Selected Financial Data
AlliedSignal Inc. (dollars in millions except per share amounts)
Years ended December 31 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
For the Year
- --------------------------------------------------------------------------------------------------------------------------------
Net sales $14,472 $13,971 $14,346 $12,817 $11,827 $12,042 $11,831 $12,343 $11,942 $11,909 $11,116
Income (loss) from continuing
operations (1) 1,170 1,020 875 759 656 535 (273) 462 528 463 515
Net income (loss) (2) 1,170 1,020 875 759 411 (712) (273) 462 528 463 656
Per share of common stock:
Earnings (loss) from continuing
operations -- basic 2.07 1.80 1.54 1.34 1.16 .95 (.50) .84 .89 .78 .77
Net earnings (loss) -- basic 2.07 1.80 1.54 1.34 .73 (1.26) (.50) .84 .89 .78 .98
Earnings (loss) from continuing
operations -- assuming dilution 2.02 1.76 1.52 1.32 1.14 .93 (.50) .84 .89 .78 .77
Net earnings (loss) -- assuming
dilution 2.02 1.76 1.52 1.32 .71 (1.24) (.50) .84 .89 .78 .98
Dividends .52 .45 .39 .3238 .29 .25 .40 .45 .45 .45 .45
- --------------------------------------------------------------------------------------------------------------------------------
At Year-End
Net working capital $ 1,137 $ 2,143 $ 1,086 $ 1,194 $ 1,078 $ 1,414 $ 526 $ 892 $ 1,065 $ 1,040 $ 722
Property, plant and
equipment -- net 4,251 4,219 4,742 4,260 4,094 3,897 3,638 3,584 3,321 3,214 3,330
Total assets 13,707 12,829 12,465 11,321 10,829 10,756 10,382 10,456 10,342 10,069 10,321
Long-term debt 1,215 1,317 1,366 1,424 1,602 1,777 1,914 2,051 1,903 2,044 2,017
Shareowners' equity 4,386 4,180 3,592 2,982 2,390 2,251 2,983 3,380 3,412 3,268 3,129
Book value per share of
common stock 7.86 7.39 6.35 5.27 4.21 3.97 5.40 6.28 5.89 5.53 5.22
Average investment (3) 6,935 6,468 5,598 4,848 4,506 4,939 6,771 6,723 6,520 6,629 6,859
Common shares outstanding
(in millions) 558.3 565.6 565.6 566.2 567.6 567.6 552.6 538.8 580.0 591.8 599.8
Common shareowners of record 78,793 77,856 79,046 82,095 84,248 84,254 91,492 97,210 102,042 111,402 109,322
Employees (4) 70,500 76,600 88,500 87,500 86,400 89,300 98,300 105,800 107,100 109,550 115,300
- --------------------------------------------------------------------------------------------------------------------------------
Financial Statistics (5)
Return on net sales (income
from operations) 11.3 10.8 8.8 9.0 8.1 3.4 (2.5) 5.9 8.0 5.7 6.8
Return on net sales (after-tax) 8.1 7.3 6.1 5.9 5.5 4.4 (2.3) 3.7 4.4 3.9 4.6
Return on average investment
(after-tax) 18.4 17.5 17.4 17.5 16.6 13.8 (1.3) 9.6 11.0 10.3 10.1
Return on average shareowners'
equity (after-tax) 27.5 26.6 26.7 28.9 30.6 26.4 (8.4) 13.9 15.6 14.5 14.5
Interest coverage ratio 8.7 7.6 6.5 6.8 5.1 3.3 (.9) 2.6 3.0 2.8 3.6
Long-term debt as a percent
of total capital 19.7 22.2 25.6 30.4 37.9 40.5 34.9 33.6 30.8 33.2 33.9
Total debt as a percent of
total capital 31.7 29.5 33.7 34.1 42.7 44.7 43.9 40.4 35.7 35.9 39.0
- --------------------------------------------------------------------------------------------------------------------------------
Financial Statistics (5)(6)
Return on net sales (income
from operations) 11.4 10.7 9.1 9.0 7.9 6.5 4.7 5.9 8.0 7.4 6.8
Return on net sales (after-tax) 8.1 7.2 6.1 5.9 5.5 4.5 2.9 3.7 4.4 4.3 3.9
Return on average investment
(after-tax) 18.3 17.4 17.4 17.5 16.6 13.9 7.8 9.6 11.0 10.9 8.9
Return on average shareowners'
equity (after-tax) 27.4 26.3 26.7 28.9 30.5 26.7 10.5 13.9 15.6 15.9 12.2
Interest coverage ratio 8.8 7.5 6.8 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 19.7 22.2 25.6 30.4 37.9 40.5 34.9 33.6 30.8 33.2 33.9
Total debt as a percent
of total capital 31.7 29.5 33.7 34.1 42.7 44.7 43.9 40.4 35.7 35.9 39.0
===============================================================================================================================
(1) In 1997, includes a provision for repositioning and other charges, a gain
on the sale of the safety restraints business as well as a charge related
to the 1996 sale of the braking business, resulting in a net charge of $24
million (after-tax gain of $4 million, or $0.01 per share). In 1996,
includes a provision for repositioning and other charges as well as a gain
on the sale of the braking business resulting in a net gain of $33 million
(after-tax $9 million, or $0.02 per share). In 1992, includes a provision
for repositioning charges as well as a gain on the sale of common stock of
Union Texas Petroleum Holdings, Inc. (Union Texas) resulting in a net
charge of $11 million (after-tax $6 million, or $0.01 per share). In 1991,
includes a provision for repositioning charges as well as gains on asset
sales by Union Texas resulting in a net charge of $838 million (after-tax
$615 million, or $1.13 per share). In 1988, includes an after-tax charge of
$125 million, or $0.21 per share, for repositioning charges, an after-tax
gain of $36 million, or $0.06 per share, from the sale of the Company's
investment in Akebono Brake Industry Company Ltd. and an after-tax gain of
$81 million, or $0.14 per share, from nonrecurring items. In 1987, includes
a gain from the sale of common stock by Union Texas of $108 million
(after-tax $82 million, or $0.12 per share).
(2) Includes in 1993 the cumulative after-tax provision for the adoption of
FASB No. 112 of $245 million, or $0.43 per share. Includes in 1992 the
cumulative after-tax provision for the adoption of FASB Nos. 106 and 109 of
$1,247 million, or $2.21 per share.
(3) Investment is defined as shareowners' equity and non-current deferred
taxes-net plus total debt.
(4) Includes employees at facilities operated for the U.S. Department of
Energy.
(5) The returns and interest coverage ratio exclude the impact on income of the
cumulative effect of changes in accounting principles.
(6) The returns and interest coverage ratio exclude the impact of provisions
for repositioning charges in 1997, 1996, 1995, 1992, 1991 and 1988, gain on
the sale of the safety restraints business as well as a charge related to
the 1996 sale of the braking business in 1997, gain on the sale of the
braking business in 1996, gain on the transfer of the HDPE business to
Exxon in 1995, nonrecurring items in 1993, gain on the 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.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS
AlliedSignal Inc.
1997 COMPARED WITH 1996
DURING 1997, THE COMPANY MADE SIGNIFICANT PROGRESS IN THE SHIFT OF ITS BUSINESS
PORTFOLIO TOWARD HIGHER GROWTH AND MARGINS. Acquisitions with aggregate annual
sales of $1.5 billion were announced. In June 1997, the Company acquired
Prestone Products Corporation (Prestone) for approximately $400 million,
including assumed liabilities. Prestone is a supplier of premium car care
products and has annual sales of approximately $300 million. In July 1997, the
Company acquired Grimes Aerospace Company (Grimes), a manufacturer of exterior
and interior aircraft lighting systems, for approximately $475 million,
including assumed liabilities. Grimes, which has annual sales of approximately
$230 million, also manufactures aircraft engine components such as valves and
heat exchangers, as well as electronic systems, including flight warning
computers and active matrix liquid crystal displays. In October 1997, the
Company acquired Astor Holdings, Inc. (Astor) for approximately $370 million,
including assumed liabilities. Astor, a producer of value-added, wax-based
processing aids, sealants and adhesives, has annual sales of approximately $300
million. In November 1997, the Company acquired Holt Lloyd Group Ltd. for
approximately $150 million. Holt Lloyd is a supplier of car care products
primarily in Europe and Asia and has annual sales of approximately $150 million.
In January 1998, the Company also acquired the Hardware Group and PacAero unit
of Banner Aerospace, distributors of aircraft hardware, for approximately $350
million. The acquired operations have annual sales of about $250 million,
principally to commercial air transport and general aviation customers. The
Company also made several smaller acquisitions in 1997, primarily in the
Engineered Materials segment.
THE COMPANY ALSO DIVESTED SOME BUSINESSES WHICH WERE PRIMARILY CYCLICAL IN
NATURE. In October 1997, the Company completed the sale of its automotive safety
restraints business to Breed Technologies for $710 million in cash, subject to
post-closing adjustments, and the Company recorded an after-tax gain of $196
million, or $0.35 per share, in the fourth quarter of 1997 (all earnings per
share data in Management's Discussion and Analysis reflect basic earnings per
share). The safety restraints business had 1996 net sales and income from
operations of $940 and $70 million, respectively, from the sale of seat belts
and air bags. It is expected that the proceeds will be used to continue to grow
the Company's higher-margin businesses and pursue acquisitions that will expand
or complement the Company's business portfolio. In April 1996, the Company sold
its worldwide hydraulic and anti-lock braking systems (ABS) business (braking
business) for $1.5 billion in cash, subject to certain post-closing adjustments
which were finalized in October 1997. See Note 4 of Notes to Financial
Statements for additional information. In the first quarter of 1998, the Company
expects to complete the sale of its underwater detection systems business to L-3
Communications Corporation for $70 million in cash, subject to post-closing
adjustments. The ocean systems unit had annual revenues of about $70 million.
During 1997, the Company also sold certain non-strategic businesses and other
assets.
The Company continuously assesses the relative strength of its portfolio
of businesses as to strategic fit, market position and profit contribution in
order to upgrade its combined portfolio and identify operating units that will
most benefit from increased investment. The Company considers acquisition
candidates that will further its strategic plan and strengthen its existing core
businesses. The Company also identifies operating units that do not fit into its
long-term strategic plan based on their market position, relative profitability
or growth potential. These operating units are considered for potential
divestiture, restructuring or other repositioning action.
IN 1997, THE COMPANY ELIMINATED ITS THREE SECTOR OFFICES, CONSOLIDATED ITS
AUTOMOTIVE PRODUCTS GROUP AND REPOSITIONED SOME OF ITS BUSINESSES. A provision
of $250 million for repositioning and other charges (after-tax $159 million, or
$0.28 per share) was established in the fourth quarter. The components of this
charge include severance costs of $59 million, asset writedowns of $34 million
and other exit costs of $31 million, as well as $40 million relating to the
write-off of capitalized business process reengineering costs associated with
information technology projects as required by Emerging Issues Task Force Issue
No. 97-13, $13 million relating to the writedown of an investment and other
items consisting of asset impairments, customer claims and legal settlements.
THE BOARD OF DIRECTORS APPROVED AN INCREASE OF 15% IN THE QUARTERLY COMMON STOCK
DIVIDEND, FROM $0.13 TO $0.15 PER SHARE. The dividend increase will be effective
with the first quarter of 1998. The Company had previously increased its regular
quarterly dividend by 16% in the first quarter of 1997.
NET SALES in 1997 were $14,472 million, an increase of $501 million, or 4%,
compared with 1996. Of this increase, $1,178 million, or 8%, was due to volume
gains and $482 million from the consolidation of recent acquisitions, offset in
part by a $744 million reduction for disposed businesses, mainly in the
Automotive segment. Lower selling prices and the impact of foreign exchange
reduced sales for the Engineered Materials and Automotive segments by $415
million. Aerospace net sales increased $698 million, or 12%, and Engineered
Materials improved by $241 million, or 6%. Automotive net sales decreased $438
million, or 10%. Excluding the disposed braking and safety restraints
businesses, Automotive net sales increased $297 million, or 11%.
COST OF GOODS SOLD as a percent of net sales was 79.3% in 1997 compared with
83.1% in 1996. Included in 1997 and 1996 are repositioning and other charges
(special charges) totaling $237 and $637 million, respectively. See Note 3 of
Notes to Financial Statements for further information. Excluding these special
charges, 1997 cost of goods sold as a percent of net sales was 77.7%, a decrease
compared with 78.5% in 1996 due in part to Six Sigma programs to lower
manufacturing and material costs and the improved mix of higher-margin
businesses.
19
GAIN ON SALE OF BUSINESS reflects the 1997 pretax gain of $226 million,
comprised of a $277 million gain on the sale of the safety restraints business,
partially offset by a charge of $51 million related to the settlement of the
sale of the braking business in 1996. The 1996 pretax gain of $655 million
resulted from the sale of the braking business. See Note 4 of Notes to
Financial Statements for further information.
INCOME FROM OPERATIONS of $1,636 million in 1997 improved by $127 million, or
8%, compared with 1996. Both 1997 and 1996 include pretax gains on the sales of
businesses as well as special charges (special items). Excluding the impact of
these special items, income from operations improved by $156 million, or 10%.
Aerospace income from operations increased 37%, but Engineered Materials and
Automotive income from operations decreased 4% and 15%, respectively. The
Company's operating margin was 11.4% in 1997, compared with 10.7% in 1996.
Productivity (the constant dollar relationship of sales to costs) improved by
5.9% over 1996, reflecting in part initiatives in manufacturing, materials,
product development and sales and marketing. See the detailed discussion of net
income below for information by industry segment.
EQUITY IN INCOME OF AFFILIATED COMPANIES of $178 million increased by $35
million, or 24%, compared with 1996, mainly due to higher earnings from the UOP
process technology joint venture (UOP), partially offset by the writedown of an
equity investment as part of the 1997 repositioning and other charges.
OTHER INCOME (EXPENSE), $77 million income in 1997, decreased by $10 million, or
11%, compared with 1996 mainly due to increased minority interest offset in part
by higher foreign exchange gains.
INTEREST AND OTHER FINANCIAL CHARGES of $175 million in 1997 decreased by $11
million, or 6%, compared with 1996. This decrease results from lower tax
interest expense due to an acceleration of worldwide tax audits resulting in
favorable developments to the Company's position, offset in part by higher
debt-related interest expense reflecting higher levels of debt.
THE EFFECTIVE TAX rate in 1997 was 31.8% compared with 34.3% in 1996. Adjusted
for special items in both years, the effective tax rate in 1997 was 33.0%
compared with 33.5% in 1996.
NET INCOME in 1997 of $1,170 million, or $2.07 per share, was 15% higher than
1996 net income of $1,020 million, or $1.80 per share. Adjusted for special
items in both years, net income for 1997 was $1,166 million, or $2.06 per share,
an increase of 15% over 1996. The higher adjusted net income in 1997 was the
result of a substantial improvement in operating performance by the Aerospace
segment and moderately higher earnings by the Engineered Materials segment. The
Automotive segment had significantly lower earnings.
A DISCUSSION OF THE OPERATIONS OF THE BUSINESS SEGMENTS follows. Adjusted net
income (see tables below) for the segments excludes the impact of the 1997 and
1996 special items. (Dollars in millions)
Adjusted
Aerospace Net Sales Net Income Net Income
- -------------------------------------------------------
1997 $6,412 $515 $529
1996 5,714 206 385
- -------------------------------------------------------
Increase $ 698 $309 $144
=======================================================
Aerospace sales of $6,412 million in 1997 increased by $698 million, or 12%,
compared with 1996. Aerospace Equipment Systems sales were substantially higher,
driven by continued aftermarket strength and substantially higher
original-equipment shipments of engine fuel systems, environmental control
systems and aircraft landing systems. The acquisition of Grimes also contributed
$119 million of sales. Engines had significantly higher shipments of auxiliary
power units (APUs) and commercial propulsion end units and spares. Sales of
Electronic & Avionics Systems were moderately higher reflecting strong demand
for flight management and safety avionics systems, including strong shipments of
enhanced ground proximity warning systems. Sales of electronic systems to the
U.S. and foreign governments, however, were lower, mainly at communications and
ocean systems. Sales of management and technical services to the U.S. Government
were moderately higher.
The Company's 1997 sales to the Department of Defense (DoD), as a prime
contractor and subcontractor, increased 8% compared with 1996. Sales to the DoD
accounted for 21% of Aerospace's total sales, a decrease of one percentage point
compared with 1996. Sales to the commercial and foreign government markets
increased 18%, while sales to the National Aeronautics and Space Administration
(NASA) and other U.S. Government agencies declined 14% in 1997.
Aerospace adjusted net income of $529 million in 1997 improved by $144 million,
or 37%, from the 1996 adjusted net income. Income from Aerospace Equipment
Systems and Engines was substantially higher due principally to increased sales
and productivity improvements. Earnings for Electronic & Avionics Systems were
moderately higher reflecting increased demand, improved manufacturing operations
and material cost savings for flight safety avionics. However, electronic
systems had lower net income on reduced sales at communications and ocean
systems to the U.S. and foreign governments. Net income from management and
technical services for the U.S. Government improved slightly.
The Company is affected by U.S. Government budget constraints for defense and
space programs as well as the level of production of commercial, business and
general aviation aircraft which are impacted by business cycles and world
economic conditions. Growth in the Company's commercial business for aerospace
products is expected, over the long term, to help mitigate the reductions in
U.S. defense spending. Moreover, aerospace sales are not dependent on any one
key defense program or commercial customer.
In 1997, world defense spending stabilized after declining in prior years.
Meanwhile, substantial improvement was seen in the commercial aircraft market,
with build rates for large airlines at near record levels. This level of
commercial activity is expected to continue in 1998. Regional airlines
experienced strong traffic growth and new regional aircraft orders were also
higher in 1997. The high-end business aviation market experienced significant
growth and the commercial aftermarket spare parts and repair and overhaul
business also showed strong improvement during 1997, reflecting a 7% increase in
world airline passenger traffic.
The Company continues to receive significant contracts from the commercial
aviation industry, DoD and NASA and Aerospace earnings are expected to remain
strong.
At December 31, 1997 and 1996, the Company had firm orders for its aerospace
products from the U.S. and foreign
20
[GRAPHIC REPRESENTATION of Net Sales (dollars in billions), expressed
numerically below.]
1995 1996 1997
---- ---- ----
14.3 14.0 14.5
[GRAPHIC REPRESENTATION of Net Income (dollars in millions), expressed
numerically below.]
1995 1996 1997
---- ---- ----
875 1,020 1,170
[GRAPHIC REPRESENTATION of Earnings per Share (dollars), expressed
numerically below.]
1995 1996 1997
---- ---- ----
1.54 1.80 2.07
governments of $1,908 and $1,906 million, respectively. Total backlog, including
commercial contracts, at year-end 1997 and 1996 was $5,087 and $4,514 million,
respectively. The Company anticipates that approximately $4,247 million of the
total 1997 backlog will be filled during 1998.
Adjusted
Automotive Net Sales Net Income Net Income
- ------------------------------------------------------------
1997 $3,802 $ 285 $170
1996 4,240 521 202
- ------------------------------------------------------------
(Decrease) $ (438) $(236) $(32)
============================================================
Automotive sales of $3,802 million in 1997 were $438 million, or 10%, lower
compared with 1996 reflecting the disposition of the braking and safety
restraints businesses. Excluding these businesses, Automotive sales increased by
$297 million, or 11%. Continued strength of the U.S. dollar negatively impacted
sales growth by 3%. Turbocharging Systems sales were significantly higher,
primarily reflecting the flow of new products and the popularity of turbocharged
vehicles in Europe. Truck Brake Systems sales in North America also improved
significantly, benefiting from an upturn in truck builds and increased
installation rates of ABS. The Automotive Products Group sales were moderately
higher reflecting $223 million of sales from the acquisitions of Prestone and
Holt Lloyd. Sales of other aftermarket products and friction materials were
lower reflecting in part unfavorable market conditions.
Automotive adjusted net income of $170 million in 1997 declined by $32 million,
or 16%, from the 1996 adjusted net income. The decrease primarily reflects the
absence of net income from the disposed braking and safety restraints
businesses. Excluding these businesses, Automotive net income increased by $11
million, or 9%. Turbocharging Systems had substantially higher net income due to
increased sales and productivity improvements. Net income for Truck Brake
Systems was also substantially higher due principally to strong sales volume.
Earnings for the Automotive Products Group decreased substantially, primarily in
the North American aftermarket business; however, improvement for friction
materials was a partial offset.
Adjusted
Engineered Materials Net Sales Net Income Net Income
- -----------------------------------------------------------------------
1997 $4,254 $389 $462
1996 4,013 361 432
- -----------------------------------------------------------------------
Increase $ 241 $ 28 $ 30
=======================================================================
Engineered Materials sales of $4,254 million in 1997 were $241 million, or 6%,
higher compared with 1996. Volume gains of 9% were partially offset by lower
selling prices and the impact of the strong U.S. dollar. Polymer sales were
higher due mainly to significant growth for engineering plastics, chemical
intermediates and specialty films. Lower sales of carpet fibers and industrial
polyester, mainly as a result of reduced selling prices and the strong U.S.
dollar, were partial offsets. Specialty Chemicals sales increased moderately due
to acquisitions and volume gains for chlorofluorocarbon (CFC) replacement
products, hydrofluoric acid, pharmaceuticals and industrial specialties
products. Pricing pressures and the strong U.S. dollar were partial offsets.
Sales for Electronic Materials improved slightly reflecting increased demand for
advanced microelectronic materials and improvement in the printed circuit board
industry. Sales of amorphous metals, however, were lower.
Engineered Materials adjusted net income of $462 million in 1997 increased by
$30 million, or 7%, from the 1996 adjusted net income. Specialty Chemicals had
significantly higher earnings, driven by UOP and improvements for
pharmaceuticals and industrial specialties products. Polymers had moderately
lower income reflecting both higher raw material costs and lower selling prices
which reduced earnings for carpet fibers, industrial polyester and industrial
nylon. Partial offsets for Polymers resulted from higher income from chemical
intermediates, engineering plastics and specialty films due to sales increases.
Electronic Materials also had improved performance led by a substantial increase
in earnings for advanced microelectronic materials and the absence of losses
from the micro-optic devices business. Laminates was a partial offset as income
declined due to pricing pressures and poor results in Europe.
REGARDING ENVIRONMENTAL MATTERS, the Company is subject to various federal,
state and local government 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
21
[GRAPHIC REPRESENTATION of Capital Expenditures/R&D (dollars in millions),
expressed numerically below.]
1995 1996 1997
----- ----- -----
Capital Expenditures....................... 746 755 717
Company-funded R&D......................... 353 345 349
Total Capital Expenditures/R&D............. 1,099 1,100 1,066
[GRAPHIC REPRESENTATION of Long-Term Debt as a Percent of Total Capital
(percent), expressed numerically below.]
1995 1996 1997
---- ---- ----
25.6 22.2 19.7
[GRAPHIC REPRESENTATION of Return on Average Shareowners' Equity
(After-tax percent), expressed numerically below.]
1995 1996 1997
---- ---- ----
26.7 26.6 27.5
are in accord with environmental laws and regulations. However, mainly because
of past operations and operations of predecessor companies, the Company, like
other companies engaged in similar businesses, 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 no
later than the completion of feasibility studies.
Remedial response and voluntary cleanup expenditures were $90 and $87 million in
1997 and 1996, respectively, and are currently estimated to be approximately $85
million in 1998. While annual expenditures may increase over time, the Company
expects it will be able to fund such expenditures from operating cash flow. The
timing of expenditures depends on a number of factors, including regulatory
approval of cleanup projects, remedial techniques to be utilized and agreements
with other parties.
At December 31, 1997, the recorded liability for environmental matters was $414
million. In addition, in 1997 the Company incurred operating costs for ongoing
businesses of approximately $70 million and capital expenditures of $69 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 21 of Notes to Financial Statements for a discussion of the Company's
commitments and contingencies, including those related to environmental matters.
REGARDING THE YEAR 2000 compliance issue for information systems, the Company
has recognized the need to ensure that its computer operations and operating
systems will not be adversely affected by the upcoming calendar year 2000 and is
cognizant of the time sensitive nature of the problem. The Company has assessed
how it may be impacted by Year 2000 and has formulated and commenced
implementation of a comprehensive plan to address known issues as they relate to
its information systems. The plan, as it relates to information systems,
involves a combination of software modification, upgrades and replacement. The
Company estimates that the cost of Year 2000 compliance for its information
systems will not have a material adverse effect on the future consolidated
results of operations of the Company. The Company is not yet able to estimate
the cost for Year 2000 compliance with respect to production systems, products,
customers and suppliers; however, based on a preliminary review, management does
not expect that such costs will have a material adverse effect on the future
consolidated results of operations of the Company.
REGARDING FINANCIAL INSTRUMENTS, the Company, with operating and financing
activities in numerous 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 17 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 Six Sigma
initiatives.
22
TOTAL ASSETS at December 31, 1997 were $13,707 million, an increase of $878
million, or 7%, from December 31, 1996. Cash and cash equivalents and short-term
investments at December 31, 1997 were $1,041 million, a decrease of $725 million
compared with December 31, 1996. The decrease mainly results from acquisitions
and common stock repurchases, partially offset by the proceeds received from the
sale of the automotive safety restraints business. Cash flow from operating
activities of $1,306 million increased by $110 million, or 9%, compared with
1996, principally due to the increase in net income. The Company's working
capital turnover was up slightly to 5.1x at December 31, 1997 from 5.0x at
December 31, 1996.
THE MAXIMUM AMOUNT OF BORROWING available under the Company's revolving credit
agreement (Credit Agreement) was $750 million. The Credit Agreement supports the
issuance of commercial paper. There was $821 and $470 million of commercial
paper outstanding at year-end 1997 and 1996, respectively. Commercial paper
borrowing reached a high of $1,546 million during 1997.
TOTAL DEBT at year-end 1997 of $2,307 million increased $376 million. The
increase principally resulted from debt assumed in the Astor, Grimes and
Prestone acquisitions and to fund common stock repurchases during the year.
Long-term debt was reduced by $102 million during 1997. The Company's total debt
as a percent of capital was 31.7% at December 31, 1997, up from 29.5% at
year-end 1996. Long-term debt as a percent of capital was 19.7% at year-end
1997, down from 22.2% at year-end 1996. Subsequent to year-end 1997, the Company
issued $400 million of long-term debt. The proceeds from the issuance were used
to repay certain outstanding commercial paper of the Company. See Note 15 of
Notes to Financial Statements for details of long-term debt and a discussion of
the Credit Agreement.
THE COMPANY REPURCHASED 21.0 MILLION SHARES OF COMMON STOCK for $814 million in
1997. Common stock was repurchased to meet expected requirements for shares
issued under employee benefit plans, acquisitions and a shareowner dividend
reinvestment plan. At year-end 1997, the Company had 158.1 million shares of
common stock held in treasury carried at $2,665 million. As of year-end 1997,
the Company was authorized to repurchase 81.4 million shares of common stock.
At the 1997 Annual Meeting, shareowners approved an amendment to the Company's
certificate of incorporation which increased the number of authorized common
shares from 500 million to one billion. The additional shares are available for
stock splits, acquisitions and other purposes. The Company's common stock was
split 2-for-1 for owners of record as of August 21, 1997.
CAPITAL EXPENDITURES during 1997 were $717 million, a decrease of $38 million
from the $755 million spent in 1996. Spending by the segments and Corporate
since 1995 is shown in Note 25 of Notes to Financial Statements. The Company's
total capital expenditures in 1998 are currently projected at approximately $700
million. These expenditures are expected to be principally financed by
internally generated funds. Approximately 62% of the projected 1998 expenditures
are planned for expansion and cost reduction, 28% for replacement and
maintenance and 10% for environmental projects.
1996 COMPARED WITH 1995
IN APRIL 1996, THE COMPANY SOLD ITS BRAKING BUSINESS WHICH HAD 1995 NET SALES
AND INCOME FROM OPERATIONS OF $2.0 BILLION AND $154 MILLION, RESPECTIVELY. The
sale of the braking business resulted in a gain of $655 million (after-tax $368
million, or $0.65 per share). The Company received consideration of $1.5
billion, subject to certain post-closing adjustments which were finalized in
October 1997. See Note 4 of Notes to Financial Statements for additional
information. Excluded from the sale were brake friction materials, brake-related
sales to the independent aftermarket and the medium- and heavy-duty truck brake
systems business which is part of a joint venture with Knorr-Bremse AG.
IN THE SECOND QUARTER OF 1996, THE COMPANY RECORDED A PRETAX CHARGE OF $622
MILLION (AFTER-TAX $359 MILLION, OR $0.63 PER SHARE) RELATING TO THE COST OF
ACTIONS TO REPOSITION SOME OF ITS BUSINESS UNITS AND TO RECOGNIZE ADDITIONAL
ENVIRONMENTAL REMEDIATION LIABILITIES AS WELL AS OTHER CHARGES. Actions are
being undertaken to consolidate production facilities, rationalize manufacturing
capacity and optimize operational capabilities. The components of the
repositioning charge include asset writedowns of $136 million, severance costs
of $127 million and other exit costs of $14 million. The repositioning actions
are expected to be completed in 1998 and will not materially impact the
Company's liquidity. Upon completion, the repositioning actions are expected to
generate additional annual income from operations of approximately $140 million.
The charge to recognize additional environmental liabilities amounted to $175
million. See Note 3 of Notes to Financial Statements for additional information.
NET SALES in 1996 were $13,971 million, a decrease of $375 million, or 3%,
compared with 1995. Net sales were lower reflecting the sale of the braking
business. Excluding the braking business, net sales increased $1,019 million, or
8%. Of this increase, $794 million was due to volume gains, mainly by the
Aerospace segment, and $366 million from the consolidation of recent
acquisitions, offset in part by an $88 million reduction for disposed
businesses, mainly by the Engineered Materials segment. Selling prices and the
impact of foreign exchange were slightly unfavorable. Aerospace net sales
increased $630 million, or 12%, and Engineered Materials improved by $300
million, or 8%. Automotive net sales increased $85 million, or 2%.
COST OF GOODS SOLD as a percent of net sales was 83.1% in 1996 compared with
81.2% in 1995. Included in 1996 are repositioning and other charges totaling
$637 million, and 1995 reflects a provision of $115 million relating to the
revaluation of the ABS assets to their fair market value (special charges). See
Note 3 of Notes to Financial Statements for further information. Excluding these
special charges, 1996 cost of goods sold as a percent of net sales was 78.5%, a
decrease compared with 80.4% in 1995 mainly due to productivity initiatives to
lower manufacturing and material costs.
GAIN ON SALE OF BUSINESS represents the 1996 pretax gain of $655 million on the
sale of the braking business and the 1995 pretax gain of $71 million on the
transfer of the high-density polyethylene (HDPE) joint venture, Paxon Polymer
Company, L.P., to Exxon Chemical Company. See Note 4 of Notes to Financial
Statements for further information.
23
INCOME FROM OPERATIONS of $1,509 million in 1996 improved by $249 million, or
20%, compared with 1995. Both 1996 and 1995 include pretax gains on the sales of
businesses as well as special charges (special items). Excluding the impact of
these special items, income from operations improved by $187 million, or 14%.
Aerospace income from operations increased 18% and Engineered Materials improved
15%, but Automotive income from operations decreased 11%. The Company's
operating margin was 10.7% in 1996, significantly higher than the 9.1% in 1995.
Productivity improved by 6.0% over 1995, reflecting in part initiatives in
manufacturing (Operational Excellence), product development (Technical
Excellence) and sales and marketing (Customer Excellence) and the sale of the
high-cost braking business. See the detailed discussion of net income below for
information by industry segment.
EQUITY IN INCOME OF AFFILIATED COMPANIES of $143 million decreased by $48
million, or 25%, compared with 1995 mainly because the Company exited its HDPE
joint venture in December 1995 and because of lower earnings from Knorr-Bremse
AG's truck brake systems joint venture. A partial offset was significantly
higher earnings from UOP.
OTHER INCOME (EXPENSE), $87 million income in 1996, improved by $109 million
compared with 1995 mainly due to increased interest income (included in the
Corporate and Unallocated segment), primarily reflecting the investment of cash
received from the sale of the braking business, higher foreign exchange costs in
1995 and the minority interest share of the 1996 repositioning and other
charges.
INTEREST AND OTHER FINANCIAL CHARGES of $186 million in 1996 increased by $18
million, or 11%, compared with 1995 due to higher levels of short-term debt.
THE EFFECTIVE TAX RATE in 1996 was 34.3% compared with 30.6% in 1995. Adjusted
for special items in both years, the effective tax rate in 1996 was 33.5%
compared with 33.0% in 1995.
NET INCOME in 1996 of $1,020 million, or $1.80 per share, was 17% higher than
net income of $875 million in 1995, or $1.54 per share. Adjusted for special
items in both years, net income for 1996 was $1,011 million, or $1.78 per share,
an increase of 16% over 1995 net income. The higher adjusted net income in 1996
was the result of a substantial improvement in the operating performance by the
Aerospace segment and higher earnings by the Engineered Materials segment. The
Automotive segment had moderately lower earnings.
A DISCUSSION OF THE OPERATIONS OF THE BUSINESS SEGMENTS follows. Adjusted net
income (see tables below) for the segments excludes the impact of the 1996 and
1995 special items. (Dollars in millions)
Adjusted
Aerospace Net Sales Net Income Net Income
- ----------------------------------------------------------------
1996 $5,714 $206 $385
1995 5,084 303 303
- ----------------------------------------------------------------
Increase (Decrease) $ 630 $(97) $ 82
================================================================
Aerospace sales of $5,714 million in 1996 increased $630 million, or 12%,
compared with 1995. Military aftermarket sales and sales to commercial original
equipment manufacturers (OEMs) were substantially higher. Commercial aftermarket
sales also improved. Military OEM sales were lower. Engines had significantly
higher sales of commercial and military propulsion engines and APUs, including
significantly higher aftermarket parts and repair and overhaul sales. Aerospace
Equipment Systems also showed strong sales growth with gains across most product
lines, including engine fuel systems, environmental control systems and aircraft
landing systems to both the aftermarket and OEMs. Electronic & Avionics Systems
sales improved slightly. Sales of communication and navigation systems increased
significantly reflecting the acquisition of a precision products business in
January 1996 and gains in guidance and control systems, but flight safety
systems sales were moderately lower, reflecting the completion in 1995 of the
program to install mandated traffic alert and collision avoidance systems (TCAS)
on commuter aircraft. Production problems at flight safety systems, resolved in
the latter part of the year, delayed the introduction of new products. Sales of
management and technical services to the U.S. Government were significantly
higher.
The Company's 1996 sales to the DoD, as a prime contractor and subcontractor,
increased 3% compared with 1995 despite reductions in U.S. defense spending.
Sales to the DoD accounted for 22% of Aerospace's total sales, a decrease of two
percentage points compared with 1995. Sales to the commercial and foreign
government markets increased 18%, while sales to NASA and other U.S. Government
agencies declined 1% in 1996.
Aerospace adjusted net income improved to $385 million from $303 million, an
increase of $82 million, or 27%, compared with 1995. Strong sales growth and
productivity resulted in substantially higher earnings for Engines and Aerospace
Equipment Systems. Increased management and technical services to the U.S.
Government also resulted in significant gains, but Electronic & Avionics Systems
had moderately lower income. Flight safety systems had substantially reduced
earnings due to lower sales, manufacturing difficulties and certain
repositioning expenses excluded from the 1996 provision. Higher net income for
communication and navigation systems was a partial offset.
At December 31, 1996 and 1995, the Company had firm orders for its aerospace
products from the U.S. and foreign governments of $1,906 and $1,871 million,
respectively. Total backlog, including commercial contracts, at year-end 1996
and 1995 was $4,514 and $4,523 million, respectively.
Adjusted
Automotive Net Sales Net Income Net Income
- -------------------------------------------------------------
1996 $ 4,240 $521 $202
1995 5,549 146 217
- -------------------------------------------------------------
Increase (Decrease) $(1,309) $375 $(15)
=============================================================
Automotive sales of $4,240 million in 1996 were $1,309 million, or 24%, lower
than in 1995. However, excluding the divested braking business, Automotive sales
increased $85 million, or 2%. Safety Restraint Systems, primarily air bags, and
Turbocharging Systems had significantly higher sales volumes in Europe,
reflecting strong demand. Growth by Turbocharging Systems reflected the
continued preference by
24
European customers for turbocharged, diesel-powered cars, although turbocharger
sales were lower in Japan and North America. The Automotive Products Group had
slightly lower sales due to the impact of weak economic conditions on the
European aftermarket business, partially offset by significantly higher sales
for filters & spark plugs due to new product introductions and higher original
equipment sales. Sales of friction materials increased slightly, mainly in North
America, and North American aftermarket sales were also slightly higher. Sales
of Truck Brake Systems in North America were lower primarily because of
decreasing medium- and heavy-duty truck production.
Automotive adjusted net income decreased to $202 million from $217 million in
1995, a $15 million, or 7%, decrease. The decrease reflects the absence of net
income from the divested braking business. Excluding the braking business,
Automotive net income increased substantially. The Automotive Products Group had
substantially higher income due to reductions in distribution costs for the
North American aftermarket business as well as significant sales gains and
manufacturing improvements for filters & spark plugs. Higher sales resulting
from additional production capacity for Turbocharging Systems and Safety
Restraint Systems also resulted in significant net income gains.
Adjusted
Engineered Materials Net Sales Net Income Net Income
- --------------------------------------------------------------------
1996 $4,013 $ 361 $432
1995 $3,713 473 402
- --------------------------------------------------------------------
Increase (Decrease) $ 300 $(112) $ 30
====================================================================
Engineered Materials sales of $4,013 million in 1996 were $300 million, or 8%,
higher compared with 1995 principally due to acquisitions. Specialty Chemicals
sales increased substantially mainly reflecting the acquisition of Riedel-de
Haen in October 1995. The fluorine products business showed slight improvement
as the transition away from CFCs to substitute products was completed and the
business diversifies to include more fluorine specialty products. The Polymers
business had significantly higher sales of industrial fibers and engineering
plastics products, primarily due to acquisitions in the fourth quarter of 1995.
Carpet fiber plants operated near capacity as stronger demand was driven by
sustained economic growth. Sales also increased for environmental catalysts,
carbon materials and amorphous metals. Sales for Electronic Materials were
moderately lower due to softness in the printed circuit board industry, however,
improved sales of advanced microelectronic materials were a partial offset.
Engineered Materials adjusted net income increased to $432 million from $402
million, a $30 million, or 7%, increase. Substantially higher earnings for
Specialty Chemicals was driven by UOP as the petrochemical and refining
industries continued to be strong worldwide. The acquisition of Riedel-de Haen
also contributed to higher earnings. Fluorine products net income also increased
due to sales growth and significant operational improvements. Net income was
significantly higher for the Polymers business, mainly reflecting improved
market conditions for carpet fiber and earnings from the Bridgestone/Firestone
acquisition in late 1995. Electronic Materials net income improved on higher
sales for advanced microelectronic materials. A partial offset to higher segment
income was the absence of earnings from the HDPE joint venture.
REGARDING ENVIRONMENTAL MATTERS, remedial response and voluntary cleanup
expenditures were $87 and $72 million in 1996 and 1995, respectively. In the
second quarter of 1996 the Company charged $175 million against pretax income
for remedial response and voluntary cleanup costs. At December 31, 1996, the
recorded liability for environmental matters was $530 million. In addition, in
1996 the Company incurred operating costs for ongoing businesses of
approximately $60 million and capital expenditures of $43 million relating to
compliance with environmental regulations.
TOTAL ASSETS at December 31, 1996 were $12,829 million, an increase of $364
million, or 3%, from December 31, 1995. Cash and cash equivalents and short-term
investments at year-end 1996 were $1,766 million, an increase of $1,226 million
compared with December 31, 1995, primarily reflecting the proceeds received from
the sale of the braking business. Cash flows from operating activities of $1,196
million decreased by $20 million, or 2%, compared with 1995. The Company's
working capital turnover was down slightly to 5.0x at December 31, 1996 from
5.2x a year earlier.
THE MAXIMUM AMOUNT OF BORROWING available under the Company's revolving Credit
Agreement was $750 million. The Credit Agreement supports the issuance of
commercial paper. There was $470 and $58 million of commercial paper outstanding
at December 31, 1996 and 1995, respectively. Commercial paper borrowing reached
a high of $1,271 million during 1996.
TOTAL DEBT at year-end 1996 of $1,931 million decreased $79 million. Long-term
debt was reduced by $49 million during 1996. The Company's total debt as a
percent of capital was 29.5% at December 31, 1996, down from 33.7% at year-end
1995. Long-term debt as a percent of capital was 22.2% at year-end 1996, down
from 25.6% at year-end 1995. See Note 15 of Notes to Financial Statements for
details of long-term debt and a discussion of the Credit Agreement.
THE COMPANY REPURCHASED 14.0 MILLION SHARES OF COMMON STOCK for $409 million in
1996. Common stock was repurchased to meet expected requirements for shares
issued under employee benefit plans and a shareowner dividend reinvestment plan.
At year-end 1996, the Company had 150.8 million shares of common stock held in
treasury carried at $1,953 million. In December 1996, the Board of Directors
voted to increase the Company's common share repurchase authority by 100 million
shares.
CAPITAL EXPENDITURES during 1996 were $755 million, an increase of $9 million
from the $746 million spent in 1995. Spending by the segments and Corporate
since 1995 is shown in Note 25 of Notes to Financial Statements.
- -------------------------------------------------------------------------------
SAFE HARBOR STATEMENT under the Private Securities Litigation Reform Act of
1995: Except for the historical information contained herein, the matters
discussed in this annual report are forward-looking statements which involve
risks and uncertainties, including but not limited to economic, competitive,
governmental and technological factors affecting the Company's operations,
markets, products, services and prices, and other factors discussed in the
Company's filings with the Securities and Exchange Commission.
25
CONSOLIDATED STATEMENT OF INCOME
AlliedSignal Inc.
YEARS ENDED DECEMBER 31 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) 1997 1996 1995
Net sales $14,472 $13,971 $14,346
- -----------------------------------------------------------------------------------------------------------
Cost of goods sold 11,481 11,606 11,654
Selling, general and administrative expenses 1,581 1,511 1,503
Gain on sale of business (226) (655) (71)
- -----------------------------------------------------------------------------------------------------------
Total costs and expenses 12,836 12,462 13,086
- -----------------------------------------------------------------------------------------------------------
Income from operations 1,636 1,509 1,260
Equity in income of affiliated companies 178 143 191
Other income (expense) 77 87 (22)
Interest and other financial charges (175) (186) (168)
- -----------------------------------------------------------------------------------------------------------
Income before taxes on income 1,716 1,553 1,261
Taxes on income 546 533 386
- -----------------------------------------------------------------------------------------------------------
Net income $ 1,170 $ 1,020 $ 875
===========================================================================================================
Earnings per share of common stock -- basic $ 2.07 $ 1.80 $ 1.54
Earnings per share of common stock -- assuming dilution $ 2.02 $ 1.76 $ 1.52
===========================================================================================================
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
YEARS ENDED DECEMBER 31 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) 1997 1996 1995
Balance at beginning of year $ 3,214 $ 2,315 $ 1,613
Net income 1,170 1,020 875
Common stock dividends (1997 -- $.52 per share;
1996 -- $.45 per share; 1995 -- $.39 per share) (295) (262) (217)
Other -- 141 44
- -----------------------------------------------------------------------------------------------------------
Balance at end of year $ 4,089 $ 3,214 $ 2,315
===========================================================================================================
The Notes to Financial Statements are an integral part of these statements.
26
CONSOLIDATED BALANCE SHEET
AlliedSignal Inc.
DECEMBER 31 (DOLLARS IN MILLIONS) 1997 1996
ASSETS
- -----------------------------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 611 $ 1,465
Short-term investments 430 301
Accounts and notes receivable 1,886 1,661
Inventories 2,093 1,946
Other current assets 553 466
- -----------------------------------------------------------------------------------------------------------
Total current assets 5,573 5,839
Investments and long-term receivables 480 473
Property, plant and equipment -- net 4,251 4,219
Cost in excess of net assets of acquired companies -- net 2,426 1,418
Other assets 977 880
- -----------------------------------------------------------------------------------------------------------
Total assets $ 13,707 $ 12,829
===========================================================================================================
LIABILITIES
- -----------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 1,345 $ 1,187
Short-term borrowings 47 32
Commercial paper 821 470
Current maturities of long-term debt 224 112
Accrued liabilities 1,999 1,895
- -----------------------------------------------------------------------------------------------------------
Total current liabilities 4,436 3,696
Long-term debt 1,215 1,317
Deferred income taxes 694 610
Postretirement benefit obligations other than pensions 1,775 1,787
Other liabilities 1,201 1,239
- -----------------------------------------------------------------------------------------------------------
SHAREOWNERS' EQUITY
- -----------------------------------------------------------------------------------------------------------
Capital -- common stock -- Authorized 1,000,000,000 shares (par value $1 per share):
-- issued 716,457,484 shares 716 716
-- additional paid-in capital 2,425 2,189
Common stock held in treasury, at cost:
1997 -- 158,114,964 shares
1996 -- 150,828,234 shares (2,665) (1,953)
Cumulative foreign exchange translation adjustment (181) 2
Unrealized holding gain on marketable securities 2 12
Retained earnings 4,089 3,214
- -----------------------------------------------------------------------------------------------------------
Total shareowners' equity 4,386 4,180
- -----------------------------------------------------------------------------------------------------------
Total liabilities and shareowners' equity $ 13,707 $ 12,829
===========================================================================================================
The Notes to Financial Statements are an integral part of this statement.
27
CONSOLIDATED STATEMENT OF CASH FLOWS
AlliedSignal Inc.
YEARS ENDED DECEMBER 31 (DOLLARS IN MILLIONS) 1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES
- ------------------------------------------------------------------------------------------------
Net income $ 1,170 $ 1,020 $ 875
Adjustments to reconcile net income to net cash provided by
operating activities:
Gain on sale of business (226) (655) (71)
Repositioning and other charges 250 622 115
Depreciation and amortization (includes goodwill) 609 602 612
Undistributed earnings of equity affiliates (55) (33) (59)
Deferred income taxes 138 213 199
(Increase) decrease in accounts and notes receivable (104) (163) 134
(Increase) in inventories (92) (87) (141)
(Increase) decrease in other current assets (88) 134 35
Increase in accounts payable 226 117 16
(Decrease) in accrued liabilities (188) (77) (245)
Net taxes paid on sale of business (21) (49) --
Other (313) (448) (254)
- ------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,306 1,196 1,216
- ------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
- ------------------------------------------------------------------------------------------------
Expenditures for property, plant and equipment (717) (755) (746)
Proceeds from disposals of property, plant and equipment 67 77 46
Decrease in investments and long-term receivables 25 20 27
(Increase) in other investments (6) (12) (4)
Cash paid for acquisitions (1,218) (114) (499)
Proceeds from sales of businesses 695 1,358 72
(Increase) in short-term investments (129) (301) --
- ------------------------------------------------------------------------------------------------
Net cash (used for) provided by investing activities (1,283) 273 (1,104)
- ------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------------------------------------------------------------------
Net increase in commercial paper 351 412 58
Net increase (decrease) in short-term borrowings 18 (356) 253
Proceeds from issuance of preferred stock of subsidiary 112 -- --
Proceeds from issuance of common stock 151 147 104
Proceeds from issuance of long-term debt 33 48 108
Payments of long-term debt (307) (124) (147)
Repurchase of preferred stock of subsidiary (112) -- --
Repurchases of common stock (786) (409) (239)
Cash dividends on common stock (295) (262) (217)
Other (42) -- --
- ------------------------------------------------------------------------------------------------
Net cash (used for) financing activities (877) (544) (80)
- ------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (854) 925 32
Cash and cash equivalents at beginning of year 1,465 540 508
- ------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 611 $ 1,465 $ 540
================================================================================================
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
its majority-owned subsidiaries. The preparation of consolidated financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Certain reclassifications were made to prior year amounts to conform
with the 1997 presentation.
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 all other inventories.
INVESTMENTS are carried at market value, if readily determinable, or cost.
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 appropriate periods ranging from 20 to 40 years. The
cumulative amount of goodwill amortized at December 31, 1997 and 1996 is $476
and $423 million, respectively.
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 no later than
the completion of feasibility studies. The liabilities for environmental costs
recorded in Accrued Liabilities and Other Liabilities at December 31, 1997 and
1996 were $110 and $304 million and $120 and $410 million, respectively.
INTEREST RATE SWAP, FOREIGN CURRENCY FORWARD AND OPTION AGREEMENTS are accounted
for as a hedge of the related asset, liability, firm commitment or anticipated
transaction when designated and effective as a hedge of such items. Agreements
qualifying for hedge accounting are accounted for as follows:
Changes in the amount to be received or paid under interest rate swap
agreements are recognized in Interest and Other Financial Charges.
Gains and losses on foreign currency forward agreements and combination
options (options purchased and written as a unit) used to hedge assets and
liabilities, or net investments in foreign subsidiaries, are recognized in
Other Income (Expense) and Cumulative Foreign Exchange Translation Adjustment,
respectively.
Gains and losses on foreign currency forward agreements used to hedge firm
foreign currency commitments, and purchased foreign currency options used to
hedge anticipated foreign currency transactions, are recognized in the
measurement of the hedged transaction when the transaction occurs.
Changes in the fair value of agreements not qualifying for hedge accounting are
recognized in Other Income (Expense).
The carrying value of each agreement is reported in Accounts and Notes
Receivable, Other Current Assets, Accounts Payable or Accrued Liabilities, as
appropriate.
INCOME TAXES are based on the asset and liability approach. 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.
EARNINGS PER SHARE are calculated in accordance with the provisions of Statement
of Financial Accounting Standards No. 128 -- "Earnings per Share" (SFAS No.
128), effective for 1997. SFAS No. 128 requires the Company to report both basic
earnings per share which is based on the weighted-average number of common
shares outstanding and diluted earnings per share which is based on the
weighted-average number of common shares outstanding and all dilutive potential
common shares outstanding. All prior years earnings per share data in this
report have been recalculated to reflect the provisions of SFAS No. 128. All
earnings per share data in this report reflect basic earnings per share, unless
otherwise indicated. The details of the earnings per share calculations for the
years 1997, 1996 and 1995 follow:
29
Per Share
Income Shares Amount
- -----------------------------------------------------------------------------------
1997
Earnings per share of
common stock -- basic $1,170 564,807,801 $2.07
Dilutive securities:
Stock options 14,372,032
Restricted stock units 688,917
- -----------------------------------------------------------------------------------
Earnings per share of common
stock -- assuming dilution $1,170 579,868,750 $2.02
===================================================================================
1996
Earnings per share of
common stock -- basic $1,020 565,660,128 $1.80
Dilutive securities:
Stock options 13,529,590
Restricted stock units 1,273,198
- -----------------------------------------------------------------------------------
Earnings per share of common
stock -- assuming dilution $1,020 580,462,916 $1.76
===================================================================================
1995
Earnings per share of
common stock -- basic $ 875 566,875,546 $1.54
Dilutive securities:
Stock options 9,022,214
Restricted stock units 1,171,998
- -----------------------------------------------------------------------------------
Earnings per share of common
stock -- assuming dilution $ 875 577,069,758 $1.52
===================================================================================
For each of the years 1997, 1996 and 1995, there were outstanding stock options
not included in the computation of diluted earnings per share of common stock
because the options exercise price was greater than the average market price of
the common shares. In 1997, 1996 and 1995, the number of stock options not
included in the computation were 1,201,900, 35,000 and 1,241,350, respectively.
These options were outstanding at the end of each of the respective years.
A TWO-FOR-ONE STOCK SPLIT was announced by the Company on July 23, 1997. The
stock split was effected on September 15, 1997 for shareowners of record on
August 21, 1997. All share and per share data in this report reflects the stock
split for all periods presented.
NOTE 2
ACQUISITIONS
In 1997, the Company acquired Prestone Products Corporation (Prestone) for
approximately $400 million, including assumed liabilities. Prestone is a
supplier of premium car care products and has annual sales of approximately $300
million. The Company also acquired Grimes Aerospace Company (Grimes), a
manufacturer of exterior and interior aircraft lighting systems, for
approximately $475 million, including assumed liabilities. Grimes, which has
annual sales of approximately $230 million, also manufactures aircraft engine
components such as valves and heat exchangers, as well as electronic systems,
including flight warning computers and active matrix liquid crystal displays. In
addition, the Company acquired Astor Holdings, Inc. (Astor) for approximately
$370 million, including assumed liabilities. Astor, a producer of value-added,
wax-based processing aids, sealants and adhesives, has annual sales of
approximately $300 million. The Company also acquired Holt Lloyd Group Ltd. for
approximately $150 million. Holt Lloyd is a supplier of car care products
primarily in Europe and Asia and has annual sales of approximately $150 million.
In 1995, the Company acquired a 95.8% interest in Riedel-de Haen AG from Hoechst
AG for approximately $245 million. Riedel-de Haen AG is a specialty chemicals
manufacturer located in Germany. The business had 1994 sales of approximately
$250 million. In addition, the Company acquired The Budd Company's Wheel & Brake
Division (Budd Wheel & Brake) for approximately $160 million. Budd Wheel & Brake
was sold in 1996 as part of the sale of the Company's worldwide hydraulic and
anti-lock braking systems (ABS) business (braking business).
The Company also made other smaller acquisitions in 1997, 1996 and 1995.
NOTE 3
REPOSITIONING AND OTHER CHARGES
In the fourth quarter of 1997, the Company recorded a pretax charge of $124
million relating to the costs to eliminate its three sector offices, consolidate
its Automotive Products Group and reposition some of its businesses. These
actions are intended to enhance the Company's competitiveness and productivity.
The components of this charge include severance costs of $59 million, asset
writedowns of $34 million and other exit costs of $31 million. All of the
actions are expected to be completed in 1998. The Company also recorded other
charges in the fourth quarter of 1997, including $40 million relating to the
write-off of capitalized business process reengineering costs associated with
information technology projects as required by Emerging Issues Task Force Issue
No. 97-13 and other items consisting of asset impairments, customer claims and
legal settlements.
Repositioning and other charges totaling $237 million are included as part of
Cost of Goods Sold for 1997. Equity in Income of Affiliated Companies includes a
charge of $13 million relating to the writedown of an equity investment. The
total pretax impact of the repositioning and other charges for 1997 is $250
million (after-tax $159 million, or $0.28 per share).
In the second quarter of 1996, the Company recorded a pretax charge of $277
million relating to the costs of actions to reposition some of its businesses.
The repositioning actions are intended to enhance the Company's competitiveness
and productivity and include consolidating production facilities, rationalizing
manufacturing capacity and optimizing operational capabilities. The components
of the repositioning charge include asset writedowns of $136 million, severance
costs of $127 million and other exit costs of $14 million. The repositioning
actions are expected to be completed in 1998.
In the second quarter of 1996, the Company adopted the provisions of the
American Institute of Certified Public Accountants' Statement of Position 96-1,
"Environmental Remediation Liabilities" (SOP 96-1). SOP 96-1 provides additional
guidance regarding the manner in which existing authoritative accounting
literature is to be applied to the specific circumstances of recognizing,
measuring and disclosing environmental remediation liabilities. The adoption of
SOP 96-1 resulted in a pretax charge of $175 million, and is accounted for as a
change in estimate. The Company also recorded other charges primarily related to
changes made in employee benefit programs and in connection with customer and
former employee claims.
30
Repositioning and other charges totaling $637 million are included as part of
Cost of Goods Sold for 1996. Other Income (Expense) for 1996 includes a $15
million credit for repositioning and other charges representing the minority
interest share of such charges. The total pretax impact of the repositioning and
other charges for 1996 is $622 million (after-tax $359 million, or $0.63 per
share).
Cost of Goods Sold in 1995 includes a provision of $115 million (after-tax $71
million, or $0.13 per share) relating to management's decision to exit the ABS
business. The provision consists of the revaluation of the Company's ABS assets
to their fair market value and certain other closure costs.
Note 4
GAIN ON SALE OF BUSINESS
In October 1997, the Company sold its automotive safety restraints business to
Breed Technologies for $710 million in cash, subject to post-closing
adjustments. The safety restraints business had 1996 net sales and income from
operations of $940 and $70 million, respectively. The sale of the safety
restraints business resulted in a pretax gain of $277 million (after-tax $196
million, including the benefit of capital losses, or $0.35 per share). In
addition, in 1997 the Company recorded a charge of $51 million (after-tax $33
million, or $0.06 per share) related to the settlement of the 1996 sale of the
braking business.
In April 1996, the Company sold its braking business to Robert Bosch GmbH, a
privately-held German company. The braking business had 1995 net sales and
income from operations of $2.0 billion and $154 million, respectively. The sale
of the braking business resulted in a pretax gain of $655 million (after-tax
$368 million, or $0.65 per share). The Company received consideration of $1.5
billion, subject to certain post-closing adjustments which were finalized in
October 1997.
In December 1995, the Company transferred the assets of its high-density
polyethylene (HDPE) business joint venture, Paxon Polymer Company, L.P., to
Exxon Chemical Company (Exxon). The transfer of the HDPE business to Exxon
resulted in a pretax gain of $71 million (after-tax $71 million, or $0.13 per
share).
NOTE 5
OTHER INCOME (EXPENSE)
Years ended December 31 1997 1996 1995
- ----------------------------------------------------------------------
Interest income and other $ 95 $ 94 $ 35
Minority interests (45) (18) (36)
Foreign exchange gain (loss) 27 11 (21)
- ----------------------------------------------------------------------
$ 77 $ 87 $(22)
======================================================================
NOTE 6
INTEREST AND OTHER FINANCIAL CHARGES
Years ended December 31 1997 1996 1995
- -----------------------------------------------------------------------
Total interest and other
financial charges $196 $ 209 $ 189
Less -- Capitalized interest (21) (23) (21)
- -----------------------------------------------------------------------
$175 $ 186 $ 168
=======================================================================
NOTE 7
TAXES ON INCOME
Income before taxes on income
Years ended December 31 1997 1996 1995
- -----------------------------------------------------------------------
United States $ 1,526 $ 1,099 $ 1,101
Foreign 190 454 160
- -----------------------------------------------------------------------
$ 1,716 $ 1,553 $ 1,261
=======================================================================
Taxes on income
Years ended December 31 1997 1996 1995
- -----------------------------------------------------------------------
United States $ 466 $ 359 $ 347
Foreign 80 174 39
- -----------------------------------------------------------------------
$ 546 $ 533 $ 386
=======================================================================
Years ended December 31 1997 1996 1995
- -----------------------------------------------------------------------
Taxes on income consist of:
Current:
United States $ 292 $ 190 $ 118
State 54 41 25
Foreign 62 89 44
- -----------------------------------------------------------------------
408 320 187
- -----------------------------------------------------------------------
Deferred:
United States 98 133 192
State 22 (5) 12
Foreign 18 85 (5)
- -----------------------------------------------------------------------
138 213 199
- -----------------------------------------------------------------------
$ 546 $ 533 $ 386
=======================================================================
Years ended December 31 1997 1996 1995
- -----------------------------------------------------------------------
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% 35.0%
Taxes on foreign earnings over
(under) U.S. tax rate .2 .4 (1.7)
Asset basis differences (2.4) (.1) (2.0)
Nondeductible amortization 1.4 2.1 1.1
State income taxes 2.6 1.3 1.6
Tax benefits of Foreign Sales
Corporation (3.0) (1.9) (1.5)
Dividends received deduction (.3) (.2) (.1)
ESOP dividend tax benefit (.7) (.7) (.8)
All other items-- net (1.0) (1.6) (1.0)
- -------------------------------------------------------------------------
31.8% 34.3% 30.6%
=========================================================================
Deferred income taxes
December 31 1997 1996
- -----------------------------------------------------------------------
Included in the following balance
sheet accounts:
Other current assets $ 394 $ 309
Other assets 117 178
Accrued liabilities -- (18)
Deferred income taxes (694) (610)
- -----------------------------------------------------------------------
$ (183) $ (141)
=======================================================================
31
Deferred tax assets (liabilities)
December 31 1997 1996
- -----------------------------------------------------------------------
The temporary differences and carryforwards
which give rise to deferred tax assets and
liabilities are as follows:
Property, plant and equipment basis
differences $(690) $(644)
Postretirement benefits other than pensions 728 732
Postemployment benefits 67 65
Investment and other asset basis differences (567) (502)
Nonrecurring items 235 151
Other accrued items 326 420
Net operating losses 218 188
Deferred foreign gain (48) (50)
Undistributed earnings of subsidiaries (45) (66)
All other items -- net (381) (398)
- -----------------------------------------------------------------------
(157) (104)
Valuation allowance (26) (37)
- -----------------------------------------------------------------------
$(183) $(141)
=======================================================================
The amount of federal tax net operating loss carryforwards generated by certain
subsidiaries prior to their acquisition in 1997 is $195 million with expiration
dates through the year 2011. The use of pre-acquisition operating losses is
subject to limitations imposed by the Internal Revenue Code. The Company does
not anticipate that these limitations will affect utilization of the
carryforwards prior to their expiration. The Company also has foreign net
operating losses of $375 million which are available to reduce future income tax
payments in several countries, subject to varying expiration rules.
Deferred income taxes have not been provided on approximately $355 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 8
SHORT-TERM INVESTMENTS
Short-term Investments consist of marketable debt and equity securities
classified as available-for-sale and carried at their quoted market value. The
fair values of marketable debt and equity securities at December 31, 1997 and
1996 were $152 million ($152 million, at cost) and $214 million ($206 million,
at cost) and $155 million ($155 million, at cost) and $128 million ($130
million, at cost), respectively. The Company also had other short-term
investments held for sale of $64 and $18 million at December 31, 1997 and 1996,
respectively, carried at cost, which approximates market value.
NOTE 9
ACCOUNTS AND NOTES RECEIVABLE
December 31 1997 1996
- -----------------------------------------------------------------------
Trade $ 1,466 $ 1,330
Other 457 362
- -----------------------------------------------------------------------
1,923 1,692
Less -- Allowance for doubtful accounts
and refunds (37) (31)
- -----------------------------------------------------------------------
$ 1,886 $ 1,661
=======================================================================
The Company is a party to agreements under which it can sell undivided interests
in designated pools of trade accounts receivable. During 1997 and 1996, the
average outstanding was $505 and $517 million, respectively. New receivables are
sold under the agreements as previously sold receivables are collected. During
1997, this represented an average collection period of 47 days or a replacement
of receivables of approximately eight times. At both December 31, 1997 and 1996,
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 10
INVENTORIES
December 31 1997 1996
- -----------------------------------------------------------------------
Raw materials $ 639 $ 538
Work in process 722 762
Finished products 871 814
Supplies and containers 89 88
- -----------------------------------------------------------------------
2,321 2,202
Less --
Progress payments (88) (126)
Reduction to LIFO cost basis (140) (130)
- -----------------------------------------------------------------------
$ 2,093 $ 1,946
=======================================================================
Inventories valued at LIFO amounted to $191 million at December 31, 1997 and
$223 million at December 31, 1996, which amounts were below estimated
replacement cost by $140 and $130 million, respectively.
NOTE 11
OTHER CURRENT ASSETS
December 31 1997 1996
- -----------------------------------------------------------------------
Current deferred taxes $394 $309
Other 159 157
- -----------------------------------------------------------------------
$553 $466
=======================================================================
NOTE 12
INVESTMENTS AND LONG-TERM RECEIVABLES
December 31 1997 1996
- -----------------------------------------------------------------------
Affiliates (1) $403 $379
Long-term receivables 77 94
- -----------------------------------------------------------------------
$480 $473
=======================================================================
(1) Includes unrealized holding gains of $3 and $23 million at December 31,
1997 and 1996, respectively, on equity securities classified as
available-for-sale. The cost basis of the equity securities was $7 and $21
million at December 31, 1997 and 1996, respectively. Also includes the
Company's 50% partnership interest in UOP, a joint venture accounted for
under the equity method. UOP is in the process technology and catalyst
business.
32
NOTE 13
PROPERTY, PLANT AND EQUIPMENT
December 31 1997 1996
- -----------------------------------------------------------------------
Land and land improvements $ 330 $ 331
Machinery and equipment 6,038 5,760
Buildings 1,417 1,415
Office furniture and equipment 868 868
Transportation equipment 126 153
Construction in progress 410 449
- -----------------------------------------------------------------------
9,189 8,976
Less -- Accumulated depreciation
and amortization (4,938) (4,757)
- -----------------------------------------------------------------------
$ 4,251 $ 4,219
=======================================================================
NOTE 14
ACCRUED LIABILITIES
December 31 1997 1996
- -----------------------------------------------------------------------
Wages $ 246 $ 315
Customer advance payments/deposits 126 127
Insurance 110 102
Postretirement benefits other than pensions 157 135
Other 1,360 1,216
- -----------------------------------------------------------------------
$ 1,999 $ 1,895
=======================================================================
NOTE 15
LONG-TERM DEBT AND CREDIT AGREEMENT
December 31 1997 1996
- -----------------------------------------------------------------------
Employee stock ownership
plan floating rate notes,
4.29%-4.71%, due 1998-1999 $ 85 $ 164
6.75% notes due August 15, 2000 100 100
9 7/8% debentures due June 1, 2002 250 250
9.20% debentures due February 15, 2003 100 100
Medium term notes,
8.93%-9.28%, due 1999-2001 69 116
Zero coupon bonds and
money multiplier notes,
13.0%-14.26%, due 1998-2009 157 229
9 1/2% debentures due June 1, 2016 100 100
Industrial development bond
obligations, 3.15%-6.75%, maturing
at various dates through 2027 105 103
Other (including capitalized leases),
1.54%-12.42%, maturing at various
dates through 2016 249 155
- -----------------------------------------------------------------------
$ 1,215 $ 1,317
=======================================================================
The schedule of principal payments on long-term debt is as follows:
Long-term
December 31, 1997 Debt
- ------------------------------------
1998 $224
1999 195
2000 177
2001 43
2002 275
Thereafter 525
- ------------------------------------
1,439
Less -- Current portion (224)
- ------------------------------------
$1,215
====================================
The Company has a Five-Year Credit Agreement (Credit Agreement) with a group of
19 banks with commitments aggregating $750 million. The funds available under
the Credit Agreement may be used for any corporate purpose. Loans under the
Credit Agreement are required to be repaid no later than June 30, 2002.
Annually, the Company may request that the maturity of the Credit Agreement be
extended by another year. The Company intends to request an extension of this
agreement in 1998. The Company has agreed to pay a facility fee of 0.065% per
annum on the aggregate commitment for the Credit Agreement, subject to increase
or decrease in the event of changes in the Company's long-term debt ratings. The
Credit Agreement does not restrict the Company's ability to pay dividends,
however, it does require the Company to maintain a minimum net worth of $3.1
billion. The Credit Agreement also contains other customary conditions and
events of default, the failure to comply with, or occurrence of, would prevent
any further borrowings and would generally require the repayment of any
outstanding borrowings under the Credit Agreement. Such events of default
include (a) non-payment of Credit Agreement debt and interest thereon, (b)
non-compliance with the terms of the Credit Agreement covenants, (c)
cross-default with other debt in certain circumstances, (d) bankruptcy and (e)
defaults upon obligations under the Employee Retirement Income Security Act.
Additionally, each of the banks has the right to terminate its commitment to
lend under the Credit Agreement 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 (the Board).
Interest on borrowings under the Credit Agreement would be determined, at the
Company's option, by (a) an auction bidding procedure; (b) the highest of the
floating base rate of the agent bank, 0.5% above the average CD rate, or 0.5%
above the Federal funds rate or (c) the average Eurocurrency rate of three
reference banks plus 0.135% (applicable margin). The applicable margin over the
Eurocurrency rate on the Credit Agreement is subject to increase or decrease if
the Company's long-term debt ratings change. The Company had no balance
outstanding under the Credit Agreement at December 31, 1997. The Credit
Agreement presently serves as support for the issuance of commercial paper.
33
NOTE 16
LEASE COMMITMENTS
Future minimum lease payments under operating leases having initial or remaining
noncancelable lease terms in excess of one year are as follows:
Lease
December 31, 1997 Payments
- -------------------------------
1998 $73
1999 72
2000 61
2001 47
2002 41
Thereafter 140
- -------------------------------
$434
===============================
Rent expense of $109, $98 and $121 million was included in costs and expenses
for 1997, 1996 and 1995, respectively.
NOTE 17
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, 1997 and
1996.
At December 31, 1997 and 1996, interest rate swap agreements effectively
changed $300 million of fixed-rate debt at an average rate of 9.53% in both
years to U.S. commercial paper based floating rate debt with an effective
average rate of 8.04% and 7.94%, respectively. Based on their terms, these
agreements will be terminated by the counterparty if short-term interest rates
drop below a predetermined level. Other interest rate swaps at December 31, 1997
and 1996 effectively changed $58 and $66 million, respectively, of London
Interbank Offer Rate (LIBOR) based floating rate debt at an average rate of
4.80% and 4.76%, respectively, to fixed rate debt with an effective average rate
of 6.81% and 7.00%, respectively. The Company's interest rate swaps mature
through the year 2000.
The Company's exposure to changes in foreign currency exchange rates arises
from intercompany 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
using 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. Forward and option agreements used to hedge
net income are marked to market and recognized immediately in income. 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,
1997, the Company held or had written foreign currency forward and option
agreements, maturing through 1999. The Company only writes foreign currency
options in combination with purchased options as an integral transaction and
economic alternative to using forward agreements.
Financial instruments expose the Company to counterparty credit risk for
nonperformance and to market risk for changes in interest and currency rates.
The Company manages exposure to counterparty credit risk through specific
minimum credit standards, diversification of counterparties and procedures to
monitor the amount of credit exposure. The Company's financial instrument
counterparties are substantial investment or commercial banks with significant
experience with such instruments. The Company also has procedures to monitor
the impact of market risk on the fair value and costs of its financial
instruments considering reasonably possible changes in interest and currency
rates. The Company manages market risk by restricting the use of derivative
financial instruments to hedging activities and by limiting potential interest
and currency rate exposures to amounts that are not material to the Company's
consolidated results of operations and cash flows. Because of the above
practices and procedures, management believes that the Company's credit and
market risk exposures from financial instruments are not significant at
December 31, 1997.
The values of the Company's outstanding derivative financial instruments at
December 31, 1997 and 1996 are as follows:
Notional
Principal Fair Carrying
December 31, 1997 Amount Value (1) Value
- ---------------------------------------------------------------------------
Interest rate swap
agreements held $358 $ 3 $ --
Foreign currency forward
agreements held 708 1 1
Foreign currency forward
agreements written 649 23 22
Foreign currency options held 150 4 4
Foreign currency options
written -- -- --
============================================================================
December 31, 1996
- ----------------------------------------------------------------------------
Interest rate swap
agreements held $366 $ (1) $ --
Foreign currency forward
agreements held 425 (1) (1)
Foreign currency forward
agreements written 420 2 4
Foreign currency options held 120 1 1
Foreign currency options
written 76 (1) (1)
============================================================================
(1) Fair values for forward, option and interest rate swap contracts are based
on market quotes.
The only other material financial instruments that are not carried on the
Consolidated Balance Sheet at amounts which approximate fair values are certain
debt instruments. The carrying values of long-term debt and related current
maturities
34
(excluding capitalized leases of $43 and $41 million at December 31, 1997 and
1996, respectively) are $1,396 and $1,388 million and the fair values are
$1,584 and $1,560 million at December 31, 1997 and 1996, 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 18
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 1,000,000,000 shares of common stock,
with a par value of one dollar. Common shareowners are entitled to receive such
dividends as may be declared by the Board, are entitled to one vote per share,
and are entitled, in the event of liquidation, to share ratably in all the
assets of 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. As of December 31,
1997, the Company has remaining authority to repurchase from time to time up to
81.4 million shares of common stock.
Common
Shares Stock/
Outstanding Paid-in Treasury
(in millions) Capital Stock
- -----------------------------------------------------------------------
Balance December 31, 1994 566.2 $2,816 $ (1,505)
Purchased under repurchase programs (11.0) -- (239)
Used for Dividend Reinvestment Plan .4 -- 3
Used for employee benefit plans
(including related tax
benefits) 10.0 31 83
- -----------------------------------------------------------------------
Balance December 31, 1995 565.6 2,847 (1,658)
Purchased under repurchase programs (14.0) -- (409)
Used for Dividend Reinvestment Plan .2 -- 2
Used for employee benefit plans
(including related tax benefits) 13.4 58 109
Used for acquisitions .4 -- 3
- -----------------------------------------------------------------------
Balance December 31, 1996 565.6 2,905 (1,953)
Purchased under repurchase programs (21.0) -- (814)
Used for Dividend Reinvestment Plan .3 8 2
Used for employee benefit plans
(including related tax
benefits) 12.4 232 92
Used for acquisitions 1.0 32 8
Other -- (36) --
- ------------------------------------------------------------------------
Balance December 31, 1997 558.3 $3,141 $(2,665)
========================================================================
NOTE 19
STOCK OPTIONS AND AWARDS
The Company has a 1993 Stock Plan and a 1985 Stock Plan available to grant
incentive and non-qualified stock options, stock appreciation rights (SARs),
restricted shares and restricted units (Units) to officers and other employees.
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) as
of 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. There were 10,468,811 and 8,204,312 shares available
for future grants under the terms of the Company's stock option plans at
December 31, 1997 and 1996, respectively. Incentive stock options have a term
determined by the Management Development and Compensation Committee of the Board
(Committee), but not in excess of ten years from the date of grant.
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. 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. Units have been granted to certain
employees, which entitle the holder to receive shares of common stock. At
December 31, 1997, there were 1,529,346 Units outstanding, including 215,920
Units granted in 1997, the restrictions on which generally lapse over periods
not exceeding ten years from date of grant. Compensation expense is recognized
over the restricted period.
The following table summarizes information about stock option activity for the
three years ended December 31, 1997:
Number Average
of Options Exercise Price
- ------------------------------------------------------------------------
Outstanding at December 31, 1994 48,743,438 $ 14.38
Granted 12,799,180 18.27
Exercised (8,398,830) 11.44
Lapsed or canceled (717,134) 17.38
- -----------------------------------------------------------------------
Outstanding at December 31, 1995 52,426,654 15.76
Granted 9,436,540 25.60
Exercised (10,003,554) 14.08
Lapsed or canceled (738,014) 21.01
- ------------------------------------------------------------------------
Outstanding at December 31, 1996 51,121,626 17.83
Granted 8,408,454 36.92
Exercised (9,299,671) 15.19
Lapsed or canceled (548,254) 23.67
- ------------------------------------------------------------------------
Outstanding at December 31, 1997 49,682,155 21.49
========================================================================
The following table summarizes information about stock options outstanding at
December 31, 1997:
Options Outstanding Options Exercisable
--------------------------------------- ------------------------------
Range of Average Average
Exercise Number Average Exercise Number Exercise
Prices Outstanding Life (1) Price Exercisable Price
- -------------------------------------------------------------------------------------------
$ 7.18-$14.58 7,447,018 3.4 $11.05 7,447,018 $11.05
$16.00-$17.75 8,722,715 5.7 17.20 8,650,615 17.20
$17.79-$19.54 15,860,288 6.7 18.43 10,622,054 18.74
$21.25-$44.33 17,652,134 8.6 30.76 3,130,670 25.44
----------- ----------
49,682,155 5.2 21.49 29,850,357 17.08
==========================================================================================
(1) Average remaining contractual life in years.
There were 28,365,464 and 28,105,478 options exercisable at average exercise
prices of $15.14 and $13.75 at December 31, 1996 and 1995, respectively.
35
The Company accounts for stock compensation costs in accordance with the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and related interpretations. Accordingly, no compensation
cost has been recognized for its fixed stock option plans. The following table
sets forth pro forma information as if compensation cost had been determined
based on the fair value at the grant date for awards under the Company's stock
plans consistent with the requirements of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation".
1997 1996 1995
- --------------------------------------------------------------------------------
Weighted-average fair value per share
of options granted during the year (1) $9.15 $6.22 $5.53
Reduction of:
Net income $ 33 $ 24 $ 15
Earnings per share of common stock -- basic $ .06 $ .04 $ .03
Earnings per share of common
stock -- assuming dilution $ .06 $ .04 $ .03
Assumptions:
Historical dividend yield 1.8% 1.8% 1.8%
Historical volatility 19.1% 21.1% 23.0%
Risk-free rate of return 6.4% 5.5% 7.2%
Expected life (years) 5.0 5.0 5.5
=================================================================================
(1) Estimated on date of grant using Black-Scholes option-pricing model.
The Company also has a Stock Plan for Non-Employee Directors (Directors' Plan)
under which restricted shares and options are granted. New directors receive
grants of 3,000 shares of common stock, subject to certain restrictions. In
addition, each director will be granted an option to purchase 2,000 shares of
common stock each year on the date of the annual meeting of shareowners. The
Company has set aside 450,000 shares for issuance under the Directors' Plan.
Options generally become exercisable over a three-year period and have a term of
ten years from the date of grant.
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 Additional Paid-in Capital during
1997 and Retained Earnings in prior years.
NOTE 20
CUMULATIVE FOREIGN EXCHANGE
TRANSLATION ADJUSTMENT
December 31 1997 1996 1995
- -------------------------------------------------
Balance at beginning of year $2 $61 $18
Translation adjustment and
impact of hedges (183) (59) 43
- --------------------------------------------------
$(181) $2 $61
==================================================
NOTE 21
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, health and safety matters.
In accordance with the Company's accounting policy described in Note 1 of Notes
to Financial Statements, liabilities are recorded for environmental matters
generally no later than the completion of feasibility studies. 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 22
SUPPLEMENTAL CASH FLOW
AND OTHER INFORMATION
Cash and Cash Equivalents includes cash on hand and on deposit as well as highly
liquid debt instruments with maturities generally of three months or less. Cash
payments during the years 1997, 1996 and 1995 included interest of $191, $178
and $183 million and income taxes of $269, $221 and $185 million, respectively.
The weighted-average interest rate on short-term borrowings and commercial paper
outstanding at December 31, 1997 and 1996 was 6.0%.
During 1997, a subsidiary of the Company issued $112 million of preferred stock
to third-party investors and subsequently redeemed such stock prior to year-end.
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. 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.
36
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. Effective July 1, 1997, the Company adopted a plan amendment
that will encourage Medicare eligible non-union retirees to join Company
sponsored Medicare managed care programs. The Company uses the services of an
enrolled actuary to calculate postretirement benefit costs.
For measurement purposes, the assumed annual rates of increase in the per capita
cost of covered health care benefits for 1997 were 6.75% to 8% for indemnity
programs and 6% to 8% for managed care programs, which reduce to 6% for all
programs in the year 2000 and remain at that level thereafter (except for
Medicare managed care programs which continue at 8%). The health care cost trend
rate assumptions have a significant effect on the amounts reported. To
illustrate, increasing the assumed health care cost trend rates by one
percentage point in each year would increase the accumulated postretirement
benefit obligation as of December 31, 1997 by $129 million and the aggregate of
the service and interest cost component of net periodic postretirement benefit
cost for the year then ended by $12 million. The weighted-average discount rate
used in determining the accumulated postretirement benefit obligation was 7.25%
and 7.75% at December 31, 1997 and 1996, respectively.
Net periodic postretirement benefit cost for 1997, 1996 and 1995 included the
following components:
Years ended December 31 1997 1996 1995
- ---------------------------------------------------------------------
Service cost-benefits attributed to service
during the period $ 21 $ 24 $ 20
Interest cost on accumulated postretirement
benefit obligation 110 110 133
Net amortization (24) (14) (12)
- ----------------------------------------------------------------------
107 120 141
Foreign plans 1 1 1
- ----------------------------------------------------------------------
Net periodic postretirement benefit cost $108 $121 $142
======================================================================
Presented below are the plans' status and amounts recognized in the Company's
Consolidated Balance Sheet at December 31, 1997 and 1996:
December 31 1997 1996
- -----------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees $1,012 $1,054
Fully eligible active plan participants 186 126
Other active plan participants 436 353
- -----------------------------------------------------------------------
1,634 1,533
Unrecognized prior service cost 221 115
Unrecognized net gain 77 274
- -----------------------------------------------------------------------
Accrued postretirement benefit cost $1,932 $1,922
=======================================================================
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 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. At December 31, 1997, approximately 60% of the assets of U.S.
plans were held in equity securities, with the balance primarily in fixed
income-type securities. 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 1997, 1996 and 1995 included the following
components:
Years ended December 31 1997 1996 1995
- ----------------------------------------------------------------------------
Service cost-benefits earned during the period $ 124 $ 133 $ 107
Interest cost on projected benefit obligation 412 398 395
Actual return on plan assets (1,041) (841) (1,019)
Net amortization and deferral 527 388 616
- -----------------------------------------------------------------------------
Net periodic pension cost for defined benefit
plans 22 78 99
Foreign plans and other 13 10 16
- ----------------------------------------------------------------------------
Net periodic pension cost $ 35 $ 88 $ 115
============================================================================
The assumed rate of return for the Company's U.S. defined benefit pension plans
was 10% in 1997, 9.5% in 1996 and 9% in 1995. The assumed discount rate used in
calculating the projected benefit obligations at December 31, 1997, 1996 and
1995 was 7.25%, 7.75% and 7.25%, respectively. In addition, the assumed annual
increase in compensation over employees' estimated remaining working lives was
5% in 1997, 1996 and 1995.
37
Presented below are the plans' funded status and amounts recognized in the
Company's Consolidated Balance Sheet at December 31, 1997 and 1996 for its
significant defined benefit pension plans:
1997 1996
---------------------------- ----------------------------
Assets Exceed Accumulated Assets Exceed Accumulated
Accumulated Benefits Accumulated Benefits
December 31 Benefits Exceed Assets Benefits Exceed Assets
- ----------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligation:
Vested $4,731 $ 231 $3,715 $ 832
Nonvested 351 15 256 65
- ----------------------------------------------------------------------------------------------------
Accumulated benefit obligation $5,082 $ 246 $3,971 $ 897
====================================================================================================
Projected benefit obligation $5,656 $ 285 $4,474 $ 933
Less-- Fair value of assets 6,397 31 5,116 711
- ----------------------------------------------------------------------------------------------------
Over (under) funded plans 741 (254) 642 (222)
Unrecognized transition (asset) liability (27) 1 (6) (24)
Unrecognized net (gain) loss (711) 52 (549) (55)
Unrecognized prior service cost 61 32 (10) 90
- ----------------------------------------------------------------------------------------------------
Prepaid (accrued) pension cost $ 64 $(169) $ 77 $(211)
====================================================================================================
NOTE 25
SEGMENT FINANCIAL DATA
AlliedSignal Inc. is a global, advanced technology and manufacturing company.
The Company's principal lines of business are aerospace, automotive and
engineered materials. Aerospace's principal products, which include propulsion
engines, auxiliary power units, environmental control systems, cabin
pressurization and engine control systems and avionics, are sold to the U.S. and
foreign governments, aircraft manufacturers, commercial airlines and dealers and
distributors of general aviation products. Automotive supplies systems and
components to worldwide manufacturers of passenger cars; light-, medium- and
heavy-duty trucks; buses; and off-highway vehicles, as well as replacement parts
through the independent aftermarket and passenger car/truck dealers. Engineered
materials' products include chemicals, fibers, plastics and advanced materials,
which have applications for numerous industries including electronics,
automotive, carpeting, refrigeration, construction, computer and utilities,
among others.
Corporate
Engineered and
Aerospace Automotive Materials Unallocated (1) Total
- ----------------------------------------------------------------------------------------------------
Net sales (2) 1997 $ 6,412 $ 3,802 $ 4,254 $ 4 $ 14,472
1996 5,714 4,240 4,013 4 13,971
1995 5,084 5,549 3,713 -- 14,346
- ----------------------------------------------------------------------------------------------------
Research and development expense 1997 180 43 126 -- 349
1996 173 49 123 -- 345
1995 154 80 109 10 353
- ----------------------------------------------------------------------------------------------------
Depreciation and amortization 1997 180 111 226 29 546
1996 186 127 207 31 551
1995 186 164 185 28 563
- ----------------------------------------------------------------------------------------------------
Income from operations (3) 1997 872 469 432 (137) 1,636
1996 359 900 438 (188) 1,509
1995 551 292 563 (146) 1,260
- ----------------------------------------------------------------------------------------------------
Net income (3)(4) 1997 515 285 389 (19) 1,170
1996 206 521 361 (68) 1,020
1995 303 146 473 (47) 875
- ----------------------------------------------------------------------------------------------------
Capital expenditures 1997 200 163 314 40 717
1996 143 212 336 64 755
1995 131 214 334 67 746
- ----------------------------------------------------------------------------------------------------
Identifiable assets 1997 5,889 2,894 4,100 824 13,707
1996 5,172 2,729 3,453 1,475 12,829
1995 5,079 3,813 3,302 271 12,465
====================================================================================================
Intersegment sales approximate market and are not significant.
(1) The "Corporate and Unallocated" column includes amounts for businesses sold
and Corporate items.
(2) Sales to the U.S. Government and its agencies, mainly for the Aerospace
segment, were $1,121 , $1,172 and $1,107 million for each of the respective
years.
(3) Includes in 1997 a pre- and after-tax provision for repositioning and other
charges for Aerospace of $23 and $14 million, Automotive of $64 and $48
million, Engineered Materials of $110 and $73 million and Corporate and
Unallocated of $40 and $24 million, respectively. Also includes in 1997 a
pre- and after-tax gain on the sale of the safety restraints business of
$277 and $196 million for Automotive and a pre- and after-tax provision for
the settlement of the 1996 braking business sale of $51 and $33 million for
Automotive. Includes in 1996 a pre- and after-tax provision for
repositioning and other charges for Aerospace of $292 and $179 million,
Automotive of $117 and $49 million, Engineered Materials of $129 and $71
million and Corporate and Unallocated of $99 and $60 million, respectively.
Also includes in 1996 a pre- and after-tax gain on the sale of the braking
business of $655 and $368 million for Automotive. Includes in 1995 a pre-
and after-tax provision for repositioning charge of $115 and $71 million for
Automotive and a pre- and after-tax gain on the transfer of the HDPE
business of $71 and $71 million for Engineered Materials.
(4) An interest charge is made by Corporate Office to the segments on the basis
of relative investment. 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.
38
NOTE 26
GEOGRAPHIC AREAS -- FINANCIAL DATA
Adjustments
United Other and
States Canada Europe International Eliminations Total
- --------------------------------------------------------------------------------------------------------------------
Net sales (1) 1997 $11,319 $361 $2,171 $621 $-- $14,472
1996 10,774 252 2,397 548 -- 13,971
1995 10,734 230 2,740 642 -- 14,346
- --------------------------------------------------------------------------------------------------------------------
Net income (2) 1997 1,086 39 23 22 -- 1,170
1996 736 28 212 44 -- 1,020
1995 734 31 58 52 -- 875
- --------------------------------------------------------------------------------------------------------------------
Assets 1997 10,861 339 2,570 677 (740) 13,707
1996 9,880 302 2,501 729 (583) 12,829
1995 9,378 219 2,964 588 (684) 12,465
- --------------------------------------------------------------------------------------------------------------------
Liabilities 1997 8,688 115 974 284 (740) 9,321
1996 8,059 132 798 243 (583) 8,649
1995 7,623 106 1,535 293 (684) 8,873
=====================================================================================================================
Sales between geographic areas approximate market and are not significant.
(1) Included in United States net sales are export sales of $2,467, $2,399 and
$2,119 million for each of the respective years.
(2) Includes in 1997 an after-tax provision for repositioning and other charges
for the United States of $92 million, for Europe of $57 million and for
Other International of $10 million. Includes in 1997 an after-tax gain on
the sale of the safety restraints business for the United States of $173
million, for Europe of $11 million and for Other International of $12
million. Also includes in 1997 an after-tax provision for the settlement of
the 1996 braking business sale for the United States of $11 million, for
Europe of $16 million and for Other International of $6 million. Includes in
1996 an after-tax provision for repositioning and other charges for the
United States of $356 million and for Europe of $3 million. Also includes in
1996 an after-tax gain on the sale of the braking business for the United
States of $244 million and for Europe of $143 million and an after-tax loss
for Other International of $19 million. Includes in 1995 an after-tax
provision for a repositioning charge for the United States of $29 million
and for Europe of $42 million. Also includes in 1995 an after-tax gain on
the transfer of the HDPE business for the United States of $71 million.
NOTE 27
UNAUDITED QUARTERLY FINANCIAL INFORMATION
1997 1996
---------------------------------------------------- ----------------------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31 Year Mar. 31 June 30 Sept. 30 Dec. 31 Year
- --------------------------------------------------------------------------------------------------------------------------------
Net sales $3,327 $3,578 $3,657 $3,910 $14,472 $3,778 $3,347 $3,348 $3,498 $13,971
Gross profit 722 814 817 638 (1) 2,991 766 112 (3) 750 737 2,365
Net income 259 305 292 314 (1)(2) 1,170 225 272 (3)(4) 253 270 1,020
Earnings per
share -- basic .46 .54 .52 .56 (1)(2) 2.07 .40 .48 (3)(4) .45 .48 1.80
Earnings per share
-- assuming dilution .45 .52 .50 .55 2.02 .39 .47 .44 .46 1.76
Dividends paid .13 .13 .13 .13 .52 .1125 .1125 .1125 .1125 .45
Market price (5)
High 38.25 42.50 47.13 43.94 47.13 29.63 30.25 33.25 37.25 37.25
Low 33.25 33.88 41.13 31.63 31.63 23.63 27.13 26.38 31.00 23.63
===============================================================================================================================
(1) Includes a provision of $237 million, after-tax $159 million and $0.28 per
share for repositioning and other charges. See Note 3 of Notes to Financial
Statements for further information.
(2) Includes an after-tax gain of $196 million and $0.35 per share on the sale
of the safety restraints business and an after-tax loss of $33 million and
$0.06 per share related to the settlement of the 1996 braking business sale.
See Note 4 of Notes to Financial Statements for further information.
(3) Includes a provision of $637 million, after-tax $359 million and $0.63 per
share for repositioning and other charges. See Note 3 of Notes to Financial
Statements for further information.
(4) Includes an after-tax gain of $368 million and $0.65 per share on the sale
of the braking business. See Note 4 of Notes to Financial Statements for
further information.
(5) From composite tape -- stock is primarily traded on the New York Stock
Exchange.
39
REPORT OF INDEPENDENT ACCOUNTANTS
[LOGO]
January 28, 1998
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, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, 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.
PRICE WATERHOUSE LLP
Morristown, NJ
40