Allied Signal Reports Record Third Quarter Earnings

MORRIS TOWNSHIP, New Jersey, October 14, 1999 - AlliedSignal Inc. [NYSE:ALD] today reported record third-quarter earnings per share of $0.69, an increase of 19% compared with 1998 third-quarter earnings per share of $0.58. Excluding a $106 million pre-tax gain (after-tax $59 million) on the sale of its Laminate Systems business and $89 million (after-tax $54 million) in repositioning and other charges, third-quarter earnings per share were $0.68, up 17%.

It was the company's 31^st consecutive quarter of earnings-per-share growth of 13% or more.

Excluding the gain on the sale of its Laminate Systems business and repositioning and other charges, operating margins expanded to a third-quarter record of 15% from 13.6%.

Productivity was 7%, driven by broadening Six Sigma to non-manufacturing areas, cost-structure improvements in the aerospace businesses, a reduction of more than 4.5% in materials purchases, and strong growth in the aerospace aftermarket and turbocharger businesses. The company has to date trained more than 3,000 Black Belts and expects to achieve more than $600 million in full-year 1999 Six Sigma savings, up from $500 million in 1998.

Net income increased 17% to a third-quarter record of $386 million from $329 million in 1998.

Third-quarter 1999 free cash flow was $150 million, an increase of 49% over free cash flow of $101 million for the year-earlier period. Free cash flow for the nine-month period was $575 million, up 58% from $365 million for the same period in 1998. Cash-conversion, a ratio of free cash flow before dividends to net income, for the nine-month period was 77%. The company expects to exceed its 1999 full-year free-cash-flow target of $700 million.

Sales in the third quarter were $3.84 billion, up 3% compared with $3.74 billion in the corresponding year-earlier quarter. Excluding divestitures and a government contract restructuring, sales in the third quarter were up 6%.

"Our strong performance in the third quarter was driven by our broad aerospace aftermarket offering, 19% revenue growth in our turbocharger products, and the profitability rebound in our extensively restructured transportation products businesses," said Lawrence A. Bossidy, AlliedSignal Chairman and Chief Executive Officer. "These impressive results were partially offset by end-market difficulties in our materials businesses."

Bossidy added that AlliedSignal's $1.4 billion global repair and overhaul services businesses, whose revenues have more than doubled in the 1990s, led the aerospace aftermarket growth in the third quarter. Strong performances were also seen in the flight-safety avionics, military and general aviation aftermarkets. Combined, these results helped to more than offset the predicted reduction in the company's shipments to commercial air transport manufacturers.

"We've taken extensive actions beginning in 1998 to ensure that our aerospace portfolio would be resilient in the face of this foreseen downturn in the commercial air transport segment," Bossidy said. "Our preparations have been successful based on the healthy performance of our aerospace portfolio this quarter."

Bossidy said that with strong flight-hour growth continuing across the global aerospace industry, the company is confident that its aerospace aftermarket businesses will deliver 6% to 8% annual growth.

In addition, the company is continuing to focus expenditures on high-growth products and services. In the aerospace businesses, high-growth areas include the new AS900 engine family for regional and long-range business jets, as well as the development of advanced software and integrated flight-safety systems to support the aviation industry's emerging free-flight system. The nationwide free-flight system will open up the skies for air travel outside of traditional airways, resulting in more on-time flights, reduced congestion and significantly lower operating costs for airlines.

In the materials businesses, the company is targeting growth opportunities in pharmaceutical fine chemicals outsourcing, specialty waxes, semiconductor chip packaging, advanced circuits and wafer fabrication materials, specialty films and plastics. "Although we have much more to do, we have made significant progress to date in transforming our materials portfolio to higher-margin businesses," Bossidy said. "In electronic materials alone, we have rebuilt the portfolio, which is evidenced by our recent divestiture of the lower-margin laminates business and our acquisition of Johnson Matthey Electronics."

"Going forward, our continued solid operating performance and intense focus on high-growth platforms will be significantly enhanced by the e-business initiatives being implemented across the company," Bossidy added. "Every business is now focused on using web-enabled technologies to capture increased productivity and to spur revenue growth through greater customer intimacy and connectivity. All of these activities combined make us confident that we will achieve full-year 1999 earnings-per-share growth of 16%."

"As we draw nearer to closing our historic merger with Honeywell," Bossidy continued, "I am confident that the strong operating disciplines and growth foundations we've developed over the past eight years at AlliedSignal will help ensure that the new Honeywell will achieve consistent annual earnings growth of 15% to 20% as we enter the new century."

Other highlights of the third-quarter include:

• AlliedSignal and Honeywell shareowners voted overwhelmingly to approve the companies' pending merger.
• Major aerospace contract wins valued at $2.5 billion were announced for a wide range of the company's air transport equipment, safety avionics and aftermarket services. This year, the aerospace business has won contracts valued at nearly $5 billion.
• The new AS900 Turbofan engine for regional and long-range business jets passed its first operating test ahead of schedule.
• The company announced it will begin testing a new electrically assisted Garrett® turbocharger with major U.S. and European automotive makers this year. The new unit, the first-of-its-kind in the industry, eliminates turbo lag-time by providing instantaneous boost from the turbocharger at the time of acceleration. It also produces electricity that could be used to replenish the vehicle's battery.
• The company, along with Unicom Distributed Energy, successfully demonstrated off-the-grid power-outage protection capabilities of the Parallon™ 75 Turbogenerator at a McDonald's restaurant in Bensenville, Illinois. The system, which has been providing power to meet the store's daily requirements since August, enables McDonald's to both reduce energy costs and benefit from power-outage protection.

The company had a $106 million pre-tax gain (after-tax $59 million) on the sale of its Laminate Systems business and took $89 million (after-tax $54 million) in repositioning and other charges in the third quarter. Repositioning activities included previously announced cost-reduction initiatives across the aerospace businesses, reductions in high-cost infrastructures in the turbochargers business and capacity and overhead reduction in the performance fibers business. The actions will result in stronger competitive positions in these businesses and improved performance in 2000 and beyond.

Additional Cost Savings From Honeywell Merger

The company also announced in the third quarter that it had reached an agreement in principle with the U.S. Department of Justice for clearance of its proposed merger with Honeywell, subject to final entry of a consent decree. The companies continue to focus on obtaining clearance from the European Commission.

Bossidy said he expects the pending merger with Honeywell to generate at least $500 million in savings in 2002. "Our merger integration teams have worked effectively over the past four months to ready their integration plans and identify significant cost-saving opportunities in areas outside of our respective aerospace businesses," Bossidy said.

"When we announced the merger, we said the keys to our success would be a quick and decisive integration process in addition to the rapid identification and implementation of our cost-reduction plans," he added. "We have made significant progress in both areas, which makes us confident that we will successfully integrate our companies and realize additional synergies."

Segment Highlights

Excluding the gain on the sale of its Laminate Systems business and repositioning and other charges, third-quarter segment results were as follows:

Aerospace Systems sales in the third quarter were $1.2 billion, which are flat compared with third-quarter 1998 sales after excluding divestitures and a government contract restructuring. Operating income increased 12% to $290 million from $259 million in the third quarter of 1998.

The segment experienced double-digit sales growth in safety avionics and repair and overhaul services. These were offset by lower sales to commercial air transport manufacturers. Operating income increased primarily due to ongoing cost-structure improvements spurred by the aerospace organization realignment and from a more profitable product mix in safety avionics and aftermarket services.

Specialty Chemicals & Electronic Solutions sales were $590 million, up 9% compared with $541 million in the third quarter of 1998. Operating income declined to $52 million from $72 million.

Revenue increases came from higher sales in pharmaceutical fine chemicals and specialty waxes. Revenues also benefited from the company's recent acquisition of Johnson Matthey Electronics, which represents a substantial transformation of the electronic materials portfolio and positions the business as a leading supplier to the growing high density interconnect (HDI) market. Electronic materials saw sharply higher sales in the quarter for its dielectric products due to improving conditions in the global semiconductor industry.

The decline in operating income reflected the effects of an under-utilized facility, new-product expenditures in electronic materials and pharmaceutical fine chemicals, and pricing pressure in the recently divested Laminate Systems business.

Turbine Technologies sales were $996 million, an increase of 11% from $900 million in the third quarter of 1998. Operating income jumped 68% to $173 million from $103 million.

The segment experienced strong sales growth in automotive turbochargers, military helicopter engines and the aerospace aftermarket. Operating income increased primarily as a result of significant ongoing cost-structure improvements, double-digit growth in the engines aftermarket and higher sales in turbochargers. Higher sales in the regional, business and military engines aftermarket were offset by flat sales in the commercial air transport aftermarket.

Demand continues to grow in Europe for its turbochargers used in turbo-diesel-powered passenger cars, in addition to an increasing demand for turbochargers in the North American light-truck market.

Performance Polymers sales were flat at $437 million compared with $436 million in the third quarter of 1998. Operating income declined to $36 million from $69 million.

The segment's revenue performance was driven by continued higher sales of its engineered plastics used in automotive applications, as well as higher sales of its specialty films products used in pharmaceutical packaging and consumer products. These were offset by lower sales in textile and industrial nylon.

Operating income declined due to continued pricing pressure in polyester and carpet and higher raw material costs. These were partially offset by higher volumes in plastics and films and ongoing cost-structure improvements.

Transportation Products sales were up slightly to $615 million compared with $609 million in the year-earlier quarter. Operating income increased 71% to $48 million from $28 million.

Truck Brake Systems saw higher sales in the North American truck aftermarket and double-digit growth in the original equipment market, including increased shipments of its anti-lock braking system products. Revenues also benefited from higher sales of Prestone® products and Fram® oil filter products. These were partially offset by lower sales of friction materials.

The increase in operating income reflected ongoing cost-structure improvements, higher unit volume growth and stronger pricing in the car care business.

AlliedSignal Inc. is an advanced technology and manufacturing company serving customers worldwide with aerospace products and services, automotive products, plastics, chemicals, fibers and advanced materials. It is one of the 30 stocks that make up the Dow Jones Industrial Average and is also a component of the Standard & Poor's 500 Index. The company employs 70,400 people in some 40 countries.

AlliedSignal was named the best diversified company by Forbes Global magazine; the most admired aerospace company by Fortune magazine, both globally and in the U.S.; and one of the 100 best companies to work for by Fortune. Additional information on the company is available on the World Wide Web at http://www.alliedsignal.com.

This release contains forward-looking statements as defined in Section 21E of the Securities Exchange Act of 1934, including statements about future business operations, financial performance and market conditions. Such forward-looking statements involve risks and uncertainties inherent in business forecasts.

Discuss in my forum