Rockwell Collins Third Quarter 2012 Earnings Per Share Increases 13% To $1.14

Rockwell Collins, Inc. (NYSE: COL) today reported third quarter fiscal year 2012 income from continuing operations of $166 million, an increase of 6%, compared to $157 million in the same period last year. Earnings per share for the quarter were $1.14, an increase of $0.13, or 13%, from earnings per share of $1.01 in the third quarter of 2011. Earnings per share growth was twice the rate of net income growth due to the favorable effect of the company's share repurchase program. Income and earnings per share from continuing operations include a benefit from the lower income tax rate of $7 million, or 5 cents per share, which partially offset the adverse impact of $8 million, or 6 cents per share resulting from the recent bankruptcy and production delays at Hawker Beechcraft.

The company reported total sales of $1.21 billion for the third quarter of 2012, an increase of 1%, while sales reported for the same period last year were $1.19 billion. Total segment operating earnings increased to $253 million compared to $248 million last year, and total segment operating margins increased to 21.0% of sales, up from 20.8% in the third quarter of 2011.

Cash provided by operating activities for the first nine months of 2012 and 2011 totaled $192 million and $246 million, respectively. The $54 million reduction in cash from operations was primarily driven by higher payments for employee incentive compensation and higher income tax payments, partially offset by higher receipts for customer advances.

“In the current challenging market conditions, our balanced business model and capital deployment strategies are providing the stability and shareowner focus that you would expect from Rockwell Collins,” said Rockwell Collins Chairman, President and Chief Executive Officer, Clay Jones. “For the first time in five quarters, Government Systems sales increased to complement moderating revenue in Commercial Systems due to difficult comparables and the impacts from a recent bankruptcy filing by one of our customers. However, despite this modest sales increase, earnings per share increased by double digits due to the increased level of share repurchases that has reduced share count by 7% this year. In addition, we increased our dividend this quarter by 25% to further enhance the return of value to our shareowners.”

Jones went on to state, “The slowdown in the global economic recovery and bankruptcy of Hawker Beechcraft continues to impact our initial projections of the business aviation growth. As a result, we have revised our 2012 sales, EPS and cash flow guidance. However, these near-term conditions have not diminished our confidence in longer term commercial growth as we look forward to several new product introductions in the years ahead.”

Following is a discussion of fiscal year 2012 third quarter sales and earnings for each business segment.

Commercial Systems

Commercial Systems, which provides aviation electronics systems, products and services to air transport, business and regional aircraft manufacturers and airlines worldwide, achieved 2012 third quarter sales of $526 million, an increase of $4 million, or 1%, compared to sales of $522 million reported for the same period last year.

Sales related to aircraft original equipment manufacturers increased $10 million, or 4%, to $295 million driven by increased sales to Airbus and Boeing resulting from higher production rates for the 787, 737 and A320 aircraft, partially offset by lower deliveries to Hawker Beechcraft as a result of a temporary production shutdown. Aftermarket sales decreased $1 million to $208 million driven by lower sales of spares.

Commercial Systems third quarter operating earnings decreased $2 million, or 2%, to $105 million, resulting in an operating margin of 20.0%, compared to operating earnings of $107 million, and an operating margin of 20.5%, for the same period a year ago. The decrease in operating earnings and margin was primarily due to increased bad debt expense related to the Hawker Beechcraft bankruptcy.

Government Systems

Government Systems provides a broad range of electronic products, systems and services to customers including the U.S. Department of Defense, state and local governments, other government agencies, civil agencies, defense contractors and ministries of defense around the world. Sales in the third quarter of 2012 were $679 million, an increase of $11 million, or 2%, compared to the $668 million reported for the same period last year.

Avionics sales increased $40 million, or 11%, from the third quarter of 2011 due to higher sales for Saudi F-15 fighters and the KC-46, KC-10 and KC-390 tanker programs. Communication product sales improved $14 million, or 9%, due to higher sales of networked communication and data link products. Surface solutions sales decreased $32 million, or 39%, resulting from the impact of two programs terminated for convenience in 2011, lower sales on the Joint Precision Approach and Landing System program as it transitions from development to production and reductions in deliveries of optical products for surface based programs. Sales of Navigation products declined by $11 million, or 16%, driven primarily by fewer deliveries of Defense Advanced GPS Receiver products.

Government Systems third quarter operating earnings of $148 million resulted in an operating margin of 21.8%, compared to operating earnings of $141 million, and an operating margin of 21.1%, for the same period last year. The increase in operating earnings and margin was primarily due to lower discretionary spending partially offset by the absence of a favorable warranty adjustment made last year.

Corporate and Financial Highlights

General corporate expenses not allocated to the company's business segments were flat at $10 million and include a $6 million restructuring charge, which was mostly offset by a gain on sale of a facility in Irvine, California. The company's effective income tax rate was 27.8% for the third quarter of 2012 compared to a rate of 30.8% for the same period last year. The lower tax rate was primarily due to a favorable adjustment to certain tax reserves partially offset by the unfavorable impact due to differences in the availability of the Federal R&D Tax Credit.

During the third quarter of 2012, the company repurchased 3.8 million shares of common stock at a total cost of $204 million. Additionally, the Board of Directors increased the share repurchase authorization by $500 million. The company increased the dividend on its common stock by 25%, resulting in a payment of $43 million, or 30 cents per share.

Discontinued Operations

During the fourth quarter of 2011, the company sold the Rollmet product line. The divestiture has been accounted for as a discontinued operation for all periods presented.

Fiscal Year 2012 Outlook

Revenue, earnings per share and operating cash flow guidance for fiscal year 2012 are being revised as a result of a temporary shutdown in aircraft production and bankruptcy filing at Hawker Beechcraft during the quarter as well as softening of the business aviation aftermarket. Operating cash flow guidance is also impacted by higher income tax payments resulting from changes in future expected pension contributions.

The following table is a complete summary of the company's updated fiscal year 2012 financial guidance:

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  Total sales   About $4.80 Bil. (From About $4.85 Bil.)

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Total segment operating margins About 21.5% (From 20.5% to 21.5%)

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Earnings per share from continuing operations $4.40 to $4.50 (From $4.40 to $4.60)

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Cash flow from operations About $600 Mil. (From $625 Mil. to $725 Mil.)

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Research & development costs About $850 Mil. (From About $900 Mil.)

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Capital expenditures About $150 Mil.
 

Business Highlights

Rockwell Collins establishing joint venture with AVIC LETRI in ChinaRockwell Collins and China Leihua Electronic Technology Research Institute (LETRI) a subsidiary of Aviation Industry Corporation of China (AVIC), are establishing AVIC Leihua Rockwell Collins Avionics Company. This joint venture will focus on bringing the latest surveillance products to the Commercial Aircraft Corporation of China Ltd. C919 aircraft.

Rockwell Collins awarded Australian Defence Force Land 17 programRockwell Collins was selected as the prime contractor for the Australian Defence Force Land 17 Digital Terminal Control Systems program. The company will be delivering a total of 152 systems valued at $68 million.

Data Link Solutions awarded contracts for MIDS Joint Tactical Radio Systems and Link-16 terminalsData Link Solutions (DLS), a joint venture between Rockwell Collins and BAE Systems, was awarded three contracts this quarter:
  • A $25.8 million contract by the Space and Naval Warfare System Command for the first full production and fielding of the Multifunctional Information Distribution System Joint Tactical Radio System Terminals (MIDS JTRS).
  • A $13.5 million task order to provide MIDS JTRS for large ship and ground based applications for the U. S. Navy.
  • A $5.4 million contract for Multifunctional Information Distribution System - Low Volume Terminals for the Taiwan ground Link-16 Program.

Rockwell Collins AN/ARC-210 Gen5 became the first software-defined radio certified to run SRWU.S. warfighters can now fully network ground troops with aircraft after Rockwell Collins AN/ARC-210 Gen 5 radio incorporated the Soldier Radio Waveform (SRW). The networked airborne v/UHF, software-defined, tactical radio is the first to be able to run SRW in both electronic warfare and combat communications modes at all four established data rates required by the Joint Tactical Radio Systems Joint Program Executive Office.

FAA selected Rockwell Collins Head-up Guidance Systems to support NextGen effortsThe Federal Aviation Administration (FAA) selected Rockwell Collins Head-up Guidance System with synthetic and enhanced vision to support its Next Gen research efforts. The technology, which is being installed on the Boeing 737 flight simulator in the FAA’s Flight Operations Simulation Laboratory in Oklahoma City, will be used to study how operators can safely achieve benefits such as lower landing minima by using head-up displays with synthetic and enhanced vision during different phases of flight in low visibility conditions. The technology will also support the approvals and development of the guidance material necessary to implement those new operations.

Conference Call and Webcast Details

Rockwell Collins Chairman, President and CEO, Clay Jones, and Senior Vice President and CFO, Patrick Allen, will conduct an earnings conference call at 9:00 a.m. Eastern Time on July 24, 2012. Individuals may listen to the call and view management's supporting slide presentation on the Internet at www.rockwellcollins.com. Listeners are encouraged to go to the Investor Relations portion of the web site at least 15 minutes prior to the call to download and install any necessary software. The call will be available for replay on the Internet at www.rockwellcollins.com through September 25, 2012.

Rockwell Collins is a pioneer in the development and deployment of innovative communication and aviation electronics solutions for both commercial and government applications. Our expertise in flight deck avionics, cabin electronics, mission communications, information management and simulation and training is delivered by 20,000 employees through a global service and support network that crosses 27 countries. To find out more, please visit www.rockwellcollins.com.

This press release contains statements, including certain projections and business trends, 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 the financial condition of our customers, including bankruptcies; the health of the global economy, including potential deterioration in economic and financial market conditions; the rate of recovery of the commercial OEM production rates and the aftermarket; the impacts of natural disasters, including operational disruption, potential supply shortages and other economic impacts; cybersecurity threats, including the potential misappropriation of assets or sensitive information, corruption of data or operational disruption; delays related to the award of domestic and international contracts; the impact of sequestration and other provisions of the Budget Control Act of 2011 that are set to be implemented in January of 2013; the continued support for military transformation and modernization programs; potential adverse impact of oil prices on the commercial aerospace industry; the impact of terrorist events on the commercial aerospace industry; declining defense budgets resulting from budget deficits in the U.S. and abroad; changes in domestic and foreign government spending, budgetary, procurement and trade policies adverse to our businesses; market acceptance of our new and existing technologies, products and services; reliability of and customer satisfaction with our products and services; favorable outcomes on or potential cancellation or restructuring of contracts, orders or program priorities by our customers; timing of international contract awards; recruitment and retention of qualified personnel; regulatory restrictions on air travel due to environmental concerns; effective negotiation of collective bargaining agreements by us and our customers; performance of our customers and subcontractors; risks inherent in development and fixed-price contracts, particularly the risk of cost overruns; risk of significant reduction to air travel or aircraft capacity beyond our forecasts; our ability to execute to our internal performance plans such as our productivity and quality improvements and cost reduction initiatives; achievement of our acquisition and related integration plans; continuing to maintain our planned effective tax rates; our ability to develop contract compliant systems and products on schedule and within anticipated cost estimates; risk of fines and penalties related to noncompliance with laws and regulations including export control and environmental regulations; risk of asset impairments; our ability to win new business and convert those orders to sales within the fiscal year in accordance with our annual operating plan; and the uncertainties of the outcome of lawsuits, claims and legal proceedings, as well as other risks and uncertainties, including but not limited to those detailed herein and from time to time in our Securities and Exchange Commission filings. These forward-looking statements are made only as of the date hereof and the company assumes no obligation to update any forward-looking statement.

ROCKWELL COLLINS, INC. SEGMENT SALES AND EARNINGS INFORMATION (Unaudited) (in millions, except per share amounts)

For the three and nine months ended June 30, 2011, results for the company's Rollmet business are reported as discontinued operations. Rollmet was previously reported in the Commercial Systems segment.
  Three Months Ended   Nine Months Ended
June 30 June 30
2012   2011 2012   2011
Sales
Government Systems $ 679 $ 668 $ 1,890 $ 2,034
Commercial Systems 526   522   1,570   1,476  
Total sales $ 1,205   $ 1,190   $ 3,460   $ 3,510  
 
Segment operating earnings
Government Systems $ 148 $ 141 $ 393 $ 422
Commercial Systems 105   107   318   280  
Total segment operating earnings 253 248 711 702
 
Interest expense (7 ) (5 ) (20 ) (14 )
Stock-based compensation (6 ) (6 ) (19 ) (18 )
General corporate, net (10 ) (10 ) (35 ) (34 )
Income from continuing operations before income taxes 230 227 637 636
Income tax expense (64 ) (70 ) (180 ) (179 )
 
Income from continuing operations 166 157 457 457
Income from discontinued operations, net of taxes   1     2  
Net income $ 166   $ 158   $ 457   $ 459  
 
Diluted earnings per share:
Continuing operations $ 1.14 $ 1.01 $ 3.09 $ 2.92
Discontinued operations       0.01  
Diluted earnings per share $ 1.14   $ 1.01   $ 3.09   $ 2.93  
 
Weighted average diluted shares outstanding 145.0 155.9 147.9 156.6
 

The following tables summarize sales by product category and by type of product or service for the three and nine months ended June 30, 2012 and 2011 (unaudited, in millions):
  Three Months Ended   Nine Months Ended
June 30 June 30
2012   2011 2012   2011
Government Systems sales by product category:
Avionics $ 393 $ 353 $ 1,082 $ 1,020
Communication products 178 164 476 510
Surface solutions 50 82 168 280
Navigation products 58   69   164   224
Total Government Systems sales $ 679   $ 668   $ 1,890   $ 2,034
 
Commercial Systems sales by product category:
Air transport aviation electronics:
Original equipment $ 150 $ 126 $ 415 $ 373
Aftermarket 109 109 351 319
Wide-body in-flight entertainment products and services 23   28   72   84
Total air transport aviation electronics 282   263   838   776
 
Business and regional aviation electronics:
Original equipment 145 159 434 415
Aftermarket 99   100   298   285
Total business and regional aviation electronics 244   259   732   700
Total Commercial Systems sales $ 526   $ 522   $ 1,570   $ 1,476
 
Commercial Systems sales by type of product or service:
Total original equipment $ 295 $ 285 $ 849 $ 788
Total aftermarket 208 209 649 604
Wide-body in-flight entertainment products and services 23   28   72   84
Total Commercial Systems sales $ 526   $ 522   $ 1,570   $ 1,476
 

The following table summarizes total Research & Development expenses by segment and funding type for the three and nine months ended June 30, 2012 and 2011 (unaudited, dollars in millions):
          Three Months Ended   Nine Months Ended
June 30 June 30
2012   2011 2012   2011
Research and Development Expense:
Customer-funded:
Government Systems $ 102 $ 110 $ 322 $ 336
Commercial Systems 20   27   61   70  
Total Customer-funded 122   137   383   406  
 
Company-funded:
Government Systems 20 33 63 82
Commercial Systems 59   57   178   175  
Total Company-funded 79   90   241   257  
Total Research and Development Expense $ 201   $ 227   $ 624   $ 663  
 
Percent of Total Sales 16.7 % 19.1 % 18.0 % 18.9 %
 

ROCKWELL COLLINS, INC.

SUMMARY BALANCE SHEET

(Unaudited)

(in millions)
         
June 30, September 30,
2012 2011
Assets
Cash and cash equivalents $ 265 $ 530
Receivables, net 967 969
Inventories, net 1,353 1,195
Current deferred income taxes 68 106
Other current assets 100   89
Total current assets 2,753 2,889
 
Property 750 754
Goodwill 775 780
Intangible assets 293 308
Long-term deferred income taxes 355 448
Other assets 222   210
Total assets $ 5,148   $ 5,389
 
Liabilities and equity
Short-term debt $ 201 $
Accounts payable 400 485
Compensation and benefits 229 324
Advance payments from customers 274 269
Accrued customer incentives 155 128
Product warranty costs 125 148
Other current liabilities 101   141
Total current liabilities 1,485 1,495
 
Long-term debt, net 778 528
Retirement benefits 1,461 1,633
Other liabilities 146 205
Equity 1,278   1,528
Total liabilities and equity $ 5,148   $ 5,389
 

ROCKWELL COLLINS, INC.

CONDENSED CASH FLOW INFORMATION

(Unaudited)

(in millions)
 
Nine Months Ended
June 30
2012   2011
Operating Activities:
Net income $ 457 $ 459
Adjustments to arrive at cash provided by operating activities:
Depreciation 82 78
Amortization of intangible assets 29 28
Stock-based compensation expense 19 18
Compensation and benefits paid in common stock 53 53
Excess tax benefit from stock-based compensation (7 ) (7 )
Deferred income taxes 119 68
Pension plan contributions (120 ) (110 )

Changes in assets and liabilities, excluding effects of acquisitions and foreign currency adjustments:
Receivables 3 (12 )
Inventories (200 ) (245 )
Accounts payable (71 ) 5
Compensation and benefits (92 ) 10
Advance payments from customers 12 (47 )
Accrued customer incentives 27 (5 )
Product warranty costs (21 ) (28 )
Income taxes (85 ) 30
Other assets and liabilities (13 ) (49 )
Cash Provided by Operating Activities 192   246  
 
Investing Activities:
Property additions (102 ) (104 )
Proceeds from disposition of property 17
Acquisition of businesses, net of cash acquired (17 )
Cash provided to customer (237 )
Collection of cash provided to customer 237
Proceeds from sale of short-term investments 18
Acquisition of intangible assets (2 ) (3 )
Other investing activities (4 ) 3  
Cash Used for Investing Activities (91 ) (103 )
 
Financing Activities:
Purchases of treasury stock (710 ) (277 )
Cash dividends (114 ) (112 )
Increase in short-term commercial paper borrowings, net 201 70
Decrease in short-term borrowings (24 )
Increase in long-term borrowings 247
Proceeds from the exercise of stock options 17 19
Excess tax benefit from stock-based compensation 7   7  
Cash Used for Financing Activities (352 ) (317 )
 
Effect of exchange rate changes on cash and cash equivalents (14 ) 7  
 
Net Change in Cash and Cash Equivalents (265 ) (167 )
Cash and Cash Equivalents at Beginning of Period 530   435  
Cash and Cash Equivalents at End of Period $ 265   $ 268  
 

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