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 September 30, 1998
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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
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AlliedSignal Inc.
---------------------------------
(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) (ZipCode)
(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 September 30, 1998
- ----------------------- -----------------------
$1 par value 560,050,080 shares
AlliedSignal Inc.
Index
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Page No.
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Part I. - Financial Information
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Item 1. Condensed Financial Statements:
Consolidated Balance Sheet -
September 30, 1998 and December 31,1997 3
Consolidated Statement of Income -
Three and Nine Months Ended September 30, 1998
and 1997 4
Consolidated Statement of Cash Flows -
Nine Months Ended September 30,1998 and 1997 5
Notes to Financial Statements 6
Report on Review by Independent
Accountants 9
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 20
Part II.- Other Information
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Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
-2-
AlliedSignal Inc.
Consolidated Balance Sheet
(Unaudited)
September 30 December 31
1998 1997
------------- -------------
(Dollars in millions)
ASSETS
Current assets:
Cash and cash equivalents $ 566 $ 611
Short-term investments - 430
Accounts and notes receivable 1,707 1,886
Inventories 2,446 2,093
Other current assets 589 553
----- -------
Total current assets 5,308 5,573
Investments and long-term
receivables 430 480
Property, plant and equipment 9,359 9,189
Accumulated depreciation and
amortization (5,072) (4,938)
Cost in excess of net assets of
acquired companies - net 2,988 2,426
Other assets 1,011 977
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Total assets $14,024 $13,707
======= ========
LIABILITIES
Current liabilities:
Accounts payable $ 1,268 $ 1,345
Short-term borrowings 71 47
Commercial paper 747 821
Current maturities of long-term debt 182 224
Accrued liabilities 1,736 1,999
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Total current liabilities 4,004 4,436
Long-term debt 1,459 1,215
Deferred income taxes 655 694
Postretirement benefit obligations
other than pensions 1,749 1,775
Other liabilities 1,125 1,201
SHAREOWNERS' EQUITY
Capital - common stock issued 716 716
- additional paid-in capital 2,917 2,425
Common stock held in treasury, at cost (3,246) (2,665)
Accumulated other nonowner changes (169) (179)
Retained earnings 4,814 4,089
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Total shareowners' equity 5,032 4,386
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Total liabilities and shareowners'equity $14,024 $13,707
======= =======
Notes to Financial Statements are an integral part of this statement.
-3-
AlliedSignal Inc.
Consolidated Statement of Income
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -------------------
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in millions except per share amounts)
Net sales $3,741 $3,657 $11,256 $10,562
------ ------ ------- -------
Cost of goods sold 2,838 2,840 8,596 8,209
Selling, general and
administrative expenses 396 394 1,200 1,145
----- ----- ------ -------
Total costs and expenses 3,234 3,234 9,796 9,354
----- ----- ------ -------
Income from operations 507 423 1,460 1,208
Equity in income of affiliated
companies 19 44 82 140
Other income (expense) (8) 14 (9) 62
Interest and other financial
charges (38) (50) (104) (131)
----- ----- ------ ------
Income before taxes on income 480 431 1,429 1,279
Taxes on income 151 139 450 423
---- ----- ------ ------
Net income $ 329 $ 292 $ 979 $ 856
====== ====== ====== ========
Earnings per share of common
stock - basic $ .59 $ .52 $ 1.74 $ 1.51
===== ====== ====== =======
Earnings per share of common
stock - assuming dilution $ .58 $ .50 $ 1.70 $ 1.47
====== ====== ====== =======
Cash dividends per share of
common stock $ .15 $ .13 $ .45 $ .39
====== ====== ====== =======
Notes to Financial Statements are an integral part of this statement.
-4-
AlliedSignal Inc.
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
-----------------
1998 1997
---- ----
(Dollars in millions)
Cash flows from operating activities:
Net income $ 979 $ 856
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization (includes goodwill) 453 456
Undistributed earnings of equity affiliates 7 (40)
Deferred income taxes 153 68
Decrease in accounts and notes receivable 150 67
(Increase) in inventories (142) (179)
Decrease in other current assets 13 17
(Decrease) increase in accounts payable (117) 8
(Decrease) in accrued liabilities (415) (253)
Taxes paid on sales of businesses (195) (5)
Other (68) (230)
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Net cash provided by operating activities 818 765
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Cash flows from investing activities:
Expenditures for property, plant and equipment (445) (471)
Proceeds from disposals of property, plant and
equipment 51 31
Decrease in investments and long-term receivables - 26
(Increase) in other investments - (6)
Cash paid for acquisitions (335) (854)
Proceeds from sales of businesses 281 35
Decrease (increase) in short-term investments 430 (173)
----- -------
Net cash (used for) investing activities (18) (1,412)
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Cash flows from financing activities:
Net (decrease) increase in commercial paper (74) 405
Net (decrease) in short-term borrowings (12) (2)
Proceeds from issuance of preferred stock of subsidiary - 112
Proceeds from issuance of common stock 122 135
Proceeds from issuance of long-term debt 413 23
Payments of long-term debt (261) (97)
Repurchase of preferred stock of subsidiary - (112)
Repurchases of common stock (779) (534)
Cash dividends on common stock (254) (221)
Other - (42)
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Net cash (used for) financing activities (845) (333)
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Net (decrease) in cash and cash equivalents (45) (980)
Cash and cash equivalents at beginning of year 611 1,465
------ ------
Cash and cash equivalents at end of period $ 566 $ 485
====== =======
Notes to Financial Statements are an integral part of this statement.
-5-
AlliedSignal Inc.
Notes to Financial Statements
(Unaudited)
(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 September 30, 1998 and the results
of operations for the three and nine months ended September 30, 1998 and
1997 and cash flows for the nine months ended September 30, 1998 and
1997. The results of operations for the three- and nine- month periods
ended September 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 September 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:
September 30, December 31,
1998 1997
------------ ------------
Trade $1,427 $1,466
Other 317 457
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1,744 1,923
Less-Allowance for
doubtful accounts and
refunds (37) (37)
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$1,707 $1,886
========== =========
Note 3. Inventories consist of the following:
September 30, December 31,
1998 1997(a)
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Raw materials $593 $605
Work in process 733 722
Finished products 1,204 905
Supplies and containers 97 89
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2,627 2,321
Less - Progress payments (68) (88)
Reduction to LIFO cost basis (113) (140)
----------- --------
$2,446 $2,093
========== ========
(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 three
and nine months ended September 30, 1998 were $380 and $989 million,
respectively, compared with $261 and $705 million for each of the same
periods of 1997. Nonowner changes in shareowners' equity principally
represent net income and foreign currency translation adjustments.
-6-
Note 5. The details of the earnings per share calculations for the
three- and nine-month periods ending September 30, 1998 and 1997 follow:
Three Months Nine Months
--------------------- ------------------
Per Per
Share Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
1998
Earnings per share of common
stock - basic $329 560.0 $.59 $979 562.5 $1.74
Dilutive securities:
Stock options 10.6 12.4
Restricted stock units .9 .8
----- ----- ---- ---- ----- ----
Earnings per share of common
stock - assuming dilution $329 571.5 $.58 $979 575.7 $1.70
===== ===== ==== ==== ===== =====
1997
Earnings per share of common
stock - basic $292 564.5 $.52 $856 565.6 $1.51
Dilutive securities:
Stock options 15.7 14.8
Restricted stock units .9 1.0
----- ---- ----- ----- ----- ----
Earnings per share of common
stock - assuming dilution $292 581.1 $.50 $856 581.4 $1.47
==== ===== ==== ==== ===== =====
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 nine-month periods ended September 30, 1998 and 1997, the number
of stock options not included in the computations were 2.0 million
and 1.9 million, and 1.1 million and 1.1 million, respectively.
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
debt exchange offer, holders of approximately $51 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 debt exchange offer,
holders of approximately $79 million principal amount of the
Company's 9 7/8% Debentures due June 1, 2002 and approximately $38
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 for financial reporting purposes.
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.
Note 8. On October 13, 1998, the Company through a wholly owned
subsidiary purchased for $890 million in cash 20 million shares, or
approximately 9% of the outstanding shares, of common stock of AMP
Incorporated (AMP), a Pennsylvania-based manufacturer of electrical
connection devices. The Company intends to acquire all outstanding
shares of AMP common stock not owned by the Company for aggregate
consideration amounting to $44.50 per share. Such price per share
is subject to decrease if AMP completes a pending self-tender for
its common stock or any diminution in value of AMP arising out of
the incremental costs and fees of AMP's financing of its self-tender
and subject to increase or decrease as a
-7-
result of changes in AMP's business or financial condition, prevailing
interest rates, or stock market, financial or other economic conditions.
The Company estimates that approximately $9.1 billion will be required to
complete an acquisition of AMP.
The $890 million purchase price for the shares of AMP common stock
purchased on October 13, 1998 was paid by proceeds from sales of
commercial paper. On October 9, 1998, the Company entered into
a $900 million 364 day backstop credit agreement with six banks.
Loans under the credit agreement are repayable on October 9, 1999,
subject to a one year extension as term loans upon election by the
Company (the "Term Loan Conversion Option"). To the extent
the Company elects to draw on this facility, loans outstanding under the
credit agreement will bear interest at a rate based on (i) the base
rate or (ii) the Eurocurrency rate plus a margin ranging from
0.17% to 0.5% if the Company has not elected the Term Loan
Conversion Option, and 0.225% to 0.7%, if the Company has elected
the Term Loan Conversion Option,in each case, depending on the
Company's long term senior unsecured non-credit enhanced debt ratings.
-8-
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 September 30, 1998, and
the consolidated statements of income for the three-month and nine-
month periods ended September 30, 1998 and 1997 and of cash flows
for the nine-month periods ended September 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
November 4, 1998
-9-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Results of Operations
---------------------
Third Quarter 1998 Compared with Third Quarter 1997
- ---------------------------------------------------
Net sales in the third quarter of 1998 were $3.7 billion, an
increase of $84 million, or 2%, compared with the third quarter of
1997. Of this increase, $255 million was due to volume gains and
$291 million was from acquisitions, offset in part by a $364 million
reduction for divested businesses, mainly the automotive safety
restraints business. Selling prices were lower by $84 million and
the impact of foreign exchange also reduced sales by $14 million.
During the second quarter 1998, the Company began reporting its
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 $1,242 million in the third
quarter of 1998 increased by $162 million, or 15%, compared with the
third quarter of 1997. This sales increase reflects continued
strong demand for safety avionics products, particularly for the
enhanced ground proximity warning system, and an increase in
aftermarket sales for engine fuel systems, environmental control
systems and aircraft landing systems. The acquisitions of a
controlling interest in the Normalair-Garrett Ltd. (NGL)
environmental controls joint venture in June 1998 and the 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 $541 million in the third
quarter of 1998 increased by $5 million, or 1%, compared with the
third quarter of 1997. Sales in Specialty Chemicals were higher
primarily reflecting the acquisitions of the Astor Holdings (Astor)
wax business in October 1997 and the Pharmaceutical Fine Chemicals
S.A. (PFC) pharmaceutical chemicals business in June 1998. This
sales increase more than offset the loss in sales due to the
divestiture in June 1998 of the environmental catalyst business and
the sales decline in Electronic Materials due to continued softness
in the semiconductor and electronics markets.
Turbine Technologies includes Aerospace Engines (auxiliary
power units; and propulsion engines); and Turbocharging Systems
(turbochargers; charged-air coolers; and portable power systems).
Turbine Technologies sales of $900 million in the third quarter of
1998 increased by $129 million, or 17%, compared with the same
quarter of 1997. This sales increase reflects strong sales of
propulsion engines for regional and executive aircraft and auxiliary
power units for commercial aircraft. Sales of turbochargers also
increased substantially, benefiting from increased penetration of
the turbocharged diesel car market in Europe and the light truck
market in North America.
-10-
Performance Polymers includes the Polymers unit (fibers;
plastic resins; specialty films; and intermediate chemicals).
Performance Polymers sales of $436 million in the third quarter of
1998 decreased by $73 million, or 14%, compared with the same
quarter of 1997. This sales decrease principally reflects the loss
of sales resulting from the divestiture of the phenol business and
the exiting of the European carpet fibers business and a portion of
the North American textile business.
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 $619 million in the third quarter
of 1998 decreased by $138 million, or 18%, compared with the third
quarter of 1997. This sales decrease reflects the divestiture of the
safety restraints business in October 1997. Excluding the divested
safety restraints business, sales were 12% higher. This sales gain
results from the acquisition of the Holt Lloyd Group Ltd. (Holt
Lloyd) in November 1997 and increased sales for Prestone car care
products and filters. Sales of truck brake systems were also
significantly higher driven by continued strong truck builds and
anti-lock truck brake installations.
Cost of goods sold as a percent of net sales decreased from
77.6% in the third quarter of 1997 to 75.8% in the third quarter 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 $507 million in the third quarter of
1998 increased by $84 million, or 20%, compared with the third
quarter of 1997. On a segment basis, Aerospace Systems income from
operations increased by 56%, Specialty Chemicals & Electronic
Solutions and Turbine Technologies income from operations both
increased by 7%. Income from operations for Performance Polymers
and Transportation Products decreased by 1% and 39%, respectively.
Excluding the divested safety restraints business, Transportation
Products income from operations decreased by 12%. The Company's
operating margin for the third quarter of 1998 was 13.6%, compared
with 11.6% for the same period last year. See the discussion of net
income below for information by segment.
Equity in income of affiliated companies of $19 million in the
third quarter of 1998 represents a decrease of $25 million, or 57%,
compared with the same quarter of 1997, primarily due to lower
earnings from the UOP process technology joint venture (UOP).
Other income (expense), an $8 million loss in the third quarter
of 1998, was unfavorable by $22 million, compared with the same
quarter of 1997, reflecting lower investment income due to a lower
cash position because of spending for acquisitions and repurchases
of the Company's common stock and reduced benefits from foreign
exchange.
Interest and other financial charges of $38 million in the
third quarter of 1998 decreased by $12 million, or 24%, compared
with the third quarter of 1997. This decrease results from lower
tax interest expense due to favorable settlements of worldwide tax
audits, offset in part by higher debt-related interest expense
reflecting higher levels of debt.
The effective tax rate in the third quarter of 1998 decreased
to 31.5%, compared with 32.3% in the third quarter of 1997,
primarily due to an increase in energy tax credits and other tax
planning strategies.
-11-
Net income of $329 million, or $0.58 per share, in the third
quarter of 1998 was 13% higher than net income of $292 million, or
$0.50 per share, in the third quarter of 1997. All earnings per
share data in Management's Discussion and Analysis reflect diluted
earnings per share.
Aerospace Systems net income of $162 million in the third
quarter of 1998 improved by $61 million, or 60%, compared with the
same quarter of 1997. This increase in net income principally
reflects sales growth in higher-margin safety and aftermarket
products and productivity improvements. The acquisition of NGL also
contributed to higher net income for Aerospace Systems.
Specialty Chemicals & Electronic Solutions net income of $56
million in the third quarter of 1998 decreased by $16 million, or
22%, compared with the third quarter of 1997, driven by a lower
contribution from UOP.
Turbine Technologies net income of $68 million in the third
quarter of 1998 increased by $16 million, or 31%, compared with the
third quarter of 1997. This increase in net income results from
significantly higher sales and productivity improvements.
Performance Polymers net income of $45 million in the third
quarter of 1998 decreased by $1 million, or 2%, compared with the
same quarter of 1997. Net income decreased due primarily to
lower unit volumes for the performance fibers businesses due to
a strike at one of the Company's customers and continued weakness
in the Asian economy. This decrease was offset by an improved
price-cost relationship across all businesses and the divestiture
of the phenol business.
Transportation Products net income of $10 million in the third
quarter of 1998 decreased by $8 million, or 44%, compared with the
third quarter of 1997. The decrease primarily reflects the absence
of net income from the divested safety restraints business. Net
income also declined for the Automotive Products Group. The
increase in net income for Truck Brake Systems due to higher sales
was a partial offset.
Nine Months 1998 Compared with Nine Months 1997
- -----------------------------------------------
Net sales in the first nine months of 1998 were $11.3 billion,
an increase of $694 million, or 7%, compared with the first nine
months of 1997. Of this increase, $949 million was due to volume
gains and $873 million was from acquisitions, offset in part by a
$854 million reduction for divested businesses, mainly the
automotive safety restraints business. Selling prices were lower by
$195 million and the impact of foreign exchange also reduced sales
by $79 million.
Aerospace Systems sales of $3,576 million in the first nine
months of 1998 increased by $657 million, or 23%, compared with the
first nine months of 1997. This sales increase was led by
significantly higher sales for the Company's flight safety and
cockpit communications products and strong sales for Aerospace
Equipment Systems across all product lines. The acquisitions of the
Grimes Aerospace (Grimes) lighting systems business in July 1997,
Banner and NGL also contributed to higher sales for Aerospace
Systems.
Specialty Chemicals & Electronic Solutions sales of $1,728
million in the first nine months of 1998 increased by $102 million,
or 6%, compared with the same period of 1997. Sales of Specialty
Chemicals were higher reflecting the acquisitions of Astor and PFC
which more than offset the decline in sales of
-12-
Electronic Materials due to soft semiconductor and electronics
markets and the loss of sales due to the divestiture of the
environmental catalysts business.
Turbine Technologies sales of $2,641 million in the first nine
months of 1998 increased by $399 million, or 18%, compared with the
same period of 1997. Engines sales increased significantly due
to strong demand for propulsion engines in the regional and business
jet markets and auxiliary power units in the commercial air transport market.
Sales of turbochargers also increased substantially, led principally by
continued strong demand in European diesel-powered passenger cars.
Performance Polymers sales of $1,494 million in the first nine
months of 1998 decreased by $13 million, or 1%, compared with the
first nine months of 1997. 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 the
exiting of the European carpet fibers business and a portion of the
North American textile business.
Transportation Products sales of $1,809 million in the first
nine months of 1998 decreased by $450 million, or 20%, compared with
the first nine months of 1997. The decrease reflects the divestiture
of the safety restraints business. Excluding the divested safety
restraints business, sales were 12% higher. This increase in sales
reflects the acquisitions of Holt Lloyd and Prestone and
significantly higher sales for Truck Brake Systems. This increase
was offset somewhat by lower sales for friction materials and spark
plugs.
Cost of goods sold as a percent of net sales decreased from
77.7% in the first nine months of 1997 to 76.4% in the first nine
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 $1,460 million in the first nine
months of 1998 increased by $252 million, or 21%, compared with the
first nine months of 1997. On a segment basis, Aerospace Systems
income from operations increased by 63%. Specialty Chemicals &
Electronic Solutions increased by 8% and Performance Polymers
increased by 39%. Income from operations for Turbine Technologies
increased by 1%; and Transportation Products decreased by 48%.
Excluding the divested safety restraints business, Transportation
Products income from operations decreased by 25%. The Company's
operating margin for the first nine months of 1998 was 13.0%,
compared with 11.4% for the same period last year. See the
discussion of net income below for information by segment.
Equity in income of affiliated companies of $82 million in the
first nine months of 1998 represents a decrease of $58 million, or
41%, compared with the same period of 1997, primarily due to lower
earnings from UOP and certain other smaller equity investments.
Other income (expense), a $9 million loss in the first nine
months of 1998, was unfavorable by $71 million compared with the
same period of 1997, reflecting lower investment income due to a
lower cash position because of spending for acquisitions and
repurchases of the Company's common stock and reduced benefits from
foreign exchange.
Interest and other financial charges of $104 million in the
first nine months of 1998 decreased by $27 million, or 21%, compared
with the first nine months of 1997. This decrease results from
lower tax interest expense due to favorable settlements of worldwide
tax audits, offset in part by higher debt-related interest expense
reflecting higher levels of debt.
-13-
The effective tax rate in the first nine months of 1998
decreased to 31.5%, compared with 33.1% for the same period of 1997,
primarily due to an increase in energy tax credits and other tax
planning strategies.
Net income of $979 million, or $1.70 per share, in the first
nine months of 1998 was 14% higher than net income of $856 million,
or $1.47 per share, in the first nine months of 1997.
Aerospace Systems net income of $401 million in the first nine
months of 1998 improved by $156 million, or 64%, compared with the
same period of 1997. This increase was led by substantially higher
sales and improved factory performance for Electronic & Avionics
Systems. The acquisitions of Grimes, Banner and NGL also
contributed to higher net income.
Specialty Chemicals & Electronic Solutions net income of $220
million in the first nine months of 1998 decreased by $39 million,
or 15%, compared with the same period of 1997. Specialty Chemicals
net income declined due principally to lower results for UOP.
Electronic Materials net income was also down due to lower sales.
Turbine Technologies net income of $184 million in the first
nine months of 1998 increased by $24 million, or 15%, compared with
the first nine months of 1997, reflecting higher sales for both
Engines and Turbocharging Systems and productivity improvements for
Engines.
Performance Polymers net income of $147 million in the first
nine months of 1998 improved by $43 million, or 41%, compared with
the first nine months of 1997. This improvement in net income was
primarily driven by a more favorable price-cost relationship in
nylon and polyester, productivity gains driven by Six Sigma
initiatives and the divestiture of the phenol business.
Transportation Products net income of $28 million in the first
nine months of 1998 decreased by $52 million, or 65%, compared with
the first nine months of 1997. This decrease primarily reflects the
absence of net income from the divested safety restraints business.
Net income was also lower for the Automotive Products Group.
Financial Condition
-------------------
September 30, 1998 compared with December 31, 1997
- --------------------------------------------------
Liquidity and Capital Resources
-------------------------------
On September 30, 1998, the Company had $566 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 repurchases of the Company's common stock and
acquisitions.
The Company's long-term debt on September 30, 1998 was $1,459
million, an increase of $244 million compared with year-end 1997.
This increase reflects the issuance of new long-term debt, as
described in Note 6 to the financial statements, partially offset by
certain debt repayments. Total debt of $2,459 million at September
30, 1998 was $152 million higher than at December 31, 1997. The
Company's total debt as a percent of capital at September 30, 1998
was 30.4%, compared with 31.7% at year-end 1997.
-14-
During the first nine months of 1998, the Company spent $445
million for capital expenditures, compared with $471 million in the
corresponding period of 1997. This decline in capital spending is
primarily due to the divestiture of the safety restraints business.
On October 13, 1998, the Company, pursuant to a tender offer by
PMA Acquisition Corporation, a wholly owned subsidiary of the
Company (PMA), purchased for $44.50 per share in cash 20 million
shares, or approximately 9% of the outstanding shares, of common
stock of AMP Incorporated (AMP), a Pennsylvania-based manufacturer
of electrical connection devices. The Company intends to commence
another tender offer for or otherwise acquire all outstanding shares
of AMP common stock not owned by the Company or PMA at total
aggregate consideration amounting to $44.50 per share. Such price
per share is subject to decrease if AMP completes a pending self-
tender for its common stock or any diminution in value of AMP
arising out of the incremental costs and fees of AMP's financing of
its self-tender and subject to increase or decrease as a result of
changes in AMP's business or financial condition, prevailing
interest rates, or stock market, financial or other economic
conditions.
The $890 million purchase price for the shares of AMP common
stock acquired on October 13, 1998 was paid by proceeds from sales
of commercial paper. On October 9, 1998, the Company entered into a
$900 million 364 day backstop credit agreement with six banks to
finance the acquisition of 20 million AMP shares pursuant to its
tender offer and for general corporate purposes, including support
for the issuance of commercial paper. See Note 8 to the financial
statements for more information on the credit agreement.
In anticipation of a transaction for the acquisition of all
remaining outstanding shares of AMP, and for general corporate
purposes, including the support for commercial paper issuance, the
Company also received on October 9, 1998 a commitment letter from
six financial institutions (the "Arrangers") in connection with a $7
billion 364 day revolving credit facility and a $2.25 billion five
year revolving credit facility. The Arrangers have committed to
provide $4.75 billion of the 364 day and the five year facilities,
subject to certain terms and conditions, including successful
syndication on a best efforts basis of the balance of these
facilities.
The 364 Day Facility has a term of 364 days, subject to the
Company's ability to request extensions for additional 364 day
periods. In addition, the Company may elect the Term Loan
Conversion Option with respect to $4 billion of loans under the 364
Day Facility on the same basis as under the $900 million credit
agreement. The 5 Year Facility has a term of five years.
It is currently anticipated that to the extent the Company
elects to draw on the 364 Day Facility, loans thereunder will bear
interest at (i) the base rate or (ii) the Eurocurrency rate plus a
margin ranging from 0.17% to 0.5% if the Company has not elected the
Term Loan Conversion Option, and 0.225% to 0.7% if the Company has
elected the Term Loan Conversion Option, in each case depending on
the Company's long term senior unsecured non-credit enhanced debt
ratings. It is currently anticipated that to the extent the Company
elects to draw on the 5 Year Facility, loans thereunder will bear
interest at (i) the base rate or (ii) the Eurocurrency rate plus a
margin ranging from 0.15% to 0.45%, depending on the Company's long
term senior unsecured non-credit enhanced debt ratings.
The Company intends to finance a portion of the approximately
$9.1 billion estimated to be required to purchase the remaining
outstanding AMP shares by a combination of short, medium and
possibly long-term borrowings in the private and public debt
markets.
-15-
It is currently anticipated that approximately $1.5 billion of
indebtedness incurred by the Company in connection with the
acquisition of AMP common stock, including the 20 million shares
already acquired, will be repaid from the issuance of equity
securities of the Company, approximately $2 billion from the
disposition of assets and the remainder from a combination of short,
medium and long-term borrowings in the bank, private or public debt
markets and from funds internally generated by the Company and its
subsidiaries (including, after the acquisition of AMP is
consummated, cash flow of the surviving corporation). No final
decision has been made concerning the method the Company will employ
to repay its borrowings incurred to consummate any acquisition of
AMP. Such decision, when made, will be based on the Company's
review from time to time of the advisability of particular actions,
as well as on prevailing interest rates and on stock markets, debt
markets, financial and other economic conditions. Furthermore,
there can be no assurance that the Company will be able to utilize
any one or more of the repayment options or that any particular
amount will be available under any of them.
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. This business had annual revenues of about $70
million. In June 1998, the Company acquired 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 sold its interest in its automotive catalyst business to
General Motors Corporation for approximately $50 million in cash.
This business had annual sales of about $250 million. In September
1998, the Company sold its communications systems business to
Raytheon Company for approximately $60 million in cash. The
communications systems business had annual revenues of about $120
million.
The Company 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. 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 nine
months of 1998, the Company sold certain non-strategic businesses
and other assets.
During the first nine months of 1998, the Company repurchased
17.5 million shares of its common stock for $751 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 and a shareowner dividend reinvestment plan, and to
reduce common stock outstanding. At September 30, 1998, the Company
was authorized to repurchase 62.2 million shares of its common
stock. The amount of common stock to be repurchased may be reduced
as a result of the Company's planned acquisition of the outstanding
shares of AMP.
-16-
Year 2000 Update
----------------
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. 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 Year 2000 problem.
The Company has assessed how it may be impacted by the Year
2000 problem and is implementing 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 the Company's operations, and
noncritical information systems), production and facilities
equipment, products, customers and suppliers (both high-impact
suppliers, which are those suppliers who would materially impact the
Company's operations if they were unable to provide supplies or
services on a timely basis, and other suppliers).
The Company has completed an inventory of information systems,
production and facilities equipment, products, customers and
suppliers that may potentially have a Year 2000 problem. The
Company has assessed the impact of a Year 2000 problem with respect
to its information systems, production and facilities equipment,
products and suppliers identified in the inventory, and is currently
assessing the impact of a Year 2000 problem with respect to its
customers. Based on the results of the assessment, the Company
prioritizes the various projects to remedy potential Year 2000
problems. The Company is developing and implementing plans to
remediate known Year 2000 problems. Testing to ensure that the
remediation is successfully completed is part of the remediation
process. Because of the importance of addressing the Year 2000
problem, the Company expects to develop by the first quarter of 1999
contingency plans and trained specialist teams to implement such
contingency plans to address any Year 2000 problems which are
unexpected or are not remedied in a timely manner under the
Company's remediation plans.
The following table sets forth the estimated dates for
substantially completing assessment, development of remediation
plans and remediation with respect to the various aspects of the
Year 2000 problem:
Development of
Assessment Remediation Plan Remediation
Critical Information
Systems SC SC 12/31/98
Other Information
Systems SC SC 3/31/99
Production and Facilities
Equipment SC 11/15/98 3/31/99
Products SC SC 3/31/99
Customers 12/31/98 1/31/99 3/31/99
High Impact Suppliers SC 12/31/98 3/31/99
Other Suppliers SC 3/31/99 6/30/99
SC = Substantially Complete
The remediation plans for information systems involve a
combination of software modification, upgrades and replacement. The
remediation plans for production and facilities equipment involve a
combination of software or hardware modification, upgrades and
replacement, or changes to operating procedures to circumvent
equipment failures caused by the Year 2000 problem. The remediation
-17-
plans for products involve 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 the Company's products. The
remediation plans for suppliers and customers involve obtaining
information about the Year 2000 programs of suppliers and customers
through surveys, meetings and other communication, the evaluation of
the information received, and the development of appropriate
responses. While the Company expects that development of
remediation plans and remediation with respect to suppliers and
customers will be completed by the dates set forth in the table
above, the Company can provide no assurance that Year 2000 problems
will be successfully corrected by suppliers and customers in a
timely manner.
The Company's estimate of the total cost for Year 2000
compliance, based on the assessment to date plus estimates of
remediation costs for customers not yet fully assessed, is
approximately $150 million, of which approximately $71 million has
been incurred through September 30, 1998. This estimate does not
include the Company's potential share of costs for Year 2000 issues
by partnerships and joint ventures in which the Company participates
but is not the operator. 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 and facilities
equipment to implementation of Year 2000 compliance plans may in
some instances delay productivity improvements.
The Company presently believes that the Year 2000 issue will
not cause material operational problems for the Company. However,
if the Company is not successful in identifying all material Year
2000 problems, or assessment and remediation of identified Year 2000
problems is not completed 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 the Company's consolidated results of operations
and financial condition, or on its relationships with customers,
suppliers or others.
Euro Conversion
---------------
On January 1, 1999, certain member countries of the European
Union are scheduled to establish fixed conversion rates between
their existing currencies and the 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. The Company has
begun to identify and ensure that all Euro conversion compliance
issues are addressed. At this time, the Company cannot predict the impact
of the Euro conversion on the Company, because of the numerous
uncertainties associated with the Euro conversion compliance, such as
the effect on the Company of noncompliance by third parties.
New Accounting Pronouncements
-----------------------------
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.
-18-
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 herein or
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.
-19-
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 5. Other Information
Shareowner proposals submitted for inclusion in the Company's
proxy statement and form of proxy for the 1999 Annual Meeting of
Shareowners are subject to the requirements of Rule 14a-8 of the
proxy rules adopted by the Securities and Exchange Commission under
the Securities Exchange Act of 1934, as amended, and must be
received by the Company not later than November 10, 1998. If a
shareowner intends to present a proposal for consideration at the
1999 Annual Meeting outside the processes of Rule 14a-8, the Company
must receive notice of such proposal on or before January 24, 1999,
or such notice will be considered untimely under recent amendments
to Rule 14a-4(c)(1) of the Commission's proxy rules, and the
Company's proxies will have discretionary voting authority with
respect to such proposal, if presented at the meeting, without
including information regarding such proposal in its proxy
materials. Shareowner proposals should be directed to the attention
of the Secretary, AlliedSignal Inc., P.O. Box 4000, Morristown, NJ 07962.
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
(b) Reports on Form 8-K.
A report on Form 8-K was filed August 6, 1998 reporting
the Company's intention to commence an unsolicited tender
offer for all of the common stock of AMP Incorporated.
-20-
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: November 5, 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)
-21-
EXHIBIT INDEX
Exhibit Number Description
2 Omitted (Inapplicable)
3 Omitted (Inapplicable)
4 Omitted (Inapplicable)
10.14 364 Day Backstop Credit Agreement
dated as of October 9, 1998 by and among
AlliedSignal Inc., Bank of America NT&SA,
Citibank, N.A., as Agent, Banque
Nationale de Paris, Barclays Bank
PLC, Citibank, N.A., Deutsche
Bank AG and Morgan Guaranty Trust
Company of New York, as Lenders, and
Citibank, N.A., as Agent (incorporated
by reference to Exhibit 99.1 to the
Company's Form 8-K filed October 21,
1998)
10.15 Commitment Letter dated as of
October 9,1998 by Banque
Nationale de Paris, Barclays
Capital, the investment banking
division of Barclays Bank PLC,
Deutsche Bank Securities Inc., J.P.
Morgan Securities Inc., NationsBanc
Montgomery Securities LLC and Salomon
Smith Barney Inc., as Arrangers
(incorporated by reference to Exhibit
99.2 to the Company's Form 8-K filed
October 21, 1998)
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)
-22-