SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1998
Commission file number 1-12383
Rockwell International Corporation
(Exact name of registrant as specified in its charter)
Delaware 25-1797617
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
600 Anton Boulevard, Suite 700, P.O. Box 5090, Costa Mesa, CA 92628-5090
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code (714) 424-4565
(Office of the Corporate Secretary)
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
191,193,099 shares of registrant's Common Stock, $1.00 par value, were
outstanding on July 31, 1998.
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
INDEX
Page
No.
PART I. FINANCIAL INFORMATION:
Item 1. Consolidated Financial Statements:
Condensed Consolidated Balance Sheet--
June 30, 1998 and September 30, 1997........... 2
Consolidated Statement of Operations--
Three Months and Nine Months Ended
June 30, 1998 and 1997......................... 3
Consolidated Statement of Cash Flows--
Nine Months Ended June 30, 1998 and 1997....... 4
Notes to Consolidated Financial Statements..... 5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations.................................. 11
Item 3. Quantitative and Qualitative Disclosures
About Market Risk.............................. 16
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings.............................. 17
Item 2. Changes in Securities and Use of Proceeds...... 17
Item 5. Other Information.............................. 17
Item 6. Exhibits and Reports on Form 8-K............... 18
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
ROCKWELL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(In millions)
(Unaudited)
<TABLE>
<CAPTION>
June 30 September 30
1998 1997
ASSETS
<S> <C> <C>
Current assets:
Cash........................................... $ 164 $ 273
Receivables (less allowance for doubtful
accounts: June 30, 1998, $55;
September 30, 1997, $52)..................... 1,074 1,096
Inventories.................................... 1,358 1,276
Deferred income taxes.......................... 251 188
Other current assets........................... 266 291
Net assets of Semiconductor Systems....... 1,280 1,106
Total current assets................... 4,393 4,230
Net property...................................... 1,425 1,430
Intangible assets................................. 1,368 1,696
Other assets...................................... 267 221
TOTAL.................... $ 7,453 $ 7,577
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt................................ $ 180 $ 42
Accounts payable............................... 686 652
Accrued compensation and benefits.............. 476 387
Accrued income taxes........................... 62 97
Other current liabilities...................... 678 419
Total current liabilities.............. 2,082 1,597
Long-term debt.................................... 908 156
Accrued retirement benefits....................... 750 763
Other liabilities................................. 244 250
Total liabilities............. 3,984 2,766
Shareowners' equity:
Common Stock (shares issued: 216.4)............ 216 216
Additional paid-in capital..................... 921 901
Retained earnings.............................. 3,839 4,409
Currency translation........................... (136) (103)
Common Stock in treasury, at cost (shares held:
June 30, 1998, 23.7;
September 30, 1997, 9.6)..................... (1,371) (612)
Total shareowners' equity..... 3,469 4,811
TOTAL.................... $ 7,453 $ 7,577
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(In millions, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30 June 30
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenues:
Sales.......................... $ 1,664 $ 1,613 $ 4,940 $ 4,652
Other income, net.............. 28 40 68 68
Total revenues............... 1,692 1,653 5,008 4,720
Costs and expenses:
Cost of sales.................. 1,657 1,124 3,943 3,236
Selling, general, and
administrative............... 472 313 1,094 915
Purchased research and
development.................. - - 103 -
Interest....................... 18 10 35 20
Total costs and expenses..... 2,147 1,447 5,175 4,171
(Loss)/income from continuing
operations before income taxes. (455) 206 (167) 549
Income tax benefit/(provision)... 35 (86) (71) (229)
(LOSS)/INCOME FROM CONTINUING
OPERATIONS BEFORE ACCOUNTING
CHANGE......................... (420) 120 (238) 320
(Loss)/income from discontinued
operations, net of tax......... (62) 47 (46) 215
Cumulative effect of accounting
change, net of tax ............ - - (17) -
NET (LOSS)/INCOME................ $ (482) $ 167 $ (301) $ 535
Basic (loss)/earnings per share:
Continuing operations, before
accounting change ........... $ (2.15) $ 0.56 $ (1.19) $ 1.48
Discontinued operations........ (0.32) 0.23 (0.23) 1.00
Cumulative effect of accounting
change....................... - - (0.09) -
Net (loss)/income.............. $ (2.47) $ 0.79 $ (1.51) $ 2.48
Diluted (loss)/earnings per share:
Continuing operations, before
accounting change ........... $ (2.15) $ 0.56 $ (1.19) $ 1.46
Discontinued operations........ (0.32) 0.22 (0.23) 0.98
Cumulative effect of accounting
change ...................... - - (0.09) -
Net (loss)/income.............. $ (2.47) $ 0.78 $ (1.51) $ 2.44
Cash dividends per share
(see Note 1)................... $ 0.51 $ 0.29 $ 1.02 $ 0.87
Average outstanding shares:
Basic......................... 195.4 212.3 200.2 215.7
Diluted....................... 195.4 215.4 200.2 219.1
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
June 30
1998 1997
<S> <C> <C>
CONTINUING OPERATIONS:
Operating Activities:
(Loss)/income from continuing operations............. $ (238) $ 320
Adjustments to (loss)/income from continuing
operations to arrive at cash provided by
operating activities:
Depreciation..................................... 175 152
Amortization of intangible assets................ 62 56
Deferred income taxes............................ (78) (15)
Pension expense, net of contributions............ 30 (35)
Special charges (see Note 3)..................... 597 -
Purchased research and development............... 103 -
Changes in assets and liabilities, excluding
effects of acquisitions, divestitures, and
foreign currency adjustments:
Receivables.................................. 18 (39)
Inventories.................................. (94) (131)
Accounts payable............................. 38 43
Accrued income taxes......................... (111) (23)
Other assets and liabilities................. (30) 7
Cash Provided by Operating Activities..... 472 335
Investing Activities:
Property additions................................... (238) (200)
Acquisition of businesses, net of cash acquired...... (158) (8)
Proceeds from disposition of property and businesses. 99 577
Cash (Used for)/Provided by
Investing Activities.................... (297) 369
Financing Activities:
Increase in short-term borrowings.................... 146 39
Increase in long-term debt........................... 750 -
Payments of long-term debt........................... - (15)
Net increase in debt................................. 896 24
Purchase of treasury stock........................... (877) (629)
Cash dividends....................................... (153) (188)
Reissuance of common stock........................... 70 49
Cash Used for Financing Activities........ (64) (744)
CASH PROVIDED BY/(USED FOR) CONTINUING OPERATIONS.... 111 (40)
Cash Used for Discontinued Operations................ (220) (227)
DECREASE IN CASH..................................... (109) (267)
CASH AT BEGINNING OF PERIOD.......................... 273 634
CASH AT END OF PERIOD................................ $ 164 $ 367
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. In the opinion of management of Rockwell International Corporation (the
Company or Rockwell), the unaudited consolidated financial statements
contain all adjustments, consisting solely of adjustments of a normal
recurring nature, necessary to present fairly the financial position,
results of operations, and cash flows for the periods presented. These
statements should be read in conjunction with the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1997. The
results of operations for the three- and nine-month periods ended June
30, 1998 are not necessarily indicative of the results for the full
year. Certain prior year amounts have been reclassified to conform with
the current presentation.
It is the Company's practice at the end of each interim reporting period
to make an estimate of the effective tax rate expected to be applicable
for the full fiscal year. The rate so determined is used in providing
for income taxes on a year-to-date basis.
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share", in the first quarter of fiscal 1998. The adoption
of this standard had no effect on the Company's financial statements.
The Company's operations for the three- and nine-month periods ended
June 30, 1998 resulted in losses from continuing operations. Dilutive
potential common shares are antidilutive for loss periods and,
accordingly, are excluded from the calculation of diluted earnings per
share. Therefore, for all periods with a loss from continuing
operations, dilutive per share amounts equal basic per share amounts.
During the second quarter of fiscal 1998, the Company adopted American
Institute of Certified Public Accountants Statement of Position No.
98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" (SOP 98-1). SOP 98-1 requires the cost of
purchased software and certain costs incurred in developing computer
software for internal use to be capitalized and amortized over future
periods. During the three- and nine-month periods ended June 30, 1998,
the Company's continuing businesses capitalized $14 million and $25
million, respectively, of such costs that would have been charged to
expense under its previous accounting policy.
Effective October 1, 1997, Rockwell changed its method of accounting for
certain general and administrative costs related to government contracts
to expense these costs as incurred. Under the previous accounting
method, these costs were included in inventory. The amount of general
and administrative costs included in inventory as of October 1, 1997,
was $27 million ($17 million after-tax or $0.09 per share) and is
presented as the cumulative effect of an accounting change in the
consolidated statement of operations for the nine-month period ended
June 30, 1998. The effect of the accounting change on income from
continuing operations on each of the first three quarters of fiscal 1998
is not material and, accordingly, prior amounts have not been restated.
In addition, the effect of the accounting change on income from
continuing operations in fiscal 1997 would not have been material.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133), which is effective for
fiscal year 2000. SFAS 133 will require the Company to record all
derivatives on the balance sheet at fair value. For derivatives that
are hedges, changes in the fair value of derivatives will be offset by
the change in fair value of the hedged assets, liabilities, or firm
commitments. The Company believes the impact of adopting this standard
will not be material to results from continuing operations or equity.
During the 1998 third quarter, the Company declared a dividend of $0.255
per share payable June 8, 1998 to shareowners of record on May 18, 1998
and also declared its fourth quarter dividend of $0.255 per share
payable September 8, 1998 to shareowners of record on August 17, 1998.
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. Discontinued operations include the Semiconductor Systems business
(Semiconductor Systems), the Automotive business (Automotive), and the
Aerospace and Defense businesses (A&D Business).
On June 29, 1998, the Company announced its intention to spin-off
Semiconductor Systems into a separately traded, publicly held company.
The spin-off is subject to several conditions including receipt of a
ruling by the U.S. Internal Revenue Service that the transaction will
qualify as a tax-free distribution. The shares of the new Semiconductor
Systems company will be distributed to Rockwell shareowners on a pro
rata basis. The transaction is expected to be completed on December 31,
1998.
On September 30, 1997, the Company completed the spin-off of Automotive
into a separately traded, publicly held company by distributing all of
the issued and outstanding shares of Meritor Automotive, Inc. (Meritor)
to the Company's shareowners (the Automotive Spin-off). In December
1996, the Company completed the merger of its A&D Business with a
subsidiary of The Boeing Company (the Reorganization).
The following table summarizes the results of discontinued operations
for the three- and nine-month periods ended June 30, 1998 and 1997 (in
millions):
Three Months Ended Nine Months Ended
June 30 June 30
1998 1997 1998 1997
Revenues:
Semiconductor Systems... $ 274 $ 317 $ 926 $1,040
Automotive.............. - 897 - 2,491
A&D Business............ - - - 535
Total................. $ 274 $1,214 $ 926 $4,066
(Loss)/income before
income taxes:
Semiconductor Systems... $ (114)(a) $ 5(b) $ (100)(a) $ 157 (b)
Automotive.............. - 60 - 160
A&D Business............ - - - - (c)
Total............... $ (114) $ 65 $ (100) $ 317
Net (loss)/income:
Semiconductor Systems... $ (62)(a) $ 11(b) $ (46)(a) $ 120 (b)
Automotive.............. - 36 - 95
A&D Business............ - - - - (c)
Total................. $ (62) $ 47 $ (46) $ 215
(a) Results for the three- and nine-month periods ended June 30, 1998
include a $36 million charge ($13 million after tax) for losses
expected to be incurred from July 1, 1998 through December 31, 1998
and a $20 million charge ($17 million after tax) for anticipated
expenses related to effecting the spin-off.
(b) Results for the three- and nine-month periods ended June 30, 1997
include a $30 million charge ($19 million after tax) for the write-
off of purchased research and development in connection with the
acquisition of the Hi-Media broadband communication chipset business
of Comstream Corporation.
(c) The earnings for the first two months of fiscal 1997 were entirely
offset by expenses related to the Reorganization.
Management is evaluating restructuring actions at Semiconductor Systems
and expects to record charges when the actions are finalized and
approved in the fourth quarter of fiscal 1998.
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. In the third quarter, the Company recorded special charges of $597
million ($508 million after tax, or $2.60 per share). The special
charges include goodwill and other asset impairments of $400 million,
severance and other employee separation costs associated with a
worldwide workforce reduction of approximately 3,200 employees of $131
million and costs related to facility closures and consolidations and
exiting non-strategic businesses and product lines of $66 million. These
actions are expected to be substantially completed by the end of 1999.
Total cash expenditures are expected to approximate $193 million, with
$135 million to be spent by the end of 1999.
Revenues of non-strategic businesses and product lines which are being
exited were $35 million and $153 million, respectively, for the three-
and nine-months ended June 30, 1998. The net operating loss related to
such businesses and product lines is not material.
The effect of the special charges on the consolidated balance sheet at
June 30, 1998 is as follows (in millions):
Inventories............................. $ 24
Net property............................ 27
Intangible assets....................... 337
Other assets............................ 9
Accrued compensation and benefits....... 99
Other current liabilities............... 43
Other liabilities....................... 58
TOTAL................................ $ 597
The special charges are reflected in the consolidated statement of
operations for the three- and nine-month periods ended June 30, 1998 as
follows (in millions):
Cost of sales........................... $ 455
Selling, general, and administrative.... 142
TOTAL................................ $ 597
During the third quarter, management determined that the long-lived
assets of Automation's industrial motors business (Motors), were
impaired, as a result of recent and forecasted operating losses. The
related impairment charge of $266 million represents the excess of the
carrying value of the long-lived assets (including goodwill) of Motors
over their estimated fair value as determined by management, with the
assistance of outside experts, utilizing accepted valuation techniques.
The Company also recorded impairment charges of $53 million related to
the long-lived assets of businesses which were sold during the quarter
or are held for disposition.
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. In December 1997, the Company acquired the In-Flight Entertainment
business of Hughes-Avicom International, Inc. (Passenger Systems). The
acquisition has been accounted for as a purchase as of December 31,
1997, and the Company has recorded a charge of $103 million ($63 million
after-tax) for purchased research and development. The remaining assets
acquired and liabilities assumed have been recorded at estimated fair
values determined by the Company's management based on information
currently available. The results of Passenger Systems have been
included in the consolidated statement of operations since the date of
acquisition.
5. Inventories, net of reserves, are summarized as follows (in millions):
June 30 September 30
1998 1997
Finished goods............................. $ 302 $ 369
Work in process............................ 603 513
Raw materials, parts, and supplies......... 450 388
Total.................................... 1,355 1,270
Adjustment to the carrying value of
certain inventories to a LIFO basis...... 3 6
Inventories.............................. $ 1,358 $ 1,276
6. Intangible assets, net of accumulated amortization, are summarized as
follows (in millions):
June 30 September 30
1998 1997
Goodwill.................................. $ 870 $ 1,215
Trademarks, patents, product technology,
and other intangibles................... 498 481
Intangible assets....................... $ 1,368 $ 1,696
7. Short-term debt consisted of the following (in millions):
June 30 September 30
1998 1997
Short-term foreign bank borrowings........ $ 59 $ 40
Commercial paper.......................... 120 -
Current portion of long-term debt......... 1 2
Short-term debt......................... $ 180 $ 42
At June 30, 1998, the Company had $1.5 billion of unsecured credit
facilities with various banks which are used primarily to support
commercial paper borrowings. There were no significant commitment fees
or compensating balance requirements under these facilities.
Short-term credit facilities available to foreign subsidiaries amounted
to $315 million at June 30, 1998 and consisted of arrangements for which
there are no significant commitment fees.
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. Other current liabilities are summarized as follows (in millions):
June 30 September 30
1998 1997
Contract reserves and advance payments..... $ 203 $ 122
Accrued product warranties................. 124 113
Accrued taxes other than income taxes...... 44 36
Dividend payable........................... 49 -
Other...................................... 258 148
Other current liabilities................ $ 678 $ 419
9. Long-term debt consisted of the following (in millions):
June 30 September 30
1998 1997
6.8% notes, payable in 2003............... $ 150 $ 150
6.15% notes, payable in 2008.............. 350 -
6.70% debentures, payable in 2028......... 250 -
5.20% debentures, payable in 2098......... 200 -
Other obligations......................... 19 20
Less unamortized discount................. (60) (12)
Total................................... 909 158
Less current portion...................... 1 2
Long-term debt.......................... $ 908 $ 156
In January 1998, the Company issued $800 million aggregate principal
amount of long-term notes and debentures in a public offering consisting
of the 6.15% 10-year notes issued at par, the 6.70% 30-year debentures
issued at par, and the 5.20% 100-year debentures issued at a discount.
The debt offering yielded approximately $750 million of proceeds.
10. Accrued retirement benefits consisted of the following (in millions):
June 30 September 30
1998 1997
Accrued retirement medical costs........... $ 652 $ 656
Accrued pension costs...................... 152 162
Total.................................... 804 818
Amount classified as current liability..... 54 55
Accrued retirement benefits.............. $ 750 $ 763
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11. Claims have been asserted against the Company for utilizing the
intellectual property rights of others in certain of the Company's
products. The resolution of these matters may result in the negotiation
of a license agreement, a settlement or the resolution of such claims
through arbitration or litigation. The Company accrues the estimated
cost of the ultimate resolution of these matters. See Note 12 for
additional legal proceedings discussion.
Various other lawsuits, claims and proceedings have been or may be
instituted or asserted against the Company relating to the conduct of
its business, including those pertaining to product liability, safety
and health, environmental, and employment matters. Pursuant to the
Reorganization, Rockwell has indemnified The Boeing Company for certain
government contract and environmental matters related to operations of
the A&D business for periods prior to the Reorganization. In connection
with the Automotive Spin-off, Meritor has indemnified the Company for
substantially all contingent liabilities related to Automotive.
Although the outcome of litigation cannot be predicted with certainty
and some lawsuits, claims, or proceedings may be disposed of unfavorably
to the Company, management believes the disposition of matters which are
pending or asserted will not have a material adverse effect on the
Company's consolidated financial statements.
12. Subsequent Event
In September 1995, Celeritas Technologies, Ltd. filed suit against the
Company for patent infringement, misappropriation of trade secrets and
breach of contract relating to cellular telephone data transmission
technology utilized in certain modem products produced by Semiconductor
Systems. In July 1997, the court entered a judgment awarding damages of
$57 million. On July 20, 1998, the U.S. Court of Appeals for the
Federal Circuit affirmed the trial court's judgment based on breach of
contract. The Company continues to believe the judgment is in error and
has filed various petitions with the court. At June 30, 1998, the
Company had accrued approximately $30 million for the ultimate
resolution of this matter. See Part II, Item 1, Legal Proceedings, for
further discussion.
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
The contributions to sales and results of operations by business segment of
the Company for the third quarter and the first nine months of fiscal 1998
and 1997 are presented below (in millions).
Three Months Ended Nine Months Ended
June 30 June 30
1998 1997 1998 1997
Sales
Automation.................... $ 1,118 $ 1,143 $ 3,387 $ 3,318
Avionics & Communications..... 546 470 1,553 1,334
Total sales..................... $ 1,664 $ 1,613 $ 4,940 $ 4,652
Operating (loss)/earnings
Automation.................... $ 144 $ 159 $ 435 $ 439
Avionics & Communications..... 42 70 195 186
Special charges............... (597) - (597) -
Purchased research and
development................. - - (103) -
Operating (loss)/earnings....... (411) 229 (70) 625
General corporate - net......... (26) (13) (62) (56)
Interest expense................ (18) (10) (35) (20)
Benefit/(provision) for
income taxes.................. 35 (86) (71) (229)
(LOSS)/INCOME FROM CONTINUING
OPERATIONS BEFORE ACCOUNTING
CHANGE........................ (420) 120 (238) 320
(Loss)/income from discontinued
operations, net of tax........ (62) 47 (46) 215
Cumulative effect of accounting
change, net of tax............ - - (17) -
NET (LOSS)/INCOME............... $ (482) $ 167 $ (301) $ 535
The special charges relate to the business segments as follows (in millions):
Automation, $488; Avionics & Communications, $99; Corporate, $10. Purchased
research and development relates to the acquisition of an Avionics &
Communications business.
Effective October 1, 1997, Rockwell changed its method of accounting for
certain general and administrative costs related to government contracts.
This change relates to the Avionics & Communications business segment.
1998 Third Quarter Compared to 1997 Third Quarter
Sales for the third quarter of fiscal 1998 were three percent higher than
fiscal 1997's third quarter sales. Avionics & Communications' sales were 16
percent higher due to strong commercial air transport markets and the
inclusion of Passenger Systems, which was acquired in December 1997.
Automation's sales were about the same as a year ago.
Income from continuing operations, before special charges, totaled $88
million, or 45 cents per share, compared to third quarter 1997 income from
continuing operations of $120 million, or 56 cents per share.
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
RESULTS OF OPERATIONS (Continued)
Third quarter results for 1998 include special charges of $597 million ($508
million after tax), or $2.60 per share, for costs associated with a worldwide
workforce reduction, facility closures and consolidations, exiting non-
strategic businesses and product lines, and write-offs of goodwill and other
assets. Including special charges, the loss from continuing operations for
the third quarter was $420 million, or $2.15 per share.
Automation's third quarter earnings, before special charges, of $144 million
were about nine percent below 1997's third quarter earnings of $159 million
due to softness in certain Automation markets, performance issues at
industrial motors and reserves for sales discounts. Automation's third
quarter 1998 results also include a reserve adjustment of approximately $16
million related to favorable resolution of certain environmental issues with
Exxon Corporation. Automation's third quarter earnings as a percent of sales
were 12.9 percent, compared to 13.9 percent a year ago. Including special
charges, Automation's third quarter operating loss was $344 million compared
to operating earnings of $159 million in the third quarter of 1997.
Avionics & Communications, which now includes the Electronic Commerce
business, had third quarter earnings, before special charges, of $42 million
which were below 1997's third quarter of $70 million due to higher air
transport earnings resulting from increased volume which were more than
offset by a $35 million loss on a government contract. Avionics &
Communications' third quarter earnings as a percent of sales, excluding the
government contract loss, were 14.1 percent compared to 14.9 percent in the
third quarter of fiscal 1997. Including special charges, Avionics &
Communications' third quarter operating loss was $57 million compared to
operating earnings of $70 million in the third quarter of 1997.
General corporate expenses for the third quarter of fiscal 1998 are about the
same as a year ago, excluding a net gain of $10 million related to a property
sale and an environmental issue in 1997's third quarter.
Discontinued Operations:
In the third quarter, the Company announced its intention to spin-off the
Semiconductor Systems business to shareowners. This transaction is expected
to be completed in December 1998. Semiconductor Systems recorded an after-
tax loss of $62 million in the third quarter compared to after-tax earnings
of $11 million in 1997's third quarter including an acquisition-related
after-tax charge of $19 million. The third quarter 1998 loss is due to lower
than planned modem unit volume, continuing pricing pressures on modem
products, large research and development investments in non-modem products,
and higher new product launch costs. A work stoppage at Semiconductor
Systems' primary manufacturing facility in Newport Beach, California also
contributed to the third quarter loss. Semiconductor Systems results for the
third quarter also include a $13 million after-tax charge, or seven cents per
share, for losses expected to be incurred from July 1, 1998 through December
31, 1998 and a $17 million after-tax charge, or nine cents per share, for
anticipated expenses related to effecting the spin-off. Management is
evaluating restructuring actions at the Company's discontinued Semiconductor
Systems business and expects to record charges when these actions are
finalized and approved in the fourth quarter of 1998. Net income for 1997's
third quarter includes the earnings of the divested Automotive business.
The third quarter net loss, including discontinued operations, amounted to
$482 million, or $2.47 per share, compared to net income of $167 million, or
78 cents per share, in 1997's third quarter.
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
Nine Months Ended June 30, 1998 Compared to Nine Months Ended June 30, 1997
Overall, sales for the first nine months of 1998 increased six percent over
sales for the same 1997 period primarily due to higher sales at Avionics &
Communications, which continues to capitalize on strong commercial air
transport markets. Automation recorded a two percent increase in sales,
principally in Europe, North America and South America, offset by sales
declines in Asian markets.
Income from continuing operations, before special charges and the write-off
of purchased research and development, totaled $333 million, or $1.66 per
share, compared to 1997 income from continuing operations of $320 million, or
$1.46 per share.
Results for the first nine months of 1998 include special charges of $597
million recorded in the third quarter and the $103 million ($63 million after
tax) write-off of purchased research and development relating to the first
quarter acquisition of the Passenger Systems business. Including charges
relating to these special items, the loss from continuing operations for 1998
was $238 million, or $1.19 per share.
Automation's operating earnings, before special charges, for the first nine
months of fiscal 1998 were slightly lower than the same period a year ago.
Operating earnings from slightly higher sales volume and a $16 million
reserve adjustment from the favorable resolution of certain environmental
issues with Exxon Corporation were more than offset by performance issues at
industrial motors and increased product selling costs. Including special
charges, Automations' operating loss for the nine months ended June 30, 1998
was $53 million compared to operating earnings of $439 million in the
comparable 1997 period.
Avionics & Communications' operating earnings, before special charges, for
the first nine months of fiscal 1998 were slightly higher than the same
period a year ago. Increased operating earnings resulting from higher sales
volume in both the air transport and the business and regional systems
markets were almost entirely offset by losses recognized on government
contracts. Avionics & Communications' operating loss for the nine months
ended June 30, 1998, including special charges and the write-off of purchased
research and development, totaled $7 million compared to operating earnings
of $186 million in the comparable 1997 period.
Discontinued Operations:
Semiconductor Systems recorded an after-tax loss of $46 million for 1998's
first nine months compared to after-tax earnings of $120 million in 1997,
which included an acquisition-related after-tax charge of $19 million. The
1998 loss is due to lower than planned modem unit volume, continuing pricing
pressures on modem products, large research and development investments in
non-modem products and higher new product launch costs. A work stoppage at
Semiconductor Systems' primary manufacturing facility in Newport Beach,
California also contributed to the loss. Semiconductor Systems results for
1998's first nine months also include a $13 million after-tax charge, or
seven cents per share, for losses expected to be incurred from July 1, 1998
through December 31, 1998 and a $17 million after-tax charge, or nine cents
per share, for anticipated expenses related to effecting the spin-off.
Management is evaluating restructuring actions at the Company's discontinued
Semiconductor Systems business and expects to record charges when these
actions are finalized and approved in the fourth quarter of 1998. Net
income for the nine months ended June 30, 1997 includes the earnings of the
divested Automotive business.
Including discontinued operations and the cumulative effect of the accounting
change, the net loss for 1998's first nine months was $301 million, or $1.51
per share, compared to net income of $535 million, or $2.44 per share, for
1997.
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
FINANCIAL CONDITION
The major uses of cash for the first nine months of fiscal 1998 were the
common stock repurchase program, the acquisition of the Passenger Systems
business, property additions, continued investment in Semiconductor Systems
and cash dividends paid to shareowners.
During the first nine months of fiscal 1998, the Company completed the $1
billion common stock repurchase program announced in December 1996 and the
$500 million program announced in September 1997. In February 1998, the
Company's Board of Directors approved an additional $500 million common stock
repurchase program. During the third quarter and first nine months of 1998,
the Company repurchased 5.2 million and 16.2 million shares of its common
stock, respectively, for $283 million and $877 million, respectively.
Future significant uses of cash, which are expected to be funded by cash
generated by operating activities and commercial paper borrowings, are
expected to include property additions, cash payments made in connection with
the Company's restructuring program, which are expected to approximate $193
million, and the continuing repurchase of common stock, although at a lower
level than during the first nine months of fiscal 1998.
In January 1998, the Company issued $800 million of aggregate principal
amount of long-term notes and debentures in a public offering. The proceeds
of this debt offering of approximately $750 million were used to repay
approximately $380 million of outstanding short-term commercial paper
borrowings, with the balance used for general corporate purposes, including
the Company's ongoing common stock repurchase program.
In the first nine months of fiscal 1998, the Company's dividend payments to
shareowners totaled $153 million, or $0.765 per share, compared to $188
million, or $0.87 per share, in the first nine months of fiscal 1997. The
annual $1.02 per share Rockwell dividend reflects the adjustment of the
Company's total fiscal 1997 dividend of $1.16 per share to take into
consideration Meritor's portion of the pre-spin-off annual dividend which was
set at $0.14 per share. The dividend to be paid to shareowners in the
fourth quarter of 1998 was declared by the Company's Board of Directors on
June 26, 1998 and accordingly, the dividend declared per share for the
quarter and nine months includes this fourth quarter dividend.
A major source of cash for the first nine months of fiscal 1997 was from the
sale of the Graphic Systems business for approximately $600 million,
consisting of $553 million in cash and $47 million in preferred stock.
Information with respect to the effect on the Company and its manufacturing
operations of compliance with environmental protection requirements and
resolution of environmental claims is contained under the caption
Environmental Issues in Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, of the Company's Annual Report
on Form 10-K for the fiscal year ended September 30, 1997. Other than the
favorable settlement with Exxon Corporation described above, management
believes that at June 30, 1998, there has been no material change to this
information.
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
YEAR 2000
The Company has developed plans to address issues related to the impact on
its computer systems of the Year 2000. Financial and operational systems, as
well as date-sensitive Rockwell products, have been assessed and plans have
been developed and implementation is underway to address systems modification
requirements. In addition, an assessment of the Company's key suppliers'
Year 2000 readiness and their plans for becoming Year 2000 compliant is also
underway.
The Company, utilizing both internal and external resources to address the
Year 2000 issue, expects to be substantially complete with this project by
the middle of calendar 1999. The current estimate of total project cost is
approximately $44 million, which includes the cost of purchasing certain
hardware and software. Purchased hardware and software will be capitalized
in accordance with normal policy. Approximately two-thirds of the total cost
relates to the use of internal resources (primarily salary costs), and about
40 percent of the total project cost has been spent through June 30, 1998,
with the majority of the remaining amount to be spent within the next year.
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
Item 3. Quantitative And Qualitative Disclosures About Market Risk
The Company's financial instruments include cash, equity securities, short-
and long-term debt, and foreign currency forward exchange contracts. At June
30, 1998, the carrying values of the Company's financial instruments
approximated their fair values based on current market prices and rates.
It is the policy of the Company not to enter into derivative financial
instruments for speculative purposes. The Company enters into foreign
currency forward exchange contracts to protect itself from adverse currency
rate fluctuations on foreign currency commitments entered into in the
ordinary course of business. These commitments are generally for terms of
less than one year. The foreign currency forward exchange contracts are
executed with creditworthy banks and are denominated in currencies of major
industrial countries. The notional amount of all the Company's outstanding
foreign currency forward exchange contracts aggregated $411 million at June
30, 1998 and $239 million at September 30, 1997. The contracts outstanding
at June 30, 1998 and September 30, 1997 included contracts relating to the
Company's discontinued operations. The gains and losses relating to these
foreign currency forward exchange contracts are deferred and included in the
measurement of the foreign currency transactions subject to the hedge. Any
gain or loss incurred on foreign currency forward exchange contracts is
offset by the effects of currency movements on the respective underlying
hedged transactions.
Based on the Company's overall currency rate exposure at June 30, 1998, a 10
percent change in currency rates would not have had a material effect on the
financial position, results of operations, or cash flows of the Company.
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On September 27, 1995, Celeritas Technologies, Ltd. filed suit
against the Company in the U.S. District Court, Central District of
California, for patent infringement, misappropriation of trade
secrets and breach of contract relating to cellular telephone data
transmission technology utilized in certain modem products produced
by Semiconductor Systems in 1995 and 1996. The court entered
judgment against the Company in January 1997 and, in ruling on post-
trial motions in July 1997, entered a revised judgment awarding
damages of $57 million. On July 20, 1998, the U.S. Court of Appeals
for the Federal Circuit reversed the holding of the trial court
based on patent infringement and found Celeritas' patent invalid but
affirmed the trial court holding based on breach of contract. The
Company continues to believe the judgment is in error and has filed
a petition for rehearing (and rehearing en banc), requesting the
Court of Appeals to review its determination of California contract
law, and a motion to certify the contract issue to the California
Supreme Court. See Note 12 of notes to consolidated financial
statements.
Item 2. Changes in Securities and Use of Proceeds
On April 1, 1998, the Company issued 175, 208, 33 and 193 shares
of restricted stock, respectively, to the following directors of the
Company: George L. Argyros, Richard M. Bressler, William H. Gray,
III and John D. Nichols. These shares were issued pursuant to
deferral elections made in accordance with the Directors Stock Plan
in partial or full payment for retainer fees otherwise payable in
cash. On June 26, 1998, the Company issued 300 shares to Donald R.
Beall as a pro-rated annual grant pursuant to the Directors Stock
Plan. The issuance of all these shares was exempt from the
registration requirements of the Securities Act of 1933 pursuant to
Section 4 (2) thereof.
Item 5. Other Information
Government Contracts
For information on the Company's United States government
contracting business, certain risks of that business and claims
related thereto, see the information set forth under the caption
Government Contracts in Item 1, Business, on page 3 of the Company's
Annual Report on Form 10-K for fiscal year ended September 30, 1997,
which is incorporated herein by reference.
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
PART II. OTHER INFORMATION (Continued)
Cautionary Statement
This Quarterly Report on Form 10-Q contains statements relating
to future results of the Company (including certain projections and
business trends) that are "forward-looking statements" as defined in
the Private Securities Litigation Reform Act of 1995. Actual
results may differ materially from those projected as a result of
certain risks and uncertainties, including but not limited to timely
completion of the Semiconductor Systems spin-off; the ultimate
resolution of lawsuits, claims and proceedings that have been or may
be asserted against the Company; the implementation of restructuring
actions in accordance with management's plans; changes in political
and economic conditions, including but not limited to rapidly
changing conditions in the Asia-Pacific region; domestic and foreign
government spending, budgetary and trade policies; demand for and
market acceptance of new and existing products; successful
development of advanced technologies; timely completion of Year 2000
software modifications by the Company and our key suppliers and
customers; and competitive product and pricing pressures; as well as
other risks and uncertainties, including but not limited to those
detailed from time to time in the Company's Securities and Exchange
Commission filings.
Item 6. Exhibits and Report on Form 8-K
(a) Exhibits:
Exhibit 11 - Computation of Per Share Information
Exhibit 12 - Computation of Ratio of Earnings to Fixed
Charges for the Nine Months Ended June 30, 1998.
Exhibit 18 - Letter regarding change in accounting
principle.
Exhibit 27 - Financial Data Schedule
(b) Report on Form 8-K:
The Company filed a Current Report on Form 8-K dated June 29,
1998 in respect of the Company's press release reporting the
spin-off of Semiconductor Systems, the Company's restructuring
and certain other matters (Items 5 and 7(c)).
<PAGE>
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.
ROCKWELL INTERNATIONAL CORPORATION
(Registrant)
Date August 14, 1998 By W. E. Sanders
W. E. Sanders
Vice President and Controller
(Principal Accounting Officer)
Date August 14, 1998 By W. J. Calise, Jr.
W. J. Calise, Jr.
Senior Vice President,
General Counsel and Secretary
<PAGE>
- - -22-
EXHIBIT 11
ROCKWELL INTERNATIONAL CORPORATION
COMPUTATION OF PER SHARE INFORMATION
Three Months Ended Nine Months Ended
June 30 June 30 ____
1998 1997 1998 1997
(In millions, except per share amounts)
Basic (loss)/earnings per share:
(Loss)/income from continuing
operations before accounting
change .......................... $ (420) $ 120 $ (238) $ 320
(Loss)/income from discontinued
operations, net of tax........... (62) 47 (46) 215
Cumulative effect of accounting
change, net of tax............... - - (17) -
Net (loss)/income.................. $ (482) $ 167 $ (301) $ 535
Average number of common shares
outstanding during the period.... 195.4 212.3 200.2 215.7
Basic (loss)/earnings per share:
Continuing operations, before
accounting change................ $(2.15) $ 0.56 $(1.19) $ 1.48
Discontinued operations............ (0.32) 0.23 (0.23) 1.00
Cumulative effect of accounting
change........................... - - (0.09) -
Net (loss)/income.................. $(2.47) $ 0.79 $(1.51) $ 2.48
Diluted (loss)/earnings per share:
(Loss)/income from continuing
operations before accounting
change........................... $ (420) $ 120 $ (238) $ 320
(Loss)/income from discontinued
operations, net of tax........... (62) 47 (46) 215
Cumulative effect of accounting
change, net of tax............... - - (17) -
Net (loss)/income.................. $ (482) $ 167 $ (301) $ 535
Average number of common shares
outstanding during the period
assuming full dilution:
Common stock....................... 195.4 212.3 200.2 215.7
Assumed issuance of stock
under award plans................ - 3.1 - 3.4
Total diluted shares............... 195.4 215.4 200.2 219.1
Diluted (loss)/earnings per share:
Continuing operations, before
accounting change................ $(2.15) $ 0.56 $(1.19) $ 1.46
Discontinued operations............ (0.32) 0.22 (0.23) 0.98
Cumulative effect of accounting
change, net of tax............... - - (0.09) -
Net (loss)/income.................. $(2.47) $ 0.78 $(1.51) $ 2.44
<PAGE>
Exhibit 12
ROCKWELL INTERNATIONAL CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
NINE MONTHS ENDED JUNE 30, 1998
(In millions, except ratio)
EARNINGS AVAILABLE FOR FIXED CHARGES:
Loss from continuing operations
before income taxes...................................... $ (167)
Less undistributed income of affiliates .................... (4)
(171)
Add fixed charges included in loss:
Interest expense......................................... 35
Interest element of rentals.............................. 35
70
Total earnings available for fixed charges.................. $ (101)
FIXED CHARGES:
Fixed charges included in loss.............................. $ 70
Capitalized interest........................................ 8
Total fixed charges...................................... $ 78
RATIO OF EARNINGS TO FIXED CHARGES (1)......................... N/A
(1) In computing the ratio of earnings to fixed charges, earnings is defined
as earnings from continuing operations before income taxes adjusted for
minority interest in income or loss of subsidiaries, undistributed
earnings of affiliates, and fixed charges exclusive of capitalized
interest. Fixed charges consist of interest on borrowings and that
portion of rentals deemed representative of the interest factor.
The year-to-date loss resulting from the third quarter special charges
of $597 million, two-thirds of which are non-cash charges, is inadequate
to cover fixed charges by $179 million.
<PAGE>
Exhibit 18
August 14, 1998
Rockwell International Corporation
600 Anton Boulevard, Suite 700
Costa Mesa, CA 92628-5090
Dear Sirs/Madams:
At your request, we have read the description included in your Quarterly
Report on Form 10-Q ("Form 10-Q") to the Securities and Exchange Commission
for the quarter ended June 30, 1998, of the facts relating to the change in
accounting for certain inventoriable general and administrative costs related
to government contracts. We believe, on the basis of the facts so set forth
and other information furnished to us by appropriate officials of the
Company, that the accounting change described in your Form 10-Q is to an
alternative accounting principle that is preferable under the circumstances.
We have not audited any consolidated financial statements of Rockwell
International Corporation and its subsidiaries as of any date or for any
period subsequent to September 30, 1997. Therefore, we are unable to
express, and we do not express, an opinion on the facts set forth in the
above-mentioned Form 10-Q, on the related information furnished to us by
officials of the Company, or on the financial position, results of
operations, or cash flows of Rockwell International Corporation and its
subsidiaries as of any date or for any period subsequent to September 30,
1997.
Yours truly,
DELOITTE & TOUCHE LLP
Costa Mesa, California
<PAGE>
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