By Debora Tidwell (TMF Debit)

AlliedSignal, Inc.
101 Columbia Road
Morristown, NJ 07962-2245
(201) 455-2000

UNION CITY, CA (May 12, 1997)/FOOLWIRE/ --- AlliedSignal reported record first quarter net income of $259 million or $0.92 per share, a 15% increase over 1996 first quarter net income of $225 million, or $0.80 per share. Sales in the first quarter were $3.3 billion, an increase of 3% over comparable 1996 first quarter sales of $3.2 billion. Excluding the effect of foreign exchange, 1997 first quarter sales were up 5%. Foreign exchange had no adverse impact on earnings. Sales from ongoing operations were up 3%, all from internal growth. This represents the 21st consecutive quarter that their earnings have grown 14% or more. Operating margin expanded a full point to 10.7%. Productivity was 6.4% and their cash-adjusted debt/cap was 10.9% reflecting a very healthy balance sheet.

AEROSPACE RESULTS. Aerospace had a terrific quarter. Sales were up 8%. Operating margin expanded 260 basis points to 12.1% and earnings were up 39%. They did not include sector operating margins in the earnings release because they have had some pressure from their customers who have noticed their margins and that has caused some price pressure. They will continue to discuss margins, but will not include it in future earnings releases. The results this quarter were primarily driven by engines and equipment systems where they enjoyed healthy gains in their aftermarket sales. For the sector, their total aftermarket sales were up 17%, about that level in both commercial and military. They had record productivity of almost 8% and the present market conditions as well as the 24% increase in air transport spares bookings indicate they will continue to have this level of performance throughout 1997. The sales growth was essentially due to growth in the aftermarket. Their OE sales did contribute a point of growth and that was driven primarily by a 14% increase in air transport sales. Engineering services, which is a lower margin but low investment business did have sales declines that cost a point to overall sector growth rates. For the full year, they expect aftermarket to continue to drive sales growth but they also expect accelerating sales growth from the OE side. For the full year, they expect 6 points of growth from the aftermarket which should have growth in the mid teens. OE should contribute 5 points of growth and that's primarily due to a 42% increase in the air transport revenue. Engineering services, like in the first quarter will cost them a point of growth. Overall they are very comfortable with double digit revenue growth for the year.

AEROSPACE MARGIN OUTLOOK. They are very comfortable that their margins will grow 200 basis points for the full year. 120-130 basis points will come from the growth in the aftermarket. 60-70 basis points will come from their ability to leverage their cost structure by driving higher aftermarket and OE volume through their system. Even in a period with double digit revenue growth, they are keeping a close eye on their cost structure. They expect to drive down their SG&A by 4% in 1997.

AUTOMOTIVE RESULTS. For automotive, their sales grew 1%. They would've grown 4% without the impact of the stronger dollar. Their margins expanded from 7.9% to 8.5%. They had very strong results from their turbocharger unit, particularly in Europe. Over the last two years, they will expand their shipments in Europe by 85%. Their worldwide aftermarket sales for the quarter were flat. This includes aftermarket turbos, friction, filters and spark plugs, and truck brakes.

OPERATING INCOME. Operating income on an ongoing basis was up 11%. Revenue growth in the first quarter was essentially all due to turbo OE which had revenue growth up 20%. That enabled the entire sector to grow by one point. For the full year they have a question mark on the impact of foreign exchange. Their view is that the dollar will remain strong through the second quarter and then weaken in the second half.

AUTOMOTIVE ORIGINAL EQUIPMENT OUTLOOK. They expect turbo OE to contribute 3-4 points of growth as it did in the first quarter. They expect the worldwide aftermarket to contribute up to a point of growth as they drive sales in turbochargers and truck brakes. And, in other OE, they expect up to a point of growth from friction OE as well as safety restraints. Overall they see growth of 3-5% before foreign exchange.

1997 AUTOMOTIVE OPERATING MARGINS. For the full year, automotive operating margins should expand by 100 basis points. 60-70 basis points should come from the higher turbo OE volume. 20-30 basis points should come from friction, benefitting both from the higher volume and the improved factory performance. In the first quarter they enjoyed increased friction OE sales. They have captured an additional $60 million of volume, $30 million of which they will experience in the second half of the year. They are making progress with their friction business.

ENGINEERED MATERIALS. For engineered materials, sales were flat. Operating margin declined by 230 basis points to 13%. Due to the strong performance of UOP, they were able to hold their net income flat. Looking at revenue growth in the first quarter, foreign exchange cost them a point of growth, a tough comparison for laminates cost them two points, price cost them a point including two points down for polymers due to lower pricing for industrial polyester and acetone and a point improvement due to higher prices in specialty chemicals and fluorine. They also drove four points of growth from higher unit volume in specialty chemicals, fluorines, and polymers for an overall result of sales being flat to last year. For the full year, they see that laminates will drive one to two points of volume growth compared to the two-point decline in the first quarter. If you take their actual sales experience in March and April month-to-date experience for laminates, and extrapolate that for the rest of the year, that would give them one point of growth. They expect that pricing may cost them up to one point of growth. They do see some improvement in acetone throughout the year but they think that industrial polyester will remain a challenge. They are adding capacity in phenol and fluorines and that will be worth two points of volume growth on top of the four points they experienced in the first quarter which gives them confidence they will be able to drive 6 points of volume growth. Overall, they see revenue for the year being up 5-8%.

REVENUE GROWTH EXPECTATIONS. First quarter had zero growth. They see the second quarter growing 5-6%. Two points will come from the added capacity. They will get 3 points of growth from laminates as opposed to the two point decline in the first quarter, they should have a one point increase in the second quarter for a net benefit of 3 points. They also see a couple points of growth in specialty chemicals and fluorines and they do see that foreign exchange and pricing might each cost them a point so in the second quarter their expectation is 5-6 points of revenue growth.

MARGIN OUTLOOK. As a forecast for margins for the full year, they expect 100 basis point improvement. In polymers they will be down 50 basis points for the overall sector. They are experiencing growth in unit volume but that is being more than offset by an adverse price/cost relationship. In 1996 in the first quarter they had their most favorable price/cost relationship. In the first quarter this year, they have the most unfavorable relationship -- a relationship that will improve throughout the year. Specialty chemicals and fluorines should add 75 basis points to margin growth. That's coming both from a growth of high margin products as well as productivity. And electronic materials should also contribute 75 basis points. That comes from sharply curtailed losses in their optical polymers unit, a rapid growth in their microelectronics unit which provides chemicals to the semiconductor industry, and from a turnaround in the laminates business. With respect to the second quarter for EMS, they see margin expansion up 100 basis points. The improvements will come from the improving price/cost relationship, the added capacity, as well as the fact that they will not have a tough comparison in laminates in the second quarter as they did in the first quarter.

EARNINGS GROWTH OUTLOOK. In 1996 Q1, they earned $0.80 per share which included $0.09 per share from the brake unit they sold to Bosch. They have been able to replace that $0.09 with income that didn't come from the sectors -- $0.05 from other income which is essentially investment income from the Bosch proceeds, as well as $0.04 from reduced interest expense and lower corporate and unallocated charges. So they have gotten back to $0.80 per share with actions below the line. The sectors have given them $0.12 per share for all of their growth -- $0.10 from aerospace and $0.02 per share from automotive. So, all of their 15% growth has come from the sectors. As they entered the year, they expected more balanced growth from the three sectors. The actual results show much stronger results from aerospace. But as they look forward, they see those strong results in aerospace and, for the reasons indicated, they see sales growth and margin expansion at engineered materials in the remaining three quarters which gives them confidence in their ability to grow earnings 13-17% for the year.

1997 AEROSPACE OUTLOOK. For the full year, for aerospace they see that the aftermarket will remain strong as indicated. The sales should be up in the mid teens. They will begin to feel the benefits in the second quarter of higher air transport sales. They are very comfortable with double-digit revenue increase and a 200 basis point increase in margins. For automotive, their turbocharger unit should perform very well throughout the year and will be the primary driver of their revenue growth as well as a 100 basis point improvement in margins. For engineered materials, they see that they will build upon the volume growth they had in the first quarter. They will be able to grow their revenue 5-8% and will be able to expand their margins 100 basis points. When you add all of that up, that gives them confidence in their ability to grow earnings 13-17% and they are comfortable at the upper end of that range.

1997 OBJECTIVES. In 1997 they have 3 objectives -- keeping customer satisfaction their highest priority, add learning to improve both their skills and enhance their future, and achieve their financial targets by emphasizing growth and productivity. Their growth targets this year are for revenue growth of 8%, productivity 6-7%, giving them earnings of 13-17%. The 8% revenue growth looks more daunting in light of the first quarter. But they don't set these targets casually and don't intend to miss them. So there is a lot of activity underway to make sure they reach that target.

OUTLOOK AND WHERE THEY ARE NOW. Looking at the businesses they are going to go into in the remaining years of this decade, they have strong franchises. On the topline, they have some 52% of their businesses in leadership or strong market positions that have operating margins of more than 15%. They have components with sales of 11% of their total that have strong market positions and earn in the 10-15% operating margin range. And they have, on the bottom, 24% of their components or 24% of their sales with margins less than 10%. They are trying to drive those higher and think they have good prospects of doing so. And they have components representing 13% of their sales where they have relatively weak positions and low margins. These will be candidates for divestiture as they go along. Components representing 63% of their sales have double digit margins and they think those are going to be strong as they go about achieving their growth.

CASH GENERATION. Looking at the portfolio in terms of its cash generation, the topline just shows operating cash flow to sales. They continue to have restructuring expenses that, last year, amounted to more than $200 million. If they didn't have those cash outs, the operating cash flow ratio would have been 11%, but they are doing okay. Since 1991, net of acquisitions and divestitures, they have probably taken out 30,000 people. That is pretty well understood. What isn't well understood is that they have probably changed 25,000 more. The cost of that transition is enormous and it has plagued their cash flow and continues to, to the extent that they continue to change their population. That will ease going forward. On return on sales they compare favorably against GE, Emerson, Rockwell, UTX, Textron, and TRW. They have strong cash flows and nice returns and their job is to embellish those going forward.

GROWTH. Looking back at their growth in the 1991-1993 period, aerospace was either heading toward recession or in full-fledged recession and as a consequence they declined in terms of revenues by 5% in the 1991-1993 period, automotive was up 2%, EMS was up 2%, and overall in that period the company shrunk by 1%. Going on to the 1994-1996 years, aerospace began to recover and expanded 5%, EMS was up 10%, and automotive was up 5%, leaving them a 6% growth rate during that period. In 1997, they see aerospace up 10%, EMS up 8%, and automotive up 5%, to give them the 8% growth rate they are in search of. So, there are benefits to being a multi-product company. In the first quarter the revenue growth of EMS was disappointing. They think that is a one-off situation that will begin to correct itself as early as the second quarter.

PROCESS DEVELOPMENT. One of the things in terms of growth that has been helpful to them is that they find that growth is a mindset and a process. It takes great perseverance and is helped by lots of imagination. So, they have across the company now some new process development processes which are helping them. They are trying to garner ideas from as many people as they can. They subject those ideas to what they call phase gate reviews, deciding which ideas to select, what the business plan is, what the product development schedule is in terms of engineering, what is the commercial readiness and the product launch date. Say, for example, at the end of the quarter they had 96 ideas in the pipeline which, if they all came to fruition (and they won't) would be worth $1.5 billion. As they go through this process they involve their customers. They have multi-functional teams. They look at the risk profile they will be facing, and they focus on cycle time -- how long will it take to get from here to there. Historically, they have been too slow. They use the phase gate reviews frequently, they stay on time, and they think this is going to have a significant impact on the amount of growth we are able to generate in the years ahead.

OUTLOOK FOR THE NEXT FEW YEARS. In aerospace, taking their commercial air transport business, just the OE business, the deliveries are going to reach $643 million this year and then increase to a range of $825 million for 1998 and 1999. If you look at their content on the Boeing aircraft, they are up between 1993 and 1999 by 15%. As a consequence, they expect the OE growth rate in the 1996-1999 period to be up 16%.

PASSENGER MILES INCREASING. Revenue passenger miles last year grew 6.7%. They grew 6.6% in 1995. It is expected that in the next decade revenue passenger miles will go up 75% and that the aircraft fleets will go up from 11,500 to 17,000. This is not just a blip on the screen, it is going to be around for awhile. It is a cyclical business and it will have another cycle. From what AlliedSignal can see, they have a long run ahead of them.

KINDS OF PLANES BEING BUILT. If you look at the kinds of planes that are apt to be constructed during this period, it looks like 43% of the total will be in the 90-170 passenger variety. AlliedSignal was sole source for the 737 3/4/5 on environmental control system, electric power and starter. They were an optional vendor on ATU, the engine controls, the wheels, and the brakes. On the 737 6/7/8, they are sole source on 5 of those and are optional on wheels and brakes and won most of the orders on those aircrafts in the last 18 months. So, instead of having a shipset value of $400,000 which was somewhat ungrounded because of the number of optional selections they have, their shipset value is $600,000 now which is quite firm because of their sole source positioning. Over the next few years, the early 737 units will go down from $30 million to $12 million, but the 6/7/8 varieties will go up to $150 million during this period.

STRONGER AFTERMARKET POSITION. It also puts AlliedSignal in better shape in terms of the aftermarket. Because of the new technology and the decision to drive systems, it is more difficult for the gray market players to participate. Also, when you are sole source, you can sign maintenance service agreements at the outset of the contract. AlliedSignal has a history of losing 25% of their aftermarket on their own parts after four years. That is not going to happen where they are sole source. The reason this has happened is that new products have been introduced which has led to their sole source selection.

AEROSPACE SPARES MARKET. In the spares market, they have 64% of a $1.1 billion market. These are just AlliedSignal's parts. They think the market will grow 8% and they think they can get 6 points of share. As a consequence, in 1999 they will have 70% of a $1.4 billion market. Again, they know more about who buys from the gray market. They want to emphasize that gray market doesn't mean bad product, it just means that someone has come into AlliedSignal's product category. They would not like to have that happen and, hence, can defend themselves better because they know where all of their parts are and who buys from the gray market. United, for example, buys 20% of its parts in the gray market. AlliedSignal knows it's a pricing issue and for the first time they can identify and begin to respond to that situation. Allied also knows that fill rates have a lot to do with people going to the gray market. AlliedSignal was in the 78% category a couple of years ago and are at 90% now going to 95%. They have regional warehouses now in London, Frankfurt, and Singapore where they offer 24 hour delivery. And because of the electronic storefront, which is their information system, they have a much better idea as to where their parts are and how to get them to customers in an accelerated way. They have also done a good job with telemarketing. For the first time they are selling parts MSA agreements. They used to have labor and parts. There are strong unions and the airlines want to use their own union labor, so Allied can just do a parts MSA and the airline handles the labor. AlliedSignal keeps the more profitable part of the business and also delays the onslaught of their gray market participants. This has been going on for a year or two now, but they think they have finally got a lot of things in place that should lead to accelerated growth in the days ahead.

AEROSPACE REPAIR/OVERHAUL BUSINESS. Looking at their repair and overhaul business where they do both labor and materials, it is an $800 million business now. They see this growing 13% over the next three years for a number of reasons. One, they have new markets to tap. They have new repair and overhaul outlets in China for APUs, wheels, brakes, and avionics. They are on their way to getting that done in Malaysia and Australia. They bought a company to complement their offering in wheels and brakes. Another acquisition gives them two new engines for which they can supply spares. SECAN is a holding they had in the UK which they have just taken control of and it involves their environmental control systems product. Another acquisition is a heat exchanger company they bought a year ago. They have also partnered and in many cases, for example Lufthansa which has a big overhaul and repair activity in Europe, they not only do repairs on their own planes they do repairs for other people in Europe. AlliedSignal now partners with Lufthansa and provides all the parts. Same is true with British Airways and Singapore Airlines. In the US, United does all the maintenance now on the 777 APUs for all the carriers across the country and Allied has an arrangement with United where they provide the parts for that effort. So, for a lot of reasons, Allied thinks it is appropriate to conclude that this market can grow 13% in the time period given.

AEROSPACE PRODUCTION GOALS. AlliedSignal has a goal for 1997 of a 20-day turnaround time and 50% market share for APUs (auxiliary power units). Once a company gets under 25 days for turnaround, the airlines have an incentive to give that company the business because it's economically advantageous. As AlliedSignal gets down to 10 days (their target), they think they can get 65% of this market.

AIR SAFETY OPPORTUNITIES. There have been four tragic air accidents in the past year, all avoidable if the aircraft had been equipped with equipment available today. As a consequence, a new aviation safety commission has been formed, the government has put up $1 billion to take a look at this with the objective of dropping by 80% the accidents in the next 10 years. If you look at the areas they are concentrating on -- prevent aircraft malfunction, prevent air traffic control malfunction, eliminate human cause mishaps, ensure aircraft separation from weather/ground/other aircraft -- AlliedSignal has an offering in each one of these areas and think they are well-positioned to participate when these choices, which are often options, become mandates. In just the last category, AlliedSignal has a $250 million business now. As a consequence of what is happening in the Gore Commission, there will be $2 billion spent in this area over the next 5 years. AlliedSignal expects to get 60% of this business, or about $1.2 billion and, as a consequence, double their sales in the year 2001 to $500 million. They think that the general aviation and corporate aircraft will also have a lot more in safety products. Even the military will have safety products. It is no secret that Ron Brown's death in the Balkans involved an airplane on which there was no safety equipment. AlliedSignal has integrated a hazard avoidance system and this is going to be an area in which they will have a lot of success in the years ahead.

AUTOMOTIVE MARKET EXPANSION. They discussed turbochargers and it continues to go well. Just in Europe in 1995, one in five cars had a diesel engine. Two and a half of those cars had a turbocharger. AlliedSignal had 69% of the market and they shipped 1.070 million units in 1995. In 1997, still only one in five cars are diesel, but four of five have turbochargers. AlliedSignal has 75% share and will ship 2 million units to Europe in 1997. The business in total of $700 million last year, growing to $1.1 billion with a 15% CAGR, and for the first time has enough capacity to more fully pay attention to the aftermarket. They have been trying to keep up with shipments in this market the last three years. They now have enough capacity that they can apply their efforts to other parts of the market and continue to grow at faster rates.

UTILITY INDUSTRY DEREGULATION. There is a new phenomenon happening in the US because of environmental concerns as well as the onset of deregulation and economics, the utility industry is going to deregulate. Right now it is highly regulated. There are relatively extensive transmission and distribution systems in place to distribute power. Oversimplified, just like with computer systems, instead of having central processing there will be distributed energy generation.

NEW PRODUCT FOR UTILITY INDUSTRY. There is a new opportunity AlliedSignal intends to take advantage of because of the technology they have in their automotive business with turbochargers and their aerospace business with heat exchangers, APUs, and power management. They want to introduce a product for this market in the 50-100 kilowatt range called a turbogenerator and has one moving part, no oil systems, multi-fuel capability, no gears or gearbox, low emissions, and lower operating cost. They will introduce the product this year and have a bevy of partners for installation purposes. They have a number of distribution partners which they will announce later so they can cover the world. But, it is a business they think can grow to $600 million with only 5% share captured by the year 2000. Their target is 50% share capture.

UTILITY INDUSTRY. If you look at the marketplace -- an $8 billion market, heavily dominated by distributed generation -- these are small industrial companies who are the customers. Like McDonalds, for example, who pays a lot of money because they are on the grid. They can't afford a co-generation product with a turbine, a gas turbine and a steam turbine, so they don't have any alternative. AlliedSignal will go to market with utilities because they feel they are better off in partnership with the utilities than in opposition. The biggest markets are China, India, and North America. India has 80,000 villages and 200 million people with no power. The same is true in China. And there is a big market in the US for small industrial businesses. The product is going to cut emissions by 15ppm and the cost which is the primary driver is half of what the commercial utility rate is ($0.035 per kilowatt versus $0.07 per kilowatt).

AUTOMOTIVE FRICTION MATERIALS. Another product in automotive is in friction materials is one they retained when they sold the braking business because they thought it had a wonderful technology base consisting of their process people in engineered materials and their automotive engineers as well. It is a business that is changing rapidly in terms of the way brake pads and linings are made. This is an important and sensitive part of the car. People want to have what is called "pedal feel" and as a consequence, the specifications of this product for all the car companies and in the aftermarket is very high. It is a small business. They lost money on it in 1996 and are going to be profitable this year, although not at levels they are satisfied with, but making real progress. The market is wonderful. There is no one with dominant share. There is 43% of the market made up of 15 small companies so it is a marketplace AlliedSignal thinks they can acquire and get bigger faster. Right now they are 67% in the aftermarket and 33% in the OE market, but they are growing rapidly in the OE market. It is the only product in automotive where you make more margins in the OE market than you do in the aftermarket.

EMS GROWTH GOING FORWARD. In terms of specialty chemicals, they have been working at this for a couple of years now. The vision gets clearer and the opportunities are going to be present faster than they thought. They have, for example, a $500 million business right now in specialty chemicals dominated by sealant and coatings and industrial products. They are targeting 3 other markets, all more than $1 billion that have to do with farming and agricultural products, polymer additives, and electronics. Without any acquisitions, they think they can grow these three markets by 15% per year. They do have an intention to acquire in this market to accelerate this growth, but they can't determine growth rates until acquisitions are complete.

PHARMACEUTICAL MARKET EXPANSION. Just looking at one of these markets, the pharmaceutical market, AlliedSignal is playing today in what they call a basic building-block market and they get $18 per kilo for their stuff. If they want to move up the food chain to where the pharmaceutical people are now and what they call advanced/intermediate, all of the fast growing pharmaceutical companies are outsourcing more things every day. AlliedSignal wants to take advantage of two markets. They have capabilities in oxenes, bromines, and fluorination, all of which are added to molecules to bring about some kind of chemical reaction. They need strength in active and inactive compounds that isolate the active, desirable compounds, coupling reactions, hydrogenation, CGMP. They are looking at acquisitions in all of those categories. They are convinced they are going to have a lineup that is able to attract this market in the very near future and it is one that promises exciting growth.

EXPANSION IN POLYMERS. In the polymers business they have a big nylon based system, they have a big polyester business and they are also trying to grow in the specialty materials business. They bought a facility in Europe two years ago and are adding plants in Germany. That business is growing nicely and had a good first quarter among an EMS contingent that didn't have a very strong first quarter. The films business, with food packaging and pharmaceutical packaging as leaders, is growing nicely.

EXPANSION OF THE MICROELECTRONIC BUSINESS. In electronic materials they are trying to find a way to get more involved in the conversion of the wafer to a chip. They have a business called advanced microelectronic materials which is an $80 million business with outrageous margins. It basically does planarization, which is the coating that contains the spread of electronic current. As the micron size goes down, you need different technology to accomplish the same purpose. They bought Electron Vision last year to give them a spin-on polymer. They have their own developments underway for organic polymers and they had a joint venture to get nano-foams which is essential in order to be able to play at the lower densities. They have a lead position now in spun-on glass and have their eyes on other capabilities as this market continues to grow. In order to participate in this wafer-to-chip conversion, you need more than planarization dielectric. They need solvent etching, specialty gases, and developers and chippers. The fabs are essentially the customers for this product. They are in good shape in terms of a beginning position. They think this business can grow 30% before acquisitions, but they are working hard to flesh it out with acquisitions so they can play in the big market.

PRODUCTIVITY. When they started operational excellence, primarily they invested their time in manufacturing. As a result they have improved their rating in manufacturing. But, along the way they didn't spend as much time in the supply chain, on the information systems and finance, and customer alignment. The faster you go, the more bottlenecks you build down the road in your plants because you eliminate defects and speed up material flows and then you put them into stations which have not been defected. So, what they are trying to do now is send 20 people to a plant to work on other processes in the plant to bring everyone up to the line that is necessary for them to do production. They have done three plants. By the end of 1997, 20% of their plans will be underway in terms of premier business achievements and 80% will be at the end of 1998. They believe they can get $1.6 billion out of operational excellence.

* 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. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.

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