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, 1999
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.
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(Exact name of registrant as specified in its charter)
Delaware 22-2640650
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(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
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(Address of principal executive offices) (Zip Code)
(973)455-2000
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(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, 1999
- --------------------- --------------------------
$1 par value 550,220,660 shares
<PAGE>
AlliedSignal Inc.
Index
-----
Page No.
--------
Part I. - Financial Information
---------------------
Item 1. Condensed Financial Statements:
Consolidated Balance Sheet -
June 30, 1999 and December 31, 1998 3
Consolidated Statement of Income -
Three and Six Months Ended June 30, 1999
and 1998 4
Consolidated Statement of Cash Flows -
Six Months Ended June 30, 1999 and 1998 5
Notes to Financial Statements 6
Report on Review by Independent
Accountants 10
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 18
Part II. - Other Information
-----------------
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
2
<PAGE>
AlliedSignal Inc.
Consolidated Balance Sheet
(Unaudited)
June 30, December 31,
1999 1998
-------------- -------------
(Dollars in millions)
ASSETS
Current assets:
Cash and cash equivalents $ 648 $ 712
Accounts and notes receivable 1,838 1,993
Inventories 2,345 2,332
Other current assets 552 556
------- -------
Total current assets 5,383 5,593
Investments and long-term receivables 433 1,488
Property, plant and equipment 9,189 9,358
Accumulated depreciation and
amortization (4,974) (4,961)
Cost in excess of net assets of
acquired companies - net 2,910 2,999
Other assets 1,148 1,083
------ ------
Total assets $14,089 $15,560
======= =======
LIABILITIES
Current liabilities:
Accounts payable $ 1,346 $ 1,423
Short-term borrowings 79 80
Commercial paper 979 1,773
Current maturities of long-term debt 41 158
Accrued liabilities 1,647 1,751
------- -------
Total current liabilities 4,092 5,185
Long-term debt 1,453 1,476
Deferred income taxes 784 795
Postretirement benefit obligations
other than pensions 1,716 1,732
Other liabilities 1,018 1,075
SHAREOWNERS' EQUITY
Capital - common stock issued 716 716
- additional paid-in capital 3,242 2,982
Common stock held in treasury, at cost (4,285) (3,413)
Accumulated other nonowner changes (275) (70)
Retained earnings 5,628 5,082
------ -------
Total shareowners' equity 5,026 5,297
------ -------
Total liabilities and shareowners' $14,089 $15,560
equity ======= =======
The Notes to Financial Statements are an integral part of this statement.
3
<PAGE>
AlliedSignal Inc.
Consolidated Statement of Income
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ----------------
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in millions except per share amounts)
Net sales $3,818 $3,869 $7,414 $7,515
------ ------ ------ ------
Cost of goods sold 3,045 2,949 5,754 5,758
Selling, general and
administrative expenses 418 406 799 804
------ ----- ------ ------
Total costs and expenses 3,463 3,355 6,553 6,562
------ ----- ------ ------
Income from operations 355 514 861 953
Equity in income of affiliated
companies (16) 29 (4) 63
Other income (expense) 277 -- 292 (1)
Interest and other financial
charges (30) (32) (74) (66)
------ ----- ----- ------
Income before taxes on income 586 511 1,075 949
Taxes on income 186 161 340 299
------ ------ ------ ------
Net income $ 400 $ 350 $ 735 $ 650
====== ====== ====== ======
Earnings per share of common
stock - basic $ .72 $ .62 $ 1.33 $ 1.15
====== ====== ====== ======
Earnings per share of common
stock - assuming dilution $ .71 $ .61 $ 1.30 $ 1.13
====== ====== ====== ======
Cash dividends per share of
common stock $ .17 $ .15 $ .34 $ .30
====== ====== ====== ======
The Notes to Financial Statements are an integral part of this
statement.
4
<PAGE>
AlliedSignal Inc.
Consolidated Statement of Cash Flows
(Unaudited)
Six Months Ended
June 30,
----------------
1999 1998
---- ----
(Dollars in millions)
Cash flows from operating activities:
Net income $ 735 $ 650
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on disposition of investment in AMP Incorporated (268) --
Repositioning and other charges 258 --
Depreciation and amortization 295 302
Undistributed earnings of equity affiliates (7) (4)
Deferred income taxes 71 38
Decrease in accounts and notes receivable 33 96
(Increase) in inventories (45) (128)
Decrease in other current assets 17 28
(Decrease) increase in accounts payable (50) 21
(Decrease) in accrued liabilities (183) (334)
Net taxes paid on sales of businesses and investments (87) (165)
Other (22) (6)
------ -----
Net cash provided by operating activities 747 498
------ -----
Cash flows from investing activities:
Expenditures for property, plant and equipment (248) (280)
Proceeds from disposals of property, plant and
equipment 31 51
(Increase) in investments (3) --
Cash paid for acquisitions (9) (316)
Disposition of investment in AMP Incorporated 1,164 --
Proceeds from sales of businesses 199 202
Decrease in short-term investments - 408
------ -----
Net cash provided by investing activities 1,134 65
------ -----
Cash flows from financing activities:
Net (decrease) in commercial paper (794) (226)
Net increase in short-term borrowings 2 3
Proceeds from issuance of common stock 193 91
Proceeds from issuance of long-term debt 3 413
Payments of long-term debt (154) (159)
Repurchases of common stock (1,006) (619)
Cash dividends on common stock (189) (170)
------- -----
Net cash (used for) financing activities (1,945) (667)
------- ------
Net (decrease) in cash and cash equivalents (64) (104)
Cash and cash equivalents at beginning of year 712 611
------- ------
Cash and cash equivalents at end of period $ 648 $ 507
====== ======
The 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, 1999 and the results of operations for the
three and six months ended June 30, 1999 and 1998 and cash flows for
the six months ended June 30, 1999 and 1998. The results of
operations for the three- and six-month periods ended June 30, 1999
should not necessarily be taken as indicative of the results of
operations that may be expected for the entire year 1999.
The financial information as of June 30, 1999 should be read in
conjunction with the financial statements contained in
AlliedSignal's Form 10-K Annual Report for 1998.
Note 2. Accounts and notes receivable consist of the following:
June 30, December 31,
1999 1998
------- -----------
Trade $1,525 $1,554
Other 348 476
------ ------
1,873 2,030
Less - Allowance for doubtful
accounts and refunds (35) (37)
------ ------
$1,838 $1,993
====== ======
Note 3. Inventories consist of the following:
June 30, December 31,
1999 1998
------- -------------
Raw materials $ 628 $ 568
Work in process 604 655
Finished products 1,170 1,174
Supplies and containers 90 96
----- ------
2,492 2,493
Less - Progress payments (45) (54)
Reduction to LIFO cost basis(102) (107)
------ ------
$2,345 $2,332
====== ======
Note 4. Total nonowner changes in shareowners' equity for the three
and six months ended June 30, 1999 and 1998 were $261 and $530
million and $351 and $609 million, respectively. Nonowner changes
in shareowners' equity consists of net income, foreign currency
translation adjustments and unrealized holding gains and losses on
marketable securities.
6
<PAGE>
Note 5. Segment financial data follows:
Three Months Ended June 30,
--------------------------------------------------------
Net Sales Income from Operations
-------------------- ---------------------------------
1999 1998 1999 1998
---- ---- ---- ----
Aerospace Systems $1,202 $1,204 $ 245 $ 201
Specialty Chemicals &
Electronic Solutions 517 589 75 112
Turbine Technologies 1,002 921 177 103
Performance Polymers 469 531 70 92
Transportation Products 615 609(a) 47 35(a)
Corporate & Unallocated 13 15(a) (37) (29)(a)
Other - - (222)(b) -
------ ------- ------ -------
$3,818 $3,869 $ 355 $ 514
====== ====== ====== =======
Six Months Ended June 30,
------------------------------------------------
Net Sales Income from Operations
----------------- -----------------------
1999 1998 1999 1998
---- ---- ---- ----
Aerospace Systems $2,352 $2,334 $ 450 $ 396
Specialty Chemicals &
Electronic Solutions 1,045 1,187 160 211
Turbine Technologies 1,865 1,741 311 191
Performance Polymers 924 1,058 134 165
Transportation
Products 1,208 1,155(a) 90 51(a)
Corporate & Unallocated 20 40(a) (62) (61)(a)
Other - - (222)(b) -
------ ------ ------ ------
$7,414 $7,515 $ 861 $ 953
====== ====== ====== ======
(a) Reclassified to conform with 1999 presentation. Net sales and
income from operations related to residual contracts of the
divested Safety Restraints business are now reported in
Corporate & Unallocated.
(b) Represents the provision for repositioning and other charges. See Note 8.
Note 6. The details of the earnings per share calculations for the
three- and six-month periods ended June 30, 1999 and 1998 follow:
Three Months Six Months
------------------------- ---------------------
Per Per
Average Share Average Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ -------- ------
1999
- ----
Earnings per share of
common stock - basic $400 551.9 $.72 $735 554.2 $ 1.33
Dilutive securities:
Stock options 12.6 12.0
Restricted stock units .5 .4
---- ---- ---- ---- ------ -----
Earnings per share of
common stock - assuming
dilution $400 565.0 $.71 $735 566.6 $ 1.30
==== ===== ==== ==== ===== =======
7
<PAGE>
Three Months Six Months
-------------------------- -----------------------
Per Per
Average Share Average Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ -------
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
==== ===== ==== ==== ===== =====
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, 1999, all stock options were
included in the computations. For the three- and six-month periods
ended June 30, 1998, the number of stock options not included in the
computations were 1.0 million and 1.1 million, respectively.
Note 7. In April 1999, AlliedSignal reached an agreement with Tyco
International Ltd. (Tyco) and AMP Incorporated (AMP), settling AMP's
claim to the gain AlliedSignal realizes on the disposition of its
investment in AMP common stock. AlliedSignal made a payment to AMP
of $50 million, and the parties released all claims that they had
against each other relating to AMP. Subsequently, AlliedSignal
converted its investment in AMP common stock into Tyco common stock
and sold the Tyco common stock for net cash proceeds of $1.2
billion. The resulting second-quarter pre-tax gain of $268 million
(after-tax $161 million, or $0.29 per share), net of the settlement
payment is included as part of Other Income (Expense).
Note 8. In the second quarter of 1999, AlliedSignal approved a
repositioning plan designed to enhance our competitiveness and
productivity and improve future profitability. The repositioning
plan includes the organizational realignment of our aerospace
businesses to strengthen market and customer focus and simplify its
business structure; the elimination of an unprofitable product line
and rationalization of manufacturing capacity in the Polymers
business; and related workforce reductions in these businesses. The
plan also includes workforce reductions in the Friction Materials,
Specialty Chemicals and Turbocharging Systems businesses. In total,
the Company will be eliminating approximately 1,200 positions
worldwide, primarily in manufacturing and administrative functions.
The repositioning plan is expected to be completed by December 31,
1999. In connection with the repositioning plan, in the second
quarter of 1999, the Company recorded a pretax charge of $75
million. The components of this charge include severance costs of
$38 million, asset writedowns of $36 million, and other exit costs
of $1 million. The following summarizes the status of the
repositioning reserve:
Charges
Repositioning Against June 30, 1999
Reserve Reserve Balance
------- ------- -------
Severance costs $38 $ (5) $33
Asset writedowns 36 (17) 19
Other exit costs 1 -- 1
--- ---- ---
Total $75 $(22) $53
=== ==== ===
8
<PAGE>
In the second quarter of 1999, we also recognized other charges
consisting of losses on aerospace engine maintenance contracts and a
cancellation penalty totaling $45 million, customer and employee
claims of $29 million, and other asset impairments and write-offs,
including inventory, of $73 million.
Repositioning and other charges totaling $222 million are included
as part of cost of goods sold. Equity in income of affiliated
companies also includes a $36 million charge resulting from an other
than temporary decline in value of an equity investment due to a
significant deterioration in market conditions. The total pretax
impact of the repositioning and other charges are $258 million
(after-tax $156 million, or $0.28 per share).
Note 9. On June 4, 1999, AlliedSignal entered into a merger
agreement with Honeywell Inc. (Honeywell). The merger is subject to
shareholder approval, regulatory reviews and other conditions. Under
the terms of the merger agreement, each share of Honeywell common
stock will be exchanged for 1.875 shares of AlliedSignal common stock.
As of the end of the second quarter of 1999, based on approximately 127
million Honeywell shares outstanding and AlliedSignal's stock price,
the transaction is valued at approximately $15 billion. The new
company will have annual revenues of about $25 billion and will assume
approximately $1.5 billion of Honeywell debt. The transaction will be
accounted for as a pooling of interests and is expected to close by
the fourth quarter of 1999. Upon completion of the merger, the name
of AlliedSignal Inc. will be changed to Honeywell International Inc. The
merger agreement provides for payment of termination fees of up to
$350 million under certain circumstances. AlliedSignal and Honeywell
also have entered into option agreements pursuant to which, under
certain circumstances, AlliedSignal may purchase approximately 19.9%
of Honeywell's outstanding common stock for $109.453 per share and
Honeywell may purchase approximately 19.9% of AlliedSignal's
outstanding common stock for $58.375 per share.
9
<PAGE>
Report on Review by Independent Accountants
-------------------------------------------
To the Shareowners and Directors
of AlliedSignal Inc.
We have reviewed the accompanying consolidated balance sheet of
AlliedSignal Inc. and its subsidiaries as of June 30, 1999, and the
related consolidated statements of income for each of the three-
month and six-month periods ended June 30, 1999 and 1998 and the
consolidated statements of cash flows for the six-month periods
ended June 30, 1999 and 1998. These financial statements are 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 accompanying consolidated interim
financial statements for them to be in conformity with generally
accepted accounting principles.
We previously audited in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1998,
and the related consolidated statements of income, of shareowners'
equity, and of cash flows for the year then ended (not presented
herein), and in our report dated February 1, 1999 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, 1998,
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 11, 1999
10
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
A. Results of Operations - Second Quarter 1999 Compared with Second Quarter 1998
- -------------------------------------------------------------------------------
Net sales in the second quarter of 1999 were $3,818 million, a
decrease of $51 million, or 1%, compared with the second quarter of
1998. The decrease resulted from divested businesses of $199
million, lower selling prices of $61 million and the impact of
foreign exchange of $14 million. Higher sales resulting from volume
gains of $126 million and from acquisitions of $97 million were a
partial offset.
Income from operations in the second quarter of 1999 was $355
million. As discussed in Note 8 on page 8 of this Form 10-Q, $222
million relating to a provision for repositioning actions and
certain other charges reduced income from operations in the current
quarter. Income from operations in the second quarter of 1998 was
$514 million. Operating margin for the second quarter of 1999 was
9.3%. The impact of the provision for repositioning actions and
other charges reduced operating margin by 5.8%. Operating margin for
the second quarter of 1998 was 13.3%. Income from operations is
discussed in detail by segment in the Review of Business Segments
section below.
The repositioning charge of $75 million represents the cost of
actions designed to enhance our competitiveness and productivity and
improve future profitability. The repositioning plan includes the
organizational realignment of our aerospace businesses to strengthen
market and customer focus and simplify its business structure; the
elimination of an unprofitable product line and rationalization of
manufacturing capacity in the Polymers business; and related
workforce reductions in these businesses. The plan also includes
workforce reductions in the Friction Materials, Specialty Chemicals
and Turbocharging Systems businesses. The cost of the repositioning
actions will be financed through the net cash proceeds from the
disposition of our investment in AMP and we do not anticipate any
significant impact on liquidity as a result of the repositioning
plan. The repositioning actions are expected to be completed by
December 31, 1999 and are expected to generate improvements in
pretax income of approximately $75 million annually primarily from
lower personnel-related costs.
Equity in income of affiliated companies, a loss of $16 million
in the second quarter of 1999, was $45 million lower compared with
the second quarter of 1998. The decrease relates to a $36 million
charge in the second quarter of 1999 resulting from an other than
temporary decline in the value of an equity investment and lower
earnings from the UOP process technology joint venture (UOP).
Other income (expense), $277 million of income in the second
quarter of 1999, includes the net gain of $268 million on the
disposition of our investment in AMP.
Interest and other financial charges of $30 million in the
second quarter of 1999 decreased by $2 million, or 6%, compared with
the second quarter of 1998. The decrease reflects higher average
debt outstanding during the current quarter versus the comparable
period in the prior year which was more than offset by lower
interest rates and tax interest expense.
Net income of $400 million, or $0.71 per share, in the second
quarter of 1999 was 14% higher than the prior year's second quarter
net income of $350
11
<PAGE>
million, or $0.61 per share. Net income in the
second quarter of 1999, adjusted for the gain on the disposition of
our investment in AMP and the repositioning and other charges, was
$395 million, or $0.70 per share, an increase of 13% over the prior
year. The higher net income in the second quarter of 1999 was the
result of improved earnings for Turbine Technologies, Aerospace
Systems and Transportation Products. Specialty Chemicals &
Electronic Solutions and Performance Polymers had lower earnings.
Review of Business Segments
- ---------------------------
The results of the Business Segments do not include the gain on
the disposition of our investment in AMP and the repositioning and
other charges.
Aerospace Systems sales were $1,202 million in the second
quarter of 1999 compared with $1,204 million in the second quarter
of 1998. Excluding the adverse impact on sales resulting from a
change from prime contractor to sub-contractor on a government
technical services contract and the prior year divestiture of the
communications business, sales in the second quarter of 1999
increased by 6% compared with the second quarter of 1998. The
increase reflects continued strong sales of flight safety products;
higher aftermarket sales and improved engineering services revenues.
The acquisition of a controlling interest in the Normalair-Garrett
Ltd. (NGL) environmental controls joint venture in June 1998 also
contributed to higher sales.
Aerospace Systems income from operations of $245 million in the
second quarter of 1999 increased by $44 million, or 22%, compared
with the second quarter of 1998 due principally to an improved cost
structure and increased sales of higher margin aftermarket and
flight safety products.
Specialty Chemicals & Electronic Solutions sales of $517
million in the second quarter of 1999 were $72 million, or 12%,
lower compared with the comparable quarter of 1998 due to
divestitures, primarily the environmental catalyst business. Higher
sales of pharmaceutical intermediates, due mainly to the prior year
acquisition of Pharmaceutical Fine Chemicals S.A., and specialty
waxes and additives were a partial offset.
Specialty Chemicals & Electronic Solutions income from
operations of $75 million in the second quarter of 1999 decreased by
$37 million, or 33%, compared with the second quarter of 1998. The
decrease resulted primarily from divestitures. The negative impact
of pricing pressures and higher expenses associated with the
development of new products also contributed to the decrease. Lower
raw material costs were a partial offset.
Turbine Technologies sales of $1,002 million in the second
quarter of 1999 were $81 million, or 9%, higher compared with the
second quarter of 1998. The increase reflects continued strong
growth in Europe for the company's turbochargers used in turbo-
diesel-powered passenger cars, as well as a growing demand for
turbochargers in the North American light-truck market. Sales for
aircraft engines increased moderately due to higher sales of
propulsion engines to the business aviation market and increased
aftermarket sales to the military. Lower original equipment sales
of propulsion engines to the military were a partial offset.
Turbine Technologies income from operations of $177 million in the
second quarter of 1999 increased by $74 million, or 72%, compared with the
second quarter of 1998 driven by a significantly lower cost structure,
higher sales volume, a more profitable product mix and technology licensing.
12
<PAGE>
Performance Polymers sales of $469 million in the second
quarter of 1999 were $62 million, or 12%, lower compared with the
same period in the prior year. Sales increases for specialty films
and engineering plastics were more than offset by the loss of sales
resulting from the divestiture of the phenol business and exiting
of the European carpet fibers business in 1998. Sales for performance
fibers were also lower.
Performance Polymers income from operations of $70 million in
the second quarter of 1999 was lower by $22 million, or 24%,
compared with the same period in the prior year. The decrease
principally reflects pricing pressures, particularly in performance
fibers, weak demand for textile nylon and prior year divestitures.
The benefit of sales increases in engineering plastics and specialty
films and cost structure improvements were a partial offset.
Transportation Products sales were $615 million in the second
quarter of 1999 compared with $609 million in the second quarter of
1998. Truck Brake Systems sales improved significantly driven by
strong truck builds and mandated installations of anti-lock brake
systems. Sales of Fram filters also increased, benefiting from a
positive response to increased advertising and new products. Lower
sales for Friction Materials were a partial offset.
Transportation Products income from operations of $47 million
in the second quarter of 1999 improved by $12 million, or 34%,
compared with the second quarter of 1998. The increase reflects
higher sales for truck brakes and filters, cost structure
improvements and the benefits of Six Sigma initiatives.
B. Results of Operations - Six Months 1999 Compared with Six Months 1998
---------------------------------------------------------------------
Net sales in the first six months of 1999 were $7,414 million,
a decrease of $101 million, or 1%, compared with the first six
months of 1998. The decrease resulted from divested businesses of
$370 million, lower selling prices of $111 million and the impact of
foreign exchange of $12 million. Higher sales resulting from volume
gains of $200 million and from acquisitions of $192 million were a
partial offset.
Income from operations in the first six months of 1999 was $861
million. As discussed on page 11 of Management's Discussion and
Analysis of Results of Operations, $222 million relating to a
provision for repositioning actions and certain other charges
reduced income from operations in the first six months of 1999.
Income from operations in the first six months of 1998 was $953
million. Operating margin for the first six months of 1999 was
11.6%. The impact of the provision for repositioning actions and
other charges reduced operating margin by 3.0%. Operating margin for
the first six months of 1998 was 12.7%. Income from operations is
discussed in detail by segment in the Review of Business Segments
section below.
Equity in income of affiliated companies, a loss of $4 million
in the first six months of 1999, was $67 million lower compared with
the first six months of 1998. The decrease relates to a $36 million
charge in the second quarter of 1999 resulting from an other than
temporary decline in the value of an equity investment and lower
earnings from UOP.
Other income (expense), $292 million of income in the first six
months of 1999, increased by $293 million compared with the first
six months of 1998. The increase reflects the net gain on the
disposition of our investment in AMP, higher investment income
and a favorable impact of foreign exchange hedging.
13
<PAGE>
Interest and other financial charges of $74 million in the
first six months of 1999 increased by $8 million, or 12%, compared
with the first six months of 1998. The increase reflects higher
average debt outstanding during the first six months of 1999 versus
the comparable period in the prior year partially offset by lower
interest rates and tax interest expense.
Net income of $735 million, or $1.30 per share, in the first
six months of 1999 was 13% higher than the prior year's first six
months net income of $650 million, or $1.13 per share. Net income
in the first six months of 1999, adjusted for the gain on the
disposition of our investment in AMP and the repositioning and other
charges, was $730 million, or $1.29 per share, an increase of 12%
over the prior year. The higher net income in the first six months
of 1999 was the result of improved earnings for Turbine
Technologies, Aerospace Systems and Transportation Products.
Specialty Chemicals & Electronic Solutions and Performance Polymers
had lower earnings.
Review of Business Segments
- ---------------------------
The results of the Business Segments do not include the gain on
the disposition of our investment in AMP and the repositioning and
other charges.
Aerospace Systems sales of $2,352 million in the first six
months of 1999 increased by $18 million, or 1%, compared with the
first six months of 1998. The increase reflects strong sales of
flight safety products, higher aftermarket sales and the acquisition
of NGL. The increase was partially offset by the adverse impact on
sales resulting from a restructuring of a government technical
services contract and the divestiture of the communications
business.
Aerospace Systems income from operations of $450 million in the
first six months of 1999 increased by $54 million, or 14%, compared
with the first six months of 1998 due principally to an improved
cost structure and increased sales of higher margin products.
Specialty Chemicals & Electronic Solutions sales of $1,045
million in the first six months of 1999 decreased by $142 million,
or 12%, compared with the first six months of 1998 due to
divestitures, principally the environmental catalyst business.
Specialty Chemicals & Electronic Solutions income from
operations of $160 million in the first six months of 1999 decreased
by $51 million, or 24%, compared with the first six months of 1998.
The decrease resulted primarily from divestitures, the negative
impact of pricing pressures and higher expenses associated with new
product development. An improved cost structure was a partial
offset.
Turbine Technologies sales of $1,865 million in the first six
months of 1999 were $124 million, or 7%, higher compared with the
first six months of 1998. The increase principally reflects
strong sales of turbochargers,particularly in Europe, and higher
sales of aircraft propulsion engines to the business aviation market.
Lower original equipment sales of propulsion engines to the military
were a partial offset.
Turbine Technologies income from operations of $311 million in
the first six months of 1999 increased by $120 million, or 63%,
compared with the first six months of 1998. The increase reflects
an improved cost structure, higher sales, the redeployment of assets
to support development of the turbogenerator and AS900 engine and
technology licensing.
14
<PAGE>
Performance Polymers sales of $924 million in the first six
months of 1999 were $134 million, or 13%, lower compared with the
same period in the prior year. The decrease primarily reflects the
loss of sales resulting from the divestiture of the phenol business
and the exiting of the European carpet fibers business in 1998 and
lower sales for performance fibers. Higher sales for specialty
films were a partial offset.
Performance Polymers income from operations of $134 million in
the first six months of 1999 was lower by $31 million, or 19%,
compared with the same period in the prior year. The decrease
principally reflects weak demand for textile nylon, pricing
pressures in performance fibers and prior year divestitures.
Transportation Products sales of $1,208 million in the first
six months of 1999 increased by $53 million, or 5%, compared with
the first six months of 1998 due to increased sales for truck
brakes, Fram filters and Prestone car care products. Lower sales
for Friction Materials were a partial offset.
Transportation Products income from operations of $90 million
in the first six months of 1999 improved by $39 million, or 76%,
compared with the first six months of 1998 due to higher sales for
truck brakes, Fram filters and Prestone car care products and cost
structure improvements for these business.
C. Financial Condition, Liquidity and Capital Resources
----------------------------------------------------
Total assets at June 30, 1999 were $14,089 million, a decrease
of $1,471 million, or 9%, from December 31, 1998 principally from
the disposition of our investment in AMP in April 1999.
Cash provided by operating activities of $747 million during
the first six months of 1999 increased by $249 million compared with
the first six months of 1998. The increase was due principally to
higher net income and the decrease in net taxes paid on sales of
businesses and investments.
Cash provided by investing activities of $1,134 million during
the first six months of 1999 increased by $1,069 million compared
with the first six months of 1998. The increase relates principally
to the disposition of our investment in AMP and a decrease in
spending for acquisitions. The liquidation in the prior year of
short-term investments to fund acquisitions and repurchases of
AlliedSignal's common stock was a partial offset.
On June 4, 1999, AlliedSignal entered into a merger agreement
with Honeywell Inc. (Honeywell). The merger is subject to shareholder
approval, regulatory reviews and other conditions. Under the terms
of the merger agreement, each share of Honeywell common stock will
be exchanged for 1.875 shares of AlliedSignal common stock. As of the
end of the second quarter of 1999, based on approximately
127 million Honeywell shares outstanding and AlliedSignal's stock price,
the transaction is valued at approximately $15 billion. The
new company will have annual revenues of about $25 billion and will
assume approximately $1.5 billion of Honeywell debt. The transaction
will be accounted for as a pooling of interests and is expected to
close by the fourth quarter of 1999. Upon completion of the merger,
the name of AlliedSignal Inc. will be changed to Honeywell International Inc.
The merger agreement provides for payment of termination fees of up to $350
million under certain circumstances. AlliedSignal and Honeywell also
have entered into option agreements pursuant to which, under certain
circumstances, AlliedSignal may
15
<PAGE>
purchase approximately 19.9% of Honeywell's outstanding common stock
for $109.453 per share and Honeywell may purchase approximately
19.9% of AlliedSignal's outstanding common stock for $58.375 per share.
In July 1999, AlliedSignal announced the sale of its
laminate systems business to Rutgers AG for approximately $425
million in cash. The laminate systems business has annual
revenues of about $400 million. Also in July 1999, AlliedSignal
announced the acquisition of Johnson Matthey Electronics, a division of
Johnson Matthey Plc, for approximately $655 million in cash.
Johnson Matthey Electronics is a leading supplier of materials to
the semiconductor and micro electronics industries and has annual
sales of approximately $670 million.
AlliedSignal continuously assesses the relative strength of
each business in its portfolio as to strategic fit, market position
and profit contribution in order to upgrade its combined portfolio
and identify operating units that will most benefit from increased
investment. AlliedSignal identifies acquisition candidates that
will further its strategic plan and strengthen its existing core
businesses. AlliedSignal 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 1999, AlliedSignal sold certain non-strategic businesses
and other assets.
Cash used for financing activities of $1,945 million during the
first six months of 1999 increased by $1,278 million compared with
the comparable period in the prior year. The increase relates to
higher net payments of debt of $974 million and an increase of $285
million in net stock repurchases. AlliedSignal's long-term debt on
June 30, 1999 was $1,453 million, a decrease of $23 million, or 2%,
compared with year-end 1998. Total debt of $2,552 million at June
30, 1999 was $935 million, or 27%, lower than at December 31, 1998.
The decrease relates to the repayment of debt with the net proceeds
from the liquidation of our investment in AMP. AlliedSignal's total
debt as a percent of capital at June 30, 1999 was 30.8%, compared
with 36.7% at year-end 1998.
During the first six months of 1999, AlliedSignal repurchased
18.9 million shares of common stock for $966 million in connection
with its stock repurchase programs. As a result of the pending
merger with Honeywell, effective June 4, 1999, AlliedSignal
rescinded its share repurchase programs.
D. Other Matters
------------
Year 2000
---------
Computer programs and embedded computer chips that are not Year
2000 compliant are unable to distinguish between the calendar year
1900 and the calendar year 2000. AlliedSignal 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 Year 2000 problem.
We have assessed how our businesses may be impacted by the Year
2000 problem and have implemented a comprehensive plan to address
all known aspects of the Year 2000 problem: information systems
(both critical information systems, which are systems the failure of
which could have a material effect on our operations, and
noncritical information systems), production and facilities
equipment, products, customers and suppliers (both high-impact
suppliers, suppliers who would materially impact our operations if
they were unable to provide supplies or services on a timely basis,
and other suppliers).
16
<PAGE>
We have substantially completed the assessment, development of
remediation plans and remediation with respect to the various
aspects of the Year 2000 problem.
We completed an inventory of and assessed the impact of the
Year 2000 problem with respect to our information systems,
production and facilities equipment, products, customers and
suppliers. Based on the results of the assessment, we prioritized
the various projects to remedy potential Year 2000
problems. We developed and implemented plans to remediate known
Year 2000 problems. Testing to ensure that the remediation was
successfully completed was part of the remediation process. We have
developed contingency plans and trained specialist teams to
implement such contingency plans to address any Year 2000 problems
which are unexpected or have not been remedied in a timely manner
under our remediation plans.
The remediation plans for information systems involved a
combination of software modifications, upgrades and replacements.
The remediation plans for production and facilities equipment
involved a combination of software or hardware modifications,
upgrades and replacements, or changes to operating procedures to
circumvent equipment failures caused by the Year 2000 problem. The
remediation plans for products involved modifying software and/or
hardware contained in products, or issuing service letters or other
industry standard communications providing customers with
instructions on correcting Year 2000 issues in our products. The
remediation plans for suppliers (including financial institutions,
governmental agencies and public utilities) and customers involved
obtaining information about their Year 2000 programs through
surveys, meetings and other communication, the evaluation of the
information received, and the development of appropriate responses.
While remediation with respect to customers, high impact suppliers
and other suppliers is substantially complete, we can provide no
assurance that the Year 2000 problems will be successfully corrected
by suppliers and customers in a timely manner.
Our estimate of the total cost for Year 2000 compliance has
been reduced from $150 million to $135 million, of which
approximately $129 million has been incurred through June 30, 1999.
This estimate does not include our potential share of costs for Year
2000 issues by partnerships and joint ventures in which we
participate but are not the operator. Incremental spending has not
been and is not expected to be material because most Year 2000
compliance costs have been met with amounts that are normally
budgeted for procurement and maintenance of our information systems
and production and facilities equipment. The redirection of
spending from procurement of information systems and production and
facilities equipment to implementation of Year 2000 compliance plans
may have in some instances delayed productivity improvements.
We believe that the Year 2000 issue will not cause material
operational problems for us. However, if we have not been
successful in identifying all material Year 2000 problems, or the
assessment and remediation of identified Year 2000 problems has not
corrected such problems in a timely manner, there may be an
interruption in, or failure of, certain normal business activities
or operations. Such interruptions or failures could have a material
adverse impact on our consolidated results of operations and
financial position or on our relationships with customers, suppliers
or others.
Euro Conversion
---------------
On January 1, 1999, certain member countries of the European Union
established fixed conversion rates between their existing currencies and the
17
<PAGE>
European Union's common currency (Euro). The transition period
for the introduction of the Euro will be between January 1, 1999
and January 1, 2002. AlliedSignal is presently identifying and
ensuring that all Euro conversion compliance issues are addressed.
Although we cannot predict the overall impact of the Euro conversion
at this time, we do not expect that the Euro conversion will have a
material adverse effect on our consolidated results of operations.
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 AlliedSignal's most recent annual report filed on Form
10-K (Item 7A). Except for the disposition of our investment in
AMP, discussed in Note 7 on page 8 of this Form 10-Q, there has been
no material change in this information.
18
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The following exhibits are filed with this
Form 10-Q:
10.5 Amendment to the AlliedSignal Inc. Incentive
Compensation Plan for Executive Employees
10.9 Amendment to the Salary Deferral Plan for Selected Employees
of AlliedSignal Inc. and its Affiliates
15 Independent Accountants' Acknowledgment Letter
as to the incorporation of their report relating
to unaudited interim financial statements
27 Financial Data Schedule
(b) Reports on Form 8-K. The following reports on Form 8-K were
filed during the three months ended June 30, 1999:
1. On June 8, 1999, a report was filed reporting that an Agreement
and Plan of Merger was entered into by AlliedSignal Inc.
and Honeywell Inc. This report was amended by Form 8-K/A filed
on July 16, 1999.
19
<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 12, 1999 By: /s/ Richard J. Diemer, Jr.
-----------------------------
Richard J. Diemer Jr.
Vice President and Controller
(on behalf of the Registrant
and as the Registrant's
Principal Accounting Officer)
20
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
2 Omitted (Inapplicable)
3 Omitted (Inapplicable)
4 Omitted (Inapplicable)
10.5 Amendment to the AlliedSignal Inc.
Incentive Compensation Plan for
Executive Employees
10.9 Amendment to the Salary Deferral Plan
for Selected Employees of AlliedSignal
Inc. and its Affiliates
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)
10.5
AMENDMENT OF THE ALLIEDSIGNAL INC. INCENTIVE
COMPENSATION PLAN FOR EXECUTIVE EMPLOYEES
WITNESSETH
WHEREAS, AlliedSignal Inc. (the "Corporation") maintains the
AlliedSignal Inc. Incentive Compensation Plan for Executive
Employees (the "Plan"), an incentive compensation plan for a
select group of highly compensated employees; and
WHEREAS, the Corporation is desirous of amending the Plan in
certain particulars; and
WHEREAS, Article XI of the Plan reserves to the
Corporation's Board of Directors the right to amend the Plan
at any time;
NOW, THEREFORE, the Plan is hereby amended, effective
January 1, 1999, as follows:
1. Article VIII.A is amended by adding the following
paragraph thereto:
The rate of notional established by the Committee
shall be set forth on Schedule A attached hereto and
made a part hereof. Any portion of such rate
designated as "Vested Rate" on such Schedule A shall be
nonforfeitable at all times. Any portion of such rate
designated as "Contingent Rate" on such Schedule A
shall become nonforfeitable only if the Employee is
still employed by the Company at the end of the third
full calendar year following the calendar year to which
the Award relates; provided, however, that in the event
an Employee terminates employment with the Company as a
result of early or normal retirement (as defined in the
qualified pension plan in which the Employee
participates), death or disability (determined in the
same manner as under the AlliedSignal Voluntary
Employees Beneficiary Association Long-Term Disability
Income Plan), no portion of such rate shall be treated
as "Contingent", even if such retirement, death or
disability occurs prior to the end of the third full
calendar year following the calendar year to which the
Award relates. The rate established by the Committee
and set forth on Schedule A shall remain in effect
until superceded by action of the Committee and
amendment of such Schedule A.
2. Article VIII is amended by adding the following Section
E. thereto:
E. Notwithstanding the foregoing, in the event an
Employee's employment with the Company is terminated
either voluntarily or for "gross cause" (as defined in
the Severance Pay Plan for Designated Career Band 5
Employees of AlliedSignal Inc. or in the AlliedSignal
Severance Pay Plan for Senior Executives, as
applicable), the nonforfeitable portion of such
Employee's Deferred Awards shall be distributed in a
lump sum as soon as practicable after such termination
of employment.
3. The Plan is amended by adding the attached Schedule A
thereto.
<PAGE>
SCHEDULE A
Notional Interest Rate
Award Year Vested Rate Contingent Rate Total Rate
1998 (Bands 5 and below) 6% 3% 9%
1998 (Bands 6 and above) 8% 3% 11%
10.9
AMENDMENT OF THE SALARY DEFERRAL PLAN FOR SELECTED
EMPLOYEES OF ALLIEDSIGNAL INC. AND ITS AFFILIATES
(CAREER BAND 6 AND ABOVE OR EMPLOYEES WHO OCCUPY
POSITIONS EQUIVALENT THERETO)
WITNESSETH
----------
WHEREAS, AlliedSignal Inc. (the "Corporation") maintains the
Salary Deferral Plan for Selected Employees of AlliedSignal
Inc. and its Affiliates (Career Band 6 and Above or
Employees Who Occupy Positions Equivalent Thereto) (the
"Plan"), a nonqualified deferred compensation plan for a
select group of highly compensated employees; and
WHEREAS, the Corporation is desirous of amending the Plan in
certain particulars; and
WHEREAS, Section 11(d) of the Plan reserves to the
Corporation the right to amend the Plan at any time;
NOW, THEREFORE, the Plan is hereby amended, effective
January 1, 1999, as follows:
1. Section 5 is amended by adding the following paragraph
thereto:
The rate established by the Committee for
calculating Interest Equivalents on such Deferral
Amounts shall be set forth on Schedule A attached
hereto and made a part hereof. Any portion of such
rate designated as "Vested Rate" on such Schedule A
shall be nonforfeitable at all times. Any portion of
such rate designated as "Contingent Rate" on such
Schedule A shall become nonforfeitable only if the
Participant is still employed by the Corporation or an
affiliate on the third January 1 following the calendar
year to which the applicable Deferral Amounts relate;
provided, however, that in the event a Participant
terminates employment with the Corporation or an
affiliate as a result of early or normal retirement (as
defined in the qualified pension plan in which the
Participant participates), death or disability
(determined in the same manner as under the
AlliedSignal Voluntary Employees Beneficiary
Association Long-Term Disability Income Plan), no
portion of such rate shall be treated as "Contingent",
even if such retirement, death or disability occurs
prior to the third January 1 following the calendar
year to which the applicable Deferral Amounts relate.
The rate established by the Committee and set forth on
Schedule A shall remain in effect until superceded by
action of the Committee and amendment of such Schedule
A.
<PAGE>
2. Section 7 is amended by adding the following paragraph
thereto:
Notwithstanding the foregoing, in the event a
Participant's employment with the Corporation or an
affiliate is terminated either voluntarily or for
"gross cause" (as defined in the AlliedSignal Inc.
Severance Plan for Senior Executives), the
nonforfeitable portion of such Participant's Account
shall be distributed in a lump sum as soon as
practicable after such termination of employment.
3. The Plan is amended by adding the attached Schedule A
thereto.
<PAGE>
SCHEDULE A
Interest Equivalents
Calendar Year Vested Rate Contingent Rate Total Rate
1999 8% 3% 11%
Exhibit 15
----------
August 12, 1999
Securities and Exchange Commission
450 Fifth Street
Washington, D.C. 20549
Commissioners:
We are aware that our report dated August 11, 1999 on our
review of interim financial information of AlliedSignal Inc.
for the period ended June 30, 1999 and included in
AlliedSignal's quarterly report on Form 10-Q for the quarter
then ended is incorporated by reference in its 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, 333-57519 and 333-83511), on Forms S-3 (Nos.
33-13211, 33-14071, 33-55425, 33-64245, 333-22355, 333-44523,
333-45555, 333-49455, 33-68847 and 333-74075), on Form S-4 (No.
333-82049) and on Form S-8 (filed as an amendment to Form S-14,
No. 2-99416-01).
Very truly yours,
PricewaterhouseCoopers LLP
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet at June 30, 1999 and the consolidated statement of
income for the six months ended June 30, 1999 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
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