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 December 31, 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
189,766,417 shares of registrant's Common Stock, $1.00 par value, were
outstanding on January 31, 1999.
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
INDEX
Page
No.
PART I. FINANCIAL INFORMATION:
Item 1. Consolidated Financial Statements:
Condensed Consolidated Balance Sheet--
December 31, 1998 and September 30, 1998....... 2
Consolidated Statement of Operations--
Three Months Ended December 31, 1998 and 1997.. 3
Consolidated Statement of Cash Flows--
Three Months Ended December 31, 1998 and 1997.. 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 Report on Form 8-K................ 17
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
ROCKWELL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(In millions)
(Unaudited)
<TABLE>
<CAPTION>
December 31 September 30
1998 1998
ASSETS
<S> <C> <C>
Current assets:
Cash........................................... $ 195 $ 103
Receivables (less allowance for doubtful
accounts: December 31, 1998, $53;
September 30, 1998, $51)..................... 1,136 1,223
Inventories, net............................... 1,352 1,313
Deferred income taxes.......................... 314 258
Other current assets........................... 233 213
Net assets of Semiconductor Systems............ - 986
Total current assets................... 3,230 4,096
Property, net..................................... 1,518 1,535
Intangible assets, net............................ 1,333 1,330
Other assets...................................... 237 209
TOTAL.................... $ 6,318 $ 7,170
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt................................ $ 331 $ 156
Accounts payable............................... 680 733
Compensation and benefits...................... 440 547
Income taxes payable........................... 67 19
Other current liabilities...................... 510 528
Total current liabilities.............. 2,028 1,983
Long-term debt.................................... 910 908
Retirement benefits............................... 711 718
Other liabilities................................. 301 316
Total liabilities............. 3,950 3,925
Shareowners' equity:
Common Stock (shares issued: 216.4)............ 216 216
Additional paid-in capital..................... 927 923
Retained earnings.............................. 2,840 3,697
Accumulated other comprehensive loss........... (134) (135)
Common Stock in treasury, at cost (shares held:
December 31, 1998, 26.6;
September 30, 1998, 25.8).................... (1,481) (1,456)
Total shareowners' equity..... 2,368 3,245
TOTAL.................... $ 6,318 $ 7,170
</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
December 31
1998 1997
<S> <C> <C>
Revenues:
Sales............................................... $ 1,608 $ 1,602
Other income, net................................... 46 20
Total revenues.................................... 1,654 1,622
Costs and expenses:
Cost of sales....................................... 1,135 1,116
Selling, general, and administrative................ 291 302
Purchased research and development.................. - 103
Interest............................................ 19 4
Total costs and expenses.......................... 1,445 1,525
Income from continuing
operations before income taxes...................... 209 97
Income tax provision.................................. (75) (37)
INCOME FROM CONTINUING OPERATIONS
BEFORE ACCOUNTING CHANGE............................ 134 60
(Loss) income from discontinued operations............ (20) 29
Cumulative effect of accounting change................ - (17)
NET INCOME............................................ $ 114 $ 72
Basic earnings per share:
Continuing operations before accounting change...... $ 0.71 $ 0.29
Discontinued operations............................. (0.11) 0.15
Cumulative effect of accounting change.............. - (0.09)
Net income.......................................... $ 0.60 $ 0.35
Diluted earnings per share:
Continuing operations before accounting change...... $ 0.70 $ 0.29
Discontinued operations............................. (0.11) 0.15
Cumulative effect of accounting change.............. - (0.09)
Net income.......................................... $ 0.59 $ 0.35
Cash dividends per share.............................. $ 0.255 $ 0.255
Weighted average outstanding shares:
Basic.............................................. 189.9 204.8
Diluted (includes effect of stock options)......... 192.2 207.8
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31
1998 1997
<S> <C> <C>
CONTINUING OPERATIONS:
Operating Activities:
Income from continuing operations before accounting
change............................................. $ 134 $ 60
Adjustments to income from continuing
operations before accounting change to arrive at
cash provided by operating activities:
Depreciation...................................... 53 52
Amortization of intangible assets................. 15 23
Deferred income taxes............................. (96) (40)
Pension expense, net of contributions............. 13 7
Purchased research and development................ - 103
Changes in assets and liabilities, excluding
effects of acquisitions, divestitures, and
foreign currency adjustments:
Receivables................................... 85 19
Inventories................................... (36) (48)
Accounts payable.............................. (59) (66)
Income taxes payable.......................... 129 45
Compensation and benefits..................... (109) (53)
Other assets and liabilities.................. (75) 41
Cash Provided by Operating Activities...... 54 143
Investing Activities:
Property additions.................................... (55) (59)
Acquisitions of businesses, net of cash acquired...... (46) (158)
Proceeds from disposition of property and businesses.. 92 13
Cash Used for Investing Activities......... (9) (204)
Financing Activities:
Net increase in debt.................................. 180 283
Purchases of treasury stock........................... (56) (239)
Cash dividends........................................ (48) (52)
Reissuances of common stock........................... 18 8
Cash Provided by Financing Activities...... 94 -
CASH PROVIDED BY (USED FOR) CONTINUING OPERATIONS..... 139 (61)
Cash Used for Discontinued Operations................. (47) (39)
INCREASE (DECREASE) IN CASH........................... 92 (100)
CASH AT BEGINNING OF PERIOD........................... 103 269
CASH AT END OF PERIOD................................. $ 195 $ 169
</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, 1998. The results of
operations for the three-month period ended December 31, 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.
Rockwell adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS 130), at the beginning of 1999. 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 impact on the Company's net income or
shareowners' equity. SFAS 130 requires certain equity adjustments to be
reported as components of comprehensive income. The amounts set forth as
accumulated other comprehensive loss in the accompanying balance sheet is
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
December 31
1998 1997
Net income...................................... $ 114 $ 72
Other comprehensive income (loss):
Net foreign currency translation adjustment... 1 (24)
Comprehensive income............................ $ 115 $ 48
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, but earlier adoption is permitted. 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. The Company believes the impact of
adopting 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 in the consolidated statement of
operations for the three months ended December 31, 1997.
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
December 31
1998 1997
Revenues......................................... $ 289 $ 377
(Loss) income before income taxes................ (29) 41
Net (loss) income................................ (20) 29
Rockwell accrued for Conexant's estimated first quarter 1999 operating loss
and costs related to the spin-off in 1998. The additional loss 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 the comprehensive restructuring
program. These charges, including the effects of adjustments through
December 31, 1998, included $118 million for severance and other employee
separation costs associated with a worldwide workforce reduction of
approximately 3,200 employees and $80 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 1999.
Total cash expenditures in connection with these actions are expected to
approximate $195 million. The Company spent approximately $41 million
through December 31, 1998, of which $27 million related to severance and
other employee separation costs, and expects to spend an additional $101
million through the end of calendar 1999, which is recorded in current
liabilities. As a result of actions taken through December 31, 1998, the
workforce was reduced by approximately 1,450 employees.
Revenues of businesses and product lines which are being exited were $19
million and $58 million for the quarters ended December 31, 1998 and 1997,
respectively. The net operating loss related to these businesses and
product lines is not material.
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. In October 1998, the Company sold its railroad electronics business at a
gain of $36 million.
In November 1998, the Company acquired Anorad Corporation, a manufacturer
of linear motor equipment, for $45 million. The acquisition has been
accounted for as a purchase as of December 31, 1998. Assets acquired and
liabilities assumed have been recorded at estimated fair values determined
by the Company's management based on information currently available.
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. 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):
December 31 September 30
1998 1998
Finished goods................................ $ 395 $ 385
Work in process............................... 454 459
Raw materials, parts, and supplies............ 491 456
Total....................................... 1,340 1,300
Adjustment to the carrying value of
certain inventories to a LIFO basis......... 12 13
Inventories................................. $ 1,352 $ 1,313
6. Intangible assets, net of accumulated amortization, are summarized as
follows (in millions):
December 31 September 30
1998 1998
Goodwill...................................... $ 853 $ 846
Trademarks, patents, product technology,
and other intangibles....................... 480 484
Intangible assets........................... $ 1,333 $ 1,330
7. Short-term debt consisted of the following (in millions):
December 31 September 30
1998 1998
Commercial paper.............................. $ 300 $ 90
Short-term foreign bank borrowings............ 29 64
Current portion of long-term debt............. 2 2
Short-term debt............................. $ 331 $ 156
At December 31, 1998, the Company had $1.0 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 December 31, 1998 and
September 30, 1998 and consist of arrangements for which there were no
significant commitment fees.
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. Other current liabilities are summarized as follows (in millions):
December 31 September 30
1998 1998
Contract reserves and advance payments........ $ 188 $ 207
Product warranty costs........................ 120 117
Taxes other than income taxes................. 46 44
Interest...................................... 26 16
Other......................................... 130 144
Other current liabilities................... $ 510 $ 528
9. Long-term debt consisted of the following (in millions):
December 31 September 30
1998 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..................... (58) (58)
Total....................................... 912 910
Less current portion.......................... (2) (2)
Long-term debt.............................. $ 910 $ 908
10. Retirement benefit liabilities consisted of the following (in millions):
December 31 September 30
1998 1998
Retirement medical costs................... $ 659 $ 668
Pension costs.............................. 118 116
Total.................................... 777 784
Amount classified as current liability..... (66) (66)
Retirement benefits...................... $ 711 $ 718
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. 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.
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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. In January 1999, the U.S.
Supreme Court denied Rockwell's petition for certiorari. Prior to the spin-
off, Rockwell paid $64 million into an escrow account which will be used to
satisfy Conexant's obligation with respect to this matter.
<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 first quarter of 1999 and 1998 are presented below (in
millions).
Three Months Ended
December 31
1998 1997
Sales
Automation......................................... $ 1,045 $ 1,139
Avionics & Communications.......................... 563 463
Total sales.......................................... $ 1,608 $ 1,602
Operating earnings
Automation......................................... $ 143 $ 144
Avionics & Communications.......................... 123 75
Purchased research and development................. - (103)
Operating earnings................................. 266 116
General corporate - net.............................. (38) (15)
Interest expense..................................... (19) (4)
Provision for income taxes........................... (75) (37)
INCOME FROM CONTINUING OPERATIONS BEFORE ACCOUNTING
CHANGE............................................. 134 60
(Loss) income from discontinued operations........... (20) 29
Cumulative effect of accounting change............... - (17)
NET INCOME........................................... $ 114 $ 72
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 related to government contracts.
This change relates to the Avionics & Communications business segment.
1999 First Quarter Compared to 1998 First Quarter
First quarter 1999 sales of $1.6 billion were about the same as last year's
sales. Automation's sales were down approximately $90 million primarily due to
slow North American market activity across most industry sectors, particularly
in forest products, metals and oil and gas. The decrease also reflects the
elimination of sales of Kato Engineering, which was sold in the third quarter of
1998. Avionics & Communications' sales increased $100 million primarily due to
the inclusion of $60 million of sales from the passenger systems business,
which was acquired in December 1997, and strong increases posted by both air
transport systems and business and regional systems as a result of higher
customer service revenue and increased production of business and regional
aircraft. Also contributing to the improvement was strong sales growth at our
Electronic Commerce business driven by increased demand for Spectrum
automatic call distribution systems.
Income from continuing operations in the first quarter of 1999 was $134
million, or 70 cents per share, versus first quarter 1998 income from
continuing operations of $123 million, or 59 cents per share (before an
acquisition-related charge). The nine percent increase was due to strong
performance at our Avionics & Communications businesses and Automation's
ability to offset the impact of lower sales with improved operating
efficiencies. The improved results include about $40 million of pre-tax
savings due to lower operating costs from the restructuring program announced
in June 1998. Including an after-tax charge of
$63 million for purchased research and development relating to the passenger
systems acquisition, first quarter 1998 income from continuing operations was
$60 million, or 29 cents per share.
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
Automation's earnings of $143 million for the first quarter of 1999 were about
the same as last year's first quarter earnings of $144 million. Lower operating
costs of $30 million resulting from the Company's restructuring program and
performance improvements at our motors business offset the impact of the sales
decline and a $9 million charge related to consolidation of the power systems
business. Automation's return on sales improved to 13.7 percent from 1998's
first quarter return on sales of 12.6 percent.
Avionics & Communications operating earnings were $123 million, a 64 percent
increase over 1998 first quarter earnings of $75 million (excluding an
acquisition-related charge of $103 million). In addition to earnings increases
generated from increased sales for both Rockwell Collins and Electronic
Commerce, operating earnings include a gain on the sale of the railroad
electronics business of approximately $36 million and a charge of $10 million
principally related to the consolidation of certain government systems
activities. Excluding these items, return on sales improved to 17.2 percent in
the first quarter, compared to 16.2 percent in the comparable period a year ago.
Corporate expenses increased to $38 million in the first quarter of 1999, from
$15 million in the first quarter of 1998. First quarter 1999 corporate expenses
include a charge of $15 million for certain costs, principally facility-related
costs incurred in connection with the decision to relocate the corporate
office. Additional costs are expected to be incurred in 1999 as the
corporate functions relocate. Corporate expenses in 1998 included
approximately $8 million of additional proceeds resulting from the favorable
resolution of a divestiture matter.
Rockwell continues to expect earnings per share from continuing operations in
1999 in the $2.90 to $3.00 range, including costs of relocating the corporate
offices. We expect to achieve this level of performance with strong growth at
Rockwell Collins and cost reductions and operating efficiencies generated by
our restructuring program.
Discontinued Operations:
The spin-off of the Company's former Semiconductor Systems business, Conexant
Systems, Inc., was completed on December 31, 1998. The loss from discontinued
operations for the first quarter of fiscal 1999 includes a $20 million pre-tax
charge due to Rockwell's recent 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 first quarter
net loss also includes a charge for costs related to the disposal of these
facilities. In addition, Rockwell accrued for Conexant's estimated 1999 first
quarter operating loss and costs related to the spin-off in fiscal 1998.
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
FINANCIAL CONDITION
The major uses of cash for the first quarter of 1999 were the $64 million
payment related to a litigation matter, the common stock repurchase program,
property additions, cash dividends paid to shareowners and the acquisition of
Anorad Corporation.
The Company spent approximately $56 million in the first quarter in connection
with its stock repurchase program. At December 31, 1998, the Company had
approximately $109 million remaining on its current $500 million stock
repurchase program. The Company is not currently repurchasing stock and no
decision has been made regarding the resumption of stock repurchases.
In November 1998, the Company completed the acquisition of Anorad Corporation,
a manufacturer of linear motor-based precision positioning equipment, for $45
million.
A major source of cash for the first three 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.
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 December 31, 1998, there has been no material change to
this information.
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.
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
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 are 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 assess-
ment phases. Finally, in the testing phase, all upgraded items are tested to
verify Year 2000 readiness. The Company has completed the inventory phase for
all five areas and has substantially completed the assessment and strategy
phases for all five areas. At December 31, 1998, the Company was approximate-
ly 75 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, 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 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 70
percent of the total project cost had been spent through December 31, 1998,
with substantially all ofthe 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 identi-
fication, assessment, remediation and testing efforts and the dates on which
the Company believes it will complete such efforts are based upon manage-
ment'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 com-
prehensive 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, 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.
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 will conduct on-site reviews and intends to monitor
specific Year 2000 milestones to ensure compliance. The Company is in the
process of identifying specific Year 2000 compliance target dates for all
critical materials suppliers. In the event a supplier does not meet established
compliance milestones, which begin as early as April 1999, the Company will
implement contingency plans that include alternate sourcing and stockpiling of
materials.
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
Part of the Company's initial assessment phase included a detailed Year 2000
questionnaire sent to all critical materials and manufacturing suppliers. This
questionnaire included questions on products, services, internal operating
systems and the supplier's own supply chain. As of December 31, 1998, the
Company has received responses from approximately 60 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. Of course, 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 indemnifi-
cation 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.
<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 December 31,
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 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 notional amount of all the Company's outstanding foreign
currency forward exchange contracts by country is as follows (in millions):
December 31 September 30
1998 1998
United Kingdom (Pound Sterling)................... $136 $151
Canada (Dollar)................................... 86 110
Switzerland (Franc)............................... 81 78
Germany (Deutsche Mark)........................... 70 80
Australia (Dollar)................................ 37 39
Italy (Lira)...................................... 26 32
Japan (Yen)....................................... 21 42
France (Franc).................................... 10 13
Other countries................................... 31 33
$ 495 $ 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 December 31,
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 a suit
against the Company in the U.S. District Court for the 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, plus interest. 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's petition for a rehearing (and rehearing en banc) and a motion
to certify the contract issue to the California Supreme Court were
denied in September 1998. The Company's petition for certiorari to the
United States Supreme Court filed on November 23, 1998 was denied in
January 1999. Prior to the spin-off of Conexant, the Company paid $64
million into an escrow account which will be used to satisfy Conexant's
obligation with respect to this matter.
Item 2. Changes in Securities and Use of Proceeds
On October 1, 1998, the Company issued 267, 331, 54 and 317 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. The
issuance of all such 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 year ended September 30, 1998, which is incorporated herein by
reference.
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
PART II. OTHER INFORMATION (Continued)
Cautionary Statement
This Quarterly Report contains statements (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
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, 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 6. Exhibits and Report on Form 8-K
(a) Exhibits:
Exhibit 10.1 - Distribution Agreement dated as of December 31,
1998 by and between the Company and Conexant
Systems, Inc., filed as Exhibit 2.1 to the
Company's Current Report on Form 8-K dated
January 12, 1999, is incorporated herein by
reference.
Exhibit 10.2 - Amended and Restated Employee Matters Agreement
dated as of December 31, 1998 by and between the
Company and Conexant Systems, Inc., filed as
Exhibit 2.2 to the Company's Current Report on
Form 8-K dated January 12, 1999, is incorporated
herein by reference.
Exhibit 10.3 - Tax Allocation Agreement dated as of December
31, 1998 by and between the Company and Conexant
Systems, Inc., filed as Exhibit 2.3 to the
Company's Current Report on Form 8-K dated
January 12, 1999, is incorporated herein by
reference.
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
PART II. OTHER INFORMATION (Continued)
Exhibit 12 - Computation of Ratio of Earnings to Fixed
Charges for the Three Months Ended December 31,
1998
Exhibit 27 - Financial Data Schedule
(b) Report on Form 8-K:
The Company filed a current report on Form 8-K dated January 12,
1999 in respect of the completion on December 31, 1998 of the
spin-off of its Semiconductor Systems business to holders of
shares of Common Stock, par value $1 per share, of the Company by
means of distribution to such holders of all outstanding shares
of Common Stock, par value $1 per share (including the preferred
share purchase rights associated with such Common Stock) of
Conexant (Items 2 and 7(c)). Conexant began operations as an
independent, separately traded, publicly-held company on January
1, 1999.
<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 February 10, 1999 By W. E. Sanders
W. E. Sanders
Vice President and Controller
(Principal Accounting Officer)
Date February 10, 1999 By W. J. Calise, Jr.
W. J. Calise, Jr.
Senior Vice President,
General Counsel and Secretary
ROCKWELL INTERNATIONAL CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
THREE MONTHS ENDED DECEMBER 31, 1998
(In millions, except ratio)
EARNINGS AVAILABLE FOR FIXED CHARGES:
Income from continuing operations before income taxes............. $ 209
Less undistributed income of affiliates.......................... (1)
------
208
------
Add fixed charges included in earnings:
Interest expense............................................... 19
Interest element of rentals................................... 13
------
32
------
Total earnings available for fixed charges........................ $ 240
======
FIXED CHARGES:
Fixed charges included in earnings................................ $ 32
Capitalized interest............................................. 1
------
Total fixed charges........................................... $ 33
======
RATIO OF EARNINGS TO FIXED CHARGES (1)............................... 7.3
(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>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
DECEMBER 31, 1998 CONDENSED CONSOLIDATED BALANCE SHEET AND CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND
NOTES TO FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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