MANAGEMENT'S DISCUSSION AND ANALYSIS
AlliedSignal Inc.
1994 COMPARED WITH 1993
IN 1994 THE COMPANY DEVELOPED NEW INITIATIVES TO IMPROVE EFFICIENCY AND
ELIMINATE WASTE, SHARPEN ITS FOCUS ON CUSTOMER SATISFACTION AND TARGET FOREIGN
GROWTH OPPORTUNITIES. PRODUCTIVITY PROGRAMS STARTED SINCE 1991 CONTINUED TO
ENHANCE AND GROW THE BUSINESS. One new initiative -- Operational Excellence --
will enhance productivity programs by redesigning the Company's basic processes
to remove variations and improve manufacturing yields as well as by implementing
measurement tools to monitor our progress. Scrap and rework will be reduced from
the design phase to the customer's acceptance of our products. Another
initiative -- Customer Partnerships -- involves customers in designing the
Company's products. This program strengthens customer relationships, while
reducing cycle times in engineering, manufacturing and product support. The
Company will start training employees in 1995 in Total Quality Leadership Phase
II to provide natural work teams with analytical tools for achieving process
improvements. Previous actions -- forming commodity purchasing teams, partnering
with suppliers, sharing common services throughout the Company, cycle time
reductions and rationalizing the organization -- continued to move ahead and
generated significant savings. Mainly as a result of these actions, the Company
had significantly higher operating margins in 1994.
DURING 1994 THE COMPANY LAID THE FOUNDATION FOR GROWTH IN 1995 AND BEYOND:
* Aerospace acquired Textron's Lycoming Turbine Engine Division (Lycoming
Engine) in October 1994 for $375 million in cash and the assumption of certain
liabilities. Lycoming Engine is expected to have 1995 sales of approximately
$450 million. This acquisition extends the Engines group's product offerings in
the robust regional aircraft market as well as into helicopter and other
commercial and military applications for turbine engines. To reduce costs and
improve competitiveness in its core product lines, Aerospace consolidated 12
businesses into four integrated units and merged its sales and service
organizations into a single group. During the year Aerospace introduced new
high-technology products to enhance flight safety and also agreed to form a
number of strategic alliances in Japan and China to better position itself as a
global supplier and to secure a share of the fast-growing markets in the
Asian-Pacific region. The Company had a strong bidding success rate during the
year; it was awarded 64% of new programs bid.
* Globalization is also a key factor in Automotive's growth strategy. The
Company acquired Ford Motor Company's spark plug plant in the U.K., which had
1993 sales of about $20 million, and a seat belt manufacturer in Italy, owned by
the Fiat Group, which had annual sales of approximately $34 million. Automotive
began construction of a $27 million turbocharger plant in Shanghai, China and
has entered into joint venture agreements to produce air bag inflators in Italy,
to distribute aftermarket products throughout Europe and to supply brake
boosters from Spain for vehicles built in Europe by Japanese manufacturers. In
November 1994 the Company acquired the seat belt business of General Safety
Corporation, a supplier to General Motors Corporation and Ford. General Safety
had 1994 sales of about $95 million.
* Engineered Materials began manufacturing environmentally-safer alternatives
to chlorofluorocarbons (CFCs) at a new $70 million facility in Geismar,
Louisiana and acquired the small CFC business of Akzo N.V. in the Netherlands. A
joint venture agreement with General Motors to produce coated automotive
catalytic converter substrates was signed in November 1994. The venture
strengthens the technology and manufacturing capacity of both companies.
THE BOARD OF DIRECTORS VOTED TO INCREASE THE REGULAR QUARTERLY DIVIDEND ON THE
COMMON STOCK BY 16%, FROM $0.1675 TO $0.195 PER SHARE. The dividend increase
will be effective in the first quarter of 1995. The Company had previously
increased its regular quarterly dividend by 16% in the second quarter of 1994.
RESULTS OF OPERATIONS. The Company's sales and earnings expanded to record
levels in 1994. The Company grew through new product introductions and niche
acquisitions and by gaining market share in an expanding worldwide economy.
Internal restructuring and productivity improvements drove earnings
significantly higher.
NET SALES in 1994 were $12,817 million, an increase of 8% over last year. Of the
$990 million increase, $880 million was the result of strong volume gains by the
Automotive and Engineered Materials segments and $442 million from the
consolidation of recent acquisitions, offset in part by a $163 million reduction
for disposed businesses, $131 million due to lower prices, mainly in the
Automotive segment, and $38 million, due to unfavorable foreign exchange
fluctuations.
INCOME FROM OPERATIONS of $1,152 million in 1994 improved by $198 million, or
21%. Excluding the nonrecurring items in 1993 (see Note 3 of Notes to Financial
Statements for information), income from operations improved by $214 million, or
23%. Aerospace's income increased 12%; Automotive was 17% higher and Engineered
Materials had a 30% gain. Profit margins increased from 7.9% in 1993 to 9.0% in
1994 and productivity (the constant dollar basis relationship of sales to costs)
increased by 6.2% over last year reflecting business consolidations, cycle time
reductions, materials management initiatives and unit sales increases. See the
detailed discussion of net income below for information by industry segment.
19
OTHER INCOME (EXPENSE), a $27 million loss, compares with a loss of $9 million
in 1993 reflecting higher minority interest as a result of the formation in late
1993 of a venture with a subsidiary of Knorr-Bremse AG (Knorr-Bremse) in the
U.S. and reduced interest income from investments in short-term securities.
Reduced foreign exchange costs on forward contracts had a favorable impact.
INTEREST AND OTHER FINANCIAL CHARGES of $143 million decreased by $14 million,
or 9%, from 1993 because of refunding a number of debt issues at lower interest
rates and a reduced level of outstanding debt. Higher interest rates on floating
rate borrowings partially offset such savings.
THE EFFECTIVE TAX RATE in 1994 was 31.7% compared with 27.9% in 1993. The 3.8
percentage point increase in 1994 was due to a higher level of earnings subject
to the U.S. statutory rate, additional non-deductible expenses in 1994 and the
absence of the favorable impact of a rate increase on the 1993
beginning-of-the-year deferred tax balances as a result of the 1993 Tax Act. See
Note 7 of Notes to Financial Statements for further information.
INCOME BEFORE THE CUMULATIVE EFFECT OF A CHANGE IN AN ACCOUNTING PRINCIPLE of
$759 million, or $2.68 a share, in 1994 increased by $103 million, or $0.37 a
share, compared with $656 million, or $2.31 a share, last year.
NET INCOME in 1994 was $759 million, or $2.68 a share, compared with $411
million, or $1.45 a share, for 1993. However, 1993 was impacted by the
cumulative effect of adopting an accounting change of $245 million, or $0.86 a
share. The higher income in 1994 was the result of a strong operating
performance by all segments.
A DISCUSSION OF THE OPERATIONS OF THE BUSINESS SEGMENTS, before the cumulative
impact of an accounting change on net income, follows. Adjusted net income
excludes the impact of the 1993 nonrecurring items. (Dollars in millions)
ADJUSTED
AEROSPACE NET SALES NET INCOME NET INCOME
- ----------------------------------------------------------
1994 $ 4,623 $ 260 $ 260
1993 4,530 224 228
- ----------------------------------------------------------
Increase $ 93 $ 36 $ 32
- ----------------------------------------------------------
Aerospace's sales increased 2% over last year. The acquisitions of the
Lycoming Engine and Sundstrand Data Control operations and contract settlements
with the U.S. Air Force contributed significantly to the higher sales. The
regional airline market continued to grow, but a reduction in military spending
and weakness in the commercial aircraft market continued to restrict sales. The
Engines group had lower sales of spares and repair and overhaul services to the
aftermarket. Government Electronic Systems had lower sales of avionics equipment
to the military. Equipment Systems had reduced commercial and military sales,
but sales from aircraft landing systems' repair and overhaul operations were
higher, in part reflecting new business. Commercial Avionics Systems had lower
sales mainly of traffic alert and collision avoidance systems (TCAS II),
reflecting the completion of the airline industry retrofit program. Sales were
reduced by the mid-year 1994 dispositions of the actuation and hangar
businesses.
[GRAPHIC REPRESENTATION of Net Sales* (dollars in billions), expressed
numerically below.]
1992 1993 1994
---- ---- ----
12.0 11.8 12.8
- ------------
* Baseline is $10 billion.
[GRAPHIC REPRESENTATION of Capital Expenditures/R&D (dollars in millions),
expressed numerically below.]
1992 1993 1994
----- ----- ----
Capital expenditures................................... 691 718 639
Company-funded R&D..................................... 320 313 318
----- ----- ----
Total............................................. 1,011 1,031 957
----- ----- ----
Overall, the Company's 1994 sales to the Department of Defense (DOD), as a
prime contractor and subcontractor, declined by 7% compared to 1993 because of
reduced defense spending. Sales to the commercial and foreign government markets
increased by 5%, while sales to the National Aeronautics and Space
Administration (NASA) and other U.S. government agencies increased by 13% in
1994. Sales to the DOD accounted for 28% of Aerospace's total sales, a decrease
of 3 percentage points compared with 1993.
Although sales were up only slightly, Aerospace's net income increased by
14% compared with last year's adjusted net income. Cost savings from business
consolidations, materials management and other productivity programs, especially
in the Engines group, contributed to significantly higher income. The Engines
group also had lower engineering expense on certain major programs that were
winding down. Government Electronic Systems had favorable contract settlements
and Equipment Systems had higher income from commercial aftermarket sales of
aircraft landing systems. The benefits from the productivity programs offset the
continued contraction of military spending and softness in the commercial
aircraft market.
The U.S. defense budget is expected to continue to decline for a number of
years. A number of the Company's military and space programs may be stretched
out, curtailed or canceled. However, the Company does not expect that its sales
will decline as rapidly as the defense budget because of its strong competitive
position on various programs. The Company's ability to successfully retain and
compete for such business is highly dependent on its technical excellence,
management proficiency, strategic alliances and cost-effective performance.
The Company believes that the cyclical downturn for the commercial aircraft
industry will reach bottom in 1995 and may show a small improvement in 1996.
Regional airline traffic grew significantly and new regional aircraft orders
were higher in 1994. Aftermarket shipments to the major airlines were slightly
lower than last year, in part because the airlines have continued to reduce
excess inventories.
The Company continues to receive significant contracts from the commercial
aviation industry, DOD and NASA and earnings are expected to remain strong.
20
At December 31, 1994 and 1993 the Company had firm orders for its aerospace
products from the U.S. and foreign governments of $1,803 and $1,861 million,
respectively. Total backlog, including commercial contracts, at year-end 1994
and 1993 was $4,730 and $4,773 million, respectively. The Company anticipates
that approximately $2,681 million of the total 1994 backlog will be filled
during 1995.
ADJUSTED
AUTOMOTIVE NET SALES NET INCOME NET INCOME
- -------------------------------------------------------------
1994 $ 4,922 $ 223 $ 223
1993 4,506 226 184
- -------------------------------------------------------------
Increase/(Decrease) $ 416 $ (3) $ 39
- -------------------------------------------------------------
Automotive's sales were up 9% compared with 1993. Demand was substantially
higher for braking systems, turbochargers and safety restraints. Strong original
equipment (OE) markets and new product introductions increased sales for North
American and European brakes and air bags. Sales of anti-lock braking systems
(ABS) increased in 1994, reflecting new business with Ford and Chrysler
Corporation due in part to the introduction of the Company's advanced traction
control system. Hybrid inflator technology spurred significantly higher sales of
air bag systems. Strong diesel truck sales in North America and greater demand
for diesel-powered cars in Europe led to significantly higher turbocharger
sales. Turbocharger plants operated at capacity to satisfy the heavy demand.
North American truck brake systems, which benefited from strong OE medium and
heavy truck demand, had increased sales. Sales of European truck brake systems
are no longer consolidated, following the 1993 venture with Knorr-Bremse.
Automotive's adjusted net income increased by 21%, reflecting higher sales
for turbochargers, braking systems, truck brakes and air bags. OE sales were
very strong in the North American market, and European businesses strengthened
due to the economic turnaround occurring mainly in France and Spain. Income
growth was limited by temporary capacity constraints in the turbocharger
business. The Company will be expanding a number of turbocharger facilities in
1995 to meet the customer demand. Productivity improvements, plant
rationalization and materials management throughout the segment also contributed
to the significantly higher earnings.
Sales in 1995 are expected to be moderately higher due to a modest rise in
North American OE sales volume, a stronger European economy, continued strength
for turbochargers, air bags and ABS, acquisitions and a somewhat improved
worldwide aftermarket volume.
ADJUSTED
ENGINEERED MATERIALS NET SALES NET INCOME NET INCOME
- ------------------------------------------------------------------
1994 $ 3,272 $ 331 $ 331
1993 2,791 269 272
- ------------------------------------------------------------------
Increase $ 481 $ 62 $ 59
- ------------------------------------------------------------------
Engineered Materials' sales increased 17% because of strong automotive,
housing, industrial and electronics markets. Higher sales volumes of industrial
and carpet fibers also reflect shipments from the new polyester facility in
France and the acquisition of a carpet nylon business in Europe. Laminates grew
significantly through continued globalization and market share gains. Fluorine
products had improved sales of environmentally-safer CFC substitutes as
additional capacity was added during the year and as a result of recent
acquisitions. Environmental catalysts had strong sales to the OE automotive
[GRAPHIC REPRESENTATION of Income* (dollars in millions), expressed numerically
below.]
1992 1993 1994
---- ---- ----
535 656 759
- ------------
* Before cumulative effect of changes in accounting principles. Baseline is
$400 million.
[GRAPHIC REPRESENTATION of Earnings Per Share* (dollars per share), expressed
numerically below.]
1992 1993 1994
----- ---- ----
1.90 2.31 2.68
- ------------
* Before cumulative effect of changes in accounting principles.
industry. Plastics had higher sales to the automotive, packaging and distributor
markets. Amorphous metals expanded sales to the article surveillance and
transformer markets.
Adjusted net income for Engineered Materials was up by 22%, reflecting
higher sales volumes for all businesses as well as operating efficiencies. The
laminate systems business had strong earnings on substantially higher sales.
Fluorine products had higher income reflecting increased CFC substitute capacity
and cost reductions, although pricing pressures limited gains. The amorphous
metals, performance chemicals and uranium hexafluoride businesses had increased
income on higher sales. Carpet and industrial fibers had substantially higher
earnings on increased sales volumes and prices, but these gains were mostly
offset by higher raw material costs and by start-up costs at the Longlaville
facility. Higher profit contributions were also realized from Engineered
Materials' joint ventures -- Paxon high-density polyethylene (Paxon) and UOP
process technology (UOP).
REGARDING ENVIRONMENTAL MATTERS, the Company is subject to various federal,
state and local requirements relating to the protection of the environment. The
Company believes that, as a general matter, its policies, practices and
procedures are properly designed to prevent unreasonable risk of environmental
damage and that its 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, the
Company is a party to lawsuits and claims and has 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. The Company continually conducts studies,
individually at Company-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 the Company's 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 on the completion of feasibility studies
or the settlement of claims, but in no event later than the Company's commitment
to a plan of action.
21
Remedial response and voluntary cleanup expenditures were $66 and $65
million in 1994 and 1993, respectively, and are currently estimated to increase
to approximately $85 million in 1995. While annual expenditures have generally
increased from year to year, and may continue to increase over time, the Company
expects it will be able to fund such expenditures from cash flow from
operations. 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.
During 1994 the Company charged $37 million against pretax income for
remedial response and voluntary cleanup costs. At December 31, 1994 the recorded
liability for environmental matters was $494 million. In addition, the Company
incurred operating costs for ongoing businesses of approximately $80 million and
capital expenditures of $43 million relating to compliance with environmental
regulations.
Although the Company does 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 the Company's consolidated results of operations.
Management does not expect that environmental matters will have a material
adverse effect on the consolidated financial position of the Company.
See Note 20 of Notes to Financial Statements for a discussion of the
Company's commitments and contingencies, including those related to
environmental matters.
REGARDING FINANCIAL INSTRUMENTS, the Company, with operating and financing
activities in 40 countries and sales throughout the world, is exposed to
fluctuations in interest rates and foreign currency exchange rates. The Company
manages exposure to changes in interest rates through its regular borrowing and
investing decisions and, when deemed appropriate, through the use of interest
rate swap agreements. The objective of such risk management activity is to
minimize the cost of the Company's debt financing over an extended period of
time. The Company manages exposure to foreign currency exchange rates for
transactional items by matching and offsetting assets and liabilities and
thereafter through financial hedge contracts with third parties. The Company
does not use financial instruments for trading or other speculative purposes.
See Note 16 of Notes to Financial Statements for further information on
financial instruments.
INFLATION has not been a significant factor for the Company in a number of
years. Cost increases for labor and material have generally been low, and any
impact has been offset by productivity enhancement programs, including materials
management.
FINANCIAL CONDITION. Cash flow from operating activities exceeded $1 billion for
the third consecutive year, allowing the Company to continue to invest heavily
in its growth initiatives -- particularly acquisitions and increases in
capacity. Additional working capital investment required to support the
Company's sales growth during 1994 impacted further cash flow improvements. High
levels of operating cash flow, together with major debt repayments and increases
in retained earnings have resulted in a significant improvement in the Company's
financial position in recent years.
[GRAPHIC REPRESENTATION of Long-Term Debt as a Percent of Total Capital
(percent), expressed numerically below.]
1992 1993 1994
---- ---- ----
40.5 37.9* 30.4*
- ------------
* Includes impact of cumulative effect of 1993 accounting change.
[GRAPHIC REPRESENTATION of Return on Shareowners' Equity (after-tax percent),
expressed numerically below.]
1992 1993 1994
---- ---- ----
26.4 30.6* 28.9*
- ------------
* Includes impact of cumulative effect of 1993 accounting change.
TOTAL ASSETS at December 31, 1994 were $11,321 million, an increase of $492
million from December 31, 1993. Cash and cash equivalents at year-end 1994 were
$508 million, a decrease of $384 million compared with December 31, 1993, mainly
reflecting the acquisitions of Lycoming Engine and General Safety. Cash flows
from operating activities decreased by $137 million because of higher accounts
receivable reflecting the Company's increased sales level. The current ratio at
year-end 1994 was 1.4x, compared with 1.3x last year. The Company's working
capital turnover improved to 5.5x at December 31, 1994 from 4.8x a year earlier.
THE MAXIMUM AMOUNT OF BORROWING available under the Company's revolving credit
agreements (Credit Agreements) was $900 million. The Credit Agreements support
the issuance of commercial paper as well as outstanding floating rate Employee
Stock Ownership Plan (ESOP) notes. There was no commercial paper outstanding at
year-end 1994 and $164 million at the end of 1993. Commercial paper borrowing
reached a high of $516 million during 1994. Outstanding ESOP notes, at favorable
floating interest rates, totaled $217 million at December 31, 1994 and $259
million at December 31, 1993.
TOTAL DEBT at year-end 1994 was $1,687 million, a decrease of $273 million,
primarily as a result of paying down commercial paper and a redemption of a
deutsche mark bond issue. Long-term debt was reduced by $178 million. The
Company's total debt as a percent of capital was 34.1% at December 31, 1994,
down from 42.7% at year-end 1993. The long-term debt to capital ratio was 30.4%
at year-end 1994, down from 37.9% at year-end 1993. See Note 14 of Notes to
Financial Statements for details of long-term debt and a discussion of the
Credit Agreements.
THE COMPANY REPURCHASED 2.9 MILLION SHARES OF COMMON STOCK for $103 million in
1994. Common stock was repurchased in 1994 to meet expected requirements for
shares issued under employee benefit plans and a shareowner dividend
reinvestment plan. At year-end, the Company had 75.1 million shares of common
stock held in treasury carried at $1,505 million. As of year-end 1994, the
Company was authorized to repurchase 13.6 million shares of common stock.
22
CAPITAL EXPENDITURES during 1994 were $639 million, a decrease of $79 million
from the $718 million spent in 1993. Spending by the segments and Corporate
since 1992 is shown in Note 26 of Notes to Financial Statements. The Company's
total capital expenditures in 1995 are currently projected at about $700
million. These expenditures are expected to be financed by internally generated
funds. Approximately 65% of the projected 1995 expenditures are planned for
expansion and cost reduction, 25% for replacement and maintenance and 10% for
environmental projects.
1993 COMPARED WITH 1992
IN 1993 THE COMPANY INITIATED A NUMBER OF NEW PROGRAMS AND FURTHERED THOSE BEGUN
IN 1991 AND 1992. A number of growth businesses were enhanced through internal
product development, strategic acquisitions, joint ventures and major capital
investments. The Company is overhauling its basic processes to increase market
penetration and forming commodity purchasing teams and working with its
customers and suppliers to raise product quality and reduce production costs.
THE COMPANY STRENGTHENED A NUMBER OF MAJOR BUSINESSES IN 1993:
* To become a more broad-based avionics supplier, the Company acquired
Sundstrand Data Control for $195 million. The acquired business manufactures a
variety of avionics products for data management, ground hazard avoidance,
general aviation communications, navigation and instrumentation. The Company
also acquired the aircraft wheel and brake repair and overhaul operations of Air
Treads, Inc.
* To strengthen the Company's position in air brake controls and related
products for the truck industry, the Company and Knorr-Bremse formed two
ventures -- one in North America and one in Europe. The Company owns 65% of the
North American operation and 35% of the European operations. The Company also
acquired Filtram S.A., a manufacturer and distributor of its Fram filter
products in Mexico.
* In the fibers business, the Company, as the majority shareowner, and Akzo
NV of Arnhem, the Netherlands formed a new company to manufacture and market
commercial carpet fibers in Europe. The Company also started up its $200 million
industrial polyester fiber plant in Longlaville, France.
* The Company expanded its fluorocarbon business through the acquisition of
the U.S. sterilant gas business of Praxair Inc. and by more than doubling, from
20 to 50 million pounds per year, the Company's hydrofluorocarbons (HCFC)-141b
capacity at its El Segundo, California facility. HCFC-141b is a new blowing
agent used in a variety of commercial and residential rigid-insulating foam
applications.
THE COMPANY ADOPTED, EFFECTIVE JANUARY 1, 1993, AN ACCOUNTING CHANGE RELATED TO
POSTEMPLOYMENT BENEFITS. The Financial Accounting Standards Board (FASB) issued
Statement No. 112 -- Employers' Accounting for Postemployment Benefits (FASB No.
112) which requires the accrual of cost over an employee's service life. The
1993 impact of FASB No. 112 was an after-tax provision of $11 million, or $0.04
a share. As part of the adoption, the Company also recorded catch-up after-tax
charges totaling $245 million, or $0.86 a share. This one-time charge reduced
the Company's shareowners' equity by 11%.
RESULTS OF OPERATIONS. The Company's earnings grew to record levels in 1993
benefiting from productivity actions and only a slowly recovering U.S. economy
which more than offset the impact of a depressed aerospace industry and a
recession in Europe.
NET SALES in 1993 were $11,827 million, down 2% from last year. Of the $215
million decrease, $206 million was the effect of the stronger dollar on
Automotive and $81 million was because of reduced sales volumes reflecting the
recession in Europe and weakness in the aerospace industry, offset in part by
$72 million of price increases.
COST OF GOODS SOLD, as a percent of sales, decreased from 82.4% in 1992 to 80.8%
in 1993. The improvement was the result of productivity gains, including
cycle-time reductions and materials management initiatives throughout the
Company. Productivity grew by 5.8% over last year.
NONRECURRING ITEMS consist of a net gain of $16 million from the formation of
the Knorr-Bremse venture offset mainly by the cost of several unusual items. See
Note 3 of Notes to Financial Statements for additional information.
INCOME FROM OPERATIONS of $954 million in 1993 improved by $539 million.
Excluding the nonrecurring items in 1993 and the current year's impact of
adopting FASB No. 112 as well as charges for streamlining and restructuring in
1992 (special provisions), income from operations improved by $173 million, or
22%, reflecting significant earnings gains despite a generally slow world
economy. After excluding the special provisions, Aerospace's income increased 4%
and Automotive's and Engineered Materials' income both increased 32%. Profit
margins, adjusted to exclude nonrecurring items in 1993 and streamlining and
restructuring charges in 1992, increased from 6.5% in 1992 to 7.9% mainly as a
result of improved productivity throughout the Company. See the discussion of
net income below for information by segment.
EQUITY IN INCOME OF AFFILIATED COMPANIES of $122 million increased by $19
million, or 18%, reflecting higher earnings for UOP. Paxon, however, had lower
income as industry overcapacity depressed prices.
EARNINGS FROM UNION TEXAS INVESTMENT reflects the disposition of the Company's
common stock holdings in 1992 as discussed in Note 22 of Notes to Financial
Statements.
OTHER INCOME (EXPENSE), a $9 million loss, compares with a gain of $9 million in
1992 reflecting increased foreign exchange losses in Europe and Brazil partly
offset by higher interest income from investments in short-term securities.
INTEREST AND OTHER FINANCIAL CHARGES of $157 million decreased $63 million, or
29%, from last year because of a lower average level of total debt outstanding
reflecting in part the redemption of three debt issues and lower interest rates.
THE EFFECTIVE TAX RATE in 1993 was 27.9% compared with 23.8% in 1992. Excluding
the impact in 1992 of streamlining and restructuring charges and the gain
relating to Union Texas Petroleum Holdings, Inc. (Union Texas), the effective
tax rate for 1992 was 24.1%. The 3.8 percentage point increase was due to a
higher level of earnings taxed at the new higher U.S. tax rate and the absence
of preferentially taxed Union Texas dividends. A partial offset resulted from an
adjustment to deferred tax balances because of the 1993 tax rate change. Net
income for 1993 benefited by about $0.02 a share from the net effect of the 1993
tax law changes. See Note 7 of Notes to Financial Statements for further
information.
23
INCOME BEFORE THE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES of $656
million, or $2.31 a share, in 1993 increased $121 million, or $0.41 a share,
compared with $535 million, or $1.90 a share, last year.
NET INCOME (LOSS) in 1993 was income of $411 million, or $1.45 a share. In 1992
the Company reported a loss of $712 million, or $2.52 a share. However, both
periods were affected by the cumulative effects of adopting accounting changes
as well as unusual items. The 1993 results included the current year's charge
for adopting FASB No. 112, a net nonrecurring gain and the impact of the U.S.
tax increase. Results in 1992 include streamlining and restructuring charges and
the gain on the disposition of Union Texas. Excluding these items from both
years, the current year's net income was $659 million, or $2.33 a share, which
compares with net income of $541 million, or $1.92 a share, in 1992. The higher
income was the result of significant increases for Automotive and Engineered
Materials.
A DISCUSSION OF THE OPERATIONS OF THE BUSINESS SEGMENTS, before the cumulative
impact of accounting changes on net income, follows. Adjusted net income
excludes the impact of the 1993 nonrecurring items and the 1992 streamlining and
restructuring provision. (Dollars in millions)
ADJUSTED
AEROSPACE NET SALES NET INCOME NET INCOME
- -------------------------------------------------------------
1993 $ 4,530 $ 224 $ 228
1992 4,937 105 227
- -------------------------------------------------------------
Increase/(Decrease) $ (407) $ 119 $ 1
- -------------------------------------------------------------
Aerospace sales decreased 8% because of continued significant volume
reductions in military, commercial and general aviation markets. Lower
production of general aviation aircraft resulted in fewer propulsion engine
deliveries. Aftermarket sales were significantly lower in the auxiliary power
unit (APU) product line. Mainly because of a reduction in the number of aircraft
built, sales of controls and accessories and fluid systems as well as avionics
and communications systems were materially lower. Technical service contracts
awarded by various government agencies and sales of ocean systems increased
moderately. Sales of aircraft landing systems increased slightly and aftermarket
sales related to propulsion engines were higher. The acquisition of Sundstrand
Data Control in the fourth quarter of 1993 contributed $24 million to sales.
Overall, the Company's 1993 sales to the DOD, as a prime contractor and
subcontractor, declined by 11% compared with 1992 because of reduced defense
spending. Sales to the commercial and foreign government markets declined by 9%,
while sales to NASA and other U.S. government agencies increased by 6% in 1993.
Sales to the DOD accounted for 31% of Aerospace's total sales, a decrease of 1
percentage point compared with 1992.
Although total sales were lower and 1993 results included an after-tax
charge of $5 million reflecting the impact of adopting FASB No. 112, Aerospace's
adjusted net income improved slightly compared to last year. Continuing
productivity improvements and sales increases in several product lines were the
principal offsets. Significant cost savings were realized at every operating
business unit. Aerospace Systems and Equipment had substantially higher
earnings. Higher aftermarket sales related to aircraft landing systems,
propulsion engines and guidance and control systems as well as higher sales of
ocean systems and technical services also contributed to the favorable earnings.
Earnings were lower for avionics, APUs and communications systems because of
lower sales.
At December 31, 1993 and 1992 the Company had firm orders for its aerospace
products from the U.S. and foreign governments of $1,861 and $1,712 million,
respectively. Total backlog, including commercial contracts, at year-end 1993
and 1992 was $4,773 and $4,859 million, respectively.
ADJUSTED
AUTOMOTIVE NET SALES NET INCOME NET INCOME
- -------------------------------------------------------------
1993 $ 4,506 $ 226 $ 184
1992 4,499 76 141
- -------------------------------------------------------------
Increase $ 7 $ 150 $ 43
- -------------------------------------------------------------
Automotive sales were essentially level with last year despite the negative
impact, totaling $206 million, of translating mainly weakened European
currencies to the U.S. dollar. Sales of all products in the North American
market were higher. OE sales for passenger cars, light trucks and heavy trucks
rebounded. Sales of passenger-side air bags were especially strong and sales of
seat belts, aftermarket products, turbocharging systems and ABS also improved.
Sales by the Company's Brazilian operations improved. OE and aftermarket product
sales were materially lower in Europe reflecting the impact of the recession.
Automotive's adjusted net income increased significantly, reflecting higher
sales to the North American OE manufacturers and the aftermarket and strong
productivity gains. Rationalization and enhanced productivity programs
continued, mainly in Europe, where sales are down materially due to the poor
economy. In the North American market, automotive and truck brakes, safety
restraints, aftermarket products and turbochargers had substantial earnings
growth. Productivity improvements and higher sales volumes substantially reduced
prior year losses in Brazil. The 1993 results include an after-tax charge of $3
million reflecting the impact of adopting FASB No. 112.
ADJUSTED
ENGINEERED MATERIALS NET SALES NET INCOME NET INCOME
- -------------------------------------------------------------------
1993 $ 2,791 $ 269 $ 272
1992 2,601 190 215
- -------------------------------------------------------------------
Increase $ 190 $ 79 $ 57
- -------------------------------------------------------------------
Engineered Materials had a 7% sales increase. Sales of fluorine products,
including environmentally-safer substitutes for CFCs, grew substantially, and
sales of laminate systems, oximes, performance additives and tar products were
materially higher. Sales of carpet and industrial fibers also improved, but
sales of intermediate chemicals and environmental catalysts were lower because
of weak market conditions.
Engineered Materials' adjusted net income was significantly higher in 1993
because of strong productivity gains and improved revenues for fluorine
products, industrial fibers, performance additives and tar products. Results
also improved for UOP. Partially offsetting these gains were higher operating
costs for laminate systems, reduced demand for intermediate chemicals and lower
earnings for Paxon. The 1993 results include an after-tax charge of $2 million
reflecting the impact of adopting FASB No. 112.
24
REGARDING ENVIRONMENTAL MATTERS, remedial response and voluntary cleanup
expenditures were $65 and $69 million in 1993 and 1992, respectively.
During 1993 the Company charged $41 million against income for remedial
response and voluntary cleanup costs. At December 31, 1993 the recorded
liability for environmental matters was $480 million. In addition, the Company
incurred ongoing operating costs, and made capital expenditures of $39 million,
relating to compliance with environmental regulations.
FINANCIAL CONDITION. Cash flow from operating activities was materially higher
as a result of strong earnings growth and a strengthening balance sheet which
reflects greatly improved operating working capital and a significant customer
advance.
TOTAL ASSETS at December 31, 1993 were $10,829 million, an increase of $73
million from December 31, 1992. Cash and cash equivalents at year-end 1993 were
$892 million, a decrease of $39 million, however, cash investments classified as
long-term increased $40 million, to $90 million, at December 31, 1993. Cash
flows from operating activities, provided by significantly improved earnings for
1993 and a reduction in working capital, increased by $111 million. The current
ratio at year-end 1993 was 1.3x, down slightly from 1.4x at December 31, 1992.
Mainly through a reduction in accounts receivable and inventories, the Company's
working capital turnover was improved to 4.8x at December 31, 1993 from 4.5x a
year earlier.
THE MAXIMUM AMOUNT OF BORROWING available under the Company's Credit Agreements
was reduced by the Company in July 1993 from $1.11 billion to $900 million
reflecting the Company's strong cash position, significantly higher earnings and
current credit requirements. The Credit Agreements support the issuance of
commercial paper and outstanding floating rate ESOP notes. There was $164
million of commercial paper outstanding at year-end 1993 and $4 million at the
end of 1992. Commercial paper borrowing reached a high of $484 million during
1993. Outstanding ESOP notes, at favorable floating interest rates, totaled $259
million at December 31, 1993 and 1992.
TOTAL DEBT at year-end 1993 was $1,960 million, a decrease of $153 million.
Long-term debt was reduced by $175 million mainly from the redemption of various
debt issues. The Company's total debt as a percent of capital, after the
adoption of FASB No. 112, was 42.7% at December 31, 1993, down from 44.7% at
year-end 1992. The long-term debt to capital ratio was 37.9% at year-end 1993,
down from 40.5% at year-end 1992. In January 1993 Moody's upgraded the Company's
long-term debt from A3 to A2 and its commercial paper from P-2 to P-1. This
followed a comparable upgrading from Standard & Poor's in December 1992.
THE COMPANY REPURCHASED 6.7 MILLION SHARES OF COMMON STOCK for $220 million in
1993. Common stock was repurchased in 1993 to offset the issuance of shares for
employee benefit plans and a shareowner dividend reinvestment plan.
CAPITAL EXPENDITURES during 1993 were $718 million, an increase of $27 million
from the $691 million spent in 1992. Spending by the segments and Corporate is
shown in Note 26 of Notes to Financial Statements.
25
CONSOLIDATED STATEMENT OF INCOME
AlliedSignal Inc.
(dollars in millions except per share amounts)
Years ended December 31 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------
Net sales $12,817 $11,827 $12,042
- ---------------------------------------------------------------------------------------------------------
Cost of goods sold 10,299 9,551 9,923
Selling, general and administrative expenses 1,366 1,338 1,336
Streamlining and restructuring -- -- 368
Nonrecurring items -- (16) --
- ---------------------------------------------------------------------------------------------------------
Total costs and expenses 11,665 10,873 11,627
- ---------------------------------------------------------------------------------------------------------
Income from operations 1,152 954 415
Equity in income of affiliated companies 129 122 103
Earnings from Union Texas investment -- -- 395
Other income (expense) (27) (9) 9
Interest and other financial charges (143) (157) (220)
- ---------------------------------------------------------------------------------------------------------
Income before taxes on income 1,111 910 702
Taxes on income 352 254 167
- ---------------------------------------------------------------------------------------------------------
Income before cumulative effect of changes in accounting principles 759 656 535
Cumulative effect of changes in accounting principles:
Accounting for income taxes -- -- (148)
Accounting for postemployment benefits, net of income taxes -- (245) --
Accounting for postretirement benefits other than pensions,
net of income taxes -- -- (1,099)
- ---------------------------------------------------------------------------------------------------------
Net income (loss) $ 759 $ 411 $ (712)
- ---------------------------------------------------------------------------------------------------------
Earnings (loss) per share of common stock: (a)
Before cumulative effect of changes in accounting principles $ 2.68 $ 2.31 $ 1.90
Cumulative effect of changes in accounting principles:
Accounting for income taxes -- -- (.52)
Accounting for postemployment benefits, net of income taxes -- (.86) --
Accounting for postretirement benefits other than pensions,
net of income taxes -- -- (3.90)
- ---------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 2.68 $ 1.45 $ (2.52)
- ---------------------------------------------------------------------------------------------------------
(a) Earnings per share of common stock are based upon the following weighted
average number of shares: 1994, 283,446,399 shares; 1993, 283,233,078 shares and
1992, 281,973,006 shares. No dilution results from outstanding common stock
equivalents.
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
(dollars in millions except per share amounts)
Years ended December 31 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------
Balance at beginning of year $ 1,023 $ 747 $ 1,594
Net income (loss) 759 411 (712)
Other 11 27 8
Common stock dividends (1994 -- $.6475 per share;
1993 -- $.58 per share; 1992 -- $.50 per share) (180) (162) (143)
- ---------------------------------------------------------------------------------------------------------
Balance at end of year $ 1,613 $ 1,023 $ 747
- ---------------------------------------------------------------------------------------------------------
The 'Notes to Financial Statements' are an integral part of these statements.
26
CONSOLIDATED BALANCE SHEET
AlliedSignal Inc.
(dollars in millions)
December 31 1994 1993
- ---------------------------------------------------------------------------------------------------------
ASSETS
- ---------------------------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 508 $ 892
Accounts and notes receivable 1,697 1,343
Inventories 1,743 1,745
Other current assets 637 587
- ---------------------------------------------------------------------------------------------------------
Total current assets 4,585 4,567
Investments and long-term receivables 475 553
Property, plant and equipment -- net 4,260 4,094
Cost in excess of net assets of acquired companies -- net 1,349 1,087
Other assets 652 528
- ---------------------------------------------------------------------------------------------------------
TOTAL ASSETS $11,321 $10,829
- ---------------------------------------------------------------------------------------------------------
LIABILITIES
- ---------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 1,296 $ 1,207
Short-term borrowings 133 57
Commercial paper -- 164
Current maturities of long-term debt 130 137
Accrued liabilities 1,832 1,924
- ---------------------------------------------------------------------------------------------------------
Total current liabilities 3,391 3,489
Long-term debt 1,424 1,602
Deferred income taxes 406 339
Postretirement benefit obligations other than pensions 1,790 1,689
Other liabilities 1,328 1,320
SHAREOWNERS' EQUITY
- ---------------------------------------------------------------------------------------------------------
Capital -- common stock -- Authorized 500,000,000 shares
(par value $1 per share); issued: 358,228,742 shares 358 358
-- additional paid-in capital 2,458 2,453
Common stock held in treasury, at cost: 1994 -- 75,096,896 shares;
1993 -- 74,395,236 shares (1,505) (1,437)
Cumulative foreign exchange translation adjustment 18 (7)
Unrealized holding gain on equity securities 40 --
Retained earnings 1,613 1,023
- ---------------------------------------------------------------------------------------------------------
Total shareowners' equity 2,982 2,390
- ---------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY $11,321 $10,829
- ---------------------------------------------------------------------------------------------------------
The 'Notes to Financial Statements' are an integral part of this statement.
27
CONSOLIDATED STATEMENT OF CASH FLOWS
AlliedSignal Inc.
(dollars in millions)
Years ended December 31 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
- ---------------------------------------------------------------------------------------------------------
Net income (loss) $ 759 $ 411 $ (712)
Adjustments to reconcile net income (loss) to net cash flows from operating
activities:
Cumulative effect of change in accounting for:
Income taxes -- -- 148
Postemployment benefits -- 245 --
Postretirement benefits other than pensions -- -- 1,099
Nonrecurring items -- (59) --
Gain on disposition of Union Texas -- -- (357)
Streamlining and restructuring (180) (217) 133
Depreciation and amortization (includes goodwill) 560 547 529
Undistributed earnings of equity affiliates (includes Union Texas in 1992) (10) (34) (47)
Deferred taxes 180 110 83
Decrease (increase) in accounts and notes receivable (195) 91 (104)
Decrease in inventories 134 123 130
Decrease (increase) in other current assets (65) 14 31
Increase in accounts payable 113 20 157
Increase (decrease) in accrued liabilities (56) 151 167
Other (197) (222) (188)
- ---------------------------------------------------------------------------------------------------------
Net cash flow provided by operating activities 1,043 1,180 1,069
CASH FLOWS FROM INVESTING ACTIVITIES
- ---------------------------------------------------------------------------------------------------------
Expenditures for property, plant and equipment (639) (718) (691)
Proceeds from disposals of property, plant and equipment 54 37 42
Decrease in investments and long-term receivables 32 48 59
(Increase) in other investments (8) (31) (18)
Cash paid for acquisitions (531) (244) (113)
Proceeds from sales of investments and businesses 130 129 1,044
Decrease (increase) in marketable securities 90 (40) (50)
- ---------------------------------------------------------------------------------------------------------
Net cash flow provided by (used for) investing activities (872) (819) 273
CASH FLOWS FROM FINANCING ACTIVITIES
- ---------------------------------------------------------------------------------------------------------
Net increase (decrease) in commercial paper (164) 160 (259)
Net increase (decrease) in short-term borrowings 64 (88) (307)
Proceeds from issuance of common stock 43 143 244
Proceeds from issuance of long-term debt 7 131 121
Repurchases of long-term debt (including current maturities) (215) (355) (163)
Repurchases of common stock (103) (229) (142)
Cash dividends on common stock (180) (162) (143)
Redemption of common stock purchase rights (7) -- --
- ---------------------------------------------------------------------------------------------------------
Net cash flow (used for) financing activities (555) (400) (649)
- ---------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (384) (39) 693
Cash and cash equivalents at beginning of year 892 931 238
- ---------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 508 $ 892 $ 931
- ---------------------------------------------------------------------------------------------------------
The 'Notes to Financial Statements' are an integral part of this statement.
28
NOTES TO FINANCIAL STATEMENTS
AlliedSignal Inc.
(dollars in millions except per share amounts)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
CONSOLIDATED FINANCIAL STATEMENTS include the accounts of AlliedSignal Inc. and
majority-owned subsidiaries.
INVENTORIES are valued at the lower of cost or market using the last-in,
first-out (LIFO) method for certain qualifying domestic inventories and the
first-in, first-out (FIFO) or the average cost method for other inventories.
INVESTMENTS AND LONG-TERM RECEIVABLES are carried at market value if readily
determinable or cost in 1994; prior to 1994, investments and long-term
receivables were carried at the lower of cost or market. Investments in
affiliates over which significant influence is exercised are accounted for using
the equity method of accounting.
PROPERTY, PLANT AND EQUIPMENT are carried at cost and are generally depreciated
using estimated service lives, which range from 3 to 40 years. For the financial
statements, depreciation is computed principally on the straight-line method.
COST IN EXCESS OF NET ASSETS OF ACQUIRED COMPANIES is being amortized on a
straight-line basis over various periods ranging from 20 to 40 years. The
cumulative amount of goodwill amortized at December 31, 1994 and December 31,
1993 is $358 and $315 million, respectively.
POSTEMPLOYMENT BENEFITS for former or inactive employees, excluding retirement
benefits, are accounted for under the provisions of Financial Accounting
Standards Board (FASB) Statement No. 112 -- 'Employers' Accounting for
Postemployment Benefits' (FASB No. 112), effective January 1, 1993. FASB No. 112
requires the Company to accrue the cost of certain benefits, including
severance, workers' compensation and health care coverage, over an employee's
service life. A one-time charge for the adoption of FASB No. 112 of $396 million
(after-tax $245 million, or $0.86 a share) was recognized as the cumulative
effect of a change in accounting principle in 1993. The 1993 ongoing expense was
$18 million (after-tax $11 million, or $0.04 a share). The Company uses the
services of an enrolled actuary to calculate postemployment costs. The Company
previously expensed the cost of such benefits on a pay-as-you-go basis or
recognized the impact at the time of a specific event.
RECOGNITION OF CONTRACT REVENUES primarily relates to Aerospace operations.
Under fixed-price contracts, sales and related costs are recorded as deliveries
are made. Sales and related costs under cost-reimbursable contracts are recorded
as costs are incurred. Anticipated future losses on contracts are charged to
income when identified. Contracts which are part of a program are evaluated on
an overall program basis.
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 which do not contribute to current or future
revenue generation, are expensed. 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 on the
completion of feasibility studies or the settlement of claims, but in no event
later than the Company's commitment to a plan of action. The liabilities for
environmental costs recorded in Accrued Liabilities and Other Liabilities at
December 31, 1994 and 1993 were $78 and $416 million and $66 and $414 million,
respectively.
INTEREST RATE AND FOREIGN CURRENCY FORWARD, OPTION AND SWAP AGREEMENTS are
accounted for as a hedge of the related asset, liability, firm commitment or
anticipated transaction when designated as a hedge of such items. Agreements not
qualifying for hedge accounting are reflected at fair value.
* Changes in the amount to be received or paid under interest rate swap
agreements are recognized in Interest and Other Financial Charges.
* Changes in the fair value of foreign currency agreements are recognized in
Other Income (Expense) or Cumulative Foreign Exchange Translation Adjustment,
as appropriate.
INCOME TAXES are based on the asset and liability approach embodied in FASB
Statement No. 109 -- 'Accounting for Income Taxes' (FASB No. 109), effective
January 1, 1992. Under FASB No. 109, deferred tax liabilities or assets reflect
the impact of temporary differences between amounts of assets and liabilities
for financial and tax reporting. Such amounts are subsequently 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. Deferred income taxes
have not been provided on approximately $177 million of undistributed earnings
of foreign affiliated companies which are considered to be permanently
reinvested. Any U.S. taxes payable on foreign earnings which may be remitted,
however, will be substantially offset by foreign tax credits.
NOTE 2. ACQUISITIONS
In 1994 the Company acquired the Lycoming Turbine Engine Division of Textron
Inc. (Lycoming Engine) for $375 million in cash and the assumption of certain
liabilities. The business had 1994 sales of $550 million. Lycoming Engine
manufactures turbofan engines for regional airlines, helicopter engines for
commercial, military and utility aircraft, military tank engines and marine
propulsion engines. The Company also made a number of smaller acquisitions in
1994.
In 1993 the Company acquired the data control business of Sundstrand
Corporation (Data Controls) for $195 million in cash. The business had sales of
$194 million in 1992. Data Controls manufactures a wide range of avionics such
as ground proximity warning systems, reactive windshear detection systems,
flight data and voice recorders, general aviation in-flight phone systems and
aircraft condition monitoring systems. The Company also made a number of smaller
acquisitions in 1993.
NOTE 3. NONRECURRING ITEMS
The 1993 nonrecurring items consist of a gain of $89 million (after-tax $50
million, or $0.17 a share) from the formation of an alliance of the Company's
air-brake control and related
29
product operations for heavy trucks with those of Knorr-Bremse AG, partly offset
by a provision totaling $73 million (after-tax $49 million, or $0.17 a share)
covering transaction and other costs, including formation costs relating to
Knorr-Bremse and other business ventures as well as the cost of several legal
actions.
NOTE 4. STREAMLINING AND RESTRUCTURING
The 1992 provision reflects a pretax charge of $368 million (after-tax $227
million, or $0.80 a share) covering programs to improve the Company's overall
productivity. These programs include the consolidation of facilities ($187
million), further streamlining of operations and administration ($103 million)
and the cost of product modifications to improve customer satisfaction ($78
million). The various programs include the elimination of about 900 hourly and
salaried employees. The actions contemplated in the 1992 provision have been
essentially completed.
NOTE 5. OTHER INCOME (EXPENSE)
Years ended December 31 1994 1993 1992
- -------------------------------------------------------------
Interest income and other $ 29 $ 41 $ 24
Minority interests (30) (7) (8)
Foreign exchange (loss) (1) (26) (43) (7)
- -------------------------------------------------------------
$ (27) $ (9) $ 9
- -------------------------------------------------------------
(1) Includes the amortization of premiums for foreign currency forward exchange
contracts of $(12), $(38) and $(28) million, in each of the respective years. In
part, the contracts, in conjunction with domestic borrowings, were utilized to
finance certain foreign operations and contributed to lower expense on the
'Interest and Other Financial Charges' line.
NOTE 6. INTEREST AND OTHER FINANCIAL CHARGES
Years ended December 31 1994 1993 1992
- -------------------------------------------------------------
Total interest and other financial
charges $ 166 $ 186 $ 247
Less -- Capitalized interest (23) (29) (27)
- -------------------------------------------------------------
$ 143 $ 157 $ 220
- -------------------------------------------------------------
NOTE 7. TAXES ON INCOME
INCOME BEFORE TAXES ON INCOME
Years ended December 31 1994 1993 1992
- -------------------------------------------------------------
United States $ 973 $ 799 $ 634
Foreign 138 111 68
- -------------------------------------------------------------
$1,111 $ 910 $ 702
- -------------------------------------------------------------
TAXES ON INCOME
Years ended December 31 1994 1993 1992
- -------------------------------------------------------------
United States $ 297 $ 244 $ 160
Foreign 55 10 7
- -------------------------------------------------------------
$ 352 $ 254 $ 167
- -------------------------------------------------------------
Years ended December 31 1994 1993 1992
- -------------------------------------------------------------
Taxes on income consist of:
Current:
United States $ 98 $ 95 $ 55
State 34 25 15
Foreign 40 24 14
- -------------------------------------------------------------
172 144 84
- -------------------------------------------------------------
Deferred:
United States 129 99 92
State 36 25 (2)
Foreign 15 (14) (7)
- -------------------------------------------------------------
180 110 83
- -------------------------------------------------------------
$ 352 $ 254 $ 167
- -------------------------------------------------------------
Years ended December 31 1994 1993 1992
- -------------------------------------------------------------
The principal items accounting for the
difference in taxes on income
computed at the U.S. statutory rate
and as recorded on an overall
basis are as follows:
Statutory U.S. federal income tax rate 35.0% 35.0% 34.0%
Taxes on foreign earnings
(under) U.S. tax rate (.6) (2.4) (3.6)
Asset basis differences (3.3) (1.7) --
Nondeductible amortization 1.0 1.2 1.5
State income taxes 3.9 3.3 .4
Tax benefits of Foreign Sales
Corporation (1.4) (1.9) (2.9)
Dividends received deduction (.1) (.2) (1.5)
ESOP dividend tax benefit (.9) (.9) (1.1)
Impact of rate change on beginning-
of-the-year deferred tax balances -- (1.5) --
All other items -- net (1.9) (3.0) (3.0)
- -------------------------------------------------------------
31.7% 27.9% 23.8%
- -------------------------------------------------------------
DEFERRED INCOME TAXES
December 31 1994 1993
- -------------------------------------------------------------
Included in the following balance sheet
accounts:
Other current assets $ 483 $ 468
Other assets 124 104
Deferred income taxes (406) (339)
- -------------------------------------------------------------
$ 201 $ 233
- -------------------------------------------------------------
DEFERRED TAX ASSETS/(LIABILITIES)
December 31 1994 1993
- -------------------------------------------------------------
The temporary differences and carryforwards
which give rise to deferred tax assets and
liabilities are as follows:
Property, plant and equipment basis differences $(793) $(742)
Postretirement benefits other than pensions 741 716
Postemployment benefits 106 158
Investment and other asset basis differences (515) (465)
Streamlining, restructuring and other
nonrecurring items 265 290
Other accrued items 423 334
Other tax credits 31 41
Alternative minimum tax credit 12 60
Foreign net operating losses 181 118
U.S. capital loss 22 43
All other items -- net (199) (239)
- -------------------------------------------------------------
274 314
Valuation allowance (73) (81)
- -------------------------------------------------------------
$ 201 $ 233
- -------------------------------------------------------------
30
Other tax credits relate primarily to U.S. general business tax credits which
are available to reduce income tax payments through the year 2008. The
alternative minimum tax credit is available to reduce regular income tax
payments for an indefinite period of time. The foreign net operating losses
relate to several countries. Such losses are available to reduce income tax
payments in the future, subject to varying expiration rules. The U.S. capital
loss is available to offset income tax payments on capital gains through 1997.
NOTE 8. ACCOUNTS AND NOTES RECEIVABLE
December 31 1994 1993
- -------------------------------------------------------------
Trade $1,526 $1,245
Other 204 126
- -------------------------------------------------------------
1,730 1,371
Less -- Allowance for doubtful accounts and
refunds (33) (28)
- -------------------------------------------------------------
$1,697 $1,343
- -------------------------------------------------------------
The Company is a party to agreements under which it can sell undivided interests
in designated pools of trade accounts receivable up to $500 million (average
outstanding was $500 and $492 million during 1994 and 1993, respectively). New
receivables are sold under the agreements as previously sold receivables are
collected. During 1994, this represented an average collection period of 47 days
or a replacement of receivables of approximately eight times. At both December
31, 1994 and 1993, customer accounts receivable on the Consolidated Balance
Sheet have been reduced by $500 million, reflecting such sales. The Company acts
as an agent for the purchasers in the collection and administration of the
receivables.
NOTE 9. INVENTORIES
December 31 1994 1993
- -------------------------------------------------------------
Raw materials $ 488 $ 504
Work in process 706 635
Finished products 766 824
Supplies and containers 70 51
- -------------------------------------------------------------
2,030 2,014
Less --
Progress payments (160) (154)
Reduction to LIFO cost basis (127) (115)
- -------------------------------------------------------------
$1,743 $1,745
- -------------------------------------------------------------
Inventories valued at LIFO amounted to $267 million at December 31, 1994 and
$316 million at December 31, 1993, which amounts were below estimated
replacement cost by $127 and $115 million, respectively.
NOTE 10. OTHER CURRENT ASSETS
December 31 1994 1993
- -------------------------------------------------------------
Current - deferred taxes $ 483 $ 468
Other 154 119
- -------------------------------------------------------------
$ 637 $ 587
- -------------------------------------------------------------
NOTE 11. INVESTMENTS AND LONG-TERM RECEIVABLES
December 31 1994 1993
- -------------------------------------------------------------
Affiliates (1) $ 416 $ 395
Marketable securities -- 90
Long-term receivables 59 68
- -------------------------------------------------------------
$ 475 $ 553
- -------------------------------------------------------------
(1) Includes in 1994 an unrealized holding gain of $66 million on equity
securities in accordance with FASB No. 115. The cost basis of the equity
securities was $44 million at December 31, 1994.
The Company has a 50% partnership interest in two significant joint ventures
accounted for under the equity method, UOP and Paxon Polymer Company (Paxon).
The UOP joint venture is in the process technology and catalyst business, while
the Paxon joint venture manufactures and sells high-density polyethylene resins.
The Company's share of the equity of the joint ventures exceeds its carrying
value for these investments by $84 million, which is being amortized over the
remaining useful lives of the related assets.
Combined selected financial data for these two entities are summarized as
follows:
Years ended December 31 1994 1993 1992
- ---------------------------------------------------------------------
Net sales $ 1,251 $ 1,238 $ 1,225
Income from operations 165 151 142
Income before cumulative effect
of changes in accounting
principles (1) 147 149 149
Net income (1) (2) 132 90 149
- ---------------------------------------------------------------------
December 31 1994 1993
- -------------------------------------------------------------
Current assets $ 854 $ 819
Total assets 1,523 1,505
Current liabilities 304 224
Noncurrent liabilities 351 350
Equity 868 931
- -------------------------------------------------------------
(1) No U.S. taxes have been provided by the entities on partnership income, as
the individual partners are responsible for their proportionate share of U.S.
taxes payable.
(2) Reflects in 1994 the adoption of FASB No. 106 ($15 million) and in 1993 the
adoptions of FASB No. 106 ($37 million) and FASB No. 112 ($22 million).
NOTE 12. PROPERTY, PLANT & EQUIPMENT
December 31 1994 1993
- -------------------------------------------------------------
Land and land improvements $ 333 $ 321
Machinery and equipment 5,862 5,296
Buildings 1,371 1,241
Office furniture and equipment 702 634
Transportation equipment 145 145
Construction in progress 379 531
- -------------------------------------------------------------
8,792 8,168
Less -- Accumulated depreciation and
amortization (4,532) (4,074)
- -------------------------------------------------------------
$4,260 $4,094
- -------------------------------------------------------------
31
NOTE 13. ACCRUED LIABILITIES
December 31 1994 1993
- -------------------------------------------------------------
Customer advance payments/deposits $ 235 $ 244
Insurance 132 163
Postemployment benefits 99 166
Retiree medical benefits 128 125
Wages 304 296
Other 934 930
- -------------------------------------------------------------
$1,832 $1,924
- -------------------------------------------------------------
NOTE 14. LONG-TERM DEBT AND CREDIT AGREEMENTS
December 31 1994 1993
- -------------------------------------------------------------
Employee stock ownership plan refunding
notes, 6.957% and 7.19%, due 1995 - 1997 $ 120 $ 200
Employee stock ownership plan floating rate
notes, 2.876% - 5.32%, due 1995 - 1999 212 218
9 7/8% debentures due June 1, 2002 250 250
9.20% debentures due February 15, 2003 100 100
Medium term notes, 8.28% - 9.28%, due
1995 - 2001 129 153
Zero coupon bonds and money multiplier notes,
12.95% - 13.518%, due 1995 - 2009 278 257
9 1/2% debentures due June 1, 2016 100 100
Industrial development bond obligations,
2.68% - 6.75%, maturing at various dates
through 2026 105 112
Other (including capitalized leases), 2.0% -
14.75%, maturing at various dates through
2016 131 214
- -------------------------------------------------------------
1,425 1,604
Less -- Unamortized discount (1) (2)
- -------------------------------------------------------------
$1,424 $1,602
- -------------------------------------------------------------
The schedule of principal payments on long-term debt is as follows:
LONG-TERM
DEBT
At December 31, 1994 (1)
- -------------------------------------------------------------
1995 $ 130
1996 179
1997 121
1998 205
1999 161
Thereafter 758
- -------------------------------------------------------------
1,554
Less -- Current portion (130)
- -------------------------------------------------------------
$1,424
- -------------------------------------------------------------
(1) Amounts are net of repurchases.
The Company has two credit agreements with a group of 21 banks (3 Year and
364 Day Credit Agreements) with commitments aggregating $900 million. The funds
available under the Credit Agreements may be used for any corporate purpose.
Loans under the $450 million 3 Year Credit Agreement are required to be repaid
no later than July 7, 1997. Annually, the Company may request that the maturity
of the 3 Year Credit Agreement be extended by another year. The Company intends
to request an extension of the agreement in 1995. The banks' commitments to lend
under the $450 million 364 Day Credit Agreement terminate on July 3, 1995 and
any loans then outstanding will be converted to term loans maturing on July 3,
1996. The Company intends to renegotiate this agreement in 1995. The Company has
agreed to pay facility fees of 0.10% per annum and 0.08% per annum on the
aggregate commitments for 3 Year and 364 Day Credit Agreements, respectively,
subject to increase or decrease in the event of changes in the Company's
long-term debt ratings. The Credit Agreements do not restrict the Company's
ability to pay dividends or require the Company to maintain a specific net
worth. However, they do contain other customary conditions and events of
default, the failure to comply with, or occurrence of, which would prevent any
further borrowings and would generally require the repayment of any outstanding
borrowings under either Credit Agreement. Such conditions include the absence of
any material adverse change in the ability of the Company to pay its
indebtedness when due, and such events of default include (a) non-payment of
Credit Agreement debt and interest thereon, (b) non-compliance with the terms of
the 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% or more of the Company's voting stock or
during any 12-month period individuals who were directors of the Company at the
beginning of the period cease to constitute a majority of the board of
directors.
Interest on borrowings under the Credit Agreements would be determined, at
the Company's option, by (a) an auction bidding procedure; (b) the highest of
the average floating base rate of two reference banks, 0.5% above the average CD
rate, or 0.5% above the Federal funds rate; or (c) a spread (equal to 21.25 and
23.25 basis points for the 3 Year and 364 Day Credit Agreements, respectively,
and if either Credit Agreement is drawn down in excess of 50% of its total
amount, 27.5 and 29.5 basis points for the 3 Year and 364 Day Credit Agreements,
respectively) over the average LIBOR or CD rate of three reference banks. The
spreads over the LIBOR or CD rates are subject to increase or decrease if the
Company's long-term debt ratings change. The Company had no balance outstanding
under the Credit Agreements at December 31, 1994. The Credit Agreements have
served as support for the issuance of commercial paper and certain notes issued
under the Company's Employee Stock Ownership Plan funding program. At December
31, 1994, the Company had outstanding $217 million of notes supported by the
Credit Agreements.
NOTE 15. 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, 1994 PAYMENTS
- ----------------------------------------------------------------
1995 $ 92
1996 63
1997 46
1998 37
1999 29
Thereafter 193
- ----------------------------------------------------------------
Total $460
- ----------------------------------------------------------------
Rent expense of $135, $128 and $131 million was included in costs and
expenses for 1994, 1993 and 1992, respectively.
32
NOTE 16. FINANCIAL INSTRUMENTS
The Company, as a result of its global operating and financing activities, is
exposed to changes in interest rates and foreign currency exchange rates, which
may adversely affect its results of operations and financial condition. In
seeking to minimize the risks and/or costs associated with such activities, the
Company manages exposure to changes in interest rates and foreign currency
exchange rates through its regular operating and financing activities and, when
deemed appropriate, through the use of derivative financial instruments. The
instruments utilized include forward, option and swap agreements. The Company
does not use financial instruments for trading or other speculative purposes.
The Company had no leveraged financial instruments at December 31, 1994.
At December 31, 1994 and 1993, the Company held interest rate swap agreements
maturing through 1999. At December 31, 1994, interest rate swap agreements
effectively changed $82 million of London Interbank Offer Rate (LIBOR) based
floating rate debt (average 5.21%) to fixed rate debt (average 7.12%) thereby
reducing the potential impact of increasing short-term interest rates on the
Company's results of operations. At December 31, 1993, interest rate swap
agreements effectively changed $373 million of fixed rate debt (average 9.66%)
to LIBOR based floating rate debt (average 5.3%), $82 million of LIBOR based
floating rate debt (average 3.11%) to fixed rate debt (average 7.24%) and a $41
million fixed rate obligation (7.5%) to a LIBOR floating rate obligation (3.5%).
The Company's exposure to changes in foreign currency exchange rates arises
from inter-company loans utilized to finance foreign subsidiaries, receivables,
payables and firm commitments arising from international transactions. The
Company attempts to have all such transaction exposures hedged with internal
natural offsets to the fullest extent possible and, once these opportunities
have been exhausted, through derivative financial instruments with third parties
(i.e., forward or option agreements). The Company currently also uses derivative
financial instruments to hedge the Company's exposure to changes in foreign
currency exchange rates for the translated U.S. dollar value of the net income
of a number of foreign subsidiaries. The Company's principal foreign currency
exposures relate to the French franc, the German deutsche mark, the British
pound and the U.S. dollar. At December 31, 1994 and 1993, the Company held or
had written foreign currency forward and option agreements, maturing through
1997. The Company uses some of these agreements to reduce exposures to changes
in foreign currency exchange rates and to reduce the risk that such changes
would adversely affect its results of operations or financial condition. In
addition, some of these instruments are hedges of firmly committed transactions
and forecasted transactions that will or are expected to occur through 1995.
The Company's financial instrument counterparties are substantial investment
or commercial banks with significant experience with such instruments. The
Company manages exposure to counterparty credit risk through specific minimum
credit standards and diversification of counterparties. The Company has
procedures to monitor the credit exposure amounts. The Company believes that the
credit risks, in part because of the above practices and procedures, are not
significant. At December 31, 1994 the net market risk exposures from financial
instruments were not significant.
The values of the Company's outstanding derivative financial instruments at
December 31, 1994 and 1993 are as follows:
NOTIONAL
PRINCIPAL FAIR CARRYING
AMOUNT VALUE VALUE
- --------------------------------------------------------------------
December 31, 1994
Interest rate swap agreements
held $ 82 $ 6 $ 1
Foreign currency forward
agreements held 953 21 18
Foreign currency forward
agreements written 1,130 (24) (28)
Foreign currency options held 276 2 2
- --------------------------------------------------------------------
December 31, 1993
Interest rate swap agreements
held $ 496 $ 8 $ --
Foreign currency forward
agreements held 210 5 6
Foreign currency forward
agreements written 117 (1) 1
Foreign currency options held 117 1 1
- --------------------------------------------------------------------
The only other material financial instruments that are not carried in 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 $47 and $52 million at year-end 1994
and 1993, respectively) is $1,507 and $1,687 million and the fair value is
$1,590 and $1,945 million at December 31, 1994 and 1993, respectively. The fair
values are estimated based on the quoted market price for the issues (if traded)
or based on current rates offered to the Company for debt of the same remaining
maturity and characteristics.
NOTE 17. CAPITAL STOCK
The Company is authorized to issue up to 20,000,000 shares of preferred stock
without par value and may establish series of preferred stock having such number
of shares and such terms as it may determine.
The Company is authorized to issue up to 500,000,000 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 of Directors (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 the Company 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 is no restriction on
dividends or the repurchase or redemption of common stock by the Company. The
Company has remaining authority to repurchase from time to time up to 13.6
million shares of common stock.
The Board determined on February 7, 1994 to redeem the share purchase rights
that accompanied each share of common stock outstanding on February 18, 1994 at
$0.05 a right.
33
COMMON
SHARES STOCK/
OUTSTANDING PAID-IN TREASURY
(IN MILLIONS) CAPITAL STOCK
- -----------------------------------------------------------------------
Balance December 31, 1991 276.3 $ 2,747 $ (1,423)
Purchased under repurchase
programs (5.3) -- (152)
Used for Dividend
Reinvestment Plan .2 -- 3
Used for employee benefit plans
(including related
tax benefits) 12.6 35 236
- -----------------------------------------------------------------------
Balance December 31, 1992 283.8 2,782 (1,336)
Purchased under repurchase
programs (6.7) -- (220)
Used for Dividend
Reinvestment Plan .1 -- 3
Used for employee benefit plans
(including related
tax benefits) 6.6 29 116
- -----------------------------------------------------------------------
Balance December 31, 1993 283.8 2,811 (1,437)
Purchased under repurchase
programs (2.9) -- (103)
Used for Dividend
Reinvestment Plan .2 -- 3
Used for employee benefit plans
(including related
tax benefits) 2.0 12 32
Redemption of common
stock purchase rights -- (7) --
- -----------------------------------------------------------------------
Balance December 31, 1994 283.1 $ 2,816 $ (1,505)
- -----------------------------------------------------------------------
NOTE 18. STOCK OPTIONS AND AWARDS
The Company has a 1993 Stock Plan and a 1985 Stock Plan available to grant
options and other related benefits to employees. Under both plans, the Company
may grant incentive and non-qualified stock options, stock appreciation rights
(SARs), restricted shares and restricted units (Units) to officers and other
employees. SARs entitle an optionee to surrender unexercised stock options for
cash or stock equal to the excess of the fair market value of the surrendered
shares over the option value of such shares. The 1993 Stock Plan provides for
the annual grant of awards in an amount not in excess of 1.5% of the total
shares issued (including shares held in treasury) on December 31 of the year
preceding the year of the award. Any shares that are available for awards that
are not utilized in a given year will be available for use in subsequent years.
Units have been granted to certain employees, which entitle the holder to
receive shares of common stock. At December 31, 1994 there were 1,206,109 Units
outstanding, including 428,680 Units granted in 1994, the restrictions on which
generally lapse over periods not exceeding nine years from date of grant.
Incentive stock options have a term determined by the Management Development and
Compensation Committee of the Board (the Committee), but not in excess of ten
years. Non-qualified stock options have been granted with terms of up to ten
years and one day. An option becomes exercisable at such times and in such
installments as set by the Committee. Options generally become exercisable over
a three-year period.
NUMBER OF
STOCK OPTIONS SHARES
- ------------------------------------------------------------------
Outstanding at December 31, 1991 22,276,124
Granted at $22.07 - $27.82 per share 5,934,198
Less --
Exercised at $10.12 - $23.41 per share 8,823,506
Lapsed or canceled 286,290
Surrendered upon exercise of SARs 270,262
- ------------------------------------------------------------------
Outstanding at December 31, 1992 18,830,264
Granted at $29.13 - $36.94 per share 5,949,990
Less --
Exercised at $10.34 - $34.35 per share 4,986,618
Lapsed or canceled 145,190
Surrendered upon exercise of SARs 30,000
- ------------------------------------------------------------------
Outstanding at December 31, 1993 19,618,446
Granted at $33.57 - $39.07 per share 6,809,010
Less --
Exercised at $13.75 - $35.91 per share 1,693,567
Lapsed or canceled 344,720
Surrendered upon exercise of SARs 17,450
- ------------------------------------------------------------------
Outstanding at December 31, 1994,
$13.75 - $39.07 per share 24,371,719
- ------------------------------------------------------------------
Exercisable at December 31, 1994 12,659,343
- ------------------------------------------------------------------
Available for grant at December 31, 1993 6,191,044
- ------------------------------------------------------------------
Available for grant at December 31, 1994 4,739,240
- ------------------------------------------------------------------
The Company also has a Stock Plan for Non-Employee Directors (Directors)
under which restricted shares and options are granted. Prior to April 25, 1994
Directors received one-time grants of 3,000 shares of common stock and new
Directors after that date will receive grants of 1,500 shares of common stock,
subject to certain restrictions. In addition, each Director will be granted an
option to purchase 1,000 shares of common stock each year on the date of the
annual meeting of shareowners. The Company has set aside 225,000 shares for
issuance under the stock plan. Options generally become exercisable over a
three-year period and have a term of ten years.
All options were granted at not less than fair market value at dates of
grant.
Treasury shares of common stock have been used upon exercise of stock
options. Differences between the cost of treasury stock used and the total
option price of shares exercised have been reflected in retained earnings.
NOTE 19. CUMULATIVE FOREIGN EXCHANGE TRANSLATION ADJUSTMENT
December 31 1994 1993 1992
- -------------------------------------------------------
Balance at beginning of year $ (7) $ 58 $ 65
Translation adjustment and impact of
hedges and intercompany balances 25 (65) (7)
- -------------------------------------------------------
$ 18 $ (7) $ 58
- -------------------------------------------------------
NOTE 20. COMMITMENTS AND CONTINGENCIES
The Company is subject to a number of lawsuits, investigations and claims (some
of which involve substantial amounts) arising out of the conduct of its
business, including those relating to commercial transactions, government
contracts, product liability and environmental, safety and health matters. One
such lawsuit was brought by The B. F. Goodrich Company (Goodrich) in the U.S.
District Court for Delaware alleging infringement by the Company of two patents
relating
34
to aircraft brakes and seeking injunctive relief and damages. The allegation
against the Company related only to brakes for the Boeing 777, which is to be
introduced in 1995, and not to any other brake program of the Company. At trial,
Goodrich claimed damages of approximately $350 million before trebling. On
November 10, 1994, after a full trial on the merits, the District Court ruled
the Goodrich patents were invalid, turned down Goodrich's claim for damages and
denied its request for an injunction. On December 8, 1994, Goodrich filed a
notice that it would appeal this decision. The Company believes that Goodrich
will not prevail on appeal.
In accordance with the Company's accounting policy described in Note 1 of
Notes to Financial Statements, liabilities are recorded for environmental
matters generally on the completion of feasibility studies or the settlement of
claims, but in no event later than the Company's commitment to a plan of action.
Although the Company does 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 management does not expect that they will have a material
adverse effect on the consolidated financial position of the Company. With
respect to all other matters, while the ultimate results of these lawsuits,
investigations and claims cannot be determined, management does not expect that
these matters will have a material adverse effect on the consolidated results of
operations or financial position of the Company.
The Company has issued or is a party to various direct and indirect
guarantees, bank letters of credit and customer guarantees. Management does not
expect these guarantees will have a material adverse effect on the consolidated
results of operations or financial position of the Company.
NOTE 21. SUPPLEMENTAL CASH FLOW AND OTHER INFORMATION
Cash and cash equivalents includes cash on hand and on deposit and highly liquid
debt instruments with maturities generally of three months or less. Cash
payments during the years 1994, 1993 and 1992 included interest of $121, $180
and $241 million and income taxes of $164, $130 and $115 million, respectively.
In November 1994 the Company and General Motors Corporation formed a joint
venture to manufacture coated substrates for catalytic converters. The Company
contributed its environmental catalysts business and General Motors contributed
other assets and a long-term sales contract to the venture. The transaction had
the following non-cash impact on the Company's 1994 balance sheet:
AMOUNT
- -----------------------------------------------------------------
Current assets $ (24)
Property, plant and equipment -- net (20)
Investments and long-term receivables (23)
Other noncurrent assets (3)
Current liabilities 102
Noncurrent liabilities (32)
- -----------------------------------------------------------------
In October 1993 the Company and Knorr-Bremse AG formed an alliance to which
both companies contributed their European operations, which provide air-brake
controls and related products to the heavy truck industry. The Company owns 35%
of the venture, and Knorr-Bremse owns the balance and manages the operations.
The transaction had the following non-cash impact on the Company's 1993 balance
sheet:
AMOUNT
- -----------------------------------------------------------------
Current assets $ (49)
Property, plant and equipment -- net (28)
Investments and long-term receivables 51
Other noncurrent assets (13)
Current liabilities 29
Noncurrent liabilities 10
- -----------------------------------------------------------------
The weighted average interest rate on short-term borrowings and commercial
paper outstanding at December 31, 1994 and 1993 was 11.21% and 9.12%,
respectively.
NOTE 22. OIL AND GAS INVESTMENT
During 1992 the Company disposed of its remaining investments in Union Texas
Petroleum Holdings, Inc. (Union Texas) resulting in a pretax gain of $357
million (after-tax $221 million, or $0.78 a share). The Company received
approximately $585 million, after underwriters' discount, from the disposition
of its approximate 39% interest in the common stock of Union Texas. In addition,
the Company received $355 million from the redemption at face value of $200
million of preferred shares and $155 million of warrants of Union Texas. The
Company received dividends from its preferred investment in Union Texas of $30
million in 1992.
NOTE 23. POSTRETIREMENT BENEFITS OTHER
THAN PENSIONS
The Company's U.S. retiree medical programs cover employees who retire with
pension eligibility for hospital, professional and other medical services
(programs). Most of the programs 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 Company also
sponsors retiree life insurance programs which generally provide a flat benefit
of at least two thousand dollars or a benefit as a percent of pay. The retiree
medical and life insurance programs are not funded. Claims and expenses are paid
from the general assets of the Company.
For most non-union employees retiring after July 1, 1992, the Company has
implemented an approach which bases the Company's contribution to retiree
medical premiums on years of service and also establishes a maximum Company
contribution in the future at approximately twice the current level at the date
of implementation.
In 1994, 1993 and 1992 the Company's cost for providing other postretirement
benefits aggregated $150, $153 and $166 million, respectively, excluding the
cumulative pretax impact of adopting FASB No. 106 in 1992 of $1,790 million
(after-tax $1,099 million, or $3.90 a share). The Company uses the services of
an enrolled actuary to calculate postretirement benefit costs.
For measurement purposes, the assumed annual rate of increase in the per
capita cost of covered health care benefits was 11% for 1994, which reduces to
6% in 2000 and remains at that level thereafter. The health care cost trend rate
assumption has a significant effect on the amounts reported. To illustrate,
increasing the assumed health care cost trend rates by 1 percentage point in
each year would increase the accumulated postretirement benefit obligation as of
December
35
31, 1994 by $116 million and the aggregate of the service and interest cost
component of net periodic postretirement benefit cost for the year then ended by
$11 million. The weighted-average discount rate used in determining the
accumulated postretirement benefit obligation was 8.75% and 7.25% at December
31, 1994 and 1993, respectively.
Net periodic postretirement benefit cost for 1994, 1993 and 1992 included the
following components:
Years ended December 31 1994 1993 1992
- -------------------------------------------------------------
Service cost-benefits attributed to
service during the period $ 27 $ 23 $ 22
Interest cost on accumulated post-
retirement benefit obligation 133 137 143
Net amortization (10) (7) --
- -------------------------------------------------------------
150 153 165
Foreign plans -- -- 1
- -------------------------------------------------------------
Net periodic postretirement
benefit cost $ 150 $ 153 $ 166
- -------------------------------------------------------------
Presented below are the plans' status and amounts recognized in the Company's
Consolidated Balance Sheet at December 31, 1994 and 1993:
December 31 1994 1993
- -------------------------------------------------------------
Accumulated postretirement benefit
obligation:
Retirees $1,120 $1,279
Fully eligible active plan participants 172 200
Other active plan participants 393 418
- -------------------------------------------------------------
1,685 1,897
Unrecognized prior service cost 139 132
Unrecognized net gain (loss) 94 (215)
- -------------------------------------------------------------
Accrued postretirement benefit cost $1,918 $1,814
- -------------------------------------------------------------
NOTE 24. PENSIONS
The Company's pension plans, most of which are defined benefit plans and almost
all of which are noncontributory, cover substantially all employees. Benefits
under the plans are generally provided based on years of service and employees'
compensation during the last years of employment or as a flat dollar benefit.
Benefits are generally paid from funds previously provided to trustees. In the
Company's principal U.S. plans, funds are contributed to a trustee as necessary
to provide for current service and for any unfunded projected benefit obligation
over a reasonable period. To the extent that these requirements are fully
covered by assets on hand for a plan, a contribution may not be made in a
particular year. As of year-end 1994 approximately 56% of the assets of U.S.
plans were held in equity securities, with the balance primarily in fixed
income-type securities.
Pension expense in 1994, 1993 and 1992 was $109, $104 and $102 million,
respectively. The Company uses the services of an enrolled actuary to calculate
the amount of pension expense and contributions to trustees of the various
pension plans.
Net periodic pension cost for 1994, 1993 and 1992 included the following
components:
Years ended December 31 1994 1993 1992
- -------------------------------------------------------------
Service cost-benefits earned during the
period $ 132 $ 115 $ 113
Interest cost on projected benefit
obligation 363 369 360
Actual return on plan assets (65) (663) (320)
Net amortization and deferral (338) 269 (69)
- -------------------------------------------------------------
Net periodic pension cost for defined
benefit plans 92 90 84
Foreign plans and other 17 14 18
- -------------------------------------------------------------
Net periodic pension cost $ 109 $ 104 $ 102
- -------------------------------------------------------------
The assumed rate of return for the Company's U.S. defined benefit pension
plans was 9% in 1994, 1993 and 1992. The assumed discount rate used in
calculating the projected benefit obligations at December 31, 1994, 1993 and
1992 was 8.75%, 7.25% and 8.25%, respectively. In addition, the assumed annual
increase in compensation over employees' estimated remaining working lives was
5% in 1994 and 5.5% for both 1993 and 1992.
Presented below are the plans' funded status and amounts recognized in the
Company's Consolidated Balance Sheet at December 31, 1994 and 1993 for its
significant defined benefit pension plans:
December 31 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
ASSETS EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS ACCUMULATED BENEFITS
BENEFITS EXCEED ASSETS BENEFITS EXCEED ASSETS
- ---------------------------------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligation:
Vested $ 3,252 $ 678 $ 3,471 $ 731
Nonvested 228 82 256 74
- ---------------------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation $ 3,480 $ 760 $ 3,727 $ 805
- ---------------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation $ 3,911 $ 802 $ 4,396 $ 857
Less -- Fair value of assets 4,127 617 4,227 678
- ---------------------------------------------------------------------------------------------------------------------------------
Over (under) funded plans 216 (185)(a) (169) (179)
Unrecognized transition (asset) liability 8 (45) (11) (7)
Unrecognized net (gain) loss (79) (13) 360 2
Unrecognized prior service cost (16) 93 (2) 63
- ---------------------------------------------------------------------------------------------------------------------------------
Prepaid (accrued) pension cost $ 129 $ (150) $ 178 $ (121)
- ---------------------------------------------------------------------------------------------------------------------------------
(a) Included in this amount is $152 million for unfunded foreign and
supplemental domestic pension plans.
36
NOTE 25. GEOGRAPHIC AREAS -- FINANCIAL DATA
ADJUSTMENTS
UNITED OTHER AND
STATES (1) CANADA EUROPE INTERNATIONAL ELIMINATIONS TOTAL
- --------------------------------------------------------------------------------------------------------------------------------
Net sales (2) 1994 $ 9,739 $ 202 $ 2,283 $ 593 $ -- $ 12,817
1993 9,220 225 1,897 485 -- 11,827
1992 8,978 331 2,295 438 -- 12,042
- --------------------------------------------------------------------------------------------------------------------------------
Income before cumulative 1994 654 23 65 17 -- 759
effect of changes in 1993 570 26 55 5 -- 656
accounting principles (3) 1992 512 32 6 (15) -- 535
- --------------------------------------------------------------------------------------------------------------------------------
Assets (4) 1994 8,977 205 2,295 543 (699) 11,321
1993 8,517 199 1,967 548 (402) 10,829
1992 8,677 177 1,940 501 (539) 10,756
- --------------------------------------------------------------------------------------------------------------------------------
Liabilities (4) 1994 7,290 87 1,319 342 (699) 8,339
1993 7,175 98 1,235 333 (402) 8,439
1992 7,374 113 1,293 264 (539) 8,505
- --------------------------------------------------------------------------------------------------------------------------------
Sales between geographic areas approximate market and are not significant.
(1) Corporate Office income, expenses, assets and liabilities are included in
the 'United States' column.
(2) Included in United States net sales are export sales of $1,818, $1,699 and
$1,810 million for each of the respective years.
(3) Includes in 1993 after-tax nonrecurring items of a gain for the United
States of $13 million and a loss for Europe of $12 million. Includes in 1992 an
after-tax provision to cover Streamlining and Restructuring charges for the
United States of $163, Europe of $56 and Other International of $8 million. Also
included in the 'United States' column in 1992 is the after-tax gain on the
disposition of the Union Texas common stock of $221 million.
(4) Reclassified for comparative purposes.
NOTE 26. SEGMENT FINANCIAL DATA
ENGINEERED CORPORATE AND
AEROSPACE AUTOMOTIVE MATERIALS UNALLOCATED (1) TOTAL
- ------------------------------------------------------------------------------------------------------------------------------
Net sales (2) 1994 $ 4,623 $ 4,922 $ 3,272 $ -- $ 12,817
1993 4,530 4,506 2,791 -- 11,827
1992 4,937 4,499 2,601 5 12,042
- ------------------------------------------------------------------------------------------------------------------------------
Research and development 1994 126 73 110 9 318
expense 1993 127 63 113 10 313
1992 122 64 124 10 320
- ------------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization 1994 183 148 171 21 523
1993 184 156 153 21 514
1992 186 162 135 13 496
- ------------------------------------------------------------------------------------------------------------------------------
Income from operations (3) 1994 458 411 409 (126) 1,152
1993 402 432 309 (189) 954
1992 187 174 201 (147) 415
- ------------------------------------------------------------------------------------------------------------------------------
Income before cumulative 1994 260 223 331 (55) 759
effect of changes in 1993 224 226 269 (63) 656
accounting principles (3) (4) 1992 105 76 190 164 535
- ------------------------------------------------------------------------------------------------------------------------------
Capital expenditures 1994 148 245 232 14 639
1993 139 205 354 20 718
1992 162 202 301 26 691
- ------------------------------------------------------------------------------------------------------------------------------
Identifiable assets 1994 5,104 3,276 2,562 379 11,321
1993 4,502 2,838 2,502 987 10,829
1992 4,380 3,082 2,295 999 10,756
- ------------------------------------------------------------------------------------------------------------------------------
Intersegment sales approximate market and are not significant.
(1) The 'Corporate and Unallocated' column includes amounts for businesses sold
and Corporate items. Income before cumulative effect of changes in accounting
principles includes amounts (including preferred dividends) for Union Texas,
accounted for on the equity basis, for 1992 of $261 million (includes the gain
on the disposition of the common stock of Union Texas of $221 million, or $0.78
a share).
(2) Sales to the U.S. Government and its agencies, mainly for the Aerospace
segment, were $1,089, $1,096 and $1,170 million for each of the respective
years.
(3) Includes in 1993 a pre- and after-tax provision to cover the current year's
impact of the adoption of FASB No. 112 for Aerospace of $8 and $5 million,
Automotive of $5 and $3 million, Engineered Materials of $4 and $2 million and
Corporate and Unallocated of $1 and $1 million, respectively. Includes in 1993
pre- and after-tax impact of nonrecurring items for Aerospace of a charge of $6
and $4 million, a gain of $81 and $42 million for Automotive, a charge of $5 and
$3 million for Engineered Materials and a charge of $54 and $34 million for
Corporate and Unallocated, respectively. Includes in 1992 a pre- and after-tax
provision to cover Streamlining and Restructuring charges for Aerospace of $213
and $122 million, Automotive of $95 and $65 million, Engineered Materials of $40
and $25 million and Corporate and Unallocated of $20 and $15 million,
respectively. In 1993 a reclassification of the reported 1992 pre- and after-tax
provision for Streamlining and Restructuring of $48 and $30 million was made
reducing Corporate and Unallocated and increasing Aerospace.
(4) A finance charge is made by Corporate Office to the segments on the basis of
relative capitalization, taxes on income are generally included in the segments
which gave rise to the tax effects and equity in income of affiliated companies
is included in the segments in which these companies operate.
37
NOTE 27. UNAUDITED QUARTERLY FINANCIAL INFORMATION
1994 1993
-----------------------------------------------------------------------------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 YEAR MAR. 31 JUNE 30 SEPT. 30 DEC. 31 YEAR
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 2,986 $ 3,187 $ 3,110 $ 3,534 $ 12,817 $ 2,901 $ 3,055 $ 2,812 $ 3,059 $ 11,827
As originally reported: (a)
Gross profit 584 646 607 681 2,518 548 590 555 585
Net income 169 196 189 205 759 149 170 168 178
Per share .60 .69 .67 .73 2.68 .52 .60 .59 .63
1993 restatement of
change in accounting
principle: (a)
Gross profit (1) (1) -- --
Cumulative after-tax
effect (245) -- -- --
Per share (.86) -- -- --
Quarterly after-tax
effect (248) (3) (3) --
Per share (.87) (.01) (.01) --
As restated: (a)
Gross profit 584 646 607 681 2,518 547 589 555 585 2,276
Income before
cumulative effect
of change in
accounting
principle 169 196 189 205 759 146 167 165 178 656
Per share .60 .69 .67 .73 2.68 .51 .59 .58 .63 2.31
Net income (loss) 169 196 189 205 759 (99) 167 165 178 411
Per share .60 .69 .67 .73 2.68 (.35) .59 .58 .63 1.45
Dividends paid .145 .1675 .1675 .1675 .6475 .145 .145 .145 .145 .58
Market price (b)
High 40.75 37.63 38.75 36.00 40.75 34.63 35.25 37.50 40.13 40.13
Low 34.25 33.13 33.63 30.38 30.38 28.75 30.88 32.13 34.88 28.75
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(a) FASB No. 112 was adopted in the fourth quarter of 1993, effective as of
January 1, 1993. As a result, the first three quarters were restated. For
further information see Note 1 of Notes to Financial Statements.
(b) From composite tape -- stock is primarily traded on the New York Stock
Exchange.
REPORT OF INDEPENDENT ACCOUNTANTS
Morristown, NJ
February 1, 1995
[Logo]
To the Shareowners and Directors
of AlliedSignal Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of retained earnings and of cash flows
present fairly, in all material respects, the financial position of AlliedSignal
Inc. and its subsidiaries at December 31, 1994 and 1993, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1994, in conformity with generally accepted accounting
principles. 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 conducted our audits of these statements in
accordance with generally accepted auditing standards 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 provide a reasonable basis for the opinion expressed
above.
As discussed in Notes 1 and 23 to the financial statements, the Company changed
its methods of accounting for postemployment benefits in 1993 and for income
taxes and postretirement benefits other than pensions in 1992.
PRICE WATERHOUSE LLP
____________________
PRICE WATERHOUSE LLP
38
SELECTED FINANCIAL DATA
AlliedSignal Inc.
(dollars in millions except per share amounts)
Years ended December 31 1994 1993 1992 1991 1990 1989 1988 1987
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FOR THE YEAR (a)
Net sales $ 12,817 $ 11,827 $ 12,042 $ 11,831 $ 12,343 $ 11,942 $ 11,909 $ 11,116
Income (loss) from continuing
operations 759 656 535(b) (273)(b) 462 528 463(b) 515(b)
Net income (loss) 759 411(c) (712)(c) (273) 462 528 463 656
Per share of common stock:
Earnings (loss) from continuing
operations 2.68 2.31 1.90 (1.00) 1.67 1.78 1.55 1.53
Net earnings (loss) 2.68 1.45 (2.52) (1.00) 1.67 1.78 1.55 1.95
Dividends .6475 .58 .50 .80 .90 .90 .90 .90
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AT YEAR-END (a)
Net working capital $ 1,194 $ 1,078 $ 1,414 $ 526 $ 892 $ 1,065 $ 1,040 $ 722
Property, plant and equipment
-- net 4,260 4,094 3,897 3,638 3,584 3,321 3,214 3,330
Total assets 11,321 10,829 10,756 10,382 10,456 10,342 10,069 10,321
Long-term debt 1,424 1,602 1,777 1,914 2,051 1,903 2,044 2,017
Shareowners' equity 2,982 2,390 2,251 2,983 3,380 3,412 3,268 3,129
Book value per share of common
stock 10.53 8.42 7.93 10.79 12.55 11.77 11.05 10.44
Average investment (d) 4,848 4,506 4,939 6,771 6,723 6,520 6,629 6,859
Common shares outstanding (in
millions) 283.1 283.8 283.8 276.3 269.4 290.0 295.9 299.9
Common shareowners of record 82,095 84,248 84,254 91,492 97,210 102,042 111,402 109,322
Employees (e) 87,500 86,400 89,300 98,300 105,800 107,100 109,550 115,300
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FINANCIAL STATISTICS (f)
Return on sales (income from
operations) 9.0 8.1 3.4 (2.5) 5.9 8.0 5.7 6.8
Return on sales (after-tax) 5.9 5.5 4.4 (2.3) 3.7 4.4 3.9 4.6
Return on average investment
(after-tax) 17.5 16.6 13.8 (1.3) 9.6 11.0 10.3 10.1
Return on average shareowners'
equity (after-tax) 28.9 30.6 26.4 (8.4) 13.9 15.6 14.5 14.5
Interest coverage ratio 6.8 5.1 3.3 (.9) 2.6 3.0 2.8 3.6
Long-term debt as a percent of
total capital 30.4 37.9 40.5 34.9 33.6 30.8 33.2 33.9
Total debt as a percent of total
capital 34.1 42.7 44.7 43.9 40.4 35.7 35.9 39.0
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FINANCIAL STATISTICS (f) (g)
Return on sales (income from
operations) 9.0 7.9 6.5 4.7 5.9 8.0 7.4 6.8
Return on sales (after-tax) 5.9 5.5 4.5 2.9 3.7 4.4 4.3 3.9
Return on average investment
(after-tax) 17.5 16.6 13.9 7.8 9.6 11.0 10.9 8.9
Return on average shareowners'
equity (after-tax) 28.9 30.5 26.7 10.5 13.9 15.6 15.9 12.2
Interest coverage ratio 6.8 5.0 3.3 2.1 2.6 3.0 2.9 3.2
Long-term debt as a percent of
total capital 30.4 37.9 40.5 34.9 33.6 30.8 33.2 33.9
Total debt as a percent of total
capital 34.1 42.7 44.7 43.9 40.4 35.7 35.9 39.0
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(a) Share and per share data for all periods reflect the March 1994 two-for-one
stock split.
(b) Includes in 1992 the effect of a provision for Streamlining and
Restructuring charges as well as a gain on the sale of common stock of Union
Texas resulting in a net charge of $11 million (after-tax $6 million, or $0.02 a
share) as discussed in Notes 4 and 22 of Notes to Financial Statements,
respectively. In 1991 includes the effect of a provision for Streamlining and
Restructuring charges as well as gains on asset sales by Union Texas resulting
in a net charge of $838 million (after-tax $615 million, or $2.25 a share). In
1988 includes an after-tax provision of $125 million, or $0.42 a share, to cover
Streamlining and Restructuring charges, an after-tax gain of $36 million, or
$0.12 a share, from the sale of the Company's investment in Akebono Brake
Industry Company Ltd. and an after-tax gain of $81 million, or $0.27 a share,
from nonrecurring items. Includes in 1987 the effect of the sale of common stock
by Union Texas which resulted in the Company recording a gain of $108 million
(after-tax $82 million, or $0.24 a share), reflecting the Company's share of an
increase in Union Texas' equity.
(c) Includes in 1993 the cumulative after-tax provision for the adoption of FASB
No. 112 of $245 million, or $0.86 a share. Includes in 1992 the cumulative
after-tax provision for the adoption of FASB Nos. 106 and 109 of $1,247 million,
or $4.42 a share. Such accounting changes are discussed in Notes 1 and 23 of
Notes to Financial Statements.
(d) Investment is defined as shareowners' equity and non-current deferred
taxes-net plus total debt.
(e) Includes employees at facilities operated for the U.S. Department of Energy.
(f) The returns and interest coverage ratio exclude the impact of the cumulative
effect of changes in accounting principles on income.
(g) The returns and interest coverage ratio exclude the impact of nonrecurring
items in 1993, provisions for Streamlining and Restructuring charges in 1992,
1991 and 1988, gain on sale of common stock of Union Texas in 1992, gains on
asset sales by Union Texas in 1991, nonrecurring income in 1988 and Union Texas'
equity transaction in 1987.
39