Posted: 12:00 noon, EDT, 6/30/98

COSTA MESA, calif. — Rockwell International Corp. said on Monday that Rockwell Semiconductor Systems will be spun off to shareholders as an independent company. Industry analysts saw a touch of anxiety in Rockwell International's decision to get rid of its semiconductor business.

Rockwell chairman Don Davis said that the dynamics of the semiconductor business were so different from Rockwell's remaining systems operations that it no longer made sense to keep the units under a single corporate structure. Rockwell Semiconductor once experienced some of the highest growth rates in the entire company, but the combination of a soft modem chip set market and a small strike at the company's fabrication facility in Newport Beach, Calif., made the semiconductor group a drain on resources, with an operating loss anticipated in the current fiscal quarter.

While declining to call Rockwell's spin out of its semiconductor business "desperate," Trevor Yancey, an analyst with IC Insights Inc. (Scottsdale, Ariz.), said "I doubt the company would be making the move if the modem IC business was as good as it was in 1995, when the modem IC business was profitable. "

Rockwell is the market leader in modem ICs, but that business has become cutthroat as the market's quick conversion to V.90 speeds has caused many semiconductor vendors to adopt instant commodity pricing models. Unit shipments are plugging along, but modem IC prices have been hurt by the PC market slowdown and by the trend toward lower-priced PCs, which has left fewer dollars for a PC's remaining components.

Modem IC sales comprised 70 percent of Rockwell's semiconductor sales in 1997, Yancey said, but the company's latest figures shows they will represent 50 to 55 percent of Rockwell Semi's sales in fiscal 1998.

Some analysts said the spin-off would be positive for investors because it will make the company easier to understand and give investors a better view of the semiconductor division's actions.

Will Strauss, president of Forward Concepts (Tempe, Ariz.), compared Rockwell's spin off of its semiconductor business to AT&T's spin off Lucent: Rockwell assumes that the hardware personnel are heavy and that the business is cyclical, thus depressing the bottom line. Clearly the semiconductor business is a drag on Rockwell's books, and the company is looking for a better stock price, Strauss said.

"If you're not used to the boom and bust cycle, it can be tough. And Rockwell's semi business has become sufficiently large to have to break out sales, so the semiconductor business has come under a lot of focus. Rockwell was on a high at the end of 1996, but in 1997 [it] had a hard time shipping enough modem 56-k chips, and 1997 revenue in modems declined," Strauss said. "Rockwell has a good stable of technology, with most of the sales coming from modem ICs, which has become a commodity business. The business' prospects are good, but Rockwell has been a one-trick pony for a long time, and price pressures in the analog modem business are likely to continue to affect them for another two years."

The spin off of the division was not unexpected, since Rockwell has been selling off its diverse businesses in an attempt to become more focused. Last year the company sold off its automotive business, and it has also shed its defense and graphics businesses.

Meanwhile, Rockwell's remaining units will see a 9 percent work force reduction in the latest restructuring. Of 3,800 employees who will be let go, 3000 will be laid off from Rockwell Automation, 720 from Rockwell Collins, and 80 from general corporate management. No layoffs will be made near-term at Rockwell Semiconductor.

Rockwell will take a pre-tax special charge in the third quarter of $625 million, $200 million of which will be in cash.

Rockwell announced that the third fiscal quarter was impacted by an International Brotherhood of Electrical Workers strike that affected the Collins Radio facility in Cedar Rapids, Iowa, as well as the Rockwell Semiconductor fab in Newport Beach. Davis said that the Cedar Rapids strike had been settled, and that Rockwell intended to settle the Newport Beach strike before Rockwell Semiconductor was spun off. The strike at the wafer fab, which affected approximately 12 percent of fab workers, had an impact on financial performance, but had little influence on the unit's ability to deliver components to customers. One source at Rockwell Semiconductor called it "a non-event, since orders are slower."

Rockwell Semiconductor's Colorado Springs operation may take a quick hit as Rockwell divests its chip unit, however. Davis said that he did not see Rockwell "facilitizing Fab 8 in Colorado Springs at any point," and added that he expected the Rockwell Semiconductor write-downs in fourth quarter, following the spin off, to include a write-down in the planned fab building in Colorado. Existing facilities and employees at the former UTMC fab in Colorado Springs will remain with the semiconductor company, however, as will operations in Newbury Park, Mexicali and El Paso.

Dwight Decker, president of the Rockwell Semiconductor Systems division, plans to stay with the newly independent company, which likely will take on a new name when it is spun off from Rockwell. Various operations, such as the discrete RF filter operation in Costa Mesa, will become part of the new semiconductor company. But the Rockwell Electronic Commerce division, which reported to Rockwell Semiconductor, will be retained by Rockwell International.

Rockwell Automation, which will take the heaviest hit in the number of employees to be laid off, will split into two operating units and will report directly to Davis. The industrial automation groups, which produce Allen-Bradley, Reliance Electric, Rockwell Software, and similar brands for factory floor and industrial computer applications, will report to Jodie Glore, the president and chief operating officer of Rockwell Automation. The Reliance Electric motors and Dodge mechanical power transmission products will be placed under the direction of Joe Swann, president of Rockwell's new Motor and Mechanical Power Transmission division. Rockwell anticipates eliminating several overlapping product lines as the two new divisions are created.

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