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, 1999
-----------------------------
Commission file number 1-12383
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Rockwell International Corporation
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(Exact name of registrant as specified in its charter)
Delaware 25-1797617
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(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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code (714) 424-4565
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(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
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191,315,996 shares of registrant's Common Stock, $1.00 par value, were
outstanding on July 31, 1999.
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ROCKWELL INTERNATIONAL CORPORATION
INDEX
Page
No.
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PART I. FINANCIAL INFORMATION:
Item 1. Consolidated Financial Statements:
Condensed Consolidated Balance Sheet--
June 30, 1999 and September 30, 1998........... 2
Consolidated Statement of Operations--
Three Months and Nine Months Ended
June 30, 1999 and 1998......................... 3
Consolidated Statement of Cash Flows--
Nine Months Ended June 30, 1999 and 1998....... 4
Notes to Consolidated Financial Statements..... 5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations.................................. 10
Item 3. Quantitative and Qualitative Disclosures
About Market Risk.............................. 15
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings.............................. 16
Item 2. Changes in Securities and Use of Proceeds...... 16
Item 5. Other Information.............................. 16
Item 6. Exhibits and Reports on Form 8-K............... 17
Signatures......................................................... 18
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
ROCKWELL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(in millions)
June 30 September 30
1999 1998
-------- --------
ASSETS
------
Current assets:
Cash........................................... $ 62 $ 103
Receivables (less allowance for doubtful
accounts: June 30, 1999, $63;
September 30, 1998, $51)...................... 1,148 1,223
Inventories, net............................... 1,390 1,313
Deferred income taxes.......................... 313 258
Other current assets........................... 216 213
Net assets of Semiconductor Systems.......... - 986
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Total current assets................... 3,129 4,096
Property, net..................................... 1,586 1,535
Intangible assets, net............................ 1,462 1,330
Other assets...................................... 187 209
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TOTAL.................... $ 6,364 $ 7,170
======= =======
LIABILITIES AND SHAREOWNERS' EQUITY
-----------------------------------
Current liabilities:
Short-term debt................................ $ 128 $ 156
Accounts payable............................... 693 733
Compensation and benefits...................... 433 547
Income taxes payable........................... 99 19
Other current liabilities...................... 567 528
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Total current liabilities.............. 1,920 1,983
Long-term debt.................................... 911 908
Retirement benefits............................... 669 691
Other liabilities................................. 326 343
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Total liabilities............. 3,826 3,925
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Shareowners' equity:
Common Stock (shares issued: 216.4)............ 216 216
Additional paid-in capital..................... 957 923
Retained earnings.............................. 2,893 3,697
Accumulated other comprehensive loss........... (153) (135)
Common Stock in treasury, at cost (shares held:
June 30, 1999, 24.8; September 30, 1998, 25.8) (1,375) (1,456)
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Total shareowners' equity..... 2,538 3,245
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TOTAL.................... $ 6,364 $ 7,170
======= =======
See Notes to Consolidated Financial Statements.
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<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(in millions, except per share amounts)
Three Months Ended Nine Months Ended
June 30 June 30
----------------- -----------------
1999 1998 1999 1998
-------- -------- -------- --------
Revenues:
Sales................................... $ 1,808 $ 1,664 $ 5,117 $ 4,940
Other income, net....................... 21 28 92 68
------- ------- ------- -------
Total revenues........................ 1,829 1,692 5,209 5,008
------- ------- ------- -------
Costs and expenses:
Cost of sales........................... 1,245 1,657 3,563 3,943
Selling, general, and administrative.... 330 472 919 1,094
Purchased research and development...... - - - 103
Interest................................ 21 18 64 35
------- ------- ------- -------
Total costs and expenses.............. 1,596 2,147 4,546 5,175
------- ------- ------- -------
Income (loss) from continuing
operations before income taxes.......... 233 (455) 663 (167)
Income tax (provision) benefit............ (83) 35 (236) (71)
------- ------- ------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE ACCOUNTING CHANGE................ 150 (420) 427 (238)
Loss from discontinued operations......... - (62) (20) (46)
Cumulative effect of accounting change.... - - - (17)
------- ------- ------- -------
NET INCOME (LOSS)......................... $ 150 $ (482) $ 407 $ (301)
======= ======= ======= =======
Basic earnings (loss) per share:
Continuing operations before
accounting change..................... $ 0.79 $ (2.15) $ 2.25 $ (1.19)
Discontinued operations................. - (0.32) (0.11) (0.23)
Cumulative effect of accounting change.. - - - (0.09)
------- ------- ------- -------
Net income (loss)....................... $ 0.79 $ (2.47) $ 2.14 $ (1.51)
======= ======= ======= =======
Diluted earnings (loss) per share:
Continuing operations before
accounting change..................... $ 0.77 $ (2.15) $ 2.21 $ (1.19)
Discontinued operations................. - (0.32) (0.10) (0.23)
Cumulative effect of accounting change.. - - - (0.09)
------- ------- ------- -------
Net income (loss)....................... $ 0.77 $ (2.47) $ 2.11 $ (1.51)
======= ======= ======= =======
Cash dividends per share (see note 1)..... $ 0.255 $ 0.51 $ 1.02 $ 1.02
======= ======= ======= =======
Weighted average outstanding shares:
Basic.................................. 190.8 195.4 190.2 200.2
======= ======= ======= =======
Diluted (includes effect of stock
options)............................. 194.5 195.4 193.2 200.2
======= ======= ======= =======
See Notes to Consolidated Financial Statements.
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<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(in millions)
Nine Months Ended
June 30
--------------------
1999 1998
-------- --------
CONTINUING OPERATIONS:
Operating Activities:
Income (loss) from continuing operations before
accounting change.................................. $ 427 $ (238)
Adjustments to arrive at cash provided by
operating activities:
Depreciation...................................... 189 175
Amortization of intangible assets................. 47 62
Deferred income taxes............................. (30) (78)
Gain on sales of businesses, net.................. (29) -
Pension expense, net of contributions............. 24 30
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................................... 75 18
Inventories................................... (75) (94)
Accounts payable.............................. (50) 38
Income taxes payable.......................... 65 (111)
Compensation and benefits..................... (113) (12)
Other assets and liabilities.................. (7) (18)
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Cash Provided by Operating Activities...... 523 472
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Investing Activities:
Property additions.................................... (241) (238)
Acquisitions of businesses, net of cash acquired...... (217) (158)
Proceeds from dispositions of property and businesses. 107 99
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Cash Used for Investing Activities......... (351) (297)
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Financing Activities:
Net (decrease) increase in debt....................... (24) 896
Purchases of treasury stock........................... (111) (877)
Cash dividends........................................ (146) (153)
Reissuances of common stock........................... 115 70
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Cash Used for Financing Activities......... (166) (64)
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CASH PROVIDED BY CONTINUING OPERATIONS................ 6 111
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Cash Used for Discontinued Operations................. (47) (220)
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DECREASE IN CASH...................................... (41) (109)
CASH AT BEGINNING OF PERIOD........................... 103 273
------- --------
CASH AT END OF PERIOD................................. $ 62 $ 164
======= ========
See Notes to Consolidated Financial Statements.
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<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, 1998. The
results of operations for the three- and nine-month periods ended June
30, 1999 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.
Effective October 1, 1998, Rockwell adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income"
(SFAS 130). SFAS 130 establishes standards for the reporting and
presentation of comprehensive income (loss) and its components in
financial statements. The adoption of this statement had no effect on
the Company's net income or shareowners' equity. SFAS 130 requires
certain equity adjustments to be reported as components of
comprehensive income. Amounts set forth as accumulated other
comprehensive loss in the accompanying balance sheet are primarily
comprised of deferred foreign currency translation adjustments. Prior
year financial statements have been reclassified to conform with the
requirements of SFAS 130. The reconciliation of net income to
comprehensive income is as follows (in millions):
Three Months Ended Nine Months Ended
June 30 June 30
------- -------
1999 1998 1999 1998
------ ------ ------ ------
Net income (loss)................. $ 150 $ (482) $ 407 $ (301)
Other comprehensive income (loss):
Net foreign currency translation
adjustment.................... (2) (19) (18) (33)
------ ------ ------ ------
Comprehensive income (loss)....... $ 148 $ (501) $ 389 $ (334)
====== ====== ====== ======
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities"
(SFAS 133). 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 changes
in the fair value of the hedged assets, liabilities or firm
commitments. In June 1999, the Financial Accounting Standards Board
delayed the effective date of SFAS 133 to fiscal year 2001, but early
adoption continues to be permitted. When adopted, the Company believes
the effect of this standard will not be material to its results of
operations or equity.
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.
-5-
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
During the 1999 third quarter, the Company declared the fourth quarter
dividend of $0.255 per share payable September 7, 1999 to shareowners
of record on August 16, 1999.
2. Discontinued operations relate to the Company's former Semiconductor
Systems business (Semiconductor Systems).
On December 31, 1998, the Company completed the spin-off of
Semiconductor Systems into an independent, separately traded,
publicly-held company by distributing all of the outstanding shares of
Conexant Systems, Inc. (Conexant) to the Company's shareowners on the
basis of one share of Conexant Common Stock for every two shares of
Company Common Stock owned. The net assets of Conexant as of December
31, 1998 of approximately $910 million were recorded as a decrease to
shareowners' equity. Prior to the spin-off, Conexant distributed to
Rockwell its wafer fabrication facilities in Colorado Springs, Colorado
with a net book value of $21 million and a related deferred tax asset
of $48 million. Also, prior to the spin-off, Rockwell paid $64 million
into an escrow account to be used to satisfy Conexant's obligation with
respect to a litigation matter (see Note 11).
The following table summarizes the results of Semiconductor Systems (in
millions):
Three Months Ended Nine Months Ended
June 30 June 30
------- -------
1999 1998 1999 1998
------ ------ ------ ------
Revenues.......................... $ - $ 274 $ 289 $ 926
Loss before income taxes.......... - (114) (29) (100)
Net loss.......................... - (62) (20) (46)
Rockwell accrued for Conexant's estimated first quarter 1999 operating
loss and costs related to the spin-off in 1998. The additional loss,
which was recorded in the first quarter of 1999, relates principally to
Rockwell's decision to record a further writedown of the wafer
fabrication facilities in Colorado Springs and for related costs of
disposal.
3. In the third quarter of 1998, the Company recorded special charges of
$597 million ($508 million after tax, or $2.57 per share) in connection
with asset impairments and the implementation of a comprehensive
restructuring program. These charges, including the effects of
adjustments through June 30, 1999, included $113 million for severance
and other employee separation costs associated with a worldwide
workforce reduction of approximately 3,300 employees and $82 million
related to facility closures and consolidations and exiting
non-strategic businesses and product lines. These actions are expected
to be substantially complete by the end of calendar 1999, with the
remaining cash expenditures related to these actions to be made by the
end of calendar 2000.
Total cash expenditures in connection with these actions are expected
to approximate $187 million. The Company spent approximately $73
million through June 30, 1999, of which $45 million related to
severance and other employee separation costs, and expects to spend an
additional $78 million through the end of June 2000. As a result of
actions taken through June 30, 1999, the workforce was reduced by
approximately 2,100 employees.
Revenues of businesses and product lines which are being exited were
$27 million and $35 million for the quarters ended June 30, 1999 and
1998, respectively, and $64 million and $153 million for the nine
months ended June 30, 1999 and 1998, respectively. The net operating
income in 1999 and net operating loss in 1998 related to these
businesses and product lines is not material.
-6-
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. In May 1999, the Company acquired certain intellectual property and
other assets of Dynapro, which will expand the Company's human-machine
interface software and hardware capabilities. In March 1999, the
Company acquired the remaining 50 percent interest in Flight Dynamics,
the market leader in Head-Up Guidance Systems for aircraft operations.
In January 1999, the Company acquired EJA Engineering Ltd., a
market-leading manufacturer of safety products. In November 1998, the
Company acquired Anorad Corporation, a manufacturer of linear motor
equipment. These acquisitions were accounted for as purchases. Assets
acquired and liabilities assumed have been recorded at estimated fair
values determined by the Company's management based on information
currently available. The aggregate purchase price for all acquisitions
was $217 million.
The results of acquired businesses have been included in the
consolidated statement of operations since their respective dates of
acquisition.
5. Inventories, net of reserves, are summarized as follows (in millions):
June 30 September 30
1999 1998
-------- --------
Finished goods............................ $ 437 $ 385
Work in process........................... 472 459
Raw materials, parts, and supplies........ 474 456
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Total................................... 1,383 1,300
Adjustment to the carrying value of
certain inventories to a LIFO basis..... 7 13
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Inventories............................. $ 1,390 $ 1,313
======= =======
6. Intangible assets, net of accumulated amortization, are summarized as
follows (in millions):
June 30 September 30
1999 1998
------- --------
Goodwill.................................. $ 950 $ 846
Trademarks, patents, product technology,
and other intangibles................... 512 484
------- -------
Intangible assets....................... $ 1,462 $ 1,330
======= =======
-7-
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Short-term debt consisted of the following (in millions):
June 30 September 30
1999 1998
-------- --------
Commercial paper.......................... $ 90 $ 90
Short-term foreign bank borrowings........ 36 64
Current portion of long-term debt......... 2 2
------- -------
Short-term debt......................... $ 128 $ 156
======= =======
At June 30, 1999, the Company had $1 billion of unsecured credit
facilities with various banks 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 $285 million at both June
30, 1999 and September 30, 1998 and consist of arrangements for which
there were no significant commitment fees.
8. Other current liabilities are summarized as follows (in millions):
June 30 September 30
1999 1998
-------- --------
Contract reserves and advance payments..... $ 195 $ 207
Product warranty costs..................... 132 117
Taxes other than income taxes.............. 53 44
Dividend payable........................... 49 -
Interest................................... 25 16
Other...................................... 113 144
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Other current liabilities............... $ 567 $ 528
======= =======
9. Long-term debt consisted of the following (in millions):
June 30 September 30
1999 1998
-------- --------
6.8% notes, payable in 2003............... $ 150 $ 150
6.15% notes, payable in 2008.............. 350 350
6.70% debentures, payable in 2028......... 250 250
5.20% debentures, payable in 2098......... 200 200
Other obligations......................... 20 18
Less unamortized discount................. (57) (58)
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Total................................... 913 910
Less current portion...................... (2) (2)
------- -------
Long-term debt.......................... $ 911 $ 908
======= =======
10. Retirement benefit liabilities consisted of the following (in
millions):
June 30 September 30
1999 1998
-------- --------
Retirement medical costs.................. $ 607 $ 639
Pension costs............................. 126 116
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Total................................... 733 755
Less current portion...................... (64) (64)
------- -------
Retirement benefits..................... $ 669 $ 691
======= =======
-8-
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11. Various 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, intellectual
property, safety and health, environmental and employment matters.
Rockwell has indemnified The Boeing Company for certain government
contract and environmental matters related to operations of its former
aerospace and defense business for periods prior to its divestiture in
fiscal 1997. 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.
In connection with the Semiconductor Systems spin-off, Conexant assumed
all contingent liabilities related to its business, including
environmental and intellectual property matters. 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, plus
interest. 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 judgment has been satisfied through $64 million paid into
escrow prior to the spin-off.
-9-
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
- - ---------------------
Sales and results of operations of the Company's continuing operations by
business segment for the third quarter and first nine months of 1999 and 1998
are presented below (in millions).
Three Months Ended Nine Months Ended
June 30 June 30
------- -------
1999 1998 1999 1998
------ ------ ------ ------
Sales
Automation........................... $ 1,134 $ 1,118 $ 3,258 $ 3,387
Avionics & Communications............ 674 546 1,859 1,553
------- ------- ------- -------
Total sales............................ $ 1,808 $ 1,664 $ 5,117 $ 4,940
======= ======= ======= =======
Operating earnings
Automation........................... $ 164 $ 144 $ 470 $ 435
Avionics & Communications............ 114 42 360 195
Special charges...................... - (597) - (597)
Purchased research and development... - - - (103)
------- ------- ------- -------
Operating earnings (loss)............ 278 (411) 830 (70)
General corporate - net................ (24) (26) (103) (62)
Interest expense....................... (21) (18) (64) (35)
(Provision) benefit for income taxes... (83) 35 (236) (71)
------- ------- ------- -------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE ACCOUNTING CHANGE.. 150 (420) 427 (238)
Loss from discontinued
operations........................... - (62) (20) (46)
Cumulative effect of accounting change. - - - (17)
------- ------- ------- -------
NET INCOME (LOSS)...................... $ 150 $ (482) $ 407 $ (301)
======= ======= ======= =======
Purchased research and development relates to the acquisition of an Avionics &
Communications business in 1998.
Effective October 1, 1997, Rockwell changed its method of accounting for certain
general and administrative costs included in inventory related to government
contracts. This change relates to the Avionics & Communications business
segment.
1999 Third Quarter Compared to 1998 Third Quarter
- - -------------------------------------------------
Sales in the 1999 third quarter of $1.8 billion were nearly nine percent higher
than the same period a year ago. Automation's sales increased slightly due to
sales gains by Control Systems in Asia-Pacific and North America which more than
offset lower sales at the motors business. Avionics & Communications sales
increased $128 million. Passenger systems, government systems, air transport and
business and regional systems all achieved sales increases in the third quarter
of 1999.
Income from continuing operations for the 1999 third quarter was $150 million,
or 77 cents per share, compared to income from continuing operations, before
special charges, of $88 million, or 45 cents per share, for the third quarter of
1998. Also excluding a $35 million pre-tax charge in last year's third quarter
for a loss on a government contract at Collins, earnings per share were up 38
percent due to improved operating margins at Automation and strong performance
at Avionics & Communications.
-10-
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
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 of 1998 was $420 million, or $2.15 per share.
Automation's third quarter earnings of $164 million were 14 percent higher than
last year, despite a pre-tax charge of approximately $10 million associated with
the bankruptcy filings of Harnischfeger Industries, Inc. and various affiliates.
The benefits of manufacturing process improvements, material cost reductions and
higher volume more than offset new product development and launch costs
resulting in improved operating earnings in the third quarter of 1999.
Automation's return on sales increased to 14.5 percent from 12.9 percent a year
ago.
Avionics & Communications' operating earnings were $114 million, a 48 percent
increase over last year's third quarter earnings of $77 million, excluding the
$35 million pre-tax charge in the prior year for a government contract loss.
Avionics & Communications' return on sales increased to 16.9 percent from 14.1
percent a year ago.
The effective tax rate for 1999 was 35.6 percent compared to 38.2 percent for
1998. The decrease was due to higher anticipated utilization of foreign tax
credits in 1999.
Nine Months Ended June 30, 1999 Compared to Nine Months Ended June 30, 1998
- - ---------------------------------------------------------------------------
Overall, sales were four percent higher in 1999 compared to sales in the same
period a year ago. Automation's sales decreased $129 million primarily due to
lower sales in the motors business and weak business conditions in Brazil.
Avionics & Communications' sales increased $306 million primarily due to the
inclusion of passenger systems sales for nine months in 1999 (acquired in
December 1997) and strong increases posted by the passenger systems, air
transport and business and regional systems businesses as a result of winning
new contracts, higher customer service revenue and increased production of
business and regional aircraft.
Income from continuing operations increased 28 percent to $427 million, or $2.21
per share, from 1998 income from continuing operations, of $333 million, or
$1.66 per share, before special charges and the write-off of purchased research
and development. The increase was due to Automation's ability to offset the
effect of lower sales with improved operating efficiencies and continued strong
performance at Avionics & Communications.
Results for the first nine months of 1998 include special charges of $597
million ($508 million after tax) recorded in the third quarter and the $103
million ($63 million after tax) write-off of purchased research and development
in connection with the first quarter acquisition of the passenger systems
business. Including charges relating to these special items, the loss from
continuing operations for the first nine months of 1998 was $238 million, or
$1.19 per share.
Automation's operating earnings increased eight percent from the same period a
year ago principally due to lower operating costs resulting from the
restructuring program announced in June 1998, other cost reduction initiatives,
and improved operating performance at the motors business.
Avionics & Communications' operating earnings increased 57 percent from the same
period a year ago (excluding an acquisition-related research and development
charge and a government contract loss in 1998) primarily due to increased sales
for Rockwell Collins, a $32 million gain from the sale of the railroad
electronics business and a $16 million gain resulting from the favorable
resolution of an intellectual property matter.
-11-
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
Corporate expenses were up $41 million in 1999 principally due to costs
associated with relocating the Company's corporate office.
The effective tax rate for 1999 was 35.6 percent compared to 37.6 percent for
1998. The decrease was due to higher anticipated utilization of foreign tax
credits in 1999.
Based on the Company's strong third quarter performance, management has high
confidence that the Company's earnings per share for 1999 will be about $3.00.
Rockwell expects to achieve this level of performance with continued strong
growth at Rockwell Collins, cost reduction initiatives and increased operating
efficiencies at the Company's automation business.
Discontinued Operations:
The spin-off of the Company's former Semiconductor Systems business, Conexant
Systems, Inc., was completed on December 31, 1998. The 1999 loss from
discontinued operations includes a $20 million pre-tax charge due to Rockwell's
decision to record a further writedown of Conexant's former wafer fabrication
facilities in Colorado Springs, Colorado. Rockwell retained these facilities as
part of the spin-off. The 1999 net loss also includes a charge for costs related
to the planned disposal of these facilities.
FINANCIAL CONDITION
- - -------------------
The major uses of cash for the first nine months of 1999 were for acquisitions
of businesses of $217 million, property additions of $241 million, cash
dividends paid to shareowners of $146 million, the payment in connection with an
intellectual property litigation matter of $64 million, and the repurchase of
common stock.
The Company spent approximately $111 million in the first nine months of 1999 in
connection with its stock repurchase program. At June 30, 1999, the Company had
approximately $53 million remaining on its current $500 million stock repurchase
program.
A major source of cash for the first nine months of 1999 was from the sale of
the Company's railroad electronics business to Westinghouse Air Brake Company
for approximately $80 million in cash.
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, dividends to shareowners and acquisitions.
The dividend to be paid to shareowners in the fourth quarter of 1999 was
declared by the Company's Board of Directors on June 2, 1999 and accordingly,
the dividend declared per share for the quarter and nine months includes the
fourth quarter dividend.
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 on pages 37 and 38 in Note 17 of
the Notes to Consolidated Financial Statements in Item 8, Consolidated Financial
Statements and Supplementary Data of the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1998. Management believes that at June
30, 1999, there has been no material change to this information.
-12-
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
YEAR 2000 READINESS DISCLOSURE
- - ------------------------------
The Year 2000 issue is the result of computer programs being written using two
digits rather than four digits to define the applicable year. Computer
equipment, software and other devices with embedded technology that are
time-sensitive may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in system failures or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to manufacture products, acquire or ship inventory, process transactions, send
invoices, or engage in other normal business activities. The inability of
business processes to function correctly in 2000 could have serious adverse
effects on companies and entities throughout the world.
The Company has developed plans to address issues related to the impact of the
Year 2000 in five major areas: products, business systems (computer systems that
handle business processes), infrastructure (servers, desktop computers,
networks, telecommunication systems and software), manufacturing systems
(computer systems used in the manufacturing process) and suppliers. Each of the
five areas is undergoing the following process to ensure readiness for the Year
2000. First, in the inventory phase, all resources are inventoried to identify
those that have any type of software or hardware Year 2000 issues. Second, in
the assessment phase, all inventoried items are assessed to confirm that a Year
2000-related issue is present and the extent of remediation required. Third, in
the strategy phase, a remediation strategy is created to ensure substantial
completion of upgrades for critical systems by the middle of calendar 1999.
Fourth, in the conversion/upgrade phase, upgrades are performed on all items
identified in the inventory and assessment phases. Finally, in the testing
phase, all upgraded items are tested to verify Year 2000 readiness. The Company
has completed the inventory, assessment and strategy phases for all five areas.
At June 30, 1999, the Company was approximately 95 percent complete in the
conversion/upgrade phase for each of the five areas and was substantially
complete with the final testing for situations where the Company has completed
the conversion/upgrade phase.
The Company is substantially complete with this project. The current estimate of
total project costs is approximately $42 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 90 percent of the total project cost had been spent through June 30,
1999, with substantially all of the remainder to be spent during 1999.
The Company has enlisted the services of industry consultants and outside
contractors to assist with its Year 2000 identification, assessment, remediation
and testing efforts. The costs of the Company's Year 2000 identification,
assessment, remediation and testing efforts and the dates on which the Company
believes it will complete such efforts are based upon management's estimates,
which were derived using numerous assumptions regarding future events, including
the continued availability of certain resources, third-party remediation plans,
and other factors. Notwithstanding this comprehensive program to make a smooth
transition, there can be no assurance that these estimates will prove to be
accurate and actual results could differ materially from those currently
anticipated. Specific factors that could cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in Year 2000 issues and the ability to identify, assess, remediate and test all
relevant computer codes and embedded technology. Moreover, the Company could be
adversely impacted by the Year 2000 issues faced by major distributors,
customers, vendors, governments and financial service organizations with which
the Company interacts.
-13-
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
The Company believes its greatest uncertainties are in the manufacturing and
supplier areas, due to the number of equipment and materials suppliers involved
and their various stages of readiness for Year 2000. In particular, the Company
is dependent on equipment manufacturers to supply the upgrades required to
remediate Year 2000 issues in the manufacturing systems area and suppliers to
upgrade their systems to ensure an uninterrupted supply of materials. A Year
2000 failure by a significant equipment or materials supplier could result in
the temporary slowdown of production by the Company, the duration of which the
Company cannot reasonably estimate. As a result, the Company's contingency
planning centers heavily on the supplier and manufacturing systems areas. For
the top five to 10 percent of its critical materials and manufacturing
suppliers, the Company is conducting on-site reviews and intends to monitor
specific Year 2000 milestones to ensure compliance. The Company has identified
specific Year 2000 compliance target dates for all critical materials suppliers
and is in the process of implementing contingency plans that include alternate
sourcing and stockpiling of materials.
Part of the Company's risk assessment process included a detailed Year 2000
questionnaire sent to all critical materials and manufacturing suppliers. The
assessment included questions on products, services, internal operating systems
and the supplier's own supply chain. As of June 30, 1999, the Company has
received responses from approximately 90 percent of those questioned. The
Company is following up the questionnaires, where necessary, to ensure Year 2000
compliance.
The varying definitions of "compliance with Year 2000" and the array of products
and services sold by the Company, both today and in the past, may lead to claims
whose impact on the Company is not currently estimable. The Company has product
and general liability insurance policies which provide coverage in the event of
certain product failures. The Company has not, however, purchased Year 2000
specific insurance because, in management's view, the cost is prohibitive and
likely of little value. In many cases, the Company contractually limits or
disclaims consequential damages in the Company's sales contracts. No assurance
can be given that the aggregate cost of defending and resolving such claims will
not materially adversely affect the Company's results of operations. Although
some of the Company's agreements with manufacturers and others from whom it
purchases products contain provisions requiring such parties to indemnify the
Company under certain circumstances, there can be no assurance that such
indemnification arrangements will cover all of the Company's liabilities and
costs related to claims by third parties related to the Year 2000 issue.
Business operations are also dependent on the Year 2000 readiness of
infrastructure suppliers in areas such as utilities, communications,
transportation and other services. In this environment, there will likely be
instances of failure that could cause disruptions in business processes. The
likelihood and effects of failures in infrastructure systems and in the supply
chain cannot be estimated. However, with respect to operations under its direct
control, management does not expect, in view of its Year 2000 readiness efforts
and the diversity of its suppliers and customers, that occurrences of Year 2000
failures will have a material adverse effect on the financial position or
results of operations of the Company.
Cautionary Statement
- - --------------------
This Quarterly Report contains statements (including certain projections and
business trends) accompanied by such phrases as "believes", "estimates",
"expects", "could", "likely", "anticipates", "has high confidence", and other
similar expressions, 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 economic and political changes in international
markets where the Company competes, such as currency exchange rates, inflation
rates, recession, foreign ownership restrictions and other external factors over
which the Company has no control; domestic and foreign government spending,
-14-
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
budgetary and trade policies; demand for and market acceptance of new and
existing products; successful development of advanced technologies; competitive
product and pricing pressures; timely completion of Year 2000 software
modifications by the Company, its key suppliers and customers, and governments;
implementation of restructuring actions in accordance with management's plans;
and the uncertainties of litigation, 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. These forward-looking statements are
made only as of the date hereof, and the Company undertakes no obligation to
update or revise the forward-looking statements, whether as a result of new
information, future events or otherwise.
Item 3. Quantitative And Qualitative Disclosures About Market Risk
The Company's financial instruments include cash, short- and long-term debt, and
foreign currency forward exchange contracts. At June 30, 1999, 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 does enter into foreign
currency forward exchange contracts in the ordinary course of business to
protect itself from adverse currency rate fluctuations on both firm and
anticipated foreign currency transactions. These contracts are generally for
terms of less than one year. Gains or losses relating to hedging firm
commitments are deferred and included in the measurement of the foreign currency
transaction subject to the hedge and gains or losses relating to anticipated
transactions are recognized currently.
The Company's foreign currency forward exchange contracts are executed with
creditworthy banks and are denominated in currencies of major industrial
countries. The United States Dollar equivalent amount at the then current
exchange rates of all the Company's outstanding foreign currency forward
exchange contracts is as follows (in millions):
June 30 September 30
1999 1998
-------- --------
United Kingdom (Pound Sterling)................... $ 226 $ 151
Canada (Dollar)................................... 101 110
Switzerland (Franc)............................... 97 78
Germany (Deutsche Mark)........................... 88 80
European Union (Euro)............................. 58 -
Australia (Dollar)................................ 56 39
Italy (Lira)...................................... 30 32
Japan (Yen)....................................... 19 42
France (Franc).................................... 10 13
Other countries................................... 30 33
------ ------
$ 715 $ 578
====== ======
The Company does not anticipate any material adverse effect on its results of
operations or financial position relating to these foreign currency forward
exchange contracts.
Based on the Company's overall currency exchange rate exposure at June 30, 1999
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.
-15-
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On November 13, 1990, the Company was served with a summons and
complaint in a civil action brought against the Company in the United
States District Court for the District of Colorado by James Stone,
claiming to act in the name of the United States, alleging violations
of the U.S. False Claims Act in connection with the Company's operation
of the Department of Energy's Rocky Flats Plant, Golden, Colorado (and
seeking treble damages and forfeitures) as well as a personal cause of
action for alleged wrongful termination of employment. On August 8,
1991, the court dismissed the personal cause of action. On December 6,
1995, the DOE notified the Company that it would no longer reimburse
costs incurred by the Company in defense of the action. On November 19,
1996, the court granted the Department of Justice leave to intervene in
the case on the government's behalf. On April 1, 1999 a jury awarded
the plaintiffs approximately $1.4 million in damages. On May 18, 1999,
the court entered judgment against the Company for approximately $4.2
million, trebling the jury's award as required by the False Claims Act,
and imposing a civil penalty of $15,000. If the judgment is affirmed on
appeal, Mr. Stone may also be entitled to an award of attorney's fees
but the court refused to consider the matter until any appeals from the
judgment have been exhausted. The Company is considering whether to
appeal, but management believes that an outcome adverse to the Company
will not have a material effect on the Company's financial statements.
Item 2. Changes in Securities and Use of Proceeds
(c) On April 1, 1999, the Company issued 239, 238 and 217
shares of restricted stock, respectively, to the following
directors of the Company: George L. Argyros, Donald R. Beall 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. 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 the year ended September 30, 1998.
-16-
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
PART II. OTHER INFORMATION (Continued)
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 12 - Computation of Ratio of Earnings to Fixed
Charges for the Nine Months Ended June 30,
1999
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K:
No current reports on Form 8-K were filed by
the Company during the quarter ended June 30,
1999.
-17-
<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 13, 1999 By W. E. Sanders
------------------- -----------------------------
W. E. Sanders
Vice President and Controller
(Principal Accounting Officer)
Date: August 13, 1999 By W. J. Calise, Jr.
------------------- -----------------------------
W. J. Calise, Jr.
Senior Vice President,
General Counsel and Secretary
-18-
Exhibit 12
ROCKWELL INTERNATIONAL CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
NINE MONTHS ENDED JUNE 30, 1999
(in millions, except ratio)
EARNINGS AVAILABLE FOR FIXED CHARGES:
Income from continuing operations before income taxes............. $ 663
Less undistributed income of affiliates........................... (4)
-------
659
Add fixed charges included in earnings:
Interest expense............................................... 64
Interest element of rentals.................................... 38
-------
102
Total earnings available for fixed charges........................ $ 761
=======
FIXED CHARGES:
Fixed charges included in earnings................................ $ 102
Capitalized interest.............................................. 3
-------
Total fixed charges............................................ $ 105
=======
RATIO OF EARNINGS TO FIXED CHARGES (1)............................... 7.25
=======
(1) In computing the ratio of earnings to fixed charges, earnings are
defined as income 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.
<TABLE> <S> <C>
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE
30, 1999 CONDENSED CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND NOTES TO FINANCIAL
STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
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