<PAGE> 1
SUNDSTRAND CORPORATION ANNUAL REPORT - 1998
Sundstrand Corporation is a manufacturer of highly engineered products
and systems for aerospace and industrial applications around the world.
Our vision is to be a sought-after company based on delivering
exceptional value to our investors, our customers, our suppliers, and our
people.
At Sundstrand, leadership is an opportunity for everyone. It is not
about position -- individual leadership is about responsibility, behavior and
ownership.
We achieve sought-after status through the strengths of our people and
their commitment to a core set of operating principles -- SIMPLIFY, FOCUS and
TRUST.
<PAGE> 2
1998 PERFORMANCE
Pie charts
Pie Chart 1 - Aerospace 61% and Industrial 39%
Pie Chart 2 - Commercial 85% and Military 15%
Pie Chart 3 - Domestic 59% and International 41%
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
Sales (millions of dollars)
<S> <C> <C> <C> <C> <C>
Aerospace 1,229 1,001 785 726 710
Industrial 776 751 736 747 663
----- ----- ----- ----- -----
Total sales 2,005 1,752 1,521 1,473 1,373
===== ===== ===== ===== =====
Net Earnings From Continuing
Operations
(millions of dollars)
Reported 226 188 114 79 96
Restructuring 1 1 26
Operating Cash Flow Per Share 5.88 4.18 2.74 3.14 1.65
Before Capital Spending
(dollars)
Diluted Earnings Per Share From
Continuing Operations
(dollars)
Reported 3.99 3.13 1.86 1.25 1.46
Restructuring .02 .02 .43 .64 --
Return on Average Equity .42 .35 .23 .16 .19
After Taxes
(percent)
</TABLE>
This Summary Annual Report contains forward-looking information which is subject
to market risks and opportunities that could have a material impact on actual
results, and accordingly should be considered in conjunction with the cautionary
language set forth in Sundstrand's most recent report on Form 8-K which is on
file with the Securities and Exchange Commission.
<PAGE> 3
TO OUR SHAREHOLDERS
Sundstrand had another outstanding year in 1998. Despite softness in global
industrial markets, as well as in Asian aerospace markets, we once again set
records in all major performance categories. The momentum we began three years
ago in creating a "sought-after" company continues to build.
1998 HIGHLIGHTS AND OBSERVATIONS
(Results before restructuring and other one-time items)
Our 1998 sales grew 14% to a record $2.0 billion. Our international
business continued strong with 41% of total sales, or $831 million, coming from
non-U.S. customers. We remain committed to strengthening and growing our
presence in all global markets.
(Quote) "Our 1998 net earnings were at record levels..."
Our 1998 net earnings were at record levels of $227 million, growing
26% over 1997. This growth, along with share repurchases, resulted in diluted
earnings per share of $4.01, up from $3.00 in 1997... an increase of 34%.
One of our company's great strengths is our cash flow. During 1998, we
generated $333 million in cash flow from operations. This amount represents an
increase of 32% over 1997. For 1999, our operating cash flow generation is
expected to be between $330 million and $370 million. During 1998, we
repurchased 3,701,700 shares. As a result, at the end of the year, we had
approximately 10 million shares remaining in our Board-approved repurchase
authorization, or approximately 18% of the 54.4 million shares outstanding.
The only disappointing note this past year was the performance of our
share price, which increased only slightly compared with 1997. We believe the
market is substantially undervaluing our shares due to concerns about the
aerospace cycle and the production forecast changes Boeing announced in
December. While Boeing is an important customer of ours, they represent only
about 10% of 1998 total Sundstrand sales and much less than 10% of our profit.
Our overall market position is stronger than ever, and we remain very confident
in our ability to outperform the cycle. Of particular significance is the role
of our aftermarket business, which makes up about 47% of total Aerospace sales
and a much larger percentage of profits. We have great confidence in our future
performance and expect to use our growing cash flow to continue our aggressive
share repurchase program.
AEROSPACE
Our Aerospace group had outstanding results in 1998. Sales grew 23% to
$1,229 million, with operating profit of $272 million, resulting in an operating
margin of 22.1%. Contained within these results are important improvements in
customer deliveries and service, as well as in cycle times and inventory turns.
We expect continued progress in our work to establish our manufacturing
capabilities as a formidable competitive advantage - equal to our global
reputation for engineering and service excellence.
The strength of passenger travel and freight traffic markets continued
this past year. Our installed product base on commercial and military aircraft
provides us with very great aftermarket strength, and we expect continued strong
traffic growth in 1999 and beyond. We added to our aftermarket service
capability during 1998 with the acquisition of Shannon Aircraft Motor Works,
which has operations in Ireland, France and Canada.
(Quote)
"Our sales to airplane manufacturers grew 31% in 1998..."
Our sales to airplane manufacturers grew 31% in 1998 and are expected
to continue to grow in 1999 as deliveries to the world's airlines continue at
high levels. In addition, the growing regional jet market is an important new
market for our future. Our content on these aircraft is significant, and we
expect continued strength and expansion of this market over the next several
years.
During 1998, we created important organization focus in our aerospace
business through the formation of four major business units: Electric Systems,
Mechanical Systems, Power Systems and Customer Service (aftermarket). From these
four units, we've formed 19 enterprises focused on
- 1 -
<PAGE> 4
TO OUR SHAREHOLDERS
specific products and markets. This focus is creating greater intimacy with
customers, with market opportunities, and in focusing our manufacturing
resources. One benefit of this organization focus is acquisitions which fit
particularly well with our strengths. During 1998, Keystone Engineering joined
Sundstrand as part of our Missile, Space and Undersea Systems enterprise.
Keystone provides fuel tanks for satellites and launch vehicles, enjoying a
reputation for exceptional quality and engineering. While we've seen many
tangible benefits during 1998 from our decentralized strategy, we believe the
best is yet to come.
For 1999, we expect our Aerospace group to grow total sales 5 to 10%,
with operating margins in the 22 to 23% range.
INDUSTRIAL
Our Industrial group began to experience the effects of the Asian
slowdown toward the end of 1997. Based upon some very focused acquisitions and
continued new product market work, we grew sales 3% for the year, despite
significant softening in our primary markets -- petrochemical, paper/pulp,
hydrocarbon exploration/processing, and mining. The businesses acquired during
the year include Ansimag in the U.S. (lined specialty pumps), Goninan Mining
Services Division in Australia (gear sets and gear drives), MASO Process Pumpen
in Germany (specialty pumps), Robin in France (industrial mixers) and Williams
Instrument in the U.S. (metering pumps).
Our core Industrial businesses continued to invest in new product
development and market rate of demand initiatives in 1998. As a result of these
investments, coupled with market pricing pressures and the absorption impact of
inventory reductions, our operating profit margin slipped to 15.5%, and our
operating profit of $120 million decreased 3% from 1997 levels.
We do not anticipate improvement in our primary market conditions
during the coming year. Nonetheless, with the full-year impact of our previous
acquisitions, our product/market growth initiatives and our operating
improvement programs, we believe we will grow our total 1999 sales up to 5% with
operating margins of approximately 15%.
OUR FUTURE
Sundstrand's history as a manufacturer of highly engineered products
and systems for global aerospace and industrial customers continues to be the
foundation for our future. This heritage guides us as we develop new
technologies, new products and new markets. It also guides us as we consider
complementary acquisitions.
(Quote) "Our goal is to be widely recognized as a `sought-after' company based
upon exceeding expectations..."
Our goal is to be widely recognized as a "sought-after" company based
upon exceeding the expectations of our investors, our customers, our suppliers
and our people. We value individual leadership as a primary cultural driver,
believing that leadership is not about position or title but about
responsibility.
We remain consistently committed to our operating principles of
Simplify, Focus and Trust. We employ these principles through a decentralized
organization structure which is currently made up of over 40 business
enterprises focused around products or markets. It is our people's sense of
ownership in their businesses and their daily commitment to execute which gives
us our ability to outperform economic cycles.
The officers and people of Sundstrand thank our shareholders for their
support.
Robert H. Jenkins
Chairman of the Board,
President and
Chief Executive Officer
- 2 -
<PAGE> 5
(Photo of Patrick Thomas, Mary Ann Hynes, Robert Jenkins, Ronald McKenna, and
Paul Donovan)
[Caption]
Patrick L. Thomas, Executive Vice President and Chief Operating
Officer, Industrial;
Mary Ann Hynes, Vice President, General Counsel and Secretary;
Robert H. Jenkins, Chairman of the Board, President and Chief
Executive Officer;
Ronald F. McKenna, Executive Vice President and Chief Operating
Officer, Aerospace;
Paul Donovan, Executive Vice President and Chief Financial Officer.
- 3 -
<PAGE> 6
SUNDSTRAND AT A GLANCE
AEROSPACE
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998 Aerospace
- ---- ---- ---- ---- ---- ---------
<S> <C> <C> <C> <C> <C>
$710 $726 $785 $1,001 $1,229 Sales (millions)
</TABLE>
PRODUCTS AND SERVICES
ELECTRIC SYSTEMS
Electric Power Generating, Distribution and Control Systems including
Generators, Solid State Power Controls, Integrated Drive Generators, and
Constant Speed Drives
MECHANICAL SYSTEMS
Actuation Systems; Secondary and Emergency Power Systems; Engine and Airframe
Transmissions and Pumps; Motors; Torpedo Propulsion; and Space Systems
POWER SYSTEMS
Auxiliary Power Units; Gas Turbine Engines; Fans; and Environmental Control
Systems
CUSTOMER SERVICE
Creating satisfied customers with on-site technical service, logistics support
and repair services.
OPERATING PERFORMANCE
1998 PRIMARY MARKETS
Pie Chart
Military OEM 18%
Military Aftermarket 9%
Commercial Aftermarket 38%
Commercial OEM 35%
INDUSTRIAL
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998 Industrial
- ---- ---- ---- ---- ---- ----------
<S> <C> <C> <C> <C> <C>
$663 $747 $736 $751 $776 Sales (millions)
</TABLE>
PRODUCTS AND SERVICES
THE FALK CORPORATION
Gear Drives; Shaft Couplings; Large Open Gear Sets; and Alloy Steel Castings
MILTON ROY COMPANY
Mixing Equipment; Metering and Specialty Pumps
SUNDSTRAND FLUID HANDLING CORPORATION
Heavy-Duty API Pumps; Process Gas Compressors; High-Pressure Pumps; Sealless
Canned Motor Pumps; Sealless Lined and Metallic Magnet Drive Pumps; and Sanitary
Positive Displacement Pumps
SULLAIR CORPORATION
Rotary Screw Air and Gas Compressors; Pneumatic Tools; Vacuum Systems; and
Dryers and Filters
<PAGE> 7
1998 PRIMARY MARKETS
Pie Chart
Construction & Cement 15%
Mining & Metals 11%
Chemical 10% Water/Waste Treatment 8%
Wood & Paper 6%
Agribusiness 5%
Other 3%
Consumer 3%
Food, Beverage & Pharmaceutical 2%
Transportation 1%
General Industry 19%
Hydrocarbon 17%
- 4 -
<PAGE> 8
OPERATING PERFORMANCE
AEROSPACE
Bar Charts (four total)
<TABLE>
<CAPTION>
Sales Operating Profit
(millions of dollars) (millions of dollars)
<S> <C>
1994 - 710 1994 (Reported) - 88
1995 - 726 1995 (Reported) - 54 and (Restructuring) - 54
1996 - 785 1996 (Reported) - 138 and (Restructuring) - 5
1997 - 1,001 1997 (Reported) - 209
1998 - 1,229 1998 (Reported) - 272
Orders Received Unfilled Orders
(millions of dollars) (millions of dollars)
1994 - 527 1994 - 572
1995 - 896 1995 - 599
1996 - 822 1996 - 806
1997 - 1,266 1997 - 1,071
1998 - 1,176 1998 - 1,018
</TABLE>
INDUSTRIAL
Bar Charts (four total)
<TABLE>
<CAPTION>
Sales Operating Profit
(millions of dollars) (millions of dollars)
<S> <C>
1994 - 663 1994 (Reported) - 106
1995 - 747 1995 (Reported) - 121 and (Restructuring) - 4
1996 - 736 1996 (Reported) - 84 and (Restructuring) - 32
1997 - 751 1997 (Reported) - 128 and (Restructuring) -2
1998 - 776 1998 (Reported) - 118 and (Restructuring) - 2
Orders Received Unfilled Orders
(millions of dollars) (millions of dollars)
1994 - 625 1994 - 148
1995 - 761 1995 - 162
1996 - 735 1996 - 161
1997 - 745 1997 - 156
1998 - 758 1998 - 137
</TABLE>
- 5 -
<PAGE> 9
AEROSPACE
1998 WAS AN OUTSTANDING YEAR FOR SUNDSTRAND AEROSPACE. ALONG WITH RECORD SALES
AND PROFITS, THERE WERE SIGNIFICANT CONTRACT AWARDS THAT WILL HELP ENSURE A
SOLID FUTURE IN MANY PRODUCT LINES. SIGNIFICANT EVENTS IN 1998 INCLUDED:
- - The integrated electric system for the Fairchild Aerospace 728JET, a
70-passenger regional jet. This system is the most functionally complete that we
have developed. It includes new Integrated Drive Generators, primary and
secondary distribution, utility management and the emergency air-driven
generator.
- - A contract to design and develop an integrated gearbox/accessory package for
the new Pratt and Whitney PW 6000 engine.
- - Selection by several world airlines of our APS 3200 Auxiliary Power Unit (APU)
for the Airbus A320 family of aircraft, which has made our unit the most
preferred option. In addition, Embraer selected our APS 500 APU for the new
ERJ-135 regional jet.
- - In 1998, the Aerospace group expanded in new directions and new markets while
concentrating on customer service. We continued to improve our product
reliability, service levels to our customers and to broaden our range of
products serviced by offering innovative solutions.
- - We signed a 10-year, on-site service support contract with American Airlines
to improve repair processes and return-to-service reliability. This will serve
as a model for other major airlines.
- - The Shannon Aircraft Motor Works acquisition fits well with our strategy to
grow our repair business in the European region. Shannon, with repair centers in
Ireland, France and Canada, will rewind generators and motors for both
Sundstrand and non-Sundstrand equipment.
- - We acquired Keystone Engineering in Los Angeles, California. Keystone is an
industry leader in the manufacturing of spin-formed titanium tanks and other
structures for satellites and launch vehicles. This expands our involvement in
space, allowing us to be a more significant participant in the growing market of
satellites and launch vehicles.
- - Very significantly, we are accelerating the transition of our Aerospace
manufacturing sites to market rate of demand (MRD) operations. Reconfiguring our
workflow already has yielded significant savings in cycle times and inventory.
In 1998, our inventory levels were reduced 16% while sales grew by 23%. Our MRD
technology will provide the basis for significant future increases in cash flow
and efficiency.
In our efforts to grow and to be sought-after, we continue to implement
initiatives that improve our products, our service and our business processes.
We are confident about our ability to outperform the aerospace cycle.
(Photo of two men)
[Caption]
Mike Campa (left) and Attila Szabo of Keystone Engineering show two sizes of
thin-wall titanium propellant tanks for space launch vehicles.
(Photo of four people)
[Caption]
(l-r) Willie Smith, Richard Nagel, Sandy Klotz, and John Spencer, members of the
11th Street Repair Center team in Rockford, Illinois, take pride in their fast
turnaround time for aircraft generating systems.
(Photo of five people)
[Caption]
Part of the Power Systems team, who build auxiliary power engine start systems
for the Saab JAS-39 Gripen fighter, are pictured with the product: (l-4) Eric
Nager, Dan Sapiro, Joan Inlow, Paul Hilgeman, and Mark Baken.
- 6 -
<PAGE> 10
(Photo of two men)
[Caption]
Bob Miller (left) and Craig LeGros of Rockford, Illinois, check an Integrated
Drive Generator on test for the Airbus A320 family/A340 improved IDG program.
(Photo of woman assembling)
[Caption}
Paula Cates assembles a TFE 731 engine main fuel pump in the Rockford, Illinois,
engine accessory system market rate of demand manufacturing cell.
(Photo of rewind and repair services facilities)
[Caption]
Shannon Aircraft Motor Works provides rewind and repair services for aircraft
electromagnetic equipment at facilities in Ireland, France and Canada.
(Photo of two men)
[Caption]
Ed Smith (left) and Michael Schneider of Rockford, Illinois, are helping to
develop a new electrohydraulic actuation system for next generation aircraft.
(Photo of four people)
[Caption]
(l-r) Aerospace Rockford, Illinois, employees Larry Ackerman, Steve Schoenberg,
Will Clark, and Theresa Wahl demonstrate supply chain inventory reduction
techniques with the "just-in-time" game.
- 7 -
<PAGE> 11
ELECTRIC SYSTEMS
BUSINESS JETS AND AIRLINE REGIONAL JETS REQUIRE INNOVATIVE ELECTRIC SYSTEMS TO
ATTAIN BOTH THE LOWEST WEIGHT AND TOTAL LIFE COST. OUR INTEGRATED ELECTRIC
SYSTEMS ELIMINATE HUNDREDS OF WIRES AND DOZENS OF COMPONENTS REQUIRED BY EARLIER
SYSTEM DESIGNS.
Integrated systems save aircraft manufacturers and operators weight,
cost, and labor for assembly, testing and line maintenance. These systems also
automate functions that otherwise would require pilot intervention so aircraft
operation is simplified.
Sundstrand Aerospace tailors these integrated systems to meet the
individual needs of each aircraft by supplying constant frequency, variable
frequency, high-voltage direct current, or hybrid output electrical power.
Customers prefer our automated power management systems regardless of what type
generator is on the aircraft.
Whatever the power supply, Sundstrand integrated and automated systems
provide aircraft manufacturers and airline operators both technical and economic
advantages over competing designs. To date, these systems have been selected by
U.S., Canadian and European manufacturers for commercial transport, defense, and
business jet programs.
(Photo of three people)
[Caption]
(l-r) J. Brian Pelc, Brian Palmer and Anne Taylor are part of the team producing
the Integrated Drive Generators in the Electric Systems cell in Rockford,
Illinois.
(Photo of Integrated Drive Generator and Control unit with Canadair airplane)
[Caption]
Sundstrand Integrated Drive Generators and controls are used on Canadair
RJ-100/200s, the first 50-passenger regional jets. Similar systems are used on
the new RJ-700 jets.
(Photo of integrated electric system and Boeing 717 airplane)
[Caption]
Sundstrand's integrated electric system for the Boeing 717 uses an integrated
primary distribution system, which provides greater functional capability at
less weight and cost.
- 8 -
<PAGE> 12
(Photo of Fairchild Aerospace 728JET airplane and integrated electric power
generating and total distribution system)
[Caption]
The constant frequency Sundstrand integrated electric power generating and total
distribution system on the new 70-passenger Fairchild Aerospace 728JET aircraft
will provide higher system functionality and reliability with less weight and
fewer components.
(Photo of Raytheon Hawker Horizon airplane and variable frequency electrical
generation, distribution and utility management system)
[Caption]
The Raytheon Hawker Horizon business jet will use the variable frequency
Sundstrand electrical generation, distribution and utility management system.
- 9 -
<PAGE> 13
ELECTRIC SYSTEMS
TODAY, SUNDSTRAND'S LOWER-MAINTENANCE, LIGHTER-WEIGHT ELECTRIC SYSTEMS SUPPLY
MORE POWER AND PERFORM MORE FUNCTIONS ON AIRCRAFT THAN EVER BEFORE.
With "functional integration" fewer components are required for the
entire aircraft electric system. This discipline reduces the system's weight and
the labor to build and maintain the aircraft.
Our proprietary systems approach replaces numerous commodity-type
components that historically aircraft manufacturers bought from many different
sources. This saves both airframers and the airlines time and money because
fewer parts are needed from fewer suppliers.
This concept applies to all types of new jet aircraft worldwide. Our
electric power generating systems, with ever increasing reliability, are the
standard in the industry. In addition to generating electric power, we now
provide the distribution and management of that power throughout the aircraft.
Also, our aftermarket upgrade programs improve the service lives of existing
systems.
(Photo of three men)
[Caption]
(l-r) Toan Chu Nguyen, Terry Welsh and Jim Peck use an automated cell to machine
finished housings for Integrated Drive Generators in Rockford, Illinois.
(Photo of Airbus A330-200 airplane and Integrated Drive Generator-based constant
frequency electric power system)
[Caption]
The new Airbus A330-200 widebody twin transport uses a Sundstrand Integrated
Drive Generator-based constant frequency electric power system.
(Photo of Boeing 737 airplane and Integrated Drive Generator-based constant
frequency electric power system)
[Caption]
The new generation Boeing 737 family of single-aisle transports relies on our
Integrated Drive Generator-based constant frequency electric power system.
- 10 -
<PAGE> 14
(Photo of Lockheed Martin C130J airplane and secondary power distribution
assembly)
[Caption]
Sundstrand's automated electric power management system saves hundreds of pounds
of wiring for the Lockheed Martin C-130J transport aircraft. The secondary power
distribution assembly shown is one of 13 Sundstrand units on the C-130J.
(Photo of Eurofighter EF 2000 airplane and Integrated Drive Generator-based
electric power system)
[Caption]
The multinational Eurofighter EF 2000 uses a Sundstrand Integrated Drive
Generator-based electric power system.
(Photo of Lockheed Martin/Boeing F-22 Raptor U.S. Air Force fighter airplane and
hybrid dc/ac main electric power generating system)
[Caption]
The Lockheed Martin/Boeing F-22 Raptor U.S. Air Force air-superiority fighter
depends on a Sundstrand hybrid dc/ac main electric power generating system.
- 11 -
<PAGE> 15
(Photo of four people)
[Caption]
(l-4) Kathy Vigna, Greg Horihan, Les Bevans and Terry Light show off the aerial
refueling pod ram air turbines built by their team in Rockford, Illinois.
(Photo of Airbus A318 and integrated accessory drive system)
[Caption]
The Pratt and Whitney PW 6000 engine, selected for the 100-passenger Airbus
A318, will use the Sundstrand integrated accessory drive system.
(Diagram of Bombardier Global Express airplane with high-lift actuation system)
[Caption]
The Sundstrand high-lift actuation system for the Bombardier Global Express
positions the wing leading edge slats and trailing edge flaps for short runway
takeoff and landing capability. A similar system also is used on the Canadair
RJ-700 regional jet.
- 12 -
<PAGE> 16
MECHANICAL SYSTEMS
MECHANICAL SYSTEMS PRODUCTS INCLUDE: ACTUATION SYSTEMS, EMERGENCY RAM AIR
TURBINES (RAT), TRANSMISSIONS AND PUMPS FOR COMMERCIAL AND MILITARY AIRCRAFT,
TORPEDO PROPULSION SYSTEMS AND LAUNCH AND SPACE VEHICLE SYSTEMS.
The acquisition of Keystone Engineering expanded the scope of
commercial space products at Sundstrand. Keystone is the preferred supplier of
titanium propellant tanks and structures for satellites and launch vehicles.
With Keystone, we are positioned to fully benefit from the rise in the
commercial space market.
New space programs in 1998 included the hydraulic power systems for the
Lockheed Martin Titan IV launch vehicle and the turbopump assembly for the
Boeing Evolved Expendable Launch Vehicle. The new technology Pratt and Whitney
PW 6000 engine, designed for low-cost operation, will use our innovative modular
integrated accessory system, which includes an engine oil tank, accessory drive
transmission, and lube/scavenge and main fuel pumps. The PW 6000 was selected by
Airbus for its new A318 aircraft.
Among significant systems in production in 1998 were undersea
propulsion systems for the U.K. Spearfish and the U.S. Mk 50 programs; the
engine accessory gearbox for the Pratt and Whitney PW 4098 engine; RAT emergency
systems for commercial and military aircraft; and actuation systems for large
commercial transports, regional aircraft and business jets.
Development programs included the air-driven emergency generator for
the Fairchild Aerospace 728JET family of aircraft and the pylon conversion
actuation system for the Bell Agusta BA 609 tiltrotor aircraft.
(Photo of titanium propellant tanks)
[Caption]
Keystone Engineering, a sought-after supplier in space systems, manufactures
spin-formed titanium propellant tanks for commercial satellites and launch
vehicles.
(Photo of two men and PW 4098 engine)
[Caption]
Jim Hyland (left) or Pratt and Whitney and Carl Cacciatore of Sundstrand share
their pride in the PW 4098 engine for the Boeing 777-300, with its Sundstrand
accessory drive transmission.
- 13 -
<PAGE> 17
POWER SYSTEMS
AS A SOUGHT-AFTER COMPANY, WE REMAINED THE MOST PREFERRED SUPPLIER OF AUXILIARY
POWER UNITS (APU) FOR THE AIRBUS A320 FAMILY OF COMMERCIAL TRANSPORTS. IN 1998
THE APS 500 APU WAS SELECTED BY EMBRAER FOR THE ERJ-135, THE NEW 35-PASSENGER
REGIONAL JET.
Our commercial airline APU business continues to grow. The APS series
is preferred by many airlines for performance, value and responsiveness to
customer needs.
The APS 500 APU, which is standard equipment on the Embraer ERJ-145
regional jet, was selected as standard for the new ERJ-135, a 35-passenger
regional jet.
The Boeing 717, which is equipped with our APS 2100 APU, made its first
test flight in 1998 and is scheduled for delivery to airlines in 1999. Since
1991, our APS 2000 APU has proven itself in major airline service worldwide on
Boeing's 737 aircraft family.
Ongoing implementation of market rate of demand manufacturing
initiatives continued at Power Systems in San Diego, California.
Product-centered enterprise organizations and dedicated manufacturing cells
helped us implement aggressive cost control measures and significantly increase
production.
(Photo of eight men from APS 3200 APU cell team)
[Caption]
The following people belong to the APS 3200 APU cell team in San Diego,
California: (front row, l-r): Patrick Varner, Wayne Pleasant, Phil Zisa (back
row, l-r): Fred Madamba, Bruce Gerber, Bill Ake, Lee Bradley and Dave Micele.
(Photo of Saab JAS-39 Gripen fighter airplane and auxiliary power engine start
system)
[Caption]
The Saab JAS-39 Gripen fighter uses the Sundstrand auxiliary power engine start
system.
(Photo of Airbus A320 airplane and APS 3200 APU)
[Caption]
The Sundstrand APS 3200 APU is selected by most airlines for their new Airbus
A320 family aircraft.
- 14 -
<PAGE> 18
(Photo of Boeing 767-400 airplane and vane axial fans)
[Caption]
High-performance Sundstrand vane axial fans are used for avionics cooling, air
circulation and venting on the new Boeing 767-400.
(Photo of Embraer ERJ-135 regional jet airplane and APS 500 APU)
[Caption]
The APS 500 APU in service on the Embraer ERJ-145 also was selected for the new
35-passenger ERJ-135 regional jet.
(Photo of Boeing 717 airplane and APS 2100 APU)
[Caption]
The Boeing 717, equipped with the Sundstrand APS 2100 APU, began flight testing
in 1998.
(Photo of six people and APS 2100 APU)
[Caption]
The Boeing 717 is flying with Sundstrand's APS 2100 APU. Pictured are some of
the APS 2100 cell team members: (l-r) J. P. Foulon, Brent Sherrill, Shelli
Brunk, Bill Pierce, Keith Flitner, and Tim Sullivan.
- 15 -
<PAGE> 19
(Photo of new joint venture repair center in Xiamen, China)
(Photo of seven men)
[Caption]
(standing at left) Ng Pock Too and (seated l-r) Tom Becker, both of Sundstrand,
and Guo Yan from Shaanxi Qinling Aeroelectric Company conclude the agreement for
the new joint venture repair center in Xiamen, China.
(Photo of two repair technicians)
[Caption]
Tony and Harriet Wellbaum are two of 22 Rockford, Illinois, repair technicians
who received FAA Diamond Awards for formal electronics training.
(Photo of three men and Airbus A320 electric power system installation)
[Caption]
Sundstrand's Alain Saumureau (center), Jean-Pierre Brunet (left) and Jacques
Adda of Air France, check an Airbus A320 electric power system installation.
Sundstrand's experienced, user-centered technical support is a key element in
retaining customer preference for our systems.
(Photo of four men)
[Caption]
(far right) Steve Johnson from Repair Services in Rockford, Illinois, discusses
service tips for Integrated Drive Generators with several field service
representatives who support our airline customers. Field service on-site team
members include: (l-r) Zaila Omar from Kuala Lumpur, Malaysia; James Zhao from
Shanghai, China; and Sergio Olguin from Sao Paulo, Brazil.
- 16 -
<PAGE> 20
CUSTOMER SERVICE
(Photo of three men with hardware)
[Caption]
As part of an innovative and cost-effective customer support agreement, Warren
Vaughan (center) from Sundstrand Service Engineering in Rockford, Illinois,
assists American Airlines mechanics Greg Permaul (left) and Rick Campbell at
their maintenance facility with Integrated Drive Generator testing.
AS A SOUGHT-AFTER BUSINESS, AEROSPACE CUSTOMER SERVICE HAS EARNED INDUSTRY
LEADER STATUS IN SERVICE TO AIRLINE CUSTOMERS. THE LEADERSHIP-DRIVEN PEOPLE WHO
COMPRISE CUSTOMER SERVICE MAINTAIN THIS COMPETITIVE ADVANTAGE BY CONTINUALLY
IMPROVING CAPABILITIES AND RESPONSE TIMES.
Despite the current recession in some Asian countries, demand for
repair services continues to grow as airline fleets age. Consequently, in China
groundbreaking for construction of the Xiamen Sundstrand Qinling Aerospace Ltd.
repair center began in 1998. The facility will repair systems on commercial
aircraft operating throughout China.
Our Aerospace repair center in Dijon, France, celebrated its 25th
anniversary by beginning an expansion of the facility and increasing its product
range.
To further broaden our range of products serviced and to improve our
capabilities and responsiveness, we acquired Shannon Aircraft Motor Works.
Repair facilities in Ireland, France and Canada will service both Sundstrand and
non-Sundstrand equipment.
Additionally, we offer repair service agreements, such as
power-by-the-hour that are tailored to individual airlines. Customers, like
American Airlines with their own overhaul facilities, use Sundstrand on-site
support people to manage the spares inventory for a "just-in-time" parts supply.
In 1998, we also added field service technicians in several
international locations where aircraft such as the new regional jets benefit
from local systems support.
(Photo of man and generator rotor)
[Caption]
Jason Quirke balances a generator rotor at Shannon Aircraft Motor Works. This
acquisition expands our capability to respond to customers' electromagnetic
repair requirements.
(Photo of four men and Comair airplane)
[Caption]
(l-r) Brad Considine and Jim Belt of Sundstrand discuss regional jet support
requirements with Curt Ward and Ralph Martin of Comair, the world's leading
operator of Canadair Regional Jets.
- 17 -
<PAGE> 21
AEROSPACE AFTERMARKET
(Photo of Sundstrand Aerospace aircraft applications map)
AS A S0UGHT-AFTER COMPANY, our commitment to defense and civil aviation
worldwide includes readiness to support aircraft systems while the aircraft
remains in service. Often, this means Sundstrand Aerospace supports an aircraft
more than three decades after it was built and a half century after the first of
its type rolled out.
(Photo of man and Boeing 757/767 generator rotor)
[Caption}
REPAIR SERVICES
Tim Mershon repairs a Boeing 757/767 generator rotor in the repair center in
Rockford, Illinois. Airlines depend on Sundstrand for innovative repair
solutions, including fixed-cost and power-by-hour plans, which allow them to
plan forward operating costs.
- 18 -
<PAGE> 22
AEROSPACE AFTERMARKET
(Photo of Sundstrand Aerospace aircraft applications map)
(Photo of woman and DHC-8 flap drive actuators)
[Caption]
END ITEMS
At a Rockford, Illinois, plant, Debbie Penn prepares DHC-8 flap drive actuators
in a market rate of demand (MRD) manufacturing cell. MRD shortens lead times for
spare end items for airlines, business jet operators and defense forces.
(Photo of woman and automated storage and retrieval system)
[Caption]
SPARE PARTS
Penny Johnson scans parts from the automated storage and retrieval system for
fast shipment to customers who do their own maintenance and repair.
- 19 -
<PAGE> 23
INDUSTRIAL
FROM THE MOUNTAINS OF CHILE WHERE FALK(R) RING GEARS PROCESS COPPER AND GOLD IN
SOME OF THE WORLD'S RICHEST MINES, TO THE NORTH SLOPES OF ALASKA WHERE
SUNDSTRAND FLUID HANDLING PUMPS RECOVER OIL FROM ARCTIC RESERVES, SUNDSTRAND
INDUSTRIAL PRODUCTS ARE THERE.
On highways and in hospitals where Sullair (R) compressors provide the
air needed to build roads and purify operating room environments -- from
irrigating wheat-belt farms to monitoring neighborhood swimming pools with
Milton Roy(R) metering pumps, our Industrial products are there.
The product applications of our Industrial group are diverse yet share
similar technologies and philosophies: mechanically engineered, rotating
equipment involving raw material processing, bulk material handling, direct
manufacturing and construction -- all done with precision and a commitment to
performance excellence.
We brought our industrial products to many new markets in 1998 by
acquiring five companies in four countries: we added Ansimag and Williams
Instrument in the U.S., MASO Process Pumpen in Germany, Robin in France and the
Goninan Mining Services Division in Australia. These focused acquisitions
reaffirmed our commitment to the global marketplace, even in challenging times.
World economic conditions, especially in Asia, softened the markets we
serve during 1998. However, most industrial business units grew through
continued implementation of market rate of demand manufacturing processes,
strategic acquisitions and new product introductions.
The Industrial group continued pursuing long-term goals while meeting
short-term customer needs. This focus drove new product development at Falk with
the WRAPFLEX(R) non-lubricated elastomer coupling; at Sullair with the
air-cooled, oil-free compressor; at Milton Roy with the mRoy(R) metering pump;
and at Sundstrand Fluid Handling with the expanded centrifugal process
compressor.
The effectiveness of faster cycle time for product development and
shorter lead times for customers has set us apart from our competition. In each
market, our leadership accelerated based on design, quality and service
performance.
Market conditions in the coming year will remain soft. However, the
strength of our product franchises and our channels that service our customers,
coupled with the impact of our aggressive strategic initiatives, gives us
confidence in our ability to outperform our markets.
(Photo of steel castings)
[Caption]
Steel castings at Falk can be poured at the rate of up to a ton per second. The
electric arc furnace with water-cooled panels can melt a 70-ton heat in 2.5
hours for the production of castings up to 100,000 pounds.
(Photo of man machining components in a flexible cell)
[Caption]
Phillippe Eudet of Dosapro Milton Roy in Pont-Saint-Pierre, France, machines
components in a flexible cell that supplies Dosapro's assembly lines on demand.
- 20 -
<PAGE> 24
(Photo of man monitoring operations at the Kapp grinding installation)
[Caption]
Dan Cole monitors an operation at the Kapp grinding installation for rotors
built at Sullair in Michigan City, Indiana. The rotor is the "heart" of every
SULLAIR(R) air compressor and vacuum system.
(Photo of Sullair team members from MRD encapsulated screw line)
[Caption]
The Industrial group focused on market rate of demand (MRD) manufacturing
initiatives to improve cycle times and reduce inventory. Pictured are Sullair
team members from the MRD encapsulated screw line.
- 21 -
<PAGE> 25
(Photo of MRD line in Standard Products enterprise)
[Caption]
At the MRD line in the Standard Products enterprise, gear drives are fully
assembled and ready for shipment in less than four hours. Previously, this took
in excess of three days. (front to back) Pictured are Todd Koloski, Lee King,
and Mike Wiktorek.
(Photo of Falk helical ring gears)
[Caption]
Routinely, Falk service engineers supervise installations to ensure everything
is right from the start -- as with these 23-foot helical ring gears installed in
a California cement plant.
(Photo of man operating a Hofler Maxima grinder at Falk)
[Caption]
Andy Ostrowski of Falk's Milwaukee, Wisconsin, facility operates a Hofler Maxima
grinder to grind the forged steel teeth on this almost three-foot diameter
pinion.
- 22 -
<PAGE> 26
FALK
AS A SOUGHT-AFTER BUSINESS BY INDUSTRIAL CUSTOMERS, THE FALK CORPORATION
MANUFACTURES A BROAD RANGE OF STANDARD AND CUSTOM-ENGINEERED GEAR DRIVES, SHAFT
COUPLINGS, LARGE OPEN GEAR SETS, AND ALLOY STEEL CASTINGS. FALK SUPPLIES
COMPONENTS AND MECHANICAL SYSTEMS TO A BROAD RANGE OF INDUSTRIES INCLUDING
MINING, CEMENT, PAPER, WOOD PRODUCTS, CHEMICAL, COAL, STEEL, AND POWER.
In 1998, we acquired the Mining Services Division of the
Australian-based A. Goninan & Co., Limited and renamed the division as Falk
Australia Pty. Ltd. As a manufacturer of steel and iron gears used primarily in
mining applications, Falk Australia supports Falk's growth strategy to be a
global supplier to our customers. The acquisition will expand our product lines,
provide new opportunities for our current product lines and improve our
capabilities for service, overhaul and repair in the Australian and South East
Asian markets.
As anticipated, our reorganization efforts in 1997 increased the focus
on simplification efforts in 1998. The Falk men and women who comprise the
Coupling Products, Standard Products, Engineered Products and RENEW(R)
enterprises have been reducing steadily the complexity and redundancy of
business and manufacturing processes from customer orders through product
delivery.
Implementing market rate of demand (MRD) manufacturing in Standard
Products was another significant Falk achievement. By aligning the rate of
manufacturing to near-term customer demand, Standard Products has shortened gear
drive cycle times and decreased inventory.
The metric versions of the A+Plus(R), Ultramax(R) and Quadrive (R) gear
drives were added to our product lines to meet international customer
expectations. In 1998, Coupling Products rolled out the new WRAPFLEX(R)
non-lubricated elastomer coupling to selected customers.
By focusing on MRD, by simplifying processes and by investing in both
people and products, Falk will continue to exceed customer expectations.
(Photo of two men at lime processing plant)
[Caption]
Falk RENEW(R) General Manager Brian Halverson (right) talks with a customer at a
lime processing plant after the installation of a main and auxiliary kiln drive,
which was renewed at Falk's Milwaukee, Wisconsin, facility.
(Photo of two men and WRAPFLEX(R) couplings)
[Caption]
Falk engineers Sean Ash (seated) and Glenn Pokrandt in Auburn, Alabama, discuss
the newly introduced WRAPFLEX (R) coupling that has been accepted
enthusiastically for its low cost and low maintenance features.
(Trade name)
FALK
A Sundstrand Company
- 23 -
<PAGE> 27
MILTON ROY
THE MILTON ROY COMPANY IS A WORLD LEADER IN THE MANUFACTURE OF METERING PUMPS
AND MIXING EQUIPMENT USED IN TREATING AND PURIFYING WATER, IN AGRICULTURAL
APPLICATIONS, IN THE PULP AND PAPER INDUSTRY, AND IN CHEMICAL, OIL AND GAS
PROCESSING.
With manufacturing facilities in the United States, France, Spain and
India, offices in the United Kingdom, Italy, China and Singapore and a global
network of distributors and representatives, we provide exceptional service to
our customers worldwide.
In 1998 we enhanced our sought-after status with two acquisitions. In
the first quarter, Robin Industries S.A., located in Samoreau, France, was
acquired. Robin manufactures custom, highly engineered mixing equipment used
primarily for mineral, chemical and pharmaceutical processing. This acquisition
significantly strengthened our position in the field of fluid mixing.
In the third quarter, the California-based Williams Instrument Company
was acquired. Williams, which will be operated as Williams Instrument
Incorporated, manufactures pneumatically powered mechanical metering pumps for
oil and gas production applications. The acquisition increased our metering pump
product breadth, added a line of proven gas-powered pumps and provided
well-developed oil and gas oriented sales channels.
Milton Roy remains focused on developing new products for increased
market share, simplifying business and manufacturing processes, expanding the
international market base, and implementing market rate of demand manufacturing
for faster customer response times and reductions in inventory.
For instance, the new "Series G" low-pressure pumps and the new
high-pressure mRoy(R) pump designs enable Milton Roy to penetrate new niche
markets. Also, reducing the complexity of business and manufacturing processes
has helped decrease costs and enhance customer service.
Milton Roy, along with the entire Industrial group, will continue to be
committed to outperforming the business cycle now and in the future.
(Photo of offshore oil platform and controlled volume pumps)
[Caption]
Controlled volume pumps, produced at Milton Roy and the newly acquired Williams
Instrument Incorporated, are ideal for a wide range of oil and gas production,
processing and refining applications.
(Trade name)
MILTON ROY
A Sundstrand Company
- 24 -
<PAGE> 28
(Photo of Mexican government pump system and LMI(TM) electronic metering pump
and a DOSAPRO(R) mixer)
[Caption]
The Mexican government uses a pump system utilizing Milton Roy products to
disinfect water for its cholera eradication program. The system pictured
incorporates an LMI(TM) electronic metering pump and a DOSAPRO(R) mixer.
(Photo of industrial mixer)
[Caption]
Robin Industries S.A., located near Paris, is one of Milton Roy's newest
companies. Robin designs and manufactures industrial mixers for chemical and
mineral processing.
(Photo of two men assembling parts and two ice machine pumps)
[Caption]
(l-r) Ed White and Jim Bailey of Milton Roy's Hartell Division are assembling
parts in the market rate of demand manufacturing cell for plumbing products.
(Photo of water treatment station and pumps)
[Caption]
The water treatment station in St. Etienne, France, uses MILROYAL(R) pumps for
dosing and injection of chemicals. The pumps are manufactured at the Dosapro
Milton Roy facility in Pont-Saint-Pierre, France.
- 25 -
<PAGE> 29
(Photo of two men and SINE(R) pumps)
[Caption]
Alexander Raugust (left) and Dietmar Schnattinger of MASO make final adjustments
to SINE(R) pumps before shipment to customers. SINE(R) Pumps are ideal for
shear-sensitive products for industries such as food and beverage, dairy,
cosmetic, and pharmaceutical.
(Photo of two-stage custom compressor)
[Caption]
Sundstrand Compressors, a Sundstrand Fluid Handling Enterprise, offers an
efficient alternative to traditional low-flow process gas handling. The
two-stage custom compressor (shown above) saves customers money, space and time
due to reduced maintenance, compact layout and exceptional delivery time.
(Photo of man assembling a plastic-lined ANSIMAG(R) pump)
[Caption]
Ron Cosico of Ansimag Incorporated in Elk Grove, Illinois, assembles a
plastic-lined ANSIMAG(R) pump designed to operate efficiently in hostile,
high-corrosive liquid environments.
- 26 -
<PAGE> 30
FLUID HANDLING
SUNDSTRAND FLUID HANDLING CORPORATION SERVES THE WORLDWIDE OIL REFINING,
PETROCHEMICAL, NATURAL GAS AND CHEMICAL INDUSTRIES. WITH MANUFACTURING
FACILITIES IN THE UNITED STATES, UNITED KINGDOM, FRANCE, AND GERMANY, AND A
JOINT VENTURE PARTNER NIKKISO/SUNDSTRAND IN JAPAN, WE ARE WELL POSITIONED TO
SUPPORT OUR GLOBAL CUSTOMERS.
In the first quarter of 1998, the acquisition of Ansimag Incorporated
in Elk Grove, Illinois, and MASO Process Pumpen GmbH in Ilsfeld, Germany,
expanded our product offerings and geographic presence.
Ansimag manufactures a line of industry standard non-metallic magnet
drive pumps for the chemical and general process industries. The ANSIMAG(R)
product range and channels to market expand our already wide range of SUNDYNE(R)
Canned Motor Pumps and HMD(R)/Kontro(R) metallic sealless, leakproof pumps.
The MASO(TM) pump uses a unique positive displacement design to pump a
wide range of processed foods, beverages, and shear-sensitive pharmaceutical and
industrial fluids. Now, Sundstrand Fluid Handling and MASO can effectively
market products to meet SINE(R) Pump customer requirements on a worldwide basis.
In addition, we significantly enhanced our line of SUNDYNE(R) Canned
Motor Pumps with the SureView(TM) predictive maintenance monitor. SureView(TM)
is the first monitoring system to directly measure and display overall operating
conditions inside a completely sealed pump and motor enclosure. The SureView(TM)
system helps avoid unexpected failures and reduces maintenance costs.
Another initiative at Sundstrand Fluid Handling was to establish the
SUNDYNE(R) compressor product line as an enterprise. This positions the
Sundstrand Compressor enterprise to meet customer requirements in a rapidly
growing market for advanced centrifugal compressor technology.
Last year, the people at Sundstrand Fluid Handling continued making
great strides to improve their products, business processes, and aftermarket
support to their customers. These improvements are critical to our customers who
want partnerships with people who understand the challenges of competing in the
global marketplace.
(Photo of man inspecting SUNDYNE(R) Canned Motor Pumps)
[Caption]
At a Gulf Coast chemical facility, Gerry Moodt of Sundstrand Fluid Handling
inspects the SUNDYNE(R) Canned Motor Pumps fitted with the new SureView(TM)
predictive maintenance monitor system.
(Trade name)
SUNDSTRAND
FLUID HANDLING
- 27 -
<PAGE> 31
SULLAIR
SULLAIR CORPORATION IS A LEADING WORLDWIDE MANUFACTURER OF ROTARY SCREW AIR
COMPRESSORS AND VACUUM SYSTEMS, COMPRESSED AIR-CONTAMINANT REMOVAL SYSTEMS AND
PNEUMATIC CONTRACTOR TOOLS.
For Sullair, 1998 was a year of positive change. To further enhance
responsiveness and improve efficiency, we decentralized our organizational
structure. Five enterprises were formed to serve customers for Industrial
Products, Construction Products, Parts and Training, Oil-Free Products, and OEM
Air-End Products.
Work processes were improved to further strengthen already excellent
product quality and customer service. Through teams encompassing all
disciplines, order-to-delivery cycle times were reduced and non-value added
tasks eliminated. These and other continuous improvement efforts heightened the
commitment of the workforce to make Sullair a sought-after company in the
marketplace.
The people of Sullair Europe made significant progress during the year
at the worldwide tool manufacturing center in Montbrison, France. By dedicating
themselves to customer service and consolidating the operations into a single
facility, Sullair Europe successfully integrated services, eliminated
operational redundancies, greatly improved response times and efficiencies.
To meet the market demands of China, Sullair launched a product
localization program in 1998. Through this process, local suppliers were
contracted to provide major components for Sullair compressors manufactured at
our Shenzhen, China, facility.
These initiatives combined with an ongoing commitment to
customer-driven product development and superior product support, position
Sullair for growth in the future.
(Photo of newspaper presses at South Bend Tribune and air compressor and
compressed air dryer)
[Caption]
The South Bend Tribune in South Bend, Indiana, relies on Sullair equipment to
publish more than 100,000 newspapers daily. The SULLAIR(R) system, which
consists of an LS-16 air compressor and a compressed air dryer, supplies the
newspaper's presses and related production equipment with clean, dry air.
- 28 -
<PAGE> 32
(Photo of construction worker and SULLAIR(R) paving breaker and 185 cfm portable
compressor)
[Caption]
At an excavation site, a construction worker operates a SULLAIR(R) paving
breaker powered by a SULLAIR(R) 185 cfm portable compressor. This compressor is
the newest model in the product line. It provides the capacity most widely used
in the construction industry.
(Photo of air compressors in final stage of production)
[Caption]
In 1998 Sullair Europe in Montbrison, France, applied market rate of demand
manufacturing to all tool production. During the final stage of production, the
tools are inspected and tested before shipping to customers around the world.
(Trade name)
SULLAIR
A Sundstrand Company
- 29 -
<PAGE> 33
CONDENSED FINANCIAL REPORT
This 1998 summary annual report contains condensed consolidated balance sheets,
statements of earnings and statements of cash flows. Complete consolidated
financial statements, including notes to the consolidated financial statements,
as well as management's discussion and analysis of financial condition and
results of operations, are presented in the company's 1998 Annual Report on Form
10-K.
- --------------------------------------------------------------------------------
Management's Report
The management of Sundstrand is responsible for the preparation and
presentation of the consolidated financial statements and related financial
information included in the Annual Report on Form 10-K. The financial statements
in the Annual Report on Form 10-K have been prepared in conformity with
generally accepted accounting principles consistently applied and, as such,
include amounts based on estimates by management. The consolidated financial
statements have been audited by Ernst & Young LLP, the company's independent
auditors. The condensed statements included in this summary annual report have
been derived from the audited financial statements and are fairly stated in all
material respects in relation to those statements.
Management also is responsible for maintaining a system of internal
accounting controls which is designed to provide reasonable assurance that
assets are safeguarded and that transactions are executed in accordance with
management's authorization and are properly recorded. To assure the maintenance
of effective internal controls, management adopts and disseminates policies,
procedures and directives; selects and trains qualified personnel; establishes
organizational structures which permit the delegation of authority and
responsibility; and maintains an active program of internal audits and
appropriate follow-up by management.
The management of Sundstrand also recognizes its responsibility to
promote a strong ethical climate throughout the company. Toward this end, the
company provides training in ethical decision making to each employee. In
addition, each employee receives a copy of the company's manual on Business
Conduct and Ethics.
The Board of Directors elects an Audit Committee from among its members
who are not employees of the company. The Audit Committee meets periodically
with management, the internal auditors, and the independent auditors to review
the work of each and satisfy itself that they are properly discharging their
responsibilities. Both the independent auditors and internal auditors have free
access to the Audit Committee, without the presence of management, to discuss
internal accounting controls, auditing, and financial reporting matters.
/s/ Robert H. Jenkins /s/ Paul Donovan
Robert H. Jenkins Paul Donovan
Chairman of the Board, Executive Vice President and
President and Chief Financial Officer
Chief Executive Officer
January 25, 1999
- --------------------------------------------------------------------------------
Independent Auditors' Report
To the Shareholders and Board of Directors, Sundstrand Corporation,
We have audited, in accordance with generally accepted auditing
standards, the consolidated balance sheets of Sundstrand Corporation and
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of earnings, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1998. These consolidated financial
statements are included in the Annual Report on Form 10-K of Sundstrand
Corporation and subsidiaries for the year ended December 31, 1998 and have not
been presented herein. In our report dated January 25, 1999 which also appears
in the Annual Report on Form 10-K, we expressed an unqualified opinion on those
consolidated financial statements.
In our opinion, the information in the accompanying condensed
consolidated financial statements appearing on pages 31 through 33 is fairly
stated, in all material respects, in relation to the consolidated financial
statements from which it was derived.
/s/ Ernst & Young LLP
Chicago, Illinois
January 25, 1999
- 30 -
<PAGE> 34
SUNDSTRAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997
- ----------------------- ------- -------
(Amounts in millions except per share data)
<S> <C> <C>
Net sales $ 2,005 $ 1,752
------- -------
Costs and expenses:
Costs of products sold 1,316 1,148
Marketing and administration 317 286
------- -------
1,633 1,434
------- -------
Earnings before other income (deductions) 372 318
Other income (deductions):
Interest expense (35) (30)
Interest income 4 6
Other, net 6 --
------- -------
(25) (24)
------- -------
Earnings before income taxes and cumulative effect of
accounting change 347 294
Less income taxes 121 106
------- -------
Net earnings before cumulative effect of accounting change 226 188
======= =======
Cumulative effect of change in method of accounting for
certain consulting costs, net of taxes -- (5)
Net earnings $ 226 $ 183
Weighted-average number of common shares outstanding 56.2 59.8
Weighted-average number of common shares outstanding--
assuming dilution 56.6 60.2
Basic earnings per share:
Earnings before cumulative effect of accounting change $ 4.02 $ 3.15
Cumulative effect of change in accounting -- (.09)
------- -------
Net earnings $ 4.02 $ 3.06
======= =======
Diluted earnings per share:
Earnings before cumulative effect of accounting change $ 3.99 $ 3.13
Cumulative effect of change in accounting -- (.09)
------- -------
Net earnings $ 3.99 $ 3.04
======= =======
Cash dividends per common share $ 0.68 $ 0.68
======= =======
</TABLE>
- 31 -
<PAGE> 35
SUNDSTRAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997
- ----------------------- -------- --------
(Amounts in millions)
<S> <C> <C>
Cash flow from operating activities:
Net earnings $ 226 $ 183
Adjustments to reconcile net earnings to cash provided by
operating activities:
Depreciation 63 58
Amortization 17 15
Deferred income taxes 11 51
Change in operating assets and liabilities excluding the
effects of acquisitions:
Accounts receivable (48) (13)
Inventories 68 (75)
Other assets 19 (20)
Accounts payable 1 23
Accrued expenses (7) 23
Other (17) 7
-------- --------
Total adjustments 107 69
-------- --------
Net cash provided by operating activities 333 252
-------- --------
Cash flow from investing activities:
Cash paid for property, plant, and equipment (109) (119)
Proceeds from the sale of assets 9 15
Cash paid for acquisitions, net of cash acquired (94) (18)
Cash paid for available-for-sale marketable securities (10) --
Other investing activities 1 1
-------- --------
Net cash used for investing activities (203) (121)
-------- --------
Cash flow from financing activities:
Net borrowings (payments) supported by lines of credit (98) 25
Issuance of short-term notes payable 118 --
Issuance of long-term debt 80 --
Principal payments on long-term debt (7) (4)
Additional debt for acquisitions 4 --
Proceeds from stock options exercised 4 5
Purchase of treasury stock (186) (125)
Dividends paid (38) (41)
-------- --------
Net cash used for financing activities (123) (140)
-------- --------
Effect of exchange rate changes on cash (5) 4
-------- --------
Increase (decrease) in cash and cash equivalents 2 (5)
Cash and cash equivalents at January 1 13 18
-------- --------
Cash and cash equivalents at December 31 $ 15 $ 13
======== ========
Supplemental cash flow information:
Interest paid $ 33 $ 29
Income taxes paid $ 78 $ 74
</TABLE>
- 32 -
<PAGE> 36
SUNDSTRAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31, 1998 1997
- ------------ -------- --------
(Amounts in millions except share data)
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 15 $ 13
Accounts receivable, net 381 326
Inventories, net of progress payments 401 462
Deferred income taxes 53 49
Other current assets 15 30
-------- --------
Total current assets 865 880
Property, Plant, and Equipment, net 527 472
Intangible Assets, net 332 265
Deferred Income Taxes 22 34
Other Assets 61 49
-------- --------
$ 1,807 $ 1,700
======== ========
Liabilities and Shareholders' Equity
Current Liabilities
Notes payable $ 163 $ 143
Long-term debt due within one year 4 9
Accounts payable 128 124
Accrued salaries, wages, and commissions 29 26
Accrued postretirement benefits other than pensions 18 17
Other accrued liabilities 157 148
-------- --------
Total current liabilities 499 467
Long-Term Debt 295 213
Accrued Postretirement Benefits Other Than Pensions 344 357
Other Liabilities 124 121
-------- --------
1,262 1,158
-------- --------
Shareholders' Equity
Common stock, par value $.50 per share;
authorized 150,000,000 shares; issued 1998
and 1997 -- 75,686,028 shares (including shares
in treasury) 38 38
Additional contributed capital 165 160
Retained earnings 1,007 819
Common stock in treasury (at cost); 1998 --
21,284,447 shares and 1997-- 17,598,391 shares (645) (456)
Unamortized value of restricted stock issued (6) (10)
-------- --------
559 551
-------- --------
Accumulated foreign currency translation adjustment (11) (9)
Unrealized gains on marketable securities 1 --
Minimum pension liability adjustment (4) --
-------- --------
Accumulated other comprehensive earnings (14) (9)
-------- --------
545 542
-------- --------
$ 1,807 $ 1,700
======== ========
</TABLE>
- 33 -
<PAGE> 37
(Photo of Directors)
[Caption]
(l-r, front row) J. P. Bolduc, Robert H. Jenkins, Richard A. Abdoo, (center row)
Ilene S. Gordon, Ward Smith, and (back row) Charles Marshall, Berger G. Wallin,
Gerald Grinstein, Klaus H. Murmann
DIRECTORS
<TABLE>
<S> <C>
Robert H. Jenkins (4) Ward Smith (2,3)
Chairman of the Board, Retired Chairman
President and Chief Executive Officer NACCO Industries, Inc.
Sundstrand Corporation Director since 1983
Director since 1995
Richard A. Abdoo (2,4) Berger G. Wallin (1,4)
Chairman, President and Retired Executive Vice President for Special Projects
Chief Executive Officer Sundstrand Corporation
Wisconsin Energy Corporation, and Director since 1995
Chairman and Chief Executive Officer
Wisconsin Electric Power Company (1) Nominating Committee
Director since 1996 (2) Audit Committee
(3) Compensation Committee
J. P. Bolduc (1,3) (4) Finance Committee
Chairman and Chief Executive Officer
JPB Enterprises, Inc.
Director since 1991 OFFICERS
Ilene S. Gordon (2,4) Robert H. Jenkins
Vice President and General Manager Chairman of the Board, President and
Tenneco Packaging Chief Executive Officer
Director since 1997 Elected Chairman of the Board, President and Chief Executive
Officer, April 15, 1997; President and Chief Executive Officer
from October 1, 1995, to April 14, 1997; Executive Vice President,
Illinois Tool Works Inc., from March 1, 1990, to September 30, 1995.
3 years of service
Gerald Grinstein (1,3) Patrick L. Thomas
Non-Executive Chairman of the Board Executive Vice President and Chief Operating Officer, Industrial
of Delta Air Lines, Inc. Elected Executive Vice President and Chief Operating Officer,
Director since 1991 Industrial
January 2, 1995; President of Milton Roy Company from April 1,
1991, to January 1, 1995.
29 years of service
Charles Marshall (1,2) Ronald F. McKenna
Retired Vice Chairman Executive Vice President and Chief Operating Officer, Aerospace
American Telephone and Telegraph Company Elected Executive Vice President and Chief Operating Officer,
Director since 1989 Aerospace May 6, 1996; Vice President of Business Development,
Sundstrand Aerospace from January 28, 1995, to May 6, 1996;
Vice President and General Manager of Sundstrand Aerospace
Electric Power from December 2, 1989, to January 27, 1995.
29 years of service
Klaus H. Murmann (2,3) Paul Donovan
Chairman and Chief Executive Officer Executive Vice President and Chief Financial Officer
Sauer Inc. Chief Financial Officer since December 2, 1988; elected to
Director since 1981 additional position of Executive Vice President August 7, 1990.
10 years of service
</TABLE>
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<PAGE> 38
OFFICERS
<TABLE>
<S> <C>
DeWayne J. Fellows James L. Gingrich
Vice President and Controller Vice President and General Manager, Mechanical Systems
Controller since February 16, 1989; elected to 16 years of service
additional position of Vice President August 7, 1990.
36 years of service
James R. Carlson Gregory J. Hayes
Vice President and Treasurer Vice President, Finance and Business Systems
Elected Vice President and Treasurer November 18, 1997; 9 years of service
Vice President Treasury Operations and Assistant Treasurer
from January 6, 1997, to November 17, 1997; Assistant David J. Linton
Treasurer for more than five years prior to January 6, 1997. Vice President and General Manager, Electric Systems
31 years of service 19 years of service
Neil D. Traubenberg Timothy M. Morris
Vice President, Tax Vice President and General Manager,
Elected Vice President, Tax November 18, 1997; Appointed Sundstrand Power Systems
Vice President, Tax from January 6, 1997, to November 17, 1997; 23 years of service
Tax Director for more than five years prior to January 6, 1997.
18 years of service
Patrick J. Winn James F. Peterson
Vice President, Corporate Human Resources Vice President and General Manager, Customer Service
Elected Vice President, Corporate Human Resources 23 years of service
November 18, 1997; Appointed Vice President, Corporate
Human Resources from September 13, 1997, to James A. Smith
November 17, 1997; for more than five years prior to Vice President, Aerospace Business Development
September 13, 1997, Senior Associate Attorney. 35 years of service
10 years of service
Mary Ann Hynes Gean B. Stalcup
Vice President, General Counsel and Secretary Senior Vice President, Mechanical Operations and Aerospace\
Elected Vice President, General Counsel and Secretary Quality
February 26, 1998; General Counsel of Wolters Kluwer U.S., Inc. 2 years of service
January 1996 to February 1998; General Counsel of CCH
Incorporated for more than five years prior to January 1996.
1 year of service
BUSINESS LEADERS INDUSTRIAL
AEROSPACE Anson S. Coolidge
Vice President and General Manager, Milton Roy Company
20 years of service
John W. Boyd Edwin W. Laprade
Vice President, Human Resources Aerospace President, Sullair Corporation
14 years of service 13 years of service
Arthur R. Charles Thomas L. Misiak
Vice President, Contracts and Compliance President, The Falk Corporation
10 years of service 17 years of service
Kenneth G. Eitenmiller William E. Taylor
Senior Vice President, Electronics Operations Vice President and General Manager,
31 years of service Sundstrand Fluid Handling Corporation
21 years of service
</TABLE>
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<PAGE> 39
SUNDSTRAND CORPORATE INFORMATION
ANNUAL MEETING
The company's Annual Meeting will be rescheduled because of the pending merger
with United Technologies Corporation. Currently, we anticipate the meeting will
be held in the late spring or early summer.
COMMON STOCK INFORMATION
Sundstrand common stock is listed on the New York, Chicago, and Pacific stock
exchanges under the symbol SNS.
SHAREHOLDER INVESTMENT SERVICE
Sundstrand offers to shareholders of its common stock a Shareholder Investment
Service which provides a simple, cost-free way of applying dividends and
voluntary cash investments to purchase additional shares of the company's stock.
The company absorbs brokerage commissions and bank service fees for all
participants. Requests for information about the Shareholder Investment Service
should be directed to the company's transfer agent.
TRANSFER AGENT
Requests for information about stock registration, stock transfers, dividend
disbursements or the Shareholder Investment Service should be directed to the
company's transfer agent.
Address correspondence to: With questions, call the transfer agent at:
Harris Trust and Savings Bank Shareholder Services Division
Shareholder Services (800) 293-8207
P.O. Box A3504
Chicago, Illinois 60606-4607
FORM 10-K AND OTHER FINANCIAL PUBLICATIONS
A copy of the company's Annual Report on Form 10-K, as filed with the Securities
and Exchange Commission, and other financial publications may be obtained
without charge by writing to Investor Relations at the address below or by voice
mail at (815) 226-2988.
INVESTOR RELATIONS
Analyst inquiries should be directed to the Investor Relations at:
Kelly Schmidt
Corporate Manager, Investor Relations
Sundstrand Corporation
4949 Harrison Avenue
P.O. Box 7003
Rockford, Illinois 61125-7003
(815) 226-2136
FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY
When used in this annual report the terms "anticipate," "believe," "estimate,"
"expect," "forecast," "goal," "outlook," "plan," "project," "should" and similar
expressions are intended to identify "forward-looking" statements. These
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those contemplated in such forward-looking
statements. Such risks and uncertainties include the Registrant's successful
execution of internal strategic initiatives, including implementation of
business unit concepts; governmental export and import policies; factors that
result in significant and prolonged disruption to air travel worldwide; overall
expenditures for capital equipment and infrastructure development; relations
with the Registrant's employees; competitive pricing pressures; global trade
policies; worldwide political stability and economic conditions, particularly
Asia and Latin America; termination of and/or difficulties related to
significant government programs (particularly military procurement programs
serviced by the Registrant); and potential risks associated with efforts by the
Registrant, its suppliers and customers to modify their information systems to
be ready for the year 2000.
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<PAGE> 40
(Trade name) SUNDSTRAND
Sundstrand Corporation
4949 Harrison Avenue
P.O. Box 7003
Rockford, Illinois 61125-7003
U.S.A.
