MANAGEMENT'S DISCUSSION AND ANALYSIS
AEROSPACE SOLUTIONS
SALES OVERVIEW Sales in 1999 were $9,908 million or basically flat compared with
1998. Sales of avionics products were higher due principally to continued strong
demand for flight safety products such as collision avoidance and enhanced
ground proximity warning systems. Sales to the aftermarket, particularly repair
and overhaul and the military, were also higher. The acquisition of a
controlling interest in the Normalair-Garrett Ltd. (NGL) environmental controls
joint venture in the prior year also increased sales in 1999. This increase was
offset by lower sales to commercial air transport and military original
equipment manufacturers, and the effects of divestitures and a restructuring of
a government technical services contract.
Sales in 1998 were $9,890 million, an increase of $1,492 million, or
18 percent compared with 1997. This increase was driven by strong sales of
avionics products and increased deliveries to air transport manufacturers. Sales
of aftermarket products and services also increased. The acquisitions of the
Grimes Aerospace (Grimes) lighting systems business, Banner Aerospace (Banner)
FAA-certified hardware parts business and NGL also contributed to the sales
increase.
SEGMENT PROFIT OVERVIEW Segment profit in 1999 was $1,918 million, an increase
of $331 million, or 21 percent compared with 1998. The increase principally
resulted from improved sales of higher-margin aftermarket and avionics products
and cost structure improvements primarily from census and benefit cost
reductions.
Segment profit in 1998 was $1,587 million, an increase of $436 million, or
38 percent compared with 1997. The increase was driven by higher sales and the
improved mix of higher-margin aftermarket and avionics products and services.
Productivity improvements and divestitures also contributed to the increase. The
acquisitions of the Grimes, Banner and NGL businesses also improved segment
profit.
NET SALES
(Dollars in Billions)
[BAR GRAPH]
97............ $8.4
98............ $9.9
99............ $9.9
SEGMENT MARGIN
(Percent)
[BAR GRAPH]
97............ 13.7%
98............ 16.0%
99............ 19.4%
20 Honeywell 1999 Annual Report
MANAGEMENT'S DISCUSSION AND ANALYSIS
AUTOMATION & ASSET MANAGEMENT
SALES OVERVIEW Sales in 1999 were $6,115 million, an increase of $158 million,
or 3 percent compared with 1998. Sales were higher for the Home and Building
Control business driven by growth in control and consumer products and building
services and security. Acquisitions also contributed to the sales increase.
Lower sales from the energy retrofit and installed systems businesses were a
partial offset. Sales for the Industrial Control business were basically flat
compared with the prior year. Higher sales due to acquisitions and growth in the
sensing and control business were offset by the effects of continued weakness in
the pulp and paper and refining markets. Sales for the segment were also
negatively impacted by foreign currency fluctuations due to the strong dollar.
Sales in 1998 were $5,957 million or basically flat compared with 1997.
Sales were slightly higher for the Home and Building Control business, driven by
continued solid growth in the services business. This growth was moderated by a
planned reduction in the lower-margin energy retrofit and installed systems
businesses and unusually warm winters in North America and Europe. Sales for the
Industrial Control business were down slightly; however, after adjusting for
divestitures and negative foreign currency fluctuations due to the strong
dollar, sales increased slightly despite weakness in the pulp and paper,
refining and industrial components markets.
SEGMENT PROFIT OVERVIEW Segment profit in 1999 was $767 million, an increase of
$62 million, or 9 percent compared with 1998. Segment profit for the Home and
Building Control business was up significantly due to improvement in the control
products business and the exiting of the lower-margin energy retrofit and
installed systems businesses. Cost savings from census reductions also
contributed to the improvement. This increase was offset somewhat by lower
segment profit for the Industrial Control business as growth in the
higher-margin sensing and control business and cost structure improvements were
more than offset by the effects of continued weakness in the pulp and paper and
refining markets.
Segment profit in 1998 was $705 million, an increase of $95 million, or 16
percent compared with 1997. Segment profit for the Industrial Control business
increased significantly, driven by improvement in the Measurex business, the
contribution of higher-margin services and software growth and ongoing
productivity improvements. Segment profit for the Home and Building Control
business also improved due to improvement in the solutions and services business
resulting from productivity gains and a strategic repositioning. Solid profit
growth in the products business, despite challenges posed by the weather,
particularly in the residential products area, also contributed to the increase.
NET SALES
(Dollars in Billions)
[BAR GRAPH]
97.................. $5.9
98.................. $6.0
99.................. $6.1
SEGMENT MARGIN
(Percent)
[BAR GRAPH]
97.................. 10.3%
98.................. 11.8%
99.................. 12.5%
SALES MIX
[PIE CHART]
INDUSTRIAL CONTROL
Industrial Automation ...... 30%
Sensing & Control .......... 12%
HOME & BUILDING
Home & Building
Solutions & Services ....... 32%
Home & Building Products ... 26%
24 Honeywell 1999 Annual Report
MANAGEMENT'S DISCUSSION AND ANALYSIS
PERFORMANCE MATERIALS
SALES OVERVIEW Sales in 1999 were $4,007 million, a decrease of $162 million, or
4 percent compared with 1998 due principally to divestitures including the
environmental catalyst, Laminate Systems and phenol businesses. Lower sales for
carpet fibers also contributed to the decrease. Higher sales for specialty
films, engineering plastics and waxes were a partial offset. Higher sales from
the acquisitions of Johnson Matthey Electronics, a supplier of wafer fabrication
materials and interconnect products to the electronics and telecommunications
industries, and Pharmaceutical Fine Chemicals (PFC), a supplier of active and
intermediate pharmaceutical chemicals, were also a partial offset.
Sales in 1998 were $4,169 million, a decrease of $79 million, or 2 percent
compared with 1997. The divestitures of the phenol, environmental catalyst and
European laminates businesses and the exiting of the European carpet fibers and
a portion of the North American textile businesses drove the decline in sales.
Lower sales for the Electronic Materials business, reflecting softness in the
semiconductor and electronic markets, also contributed to the sales decrease.
Higher sales for specialty films and engineering plastics were a partial offset.
Increased sales due to the acquisitions of the Astor Holdings wax business and
PFC were also a partial offset.
SEGMENT PROFIT OVERVIEW Segment profit in 1999 was $439 million, a decrease of
$195 million, or 31 percent compared with 1998. The decrease principally
reflects the effects of the continuing pricing pressures in the Performance
Polymers and Electronic Materials businesses and higher raw material costs in
certain Performance Polymers businesses. The impact of prior year divestitures
also contributed to the decrease. The effect of improved sales volume for
specialty films, engineering plastics and waxes was a partial offset.
Segment profit in 1998 was $634 million, an increase of $93 million, or 17
percent compared with 1997. The increase was driven by a more favorable
price-cost relationship in the Performance Polymers nylon and polyester
businesses and the divestitures of the phenol and environmental catalyst
businesses. Lower raw material costs, acquisitions and cost structure
improvements from census reductions in the Specialty Chemicals businesses also
contributed to the increase. The negative effects of pricing pressures in
certain Specialty Chemicals businesses and lower sales for the Electronic
Materials business were partial offsets.
NET SALES
(Dollars in Billions)
[BAR GRAPH]
97.................. $4.2
98.................. $4.2
99.................. $4.0
SEGMENT MARGIN
(Percent)
[BAR GRAPH]
97.................. 12.7%
98.................. 15.2%
99.................. 11.0%
SALES MIX
[PIE CHART]
Performance Polymers .... 45%
Electronic Materials .... 19%
Specialty Chemicals ..... 36%
26 Honeywell 1999 Annual Report
MANAGEMENT'S DISCUSSION AND ANALYSIS
POWER & TRANSPORTATION PRODUCTS
SALES OVERVIEW Sales in 1999 were $3,581 million, an increase of $194 million,
or 6 percent compared with 1998. Sales for the Transportation and Power Systems
business were significantly higher driven by strong growth for the Turbocharging
Systems business due primarily to continued strong sales in Europe reflecting
the turbodiesel's increased penetration of the passenger car market. Sales for
the Commercial Vehicle Systems business also increased due principally to
increased North American truck builds. Sales for the Consumer Products Group
business also increased, led by higher sales of Prestone'r' products and
FRAM'r' filters. Lower sales for the Friction Materials business due to
pricing pressures and weakness in the European market were a partial offset.
Sales were also negatively impacted by foreign currency fluctuations due to the
strong dollar.
Sales in 1998 were $3,387 million, a decrease of $382 million, or 10
percent compared with 1997, reflecting the disposition of the automotive Safety
Restraints business. Excluding the divested Safety Restraints business, sales
increased 11 percent. Sales for the Transportation and Power Systems business
were strong led by higher sales for the Turbocharging Systems business which
benefited from increased penetration of the turbocharged diesel passenger car
market in Europe and the light truck market in North America. Sales for the
Commercial Vehicle Systems business also improved significantly, driven by an
improvement in truck builds and increased market penetration for anti-lock brake
systems. The increase also reflects higher sales for the Consumer Products Group
business due to the 1997 acquisitions of the Prestone'r' Products and Holt
Lloyd car care products businesses. Sales for the Friction Materials business
were moderately lower.
SEGMENT PROFIT OVERVIEW Segment profit in 1999 was $322 million, an increase of
$88 million, or 38 percent compared with 1998. The increase reflects higher
sales for the Transportation and Power Systems and Consumer Products Group
businesses. Cost structure improvements in these businesses resulting from Six
Sigma initiatives, materials procurement savings and census reductions also
contributed to the increase.
Segment profit in 1998 was $234 million, a decrease of $74 million, or 24
percent compared with 1997. The decrease reflects the absence of segment profit
from the divested Safety Restraints business. Segment profit from the Consumer
Products Group business decreased substantially, due in part to the initial
costs of new distribution facilities, higher advertising expense to increase
brand awareness and other expenses to improve future operations. The Friction
Materials business segment profit was also lower due primarily to decreased
sales. Segment profit from the Transportation and Power Systems businesses was
higher due principally to strong sales growth.
NET SALES
(Dollars in Billions)
[BAR GRAPH]
97.................. $3.8
98.................. $3.4
99.................. $3.6
SEGMENT MARGIN
(Percent)
[BAR GRAPH]
97.................. 8.2%
98.................. 6.9%
99.................. 9.0%
SALES MIX
[PIE CHART]
Turbocharging Systems ....... 32%
Friction Materials .......... 24%
Consumer Products Group ..... 29%
Commercial Vehicle Systems .. 15%
28 Honeywell 1999 Annual Report
SELECTED FINANCIAL DATA
Honeywell International Inc.
YEARS ENDED DECEMBER 31 1999 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
(Dollars and Shares in Millions Except Per Share Amounts)
=====================================================================================================================
RESULTS OF OPERATIONS
Net sales $ 23,735 $ 23,555 $ 22,499 $ 21,283 $ 21,077 $ 18,874
--------------------------------------------------------------------
Net income(1) 1,541 1,903 1,641 1,423 1,209 1,038
- ---------------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE
Net earnings:
Basic $ 1.95 $ 2.38 $ 2.04 $ 1.77 $ 1.50 $ 1.28
--------------------------------------------------------------------
Assuming dilution 1.90 2.34 2.00 1.73 1.48 1.27
--------------------------------------------------------------------
Dividends 0.68 0.60 0.52 0.45 0.39 0.3238
- ---------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION AT YEAR-END
Property, plant and equipment--net $ 5,630 $ 5,600 $ 5,380 $ 5,353 $ 5,841 $ 5,360
--------------------------------------------------------------------
Total assets 23,527 22,738 20,118 18,322 17,525 16,207
--------------------------------------------------------------------
Short-term debt 2,609 2,190 1,238 867 956 624
--------------------------------------------------------------------
Long-term debt 2,457 2,776 2,394 2,034 1,848 1,926
--------------------------------------------------------------------
Total debt 5,066 4,966 3,632 2,901 2,804 2,550
--------------------------------------------------------------------
Shareowners' equity 8,599 8,083 6,775 6,385 5,632 4,837
- ---------------------------------------------------------------------------------------------------------------------
FINANCIAL STATISTICS(2)
Return on net sales (segment profit) 13.8 12.4 10.9 10.2 8.8 8.7
--------------------------------------------------------------------
Return on average investment (after-tax) 17.8 17.6 18.2 18.3 17.0 17.3
--------------------------------------------------------------------
Return on average shareowners' equity (after-tax) 26.2 25.9 24.9 23.8 22.9 23.2
--------------------------------------------------------------------
Total debt as a percent of total capital
(cash adjusted) 26.6 32.5 30.2 19.1 27.6 29.1
--------------------------------------------------------------------
Book value per share of common stock 10.82 10.17 8.52 7.95 7.01 6.01
- ---------------------------------------------------------------------------------------------------------------------
OTHER INFORMATION
Common shares outstanding at year-end 795.1 795.3 794.9 802.7 803.4 804.8
--------------------------------------------------------------------
Shares used in computing per share amounts:
Basic 792.0 798.4 803.0 803.1 805.3 809.6
--------------------------------------------------------------------
Assuming dilution 809.0 814.0 822.1 823.2 819.3 818.1
--------------------------------------------------------------------
Average investment(3) $ 12,843 $ 11,589 $ 9,717 $ 8,301 $ 7,858 $ 6,637
--------------------------------------------------------------------
Number of employees at year-end(4) 120,000 127,400 128,000 129,600 138,600 138,300
- ---------------------------------------------------------------------------------------------------------------------
(1) In 1999, includes merger, repositioning and other charges and gains on the
sales of our Laminate Systems business and our investment in AMP common
stock resulting in a net after-tax charge of $624 million, or $0.78 per
share. In 1998, includes repositioning charges, a gain on settlement of
litigation claims and a tax benefit resulting from the favorable resolution
of certain prior-year research and development tax claims resulting in a
net after-tax charge of $4 million, with no impact on the per share amount.
In 1997, includes repositioning and other charges, gains on the sales of
our automotive Safety Restraints and certain Industrial Control businesses
and a charge related to the 1996 sale of our automotive Braking Systems
business resulting in a net after-tax charge of $5 million, or $0.01 per
share. In 1996, includes repositioning and other charges and a gain on the
sale of our automotive Braking Systems business resulting in a net
after-tax gain of $9 million, or $0.01 per share.
(2) The returns ratios exclude the impact of repositioning and other charges in
1999, 1998, 1997 and 1996, gains on the sales of our Laminate Systems
business and our investment in AMP common stock in 1999, gain on settlement
of litigation claims and a tax benefit resulting from the favorable
resolution of certain prior-year research and development tax claims in
1998, gains on the sales of our automotive Safety Restraints and certain
Industrial Control businesses and a charge related to the 1996 sale of our
automotive Braking Systems business in 1997, and gain on the sale of our
Braking Systems business in 1996.
(3) Investment is defined as shareowners' equity and non-current deferred
taxes-net plus cash adjusted total debt.
(4) Includes employees at facilities operated for the U.S. Department of
Energy.
30 Honeywell 1999 Annual Report
MANAGEMENT'S DISCUSSION AND ANALYSIS
OPERATIONS
RESULTS OF OPERATIONS
(Dollars in Millions) 1999 1998 1997
- -------------------------------------------------------------
NET SALES
------------------------------------
Aerospace Solutions $ 9,908 $ 9,890 $ 8,398
------------------------------------
Automation & Asset
Management 6,115 5,957 5,934
------------------------------------
Performance Materials 4,007 4,169 4,248
------------------------------------
Power & Transportation
Products 3,581 3,387 3,769
------------------------------------
Corporate 124 152 150
- -------------------------------------------------------------
$ 23,735 $ 23,555 $ 22,499
- -------------------------------------------------------------
SEGMENT PROFIT
------------------------------------
Aerospace Solutions $ 1,918 $ 1,587 $ 1,151
------------------------------------
Automation & Asset
Management 767 705 610
------------------------------------
Performance Materials 439 634 541
------------------------------------
Power & Transportation
Products 322 234 308
------------------------------------
Corporate (175) (248) (167)
- -------------------------------------------------------------
$ 3,271 $ 2,912 $ 2,443
- -------------------------------------------------------------
Refer to Note 23 of Notes to Financial Statements for further information on our
reportable segments.
Net sales in 1999 were $23,735 million, an increase of $180 million, or 1
percent compared with 1998. Excluding the effect of divestitures and a change
from prime contractor to sub-contractor status on a government technical
services contract, sales increased approximately 4 percent. This increase
resulted principally from acquisitions. Fluctuations in foreign currency rates
decreased sales approximately 1 percent. Net sales in 1998 were $23,555 million,
an increase of $1,056 million, or 5 percent, compared with 1997. Acquisitions
and higher sales volume increased sales approximately 6 percent each. The
increase in sales volume includes a partial offset for lower selling prices. The
effects of divestitures and fluctuations in foreign currency rates lowered sales
by 6 percent and 1 percent, respectively.
Total segment profit in 1999 was $3,271 million, an increase of $359
million, or 12 percent compared with 1998. Segment profit margin for 1999 was
13.8 percent compared with 12.4 percent in 1998. The increase in segment profit
in 1999 was led by a substantial improvement by the Aerospace Solutions segment
with the Power & Transportation Products and Automation & Asset Management
segments also contributing solid gains. Lower Corporate expenses also
contributed to the increase. A substantial decrease in segment profit for the
Performance Materials segment was a partial offset. Total segment profit in 1998
was $2,912 million, an increase of $469 million, or 19 percent compared with
1997. Segment profit margin for 1998 was 12.4 percent compared with 10.9 percent
in 1997. The increase in segment profit in 1998 was led by a substantial
improvement by the Aerospace Solutions segment with the Automation & Asset
Management and Performance Materials segments also showing solid gains. A
substantial decrease in segment profit for the Power & Transportation Products
segment and higher Corporate expenses were partial offsets.
A discussion of net sales and segment profit by reportable segment can be
found in the Segment section of Management's Discussion and Analysis appearing
on pages 20, 24, 26 and 28 of this Annual Report.
Gain on sale of non-strategic businesses of $106 million in 1999 reflects
the pretax gain on the sale of our Laminate Systems business. The gain on sale
of non-strategic businesses of $303 million in 1997 was comprised of $354
million representing the total gain on the sales of our automotive Safety
Restraints business and certain Industrial Control businesses. This was
partially offset by a charge of $51 million related to the settlement of the
1996 sale of our automotive Braking Systems business. See Note 5 of Notes to
Financial Statements for further information.
Equity in income of affiliated companies of $76 million in 1999 decreased
by $86 million, or 53 percent compared with 1998. The decrease reflects a charge
of $40 million relating to the writedown of an equity investment and an equity
investee's severance actions as well as lower earnings from our UOP process
technology (UOP) joint venture. Equity in income of affiliated companies of $162
million in 1998 decreased by $29 million, or 15 percent, compared with 1997. The
decrease resulted mainly from lower earnings from UOP, partially offset by a
gain on the sale of a portion of our interest in our European Commercial Vehicle
Systems joint venture.
- --------------------------------------------------------------------------------
[BAR GRAPH] [BAR GRAPH]
SEGMENT PROFIT SEGMENT MARGIN
(Dollars in Millions) (Percent)
1997 1998 1999 1997 1998 1999
---- ---- ---- ---- ---- ----
$2,443 $2,912 $3,271 10.9% 12.4% 13.8%
Honeywell 1999 Annual Report 31
MANAGEMENT'S DISCUSSION AND ANALYSIS
Other (income) expense, $307 million of income in 1999, increased by $280
million compared with 1998. The increase principally reflects the net gain of
$268 million on our disposition of our investment in AMP Incorporated (AMP)
common stock. Other (income) expense, $27 million of income in 1998, decreased
by $60 million compared with 1997, principally reflecting lower investment
income and reduced benefits from foreign exchange hedging. A gain on litigation
settlements was a partial offset. See Note 6 of Notes to Financial Statements
for further information.
Interest and other financial charges of $265 million in 1999 decreased by
$10 million, or 4 percent, compared with 1998. The decrease results from lower
interest rates and tax interest expense somewhat offset by the effects of higher
average debt outstanding during 1999. Interest and other financial charges of
$275 million in 1998 were basically flat compared with 1997.
The effective tax rate was 31.5 percent, 31.3 percent and 32.2 percent in
1999, 1998 and 1997, respectively. See Note 8 of Notes to Financial Statements
for further information.
Net income in 1999 of $1,541 million, or $1.90 per share, was 19 percent
lower than 1998 net income of $1,903 million, or $2.34 per share. Net income in
1999 included the gains on our dispositions of our Laminate Systems business and
our investment in AMP and merger, repositioning and other charges. Net income in
1998 included repositioning charges, litigation settlements and a tax
settlement. Adjusted for these items, net income in 1999 was $624 million, or
$0.78 per share, higher than reported. This represents an increase of 14 percent
over 1998 if both years are adjusted for these items. The higher net income in
1999 was the result of substantially improved earnings for the Aerospace
Solutions, Automation & Asset Management and Power & Transportation Products
segments. The Performance Materials segment had lower earnings. Net income in
1998 of $1,903 million, or $2.34 per share, was 16 percent higher than 1997 net
income of $1,641 million, or $2.00 per share. Net income in 1997 included the
gains on our dispositions of our automotive Safety Restraints and certain
Industrial Control businesses and repositioning and other charges. Adjusted for
repositioning charges, litigation settlements and a tax settlement, net income
in 1998 was $4 million more than reported and earnings per share were the same.
This represents an increase of 16 percent over 1997 if both years are adjusted
for repositioning and other charges and the specified settlements and gains. The
higher net income in 1998 was the result of substantially improved earnings for
the Aerospace Solutions and Automation & Asset Management segments. Earnings for
the Performance Materials segment were also slightly higher. The Power &
Transportation Products segment had lower earnings.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Total assets at December 31, 1999 were $23,527 million, an increase of $789
million, or 3 percent from December 31, 1998. Total assets at December 31, 1998
were $22,738 million, an increase of $2,620 million, or 13 percent from December
31, 1997. The increase from year-end 1997 to year-end 1998 primarily reflects
acquisitions and our investment in AMP.
Cash provided by operating activities of $2,374 million during 1999
increased by $400 million compared with 1998 due principally to net income
excluding the impact of the gains on our dispositions of our Laminate Systems
business and our investment in AMP and merger, repositioning and other charges.
Cash provided by operating activities of $1,974 million during 1998 increased by
$40 million compared with 1997.
- --------------------------------------------------------------------------------
[BAR GRAPH] [BAR GRAPH] [BAR GRAPH]
EARNINGS PER SHARE RESEARCH AND FREE CASH FLOW
(Dollars Per Share) DEVELOPMENT EXPENSE (Dollars in Billions)
(Dollars in Millions)
1997 1998 1999 1997 1998 1999 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ----
$2.00 $2.34 $2.68 $796 $876 $909 $1.1 $1.4 $1.7
32 Honeywell 1999 Annual Report
Cash used for investing activities of $291 million during 1999 decreased by
$1,302 million compared with 1998. The decrease relates principally to the
proceeds from the disposition of our investment in AMP. An increase in proceeds
from sales of businesses, primarily Laminate Systems, also contributed to the
decrease. Higher spending for acquisitions, mainly Johnson Matthey Electronics,
and the liquidation in the prior year of short-term investments were partial
offsets. Cash used for investing activities of $1,593 million during 1998
decreased by $403 million compared with 1997 due primarily to lower spending for
acquisitions and the liquidation of short-term investments. This was partially
offset by lower proceeds from the sales of businesses and our investment in AMP.
On February 3, 2000, we completed a tender offer acquiring substantially
all of the outstanding shares of Pittway Corporation (Pittway) Common Stock and
Class A Stock for approximately $2.2 billion, including the assumption of the
net debt of Pittway of approximately $167 million. The acquisition was funded
through the issuance of commercial paper. Pittway designs, manufactures and
distributes security and fire systems for homes and buildings and had 1998
sales of $1.3 billion.
We continuously assess the relative strength of each business in our
portfolio as to strategic fit, market position and profit contribution in order
to upgrade our combined portfolio and identify operating units that will most
benefit from increased investment. We identify acquisition candidates that will
further our strategic plan and strengthen our existing core businesses. We also
identify operating units that do not fit into our long-term strategic plan based
on their market position, relative profitability or growth potential. These
operating units are considered for potential divestiture, restructuring or other
repositioning action subject to regulatory constraints.
- --------------------------------------------------------------------------------
[BAR GRAPH] [BAR GRAPH]
DEBT AS A PERCENT CAPITAL EXPENDITURES
OF TOTAL CAPITAL (Dollars in Millions)
(Percent)
1997 1998 1999 1997 1998 1999
---- ---- ---- ---- ---- ----
30.2% 32.5% 26.6% $1,015 $1,037 $986
Capital expenditures were $986, $1,037 and $1,015 million in 1999, 1998 and
1997, respectively. Spending by the reportable segments and Corporate since 1997
is shown in Note 23 of Notes to Financial Statements. Our total capital
expenditures in 2000 are currently projected at approximately $1,050 million.
These expenditures are expected to be financed principally by internally
generated funds and are primarily planned for expansion and cost reduction.
Cash used for financing activities of $1,110 million during 1999 increased
by $1,002 million compared with 1998. The increase relates principally to lower
net issuances of debt of $1,190 million. Cash dividends paid in 1999 were also
$46 million higher. Lower net stock repurchases of $234 million were a partial
offset. Total debt of $5,066 million at year-end 1999 was $100 million, or 2
percent higher than at December 31, 1998. Cash used for financing activities of
$108 million during 1998 decreased by $677 million compared with 1997. The
decrease relates to higher net issuances of debt of $809 million somewhat offset
by an increase in net stock repurchases of $128 million and higher cash
dividends paid of $47 million. Total debt of $4,966 million at year-end 1998 was
$1,334 million, or 37 percent higher than at December 31, 1997. The increase in
total debt resulted principally from our investment in AMP, acquisitions and
common stock repurchases.
In September 1999, a $1 billion shelf registration filed with the
Securities and Exchange Commission for the issuance of debt securities was
declared effective. In December 1999, we entered into a $3 billion bank
revolving credit facility which is comprised of (a) a $1 billion Five-Year
Credit Agreement; and, (b) a $2 billion 364-Day Credit Agreement, which reduces
to $1 billion on March 31, 2000 bringing the total bank revolving credit
facility to $2 billion. The credit agreements which replaced previous credit
agreements maintained by AlliedSignal and the former Honeywell were established
for general corporate purposes including support for the issuance of commercial
paper. There was $2,023 and $1,773 million of commercial paper outstanding at
year-end 1999 and 1998, respectively. See Note 15 of Notes to Financial
Statements for details of long-term debt and a discussion of the Credit
Agreements.
In January 2000, we entered into an additional $1 billion bank revolving
credit facility to be used to support the issuance of commercial paper to
finance in part the acquisition of Pittway. This bank revolving credit facility
expires on April 12, 2000 and has terms and conditions similar to the $2 billion
364-Day Credit Agreement.
Honeywell 1999 Annual Report 33
MANAGEMENT'S DISCUSSION AND ANALYSIS
We believe that our available cash, committed credit lines, and access to
the public debt markets using debt securities and commercial paper, provide
adequate short-term and long-term liquidity.
From 1997 to 1999, we purchased $3.1 billion of treasury shares in
connection with our stock repurchase programs. As of June 4, 1999, the date of
the merger agreement between AlliedSignal and the former Honeywell, all share
repurchase programs were rescinded.
The Board of Directors approved a quarterly dividend increase of 10.3
percent from $0.17 to $0.1875 per share. The dividend increase will be effective
with the first quarter of 2000.
MERGER AND REPOSITIONING CHARGES Upon completion of the merger between
AlliedSignal and the former Honeywell, we recognized a pretax charge of $642
million for the cost of actions designed to improve our combined competitiveness
and productivity and improve future profitability. The merger-related actions
included the elimination of redundant corporate offices and functional
administrative overhead; elimination of redundant and excess facilities and
workforce in our combined aerospace businesses; adoption of six sigma
productivity initiatives at the former Honeywell businesses; and the transition
to a global shared services model. The components of the charge included
severance costs of $342 million, asset impairments of $108 million, other exit
costs of $57 million and merger-related transaction and period expenses of $135
million. Planned global workforce reductions consisted of approximately 6,500
administrative and manufacturing positions. Asset impairments principally
related to the elimination of redundant or excess corporate and aerospace
facilities and equipment.
- --------------------------------------------------------------------------------
[BAR GRAPH] [BAR GRAPH]
DIVIDENDS PER SHARE MARKET VALUE OF
(Dollars Per Share) COMMON STOCK
(Dollars Per Share)
1997 1998 1999 1997 1998 1999
---- ---- ---- ---- ---- ----
$0.52 $0.60 $0.68 $38.81 $44.31 $57.69
At year-end, approximately $9 million of redundant assets were not able to be
removed from service and are currently being depreciated over their shortened
useful lives. Other exit costs related to lease terminations and contract
cancellation losses negotiated or subject to reasonable estimation at year-end.
Merger-related transaction and period expenses consisted of investment banking
and legal fees, former Honeywell deferred compensation vested upon change in
control and other direct merger-related expenses incurred in the period the
merger was completed. All merger-related actions are expected to be completed by
December 31, 2000.
In 1999, we also recognized a pretax charge of $321 million for the costs
of actions designed to reposition principally the AlliedSignal business units
for improved productivity and future profitability. These repositioning actions
included the organizational realignment of our aerospace businesses to
strengthen market focus and simplify business structure; elimination of an
unprofitable product line and rationalization of manufacturing capacity and
infrastructure in the Performance Polymers business; a reduction in
infrastructure in the Turbocharging Systems business; closing a wax refinery and
carbon materials plant and rationalization of manufacturing capacity in the
Specialty Chemicals business; elimination of two manufacturing facilities in our
Electronic Materials business; a plant closure and outsourcing activity in our
automotive Consumer Products Group business; and related and general workforce
reductions in all AlliedSignal businesses and our Industrial Control business.
The components of the charge included severance costs of $140 million, asset
impairments of $149 million, and other exit costs of $32 million. Global
workforce reductions consisted of approximately 5,100 manufacturing,
administrative, and sales positions. Asset impairments principally related to
manufacturing plant and equipment held for sale and capable of being taken out
of service and actively marketed in the period of impairment. Other exit costs
principally consisted of environmental exit costs associated with chemical plant
shutdowns. All repositioning actions, excluding environmental remediation, are
expected to be completed by December 31, 2000.
We expect that the merger and repositioning actions committed to in 1999
will generate incremental pretax savings of $250 million in 2000, $575 million
in 2001 and $750 million in 2002 principally from planned workforce reductions
and facility consolidations. Cash expenditures for severance, other exit costs,
and future period expenses necessary to execute these
34 Honeywell 1999 Annual Report
actions will exceed $500 million and will principally be incurred in 2000. Such
expenditures will be funded through future operating cash flows, proceeds from
government required divestitures resulting from the merger and sale of
merger-related, excess or duplicate facilities and equipment. The government
required divestitures will not materially affect our results of operations or
financial position.
In 1998, we recognized a pretax charge of $54 million related to
productivity initiatives which included workforce reductions of 1,200 employees
and facility consolidations principally in our Home and Building Control and
Industrial Control businesses. These actions were completed by December 31,
1999, with substantially all reserve spending occurring in 1999.
In 1997, we recognized a pretax charge of $215 million for costs to
eliminate AlliedSignal's three sector administrative offices; consolidate our
automotive Consumer Products Group business; close four performance materials
manufacturing facilities; and, execute workforce reductions and facility
consolidations in our Home and Building Control and Industrial Control
businesses. The charge principally consisted of severance for approximately
2,900 employees and other cash exit costs. These actions were essentially
completed by December 31, 1998, with substantially all reserve spending
occurring in 1998.
The 1998 and 1997 actions generated over $150 million in incremental pretax
savings in 1999 and were funded through proceeds received from the sales of
non-strategic businesses.
ENVIRONMENTAL MATTERS We are subject to various federal, state and local
government requirements relating to the protection of the environment. We
believe that, as a general matter, our policies, practices and procedures are
properly designed to prevent unreasonable risk of environmental damage and that
our handling, manufacture, use and disposal of hazardous or toxic substances are
in accord with environmental laws and regulations. However, mainly because of
past operations and operations of predecessor companies, we, like other
companies engaged in similar businesses, are a party to lawsuits and claims and
have incurred remedial response and voluntary cleanup costs associated with
environmental matters. Additional lawsuits, claims and costs involving
environmental matters are likely to continue to arise in the future. We
continually conduct studies, individually at our owned sites, and jointly as a
member of industry groups at non-owned sites, to determine the feasibility of
various remedial techniques to address environmental matters. It is our policy
to record appropriate liabilities for such matters when environmental
assessments are made or remedial efforts are probable and the costs can be
reasonably estimated. The timing of these accruals is generally no later than
the completion of feasibility studies.
Remedial response and voluntary cleanup expenditures were $78, $77 and $90
million in 1999, 1998 and 1997, respectively, and are currently estimated to be
approximately $82 million in 2000. We expect that we will be able to fund such
expenditures from operating cash flow. The timing of expenditures depends on a
number of factors, including regulatory approval of cleanup projects, remedial
techniques to be utilized and agreements with other parties.
At December 31, 1999 and 1998, the recorded liability for environmental
matters was $349 and $406 million, respectively. In addition, in 1999 and 1998
we incurred operating costs for ongoing businesses of approximately $89 and $75
million, respectively, and capital expenditures of $40 and $52 million,
respectively relating to compliance with environmental regulations.
Although we do not currently possess sufficient information to reasonably
estimate the amounts of liabilities to be recorded upon future completion of
studies or settlements, and neither the timing nor the amount of the ultimate
costs associated with environmental matters can be determined, they may be
significant to our consolidated results of operations. We do not expect that
environmental matters will have a material adverse effect on our consolidated
financial position.
See Note 21 of Notes to Financial Statements for a discussion of our
commitments and contingencies, including those related to environmental matters.
FINANCIAL INSTRUMENTS As a result of our global operating and financing
activities, we are exposed to market risks from changes in interest and foreign
currency exchange rates, which may adversely affect our results of operations
and financial position. We minimize our risks from interest and foreign currency
exchange rate fluctuations through our normal operating and financing activities
and, when deemed appropriate, through the use of derivative financial
instruments. We do not use derivative financial instruments for trading or other
speculative purposes and do not use leveraged derivative financial instruments.
A discussion of our accounting policies for derivative financial instruments is
included in Note 1 of Notes to Financial Statements.
Honeywell 1999 Annual Report 35
MANAGEMENT'S DISCUSSION AND ANALYSIS
Our exposure to market risk from changes in interest rates relates
primarily to our debt obligations. As described in Notes 15 and 17 of Notes to
Financial Statements, we issue both fixed and variable rate debt and use
interest rate swaps to manage our exposure to interest rate movements and reduce
borrowing costs.
Our exposure to market risk for changes in foreign currency exchange rates
arises from international financing activities between subsidiaries and foreign
currency denominated receivables, payables, and firm commitments arising from
international transactions. We attempt to have all such transaction exposures
hedged with internal natural offsets to the fullest extent possible and, once
these opportunities have been exhausted, through foreign currency forward and
option agreements with third parties. We also use derivative financial
instruments to hedge the impact of exchange rate movements on the translated
U.S. dollar value of the net income for a number of foreign subsidiaries.
Foreign currency forward and option agreements used to hedge net income are
marked to market, with gains or losses recognized immediately in income. Our
principal foreign currency exposures relate to the Belgian franc, the French
franc, the German mark (collectively the Euro countries), and the British pound,
the Canadian dollar, and the U.S. dollar. At December 31, 1999, we held or had
written foreign currency forward and option agreements, maturing through 2003.
We write foreign currency options only in combination with purchased options as
an integral transaction and economic alternative to using forward agreements.
Derivative financial instruments expose us to counterparty credit risk for
nonperformance and to market risk related to changes in interest or currency
exchange rates. We manage exposure to counterparty credit risk through specific
minimum credit standards, diversification of counterparties, and procedures to
monitor concentrations of credit risk. Our counterparties are substantial
investment and commercial banks with significant experience using such
derivative instruments. We monitor the impact of market risk on the fair value
and cash flows of our derivative and other financial instruments considering
reasonably possible changes in interest and currency exchange rates and restrict
the use of derivative financial instruments to hedging activities.
The following table illustrates the potential change in fair value for
interest rate sensitive instruments based on a hypothetical immediate
one-percentage-point increase in interest rates across all maturities and the
potential change in fair value for foreign exchange rate sensitive instruments
based on a 10 percent increase in U.S. dollar per local currency exchange rates
across all maturities at December 31, 1999 and 1998.
Estimated
Face or Increase
Notional Carrying Fair (Decrease)
(Dollars in Millions) Amount Value(1) Value(1) In Fair Value
- ------------------------------------------------------------------------------------------------
December 31, 1999
INTEREST RATE SENSITIVE INSTRUMENTS
Long-term debt
(including current
maturities)(2) $(2,712) $(2,705) $(2,702) $(120)
Interest rate swaps 1,100 (4) (36) (22)
FOREIGN EXCHANGE RATE SENSITIVE INSTRUMENTS
Foreign currency
exchange contracts(3) 1,445 4 6 25
- ------------------------------------------------------------------------------------------------
December 31, 1998
INTEREST RATE SENSITIVE INSTRUMENTS
Long-term debt
(including current
maturities)(2) $(3,041) $(3,018) $(3,278) $(162)
Interest rate swaps 1,450 3 6 (23)
FOREIGN EXCHANGE RATE SENSITIVE INSTRUMENTS
Foreign currency
exchange contracts(3) 2,087 1 (4) 74
- ------------------------------------------------------------------------------------------------
(1) Asset or (liability).
(2) Excludes capitalized leases.
(3) Increases in the fair value of foreign currency exchange contracts are
substantially offset by changes in the fair value of net underlying hedged
foreign currency transactions.
The above discussion of our procedures to monitor market risk and the estimated
changes in fair value resulting from our sensitivity analyses are
forward-looking statements of market risk assuming certain adverse market
conditions occur. Actual results in the future may differ materially from these
estimated results due to actual developments in the global financial markets.
The methods used by us to assess and mitigate risk discussed above should not be
considered projections of future events.
36 Honeywell 1999 Annual Report
OTHER MATTERS
LITIGATION On March 13, 1990, Litton Systems, Inc. filed a legal action against
the former Honeywell in U.S. District Court, Central District of California, Los
Angeles, with claims that were subsequently split into two separate cases. One
alleges patent infringement under federal law for using an ion-beam process to
coat mirrors incorporated in the former Honeywell's ring laser gyroscopes, and
tortious interference under state law for interfering with Litton's prospective
advantage with customers and contractual relationships with an inventor and his
company, Ojai Research, Inc. The other case alleges monopolization and attempted
monopolization under federal antitrust laws by the former Honeywell in the sale
of inertial reference systems containing ring laser gyroscopes into the
commercial aircraft market. The former Honeywell generally denied Litton's
allegations in both cases. In the patent/tort case, the former Honeywell also
contested the validity as well as the infringement of the patent, alleging,
among other things, that the patent had been obtained by Litton's inequitable
conduct before the United States Patent and Trademark Office.
In 1993 and 1995,trials were held in each case and juries initially awarded
Litton significant monetary damages. However, those verdicts were set aside by
the trial court judge who ordered, at a minimum, new trials on the issue of
damages in each case.
Following cross-appeals by the parties of various issues to the Federal
Circuit and the U.S. Supreme Court in the patent/tort case, it was remanded to
the trial court for further legal and perhaps factual review with respect to
both liability and damages. On September 23, 1999, the trial court issued
dispositive rulings in the case, granting the former Honeywell's Motion for
Judgment as a Matter of Law and Summary Judgment on the Patent claims on various
grounds; granting the former Honeywell's Motion for Judgment as a Matter of Law
on the State Law Claims on the grounds of insufficient evidence; and denying
Litton's Motion for Partial Summary Judgment. We expect that Litton will appeal
the trial court's rulings.
A retrial of damages in the antitrust case commenced October 29, 1998, and
on December 9, 1998, a jury returned a verdict against Honeywell for actual
damages in the amount of $250 million. Following post trial motions, on
September 24, 1999, the trial court issued rulings denying the former
Honeywell's Motion for Judgment as a Matter of Law and Motion for New Trial and
Remittitur as they related to Litton Systems, Inc., but granting the former
Honeywell's Motion for Judgment as a Matter of Law as it relates to Litton
Systems, Canada, Limited. The net effect of these rulings was to reduce the
existing judgment against the former Honeywell of $750 million to $660 million,
plus attorney fees and costs of approximately $35 million. We believe that there
is no factual or legal basis for the magnitude of the jury's award and believe
that it should be overturned. We also believe we have very strong arguments that
the liability portion of the jury verdict in the first antitrust trial was
erroneous. Both parties have appealed this judgment, as to both liability and
damages, to the U.S. Court of Appeals for the Ninth Circuit.
Although it is not possible at this time to predict the result of any
further appeals in this case, potential does remain for an adverse outcome which
could be material to our financial position or results of operations. As a
result of the uncertainty regarding the outcome of this matter, no provision has
been made in the financial statements with respect to this contingent liability.
For a detailed discussion of this litigation, see Note 21 of Notes to the
Financial Statements.
YEAR 2000 UPDATE In preparation for the transition to the calendar Year 2000, we
completed extensive remediation efforts with respect to the various aspects of
the Year 2000 problem, including information systems, production and facilities
equipment, products, customers and suppliers. While there can be no assurances
that future problems will not occur, these efforts resulted in a successful
transition into the Year 2000 without any major complications being identified
to date related to the Year 2000 problem.
Our total cost for Year 2000 compliance was approximately $195 million.
This amount does not include our share of costs for Year 2000 issues by
partnerships and joint ventures in which we participate but are not the
operator. Incremental spending was not material because most Year 2000
compliance costs were met with amounts that were normally budgeted for
procurement and maintenance of our information systems and production and
facilities equipment. The redirection of spending from procurement of
information systems and production and facilities equipment to implementation of
Year 2000 compliance plans may in some instances have delayed productivity
improvements.
Honeywell 1999 Annual Report 37
MANAGEMENT'S DISCUSSION AND ANALYSIS
EURO CONVERSION On January 1, 1999, certain member countries of the European
Union established fixed conversion rates between their existing currencies and
the European Union's common currency (Euro). The transition period for the
introduction of the Euro is between January 1, 1999 and January 1, 2002. We have
identified and are ensuring that all Euro conversion compliance issues are
addressed. Although we cannot predict the impact of the Euro conversion at this
time, we do not expect the Euro conversion will have a material adverse effect
on our consolidated results of operations.
SALES TO THE U.S. GOVERNMENT Sales to the U.S. Government, acting through its
various departments and agencies and through prime contractors, amounted to
$2,383, $2,693 and $2,655 million in 1999, 1998 and 1997, respectively. This
included sales to the Department of Defense (DoD), as a prime contractor and
subcontractor, of $1,415, $1,658 and $1,618 million in 1999, 1998 and 1997,
respectively. Sales to the DoD accounted for 6.0, 7.0 and 7.2 percent of our
total sales in 1999, 1998 and 1997, respectively. We are affected by U.S.
Government budget constraints for defense and space programs. U.S. defense
spending increased slightly in 1999 and is also expected to increase slightly in
2000.
BACKLOG Our total backlog at year-end 1999 and 1998 was $8,736 and $9,400
million, respectively. We anticipate that approximately $6,400 million of the
1999 backlog will be filled in 2000. We believe that backlog is not a reliable
indicator of our future sales because a substantial portion of the orders
constituting this backlog may be canceled at the customer's option.
INFLATION Highly competitive market conditions have minimized inflation's impact
on the selling prices of our products and the cost of our purchased materials.
Cost increases for materials and labor have generally been low, and productivity
enhancement programs, including Six Sigma initiatives, have largely offset any
impact.
NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities"(SFAS No.133).
SFAS No. 133 requires derivatives to be recorded on the balance sheet as assets
or liabilities, measured at fair value. Gains or losses resulting from changes
in values of derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. In June 1999, the FASB
issued Statement of Financial Accounting Standards No. 137, which defers the
effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. We
are currently completing an analysis of these standards and their impact on our
results of operations and financial position.
38 Honeywell 1999 Annual Report
REPORT OF INDEPENDENT ACCOUNTANTS
[PRICEWATERHOUSECOOPERS LOGO]
To the Board of Directors and Shareowners of Honeywell International Inc.
In our opinion, based on our audits and the report of other auditors, the
accompanying consolidated balance sheet and the related consolidated statements
of income, of shareowners' equity and of cash flows present fairly, in all
material respects, the financial position of Honeywell International Inc. and
its subsidiaries at December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of Honeywell Inc., a wholly-owned subsidiary, which statements
reflect total assets of $7,170.4 million as of December 31, 1998, and total
sales of $8,426.7 million and $8,027.5 million for each of the two years in the
period ended December 31, 1998. Those statements were audited by other auditors
whose report thereon has been furnished to us, and our opinion expressed herein,
insofar as it relates to the amounts included for Honeywell Inc. as of and for
the two years ended December 31, 1998 is based solely on the report of the other
auditors. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
PRICEWATERHOUSECOOPERS LLP
Florham Park, New Jersey
January 27, 2000, except as to Note 25
which is as of February 4, 2000
Honeywell 1999 Annual Report 39
CONSOLIDATED STATEMENT OF INCOME
Honeywell International Inc.
Years Ended December 31
--------------------------------------
(Dollars in Millions Except Per Share Amounts) 1999 1998 1997
- ---------------------------------------------------------------------------------------------
Net sales $ 23,735 $ 23,555 $ 22,499
- ---------------------------------------------------------------------------------------------
Costs, expenses and other
--------------------------------------
Cost of goods sold 18,495 17,689 17,444
--------------------------------------
Selling, general and administrative expenses 3,216 3,008 2,940
--------------------------------------
Gain on sale of non-strategic businesses (106) -- (303)
--------------------------------------
Equity in income of affiliated companies (76) (162) (191)
--------------------------------------
Other (income) expense (307) (27) (87)
--------------------------------------
Interest and other financial charges 265 275 277
- ---------------------------------------------------------------------------------------------
21,487 20,783 20,080
- ---------------------------------------------------------------------------------------------
Income before taxes on income 2,248 2,772 2,419
--------------------------------------
Taxes on income 707 869 778
- ---------------------------------------------------------------------------------------------
Net income $ 1,541 $ 1,903 $ 1,641
=============================================================================================
Earnings per share of common stock--basic $ 1.95 $ 2.38 $ 2.04
--------------------------------------
Earnings per share of common stock--assuming dilution $ 1.90 $ 2.34 $ 2.00
=============================================================================================
The Notes to Financial Statements are an integral part of this statement.
40 Honeywell 1999 Annual Report
CONSOLIDATED BALANCE SHEET
Honeywell International Inc.
December 31
----------------------
(Dollars in Millions) 1999 1998
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,991 $ 1,018
----------------------
Accounts and notes receivable 3,896 3,899
----------------------
Inventories 3,436 3,456
----------------------
Other current assets 1,099 981
- --------------------------------------------------------------------------------
Total current assets 10,422 9,354
----------------------
Investments and long-term receivables 782 1,792
----------------------
Property, plant and equipment -- net 5,630 5,600
----------------------
Goodwill and other intangible assets--net 4,660 4,365
----------------------
Other assets 2,033 1,627
- --------------------------------------------------------------------------------
Total assets $ 23,527 $ 22,738
================================================================================
LIABILITIES
Current liabilities:
Accounts payable $ 2,129 $ 2,018
----------------------
Short-term borrowings 302 133
----------------------
Commercial paper 2,023 1,773
----------------------
Current maturities of long-term debt 284 284
----------------------
Accrued liabilities 3,534 3,437
- --------------------------------------------------------------------------------
Total current liabilities 8,272 7,645
----------------------
Long-term debt 2,457 2,776
----------------------
Deferred income taxes 864 861
----------------------
Postretirement benefit obligations other than pensions 1,968 2,042
----------------------
Other liabilities 1,367 1,331
- --------------------------------------------------------------------------------
CONTINGENCIES
SHAREOWNERS' EQUITY
Capital -- common stock -- Authorized 2,000,000,000
shares (par value $1 per share): issued
1999 -- 957,599,006 shares
1998 -- 953,326,000 shares 958 953
----------------------
-- additional paid-in capital 2,318 1,719
----------------------
Common stock held in treasury, at cost:
----------------------
1999 -- 162,466,000 shares
----------------------
1998 -- 157,991,553 shares (4,254) (3,413)
----------------------
Accumulated other nonowner changes (355) (94)
----------------------
Retained earnings 9,932 8,918
- --------------------------------------------------------------------------------
Total shareowners' equity 8,599 8,083
- --------------------------------------------------------------------------------
Total liabilities and shareowners' equity $ 23,527 $ 22,738
================================================================================
The Notes to Financial Statements are an integral part of this statement.
Honeywell 1999 Annual Report 41
CONSOLIDATED STATEMENT OF CASH FLOWS
Honeywell International Inc.
Years Ended December 31
--------------------------------------------
(Dollars in Millions) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $1,541 $1,903 $1,641
--------------------------------------------
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on sale of non-strategic businesses (106) -- (303)
--------------------------------------------
Gain on disposition of investment in AMP Incorporated (268) -- --
--------------------------------------------
Merger, repositioning and other charges 1,287 54 341
--------------------------------------------
Depreciation and amortization 881 897 888
--------------------------------------------
Undistributed earnings of equity affiliates (39) (24) (65)
--------------------------------------------
Deferred income taxes (11) 221 116
--------------------------------------------
Net taxes paid on sales of businesses and investments (246) (300) (21)
--------------------------------------------
Other (165) (176) (535)
--------------------------------------------
Changes in assets and liabilities, net of the effects of acquisitions and
divestitures:
Accounts and notes receivable (54) (154) (165)
--------------------------------------------
Inventories 90 (96) (159)
--------------------------------------------
Other current assets (39) 3 (88)
--------------------------------------------
Accounts payable 121 35 264
--------------------------------------------
Accrued liabilities (618) (389) 20
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,374 1,974 1,934
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (986) (1,037) (1,015)
--------------------------------------------
Proceeds from disposals of property, plant and equipment 67 150 149
--------------------------------------------
Decrease in investments and long-term receivables -- -- 25
--------------------------------------------
(Increase) in investments (20) (1) (6)
--------------------------------------------
Disposition (purchase) of investment in AMP Incorporated 1,164 (890) --
--------------------------------------------
Cash paid for acquisitions (1,311) (581) (1,816)
--------------------------------------------
Proceeds from sales of businesses 784 335 796
--------------------------------------------
Decrease (increase) in short-term investments 11 431 (129)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash (used for) investing activities (291) (1,593) (1,996)
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in commercial paper 250 909 307
--------------------------------------------
Net increase (decrease) in short-term borrowings 156 16 (11)
--------------------------------------------
Proceeds from issuance of common stock 419 216 195
--------------------------------------------
Proceeds from issuance of long-term debt 25 687 630
--------------------------------------------
Payments of long-term debt (375) (366) (489)
--------------------------------------------
Repurchases of common stock (1,058) (1,089) (940)
--------------------------------------------
Cash dividends on common stock (527) (481) (434)
--------------------------------------------
Other -- -- (43)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash (used for) financing activities (1,110) (108) (785)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 973 273 (847)
--------------------------------------------
Cash and cash equivalents at beginning of year 1,018 745 1,592
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1,991 $1,018 $ 745
====================================================================================================================================
The Notes to Financial Statements are an integral part of this statement.
42 Honeywell 1999 Annual Report
CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY
Honeywell International Inc.
Common Common Stock
Stock Issued Additional Held in Treasury Accumulated Total
------------ Paid-in ---------------- Other Non- Retained Shareowners'
(In Millions Except Per Share Amounts) Shares Amount Capital Shares Amount owner Changes Earnings Equity
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 953.5 $953 $ 999 (150.8) $(1,953) $ 97 $6,289 $ 6,385
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 1,641 1,641
--------------------------------------------------------------------------------
Foreign exchange translation adjustments (293) (293)
--------------------------------------------------------------------------------
Minimum pension liability adjustment (2) (2)
--------------------------------------------------------------------------------
Unrealized holding loss on marketable securities (10) (10)
--------------------------------------------------------------------------------
Nonowner changes in shareowners' equity 1,336
--------------------------------------------------------------------------------
Common stock issued for acquisitions 32 1.0 8 40
--------------------------------------------------------------------------------
Common stock issued for employee benefit
plans (including related tax benefits of $100) 3.6 4 354 12.7 94 452
--------------------------------------------------------------------------------
Repurchases of common stock (4.2) (4) (150) (21.0) (814) (968)
--------------------------------------------------------------------------------
Cash dividends on common stock ($.52 per share) (434) (434)
--------------------------------------------------------------------------------
Other 0.2 (36) (36)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 953.1 953 1,199 (158.1) (2,665) (208) 7,496 6,775
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 1,903 1,903
--------------------------------------------------------------------------------
Foreign exchange translation adjustments 34 34
--------------------------------------------------------------------------------
Minimum pension liability adjustment (10) (10)
--------------------------------------------------------------------------------
Unrealized holding gain on marketable securities 90 90
--------------------------------------------------------------------------------
Nonowner changes in shareowners' equity 2,017
--------------------------------------------------------------------------------
Common stock issued for acquisitions 322 11.1 98 420
--------------------------------------------------------------------------------
Common stock issued for employee benefit
plans (including related tax benefits of $91) 3.8 4 348 11.0 96 448
--------------------------------------------------------------------------------
Repurchases of common stock (3.9) (4) (156) (22.0) (942) (1,102)
--------------------------------------------------------------------------------
Cash dividends on common stock ($.60 per share) (481) (481)
--------------------------------------------------------------------------------
Other 0.3 6 6
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 953.3 953 1,719 (158.0) (3,413) (94) 8,918 8,083
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 1,541 1,541
--------------------------------------------------------------------------------
Foreign exchange translation adjustments (126) (126)
--------------------------------------------------------------------------------
Minimum pension liability adjustment (43) (43)
--------------------------------------------------------------------------------
Unrealized holding loss on marketable securities (92) (92)
--------------------------------------------------------------------------------
Nonowner changes in shareowners' equity 1,280
--------------------------------------------------------------------------------
Common stock issued for employee benefit
plans (including related tax benefits of $237) 4.7 5 602 14.5 125 732
--------------------------------------------------------------------------------
Repurchases of common stock (18.9) (966) (966)
--------------------------------------------------------------------------------
Cash dividends on common stock ($.68 per share) (527) (527)
--------------------------------------------------------------------------------
Other (0.4) (3) (3)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 957.6 $958 $2,318 (162.4) $(4,254) $(355) $9,932 $8,599
====================================================================================================================================
The Notes to Financial Statements are an integral part of this statement.
Honeywell 1999 Annual Report 43
NOTES TO FINANCIAL STATEMENTS
Honeywell International Inc. (Dollars in Millions Except Per Share Amounts)
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
HONEYWELL INTERNATIONAL INC. is a diversified technology and manufacturing
company,serving customers worldwide with aerospace products and services,
control technologies for buildings, homes and industry,automotive products,
power generation systems, specialty chemicals,fibers, plastics and electronic
and advanced materials. As described in Note 2, Honeywell International Inc. was
formed upon the merger of AlliedSignal Inc. and Honeywell Inc. The following is
a description of the significant accounting policies of Honeywell International
Inc.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
accounts of Honeywell International Inc. and all of its subsidiaries in which a
controlling interest is maintained. All intercompany transactions and balances
are eliminated in consolidation.
INVENTORIES Inventories are valued at the lower of cost or market using the
first-in, first-out or the average cost method and the last-in, first-out (LIFO)
method for certain qualifying domestic inventories.
INVESTMENTS Investments in affiliates over which we have a significant
influence, but not a controlling interest, are accounted for using the equity
method of accounting. Other investments are carried at market value, if readily
determinable, or cost.
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost
less accumulated depreciation. For financial reporting, the straight-line method
of depreciation is used over the estimated useful lives of 10 to 40 years for
buildings and improvements and 3 to 15 years for machinery and equipment.
GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill represents the excess of
acquisition costs over the fair value of net assets of businesses acquired and
is amortized on a straight-line basis over appropriate periods up to 40 years.
Goodwill was $4,282 and $3,951 million, net, at December 31, 1999 and 1998,
respectively. Accumulated amortization was $804 and $723 million at December 31,
1999 and 1998, respectively.
Other intangible assets includes patents, trademarks, customer lists and
other items amortized on a straight-line basis over appropriate periods up to 24
years. Other intangible assets were $378 and $414 million, net, at December 31,
1999 and 1998, respectively. Accumulated amortization was $398 and $338 million
at December 31, 1999 and 1998, respectively.
LONG-LIVED ASSETS We periodically evaluate the recoverability of the carrying
amount of long-lived assets (including property, plant, and equipment, goodwill
and other intangible assets) whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be fully recoverable. An
impairment is assessed when the undiscounted expected future cash flows derived
from an asset are less than its carrying amount. Impairment losses are measured
as the amount by which the carrying value of an asset exceeds its fair value and
are recognized in operating results. We also continually evaluate the estimated
useful lives of all long-lived assets and periodically revise such estimates
based on current events.
SALES RECOGNITION Product and service sales are recognized when an agreement of
sale exists, product delivery has occurred or services have been rendered,
pricing is fixed or determinable, and collection is reasonably assured. Sales
under long-term contracts in the Aerospace Solutions and Automation & Asset
Management segments are recorded on a 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 such losses become evident.
ENVIRONMENTAL EXPENDITURES Environmental expenditures that relate to current
operations are expensed or capitalized as appropriate. Expenditures that relate
to an existing condition caused by past operations, and that do not provide
future benefits, are expensed as incurred. Liabilities are recorded when
environmental assessments are made or remedial efforts are probable and the
costs can be reasonably estimated. The timing of these accruals is generally no
later than the completion of feasibility studies.
FOREIGN CURRENCY TRANSLATION Assets and liabilities of subsidiaries operating
outside the United States with a functional currency other than U.S. dollars are
translated into U.S. dollars using year-end exchange rates. Sales, costs and
expenses are translated at the average exchange rates effective during the year.
Foreign currency translation gains and losses are included as a component of
Accumulated Other Nonowner Changes in shareowners' equity. For subsidiaries
operating in highly inflationary environments, inventories and property, plant
and equipment, including related expenses, are remeasured at the rate of
exchange in effect on the date the assets are acquired, while monetary assets
and liabilities are remeasured at year-end exchange rates. Remeasurement
adjustments for these operations are included in net income.
FINANCIAL INSTRUMENTS Interest rate swap, foreign currency forward and option
agreements are accounted for as a hedge of the related asset, liability, firm
commitment or anticipated transaction when designated and effective as a hedge
of such items. Agreements qualifying for hedge accounting are accounted for as
follows:
o Changes in the amount to be received or paid under interest rate swap
agreements are recognized in Interest and Other Financial Charges.
o Gains and losses on foreign currency exchange contracts used to hedge
assets, liabilities and net income are recognized in Other (Income)
Expense.
o Gains and losses on foreign currency exchange contracts to hedge net
investments in foreign subsidiaries are recognized in the Cumulative
Foreign Exchange Translation Adjustment.
o Gains and losses on foreign currency exchange contracts used to hedge firm
foreign currency commitments, and purchased foreign currency options used
to hedge anticipated foreign currency transactions, are recognized in the
measurement of the hedged transaction when the transaction occurs.
44 Honeywell 1999 Annual Report
Changes in the fair value of agreements not qualifying for hedge accounting
are recognized in Other (Income) Expense. Gains and losses on terminated
interest rate swap agreements are amortized over the shorter of the remaining
term of the agreement or the hedged liability.
The carrying value of each agreement is reported in Accounts and Notes
Receivable, Other Current Assets, Accounts Payable or Accrued Liabilities, as
appropriate.
INCOME TAXES Deferred tax liabilities or assets reflect temporary differences
between amounts of assets and liabilities for financial and tax reporting. Such
amounts are adjusted, as appropriate, to reflect changes in tax rates expected
to be in effect when the temporary differences reverse. A valuation allowance is
established for any deferred tax asset for which realization is not likely.
RESEARCH AND DEVELOPMENT Research and development costs for company-sponsored
research and development projects are expensed as incurred. Such costs are
classified as part of Cost of Goods Sold and were $909, $876 and $796 million in
1999, 1998 and 1997, respectively.
EARNINGS PER SHARE Basic earnings per share is based on the weighted average
number of common shares outstanding. Diluted earnings per share is based on the
weighted average number of common shares outstanding and all dilutive potential
common shares outstanding. All earnings per share data in this report reflect
earnings per share -- assuming dilution, unless otherwise indicated.
CASH AND CASH EQUIVALENTS Cash and cash equivalents includes cash on hand and on
deposit and highly liquid, temporary cash investments with an original maturity
of three months or less.
USE OF ESTIMATES The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts in the financial
statements and related disclosures in the accompanying notes. Actual results
could differ from those estimates.
RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform
with the current year presentation.
NOTE 2
ALLIEDSIGNAL-HONEYWELL MERGER
On December 1, 1999, AlliedSignal Inc. (AlliedSignal) and Honeywell Inc. (former
Honeywell) completed a merger under an Agreement and Plan of Merger (Merger
Agreement) dated as of June 4, 1999. Under the Merger Agreement, a wholly-owned
subsidiary of AlliedSignal merged with and into the former Honeywell. As a
result of the merger, the former Honeywell has become a wholly-owned subsidiary
of AlliedSignal. At the effective time of the merger AlliedSignal was renamed
Honeywell International Inc. (Honeywell).
The former Honeywell shareowners were entitled to receive 1.875 shares of
Honeywell common stock for each share of the former Honeywell common stock with
cash paid in lieu of any fractional shares. As a result, former Honeywell
shareowners were entitled to receive approximately 241 million shares of
Honeywell common stock valued at approximately $15 billion at the merger date.
In addition, outstanding former Honeywell employee stock options were converted
at the same exchange factor into options to purchase approximately 10 million
shares of Honeywell common stock.
The merger qualified as a tax-free reorganization and was accounted for
under the pooling-of-interests accounting method. Accordingly, Honeywell's
consolidated financial statements have been restated for all periods prior to
the merger to include the results of operations, financial position and cash
flows of the former Honeywell as though it had always been a part of Honeywell.
There were no material transactions between AlliedSignal and the former
Honeywell prior to the merger and there were no material adjustments to conform
the accounting policies of the combining companies.
The net sales and net income previously reported by the separate companies
and the combined amounts presented in the accompanying Consolidated Statement of
Income are as follows:
NINE MONTHS ENDED Year Ended Year Ended
SEPTEMBER 30, December 31, December 31,
1999 1998 1997
(UNAUDITED)
- ---------------------------------------------------------------
NET SALES
AlliedSignal $11,252 $15,128 $14,472
--------------------------------------
Former Honeywell 6,324 8,427 8,027
- ---------------------------------------------------------------
Combined $17,576 $23,555 $22,499
===============================================================
Net income
AlliedSignal $ 1,121 $ 1,331 $ 1,170
--------------------------------------
Former Honeywell 413 572 471
- ---------------------------------------------------------------
Combined $ 1,534 $ 1,903 $ 1,641
===============================================================
As described in Note 4, fees and expenses related to the merger and costs
to integrate the combined companies were expensed in the fourth quarter of 1999.
Honeywell 1999 Annual Report 45
NOTES TO FINANCIAL STATEMENTS
Honeywell International Inc. (Dollars in Millions Except Per Share Amounts)
NOTE 3
ACQUISITIONS
In addition to the pooling-of-interests transaction discussed in Note 2, we
acquired businesses for an aggregate cost of $1,314,$1,191 and $2,180 million in
1999,1998 and 1997,respectively. The following table presents information about
the more significant acquisitions:
Acquisition Aggregate Annual
1999 Date Cost Goodwill Net Sales
- ------------------------------------------------------------------------
Johnson Matthey
Electronics(1) 8/99 $655 $331 $670
TriStar Aerospace Co.(2) 12/99 300 147 200
1998
- ------------------------------------------------------------------------
Banner Aerospace(3) 1/98 $350 $175 $250
Pharmaceutical
Fine Chemicals(4) 6/98 390 297 110
1997
- ------------------------------------------------------------------------
Measurex Corporation(5) 3/97 $600 $306 $420
Prestone Products(6) 6/97 400 279 300
Grimes Aerospace Company(7) 7/97 475 416 230
Astor Holdings, Inc.(8) 10/97 370 271 300
- ------------------------------------------------------------------------
(1) Johnson Matthey Electronics supplies wafer fabrication materials and
interconnect products to the electronics and telecommunications industries.
(2) TriStar Aerospace Co. distributes fasteners, fastening systems and related
hardware and provides customized inventory management services to original
equipment manufacturers of aircraft and aircraft components, commercial
airlines and aircraft maintenance, repair and overhaul facilities.
(3) Banner Aerospace distributes FAA-certified aircraft hardware principally to
commercial air transport and general aviation markets.
(4) Pharmaceutical Fine Chemicals manufactures and distributes active and
intermediate pharmaceutical chemicals.
(5) Measurex Corporation designs and supplies measurements, control and
industrial automation systems that unify business and control information
for the pulp and paper industry.
(6) Prestone Products supplies antifreeze/coolant and other car care products.
(7) Grimes Aerospace Company manufactures interior and exterior aircraft
lighting systems.
(8) Astor Holdings, Inc. manufactures value-added, wax-based processing aids,
sealants and adhesives.
All the acquisitions were accounted for under the purchase method of
accounting, and accordingly, the assets and liabilities of the acquired
businesses were 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,of $678, $883 and $1,478 million in 1999, 1998 and 1997,
respectively, was recorded as goodwill and is amortized over estimated useful
lives. In connection with these acquisitions the amounts recorded for
transaction costs and the costs of integrating the acquired businesses into
Honeywell were not material. The results of operations of the acquired
businesses have been included in the consolidated results of Honeywell from
their respective acquisition dates. The pro forma results for 1999, 1998 and
1997, assuming these acquisitions had been made at the beginning of the year,
would not be materially different from reported results.
NOTE 4
MERGER, REPOSITIONING AND OTHER CHARGES
Upon completion of the merger between AlliedSignal and the former Honeywell, we
recognized a pretax charge of $642 million for the cost of actions designed to
improve our combined competitiveness and productivity and improve future
profitability.The merger-related actions included the elimination of redundant
corporate offices and functional administrative overhead; elimination of
redundant and excess facilities and workforce in our combined aerospace
businesses; adoption of six sigma productivity initiatives at the former
Honeywell businesses; and, the transition to a global shared services model. The
components of the charge included severance costs of $342 million, asset
impairments of $108 million, other exit costs of $57 million and merger-related
transaction and period expenses of $135 million. Planned global workforce
reductions consisted of approximately 6,500 administrative and manufacturing
positions. Asset impairments principally related to the elimination of redundant
or excess corporate and aerospace facilities and equipment. At year-end,
approximately $9 million of redundant assets were not able to be removed from
service and are currently being depreciated over their shortened useful lives.
Other exit costs related to lease terminations and contract cancellation losses
negotiated or subject to reasonable estimation at year-end. Merger-related
transaction and period expenses consisted of investment banking and
legal fees,former Honeywell deferred compensation vested upon change in control
and other direct merger-related expenses incurred in the period the merger was
completed. All merger-related actions are expected to be completed by December
31, 2000.
In 1999,we also recognized a pretax charge of $321 million for the cost of
actions designed to reposition principally the AlliedSignal business units for
improved productivity and future profitability. These repositioning actions
included the organizational realignment of our aerospace businesses to
strengthen market focus and simplify business structure; elimination of an
unprofitable product line and rationalization of manufacturing capacity and
infrastructure in the Performance Polymers business; a reduction in
infrastructure in the Turbocharging Systems business; closing a wax refinery and
carbon materials plant and rationalization of manufacturing capacity in the
Specialty Chemicals business; elimination of two manufacturing facilities in our
Electronic Materials business; a plant closure and outsourcing activity in our
automotive Consumer Products Group business; and related and general workforce
reductions in all AlliedSignal businesses and our Industrial Control business.
The components of the charge included severance costs of $140 million, asset
impairments of $149 million, and other exit costs of $32 million. Global
workforce reductions consisted of approximately 5,100 manufacturing,
administrative, and sales positions. Asset impairments principally related to
manufacturing plant and equipment held for sale and capable of being taken out
of service and actively marketed in the period of impairment. Other exit costs
principally consisted of environmental exit costs associated with chemical plant
shutdowns. All repositioning actions, excluding environmental remediation, are
expected to be completed by December 31, 2000.
46 Honeywell 1999 Annual Report
The following table summarizes planned workforce reductions, liabilities
and asset impairments recognized in the 1999 merger and repositioning actions.
Number of Severance Asset Exit Merger Fees
Employees Costs Impairments Costs and Expenses Total
- ---------------------------------------------------------------------------------
1999 charges 11,600 $482 $ 257 $89 $135 $ 963
1999 usage (2,800) (58) (257) (4) (77) (396)
- ---------------------------------------------------------------------------------
Balance at
December 31,
1999 8,800 $424 $ -- $85 $ 58 $ 567
================================================================================
In 1999, we recognized other charges consisting of losses on aerospace
engine maintenance contracts and a contract cancellation penalty totaling $45
million, customer and employee claims of $69 million, contract settlements and
contingent liabilities of $18 million, and other write-offs principally related
to tangible and intangible assets removed from service, including inventory, of
$152 million. We also recognized a $36 million charge resulting from an other
than temporary decline in value of an equity investment due to a significant
deterioration in market conditions and a $4 million charge related to an equity
investee's severance action involving approximately 220 employees. The
investee's severance action was completed by year-end.
In 1998, we recognized a pretax charge of $54 million related to
productivity initiatives which included workforce reductions and facility
consolidations principally in our Home and Building Control and Industrial
Control businesses. The components of the charge included severance costs of $46
million and other exit costs of $8 million. Global workforce reductions included
approximately 1,200 sales, marketing, manufacturing and other administrative
positions. Other exit costs consisted of lease termination penalties to
consolidate field office locations and other period costs incurred to
rationalize product lines. These actions were completed by December 31, 1999,
with substantially all reserve spending occurring in 1999.
In 1997, we recognized a pretax charge of $215 million for costs to
eliminate AlliedSignal's three sector administrative offices; consolidate our
automotive Consumer Products Group business; close four performance materials
manufacturing facilities; and, execute a workforce reduction and facility
consolidations in our Home and Building Control and Industrial Control
businesses. The components of the charge included severance costs of $134
million, asset impairments of $42 million, and other exit costs of $39 million.
Global workforce reductions included approximately 2,900 sales, marketing,
manufacturing and other administrative positions. Asset impairments principally
related to administrative and manufacturing facilities and equipment held for
disposal. Other exit costs principally consisted of lease termination costs and
other shut-down period expenses. These actions were essentially completed by
December 31, 1998, with substantially all reserve spending and asset disposals
occurring in 1998.
In 1997, we also recognized other charges consisting of a $40 million
write-off of capitalized business process reengineering costs associated with
information technology projects as required by Emerging Issues Task Force Issue
No. 97-13, customer claims and legal settlements of $30 million, and other
write-offs principally related to tangible and intangible assets removed from
service, including inventory, of $43 million. We also recognized a $13 million
charge related to an other than temporary decline in value of an equity
investment resulting from the Asian economic downturn in late 1997.
The following table summarizes the pretax impact of total merger,
repositioning and other charges by reportable business segment.
1999 1998 1997
- ---------------------------------------------------
Aerospace Solutions $ 315 $ 1 $ 23
-----------------------
Automation & Asset
Management 215 52 88
-----------------------
Performance Materials 251 -- 110
-----------------------
Power & Transportation
Products 129 -- 77
-----------------------
Corporate 377 1 43
- ---------------------------------------------------
$1,287 $ 54 $341
===================================================
The following table summarizes the pretax distribution of total merger,
repositioning and other charges by income statement classification.
1999 1998 1997
- ---------------------------------------------------
Cost of goods sold $ 947 $ 54 $328
-----------------------
Selling, general and
administrative expenses 300 -- --
-----------------------
Equity in income of
affiliated companies 40 -- 13
- ---------------------------------------------------
$1,287 $ 54 $341
===================================================
Honeywell 1999 Annual Report 47
NOTES TO FINANCIAL STATEMENTS
Honeywell International Inc. (Dollars in Millions Except Per Share Amounts)
NOTE 5
GAIN ON SALE OF NON-STRATEGIC BUSINESSES
In 1999, we sold our Laminate Systems business for approximately $425 million in
cash resulting in a pretax gain of $106 million. The Laminate Systems business
had 1998 net sales of about $400 million.
In 1997, we sold our automotive Safety Restraints business for $710 million
in cash resulting in a pretax gain of $277 million. We also sold certain
Industrial Control businesses for approximately $126 million in cash and
receivables, resulting in a total pretax gain of $77 million. In 1997 we also
recorded a charge of $51 million related to the settlement of the 1996 sale of
our automotive Braking Systems business. The total pretax impact of the gains on
sales of non-strategic businesses in 1997, net of the Braking Systems business
settlement, was $303 million.
NOTE 6
OTHER (INCOME) EXPENSE
Years ended December 31 1999 1998 1997
- --------------------------------------------------------------------
Interest income and other $ (76) $(57) $(105)
---------------------------------------
Minority interests 46 37 45
---------------------------------------
Foreign exchange (gain) loss (9) 17 (27)
---------------------------------------
Gain on disposition of
investment in AMP
Incorporated (268) -- --
---------------------------------------
Litigation settlements -- (24) --
- --------------------------------------------------------------------
$(307) $(27) $ (87)
====================================================================
In April 1999, we reached an agreement with Tyco International Ltd. (Tyco)
and AMP Incorporated (AMP), settling AMP's claim to the gain we would realize on
the disposition of our investment in AMP common stock. We made a payment to AMP
of $50 million, and the parties released all claims that they had against each
other relating to AMP. Subsequently, we converted our investment in AMP common
stock into Tyco common stock and sold the Tyco common stock for net cash
proceeds of $1.2 billion resulting in a pretax gain of $268 million, net of the
settlement payment.
NOTE 7
INTEREST AND OTHER FINANCIAL CHARGES
Years ended December 31 1999 1998 1997
- --------------------------------------------------------------------
Total interest and other
financial charges $287 $300 $298
---------------------------------------
Less--Capitalized interest (22) (25) (21)
- --------------------------------------------------------------------
$265 $275 $277
====================================================================
Cash payments of interest during the years 1999, 1998 and 1997 were $328,
$426 and $286 million, respectively.
The weighted average interest rate on short-term borrowings and commercial
paper outstanding at December 31, 1999 and 1998 was 5.97 and 5.78 percent,
respectively.
NOTE 8
TAXES ON INCOME
INCOME BEFORE TAXES ON INCOME
Years ended December 31 1999 1998 1997
- --------------------------------------------------------------------
United States $1,742 $2,085 $1,903
---------------------------------------
Foreign 506 687 516
- --------------------------------------------------------------------
$2,248 $2,772 $2,419
====================================================================
TAXES ON INCOME
Years ended December 31 1999 1998 1997
- --------------------------------------------------------------------
United States $ 531 $ 616 $ 602
---------------------------------------
Foreign 176 253 176
- --------------------------------------------------------------------
$ 707 $ 869 $ 778
====================================================================
Years ended December 31 1999 1998 1997
- --------------------------------------------------------------------
Taxes on income consist of:
Current:
United States $ 416 $ 424 $ 417
---------------------------------------
State 113 49 81
---------------------------------------
Foreign 189 175 164
- --------------------------------------------------------------------
718 648 662
- --------------------------------------------------------------------
Deferred:
United States 37 81 84
---------------------------------------
State (35) 62 20
---------------------------------------
Foreign (13) 78 12
- --------------------------------------------------------------------
(11) 221 116
- --------------------------------------------------------------------
$ 707 $ 869 $ 778
====================================================================
Years ended December 31 1999 1998 1997
- --------------------------------------------------------------------
The U.S. statutory federal
income tax rate is reconciled
to our effective income
tax rate as follows:
Statutory U.S. federal
income tax rate 35.0% 35.0% 35.0%
---------------------------------------
Taxes on foreign
earnings over (under)
U.S. tax rate (1.2) 1.0 --
---------------------------------------
Asset basis
differences (1.6) (1.5) (1.7)
---------------------------------------
Nondeductible amortization 3.3 1.3 1.4
---------------------------------------
State income taxes 2.2 2.5 2.5
---------------------------------------
Tax benefits of Foreign
Sales Corporation (4.4) (2.2) (2.4)
---------------------------------------
ESOP dividend tax benefit (.7) (.6) (.6)
---------------------------------------
Tax credits (1.2) (1.1) (.2)
---------------------------------------
All other items--net .1 (3.1) (1.8)
- --------------------------------------------------------------------
31.5% 31.3% 32.2%
====================================================================
48 Honeywell 1999 Annual Report
DEFERRED INCOME TAXES
December 31 1999 1998
- --------------------------------------------------------------------
Included in the following
balance sheet accounts:
Other current assets $ 789 $ 694
---------------------------------------
Other assets 143 103
---------------------------------------
Accrued liabilities (13) (26)
---------------------------------------
Deferred income taxes (864) (861)
- --------------------------------------------------------------------
$ 55 $ (90)
====================================================================
DEFERRED TAX ASSETS (LIABILITIES)
December 31 1999 1998
- --------------------------------------------------------------------
The principal components of deferred tax
assets and (liabilities) are as follows:
Property, plant and equipment
basis differences $(648) $(715)
------------------------------
Postretirement benefits other than
pensions and postemployment
benefits 869 918
------------------------------
Investment and other asset basis
differences (328) (390)
------------------------------
Other accrued items 552 490
------------------------------
Net operating losses 184 218
------------------------------
Deferred foreign gain (27) (39)
------------------------------
Undistributed earnings of subsidiaries (33) (55)
------------------------------
All other items--net (491) (487)
- --------------------------------------------------------------------
78 (60)
------------------------------
Valuation allowance (23) (30)
- --------------------------------------------------------------------
$ 55 $ (90)
====================================================================
The amount of federal tax net operating loss carryforwards available at
December 31, 1999 was $166 million. The majority of these loss carryforwards
were generated by certain subsidiaries prior to their acquisition in 1997 and
have expiration dates through the year 2011. The use of pre-acquisition
operating losses is subject to limitations imposed by the Internal Revenue
Code. We do not anticipate that these limitations will affect utilization of
the carryforwards prior to their expiration. We also have foreign net operating
losses of $434 million which are available to reduce future income tax payments
in several countries, subject to varying expiration rules.
Deferred income taxes have not been provided on approximately $1.6 billion
of undistributed earnings of foreign affiliated companies, which are considered
to be permanently reinvested. It is not practicable to estimate the amount of
tax that might be payable on the eventual remittance of such earnings.
Cash payments of income taxes during the years 1999, 1998 and 1997 were
$625, $650 and $473 million, respectively.
NOTE 9
EARNINGS PER SHARE
The following table sets forth the computations of basic and diluted
earnings per share:
Average Per Share
Income Shares Amount
- -------------------------------------------------------------------------------
1999
Earnings per share of common
stock--basic $1,541 792,010,145 $1.95
-------------------------------------------
Dilutive securities issuable in
connection with stock plans 16,979,863
-------------------------------------------
Earnings per share of common
stock--assuming dilution $1,541 808,990,008 $1.90
- -------------------------------------------------------------------------------
1998
Earnings per share of common
stock--basic $1,903 798,390,836 $2.38
-------------------------------------------
Dilutive securities issuable in
connection with stock plans 15,608,334
-------------------------------------------
Earnings per share of common
stock--assuming dilution $1,903 813,999,170 $2.34
- -------------------------------------------------------------------------------
1997
Earnings per share of common
stock--basic $1,641 803,029,575 $2.04
-------------------------------------------
Dilutive securities issuable in
connection with stock plans 19,074,591
-------------------------------------------
Earnings per share of common
stock--assuming dilution $1,641 822,104,166 $2.00
- -------------------------------------------------------------------------------
The diluted earnings per share calculation excludes the effect of stock
options when the options' exercise prices exceed the average market price of the
common shares during the period. In 1999, 1998 and 1997, the number of stock
options not included in the computations was 868,631, 3,688,074 and 3,826,900,
respectively. These stock options were outstanding at the end of each of the
respective years.
Honeywell 1999 Annual Report 49
NOTES TO FINANCIAL STATEMENTS
Honeywell International Inc. (Dollars in Millions Except Per Share Amounts)
NOTE 10
ACCOUNTS AND NOTES RECEIVABLE
December 31 1999 1998
- --------------------------------------------------------------------
Trade $3,545 $3,469
--------------------------------
Other 435 508
- --------------------------------------------------------------------
3,980 3,977
- --------------------------------------------------------------------
Less--Allowance for doubtful
accounts and refunds (84) (78)
- --------------------------------------------------------------------
$3,896 $3,899
====================================================================
Unbilled receivables related to long-term contracts were $359 and $387
million at December 31, 1999 and 1998, respectively, and are generally billable
and collectible within one year.
We are a party to agreements under which we can sell undivided interests in
designated pools of trade accounts receivable. At both December 31, 1999 and
1998, trade accounts receivable on the Consolidated Balance Sheet have been
reduced by approximately $500 million reflecting such sales. We act as an agent
for the purchasers in the collection and administration of the receivables.
NOTE 11
INVENTORIES
December 31 1999 1998
- -------------------------------------------------------------------
Raw materials $1,027 $ 996
-------------------------------
Work in process 973 1,095
-------------------------------
Finished products 1,589 1,555
- -------------------------------------------------------------------
3,589 3,646
- -------------------------------------------------------------------
Less--
Progress payments and customer advances (44) (83)
-------------------------------
Reduction to LIFO cost basis (109) (107)
- -------------------------------------------------------------------
$3,436 $3,456
====================================================================
Inventories valued at LIFO amounted to $167 and $214 million at December
31, 1999 and 1998, respectively. Had such LIFO inventories been valued at
current costs, their carrying values would have been approximately $109 and $107
million higher at December 31, 1999 and 1998, respectively.
Inventories related to long-term contracts, net of progress payments and
customer advances, were $271 and $260 million at December 31, 1999 and 1998,
respectively.
NOTE 12
INVESTMENTS AND LONG-TERM RECEIVABLES
December 31 1999 1998
- --------------------------------------------------------------------
Investment in AMP Incorporated(1) $ -- $ 1,041
-------------------------------
Investments 664 640
-------------------------------
Long-term receivables 118 111
- -------------------------------------------------------------------
$ 782 $ 1,792
====================================================================
(1) Investment in AMP was liquidated in 1999. See Note 6. Includes
unrealized holding gain of $151 million at December 31, 1998.
NOTE 13
PROPERTY, PLANT AND EQUIPMENT
December 31 1999 1998
- --------------------------------------------------------------------
Land and improvements $ 371 $ 407
-------------------------------
Machinery and equipment 9,574 9,471
-------------------------------
Buildings and improvements 2,192 2,174
-------------------------------
Construction in progress 566 605
- -------------------------------------------------------------------
12,703 12,657
- -------------------------------------------------------------------
Less--Accumulated depreciation and
amortization (7,073) (7,057)
- -------------------------------------------------------------------
$ 5,630 $ 5,600
====================================================================
NOTE 14
ACCRUED LIABILITIES
December 31 1999 1998
- --------------------------------------------------------------------
Compensation and benefit costs $ 828 $ 849
-------------------------------
Customer advances 511 466
-------------------------------
Income taxes 186 384
-------------------------------
Environmental costs 104 128
-------------------------------
Other 1,905 1,610
- --------------------------------------------------------------------
$ 3,534 $ 3,437
====================================================================
50 Honeywell 1999 Annual Report
Note 15
LONG-TERM DEBT AND CREDIT AGREEMENTS
December 31 1999 1998
- --------------------------------------------------------------------------------
6.75% notes due 2000 $ -- $ 100
----------------------
6.60% notes due 2001 100 100
----------------------
6.75% notes due 2002 200 200
----------------------
9 7/8% debentures due 2002 171 171
----------------------
8 5/8% debentures due 2006 100 100
----------------------
7.0% notes due 2007 350 350
----------------------
7 1/8% notes due 2008 200 200
----------------------
6.20% notes due 2008 200 200
----------------------
Zero coupon bonds and money
multiplier notes, 13.0%-14.26%,
due 2000-2009 100 174
----------------------
5 3/4% dealer remarketable securities
due 2011 200 200
----------------------
Industrial development bond
obligations, 3.15%-6.75%, maturing
at various dates through 2027 107 99
----------------------
6 5/8% debentures due 2028 216 250
----------------------
9.065% debentures due 2033 51 51
----------------------
Other (including capitalized leases),
1.54%-12.42%, maturing at
various dates through 2016 462 581
- ----------------------------------------------------------------------------
$2,457 $2,776
============================================================================
The schedule of principal payments on long-term debt is as follows:
Long-term
At December 31, 1999 Debt
- --------------------------------------------------------------------------------
2000 $284
-------------------
2001 176
-------------------
2002 402
-------------------
2003 88
-------------------
2004 37
-------------------
Thereafter 1,754
- --------------------------------------------------------------------------------
2,741
- --------------------------------------------------------------------------------
Less--Current portion 284
- --------------------------------------------------------------------------------
$2,457
- --------------------------------------------------------------------------------
In December 1999, we entered into a $3 billion bank revolving credit
facility with a group of 25 banks which is comprised of: (a) a $1 billion
Five-Year Credit Agreement and (b) a $2 billion 364 Day Credit Agreement which
reduces to $1 billion on March 31, 2000, bringing the total revolving credit
facility to $2 billion. The credit agreements which replaced previous credit
agreements maintained by AlliedSignal and the former Honeywell were established
for general corporate purposes including support for the issuance of commercial
paper. We had no balance outstanding under either agreement at December 31,
1999.
Neither of the credit agreements restrict our ability to pay dividends
and neither contain financial covenants. The failure to comply with customary
conditions or the occurrence of customary events of default contained in the
credit agreements would prevent any further borrowings and would generally
require the repayment of any outstanding borrowings under such credit
agreements. Such events of default include (a) non-payment of credit agreement
debt and interest thereon, (b) non-compliance with the terms of the credit
agreement covenants, (c) cross-default with other debt in certain circumstances,
(d) bankruptcy and (e) defaults upon obligations under the Employee Retirement
Income Security Act. Additionally, each of the banks has the right to terminate
its commitment to lend under the credit agreements if any person or group
acquires beneficial ownership of 30 percent or more of our voting stock or,
during any 12-month period, individuals who were directors of Honeywell at the
beginning of the period cease to constitute a majority of the Board of Directors
(the Board).
Loans under the Five-Year Credit Agreement are required to be repaid no
later than December 2, 2004. We have agreed to pay a facility fee of 0.065
percent per annum on the aggregate commitment for the Five-Year Credit
Agreement, subject to increase or decrease in the event of changes in our
long-term debt ratings.
Interest on borrowings under the Five-Year Credit Agreement would be
determined, at our option, by (a) an auction bidding procedure; (b) the highest
of the floating base rate of the agent bank, 0.5 percent above the average CD
rate, or 0.5 percent above the Federal funds rate or (c) the average
Eurocurrency rate of three reference banks plus 0.135 percent (applicable
margin). The applicable margin over the Eurocurrency rate on the Five-Year
Credit Agreement is subject to increase or decrease if our long-term debt
ratings change.
The commitments under the 364-Day Credit Agreement terminate on
November 30, 2000. Annually, prior to the Agreement's anniversary date, we may
request that the termination date of the 364-Day Credit Agreement be extended by
364 days. We have agreed to pay a facility fee of 0.055 percent per annum on the
aggregate commitment for the 364-Day Credit Agreement.
Interest on borrowings under the 364-Day Credit Agreement would be
determined, at our option, by (a) an auction bidding procedure; (b) the highest
of the floating base rate of the agent bank, 0.5 percent above the average CD
rate, or 0.5 percent above the Federal funds rate or (c) the average
Eurocurrency rate of three reference banks plus 0.145 percent (applicable
margin).
In January 2000, we entered into an additional $1 billion bank
revolving credit facility to be used to support the issuance of commercial paper
to finance in part the acquisition of Pittway Corporation. This bank revolving
credit facility expires on April 12, 2000 and has terms and conditions similar
to the $2 billion 364-Day Credit Agreement.
NOTE 16
LEASE COMMITMENTS
Future minimum lease payments under operating leases having initial or
remaining noncancellable lease terms in excess of one year are as follows:
Lease
At December 31, 1999 Payments
- --------------------------------------------------------------------------------
2000 $ 248
---------------------
2001 193
---------------------
2002 149
---------------------
2003 108
---------------------
2004 79
---------------------
Thereafter 260
- --------------------------------------------------------------------------------
$1,037
=================================================================================
Rent expense was $291, $262 and $251 million in 1999, 1998 and 1997,
respectively.
Honeywell 1999 Annual Report 51
NOTES TO FINANCIAL STATEMENTS
Honeywell International Inc. (Dollars in Millions Except Per Share Amounts)
NOTE 17
FINANCIAL INSTRUMENTS
As a result of our global financing and operating activities, we are exposed
to market risks from changes in interest and foreign currency exchange rates,
which may adversely affect our operating results and financial position.
We minimize our risks from interest and foreign currency exchange rate
fluctations through our normal financing and operating activities and, when
deemed appropriate, through the use of derivative financial instruments. We do
not use derivative financial instruments for trading or other speculative
purposes and do not use leveraged derivative financial instruments.
Interest rate swap agreements are used to manage interest rate risk by
adjusting our ratio of fixed to floating interest rates payable on our
outstanding debt. At December 31, 1999 and 1998, interest rate swap agreements
effectively changed $850 and $1,000 million, respectively, of fixed rate debt at
an average rate of 6.6 and 7.0 percent, respectively, to LIBOR and commercial
paper based floating rate debt. Other interest rate swaps at December 31, 1999
and 1998 effectively changed $250 and $450 million, respectively, of LIBOR and
commercial paper based floating rate swaps and debt to fixed rate swaps and debt
with an average fixed rate of 6.3 and 6.4 percent, respectively. Our interest
rate swaps mature through the year 2007.
Our exposure to market risk for changes in foreign currency exchange
rates arises from international financing activities between subsidiaries, and
foreign currency denominated receivables, payables, and firm commitments arising
from international transactions. We attempt to have all such transaction
exposure hedged with internal natural offsets to the fullest extent possible
and, once these opportunities have been exhausted, through foreign currency
forward and option agreements with third parties. We also use derivative
financial instruments to hedge the impact of exchange rate movements on the
translated U.S. dollar value of the net income for a number of foreign
subsidiaries. Foreign currency forward and option agreements used to hedge net
income are marked-to-market, with gains or losses recognized immediately in
income. Our principal foreign currency exposures relate to the Belgian franc,
the French franc, the German mark (collectively the Euro countries), and the
British pound, the Canadian dollar, and the U.S. dollar.
At December 31, 1999, we held or had written foreign currency forward
and option agreements maturing through 2003. We write foreign currency options
only in combination with purchased options as an integral transaction and
economic alternative to using forward agreements.
Derivative financial instruments expose us to counterparty credit risk
for nonperformance and to market risk related to changes in interest or currency
exchange rates. We manage our exposure to counterparty credit risk through
specific minimum credit standards, diversification of counterparties, and
procedures to monitor concentrations of credit risk. Our counterparties are
substantial investment and commercial banks with significant experience using
such derivative instruments. We monitor the impact of market risk on the fair
value and cash flows of our derivative and other financial instruments
considering reasonably possible changes in interest and currency exchange rates
and restrict the use of derivative financial instruments to hedging activities.
The values of our outstanding derivative financial instruments at
December 31, 1999 and 1998 follows:
Notional
Principal Carrying Fair
Amount Value Value(1)
- --------------------------------------------------------------------------------
DECEMBER 31, 1999
Interest rate
swap agreements $1,100 $(4) $(36)
- --------------------------------------------------------------------------------
Foreign currency
exchange contracts 1,445 4 6
================================================================================
DECEMBER 31, 1998
Interest rate
swap agreements $1,450 $ 3 $ 6
- --------------------------------------------------------------------------------
Foreign currency
exchange contracts 2,087 1 (4)
- --------------------------------------------------------------------------------
(1) The fair value of financial instruments is based on quoted market prices or
other valuation techniques, as appropriate.
Other financial instruments that are not carried on the Consolidated
Balance Sheet at amounts, which approximate fair values, are certain debt
instruments. The carrying value of long-term debt and related current maturities
(excluding capitalized leases of $36 and $42 million at December 31, 1999 and
1998, respectively) were $2,705 and $3,018 million and the fair values were
$2,702 and $3,278 million at December 31, 1999 and 1998, respectively. The fair
values are estimated based on the quoted market price for the issues (if traded)
or based on current rates offered to us for debt of the same remaining maturity
and characteristics.
52 Honeywell 1999 Annual Report
NOTE 18
CAPITAL STOCK
We are authorized to issue up to 2,000,000,000 shares of common stock, with
a par value of one dollar. Common shareowners are entitled to receive such
dividends as may be declared by the Board, are entitled to one vote per share,
and are entitled, in the event of liquidation, to share ratably in all the
assets of Honeywell which are available for distribution to the common
shareowners. Common shareowners do not have preemptive or conversion rights.
Shares of common stock issued and outstanding or held in the treasury are not
liable to further calls or assessments. There are no restrictions on us relative
to dividends or the repurchase or redemption of common stock. As of June 4,
1999, the date of the Merger Agreement between AlliedSignal and the former
Honeywell, all share repurchase programs were rescinded.
We are authorized to issue up to 40,000,000 shares of preferred stock
without par value and may establish series of preferred stock having such number
of shares and such terms as we may determine.
NOTE 19
OTHER NONOWNER CHANGES IN SHAREOWNERS' EQUITY
Total nonowner changes in shareowners' equity are included in the Consolidated
Statement of Shareowners' Equity. The components of Accumulated Other
Nonowner Changes are as follows:
After-
Pretax Tax Tax
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999
Unrealized gains on securities
available for sale $ -- $ -- $ --
------------------------------
Reclassification adjustment
for gains on securities available
for sale included in net income (152) 60 (92)
- --------------------------------------------------------------------------------
Net unrealized losses arising
during the year (152) 60 (92)
------------------------------
Foreign exchange translation adjustments (126) -- (126)
------------------------------
Minimum pension liability adjustment (70) 27 (43)
- --------------------------------------------------------------------------------
$(348) $ 87 $(261)
================================================================================
After-
Pretax Tax Tax
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
Unrealized gains on securities
available for sale $ 149 $ (59) $ 90
------------------------------
Reclassification adjustment
for gains on securities available
for sale included in net income -- -- --
- --------------------------------------------------------------------------------
Net unrealized gains arising
during the year 149 (59) 90
------------------------------
Foreign exchange translation adjustments 34 -- 34
------------------------------
Minimum pension liability adjustment (16) 6 (10)
- --------------------------------------------------------------------------------
$ 167 $ (53) $ 114
================================================================================
YEAR ENDED DECEMBER 31, 1997
Unrealized (losses) on securities
available for sale $ (5) $ 2 $ (3)
------------------------------
Reclassification adjustment
for losses on securities available
for sale included in net income (13) 6 (7)
- --------------------------------------------------------------------------------
Net unrealized losses arising
during the year (18) 8 (10)
------------------------------
Foreign exchange translation adjustments (293) -- (293)
------------------------------
Minimum pension liability adjustment (3) 1 (2)
- --------------------------------------------------------------------------------
$(314) $ 9 $(305)
================================================================================
The components of Accumulated Other Nonowner Changes are as follows:
December 31 1999 1998 1997
- --------------------------------------------------------------------------------
Cumulative foreign exchange translation
adjustment $(295) $(169) $(203)
----------------------------
Unrealized holding gains on securities
available for sale -- 92 2
----------------------------
Minimum pension liability (60) (17) (7)
- --------------------------------------------------------------------------------
$(355) $ (94) $(208)
================================================================================
NOTE 20
STOCK-BASED COMPENSATION PLANS
We have stock plans available to grant incentive stock options, non-qualified
stock options and stock appreciation rights to officers and employees.
FIXED STOCK OPTIONS The exercise price, term and other conditions applicable to
each option granted under the stock plans are generally determined by the
Management Development and Compensation Committee of the Board. The options
are granted at a price equal to the stock's fair market value on the date of
grant. The options generally become exercisable over a three-year period
and expire after ten years.
Honeywell 1999 Annual Report 53
NOTES TO FINANCIAL STATEMENTS
Honeywell International Inc. (Dollars in Millions Except Per Share Amounts)
The following table summarizes information about stock option activity for
the three years ended December 31, 1999:
Weighted
Average
Number Exercise
of Options Price
- ----------------------------------------------------------------
Outstanding at December 31, 1996 59,572,251 18.25
---------------------------
Granted 11,753,454 37.49
---------------------------
Assumed 1,258,125 27.73
---------------------------
Exercised (11,712,796) 16.13
---------------------------
Lapsed or canceled (908,254) 28.45
- ----------------------------------------------------------------
Outstanding at December 31, 1997 59,962,780 22.47
---------------------------
Granted 9,819,362 34.33
---------------------------
Exercised (10,708,194) 20.28
---------------------------
Lapsed or canceled (4,352,142) 26.33
- ----------------------------------------------------------------
Outstanding at December 31, 1998 54,721,806 25.66
---------------------------
Granted 20,580,611 54.93
---------------------------
Exercised (16,956,945) 23.04
---------------------------
Lapsed or canceled (2,304,969) 35.38
- ----------------------------------------------------------------
Outstanding at December 31, 1999 56,040,503 36.81
================================================================
The following table summarizes information about stock options outstanding
at December 31, 1999:
Options Outstanding Options Exercisable
---------------------------------- -----------------------
Weighted Weighted
Range of Weighted Average Average
exercise Number Average Exercise Number Exercise
prices Outstanding Life(1) Price Exercisable Price
- ---------------------------------------------------------------------------
$ 7.18-$17.79 12,323,028 3.7 $16.11 10,823,028 $15.88
------------------------------------------------------------
$17.81-$34.19 10,211,074 5.5 23.55 8,541,514 23.18
------------------------------------------------------------
$34.20-$42.29 18,511,527 8.0 38.56 9,627,702 38.56
------------------------------------------------------------
$42.32-$66.73 14,994,874 9.7 60.68 1,935,460 51.90
------------------------------------------------------------
56,040,503 7.1 36.81 30,927,704 27.21
- ---------------------------------------------------------------------------
(1) Average remaining contractual life in years.
There were 33,530,799 and 37,012,857 options exercisable at weighted average
exercise prices of $20.38 and $18.01 at December 31, 1998 and 1997,
respectively. There were 11,182,210 shares available for future grants under
the terms of our stock option plans at December 31, 1999.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," (SFAS No. 123) requires that the cost of stock based
compensation be measured using a fair value based method. As permitted by SFAS
No. 123, we elected to continue to account for stock-based compensation using
the intrinsic value based method under Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees." Accordingly, no compensation
cost has been recognized for our fixed stock option plans. The following table
sets forth pro forma information, including related assumptions, as if
compensation cost had been determined consistent with the requirements of SFAS
No. 123.
1999 1998 1997
- ---------------------------------------------------------------
Weighted average fair
value per share of options
granted during the year(1) $12.70 $ 9.24 $ 9.15
---------------------------------
Reduction of:
Net income $ 65 $ 48 $ 48
---------------------------------
Earnings per share of
common stock--basic $ .08 $ .06 $ .06
---------------------------------
Earnings per share of
common stock--
assuming dilution $ .08 $ .06 $ .06
---------------------------------
Assumptions:
Historical dividend yield 1.3% 1.6% 1.8%
---------------------------------
Historical volatility 24.6% 20.7% 19.1%
---------------------------------
Risk-free rate of return 5.2% 5.3% 6.4%
---------------------------------
Expected life (years) 5.0 5.0 5.0
- ---------------------------------------------------------------
(1) Estimated on date of grant using Black-Scholes option-pricing model.
RESTRICTED STOCK UNITS Restricted stock unit (RSU) awards entitle the holder to
receive one share of common stock for each unit when the units vest. RSU's are
issued to certain key employees as compensation and as incentives tied directly
to the achievement of certain performance objectives.
RSU's issued were 1,175,127 in 1999, 942,143 in 1998 and 660,912 in 1997.
There were 2,657,561, 3,117,736 and 3,242,472 RSU's outstanding, with a weighted
average grant date fair value per share of $37.81, $28.84 and $24.83 at December
31, 1999, 1998 and 1997, respectively.
NON-EMPLOYEE DIRECTORS' PLAN We also have a Stock Plan for Non-Employee
Directors (Directors' Plan) under which restricted shares and options are
granted. New directors receive grants of 3,000 shares of common stock, subject
to certain restrictions. In addition, each director will be granted an option to
purchase 2,000 shares of common stock each year on the date of the annual
meeting of shareowners. We have set aside 450,000 shares for issuance under the
Directors' Plan. Options generally become exercisable over a three-year period
and expire after ten years.
EMPLOYEE STOCK MATCH PLANS We sponsor employee savings plans under which we
match, in the form of our common stock, certain eligible U.S. employee savings
plan contributions. Shares issued under the stock match plans were 2.6, 3.4 and
3.4 million in 1999, 1998 and 1997, respectively at a cost of $142, $139 and
$132 million, respectively.
54 Honeywell 1999 Annual Report
NOTE 21
COMMITMENTS AND CONTINGENCIES
LITTON LITIGATION On March 13, 1990, Litton Systems, Inc. (Litton) filed a legal
action against the former Honeywell in U.S. District Court, Central District of
California, Los Angeles (the trial court) with claims that were subsequently
split into two separate cases. One alleges patent infringement under federal law
for using an ion-beam process to coat mirrors incorporated in the former
Honeywell's ring laser gyroscopes, and tortious interference under state law for
interfering with Litton's prospective advantage with customers and contractual
relationships with an inventor and his company, Ojai Research, Inc. The other
case alleges monopolization and attempted monopolization under federal antitrust
laws by the former Honeywell in the sale of inertial reference systems
containing ring laser gyroscopes into the commercial aircraft market. The former
Honeywell generally denied Litton's allegations in both cases. In the
patent/tort case, the former Honeywell also contested the validity as well as
the infringement of the patent, alleging, among other things, that the patent
had been obtained by Litton's inequitable conduct before the United States
Patent and Trademark Office.
Patent/Tort Case U.S. District Court Judge Mariana Pfaelzer presided over a
three month patent infringement and tortious interference trial in 1993. On
August 31, 1993, a jury returned a verdict in favor of Litton, awarding damages
against the former Honeywell in the amount of $1.2 billion on three claims. The
former Honeywell filed post-trial motions contesting the verdict and damage
award. On January 9, 1995, the trial court set them all aside, ruling, among
other things, that the Litton patent was invalid due to obviousness,
unenforceable because of Litton's inequitable conduct before the Patent and
Trademark Office, and in any case, not infringed by the former Honeywell's
current process. It further ruled that Litton's state tort claims were not
supported by sufficient evidence. The trial court also held that if its rulings
concerning liability were vacated or reversed on appeal, the former Honeywell
should at least be granted a new trial on the issue of damages because the
jury's award was inconsistent with the clear weight of the evidence and based
upon a speculative damage study.
The trial court's rulings were appealed to the U.S. Court of Appeals for
the Federal Circuit, and on July 3, 1996, in a two to one split decision, a
three judge panel of that court reversed the trial court's rulings of patent
invalidity, unenforceability and non-infringement, and also found the former
Honeywell to have violated California law by intentionally interfering with
Litton's consultant contracts and customer prospects. However, the panel upheld
two trial court rulings favorable to the former Honeywell, namely that the
former Honeywell was entitled to a new trial for damages on all claims, and also
to a grant of intervening patent rights which are to be defined and quantified
by the trial court. After unsuccessfully requesting a rehearing of the panel's
decision by the full Federal Circuit appellate court, the former Honeywell filed
a petition with the U.S. Supreme Court on November 26, 1996, seeking review of
the panel's decision. In the interim, Litton filed a motion and briefs with the
trial court seeking injunctive relief against the former Honeywell's commercial
ring laser gyroscope sales. After the former Honeywell and certain aircraft
manufacturers filed briefs and made oral arguments opposing the injunction, the
trial court denied Litton's motion on public interest grounds on December 23,
1996, and then scheduled the patent/tort damages retrial for May 6, 1997.
On March 17, 1997, the U.S. Supreme Court granted the former Honeywell's
petition for review and vacated the July 3, 1996 Federal Circuit panel decision.
The case was remanded to the Federal Circuit panel for reconsideration in light
of a recent decision by the U.S. Supreme Court in the Warner-Jenkinson vs.
Hilton Davis case, which refined the law concerning patent infringement under
the doctrine of equivalents. On March 21, 1997, Litton filed a notice of appeal
to the Federal Circuit of the trial court's December 23, 1996 decision to deny
injunctive relief, but the Federal Circuit stayed any briefing or consideration
of that matter until such time as it completed its reconsideration of liability
issues ordered by the U.S. Supreme Court.
The liability issues were argued before the same three judge Federal
Circuit panel on September 30, 1997. On April 7, 1998, the panel issued its
decision:
(i) affirming the trial court's ruling that the former Honeywell's
hollow cathode and RF ion-beam processes do not literally infringe
the asserted claims of Litton's `849 reissue patent (Litton's
patent);
(ii) vacating the trial court's ruling that the former Honeywell's RF
ion-beam process does not infringe the asserted claims of Litton's
patent under the doctrine of equivalents, but also vacating the
jury's verdict on that issue and remanding that issue to the trial
court for further proceedings in accordance with the
Warner-Jenkinson decision;
(iii) vacating the jury's verdict that the former Honeywell's hollow
cathode process infringes the asserted claims of Litton's patent
under the doctrine of equivalents and remanding that issue to the
trial court for further proceedings;
(iv) reversing the trial court's ruling with respect to the torts of
intentional interference with contractual relations and intentional
interference with prospective economic advantage, but also vacating
the jury's verdict on that issue, and remanding the issue to the
trial court for further proceedings in accordance with California
state law;
(v) affirming the trial court's grant of a new trial to the former
Honeywell on damages for all claims, if necessary;
(vi) affirming the trial court's order granting intervening rights to the
former Honeywell in the patent claim;
(vii) reversing the trial court's ruling that the asserted claims of
Litton's patent were invalid due to obviousness and reinstating the
jury's verdict on that issue; and
(viii) reversing the trial court's determination that Litton had obtained
Litton's patent through inequitable conduct.
Honeywell 1999 Annual Report 55
NOTES TO FINANCIAL STATEMENTS
Honeywell International Inc. (Dollars in Millions Except Per Share Amounts)
Litton's request for a rehearing of the panel's decision by the full
Federal Circuit court was denied and its appeal of the denial of an injunction
was dismissed. The case was remanded to the trial court for further legal and
perhaps factual review. The parties filed motions with the trial court to
dispose of the remanded issues as matters of law, which were argued before the
trial court on July 26, 1999. On September 23, 1999, the trial court issued
dispositive rulings in the case, granting the former Honeywell's Motion for
Judgment as a Matter of Law and Summary Judgment on the Patent claims on various
grounds; granting the former Honeywell's Motion for Judgment as a Matter of Law
on the State Law Claims on the grounds of insufficient evidence; and denying
Litton's Motion for Partial Summary Judgment. We expect that Litton will appeal
the trial court's rulings.
When preparing for the patent/tort damages retrial that was scheduled for
May 1997, Litton had submitted a revised damage study to the trial court,
seeking damages as high as $1.9 billion. We believe that our ion-beam processes
do not infringe Litton's patent, and further, that Litton's damage study remains
flawed and speculative for a number of reasons. We expect that the trial court's
latest rulings in the case will eventually be affirmed since they are consistent
with the Federal Circuit's most recent opinions in this case and others which
deal with alleged patent infringement under the doctrine of equivalence, and
since, absent any patent infringement, Litton has not proven any tortious
behavior by the former Honeywell which interfered with its contracts or business
prospects. We also believe that it is reasonably possible that no damages will
ultimately be awarded to Litton.
Although it is not possible at this time to predict the result of any
further appeals in this case, potential does remain for an adverse outcome which
could be material to our financial position or results of operations. We believe
however, that any potential award of damages for an adverse judgment of
infringement or interference should be based upon a reasonable royalty
reflecting the value of the ion-beam coating process, and further that such an
award would not be material to our financial position or results of operations.
As a result of the uncertainty regarding the outcome of this matter, no
provision has been made in the financial statements with respect to this
contingent liability.
Antitrust Case Preparations for, and conduct of, the trial in the antitrust case
have generally followed the completion of comparable proceedings in the
patent/tort case. The antitrust trial did not begin until November 20, 1995.
Judge Pfaelzer also presided over the trial, but it was held before a different
jury. At the close of evidence and before jury deliberations began, the trial
court dismissed, for failure of proof, Litton's contentions that the former
Honeywell had illegally monopolized and attempted to monopolize by:
(i) engaging in below-cost predatory pricing;
(ii) tying and bundling product offerings under packaged pricing;
(iii) misrepresenting its products and disparaging Litton products; and
(iv) acquiring the Sperry Avionics business in 1986.
On February 2, 1996, the case was submitted to the jury on the remaining
allegations that the former Honeywell had illegally monopolized and attempted to
monopolize by:
(i) entering into certain long-term exclusive dealing and penalty
arrangements with aircraft manufacturers and airlines to exclude
Litton from the commercial aircraft market, and
(ii) failing to provide Litton with access to proprietary software used in
the cockpits of certain business jets.
On February 29, 1996, the jury returned a $234 million single damages
verdict against the former Honeywell for illegal monopolization, which verdict
would have been automatically trebled. On March 1, 1996, the jury indicated that
it was unable to reach a verdict on damages for the attempt to monopolize claim,
and a mistrial was declared as to that claim.
The former Honeywell subsequently filed a motion for judgment as a matter
of law and a motion for a new trial, contending, among other things, that the
jury's partial verdict should be overturned because the former Honeywell was
prejudiced at trial, and Litton failed to prove essential elements of liability
or submit competent evidence to support its speculative, all-or-nothing $298.5
million damage claim. Litton filed motions for entry of judgment and injunctive
relief. On July 24, 1996, the trial court denied the former Honeywell's
alternative motions for judgment as a matter of law or a complete new trial, but
concluded that Litton's damage study was seriously flawed and granted the former
Honeywell a retrial on damages only. The court also denied Litton's two motions.
At that time, Judge Pfaelzer was expected to conduct the retrial of antitrust
damages sometime following the retrial of patent/tort damages. However, after
the U.S. Supreme Court remanded the patent/tort case to the Federal Circuit in
March 1997, Litton moved to have the trial court expeditiously schedule the
antitrust damages retrial. In September 1997, the trial court rejected that
motion, indicating that it wished to know the outcome of the current patent/tort
appeal before scheduling retrials of any type.
Following the April 7, 1998 Federal Circuit panel decision in the
patent/tort case, Litton again petitioned the trial court to schedule the
retrial of antitrust damages. The trial court tentatively scheduled the trial to
commence in the fourth quarter of 1998, and reopened limited discovery and other
pretrial preparations. Litton then filed another antitrust damage claim of
nearly $300 million.
The damages only retrial began October 29, 1998 before Judge Pfaelzer and a
new jury. On December 9, 1998, the jury returned verdicts against the former
Honeywell totaling $250 million, $220 million of which is in favor of Litton and
$30 million of which is in favor of its sister corporation, Litton Systems,
Canada, Limited.
56 Honeywell 1999 Annual Report
On January 27, 1999, the court vacated its prior mistrial ruling with
respect to the attempt to monopolize claim and entered a treble damages judgment
in the total amount of $750 million for actual and attempted monopolization. The
former Honeywell filed appropriate post-judgment motions with the trial court
and Litton filed motions seeking to add substantial attorney's fees and costs to
the judgment. A hearing on the post-judgment motions was held before the trial
court on May 20, 1999. On September 24, 1999, the trial court issued rulings
denying the former Honeywell's Motion for Judgment as a Matter of Law and Motion
for New Trial and Remittitur as they related to Litton Systems Inc., but
granting the former Honeywell's Motion for Judgment as a Matter of Law as it
relates to Litton Systems, Canada, Limited. The net effect of these rulings was
to reduce the existing judgment against the former Honeywell of $750 million to
$660 million, plus attorney fees and costs of approximately $35 million. Both
parties have appealed the judgment, as to both liability and damages, to the
U.S. Court of Appeals for the Ninth Circuit. Execution of the trial court's
judgment will be stayed pending resolution of the former Honeywell's
post-judgment motions and the disposition of any appeals filed by the parties.
We expect to obtain substantial relief from the current adverse judgment in
the antitrust case by an appeal to the Ninth Circuit, based upon sound
substantive and procedural legal grounds. We believe that there was no factual
or legal basis for the magnitude of the jury's award in the damages retrial and
that, as was the case in the first trial, the jury's award should be overturned.
We also believe there are serious questions concerning the identity and nature
of the business arrangements and conduct which were found by the first antitrust
jury in 1996 to be anti-competitive and damaging to Litton, and the verdict of
liability should be overturned as a matter of law.
Although it is not possible at this time to predict the result of any
eventual appeals in this case, potential remains for an adverse outcome which
could be material to our financial position or results of operations. As a
result of the uncertainty regarding the outcome of this matter, no provision has
been made in the financial statements with respect to this contingent liability.
We also believe that it would be inappropriate for Litton to obtain recovery of
the same damages, e.g. losses it suffered due to the former Honeywell's sales of
ring laser gyroscope-based inertial systems to OEMs and airline customers, under
multiple legal theories, claims, and cases, and that eventually any duplicative
recovery would be eliminated from the antitrust and patent/tort cases.
In the fall of 1996, Litton and the former Honeywell commenced a court
ordered mediation of the patent, tort and antitrust claims. No claim was
resolved or settled, and the mediation is currently in recess.
ENVIRONMENTAL MATTERS In accordance with our accounting policy (see Note 1),
liabilities are recorded for environmental matters generally no later than the
completion of feasibility studies. Although we do not currently possess
sufficient information to reasonably estimate the amounts of the liabilities to
be recorded upon future completion of studies, they may be significant to the
consolidated results of operations, but we do not expect that they will have a
material adverse effect on our consolidated financial position. The liabilities
for environmental costs recorded in Accrued Liabilities and Other Liabilities at
December 31, 1999 were $104 and $245 million, respectively, and at December 31,
1998 were $128 and $278 million, respectively.
OTHER MATTERS We are subject to a number of other lawsuits, investigations and
claims (some of which involve substantial amounts) arising out of the conduct of
our business. With respect to all these other matters, including those relating
to commercial transactions, government contracts, product liability and
non-environmental health and safety matters, while the ultimate results of these
lawsuits, investigations and claims cannot be determined, we do not expect that
these matters will have a material adverse effect on our consolidated results of
operations or financial position.
We have issued or are a party to various direct and indirect guarantees,
bank letters of credit and customer guarantees. We do not expect that these
guarantees will have a material adverse effect on our consolidated results of
operations or financial position.
Honeywell 1999 Annual Report 57
NOTES TO FINANCIAL STATEMENTS
Honeywell International Inc. (Dollars in Millions Except Per Share Amounts)
NOTE 22
PENSION AND OTHER POSTRETIREMENT BENEFITS
We provide separate pension and retiree medical benefit plans for employees of
both AlliedSignal and the former Honeywell. Pension benefits for substantially
all U.S. employees are provided through non-contributory, defined benefit
pension plans. 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. Our retiree medical
plans cover U.S. and Canadian employees who retire with pension eligibility for
hospital, professional and other medical services. Most of the U.S. retiree
medical plans require deductibles and copayments and virtually all are
integrated with Medicare. Retiree contributions are generally required based on
coverage type, plan and Medicare eligibility. The retiree medical and life
insurance plans are not funded. Claims and expenses are paid from our general
assets.
The following disclosures present financial information for the combined
AlliedSignal and former Honeywell significant pension and retiree medical
benefit plans using weighted-average assumptions to calculate benefit costs and
obligations.
Net periodic pension and other postretirement benefit costs (income)
include the following components:
Other
Pension Postretirement
Benefits Benefits
----------------------------- --------------------------
1999 1998 1997 1999 1998 1997
----------------------------- --------------------------
Service cost $ 229 $ 233 $ 212 $ 32 $ 30 $ 29
----------------------------- --------------------------
Interest cost 710 721 707 125 121 129
----------------------------- --------------------------
Assumed return on
plan assets (1,062) (951) (849) -- -- --
----------------------------- --------------------------
Amortization of
prior service cost 50 45 43 (18) (18) (14)
----------------------------- --------------------------
Other (48) (40) (17) (79) (52) (17)
- ------------------------------------------------------ --------------------------
Benefit cost (income) $ (121) $ 8 $ 96 $ 60 $ 81 $ 127
====================================================== ==========================
The following table summarizes the balance sheet impact, including the
benefit obligations, assets,funded status and weighted average rate assumptions
associated with our significant pension and retiree medical benefit plans.
Other
Pension Postretirement
Benefits Benefits
------------------------- ------------------------
1999 1998 1999 1998
------------------------- ------------------------
Change in benefit
obligation
Benefit obligation at
beginning of year $ 11,101 $ 10,118 $ 1,867 $ 1,880
------------------------- ------------------------
Service cost 229 233 32 30
------------------------- ------------------------
Interest cost 710 721 125 121
------------------------- ------------------------
Participant contributions 7 7 -- --
------------------------- ------------------------
Plan amendments 29 94 (16) 5
------------------------- ------------------------
Actuarial (gains) losses (1,223) 621 (114) 8
------------------------- ------------------------
Acquisitions 95 91 -- --
------------------------- ------------------------
Benefits paid (794) (723) (144) (145)
------------------------- ------------------------
Settlements and
curtailments (128) (65) (42) (32)
------------------------- ------------------------
Translation effect (88) 4 -- --
- ------------------------------------------------------ ------------------------
Benefit obligation
at end of year 9,938 11,101 1,708 1,867
- ------------------------------------------------------ ------------------------
Change in plan assets
Fair value of plan assets
at beginning of year 11,560 11,072 -- --
------------------------- ------------------------
Actual return on
plan assets 2,232 1,016 -- --
------------------------- ------------------------
Company contributions 108 183 -- --
------------------------- ------------------------
Participant
contributions 8 7 -- --
------------------------- ------------------------
Acquisitions 57 63 -- --
------------------------- ------------------------
Settlements (80) (48) -- --
------------------------- ------------------------
Benefits paid (794) (723) -- --
------------------------- ------------------------
Translation effect (69) (10) -- --
- ------------------------------------------------------ ------------------------
Fair value of plan assets
at end of year 13,022 11,560 -- --
- ------------------------------------------------------ ------------------------
Funded status of plans 3,084 459 (1,708) (1,867)
------------------------- ------------------------
Unrecognized transition
(asset) (27) (37) -- --
------------------------- ------------------------
Unrecognized net (gain) (2,742) (402) (257) (143)
------------------------- ------------------------
Unrecognized prior
service cost (credit) 305 360 (145) (184)
- ------------------------------------------------------ ------------------------
(Accrued) prepaid
benefit cost $ 620 $ 380 $(2,110) $(2,194)
====================================================== ========================
Assumptions at
December 31:
Discount rate 8.00% 6.75% 8.00% 6.75%
------------------------- ------------------------
Assumed rate of return
on plan assets 10.00% 9.80% -- --
------------------------- ------------------------
Assumed annual rate
of compensation increase 4.00% 4.60% -- --
====================================================== ========================
58 Honeywell 1999 Annual Report
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets were $608, $534, and $210 million, respectively, as of
December 31, 1999 and $623, $540 and $216 million, respectively, as of December
31, 1998.
For measurement purposes, we assumed an annual health-care cost trend rate
of 6 percent for 2000 and beyond. Assumed health care cost trend rates have a
significant effect on the amounts reported for the health care plan. A
one-percentage-point change in assumed health care cost trend rates would have
the following effects:
One-Percentage- One-Percentage-
Point Increase Point Decrease
- --------------------------------------------------------------
Effect on total of
service and interest
cost components $ 14 $ (12)
------------------------------------
Effect on
postretirement
benefit obligation $135 $(120)
- --------------------------------------------------------------
NOTE 23
SEGMENT FINANCIAL DATA
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" (SFAS No. 131), establishes standards
for reporting information about operating segments. The following information is
provided in accordance with the requirements of SFAS No. 131 and is consistent
with how business results are reported internally to management.
We globally manage our business operations through strategic business units
(SBUs) offering products and services to the aerospace, automation and control,
chemicals, and automotive industries. Based on similar economic and operational
characteristics, our SBUs are aggregated into the following four reportable
segments:
Aerospace Solutions includes Engines & Systems (auxiliary power units;
propulsion engines; environmental control systems; engine controls; and
power generation systems); Aerospace Electronic Systems (flight safety
communications, navigation, radar and surveillance systems; aircraft and
airfield lighting; and advanced systems and instruments); Aerospace
Services (repair and overhaul services; hardware; logistics; and management
and technical services); and Aircraft Landing Systems (aircraft wheels and
brakes).
Automation & Asset Management includes Home and Building Control (controls
for heating, ventilating, humidification and air-conditioning equipment;
energy-efficient lighting controls; home consumer products; security and
fire alarm systems; home automation systems; and building management
systems and services); and Industrial Control (systems for the automation
and control of process operations; solid-state sensors for position,
pressure, air flow, temperature and current; precision electromechanical
switches; control products; advanced vision-based sensors; and fiber-optic
components).
Performance Materials includes Performance Polymers (fibers; plastic
resins; specialty films; and intermediate chemicals); Specialty Chemicals
(fluorine-based products; pharmaceutical and agricultural chemicals;
specialty waxes, adhesives and sealants; and process technology); and
Electronic Materials (wafer fabrication materials and services; printed
circuit boards; advanced chip packaging and amorphous metals).
Power & Transportation Products includes Transportation & Power Systems
(turbochargers; charge-air coolers; portable power systems; air brake and
anti-lock braking systems); the Consumer Products Group (car care products
including anti-freeze, filters, spark plugs, cleaners, waxes and
additives); and Friction Materials (friction material and related brake
system components).
The accounting policies of the segments are the same as those described in
Note 1. We evaluate segment performance based on segment profit, which excludes
general corporate unallocated expenses, gains on sales of non-strategic
businesses, equity income, other income (expense), interest and other financial
charges and merger, repositioning and other charges, and other. We do not
disaggregate assets on a products and services basis for internal management
reporting and, therefore, such information is not presented. Intersegment sales
approximate market and are not significant. Reportable segment data were as
follows:
Honeywell 1999 Annual Report 59
NOTES TO FINANCIAL STATEMENTS
Honeywell International Inc. (Dollars in Millions Except Per Share Amounts)
1999 1998 1997
- ----------------------------------------------------------------
Net sales
Aerospace Solutions $ 9,908 $ 9,890 $ 8,398
--------------------------------
Automation & Asset
Management 6,115 5,957 5,934
--------------------------------
Performance Materials 4,007 4,169 4,248
--------------------------------
Power & Transportation
Products 3,581 3,387 3,769
--------------------------------
Corporate 124 152 150
- ----------------------------------------------------------------
$23,735 $23,555 $22,499
================================================================
Depreciation and amortization
Aerospace Solutions $ 291 $ 304 $ 267
--------------------------------
Automation & Asset
Management 192 194 191
--------------------------------
Performance Materials 214 212 240
--------------------------------
Power & Transportation
Products 106 111 123
--------------------------------
Corporate 78 76 67
- ----------------------------------------------------------------
$ 881 $ 897 $ 888
================================================================
Segment profit
Aerospace Solutions $ 1,918 $ 1,587 $ 1,151
--------------------------------
Automation & Asset
Management 767 705 610
--------------------------------
Performance Materials 439 634 541
--------------------------------
Power & Transportation
Products 322 234 308
--------------------------------
Corporate (175) (248) (167)
- ----------------------------------------------------------------
$ 3,271 $ 2,912 $ 2,443
================================================================
Capital expenditures
Aerospace Solutions $ 270 $ 287 $ 269
--------------------------------
Automation & Asset
Management 212 212 194
--------------------------------
Performance Materials 282 308 309
--------------------------------
Power & Transportation
Products 143 149 161
--------------------------------
Corporate 79 81 82
- ----------------------------------------------------------------
$ 986 $ 1,037 $ 1,015
================================================================
A reconciliation of segment profit to consolidated income before taxes on
income is as follows:
1999 1998 1997
- --------------------------------------------------------------
Segment profit $ 3,271 $2,912 $2,443
------------------------------
Gain on sale of non-strategic
businesses 106 -- 303
------------------------------
Equity in income of
affiliated companies 116 162 204
------------------------------
Other income (expense) 39 3 87
------------------------------
Interest and other
financial charges (265) (275) (277)
------------------------------
Merger, repositioning and
other charges (1,287) (54) (341)
------------------------------
Other(1) 268 24 --
- --------------------------------------------------------------
Income before taxes
on income $ 2,248 $2,772 $2,419
==============================================================
(1) Other represents the gain on our disposition of our investment in AMP
common stock in 1999 and litigation settlements in 1998.
NOTE 24
GEOGRAPHIC AREAS-- FINANCIAL DATA
United Other
States Europe International Total
- ---------------------------------------------------------------------------
Net sales(1) 1999 $16,913 $4,608 $2,214 $23,735
--------------------------------------------
1998 17,082 4,510 1,963 $23,555
--------------------------------------------
1997 16,162 4,308 2,029 $22,499
- ---------------------------------------------------------------------------
Long-lived assets(2) 1999 $ 7,837 $1,840 $ 613 $10,290
--------------------------------------------
1998 7,346 1,944 675 $ 9,965
--------------------------------------------
1997 7,250 1,288 483 $ 9,021
- ---------------------------------------------------------------------------
(1) Sales between geographic areas approximate market and are not significant.
Net sales are classified according to their country of origin. Included in
United States net sales are export sales of $3,715, $3,824, and $3,632
million in 1999, 1998 and 1997, respectively. Our sales are not materially
dependent on a single customer or a small group of customers.
(2) Long-lived assets are comprised of property, plant and equipment, goodwill
and other intangible assets.
NOTE 25
SUBSEQUENT EVENT
On February 3, 2000, we completed a tender offer acquiring substantially all of
the outstanding shares of Pittway Corporation (Pittway) Common Stock and Class A
Stock for approximately $2.2 billion, including the assumption of the net debt
of Pittway of approximately $167 million. The acquisition was funded through the
issuance of commercial paper. Pittway designs, manufactures and distributes
security and fire systems for homes and buildings and had 1998 sales of $1.3
billion.
60 Honeywell 1999 Annual Report
NOTE 26
UNAUDITED QUARTERLY FINANCIAL INFORMATION
1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31 Year Mar. 31 June 30 Sept. 30 Dec. 31 Year
- -----------------------------------------------------------------------------------------------------------------------------------
Net sales $5,582 $5,958 $6,036 $6,159 $23,735 $5,569 $5,904 $5,861 $6,221 $23,555
--------------------------------------------------------------------------------------------------------
Gross profit 1,390 1,333(1) 1,462(3) 1,055(5) 5,240 1,320 1,454 1,491 1,601(7) 5,866
--------------------------------------------------------------------------------------------------------
Net income 440 540(1,2) 554(3,4) 7(5,6) 1,541 396 476 474 557(7,8,9) 1,903
--------------------------------------------------------------------------------------------------------
Earnings per share--basic .55 .68 .70 .01 1.95 .49 .60 .60 .70 2.38
--------------------------------------------------------------------------------------------------------
Earnings per share--
assuming dilution .55 .67(1,2) .68(3,4) .01(5,6) 1.90 .48 .58 .58 .69(7,8,9) 2.34
--------------------------------------------------------------------------------------------------------
Dividends paid(10) .17 .17 .17 .17 .68 .15 .15 .15 .15 .60
--------------------------------------------------------------------------------------------------------
Market price(11)
--------------------------------------------------------------------------------------------------------
High 50.94 68.63 67.56 63.75 68.63 43.81 47.56 46.69 45.13 47.56
--------------------------------------------------------------------------------------------------------
Low 37.81 49.25 57.50 52.38 37.81 34.63 39.63 32.63 33.06 32.63
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Includes $222 million, after-tax $156 million, or $0.19 per share for
repositioning and other charges. See Note 4 of Notes to Financial
Statements for further information.
(2) Includes an after-tax gain of $161 million, or $0.20 per share on the
disposition of our investment in AMP common stock. See Note 6 of Notes to
Financial Statements for further information.
(3) Includes $103 million, after-tax $65 million, or $0.08 per share for
repositioning and other charges. See Note 4 of Notes to Financial
Statements for further information.
(4) Includes an after-tax gain of $59 million, or $0.07 per share on the sale
of our Laminate Systems business. See Note 5 of Notes to Financial
Statements for further information.
(5) Includes $622 million, after-tax $395 million, or $0.49 per share for
repositioning and other charges. See Note 4 of Notes to Financial
Statements for further information.
(6) Includes $300 million, after-tax $228 million, or $0.28 per share for
repositioning and other charges. See Note 4 of Notes to Financial
Statements for further information.
(7) Includes $54 million, after-tax $35 million, or $0.04 per share for
repositioning charges. See Note 4 of Notes to Financial Statements for
further information.
(8) Includes an after-tax gain of $14 million, or $0.02 per share for a
settlement of litigation claims.
(9) Includes a tax benefit of $17 million, or $0.02 per share resulting from
the favorable resolution of certain prior-year research and development tax
claims.
(10) Represents the historical dividends of AlliedSignal.
(11) Represents the historical market price of AlliedSignal up to December 1,
1999, and of Honeywell subsequent to that date. From composite tape-- stock
is primarily traded on the New York Stock Exchange.
Honeywell 1999 Annual Report 61