Rockwell Collins' CEO Discusses Q2 2012 Results - Earnings Call Transcript

Rockwell Collins (COL)

Q2 2012 Earnings Call

April 19, 2012 9:00 am ET

Executives

Steve Buesing - Vice President of Investor Relations

Clayton M. Jones - Chairman, Chief Executive Officer, President and Member of Executive Committee

Patrick E. Allen - Chief Financial Officer and Senior Vice President

Analysts

David E. Strauss - UBS Investment Bank, Research Division

Samuel J. Pearlstein - Wells Fargo Securities, LLC, Research Division

Robert Spingarn - Crédit Suisse AG, Research Division

Jason M. Gursky - Citigroup Inc, Research Division

Robert Stallard - RBC Capital Markets, LLC, Research Division

Howard A. Rubel - Jefferies & Company, Inc., Research Division

Myles A. Walton - Deutsche Bank AG, Research Division

Cai Von Rumohr - Cowen and Company, LLC, Research Division

Richard Tobie Safran - The Buckingham Research Group Incorporated

Joseph Nadol - JP Morgan Chase & Co, Research Division

George Shapiro

Yair Reiner - Oppenheimer & Co. Inc., Research Division

Peter J. Arment - Sterne Agee & Leach Inc., Research Division

Kenneth Herbert - Wedbush Securities Inc., Research Division

Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division

F. Carter Leake - BB&T Capital Markets, Research Division

Presentation

Operator

Good morning, and welcome to the Rockwell Collins' Second Quarter Fiscal Year 2012 Earnings Conference Call. Today's call is being recorded. For opening remarks and management introductions, I would like to turn the call over to Rockwell Collins' Vice President of Investor Relations, Steve Buesing. Please go ahead, sir.

Steve Buesing

Thank you, Darla, and good morning to all of you on the call. With me on the line this morning are Rockwell Collins' Chairman, President and Chief Executive Officer, Clay Jones; and Senior Vice President and Chief Financial Officer, Patrick Allen. Today's call is being webcast, and you can view the slides we will be presenting today on our website at www.rockwellcollins.com under the Investor Relations tab.

Please note that today's presentation and webcast will include certain projections and statements that are forward-looking. Actual results may differ materially from those projected as a result of certain risks and uncertainties, including those detailed on Slide 2 of this webcast presentation and, from time to time, in the company's Securities and Exchange Commission filings. These forward-looking statements are made as of today, and the company assumes no obligation to update any forward-looking statement.

With that, I'll turn the call over to Clay.

Clayton M. Jones

Thanks, Steve, and good morning, everybody. With the first and, I'd say, the most difficult half of our fiscal year complete, I'm pleased that the second quarter results came in just as we had expected. Even though second quarter revenue declined 5% from last year as headwinds facing Government Systems were only partially offset by growth in Commercial Systems, net income rose 7%, resulting from a 90-basis-point increase in operating margins and a lower tax rate. The increased net income, when combined with the share repurchases year-to-date that reduced our outstanding shares by 5%, resulted in earnings per share of $1.09, which is up 14% increase from last year.

Now looking a little deeper into the results of our 2 businesses, we saw our performance continue to improve in Commercial Systems, with revenue growth across both market segments. In the air transport market, the robust backlog at Boeing and Airbus is enabling both OEMs to increase production rates. In addition, Boeing continues to ramp up production for the 787 according to their latest schedule, and we've increased our 787 rates to 4 ship sets per month.

In the air transport aftermarket, revenue growth is predominantly being driven by spares provisioning as the airlines that take initial deliveries of 787 and 747-8. So far, the 7 airlines -- sorry, so far 7 airlines have made their 787 sparing decisions regarding their products. There are 3 choosing to purchase spares directly, and the other 4 are choosing power-by-the-hour alternative for spares asset management. We expected a relatively even split between the 2 option, and that seems to be exactly how it's playing out.

In the business jet market, increased deliveries of Pro Line Fusion to Bombardier continue to drive our OEM revenue growth. I'm also pleased to report that we hit a significant entry into service milestone this quarter when Bombardier delivered their first Global 5000 and Global 6000 aircraft featuring our Avionics.

Beyond the first 2 globals, we are working development programs to put Pro Line Fusion on 9 announced aircraft platforms which enter into service over the next 5 years.

Regarding the Embedded Display System variant of Pro Line Fusion, development is progressing according to our schedule, and we have successfully secured our first OEM position at the light end of the market.

So for the first half of the year, we've seen about a 10% revenue growth in Commercial Systems, and that business has generated 230 basis points of margin expansion.

Our Government Systems results came in as expected, with a 12% decline in revenue, and operating margins holding steady at around 20%. Despite the adverse market conditions, we've experienced consistent growth in Avionics as the Saudi F-15 and the 3 tanker programs, the KC-46, KC-10 and KC-390, are ramping up. These programs are all progressing on plan, and I expect them to be long-term revenue drivers for this business.

Just this quarter, we were awarded additional content on the KC-390, further demonstrating our strengthening relationship with Embraer and the Brazilian Ministry of Defense. Meanwhile, our other 3 product categories in Government Systems saw headwinds from previously canceled programs and reduced DAGR deliveries which pulled down sales this quarter, as expected. Most of these revenue headwinds are behind us for the year, and we continue to expect revenue growth in the second half of the year, albeit at a slightly lower rate.

Our focus this year in Government Systems has been to sustain margin performance and generate strong cash flows. And so far, that's exactly what that team has done in the face of some pretty big challenges.

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