01—Abstract
Summary
Summary of the 10-K filed December 19, 1996. Cited figures are marked; the original filing is the authoritative source.
Rockwell's fiscal 1996 10-K (year ended September 30, 1996) describes a company reshaped by two major transactions completed in late 1996.
On December 6, 1996, it divested its Aerospace & Defense business to Boeing (about $3.2 billiona including $2.3 billion of liabilities assumed) and spun off the remaining operations as a new company that kept the Rockwell name. Graphic Systems was sold for about $600 million in October 1996. The continuing businesses are now predominantly electronics: Electronics generated 70% of sales and 83% of operating earnings.
Continuing sales rose 14% to $10.4 billionb, and income from continuing operations was $555 million, or $2.55 per share. Excluding a $121 million Brooktree purchased R&D charge (56 cents per share), income was $676 million, or $3.11 per share, up 37%. Growth was led by Automation (industrial automation, $4.2 billion in sales, up 16%) and Semiconductor Systems (modem chipsets, up 82% to $1.6 billion, with a 21% return on sales).
Automotive was roughly flat at $3.1 billionc, and Avionics & Communications was flat with earnings down 8%. The balance sheet was transformed: management reports an 11% debt-to-capital ratio excluding $2.165 billion of debt assumed by Boeing, and year-end cash was about $715 million. Operating cash flow was $1.16 billion, with capital spending of $866 million and dividends of $253 million ($1.16 per share).
Management's long-term targets are 8% annual sales growth, 15% annual EPS growth, and a return on equity rising from about 14% to 20% over three years. Investors should weigh the legacy liabilities that remain with the continuing company. These include environmental exposure (31 Superfund sites, with about $112 milliond accrued against roughly $140 million of reasonably possible costs for other matters), and the Rocky Flats and Hanford nuclear litigation, which management says is indemnified by the DOE.
The most significant near-term item is a June 1996 Kentucky judgment of $218 million (including $210 million in punitive damages) for alleged PCB contamination, which the company is contesting. Management considers none of these matters material. The filing also notes that the company filed late, as its 10-K was delayed by the reorganization, and that the 1997 proxy was not yet filed.
02—Key points
Key Highlights
- Continuing sales grew 14% to $10.4 billion in fiscal 1996, with Electronics at 70% of sales and 83% of operating earnings.
- Income from continuing operations was $555 million ($2.55 per share), or $676 million ($3.11 per share) before a $121 million Brooktree purchased R&D charge; the pre-charge figure rose 37%.
- Semiconductor Systems sales rose 82% to $1.59 billion with a 21% return on sales, driven by high-speed PC modem chipsets; Automation sales rose 16% to $4.17 billion.
- The A&D Business was sold to Boeing (about $3.2 billion) and Graphic Systems to Stonington Partners (about $600 million), leaving a much less cyclical electronics and automotive portfolio.
- Balance sheet is very strong: debt-to-capital of 11% excluding $2.165 billion of debt assumed by Boeing, $715 million of cash, and $1.16 billion of operating cash flow.
- Capital returns and investment: $253 million in dividends ($1.16 per share, a record) and $866 million in capex, with planned capex of about $900 million in 1997.
- Key risks include a $218 million Kentucky PCB judgment (under appeal), Rocky Flats and Hanford nuclear litigation, and environmental liabilities, which management believes will not be material.
03—Questions
Frequently Asked Questions
What happened to the company's aerospace and defense business?
On December 6, 1996, Rockwell completed a tax-free merger of its Aerospace & Defense business into a Boeing subsidiary, valued at about $3.2 billion including roughly $2.3 billion of assumed liabilities, mostly debt. Boeing issued about $860 million of its stock in exchange for the shareowners' interest. The remaining businesses were spun off to shareowners on a one-for-one basis as a new company that retained the Rockwell name.
How strong were the underlying earnings, and what was the one-time charge?
Continuing income was $555 million, or $2.55 per share, after a $121 million (56 cents per share) write-off of in-process R&D from the Brooktree acquisition. Excluding that charge, income was $676 million, or $3.11 per share, up 37% from $2.27 in 1995. The year also included a $122 million pre-tax ($77 million after-tax) restructuring charge, offset by $76 million of favorable tax and insurance settlements.
Which segments drive growth, and which are weaker?
Semiconductor Systems was the fastest-growing segment, with sales up 82% and earnings roughly tripled, but management does not expect growth at that pace to continue. Automation (the largest unit at 40% of sales) grew 16%, helped by the full-year inclusion of Reliance. Automotive was roughly flat at $3.14 billion, with Light Vehicle Systems up 11% and Heavy Vehicle Systems weaker in Brazil. Avionics & Communications sales were flat and its earnings fell 8%, due partly to a charge tied to the Fokker bankruptcy.
What are the main legal and environmental risks that remain with the company?
The company faces a June 1996 Kentucky judgment of $218 million ($8 million compensatory and $210 million punitive) over alleged PCB contamination, which it is challenging. It is also a defendant in Rocky Flats and Hanford nuclear litigation, where it says the DOE must indemnify its costs. It has been named a potentially responsible party at 31 Superfund sites, with about $52 million in estimated remediation costs ($35 million accrued), and $112 million accrued for other environmental matters. Management considers none of these likely to have a material adverse effect, but outcomes cannot be predicted with certainty.
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