1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999. COMMISSION FILE NUMBER 1-12383 ------------------------ ROCKWELL INTERNATIONAL CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) <TABLE> <S> <C> DELAWARE 25-1797617 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 777 EAST WISCONSIN AVENUE 53202 SUITE 1400 (ZIP CODE) MILWAUKEE, WISCONSIN (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) </TABLE> REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (414) 212-5299 (OFFICE OF THE SECRETARY) ------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: <TABLE> <CAPTION> TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- <S> <C> Common Stock, $1 Par Value New York, Pacific and London Stock Exchanges (including the associated Preferred Share Purchase Rights) </TABLE> ------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None 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 _ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of registrant's voting stock held by non-affiliates of registrant on November 15, 1999 was approximately $8.5 billion. 190,221,589 shares of registrant's Common Stock, par value $1 per share, were outstanding on November 15, 1999. DOCUMENTS INCORPORATED BY REFERENCE Certain information contained in the Proxy Statement for the Annual Meeting of Shareowners of registrant to be held on February 2, 2000 is incorporated by reference into Part III hereof. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
2 PART I ITEM 1. BUSINESS. Rockwell International Corporation (the Company or Rockwell), a Delaware corporation, is a global electronic controls and communications company with leadership positions in industrial automation, avionics and communications and automated call distribution systems. The Company was incorporated in 1996 and is the successor to the former Rockwell International Corporation as a result of a tax-free reorganization completed on December 6, 1996, pursuant to which the Company divested its former Aerospace and Defense businesses (the A&D Business) to The Boeing Company (Boeing). The predecessor corporation was incorporated in 1928. On September 30, 1997, the Company completed the spin-off of its automotive component systems business (the Automotive Business) into an independent, separately traded, publicly held company named Meritor Automotive, Inc. (Meritor). On December 31, 1998, the Company completed the spin-off of its semiconductor systems business (Semiconductor Systems) into an independent, separately traded, publicly held company named Conexant Systems, Inc. (Conexant). As used herein, the terms the "Company" or "Rockwell" include subsidiaries and predecessors unless the context indicates otherwise. Information included in this Annual Report on Form 10-K refers to the Company's continuing businesses unless otherwise indicated. For purposes hereof, whenever reference is made in any Item of this Annual Report on Form 10-K to information under specific captions in Item 7, MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (the MD&A), or in Item 8, CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (the Financial Statements), or to information in the Proxy Statement for the Annual Meeting of Shareowners of the Company to be held on February 2, 2000 (the 2000 Proxy Statement), such information shall be deemed to be incorporated therein by such reference. PRODUCTS AND SERVICES The Company's business segments are engaged in research and development, manufacture, sale and service of electronic controls and communication products. The Company is organized based upon products and services and has three business segments consisting of Automation, Avionics & Communications and Other Businesses, which includes Electronic Commerce and the Science Center. The Automation business is a supplier of industrial automation products, systems, software and services focused on helping customers control and power manufacturing processes. Products include controllers, I/O (input/output) systems, drives, sensors, power devices, packaged control products, operator interface devices, software products and services, gear reducers, mounted bearings, power transmission components, network monitoring products and motors. These products are primarily marketed under the Rockwell Automation, Allen-Bradley, Rockwell Software, Dodge, and Reliance Electric brand names. Major markets served include consumer products, food and beverage, transportation, metals, mining, cement, pulp and paper, petroleum, specialty chemicals, pharmaceutical, electric power, water treatment, infrastructure and semiconductor fabrication. The Avionics & Communications business is a supplier of electronic products and systems, service and support solutions to the commercial aerospace and defense industries. Products include electronic equipment for flight control, cockpit display, navigation, voice and data communication, cockpit management, in-flight cabin management, communications and passenger entertainment, radar, global positioning and other command, control and communications devices marketed primarily under the Rockwell Collins brand name. Major customers include airframe manufacturers, the United States government and most of the world's airlines. Other Businesses includes the Electronic Commerce business, which is a supplier of technologies for companies that interact with their customers over the telephone and/or the Internet. Products include automatic call distributors, computer telephony integration software, information collection, reporting and management systems and call center consulting services and systems. Other Businesses also includes the Science Center, a research and development facility. Financial information with respect to the Company's business segments, including their contributions to sales and operating earnings for the three years ended September 30, 1999, is contained under the caption RESULTS OF OPERATIONS in the MD&A on pages 12-14 hereof, and in Note 19 of the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS in the Financial Statements. 2
3 COMPETITIVE POSTURE The Company competes with many manufacturers which, depending on the product involved, range from large diversified enterprises, comparable to or greater than the Company in scope and resources, to smaller companies specializing in particular products. Factors which affect the Company's competitive posture are its research and development efforts, the quality of its products and services and its marketing and pricing strategies. The Company's products are sold by its own sales force and through distributors and agents. GOVERNMENT CONTRACTS Approximately ten percent of the Company's sales is derived from United States government contracts, almost entirely from its Avionics & Communications business. The Avionics & Communications business supplies certain military equipment to the United States government. In addition to normal business risks, companies engaged in supplying military equipment to the United States government are subject to unusual risks, including dependence on Congressional appropriations and administrative allotment of funds, changes in governmental procurement legislation and regulations and other policies which may reflect military and political developments, significant changes in contract scheduling, complexity of designs and the rapidity with which they become obsolete, constant necessity for design improvements, intense competition for available United States government business necessitating increases in time and investment for design and development, difficulty of forecasting costs and schedules when bidding on developmental and highly sophisticated technical work and other factors characteristic of the industry. Changes are customary over the life of United States government contracts, particularly development contracts, and generally result in adjustments of contract prices. Moreover, various claims (whether based on United States government or Company audits and investigations or otherwise) have been or may be instituted or asserted against the Company related to its United States government contract work, including claims based on business practices and cost classifications. Although such claims are usually resolved by detailed fact-finding and negotiation, on those occasions when they are not so resolved, civil or criminal legal or administrative proceedings may ensue. Depending on the circumstances and the outcome, such proceedings could result in fines, the cancellation of or suspension of payments under one or more United States government contracts, suspension or debarment proceedings affecting potential further business with the United States government, or alteration of the Company's procedures relating to the performance or obtaining of United States government contracts. Management of the Company believes there are no claims, audits or investigations currently pending which will have a material adverse effect on either the Company's business or its financial statements. ACQUISITIONS AND DISPOSITIONS The Company regularly considers the acquisition or development of new businesses and reviews the prospects of its existing businesses to determine whether any should be modified, sold or otherwise discontinued. During 1999, the Automation business acquired Anorad Corporation, U.K.-based EJA Engineering Ltd., substantially all of the assets of Enterprise Technology Group, Inc., a software business, and certain assets, principally intellectual property, of Vancouver-based Dynapro. The Avionics & Communications business acquired Intertrade Limited and the remaining 50 percent interest in Flight Dynamics. The total cost of these acquisitions was $241 million, of which $214 million was allocated to intangible assets, including developed technology, patents, assembled workforce and goodwill. The intangible assets are being amortized on a straight-line basis over periods ranging from six to thirty years. 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 to the Company's shareowners on a pro-rata basis. The Company also sold its railroad electronics and North American Transformer businesses during 1999. 3
4 In the first quarter of 1998, the Avionics & Communications business acquired the in-flight entertainment business of Hughes-Avicom International, Inc. for $157 million. In connection with the acquisition, the Company recorded a charge of $103 million ($63 million after tax) for purchased research and development and recorded $70 million for other intangible assets, including developed technology, patents, assembled workforce and goodwill, which are being amortized on a straight-line basis over 10 years. In October 1996, the Company sold its Graphic Systems business for approximately $600 million. On December 6, 1996, the Company completed the divestiture of the A&D Business to Boeing. On September 30, 1997, the Company completed the spin-off of Meritor. The net (loss) income from operations of the Graphic Systems business, the A&D Business, the Automotive Business and Semiconductor Systems have been presented on the Company's Consolidated Statement of Operations included in the Financial Statements as (Loss) income from discontinued operations for all periods. The assets and liabilities of Semiconductor Systems as of September 30, 1998 have been classified on the Company's Consolidated Balance Sheet included in the Financial Statements as Net assets of Semiconductor Systems. Additional information relating to acquisitions and discontinued operations is contained under the captions ACQUISITIONS and DISCONTINUED OPERATIONS in the MD&A on page 14 hereof, and in Notes 2 and 4 of the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS in the Financial Statements. GEOGRAPHIC INFORMATION The Company's principal markets outside the United States are in Australia, Brazil, Canada, China, Denmark, France, Germany, Italy, Japan, Mexico, Singapore, Southeast Asia, Spain, Sweden, Switzerland, The Netherlands and the United Kingdom. In addition to normal business risks, operations outside the United States are subject to other risks including, among other factors, the political, economic and social environments, governmental laws and regulations, and currency revaluations and fluctuations. Selected financial information by major geographic area for each of the three years in the period ended September 30, 1999 is contained in Note 19 of the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS in the Financial Statements. RESEARCH AND DEVELOPMENT In addition to research and development activities conducted by each of the Company's businesses, the Company's Science Center conducts a basic research program to support the strategies of the operating businesses and continues to provide research services to Boeing, Meritor and Conexant at agreed rates. At September 30, 1999, the Company employed approximately 5,000 professional engineers and scientists and 2,600 supporting technical personnel. EMPLOYEES At September 30, 1999, the Company had approximately 41,200 employees, of whom approximately 8,200 were employed outside the United States. RAW MATERIALS AND SUPPLIES Raw materials essential to the conduct of each of the Company's business segments generally are available at competitive prices. Many items of equipment and components used in the production of the Company's products are purchased from others. In addition, the Avionics & Communications business generally subcontracts major portions of systems. Although the Company has a broad base of suppliers and subcontractors, it is dependent upon the ability of its suppliers and subcontractors to meet performance and quality specifications and delivery schedules. ENVIRONMENTAL PROTECTION REQUIREMENTS 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 in Note 18 of the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS in the Financial Statements. See also Item 3, LEGAL PROCEEDINGS, on pages 6-8 hereof. 4
5 PATENTS, LICENSES AND TRADEMARKS Numerous patents and patent applications are owned or licensed by the Company and utilized in its activities and manufacturing operations. Various claims of patent infringement have been made against the Company. Management believes that none of these claims will have a material adverse effect on the Financial Statements of the Company. See Item 3, LEGAL PROCEEDINGS, on pages 6-8 hereof. While in the aggregate the Company's patents and licenses are considered important in the operation of its business, management does not consider them of such importance that loss or termination of any one of them would materially affect the Company's business. The Company's name and its registered trademarks "Rockwell" and "Rockwell International" are important to each of its business segments. In addition, the Company owns a large number of other important trademarks applicable to only certain of its products, such as "Collins" for navigation and communication equipment, "Allen-Bradley" and "A-B" for electronic controls and systems for industrial automation, "Reliance Electric" for electric motors and "Dodge" for mechanical power transmission products. SEASONALITY None of the Company's business segments is seasonal. ITEM 2. PROPERTIES. At September 30, 1999, the Company's businesses operated 87 plants and research and development facilities throughout the United States and in Europe, Brazil, Canada, India, Mexico, Australia and the Far East. These businesses also had approximately 400 sales offices, warehouses and service centers. These facilities had an aggregate floor space of approximately 23 million square feet. Of this floor space, approximately 62 percent was owned by the Company and approximately 38 percent was leased. At September 30, 1999, approximately 1.8 million square feet of floor space was not in use, most of which was in owned facilities. A summary of floor space of these facilities at September 30, 1999 is as follows: <TABLE> <CAPTION> OWNED LEASED LOCATION AND SEGMENTS FACILITIES FACILITIES TOTAL --------------------- ---------- ---------- ----- (In millions of square feet) <S> <C> <C> <C> United States: Automation............................................. 8.7 3.4 12.1 Avionics & Communications.............................. 3.2 1.4 4.6 Other Businesses....................................... 0.3 0.2 0.5 Europe: Automation............................................. 0.4 1.1 1.5 Avionics & Communications.............................. 0.1 -- 0.1 South America: Automation............................................. 0.1 1.4 1.5 Avionics & Communications.............................. -- 0.1 0.1 Canada and other areas: Automation............................................. 0.4 0.9 1.3 Corporate Offices (including unused wafer fabrication facilities held for sale).............................. 1.0 0.3 1.3 ---- --- ---- Total.......................................... 14.2 8.8 23.0 ==== === ==== </TABLE> In connection with the spin-off of Semiconductor Systems, the Company retained ownership of wafer fabrication facilities in Colorado Springs, Colorado, which are currently being held for sale. These facilities have approximately one million square feet of floor space and are not currently being used. At September 30, 1999, these facilities are included in Other current assets on the Company's Consolidated Balance Sheet included in the Financial Statements. 5
6 There are no major encumbrances (other than financing arrangements which in the aggregate are not material) on any of the Company's plants or equipment. In the opinion of management, the Company's properties have been well maintained, are in sound operating condition and contain all equipment and facilities necessary to operate at present levels. ITEM 3. LEGAL PROCEEDINGS. Rocky Flats Plant. On January 30, 1990, a civil action was brought in the United States District Court for the District of Colorado against the Company and another former operator of the Rocky Flats Plant (the Plant), Golden, Colorado, operated from 1975 through December 31, 1989 by the Company for the Department of Energy (DOE). The action alleges the improper production, handling and disposal of radioactive and other hazardous substances, constituting, among other things, violations of various environmental, health and safety laws and regulations, and misrepresentation and concealment of the facts relating thereto. The plaintiffs, who purportedly represent two classes, sought compensatory damages of $250 million for diminution in value of real estate and other economic loss; the creation of a fund of $150 million to finance medical monitoring and surveillance services; exemplary damages of $300 million; CERCLA response costs in an undetermined amount; attorneys' fees; an injunction; and other proper relief. On February 13, 1991, the court granted certain of the motions of the defendants to dismiss the case. The plaintiffs subsequently filed a new complaint, and on November 26, 1991, the court granted in part a renewed motion to dismiss. The remaining portion of the case is pending before the court. On October 8, 1993, the court certified separate medical monitoring and property value classes. Effective August 1, 1996, the DOE assumed control of the defense of the contractor defendants, including the Company, in the action. Beginning on that date, the costs of the Company's defense, which had previously been reimbursed to the Company by the DOE, have been and are being paid directly by the DOE. The Company believes that it is entitled under applicable law and its contract with the DOE to be indemnified for all costs and any liability associated with this action. On November 13, 1990, the Company was served with a summons and complaint in another civil action brought against the Company in the same court 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 Plant (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 appeals from the judgment have been exhausted. Both the plaintiffs and the Company have appealed the judgment, but management believes that an outcome adverse to the Company will not have a material effect on the Company's financial statements. On January 8, 1991, the Company filed suit in the United States Claims Court against the DOE, seeking recovery of $6.5 million of award fees to which the Company alleges it is entitled under the terms of its contract with the DOE for management and operation of the Plant during the period October 1, 1988 through September 30, 1989. On July 17, 1996, the government filed an amended answer and counterclaim against the Company alleging violations of the U.S. False Claims Act previously asserted in the civil action described in the preceding paragraph. On March 20, 1997, the court stayed the case pending disposition of the civil action described in the preceding paragraph. On August 30, 1999, the court continued the stay pending appeals in that civil action. The Company believes the government's counterclaim is without merit, and believes it is entitled under applicable law and its contract with the DOE to be indemnified for any liability associated with the counterclaim. Hanford Nuclear Reservation. On August 6, 1990 and August 9, 1990, civil actions were filed in the United States District Court for the Eastern District of Washington against the Company and the present and other former operators of the DOE's Hanford Nuclear Reservation (Hanford), Hanford, Washington. The 6
7 Company operated part of Hanford for the DOE from 1977 through June 1987. Both actions purport to be brought on behalf of various classes of persons and numerous individual plaintiffs who resided, worked, owned or leased real property, or operated businesses, at or near Hanford or downwind or downriver from Hanford, at any time since 1944. The actions allege the improper handling and disposal of radioactive and other hazardous substances and assert various statutory and common law claims. The relief sought includes unspecified compensatory and punitive damages for personal injuries and for economic losses, and various injunctive and other equitable relief. Other cases asserting similar claims (the follow-on claims) on behalf of the same and similarly situated individuals and groups have been filed from time to time since August 1990, and may continue to be filed from time to time in the future. These actions and the follow-on claims have been (and any additional follow-on claims that may be filed are expected to be) consolidated in the United States District Court for the Eastern District of Washington under the name In re Hanford Nuclear Reservation Litigation. Because the claims and classes of claimants included in the actions described in the preceding paragraph are so broadly defined, the follow-on claims filed as of November 30, 1999 have not altered, and possible future follow-on claims are not expected to alter, in any material respect the scope of the litigation. Effective October 1, 1994, the DOE assumed control of the defense of certain of the contractor defendants (including the Company) in the In re Hanford Nuclear Reservation Litigation. Beginning on that date, the costs of the Company's defense, which had previously been reimbursed to the Company by the DOE, have been and are being paid directly by the DOE. The Company believes it is entitled under applicable law and its contracts with the DOE to be indemnified for all costs and any liability associated with these actions. Russellville. 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. The Company believes that the verdict is unsupported by the evidence and, on January 22, 1997, filed a notice of appeal. Since the Company believes it is not reasonably possible that the punitive damages will be sustained on appeal, the Company has not accrued any reserve for those damages. On March 24, 1997, the Circuit Court of Franklin County, Kentucky in Commonwealth of Kentucky, Natural Resources and Environmental Protection Cabinet vs. Rockwell, an action filed in 1986 seeking remediation of PCB contamination resulting from unpermitted discharges of PCBs from the Company's former Russellville, Kentucky plant, entered judgment establishing PCB cleanup levels for the former plant site and certain offsite property and ordering additional characterization of possible contamination in the Mud River and its floodplain. The Court deferred any decision on the imposition of fines and penalties pending implementation of an appropriate remediation program. On August 13, 1999, the Court of Appeals affirmed the trial court's judgment. On September 10, 1999, the Company filed a petition for discretionary review of that decision with the Supreme Court of the State of Kentucky. The Company has been proceeding with remediation and characterization efforts consistent with the trial Court's ruling while simultaneously appealing that ruling. Other. In July 1995, a federal grand jury impaneled by the United States District Court for the Central District of California began an investigation into a July 1994 explosion at the Santa Susana Field Laboratory operated by the Company's former Rocketdyne Division in which two scientists were killed and a technician was injured. On April 11, 1996, pursuant to an agreement between the Company and the United States Attorney for the Central District of California, the Company entered a plea of guilty to two counts of unpermitted disposal of hazardous waste and one count of unpermitted storage of hazardous waste, all of which are felony violations of the Resource Conservation and Recovery Act, and paid a fine of $6.5 million to settle potential federal criminal claims arising out of the federal government's investigation. Investigation under other U.S. and California laws continues. While the Company has no information on the status of these 7
8 investigations, further civil sanctions could be imposed on the current owner of the facility, Boeing North American, Inc. (BNA), for which the Company would be required to indemnify BNA. 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. On August 7, 1996, the Los Angeles County action was dismissed voluntarily by the plaintiffs. On August 22, 1996, 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. A Second Amended Consolidated Complaint was filed in the Orange County action on November 27, 1996. Subsequently, 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. Non-expert discovery has been completed and the court has under submission defendants' motion for summary judgment. Various other lawsuits, claims and proceedings have been or may be instituted or asserted against the Company relating to the conduct of its business, including those pertaining to product liability, environmental, safety and health, intellectual property, employment and government contract matters. 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 financial statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the fourth quarter of 1999. ITEM 4a. EXECUTIVE OFFICERS OF THE COMPANY. The name, age, office and position held with the Company and principal occupations and employment during the past five years of each of the executive officers of the Company as of November 30, 1999 are as follows: <TABLE> <CAPTION> NAME, OFFICE AND POSITION, AND PRINCIPAL OCCUPATIONS AND EMPLOYMENT AGE - ------------------------------------------------------------------- --- <S> <C> DON H. DAVIS, JR.--Chairman of the Board of Rockwell since February 1998 and Chief Executive Officer of Rockwell since October 1997; President and Chief Operating Officer of Rockwell from July 1995 to October 1997; Executive Vice President and Chief Operating Officer of Rockwell prior thereto............................. 59 W. MICHAEL BARNES--Senior Vice President, Finance & Planning and Chief Financial Officer of Rockwell........................... 57 WILLIAM J. CALISE, JR.--Senior Vice President, General Counsel and Secretary of Rockwell......................................... 61 JOHN D. COHN--Senior Vice President, Marketing and Communications of Rockwell since July 1999; Vice President-Global Strategy Development of Rockwell Collins from February 1999 to June 1999; Director, Global Business Development and Strategic Planning of Rockwell Collins from November 1996 to February 1999; Regional Director-Europe and Africa of Rockwell Collins prior thereto... 45 </TABLE> 8
9 <TABLE> <CAPTION> NAME, OFFICE AND POSITION, AND PRINCIPAL OCCUPATIONS AND EMPLOYMENT AGE - ------------------------------------------------------------------- --- <S> <C> STEVEN S. GARDNER--Vice President and General Tax Counsel of Rockwell since March 1998; Associate General Tax Counsel of Rockwell from October 1997 to March 1998; European Tax Counsel of Rockwell from January 1996 to October 1997; European Area Tax Counsel of Dow Corning (silicone products) prior thereto...... 44 JAMES E. HART--Vice President, Strategic Sourcing of Rockwell since April 1999; Vice President and Program Manager, Strategic Sourcing Initiative of Rockwell from November 1998 to April 1999; Vice President, Finance, Materials and Business Planning of Rockwell Automation, Control and Information Group prior thereto....................................................... 50 CLAYTON M. JONES--Senior Vice President of Rockwell and President, Rockwell Collins since January 1999; Executive Vice President of Rockwell Collins from November 1996 to January 1999; Vice President and General Manager of Rockwell Collins Air Transport Division from October 1995 to November 1996; Senior Vice President-Government Operations & International of Rockwell from February 1995 to October 1995; Vice President-Aerospace Government Affairs and Marketing of Rockwell prior thereto.... 50 KEITH D. NOSBUSCH--Senior Vice President of Rockwell and President, Rockwell Automation Control Systems since November 1998; Senior Vice President-Automation Control and Information Group of Rockwell Automation from February 1996 to November 1998; Vice President-Presence Sensing Products of Rockwell Automation prior thereto....................................................... 48 GEORGE C. ODDEN--Vice President, Corporate Development of Rockwell since June 1999; Director, Mergers and Acquisitions of Warburg Dillon Read LLC (investment banking) from April 1999 to June 1999; Associate Director, Warburg Dillon Read LLC from September 1997 to April 1999; Associate, Warburg Dillon Read LLC prior thereto....................................................... 34 JAMES P. O'SHAUGHNESSY--Vice President and Chief Intellectual Property Counsel of Rockwell since May 1996; partner of Foley & Lardner (law firm) prior thereto.............................. 52 DENNIS J. POPOVEC--Vice President and Treasurer of Rockwell since March 1997; Assistant Treasurer of Rockwell prior thereto..... 44 WILLIAM E. SANDERS--Vice President and Controller of Rockwell since August 1997; Assistant Controller of Rockwell from October 1996 to August 1997; Accounting Executive, Financial Reports of Rockwell prior thereto........................................ 47 WILLIAM A. SANTE, II--General Auditor of Rockwell............... 56 JOHN R. STOCKER--Vice President, Law of Rockwell................ 58 JOEL R. STONE--Senior Vice President, Human Resources of Rockwell since December 1996; Vice President, Compensation & Benefits of Rockwell prior thereto........................................ 55 JOSEPH D. SWANN--Vice President of Rockwell and President, Rockwell Automation Power Systems since June 1998; Senior Vice President and General Manager-Dodge Mechanical Group, Rockwell Automation prior thereto................................................. 58 EARL S. WASHINGTON--Senior Vice President & Special Assistant to the Chairman and Chief Executive Officer of Rockwell since June 1999; Senior Vice President, Corporate Marketing and Communications of Rockwell from February 1998 to June 1999; Senior Vice President, Communications of Rockwell from September 1995 to February 1998; Vice President, Advertising and Public Relations of Rockwell prior thereto........................... 54 </TABLE> There are no family relationships, as defined, between any of the above executive officers. No officer of the Company was selected pursuant to any arrangement or understanding between him and any person other than the Company. All executive officers are elected annually. 9
10 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The principal market on which the Company's Common Stock is traded is the New York Stock Exchange. The Company's Common Stock is also traded on the Pacific and London Stock Exchanges. On November 15, 1999, there were 53,894 shareowners of record of the Company's Common Stock. The following table sets forth the high and low trading price of the Company's Common Stock on the New York Stock Exchange--Composite Transactions reporting system during each quarter of the Company's fiscal years ended September 30, 1999 and 1998: <TABLE> <CAPTION> 1999 1998 --------------- --------------- FISCAL QUARTERS HIGH LOW HIGH LOW - --------------- ---- --- ---- --- <S> <C> <C> <C> <C> First..................................... 52 5/16 32 1/8 58 5/8 44 5/16 Second.................................... 49 7/16 39 15/16 61 5/8 48 3/8 Third..................................... 63 9/16 41 1/4 59 1/16 46 9/16 Fourth.................................... 64 15/16 48 7/8 48 1/4 33 3/4 </TABLE> On December 6, 1996, each Rockwell shareowner became entitled to receive .042 share (presently .084 share) of Boeing common stock for each share of Rockwell Common Stock or Class A Common Stock owned. On September 30, 1997, each Rockwell shareowner received one-third of a share of Meritor common stock for each share of Rockwell Common Stock owned. On December 31, 1998, each Rockwell shareowner received one-half of a share (presently one share) of Conexant common stock for each share of Rockwell Common Stock owned. At September 30, 1999, such fractional shares of Boeing, Meritor and Conexant common stock per Rockwell share had values of $3.58, $6.96 and $36.33, respectively. Rockwell's current stock price does not reflect the value of the Boeing, Meritor and Conexant fractional shares. During the year ended September 30, 1999, the Company repurchased, through open-market purchases, 3.5 million shares of Common Stock. The following table sets forth the aggregate quarterly cash dividends per common share (comprised of the Common Stock and, until February 23, 1997, the date of its automatic conversion to Common Stock, Class A Common Stock) during each of the Company's five fiscal years ended September 30, 1999: <TABLE> <CAPTION> CASH DIVIDENDS PER FISCAL YEAR COMMON SHARE(1) - ----------- ------------------ <S> <C> 1999........................................................ $1.02 1998........................................................ 1.02 1997........................................................ 1.16 1996........................................................ 1.16 1995........................................................ 1.08 </TABLE> - --------------- (1) Upon the spin-off of Meritor on September 30, 1997, the Company's annual $1.16 per share dividend was set at $1.02 for Rockwell and 14 cents for Meritor. Per share dividend amounts indicated do not include dividends paid on the fractional shares of Boeing and Meritor received on December 6, 1996 and September 30, 1997, respectively, by Rockwell shareowners. On July 1, 1999, the Company issued 151, 158 and 158 shares of restricted stock, respectively, to the following directors of the Company: Donald R. Beall, George L. Argyros and John D. Nichols. These shares were issued pursuant to deferral elections made in accordance with the Company's 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 6. SELECTED FINANCIAL DATA. The following sets forth selected consolidated financial data in respect of the Company's continuing operations. The selected consolidated financial data have been derived from the consolidated financial statements of the Company. The data should be read in conjunction with the MD&A and the Financial 10
11 Statements. The statement of operations data for the five years ended September 30, 1999 and the related balance sheet data have been derived from the audited consolidated financial statements of the Company. <TABLE> <CAPTION> Year Ended September 30, --------------------------------------------- 1999 1998(a) 1997(b) 1996(c) 1995 ---- ------- ------- ------- ---- (in millions, except per share data) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Sales........................................... $7,043 $6,752 $6,370 $5,784 $5,169 Interest expense................................ 84 58 27 22 14 Income (loss) from continuing operations before accounting change............................. 582 (109) 437 364 308 Earnings (loss) per share from continuing operations before accounting change: Basic......................................... 3.06 (0.55) 2.04 1.67 1.42 Diluted....................................... 3.01 (0.55) 2.01 1.65 1.39 Cash dividends per share........................ 1.02 1.02 1.16 1.16 1.08 BALANCE SHEET DATA: (at end of period) Total assets.................................... $6,704 $7,170 $7,642 $8,564 $7,977 Long-term debt.................................. 911 908 156 156 167 Shareowners' equity............................. 2,637 3,245 4,811 4,256 3,782 </TABLE> - --------------- (a) Includes pre-tax charges of $597 million ($508 million after tax, or $2.57 per diluted share) for costs associated with asset impairments and a comprehensive restructuring program and $103 million ($63 million after tax, or 31 cents per diluted share) relating to the write-off of purchased research and development in connection with an acquisition. (b) Includes a charge of $23 million (before and after tax), or 11 cents per diluted share, relating to the write-off of purchased research and development in connection with an acquisition. (c) Includes a pre-tax charge of $76 million ($47 million after tax, or 22 cents per diluted share) related to restructuring actions and a tax credit of $65 million, or 29 cents per diluted share, related to the settlement of research and experimentation tax credit refund claims for years prior to 1996. 11
12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS Summary of Results of Operations <TABLE> <CAPTION> YEAR ENDED SEPTEMBER 30, ---------------------------------------------- 1999 1998 1997 1996 1995 ------ ------ ------ ------ ------ (in millions) <S> <C> <C> <C> <C> <C> SALES: Automation.................................. $4,411 $4,546 $4,494 $4,165 $3,590 Avionics & Communications................... 2,395 1,980 1,674 1,459 1,443 Other Businesses............................ 237 226 202 160 136 ------ ------ ------ ------ ------ Total.................................... $7,043 $6,752 $6,370 $5,784 $5,169 ====== ====== ====== ====== ====== SEGMENT OPERATING EARNINGS: Automation.................................. $ 661 $ 594 $ 598 $ 537 $ 481 Avionics & Communications................... 448 272 253 166 185 Other Businesses............................ 30 13 13 11 (6) ------ ------ ------ ------ ------ Total.................................... 1,139 879 864 714 660 Special charges............................... -- (597) -- (76) -- Purchased research and development............ -- (103) (23) -- -- General corporate -- net...................... (165) (96) (79) (84) (108) Interest expense.............................. (84) (58) (27) (22) (14) ------ ------ ------ ------ ------ Income from continuing operations before income taxes and accounting change.......... 890 25 735 532 538 Provision for income taxes.................... (308) (134) (298) (168) (230) ------ ------ ------ ------ ------ Income (loss) from continuing operations before accounting change.................... $ 582 $ (109) $ 437 $ 364 $ 308 ====== ====== ====== ====== ====== </TABLE> 1999 Compared to 1998 Sales increased four percent in 1999 to $7 billion from $6.8 billion in 1998 due to strong growth at Rockwell Collins. The composition of sales was as follows (in billions): <TABLE> <CAPTION> 1999 1998 ---- ---- <S> <C> <C> U.S. Commercial............................................. $4.1 $4.1 International............................................... 2.2 2.1 U.S. Government............................................. 0.7 0.6 ---- ---- Total............................................. $7.0 $6.8 ==== ==== </TABLE> Earnings per share from continuing operations in 1999 of $3.01 were up 29 percent over comparable 1998 earnings (before special items) of $2.33. The related income increased $120 million to $582 million from $462 million in 1998. Effective September 30, 1999, Rockwell revised the presentation of its business segments. The Avionics & Communications segment is now comprised solely of Rockwell Collins while Rockwell Electronic Commerce and Rockwell Science Center have been combined into the Other Businesses segment. Prior period amounts have been reclassified to conform with the current year presentation. Automation's sales of $4.4 billion in 1999 were down three percent from 1998 due to a $130 million sales decline at the motors business. Despite sluggish markets, Automation achieved record operating earnings of $633 million in 1999, excluding a $28 million gain resulting from the sale of our North American Transformer business. Automation's higher operating performance was driven by significant improvements in manufacturing processes and material cost reductions, which more than offset investments in new product development and launch costs. Operating earnings in 1999 also include a $9 million charge related to the consolidation of the power systems businesses. Operating results for 1998 include a $16 million gain related to 12
13 the favorable resolution of certain environmental matters with Exxon Corporation. Operating earnings as a percent of sales were 14.4 percent in 1999, excluding the $28 million gain, compared to 13.1 percent in 1998. Avionics & Communications achieved a 21 percent increase in sales during 1999 to $2.4 billion from $2 billion in 1998. All of Rockwell Collins' businesses, passenger systems, government systems, air transport and business and regional systems, posted sales increases in 1999. Rockwell Collins also generated a 34 percent increase in customer service and support revenue in 1999. Rockwell Collins' operating earnings in 1999 of $416 million, excluding a $32 million gain associated with the sale of the railroad electronics business, were up 36 percent from 1998 operating earnings of $307 million, excluding a $35 million charge in 1998 for the estimated loss on a government systems contract. Higher operating earnings in 1999 were driven by outstanding performance at the air transport and business and regional systems businesses. Operating earnings as a percent of sales in 1999 (excluding the $32 million gain) were 17.4 percent compared to 15.5 percent in 1998 (excluding the $35 million contract charge). Sales for Other Businesses increased five percent in 1999 to $237 million. Operating earnings in 1999 of $30 million include approximately $14 million resulting from the favorable resolution of an intellectual property matter. The increase in general corporate expenses in 1999 is due to charges of approximately $37 million for costs incurred in connection with the Company's relocation of its corporate office and a $29 million loss associated with the write-off of its investment in Goss Graphics Systems, Inc. preferred stock. 1998 Compared to 1997 Sales increased six percent in 1998 to $6.8 billion from $6.4 billion in 1997 due primarily to strong markets for Rockwell Collins products. Income from continuing operations (before special items) for 1998 totaled $462 million, or $2.33 per share, compared to $460 million, or $2.12 per share in 1997. Automation demonstrated its ability in 1998 to perform in uncertain global markets by offsetting lower sales in North America and the Asia-Pacific region with gains in Europe and Latin America. Sales in 1998 of $4.5 billion were about the same as 1997. Operating earnings for 1998 were $594 million compared to $598 million in 1997. Operating earnings as a percent of sales were 13.1 percent in 1998 compared to 13.3 percent in 1997 as operating efficiencies and cost-reduction actions implemented in June 1998 substantially offset the effects of performance issues at the motors business. Avionics & Communications achieved an 18 percent increase in sales during 1998 to $2 billion from $1.7 billion in 1997. Significant sales increases occurred at the Company's commercial air transport and business and regional aircraft systems businesses in 1998. Approximately one-third of the sales increase in 1998 was due to inclusion of the passenger systems business, which was acquired in December 1997. Avionics & Communications' operating earnings for 1998, excluding a third quarter government contract reserve of $35 million, were up 21 percent from 1997. Operating earnings as a percent of sales in 1998, before special items and the contract reserve, were 15.5 percent compared to 15.1 percent in 1997. Sales for Other Businesses increased to $226 million in 1998 from $202 million in 1997. Operating earnings of $13 million in 1998 were consistent with the operating earnings of 1997. Special items in 1998 consisted of a pre-tax charge of $103 million, or 31 cents per share, for purchased research and development in connection with the acquisition of the passenger systems business and a pre-tax charge of $597 million, or $2.57 per share, for asset impairments and a comprehensive restructuring program. A significant component of the asset impairment charge related to the writedown of long-lived assets (primarily goodwill) associated with Rockwell Automation's motors business. The special charges related to the business segments as follows: Automation, $488 million; Avionics & Communications, $88 million; Other Businesses, $11 million; and Corporate, $10 million. Including special items, the 1998 loss from continuing operations, before an accounting change, was $109 million, or 55 cents per share, compared to 1997 income from continuing operations of $437 million, or $2.01 per share. In addition, the Company recorded an after-tax charge of $17 million, or nine cents per share, related to a change in accounting method at the Avionics & Communications business for certain general and administrative costs related to government contracts. Including the effect of the accounting change and the results of discontinued operations, the net loss for 1998 13
14 was $427 million, or $2.16 per share, compared to 1997 net income of $644 million, or $2.97 per share. The special item in 1997 was a pre-tax charge of $23 million, or 11 cents per share, for purchased research and development related to the acquisition of a Rockwell Automation software business. DISCONTINUED OPERATIONS 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. to the Company's shareowners on a pro-rata basis. In connection with this spin-off, the Company retained ownership of wafer fabrication facilities in Colorado Springs, Colorado, which are currently being held for sale. The Company accrued for Semiconductor Systems' estimated first quarter 1999 operating loss and costs related to the spin-off in 1998. An additional $20 million loss was recorded in the first quarter of 1999, which relates principally to the Company's decision to record a further writedown of the wafer fabrication facilities in Colorado Springs and for related costs of disposal. Discontinued operations for periods prior to 1999 include the Semiconductor Systems, Automotive, Aerospace & Defense, and Graphic Systems businesses. ACQUISITIONS The Company completed six acquisitions during 1999 that complement the Company's product offerings, strengthen its technologies, and expand its global reach. The total cost of these acquisitions was $241 million, of which $214 million was allocated to intangible assets, including developed technology, patents, assembled workforce and goodwill. The intangible assets are being amortized on a straight-line basis over periods ranging from six to thirty years. Rockwell Automation acquired Anorad Corporation (Anorad), EJA Engineering, Ltd. (EJA), substantially all of the assets of Enterprise Technology Group, Inc. (ETG), a software business, and certain assets, principally intellectual property, of Vancouver-based Dynapro. Anorad is a leading supplier of linear motor equipment and its acquisition positions Rockwell to address motion control opportunities in the semiconductor fabrication market. EJA, based in the United Kingdom, is a market-leading manufacturer of integrated control and safety systems in the $2 billion industrial safety market. The ETG acquisition enhances the technological capabilities of our growing Rockwell Software business while the Dynapro acquisition expands Rockwell Automation's human-machine interface software and hardware capabilities. Our Avionics & Communications business acquired Intertrade Limited (Intertrade) and the remaining 50 percent interest in Flight Dynamics. Intertrade is an avionics parts supplier that will complement our growing customer service and support business. Flight Dynamics, the market leader in Head-Up Guidance Systems, increases Rockwell Collins' aviation electronics content across multiple platforms. INCOME TAXES The Company's effective income tax rate declined to 34.6 percent in 1999 from 36.3 percent, excluding the tax effects of special items in 1998. The lower tax rate in 1999 is primarily attributable to higher utilization of foreign tax credits in 1999. Management believes the Company's effective income tax rate will continue to benefit in 2000 and beyond from ongoing tax planning initiatives. BENEFIT PLANS The Company's pension plan surplus increased to $270 million at September 30, 1999, from $95 million in 1998 due to a higher discount rate and continued strong investment returns. Assets in the pension plans amounted to approximately $3 billion at September 30, 1999. The Company is on track for full implementation of its single simplified medical plan for active employees and retirees on January 1, 2000. OUTLOOK FOR 2000 Assuming a continuation of present global economic conditions, we expect earnings per share growth of approximately 10 percent. We expect higher sales and earnings at Rockwell Automation and Rockwell Electronic Commerce while Rockwell Collins' results should be about the same as 1999, with higher sales and 14
15 earnings in business and regional systems, government systems, and customer service and support, offsetting an expected decline in new aircraft production in the commercial air transport market. FINANCIAL CONDITION Rockwell's strong financial position provides substantial flexibility for acquisitions and investments in new product development and technology. Cash generated by operations of $940 million in 1999 was up 30 percent from $723 million in 1998. Free cash flow in 1999 was $594 million, an increase of $256 million over the $338 million of free cash flow in 1998. The higher cash generation in 1999 was driven by improvements in working capital management, supplier management and cost reductions. The Company defines free cash flow, an internal performance measurement, as cash provided by operating activities, including proceeds from dispositions of property and reduced by capital expenditures. The Company's definition of free cash flow may be different from definitions used by other companies. Cash used for investing activities was $420 million in 1999 compared to $465 million in 1998. Capital expenditures in 1999 were $377 million and consisted primarily of investments in facilities, machinery and equipment, and integrated, enterprise-wide information systems to facilitate growth and increase operating efficiencies. In addition, the Company used $241 million for the acquisition of six new businesses in 1999. Cash used for acquisitions was partially offset by $198 million in proceeds received from the sale of property and businesses, including the Company's railroad electronics business and North American Transformer business. Capital expenditures in 2000 are expected to approximate $400 million. The Company continues to invest heavily in research and new product development. Investment totaled $422 million in 1999, up five percent from $402 million in 1998. New product development at Rockwell Collins was up 15 percent over 1998 due to higher investment at our passenger systems business. The Company expects this level of product development to continue in 2000. In addition to internally generated cash, the Company has access to existing financing sources, including the public debt markets and from the approximately $1.3 billion of unsecured credit facilities with various banks. The Company's debt-to-total-capital ratio at September 30, 1999, was 29 percent compared to 25 percent at September 30, 1998. During 1999, the Company completed the $500 million stock repurchase program initiated in 1997 and the Board of Directors approved an additional $250 million stock repurchase program. The Company spent approximately $172 million during 1999 in connection with these programs. At September 30, 1999, there was approximately $242 million remaining on its current $250 million stock repurchase program. Cash dividends to shareowners were $194 million, or $1.02 per share, in 1999, compared to $202 million, or $1.02 per share, in 1998. YEAR 2000 READINESS DISCLOSURE The Company has substantially completed a comprehensive, five-phased Year 2000 remediation project. The inventory, assessment, and strategy phases were completed in early 1999 and the conversion/upgrade and testing phases were essentially complete by September 30, 1999. The Company's recent efforts have been focused upon the development of Year 2000 contingency plans to deal with unanticipated Year 2000 situations and any items that have not been remediated, in order to minimize the risk of disruption to our customers and our businesses. Management believes that the Company's products and the mission critical components of its business systems, infrastructure and supporting systems are ready for the transition to the Year 2000 and beyond. Despite the Company's internal state of readiness for the Year 2000, business operations can still be negatively affected by external Year 2000 failures, especially in the supply chain as it relates to critical manufacturing suppliers, material suppliers, and infrastructure (utilities, communications, transportation and other services) suppliers. A Year 2000 failure by a critical supplier could result in the temporary slowdown or cessation of production by the Company, the duration of which cannot be reasonably estimated. Where possible, the Company has attempted to reduce this risk through various means by assessing the Year 2000 readiness of critical suppliers, including reviewing their responses to a standard Year 2000 questionnaire, reviewing their public Year 2000 readiness statements and engaging in follow-up actions, where necessary, to evaluate Year 2000 readiness. For our top five percent of critical manufacturing and material suppliers, the 15
16 Company has conducted on-site reviews and monitored specific Year 2000 milestones to review the supplier's readiness and the compliance of their products and services. The current estimate of Year 2000 total project costs is approximately $42 million, which includes the cost of purchasing certain hardware and software. Purchased hardware and software has been capitalized in accordance with normal policy. Through September 30, 1999, approximately 95 percent of the total project cost had been spent. 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 effect 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 would cover all of the Company's potential liabilities and costs related to claims by third parties related to the Year 2000 issue. The Company has been developing contingency plans to address potential Year 2000 events. As of September 30, 1999, approximately 85 percent of the Company's Year 2000 contingency plans have been developed through a process that includes the identification of key business processes, the assessment of exposure to Year 2000-related incidents, and the outlining of the actions to be taken. These actions include identifying alternate suppliers, pre-stocking critical inventory items and forming rapid response teams to ensure that normal business operations continue unaffected. With respect to operations under its direct control, management does not currently 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. However, our evaluation is ongoing and we expect that new and different information will become available to us. Consequently, there can be no guarantee that all material elements will be Year 2000 ready in time. In this environment, there will likely be instances of failure that could cause disruptions in business processes. The likelihood and effects of such failures cannot be estimated. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk during the normal course of business from changes in interest rates and foreign currency exchange rates. The exposure to these risks is managed through a combination of normal operating and financing activities, and with respect to foreign currency transactions, derivative financial instruments in the form of foreign currency forward exchange contracts. Interest Rate Risk In addition to using cash provided by normal operating activities, the Company utilizes a combination of short-term and long-term debt to finance operations. The Company is exposed to interest rate risk on these debt obligations. The Company had short-term debt obligations consisting of commercial paper and foreign bank borrowings with carrying values of $187 million and $154 million at September 30, 1999 and 1998, respectively. The Company's results of operations are affected by changes in market interest rates on these short-term obligations. If market interest rates would have averaged 10 percent higher than actual levels in either 1999 or 1998, the effect on the Company's results of operations would not have been material. The fair values of these obligations approximated their carrying values at September 30, 1999 and 1998, and would not have been materially affected by changes in market interest rates. At September 30, 1999 and 1998, the Company had outstanding fixed rate long-term debt obligations with carrying values of $913 million and $910 million, respectively. The fair value of this debt was $836 16
17 million and $962 million at September 30, 1999 and 1998, respectively. The potential loss in fair value on such fixed-rate debt obligations from a hypothetical 10 percent increase in market interest rates would not be material to the overall fair value of the debt. The Company currently has no plans to repurchase outstanding fixed-rate instruments and, therefore, fluctuations in market interest rates would not have an effect on the Company's results of operations or shareowners' equity. Foreign Currency Risk The Company is a global electronic controls and communications company and as such, conducts a significant portion of its business activities outside the United States in currencies other than the United States dollar. The Company enters into foreign currency forward exchange contracts (contracts) in the ordinary course of business to protect itself from adverse currency rate fluctuations on firm foreign currency transactions. In addition, the Company enters into contracts to conservatively hedge certain forecasted foreign currency transactions. These contracts are executed with creditworthy banks and are denominated in currencies of major industrial countries. It is the policy of the Company not to enter into derivative financial instruments for speculative purposes. A substantial majority of these contracts are entered into in order to hedge firm commitments with the remainder entered into to hedge forecasted transactions. Under generally accepted accounting principles, gains and losses on contracts for firm commitments are deferred through accumulated other comprehensive income (loss) and included in the measurement of the underlying foreign currency transaction being hedged. Gains and losses on contracts relating to forecasted transactions are recognized in the current results of operations. At September 30, 1999 and 1998, the Company had outstanding foreign currency forward exchange contracts with notional amounts of $708 million and $578 million, respectively, primarily consisting of contracts to exchange the Euro, British pound sterling, Canadian dollar, and Swiss franc. Notional amounts are stated in the U.S. dollar equivalents at exchange rates in effect at the time of contract initiation. A hypothetical 10 percent adverse change in underlying foreign currency exchange rates associated with these contracts would not be material to the results of operations or financial position of the Company. CAUTIONARY STATEMENT This Annual Report contains statements (including certain projections and business trends) accompanied by such phrases as "believes," "estimates," "expect(s)," "high expectations," "could," "likely," "anticipates," "will" 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; 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. 17
18 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. CONSOLIDATED BALANCE SHEET (in millions) <TABLE> <CAPTION> SEPTEMBER 30, ------------------ 1999 1998 ------- ------- <S> <C> <C> ASSETS CURRENT ASSETS Cash (includes time deposits and certificates of deposit: 1999, $260; 1998, $61).................................... $ 356 $ 103 Receivables (less allowance for doubtful accounts: 1999, $56; 1998, $51)........................................... 1,294 1,223 Inventories, net............................................ 1,339 1,313 Deferred income taxes....................................... 364 258 Other current assets........................................ 229 213 Net assets of Semiconductor Systems......................... -- 986 ------- ------- Total current assets................................... 3,582 4,096 ------- ------- PROPERTY, NET............................................... 1,581 1,535 ------- ------- INTANGIBLE ASSETS, NET...................................... 1,390 1,330 ------- ------- OTHER ASSETS................................................ 151 209 ------- ------- TOTAL.................................................. $ 6,704 $ 7,170 ======= ======= LIABILITIES AND SHAREOWNERS' EQUITY CURRENT LIABILITIES Short-term debt............................................. $ 189 $ 156 Accounts payable............................................ 843 733 Compensation and benefits................................... 469 547 Income taxes payable........................................ 91 19 Other current liabilities................................... 516 528 ------- ------- Total current liabilities.............................. 2,108 1,983 ------- ------- LONG-TERM DEBT.............................................. 911 908 ------- ------- RETIREMENT BENEFITS......................................... 653 691 ------- ------- OTHER LIABILITIES........................................... 395 343 ------- ------- SHAREOWNERS' EQUITY Common stock (shares issued: 216.4)......................... 216 216 Additional paid-in capital.................................. 960 923 Retained earnings........................................... 3,034 3,697 Accumulated other comprehensive loss........................ (153) (135) Common stock in treasury, at cost (shares held: 1999, 25.5; 1998, 25.8)............................................... (1,420) (1,456) ------- ------- Total shareowners' equity.............................. 2,637 3,245 ------- ------- TOTAL.................................................. $ 6,704 $ 7,170 ======= ======= </TABLE> See notes to consolidated financial statements. 18
19 CONSOLIDATED STATEMENT OF OPERATIONS (in millions, except per share amounts) <TABLE> <CAPTION> YEAR ENDED SEPTEMBER 30, -------------------------- 1999 1998 1997 ------ ------ ------ <S> <C> <C> <C> REVENUES: Sales....................................................... $7,043 $6,752 $6,370 Other income, net........................................... 108 88 106 ------ ------ ------ Total revenues.............................................. 7,151 6,840 6,476 ------ ------ ------ COSTS AND EXPENSES: Cost of sales (see Note 3).................................. 4,907 5,206 4,456 Selling, general, and administrative (see Note 3)........... 1,270 1,448 1,235 Purchased research and development (see Note 4)............. -- 103 23 Interest.................................................... 84 58 27 ------ ------ ------ Total costs and expenses.................................... 6,261 6,815 5,741 ------ ------ ------ Income from continuing operations before income taxes....... 890 25 735 Income tax provision........................................ 308 134 298 ------ ------ ------ INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE ACCOUNTING CHANGE.................................................... 582 (109) 437 (Loss) income from discontinued operations.................. (20) (301) 207 Cumulative effect of accounting change...................... -- (17) -- ------ ------ ------ NET INCOME (LOSS)........................................... $ 562 $ (427) $ 644 ====== ====== ====== BASIC EARNINGS (LOSS) PER SHARE: Continuing operations before accounting change............ $ 3.06 $(0.55) $ 2.04 Discontinued operations................................... (0.11) (1.52) 0.97 Cumulative effect of accounting change.................... -- (0.09) -- ------ ------ ------ Net income (loss)......................................... $ 2.95 $(2.16) $ 3.01 ====== ====== ====== DILUTED EARNINGS (LOSS) PER SHARE: Continuing operations before accounting change............ $ 3.01 $(0.55) $ 2.01 Discontinued operations................................... (0.11) (1.52) 0.96 Cumulative effect of accounting change.................... -- (0.09) -- ------ ------ ------ Net income (loss)......................................... $ 2.90 $(2.16) $ 2.97 ====== ====== ====== AVERAGE OUTSTANDING SHARES: Basic..................................................... 190.5 197.9 213.8 ====== ====== ====== Diluted................................................... 193.6 197.9 217.1 ====== ====== ====== </TABLE> See notes to consolidated financial statements. 19
20 CONSOLIDATED STATEMENT OF CASH FLOWS (in millions) <TABLE> <CAPTION> YEAR ENDED SEPTEMBER 30, ------------------------- 1999 1998 1997 ----- ----- ------- <S> <C> <C> <C> CONTINUING OPERATIONS: OPERATING ACTIVITIES Income (loss) from continuing operations before accounting change.................................................... $ 582 $(109) $ 437 Adjustments to arrive at cash provided by operating activities: Depreciation.............................................. 258 227 210 Amortization of intangible assets......................... 79 79 83 Deferred income taxes..................................... 12 (44) (38) Net gain on dispositions of businesses (see Note 15)...... (57) (8) -- Loss on investment (see Note 15).......................... 29 -- -- Special charges (see Note 3).............................. -- 597 -- Purchased research and development (see Note 4)........... -- 103 23 Changes in assets and liabilities, excluding effects of acquisitions, divestitures, and foreign currency adjustments: Receivables............................................ (77) (126) (125) Inventories............................................ (29) (40) (120) Accounts payable....................................... 97 79 41 Income taxes........................................... 26 (76) (77) Other assets and liabilities........................... 20 41 (27) ----- ----- ------- CASH PROVIDED BY OPERATING ACTIVITIES.................. 940 723 407 ----- ----- ------- INVESTING ACTIVITIES Property additions.......................................... (377) (408) (336) Acquisitions of businesses, net of cash acquired............ (241) (158) (50) Special payment from Meritor (see Note 2)................... -- -- 445 Proceeds from the dispositions of property and businesses... 198 101 607 ----- ----- ------- CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES....... (420) (465) 666 ----- ----- ------- FINANCING ACTIVITIES Increase (decrease) in short-term borrowings................ 21 107 (241) Payments of long-term debt.................................. -- (3) (15) Long-term borrowings........................................ -- 751 2 ----- ----- ------- Net increase (decrease) in debt........................... 21 855 (254) Purchases of treasury stock................................. (172) (980) (856) Cash dividends.............................................. (194) (202) (248) Proceeds from the exercise of stock options................. 125 75 56 ----- ----- ------- CASH USED FOR FINANCING ACTIVITIES..................... (220) (252) (1,302) ----- ----- ------- CASH PROVIDED BY (USED FOR) CONTINUING OPERATIONS........... 300 6 (229) Cash Used for Discontinued Operations....................... (47) (172) (141) ----- ----- ------- INCREASE (DECREASE) IN CASH................................. 253 (166) (370) CASH AT BEGINNING OF YEAR................................... 103 269 639 ----- ----- ------- CASH AT END OF YEAR......................................... $ 356 $ 103 $ 269 ===== ===== ======= </TABLE> See notes to consolidated financial statements. 20
21 CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY (in millions, except per share amounts) <TABLE> <CAPTION> YEAR ENDED SEPTEMBER 30, ---------------------------- 1999 1998 1997 ------- ------- ------ <S> <C> <C> <C> COMMON STOCK Beginning balance........................................... $ 216 $ 216 $ 210 Conversion of Class A common stock.......................... -- -- 25 Cancellation of treasury stock (see Note 2)................. -- -- (19) ------- ------- ------ Ending balance.............................................. 216 216 216 ------- ------- ------ CLASS A COMMON STOCK Beginning balance........................................... -- -- 28 Conversion into common stock................................ -- -- (28) ------- ------- ------ Ending balance.............................................. -- -- -- ------- ------- ------ ADDITIONAL PAID-IN CAPITAL Beginning balance........................................... 923 901 199 Exercise of stock options................................... 37 22 26 Divestiture of A&D Business (see Note 2).................... -- -- 1,175 Cancellation of treasury stock (see Note 2)................. -- -- (499) ------- ------- ------ Ending balance.............................................. 960 923 901 ------- ------- ------ RETAINED EARNINGS Beginning balance........................................... 3,697 4,409 4,466 Net income (loss)........................................... 562 (427) 644 Cash dividends (per share: 1999 and 1998, $1.02; 1997, $1.16).................................................... (194) (202) (248) Treasury stock reissuances.................................. (118) (83) (230) Spin-off of Conexant (see Note 2)........................... (913) -- -- Spin-off of Meritor (see Note 2)............................ -- -- (223) ------- ------- ------ Ending balance.............................................. 3,034 3,697 4,409 ------- ------- ------ ACCUMULATED OTHER COMPREHENSIVE LOSS Beginning balance........................................... (135) (103) (103) Other comprehensive loss.................................... (18) (32) (72) Adjustment for Meritor spin-off (see Note 2)................ -- -- 72 ------- ------- ------ Ending balance.............................................. (153) (135) (103) ------- ------- ------ TREASURY STOCK Beginning balance........................................... (1,456) (612) (544) Purchases................................................... (172) (980) (856) Stock option exercises...................................... 208 136 270 Cancellation of treasury stock (see Note 2)................. -- -- 518 ------- ------- ------ Ending balance.............................................. (1,420) (1,456) (612) ------- ------- ------ TOTAL SHAREOWNERS' EQUITY................................... $ 2,637 $ 3,245 $4,811 ======= ======= ====== </TABLE> See notes to consolidated financial statements. 21
22 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (in millions) <TABLE> <CAPTION> YEAR ENDED SEPTEMBER 30, ------------------------ 1999 1998 1997 ----- ------ ----- <S> <C> <C> <C> Net income (loss)........................................... $562 $(427) $644 Other comprehensive loss: Foreign currency translation adjustments (net of tax benefit of $(3), $(2), and $0)......................... (16) (30) (67) Pension adjustments....................................... (2) (2) (5) ---- ----- ---- Other comprehensive loss.................................... (18) (32) (72) ---- ----- ---- Comprehensive income (loss)................................. $544 $(459) $572 ==== ===== ==== </TABLE> See notes to consolidated financial statements. 22
23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ACCOUNTING POLICIES Basis of Presentation Except as indicated, amounts reflected in the consolidated financial statements or the notes thereto relate to the continuing operations of Rockwell International Corporation (Rockwell or the Company). Certain prior year amounts have been reclassified to conform with the current year presentation. Consolidation The consolidated financial statements of the Company include the accounts of the Company and all majority-owned subsidiaries in which the Company has control. All significant intercompany accounts and transactions are eliminated in consolidation. Use of Estimates The consolidated financial statements have been prepared in accordance with generally accepted accounting principles which require management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements. Actual results could differ from those estimates. Revenue Recognition Sales are generally recorded as products are shipped or services are rendered, except sales under certain contracts requiring performance over several periods, which are accounted for under the percentage-of-completion method of accounting. Anticipated losses on contracts accounted for under the percentage-of-completion method are recognized in full in the period that the losses become evident. Cash Cash includes time deposits and certificates of deposit with original maturities of three months or less. Inventories Inventories are stated at the lower of cost or market using LIFO, FIFO, or average methods. Market is determined on the basis of estimated realizable values. Property Property is stated at cost. Depreciation of property is provided based on estimated useful lives generally using accelerated and straight-line methods. Significant renewals and betterments are capitalized and replaced units are written off. Maintenance and repairs, as well as renewals of minor amounts, are charged to expense. Purchased Intangibles Goodwill and other intangible assets generally result from business acquisitions. The Company accounts for business acquisitions under the purchase method by assigning the purchase price to tangible and intangible assets and liabilities, including research and development projects which have not yet reached technological feasibility and have no alternative future use (purchased research and development). Assets acquired and liabilities assumed are recorded at their fair values; the appraised value of purchased research and development is immediately charged to expense, and the excess of the purchase price over the amounts assigned is recorded as goodwill. Goodwill is amortized using the straight-line method over periods generally ranging from 10 to 40 years. Trademarks, patents, product technology, and other intangibles are amortized on a straight-line basis over their estimated useful lives, ranging from 5 to 40 years. 23
24 Impairment of Long-Lived Assets Long-lived assets are reviewed for impairment when events or circumstances indicate that the carrying amount of a long-lived asset may not be recoverable, and for all assets to be disposed of. Long-lived assets held for use are reviewed for impairment by assessing their net realizable values based on estimated undiscounted cash flows over their remaining useful lives. If impairment is indicated, the carrying amount of the asset is reduced to its fair value. Derivative Financial Instruments The Company enters into foreign currency forward exchange contracts in the ordinary course of business to protect itself from adverse currency rate fluctuations on both firm and forecasted foreign currency transactions. These contracts are executed with creditworthy banks and are denominated in currencies of major industrial countries. It is the policy of the Company not to enter into derivative financial instruments for speculative purposes. Accounting policies for these instruments are based upon the Company's designation of such instruments as hedging transactions under generally accepted accounting principles. Criteria used in the designation of an instrument as a hedge include the effectiveness of the instrument in reducing associated risk of the underlying position. Gains or losses relating to hedging firm commitments are deferred through accumulated other comprehensive income (loss) and included in the measurement of the underlying foreign currency transaction being hedged. Gains or losses relating to forecasted transactions are recognized in current period other income, net. Stock Options The Company accounts for stock options in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Environmental Matters The Company records accruals for environmental matters in the accounting period in which its responsibility is established and the cost can be reasonably estimated. Revisions to the accruals are made in the periods in which the estimated costs of remediation change. At environmental sites in which more than one potentially responsible party has been identified, the Company records a liability for its estimated allocable share of costs related to its involvement with the site as well as an estimated allocable share of costs related to the involvement of insolvent or unidentified parties. At environmental sites in which the Company is the only responsible party, the Company records a liability for the total estimated costs of remediation. Costs of future expenditures for environmental remediation obligations are not discounted to their present value. If recovery from insurers or other third parties is determined to be probable, the Company records a receivable for the estimated recovery. New Accounting Standards Effective October 1, 1998, the Company 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. SFAS 130 requires certain equity adjustments to be reported as components of comprehensive income. The adoption of this statement had no effect on the Company's results of operations or shareowners' equity. Effective September 30, 1999, the Company adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS 131). The adoption of SFAS 131 changed the composition of the Company's reportable operating segments, and accordingly, certain segment information reported in prior year financial statements has been reclassified to conform with the current year presentation. The adoption of SFAS 131 had no effect on the Company's results of operations or shareowners' equity. 24
25 Effective September 30, 1999, the Company adopted SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits (SFAS 132). SFAS 132 establishes new disclosure requirements for pension and other postretirement benefit information in the notes to the consolidated financial statements. The adoption of SFAS 132 had no effect on the Company's results of operations or shareowners' equity. 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 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. The Company believes the effect of adopting this standard will not be material to its results of operations or shareowners' equity. In 1998, the Company adopted American Institute of Certified Public Accountants Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use (SOP 98-1). SOP 98-1 requires the cost of purchased software and certain costs incurred in developing computer software for internal use to be capitalized and amortized over future periods. During the year ended September 30, 1998, the Company's continuing businesses capitalized $46 million of such costs that would have been charged to expense under its previous accounting policy. Accounting Change 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 nine cents per share) and is presented as the cumulative effect of an accounting change in the consolidated statement of operations for the year ended September 30, 1998. The effect of the accounting change on income from continuing operations in 1997 would not have been material. 25
26 2. DISCONTINUED OPERATIONS On December 31, 1998, the Company completed the spin-off of its former semiconductor systems business (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 a pro-rata basis. 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 satisfy Conexant's obligation with respect to a litigation matter. The net assets of Conexant as of December 31, 1998 of $913 million were recorded as a decrease to shareowners' equity. At September 30, 1998, the net assets of Semiconductor Systems consisted of the following (in millions): <TABLE> <S> <C> Cash........................................................ $ 14 Receivables................................................. 150 Inventories................................................. 201 Other current assets........................................ 157 Net property................................................ 780 Intangible assets........................................... 53 Other assets................................................ 82 ------ Total assets.............................................. 1,437 ------ Short-term debt............................................. 14 Accounts payable............................................ 151 Other liabilities........................................... 246 Retirement benefits......................................... 40 ------ Total liabilities......................................... 451 ------ Net assets of Semiconductor Systems......................... $ 986 ====== </TABLE> On September 30, 1997, the Company completed the spin-off of its automotive component systems businesses (Automotive) into an independent company by distributing all of the issued and outstanding shares of Meritor Automotive, Inc. (Meritor) to the Company's shareowners on a pro-rata basis. In connection with the transaction, Meritor made a special payment of $445 million to the Company and the net assets of Meritor as of September 30, 1997 of $151 million were recorded as a decrease to shareowners' equity. In December 1996, the Company divested its former Aerospace and Defense businesses (the A&D Business) by merging it with a subsidiary of The Boeing Company (Boeing) in a tax-free reorganization (the Reorganization). In connection with the Reorganization, all shares of common stock held in treasury were canceled and the net liabilities of the A&D Business at the date of the Reorganization of approximately $1.2 billion were recorded as an increase to additional paid-in capital. In October 1996, the Company's graphic systems business (Graphic Systems) was sold for approximately $600 million. 26
27 Summarized results of discontinued operations are as follows (in millions): <TABLE> <CAPTION> YEAR ENDED SEPTEMBER 30, ------------------------ 1999 1998 1997 ---- ------ ------ <S> <C> <C> <C> Revenues: Semiconductor Systems..................................... $289 $1,185 $1,392 Automotive................................................ -- -- 3,342 A&D Business.............................................. -- -- 535 ---- ------ ------ Total.................................................. $289 $1,185 $5,269 ==== ====== ====== (Loss) income before income taxes: Semiconductor Systems..................................... $(29) $ (496) $ 188 Automotive................................................ -- -- 121 A&D Business.............................................. -- -- -- ---- ------ ------ Total....................................................... $(29) $ (496) $ 309 ==== ====== ====== Net (loss) income: Semiconductor Systems..................................... $(20) $ (301) $ 149 Automotive................................................ -- -- 58 A&D Business.............................................. -- -- -- ---- ------ ------ Total....................................................... $(20) $ (301) $ 207 ==== ====== ====== </TABLE> The Company accrued for Semiconductor Systems' 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 the Company's decision to record a further writedown of the wafer fabrication facilities in Colorado Springs and for related costs of disposal. 3. SPECIAL CHARGES 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 September 30, 1999, included $103 million for severance and other employee separation costs associated with a worldwide workforce reduction of approximately 3,200 employees and $83 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 $166 million. The Company spent approximately $73 million through September 30, 1999, of which $46 million related to severance and other employee separation costs, and expects to spend an additional $49 million through the end of 2000. As a result of actions taken through September 30, 1999, the workforce has been reduced by approximately 2,300 employees. As of September 30, 1999 and 1998, approximately $93 million and $156 million, respectively, is included in the consolidated balance sheet for remaining activities associated with the third quarter 1998 special charges. Of the amount at September 30, 1999, $48 million is included in compensation and benefits, $20 million is included in other liabilities and the remaining $25 million is included in accounts payable or other current liabilities. Of the amount at September 30, 1998, $83 million is included in compensation and benefits, $37 million is included in other liabilities and the remaining $36 million is included in accounts payable or other current liabilities. Included in the special charges is $266 million related to the impairment of the long-lived assets of the Automation segment's industrial motors business (Motors). This impairment resulted from a significant 27
28 decline in operating performance and represents the excess of the carrying value of the long-lived assets (including goodwill) of Motors over their estimated fair value as determined by management, with the assistance of outside experts, utilizing accepted valuation techniques. The Company also recorded impairment charges of $53 million related to the long-lived assets of businesses that have been sold or are held for disposition. The special charges are reflected in the consolidated statement of operations for the year ended September 30, 1998 in cost of sales and selling, general and administrative expenses in the amount of $455 million and $142 million, respectively. Revenues of businesses and product lines which have been or are being exited were $88 million, $197 million and $211 million for 1999, 1998 and 1997, respectively. The net operating income in 1999 and net operating losses in 1998 and 1997 related to these businesses and product lines are not material. 4. ACQUISITIONS OF BUSINESSES In May 1999, the Automation segment acquired certain intellectual property and other assets of Dynapro, expanding its human-machine interface software and hardware capabilities, and substantially all of the assets of Enterprise Technology Group, Inc., a software business. In January 1999, the Automation segment acquired EJA Engineering Ltd., a market-leading manufacturer of safety products. In November 1998, the Automation segment acquired Anorad Corporation, a manufacturer of linear motor equipment. In August 1999, the Avionics & Communications segment acquired Intertrade Limited, an avionics parts supplier. In March 1999, the Avionics & Communications segment acquired the remaining 50 percent interest in Flight Dynamics, the market leader in Head-Up Guidance Systems for aircraft operations. 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 during 1999 was $241 million of which $214 million was allocated to intangible assets, including developed technology, patents, assembled workforce and goodwill. The intangible assets are being amortized on a straight-line basis over periods ranging from six to thirty years. In December 1997, the Avionics & Communications segment acquired the in-flight entertainment business of Hughes-Avicom International, Inc. (Passenger Systems). In connection with the acquisition, the Company recorded a charge of $103 million ($63 million after tax) for purchased research and development and recorded $70 million for other intangible assets, including developed technology, patents, assembled workforce and goodwill, which are being amortized on a straight-line basis over 10 years. These acquisitions were accounted for as purchases and, accordingly, the results of operations of these businesses have been included in the consolidated statement of operations since their respective dates of acquisition. Pro forma financial information is not presented as the combined effect of these acquisitions was not material to the Company's results of operations or financial position. 5. INVENTORIES, NET Inventories, net are summarized as follows (in millions): <TABLE> <CAPTION> SEPTEMBER 30, ---------------- 1999 1998 ------ ------ <S> <C> <C> Finished goods.............................................. $ 415 $ 385 Work in process............................................. 457 459 Raw materials, parts, and supplies.......................... 446 456 ------ ------ Total.................................................. 1,318 1,300 Adjustment to the carrying value of certain inventories (1999, $524; 1998, $551) to a LIFO basis.................. 21 13 ------ ------ Inventories, net............................................ $1,339 $1,313 ====== ====== </TABLE> 28
29 6. PROPERTY, NET Property, net is summarized as follows (in millions): <TABLE> <CAPTION> SEPTEMBER 30, ---------------- 1999 1998 ------ ------ <S> <C> <C> Land........................................................ $ 55 $ 65 Land and leasehold improvements............................. 87 76 Buildings................................................... 569 558 Machinery and equipment..................................... 1,509 1,450 Office and data processing equipment........................ 625 594 Construction in progress.................................... 244 213 ------ ------ Total.................................................. 3,089 2,956 Less accumulated depreciation............................... 1,508 1,421 ------ ------ Property, net............................................... $1,581 $1,535 ====== ====== </TABLE> 7. INTANGIBLE ASSETS, NET Intangible assets, net are summarized as follows (in millions): <TABLE> <CAPTION> SEPTEMBER 30, ---------------- 1999 1998 ------ ------ <S> <C> <C> Goodwill, less accumulated amortization (1999, $267; 1998, $227)..................................................... $ 901 $ 846 Trademarks, patents, product technology, and other intangibles, less accumulated amortization (1999, $247; 1998, $219)................................................. 489 484 ------ ------ Intangible assets, net...................................... $1,390 $1,330 ====== ====== </TABLE> 8. SHORT-TERM DEBT Short-term debt consists of the following (in millions): <TABLE> <CAPTION> SEPTEMBER 30, -------------- 1999 1998 ----- ----- <S> <C> <C> Commercial paper............................................ $150 $ 90 Short-term foreign bank borrowings.......................... 37 64 Current portion of long-term debt........................... 2 2 ---- ---- Short-term debt............................................. $189 $156 ==== ==== </TABLE> Weighted average interest rates on short-term borrowings: <TABLE> <CAPTION> SEPTEMBER 30, -------------- 1999 1998 ----- ----- <S> <C> <C> Commercial paper............................................ 5.9% 5.6% Short-term foreign bank borrowings.......................... 2.9% 5.1% </TABLE> At September 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 September 30, 1999 and consisted of arrangements for which there are no significant commitment fees. 29
30 9. OTHER CURRENT LIABILITIES Other current liabilities are summarized as follows (in millions): <TABLE> <CAPTION> SEPTEMBER 30, -------------- 1999 1998 ----- ----- <S> <C> <C> Contract reserves and advance payments...................... $192 $207 Product warranty costs...................................... 139 117 Taxes other than income taxes............................... 48 44 Other....................................................... 137 160 ---- ---- Other current liabilities................................... $516 $528 ==== ==== </TABLE> 10. LONG-TERM DEBT Long-term debt consists of the following (in millions): <TABLE> <CAPTION> SEPTEMBER 30, -------------- 1999 1998 ----- ----- <S> <C> <C> 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........................................... 19 18 Less unamortized discount................................... (56) (58) ---- ---- Total....................................................... 913 910 Less current portion........................................ 2 2 ---- ---- Long-term debt.............................................. $911 $908 ==== ==== </TABLE> 11. FINANCIAL INSTRUMENTS The Company's financial instruments include cash, short- and long-term debt and foreign currency forward exchange contracts. The fair values of cash and short-term debt approximate the carrying values due to the short-term nature of these instruments. At September 30, 1999 and 1998, the carrying value of long- term debt was $913 million and $910 million, respectively. The fair value of long-term debt, based upon quoted market prices for the same or similar issues, was $836 million and $962 million at September 30, 1999 and 1998, respectively. Foreign currency forward exchange contracts provide for the purchase or sale of foreign currencies at specified future dates at specified exchange rates. At September 30, 1999 and 1998, the Company had outstanding foreign currency forward exchange contracts with notional amounts of $708 million and $578 million, respectively, primarily consisting of contracts for the Euro, British pound sterling, Canadian dollar, and Swiss franc. Notional amounts are stated in the U.S. dollar equivalents at exchange rates in effect at the time of contract initiation. At September 30, 1999 and 1998, the carrying value of foreign currency forward exchange contracts approximated their fair value based upon quoted market prices for contracts with similar maturities. 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. 12. SHAREOWNERS' EQUITY Common Stock At September 30, 1999, the authorized stock of the Company consisted of one billion shares of common stock, with a $1 par value, and 25 million shares of preferred stock, without par value. At September 30, 1999, 30
31 19 million shares of common stock were reserved for various employee incentive plans. In 1997, all outstanding shares of Class A common stock were converted into common stock. Changes in outstanding common shares are summarized as follows (in millions): <TABLE> <CAPTION> 1999 1998 1997 ----- ----- ----- <S> <C> <C> <C> Beginning balance...................................... 190.6 206.8 218.5 Treasury stock purchases............................... (3.5) (18.5) (13.4) Stock option exercises................................. 3.8 2.3 1.7 ----- ----- ----- Ending balance......................................... 190.9 190.6 206.8 ===== ===== ===== </TABLE> In 1998, there was a loss from continuing operations and stock options were antidilutive. Therefore, for 1998, diluted and basic earnings per share amounts are identical. For 1999 and 1997, dilutive stock options resulted in an increase in average outstanding shares of 3.1 million and 3.3 million, respectively. Preferred Share Purchase Rights Each outstanding share of common stock provides the holder with one Preferred Share Purchase Right (Right). The Rights will become exercisable only if a person or group acquires, or offers to acquire, 20% or more of the common stock, although the Company is authorized to reduce the 20% threshold for triggering the Rights to not less than 10%. Upon exercise, each Right entitles the holder to 1/100th of a share of Series A Junior Participating Preferred Stock of the Company (Junior Preferred Stock) at a price of $250, subject to adjustment. Upon an acquisition of the Company, each Right (other than Rights held by the acquiror) will generally be exercisable for $500 worth of common stock or common stock of the acquiror for $250. In certain circumstances, each Right may be exchanged by the Company for one share of common stock or 1/100th of a share of Junior Preferred Stock. The Rights will expire on December 6, 2006, unless earlier exchanged or redeemed at $0.01 per Right. Accumulated Other Comprehensive Loss Accumulated other comprehensive loss consisted of the following (in millions): <TABLE> <CAPTION> SEPTEMBER 30, -------------- 1999 1998 ----- ----- <S> <C> <C> Foreign currency translation adjustments............... $(144) $(128) Pension adjustments.................................... (9) (7) ----- ----- Accumulated other comprehensive loss................... $(153) $(135) ===== ===== </TABLE> 13. STOCK OPTIONS Options to purchase common stock of the Company have been granted under various incentive plans to directors, officers and other key employees at prices equal to or above the fair market value of such stock on the dates the options were granted. The plans provide that the option price for certain options granted under the plans may be paid in cash, shares of common stock or a combination thereof. Under the 1995 Long-Term Incentives Plan, the Company may grant up to 16 million shares of Company common stock as non-qualified options, incentive stock options, stock appreciation rights and restricted stock. Shares available for future grant or payment under various incentive plans were seven million at September 30, 1999. None of the incentive plans presently permits options to be granted after September 30, 2005. Stock options generally expire ten years from the date they are granted and vest over three years (time-vesting options) with the exception of performance-vesting options. 31
32 During 1999, the Company granted approximately one million performance-vesting options. These options expire ten years from the date they are granted and vest at the earlier of (a) the date the market price of the Company's common stock reaches a specified level for a pre-determined period of time or certain other financial performance criteria are met or (b) a period of six to nine years from the date they are granted. During 1999, approximately 0.9 million of the performance options vested. Information relative to stock options is as follows (shares in thousands): <TABLE> <CAPTION> 1999 1998 1997 ------------------- ------------------- ------------------- WTD. AVG. WTD. AVG. WTD. AVG. EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ------ --------- ------ --------- ------ --------- <S> <C> <C> <C> <C> <C> <C> Number of shares under option: Outstanding at beginning of year...... 13,419 $36.27 12,837 $31.67 10,871 $33.95 Granted: Time-vesting....................... 2,169 37.05 3,031 47.93 1,592 61.28 Performance-vesting................ 1,023 35.22 -- -- -- -- Adjustments: Conexant adjustment................ 669 -- -- -- -- -- Conversion to Conexant options..... (1,621) 48.97 -- -- -- -- A&D and Meritor adjustments........ -- -- -- -- 2,260 -- Conversion to Meritor options...... -- -- -- -- (141) 61.84 Exercised............................. (3,750) 23.68 (2,238) 24.59 (1,585) 27.40 Canceled or expired................... (345) 39.60 (211) 47.08 (160) 49.29 ------ ------ ------ Outstanding at end of year............ 11,564 31.13 13,419 36.27 12,837 31.67 ====== ====== ====== Exercisable at end of year............ 7,419 28.69 8,809 29.80 9,607 26.32 ====== ====== ====== </TABLE> In connection with the spin-off of Semiconductor Systems, for certain of the outstanding options, the number of options and the exercise prices of such options were adjusted in order to preserve the intrinsic value of the options that were outstanding as of the date of the spin-off. For certain other options, option holders received a combination of Rockwell and Conexant options with adjustments made to the number of options outstanding and the exercise prices of those options such that the intrinsic value of the Rockwell and Conexant options that were outstanding after the date of the spin-off was preserved. Additionally, Rockwell options granted to Semiconductor Systems employees were converted into Conexant options. In connection with the spin-off of Automotive and the divestiture of the A&D Business, the number of options outstanding and the exercise prices of such options were adjusted in order to preserve the intrinsic value of the options that were outstanding as of the date of each divestiture. In connection with the Automotive spin-off, Rockwell options granted to Automotive employees during 1997 were converted into Meritor options. The following table summarizes information about stock options outstanding at September 30, 1999 (shares in thousands; remaining life in years): <TABLE> <CAPTION> OPTIONS OUTSTANDING ------------------------------- OPTIONS EXERCISABLE WEIGHTED AVERAGE ------------------- --------------------- WTD. AVG. REMAINING EXERCISE EXERCISE RANGE OF EXERCISE PRICES SHARES LIFE PRICE SHARES PRICE ------------------------ ------ --------- -------- ------ --------- <S> <C> <C> <C> <C> <C> $15.33 to $24.41........................ 3,862 3.7 $21.70 3,862 $21.70 $25.78 to $28.93........................ 2,772 9.0 27.30 758 27.27 $32.20 to $42.50........................ 3,171 7.4 36.78 2,000 36.21 $44.13 to $60.81........................ 1,759 8.0 47.67 799 44.99 ------ ----- 11,564 7,419 ====== ===== </TABLE> 32
33 The Company's net income and earnings per share would have been reduced, and net loss and loss per share increased, to the following pro forma amounts if the Company accounted for its stock-based plans using the fair value method provided by SFAS No. 123, Accounting for Stock-Based Compensation (in millions, except per share amounts): <TABLE> <CAPTION> 1999 1998 1997 ----------------- ------------------ ----------------- AS PRO AS PRO AS PRO REPORTED FORMA REPORTED FORMA REPORTED FORMA -------- ----- -------- ------ -------- ----- <S> <C> <C> <C> <C> <C> <C> Net income (loss)................ $ 562 $ 481 $ (427) $ (444) $ 644 $ 626 Basic earnings (loss) per share............................ $2.95 $2.52 $(2.16) $(2.25) $3.01 $2.93 Diluted earnings (loss) per share.......................... $2.90 $2.48 $(2.16) $(2.25) $2.97 $2.89 </TABLE> The 1999 pro forma net income includes $87 million ($57 million after tax, or 29 cents per diluted share) of pro forma compensation expense related to the spin-off of Semiconductor Systems. The pro forma effect of stock options on net income for 1999 may not be indicative of the pro forma effect on net income in future years. The weighted average fair value of options granted was $9.55, $13.68 and $15.38 per share in 1999, 1998 and 1997, respectively. The fair value of each option was estimated on the date of grant or subsequent date of option adjustment using the Black-Scholes pricing model and the following assumptions: <TABLE> <CAPTION> 1999 1998 1997 -------------------- ------ ------------------------------------ CONEXANT MERITOR A&D BUSINESS SPIN-OFF SPIN-OFF DIVESTITURE ADJUSTMENT GRANTS GRANTS ADJUSTMENT GRANTS ADJUSTMENT ---------- ------ ------ ---------- ------ ------------ <S> <C> <C> <C> <C> <C> <C> Average risk-free interest rate.................... 4.66% 4.51% 5.68% 5.88% 5.98% 5.74% Expected dividend yield... -- 2.23% 2.23% 1.87% 2.56% 2.59% Expected volatility....... 0.44 0.29 0.29 0.27 0.25 0.25 Expected life (years)..... 5 5 5 5 5 5 </TABLE> 14. RETIREMENT BENEFITS The Company sponsors pension and other postretirement benefit plans for its employees. The pension plans cover most of the Company's employees and provide for monthly pension payments to eligible employees upon retirement. Pension benefits for salaried employees generally are based on years of credited service and average earnings. Pension benefits for hourly employees generally are based on specified benefit amounts and years of service. The Company's policy is to fund its pension obligations in conformity with the funding requirements of applicable laws and governmental regulations. Other postretirement benefits are in the form of retirement medical plans and cover most of the Company's United States employees and provide for the payment of medical costs of eligible employees and dependents upon retirement. The components of net periodic benefit cost are as follows (in millions): <TABLE> <CAPTION> PENSION BENEFITS POSTRETIREMENT BENEFITS ----------------------- ----------------------- 1999 1998 1997 1999 1998 1997 ----- ----- ----- ----- ----- ----- <S> <C> <C> <C> <C> <C> <C> Service cost................................. $ 84 $ 65 $ 61 $10 $ 9 $ 8 Interest cost................................ 170 145 136 31 49 48 Expected return on plan assets............... (215) (172) (155) -- -- -- Amortization: Prior service cost......................... 10 10 9 (26) (6) (8) Net transition asset....................... (10) (10) (11) -- -- -- Net actuarial loss......................... 16 2 5 -- -- -- ----- ----- ----- --- --- --- Net periodic benefit cost.................... $ 55 $ 40 $ 45 $15 $52 $48 ===== ===== ===== === === === </TABLE> 33
34 In 1999, the Company recognized a curtailment gain of $16 million and special termination benefit charges of $11 million. Benefit obligation, plan asset, funded status, and net asset (liability) information is summarized as follows (in millions): <TABLE> <CAPTION> OTHER POSTRETIREMENT PENSION BENEFITS BENEFITS ---------------- -------------- 1999 1998 1999 1998 ------ ------ ----- ----- <S> <C> <C> <C> <C> Benefit obligation at beginning of year................ $2,716 $2,204 $ 493 $ 671 Service cost........................................... 84 65 10 9 Interest cost.......................................... 170 145 31 49 Discount rate change................................... (262) 350 (46) 53 Actuarial losses (gains)............................... 57 44 82 (24) Plan amendments........................................ 5 8 22 (204) Curtailment............................................ -- (69) -- -- Benefits paid.......................................... (89) (55) (63) (61) Other.................................................. -- 24 2 -- ------ ------ ----- ----- Benefit obligation at end of year...................... 2,681 2,716 531 493 ------ ------ ----- ----- Plan assets at beginning of year....................... 2,811 2,437 14 8 Actual return on plan assets........................... 227 421 2 1 Company contributions.................................. 15 10 63 66 Benefits paid.......................................... (89) (55) (66) (63) Other.................................................. (13) (2) 3 2 ------ ------ ----- ----- Plan assets at end of year............................. 2,951 2,811 16 14 ------ ------ ----- ----- Funded status of plans................................. 270 95 (515) (479) Unamortized amounts: Prior service cost................................... 37 43 (200) (248) Net transition asset................................. (20) (29) -- -- Net actuarial (gain) loss............................ (287) (96) 122 88 ------ ------ ----- ----- Net asset (liability) on balance sheet................. $ -- $ 13 $(593) $(639) ====== ====== ===== ===== Net asset (liability) on balance sheet consists of: Prepaid benefit cost................................... $ 95 $ 99 $ -- $ -- Accrued benefit liability.............................. (123) (115) (593) (639) Deferred tax asset..................................... 4 3 -- -- Intangible asset....................................... 15 19 -- -- Accumulated other comprehensive loss................... 9 7 -- -- ------ ------ ----- ----- Net asset (liability) on balance sheet................. $ -- $ 13 $(593) $(639) ====== ====== ===== ===== </TABLE> 34
35 The Company uses an actuarial measurement date of June 30 to measure its benefit obligations. Significant assumptions used in determining these benefit obligations are summarized as follows (in weighted averages): <TABLE> <CAPTION> OTHER PENSION POSTRETIREMENT BENEFITS BENEFITS ------------ -------------- 1999 1998 1999 1998 ---- ---- ----- ----- <S> <C> <C> <C> <C> Discount rate............................................... 7.5% 6.75% 7.5% 6.75% Compensation increase rate.................................. 4.5% 4.5% -- -- Expected return on plan assets.............................. 9.5% 9.5% 9.5% 9.5% Health care cost trend rate*................................ -- -- 7.0% 7.0% </TABLE> * Decreasing to 5.5% after 2015. Pension Benefits The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of the fair value of plan assets (underfunded plans) were $145 million, $130 million and $7 million, respectively, as of September 30, 1999 and $151 million, $122 million and $7 million, respectively, as of September 30, 1998. Other Postretirement Benefits Assumed health care cost trend rates have a significant effect on amounts reported for the retiree medical plans. A one percentage point change in assumed health care cost trend rates would have the following effect (in millions): <TABLE> <CAPTION> ONE PERCENTAGE ONE PERCENTAGE POINT INCREASE POINT DECREASE -------------- -------------- 1999 1998 1999 1998 ---- ---- ---- ---- <S> <C> <C> <C> <C> Increase (decrease) to total of service and interest cost components............................................... $ 5 $ 6 $ (5) $ (6) Increase (decrease) to postretirement benefit obligation... 38 35 (33) (31) </TABLE> Defined Contribution Savings Plans The Company also sponsors certain defined contribution savings plans for eligible employees. Expense related to these plans was $43 million, $42 million, and $43 million for 1999, 1998, and 1997, respectively. 15. OTHER INCOME, NET The components of other income, net are as follows (in millions): <TABLE> <CAPTION> 1999 1998 1997 ---- ---- ---- <S> <C> <C> <C> Net gain on dispositions of businesses...................... $ 57 $ 8 $ -- Loss on investment.......................................... (29) -- -- Gain on dispositions of property............................ 7 7 27 Interest income............................................. 10 13 26 Royalty income.............................................. 11 6 6 Other....................................................... 52 54 47 ---- --- ---- Other income, net........................................... $108 $88 $106 ==== === ==== </TABLE> Included in the $57 million gain on dispositions of businesses in 1999 is a $32 million gain related to the sale of the Avionics & Communications segment's railroad electronics business in October 1998 and a $28 million gain related to the sale of the Automation segment's North American Transformer business in September 1999. 35
36 In September 1999, the Company recorded a loss of $29 million associated with the write-off of its investment in Goss Graphic Systems, Inc. (Goss) preferred stock, which the Company received in connection with the sale of Graphic Systems in October 1996. Goss filed for bankruptcy in the fourth quarter of 1999. 16. INCOME TAXES The components of the income tax provision are as follows (in millions): <TABLE> <CAPTION> 1999 1998 1997 ---- ---- ---- <S> <C> <C> <C> Current: United States............................................. $221 $140 $243 Foreign................................................... 32 20 44 State and local........................................... 43 21 44 ---- ---- ---- Total current............................................... 296 181 331 ---- ---- ---- Deferred: United States............................................. (2) (41) (7) Foreign................................................... 11 (3) (21) State and local........................................... 3 (3) (5) ---- ---- ---- Total deferred.............................................. 12 (47) (33) ---- ---- ---- Income tax provision........................................ $308 $134 $298 ==== ==== ==== </TABLE> Net current deferred income tax benefits at September 30, 1999 and 1998 consist of the tax effects of temporary differences related to the following (in millions): <TABLE> <CAPTION> 1999 1998 ---- ---- <S> <C> <C> Compensation and benefits........................................... $ 61 $ 98 Product warranty costs.............................................. 46 42 Assets held for sale................................................ 48 -- Inventory........................................................... 4 9 Allowance for doubtful accounts..................................... 32 19 Contract loss reserves.............................................. 29 31 Other -- net........................................................ 144 59 ---- ---- Current deferred income taxes....................................... $364 $258 ==== ==== </TABLE> Net long-term deferred income taxes included in Other Liabilities in the balance sheet at September 30, 1999 and 1998 consist of the tax effects of temporary differences related to the following (in millions): <TABLE> <CAPTION> 1999 1998 ----- ----- <S> <C> <C> Retirement benefits................................................. $(230) $(247) Property............................................................ 161 162 Intangible assets................................................... 107 109 Loss carryforwards.................................................. (24) (37) Foreign tax credit carryforwards.................................... (95) (113) Other -- net........................................................ 77 78 ----- ----- Subtotal............................................................ (4) (48) Valuation allowance................................................. 119 150 ----- ----- Long-term deferred income taxes..................................... $ 115 $ 102 ===== ===== </TABLE> Management believes it is more likely than not that current and long-term tax assets will be realized through the reduction of future taxable income. Significant factors considered by management in its 36
37 determination of the probability of the realization of the deferred tax assets include: (a) the historical operating results of the Company ($1.8 billion of United States taxable income over the past three years), (b) expectations of future earnings, and (c) the extended period of time over which the retirement medical liability will be paid. The valuation allowance represents the amount of tax benefits related to net operating loss, capital loss and foreign tax credit carryforwards that have not yet been recognized. The carryforward period for net operating and capital losses expires between 2000 and 2006. The carryforward period for foreign tax credits expires between 2000 and 2002. The consolidated income tax provision differed from income tax at the United States statutory tax rate for the reasons set forth below (in millions): <TABLE> <CAPTION> 1999 1998 1997 ---- ---- ---- <S> <C> <C> <C> Income tax expense at thirty-five percent................... $312 $ 9 $257 State and local income taxes................................ 30 1 26 Foreign income taxes........................................ (18) 3 10 Non-deductible goodwill write-off........................... -- 136 -- Non-deductible goodwill amortization........................ 9 11 12 Property donation........................................... -- (16) -- Foreign sales corporation benefit........................... (12) (6) (9) Utilization of foreign loss carryforwards................... (4) (3) (6) Other....................................................... (9) (1) 8 ---- ---- ---- Income tax provision........................................ $308 $134 $298 ==== ==== ==== </TABLE> In September 1998, the Company donated a trisonic wind tunnel, valued at $49 million, to a university. The income tax provisions were calculated based upon the following components of income (loss) from continuing operations before income taxes (in millions): <TABLE> <CAPTION> 1999 1998 1997 ---- ---- ---- <S> <C> <C> <C> United States income (loss)................................. $776 $(27) $669 Foreign income.............................................. 114 52 66 ---- ---- ---- Total....................................................... $890 $ 25 $735 ==== ==== ==== </TABLE> No provision has been made for United States, state, or additional foreign income taxes related to approximately $172 million of undistributed earnings of foreign subsidiaries which have been or are intended to be permanently reinvested. The Company's United States income tax returns for the years 1989 through 1997 are currently under examination. In connection with the divestiture of the A&D Business, the Automotive spin-off and the Semiconductor Systems spin-off, the Company has retained all tax liabilities and the right to all tax refunds related to United States and certain non-U.S. operations of the A&D Business, Automotive and Semiconductor Systems for periods prior to the respective divestiture dates. Management believes that adequate provision for income taxes has been made for all years through 1999. 37
38 17. SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION <TABLE> <CAPTION> 1999 1998 1997 ---- ---- ---- <S> <C> <C> <C> Statement of cash flows information (in millions): Income taxes paid........................................... $111 $ 59 $449 Interest payments........................................... 85 55 27 Statement of operations information (in millions): Research and development: Company-initiated......................................... 422 402 377 Customer-funded........................................... 161 165 152 Rental expense.............................................. 106 104 98 </TABLE> Income taxes paid and interest payments related to discontinued operations were (in millions) $25 and $56 in 1997, respectively, and are included in the determination of the cash flows of discontinued operations. The amounts for 1999 and 1998 were not significant. Minimum future rental commitments under operating leases having noncancelable lease terms in excess of one year aggregated $223 million as of September 30, 1999 and are payable as follows (in millions): 2000, $52; 2001, $43; 2002, $33; 2003, $22; 2004, $19; and after 2005, $54. Commitments from third parties under sublease agreements having noncancelable lease terms in excess of one year aggregated $41 million as of September 30, 1999 and are receivable through 2008 at approximately $5 million per year. 18. CONTINGENT LIABILITIES Federal, state and local requirements relating to the discharge of substances into the environment, the disposal of hazardous wastes and other activities affecting the environment have and will continue to have an effect on the manufacturing operations of the Company. Thus far, compliance with environmental requirements and resolution of environmental claims have been accomplished without material effect on the Company's liquidity and capital resources, competitive position or financial condition. The Company has been designated as a potentially responsible party at 19 Superfund sites, excluding sites as to which the Company's records disclose no involvement or as to which the Company's potential liability has been finally determined. Management estimates the total reasonably possible costs the Company could incur for the remediation of Superfund sites at September 30, 1999 to be about $19 million, of which $16 million has been accrued. Various other lawsuits, claims and proceedings have been asserted against the Company alleging violations of federal, state and local environmental protection requirements, or seeking remediation of alleged environmental impairments, principally at previously owned properties. As of September 30, 1999, management has estimated the total reasonably possible costs the Company could incur from these matters to be about $90 million. The Company has recorded environmental accruals for these matters of $61 million. In addition to the above matters, the Company assumed certain other environmental liabilities in connection with the 1995 acquisition of Reliance Electric Company (Reliance). The Company is indemnified by Exxon Corporation (Exxon) for substantially all costs associated with these Reliance matters. At September 30, 1999, the Company has recorded a $29 million liability and a $28 million receivable for these Reliance matters. Management estimates the total reasonably possible costs for these matters to be approximately $43 million for which the Company is substantially indemnified by Exxon. Based on its assessment, management believes that the Company's expenditures for environmental capital investment and remediation necessary to comply with present regulations governing environmental protection and other expenditures for the resolution of environmental claims will not have a material adverse effect on the Company's liquidity and capital resources, competitive position or financial condition. Management cannot assess the possible effect of compliance with future requirements. 38
39 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 and employment matters. Pursuant to the Reorganization, Rockwell has agreed to indemnify Boeing for certain government contract and environmental matters related to operations of the A&D Business for periods prior to the Reorganization. In connection with the Automotive spin-off, Meritor has agreed to indemnify the Company for substantially all contingent liabilities related to Automotive. In connection with the Semiconductor Systems spin-off, Conexant assumed all contingent liabilities related to its business, including environmental and intellectual property matters. 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 financial statements. In the ordinary course of business, the Company has divested certain of its businesses. As a result of such divestitures, there may be lawsuits, claims or proceedings instituted or asserted against the Company related to the period that the businesses were owned by the Company. Management believes that any judgments against the Company related to such matters would not have a material adverse effect on the Company's financial statements. 19. BUSINESS SEGMENT INFORMATION Rockwell is an electronics and communications company with global leadership positions in industrial automation, avionics and communications, and automated call distribution systems. The Company is organized based upon products and services and has three operating segments consisting of Automation, Avionics & Communications, and Electronic Commerce. The Automation segment is a supplier of industrial automation products, systems, software and services focused on helping customers control and power manufacturing processes. Products include controllers, I/O (input/output) systems, drives, sensors, power devices, packaged control products, operator interface devices, software products and services, gear reducers, mounted bearings, power transmission components, network monitoring products and motors. These products are primarily marketed under the Rockwell Automation, Allen-Bradley, Rockwell Software, Dodge, and Reliance Electric brand names. Major markets served include consumer products, food and beverage, transportation, metals, mining, cement, pulp and paper, petroleum, specialty chemicals, pharmaceutical, electric power, water treatment, infrastructure and semiconductor fabrication. The Avionics & Communications segment is a supplier of electronic products and systems, service and support solutions to the commercial aerospace and defense industries. Products include electronic equipment for flight control, cockpit display, navigation, voice and data communication, cockpit management, in-flight cabin management, communications and passenger entertainment, radar, global positioning and other command, control and communications devices marketed primarily under the Rockwell Collins brand name. Major customers include airframe manufacturers, the United States government, and most of the world's airlines. The Electronic Commerce segment, which is engaged in the research, development, and manufacture of technologies used in telephony and Internet applications, has been combined with the Science Center, a research and development facility, in "Other Businesses." 39
40 The following tables reflect the sales and operating results of the Company's reportable segments for the years ended September 30 (in millions): <TABLE> <CAPTION> 1999 1998 1997 ------ ------ ------ <S> <C> <C> <C> Sales: Automation................................................ $4,411 $4,546 $4,494 Avionics & Communications................................. 2,395 1,980 1,674 Other Businesses.......................................... 237 226 202 ------ ------ ------ Total.................................................. $7,043 $6,752 $6,370 ====== ====== ====== Segment operating earnings: Automation................................................ $ 661 $ 594 $ 598 Avionics & Communications................................. 448 272 253 Other Businesses.......................................... 30 13 13 ------ ------ ------ Total.................................................. 1,139 879 864 Special charges............................................. -- (597) -- Purchased research and development.......................... -- (103) (23) General corporate -- net.................................... (165) (96) (79) Interest expense............................................ (84) (58) (27) ------ ------ ------ Income from continuing operations before income taxes....... $ 890 $ 25 $ 735 ====== ====== ====== </TABLE> Intersegment sales are not material and have been eliminated. Among other considerations, the Company evaluates performance and allocates resources based upon segment operating earnings before income taxes, interest expense, costs related to the corporate offices, foreign currency translation gains and losses, nonrecurring special charges and purchased research and development charges. The accounting policies used in preparing the segment information are consistent with those described in Note 1. Special charges are discussed in Note 3 and the purchased research and development charge is discussed in Note 4. The following tables summarize the identifiable assets at September 30, the provision for depreciation and amortization and the amount of capital expenditures for property for the years ended September 30 for each of the reportable segments and Corporate (in millions): <TABLE> <CAPTION> 1999 1998 1997 ------ ------ ------ <S> <C> <C> <C> Identifiable assets: Automation................................................ $3,857 $3,852 $4,435 Avionics & Communications................................. 1,668 1,446 1,067 Other Businesses.......................................... 152 151 133 Corporate................................................. 1,027 735 892 Net assets of discontinued operations..................... -- 986 1,115 ------ ------ ------ Total.................................................. $6,704 $7,170 $7,642 ====== ====== ====== Depreciation and amortization: Automation................................................ $ 230 $ 220 $ 219 Avionics & Communications................................. 86 67 58 Other Businesses.......................................... 15 14 11 Corporate................................................. 6 5 5 ------ ------ ------ Total.................................................. $ 337 $ 306 $ 293 ====== ====== ====== </TABLE> 40
41 <TABLE> <CAPTION> 1999 1998 1997 ------ ------ ------ <S> <C> <C> <C> Capital expenditures for property: Automation................................................ $ 220 $ 223 $ 221 Avionics & Communications................................. 127 143 72 Other Businesses.......................................... 15 17 16 Corporate................................................. 15 25 27 ------ ------ ------ Total.................................................. $ 377 $ 408 $ 336 ====== ====== ====== </TABLE> Identifiable assets at Corporate consist principally of cash, net deferred income tax assets, and property. The Company is a global electronic controls and communications company and as such, conducts a significant portion of its business activities outside the United States. The following tables reflect geographic sales and long-lived assets by geographic region (in millions): <TABLE> <CAPTION> SALES PROPERTY, NET -------------------------- -------------------------- 1999 1998 1997 1999 1998 1997 ------ ------ ------ ------ ------ ------ <S> <C> <C> <C> <C> <C> <C> United States........................ $5,614 $5,357 $5,001 $1,401 $1,367 $1,257 Europe............................... 762 748 712 106 113 114 Canada............................... 290 297 310 22 20 21 Asia-Pacific......................... 236 194 222 36 19 25 Latin America........................ 141 156 125 16 16 13 ------ ------ ------ ------ ------ ------ Total................................ $7,043 $6,752 $6,370 $1,581 $1,535 $1,430 ====== ====== ====== ====== ====== ====== </TABLE> Sales are attributed to the geographic regions based on their location of origin. United States sales include export sales to unaffiliated customers of $762 million in 1999, $660 million in 1998, and $581 million in 1997. 20. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) <TABLE> <CAPTION> 1999 QUARTERS ------------------------------------ FIRST SECOND THIRD FOURTH 1999 ------ ------ ------ ------ ------ (in millions, except per share amounts) <S> <C> <C> <C> <C> <C> Sales......................................... $1,608 $1,701 $1,808 $1,926 $7,043 Cost of sales................................. 1,135 1,183 1,245 1,344 4,907 Income from continuing operations............. 134 143 150 155 582 Net income.................................... 114 143 150 155 562 Basic earnings per share: Continuing operations....................... 0.71 0.75 0.79 0.81 3.06 Net income.................................. 0.60 0.75 0.79 0.81 2.95 Diluted earnings per share: Continuing operations....................... 0.70 0.74 0.77 0.80 3.01 Net income.................................. 0.59 0.74 0.77 0.80 2.90 </TABLE> Net income for 1999 includes: (a) a gain of $36 million ($24 million after tax, or 12 cents per diluted share) on the sale of the Company's railroad electronics business in the first quarter, (b) a gain of $28 million ($18 million after tax, or nine cents per diluted share) on the sale of the Company's North American Transformer business in the fourth quarter, and (c) a loss of $29 million ($19 million after tax, or 10 cents per diluted share) associated with the write-off of its investment in Goss preferred stock, which the Company received in connection with the sale of Graphic Systems in October 1996. Goss filed for bankruptcy in the fourth quarter of 1999. 41
42 <TABLE> <CAPTION> 1998 QUARTERS ------------------------------------ FIRST SECOND THIRD FOURTH 1998 ------ ------ ------ ------ ------ (in millions, except per share amounts) <S> <C> <C> <C> <C> <C> Sales......................................... $1,602 $1,674 $1,664 $1,812 $6,752 Cost of sales................................. 1,116 1,170 1,657 1,263 5,206 Income (loss) from continuing operations before accounting change.................... 60 122 (420) 129 (109) Net income (loss)............................. 72 109 (482) (126) (427) Basic earnings (loss) per share: Continuing operations before accounting change................................... 0.29 0.61 (2.15) 0.67 (0.55) Net income (loss)........................... 0.35 0.54 (2.47) (0.66) (2.16) Diluted earnings (loss) per share: Continuing operations before accounting change................................... 0.29 0.60 (2.15) 0.67 (0.55) Net income (loss)........................... 0.35 0.54 (2.47) (0.65) (2.16) </TABLE> Per share information is calculated for each quarterly and annual period using average outstanding shares for that period. Therefore, the sum of the quarterly per share amounts will not necessarily equal the annual per share amounts presented. First quarter and full year net income (loss) for 1998 includes a $27 million charge ($17 million after tax, or nine cents per diluted share) related to the cumulative effect of a change in accounting principle. Income (loss) from continuing operations before accounting change for 1998 includes: (a) the write-off of purchased research and development of $63 million after tax, or 31 cents per diluted share, related to the acquisition of Passenger Systems in the first quarter, and (b) the effects of special charges recorded in the third quarter of $508 million after tax, or $2.57 per diluted share. 42
43 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareowners of Rockwell International Corporation: We have audited the accompanying consolidated balance sheet of Rockwell International Corporation and subsidiaries as of September 30, 1999 and 1998, and the related consolidated statements of operations, shareowners' equity, cash flows, and comprehensive income (loss) for each of the three years in the period ended September 30, 1999. Our audits also included the financial statement schedule listed at Item 14(a)(2). These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Rockwell International Corporation and subsidiaries at September 30, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1999, in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for certain inventoriable general and administrative costs related to government contracts in 1998. DELOITTE & TOUCHE LLP Milwaukee, Wisconsin November 3, 1999 43
44 See also the table under the caption Summary of Results of Operations in the MD&A on page 12 hereof. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY. See the information under the captions ELECTION OF DIRECTORS and INFORMATION AS TO NOMINEE FOR DIRECTOR AND CONTINUING DIRECTORS on pages 3-6 of the 2000 Proxy Statement. No nominee for director was selected pursuant to any arrangement or understanding between the nominee and any person other than the Company pursuant to which such person is or was to be selected as a director or nominee. See also the information with respect to executive officers of the Company under Item 4a of Part I hereof. ITEM 11. EXECUTIVE COMPENSATION. See the information under the captions EXECUTIVE COMPENSATION, OPTION GRANTS and AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END VALUES on pages 10-12 and RETIREMENT PLANS on page 17 of the 2000 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. See the information under the captions VOTING SECURITIES and OWNERSHIP BY MANAGEMENT OF EQUITY SECURITIES on pages 3 and 9, respectively, of the 2000 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. See the information under the caption BOARD OF DIRECTORS AND COMMITTEES on pages 6-8 of the 2000 Proxy Statement. 44
45 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K. (a) Financial Statements, Financial Statement Schedule and Exhibits. (1) Financial Statements (all financial statements listed below are those of the Company and its consolidated subsidiaries). Consolidated Balance Sheet, September 30, 1999 and 1998. Consolidated Statement of Operations, years ended September 30, 1999, 1998 and 1997. Consolidated Statement of Cash Flows, years ended September 30, 1999, 1998 and 1997. Consolidated Statement of Shareowners' Equity, years ended September 30, 1999, 1998 and 1997. Consolidated Statement of Comprehensive Income (Loss), years ended September 30, 1999, 1998 and 1997. Notes to Consolidated Financial Statements. Independent Auditors' Report. (2) Financial Statement Schedule for the years ended September 30, 1999, 1998 and 1997. Page ---- Schedule II--Valuation and Qualifying Accounts........... S-1 Schedules not filed herewith are omitted because of the absence of conditions under which they are required or because the information called for is shown in the consolidated financial statements or notes thereto. (3) Exhibits. <TABLE> <S> <C> 3-a-1 Restated Certificate of Incorporation of the Company, as amended, filed as Exhibit 3-a-1 to the Company's Annual Report on Form 10-K for the year ended September 30, 1996, is hereby incorporated by reference. 3-b-1 By-Laws of the Company, filed as Exhibit 3-b-2 to the Company's Annual Report on Form 10-K for the year ended September 30, 1998, are hereby incorporated by reference. 4-a-1 Rights Agreement, dated as of November 30, 1996, between the Company and ChaseMellon Shareholder Services, L.L.C., as rights agent, filed as Exhibit 4-c to Registration Statement No. 333-17031, is hereby incorporated by reference. 4-b-1 Indenture dated as of April 1, 1993 between Reliance Electric Company and Bankers Trust Company, as Trustee, pursuant to which the 6.8% Notes of Reliance Electric Company due April 15, 2003 have been issued, filed as Exhibit 4.7 to Registration Statement No. 33-60066, is hereby incorporated by reference. 4-b-2 First Supplemental Indenture dated April 14, 1993 to the Indenture listed as Exhibit 4-b-1 above, filed as Exhibit 4.1 to Current Report on Form 8-K of Reliance Electric Company dated April 19, 1993, is hereby incorporated by reference. 4-b-3 Form of the 6.8% Notes of Reliance Electric Company due April 15, 2003, filed as Exhibit 4-8 to Registration Statement No. 33-60066, is hereby incorporated by reference. 4-c-1 Indenture dated as of December 1, 1996 between the Company and The Chase Manhattan Bank (successor to Mellon Bank, N.A.), as Trustee, filed as Exhibit 4-a to Registration Statement No. 333-43071, is hereby incorporated by reference. </TABLE> 45
46 <TABLE> <S> <C> 4-c-2 Form of certificate for the Company's 6.15% Notes due January 15, 2008, filed as Exhibit 4-a to the Company's Current Report on Form 8-K dated January 26, 1998, is hereby incorporated by reference. 4-c-3 Form of certificate for the Company's 6.70% Debentures due January 15, 2028, filed as Exhibit 4-b to the Company's Current Report on Form 8-K dated January 26, 1998, is hereby incorporated by reference. 4-c-4 Form of certificate for the Company's 5.20% Debentures due January 15, 2098, filed as Exhibit 4-c to the Company's Current Report on Form 8-K dated January 26, 1998, is hereby incorporated by reference. *10-a-1 Copy of the Company's 1988 Long-Term Incentives Plan, as amended through November 30, 1994, filed as Exhibit 10-d-1 to the Company's Annual Report on Form 10-K for the year ended September 30, 1994 (File No. 1-1035), is hereby incorporated by reference. *10-a-2 Copy of resolution of the Board of Directors of the Company, adopted November 6, 1996, amending the Company's 1988 Long-Term Incentives Plan, filed as Exhibit 4-g-1 to Registration Statement No. 333-17055, is hereby incorporated by reference. *10-a-3 Copy of resolution of the Board of Directors of the Company, adopted November 5, 1997, increasing the number of shares authorized for issuance under the Company's 1988 Long-Term Incentives Plan, filed as Exhibit 10-b-2 to the Company's Annual Report on Form 10-K for the year ended September 30, 1997, is hereby incorporated by reference. *10-a-4 Forms of Stock Option Agreements under the Company's 1988 Long-Term Incentives Plan for options granted prior to May 1, 1992, filed as Exhibit 10-d-2 to the Company's Annual Report on Form 10-K for the year ended September 30, 1988 (File No. 1-1035), are hereby incorporated by reference. *10-a-5 Forms of Stock Option and Stock Appreciation Rights Agreements under the Company's 1988 Long-Term Incentives Plan for options and stock appreciation rights granted prior to May 1, 1992, filed as Exhibit 10-d-3 to the Company's Annual Report on Form 10-K for the year ended September 30, 1988 (File No. 1-1035), are hereby incorporated by reference. *10-a-6 Form of Stock Option Agreement under the Company's 1988 Long-Term Incentives Plan for options granted after May 1, 1992 and prior to March 1, 1993, filed as Exhibit 28-a-1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992 (File No. 1-1035), is hereby incorporated by reference. *10-a-7 Forms of Stock Option Agreements under the Company's 1988 Long-Term Incentives Plan for options granted after March 1, 1993 and prior to November 1, 1993, filed as Exhibit 28-a to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993 (File No. 1-1035), are hereby incorporated by reference. *10-a-8 Forms of Stock Option Agreements under the Company's 1988 Long-Term Incentives Plan for options granted after November 1, 1993 and prior to December 1, 1994, filed as Exhibit 10-d-6 to the Company's Annual Report on Form 10-K for the year ended September 30, 1993 (File No. 1-1035), are hereby incorporated by reference. </TABLE> - --------------- * Management contract or compensatory plan or arrangement. 46
47 <TABLE> <S> <C> *10-a-9 Forms of Stock Option Agreements under the Company's 1988 Long-Term Incentives Plan for options granted after December 1, 1994, filed as Exhibit 10-d-7 to the Company's Annual Report on Form 10-K for the year ended September 30, 1994 (File No. 1-1035), are hereby incorporated by reference. *10-b-1 Copy of the Company's 1995 Long-Term Incentives Plan, as amended, filed as Exhibit 10-b-1 to the Company's Annual Report on Form 10-K for the year ended September 30, 1998, is hereby incorporated by reference. *10-b-2 Forms of Stock Option Agreements under the Company's 1995 Long-Term Incentives Plan for options granted prior to December 3, 1997, filed as Exhibit 10-e-2 to the Company's Annual Report on Form 10-K for the year ended September 30, 1994 (File No. 1-1035), are hereby incorporated by reference. *10-b-3 Forms of Stock Option Agreements under the Company's 1995 Long-Term Incentives Plan for options granted between December 3, 1997 and August 31, 1998, filed as Exhibit 10-b-3 to the Company's Annual Report on Form 10-K for the year ended September 30, 1998, is hereby incorporated by reference. *10-b-4 Form of Stock Option Agreement under the Company's 1995 Long-Term Incentives Plan for options granted on April 23, 1998, filed as Exhibit 10-b-4 to the Company's Annual Report on Form 10-K for the year ended September 30, 1998, is hereby incorporated by reference. *10-b-5 Form of Stock Option Agreement under the Company's 1995 Long-Term Incentives Plan for options granted after August 31, 1998, filed as Exhibit 10-b-5 to the Company's Annual Report on Form 10-K for the year ended September 30, 1998, is hereby incorporated by reference. *10-b-6 Form of Restricted Stock Agreement under the Company's 1995 Long-Term Incentives Plan, filed as Exhibit 10-e to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996, is hereby incorporated by reference. *10-b-7 Copy of Restricted Stock Agreement dated December 3, 1997 between the Company and Don H. Davis, Jr., filed as Exhibit 10-c-5 to the Company's Annual Report on Form 10-K for the year ended September 30, 1997, is hereby incorporated by reference. *10-c-1 Copy of the Company's Directors Stock Plan, as amended. *10-c-2 Form of Stock Option Agreement under the Company's Directors Stock Plan, filed as Exhibit 10-d to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 (File No. 1-1035), is hereby incorporated by reference. *10-c-3 Forms of Restricted Stock Agreements under the Company's Directors Stock Plan between the Company and each of George L. Argyros, William H. Gray, III, James Clayburn La Force, Jr., William T. McCormick, Jr., John D. Nichols and Joseph F. Toot, Jr., filed as Exhibit 10-f to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996, are hereby incorporated by reference. *10-d-1 Copy of resolution of the Board of Directors of the Company, adopted November 6, 1996, adjusting outstanding awards under the Company's (i) 1988 Long-Term Incentives Plan, (ii) 1995 Long-Term Incentives Plan and (iii) Directors Stock Plan, filed as Exhibit 4-g-2 to Registration Statement No. 333-17055, is hereby incorporated by reference. </TABLE> - --------------- * Management contract or compensatory plan or arrangement. 47
48 <TABLE> <S> <C> *10-d-2 Copy of resolution of the Board of Directors of the Company, adopted September 3, 1997, adjusting outstanding awards under the Company's (i) 1988 Long-Term Incentives Plan, (ii) 1995 Long-Term Incentives Plan and (iii) Directors Stock Plan, filed as Exhibit 10-e-3 to the Company's Annual Report on Form 10-K for the year ended September 30, 1997, is hereby incorporated by reference. *10-d-3 Memorandum of Adjustments to Outstanding Options Under Rockwell International Corporation's 1988 Long-Term Incentives Plan, 1995 Long-Term Incentives Plan and Directors Stock Plan approved and adopted by the Board of Directors of the Company in connection with the spin-off of Conexant. *10-e-1 Copy of the Company's Incentive Compensation Plan, amended and restated as of July 1, 1997, filed as Exhibit 10-f-1 to the Company's Annual Report on Form 10-K for the year ended September 30, 1997, is hereby incorporated by reference. *10-f-1 Copy of the Company's Deferred Compensation Plan, as amended effective as of October 1, 1992, filed as Exhibit 10-g-1 to the Company's Annual Report on Form 10-K for the year ended September 30, 1993 (File No. 1-1035), is hereby incorporated by reference. *10-g-1 Copy of resolution of the Board of Directors of the Company, adopted November 6, 1996, authorizing the assignment of certain compensation and employee benefit plans to New Rockwell International Corporation, including the Company's (i) 1988 Long-Term Incentives Plan, (ii) 1995 Long-Term Incentives Plan, (iii) Directors Stock Plan, (iv) Incentive Compensation Plan, (v) Deferred Compensation Plan and (vi) Annual Incentive Compensation Plan for Senior Executive Officers, filed as Exhibit 4-g-3 to Registration Statement No. 333-17055, is hereby incorporated by reference. *10-g-2 Copy of resolution of the Board of Directors of New Rockwell International Corporation, adopted December 4, 1996, assuming and adopting the Company's (i) 1988 Long-Term Incentives Plan, (ii) 1995 Long-Term Incentives Plan, (iii) Directors Stock Plan, (iv) Incentive Compensation Plan, (v) Deferred Compensation Plan and (vi) Annual Incentive Compensation Plan for Senior Executive Officers, filed as Exhibit 10-h-2 to the Company's Annual Report on Form 10-K for the year ended September 30, 1996, is hereby incorporated by reference. *10-h-1 Copy of resolutions of the Board of Directors of the Company, adopted November 3, 1993, providing for the Company's Deferred Compensation Policy for Non-Employee Directors, filed as Exhibit 10-h-1 to the Company's Annual Report on Form 10-K for the year ended September 30, 1994 (File No. 1-1035), is hereby incorporated by reference. *10-h-2 Copy of resolutions of the Compensation Committee of the Board of Directors of the Company, adopted July 6, 1994, modifying the Company's Deferred Compensation Policy for Non-Employee Directors, filed as Exhibit 10-h-2 to the Company's Annual Report on Form 10-K for the year ended September 30, 1994 (File No. 1-1035), is hereby incorporated by reference. *10-h-3 Copy of resolutions of the Board of Directors of New Rockwell International Corporation, adopted December 4, 1996, providing for its Deferred Compensation Policy for Non-Employee Directors, filed as Exhibit 10-i-3 to the Company's Annual Report on Form 10-K for the year ended September 30, 1996, is hereby incorporated by reference. </TABLE> - --------------- * Management contract or compensatory plan or arrangement. 48
49 <TABLE> <S> <C> *10-i-1 Copy of resolutions of the Board of Directors of the Company, adopted November 2, 1994, providing for the Company's Retirement Policy for Non-Employee Directors, filed as Exhibit 10-j-1 to the Company's Annual Report on Form 10-K for the year ended September 30, 1994 (File No. 1-1035), is hereby incorporated by reference. *10-i-2 Copy of resolutions of the Board of Directors of the Company, adopted December 6, 1995, rescinding the Company's Retirement Policy for Non-Employee Directors (except to the extent applicable to Directors then age 67 or older and former Directors then retired), filed as Exhibit 10-j-2 to the Company's Annual Report on Form 10-K for the year ended September 30, 1995 (File No. 1-1035), is hereby incorporated by reference. *10-i-3 Copy of resolution of the Board of Directors of New Rockwell International Corporation, adopted December 4, 1996, assuming and adopting the Company's Retirement Policy for Non-Employee Directors (applicable to Directors of the Company who were age 67 or older on December 6, 1995 and former Directors then retired), filed as Exhibit 10-j-3 to the Company's Annual Report on Form 10-K for the year ended September 30, 1996, is hereby incorporated by reference. *10-j-1 Copy of the Company's Annual Incentive Compensation Plan for Senior Executive Officers, filed as Exhibit A to the Company's Proxy Statement for its 1996 Annual Meeting of Shareowners (File No. 1-1035), is hereby incorporated by reference. *10-k-1 Restricted Stock Agreement dated December 6, 1995 between the Company and Don H. Davis, Jr., filed as Exhibit 10-l-1 to the Company's Annual Report on Form 10-K for the year ended September 30, 1995 (File No. 1-1035), is hereby incorporated by reference. *10-l-1 Consulting Agreement dated as of November 25, 1997 between the Company and Donald R. Beall, filed as Exhibit 10-n-1 to the Company's Annual Report on Form 10-K for year ended September 30, 1997, is hereby incorporated by reference. *10-l-2 Consulting Agreement dated September 30, 1999 between the Company and Donald R. Beall. *10-m-1 Form of Change of Control Agreements between the Company and each of D.H. Davis, Jr., W.M. Barnes, W.J. Calise, Jr., J.D. Cohn, C.M. Jones, K.D. Nosbusch, J.R. Stone and J.D. Swann, filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, is hereby incorporated by reference. *10-m-2 Form of Change of Control Agreements between the Company and certain other officers of the Company, filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, is hereby incorporated by reference. *10-m-3 Agreement and General Release dated as of March 2, 1999, with E.S. Washington, filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, is hereby incorporated by reference. 10-n-1 Agreement and Plan of Distribution dated as of December 6, 1996, among Rockwell International Corporation (now named Boeing North American, Inc.), the Company (formerly named New Rockwell International Corporation), Allen-Bradley Company, Inc., Rockwell Collins, Inc., Rockwell Semiconductor Systems, Inc., Rockwell Light Vehicle Systems, Inc. and Rockwell Heavy Vehicle Systems, Inc., filed as Exhibit 10-b to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996, is hereby incorporated by reference. </TABLE> - --------------- * Management contract or compensatory plan or arrangement. 49
50 <TABLE> <S> <C> 10-n-2 Post-Closing Covenants Agreement dated as of December 6, 1996, among Rockwell International Corporation (now named Boeing North American, Inc.), The Boeing Company, Boeing NA, Inc. and the Company (formerly named New Rockwell International Corporation), filed as Exhibit 10-c to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996, is hereby incorporated by reference. 10-n-3 Tax Allocation Agreement dated as of December 6, 1996, among Rockwell International Corporation (now named Boeing North American, Inc.), the Company (formerly named New Rockwell International Corporation) and The Boeing Company, filed as Exhibit 10-d to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996, is hereby incorporated by reference. 10-o-1 Distribution Agreement dated as of September 30, 1997 by and between the Company and Meritor Automotive, Inc., filed as Exhibit 2.1 to the Company's Current Report on Form 8-K dated October 10, 1997, is hereby incorporated by reference. 10-o-2 Employee Matters Agreement dated as of September 30, 1997 by and between the Company and Meritor Automotive, Inc., filed as Exhibit 2.2 to the Company's Current Report on Form 8-K dated October 10, 1997, is hereby incorporated by reference. 10-o-3 Tax Allocation Agreement dated as of September 30, 1997 by and between the Company and Meritor Automotive, Inc., filed as Exhibit 2.3 to the Company's Current Report on Form 8-K dated October 10, 1997, is hereby incorporated by reference. 10-p-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 hereby incorporated by reference. 10-p-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 hereby incorporated by reference. 10-p-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 hereby incorporated by reference. 12 Computation of Ratio of Earnings to Fixed Charges for the Five Years Ended September 30, 1999. 21 List of Subsidiaries of the Company. 23 Independent Auditors' Consent. 24 Powers of Attorney authorizing certain persons to sign this Annual Report on Form 10-K on behalf of certain directors and officers of the Company. 27 Financial Data Schedule for this Annual Report on Form 10-K. </TABLE> (b) Reports on Form 8-K. No reports on Form 8-K were filed during the last quarter of the period covered by this Report. - --------------- * Management contract or compensatory plan or arrangement. 50
51 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) 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 By /s/ WILLIAM J. CALISE, JR. --------------------------------------- WILLIAM J. CALISE, JR. SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY Dated: December 1, 1999 PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW ON THE 1ST DAY OF DECEMBER 1999 BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES INDICATED. DON H. DAVIS, JR.* CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE OFFICER) GEORGE L. ARGYROS* DIRECTOR DONALD R. BEALL* DIRECTOR WILLIAM H. GRAY, III* DIRECTOR JAMES CLAYBURN LA FORCE, JR.* DIRECTOR WILLIAM T. MCCORMICK, JR.* DIRECTOR JOHN D. NICHOLS* DIRECTOR BRUCE M. ROCKWELL* DIRECTOR ROBERT B. SHAPIRO* DIRECTOR WILLIAM S. SNEATH* DIRECTOR JOSEPH F. TOOT, JR.* DIRECTOR W. MICHAEL BARNES* SENIOR VICE PRESIDENT, FINANCE & PLANNING AND CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL OFFICER) WILLIAM E. SANDERS* VICE PRESIDENT AND CONTROLLER (PRINCIPAL ACCOUNTING OFFICER) *By /s/ WILLIAM J. CALISE, JR. -------------------------------------------------------------- WILLIAM J. CALISE, JR., ATTORNEY-IN-FACT** ** BY AUTHORITY OF POWERS OF ATTORNEY FILED HEREWITH. 51
52 SCHEDULE II ROCKWELL INTERNATIONAL CORPORATION VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 <TABLE> <CAPTION> BALANCE AT BEGINNING NET CHARGE TO BALANCE AT OF COSTS AND END OF DESCRIPTION YEAR(a) EXPENSES DEDUCTIONS YEAR(a) ----------- ---------- ------------- ---------- ---------- <S> <C> <C> <C> <C> Year ended September 30, 1999: Allowance for doubtful accounts.............. $55 $16 $12 (b) $60 (1)(c) Year ended September 30, 1998: Allowance for doubtful accounts.............. 56 7 8 (b) 55 Year ended September 30, 1997: Allowance for doubtful accounts.............. 62 3 6 (b) 56 3 (c) </TABLE> - --------------- (a) Includes allowances for commercial and other long-term receivables. (b) Uncollectible accounts written off. (c) Consists principally of amounts relating to businesses acquired, businesses sold and foreign currency translation adjustments. S-1