitment evidenced
both by Honeywell's products and its manufacturing operations. Honeywell's
manufacturing sites generate both hazardous and nonhazardous wastes, the
treatment, storage, transportation and disposal of which are subject to various
local, state and federal laws relating to protection of the environment.
Honeywell is in varying stages of investigation or remediation of potential,
alleged or acknowledged contamination at currently or previously owned or
operated sites and at off-site locations where its wastes were taken for
treatment or disposal. In connection with the cleanup of various off-site
locations, Honeywell, along with a large number of other entities, has been
designated a potentially responsible party (PRP) by the U.S. Environmental
Protection Agency under the Comprehensive Environmental Response, Compensation
and Liability Act or by state agencies under similar state laws (Superfund),
which potentially subject PRPs to joint and several liability for the costs of
such cleanup. In addition, Honeywell is incurring costs relating to
environmental remediation pursuant to the federal Resource Conservation and
Recovery Act. Based on Honeywell's assessment of the costs associated with its
environmental responsibilities, compliance with federal, state and local laws
regulating the discharge of materials into the environment, or otherwise
relating to the protection of the environment, has not had and in the opinion of
Honeywell management, will not have a material effect on Honeywell's financial
position, net income, capital expenditures or competitive position. Honeywell's
opinion with regard to Superfund matters is based on its assessment of the
predicted investigation, remediation and associated costs, its expected share of
those costs and the availability of legal defenses. Honeywell's policy is to
record environmental liabilities when loss amounts are probable and reasonably
estimable.
NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This Statement
requires that assets to be held and used be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. An impairment loss should be recognized when the
estimated future cash flows from the asset are less than the carrying value of
the asset. Assets to be disposed of should be reported at the lower of their
carrying amount or their fair value, less cost to sell. This Statement is
effective for financial statements for fiscal years beginning after December 15,
1995, and adoption by Honeywell in 1996 is not expected to have a material
impact on results of operations or financial position.
13
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for
Stock-Based Compensation." As permitted by SFAS 123, Honeywell has elected to
continue following the guidance of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," for measurement and recognition of
stock-based transactions with employees. Honeywell will adopt the disclosure
provisions of SFAS 123 in 1996.
SAFE HARBOR STATEMENT
Except for the historical information contained herein, certain of the
matters discussed in this annual report are "forward-looking statements" as
defined in the Private Securities Litigation Reform Act of 1995, which involve
risks and uncertainties, including but not limited to, changing economic
conditions, international trade factors and government policies affecting
Honeywell's operations, markets, products, services and prices.
Economic downturns or recessionary conditions in the United States and
international markets served by Honeywell can adversely affect the demand for
Honeywell's products and services. Changes in international policy may result in
unfavorable conditions such as trading sanctions or increased tariffs between
various countries and restrict the markets for Honeywell's products and
services. Changes in government spending and budgetary policies, both in the
United States and in other countries, may adversely affect the demand for
Honeywell's products and services by government entities.
DISCUSSION AND ANALYSIS BY SEGMENT
HOME AND BUILDING CONTROL
Sales in Home and Building Control were $3.035 billion in 1995, compared
with $2.665 billion in 1994 and $2.424 billion in 1993. Sales in 1995 benefited
from an improving economy in Europe and solid growth in the Asia Pacific region.
Home Control experienced strong sales growth from acquisitions and business in
the trade and retail channels, and also broadened its product offerings in gas
valves, actuators and thermostats in key markets. The business introduced the
Perfect Climate Comfort Control Center-TM-, a low-cost, automated, integrated
home temperature and indoor air quality control system. Building Control
experienced strong sales growth, fueled by strength overall in Europe and by its
comprehensive energy retrofit and service solutions business in U.S. healthcare
and government markets; and there was a strong worldwide acceptance of
Honeywell's Excel Security Manager, an access control system for buildings. We
anticipate that Home and Building Control's large worldwide installed product
and service base and market strategies will continue to support future sales
growth.
Sales in 1994 were up moderately as U.S. sales continued to benefit from an
improving economy and growing consumer confidence. International sales were
aided by the beginnings of economic recovery. Home Control continued to achieve
greater market penetration with original equipment manufacturers worldwide and
to broaden its product offerings in key markets such as burner boiler control.
Honeywell acquired Metallwerke Neheim Goeke & Co. GmbH, a leading German
manufacturer of water heating control products, to complement its current
offerings in Europe. In addition, there were a number of new product
introductions which included a new line of smart gas valves and integrated
boiler and furnace controls. Building Control experienced continued success with
its comprehensive energy retrofit and service solutions, particularly in the
schools and industrial markets in the United States.
Home and Building Control operating profit was $309 million in 1995,
compared with $236 million in 1994 and $233 million in 1993. Operating profit
included special charges of $29 million in 1994 and $10 million in 1993 to
consolidate facilities, streamline operations and improve productivity.
Excluding the impact of special charges, operating profit increased 16 percent
in 1995, primarily from strong international volume increases, new product
introductions and cost-reduction initiatives. Cost-
14
reduction initiatives included the re-engineering of the installed systems
business, transfer of an electric heat thermostat line from Canada to Mexico and
headcount reductions in the protection services business.
Excluding the impact of special charges, operating profit increased
moderately in 1994, benefiting from increasing volume in an improving U.S.
economy and growing consumer confidence.
Both Home Control and Building Control experienced strong orders growth in
1995, benefiting from international strength and new product introductions. The
backlog of orders increased moderately for 1995.
INDUSTRIAL CONTROL
Industrial Control sales were $2.036 billion in 1995, compared with $1.835
billion in 1994 and $1.692 billion in 1993. Industrial Automation and Control
sales increased moderately in 1995. The business continued to make inroads in
key markets such as pulp and paper and hydrocarbon processing as a result of
increased domestic and international demand for TotalPlant-TM- open solutions,
as industry continues to focus on improving productivity and meeting stringent
environmental and safety regulations. The business entered into a strategic
alliance with Sinopec, the world's third-largest petroleum refiner, representing
the first major application of TotalPlant advanced services in international
markets. The business also introduced a major new release of software and
enhanced hardware components for its TDC 3000x-Registered Trademark- industrial
automation system that will significantly increase customer productivity, safety
and regulatory compliance, SMV 3000, the first multi-variable transmitter, and
SCAN 3000 on the NT platform. Sensing and Control sales increased moderately in
1995, benefiting from strong international sales of commercial sensors and
switches, particularly in Europe and Asia Pacific. The business introduced the
Smart Distributed System, a revolutionary sensor network for distributed machine
control, into Europe and Asia Pacific. A new solenoid valve series, designed for
the process control market, was introduced globally and will help customers meet
stringent environmental and safety regulations. We expect continued growth for
both Industrial Automation and Control's and Sensing and Control's systems and
products in 1996.
Excluding year-earlier results of the Keyboard Division, which was sold in
the third quarter of 1993, sales increased moderately in 1994. Industrial
Automation and Control experienced improving sales for TotalPlant open
solutions. Sales to the hydrocarbon processing market were strong as companies
invested to comply with the U.S. Environmental Protection Agency regulations for
reformulated fuels. Honeywell acquired Allied Data Communications, the systems
business from Pepperl + Fuchs Systems, and Profimatics during the year and
forged alliances with other companies to expand its TotalPlant open solutions
portfolio and provide more one-stop shopping and a broader range of services to
its industrial customers. Sensing and Control benefited from continued
improvements in the U.S. durable goods market, particularly in the automotive,
appliance and information technology industries. The business introduced the
Smart Distributed System in the United States.
Industrial Control operating profit was $234 million in 1995, $207 million
in 1994 and $190 million in 1993. Operating profit included special charges of
$14 million in 1994 and $9 million in 1993 to consolidate facilities, streamline
operations and improve productivity. Excluding the impact of special charges,
Industrial Automation and Control operating profit declined slightly in 1995,
reflecting the timing of TotalPlant project implementation and the current mix
of lower margin services. Sensing and Control experienced a sharp increase in
operating profit as a result of improvement in solid state and electrical switch
margins in the United States and increased international profits driven by
volume and lower product costs in Europe.
Excluding the impact of special charges, 1994 operating profit showed a
moderate increase as a result of volume increases in Industrial Automation and
Control, where environmental and safety regulations were key drivers of spending
around the world, particularly in the hydrocarbon processing and chemicals
markets; and volume increases in Sensing and Control, where durable goods
markets continued to improve, particularly in the automotive and appliance
industries.
15
In 1995, Industrial Automation and Control experienced a solid increase in
order activity both domestically and internationally in such key markets as pulp
and paper and hydrocarbon processing. Sensing and Control orders increased
modestly, driven by commercial and automative sensors in Europe and the United
States. The backlog of orders was up moderately for the year.
SPACE AND AVIATION CONTROL
Sales in Space and Aviation Control were $1.527 billion in 1995, compared
with $1.432 billion in 1994 and $1.675 billion in 1993. Sales increased
moderately in 1995, driven by the recovery in the business jet and commuter
aircraft market, strength in the retrofit and repair business and improved
production efficiencies in the air transport market, and increased sales from
the International Space Station program. We anticipate a modest increase in
Space and Aviation Control sales in 1996 and stronger growth in 1997 with the
cyclical recovery of the commercial aircraft industry and onset of the volume
production phase on two large military contracts.
Sales in 1994 experienced an anticipated decline, reflecting lower
commercial aircraft production rates and reduced government spending.
Space and Aviation Control operating profit was $127 million in 1995,
compared with $81 million in 1994 and $148 million in 1993. Operating profit
included special charges of $20 million in 1994 and $7 million in 1993 to
consolidate facilities, streamline operations and improve productivity.
Excluding the impact of special charges, 1995 operating profit increased as a
result of the strong performance in Commercial Aviation Systems. Commercial
margins improved as a result of increased volume, completion of a major
next-generation technology development effort and the benefit of earlier
restructuring activities. Operating profit was down modestly in the military
business and flat in the space business.
Excluding the impact of special charges, 1994 operating profit declined
sharply due to lower sales volume and continued investment in next-generation
technology. This was partially offset by favorable warranty performance and
termination settlements in the military and space businesses.
Space and Aviation Control orders increased slightly in 1995. Adjusting for
Space Systems' 1994 multi-year contract award to supply command and
data-handling systems for the International Space Station, orders increased
modestly in 1995. The increase was aided by a rebound in the business jet
market, a large multi-year military award for an F-16 avionics upgrade, and a
strengthening in orders for military retrofit and repair products. The backlog
of orders increased modestly from 1994 levels.
OTHER
Sales from other operations were $133 million in 1995, compared with $125
million in 1994 and $172 million in 1993. These sales included the activities of
various units such as the Solid State Electronics and the Honeywell Technology
research and development centers, which do not correspond with Honeywell's
primary business segments. Other operations had an operating profit of $3
million in 1995, broke even in 1994 and incurred an operating loss of $2 million
in 1993. The 1993 loss included special charges of $16 million for work force
reductions.
FINANCIAL POSITION
FINANCIAL CONDITION
At year-end 1995, Honeywell's capital structure comprised $312 million of
short-term debt, $481 million of long-term debt and $2.040 billion of
stockholders' equity. The ratio of debt-to-total capital was 28 percent,
compared with 32 percent at year-end 1994. Honeywell's debt-to-total capital
policy range is 30 to 40 percent.
Total debt decreased $69 million during 1995, to $793 million. The decrease
resulted from reduced general corporate financing requirements, including
capital expenditures, working capital and acquisitions.
16
Stockholders' equity increased $185 million in 1995 to $2.040 billion. The
increase was primarily due to an increase in retained earnings of $334 million
from net income, an $89 million increase from stock option exercises and
employee stock plans, and a $33 million increase in accumulated foreign currency
translation, offset by dividends of $128 million, $129 million of treasury stock
purchases and a $14 million increase in the pension liability adjustment.
CASH GENERATION AND DEPLOYMENT
In 1995, $573 million of cash was generated from operating activities,
compared with $470 million in 1994 and $475 million in 1993. The increase in
1995 was largely due to improved earnings compared with 1994. In 1995, cash
generated from investing and financing activities included $19 million of
proceeds from the sale of assets and $60 million of proceeds from employee stock
plans and the exercise of Honeywell Foundation stock options. These funds were
used to support $238 million of capital expenditures, $128 million of dividend
payments and $137 million of payments for share repurchases. Cash balances
increased $24 million in 1995.
CONTROLLED WORKING CAPITAL
Cash generated from decreases in "controlled working capital" consisting of
trade and long-term receivables and inventories, offset by accounts payable and
customer advances, was $4 million in 1995. This portion of working capital as a
percentage of sales was 26 percent compared with 28 percent in 1994. The two
percentage point improvement reflects the continuing effort by Honeywell to
reduce "controlled working capital" as a percent of sales. The increase in
receivable and payable balances in 1995 was consistent with the increase in
fourth-quarter sales.
CAPITAL EXPENDITURES AND ACQUISITIONS
Capital expenditures for property, plant and equipment were $238 million in
1995, compared with $262 million in 1994 and $232 million in 1993. The 1995
depreciation charges were $236 million. Honeywell continues to invest at levels
believed to be adequate to maintain its technological leadership position.
During 1995, Honeywell invested $38 million in complementary business
acquisitions.
SHARE REPURCHASE PLANS
In December 1994, the Board of Directors authorized a program to purchase up
to 2 million Honeywell shares; this program was completed in the third quarter
1995. In July 1995, the Board of Directors authorized an open-ended program to
repurchase $250 million of Honeywell shares, of which $49 million was utilized
in the second half of 1995. Honeywell repurchased $240 million of shares in
1993, $168 million of shares in 1994 and $129 million of shares in 1995.
At year-end 1995, Honeywell had 188 million shares issued, 127 million
shares outstanding and 32,569 stockholders of record. At year-end 1994,
Honeywell had 188 million shares issued, 127 million shares outstanding and
32,025 stockholders of record.
DIVIDENDS
In November 1994, the Board of Directors approved a 4 percent increase in
the regular annual dividend to $1.00 per share, from $0.96 per share, effective
in the fourth quarter 1994. In November 1995, the Board of Directors approved an
additional 4 percent increase in the regular annual dividend to $1.04 per share
effective in the fourth quarter 1995. Honeywell paid $1.01 per share in
dividends in 1995, compared with $0.97 in 1994 and $0.9075 in 1993.
Honeywell has paid a quarterly dividend since 1932 and has increased the
annual payout per share in each of the last 20 years.
EMPLOYEE STOCK PROGRAM
In 1995, Honeywell contributed 571,905 shares of Honeywell common stock to
employees under its U.S. employee stock match savings plan. The number of shares
contributed under this program depends on employee savings levels and company
performance.
17
PENSION CONTRIBUTIONS
Cash contributions to Honeywell's pension and retirement plans amounted to
$172 million in 1995, $141 million in 1994 and $154 million in 1993.
TAXES
In 1995, taxes paid were $128 million. Accrued income taxes and related
interest decreased $29 million during 1995.
FUNDING SPECIAL CHARGES
During 1994 and 1993, Honeywell established reserves for productivity
initiatives to strengthen the company's competitiveness (see page 11 and Note 4
to Financial Statements on page 27). Future cash flows from operating activities
are expected to be sufficient to fund these accrued costs.
LIQUIDITY
Short-term debt at year-end 1995 was $312 million, consisting of $65 million
of commercial paper, $63 million of notes payable and $184 million of current
maturities of long-term debt. Short-term debt at year-end 1994 totaled $361
million, consisting of $125 million of commercial paper, $102 million of notes
payable and $134 million of current maturities of long-term debt.
Through its banks, Honeywell has access to various credit facilities,
including committed credit lines for which Honeywell pays commitment fees and
uncommitted lines provided by banks on a non-committed, best-efforts basis.
Available general-purpose lines of credit at year-end 1995 totaled $1.089
billion. This consisted of $725 million of committed credit lines to meet
Honeywell's financing requirements, including support of commercial paper and
bank note borrowings, and $364 million of uncommitted credit lines available to
certain foreign subsidiaries. This compared with $1.076 billion of available
credit lines at year-end 1994, consisting of $737 million of committed credit
lines for general financing requirements and $339 million of uncommitted credit
lines available to certain foreign subsidiaries.
In addition to its committed credit lines, Honeywell has access to the
public debt markets as evidenced by its $500 million medium-term note program
initiated in August 1994. The medium-term note program allows note issuances
with maturities ranging from nine months to 30 years. At December 31, 1995, $222
million of notes was outstanding under this program. Long-term debt maturities
consist of $185 million in 1996, $109 million in 1997 and $98 million in 1998.
Cash and short-term investments totaled $301 million at year-end 1995 and
$275 million at year-end 1994. Honeywell believes its available cash, committed
credit lines and access to the public debt markets, through its medium-term note
and commercial paper programs, provide adequate short-term and long-term
liquidity.
DERIVATIVE FINANCIAL INSTRUMENTS
Honeywell is exposed to market risk from changes in interest rates and
foreign currency exchange rates, which may adversely affect its results of
operations and financial condition. In seeking to minimize this risk, Honeywell
manages exposure to changes in interest rates and foreign currency rates through
its regular operating and financing activities and, when deemed appropriate,
through the use of derivative financial instruments. Honeywell policy prohibits
the use of derivative financial instruments for trading or other speculative
purposes and Honeywell is not a party to leveraged financial instruments.
Honeywell has entered into various foreign currency exchange contracts
designed to minimize its net exposure to exchange rate fluctuations on foreign
currency transactions (see Notes 6, 14 and 15 to Financial Statements on pages,
29, 32 and 34 respectively). Foreign exchange contracts reduce Honeywell's
overall exposure to exchange rate movements, since the gains and losses on these
contracts offset losses and gains on the assets, liabilities and transactions
being hedged. Transactions that are hedged include foreign currency denominated
receivables and payables on the statement of financial
18
position, firm purchase orders and firm sales commitments. At year-end 1995, the
notional amount of outstanding foreign exchange contracts, including contracts
to hedge intercompany transactions, was $1.262 billion.
It is Honeywell's practice to manage the relative proportions of its fixed
and floating rate debt in the context of the interest rate environment. The
objective is to minimize the cost of Honeywell's debt financing over an extended
period of time. To manage this mix in a cost efficient manner, Honeywell enters
into interest rate swap agreements, in which it agrees to exchange, at specified
intervals, the difference between fixed and variable interest amounts calculated
by reference to an agreed-upon notional principal amount (see Notes 14 and 15 to
Financial Statements on pages 32 and 34 respectively). At year-end 1995, the
notional amount of outstanding interest rate swaps was $225 million.
LITIGATION
On March 13, 1990, Litton Systems, Inc. filed suit against Honeywell Inc. in
U.S. District Court, Central District of California, alleging Honeywell patent
infringement relating to the process used by Honeywell to coat mirrors
incorporated in its ring laser gyroscopes; attempted monopolization and
predatory pricing 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. Honeywell
generally denied Litton's allegations, contested both the validity and
infringement of the patent, and alleged that the patent had been obtained by
Litton's inequitable conduct before the United States Patent and Trademark
Office. Honeywell also filed counterclaims against Litton alleging, among other
things, that Litton's business and litigation conduct violated federal and state
laws, causing Honeywell considerable damage and expense.
On January 9, 1995, Judge Mariana Pfaelzer of the U.S. District Court set
aside an August 1993 jury verdict and damage award of $1.2 billion against
Honeywell in the patent and interference with contract case. She ruled, among
other things, that the Litton patent was unenforceable because it was obtained
by inequitable conduct and invalid because it was an invention that would have
been obvious from combining existing processes. She further ruled that if her
judgment were ever subsequently vacated or reversed on appeal, Honeywell would
be granted a new trial on the issue of damages because the jury's 1993 award was
inconsistent with the clear weight of the evidence, and permitting it to stand
would constitute a miscarriage of justice. Litton has appealed to the Court of
Appeals for the Federal Circuit, Washington, D.C. Briefs for the appeal have
been submitted by the parties and oral arguments were presented December 8,
1995. Honeywell believes that Judge Pfaelzer's rulings will be upheld on appeal.
As a result, no provision has been made in the financial statements with respect
to this contingent liability.
The trial for the antitrust case began on November 20, 1995, before Judge
Pfaelzer and a different jury. Prior to the jury's deliberations in the
antitrust trial, the court dismissed, for failure of proof, Litton's contentions
that Honeywell engaged in below-cost predatory pricing, illegal tying, bundling
and illegally acquiring Sperry Avionics in 1986. The case was submitted to the
jury on two claims, monopolization and attempt to monopolize, both based on
Litton's allegations that Honeywell entered into certain exclusive dealings and
penalty arrangements with aircraft manufacturers and airlines to exclude Litton
from the commercial aircraft market. On February 29, 1996, the jury returned a
$234 million verdict against Honeywell for the monopolization claim. On March 1,
1996, the jury indicated that it was unable to reach a verdict on damages for
the attempted monopolization claim, and a mistrial was declared on that claim.
Honeywell continues to maintain that it competed vigorously and lawfully in
the inertial navigation business and will continue to defend itself against
Litton's allegations. Honeywell believes that the jury's partial verdict should
be overturned because Litton (i) failed to prove essential elements of liability
and (ii) failed to submit competent evidence to support its claim for damages by
offering only a speculative, all-or-nothing $298.5 million damage study.
Honeywell will file post-verdict motions with the trial court asking that
judgment be granted in favor of Honeywell as a matter of law or, in the
19
alternative, for a new trial, and will argue important procedural and other
matters which could dispose of this case. If the $234 million jury verdict
withstands post-verdict motions, in whole or in part, any dollar judgment will
be trebled under federal antitrust laws and will be appealed by Honeywell. The
case will conclude only when the trial and appellate courts resolve all of the
legal issues that could reduce or eliminate the jury verdict. As a result, no
provision has been made in the financial statements with respect to this
contingent liability.
CREDIT RATINGS
Honeywell's credit ratings remained unchanged during 1995. Ratings for
long-term and short-term debt are, respectively, A/A-1 by Standard and Poor's
Corporation, A/Duff1 by Duff and Phelps Corporation and A3/P-2 by Moody's
Investors Service, Inc.
STOCK PERFORMANCE
The market price of Honeywell stock ranged from $49 1/2 to $30 3/4 in 1995,
and was $48 5/8 at year end. Book value per common share at year end was $16.09
in 1995 and $14.57 in 1994.
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To the Stockholders of Honeywell Inc.:
We have audited the statement of financial position of Honeywell Inc. and
subsidiaries as of December 31, 1995 and 1994, and the related statements of
income and cash flows for each of the three years in the period ended December
31, 1995. Our audits also included the financial statement schedule listed at
Part IV, Item 14(a)2. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We have conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Honeywell Inc. and subsidiaries at December
31, 1995 and 1994, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles. Also, in our opinion, such
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Deloitte & Touche LLP
Minneapolis, Minnesota
February 13, 1996
(February 29, 1996 and March 1, 1996
as to certain information included in
Note 22 and March 15, 1996 as to
certain information included in Note
24)
21
INCOME STATEMENT
HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS AND SHARES IN MILLIONS
EXCEPT PER SHARE AMOUNTS)
[Enlarge/Download Table]
YEARS ENDED DECEMBER 31
---------------------------------
1995 1994 1993
--------- ---------- ----------
Sales......................................................................... $ 6,731.3 $ 6,057.0 $ 5,963.0
--------- ---------- ----------
Costs and Expenses
Cost of sales............................................................... 4,584.2 4,082.1 4,019.6
Research and development.................................................... 323.2 319.0 337.4
Selling, general and administrative......................................... 1,263.1 1,173.8 1,075.7
Litigation settlements...................................................... (32.6)
Special charges............................................................. 62.7 51.2
--------- ---------- ----------
6,170.5 5,637.6 5,451.3
--------- ---------- ----------
Interest
Interest expense............................................................ 83.3 75.5 68.0
Interest income............................................................. 14.4 15.3 17.0
--------- ---------- ----------
68.9 60.2 51.0
--------- ---------- ----------
Equity Income................................................................. 13.6 10.5 17.8
--------- ---------- ----------
Income before Income Taxes.................................................... 505.5 369.7 478.5
Provision for Income Taxes.................................................... 171.9 90.8 156.3
--------- ---------- ----------
Net Income.................................................................... $ 333.6 $ 278.9 $ 322.2
--------- ---------- ----------
--------- ---------- ----------
Earnings Per Common Share..................................................... $ 2.62 $ 2.15 $ 2.40
--------- ---------- ----------
--------- ---------- ----------
Average Number of Common Shares Outstanding................................... 127.1 129.4 134.2
See accompanying Notes to Financial Statements.
22
STATEMENT OF FINANCIAL POSITION
HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS IN MILLIONS)
ASSETS
[Enlarge/Download Table]
DECEMBER 31
-----------------------
1995 1994
---------- -----------
Current Assets
Cash and cash equivalents............................................................. $ 291.6 $ 267.4
Short-term investments................................................................ 9.0 7.4
Receivables........................................................................... 1,477.3 1,406.9
Inventories........................................................................... 794.4 760.2
Deferred income taxes................................................................. 194.6 207.5
---------- -----------
2,766.9 2,649.4
Investments and Advances................................................................ 244.8 242.8
Property, Plant and Equipment
Property, plant and equipment......................................................... 2,857.1 2,716.8
Less accumulated depreciation......................................................... 1,758.2 1,617.3
---------- -----------
1,098.9 1,099.5
Other Assets
Long-term receivables................................................................. 46.8 40.1
Goodwill.............................................................................. 240.7 209.8
Patents, licenses and trademarks...................................................... 43.4 66.1
Software and other intangibles........................................................ 340.1 290.3
Deferred income taxes................................................................. 71.8 98.5
Other................................................................................. 206.8 189.4
---------- -----------
Total Assets........................................................................ $ 5,060.2 $ 4,885.9
---------- -----------
---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt....................................................................... $ 312.4 $ 360.6
Accounts payable...................................................................... 491.5 429.6
Customer advances..................................................................... 93.2 72.6
Accrued compensation and benefit costs................................................ 374.3 434.6
Accrued income taxes.................................................................. 274.8 309.6
Deferred income taxes................................................................. 20.4
Other accrued liabilities............................................................. 455.9 464.8
---------- -----------
2,022.5 2,071.8
Long-Term Debt.......................................................................... 481.0 501.5
Other Liabilities
Accrued benefit costs................................................................. 416.3 359.0
Deferred income taxes................................................................. 39.2 39.8
Other................................................................................. 61.1 59.1
Stockholders' Equity
Common stock -- $1.50 par value
Authorized -- 250,000,000 shares
Issued -- 1995 -- 188,126,704 shares.................................................. 282.2
1994 -- 188,286,000 shares................................................... 282.4
Additional paid-in capital............................................................ 481.3 446.9
Retained earnings..................................................................... 2,805.8 2,600.4
Treasury stock -- 1995 -- 61,306,251 shares........................................... (1,650.2)
1994 -- 61,030,565 shares............................................ (1,576.5)
Accumulated foreign currency translation.............................................. 140.9 107.4
Pension liability adjustment.......................................................... (19.9) (5.9)
---------- -----------
2,040.1 1,854.7
---------- -----------
Total Liabilities and Stockholders' Equity.......................................... $ 5,060.2 $ 4,885.9
---------- -----------
---------- -----------
See accompanying Notes to Financial Statements.
23
STATEMENT OF CASH FLOWS
HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS IN MILLIONS)
[Enlarge/Download Table]
YEARS ENDED DECEMBER 31
-------------------------------
1995 1994 1993
--------- --------- ---------
Cash Flows from Operating Activities
Net income..................................................................... $ 333.6 $ 278.9 $ 322.2
Adjustments to reconcile net income to net cash flows from operating
activities:
Depreciation................................................................. 236.1 235.3 235.3
Amortization of intangibles.................................................. 56.8 52.1 49.6
Deferred income taxes........................................................ 67.2 14.0 28.8
Equity income, net of dividends received..................................... (11.0) (7.6) (14.5)
Loss on sale of assets....................................................... 7.2 1.0 6.2
Contributions to employee stock plans........................................ 27.4 26.5 28.7
Increase in receivables...................................................... (38.4) (83.8) (62.7)
(Increase) decrease in inventories........................................... (27.6) 20.9 54.2
Increase in accounts payable................................................. 50.1 27.7 28.8
Increase (decrease) in accrued income taxes and interest..................... (35.4) (4.6) 8.3
Other changes in working capital, excluding short-term investments and
short-term debt............................................................. (99.1) (93.9) (146.6)
Other noncurrent items -- net................................................ 5.6 3.0 (63.5)
--------- --------- ---------
Net cash flows from operating activities......................................... 572.5 469.5 474.8
--------- --------- ---------
Cash Flows from Investing Activities
Reduction of investment in Sperry Aerospace Group.............................. 20.0
Proceeds from sale of assets................................................... 18.7 22.6 46.8
Capital expenditures........................................................... (238.1) (262.4) (232.1)
Investment in acquisitions..................................................... (37.7) (104.6) (14.2)
(Increase) decrease in short-term investments.................................. (1.4) 6.7 (10.2)
Other -- net................................................................... (5.2) 10.5 (23.3)
--------- --------- ---------
Net cash flows from investing activities......................................... (263.7) (327.2) (213.0)
--------- --------- ---------
Cash Flows from Financing Activities
Net increase (decrease) in short-term debt..................................... (101.0) 35.7 2.8
Proceeds from issuance of long-term debt....................................... 167.5 126.5 0.6
Repayment of long-term debt.................................................... (156.4) (1.8) (7.3)
Purchase of treasury stock..................................................... (137.3) (162.5) (241.2)
Proceeds from exercise of stock options........................................ 60.4 5.9 17.6
Dividends paid................................................................. (127.5) (125.6) (122.0)
--------- --------- ---------
Net cash flows from financing activities......................................... (294.3) (121.8) (349.5)
--------- --------- ---------
Effect of exchange rate changes on cash.......................................... 9.7 4.6 (12.4)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents................................. 24.2 25.1 (100.1)
Cash and cash equivalents at beginning of year................................... 267.4 242.3 342.4
--------- --------- ---------
Cash and cash equivalents at end of year......................................... $ 291.6 $ 267.4 $ 242.3
--------- --------- ---------
--------- --------- ---------
See accompanying Notes to Financial Statements.
24
NOTES TO FINANCIAL STATEMENTS
HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
NOTE 1 -- ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements and accompanying data comprise
Honeywell Inc. and subsidiaries. All material intercompany transactions are
eliminated.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires Honeywell to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods.
SALES
Product sales are recorded when title is passed to the customer, which
usually occurs at the time of delivery or acceptance. Sales under long-term
contracts are recorded on the percentage-of-completion method measured on the
cost-to-cost basis for engineering-type contracts and the units-of-delivery
basis for production-type contracts. Provisions for anticipated losses on
long-term contracts are recorded in full when they become evident.
EARNINGS PER COMMON SHARE
Earnings per common share are based on the average number of common shares
outstanding during the year.
STATEMENT OF CASH FLOWS
Cash equivalents are all highly liquid, temporary cash investments with an
original maturity of three months or less.
Cash flows from purchases and maturities of held-to-maturity securities are
classified as cash flows from investing activities. Cash flows from contracts
used to hedge cash dividend payments from subsidiaries are classified as part of
the effect of exchange rate changes on cash.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
using the weighted-average method. Market is based on net realizable value.
Payments received from customers relating to the uncompleted portion of
contracts are deducted from applicable inventories.
INVESTMENTS
Investments in companies owned 20 to 50 percent are accounted for using the
equity method.
PROPERTY
Property is carried at cost and depreciated primarily using the
straight-line method over estimated useful lives of 10 to 40 years for buildings
and improvements, and three to 15 years for machinery and equipment.
INTANGIBLES
Intangibles are carried at cost and amortized using the straight-line method
over their estimated useful lives of not more than 40 years for goodwill; four
to 17 years for patents, licenses and trademarks; and three to 24 years for
software and other intangibles. Intangibles also include the asset resulting
from recognition of the defined benefit pension plan minimum liability, which is
amortized as part of net periodic pension cost.
25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
NOTE 1 -- ACCOUNTING POLICIES (CONTINUED)
DERIVATIVES
In 1994, Honeywell adopted Statement of Financial Accounting Standards No.
119, "Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments." Honeywell uses derivative financial instruments such as
foreign currency contracts (forwards, swaps and options) to manage its foreign
currency exposure (see Notes 6, 14 and 15) and interest rate swaps to manage its
exposure to interest rate fluctuations and its mix of fixed and floating
interest rates (see Notes 14 and 15).
The carrying amounts of foreign currency contracts purchased to hedge firm
foreign currency commitments are deferred and included in the measurement of the
related foreign currency transactions. These hedges are scheduled to mature
coincident with the timing of the underlying foreign currency commitments and
transactions. Gains and losses from other foreign currency transactions are
included in selling, general and administrative expenses on the income statement
and were not material in any year.
The amount to be paid or received from interest rate swaps is charged or
credited to interest expense over the lives of the interest rate swap
agreements. Any gains realized upon the termination of interest rate swap
agreements are deferred and amortized as an adjustment to interest expense of
the underlying liabilities over the original term of the interest rate swap
agreements.
FOREIGN CURRENCY
Foreign currency assets and liabilities are generally translated into U. S.
dollars using the exchange rates in effect at the statement of financial
position date. Results of operations are generally translated using the average
exchange rates throughout the period. The effects of exchange rate fluctuations
on translation of assets, liabilities and hedges of cash dividend payments from
subsidiaries are reported as accumulated foreign currency translation and
increased/(reduced) stockholders' equity $33.5 in 1995, $54.5 in 1994 and $(3.0)
in 1993.
POSTEMPLOYMENT BENEFITS
The enactment by Congress of the Omnibus Budget Reconciliation Act of 1993,
which made Medicare the primary provider of medical benefits for disabled former
employees after 29 months of disability, reduced the accumulated benefit
obligation for postemployment benefits by $33.4 in 1993. This change in estimate
is included in cost of sales on the income statement.
NOTE 2 -- ACQUISITIONS AND SALE OF ASSETS
Honeywell acquired nine companies in 1995, 15 companies in 1994 and eight
companies in 1993 for $37.7, $104.6 and $14.2 in cash, respectively. These
acquisitions were accounted for as purchases, and accordingly, the assets and
liabilities of the acquired entities have been recorded at their estimated fair
values at the dates of acquisition. The excess of purchase price over the
estimated fair values of the net assets acquired, in the amount of $32.4 in
1995, $87.4 in 1994 and $11.8 in 1993, has been recorded as goodwill and is
amortized over estimated useful lives. The pro forma results for 1995, 1994 and
1993, assuming these acquisitions had been made at the beginning of the year,
would not be significantly different from reported results.
In 1993, Honeywell sold its Keyboard Division to Key Tronic Corporation for
$29.7 in cash, notes and common stock. Proceeds from other asset sales,
including the collection of notes receivable and sale of stock received from
asset sales made in previous years, amounted to $8.1 in 1995, $8.6 in 1994 and
$22.9 in 1993. Gains and losses from asset sales were not material in any year
and are included in selling, general and administrative expenses on the income
statement.
26
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
NOTE 3 -- LITIGATION SETTLEMENTS
On April 16, 1993, Honeywell announced the settlement of its lawsuits
against the Unisys Corporation and other parties in connection with Honeywell's
1986 purchase of the Sperry Aerospace Group. Honeywell received $70.0 in cash
and notes and recorded a gain of $22.4 in 1993 to offset previously incurred
costs associated with the matter. In addition, the portion of the purchase price
originally allocated to goodwill and other intangibles was reduced by $47.6.
Honeywell has reached agreement with various camera manufacturers for their
use of Honeywell's patented automatic focus camera technology. The total of all
one-time settlements recorded in these matters, after associated expenses,
resulted in a gain of $10.2 in 1993. Several settlements also included licensing
agreements that require the payment of royalties to Honeywell based upon the
amount of product manufactured or sold by the licensee. Autofocus royalty income
from the licensing agreements amounted to $8.2 in 1994 and $31.4 in 1993, and is
included in selling, general and administrative expenses on the income
statement. Autofocus royalty income from licensing agreements was not material
in 1995.
NOTE 4 -- SPECIAL CHARGES
In December 1994, Honeywell's management, with the approval of the board of
directors, committed itself to a plan of action and recorded special charges of
$62.7. The actions undertaken included a continuation of right-sizing the Space
and Aviation Control business segment, a worldwide consolidation of
manufacturing capacity, a streamlining and realignment of the overhead structure
and corporate expense reductions. Special charges of $51.2 were recorded in 1993
for productivity initiatives to strengthen the company's competitiveness.
Special charges include costs for work force reductions, worldwide facilities
consolidation and other cost accruals.
Work force reduction costs primarily include severance costs related to
involuntary termination programs instituted to improve efficiency and reduce
costs. These costs amounted to $52.4 in 1994 and $43.7 in 1993. As a result of
the 1994 plan, approximately 1,200 employees were terminated. Total expenditures
of $42.9 in 1995 included $38.3, $3.8 and $0.8 related to costs incurred in
1994, 1993 and 1992, respectively. Total expenditures of $36.0 in 1994 included
$2.9, $26.4 and $6.7 related to costs incurred in 1994, 1993 and 1992,
respectively. Total expenditures of $49.8 in 1993 included $7.8 and $42.0
related to costs incurred in 1993 and 1992, respectively. Special charges of
$8.0 from 1994 remain to be paid out as a result of longer-term agreements.
Facilities consolidation costs are primarily associated with consolidations
of branch office space and product lines to restructure and streamline
Honeywell's operations. These costs amounted to $10.3 in 1994 and $2.0 in 1993.
Total expenditures of $11.4 in 1995 included $6.9, $0.4 and $4.1 related to
costs incurred in 1994, 1993 and 1992, respectively. Total expenditures of $8.5
in 1994 included $1.6 and $6.9 related to costs incurred in 1993 and 1992,
respectively. Total expenditures of $26.2 in 1993 related to costs incurred in
1992. Special charges of $2.6 from 1994 and $0.9 from 1992 remain to be paid out
as a result of lease costs associated with vacated facilities.
Other cost accruals include costs of exiting several product lines which
were no longer considered complementary to Honeywell's businesses and amounted
to $5.5 in 1993. Total expenditures of $5.5 in 1994 related to costs incurred in
1993. Total expenditures of $17.0 in 1993 related to costs incurred in 1992.
Cash flows from operating activities have funded and are expected to fund
all special charges.
27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
NOTE 5 -- INCOME TAXES
The components of income before income taxes consist of the following:
[Download Table]
1995 1994 1993
------ ------ ------
Domestic..................................... $285.4 $208.4 $316.9
Foreign...................................... 220.1 161.3 161.6
------ ------ ------
$505.5 $369.7 $478.5
The provision for income taxes on that income is as follows:
[Download Table]
1995 1994 1993
------ ------ ------
Current tax expense
United States.............................. $ 39.8 $ 33.8 $ 81.7
Foreign.................................... 59.9 40.6 36.0
State and local............................ 8.9 2.9 11.3
------ ------ ------
Total current.............................. 108.6 77.3 129.0
------ ------ ------
Deferred tax expense
United States.............................. 41.7 13.0 17.9
Foreign.................................... 17.5 (0.8) 5.8
State and local............................ 4.1 1.3 3.6
------ ------ ------
Total deferred............................. 63.3 13.5 27.3
------ ------ ------
Provision for income taxes................... $171.9 $ 90.8 $156.3
A favorable tax settlement reduced the 1994 provision for income taxes by
$37.6 ($0.29 per share).
The enactment by Congress of the Omnibus Budget Reconciliation Act of 1993,
which raised the U.S. federal statutory income tax rate for corporations from 34
percent to 35 percent retroactive to January 1, 1993, did not have a material
impact on the 1993 provision for income taxes; however, the enactment of this
legislation did result in a one-time gain of $9.2 ($0.07 per share) in 1993 from
the revaluation of deferred tax assets.
A reconciliation of the provision for income taxes to the amount computed
using U.S. federal statutory rates is as follows:
[Download Table]
1995 1994 1993
------ ------ ------
Taxes on income at U.S. federal statutory
rates....................................... $176.9 $129.4 $167.5
Tax effects of foreign income................ (11.7) (15.5) (26.0)
State taxes.................................. 9.9 4.2 10.9
Tax effect of settlement..................... (37.6)
Adjustments to effective tax rates used in
recording tax assets and liabilities........ 2.7
Other........................................ (3.2) 7.6 3.9
------ ------ ------
Provision for income taxes................... $171.9 $ 90.8 $156.3
Interest costs related to prior years' tax issues are included in the
provision for income taxes. Taxes paid were $128.3 in 1995, $79.4 in 1994 and
$111.2 in 1993.
28
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
NOTE 5 -- INCOME TAXES (CONTINUED)
Deferred income taxes are provided for the temporary differences between the
financial reporting basis and the tax basis of Honeywell's assets and
liabilities. Temporary differences comprising the net deferred taxes shown on
the statement of financial position are:
[Download Table]
1995 1994
------ ------
Employee benefits............................ $101.6 $142.2
Miscellaneous accruals....................... 76.4 95.2
Excess of tax over book
depreciation/amortization................... (8.4) (24.0)
Asset valuation reserves..................... 37.6 43.0
Long-term contracts.......................... 16.0 4.2
State taxes.................................. 24.3 28.5
Pension liability adjustment................. 12.7 3.7
Other........................................ (53.4) (26.6)
------ ------
$206.8 $266.2
The components of net deferred taxes shown on the statement of financial
position are:
[Download Table]
1995 1994
------ ------
Deferred tax assets.......................... $463.7 $463.8
Deferred tax liabilities..................... 256.9 197.6
Provision has not been made for U.S. or additional foreign taxes on $585.2
of undistributed earnings of international subsidiaries, as those earnings are
considered to be permanently reinvested in the operations of those subsidiaries.
It is not practicable to estimate the amount of tax that might be payable on the
eventual remittance of such earnings.
At December 31, 1995, foreign subsidiaries had tax operating loss
carryforwards of $13.6.
NOTE 6 -- FOREIGN CURRENCY
Honeywell has entered into various foreign currency exchange contracts
(primarily Belgian francs, Deutsche marks and Canadian dollars) designed to
minimize its exposure to exchange rate fluctuations on foreign currency
transactions. Honeywell only uses foreign currency exchange contracts to hedge
underlying exposures such as non-functional currency receivables and payables
and foreign currency imports and exports. Company policy prohibits speculation
in foreign currency contracts.
Foreign exchange contracts reduce Honeywell's overall exposure to exchange
rate movements, since the gains and losses on these contracts offset losses and
gains on the assets, liabilities and transactions being hedged. Honeywell hedges
a significant portion of all known foreign exchange exposures, including
intercompany transactions. The notional amount of Honeywell's outstanding
foreign currency contracts, consisting of forwards, purchased options and swaps
was approximately $1,262.2 and $1,088.6 at December 31, 1995, and 1994,
respectively. These contracts generally have a term of less than one year.
NOTE 7 -- INVESTMENTS IN DEBT AND EQUITY SECURITIES
In 1994, Honeywell adopted Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities," which
specifies certain accounting and reporting for investments in equity securities
that have readily determinable fair values and for all investments in debt
securities.
29
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
NOTE 7 -- INVESTMENTS IN DEBT AND EQUITY SECURITIES (CONTINUED)
Honeywell's investments in held-to-maturity securities are reported at
amortized cost in the statement of financial position as follows:
[Download Table]
1995 1994
------ ------
Cash equivalents............................. $161.6 $124.9
Short-term investments....................... 9.0 6.6
Investments and advances..................... 6.9 12.9
------ ------
$177.5 $144.4
Held-to-maturity securities generally mature within one year and include the
following:
[Download Table]
1995 1994
------ ------
Time deposits with financial institutions.... $ 53.4 $ 85.8
Commercial paper............................. 109.3 42.4
Other........................................ 14.8 16.2
------ ------
$177.5 $144.4
Honeywell's purchases of held-to-maturity securities, consisting primarily
of commercial paper amounted to $3,528.0 and $1,674.8 in 1995 and 1994,
respectively. Proceeds from maturities of held-to-maturity securities amounted
to $3,494.3 and $1,673.9 in 1995 and 1994, respectively. Honeywell has no
investments in trading securities, and available-for-sale securities are not
material. The estimated aggregate fair value of these securities approximates
their carrying amounts in the statement of financial position. Gross unrealized
holding gains and losses were not material in any year.
NOTE 8 -- RECEIVABLES
Receivables have been reduced by an allowance for doubtful accounts as
follows:
[Enlarge/Download Table]
1995 1994
----------- -----------
Receivables, current............................................................... $ 34.5 $ 31.1
Long-term receivables.............................................................. 0.7 0.7
Receivables include approximately $20.1 in 1995 and $21.9 in 1994 billed to
customers but not paid pursuant to contract retainage provisions. These balances
are due upon completion of the contracts, generally within one year.
Unbilled receivables related to long-term contracts amount to $314.0 and
$295.9 at December 31, 1995, and 1994, respectively, and are generally billable
and collectible within one year.
Long-term, interest-bearing notes receivable from the sale of assets have
been reduced by valuation reserves of $1.8 in 1995 and $1.9 in 1994 to an amount
that approximates realizable value.
In 1992, Honeywell entered into a three-year agreement, with a large
international banking institution, whereby it can sell an undivided interest in
a designated pool of trade accounts receivable up to a maximum of $50.0 on an
ongoing basis and without recourse. As collections reduce accounts receivable
sold, Honeywell may sell an additional undivided interest in new receivables to
bring the amount sold up to the $50.0 maximum. Proceeds received from the sale
of receivables are included in cash flows from operating activities in the
statement of cash flows and amounted to $22.4 in 1995, $34.4 in 1994 and $193.7
in 1993. The uncollected balance of receivables sold amounted to $1.5 and $2.4
at December 31, 1995, and 1994, respectively, and averaged $2.7 and $4.2 during
those respective years. The discount recorded on sale of receivables is included
in selling, general and administrative
30
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
NOTE 8 -- RECEIVABLES (CONTINUED)
expenses on the income statement and amounted to $0.2, $0.4 and $0.7 in 1995,
1994 and 1993, respectively. Honeywell, as agent for the purchaser, retains
collection and administrative responsibilities for the participating interests
sold.
NOTE 9 -- INVENTORIES
[Enlarge/Download Table]
1995 1994
--------- ---------
Finished goods........................................................ $ 356.6 $ 297.4
Inventories related to long-term contracts............................ 73.6 89.1
Work in process....................................................... 159.5 156.9
Raw materials and supplies............................................ 204.7 216.8
--------- ---------
$ 794.4 $ 760.2
Inventories related to long-term contracts are net of payments received from
customers relating to the uncompleted portions of such contracts in the amounts
of $56.4 and $32.5 at December 31, 1995, and 1994, respectively.
NOTE 10 -- PROPERTY, PLANT AND EQUIPMENT
[Enlarge/Download Table]
1995 1994
--------- ----------
Land.................................................................. $ 77.7 $ 78.2
Buildings and improvements............................................ 585.8 623.4
Machinery and equipment............................................... 2,100.3 1,937.3
Construction in progress.............................................. 93.3 77.9
--------- ----------
$ 2,857.1 $ 2,716.8
NOTE 11 -- FOREIGN SUBSIDIARIES
The following is a summary of financial data pertaining to foreign
subsidiaries:
[Enlarge/Download Table]
1995 1994 1993
--------- ---------- ----------
Net income................................................ $ 142.9 $ 121.5 $ 119.8
Assets.................................................... $ 1,849.4 $ 1,742.3 $ 1,546.5
Liabilities............................................... 802.8 726.4 620.5
--------- ---------- ----------
Net assets................................................ $ 1,046.6 $ 1,015.9 $ 926.0
Insofar as can be reasonably determined, there are no foreign exchange
restrictions that materially affect the financial position or the operating
results of Honeywell and its subsidiaries.
31
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
NOTE 12 -- INVESTMENTS IN OTHER COMPANIES
Following is a summary of financial data pertaining to companies 20 to 50
percent owned. The principal company included is Yamatake-Honeywell Co., Ltd.,
of which Honeywell owns 24.2 percent of the outstanding common stock. This
investment had a market value of $316.3 and $327.3 at December 31, 1995, and
1994, respectively.
[Download Table]
1995 1994 1993
-------- -------- --------
Sales........................................ $2,065.1 $1,877.0 $1,866.7
Gross profit................................. 743.5 680.7 682.4
Net income................................... 54.2 48.4 69.8
Equity in net income......................... 13.6 10.5 17.8
Current assets............................... $1,400.6 $1,371.4 $1,297.0
Noncurrent assets............................ 598.8 616.8 588.2
-------- -------- --------
1,999.4 1,988.2 1,885.2
-------- -------- --------
Current liabilities.......................... 742.6 841.6 704.5
Noncurrent liabilities....................... 327.8 225.8 359.3
-------- -------- --------
1,070.4 1,067.4 1,063.8
-------- -------- --------
Net assets................................... $ 929.0 $ 920.8 $ 821.4
Equity in net assets......................... $ 236.8 $ 225.5 $ 200.3
NOTE 13 -- INTANGIBLE ASSETS
Intangible assets have been reduced by accumulated amortization as follows:
[Download Table]
1995 1994
-------- --------
Goodwill..................................... $ 49.2 $ 42.3
Patents, licenses and trademarks............. 75.8 175.4
Software and other intangibles............... 168.1 152.4
NOTE 14 -- DEBT
SHORT-TERM DEBT
Honeywell had general purpose lines of credit available totaling $1,089.2 at
December 31, 1995. Committed revolving credit lines with 21 banks total $725.0,
which management believes is adequate to meet its financing requirements,
including support of commercial paper and bank note borrowings. These lines have
commitment fee requirements. There were no borrowings on these lines at December
31, 1995. The remaining credit facilities of $364.2 have been arranged by
non-U.S. subsidiaries in accordance with customary lending practices in their
respective countries of operation. Borrowings against these lines amounted to
$5.3 at December 31, 1995. The weighted-average interest rate on short-term
borrowings outstanding at December 31, 1995, and 1994, respectively, was as
follows: commercial paper, 6.0 percent and 5.7 percent; and notes payable, 6.5
percent and 5.8 percent.
Short-term debt consists of the following:
[Download Table]
1995 1994
-------- --------
Commercial paper............................. $ 65.0 $ 125.0
Notes payable................................ 62.8 102.2
Current maturities of long-term debt......... 184.6 133.4
-------- --------
$ 312.4 $ 360.6
32
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
NOTE 14 -- DEBT (CONTINUED)
LONG-TERM DEBT
[Enlarge/Download Table]
1995 1994
--------- ---------
Honeywell Inc.
8% dual-currency yen/U.S. dollar notes due 1995......................... $ 120.2
7 7/8% due 1996......................................................... $ 100.0 100.0
6 1/4% Deutsche mark bonds due 1997..................................... 104.7 95.2
7.15% to 7.71% medium-term notes due 1998............................... 50.0 30.0
7.36% to 7.46% medium-term notes due 1999............................... 70.5 70.5
7.35% medium-term notes due 2000........................................ 75.0
7.45% medium-term notes due 2001........................................ 16.0
7.48% medium-term notes due 2002........................................ 10.0
8 5/8% due 2006......................................................... 100.0 100.0
9 1/2% to 10 1/2% due 2003 to 2010...................................... 2.0 10.2
Subsidiaries
9.6% Canadian dollar notes due 1996..................................... 84.4 82.0
7.0% to 10.0% due 1996 to 2001, various currencies...................... 53.0 26.8
--------- ---------
665.6 634.9
Less amount included in short-term debt................................. 184.6 133.4
--------- ---------
$ 481.0 $ 501.5
The 8 percent dual-currency yen/U.S. dollar notes matured in August 1995.
These notes were repaid at a fixed exchange rate and were linked to a currency
exchange agreement that resulted in a fixed U.S. dollar interest cost of 10.5
percent.
The 6 1/4 percent Deutsche mark bonds due 1997 are linked to a currency
exchange agreement that converts principal and interest payments into fixed U.S.
dollar obligations with an interest cost of 8.17 percent.
In August 1994, Honeywell initiated a $500.0 medium-term note program
whereby it may issue notes with maturities of nine months to 30 years
denominated in U.S. dollars or foreign currencies with fixed or variable
interest rates. Honeywell issued $121.0 and $100.5 of U.S. dollar fixed-rate
medium-term notes in 1995 and 1994, respectively.
Honeywell utilizes interest rate swaps to manage its interest rate exposures
and its mix of fixed and floating interest rates. In 1992, Honeywell entered
into interest rate swap agreements effectively converting $100.0 of its 8 5/8
percent debentures due 2006 from fixed-rate debt to floating-rate debt based on
six-month LIBOR rates. During 1993, $50.0 of the $100.0 swap was terminated
resulting in a gain of $0.9, which was amortized over the remaining life of the
swap agreement. In 1993, Honeywell entered into interest rate swap agreements
effectively converting the 9.6 percent Canadian dollar notes due 1996 to
floating-rate debt based on three-month Canadian bankers acceptance rates. In
1994, Honeywell entered into interest rate swap agreements effectively
converting $30.0 of medium-term notes due 1998 and $70.5 of medium-term notes
due 1999 to floating rate debt based on three-month LIBOR rates. In 1995,
interest rate swap agreements were initiated to effectively convert $40.0 of
medium-term notes back to fixed-rate debt. The swap agreements for the 9.6
percent Canadian dollar notes expire in December 1996 and for the medium-term
notes: $20.0 in December 1996, $20.0 in July 1997, $20.0 in May 1998, $10.0 in
September 1998, $50.0 in August 1999 and $20.5 in September 1999. The swap
agreement for 8 5/8 percent debentures expired in September 1995.
33
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
NOTE 14 -- DEBT (CONTINUED)
Annual sinking-fund and maturity requirements for the next five years on
long-term debt outstanding at December 31, 1995, are as follows:
[Download Table]
1996.............................................. $ 184.6
1997.............................................. 108.9
1998.............................................. 97.5
1999.............................................. 71.1
2000.............................................. 75.1
Interest paid amounted to $86.0, $69.1 and $63.9 in 1995, 1994 and 1993,
respectively.
NOTE 15 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
All financial instruments are held for purposes other than trading. The
estimated fair values of all nonderivative financial instruments approximate
their carrying amounts in the statement of financial position with the exception
of long-term debt. The estimated fair value of long-term debt is based on quoted
market prices for the same or similar issues or on current rates available to
Honeywell for debt of the same remaining maturities. The carrying amount of
long-term debt was $665.6 and $634.9 at December 31, 1995, and 1994,
respectively; and the fair value was $702.6 and $630.3 at December 31, 1995, and
1994, respectively.
The carrying amount of interest rate swaps was zero at December 31, 1995 and
1994. The gross unrealized market loss on interest rate swaps was $4.7 and $7.5
at December 31, 1995, and 1994, respectively. The carrying amount of foreign
currency contracts was $25.7 and $18.3 at December 31, 1995, and 1994,
respectively. The gross unrealized market gain on foreign currency contracts was
$32.5 and $26.6 and the gross unrealized market loss was $27.8 and $28.3 at
December 31, 1995, and 1994, respectively. The estimated fair value of interest
rate swaps and foreign currency contracts, which is the gross unrealized market
gain or loss, is based primarily on quotes obtained from various financial
institutions that deal in these types of instruments.
Honeywell is exposed to credit risk to the extent of nonperformance by the
counterparties to the foreign currency contracts and the interest rate swaps
discussed above. However, the credit ratings of the counterparties, which
consist of a diversified group of financial institutions, are regularly
monitored and risk of default is considered remote.
NOTE 16 -- LEASING ARRANGEMENTS
As lessee, Honeywell has minimum annual lease commitments outstanding at
December 31, 1995, with the majority of the leases having initial periods
ranging from one to 10 years. Following is a summary of operating lease
information:
[Download Table]
OPERATING
LEASES
-----------
1996........................................................... $ 105.6
1997........................................................... 82.5
1998........................................................... 60.7
1999........................................................... 44.5
2000........................................................... 34.2
2001 and beyond................................................ 131.0
-----------
$ 458.5
Rent expense for operating leases was $143.4 in 1995, $136.9 in 1994 and
$134.2 in 1993.
34
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
NOTE 16 -- LEASING ARRANGEMENTS (CONTINUED)
Substantially all leases are for plant, warehouse, office space and
automobiles. A number of the leases contain renewal options ranging from one to
10 years.
NOTE 17 -- CAPITAL STOCK
[Enlarge/Download Table]
ADDITIONAL
COMMON PAID-IN TREASURY
STOCK CAPITAL STOCK
----------- ----------- -----------
Balance January 1, 1993............................................. $ 282.7 $ 423.8 $ (1,219.0)
Purchase of treasury stock --
6,916,868 shares.................................................. (240.0)
Issued for employee stock plans --
1,907,165 treasury shares......................................... 7.7 30.6
110,934 shares canceled........................................... (0.2)
----------- ----------- -----------
Balance December 31, 1993........................................... 282.5 431.5 (1,428.4)
Purchase of treasury stock --
5,223,800 shares.................................................. (168.0)
Issued for employee stock plans --
962,242 treasury shares........................................... 15.4 19.9
42,570 shares canceled............................................ (0.1)
----------- ----------- -----------
Balance December 31, 1994........................................... 282.4 446.9 (1,576.5)
Purchase of treasury stock --
3,090,400 shares.................................................. (129.3)
Issued for Honeywell Foundation pledge
1,000,000 treasury shares......................................... 13.4 21.7
Issued for employee stock plans --
1,814,714 treasury shares......................................... 21.0 33.9
159,296 shares canceled........................................... (0.2)
----------- ----------- -----------
Balance December 31, 1995........................................... $ 282.2 $ 481.3 $ (1,650.2)
KEY EMPLOYEE PLANS
In 1993, the Board of Directors adopted, and the stockholders approved, the
1993 Honeywell Stock and Incentive Plan. The plan, which terminates December 31,
1998, provides for the award of up to 7,500,000 shares of common stock. The
purpose of the plan is to further the growth, development and financial success
of Honeywell and its subsidiaries by aligning the personal interests of key
employees, through the ownership of shares of common stock and through other
incentives, to those of Honeywell stockholders. The plan is further intended to
provide flexibility to Honeywell in its ability to compensate key employees and
to motivate, attract and retain the services of such key employees who have the
ability to enhance the value of Honeywell and its subsidiaries. Awards made
under the plan may be in the form of stock options, restricted stock or other
stock-based awards. The plan replaced existing similar plans, and awards
currently outstanding under those plans were not affected. There were 9,099,612
shares reserved for all key employee plans at December 31, 1995.
35
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
NOTE 17 -- CAPITAL STOCK (CONTINUED)
Options to purchase common stock have been granted to key employees at 100
percent of the market price on date of grant. The following is a summary of
stock options under all plans:
[Enlarge/Download Table]
1995 1994 1993
---------- ----------- -----------
Granted --
Number of shares.................................... 1,891,333 1,001,250 969,173
Price per share..................................... $31-$48 $33-$36 $31-$38
Exercised --
Number of shares.................................... 1,248,457 320,337 1,020,769
Price per share..................................... $15-$38 $12-$33 $12-$33
Outstanding December 31 --
Number of shares.................................... 5,963,023 5,346,237 4,739,683
Price per share..................................... $15-$48 $15-$38 $12-$38
Options totaling 4,086,647 shares at prices ranging from $16 to $38 were
exercisable at December 31, 1995.
Restricted shares of common stock are issued to certain key employees as
compensation. Restricted shares are awarded with a fixed restriction period,
usually five years, or with a restriction period that may be shortened dependent
on the achievement of performance goals within a specified measurement period.
Participants have the rights of stockholders, including the right to receive
cash dividends and the right to vote. Restricted shares forfeited revert to
Honeywell at no cost. Restricted shares issued totaled 212,781 in 1995, 141,376
in 1994 and 533,995 in 1993. The cost of restricted stock is charged to income
over the restriction period and amounted to $3.2 in 1995, $5.6 in 1994 and $6.3
in 1993. At December 31, restricted shares outstanding pursuant to key employee
plans totaled 746,150 in 1995, 767,209 in 1994 and 775,861 in 1993.
EMPLOYEE STOCK MATCH PLANS
In 1990, Honeywell adopted Stock Match and Performance Stock Match plans
under which Honeywell matches, in the form of Honeywell common stock, certain
eligible U.S. employee savings plan contributions. Shares issued under the stock
match plans totaled 571,905 shares in 1995, 634,561 shares in 1994 and 643,913
shares in 1993 at a cost of $24.2, $20.7 and $22.3, respectively. There were
1,141,829 shares reserved for employee stock match plans at December 31, 1995.
STOCK PLEDGE
In 1993, Honeywell pledged to the Honeywell Foundation a five-year option to
purchase 2,000,000 shares of common stock at $33 per share. This option is
transferable to charitable organizations and exercisable in whole or in part,
subject to certain conditions, from time to time during its term. Shares
purchased under the option totaled 1,000,000 in 1995. No shares were purchased
under this option in 1994 or 1993.
PREFERENCE STOCK
Twenty-five million preference shares with a par value of $1 have been
authorized. None have been issued at December 31, 1995.
36
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
NOTE 18 -- RETAINED EARNINGS
[Enlarge/Download Table]
1995 1994 1993
--------- ---------- ----------
Balance January 1......................................... $ 2,600.4 $ 2,447.3 $ 2,247.0
Net income................................................ 333.6 278.9 322.2
Dividends
1995-$1.01 PER SHARE.................................... (128.2)
1994-$0.97 per share.................................... (125.8)
1993-$0.9075 per share.................................. (121.9)
--------- ---------- ----------
Balance December 31....................................... $ 2,805.8 $ 2,600.4 $ 2,447.3
Included in retained earnings are undistributed earnings of companies 20 to
50 percent owned, amounting to $144.7 at December 31, 1995.
NOTE 19 -- SEGMENT INFORMATION
Honeywell is a global controls company focused on creating value through
control technology. Honeywell serves customers worldwide through operations
engaged in the design, development, manufacture, marketing and service of
control solutions in three industry segments -- Home and Building Control,
Industrial Control and Space and Aviation Control.
Home and Building Control provides products and services to create
efficient, safe, comfortable environments by offering controls for heating,
ventilation, humidification and air-conditioning equipment; security and fire
alarm systems; home automation systems; energy-efficient lighting controls; and
building management systems and services. Customers include building managers
and owners; distributors and wholesalers; heating, ventilation and air
conditioning manufacturers; home builders; home owners; and original equipment
manufacturers.
Industrial Control produces systems for the automation and control of
process operations in industries such as oil refining, oil and gas drilling,
pulp and paper manufacturing, food processing, chemical manufacturing and power
generation; solid-state sensors for position, pressure, air flow, temperature
and current; precision electromechanical switches; manual controls; advanced
vision-based sensors; fiber-optic components; and solenoid valves used in fluid
control and processing industries. Customers include appliance manufacturers;
automotive companies; food processing companies; oil and gas producers; refining
and petrochemical companies; pharmaceutical companies; paper companies; and
utilities.
Space and Aviation Control is a full-line avionics supplier and systems
integrator for commercial, military and space applications, providing automatic
flight control systems; electronic cockpit displays; flight management systems;
navigation, surveillance and warning systems; severe weather avoidance systems;
and flight reference sensors. Customers include airframe manufacturers;
international, national and regional airlines; NASA; prime U.S. defense
contractors; and the U.S. Department of Defense.
The "other" category comprises primarily research and development
operations, such as Solid State Electronics Center and Honeywell Technology
Center, that are not a significant part of Honeywell's operations either
individually or in the aggregate.
Information concerning Honeywell's sales, operating profit and identifiable
assets by industry segment can be found on page 10. This information for 1995,
1994 and 1993 is an integral part of these financial statements. Sales include
external sales only. Intersegment sales are not significant. Corporate and other
assets include the assets of the entities in the "other" category and cash,
short-term investments, investments, property and deferred taxes held by
corporate.
37
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
NOTE 19 -- SEGMENT INFORMATION (CONTINUED)
Following is additional financial information relating to industry segments:
[Enlarge/Download Table]
1995 1994 1993
----------- ----------- -----------
Capital expenditures
Home and Building Control............................... $ 87.2 $ 95.6 $ 73.6
Industrial Control...................................... 73.0 73.6 72.8
Space and Aviation Control.............................. 42.9 54.9 58.4
Corporate and other..................................... 35.0 38.3 27.3
----------- ----------- -----------
$ 238.1 $ 262.4 $ 232.1
Depreciation and amortization
Home and Building Control............................... $ 87.4 $ 71.8 $ 67.9
Industrial Control...................................... 69.3 67.1 59.9
Space and Aviation Control.............................. 109.7 120.0 127.0
Corporate and other..................................... 26.5 28.5 30.1
----------- ----------- -----------
$ 292.9 $ 287.4 $ 284.9
Honeywell engages in material operations in foreign countries, the majority
of which are located in Europe. Other geographic areas of operation include
Canada, Latin America and Asia Pacific.
Following is financial information relating to geographic areas:
[Enlarge/Download Table]
1995 1994 1993
--------- ---------- ----------
External sales
United States........................................... $ 4,087.5 $ 3,824.7 $ 3,895.1
Europe.................................................. 1,858.9 1,528.5 1,441.2
Other areas............................................. 784.9 703.8 626.7
--------- ---------- ----------
$ 6,731.3 $ 6,057.0 $ 5,963.0
Transfers between geographic areas
United States........................................... $ 318.6 $ 293.3 $ 246.7
Europe.................................................. 67.1 46.3 36.9
Other areas............................................. 61.5 54.3 47.6
--------- ---------- ----------
$ 447.2 $ 393.9 $ 331.2
Total sales
United States........................................... $ 4,406.1 $ 4,118.0 $ 4,141.8
Europe.................................................. 1,926.0 1,574.8 1,478.1
Other areas............................................. 846.4 758.1 674.3
Eliminations............................................ (447.2) (393.9) (331.2)
--------- ---------- ----------
$ 6,731.3 $ 6,057.0 $ 5,963.0
38
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
NOTE 19 -- SEGMENT INFORMATION (CONTINUED)
[Enlarge/Download Table]
1995 1994 1993
--------- ---------- ----------
Operating profit
United States........................................... $ 425.4 $ 343.7 $ 384.1
Europe.................................................. 191.7 139.1 140.2
Other areas............................................. 55.7 41.2 44.4
--------- ---------- ----------
Operating profit........................................ 672.8 524.0 568.7
Interest expense........................................ (83.3) (75.5) (68.0)
Litigation settlements.................................. 32.6
Equity income........................................... 13.6 10.5 17.8
General corporate expense............................... (97.6) (89.3) (72.6)
--------- ---------- ----------
Income before income taxes.............................. $ 505.5 $ 369.7 $ 478.5
Identifiable assets
United States........................................... $ 2,331.1 $ 2,356.2 $ 2,337.5
Europe.................................................. 1,375.0 1,303.1 1,111.4
Other areas............................................. 461.4 434.9 357.1
Corporate............................................... 892.7 791.7 792.1
--------- ---------- ----------
$ 5,060.2 $ 4,885.9 $ 4,598.1
Honeywell transfers products from one geographic region for resale in
another. These transfers are priced to provide both areas with an equitable
share of the overall profit.
Operating profit is net of provisions for special charges amounting to $62.7
and $51.2 in 1994 and 1993, respectively, (see Note 4) as follows: United
States, $23.2 and $22.4; Europe, $29.6 and $20.3; other areas, $9.9 in 1994.
General corporate expense includes special charges of $8.5 in 1993.
General corporate expense has been reduced by royalty income of $8.2 in 1994
and $31.4 in 1993 (see Note 3).
NOTE 20 -- PENSION PLANS
Honeywell and its subsidiaries have noncontributory defined benefit pension
plans that cover substantially all of their U.S. employees. The plan covering
non-union employees provides pension benefits based on employee average earnings
during the highest paid 60 consecutive calendar months of employment during the
10 years prior to retirement. The plan covering union employees provides pension
benefits of stated amounts for each year of credited service. Funding for these
plans is provided solely through contributions from Honeywell determined by the
Board of Directors after consideration of recommendations from the plans'
independent actuary. Such recommendations are based on actuarial valuations of
benefits payable under the plans.
The components of net periodic pension cost for U.S. defined benefit pension
plans are as follows:
[Enlarge/Download Table]
1995 1994 1993
----------- ----------- -----------
Service cost of benefits earned during the period......... $ 50.5 $ 53.8 $ 48.3
Interest cost of projected benefit obligation............. 222.8 201.5 198.9
Actual return on assets................................... (400.8) (73.3) (225.7)
Net amortization and deferral............................. 228.9 (92.6) 69.3
----------- ----------- -----------
$ 101.4 $ 89.4 $ 90.8
39
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
NOTE 20 -- PENSION PLANS (CONTINUED)
Following is a summary of assumptions used in the accounting for the U.S.
defined benefit plans.
[Enlarge/Download Table]
1995 1994 1993
------------- ------------- -------------
Discount rate used in determining present values................... 7.5% 8.5% 7.5%
Annual increase in future compensation levels...................... 3.5% 4.5% 4.0%
Expected long-term rate of return on assets........................ 8.5% 8.5% 8.5%
Employees in foreign countries who are not U.S. citizens are covered by
various retirement benefit arrangements, some of which are considered to be
defined benefit pension plans for accounting purposes. The net cost of all
foreign pension plans amounted to $(3.6) in 1995, $1.2 in 1994 and $14.2 in
1993.
The components of net periodic pension cost for foreign defined benefit
pension plans are as follows:
[Enlarge/Download Table]
1995 1994 1993
--------------- ------------- -------------
Service cost of benefits earned during the period.................. $ 31.2 $ 30.3 $ 25.8
Interest cost of projected benefit obligation...................... 55.7 47.6 46.3
Actual return on assets............................................ (90.6) (43.2) (111.7)
Net amortization and deferral...................................... (3.2) (37.1) 50.7
------ ------------- -------------
$ (6.9) $ (2.4) $ 11.1
Assumptions used in the accounting for foreign defined benefit plans were:
[Enlarge/Download Table]
1995 1994 1993
------------- ------------- -------------
Discount rate used in determining present values................... 4.5-9.5% 4.5-9.0% 5.0-9.0%
Annual increase in future compensation levels...................... 2.0-7.25% 2.0-8.0% 2.0-8.0%
Expected long-term rate of return on assets........................ 5.5-9.0% 5.5-9.5% 6.0-9.5%
The plans' funded status as of September 30 and amounts recognized in
Honeywell's statement of financial position for its pension plans are summarized
below.
[Enlarge/Download Table]
Plans Whose Plans Whose
Assets Exceed Accumulated
Accumulated Benefits
1995 (U.S. AND FOREIGN) Benefits Exceed Assets
----------------------------------------------------------------------------------- ------------- -------------
Actuarial present value of benefit obligations:
Vested benefit obligation........................................................ $ (503.3) $ (2,778.7)
Accumulated benefit obligation................................................... $ (506.5) $ (2,988.4)
Projected benefit obligation..................................................... $ (631.4) $ (3,236.0)
Plan assets at fair value.......................................................... 809.2 2,740.5
------------- -------------
Projected benefit obligation (in excess of) less than plan assets.................. 177.8 (495.5)
Remaining unrecognized net transition obligation (asset)........................... (68.6) 11.1
Unrecognized prior service cost.................................................... 3.8 205.9
Unrecognized net (gain) loss....................................................... (34.6) 259.8
Fourth-quarter 1995 contributions to plans......................................... 36.1
Adjustment to recognize minimum liability.......................................... (220.2)
------------- -------------
Overfunded (unfunded) pension asset (liability) recognized in the statement of
financial position................................................................ $ 78.4 $ (202.8)
40
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
NOTE 20 -- PENSION PLANS (CONTINUED)
[Enlarge/Download Table]
Plans Whose Plans Whose
Assets Exceed Accumulated
Accumulated Benefits
1994 (U.S. and Foreign) Benefits Exceed Assets
----------------------------------------------------------------------------------- ------------- -------------
Actuarial present value of benefit obligations:
Vested benefit obligation........................................................ $ (409.2) $ (2,412.7)
Accumulated benefit obligation................................................... $ (414.7) $ (2,581.3)
Projected benefit obligation..................................................... $ (587.6) $ (2,847.8)
Plan assets at fair value.......................................................... 723.8 2,386.9
------------- -------------
Projected benefit obligation (in excess of) less than plan assets.................. 136.2 (460.9)
Remaining unrecognized net transition obligation (asset)........................... (76.3) 5.2
Unrecognized prior service cost.................................................... 1.7 233.4
Unrecognized net loss.............................................................. 10.6 160.4
Fourth-quarter 1994 contributions to plans......................................... 24.8
Adjustment to recognize minimum liability.......................................... (129.4)
------------- -------------
Overfunded (unfunded) pension asset (liability) recognized in the statement of
financial position................................................................ $ 72.2 $ (166.5)
Adjustments recorded to recognize the minimum liability required for defined
benefit pension plans whose accumulated benefits exceed assets amounted to
$220.2 in 1995 and $129.4 in 1994. A corresponding amount was recognized as an
intangible asset to the extent of unrecognized prior service cost and
unrecognized transition obligation. At December 31, 1995, $32.6 of excess
minimum liability resulted in a reduction in stockholders' equity, net of income
taxes, of $19.9. At December 31, 1994, $9.6 of excess minimum liability resulted
in a reduction in stockholders' equity, net of income taxes, of $5.9.
Plan assets are held by trust funds devoted to servicing pension benefits
and are not available to Honeywell until all covered benefits are satisfied
after a plan is terminated. The assets held by the trust funds consist of a
diversified portfolio of fixed-income investments and equity securities.
NOTE 21 -- POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Substantially all of Honeywell's domestic and Canadian employees who retire
from Honeywell between the ages of 55 and 65 with 10 or more years of service
are eligible to receive health-care benefits, until age 65, identical to those
available to active employees. Honeywell funds postretirement benefits on a
pay-as-you-go basis.
The components of net periodic postretirement benefit cost are as follows:
[Enlarge/Download Table]
1995 1994 1993
-------- -------- --------
Service cost of benefits earned during the period........... $ 11.5 $ 10.4 $ 11.5
Interest cost on accumulated postretirement benefit
obligation................................................. 23.1 18.0 22.2
Net amortization............................................ 1.1 0.5
-------- -------- --------
$ 35.7 $ 28.9 $ 33.7
41
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
NOTE 21 -- POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
The amounts recognized in Honeywell's statement of financial position are as
follows:
[Download Table]
1995 1994
------ ------
Accumulated postretirement benefit obligation:
Retirees.................................................. $ 90.4 $ 87.7
Fully eligible active plan participants................... 63.8 58.7
Other active plan participants............................ 175.5 151.8
Unrecognized prior service cost........................... (6.9) (7.7)
Unrecognized net gain (loss).............................. (14.8) 2.3
------ ------
Accrued postretirement benefit cost......................... $308.0 $292.8
The discount rate used in determining the APBO was 7.0 percent in 1995 and
8.0 percent in 1994. The assumed health-care cost trend rate used in measuring
the APBO was 8.2 percent in 1996, then declining by 0.5 percent per year to an
ultimate rate of 5.5 percent. The health-care cost trend rate assumption has a
significant effect on the amounts reported. For example, a one percent increase
in the health-care trend rate would increase the APBO by 11.3 percent at
December 31, 1995, and the net periodic postretirement benefit cost by 13.6
percent for 1995.
NOTE 22 -- CONTINGENCIES
LITTON LITIGATION
On March 13, 1990, Litton Systems, Inc. filed suit against Honeywell in U.S.
District Court, Central District of California, alleging Honeywell patent
infringement relating to the process used by Honeywell to coat mirrors
incorporated in its ring laser gyroscopes; attempted monopolization and
predatory pricing 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. Honeywell
generally denied Litton's allegations, contested both the validity and
infringement of the patent, and alleged that the patent had been obtained by
Litton's inequitable conduct before the United States Patent and Trademark
Office. Honeywell also filed counterclaims against Litton alleging, among other
things, that Litton's business and litigation conduct violated federal and state
laws, causing Honeywell considerable damage and expense.
On January 9, 1995, Judge Mariana Pfaelzer of the U.S. District Court set
aside an August 1993 jury verdict and damage award of $1,200.0 against Honeywell
in the patent and interference with contract case. She ruled, among other
things, that the Litton patent was unenforceable because it was obtained by
inequitable conduct and invalid because it was an invention that would have been
obvious from combining existing processes. She further ruled that if her
judgment were ever subsequently vacated or reversed on appeal, Honeywell would
be granted a new trial on the issue of damages because the jury's 1993 award was
inconsistent with the clear weight of the evidence and permitting it to stand
would constitute a miscarriage of justice. Litton has appealed to the Court of
Appeals for the Federal Circuit, Washington, D.C. Briefs for the appeal have
been submitted by the parties and oral arguments were presented December 8,
1995. Honeywell believes that Judge Pfaelzer's rulings will be upheld on appeal.
As a result, no provision has been made in the financial statements with respect
to this contingent liability.
The trial for the antitrust case began on November 20, 1995, before Judge
Pfaelzer and a different jury. Prior to the jury's deliberations in the
antitrust trial, the court dismissed, for failure of proof, Litton's contentions
that Honeywell engaged in below-cost predatory pricing, illegal tying, bundling
and illegally acquiring Sperry Avionics in 1986. The case was submitted to the
jury on two claims,
42
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
NOTE 22 -- CONTINGENCIES (CONTINUED)
monopolization and attempt to monopolize, both based on Litton's allegations
that Honeywell entered into certain exclusive dealings and penalty arrangements
with aircraft manufacturers and airlines to exclude Litton from the commercial
aircraft market. On February 29, 1996, the jury returned a $234 million verdict
against Honeywell for the monopolization claim. On March 1, 1996, the jury
indicated that it was unable to reach a verdict on damages for the attempted
monopolization claim, and a mistrial was declared on that claim.
Honeywell continues to maintain that it competed vigorously and lawfully in
the inertial navigation business and will continue to defend itself against
Litton's allegations. Honeywell believes that the jury's partial verdict should
be overturned because Litton (i) failed to prove essential elements of liability
and (ii) failed to submit competent evidence to support its claim for damages by
offering only a speculative, all-or-nothing $298.5 million damage study.
Honeywell will file post-verdict motions with the trial court asking that
judgment be granted in favor of Honeywell as a matter of law or, in the
alternative, for a new trial, and will argue important procedural and other
matters which could dispose of this case. If the $234 million jury verdict
withstands post-verdict motions, in whole or in part, any dollar judgment will
be trebled under federal antitrust laws and will be appealed by Honeywell. The
case will conclude only when the trial and appellate courts resolve all of the
legal issues that could reduce or eliminate the jury verdict. As a result, no
provision has been made in the financial statements with respect to this
contingent liability.
ENVIRONMENTAL MATTERS
Honeywell's manufacturing sites generate both hazardous and nonhazardous
wastes, the treatment, storage, transportation and disposal of which are subject
to various local, state and national laws relating to protection of the
environment. Honeywell is in varying stages of investigation or remediation of
potential, alleged or acknowledged contamination at currently or previously
owned or operated sites and at off-site locations where its wastes were taken
for treatment or disposal. In connection with the cleanup of various off-site
locations, Honeywell, along with a large number of other entities, has been
designated a potentially responsible party (PRP) by the U.S. Environmental
Protection Agency under the Comprehensive Environmental Response, Compensation
and Liability Act or by state agencies under similar state laws (Superfund),
which potentially subject PRPs to joint and several liability for the costs of
such cleanup. In addition, Honeywell is incurring costs relating to
environmental remediation pursuant to the federal Resource Conservation and
Recovery Act. Based on Honeywell's assessment of the costs associated with its
environmental responsibilities, compliance with federal, state and local laws
regulating the discharge of materials into the environment, or otherwise
relating to the protection of the environment, has not had, and in the opinion
of Honeywell management, will not have a material effect on Honeywell's
financial position, net income, capital expenditures or competitive position.
Honeywell's opinion with regard to Superfund matters is based on its assessment
of the predicted investigation, remediation and associated costs, its expected
share of those costs and the availability of legal defenses. Honeywell's policy
is to record environmental liabilities when loss amounts are probable and
reasonably estimable.
OTHER MATTERS
Honeywell is a party to a large number of other legal proceedings, some of
which are for substantial amounts. It is the opinion of management that any
losses in connection with these matters will not have a material effect on
Honeywell's net income, financial position or liquidity.
Honeywell has entered into letter of credit agreements with various
financial institutions to support certain financing instruments and insurance
policies aggregating approximately $135.0 at December 31, 1995.
43
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
NOTE 23 -- QUARTERLY DATA (UNAUDITED)
[Enlarge/Download Table]
1995 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
------------------------------------------------------ ---------- ---------- ---------- ----------
Sales................................................. $1,478.7 $1,655.6 $1,680.3 $1,916.7
Cost of sales......................................... 1,013.2 1,137.8 1,148.1 1,285.1
Net income............................................ 54.7 68.9 84.2 125.8
Per share........................................... 0.43 0.54 0.66 0.99
[Enlarge/Download Table]
1994 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
------------------------------------------------------ ---------- ---------- ---------- ----------
Sales................................................. $1,347.9 $1,463.8 $1,507.6 $1,737.7
Cost of sales......................................... 917.3 1,001.8 1,011.9 1,151.1
Net income............................................ 47.7 56.9 69.4 104.9
Per share........................................... 0.36 0.44 0.54 0.81
The fourth quarter of 1994 includes special charges of $62.7, or $37.6
($0.29 per share) after income taxes (see Note 4). The fourth quarter of 1994
also includes a reduction of the provision for income taxes of $37.6 ($0.29 per
share) related to a favorable tax settlement (see Note 5).
[Download Table]
Common Stock Price
(New York Stock
Exchange
Dividends Composite)
Per Share High Low
---------- ------- -------
1995 FIRST QUARTER................................ $.25 $38 1/2 $30 3/4
SECOND QUARTER............................... .25 44 3/4 36 3/4
THIRD QUARTER................................ .25 46 1/2 40 5/8
FOURTH QUARTER............................... .26 49 1/2 39 1/4
1994 First Quarter................................ $.24 $35 1/2 $31 3/4
Second Quarter............................... .24 34 1/2 30 1/2
Third Quarter................................ .24 36 7/8 31
Fourth Quarter............................... .25 35 5/8 28 1/4
Stockholders of record on February 2, 1996, totaled 32,529.
NOTE 24 -- SUBSEQUENT EVENT
On February 12, 1996, Honeywell announced that it had entered into a
definitive agreement to acquire Duracraft Corp. for approximately $283.0 in
cash. Under the terms of the agreement, which was unanimously approved by the
boards of directors of both companies, a Honeywell subsidiary commenced an
all-cash tender offer for all the shares of Duracraft, which was concluded on
March 15 with approximately 93.4 percent of such shares being tendered.
Duracraft Corp. develops, manufactures and markets consumer household products
in five major areas: heaters, fans, humidifiers, air cleaners and vaporizers.
The acquisition will be accounted for as a purchase and will be included in the
Home and Building Control industry segment.
44
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No report on Form 8-K reporting a change in Honeywell's certifying
independent accountants has been filed within the 24 months prior to the date of
the most recent financial statements.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Pages 3 through 9 and page 25 of the Honeywell Notice of 1996 Annual Meeting
and Proxy Statement are incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Pages 14 through 22 of the Honeywell Notice of 1996 Annual Meeting and Proxy
Statement are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Page 13 of the Honeywell Notice of 1996 Annual Meeting and Proxy Statement
are incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS A PART OF THIS REPORT
1. FINANCIAL STATEMENTS
The financial statements required to be filed as part of this Annual Report
on Form 10-K are listed below with their location in this report.
[Enlarge/Download Table]
PAGE
---------
Honeywell Inc. and Subsidiaries:
Independent Auditors' Report....................................................... 21
Income Statement................................................................... 22
Statement of Financial Position.................................................... 23
Statement of Cash Flows............................................................ 24
Notes to Financial Statements...................................................... 25-44
2. FINANCIAL STATEMENT SCHEDULES
The schedules required to be filed as part of this Annual Report on Form
10-K are listed below with their location in this report.
PAGE
----
Honeywell Inc. and Subsidiaries:
Independent Auditors' Report...................................... 21
Schedules for the Years Ended December 31, 1995, 1994 and 1993:
II -- Valuation Reserves................................ 49
All schedules, other than indicated above, are omitted because of the
absence of the conditions under which they are required or because the
information required is shown in the financial statements or notes thereto.
45
3. EXHIBITS
Documents Incorporated by Reference:
[Enlarge/Download Table]
(3)(a) Restated Certificate of Incorporation of Honeywell Inc. dated June 18,
1991.
(4)(a) Rights Agreement between Honeywell Inc. and Chemical Mellon Shareholder
Services L.L.C., as Rights Agent, dated as of January 16, 1996 is
incorporated by reference to Exhibit 4 to Honeywell's Current Report on
Form 8-K dated January 31, 1996.
(4)(b) Indenture, dated as of August 1, 1994, between Honeywell Inc. and The Chase
Manhattan Bank (National Association), as Trustee for Honeywell Inc.
Medium-Term Notes, Series A is incorporated by reference to Exhibit (4)(b)
to Honeywell's Annual Report on Form 10-K for 1994.
(10)(iii)(a) Honeywell Key Employee Severance Plan, as amended is incorporated by
reference to Exhibit (10)(iii)(a) to Honeywell's Annual Report on Form 10-K
for 1994.*
(10)(iii)(b) Honeywell Supplementary Executive Retirement Plan for Mid-Career Hires, as
amended is incorporated by reference to Exhibit (10)(iii)(b) to Honeywell's
Annual Report on Form 10-K for 1994.*
(10)(iii)(c) Honeywell-Norwest Rabbi Trust Agreement, as amended is incorporated by
reference to Exhibit (10)(iii)(c) to Honeywell's Annual Report on Form 10-K
for 1994.*
(10)(iii)(d) 1993 Honeywell Stock and Incentive Plan, as amended is incorporated by
reference to Exhibit (10)(iii)(d) to Honeywell's Annual Report on Form 10-K
for 1994.*
(10)(iii)(e) 1988 Honeywell Stock and Incentive Plan, as amended is incorporated by
reference to Exhibit (10)(iii)(e) to Honeywell's Annual Report on Form 10-K
for 1994.*
(10)(iii)(h) Honeywell Supplementary Executive Retirement Plan for Compensation in
Excess of $200,000, as amended is incorporated by reference to Exhibit
(10)(iii)(h) to Honeywell's Annual Report on Form 10-K for 1994.*
(10)(iii)(i) Honeywell Supplementary Executive Retirement Plan for CECP Participants, as
amended is incorporated by reference to Exhibit (10)(iii)(i) to Honeywell's
Annual Report on Form 10-K for 1994.*
(10)(iii)(j) Honeywell Supplementary Retirement Plan, as amended is incorporated by
reference to Exhibit (10)(iii)(j) to Honeywell's Annual Report on Form 10-K
for 1994.*
(10)(iii)(k) Honeywell Supplementary Executive Retirement Plan for Benefits in Excess of
Limits Under Tax Reform Act of 1986, as amended is incorporated by
reference to Exhibit (10)(iii)(k) to Honeywell's Annual Report on Form 10-K
for 1994.*
(10)(iii)(l) Honeywell Executive Life Insurance Agreement, is incorporated by reference
to Exhibit 10(iii)(m) to Honeywell's Annual Report on Form 10-K for 1993.*
(10)(iii)(m) Form of Executive Termination Contract is incorporated by reference to
Exhibit to Honeywell's Annual Report on Form 10-K for 1994.*
(99)(ii) Honeywell Notice of 1996 Annual Meeting and Proxy Statement.**
Exhibits submitted herewith:
(3)(b) By-laws of Honeywell Inc., as amended through September 19, 1995.
(10)(iii)(f) Restricted-Stock Retirement Plan for Non-Employee Directors, as amended.*
(10)(iii)(g) Honeywell Corporate Executive Compensation Plan, as amended*
(10)(iii)(n) Honeywell Inc. Compensation Plan for Outside Directors.*
(10)(iii)(o) Honeywell Senior Management Performance Incentive Plan.*
(11) Computation of Earnings Per Share.
(12) Computation of Ratios of Earnings to Fixed Charges.
(21) Subsidiaries of Honeywell.
(23) Consent of Independent Auditors.
(24) Powers of Attorney.
46
3. EXHIBITS (CONTINUED)
[Download Table]
(27) Financial Data Schedule.
(B) REPORTS ON FORM 8-K
None
------------------------
*Management contract or compensatory plan or arrangement.
**Only the portions of Exhibit (99)(ii) specifically incorporated by reference
are deemed filed with the Commission.
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ SIGURD UELAND, JR.
____________________________________
Sigurd Ueland, Jr., Vice President
Dated: March 25, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE
-------------------- --------------------------------------------------------
M. R. BONSIGNORE Chairman of the Board and Chief Executive Officer and
Director
W. M. HJERPE Vice President and Chief Financial Officer
P. M. PALAZZARI Vice President and Controller
A. J. BACIOCCO, JR. Director
E. E. BAILEY Director
E. H. CLARK, JR. Director
W. H. DONALDSON Director
R. D. FULLERTON Director
C. M. HAPKA Director
J. J. HOWARD Director
B. E. KARATZ Director
D. L. MOORE Director
A. B. RAND Director
S. G. ROTHMEIER Director
M. W. WRIGHT Director
By: /s/ SIGURD UELAND, JR.
____________________________________
Sigurd Ueland, Jr.,
ATTORNEY-IN-FACT
March 25, 1996
48
SCHEDULE II
HONEYWELL INC. AND SUBSIDIARIES
VALUATION RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN MILLIONS)
[Enlarge/Download Table]
BALANCE AT ADDITIONS DEDUCTIONS BALANCE
BEGINNING CHARGED TO FROM AT CLOSE
OF YEAR INCOME RESERVES OF YEAR
------------- ---------------- --------------- -----------
Reserves deducted from assets to which they apply --
allowance for doubtful accounts:
RECEIVABLES -- CURRENT
--------------------------------------------------------
Year ended December 31, 1995............................ $ 31.1 $ 10.4(1) $ 7.0(2) $ 34.5
------------- ------ ------- -----------
------------- ------ ------- -----------
Year ended December 31, 1994............................ $ 24.3 $ 12.5(1) $ 5.7(2) $ 31.1
------------- ------ ------- -----------
------------- ------ ------- -----------
Year ended December 31, 1993............................ $ 26.7 $ 9.1(1) $ 11.5(2) $ 24.3
------------- ------ ------- -----------
------------- ------ ------- -----------
LONG-TERM RECEIVABLES
--------------------------------------------------------
Year ended December 31, 1995............................ $ 0.7 $ -- $ -- $ 0.7
------------- ------ ------- -----------
------------- ------ ------- -----------
Year ended December 31, 1994............................ $ 0.5 $ -- $ (0.2)(2) $ 0.7
------------- ------ ------- -----------
------------- ------ ------- -----------
Year ended December 31, 1993............................ $ 0.8 $ -- $ 0.3(2) $ 0.5
------------- ------ ------- -----------
------------- ------ ------- -----------
Reserves deducted from assets to which they apply --
valuation reserve:
LONG-TERM RECEIVABLES
--------------------------------------------------------
Year ended December 31, 1995............................ $ 1.9 $ (0.1)(1) $ -- $ 1.8
------------- ------ ------- -----------
------------- ------ ------- -----------
Year ended December 31, 1994............................ $ 3.6 $ (1.7)(1) $ -- $ 1.9
------------- ------ ------- -----------
------------- ------ ------- -----------
Year ended December 31, 1993............................ $ 2.9 $ 0.7(1) $ -- $ 3.6
------------- ------ ------- -----------
------------- ------ ------- -----------
Reserves deducted from assets to which they apply --
allowance for amortization of intangibles:
GOODWILL
--------------------------------------------------------
Year ended December 31, 1995............................ $ 42.3 $ 12.6(3) $ 5.7(4) $ 49.2
------------- ------ ------- -----------
------------- ------ ------- -----------
Year ended December 31, 1994............................ $ 34.3 $ 8.6(3) $ 0.6(4) $ 42.3
------------- ------ ------- -----------
------------- ------ ------- -----------
Year ended December 31, 1993............................ $ 30.4 $ 6.7(3) $ 2.8(4) $ 34.3
------------- ------ ------- -----------
------------- ------ ------- -----------
PATENTS, LICENSES AND TRADEMARKS
--------------------------------------------------------
Year ended December 31, 1995............................ $ 175.4 $ 24.0(3) $ 123.6(4) $ 75.8
------------- ------ ------- -----------
------------- ------ ------- -----------
Year ended December 31, 1994............................ $ 170.0 $ 24.2(3) $ 18.8(4) $ 175.4
------------- ------ ------- -----------
------------- ------ ------- -----------
Year ended December 31, 1993............................ $ 144.2 $ 25.8(3) $ -- $ 170.0
------------- ------ ------- -----------
------------- ------ ------- -----------
SOFTWARE AND OTHER INTANGIBLES
--------------------------------------------------------
Year ended December 31, 1995............................ $ 152.4 $ 20.2(3) $ 4.5(4) $ 168.1
------------- ------ ------- -----------
------------- ------ ------- -----------
Year ended December 31, 1994............................ $ 135.4 $ 19.3(3) $ 2.3(4) $ 152.4
------------- ------ ------- -----------
------------- ------ ------- -----------
Year ended December 31, 1993............................ $ 117.8 $ 17.1(3) $ (0.5)(4) $ 135.4
------------- ------ ------- -----------
------------- ------ ------- -----------
--------------------------
Notes: (1) Represents amounts included in selling, general and administrative
expenses.
(2) Represents uncollectible accounts written off, less recoveries and
translation adjustments.
(3) Represents amounts included in cost of sales.
(4) Represents removal of fully amortized amounts and translation
adjustments.
49
Dates Referenced Herein and Documents Incorporated by Reference
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