ITEM 1. BUSINESS
AlliedSignal Inc. (with its consolidated subsidiaries referred to in this Report as the Company) was organized in the State of Delaware in 1985. The Company is the successor to Allied Corporation, which was organized in the State of New York in 1920.
AlliedSignal is an advanced technology and manufacturing company serving customers worldwide with aerospace and automotive products, chemicals, fibers, plastics and advanced materials. The Company's operations are conducted under three business segments: Aerospace, Automotive and Engineered Materials.
AEROSPACE
The Aerospace segment is among the world's largest manufacturers and suppliers of advanced technology products and services for the military, commercial and general aviation, and space markets.
Following is a description of the major Aerospace businesses:
The Aerospace segment serves key military and commercial components of the aviation, defense and space markets with a broad array of systems, subsystems, components and services. It designs, develops, manufactures, markets and services hundreds of products found on all types of aircraft, from single-piston engine aircraft, business aircraft and wide-bodied 'jumbos' flown by the world's commercial airlines, to trainers, transports, bombers, fighters and helicopters used by the U.S. and other countries for national defense. The Company's global business consists primarily of original equipment (OE) sales and an extensive aftermarket business, including spare parts, maintenance and repair, and retrofitting. Worldwide customers include the U.S. and foreign governments, all of the major airframe and engine manufacturers, including Boeing, McDonnell Douglas, Lockheed Martin, Airbus Industrie, Aero International (Regional), Raytheon, Israeli Aircraft Industries, Northrop Grumman, British Aerospace, Cessna, Fairchild/Dornier, Dassault, Gulfstream, Bombardier, Rockwell International, Pratt & Whitney, General Electric and Rolls-Royce, as well as the world's leading airlines and business aircraft and general aviation aircraft operators, and dealers and distributors of general aviation products. The Company also provides field engineering management and technical support services to Boeing, the National Aeronautics and Space Administration (NASA), the U.S. Department of Defense (DoD), the U.S. Department of Energy, other federal civilian agencies as well as state and local governments and other commercial entities.
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. However, contract awards by aircraft manufacturers can be canceled or reduced if aircraft orders are cut back. Aerospace's products and services are sold in competition with those of a large number of other companies, some of which have substantial financial resources and significant technological capabilities.
In 1996, world defense spending flattened after declining in prior years. The Company believes that the cyclical downturn for the commercial aircraft industry reached bottom in 1995. A slight improvement was seen in the second half of 1996 and this growth is expected to significantly accelerate in 1997. Most major U.S. and international airlines operated in an improving economic
environment. The modest turnaround for the airline industry that began in the second half of 1993, continued in 1994 and strengthened significantly in 1995 and 1996. The regional airlines experienced strong traffic growth and new regional aircraft orders were higher in 1996. The high-end business aviation market showed moderate growth and the commercial aftermarket spare parts and repair and overhaul business showed strong growth during 1996.
Sales to the U.S. Government, acting through its various departments and agencies and through prime contractors, amounted to $1,833 million for 1996 and $1,806 million for 1995, which includes sales to the DoD of $1,237 million in 1996 and $1,205 million in 1995. Approximately 55% and 54% of sales to the U.S. Government in 1996 and 1995, respectively, were made under fixed-price contracts in which the Company agrees to perform a contract for a fixed price and retains for itself any benefits of cost savings or must bear the burden of cost overruns.
Government contracts and, in general, subcontracts thereunder are terminable, in whole or in part, for default or for convenience by the government or the higher level contractor if deemed in their best interest. Upon termination for convenience, the contractor is normally entitled to reimbursement for allowable costs and to an allowance for profit. However, if the contract is terminated because of the contractor's default, the contractor may not recover all of its costs and may be liable for any excess costs incurred by the government in procuring undelivered items from another source.
In addition to the right of the government to terminate, government contracts are conditioned upon the continuing availability of Congressional appropriations. Congress usually appropriates funds on a fiscal-year basis even though contract performance may extend over many years. Consequently, at the outset of a program, the prime contract is usually partially funded and additional funds are normally only appropriated to the contract by Congress in future years. Fixed-price subcontracts are normally fully funded, but are subject to convenience termination if the prime contract is not funded.
The Company, as are other government contractors, is subject to government investigations of business practices and compliance with government procurement regulations. Although such regulations provide that a contractor may be suspended or debarred from government contracts under certain circumstances, and the outcome of pending government investigations cannot be predicted with certainty, management is not currently aware of any such investigations that it expects will have a material adverse effect on the Company. In addition, the Company carries out proactive compliance programs focused on areas of potential exposure.
Orders for certain products sold to general and commercial aviation customers mainly consist of relatively short-term and frequently renewed commitments. Government procurement agencies generally issue contracts covering relatively long periods of time. Total backlog for products and services for both government and commercial contracts was $4,514 million at December 31, 1996 and $4,523 million at December 31, 1995 of which U.S. and foreign government orders were $1,906 million and $1,871 million for the respective years. The Company anticipates that approximately $3,562 million of the total 1996 backlog will be filled during 1997.
The Aerospace segment's international operations consist primarily of exporting U.S. manufactured products and systems, performance of services that include operating aircraft repair and overhaul facilities, and licensing activities. The principal manufacturing facility outside of the U.S. is in Canada.
AUTOMOTIVE
The Automotive segment designs, engineers, manufactures and distributes systems and components for worldwide vehicle manufacturers and aftermarket customers.
Following is a description of the major Automotive businesses:
On April 12, 1996, the Company sold a major component of its worldwide braking business to Robert Bosch Gmbh, a privately held German company, for $1.5 billion in cash, subject to certain post-closing adjustments. Included in the sale were the worldwide light-vehicle and medium-heavy
truck hydraulic braking and ABS businesses. These businesses had 1995 sales of approximately $2.0 billion. Excluded from the sale were the brake friction materials business, brake-related sales to the independent aftermarket and the truck brake systems business which is part of a joint venture with Knorr-Bremse AG of Germany.
In February 1997, the Company and Knorr-Bremse AG, agreed in principle to purchase the heavy-truck air brake systems business of Echlin Inc. in the United States and Europe, as well as Echlin's U.S.-based commercial vehicle friction materials and aftermarket brake shoe relining operations. The businesses to be acquired have sales of about $320 million. The proposed acquisition is subject to review by government agencies in the U.S. and Europe.
Automotive operations are located in the U.S., Australia, Brazil, Canada, China, France, Germany, India, Ireland, Italy, Japan, Malaysia, Mexico, South Korea, Spain and the United Kingdom. Distribution and marketing are conducted in these and numerous other countries as well. The segment's operations outside the U.S. are conducted through various foreign companies in which it has interests ranging from minor to complete control. International operations also include the exporting of U.S. manufactured products and licensing activities. Internationally, products are marketed under the Bendix, Fram, Autolite, Garrett and Jurid trademarks.
Excluding the impact of the divested braking business from both years, worldwide passenger car and truck OE sales accounted for approximately 50% and 48% in 1996 and 1995, respectively, of the total sales of the Automotive segment with aftermarket sales, including OES sales, accounting for the balance. In 1996 and 1995, Automotive operations outside the U.S. accounted for $1,583 and $1,531 million, respectively, or 43% in both years, of total Automotive sales. Total worldwide sales for 1996 and 1995 to the Company's five largest automotive manufacturing customers amounted to $1,099 and $1,016 million, or 30% and 28%, respectively, of total Automotive sales.
The Automotive segment's products are sold in highly competitive markets to customers who demand performance, quality and competitive prices. Virtually all automotive components are sold in competition with other independent suppliers or with the captive component divisions of the vehicle manufacturers. While the Company's competitive position varies among its products, the Company believes it is a significant factor in each of its major product markets.
ENGINEERED MATERIALS
The Engineered Materials segment manufactures chemicals, fibers, plastics and advanced materials with applications for numerous industries, including automotive, carpeting, refrigeration, construction, electronics, computers and utilities.
Following is a description of the major Engineered Materials businesses:
Engineered Materials' three major businesses are aligned around markets, customers and common technologies. Brand identity, service to customers and quality are important competitive factors in the market and there is considerable price competition.
The Montreal Protocol (Protocol), which was signed by the United States, regulates worldwide chlorofluorocarbons (CFC) production and consumption. With few exceptions, the Protocol required 100% elimination of fully halogenated CFC production by industrialized countries as of December 31, 1995. The amended U.S. Clean Air Act also regulates CFCs and similarly required that most U.S. production of CFCs be phased out by the end of 1995. The Company completed its efforts to develop environmentally safer fluorocarbon products and replaced its CFC product line. The Company has commercialized key CFC substitute products in various applications, including automotive air conditioning and residential, commercial and industrial refrigeration. The Company is continuing its research and development efforts in view of the changing regulatory environment in which it operates. The Company cannot predict the impact of possible future regulatory issues.
Engineered Materials operations are mainly located in the U.S., France and Germany. Polymers and Specialty Chemicals manufacturing facilities are also located in the Netherlands; Electronic Materials maintains facilities in Southeast Asia, including Taiwan, Singapore, Thailand and South Korea. Engineered Materials also has significant exports worldwide.
The Engineered Materials segment also includes the following other businesses: carbon materials, environmental catalysts and specialty films. The carbon materials business produces binder pitch for electrodes for the aluminum and carbon industries, creosote oils as preservatives for the wood products and carbon black markets, refined naphthalene as a chemical intermediate, and driveway sealer tar and roofing pitch for the construction industry. The environmental catalysts business is a major worldwide supplier of catalysts used in catalytic converters for automobiles. In November 1994, the Company and General Motors Corporation formed a joint venture to produce coated automotive catalytic converter substrates. Major products in the specialty films business include cast nylon (Capran'r'), biaxially oriented nylon film (Capran Emblem'r') and fluoropolymer film (Aclar'r'). Specialty film markets include food, pharmaceutical, and other packaging and industrial applications.
SEGMENT FINANCIAL DATA
Note 25 (Segment Financial Data) of Notes to Financial Statements in the Company's 1996 Annual Report to shareowners is incorporated herein by reference.
DOMESTIC AND FOREIGN FINANCIAL DATA
Note 26 (Geographic Areas -- Financial Data) of Notes to Financial Statements in the Company's 1996 Annual Report to shareowners is incorporated herein by reference.
OTHER RECENT DEVELOPMENTS
The Company has undertaken certain repositioning actions that require employee and asset relocation, plant integration and capital improvements. The repositioning actions are generally expected to be completed by 1998.
FOREIGN ACTIVITIES
The Company's foreign businesses are subject to the usual risks attendant upon investments in foreign countries, including nationalization, expropriation, limitations on repatriation of funds, restrictive actions by local governments and changes in foreign currency exchange rates.
The Company's principal foreign manufacturing operations are in Australia, Brazil, Canada, France, Germany, Ireland, Italy, Japan, Mexico, Portugal, South Korea, Spain, Singapore, Taiwan, the Netherlands and the United Kingdom. The Company maintains sales and business offices in these and various other countries, including Austria, Belgium, China, Denmark, Finland, Hong Kong, India, New Zealand, Norway, Sweden and Turkey as well as warehousing, distribution and aircraft repair and overhaul facilities to support foreign operations and export sales. Further information about foreign activities is discussed in the segment narratives.
RAW MATERIALS
The principal raw materials used by the Company's segments include: Aerospace -- carbon fiber; electronic, optical and mechanical component parts and assemblies; electronic and electromechanical devices and metallic products; Automotive -- castings, forgings, steel and bar stock, copper, aluminum, platinum and titanium and Engineered Materials -- cumene, natural gas, sulfur, terephthalic acid, ethylene and ethylene glycol, fluorspar, HF, carbon tetrachloride, chloroform, nylon resins, fiberglass, copper foil, platinum, rhodium and coal tar pitch. The Company is producing virtually all of its HF and nylon resin requirements. The principal raw materials used in the Company's operations are generally readily available. The Company is dependent on its suppliers and subcontractors in order to meet commitments to its customers, and many major components and product equipment items are procured or subcontracted with a number of domestic and foreign companies. The Company maintains a qualification and performance surveillance process to control risk associated with such reliance on third parties. The Company believes that sources of supply for raw materials and components are generally adequate.
PATENTS AND TRADEMARKS
The Company owns approximately 9,500 patents or pending patent applications and is licensed under other patents covering certain of its products and processes. It believes that, in the aggregate, the rights under such patents and licenses are generally important to its operations, but does not consider that any patent or patent license agreement or group of them related to a specific process or product is of material importance in relation to the Company's total business.
The Company also has registered trademarks for a number of its products. Some of the more significant trademarks include: AiResearch, Anso, Autolite, Bendix, Bendix/King, Capron, Fram, Garrett, Genetron, Jurid, King and Norplex Oak.
RESEARCH AND DEVELOPMENT
The Company's research activities are directed toward the discovery and development of new products and processes, improvements in existing products and processes, and the development of new uses of existing products.
Research and development expense totaled $345, $353 and $318 million in 1996, 1995 and 1994, respectively. Customer-sponsored (principally the U.S. Government) research and development activities amounted to an additional $536, $536 and $486 million in 1996, 1995 and 1994, respectively.
ENVIRONMENT
The Company is subject to various federal, state and local requirements regulating the discharge of materials into the environment or otherwise relating to the protection of the environment. It is the Company's policy to comply with these requirements and the Company believes that, as a general matter, its policies, practices and procedures are properly designed to prevent unreasonable risk of environmental damage, and of resulting financial liability, in connection with its business. Some risk of environmental damage is, however, inherent in certain operations and products of the Company, as it is with other companies engaged in similar businesses. See the description of the Engineered Materials segment, above, for information regarding regulation of CFCs.
The Company is and has been engaged in the handling, manufacture, use or disposal of many substances which are classified as hazardous or toxic by one or more regulatory agencies. The Company believes that, as a general matter, its handling, manufacture, use and disposal of such substances are in accord with environmental laws and regulations. It is possible, however, that future knowledge or other developments, such as improved capability to detect substances in the environment, increasingly strict environmental laws and standards and enforcement policies thereunder, could bring into question the Company's handling, manufacture, use or disposal of such substances.
Among other environmental requirements, the Company is subject to the federal superfund law, and similar state laws, under which the Company has been designated as a potentially responsible party which may be liable for cleanup costs associated with various hazardous waste sites, some of which are on the U.S. Environmental Protection Agency's superfund priority list. Although, under some court interpretations of these laws, there is a possibility that a responsible party might have to bear more than its proportional share of the cleanup costs if it is unable to obtain appropriate contribution from other responsible parties, the Company has not had to bear significantly more than its proportional share in multi-party situations taken as a whole.
Capital expenditures for environmental control facilities at existing operations were $43 million in 1996. The Company estimates that during each of the years 1997 and 1998 such capital expenditures will be in the $55 to $60 million range. In addition to capital expenditures, the Company has incurred and will continue to incur operating costs in connection with such facilities.
Reference is made to Management's Discussion and Analysis at page 21 of the Company's 1996 Annual Report to shareowners, incorporated herein by reference, for further information regarding environmental matters.
EMPLOYEES
The Company had an aggregate of 76,600 salaried and hourly employees at December 31, 1996. Approximately 53,200 were located in the United States, and, of these employees, about 25% were unionized employees represented by various local or national unions.
ITEM 2.

ITEM 2. PROPERTIES
The Company has 339 locations consisting of plants, research laboratories, sales offices and other facilities. The plants are generally located to serve large marketing areas and to provide accessibility to raw materials and labor pools. The properties are generally maintained in good operating condition. Utilization of these plants may vary with government spending and other business conditions; however, no major operating facility is significantly idle. The facilities, together with planned
expansions, are expected to meet the Company's needs for the foreseeable future. The Company owns or leases warehouses, railroad cars, barges, automobiles, trucks, airplanes and materials handling and data processing equipment. It also leases space for administrative and sales staffs. The Company's headquarters and administrative complex are located at Morris Township, New Jersey.
The principal plants, which are owned in fee unless otherwise indicated, are as follows:
AEROSPACE
Phoenix, AZ (4 plants, 3 fully leased, 1 partially leased) Tempe, AZ Tucson, AZ (partially leased) Torrance, CA (partially leased) Stratford, CT (owned by the U.S. Government and managed by the Company) South Bend, IN Lawrence, KS Olathe, KS Columbia, MD Towson, MD Teterboro, NJ Rocky Mount, NC Rexdale, Ont., Canada (partially leased) Raunheim, Germany
AUTOMOTIVE
Greenville, AL Torrance, CA Fostoria, OH Greenville, OH Jackson, TN Maryville, TN Conde, France Thaon-Les-Vosges, France Colleferro, Italy Glinde, Germany Skelmersdale, United Kingdom
ENGINEERED MATERIALS
Metropolis, IL Baton Rouge, LA Geismar, LA Moncure, NC Philadelphia, PA Pottsville, PA Columbia, SC Chesterfield, VA Hopewell, VA Longlaville, France Seelze, Germany
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
The first and second paragraphs of Note 21 (Commitments and Contingencies) of Notes to Financial Statements at page 35 of the Company's 1996 Annual Report to shareowners are incorporated herein by reference.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Registrant, listed as follows, are elected annually in April. There are no family relationships among them.
- ------------ (a) Also a director.
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PART II.
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market and dividend information for the Registrant's common stock is contained in Note 27 (Unaudited Quarterly Financial Information) of Notes to Financial Statements at page 38 of the Company's 1996 Annual Report to shareowners, and such information is incorporated herein by reference.
The number of record holders of the Registrant's common stock is contained in the statement 'Selected Financial Data' at page 39 of the Company's 1996 Annual Report to shareowners, and such information is incorporated herein by reference.
On July 10, 1996, the Company acquired Electron Vision Inc. in exchange for 148,941 shares of common stock. Because the fairness of this transaction had been approved by the California Department of Corporations, the transaction was exempt from registration pursuant to Section 3(a)(10) of the Securities Act of 1933, as amended (the 'Act').
On October 3, 1996, in exchange for 143,355 shares of its common stock, the Company acquired the assets of Lori, Inc. from The Nordam Group Inc. ('Nordam'). Because Nordam is an 'accredited investor' within the meaning of Rule 501(a)(3) under the Act, the common shares of the Company transferred to Nordam in this transaction were not registered under the Act, in reliance on Rule 506 under the Act.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
The information included under the captions 'For the Year' and 'At Year-End' in the statement 'Selected Financial Data' at page 39 of the Company's 1996 Annual Report to shareowners is incorporated herein by reference.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
'Management's Discussion and Analysis' on pages 19 through 25 of the Company's 1996 Annual Report to shareowners is incorporated herein by reference.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements, together with the report thereon of Price Waterhouse LLP dated January 31, 1997 appearing on pages 26 through 38 of the Company's 1996 Annual Report to shareowners, are incorporated herein by reference. With the exception of the aforementioned information and the information incorporated by reference in Items 1, 3, 5, 6 and 7, the 1996 Annual Report to shareowners is not to be deemed filed as part of this Form 10-K Annual Report.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable
PART III.
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to directors of the Registrant, as well as information relating to compliance with Section 16(a) of the Securities Exchange Act of 1934, will be contained in a definitive Proxy Statement involving the election of directors which the Registrant will file with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after December 31, 1996, and such information is incorporated herein by reference. Certain other information relating to Executive Officers of the Registrant appears at pages 14 and 15 of this Form 10-K Annual Report.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation is contained in the Proxy Statement referred to above in 'Item 10. Directors and Executive Officers of the Registrant,' and such information is incorporated herein by reference.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to security ownership of certain beneficial owners and management is contained in the Proxy Statement referred to above in 'Item 10. Directors and Executive Officers of the Registrant,' and such information is incorporated herein by reference.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not Applicable
PART IV.
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(2.) Consolidated Financial Statement Schedules
The two financial statement schedules applicable to the Company have been omitted because of the absence of the conditions under which they are required.
(a)(3.) Exhibits
See the Exhibit Index to this Form 10-K Annual Report. The following exhibits listed on the Exhibit Index are filed with this Form 10-K Annual Report:
The exhibits identified in the Exhibit Index with an asterisk(*) are management contracts or compensatory plans or arrangements.
(b) Reports on Form 8-K
During the three months ended December 31, 1996, reports on Form 8-K were filed on November 26 and December 16, in each case reporting, under Item 9, unregistered sales of the Company's Common Stock in reliance on Regulation S under the Act.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized.
AlliedSignal Inc.
February 28, 1997 By: /s/ NANCY A. GARVEY ---------------------------------- Nancy A. Garvey Vice President and Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this annual report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated:
Name Name - ----------------------------------------- ------------------------------------
* * - ----------------------------------------- ------------------------------------- Lawrence A. Bossidy Ivan G. Seidenberg Chairman of the Board and Chief Executive Director Officer and Director
* * - ----------------------------------------- ------------------------------------- Hans W. Becherer Andrew C. Sigler Director Director
* * - ----------------------------------------- ------------------------------------- Ann M. Fudge John R. Stafford Director Director
* * - ----------------------------------------- ------------------------------------- Paul X. Kelley Thomas P. Stafford Director Director
* * - ----------------------------------------- ------------------------------------- Robert P. Luciano Robert C. Winters Director Director
* * - ----------------------------------------- ------------------------------------- Robert B. Palmer Henry T. Yang Director Director
* - ----------------------------------------- Russell E. Palmer Director
/s/ RICHARD F. WALLMAN /s/ NANCY A. GARVEY - ----------------------------------------- ------------------------------------- Richard F. Wallman Nancy A. Garvey Senior Vice President and Vice President and Controller Chief Financial Officer (Chief Accounting Officer)
*By: /s/ RICHARD F. WALLMAN - ----------------------------------------- (Richard F. Wallman Attorney-in-fact)
February 28, 1997
EXHIBIT INDEX
The Exhibits identified above with an asterisk(*) are management contracts or compensatory plans or arrangements.
STATEMENT OF DIFFERENCES ------------------------
The registered trademark symbol shall be expressed as ...... 'r'