Rockwell Collins Second Quarter 2014 Sales Increase 12%

17-Apr-2014

Rockwell Collins, Inc. (NYSE: COL) today reported total sales for the second quarter of fiscal year 2014 were $1.27 billion, an increase of 12% from the same period in 2013 primarily due to the acquisition of ARINC. Total segment operating earnings for the second quarter of fiscal year 2014 were $254 million, an increase of $25 million, or 11%, from the same period a year ago. Second quarter fiscal year 2014 earnings per share from continuing operations were $1.07 and net income was $147 million compared to earnings per share from continuing operations of $1.17 and net income of $161 million in the second quarter of last year. Prior year net income included a $31 million, or $0.22 per share, benefit from the retroactive reinstatement of the Federal Research & Development Tax Credit, which expired on December 31, 2013.

ARINC, which was acquired on December 23, 2013, contributed $137 million of sales and $17 million of operating earnings to the second quarter of 2014. Rockwell Collins expects the ARINC portion of Information Management Services' fiscal year 2014 operating margin to be in the range of 11% to 12%, (from 9% to 10%), due primarily to lower than previously estimated intangible asset amortization expense.

"These strong second quarter financial results, including 12% sales growth and 20% total segment operating margins, support our plan to accelerate growth and increase shareowner value," said Rockwell Collins Chief Executive Officer, Kelly Ortberg. "Share gains from new OEM programs, expanding international sales, and growth in our new Information Management Services business more than offset anticipated declines in business aviation and defense. As we look forward, we expect to convert our sales growth into even higher levels of earnings and cash flow generation as we leverage our proven operating model."

Following is a discussion of fiscal year 2014 second quarter sales and earnings for each business segment. Certain amounts previously included in the Commercial Systems segment have been reclassified to the newly created Information Management Services segment. See the supplemental schedule included in the press release filed on Form 8-K dated January 21, 2014 for a reconciliation of amounts reclassified.

Commercial Systems

Commercial Systems, which provides aviation systems, products and services to air transport, business and regional aircraft manufacturers and airlines worldwide, achieved 2014 second quarter results as summarized below.

• Sales to aircraft original equipment manufacturers increased due to higher hardware delivery rates for the Boeing 787 aircraft partially offset by lower deliveries to light business jet manufacturers.
• Aftermarket sales increased primarily due to higher service and support activities and higher regulatory airspace mandates.
• Operating earnings and margin increased due to incremental earnings from the higher sales volume as well as the benefit of lower company-funded research & development expenses and cost savings initiatives.

Government Systems

Government Systems provides a broad range of products, systems and services to customers including the U.S. Department of Defense, other government agencies, civil agencies, defense contractors and ministries of defense around the world. Results from the second quarter of 2014 are summarized below.

• Avionics sales increased primarily due to higher hardware deliveries and installations for the E-6B aircraft upgrade program as well as hardware deliveries for international programs, partially offset by lower KC-46 and KC-10 development program sales.
• Communication product sales declined due to lower satellite communication sales as fewer terminals were delivered and service revenues declined as troop deployments wind down in the Middle East.
• Operating earnings and margin decreased slightly due to the impact of lower sales volume.

Information Management Services

Information Management Services (IMS) enables mission-critical data and voice communications throughout the world to customers including the U.S. Federal Aviation Administration (FAA), commercial airlines, business aircraft operators, airport and critical infrastructure operators and major passenger and freight railroads. These communications are enabled by ARINC's high-performance, high-quality and high-assurance proprietary radio and terrestrial networks, enhancing customer efficiency, safety and connectivity.

The company previously announced its intent to divest ARINC's Aerospace Systems Engineering and Support business (ASES), which provides military aircraft integration and modification services. As such, the results of ASES have been classified in discontinued operations and are excluded from the results below.

Sales for ARINC were $137 million in the second quarter of fiscal 2014. All remaining sales are related to Rockwell Collins' flight services business. IMS operating earnings includes $12 million and $1 million of depreciation and amortization expense for the three months ended March 31, 2014 and 2013, respectively.

Corporate and Financial Highlights

Interest Expense
The increase in interest expense from $8 million in the second quarter of fiscal year 2013 to $16 million in the second quarter of fiscal year 2014 was due to the incremental interest on debt issued to fund the acquisition of ARINC.

Income Taxes
The company's effective income tax rate was 31.3% for the second quarter of 2014 compared to a rate of 18.3% for the same period last year. The higher income tax rate in the second quarter of 2014 was primarily attributable to differences in the availability of the Federal Research & Development Tax Credit.

Cash Flow
Cash provided by operating activities was $63 million for the first six months of fiscal year 2014, compared to cash provided by operating activities of $179 million in the same period last year. The $116 million reduction in cash flow from operations was primarily due to $69 million in higher income tax payments, $60 million in higher employee incentive pay, and other working capital changes, partially offset by $54 million in lower pension plan contributions.

During the second quarter of fiscal year 2014, the company repurchased 0.5 million shares of common stock at a total cost of $39 million. The company paid a dividend on its common stock of 30 cents per share, or $40 million, in the second quarter of 2014.

Fiscal Year 2014 Outlook

The following table is a complete summary of the company's fiscal year 2014 financial guidance. Earnings per share guidance has been updated due to lower than previously estimated intangible asset amortization expense for ARINC. All other financial guidance is unchanged from amounts previously provided on January 21, 2014:

Business Highlights

Rockwell Collins to provide Inmarsat's GX Aviation
Inmarsat, the leading provider of global mobile satellite communications services, and Rockwell Collins have signed a Memorandum of Understanding to make Rockwell Collins a Value Added Reseller of GX Aviation Ka-broadband service. GX Aviation is scheduled to be available for the commercial aviation market segment in the first half of 2015. It will provide Internet speeds of 50Mbps virtually everywhere in the world and is set to change the shape of inflight connectivity. Rockwell Collins is already a reseller of GX Aviation airtime in the business aviation market segment, and upon agreement will be able to provide a full solution offering to airlines to support all of their satcom connectivity needs from the cockpit to the cabin.

Rockwell Collins signs new five-year agreement with airlines represented by Heathrow AOC Ltd for ARINC Passenger Processing Services
Heathrow AOC Ltd, through the AOC Shared Systems Board, has awarded Rockwell Collins a five-year contract that will place the company's latest ARINC vMUSE™ Common Use Passenger Processing System in all four common-use terminals at the London Heathrow airport, one of the world's busiest airports.

Rockwell Collins avionics selected by the following airlines:

• AirAsia has selected a suite of Rockwell Collins communication, navigation and surveillance systems, including MultiScan ThreatTrack™ weather radar and GLU-925 Multi-Mode Receiver (MMR), for 36 new Airbus A320s.
• Singapore-based SilkAir, the regional wing of Singapore Airlines, has selected a Rockwell Collins avionics package, including the new MultiScan ThreatTrack™ weather radar, for 23 Next-Generation Boeing 737s.
• China Eastern Airlines has selected a suite of its communication, navigation and surveillance avionics and SATCOM for 80 new aircraft, including 60 Airbus A320s and 20 Boeing 777s.
• Qantas Airways has agreed to purchase Rockwell Collins' full avionics suite, including its Head-up Guidance System (HGS™), for five Next-Generation Boeing 737s. This marks a continuation of Qantas' HGS use on its entire Next-Generation 737 fleet, which totals 70 aircraft.

Rockwell Collins completed first Pro Line Fusion® software delivery for KC-390 program
Rockwell Collins completed its first delivery of Pro Line Fusion® software updates for the Brazilian Air Force's KC-390 program. This delivery marks the first Rockwell Collins delivery of this cutting edge civil aviation product modified for a military application.

Rockwell Collins selected for Mexican Air Force C-130 avionics upgrade
Rockwell Collins' Flight2™ integrated avionics system was selected for the Mexican Air Force C-130 upgrade program. The equipment will be installed on two prototype aircraft, part of the six C-130 aircraft scheduled to undergo an upgrade, with work started in January 2014.

Sikorsky S-92® helicopters to receive new Rockwell Collins display
The Sikorsky S-92® helicopter will feature new Rockwell Collins MFD-268P2B Multi-Function Displays enabling growth to capabilities that will enhance situational awareness and flight safety. The new displays will be standard cockpit equipment for new aircraft delivered beginning in 2014.

U.S. Coast Guard selected Rockwell Collins to provide the MH-65E fleet's Radar Sensor System solution
Rockwell Collins was selected by the U.S. Coast Guard to provide the MH-65E Radar Sensor System (RSS) for 102 MH-65E aircraft. Rockwell Collins' RTA-4114 MultiScanTM Weather Radar with enhanced ground/shoreline mapping and a new maritime surface search mode will provide the USCG with a light weight, flexible, and supportable solution.

Rockwell Collins Cockpit Display System received EASA certification on AgustaWestland AW189
The Rockwell Collins Cockpit Display System has successfully passed the European Aviation Safety Agency's Civil Certification Audit onboard the AgustaWestland AW189 helicopter. This critical milestone enables final EASA approval of the aircraft's advanced cockpit, which includes the first two products of the HeliSure family - Helicopter Synthetic Vision System (H-SVS) and Helicopter Terrain Awareness and Warning System (H-TAWS) - to receive certification.

Rockwell Collins awarded L-3 Mission Integration Republic of Korea Navy avionics contract
Rockwell Collins' Flight2 avionics were selected by subcontractor L-3 Mission Integration for the P-3C upgrade contract. Korean Air serves as the prime contractor.

Rockwell Collins to provide 721S radio for Indian Air Force advanced telemetry system
Rockwell Collins' 721S Fixed Site Ground radio was selected by India-based Park Controls & Communications Ltd. as an integral part of an advanced telemetry system for the Indian Air Force. This is the first selection of the 721S radio for the Indian military.

Rockwell Collins and Bluesky sign final agreement to form ACCEL (Tianjin) Flight Simulation Co. LTD.
Rockwell Collins and Beijing Bluesky Aviation Technology, an AVIC subsidiary, signed an agreement to establish ACCEL (Tianjin) Flight Simulation Co. LTD. Joint Venture.