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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, 1999
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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.)
777 East Wisconsin Avenue, Suite 1400, Milwaukee, Wisconsin 53202
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code (414) 212-5299
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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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189,769,279 shares of registrant's Common Stock, $1.00 par value, were
outstanding on January 31, 2000.
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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 --
December 31, 1999 and September 30, 1999....... 2
Consolidated Statement of Operations --
Three Months Ended December 31, 1999 and 1998.. 3
Consolidated Statement of Cash Flows --
Three Months Ended December 31, 1999 and 1998.. 4
Notes to Consolidated Financial Statements..... 5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations.................................. 8
Item 3. Quantitative and Qualitative Disclosures
About Market Risk.............................. 9
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings.............................. 10
Item 2. Changes in Securities and Use of Proceeds...... 10
Item 5. Other Information.............................. 11
Item 6. Exhibits and Reports on Form 8-K............... 11
Signatures......................................................... 12
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
ROCKWELL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(in millions)
December 31 September 30
1999 1999
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ASSETS
Current assets:
Cash.................................................... $ 296 $ 356
Receivables, net........................................ 1,181 1,294
Inventories, net........................................ 1,337 1,339
Deferred income taxes................................... 364 364
Other current assets.................................... 248 229
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Total current assets.............................. 3,426 3,582
Property (net of accumulated depreciation:
December 31, 1999, $1,558; September 30, 1999, $1,508).. 1,562 1,581
Intangible assets (net of accumulated amortization:
December 31, 1999, $531; September 30, 1999, $514)...... 1,372 1,390
Other assets............................................... 155 151
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TOTAL....................................... $ 6,515 $ 6,704
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LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt......................................... $ 186 $ 189
Accounts payable........................................ 713 843
Compensation and benefits............................... 357 469
Income taxes payable.................................... 152 91
Other current liabilities............................... 483 516
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Total current liabilities......................... 1,891 2,108
Long-term debt............................................. 911 911
Retirement benefits........................................ 650 653
Other liabilities.......................................... 383 395
Shareowners' equity:
Common stock (shares issued: 216.4)..................... 216 216
Additional paid-in capital.............................. 962 960
Retained earnings....................................... 3,138 3,034
Accumulated other comprehensive loss.................... (159) (153)
Common stock in treasury, at cost (shares held:
December 31, 1999, 26.7; September 30, 1999, 25.5)..... (1,477) (1,420)
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Total shareowners' equity......................... 2,680 2,637
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TOTAL....................................... $ 6,515 $ 6,704
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See Notes to Consolidated Financial Statements.
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ROCKWELL INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(in millions, except per share amounts)
Three Months Ended
December 31
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1999 1998
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Revenues:
Sales....................................................... $ 1,660 $ 1,608
Other income, net........................................... 13 46
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Total revenues............................................ 1,673 1,654
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Costs and expenses:
Cost of sales............................................... 1,123 1,135
Selling, general, and administrative........................ 297 291
Interest.................................................... 20 19
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Total costs and expenses.................................. 1,440 1,445
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Income from continuing operations before income taxes......... 233 209
Income tax provision.......................................... (76) (75)
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Income from continuing operations............................. 157 134
Loss from discontinued operations............................. -- (20)
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Net income.................................................... $ 157 $ 114
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Basic earnings per share:
Continuing operations....................................... $ 0.83 $ 0.71
Discontinued operations..................................... -- (0.11)
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Net income.................................................. $ 0.83 $ 0.60
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Diluted earnings per share:
Continuing operations ...................................... $ 0.81 $ 0.70
Discontinued operations..................................... -- (0.11)
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Net income ................................................ $ 0.81 $ 0.59
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Cash dividends per share...................................... $ 0.255 $ 0.255
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Weighted average outstanding shares:
Basic....................................................... 190.0 189.9
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Diluted (includes effect of stock options).................. 192.9 192.2
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See Notes to Consolidated Financial Statements.
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ROCKWELL INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(in millions)
Three Months Ended
December 31
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1999 1998
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Continuing Operations:
Operating Activities:
Income from continuing operations.......................... $ 157 $ 134
Adjustments to arrive at cash provided by
operating activities:
Depreciation........................................... 63 53
Amortization of intangible assets...................... 22 15
Deferred income taxes.................................. (5) (96)
Changes in assets and liabilities, excluding
effects of acquisitions and divestitures:
Receivables........................................ 110 85
Inventories........................................ -- (36)
Accounts payable................................... (130) (59)
Income taxes payable............................... 61 129
Compensation and benefits.......................... (111) (109)
Other assets and liabilities....................... (60) (62)
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Cash Provided by Operating Activities........... 107 54
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Investing Activities:
Property additions......................................... (54) (55)
Acquisitions of businesses, net of cash acquired........... -- (46)
Proceeds from dispositions of property and businesses...... 1 92
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Cash Used for Investing Activities.............. (53) (9)
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Financing Activities:
Net (decrease) increase in debt............................ (3) 180
Purchases of treasury stock................................ (67) (56)
Cash dividends............................................. (49) (48)
Proceeds from the exercise of stock options................ 5 18
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Cash (Used for) Provided by
Financing Activities......................... (114) 94
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Cash (Used for) Provided by Continuing Operations.......... (60) 139
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Cash Used for Discontinued Operations...................... -- (47)
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(Decrease) Increase in Cash................................ (60) 92
Cash at Beginning of Period................................ 356 103
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Cash at End of Period...................................... $ 296 $ 195
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See Notes to Consolidated Financial Statements.
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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, 1999. The results of
operations for the three-month period ended December 31, 1999 are not
necessarily indicative of the results for the full year.
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.
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 fair value
will be offset by 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.
2. Discontinued operations relate to the Company's former Semiconductor
Systems business (Semiconductor Systems) which was spun off on December 31,
1998 into an independent, separately traded, publicly-held company by
distributing all of the outstanding shares of Conexant Systems, Inc. to the
Company's shareowners. The revenues and net loss of Semiconductor Systems
for the three months ended December 31, 1998 were $289 million and
$20 million, respectively.
3. Inventories, net of reserves, are summarized as follows (in millions):
December 31 September 30
1999 1999
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Finished goods.................................... $ 408 $ 415
Work in process................................... 449 457
Raw materials, parts, and supplies................ 459 446
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Total........................................... 1,316 1,318
Adjustment to the carrying value of
certain inventories to a LIFO basis............. 21 21
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Inventories, net.................................. $ 1,337 $ 1,339
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4. The reconciliation of net income to comprehensive income is as follows (in
millions):
Three Months Ended
December 31
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1999 1998
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Net income.......................................... $ 157 $ 114
Other comprehensive (loss) income:
Net foreign currency translation
adjustment..................................... (6) 1
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Comprehensive income................................ $ 151 $ 115
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ROCKWELL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. In the third quarter of 1998, the Company recorded special charges of $597
million in connection with asset impairments and the implementation of a
comprehensive restructuring program. These charges included $100 million
for severance and other employee separation costs associated with a
worldwide workforce reduction of approximately 3,100 employees and $84
million related to facility closures and consolidations and exiting
non-strategic businesses and product lines. These actions are substantially
complete at December 31, 1999.
Total cash expenditures in connection with these actions are expected to
approximate $149 million. The Company spent approximately $84 million
through December 31, 1999, of which $52 million related to severance and
other employee separation costs, and expects to spend an additional $26
million through December 2000. The remaining cash expenditures relate to
employee separation costs and lease obligations for vacant facilities.
Through December 31, 1999, the workforce has been reduced by approximately
2,500 employees.
Revenues and results of operations of businesses and product lines which
have been exited were not material for the quarter ended December 31, 1998.
6. 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.
7. In February 2000, the Company entered into an interest rate swap contract
which effectively converted its $350 million aggregate principal amount of
6.15% notes, payable in 2008, to floating rate debt based on 90 day LIBOR.
The effective rate the Company will pay through April 15, 2000 is 4.79%.
The Company entered into this contract to achieve a more balanced mix of
fixed and floating rate debt. The Company accounts for interest rate swap
contracts by accruing the underlying payments and receipts as an adjustment
to interest expense on the underlying notes payable.
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ROCKWELL INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. The sales and results of operations of the Company's reportable segments
are summarized as follows (in millions):
Three Months Ended
December 31
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1999 1998
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Sales:
Automation............................................ $ 1,043 $ 1,045
Avionics & Communications............................. 561 510
Other Businesses...................................... 56 53
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Total............................................... $ 1,660 $ 1,608
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Segment operating earnings:
Automation............................................ $ 163 $ 143
Avionics & Communications............................. 104 121
Other Businesses...................................... 4 2
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Total............................................... 271 266
General corporate - net................................. (18) (38)
Interest expense........................................ (20) (19)
Provision for income taxes.............................. (76) (75)
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Income from continuing operations....................... 157 134
Loss from discontinued operations....................... - (20)
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Net income.............................................. $ 157 $ 114
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ROCKWELL INTERNATIONAL CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Sales in the 2000 first quarter of $1.7 billion were three percent higher than
the same period a year ago. Automation's sales of $1 billion were about the same
as last year's first quarter as sales increases at control systems were offset
by a $25 million decline at the motors business. Avionics & Communications sales
increased 10 percent over the same period a year ago to $561 million. The
government systems, passenger systems and business and regional systems
businesses all reported substantial sales increases over 1999's first quarter
and more than offset lower volume at the air transport systems business. Sales
at Rockwell Electronic Commerce and Rockwell Science Center were up six percent
to $56 million from $53 million a year ago.
Income from continuing operations for the 2000 first quarter was $157 million,
or 81 cents per diluted share, compared to income from continuing operations of
$134 million, or 70 cents per diluted share, for the first quarter of 1999.
Earnings per diluted share were up 16 percent due to improved operating margins
at Automation and continued strong performance at Avionics & Communications.
Automation's first quarter operating earnings of $163 million were 14 percent
higher than last year. The benefits of manufacturing process improvements,
material cost reductions from the Company's Strategic Sourcing Initiative and
higher control systems volume more than offset investments in new product
development, SourceAlliance.com launch costs and the earnings effect of lower
motors volume. Automation's return on sales increased to 15.6 percent from 13.7
percent a year ago.
Avionics & Communications' operating earnings were $104 million, an 11 percent
increase over last year's first quarter earnings of $94 million, excluding
1999's $36 million pre-tax gain from the sale of the railroad electronics
business and pre-tax charge of $9 million related to the consolidation of
certain government systems activities. Avionics & Communications' return on
sales increased to 18.5 percent from 18.4 percent a year ago (excluding the $36
million gain and the $9 million charge).
Operating earnings for Other Businesses of $4 million were $2 million higher
than last year's first quarter primarily due to higher sales volume.
Corporate expenses were lower in the first quarter of 2000 compared to a year
ago due to a charge of $15 million in 1999 for costs related to the relocation
of the corporate office.
The first quarter 2000 effective income tax rate of 32.6 percent was lower than
1999's first quarter rate of 35.9 percent. This improvement reflects the
benefits of the development and implementation of strategies to achieve
meaningful and sustainable tax rate reductions. These strategies include
utilization over the next few years of large foreign tax credit carryforwards,
lower state income tax rates, and lower taxes associated with our growing
international business due to the rationalization of our European distribution,
warehousing and customer support operations.
Based upon the Company's strong first quarter operating performance, coupled
with expected profitable growth across each of the Company's businesses,
management has confidence that Rockwell can achieve earnings per share growth in
2000 well in excess of the long-term goal of low double digit annual growth.
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ROCKWELL INTERNATIONAL CORPORATION
FINANCIAL CONDITION
The major uses of cash for the first three months of 2000 were for property
additions of $54 million, cash dividends paid to shareowners of $49 million, and
the repurchase of common stock. The Company spent $67 million in the first three
months of 2000 in connection with its stock repurchase program. At December 31,
1999, the Company had approximately $175 million remaining on its current $250
million stock repurchase program.
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, dividends to shareowners and may include
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 38 and 39 in Note 18 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, 1999. Management believes that at
December 31, 1999, there has been no material change to this information.
Year 2000 Update
As described in the Company's Annual Report on Form 10-K for the year ended
September 30, 1999, the Company developed plans to address possible exposures
related to the Year 2000. Since entering the year 2000, the Company has not
experienced any major disruptions to its business nor is it aware of any
significant Year 2000 related disruptions related to its products or impacting
its customers and suppliers. The Company will continue to monitor its critical
systems over the next several months but does not anticipate any significant
effects due to Year 2000 exposures from its internal systems or from the
activities of its suppliers and customers.
Cautionary Statement
This Quarterly Report contains statements (including certain projections and
business trends) accompanied by such phrases as "believes", "expected", "has
confidence", "anticipate", 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, budgetary and trade policies;
demand for and market acceptance of new and existing products; successful
development of advanced technologies; competitive product and pricing pressures;
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
Information with respect to the Company's exposure to interest rate risk and
foreign currency risk is contained in pages 16 and 17 in Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations of the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
1999. Management believes that at December 31, 1999, there has been no material
change to this information. In February 2000, the Company entered into an
interest rate swap contract which effectively converted its $350 million
aggregate principal amount of 6.15% notes, payable in 2008, to floating rate
debt based on 90 day LIBOR.
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ROCKWELL INTERNATIONAL CORPORATION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On June 24, 1996, judgment was entered against the Company in a civil
action in the Circuit Court of Logan County, Kentucky on a jury verdict
awarding $8 million in compensatory and $210 million in punitive damages
for property damage. The action had been brought August 12, 1993 by owners
of flood plain real property near Russellville, Kentucky allegedly damaged
by polychlorinated biphenyls (PCBs) discharged from a plant owned and
operated by the Company's Measurement & Flow Control Division prior to its
divestiture in March 1989. On January 14, 2000, the Kentucky Court of
Appeals reversed the lower court's judgment and directed entry of judgment
in Rockwell's favor on all claims as a matter of law. The plaintiffs have
30 days from the ruling in which to seek discretionary review of the
decision in the state supreme court.
On December 27, 1995, one shareowner, purporting to act derivatively on
behalf of the Company, commenced an action in the Superior Court of the
State of California for the County of Orange against 13 of the Company's
directors, and the Company as a nominal defendant, alleging principally
breaches of fiduciary duties in failing properly to manage the business of
the Company in a manner to prevent certain violations of applicable federal
and state laws, including environmental laws, by certain named and unnamed
employees or agents of the Company. The action seeks declaratory judgment,
damages suffered by the Company as a result of the alleged conduct,
plaintiffs' costs and expenses and other proper relief.
On February 27, 1996, a similar suit, making similar allegations and
seeking similar relief, was filed against the Company and the same
directors, plus Don H. Davis, Jr., by two other shareowners in the Superior
Court of the State of California for the County of Los Angeles. In August
1996, the Los Angeles County action was dismissed voluntarily by the
plaintiffs, and a First Amended Consolidated Complaint was filed in the
Orange County action, adding the plaintiffs from the dismissed Los Angeles
County suit as party plaintiffs to the Orange County suit. On February 4,
1997, plaintiffs voluntarily dismissed the action with respect to two of
the director-defendants, Judith L. Estrin and William H. Gray, III. The
Company and the director-defendants are defending the consolidated action.
On December 3, 1999, the court denied the defendants' motion for summary
judgment. No trial date has been set.
Item 2. Changes in Securities and Use of Proceeds
(c) On October 1, 1999, the Company paid a portion of the annual retainer
fees for non-employee directors by issuance of 177 shares of
restricted stock to each of James Clayburn LaForce, Jr. and William S.
Sneath, whose terms expired in February 2000, and issuance of 516
shares of restricted stock to each of the following directors: George
L. Argyros, Donald R. Beall, William H. Gray, III, William T.
McCormick, Jr., John D. Nichols, Bruce M. Rockwell, Robert B. Shapiro
and Joseph F. Toot, Jr. On the same date, the Company also issued 187,
182 and 187 shares of restricted stock to Messrs. Argyros, Beall and
Nichols, respectively, pursuant to deferral elections made in
accordance with the Directors Stock Plan in payment of retainer fees
otherwise payable in cash. On December 1, 1999, the Company issued
17,500 shares of restricted stock to Don H. Davis, Jr., Chairman of
the Board and Chief Executive Officer, in part payment of a bonus
under the Annual Incentive Compensation Plan for Senior Executive
Officers. The issuance of all these shares was exempt from the
registration requirements of the Securities Act of 1933 pursuant to
Section 4(2) thereof.
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ROCKWELL INTERNATIONAL CORPORATION
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, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges for
the Three Months Ended December 31, 1999
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K during the quarter ended December 31, 1999:
None
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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
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(Registrant)
Date: February 11, 2000 By W. E. Sanders
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W. E. Sanders
Vice President and Controller
(Principal Accounting Officer)
Date: February 11, 2000 By W. J. Calise, Jr.
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W. J. Calise, Jr.
Senior Vice President,
General Counsel and Secretary
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