UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
________________________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
_____________
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 1-8974
______
AlliedSignal Inc.
______________________________________________________________
(Exact name of registrant as specified in its charter)
Delaware 22-2640650
_______________________________ _____________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 Columbia Road
P.O. Box 4000
Morristown, New Jersey 07962-2497
________________________________________ _____________
(Address of principal executive offices) (Zip Code)
(973)455-2000
_____________________________________________________
(Registrant's telephone number, including area code)
NOT APPLICABLE
_________________________________________________________________________
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
YES X NO
_____ _____
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock June 30,1998
_____________________ ______________________
$1 par value 561,264,881 shares
<PAGE>
AlliedSignal Inc.
Index
_____
Part I. - Financial Information Page No.
_____________________ ________
Item 1. Condensed Financial Statements:
Consolidated Balance Sheet -
June 30, 1998 and December 31, 1997 3
Consolidated Statement of Income -
Three and Six Months Ended June 30, 1998 and 1997 4
Consolidated Statement of Cash Flows -
Six Months Ended June 30, 1998 and 1997 5
Notes to Financial Statements 6
Report on Review by Independent
Accountants 8
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 16
Part II. - Other Information
_________________
Item 2. Changes in Securities 16
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 19
2
<PAGE>
<TABLE>
<CAPTION>
AlliedSignal Inc.
Consolidated Balance Sheet
(Unaudited)
<S> <C> <C>
June 30, December 31,
1998 1997
___________ ____________
(Dollars in millions)
ASSETS
Current assets:
Cash and cash equivalents $ 507 $ 611
Short-term investments 22 430
Accounts and notes receivable 1,809 1,886
Inventories 2,409 2,093
Other current assets 565 553
_____ _____
Total current assets 5,312 5,573
Investments and long-term receivables 526 480
Property, plant and equipment 9,106 9,189
Accumulated depreciation and
amortization (4,909) (4,938)
Cost in excess of net assets of
acquired companies - net 2,881 2,426
Other assets 981 977
______ ______
Total assets $13,897 $13,707
======== =======
LIABILITIES
Current liabilities:
Accounts payable $ 1,386 $ 1,345
Short-term borrowings 84 47
Commercial paper 595 821
Current maturities of long-term debt 185 224
Accrued liabilities 1,668 1,999
_______ ______
Total current liabilities 3,918 4,436
Long-term debt 1,638 1,215
Deferred income taxes 601 694
Postretirement benefit obligations
other than pensions 1,760 1,775
Other liabilities 1,157 1,201
SHAREOWNERS' EQUITY
Capital - common stock issued 716 716
- additional paid-in capital 2,866 2,425
Common stock held in treasury, at cost (3,108) (2,665)
Accumulated other nonowner changes (220) (179)
Retained earnings 4,569 4,089
______ _____
Total shareowners' equity 4,823 4,386
______ _____
Total liabilities and shareowners' equity $13,897 $13,707
======= =======
</TABLE>
Notes to Financial Statements are an integral part of this statement.
3
<PAGE>
<TABLE>
<CAPTION>
AlliedSignal Inc.
Consolidated Statement of Income
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
__________________ _________________
<S> <C> <C> <C> <C>
1998 1997 1998 1997
____ ____ ____ ____
(Dollars in millions except per share amounts)
Net sales $3,869 $3,578 $7,515 $6,905
______ ______ ______ ______
Cost of goods sold 2,949 2,764 5,758 5,369
Selling, general and
administrative expenses 406 386 804 751
______ _____ ______ ______
Total costs and expenses 3,355 3,150 6,562 6,120
Income from operations 514 428 953 785
Equity in income of affiliated
companies 29 55 63 96
Other income (expense) -- 14 (1) 48
Interest and other financial
charges (32) (39) (66) (81)
______ ______ _____ ______
Income before taxes on income 511 458 949 848
Taxes on income 161 153 299 284
_____ _____ _____ ______
Net income $ 350 $ 305 $ 650 $ 564
======= ======= ====== ======
Earnings per share of common
stock - basic $ .62 $ .54 $ 1.15 $ 1.00
====== ====== ====== ======
Earnings per share of common
stock - assuming dilution $ .61 $ .52 $ 1.13 $ .97
====== ====== ====== ======
Cash dividends per share of
common stock $ .15 $ .13 $ .30 $ .26
====== ====== ====== ======
</TABLE>
Notes to Financial Statements are an integral part of this statement.
4
<PAGE>
<TABLE>
<CAPTION>
AlliedSignal Inc.
Consolidated Statement of Cash Flows
(Unaudited)
Six Months Ended
June 30
________________
<S> <C> <C>
1998 1997
____ ____
(Dollars in millions)
Cash flows from operating activities:
Net income $ 650 $ 564
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization (includes goodwill) 302 305
Undistributed earnings of equity affiliates (4) (22)
Deferred income taxes 38 67
Decrease in accounts and notes receivable 96 76
(Increase) in inventories (128) (158)
Decrease in other current assets 28 16
Increase in accounts payable 21 6
(Decrease) in accrued liabilities (334) (345)
Taxes paid on sales of businesses (165) (5)
Other (6) (40)
_____ _____
Net cash provided by operating activities 498 464
_____ _____
Cash flows from investing activities:
Expenditures for property, plant and equipment (280) (309)
Proceeds from disposals of property, plant and
equipment 51 16
Decrease in investments and long-term receivables - 17
(Increase) in other investments - (5)
Cash paid for acquisitions (316) (382)
Proceeds from sales of businesses 202 34
Decrease(increase) in short-term investments 408 (164)
_____ _______
Net cash provided by (used for) investing activities 65 (793)
_____ _______
Cash flows from financing activities:
Net (decrease) increase in commercial paper (226) 192
Net increase (decrease) in short-term borrowings 3 (5)
Proceeds from issuance of preferred stock of subsidiary - 112
Proceeds from issuance of common stock 91 101
Proceeds from issuance of long-term debt 413 12
Payments of long-term debt (159) (65)
Repurchases of common stock (619) (290)
Cash dividends on common stock (170) (148)
Other - (45)
_____ ______
Net cash (used for) financing activities (667) (136)
_____ ______
Net (decrease) in cash and cash equivalents (104) (465)
Cash and cash equivalents at beginning of year 611 1,465
_____ _______
Cash and cash equivalents at end of period $ 507 $1,000
</TABLE>
====== ========
Notes to Financial Statements are an integral part of this statement.
5
<PAGE>
AlliedSignal Inc.
Notes to Financial Statements
(Unaudited)
(Dollars in millions except per share amounts)
Note 1. In the opinion of management, the accompanying unaudited
consolidated financial statements reflect all adjustments, consisting
only of normal adjustments, necessary to present fairly the financial
position of AlliedSignal Inc. and its consolidated subsidiaries at
June 30, 1998 and the results of operations for the three and six months
ended June 30, 1998 and 1997 and cash flows for the six months ended
June 30, 1998 and 1997. The results of operations for the three- and
six-month periods ended June 30, 1998 should not necessarily be taken
as indicative of the results of operations that may be expected for
the entire year 1998.
The financial information as of June 30, 1998 should be read in
conjunction with the financial statements contained in the Company's
Form 10-K Annual Report for 1997.
Note 2. Accounts and notes receivable consist of the following:
<TABLE>
<S> <C> <C> <C>
June 30, December 31,
1998 1997
_________ ____________
Trade $1,474 $1,466
Other 367 457
______ ______
1,841 1,923
Less-Allowance for doubtful
accounts and refunds (32) (37)
_______ _______
$1,809 $1,886
======= =======
Note 3. Inventories consist of the following:
June 30, December 31,
1998 1997(a)
________ ____________
Raw materials $ 623 $ 605
Work in process 807 722
Finished products 1,081 905
Supplies and containers 91 89
_______ _______
2,602 2,321
Less - Progress payments (73) (88)
Reduction to LIFO cost basis (120) (140)
_______ ________
$2,409 $2,093
====== ======
</TABLE>
(a) Reclassified for comparative purposes.
Note 4. Effective January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130 - "Reporting Comprehensive Income"
(SFAS No. 130), which establishes standards for reporting and display
of changes in equity from nonowner sources in the financial statements.
Total nonowner changes in shareowners' equity for the six months ended
June 30, 1998 and 1997 are $609 and $444 million, respectively, which
principally represent net income and foreign currency translation
adjustments.
6
<PAGE>
Note 5. The details of the earnings per share calculations for the
three- and six-month periods ending June 30, 1998 and 1997 follow:
<TABLE>
<CAPTION>
Three Months Six Months
___________________ _______________________
Per Per
Share Share
Income Shares Amount Income Shares Amount
<S> <C> <C> <C> <C> <C> <C>
1998
Earnings per share of common
stock - basic $350 563.2 $.62 $650 563.7 $1.15
Dilutive securities:
Stock options 13.2 13.4
Restricted stock units .7 .7
____ ____ _____ ____ ____ _____
Earnings per share of common
stock - assuming dilution $350 577.1 $.61 $650 577.8 $1.13
==== ===== ==== ==== ====== =====
1997
Earnings per share of
common stock - basic $305 565.4 $.54 $564 566.2 $1.00
Dilutive securities:
Stock options 13.8 14.1
Restricted stock units 1.1 1.1
___ ____ ___ ____ _____ ____
Earnings per share of common
stock - assuming dilution $305 580.3 $.52 $564 581.4 $.97
==== ===== ==== ==== ===== ====
</TABLE>
The diluted earnings per share calculation excludes the effect of stock
options when the options' exercise prices exceed the average market price
of the common shares during the period. For the three and six-month
periods ended June 30, 1998, options for 1.0 million and 1.1 million,
respectively, were excluded.
Note 6. During the first quarter of 1998, the Company issued $200 million
of 6.20% notes due February 1, 2008, and $200 million of 5-3/4% dealer
remarketable securities due March 15, 2011. During the second quarter of
1998, the Company made two exchange offers to holders of certain of its
outstanding debt securities. In the first such exchange offer, holders
of approximately $52 million principal amount of the Company's 9 1/2%
Debentures due June 1, 2016 tendered debentures for a like principal
amount of the Company's 9.065% Debentures due June 1, 2033. In the
second such exchange offer, holders of approximately $79 million principal
amount of the Company's 9 7/8% Debentures due June 1, 2002 and
approximately $39 million principal amount of the Company's 9.20%
Debentures due February 15, 2003 tendered debentures for approximately
$133 million principal amount of the Company's 6 1/8% Notes due July 1, 2005.
The debt exchange did not result in a substantial modification of the
original debt terms.
Note 7. During the first quarter of 1998, the Company issued 10.7 million
shares of its common stock, valued at approximately $400 million, for
acquisitions.
7
<PAGE>
Report on Review by Independent Accountants
___________________________________________
To the Board of Directors
of AlliedSignal Inc.
We have reviewed the accompanying consolidated balance sheet of AlliedSignal
Inc. and its subsidiaries as of June 30, 1998, and the consolidated
statements of income for the three-month and six-month periods ended
June 30, 1998 and 1997 and of cash flows for the six-month periods ended
June 30, 1998 and 1997. This financial information is the responsibility
of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion regarding
the financial statements taken as a whole. Accordingly, we do not express
such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial information referred to above for it to be
in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet as of December 31, 1997,
and the related consolidated statements of income, of retained earnings,
and of cash flows for the year then ended (not presented herein); and in
our report dated January 28, 1998 we expressed an unqualified opinion
on those consolidated financial statements. In our opinion, the information
set forth in the accompanying consolidated balance sheet information as of
December 31, 1997, is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
PricewaterhouseCoopers LLP
Florham Park, NJ 07932
August 7, 1998
8
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
______________________________________________
Results of Operations
_____________________
Second Quarter 1998 Compared with Second Quarter 1997
_____________________________________________________
Net sales in the second quarter of 1998 were $3.9 billion, an increase
of $291 million, or 8%, compared with the second quarter of 1997. Of this
increase, $323 million was due to higher sales volume and $312 million
was from recent acquisitions, offset in part by a $258 million reduction
for disposed businesses, mainly the safety restraints business. Selling
prices were lower by $59 million and the impact of foreign exchange
reduced sales by $27 million.
During the second quarter 1998, the Company began reporting
results in five business segments.
Aerospace Systems includes Aerospace Equipment Systems (environmental
control systems; engine and fuel controls; power systems; aircraft
lighting; and aircraft wheels and brakes); Electronic & Avionics Systems
(flight safety, communications, navigation, radar and surveillance
systems; and advanced systems and instruments); and Aerospace Marketing,
Sales & Service (repair and overhaul services; hardware; logistics; and
management and technical services). Aerospace Systems sales of $1,204
million in the second quarter of 1998 increased by $237 million, or 25%,
compared with the second quarter of 1997. This sales growth reflects strong
commercial spares sales and original equipment (OE) sales in power
management and generation systems. Strong demand also continued for
Electronic & Avionics Systems safety avionics products, particularly
for the enhanced ground proximity warning system. The acquisition of Grimes
Aerospace (Grimes) lighting systems business in July 1997 and Banner
Aerospace (Banner) FAA-certified hardware parts business
in January 1998 also contributed to Aerospace Systems higher sales.
Specialty Chemicals & Electronic Solutions includes Specialty
Chemicals (fluorine-based products; pharmaceutical and agricultural
chemicals; specialty waxes, adhesives and sealants; and process technology);
and Electronic Materials (insulation materials for integrated circuitry;
copper-clad laminates for printed circuit boards; advanced chip
packaging; and amorphous metals). Specialty Chemicals & Electronic
Solutions sales of $589 million in the second quarter of 1998
increased by $13 million, or 2%, compared with the second quarter of 1997.
Sales in Specialty Chemicals were higher primarily reflecting the
acquisition of Astor Holdings (Astor) wax business in October 1997,
which more than offset a sales decline in Electronic Materials due to
soft semiconductor and electronics markets.
Turbine Technologies includes Aerospace Engines (auxiliary
power units; and propulsion engines); and Turbocharging Systems
(turbochargers; charge-air coolers; and portable power systems).
Turbine Technologies sales of $921 million in the second quarter of
1998 were $172 million, or 23%, higher compared with the same
quarter of 1997. This sales increase reflects higher sales of OE
and aftermarket propulsion engines and auxiliary power units. Sales
of turbochargers also increased, benefiting from strength in European
diesel-powered passenger cars and from growth in the North American
diesel truck market.
9
<PAGE>
Performance Polymers includes the Polymers unit (fibers;
plastics resins; specialty films; and intermediate chemicals).
Performance Polymers sales of $531 million in the second quarter of
1998 were $19 million, or 4%, higher compared with the same quarter
of 1997. This sales growth resulted from increases in sales of
specialty films for pharmaceutical packaging, increased engineering
plastics volume in the lawn and power tool segment, and improved
sales of higher-margin plastics in Europe. The loss of sales
resulting from exiting the European carpet fibers business and a
portion of the North American textiles business was a partial
offset.
Transportation Products includes the Automotive Products Group
(car care products including anti-freeze, filters, spark plugs, cleaners,
waxes and additives; and friction materials); and Truck Brake Systems
(air brake and anti-lock braking systems). Transportation Products
sales of $621 million in the second quarter of 1998 were $151 million,
or 20%, lower compared with the second quarter of 1997. The decrease
primarily reflects the disposition of the safety restraints business.
Excluding the disposed safety restraints business, sales were 13%
higher. The sales gain reflects the acquisition of the Prestone Products
Corporation (Prestone) in June 1997 and the Holt Lloyd Group Ltd.
(Holt Lloyd) in November 1997 and higher demand for OE truck brake
products, anti-lock truck brake installations and growth in truck
brake aftermarket products.
Cost of goods sold as a percent of net sales decreased from 77.2% in
the second quarter of 1997 to 76.2% in the second quarter of 1998
reflecting in part results of the Company's continuing Six Sigma
programs to improve productivity and lower manufacturing and materials costs.
Income from operations of $514 million in the second quarter of
1998 increased by $86 million, or 20%, compared with the second
quarter of 1997. On a segment basis, Aerospace Systems income from
operations increased by 49%, Specialty Chemicals & Electronic
Solutions increased by 14%, Turbine Technologies increased by 5% and
Performance Polymers increased by 39%. Income from operations for
Transportation Products decreased by 39%. Excluding the divested
safety restraints business, Transportation Products income from operations
decreased by 20%. The Company's operating margin for the second quarter
of 1998 was 13.3%, compared with 12.0% for the same period last year.
See the discussion of net income below for information by segment.
Productivity (the constant dollar basis relationship of sales
to costs) improved by 5.5% compared with the second quarter of 1997
primarily reflecting ongoing Six Sigma initiatives to lower materials
and manufacturing costs.
Equity in income of affiliated companies of $29 million in the
second quarter of 1998 represents a decrease of $26 million, or 47%,
compared with the same quarter of 1997, primarily due to lower
earnings from the UOP process technology joint venture (UOP).
Other income (expense) decreased by $14 million, compared with
the same quarter of 1997, reflecting lower interest income primarily
due to a lower cash position because of spending for acquisitions and
repurchases of the Company's common stock.
10
<PAGE>
Interest and other financial charges of $32 million in the second
quarter of 1998 decreased by $7 million, or 18%, compared with the
second quarter of 1997. This decrease results from lower tax interest
expense due to an acceleration of worldwide tax audits resulting in
developments favorable to the Company's position, offset in part by
higher debt-related interest expense reflecting increased levels of debt.
The effective tax rate in the second quarter of 1998 was 31.5%,
compared with 33.5% in the second quarter of 1997, primarily due to tax
benefits on exports, an increase in energy tax credits and other tax
planning strategies.
Net income of $350 million, or $0.61 per share, in the second
quarter of 1998 was 15% higher than net income of $305 million, or $0.52
per share, in the second quarter of 1997. All earnings per share data
in Management's Discussion and Analysis reflect diluted earnings per share.
Aerospace Systems net income of $123 million in the second quarter of
1998 improved by $42 million, or 52%, compared with the same quarter
of 1997. Net income growth results primarily from strong demand for
higher-margin new safety and communications products and improved
avionics factory performance. The acquisition of Grimes also contributed
to higher net income for Aerospace Systems.
Specialty Chemicals & Electronic Solutions net income of $82
million in the second quarter of 1998 decreased by $18 million, or
18%, compared with the second quarter of 1997. This decline in net income
was driven by a lower contribution by UOP.
Turbine Technologies net income of $63 million in the second quarter
of 1998 increased by $9 million, or 17%, compared with the second quarter
of 1997. This increase in net income results from higher sales and
factory productivity improvements which were somewhat offset by
engineering and development costs in two new product lines.
Performance Polymers net income of $57 million in the second
quarter of 1998 increased by $20 million, or 54%, compared with the
same quarter of 1997. Net income increased due to a more favorable
price-cost relationship in nylon and polyester, productivity actions,
and the elimination of losses from exiting the European carpet
fibers business and a portion of the North American textiles business.
Transportation Products net income of $14 million in the second
quarter of 1998 decreased by $15 million, or 52%, compared with the
second quarter of 1997. The decrease primarily reflects the absence
of net income from the disposed safety restraints business. Net income
also declined for the Automotive Products Group.
Six Months 1998 Compared with Six Months 1997
_____________________________________________
Net sales in the first six months of 1998 were $7.5 billion, an
increase of $610 million, or 9%, compared with the first six months of
1997. Of this increase, $694 million was due to higher sales
volume and $582 million was from recent acquisitions, offset
in part by a $490 million reduction for disposed
11
<PAGE>
businesses, mainly the safety restraints business. Selling prices
were lower by $111 million and the impact of foreign exchange
reduced sales by $65 million.
Aerospace Systems sales of $2,334 million in the first six
months of 1998 increased by $495 million, or 27%, compared with the
first six months of 1997. This sales increase was led by strong
sales by Aerospace Equipment Systems across all product lines, as
well as the acquisition of Grimes. Electronic & Avionics Systems
also had substantially higher sales reflecting strong demand for the
Company's flight safety and cockpit communication products. The
acquisition of Banner also contributed to higher sales for Aerospace
Systems.
Specialty Chemicals & Electronic Solutions sales of $1,187 million
in the first six months of 1998 increased by $97 million, or 9%,
compared with the same period of 1997. Sales of Specialty Chemicals
were significantly higher primarily reflecting the acquisition of Astor.
However, sales of Electronic Materials declined slightly due to
soft semiconductor and electronics markets.
Turbine Technologies sales of $1,741 million in the first six
months of 1998 were $270 million, or 18%, higher compared with the
same period of 1997. Engines sales of auxiliary power units to the
commercial air transport and regional aircraft markets and propulsion
engine demand in the business jet market were strong. Sales of
turbochargers were also higher due primarily to the continued strong
demand in European diesel-powered passenger cars.
Performance Polymers sales of $1,058 million in the first six
months of 1998 were $60 million, or 6%, higher compared with the
first six months of 1997, due mainly to growth in specialty films
and engineering plastics.
Transportation Products sales of $1,190 million in the first
six months of 1998 decreased by $312 million, or 21%, compared with
the first six months of 1997. The decrease primarily reflects the
disposition of the safety restraints business. Excluding the
disposed safety restraints business, sales were 12% higher. This
increase in sales reflects significantly higher sales for Truck
Brake Systems and the acquisitions of Prestone and Holt Lloyd. The
increase was somewhat offset by lower sales for friction materials,
spark plugs and filters.
Cost of goods sold as a percent of net sales decreased from 77.7%
in the first six months of 1997 to 76.6% in the first six months of
1998 primarily reflecting results of the Company's continuing Six Sigma
programs to improve productivity and lower manufacturing and materials costs.
Income from operations of $953 million in the first six months
of 1998 increased by $168 million, or 21%, compared with the first six
months of 1997. On a segment basis, Aerospace Systems income from
operations increased by 69%. Specialty Chemicals & Electronic Solutions
increased by 8% and Performance Polymers increased by 68%. Income from
operations for Turbine Technologies and Transportation Products decreased
by 2% and 53%, respectively. Excluding the divested safety restraints
business, Transportation Products income from operations decreased by 30%.
The Company's operating margin for the first six months of 1998 was
12.7%, compared with 11.4% for the same period last year. See the
discussion of net income below for information by segment.
12
<PAGE>
Productivity improved by 5.7% for the first six months of 1998
compared with the first six months of 1997 primarily reflecting
ongoing Six Sigma initiatives to lower materials and manufacturing
costs.
Equity in income of affiliated companies of $63 million in the
first six months of 1998 represents a decrease of $33 million, or
34%, compared with the same period of 1997, primarily due to lower
earnings from UOP and the absence of earnings from investments divested
in connection with the sale of the safety restraints business.
Other income (expense), a $1 million loss in the first six
months of 1998, was unfavorable by $49 million compared with the
same period of 1997, reflecting lower interest income primarily due
to a lower cash position because of spending for acquisitions and
repurchases of the Company's common stock and the absence of foreign
exchange gains offset somewhat by lower minority interest.
Interest and other financial charges of $66 million in the
first six months of 1998 decreased by $15 million, or 19%, compared
with the first six months of 1997. This decrease results from lower
tax interest expense due to an acceleration of worldwide tax audits
resulting in developments favorable to the Company's position,
offset in part by higher debt-related interest expense reflecting
increased levels of debt.
The effective tax rate in the first six months of 1998 decreased to
31.5% compared with 33.5% in 1997, primarily due to tax benefits on
exports, an increase in energy tax credits and other tax planning strategies.
Net income of $650 million, or $1.13 per share, in the first
six months of 1998 was 15% higher than net income of $564 million,
or $0.97 per share, in the first six months of 1997.
Aerospace Systems net income of $239 million in the first six
months of 1998 improved by $95 million, or 66%, compared with the same
period of 1997. This increase in net income was led by substantially
higher sales and improved factory performance for
Electronic & Avionics Systems. The acquisitions of Grimes and
Banner also contributed to the higher net income.
Specialty Chemicals & Electronic Solutions net income of $164
million in the first six months of 1998 represents a decrease of $23
million, or 12%, compared with the same period of 1997. Electronic
Materials net income declined substantially due principally to
weakness in the semiconductor and electronics markets. Specialty
Chemicals net income also decreased due principally to lower results
for UOP.
Turbine Technologies net income of $116 million in the first
six months of 1998 increased by $8 million, or 7%, compared with the
first six months of 1997, reflecting higher sales and productivity
improvements for Engines.
Performance Polymers net income of $102 million in the first six
months of 1998 improved by $44 million, or 76%, compared with the first
six months of 1997. This improvement in net income was primarily driven
by volume growth across most businesses, a more favorable price-cost
relationship in nylon and polyester and productivity initiatives.
13
<PAGE>
Transportation Products net income of $18 million in the first
six months of 1998 was $44 million, or 71%, lower than in the first
six months of 1997. The decrease primarily reflects the absence of
net income from the disposed safety restraints business. Net income
was also lower for the Automotive Products Group.
Financial Condition
___________________
June 30, 1998 Compared with December 31, 1997
_____________________________________________
On June 30, 1998, the Company had $529 million in cash and cash
equivalents and short-term investments compared with $1,041 million
at year-end 1997. The decrease mainly reflects funds deployed for
acquisitions and repurchases of the Company's common stock.
The Company's long-term debt on June 30, 1998 was $1,638 million,
an increase of $423 million compared with year-end 1997. This increase
principally reflects the issuance of new long-term debt, as described
in Note 6 to the financial statements. Total debt of $2,502
million on June 30, 1998 was $195 million higher than at December 31, 1997.
The Company's total debt as a percent of capital at June 30, 1998
was 31.9%, compared with 31.7% at year-end 1997.
During the first six months of 1998, the Company spent $280
million for capital expenditures, compared with $309 million in the
corresponding period of 1997. This decline in capital spending is
primarily due to the divestiture of the safety restraints business.
On August 4, 1998, the Company announced that it intends to
commence a tender offer subject to customary terms and conditions for all
of the outstanding shares of AMP Incorporated, a Pennsylvania
corporation (AMP), at $44.50 per share in cash, or approximately
$9.8 billion for the approximately 220 million AMP shares outstanding.
Any such offer will be made by way of offering materials complying with
the requirements of applicable federal and state securities laws.
The Company expects to finance such offering through bank credit
facilities, issuance of commercial paper, long-term debt offerings
and/or equity offerings.
In January 1998, the Company acquired Banner, distributors of
FAA-certified aircraft hardware, for common stock valued at approximately
$350 million. The acquired operations have annual sales of about
$250 million, principally to commercial air transport and general
aviation customers. Also, in the first quarter of 1998, the Company
completed the sale of its underwater detection systems business to
L-3 Communications Corporation for approximately $70 million in cash.
The ocean systems unit had annual revenues of about $70 million.
In June 1998, the Company acquired Pharmaceutical Fine Chemicals S.A.
(PFC) for approximately $390 million, including assumed liabilities.
PFC manufactures and distributes active and intermediate pharmaceutical
chemicals and had sales of approximately $110 million in 1997.
Also in June 1998, the Company completed the sale of its 50%-owned
automotive catalyst business to General Motors Corporation for
approximately $50 million in cash. This business had annual sales of
about $250 million.
The Company continuously assesses the relative
strength of its portfolio of businesses as to strategic fit,
market position and profit contribution in order
14
<PAGE>
to upgrade its combined portfolio and identify operating units that will
most benefit from increased investment. The Company considers acquisition
candidates that will further its strategic plan and strengthen its existing
core businesses. The Company also identifies operating units that do not
fit into its long-term strategic plan based on their market position,
relative profitability or growth potential. These operating units
are considered for potential divestiture, restructuring or other
repositioning action. During the first six months of 1998, the Company
sold certain non-strategic businesses and other assets.
During the first six months of 1998, the Company repurchased
14.0 million shares of its common stock for $591 million. During
the second quarter 1998, the Company announced its intentions to
repurchase up to $2.2 billion of its common stock over the next two
years. Common stock is repurchased to meet the expected requirements
for shares issued under employee benefit plans, acquisitions, a
shareowner dividend reinvestment plan and to reduce common stock
outstanding. At June 30, 1998, the Company was authorized to
repurchase 65.7 million shares of its common stock. The amount of
common stock repurchased may be affected by the commencement of a
tender offer for the outstanding shares of AMP.
The Company has recognized the need to ensure that its business
operations will not be adversely affected by the upcoming calendar
year 2000 and is cognizant of the time sensitive nature of the
problem. The Company has assessed how it may be impacted by Year
2000 and has formulated and commenced implementation of a comprehensive
plan to address all known aspects of the Year 2000 problem: information
systems, production and facilities equipment, products, suppliers
and customers.
The plan, as it relates to information systems, involves a
combination of software modification, upgrades and replacement. The
Company's target date for the remediation of its critical
information systems is December 31, 1998 and the target date for
remediation of the remainder of its information systems is March 31,
1999. The Company has completed the assessment and development of
remediation plans with respect to substantially all of the Company's
products and expects that the assessment and development of
remediation plans with respect to production and facilities
equipment, suppliers and customers will be substantially complete by
the end of the third quarter of 1998. The Company has begun
remediating production and facilities equipment and products and
expects that remediation will be substantially completed by March
31, 1999. The Company expects that development of remediation plans
with respect to major suppliers and customers will be completed by
year-end 1998 and that remediation will be substantially completed
by March 31, 1999; however, the Company can provide no assurance
that Year 2000 compliance plans will be successfully completed by
suppliers and customers in a timely manner.
The Company's preliminary estimate of the total cost for Year
2000 compliance, based on the assessment to date plus estimates of
remediation costs on components not yet fully assessed, is approximately
$150 million, of which approximately $50 million has been incurred
through June 30, 1998. Incremental spending has not been
and is not expected to be material because most Year 2000 compliance
costs will be met with amounts that are normally budgeted for procurement
and maintenance of the Company's information systems and production
and facilities equipment. The redirection of spending from procurement
of information systems and production facilities equipment to
15
<PAGE>
implementation of Year 2000 compliance plans may in some instances
delay productivity improvements.
If the Company is not successful in implementing its Year 2000
compliance plan, it may have a material adverse impact on the
Company's consolidated results of operations and financial
condition. Because of the importance of addressing the Year 2000
problem, the Company expects to develop by year-end 1998 contingency
plans and trained specialist teams to implement such contingency
plans to address any issues that may not be corrected by
implementation of the Company's Year 2000 compliance plan in a
timely manner.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133-"Accounting for
Derivative Instruments and Hedging Activities" (SFAS No. 133),
effective for fiscal years beginning after June 15, 1999. SFAS No.
133 requires derivatives to be recorded on the balance sheet as
assets or liabilities, measured at fair value. Gains or losses
resulting from changes in values of derivatives would be accounted
for depending on the use of the derivative and whether it qualifies
for hedge accounting. The Company is completing an analysis of SFAS
No. 133 which is not expected to have a material impact on the
Company's results of operations or financial position.
Safe Harbor Statement under the Private Securities Litigation
Reform Act of 1995: Except for the historical information contained
herein, the matters discussed in this quarterly report are forward-
looking statements which involve risks and uncertainties, including
but not limited to economic, competitive, governmental and
technological factors affecting the Company's operations, markets,
products, services and prices, and other factors discussed in the
Company's filings with the Securities and Exchange Commission.
Review by Independent Accountants
_________________________________
The "Independent Accountants' Report" included herein is not a
"report" or "part of a Registration Statement" prepared or certified
by an independent accountant within the meanings of Section 7 and 11
of the Securities Act of 1933, and the accountants' Section 11
liability does not extend to such report.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
See the Company's most recent annual report filed on Form 10-
K (Item 7A). There has been no material change in this information.
PART II. OTHER INFORMATION
Item 2. Changes in Securities
During the second quarter of 1998, the Company made two
exchange offers to holders of certain of its outstanding debt securities.
In the first such exchange offer, approximately $52 million principal
amount of the Company's 9.065% Debentures due June 1, 2033 were issued
to tendering holders of the Company's 9 1/2% Debentures due June 1, 2016.
The 9.065% Debentures bear interest at 9.065% per annum payable on June 1
and December 1, commencing December 1, 1998, to holders of record on the
preceding May 15 or November 15.
16
<PAGE>
In the second such exchange offer, approximately $133 million
principal amount of the Company's 6 1/8% Notes due July 1, 2005 were issued
to tendering holders of approximately $79 million principal amount of the
Company's 9 7/8% Debentures due June 1, 2002 and approximately $39 million
principal amount of the Company's 9.20% Debentures due February 15, 2003.
The 6 1/8% Notes bear interest at 6 1/8% per annum payable on January 1
and July 1, commencing January 1, 1999 to holders of record on the preceding
June 15 or December 15.
Each of the exchange offers was made pursuant to an
exemption from registration under Section 3(a)(9) of the Securities
Act of 1933 solely to existing debtholders of the Company.
Item 5. Other Information
The following represents segment data for 1997, 1996 and the three
months ending March 31, 1998 under the Company's new five business segments.
<TABLE>
<CAPTION>
(Dollars in
millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Years 1997 Specialty
and 1996 Chemicals & Corporate
Aerospace Electronic Turbine Performance Transportation and Un-
Systems Solutions Technologies Polymers Products allocated Other(1) Total
_________ ___________ ____________ ___________ ______________ __________ _______ _____
Net sales 1997 $4,117 $2,218 $3,111 $2,030 $2,983 $ 13 - $14,472
1996 3,635 2,117 2,775 1,888 3,539 17 - 13,971
Depreciation and 1997 109 97 91 129 85 35 - 546
amortization 1996 116 84 87 122 101 41 - 551
Income from 1997 608 326 401 215 194 (97) (11) 1,636
operations 1996 469 355 264 211 280 (88) 18 1,509
Net income 1997 368 328 236 134 95 5 4 1,170
1996 287 307 144 125 156 (8) 9 1,020
Capital 1997 132 135 111 174 115 50 - 717
expenditures 1996 83 111 103 220 163 75 - 755
Identifiable 1997 3,611 2,452 2,768 1,607 2,114 1,155 - 13,707
assets 1996 2,902 1,858 2,706 1,533 1,757 2,073 - 12,829
Three months ending
March 31, 1998
__________________
Net sales $1,130 $ 598 $ 820 $ 527 $ 569 $ 2 - $3,646
Net income 116 82 53 45 4 - - 300
</TABLE>
(1) The Other column includes in 1997 a pre- and after-tax provision
for repositioning and other charges of $237 and $159 million. Also
includes in 1997 a pre- and after-tax gain on the sale of the safety
restraints business of $277 and $196 million, and the pre-and after-
tax charge related to the settlement of the 1996 braking business
sale of $51 and $33 million. Includes in 1996 a pre-and after-tax
provision for repositioning and other charges of $637 and $359
million. Also includes in 1996 a pre- and after-tax gain on the
sale of the braking business of $655 and $368 million.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The following exhibits are filed with this
Form 10-Q:
15 Independent Accountants' Acknowledgment Letter
as to the incorporation of their report relating
to unaudited interim financial statements
27 Financial Data Schedule
17
<PAGE>
(b) Reports on Form 8-K.
During the three months ended June 30, 1998:
1) On April 22, 1998, a report was filed reporting the
results of operations for the three-month period ending
March 31, 1998.
2) On April 28, 1998, a report was filed reporting, under
Item 9, unregistered sales of the Company's Common Stock
in reliance on Regulation S under the Securities Act.
3) On May 20, 1998, a report was filed reporting an offer
to exchange new debt for outstanding debt.
4) On May 29, 1998, a report was filed reporting a
revised share repurchase program.
5) On June 18, 1998, a report was filed reporting the
appointment of a President and Chief Operating Officer.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
AlliedSignal Inc.
Date: August 7, 1998 By: /s/ Richard F.Wallman
_________________________
Richard F. Wallman
Senior Vice President and Chief
Financial Officer
(on behalf of the Registrant
and as the Registrant's
Principal Accounting Officer)
19
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
2 Omitted (Inapplicable)
3 Omitted (Inapplicable)
4 Omitted (Inapplicable)
10 Omitted (Inapplicable)
11 Omitted (Inapplicable)
15 Independent Accountants'
Acknowledgment Letter as to
the incorporation of their
report relating to unaudited
interim financial statements
18 Omitted (Inapplicable)
19 Omitted (Inapplicable)
22 Omitted (Inapplicable)
23 Omitted (Inapplicable)
24 Omitted (Inapplicable)
27 Financial Data Schedule
99 Omitted (Inapplicable)
20
EXHIBIT 15
__________
August 7, 1998
Securities and Exchange Commission
450 Fifth Street
Washington, D.C. 20549
Dear Ladies and Gentlemen:
We are aware that the June 30, 1998 Quarterly Report on Form 10-Q of
AlliedSignal Inc. which includes our report dated August 7, 1998 (issued
pursuant to the provisions of Statement on Auditing Standard No. 71)
will be incorporated by reference in the Prospectuses constituting part of
AlliedSignal Inc.'s Registration Statements, on Forms S-8 (Nos. 33-09896,
33-51455, 33-55410, 33-58347, 33-60261, 33-62963, 33-64295, 333-14673,
333-57509, 333-57515, 333-57517 and 333-57519, on Forms S-3 (Nos.
33-13211, 33-14071, 33-55425, 33-64245, 333-22355, 333-44523, 333-45555
and 333-49455) and on Form S-8 (filed as an amendment to Form S-14,
No. 2-99416-01). We are also aware of our responsibilities under the
Securities Act of 1933.
Very truly yours,
Price Waterhouse LLP
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
the consolidated balance sheet at June 30, 1998 and the consolidated
statement of income for the six months ended June 30, 1998 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 507
<SECURITIES> 22
<RECEIVABLES> 1,474
<ALLOWANCES> 32
<INVENTORY> 2,409
<CURRENT-ASSETS> 5,312
<PP&E> 9,106
<DEPRECIATION> 4,909
<TOTAL-ASSETS> 13,897
<CURRENT-LIABILITIES> 3,918
<BONDS> 1,638
0
0
<COMMON> 716
<OTHER-SE> 4,107
<TOTAL-LIABILITY-AND-EQUITY> 13,897
<SALES> 7,515
<TOTAL-REVENUES> 7,515
<CGS> 5,758
<TOTAL-COSTS> 5,758
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 66
<INCOME-PRETAX> 949
<INCOME-TAX> 299
<INCOME-CONTINUING> 650
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 650
<EPS-PRIMARY> 1.15
<EPS-DILUTED> 1.13
</TABLE>
