AlliedSignal <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALD)") else Response.Write("(NYSE: ALD)") end if %>
P.O. Box 2245
Morristown, NJ 07962-2245
(201) 455-2127

BUFFALO, N.Y., July 22, 1996/FOOLWIRE/ ---Dow Jones Industrial Average component AlliedSignal reported record earnings of $263 million, or $0.93 per share before charges. Including the extraordinary gain, net earnings came in at $272 million, or EPS of $0.96. These results compare with earnings of $227 million, or $0.80 per share, in Q2 1995, up 16.2%. Sales in the second quarter advanced nine percent to $3.3 billion on continuing operations.

Raw sales were down $300 million from Q2 1995, reflecting the presence of the company's now-sold braking systems unit in last year's consolidated results. Special items in the quarter included a gain of $1.30 per share and a charge of $1.27 a share, resulting in a net one-time gain of $0.03 per share. The gain was associated with ALD's sale of the braking business and a charge taken for environmental liabilities.

Nine of the company's 15 business units experienced double-digit growth in revenues, while consolidated operating margins increased 160 basis points (one basis point equals one one-hundredth of a percentage point), from 9.8 to 11.4 percent of sales. Operating income on continuing operations increased 15%. Equity in affiliates was up 28%. Free cash flow of $42 million increased slightly from last year. Productivity (sales per employee) increased 5.7%, which approached the company's full-year objective of 6.0% growth. Cash-adjusted debt to total capitalization of 5.0% "reflects a strong cash position." Effective tax rate in the quarter was 34.1%.

AlliedSignal's Three Sectors

Aerospace turned in a record quarter in Q2 with revenues increasing 12% to almost $1.4 billion. Operating margin expanded almost one point to 11.6%. Commercial propulsion, spares, and repair & overhaul were the key drivers in engines and equipment systems growth. Aftermarket sales were up 16%. Flying hours at commercial airlines were up 9%, increasing at the about same rate as spares bookings in the quarter. Past due orders decreased to their lowest level in two years, adding to improved performance in government electronics. Revenues decreased in commercial avionics, primarily because of delays in new product introductions, though ALD's win rate was 70% during the quarter. ALD has set the goal of increasing revenues by 10% and operating margins by 50-100 basis points for this segment.

The automotive segment expanded operating margins by almost 200 basis points to 9.9%, driven by high productivity gains of 7.4%. Excluding revenues from the now-divested brake unit, revenue grew by 4% to $955 million from $917 million in 1995. Safety restraints business grew with gains in the European airbags and US seatbelts segments. The turbocharging unit benefitted from increasing demand for turbo diesels in Europe and showed a revenue gain of 13%. European aftermarket operations were impacted by generally weak conditions and were compounded by the fact that ALD's business is concentrated in France and Germany, which are showing the weakest economies on the continent. Broad-based improvements across SBUs in the automotive segment fueled income growth across all units except one. Guidance for the coming year pegs revenues growth at 5% and margin expansion at 150-200 basis points.

In engineered materials (EMS), revenues grew 10% to just over $1 billion. Recent acquisitions in the specialty chemicals and industrial polyester businesses and growth in fluorines and engineered plastics were all key to segment performance. Revenue shrank in the laminates business due to a global slowdown in computers and electronics businesses. Margins fell slightly to 14.2% due to the integration of new businesses as well as weaker pricing for carpet fibers. ALD's UOP joint venture [accounted for as an equity investment] showed near-record earnings, driven by new business in Asia. H2 outlook for EMS is "very good" with additional capacity coming onstream, which will drive volume increases. The company also plans on capitalizing upon favorable price/cost trends. Looking at the full year, ALD expects revenue growth to climb grow at a double-digit rate and operating margin expansion of 100-150 basis points.

Cash Flow

"At AlliedSignal, we look at operating cash flow and free cash flow." [The Wall Street Journal addressed these in a recent article]. Operating cash flow was $1.2 billion in 1995; ALD expects to this to grow to $1.450 billion in 1996. Compound annual growth over the last two years "is an 18% improvement." "We also wanted to show that we do have seasonality in our cash flow," in that the second half of the fiscal year's cash flow is larger than the first. This is primarily due to changes in working capital. Working capital in H1 1995 decreased by $332 million and increased by $341 in H2, for a net increase of $9 million for the full fiscal year. In 1996, working capital in H1 1996 has decreased $247 million; ALD expects to grow working capital $347 million in H2 for a net working capital increase of $100 million in fiscal 1996.

Seasonal cash flow changes occur in the three segments for a variety of reasons. In automotive, the company builds inventories of new and existing products in Q2 and benefits in Q4 from reductions in receivables as automotive customers reduce their accounts payable as they go on holiday. In EMS, inventories are built in Q2 to support the refrigerants and agriculture markets. Aerospace cash flow off working capital changes benefits from the skewing of government payments toward December. ALD is trying to reduce seasonality, though "it remains a fact of life."

Free cash flow is another metric to which ALD pays attention (operating cash flow of $1.450 billion minus capital expenditures and dividends; 1996 will include $200 million in cash outflow associated with repositioning actions). "AlliedSignal has strong cash flow; when you hear $300 million of free cash flow, that equates to $1.450 billion in operating cash flow).

Accounting Changes

Accounting rules for repositioning changed in late 194. Under the old rule, a corporation could accrue the costs for asset write-offs, severance, lease cancellation, relocation, training costs, and system development. Under the new rules, a corporation "cannot accrue those costs today if they provide future benefits." ALD will continue to be able to recognize costs in the charges they have taken in the current quarter for asset write-offs, severance, and exit costs. But the costs for relocation and training will be recognized when incurred. An accounting society's statement on liabilities for environmental actions will bring ALD to recognize environmental liabilities on an accelerated basis. Previously, two events would have triggered the recognition of liabilities--either at the moment a corporation discovered that liability or upon the completion of a remediation study. ALD has been using the latter. With the adoption of the American Institute of Certified Public Accountants' Statement of Position, "Environmental Remediation Liabilities," AlliedSignal has recognized certain liabilities in Q2 and has charged those liabilities to earnings.

Total program costs for repositioning, including employee severance, asset write-off, capital spending, and relocation, will total $535 million and will generate annual savings of $200 million by late 1998 and "will produce a rate of return of 45%. These actions are being taken to make a quantum improvement in our cost structure. The $200 million savings is a net number, which includes the benefits as well as the costs we'll incur for the relocation as well as for depreciation."

"As I look at out situation, it's no secret to you that our customers want price reduction, they want improved product reliability, and they want lead-times that are average shorter. We juxtaposed that against on own situation where we have a good cost structure but not optimal and [which] is also aggravated by excess capacity."The company will be focusing on process control, relocating to lower-cost facilities, increase capacity utilization, outsourcing of non-proprietary items, and factory layout. $400 million will be devoted to such programs.

The repositioning project involves the aircraft equipment business, a $1.7 billion revenue business with four components: wheels and brakes; engine controls; power management; and cabin air-conditioning. Three facilities closings and outsourcing will be part of the effort to improve capacity utilization from 45 to 80% and generating annual returns of 39% on this segment's restructuring costs.

Commercial avionics will keep two plants and will have a 550,000 ft.2 plant built in Greenfield, Kansas. Product development, engineering, and manufacturing will be co-located in Kansas, where flow control will allow the company to outsource some parts. The company is looking for a 32% annual on these expenditures. ALD will be a beneficiary of the FAA's heightened scrutiny of safety regulations in the aftermath of this year's aviation accidents.

Friction materials, having to do with brake shoes and pad, is the unit not sold with the brake division. "The whole industry is plagued by high costs of operations, inefficient layouts, numerous processes, and low yields." ALD plans to "eliminate redundancies, shrink or close four plants, do some strategic ousourcing...and wind up with a lower cost, a far more common manufacturing and engineering process, and more focus with respect to the product."

Turbocharging has been hampered by thin expertise, several operations which "not world class," high defect rates, and high overtime. A major outsourcing program will be initiated in this segment.

The automotive aftermarket business, a $1.1 billion global business, is not highly automated at the moment. Two distribution centers, East and West, will be complemented by investments in information systems and industrial automation. The company's goal is to achieve a 72% return on these investments.

In truck brakes and safety restraints, plants rationalizations and shifting of labor-intensive operations to lower-cost locales, in addition to technology investments are planned.

In the three years ahead, the company is targeting 12% revenues growth. Eliminating, braking systems for the full year, the company is looking for revenues of $13.5 billion. The company also expects aerospace to grow 7-9%, turbos and the aftermarket predominant contributors to that growth; automotive to grow 6-8%, with friction, materials, and turbochargers making the major contribution; and engineering materials to grow 9-11% with all four of this division's components delivering earnings. In order to grow at a 12% compounded rate by the end of 1999, the company will need $1.6 in acquisitions.

In order to grow, the company considers product development, globalization, and niche acquisitions. The company expects 2.5% real GDP growth in the next three years and higher rates in Asia, which is "not great." They also look to growth to come from a record number of new products such as from safety avionics with a new ground proximity warning system and new engines. ALD only has a 43% share of the aftermarket for its own parts and expects that it can exploit this $1.5 billion market over the next three years with its efficiency improvement programs, parts tracking, and solutions for safety concerns.

Aftermarket content for the automotive segment is about 37%. The removal of the brake systems business removes an earnings risk that the company termed "significant."Friction, filters, and spark plugs are significant aftermarket items. With turbocharging, currently at 64% world share, they believe they can grow at a compounded annual rate of 10%. Turbo diesels are a growth segment in Europe and in China. In aftermarket products, the company believes in fewer SKUs (stock or shelf keeping units), higher turnover, better promotion, and its strong brand names in Bendix, Fram, and Autolite. They also believe that Pep Boys, Autozone, and other high-volume retailers' picking up market share plays to their ability to offer a variety of products.

EMS' 11% growth in the past matched their forward-looking goals. Fluorine is highly profitable. The company is adding polymerization capacity and plans on placing technical facilities in locations central to customers. Semiconductor process materials is one area where the company is looking at opportunities.

"The model factory talks about cellular manufacturing."The company is putting in five model factories this year in its quest for efficiency. Education has been a target for investment with the many people ALD has taken on in the past five years. There has been discouragement over the last few years and the company has appraised itself as not yet good enough with customers. Employees are being brought into stock-based compensation with more than 60% of US employees owning shares.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event.

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