1994
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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, 1994
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 $36.00 on March 1, 1995, the aggregate
market value of the voting stock held by nonaffiliates of the registrant was
$4,562,938,836.
As of March 1, 1995, the number of shares outstanding of the registrant's
common stock, par value $1.50 per share, was 127,327,034 shares.
DOCUMENTS INCORPORATED IN PART BY REFERENCE
Incorporated Documents Location in Form 10-K
-------------------------------------------------------- ---------------------
Honeywell Notice of 1995 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 software and services to customers in the 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. These products are sold as stand-alone products or
integrated into systems. These products are generally used in indicating,
recording and automatically controlling process variables.
Under the MICRO SWITCH trademark, Honeywell manufactures solid-state sensors
(position, pressure, airflow, temperature and current), sensor interface
devices, manual controls, explosion-
1
proof switches and precision snap-acting switches, as well as proximity,
photoelectric and mercury switches and lighted/unlighted push-buttons. These
products are used in industrial, commercial, 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,
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.
Honeywell provides systems analysis and applied research and development on
systems and products, including, application software, sensors, artificial
intelligence 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 Aerospace and Defense Group 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 1994. 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 1995.
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 in which Honeywell is involved
relating to patents.
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 $3,340 million at December 31, 1994, and $3,128 million at
December 31, 1993. All but approximately $813 million of the 1994 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 that are cancelable 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 1994 Honeywell spent approximately $659.5 million on research and
development activities, including $340.5 million in customer-funded research,
relating to the development of new products or services, or the improvement of
existing products or services. Honeywell spent $742.2 million in 1993 and $703.1
million in 1992 on research and development activities, including $404.8 million
and $390.5 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 14 for further
information concerning environmental matters.
EMPLOYEES
Honeywell employed approximately 50,800 persons in total operations as of
December 31, 1994.
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 36.
4
EXECUTIVE OFFICERS OF THE REGISTRANT
POSITION AGE AT
NAME OFFICE HELD SINCE 3/1/95
-------------------------- ------------------------------------------------------------ ------------- -------------
M. R. Bonsignore (1) Chairman of the Board and Chief Executive Officer 1993 53
D. L. Moore (2) President and Chief Operating Officer 1993 58
J. R. Dewane (3) President, Space & Aviation Control 1993 60
E. D. Grayson (4) Vice President and General Counsel 1992 56
J. J. Grierson (5) Vice President, Business Development 1992 52
W. M. Hjerpe (6) Vice President and Chief Financial Officer 1994 43
E. T. Hurd (7) Senior Vice President 1995 56
B. M. McGourty (8) President, Home and Building Control 1994 57
P. M. Palazzari (9) Vice President and Controller 1994 47
M. I. Tambakeras (10) President, Industrial Automation and Control 1995 44
Officers are elected by the Board of Directors to terms of one year and until their successors are elected and
qualified.
<FN>
------------------------
(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.
From May 1989 to November 1990, he was President, Space and Aviation.
(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. Grierson was elected to this position on February 18, 1992, effective
March 1, 1992. For more than five years prior thereto he was an executive
officer of the company.
(6) 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. From March 1989 to June 1990, he was Vice President of
Finance and Administration for Home and Building and Defense and Marine
Business.
(7) Mr. Hurd was elected to this position on February 21, 1995, effective
February 1, 1995. From January 1992 to January 1995, he was President,
Industrial Control. From January 1991 to December 1991, he was Vice
President and Group Executive of Honeywell's Industrial Automation and
Control Group. From October 1989 to December 1990, he was Vice President
and General Manager of Honeywell's Industrial Automation and Control
Division.
(8) 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.
5
(9) 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.
(10) 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 21,331,600 square feet of space for use as manufacturing, office
and warehouse space, of which approximately 12,409,100 square feet is owned and
approximately 8,922,500 square feet is leased. In the judgment of management,
the facilities used by Honeywell are adequate and suitable for the purposes they
serve.
Facilities allocated for corporate use in the United States, including sales
offices, comprise approximately 3,405,800 square feet of space, of which
approximately 1,683,300 square feet is owned and approximately 1,722,500 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 184,600 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 2,472,100 square feet of
space for operations in the United States, of which approximately 1,887,900
square feet is owned and approximately 584,200 square feet is leased.
Outside the United States, Home and Building Control operations occupy
approximately 4,101,100 square feet, of which approximately 1,487,000 square
feet is owned and approximately 2,614,100 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.
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 3,191,300 square feet of space for
operations in the United States, of which approximately 2,233,200 square feet is
owned and approximately 958,100 square feet is leased.
Outside the United States, Industrial Control operations occupy
approximately 2,441,100 square feet, of which approximately 968,800 square feet
is owned and approximately 1,472,300 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.
6
Facilities in the United States comprising 300,000 square feet or more are
listed below.
MAJOR USE OF APPROXIMATE OWNED OR
LOCATION FACILITY SQUARE FEET LEASED
-------------------------- ------------------- ------------ ---------
Freeport, Ill. Manufacturing 316,000 Owned
Ft. Washington, Pa. Manufacturing 411,400 Leased
Phoenix, Az. Manufacturing 550,000 Owned
SPACE AND AVIATION CONTROL
Space and Aviation Control occupies approximately 5,166,300 square feet of
space for operations in the United States, of which approximately 3,819,100
square feet is owned and approximately 1,347,200 square feet is leased.
Outside the United States, Space and Aviation Control operations occupy
approximately 553,900 square feet, of which approximately 329,800 square feet is
owned and approximately 224,100 square feet is leased. Principal facilities
operated outside the United States are located in Canada, the United Kingdom and
Singapore.
Facilities in the United States comprising 300,000 square feet or more are
listed below.
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 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 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 has filed counterclaims against Litton
alleging, among other things, violations by Litton of various antitrust laws
including attempted monopolization of markets for inertial systems and
interference with Honeywell's relationships with suppliers.
The trial of the patent infringement and intentional interference claims
commenced June 4, 1993, and on August 31, 1993, a federal court jury in U.S.
District Court in Los Angeles returned a verdict against Honeywell on each of
these claims and awarded damages in the amount of $1.2 billion and concluded
that the patent infringement was willful. Honeywell contended that the verdict
was unsupported by the facts; that the Litton patent was invalid; and that
Honeywell's process differed from Litton's. The judge in the case held a hearing
November 22, 1993, on various issues including, among others, Honeywell's claims
that the patent was improperly obtained due to alleged "inequitable conduct" on
the part of Litton; Honeywell's other legal and equitable defenses; and Litton's
motion to enhance the damage award. On January 9, 1995, the court issued a
decision in favor of Honeywell, ruling 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. The
court further ruled that if the judgment is subsequently vacated or reversed as
a result of an appeal of the court's ruling, a new trial on the issue of damages
would be held on the ground that the jury's award was inconsistent with the
clear weight of the evidence and to permit it to
7
stand would constitute a miscarriage of justice. Litton has filed a motion to
appeal the court's ruling. The trial for the antitrust claims of Litton and
Honeywell is presently scheduled to commence in November 1995.
Honeywell believes that the court's ruling was correct and continues to
believe that Litton's claims are without merit. 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 1994.
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 Part II, Item 8 at page 43.
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 43. Further
information regarding the company's payment of dividends is set forth in Part
II, Item 7 at pages 17 and 18.
In November 1991, as part of Honeywell's program to enhance shareholder
value, the company authorized the repurchase of shares of its common stock in
open market transactions during the next five years for an amount not to exceed
$600 million. In 1992, 1993 and 1994, $189 million, $240 million and $168
million respectively, of share repurchases were made under this program.
Stockholders of record on March 1, 1995 totaled 31,829, 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)
1994 1993 1992 1991 1990 1989
-------- -------- -------- -------- -------- --------
Results of Operations
Sales................................................... $6,057.0 $5,963.0 $6,222.6 $6,192.9 $6,309.1 $6,058.6
-------- -------- -------- -------- -------- --------
Cost of sales........................................... 4,082.1 4,019.6 4,195.3 4,185.1 4,308.7 4,172.5
Research and development................................ 319.0 337.4 312.6 300.7 279.6 283.5
Selling, general and administrative..................... 1,173.8 1,075.7 1,196.8 1,150.9 1,170.0 1,127.9
Litigation settlements.................................. (32.6) (287.9)
Special charges......................................... 62.7 51.2 128.4 81.6
Interest -- net......................................... 60.2 51.0 58.5 61.4 67.6 90.3
Gain on sale of assets.................................. (21.7) (340.1)
Equity income........................................... (10.5) (17.8) (15.8) (14.6) (11.5) (33.0)
-------- -------- -------- -------- -------- --------
5,687.3 5,484.5 5,587.9 5,683.5 5,792.7 5,382.7
-------- -------- -------- -------- -------- --------
Income from continuing operations before income taxes... 369.7 478.5 634.7 509.4 516.4 675.9
Provision for income taxes.............................. 90.8 156.3 234.8 178.3 144.6 125.6
-------- -------- -------- -------- -------- --------
Income from continuing operations....................... 278.9 322.2 399.9 331.1 371.8 550.3
Income from discontinued operations..................... 10.1 53.8
Extraordinary item...................................... (8.6)
Cumulative effect of accounting changes................. (144.5)
-------- -------- -------- -------- -------- --------
Net income.............................................. $ 278.9 $ 322.2 $ 246.8 $ 331.1 $ 381.9 $ 604.1
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Earnings Per Common Share
Continuing operations................................... $ 2.15 $ 2.40 $ 2.88 $ 2.35 $ 2.45 $ 3.23
Discontinued operations................................. 0.07 0.32
Extraordinary item...................................... (0.06)
Cumulative effect of accounting changes................. (1.04)
-------- -------- -------- -------- -------- --------
Net income.............................................. $ 2.15 $ 2.40 $ 1.78 $ 2.35 $ 2.52 $ 3.55
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Cash Dividends Per Common Share........................... $ 0.97 $ 0.91 $ 0.84 $ 0.77 $ 0.70 $ 0.57
Financial Position
Current assets.......................................... $2,649.4 $2,550.2 $2,707.8 $2,698.9 $2,582.2 $2,800.7
Current liabilities..................................... 2,071.8 1,856.1 1,969.2 2,095.0 2,175.1 2,415.8
-------- -------- -------- -------- -------- --------
Working capital......................................... $ 577.6 $ 694.1 $ 738.6 $ 603.9 $ 407.1 $ 384.9
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Short-term debt......................................... $ 360.6 $ 187.9 $ 188.4 $ 168.4 $ 109.0 $ 145.6
Long-term debt.......................................... 501.5 504.0 512.1 639.8 616.3 692.5
-------- -------- -------- -------- -------- --------
Total debt.............................................. 862.1 691.9 700.5 808.2 725.3 838.1
Stockholders' equity.................................... 1,854.7 1,773.0 1,790.4 1,850.8 1,696.9 1,918.2
-------- -------- -------- -------- -------- --------
Capitalization.......................................... $2,716.8 $2,464.9 $2,490.9 $2,659.0 $2,422.2 $2,756.3
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
9
(DOLLARS AND SHARES IN MILLIONS EXCEPT PER SHARE AMOUNTS)
1994 1993 1992 1991 1990 1989
-------- -------- -------- -------- -------- --------
Sales
Home and Building Control............................... $2,664.5 $2,424.3 $2,393.6 $2,249.1 $2,196.7 $2,076.8
Industrial Control...................................... 1,835.3 1,691.5 1,743.9 1,626.8 1,653.5 1,491.4
Space and Aviation Control.............................. 1,432.0 1,674.9 1,933.1 2,132.3 2,071.3 2,004.1
Other................................................... 125.2 172.3 152.0 184.7 387.6 486.3
-------- -------- -------- -------- -------- --------
$6,057.0 $5,963.0 $6,222.6 $6,192.9 $6,309.1 $6,058.6
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Operating Profit (1)(2)
Home and Building Control............................... $ 236.5 $ 232.7 $ 193.4 $ 229.1 $ 237.0 $ 225.1
Industrial Control...................................... 206.6 189.7 156.9 224.0 219.5 136.8
Space and Aviation Control.............................. 80.9 148.1 175.8 226.1 200.4 111.5
Other................................................... (1.8) (9.5) (3.1) 18.8 20.8
-------- -------- -------- -------- -------- --------
Total operating profit.................................. 524.0 568.7 516.6 676.1 675.7 494.2
Interest expense........................................ (75.5) (68.0) (89.9) (89.4) (106.0) (135.2)
Litigation settlements.................................. 32.6 287.9
Gain on sale of assets.................................. 21.7 340.1
Equity income........................................... 10.5 17.8 15.8 14.6 11.5 33.0
General corporate expense............................... (89.3) (72.6) (95.7) (91.9) (86.5) (56.2)
-------- -------- -------- -------- -------- --------
Income before income taxes.............................. $ 369.7 $ 478.5 $ 634.7 $ 509.4 $ 516.4 $ 675.9
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Assets
Home and Building Control............................... $1,529.8 $1,327.3 $1,302.4 $1,282.8 $1,228.7 $1,202.1
Industrial Control...................................... 1,273.3 1,059.8 1,057.5 1,001.7 955.3 937.5
Space and Aviation Control.............................. 1,174.9 1,219.6 1,403.6 1,594.5 1,684.7 1,701.8
Corporate and Other..................................... 907.9 991.4 1,106.6 927.7 877.5 1,158.7
Discontinued operations................................. 258.1
-------- -------- -------- -------- -------- --------
$4,885.9 $4,598.1 $4,870.1 $4,806.7 $4,746.2 $5,258.2
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Additional Information
Average number of common shares outstanding............. 129.4 134.2 138.5 140.9 151.8 170.4
Return on average stockholders' equity.................. 15.6% 18.4% 13.8% 19.2% 20.6% 33.5%
Stockholders' equity per common share................... $ 14.57 $ 13.48 $ 13.10 $ 13.25 $ 11.99 $ 11.99
Percent of debt to total capitalization................. 32% 28% 28% 30% 30% 30%
Research and development
Honeywell-funded...................................... $ 319.0 $ 337.4 $ 312.6 $ 300.7 $ 279.6 $ 283.5
Customer-funded....................................... 340.5 404.8 390.5 373.5 417.5 460.9
Capital expenditures.................................... 262.4 232.1 244.1 240.2 251.5 268.0
Depreciation............................................ 235.3 235.3 242.8 238.5 236.1 247.8
Employees at year end................................... 50,800 52,300 55,400 58,200 60,300 65,300
<FN>
--------------------------
(1) Operating profit is net of special charges amounting to $62.7, $51.2,
$128.4 and $81.6 in 1994, 1993, 1992 and 1989, respectively, (see Note 4
to Financial Statements) as follows: Home and Building Control, $28.7,
$9.9, $42.7 and $28.4; Industrial Control, $14.4, $9.0, $38.6 and $32.7;
Space and Aviation Control, $19.6, $7.4, $34.9 and $12.1; Other, $--,
$16.4, $2.6 and $3.1; and General Corporate Expense, $--, $8.5, $9.6 and
$5.3.
(2) Operating profit is net of the additional operating expense impact of
adopting SFAS 106 (see Note 21 to Financial Statements) and SFAS 112 (see
Note 1 to Financial Statements) 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 1994 sales were $6.057 billion, compared with $5.963 billion in
1993 and $6.223 billion in 1992. Sales in the United States of $3.825 billion
were down two percent primarily due to a continuing cyclical downturn in the
Space and Aviation Control commercial aviation market and reduced government
spending. International sales, which represent 37 percent of total sales,
increased eight percent from 1993 to $2.232 billion. The international sales
increase was the result of positive sales growth of seven percent measured in
local currency, along with positive currency effects as the U.S. dollar weakened
an average of one percent against local currencies in countries where Honeywell
does business. U.S. export sales, including exports to foreign affiliates, were
$780 million in 1994, compared with $769 million in 1993 and $830 million in
1992.
COST OF SALES
Cost of sales was $4.082 billion in 1994, or 67.4 percent of sales, compared
with $4.020 billion (67.4 percent) in 1993 and $4.195 billion (67.4 percent) in
1992. Cost as a percentage of sales remained flat for 1994 despite highly
competitive conditions in all sectors of operation. Honeywell continues to
closely monitor all phases of its program to reduce operating costs and improve
margins, and margin expansion is anticipated in 1995.
RESEARCH AND DEVELOPMENT
Honeywell spent $319 million, or 5.3 percent of sales, on research and
development in 1994, compared with $337 million (5.7 percent) in 1993 and $313
million (5.0 percent) in 1992. The higher 1993 percentage reflects significant
investments in next-generation technologies. Honeywell expects to return to
approximately the same rate of R&D spending in 1995 as in 1992. Honeywell also
received $340 million in funds for customer-funded research and development in
1994, compared with $405 million in 1993 and $390 million in 1992.
OTHER EXPENSES AND INCOME
Selling, general and administrative expenses were $1.174 billion, or 19.4
percent of sales in 1994, compared with $1.076 billion (18.0 percent) in 1993
and $1.197 billion (19.2 percent) in 1992. Excluding royalties from autofocus
licensees (see Note 3 to Financial Statements on page 26), the percent of sales
would have been 19.5 percent, 18.6 percent and 19.5 percent in 1994, 1993 and
1992, respectively. The higher percentage in 1994 was primarily due to increased
legal costs. The higher percentage in 1992 was due to increased international
selling expenses. Royalty income from autofocus licensing agreements is expected
to decline to less than $1 million in 1995 as a result of the expiration of the
related patents.
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, to offset previously incurred costs associated with
the matter (see Note 3 to Financial Statements on page 26).
In April 1987, Honeywell filed suit against Minolta Camera Co. alleging that
Minolta autofocus cameras infringe Honeywell patents. Subsequently, Honeywell
filed similar suits against other major camera manufacturers that employ
autofocus technology. In March 1992, following a jury award in Honeywell's
favor, Minolta agreed to pay Honeywell $127 million in settlement of the damages
and Honeywell's claims for interest and legal fees. In addition to the Minolta
settlement, agreements were reached with various 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 and $288 million, or
$171 million ($1.24 per share) after income taxes, in 1992 (see Note 3 to
Financial Statements on page 26).
11
Honeywell remains committed to efforts to reduce operating costs and improve
margins. As a result of the identification of additional opportunities to
restructure and streamline operations, Honeywell announced on October 19, 1994,
its intention to record additional special charges in 1994. 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 $63 million, or $38
million ($0.29 per share) after income taxes. The actions to be undertaken
include 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 million, or $29 million ($0.22 per share) after income taxes,
were recorded in 1993 for productivity initiatives to strengthen the company's
competitiveness. In 1992, special charges of $128 million, or $85 million ($0.62
per share) after income taxes, were recorded to right-size the Space and
Aviation Control business segment and to reposition the Home and Building
Control and Industrial Control business segments to capitalize on emerging
market opportunities. 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, $44 million in 1993 and $65 million in 1992. As a result
of the 1994 plan, approximately 1,500 employees will be terminated. 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, $2 million in 1993 and
$43 million in 1992. Other cost accruals include costs of exiting several
product lines which were no longer considered complementary to Honeywell's
businesses and amounted to $5 million in 1993 and $20 million in 1992.
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 $74 million, $79 million and $121 million at December 31, 1994,
1993 and 1992, respectively. Total expenditures amounted to $50 million in 1994,
$93 million in 1993 and $8 million in 1992. 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 26.
Net interest expense was $60 million in 1994, $51 million in 1993 and $59
million in 1992. Net interest expense increased in 1994 as a result of higher
market interest rates and higher debt compared with 1993. In 1992, Honeywell
reduced total debt by $108 million, including redemption of high-coupon,
long-term debt. Information concerning Honeywell's exposure to and management of
interest rate risk through the use of derivative financial instruments is
provided on page 19 and in Notes 14 and 15 to Financial Statements on pages 31
and 33, respectively.
Earnings of companies owned 20 percent to 50 percent (primarily
Yamatake-Honeywell Co., Ltd.), which are accounted for using the equity method,
were $11 million in 1994, $18 million in 1993 and $16 million in 1992. 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 $91 million in 1994, compared with $156
million in 1993 and $235 million in 1992. The 1994 income tax provision has been
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 27.
12
EXTRAORDINARY ITEM
In 1992, Honeywell recorded an extraordinary loss of $14 million, or $9
million ($0.06 per share) after income taxes, as a result of early debt
redemptions that required the payment of premiums and the recognition of
unamortized discounts and deferred costs. These redemptions were undertaken as
part of Honeywell's efforts to reduce its debt and manage its interest rate
exposure.
ACCOUNTING CHANGES
In 1992, Honeywell adopted three new Statements of Financial Accounting
Standards. Statement of Financial Accounting Standards No. 106 (SFAS 106),
"Employers' Accounting for Postretirement Benefits Other Than Pensions,"
required recognition of the expected cost of providing postretirement benefits
over the time employees earn these benefits. Before adopting SFAS 106, Honeywell
recognized the costs of providing these benefits on a pay-as-you-go basis by
expensing the cost in the year the benefit was provided. The cumulative effect
of adopting SFAS 106 at January 1, 1992, was a charge to income of $244 million,
or $151 million ($1.09 per share) after income taxes.
Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting
for Income Taxes," allowed consideration of future events in assessing the
likelihood that tax benefits will be realized in future tax returns. The
cumulative effect of adopting SFAS 109 at January 1, 1992, was an increase in
income of $31 million ($0.23 per share) resulting from Honeywell's ability to
recognize additional deferred tax assets.
Statement of Financial Accounting Standards No. 112 (SFAS 112), "Employers'
Accounting for Postemployment Benefits," required that the estimated cost of
providing postemployment benefits be recognized on an accrual basis. The
cumulative effect of adopting SFAS 112 at January 1, 1992, was a charge to
income of $40 million, or $25 million ($0.18 per share) after income taxes.
NET INCOME
Honeywell's net income was $279 million ($2.15 per share) in 1994, compared
with net income of $322 million ($2.40 per share) in 1993 and $247 million
($1.78 per share) in 1992. 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. Net income in 1992 includes an after-tax gain from litigation
settlements, after associated expenses, of $171 million ($1.24 per share); an
after-tax provision for special charges of $85 million ($0.62 per share); an
extraordinary loss after income taxes of $9 million ($0.06 per share) from the
early redemption of long-term debt; and an after-tax reduction of $145 million
($1.04 per share) for the cumulative effect of accounting changes.
RETURN ON EQUITY AND INVESTMENT
Return on equity (ROE) was 15.6 percent in 1994, 18.4 percent in 1993 and
13.8 percent in 1992. Return on investment (ROI) was 12.3 percent in 1994, 14.6
percent in 1993 and 11.8 percent in 1992. The adoption of SFAS 106 and SFAS 112
significantly reduced ROE and ROI in 1992.
CURRENCY
The U.S. dollar weakened an average of one percent in 1994 compared with
1993 in relation to the principal foreign currencies in countries where
Honeywell products are sold. A weaker dollar has a positive effect on
international results because foreign-exchange denominated profits translate
into more U.S. dollars of profit; a stronger dollar has a negative translation
effect. Information about Honeywell's exposure to and management of currency
risk through the use of derivative financial instruments is provided on page 19
and in Notes 6, 14 and 15 to Financial Statements on pages 28, 31 and 33,
respectively.
13
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 50,800 people worldwide at year-end 1994, compared with
52,300 people in 1993 and 55,400 people in 1992. Approximately 31,400 employees
work in the United States, with 19,400 employed outside the country, primarily
in Europe. Total compensation and benefits in 1994 were $2.7 billion, or 47
percent of total costs and expenses. Sales per employee were $118,600 in 1994,
compared with $110,900 in 1993 and $109,600 in 1992.
ENVIRONMENTAL MATTERS
Honeywell is committed to protecting the environment, a commitment evidenced
by both Honeywell's products and 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 current 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
subjects 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.
DISCUSSION AND ANALYSIS BY SEGMENT
HOME AND BUILDING CONTROL
Sales in Home and Building Control were $2.665 billion in 1994, compared
with $2.424 billion in 1993 and $2.394 billion in 1992. 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 internationally. 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's
large worldwide installed product and service base and market strategies will
continue to support future sales growth.
Sales in 1993 were up slightly from 1992 as stronger U.S. sales were mostly
offset by a stronger U.S. dollar and economic weakness in international markets,
driven in large part by the continuing recession in Europe. Home Control gained
market share in the United States through new product
14
introductions and greater penetration of the OEM market.
TotalHome-Registered Trademark- was introduced outside the United States in
1993. The acquisition of Enviracaire in December 1992 also contributed to the
improvement in U.S. sales. Building Control experienced strong U.S. interest in
its comprehensive energy retrofit and service solutions for schools and other
institutions.
Home and Building Control operating profit was $236 million in 1994,
compared with $233 million in 1993 and $193 million in 1992. Operating profit
included special charges of $29 million in 1994, $10 million in 1993 and $43
million in 1992. 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. Special charges were incurred in
1994 to consolidate facilities, streamline operations and improve productivity.
Excluding the impact of special charges, operating profit increased slightly
in 1993 despite the deepening European recession, a stronger U.S. dollar,
unfavorable intra-European currency fluctuations, additional costs associated
with streamlining the U.S. field organization, and costs associated with
introducing the new EXCEL 5000-Registered Trademark- building automation
platform in the United States. Special charges were incurred in 1993 and 1992
for implementation of programs to consolidate facilities and improve
productivity.
Orders improved moderately in 1994 for both Home Control and Building
Control, primarily in the United States. Order activity in the targeted segments
of schools and industrial facilities experienced double-digit growth. The
backlog of orders also showed a moderate increase for 1994.
INDUSTRIAL CONTROL
Industrial Control sales were $1.835 billion in 1994, compared with $1.692
billion in 1993 and $1.744 billion in 1992. 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-Registered Trademark- Open Solutions as industry
continues to focus on improving productivity and meeting stringent environmental
and safety regulations worldwide. 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, 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 (formerly Control
Components) benefited from continued improvements in the U.S. durable goods
market, particularly in the automotive, appliance and information technology
industries. The business introduced SDS Smart Distributed System, a
revolutionary sensor network for distributed machine control. The company
expects continued growth for both Industrial Automation and Control's and
Sensing and Control's systems and products in 1995.
Sales declined slightly in 1993 due to negative currency translation trends
and the divestiture of the Keyboard Division, which was sold to Key Tronic
Corporation in the third quarter of 1993. Excluding these items, both Industrial
Automation and Control and Sensing and Control grew at moderate rates despite
weak conditions in the United States, Europe and Latin America. Industrial
Automation and Control reported solid penetration gains in targeted worldwide
markets despite a weak capital spending environment in the United States and
Europe. Demand for Industrial's systems increased in the Middle East and Asia
Pacific. Sales of field instruments showed a strong increase due to broad
acceptance of Industrial Automation and Control's smart field products. Sensing
and Control experienced significant growth in solid state sensors for on-board
automotive and information technology and appliance market segments as demand
for durable goods improved.
Industrial Control operating profit was $207 million in 1994, $190 million
in 1993 and $157 million in 1992. Operating profit included special charges of
$14 million in 1994, $9 million in 1993 and $39 million in 1992. Excluding the
impact of special charges, operating profit showed a moderate increase as a
result of volume increases in Industrial Automation and Control where
environmental
15
and safety regulations remain 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. Special
charges were incurred in 1994 to consolidate facilities, streamline operations
and improve productivity.
Excluding the impact of special charges, operating profit showed a slight
increase in 1993. Profits were affected by the weak capital spending environment
in the United States and Europe, strength of the U.S. dollar and aggressive
investments in new technologies, with R&D spending up 26 percent over 1992.
Special charges were incurred in 1993 and 1992 for implementation of programs to
consolidate facilities and improve productivity.
In 1994, on a comparable basis, Industrial Automation and Control
experienced strong order activity in both the United States and internationally
in such key markets as hydrocarbon and chemical processing. The backlog of
orders was up modestly for the year.
SPACE AND AVIATION CONTROL
Sales in Space and Aviation Control were $1.432 billion in 1994, compared
with $1.675 billion in 1993 and $1.933 billion in 1992. Sales continued to
decline in 1994 as anticipated, reflecting lower commercial aircraft production
rates and reduced government spending. A cyclical recovery of the commercial
aircraft industry is expected in 1996. We believe we have seen the worst of the
decline, and we anticipate flat sales in 1995.
Sales in 1993 declined as a result of the continuing cyclical decline in
commercial aircraft production, weak demand in the business jet market and
decreased spending in the military market.
Space and Aviation Control operating profit was $81 million in 1994,
compared with $148 million in 1993 and $176 million in 1992. Operating profit
included special charges of $20 million in 1994, $7 million in 1993 and $35
million in 1992. Excluding the impact of special charges, there was a sharp
decline in operating profit resulting from 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. Special charges were incurred in 1994 to consolidate facilities,
streamline operations and improve productivity.
Excluding the impact of special charges, operating profit declined in 1993
due to the sharp volume decline in sales of commercial flight systems and
significant investments in next-generation avionics. Special charges were
incurred in 1993 and 1992 for implementation of programs to consolidate
facilities and improve productivity.
Space and Aviation Control orders increased sharply in 1994 as result of
contract awards in Space Systems to provide cockpit displays for the space
shuttle and supply command and data-handling systems for the International Space
Station Alpha, and improved orders in Business and Commuter Aviation driven by a
rebound in the business jet market. The backlog of orders increased moderately
from 1993 levels.
OTHER
Sales from other operations were $125 million in 1994, $172 million in 1993
and $152 million in 1992. 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 broke even in 1994 and incurred operating losses of
$2 million in 1993 and $9 million in 1992. The 1993 and 1992 losses included
special charges of $16 million and $3 million, respectively, for work force
reductions.
16
FINANCIAL POSITION
FINANCIAL CONDITION
At year-end 1994, Honeywell's capital structure comprised $361 million of
short-term debt, $501 million of long-term debt and $1.855 billion of
stockholders' equity. The ratio of debt to total capital was 32 percent,
compared with 28 percent at year-end 1993. Honeywell's debt-to-total capital
policy range is 30 to 40 percent. Honeywell managed its capital structure at the
low end of this range during 1994.
Total debt increased $170 million during 1994 to $862 million. The increase
was used to finance general corporate requirements, including capital
expenditures and working capital, and $105 million of acquisitions.
Stockholders' equity increased $82 million in 1994 to $1.855 billion. The
increase was primarily due to an increase in retained earnings of $279 million
from net income, offset by dividends of $126 million, a $55 million increase in
the accumulated foreign currency translation, and a $7 million reduction in the
pension liability adjustment. These increases in stockholders' equity were
partially offset by a $148 million increase in treasury stock.
CASH GENERATION AND DEPLOYMENT
In 1994, $470 million of cash was generated from operating activities,
compared with $475 million in 1993 and $532 million in 1992. The decrease in
1994 was largely due to lower earnings compared with 1993. In 1994, cash
generated from investing and financing activities included $23 million of
proceeds from the sale of assets and $6 million of proceeds from employee stock
plans. These funds were used to support $262 million of capital expenditures,
$126 million of dividend payments and $163 million of share repurchases. Cash
balances increased $25 million in 1994.
WORKING CAPITAL
Cash used for increases in the portion of working capital consisting of
trade and long-term receivables and inventories, offset by accounts payable and
customer advances, was $9 million in 1994. This portion of working capital as a
percentage of sales was 28 percent, which was consistent with 1993. Trade
receivables sold at year-end 1994 were $2 million, a reduction of $36 million in
1994. The increases in receivable and payable balances in 1994 were consistent
with the increase in fourth quarter sales.
CAPITAL EXPENDITURES AND ACQUISITIONS
Capital expenditures for property, plant and equipment in 1994 were $262
million, compared with $232 million in 1993 and $244 million in 1992. The 1994
depreciation charges were $235 million. Honeywell continues to invest at levels
believed to be adequate to maintain its technological position in areas
providing value-added long-term returns. During 1994, Honeywell invested $105
million in complementary business acquisitions.
SHARE REPURCHASE PLANS
In November 1991, the Board of Directors authorized a five-year program to
purchase up to $600 million of Honeywell shares. This program was completed in
1994, two years ahead of schedule. Honeywell repurchased $3 million of shares in
1991, $189 million of shares in 1992, $240 million of shares in 1993, and $168
million of shares in 1994.
At year-end 1994, Honeywell had 188 million shares issued, 127 million
shares outstanding and 32,025 stockholders of record. At year-end 1993,
Honeywell had 188 million shares issued, 132 million shares outstanding and
33,382 stockholders of record.
DIVIDENDS
In November 1993, the Board of Directors approved an 8 percent increase in
the regular annual dividend to $0.96 per share, from $0.89 per share, effective
in the fourth quarter 1993. In November 1994, the Board of Directors approved an
additional 4 percent increase in the regular annual
17
dividend to $1.00 per share effective in the fourth quarter 1994. Honeywell paid
$0.97 per share in dividends in 1994, compared with $0.9075 in 1993, and
$0.84125 in 1992. Honeywell has paid a quarterly dividend since 1932 and has
increased the annual payout per share in each of the last 19 years.
EMPLOYEE STOCK PROGRAM
Honeywell contributed 634,561 shares of Honeywell common stock to employees
under its U.S. employee stock match savings plan in 1994. The number of shares
contributed under this program depends on employee savings levels and company
performance.
PENSION CONTRIBUTIONS
Cash contributions to Honeywell's Retirement Plan for U.S. non-union
employees were $86 million in 1994, $105 million in 1993 and $79 million in
1992. Cash contributions to the Pension Plan for U.S. union employees were $40
million in 1994, $36 million in 1993 and $27 million in 1992.
TAXES
In 1994, taxes paid were $79 million. Accrued income taxes and related
interest decreased $11 million during 1994.
FUNDING SPECIAL CHARGES
During 1994, 1993 and 1992, the company established reserves for
productivity initiatives to strengthen the company's competitiveness (see page
12 and Note 4 to Financial Statements on page 26). Future cash flows from
operating activities are expected to be sufficient to fund these accrued costs.
LIQUIDITY
Short-term debt at year-end 1994 was $361 million, consisting of $125
million of commercial paper, $102 million of notes payable and $134 million of
current maturities of long-term debt. Short-term debt at year-end 1993 totaled
$188 million, consisting of $181 million of commercial paper and $7 million of
notes payable and 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 1994 totaled $1.076
billion. This consisted of $737 million of committed credit lines to meet
Honeywell's financing requirements, including support of commercial paper and
bank note borrowings, and $339 million of uncommitted credit lines available to
certain foreign subsidiaries. In addition, Honeywell had a $1.2 billion special
purpose credit facility available for an appeal bond that might have been
required in the Litton litigation described in Litigation below. The $1.2
billion facility was canceled in February, 1995.
This compared with $2.272 billion of available credit lines at year-end
1993, consisting of $675 million of committed credit lines for general financing
requirements, $397 million of uncommitted credit lines available to certain
foreign subsidiaries and the $1.2 billion special purpose facility.
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
which was initiated in August 1994. The medium-term note program allows note
issuances with maturities ranging from nine months to 30 years. At December 31,
1994, $101 million of notes was outstanding under this program. Long-term debt
maturities consist of $133 million in 1995, $185 million in 1996 and $115
million in 1997.
Cash and short-term investments totaled $275 million at year-end 1994 and
$256 million at year-end 1993. Management believes its available cash, committed
credit lines and access to the public debt markets through its medium-term note
program, provide adequate short-term and long-term liquidity.
18
DERIVATIVE FINANCIAL INSTRUMENTS
Honeywell utilizes various foreign currency exchange contracts and interest
rate swaps to manage its exposure to exchange rate (see Notes 6, 14 and 15 to
Financial Statements on pages 28, 31 and 33, respectively) and interest rate
fluctuations and its mix of fixed and floating interest rates (see Notes 14 and
15 to Financial Statements on pages 31 and 33, respectively). At year-end 1994,
the notional amount of outstanding foreign exchange contracts was $1.089
billion. The notional amount of outstanding interest rate swaps was $232
million.
LITIGATION
On August 31, 1993, a federal court jury in the U.S. District Court in Los
Angeles returned a verdict against Honeywell on patent infringement and
intentional interference claims in the amount of $1.2 billion. These claims were
part of a lawsuit brought by Litton Systems, Inc. alleging, among other things,
Honeywell patent infringement relating to the process used by Honeywell to coat
mirrors incorporated in its ring laser gyroscopes. Honeywell contended the
verdict was unsupported by the facts; that the Litton patent was invalid; and
that Honeywell's process differs from Litton's. The judge in the case held a
hearing November 22, 1993, on various issues including, among others,
Honeywell's claims that the patent was improperly obtained due to alleged
"inequitable conduct" on the part of Litton; Honeywell's other legal and
equitable defenses; and Litton's motion to enhance the damage award. On January
9, 1995, the court issued a decision in favor of Honeywell, ruling 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. The court further ruled that if the judgment is
subsequently vacated or reversed as a result of an appeal of the court's ruling,
a new trial on the issue of damages would be held on the ground that the jury's
award was inconsistent with the clear weight of the evidence and to permit it to
stand would constitute a miscarriage of justice. Litton has filed a motion to
appeal the court's ruling. The trial for the antitrust claims of Litton and
Honeywell is currently scheduled to commence in November 1995.
Honeywell believes that the court's ruling was correct and continues to
believe that Litton's claims are without merit. 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 1994. 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. On January 10, 1995, Moody's Investors Service, Inc.
removed Honeywell from credit watch and affirmed the A3/P-2 debt ratings.
Moody's had placed Honeywell on credit watch status on August 31, 1993, as a
result of the jury verdict in the Litton litigation.
STOCK PERFORMANCE
The market price of Honeywell stock ranged from $36 7/8 to $28 1/4 in 1994,
and was $31 1/2 at year
end. Book value per common share at year end was $14.57 in 1994 and $13.48 in
1993.
19
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, 1994 and 1993, and the related statements of
income and cash flows for each of the three years in the period ended December
31, 1994. Our audits also included the financial statement schedule listed at
Part IV, Item 14(a)2. These financial statements and the financial statement
schedule 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, 1994 and 1993, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1994, 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.
As discussed in Notes 1, 5 and 21 to the financial statements, in 1992 the
Company changed its method of accounting for postemployment benefits, income
taxes and postretirement benefits other than pensions.
Deloitte & Touche LLP
Minneapolis, Minnesota
February 13, 1995
20
INCOME STATEMENT
HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS AND SHARES IN MILLIONS
EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31
---------------------------------
1994 1993 1992
--------- ---------- ----------
Sales......................................................................... $ 6,057.0 $ 5,963.0 $ 6,222.6
--------- ---------- ----------
Costs and Expenses
Cost of sales............................................................... 4,082.1 4,019.6 4,195.3
Research and development.................................................... 319.0 337.4 312.6
Selling, general and administrative......................................... 1,173.8 1,075.7 1,196.8
Litigation settlements...................................................... (32.6) (287.9)
Special charges............................................................. 62.7 51.2 128.4
--------- ---------- ----------
5,637.6 5,451.3 5,545.2
--------- ---------- ----------
Interest
Interest expense............................................................ 75.5 68.0 89.9
Interest income............................................................. 15.3 17.0 31.4
--------- ---------- ----------
60.2 51.0 58.5
--------- ---------- ----------
Equity Income................................................................. 10.5 17.8 15.8
--------- ---------- ----------
Income before Income Taxes.................................................... 369.7 478.5 634.7
Provision for Income Taxes.................................................... 90.8 156.3 234.8
--------- ---------- ----------
Income before Extraordinary Item and Cumulative Effect of Accounting
Changes...................................................................... 278.9 322.2 399.9
Extraordinary Item -- Loss on Early Redemption of Debt........................ (8.6)
Cumulative Effect of Accounting Changes....................................... (144.5)
--------- ---------- ----------
Net Income.................................................................... $ 278.9 $ 322.2 $ 246.8
--------- ---------- ----------
--------- ---------- ----------
Earnings Per Common Share
Income before extraordinary item and cumulative effect of accounting
changes.................................................................... $ 2.15 $ 2.40 $ 2.88
Extraordinary item -- loss on early redemption of debt...................... (0.06)
Cumulative effect of accounting changes..................................... (1.04)
--------- ---------- ----------
Net income.................................................................. $ 2.15 $ 2.40 $ 1.78
--------- ---------- ----------
--------- ---------- ----------
Average Number of Common Shares Outstanding................................... 129.4 134.2 138.5
See accompanying Notes to Financial Statements.
21
STATEMENT OF FINANCIAL POSITION
HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS IN MILLIONS)
ASSETS
DECEMBER 31
-----------------------
1994 1993
---------- -----------
Current Assets
Cash and cash equivalents............................................................. $ 267.4 $ 242.3
Short-term investments................................................................ 7.4 13.8
Receivables........................................................................... 1,406.9 1,275.9
Inventories........................................................................... 760.2 760.1
Deferred income taxes................................................................. 207.5 258.1
---------- -----------
2,649.4 2,550.2
Investments and Advances................................................................ 242.8 227.7
Property, Plant and Equipment
Property, plant and equipment......................................................... 2,716.8 2,549.4
Less accumulated depreciation......................................................... 1,617.3 1,487.4
---------- -----------
1,099.5 1,062.0
Other Assets
Long-term receivables................................................................. 40.1 51.3
Goodwill.............................................................................. 209.8 133.0
Patents, licenses and trademarks...................................................... 66.1 89.8
Software and other intangibles........................................................ 290.3 266.3
Deferred income taxes................................................................. 98.5 63.8
Other................................................................................. 189.4 154.0
---------- -----------
Total Assets........................................................................ $ 4,885.9 $ 4,598.1
---------- -----------
---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt....................................................................... $ 360.6 $ 187.9
Accounts payable...................................................................... 429.6 381.9
Customer advances..................................................................... 72.6 61.4
Accrued compensation and benefit costs................................................ 434.6 433.2
Accrued income taxes.................................................................. 309.6 320.8
Deferred income taxes................................................................. 10.2
Other accrued liabilities............................................................. 464.8 460.7
---------- -----------
2,071.8 1,856.1
Long-Term Debt.......................................................................... 501.5 504.0
Other Liabilities
Accrued benefit costs................................................................. 359.0 378.6
Deferred income taxes................................................................. 39.8 27.6
Other................................................................................. 59.1 58.8
Stockholders' Equity
Common stock -- $1.50 par value
Authorized -- 250,000,000 shares
Issued -- 1994 -- 188,286,000 shares.................................................. 282.4
1993 -- 188,328,570 shares.................................................... 282.5
Additional paid-in capital............................................................ 446.9 431.5
Retained earnings..................................................................... 2,600.4 2,447.3
Treasury stock -- 1994 -- 61,030,565 shares........................................... (1,576.5)
1993 -- 56,769,007 shares............................................. (1,428.4)
Accumulated foreign currency translation.............................................. 107.4 52.9
Pension liability adjustment.......................................................... (5.9) (12.8)
---------- -----------
1,854.7 1,773.0
---------- -----------
Total Liabilities and Stockholders' Equity.......................................... $ 4,885.9 $ 4,598.1
---------- -----------
---------- -----------
See accompanying Notes to Financial Statements.
22
STATEMENT OF CASH FLOWS
HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS IN MILLIONS)
YEARS ENDED DECEMBER 31
-------------------------------
1994 1993 1992
--------- --------- ---------
Cash Flows from Operating Activities
Net income..................................................................... $ 278.9 $ 322.2 $ 246.8
Adjustments to reconcile net income to net cash flows from operating
activities:
Cumulative effect of accounting changes...................................... 144.5
Extraordinary item -- loss on early redemption of debt....................... 8.6
Depreciation................................................................. 235.3 235.3 242.8
Amortization of intangibles.................................................. 52.1 49.6 49.9
Deferred income taxes........................................................ 14.0 28.8 6.7
Equity income, net of dividends received..................................... (7.6) (14.5) (13.8)
Loss on sale of assets....................................................... 1.0 6.2 1.6
Contributions to employee stock plans........................................ 26.5 28.7 40.0
Increase in receivables...................................................... (83.8) (62.7) (136.0)
Decrease in inventories...................................................... 20.9 54.2 67.7
Increase (decrease) in accounts payable...................................... 27.7 28.8 (60.8)
Increase (decrease) in accrued income taxes and interest..................... (4.6) 8.3 (25.7)
Other changes in working capital, excluding short-term investments and
short-term debt............................................................. (93.9) (146.6) (85.6)
Other noncurrent items -- net................................................ 3.0 (63.5) 44.9
--------- --------- ---------
Net cash flows from operating activities......................................... 469.5 474.8 531.6
--------- --------- ---------
Cash Flows from Investing Activities
Reduction of investment in Sperry Aerospace Group.............................. 20.0
Proceeds from sale of assets................................................... 22.6 46.8 54.7
Capital expenditures........................................................... (262.4) (232.1) (244.1)
Investment in acquisitions..................................................... (104.6) (14.2) (83.5)
(Increase) decrease in short-term investments.................................. 6.7 (10.2) 6.8
Other -- net................................................................... 10.5 (23.3) (7.1)
--------- --------- ---------
Net cash flows from investing activities......................................... (327.2) (213.0) (273.2)
--------- --------- ---------
Cash Flows from Financing Activities
Net increase in short-term debt................................................ 35.7 2.8 90.1
Proceeds from issuance of long-term debt....................................... 126.5 0.6 2.6
Repayment of long-term debt.................................................... (1.8) (7.3) (199.7)
Purchase of treasury stock..................................................... (162.5) (241.2) (188.2)
Proceeds from employee stock plans............................................. 5.9 17.6 27.4
Dividends paid................................................................. (125.6) (122.0) (116.7)
--------- --------- ---------
Net cash flows from financing activities......................................... (121.8) (349.5) (384.5)
--------- --------- ---------
Effect of exchange rate changes on cash.......................................... 4.6 (12.4) (28.7)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents................................. 25.1 (100.1) (154.8)
Cash and cash equivalents at beginning of year................................... 242.3 342.4 497.2
--------- --------- ---------
Cash and cash equivalents at end of year......................................... $ 267.4 $ 242.3 $ 342.4
--------- --------- ---------
--------- --------- ---------
See accompanying Notes to Financial Statements.
23
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.
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.
INCOME TAXES
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109 (see Note 5). Interest costs related to prior
years' tax issues are included in the provision for income taxes in 1994 and
1993.
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 purchased
with a 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.
24
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 transaction. 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.
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 $54.5 in 1994, $(3.0) in 1993 and
$(74.8) in 1992.
POSTEMPLOYMENT BENEFITS
In 1992, Honeywell adopted Statement of Financial Accounting Standards No.
112 (SFAS 112), "Employers' Accounting for Postemployment Benefits." The pre-tax
cumulative effect of this accounting change to January 1, 1992, was $39.7 and
resulted in a reduction in net income of $24.6 ($0.18 per share).
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.
RECLASSIFICATIONS
Certain amounts in prior years' income statements have been reclassified to
conform to the current year presentation.
NOTE 2 -- ACQUISITIONS AND SALE OF ASSETS
Honeywell acquired 15 companies in 1994, eight companies in 1993 and nine
companies in 1992 for $104.6, $14.2 and $83.5 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 $82.4 in
1994, $11.8 in 1993 and $44.2 in 1992, has been recorded as goodwill and is
amortized over estimated useful lives. The pro forma results for 1994, 1993 and
1992, assuming these acquisitions had been made at the beginning of the year,
would not be significantly different from reported results.
25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
NOTE 2 -- ACQUISITIONS AND SALE OF ASSETS (CONTINUED)
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 $8.6 in 1994, $22.9 in 1993 and
$41.1 in 1992. 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.
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 and $287.9 in 1992. 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, $31.4 in
1993 and $14.9 in 1992, and is included in selling, general and administrative
expenses on the income statement.
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. Honeywell remains committed to efforts to reduce operating costs and
improve margins. The actions to be undertaken include 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. In 1992, special charges of $128.4 were recorded to right-size
the Space and Aviation Control business segment and to reposition the Home and
Building Control and Industrial Control business segments to capitalize on
emerging market opportunities. 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, $43.7 in 1993 and $65.1 in 1992.
As a result of the 1994 plan, approximately 1,500 employees will be terminated.
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. Total expenditures amounted to $2.3 in 1992. Special charges of
$5.9 from 1993 and $3.0 from 1992 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, $2.0 in 1993 and
$42.7 in 1992. 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
26
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
NOTE 4 -- SPECIAL CHARGES (CONTINUED)
related to costs incurred in 1992. Total expenditures amounted to $2.0 in 1992.
No expenditures have been made under the 1994 plan. Special charges of $0.4 from
1993 and $4.4 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 and $20.6 in 1992. 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. Total expenditures amounted to $3.6 in 1992.
Cash flows from operating activities have funded and are expected to fund
all special charges.
NOTE 5 -- INCOME TAXES
The components of income before income taxes consist of the following:
1994 1993 1992
------ ------ ------
Domestic..................................... $208.4 $316.9 $467.7
Foreign...................................... 161.3 161.6 167.0
------ ------ ------
$369.7 $478.5 $634.7
The provision for income taxes on that income is as follows:
1994 1993 1992
------ ------ ------
Current tax expense
United States.............................. $ 33.8 $ 81.7 $140.2
Foreign.................................... 40.6 36.0 52.5
State and local............................ 2.9 11.3 35.7
------ ------ ------
Total current.............................. 77.3 129.0 228.4
------ ------ ------
Deferred tax expense
United States.............................. 13.0 17.9 3.1
Foreign.................................... (0.8) 5.8 2.5
State and local............................ 1.3 3.6 0.8
------ ------ ------
Total deferred............................. 13.5 27.3 6.4
------ ------ ------
Provision for income taxes................... $ 90.8 $156.3 $234.8
A favorable tax settlement reduced the provision for income taxes by $37.6
($0.29 per share) in the fourth quarter of 1994.
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.
In 1992, Honeywell adopted Statement of Financial Accounting Standards No.
109 (SFAS 109), "Accounting for Income Taxes," and elected not to restate prior
years. The cumulative effect of this accounting change to January 1, 1992, was
an increase in net income of $31.4 ($0.23 per share), resulting from the
recognition of unrecorded deferred tax assets.
27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
NOTE 5 -- INCOME TAXES (CONTINUED)
A reconciliation of the provision for income taxes to the amount computed
using U.S. federal statutory rates is as follows:
1994 1993 1992
------ ------ ------
Taxes on income at U.S. federal statutory
rates....................................... $129.4 $167.5 $215.8
Tax effects of foreign income................ (15.5) (26.0) (1.8)
State taxes.................................. 4.2 10.9 24.1
Tax effect of settlement..................... (37.6)
Adjustments to effective tax rates used in
recording tax assets and liabilities........ 2.7 (1.5)
Other........................................ 7.6 3.9 (1.8)
------ ------ ------
Provision for income taxes................... $ 90.8 $156.3 $234.8
Taxes paid were $79.4 in 1994, $111.2 in 1993 and $244.0 in 1992.
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:
1994 1993
------ ------
Employee benefits............................ $142.2 $177.8
Miscellaneous accruals....................... 95.2 96.0
Excess of tax over book
depreciation/amortization................... (24.0) (79.2)
Asset valuation reserves..................... 43.0 42.5
Long-term contracts and installment sales.... 4.2 24.8
Losses on discontinuance of product lines.... 0.7 2.3
State taxes.................................. 28.5 29.8
Pension liability adjustment................. 3.7 8.2
Other........................................ (27.3) (18.1)
------ ------
$266.2 $284.1
The components of net deferred taxes shown on the statement of financial
position are:
1994 1993
------ ------
Deferred tax assets.......................... $463.8 $445.7
Deferred tax liabilities..................... 197.6 161.6
Provision has not been made for U.S. or additional foreign taxes on $711.0
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, 1994, foreign subsidiaries had tax operating loss
carryforwards of $14.7.
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.
28
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
NOTE 6 -- FOREIGN CURRENCY (CONTINUED)
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. The notional
amount of Honeywell's outstanding foreign currency contracts, consisting of
forwards, purchased options and swaps, at December 31, 1994, was approximately
$1,088.6. The remaining term of the contracts is generally less than one year.
The amount of hedging gains and losses deferred was not material at December 31,
1994.
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.
Honeywell's investments in held-to-maturity securities totaled $144.4 at
December 31, 1994, and are reported at amortized cost in the statement of
financial position as follows: cash equivalents, $124.9; short-term investments,
$6.6; and investments and advances, $12.9. Held-to-maturity securities generally
mature within one year and include the following: time deposits with financial
institutions, $116.2; commercial paper, $12.0; and other, $16.2. During 1994,
Honeywell purchased $233.9 of held-to-maturity securities. Proceeds from
maturities of held-to-maturity securities amounted to $233.0. 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 are not material.
NOTE 8 -- RECEIVABLES
Receivables have been reduced by an allowance for doubtful accounts as
follows:
1994 1993
--------- ---------
Receivables, current............................................... $ 31.1 $ 24.3
Long-term receivables.............................................. 0.7 0.5
Receivables include approximately $21.9 in 1994 and $21.1 in 1993 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 $295.9 in 1994
and $275.6 in 1993 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 $1.9 in 1994 and $3.6 in 1993 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 $34.4 in 1994, $193.7 in 1993 and $30.9
in 1992. The uncollected balance of receivables sold amounted to $2.4 and $37.9
at December 31, 1994, and 1993, respectively, and averaged $4.2 and $21.7 during
those respective years. The discount recorded on sale of receivables is included
in selling, general and
29
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
NOTE 8 -- RECEIVABLES (CONTINUED)
administrative expenses on the income statement and amounted to $0.4, $0.7 and
$0.6 in 1994, 1993 and 1992, respectively. Honeywell, as agent for the
purchaser, retains collection and administrative responsibilities for the
participating interests sold.
NOTE 9 -- INVENTORIES
1994 1993
--------- ---------
Finished goods........................................................ $ 297.4 $ 265.3
Inventories related to long-term contracts............................ 89.1 97.7
Work in process....................................................... 156.9 168.1
Raw materials and supplies............................................ 216.8 229.0
--------- ---------
$ 760.2 $ 760.1
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 $32.5 and $36.8 at December 31, 1994, and 1993, respectively.
NOTE 10 -- PROPERTY, PLANT AND EQUIPMENT
1994 1993
--------- ----------
Land.................................................................. $ 78.2 $ 77.1
Buildings and improvements............................................ 623.4 589.9
Machinery and equipment............................................... 1,937.3 1,814.2
Construction in progress.............................................. 77.9 68.2
--------- ----------
$ 2,716.8 $ 2,549.4
NOTE 11 -- FOREIGN SUBSIDIARIES
The following is a summary of financial data pertaining to foreign
subsidiaries:
1994 1993 1992
--------- ---------- ----------
Income before extraordinary item and cumulative effect of
accounting changes....................................... $ 121.5 $ 119.8 $ 112.0
Assets.................................................... $ 1,742.3 $ 1,546.5 $ 1,554.7
Liabilities............................................... 726.4 620.5 655.7
--------- ---------- ----------
Net assets................................................ $ 1,015.9 $ 926.0 $ 899.0
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.
30
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.
1994 1993 1992
-------- -------- --------
Sales........................................ $1,877.0 $1,866.7 $1,656.3
Gross profit................................. 680.7 682.4 607.4
Net income................................... 48.4 69.8 62.8
Equity in net income......................... 10.5 17.8 15.8
Current assets............................... $1,371.4 $1,297.0 $1,035.4
Noncurrent assets............................ 616.8 588.2 502.8
-------- -------- --------
1,988.2 1,885.2 1,538.2
-------- -------- --------
Current liabilities.......................... 841.6 704.5 687.0
Noncurrent liabilities....................... 225.8 359.3 200.1
-------- -------- --------
1,067.4 1,063.8 887.1
-------- -------- --------
Net assets................................... $ 920.8 $ 821.4 $ 651.1
Equity in net assets......................... $ 225.5 $ 200.3 $ 158.3
NOTE 13 -- INTANGIBLE ASSETS
Intangible assets have been reduced by accumulated amortization as follows:
1994 1993
-------- --------
Goodwill..................................... $ 42.3 $ 34.3
Patents, licenses and trademarks............. 175.4 170.0
Software and other intangibles............... 152.4 135.4
NOTE 14 -- DEBT
SHORT-TERM DEBT
Honeywell had general purpose lines of credit available totaling $1,075.8 at
December 31, 1994. Domestic revolving credit lines with 21 banks total $737.0,
which management believes is adequate to meet its financing requirements,
including support of commercial paper and bank note borrowings. These domestic
lines have commitment fee requirements. There were no borrowings on these lines
at December 31, 1994. The remaining credit facilities of $338.8 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 $3.1 at December 31, 1994. The weighted-average interest rate on
short-term borrowings outstanding at December 31, 1994, and 1993, respectively,
was as follows: commercial paper, 5.7 percent and 3.3 percent; and notes
payable, 5.8 percent and 10.1 percent.
Short-term debt consists of the following:
1994 1993
-------- --------
Commercial paper............................. $ 125.0 $ 181.0
Notes payable................................ 102.2 6.6
Current maturities of long-term debt......... 133.4 0.3
-------- --------
$ 360.6 $ 187.9
31
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
NOTE 14 -- DEBT (CONTINUED)
LONG-TERM DEBT
1994 1993
--------- ---------
Honeywell Inc.
8% Dual-currency yen/U.S. dollar notes due 1995......................... $ 120.2 $ 116.7
7 7/8% due 1996......................................................... 100.0 100.0
6 1/4% Deutsche mark bonds due 1997..................................... 95.2 88.0
7.25% to 7.71% medium-term notes due 1998............................... 30.0
7.36% to 7.46% medium-term notes due 1999............................... 70.5
8 5/8% due 2006......................................................... 100.0 100.0
7.7% to 10 1/2% due 1995 to 2010........................................ 10.2 12.0
Subsidiaries
9.6% Canadian dollar notes due 1996..................................... 82.0 86.4
7.0% to 10.06% due 1995 to 2001, various currencies..................... 26.8 1.2
--------- ---------
634.9 504.3
Less amount included in short-term debt................................. 133.4 0.3
--------- ---------
$ 501.5 $ 504.0
The 8 percent dual-currency yen/U.S. dollar notes due 1995 are repayable at
a fixed exchange rate and are linked to a currency exchange agreement that
results 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 $100.5 of U.S. dollar fixed-rate medium-term
notes in 1994.
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 is being 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. These swap
agreements expire in September 1995 for the 8 5/8 percent debentures, December
1996 for the 9.6 percent Canadian dollar notes, and for the medium-term notes:
$10.0 in March 1998, $20.0 in May 1998, $50.0 in August 1999 and $20.5 in
September 1999.
In 1992, Honeywell redeemed its 9 3/8 percent debentures due 2005 to 2009,
its 8.2 percent debentures due 1996 to 1998, its 9 7/8 percent debentures due
1998 to 2017, and certain notes due 1993 to 2004, amounting to $9.6 with
interest rates ranging from 7.5 percent to 11.75 percent. These early
redemptions required the payment of premiums and the recognition of unamortized
discounts and
32
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
NOTE 14 -- DEBT (CONTINUED)
deferred cost resulting in the recording of an extraordinary loss of $13.8, or
$8.6 ($0.06 per share) after income taxes. Honeywell redeemed an additional $5.9
of notes due 1993 to 2000 with interest rates ranging from 10 percent to 12.1
percent in 1993 with no additional income statement impact.
Annual sinking-fund and maturity requirements for the next five years on
long-term debt outstanding at December 31, 1994, are as follows:
1995............................................... $ 133.4
1996............................................... 185.2
1997............................................... 114.9
1998............................................... 30.2
1999............................................... 70.9
Interest paid amounted to $69.1, $63.9 and $98.5 in 1994, 1993 and 1992,
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 $634.9 and $504.3 at December 31, 1994, and 1993, respectively;
and the fair value was $630.3 and $569.0 at December 31, 1994, and 1993,
respectively.
The carrying amount of interest rate swaps was zero and $0.3 at December 31,
1994, and 1993, respectively. The gross unrealized market (loss)/gain on
interest rate swaps was $(7.5) and $2.8 at December 31, 1994, and 1993,
respectively. The carrying amount of foreign currency contracts was $18.3 and
$10.4 at December 31, 1994, and 1993, respectively. The gross unrealized market
gain on foreign currency contracts was $26.6 and $19.9 and the gross unrealized
market loss was $28.3 and zero at December 31, 1994, and 1993, 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.
33
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
NOTE 16 -- LEASING ARRANGEMENTS
As lessee, Honeywell has minimum annual lease commitments outstanding at
December 31, 1994, with the majority of the leases having initial periods
ranging from one to 10 years. Following is a summary of operating lease
information.
OPERATING
LEASES
-----------
1995................................................................. $ 101.3
1996................................................................. 79.7
1997................................................................. 58.0
1998................................................................. 39.9
1999................................................................. 29.1
2000 and beyond...................................................... 130.1
-----------
$ 438.1
Rent expense for operating leases was $136.9 in 1994, $134.2 in 1993 and
$128.0 in 1992.
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
ADDITIONAL
COMMON PAID-IN TREASURY
STOCK CAPITAL STOCK
----------- ----------- -----------
Balance January 1, 1992............................................. $ 141.6 $ 530.4 $ (1,068.8)
Purchase of treasury stock --
5,586,254 shares.................................................. (192.0)
Issued for employee stock plans --
2,965,328 treasury shares......................................... 35.0 41.8
355,342 shares canceled........................................... (0.5)
Adjustment for two-for-one stock split --
94,397,423 shares................................................. 141.6 (141.6)
----------- ----------- -----------
Balance December 31, 1992........................................... 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)
STOCK SPLIT
On November 9, 1992, the board of directors authorized a two-for-one stock
split in the form of a stock dividend payable to stockholders of record November
27, 1992. All references in the financial
34
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
NOTE 17 -- CAPITAL STOCK (CONTINUED)
statements relating to 1992 for average number of shares outstanding and related
prices, per share amounts, stock plan data and the 1992 share amounts in the
table above have been restated to reflect this split.
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 10,539,718
shares reserved for all key employee plans at December 31, 1994.
Options to purchase common stock have been granted to key employees at 100
percent of the market price on the date of grant, pursuant to
stockholder-approved plans. The following is a summary of existing stock options
under all plans:
1994 1993 1992
---------- ----------- -----------
Granted --
Number of shares.................................... 1,001,250 969,173 1,353,224
Price per share..................................... $33-$36 $31-$38 $31-$37
Exercised --
Number of shares.................................... 320,337 1,020,769 1,926,649
Price per share..................................... $12-$33 $12-$33 $8-$30
Outstanding December 31 --
Number of shares.................................... 5,346,237 4,739,683 4,800,613
Price per share..................................... $15-$38 $12-$38 $12-$37
Options totaling 4,390,382 shares at prices ranging from $15 to $38 were
exercisable at December 31, 1994.
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 141,376 in 1994, 533,995
in 1993 and 47,812 in 1992. The cost of restricted stock is charged to income
over the restriction period and amounted to $5.6 in 1994, $6.3 in 1993 and $6.5
in 1992. At December 31, restricted shares outstanding pursuant to key employee
plans totaled 767,209 in 1994, 775,861 in 1993 and 412,872 in 1992.
EMPLOYEE STOCK MATCH AND STOCK PURCHASE 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
35
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
NOTE 17 -- CAPITAL STOCK (CONTINUED)
plan contributions. Shares issued under the stock match plans totaled 634,561
shares in 1994, 643,913 shares in 1993 and 977,716 shares in 1992 at a cost of
$20.7, $22.3 and $33.3, respectively. There were 1,713,734 shares reserved for
employee stock match plans at December 31, 1994.
Honeywell has granted to eligible foreign subsidiary employees the right to
purchase common stock, principally at the lower of 85 percent of the market
price at the time of grant or at the time of purchase. Total shares issued under
the foreign stock purchase plans amounted to 49,250 in 1992 at an average price
per share of $33. There were no shares issued in 1994 or 1993 under these plans.
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. No shares were
purchased under this option in 1994 or 1993 and at December 31, 1994, there were
2,000,000 shares reserved for this pledge.
PREFERENCE STOCK
Twenty-five million preference shares with a par value of $1 per share have
been authorized. None has been issued at December 31, 1994.
NOTE 18 -- RETAINED EARNINGS
1994 1993 1991
--------- ---------- ----------
Balance January 1......................................... $ 2,447.3 $ 2,247.0 $ 2,116.9
Net income................................................ 278.9 322.2 246.8
Dividends
1994-$0.97 PER SHARE.................................... (125.8)
1993-$0.9075 per share.................................. (121.9)
1992-$0.84125 per share................................. (116.7)
--------- ---------- ----------
Balance December 31....................................... $ 2,600.4 $ 2,447.3 $ 2,247.0
Included in retained earnings are undistributed earnings of companies 20 to
50 percent owned, amounting to $131.8 at December 31, 1994.
NOTE 19 -- SEGMENT INFORMATION
Honeywell's operations are 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.
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.
36
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
NOTE 19 -- SEGMENT INFORMATION (CONTINUED)
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.
The "other" category comprises various 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 1994,
1993 and 1992 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.
Following is additional financial information relating to industry segments:
1994 1993 1992
--------- --------- ---------
Capital expenditures
Home and Building Control..................................... $ 95.6 $ 73.6 $ 63.5
Industrial Control............................................ 73.6 72.8 81.9
Space and Aviation Control.................................... 54.9 58.4 67.2
Corporate and other........................................... 38.3 27.3 31.5
--------- --------- ---------
$ 262.4 $ 232.1 $ 244.1
Depreciation and amortization
Home and Building Control..................................... $ 71.8 $ 67.9 $ 69.0
Industrial Control............................................ 67.1 59.9 54.6
Space and Aviation Control.................................... 120.0 127.0 137.4
Corporate and other........................................... 28.5 30.1 31.7
--------- --------- ---------
$ 287.4 $ 284.9 $ 292.7
Honeywell engages in material operations in foreign countries, the majority
of which are located in Europe. Other geographic areas of operation include
Canada, Mexico, Australia, South America and the Far East.
37
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
NOTE 19 -- SEGMENT INFORMATION (CONTINUED)
Following is financial information relating to geographic areas:
1994 1993 1992
--------- ---------- ----------
External sales
United States........................................... $ 3,824.7 $ 3,895.1 $ 4,014.9
Europe.................................................. 1,528.5 1,441.2 1,556.3
Other areas............................................. 703.8 626.7 651.4
--------- ---------- ----------
$ 6,057.0 $ 5,963.0 $ 6,222.6
Transfers between geographic areas
United States........................................... $ 293.3 $ 246.7 $ 242.2
Europe.................................................. 46.3 36.9 33.0
Other areas............................................. 54.3 47.6 47.0
--------- ---------- ----------
$ 393.9 $ 331.2 $ 322.2
Total sales
United States........................................... $ 4,118.0 $ 4,141.8 $ 4,257.1
Europe.................................................. 1,574.8 1,478.1 1,589.3
Other areas............................................. 758.1 674.3 698.4
Eliminations............................................ (393.9) (331.2) (322.2)
--------- ---------- ----------
$ 6,057.0 $ 5,963.0 $ 6,222.6
Operating profit
United States........................................... $ 343.7 $ 384.1 $ 338.1
Europe.................................................. 139.1 140.2 150.4
Other areas............................................. 41.2 44.4 28.1
--------- ---------- ----------
Operating profit........................................ 524.0 568.7 516.6
Interest expense........................................ (75.5) (68.0) (89.9)
Litigation settlements.................................. 32.6 287.9
Equity income........................................... 10.5 17.8 15.8
General corporate expense............................... (89.3) (72.6) (95.7)
--------- ---------- ----------
Income before income taxes.............................. $ 369.7 $ 478.5 $ 634.7
Identifiable Assets
United States........................................... $ 2,356.2 $ 2,337.5 $ 2,502.7
Europe.................................................. 1,303.1 1,111.4 1,134.4
Other areas............................................. 434.9 357.1 372.5
Corporate............................................... 791.7 792.1 860.5
--------- ---------- ----------
$ 4,885.9 $ 4,598.1 $ 4,870.1
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, $51.2 and $128.4 in 1994, 1993 and 1992, respectively, (see Note 4) as
follows: United States, $23.2, $22.4 and $79.8; Europe, $29.6, $20.3 and $29.7;
other areas, $9.9 in 1994 and $9.3 in 1992. General corporate expense includes
special charges of $8.5 in 1993 and $9.6 in 1992.
General corporate expense has been reduced by royalty income of $8.2 in
1994, $31.4 in 1993 and $14.9 in 1992 (see Note 3).
38
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
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:
1994 1993 1992
--------- --------- ---------
Service cost of benefits earned during the period.................. $ 53.8 $ 48.3 $ 48.1
Interest cost of projected benefit obligation...................... 201.5 198.9 192.2
Actual return on assets............................................ (73.3) (225.7) (147.7)
Net amortization and deferral...................................... (92.6) 69.3 (5.1)
--------- --------- ---------
$ 89.4 $ 90.8 $ 87.5
Following is a summary of assumptions used in the accounting for the U.S.
defined benefit plans.
1994 1993 1992
--------- --------- ---------
Discount rate used in determining present values.................. 8.5% 7.5% 8.75%
Annual increase in future compensation levels..................... 4.5% 4.0% 5.0%
Expected long-term rate of return on assets....................... 8.5% 8.5% 8.75%
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 cost of all foreign
pension plans charged to income was $1.2 in 1994, $14.2 in 1993 and $9.0 in
1992.
The components of net periodic pension cost for foreign defined benefit
pension plans are as follows:
1994 1993 1992
--------- --------- ---------
Service cost of benefits earned during the period................. $ 30.3 $ 25.8 $ 29.8
Interest cost of projected benefit obligation..................... 47.6 46.3 47.0
Actual return on assets........................................... (43.2) (111.7) (38.4)
Net amortization and deferral..................................... (37.1) 50.7 (32.8)
--------- --------- ---------
$ (2.4) $ 11.1 $ 5.6
Assumptions used in the accounting for foreign defined benefit plans were:
1994 1993 1992
---------- ----------- ------------
Discount rate used in determining present values.................. 4.5-9.0% 5.0-9.0% 5.0-9.5%
Annual increase in future compensation levels..................... 2.0-8.0% 2.0-8.0% 2.0-8.0%
Expected long-term rate of return on assets....................... 5.5-9.5% 6.0-9.5% 6.0-10.3%
39
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
NOTE 20 -- PENSION PLANS (CONTINUED)
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.
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)
Plans Whose Plans Whose
Assets Exceed Accumulated
Accumulated Benefits
1993 (U.S. and Foreign) Benefits Exceed Assets
--------------------------------------------------------------------------------- ------------- -------------
Actuarial present value of benefit obligations:
Vested benefit obligation...................................................... $ (309.7) $ (2,472.0)
Accumulated benefit obligation................................................. $ (389.5) $ (2,626.5)
Projected benefit obligation................................................... $ (480.6) $ (2,909.0)
Plan assets at fair value........................................................ 637.7 2,381.7
------------- -------------
Projected benefit obligation (in excess of) less than plan assets................ 157.1 (527.3)
Remaining unrecognized net transition asset...................................... (71.4) (9.2)
Unrecognized prior service cost.................................................. 1.8 228.6
Unrecognized net (gain) loss..................................................... (23.1) 170.3
Fourth-quarter 1993 contributions to plans....................................... 38.0
Adjustment to recognize minimum liability........................................ (113.0)
------------- -------------
Overfunded (unfunded) pension asset (liability) recognized in the statement of
financial position.............................................................. $ 64.4 $ (212.6)
Adjustments recorded to recognize the minimum liability required for defined
benefit pension plans whose accumulated benefits exceed assets amounted to
$129.4 in 1994 and $113.0 in 1993. A corresponding amount was recognized as an
intangible asset to the extent of unrecognized prior service cost and
unrecognized transition obligation. At December 31, 1994, $9.6 of excess minimum
liability resulted in a reduction in stockholders equity, net of income taxes,
of $5.9. At December 31, 1993, $21.0 of excess minimum liability resulted in a
reduction in stockholders equity, net of income taxes, of $12.8.
40
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
NOTE 20 -- PENSION PLANS (CONTINUED)
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
In 1992, Honeywell adopted Statement of Financial Accounting Standards No.
106 (SFAS 106), "Employers' Accounting for Postretirement Benefits Other Than
Pensions," which requires recognition of the expected cost of providing
postretirement benefits over the time employees earn the benefits.
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.
Honeywell elected to immediately recognize the cumulative effect of this
change in accounting for postretirement benefits for both U.S. and Canadian
plans, reducing net income by $151.3 ($1.09 per share). The pre-tax cumulative
effect of $244.1 represents the accumulated postretirement benefit obligation
(APBO) existing at January 1, 1992, less $11.3 related to discontinued product
lines recorded in prior years.
The components of net periodic postretirement benefit cost are as follows:
1994 1993 1992
----- ----- -----
Service cost of benefits earned during the period........... $10.4 $11.5 $10.5
Interest cost on accumulated post-retirement benefit
obligation................................................. 18.0 22.2 20.9
Net amortization............................................ 0.5
----- ----- -----
$28.9 $33.7 $31.4
The amounts recognized in Honeywell's statement of financial position are as
follows:
1994 1993
------ ------
Accumulated postretirement benefit obligation:
Retirees.................................................. $ 87.7 $ 86.6
Fully eligible active plan participants................... 58.7 41.5
Other active plan participants............................ 151.8 129.9
Unrecognized prior service cost........................... (7.7)
Unrecognized net gain..................................... 2.3 25.7
------ ------
Accrued postretirement benefit cost......................... $292.8 $283.7
The discount rate used in determining the APBO was 8.0 percent in 1994 and
7.0 percent in 1993. The assumed health-care cost trend rate used in measuring
the APBO was 10.1 percent in 1995, then declining by 0.6 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 1 percent increase in
the health-care trend rate would increase the APBO by 11 percent at December 31,
1994, and the net periodic postretirement benefit cost by 14 percent for 1994.
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 by
41
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
NOTE 22 -- CONTINGENCIES (CONTINUED)
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 has filed counterclaims
against Litton alleging, among other things, violations by Litton of various
antitrust laws including attempted monopolization of markets for inertial
systems and interference with Honeywell's relationships with suppliers.
The trial of the patent infringement and intentional interference claims
commenced June 4, 1993, and on August 31, 1993, a federal court jury in U.S.
District Court in Los Angeles returned a verdict against Honeywell on each of
these claims and awarded damages in the amount of $1,200.0 and concluded that
the patent infringement was willful. Honeywell contended that the verdict was
unsupported by the facts; that the Litton patent was invalid; and that
Honeywell's process differed from Litton's. The judge in the case held a hearing
November 22, 1993, on various issues including, among others, Honeywell's claims
that the patent was improperly obtained due to alleged "inequitable conduct" on
the part of Litton; Honeywell's other legal and equitable defenses; and Litton's
motion to enhance the damage award. On January 9, 1995, the court issued a
decision in favor of Honeywell, ruling 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. The
court further ruled that if the judgment is subsequently vacated or reversed as
a result of an appeal of the court's ruling, a new trial on the issue of damages
would be held on the ground that the jury's award was inconsistent with the
clear weight of the evidence and to permit it to stand would constitute a
miscarriage of justice. Litton has filed a motion to appeal the court's ruling.
The trial for the antitrust claims of Litton and Honeywell is currently
scheduled to commence in November 1995.
Honeywell believes that the court's ruling was correct and continues to
believe that Litton's claims are without merit. 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 current 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 subjects 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.
42
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
NOTE 22 -- CONTINGENCIES (CONTINUED)
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.
NOTE 23 -- QUARTERLY DATA (UNAUDITED)
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).
1993 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
---------------------------------------------------------------- ---------- ---------- ---------- ----------
Sales........................................................... $1,438.6 $1,452.0 $1,452.3 $1,620.1
Cost of sales................................................... 989.8 982.2 985.4 1,062.2
Net income...................................................... 57.3 71.4 80.9 112.6
Per share..................................................... 0.42 0.53 0.60 0.85
The third quarter of 1993 includes a gain of $9.2 from the revaluation of
deferred tax assets (see Note 5). The fourth quarter of 1993 benefited from a
change in estimate of $33.4 for postemployment benefits (see Note 1) that was
partially offset by accruals for facilities closures and other expenses in the
amount of $26.9. Following is a summary of other significant items affecting
1993 results.
1993 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
----------------------------------------------------------------- --------- ---------- ---------- ----------
Gain from litigation settlements (see Note 3).................... $22.4 $10.2
After tax...................................................... 13.9 6.3
Per share...................................................... 0.10 0.05
Special charges (see Note 4)..................................... (23.2) (28.0)
After tax...................................................... (13.3) (15.5)
Per share...................................................... (0.10) (0.12)
Common Stock Price
(New York Stock
Exchange Composite)
Dividends
Per Share High Low
---------- ---------- ----------
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
1993 First Quarter................................ $.2225 $35 1/2 $31 1/2
Second Quarter............................... .2225 38 1/4 32 1/4
Third Quarter................................ .2225 39 3/8 34 5/8
Fourth Quarter............................... .24 37 31
Stockholders of record on February 1, 1995, totaled 31,940.
43
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 8 and page 22 of the Honeywell Notice of 1995 Annual Meeting
and Proxy Statement are incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Pages 12 through 20 of the Honeywell Notice of 1995 Annual Meeting and Proxy
Statement are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Page 11 of the Honeywell Notice of 1995 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.
PAGE
---------
Honeywell Inc. and Subsidiaries:
Independent Auditors' Report....................................................... 20
Income Statement................................................................... 21
Statement of Financial Position.................................................... 22
Statement of Cash Flows............................................................ 23
Notes to Financial Statements...................................................... 24-43
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.................................................................. 20
Schedules for the Years Ended December 31, 1994, 1993 and 1992:
II -- Valuation Reserves.................................................... 47
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.
44
3. EXHIBITS
Documents Incorporated by Reference:
(3)(a) Restated Certificate of Incorporation of Honeywell Inc. dated June 18,
1991.
(4)(a) Rights Agreement between Honeywell Inc. and Manufacturers Hanover Trust
Company, as Rights Agent, dated as of February 24, 1986, Amended and
Restated as of June 17, 1986, Amended and Restated as of December 12, 1988,
Amended as of April 2, 1990.
(10)(iii)(f) Restricted-Stock Retirement Plan for Non-Employee Directors, is
incorporated by reference to Exhibit 10(iii)(g) to Honeywell's Annual
Report on Form 10-K for 1993.*
(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.*
(99)(ii) Honeywell Notice of 1995 Annual Meeting and Proxy Statement.**
Exhibits submitted herewith:
(3)(b) By-laws of Honeywell Inc., as amended through February 21, 1995.
(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.
(10)(iii)(a) Honeywell Key Employee Severance Plan, as amended.*
(10)(iii)(b) Honeywell Supplementary Executive Retirement Plan for Mid-Career Hires, as
amended.*
(10)(iii)(c) Honeywell-Norwest Rabbi Trust Agreement, as amended.*
(10)(iii)(d) 1993 Honeywell Stock and Incentive Plan, as amended.*
(10)(iii)(e) 1988 Honeywell Stock and Incentive Plan, as amended.*
(10)(iii)(g) Honeywell Corporate Executive Compensation Plan, as amended.*
(10)(iii)(h) Honeywell Supplementary Executive Retirement Plan for Compensation in
Excess of $200,000, as amended.*
(10)(iii)(i) Honeywell Supplementary Executive Retirement Plan for CECP Participants, as
amended.*
(10)(iii)(j) Honeywell Supplementary Retirement Plan, as amended.*
(10)(iii)(k) Honeywell Supplementary Executive Retirement Plan for Benefits in Excess of
Limits Under Tax Reform Act of 1986, as amended.*
(10)(iii)(m) Form of Executive Termination Contract.*
(10)(iii)(n) Honeywell Inc. Compensation Plan for Outside Directors.*
(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.
(27) Financial Data Schedule.
(B) REPORTS ON FORM 8-K
None
<FN>
------------------------
*Management contract or compensatory plan or arrangement.
**Only the portions of Exhibit (99)(ii) specifically incorporated by reference
are deemed filed with the Commission.
45
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 29, 1995
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
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 29, 1995
46
SCHEDULE II
HONEYWELL INC. AND SUBSIDIARIES
VALUATION RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
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, 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
------------- ------ ------ -----------
------------- ------ ------ -----------
Year ended December 31, 1992............................ $ 26.3 $ 13.1(1) $ 12.7(2) $ 26.7
------------- ------ ------ -----------
------------- ------ ------ -----------
LONG-TERM RECEIVABLES
--------------------------------------------------------
Year ended December 31, 1994............................ $ 0.5 $ -- $ (0.2)(2) $ 0.7
------------- ------ ------ -----------
------------- ------ ------ -----------
Year ended December 31, 1993............................ $ 0.8 $ -- $ 0.3(2) $ 0.5
------------- ------ ------ -----------
------------- ------ ------ -----------
Year ended December 31, 1992............................ $ 1.7 -- $ 0.9(2) $ 0.8
------------- ------ ------ -----------
------------- ------ ------ -----------
Reserves deducted from assets to which they apply --
valuation reserve:
LONG-TERM RECEIVABLES
--------------------------------------------------------
Year ended December 31, 1994............................ $ 3.6 $ (1.7)(1) $ -- $ 1.9
------------- ------ ------ -----------
------------- ------ ------ -----------
Year ended December 31, 1993............................ $ 2.9 $ 0.7(1) $ -- $ 3.6
------------- ------ ------ -----------
------------- ------ ------ -----------
Year ended December 31, 1992............................ $ 7.9 $ -- $ 5.0(3) $ 2.9
------------- ------ ------ -----------
------------- ------ ------ -----------
Reserves deducted from assets to which they apply --
allowance for amortization of intangibles:
GOODWILL
--------------------------------------------------------
Year ended December 31, 1994............................ $ 34.3 $ 8.6(4) $ 0.6(5) $ 42.3
------------- ------ ------ -----------
------------- ------ ------ -----------
Year ended December 31, 1993............................ $ 30.4 $ 6.7(4) $ 2.8(5) $ 34.3
------------- ------ ------ -----------
------------- ------ ------ -----------
Year ended December 31, 1992............................ $ 24.8 $ 5.3(4) $ (0.3)(5) $ 30.4
------------- ------ ------ -----------
------------- ------ ------ -----------
PATENTS, LICENSES AND TRADEMARKS
--------------------------------------------------------
Year ended December 31, 1994............................ $ 170.0 $ 24.2(4) $ 18.8(5) $ 175.4
------------- ------ ------ -----------
------------- ------ ------ -----------
Year ended December 31, 1993............................ $ 144.2 $ 25.8(4) $ -- $ 170.0
------------- ------ ------ -----------
------------- ------ ------ -----------
Year ended December 31, 1992............................ $ 119.8 $ 24.4(4) $ -- $ 144.2
------------- ------ ------ -----------
------------- ------ ------ -----------
SOFTWARE AND OTHER INTANGIBLES
--------------------------------------------------------
Year ended December 31, 1994............................ $ 135.4 $ 19.3(4) $ 2.3(5) $ 152.4
------------- ------ ------ -----------
------------- ------ ------ -----------
Year ended December 31, 1993............................ $ 117.8 $ 17.1(4) $ (0.5)(5) $ 135.4
------------- ------ ------ -----------
------------- ------ ------ -----------
Year ended December 31, 1992............................ $ 96.1 $ 20.2(4) $ (1.5)(5) $ 117.8
------------- ------ ------ -----------
------------- ------ ------ -----------
<FN>
--------------------------
Notes: (1) Represents amounts included in selling, general and administrative
expenses.
(2) Represents uncollectible accounts written off, less recoveries and
translation adjustments.
(3) Represents reclassification of amount to other liabilities.
(4) Represents amounts included in cost of sales.
(5) Represents removal of fully amortized amounts and translation
adjustments.
47