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Rockwell to Shed Unit, Jobs

TIMES STAFF WRITER

Rockwell International Corp., in a surprisingly drastic move to stem its recent troubles, said Monday it will spin off its beleaguered semiconductor division into a separate, publicly traded company.

The Costa Mesa company will retain its factory automation and avionics units, but will slash 3,800 jobs from its remaining work force of 38,000.

While most of the job cuts will be outside California, Rockwell said it hasn’t decided if it will keep its current headquarters in Costa Mesa, where it relocated from Seal Beach just eight months ago as part of an earlier restructuring.

Although the company has been plagued with problems lately--including a severe downturn in the modem chip set business, a strike at its semiconductor plant in Newport Beach, and a slump at its factory automation unit because of the Asian financial crisis--the moves still stunned observers.

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“After all, the semiconductor systems division was supposed to be part of the ‘new Rockwell,’ ” said analyst Anthony Ginsberg at Fourteen Research in New York.

Indeed, until recently Rockwell had been lauded for what was viewed as a successful transition from a defense and aerospace giant into a much smaller company focused on commercial markets. Former longtime Chief Executive Donald Beall, who engineered the first restructuring, said it would transform Rockwell into a fast-growth electronics company.

But analysts said the recent woes underscore the perils of pinning the company’s future on inherently volatile businesses.

Rockwell’s current chief executive, Don H. Davis, who took the helm after Beall retired as CEO in October, said the spinoff and layoffs are necessary for the company to stay competitive.

Acknowledging that the problems are deeper than anticipated, Davis said “it would be easy just to make some minor adjustments to the business and simply move on.

“However,” he said, “we are not content to play the hand we have.”

Davis defended the earlier restructuring, saying that “under the circumstances it sure didn’t feel wrong. Time and circumstances change.”

The semiconductor systems business has far different markets, products, and investment requirements than Rockwell’s other businesses, he said. Splitting up the units would allow each to be run more effectively, he said.

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The job cuts will mostly affect Rockwell’s automation division, which makes controls, software and systems for automating factory production processes. The company plans to eliminate 3,000 positions in the unit over the next several months, the vast majority of them at its Milwaukee headquarters and in Ohio. About 100 of those 3,000 jobs will be lost at offices throughout California.

Rockwell’s Collins avionics unit in Cedar Rapids, Iowa, will lose about 720 positions over the next few years. But Rockwell spokesman Terry Francisco said that the unit’s Pomona plant, which has 1,000 workers, could actually grow over the long term because its work is concentrated in such faster-growing areas as commercial avionics and in-flight entertainment systems.

The remaining 80 jobs will be eliminated over next few weeks at Rockwell’s Costa Mesa headquarters, which currently has 150 workers.

No job cuts are expected at the Newport Beach-based semiconductor business, said Dwight W. Decker, who is president of the division and will be chief executive of the spinoff company.

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The unit, the world’s largest maker of computer modem semiconductors with projected sales of $1.3 billion this year, currently has 7,000 workers, including 2,500 in Newport Beach.

Pending a favorable ruling from the Internal Revenue Service, the semiconductor business will be spun off to Rockwell’s shareholders by the end of the year under a formula that will be determined later. Rockwell said it will not retain any stake in the new company.

Shares in the new company, which hasn’t been named, will be traded on the Nasdaq market.

Despite the semiconductor division’s expected operating losses for its fiscal third quarter and full year, Decker said “the long-term prospects of the business are very strong.”

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The company will continue to devote more resources to faster-growing areas such as wireless communications and digital “infotainment,” he said.

Brian Eisenbarth, an analyst at Collins & Co. in Larkspur, said the outlook for the semiconductor business remains clouded. There’s little demand from Asia, and Asian manufacturers could begin dumping products here, further exacerbating the price declines.

The semiconductor business “has to focus on product innovation to get some of their prices back,” he said.

The continued shrinking of Rockwell contrasts sharply with its heritage as a hulking conglomerate, once famed as the maker of the B-1 bomber and the nation’s space shuttle fleet. Just three years ago, it was the fourth-largest employer based in the state, with 82,671 workers worldwide.

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The semiconductor business, once Rockwell’s fastest-growing unit, was the linchpin of the restructured concern that emerged after Rockwell sold its aerospace business to Boeing Co. for $3.2 billion two years ago and spun off its automotive parts business last year.

At first, the semiconductor unit performed well and Rockwell’s transition appeared successful. But in recent months, it has been battered by falling prices and competition from newer technologies. At the same time, Asia’s economic crisis has been hurting its factory automation business.

On Monday, the company said its earnings for the fiscal third quarter ending today are expected to be 45 cents a share, 20% below the year-earlier profit of 56 cents a share. Sales will be about $1.7 billion, up 5% from a year ago. The earnings and sales projections for the current quarter do not include the semiconductor business.

In addition, the company said it expects to take a charge of $625 million in the quarter for the restructuring.

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For the full year, Rockwell expects earnings per share from continuing operations of about $2.30, compared with $2.12 in the previous year, on sales of about $6.8 billion. Fiscal 1999 earnings are projected to be $2.90 to $3 a share, and revenue is expected to increase about 7%.

In its next fiscal year, the company expects its cost-cutting to result in savings of about $100 million, or 33 cents a share, before taxes. By 2001, those savings will increase to $200 million, it said.

Rockwell’s stock Monday climbed 56 cents a share to $49. The stock is down nearly 20% from its 52-week high of $60.75 in March.

The only piece of the semiconductor business that will remain with Rockwell is its electronic-commerce unit, which Davis said is positioned for growth.

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The big questions for Rockwell now, analyst Ginsberg said, are where it goes from here and how it will grow.

Davis said his goal is to achieve annual profit growth in the low double digits, increase revenue 8% a year, generate free cash flow of $400 million annually and a shareholder return of at least 20% a year.

He said the company has a “fair amount of buying power” but plans no “blockbuster deals” or moves into entirely new businesses. It will focus on small- to medium-sized acquisitions that will complement its existing operations, he said.

The company’s global expansion will account for about half of its revenue growth during the next five years, he said.

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Rocky Times

Rockwell International’s plans to spin off its semiconductor business fall in line with the company’s many transitions over the decades. Once a government contract giant, Rockwell has shifted its focus to international and commercial markets. The shift has resulted in market domination in a few areas but has also brought layoffs. A look at the employment numbers, Rockwell’s remaining market domination and a chronology of the company:

Dwindling Numbers

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Over the past 31 years, the employee ranks worldwide have dropped nearly 58%:

1967: 115,326

1970: 81,455

1980: 108,199

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1990: 101,923

1997: 63,000

1998: 48,000 *

* Before Monday’s announcement; employment will drop to about 38,000 over next two years.

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Industry Strongholds

Rockwell’s remaining industries by percentage:

Automation: 67%

Avionics/communications: 33%

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Rockwell’s Evolution

In 1919, Willard Rockwell purchased a small axle plant called Wisconsin Parts Co. to produce a new, improved axle based on his own design. How Rockwell has changed over the decades:

1953: Wisconsin Parts merges with Standard Steel & Spring and Timken Detroit to form Rockwell Spring & Axle Co.

1967: Rockwell-Standard and North American Aviation merge, forming a new company named North American Rockwell, with $2.4 billion in sales.

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1973: Rockwell acquires Collins Radio Co.; name changes from North American Rockwell to Rockwell International. The 1970s also bring in government contracts to build B-1B bombers and a fleet of space shuttles. Its semiconductor business begins making modems for facsimile machines in 1978.

1985: $1 billion is added to Rockwell’s sales in electronics with the $1.6-billion acquisition of Allen-Bradley. Government contracts make up 60% of revenue but government business is falling off. Rockwell begins emphasizing commercial and international sales.

1995: Rockwell’s automation business grows with acquisition of Reliance Electric, a well-known maker of industrial motors, drives and power transmission products. Automation is the company’s biggest business as annual sales reach $3 billion.

1996: In a move to dominate in three main areas--automation, semiconductor systems and avionics/communications--Rockwell sells its aerospace and defense businesses to Boeing for $3.2 billion.

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1997: To further concentrate on market domination, Rockwell spins off its automotive components business. International and commercial sales reach 93% of the company’s total sales--a huge shift from the Rockwell of the 1980s.

1998: Rockwell announces plans to move its semiconductor unit into a separate, publicly traded company.

Source: Rockwell International and Times reports


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