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, 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
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AlliedSignal Inc.
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(Exact name of registrant as specified in its charter)
Delaware 22-2640650
--------------------------------- ---------------------
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
101 Columbia Road
P.O. Box 4000
Morristown, New Jersey 07962-2497
- --------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
(973)455-2000
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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 30,1999
- ----------------------- ----------------------
$1 par value 552,601,386 shares
AlliedSignal Inc.
Index
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Page No.
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Part I. - Financial Information
---------------------
Item 1. Condensed Financial Statements:
Consolidated Balance Sheet -
September 30, 1999 and December 31, 1998 3
Consolidated Statement of Income -
Three and Nine Months Ended September 30, 1999
and 1998 4
Consolidated Statement of Cash Flows -
Nine Months Ended September 30, 1999 and 1998 5
Notes to Financial Statements 6
Report on Review by Independent Accountants 11
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 19
Part II. - Other Information
-----------------
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
2
AlliedSignal Inc.
Consolidated Balance Sheet
(Unaudited)
September 30, December 31,
1999 1998
------------------------------
(Dollars in millions)
ASSETS
Current assets:
Cash and cash equivalents $ 981 $ 712
Accounts and notes receivable 1,984 1,993
Inventories 2,326 2,332
Other current assets 576 556
------- ------
Total current assets 5,867 5,593
Investments and long-term
receivables 436 1,488
Property, plant and equipment 9,317 9,358
Accumulated depreciation and
amortization (4,965) (4,961)
Cost in excess of net assets of
acquired companies - net 3,094 2,999
Other assets 1,204 1,083
------- -------
Total assets $14,953 $15,560
======= =======
LIABILITIES
Current liabilities:
Accounts payable $ 1,273 $ 1,423
Short-term borrowings 58 80
Commercial paper 1,513 1,773
Current maturities of long-term debt 195 158
Accrued liabilities 1,745 1,751
------- -------
Total current liabilities 4,784 5,185
Long-term debt 1,287 1,476
Deferred income taxes 802 795
Postretirement benefit obligations
other than pensions 1,664 1,732
Other liabilities 993 1,075
SHAREOWNERS' EQUITY
Capital - common stock issued 716 716
- additional paid-in capital 3,323 2,982
Common stock held in treasury, at cost (4,265) (3,413)
Accumulated other nonowner changes (270) (70)
Retained earnings 5,919 5,082
------ -------
Total shareowners' equity 5,423 5,297
------ -----
Total liabilities and shareowners'
equity $14,953 $15,560
======= ========
The 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,
------------------ ------------------
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in millions except per share amounts)
Net sales $3,838 $3,741 $11,252 $11,256
------ ------ ------- -------
Cost of goods sold 2,976 2,838 8,730 8,596
Selling, general and
administrative expenses 372 396 1,171 1,200
Gain on sale of strategic
business unit (106) - (106) -
----- ---- ------ -------
Total costs and expenses 3,242 3,234 9,795 9,796
----- ----- ----- -------
Income from operations 596 507 1,457 1,460
Equity in income of affiliated
companies 16 19 12 82
Other income (expense) (5) (8) 287 (9)
Interest and other financial
charges (33) (38) (107) (104)
----- ---- ----- -----
Income before taxes on income 574 480 1,649 1,429
Taxes on income 188 151 528 450
---- ---- ----- -----
Net income $ 386 $ 329 $1,121 $ 979
====== ====== ====== ======
Earnings per share of common
stock - basic $ .70 $ .59 $ 2.03 $ 1.74
====== ====== ====== ======
Earnings per share of common
stock - assuming dilution $ .69 $ .58 $ 1.98 $ 1.70
====== ====== ====== ======
Cash dividends per share of
common stock $ .17 $ .15 $ .51 $ .45
====== ====== ====== ======
The 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,
------------
1999 1998
---- ----
(Dollars in millions)
Cash flows from operating activities:
Net income $1,121 $ 979
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on sale of strategic business unit (106) --
Gain on disposition of investment in AMP Incorporated (268) --
Repositioning and other charges 347 --
Depreciation and amortization 443 453
Undistributed earnings of equity affiliates (12) 7
Deferred income taxes 129 153
(Increase) decrease in accounts and notes receivable (80) 150
Decrease (increase) in inventories 8 (142)
(Increase) decrease in other current assets (21) 13
(Decrease) in accounts payable (130) (117)
(Decrease) in accrued liabilities (142) (415)
Net taxes paid on sales of businesses and investments (185) (195)
Other (49) (68)
------ -----
Net cash provided by operating activities 1,055 818
----- -----
Cash flows from investing activities:
Expenditures for property, plant and equipment (408) (445)
Proceeds from disposals of property, plant and
equipment 30 51
(Increase) in investments (3) --
Cash paid for acquisitions (681) (335)
Disposition of investment in AMP Incorporated 1,164 --
Proceeds from sales of businesses 637 281
Decrease in short-term investments - 430
---- -----
Net cash provided by (used for) investing activities 739 (18)
---- -----
Cash flows from financing activities:
Net (decrease) in commercial paper (260) (74)
Net (decrease) in short-term borrowings (25) (12)
Proceeds from issuance of common stock 234 122
Proceeds from issuance of long-term debt 6 413
Payments of long-term debt (190) (261)
Repurchases of common stock (1,006) (779)
Cash dividends on common stock (284) (254)
------- -----
Net cash (used for) financing activities (1,525) (845)
------- -----
Net increase (decrease) in cash and cash equivalents 269 (45)
Cash and cash equivalents at beginning of year 712 611
------ ------
Cash and cash equivalents at end of period $ 981 $566
====== =====
The Notes to Financial Statements are an integral part of this statement.
5
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 September 30, 1999 and the results of operations for
the three and nine months ended September 30, 1999 and 1998 and cash
flows for the nine months ended September 30, 1999 and 1998. The
results of operations for the three- and nine-month periods ended
September 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 September 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:
September 30, December 31,
1999 1998
---- ----
Trade $1,665 $1,554
Other 360 476
------ ------
2,025 2,030
Less - Allowance for doubtful
accounts and refunds (41) (37)
------- ------
$1,984 $1,993
====== ======
Note 3. Inventories consist of the following:
September 30, December 31,
1999 1998
------ -----
Raw materials $ 636 $ 568
Work in process 628 655
Finished products 1,101 1,174
Supplies and containers 95 96
----- -----
2,460 2,493
Less - Progress payments (31) (54)
Reduction to LIFO cost basis (103) (107)
------ -------
$2,326 $2,332
====== ======
Note 4. Total nonowner changes in shareowners' equity for the three
and nine months ended September 30, 1999 and 1998 were $391 and $921
million and $380 and $989 million, respectively. Nonowner changes
in shareowners' equity consist of net income, foreign currency
translation adjustments and unrealized holding gains and losses on
marketable securities.
6
Note 5. Segment financial data follows:
Three Months Ended September 30,
---------------------------------------
Net Sales Income from Operations
--------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
Aerospace Systems $1,191 $1,242 $ 290 $ 259
Specialty Chemicals
& Electronic Solutions 590 541 52 72
Turbine Technologies 996 900 173 103
Performance Polymers 437 436 36 69
Transportation Products 615 609 (a) 48 28 (a)
Corporate & Unallocated 9 13 (a) (24) (24)(a)
Other - - 21 (b) -
----- ------ ----- -------
$3,838 $3,741 $ 596 $ 507
====== ====== ====== =======
Nine Months Ended September 30,
-------------------------------------------------------
Net Sales Income from Operations
---------------- -----------------------------------
1999 1998 1999 1998
---- ---- ---- ----
Aerospace Systems $3,543 $3,576 $ 740 $ 655
Specialty Chemicals
& Electronic Solutions 1,635 1,728 212 283
Turbine Technologies 2,861 2,641 484 294
Performance Polymers 1,361 1,494 170 234
Transportation
Products 1,823 1,764(a) 138 79 (a)
Corporate & Unallocated 29 53(a) (86) (85)(a)
Other - - (201)(b) -
----- ----- ----- -----
$11,252 $11,256 $1,457 $1,460
======= ======= ====== ======
(a) Reclassified to conform to 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 repositioning and other charges and the gain on
the sale of our Laminate Systems business. See Notes 8 and 9.
Note 6. The details of the earnings per share calculations for the
three- and nine-month periods ended September 30, 1999 and 1998
follow:
Three Months Nine Months
--------------------- ------------------------
Per Per
Average Share Average Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
1999
- ----
Earnings per share of
common stock - basic $386 551.8 $.70 553.4 $ 2.03
Dilutive securities:
Stock options 12.0 $1,121 12.1
Restricted stock units .5 .5
---- ----- ---- ------ ----- ------
Earnings per share of
common stock
assuming dilution $386 564.3 $.69 $1,121 566.0 $ 1.98
==== ===== ==== ====== ===== ======
7
Three Months Nine Months
--------------------------- ----------------------
Per Per
Average Share Average 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
==== ====== ==== ==== ===== ======
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, 1999 and 1998, the number
of stock options not included in the computations were .7 million
and .8 million, and 2.0 million and 1.9 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 pretax 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 September 1999, AlliedSignal sold its Laminate Systems
business to Rutgers AG for approximately $425 million in cash. The
Laminate Systems business had annual revenues of about $400 million.
The sale of the Laminate Systems business resulted in a third
quarter pretax gain of $106 million (after-tax $59 million, or $0.11
per share).
Note 9. In both the second and third quarters of 1999, AlliedSignal
approved repositioning plans designed to enhance our
competitiveness and productivity and improve future profitability.
The second quarter repositioning plan included the organizational
realignment of our aerospace businesses to strengthen market and
customer focus and to 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 included
workforce reductions in the Friction Materials, Specialty Chemicals
and Turbocharging Systems businesses. In total, we 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, we
recorded a pretax charge of $75 million. The components of this
charge included severance costs of $38 million, asset writedowns of
$36 million, and other exit costs of $1 million.
The third quarter repositioning plan included a reduction in
infrastructure in the Turbocharging Systems business; the closing of
a wax refinery in the Specialty Chemicals business; and related
workforce reductions in these
8
businesses. The plan also included workforce reductions in the
Aerospace Engines, Aerospace Equipment Systems, Polymers and
Friction Materials businesses. In total, we will be eliminating
approximately 1,500 positions worldwide, primarily in manufacturing
and administrative functions. The repositioning plan is expected to
be completed by March 31, 2000. In connection with the
repositioning plan, in the third quarter of 1999, we recorded a
pretax charge of $78 million. The components of this charge
included severance costs of $46 million, asset writedowns of $23
million, and other exit costs of $9 million.
The following table summarizes the costs associated with the 1999
repositioning actions:
1999 Utilized September 30,
Repositioning In 1999
Charges 1999 Reserve Balance
------- ---- ---------------
Severance costs $84 ($11) $73
Asset writedowns 59 (59) -
Other exit costs 10 - 10
--- ----- -----
Total $153 ($70) $83
==== ===== ===
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. In the third quarter of 1999,
other charges of $7 million relating to asset impairments were also
recorded.
Repositioning and other charges totaling $222 million in the second
quarter of 1999 and $85 million in the third quarter of 1999 were
included as part of cost of goods sold. Equity in income of
affiliated companies in the second quarter of 1999 included 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. Equity in income of affiliated companies in the
third quarter of 1999 included a $4 million charge relating to an
equity investee's severance actions. The total pretax impact of the
repositioning and other charges was $89 million (after-tax $54
million, or $0.10 per share) for the three months ended September
30, 1999 and $347 million (after-tax $210 million, or $0.38 per
share) for the nine months ended September 30, 1999.
Note 10. On June 4, 1999, AlliedSignal entered into a merger
agreement with Honeywell Inc. (Honeywell). 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 third quarter of 1999, based on approximately 128 million
Honeywell shares outstanding and AlliedSignal's stock price, the
transaction is valued at approximately $14 billion and will be
accounted for as a pooling of interests. The new company will have
annual revenues of about $25 billion and will assume approximately
$1.5 billion of Honeywell debt. The transaction was approved by
AlliedSignal's and Honeywell's shareowners on September 1, 1999 and
remains subject to regulatory reviews and other conditions. On
November 8, 1999, the U.S. Department of Justice filed a consent
decree in federal court which would permit consummation of the
proposed transaction with Honeywell. The companies continue to focus on
obtaining clearance from the European Commission. The transaction is
expected to close in the fourth quarter of 1999. Upon completion of
the transaction, the name of our company will be changed from
AlliedSignal Inc. 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
9
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.
10
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 September 30, 1999, and
the related consolidated statements of income for each of the three-
month and nine-month periods ended September 30, 1999 and 1998 and
the consolidated statements of cash flows for the nine-month periods
ended September 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
November 9, 1999
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
-----------------------------------------------
A. Results of Operations - Third Quarter 1999 Compared with Third
Quarter 1998
----------------------------------------------------------------
Net sales in the third quarter of 1999 were $3,838 million, an
increase of $97 million, or 3%, compared with the third quarter of
1998. The increase resulted from volume gains of $164 million and
from acquisitions of $114 million. Lower sales resulting from
divested businesses of $97 million, lower selling prices of $65
million and the impact of foreign exchange of $19 million were a
partial offset.
Income from operations in the third quarter of 1999 was $596
million. As discussed in Notes 8 and 9 on page 8 of this Form 10-Q,
income from operations includes $106 million relating to the gain on
the sale of our Laminate Systems business and $85 million relating
to repositioning and other charges. The net effect of these items
increased income from operations by $21 million in the current
quarter. Income from operations in the third quarter of 1998 was
$507 million. Operating margin for the third quarter of 1999 was
15.5%. The impact of the gain on the sale of our Laminate Systems
business and the repositioning and other charges increased operating
margin by 0.5%. Operating margin for the third quarter of 1998 was
13.6%. Income from operations is discussed in detail by segment in
the Review of Business Segments section below.
The repositioning charge of $78 million in the third quarter of
1999 represents the cost of actions designed to enhance our
competitiveness and productivity and improve future profitability.
The repositioning actions included a reduction in infrastructure in
the Turbocharging Systems business; the closing of a wax refinery in
the Specialty Chemicals business; and related workforce reductions
in these businesses. The actions also included workforce reductions
in the Aerospace Engines, Aerospace Equipment Systems, Polymers and
Friction Materials businesses. The cost of the repositioning
actions will be financed through the cash proceeds from the
disposition of our Laminate Systems business and we do not
anticipate any significant impact on liquidity as a result of the
repositioning actions. The repositioning actions are expected to be
completed by March 31, 2000 and are expected to generate
improvements in pretax income of approximately $100 million annually
primarily from lower personnel-related costs.
Equity in income of affiliated companies of $16 million in the
third quarter of 1999 was $3 million lower compared with the third
quarter of 1998 due primarily to the charge of $4 million relating
to severance actions at the UOP process technology joint venture (UOP).
Interest and other financial charges of $33 million in the third
quarter of 1999 decreased by $5 million, or 13%, compared with the
third 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 $386 million, or $0.69 per share, in the third
quarter of 1999 was 17% higher than the prior year's third quarter
net income of $329 million, or $0.58 per share. Net income in the
third quarter of 1999, adjusted for the gain on the disposition of
our Laminate Systems business and the repositioning and other
charges, was $381 million, or $0.68 per share, an increase of 16%
over the prior year. The higher net income in the third quarter of
1999 was the result of improved earnings for Turbine Technologies,
Aerospace Systems and Transportation
12
Products. Performance Polymers and Specialty Chemicals & Electronic
Solutions had lower earnings.
Review of Business Segments
- ---------------------------
The results of the Business Segments do not include the gain on
the disposition of our Laminate Systems business and the
repositioning and other charges.
Aerospace Systems sales of $1,191 million in the third quarter
of 1999 were $51 million, or 4%, lower compared with the third
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 divestitures, sales in
the third quarter of 1999 were flat compared with the comparable
quarter of 1998. Continued strong sales growth in flight safety
products and repair and overhaul services were offset by lower sales
to commercial air transport manufacturers.
Aerospace Systems income from operations of $290 million in the
third quarter of 1999 increased by $31 million, or 12%, compared
with the third quarter of 1998 due principally to ongoing cost-
structure improvements and increased sales of higher margin flight
safety products and aftermarket services.
Specialty Chemicals & Electronic Solutions sales of $590
million in the third quarter of 1999 were $49 million, or 9%, higher
compared with the comparable quarter of 1998. Higher sales due to
the acquisition of Johnson Matthey Electronics in August 1999 were
partially offset by divestitures, principally the Laminate Systems
business.
Specialty Chemicals & Electronic Solutions income from
operations of $52 million in the third quarter of 1999 decreased by
$20 million, or 28%, compared with the third quarter of 1998. The
decrease resulted primarily from higher expenses associated with the
development of new products in the electronic materials and
pharmaceutical fine chemicals businesses and the negative impact of
pricing pressures. Operating losses incurred in the Johnson Matthey
Electronics business due to excess capacity at a major facility also
contributed to the decrease.
Turbine Technologies sales of $996 million in the third quarter
of 1999 were $96 million, or 11%, higher compared with the third
quarter of 1998. Sales for aerospace engines increased moderately
due to higher sales of helicopter engines to the military and
increased sales in the regional, business and military aftermarket.
Lower sales to the commercial air transport aftermarket were a
partial offset. Sales of turbochargers increased significantly due
primarily to continued strong sales in Europe reflecting the
turbodiesel's increased penetration of the passenger car market.
Turbine Technologies income from operations of $173 million in
the third quarter of 1999 increased by $70 million, or 68%, compared
with the third quarter of 1998. The increase principally reflects a
significantly reduced cost structure and improved sales of higher
margin aftermarket products and services in the aerospace engines
business. Higher sales of turbochargers, particularly in Europe,
also contributed to the increase.
Performance Polymers sales were $437 million in the third
quarter of 1999 compared with $436 million in the third quarter of
1998. Higher sales of engineered plastics used in automotive
applications and specialty films products used in pharmaceutical
packaging and consumer products were offset by lower sales for
carpet fibers and textile and industrial nylon.
13
Performance Polymers income from operations of $36 million in
the third quarter of 1999 was lower by $33 million, or 48%, compared
with the same period in the prior year. The decrease principally
reflects weak demand for textile and industrial nylon, pricing
pressures at performance fibers, carpet fibers and engineering
plastics and higher raw material costs. Increased sales volume of
polyester, specialty films and engineering plastics and an improved
cost structure were partial offsets.
Transportation Products sales were $615 million in the third
quarter of 1999 compared with $609 million in the third quarter of
1998. Truck Brake Systems sales continued to be strong, driven
primarily by increased truck builds. Sales of Prestone products
also improved significantly. Lower sales for Friction Materials
were a partial offset.
Transportation Products income from operations of $48 million
in the third quarter of 1999 improved by $20 million, or 71%,
compared with the third quarter of 1998. The increase reflects
higher unit volume growth particularly in Truck Brake Systems,
stronger pricing for Prestone's products and cost-structure
improvements.
B. Results of Operations - Nine Months 1999 Compared with Nine Months 1998
------------------------------------------------------------------------
Net sales in the first nine months of 1999 were $11,252
million, a decrease of $4 million compared with the first nine
months of 1998. The decrease resulted from divested businesses of
$467 million, lower selling prices of $176 million and the impact of
foreign exchange of $31 million. Higher sales resulting from volume
gains of $364 million and from acquisitions of $306 million were a
partial offset.
Income from operations in the first nine months of 1999 was
$1,457 million. As discussed in Notes 8 and 9 on page 8 of this Form
10-Q, income from operations includes $106 million relating to the
gain on the sale of our Laminate Systems business and $307 million
relating to repositioning and other charges. The net effect of
these items reduced income from operations by $201 million in the
first nine months of 1999. Income from operations in the first nine
months of 1998 was $1,460 million. Operating margin for the first
nine months of 1999 was 12.9%. The impact of the gain on the sale of
our Laminate Systems business and the repositioning and other
charges reduced operating margin by 1.8%. Operating margin for the
first nine months of 1998 was 13.0%. Income from operations is
discussed in detail by segment in the Review of Business Segments
section below.
Repositioning charges totaling $153 million in the nine months
ended September 30, 1999 represent the cost of actions designed to
enhance our competitiveness and productivity and improve future
profitability. The repositioning actions included 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; a reduction in
infrastructure in the Turbocharging Systems business; the closing of
a wax refinery in the Specialty Chemicals business; and related
workforce reductions in these businesses. The actions also included
workforce reductions in the Aerospace Engines, Aerospace Equipment
Systems, Turbocharging Systems, Friction Materials, Polymers and
Specialty Chemicals businesses. The cost of the repositioning
actions will be financed through the net cash proceeds from the
dispositions of our investment in AMP and our Laminate Systems
business. We do not anticipate any significant impact on liquidity
as a result of the repositioning actions. The repositioning actions
are expected to be completed by March 31, 2000 and are
14
expected to generate improvements in pretax income of approximately
$175 million annually primarily from lower personnel-related costs.
Equity in income of affiliated companies of $12 million in the
first nine months of 1999 was $70 million lower compared with the
first nine months of 1998. The decrease relates to lower earnings
from UOP and charges totaling $40 million relating to a severance
action and an asset impairment. See Note 9 on page 8 of this Form
10-Q for further discussion of these charges.
Other income (expense), $287 million of income in the first
nine months of 1999, increased by $296 million compared with the
first nine 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. Higher minority
interest expense was a partial offset.
Interest and other financial charges of $107 million in the
first nine months of 1999 increased by $3 million, or 3%, compared
with the first nine months of 1998. The increase reflects higher
average debt outstanding during the first nine months of 1999 versus
the comparable period in the prior year partially offset by lower
interest rates and tax interest expense.
Net income of $1,121 million, or $1.98 per share, in the first
nine months of 1999 was 15% higher than the prior year's first nine
months net income of $979 million, or $1.70 per share. Net income
in the first nine months of 1999, adjusted for the gains on the
dispositions of our Laminate Systems business and of our investment
in AMP and the repositioning and other charges, was $1,111 million,
or $1.96 per share, an increase of 13% over the prior year. The
higher net income in the first nine 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 gains
on the dispositions of our Laminate Systems business and of our
investment in AMP and the repositioning and other charges.
Aerospace Systems sales of $3,543 million in the first nine
months of 1999 were $33 million, or 1%, lower compared with the
first nine months of 1998. The decrease reflects the adverse impact
on sales resulting from a restructuring of a government technical
services contract, the divestiture of the communications business
and lower sales to commercial air transport manufacturers. This
decrease was partially offset by strong sales of flight safety
products, higher aftermarket sales and the acquisition of a
controlling interest in the Normalair-Garrett Ltd. environmental
controls joint venture in June 1998.
Aerospace Systems income from operations of $740 million in the
first nine months of 1999 increased by $85 million, or 13%, compared
with the first nine months of 1998 due principally to ongoing cost
structure improvements and increased sales of higher margin
aftermarket and flight safety products.
Specialty Chemicals & Electronic Solutions sales of $1,635
million in the first nine months of 1999 decreased by $93 million,
or 5%, compared with the first nine months of 1998 due to
divestitures, principally the environmental catalyst business.
Higher sales due to the acquisition of Johnson Matthey Electronics
were a partial offset.
15
Specialty Chemicals & Electronic Solutions income from
operations of $212 million in the first nine months of 1999
decreased by $71 million, or 25%, compared with the first nine
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 $2,861 million in the first nine
months of 1999 were $220 million, or 8%, higher compared with the
first nine months of 1998. The increase principally reflects
continued strong sales of turbochargers, particularly in Europe.
Higher sales of propulsion engines and aftermarket products and
services also contributed to the increase. Lower sales to the
commercial air transport aftermarket and a decrease in original
equipment sales to the military were a partial offset.
Turbine Technologies income from operations of $484 million in
the first nine months of 1999 increased by $190 million, or 65%,
compared with the first nine months of 1998. The increase reflects
significantly higher sales of turbochargers and improved sales of
higher margin aftermarket products and services in the aerospace
engines business. An improved cost structure, particularly in the
aerospace engines business, the redeployment of assets to support
development of the turbogenerator and AS900 engine and technology
licensing also contributed to the increase.
Performance Polymers sales of $1,361 million in the first nine
months of 1999 were $133 million, or 9%, 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 carpet and performance fibers. Higher sales for
specialty films and engineering plastics were a partial offset.
Performance Polymers income from operations of $170 million in
the first nine months of 1999 was lower by $64 million, or 27%,
compared with the same period in the prior year. The decrease
principally reflects weak demand for textile and industrial nylon,
pricing pressures in several businesses, higher raw material costs
and prior year divestitures.
Transportation Products sales of $1,823 million in the first
nine months of 1999 increased by $59 million, or 3%, compared with
the first nine months of 1998 due to increased sales for Truck Brake
Systems, Fram filters and Prestone products. Lower sales for
Friction Materials were a partial offset.
Transportation Products income from operations of $138 million
in the first nine months of 1999 improved by $59 million, or 75%,
compared with the first nine months of 1998 due to higher sales for
Truck Brake Systems, Fram filters and Prestone products. Cost
structure improvements for these businesses also contributed to the
increase.
C. Financial Condition, Liquidity and Capital Resources
----------------------------------------------------
Total assets at September 30, 1999 were $14,953 million, a
decrease of $607 million, or 4%, from December 31, 1998 principally
from the disposition of our investment in AMP in April 1999 and the
repayment of debt with the net proceeds from the disposition.
Cash provided by operating activities of $1,055 million during
the first nine months of 1999 increased by $237 million compared
with the first nine months of 1998 due principally to higher net income.
16
Cash provided by investing activities of $739 million during
the first nine months of 1999 increased by $757 million compared
with the first nine months of 1998. The increase relates
principally to the proceeds from the dispositions of our Laminate
Systems business and of our investment in AMP. Higher spending for
acquisitions, mainly Johnson Matthey Electronics, and the
liquidation in the prior year of short-term investments to fund
acquisitions and repurchases of our common stock were a partial
offset.
On June 4, 1999, AlliedSignal entered into a merger agreement
with Honeywell Inc. The transaction is discussed in further detail
in Note 10 on page 9 of this Form 10-Q.
In September 1999, AlliedSignal sold its Laminate Systems
business to Rutgers AG for approximately $425 million in cash. The
Laminate Systems business had annual revenues of about $400 million.
In August 1999, AlliedSignal completed 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
microelectronics industries and has annual sales of approximately
$670 million. On October 31, 1999, AlliedSignal entered into a
definitive merger agreement to acquire TriStar Aerospace Co.
(TriStar) for $9.50 per share in cash. On November 5, 1999, a
wholly-owned subsidiary of AlliedSignal commenced a tender offer to
acquire all of the outstanding shares of TriStar for approximately
$296 million, which includes the assumption of approximately $107
million of TriStar debt. TriStar is a distributor of aerospace fasteners,
fastening systems and related hardware and a provider of customized
inventory management services to the aerospace industry and
has annual sales of approximately $200 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 subject to regulatory
constraints. During the first nine months of 1999, AlliedSignal
sold certain non-strategic businesses and other assets.
Cash used for financing activities of $1,525 million during the
first nine months of 1999 increased by $680 million compared with
the comparable period in the prior year. The increase relates to
higher net payments of debt of $535 million and an increase of $115
million in net stock repurchases. Cash dividends paid were also $30
million, or 12%, higher in the current year. Long-term debt on
September 30, 1999 was $1,287 million, a decrease of $189 million,
or 13%, compared with year-end 1998. Total debt of $3,053 million
at September 30, 1999 was $434 million, or 12%, 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.
Total debt as a percent of capital at September 30, 1999 was 33.2%,
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.
17
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).
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 is $135
million, of which approximately $133 million has been incurred
through September 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
18
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 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.
19
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Special Meeting of Shareowners of AlliedSignal held on
September 1, 1999, the following matters set forth in
AlliedSignal's/ Honeywell's Joint Proxy Statement dated July
23, 1999, which was filed with the Securities and Exchange
Commission pursuant to Regulation 14A under the Securities
Exchange Act of 1934, were voted upon with the results
indicated below.
(1) A proposed merger to be implemented pursuant
to an Agreement and Plan of Merger, dated as of June 4, 1999, among
AlliedSignal Inc., Honeywell Inc. and a subsidiary of AlliedSignal Inc.,
including the related issuance of shares of common stock, was
approved with 428,828,716 votes cast FOR, 9,123,266 votes cast
AGAINST, 2,329,545 abstentions and no broker non-votes;
(2) A proposal to amend AlliedSignal's certificate
of incorporation to increase the number of authorized shares of common
stock from one billion to two billion shares, to increase the number
of authorized shares of preferred stock from 20 million to 40 million
shares and to eliminate several series of preferred stock not currently
outstanding was approved with 323,636,136 votes cast FOR,
113,001,998 votes cast AGAINST, 3,643,393 abstentions and no broker
non-votes.
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. The following reports on Form 8-K
were filed during the three months ended September 30,
1999:
1. On July 16, 1999 a report on Form 8-K/A was filed amending a
June 8, 1999 report relative to an Agreement and Plan of Merger
entered into by AlliedSignal Inc. and Honeywell Inc.;
2. On July 16, 1999 a report was filed reporting the results of
operations for the three-month and six-month periods ended June
30, 1999 for AlliedSignal Inc.;
3. On September 2, 1999 a report was filed reporting an amendment
of the restated certificate of incorporation of AlliedSignal Inc.
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 10, 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)
21
EXHIBIT INDEX
Exhibit Number Description
2 Omitted (Inapplicable)
3 Omitted (Inapplicable)
4 Omitted (Inapplicable)
11 Omitted (Inapplicable)
15 Independent Accountants'
Acknowledgment Letter as to
the incorporation of their
report relating to unaudited
interim financial statements
18 Omitted (Inapplicable)
19 Omitted (Inapplicable)
22 Omitted (Inapplicable)
23 Omitted (Inapplicable)
24 Omitted (Inapplicable)
27 Financial Data Schedule
99 Omitted (Inapplicable)