þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2011>
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-16445
Rockwell Collins, Inc.
(Exact name of registrant as specified in its charter)
Delaware
52-2314475
(State or other jurisdiction
(I.R.S. Employer
of incorporation or organization)
Identification No.)
400 Collins Road NE
Cedar Rapids, Iowa
52498
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (319) 295-1000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)
Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
Accelerated filer ¨
Non-accelerated filer ¨
(Do not check if a smaller reporting company)
Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No þ
154,053,187 shares of registrant's Common Stock, par value $.01 per share, were outstanding on April 18, 2011.
ROCKWELL COLLINS, INC.
INDEX
Page No.
PART I.
FINANCIAL INFORMATION:
Item 1.
Condensed Consolidated Financial Statements:
Condensed Consolidated Statement of Financial Position (Unaudited) — March 31, 2011 and September 30, 2010
2
Condensed Consolidated Statement of Operations (Unaudited) — Three and Six Months Ended March 31, 2011 and 2010
3
Condensed Consolidated Statement of Cash Flows (Unaudited) — Six Months Ended March 31, 2011 and 2010
4
Notes to Condensed Consolidated Financial Statements (Unaudited)
5
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
22
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
36
Item 4.
Controls and Procedures
37
PART II.
OTHER INFORMATION:
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Unaudited)
(in millions, except per share amounts)
March 31,
September 30,
2011
2010
ASSETS
Current Assets:
Cash and cash equivalents
$
236
$
435
Receivables, net
1,021
1,024
Inventories, net
1,172
1,004
Current deferred income taxes
126
129
Other current assets
97
97
Total current assets
2,652
2,689
Property
718
707
Goodwill
786
766
Intangible Assets
316
306
Long-term Deferred Income Taxes
350
389
Other Assets
198
207
TOTAL ASSETS
$
5,020
$
5,064
LIABILITIES AND EQUITY
Current Liabilities:
Short-term debt
$
28
$
24
Accounts payable
453
420
Compensation and benefits
263
259
Advance payments from customers
281
324
Product warranty costs
167
183
Other current liabilities
248
242
Total current liabilities
1,440
1,452
Long-term Debt, Net
509
525
Retirement Benefits
1,293
1,420
Other Liabilities
201
181
Equity:
Common stock ($0.01 par value; shares authorized: 1,000; shares issued: 183.8)
2
2
Additional paid-in capital
1,421
1,420
Retained earnings
3,041
2,816
Accumulated other comprehensive loss
(1,240
)
(1,259
)
Common stock in treasury, at cost (shares held: March 31, 2011, 29.6; September 30, 2010, 27.0)
(1,651
)
(1,497
)
Total shareowners’ equity
1,573
1,482
Noncontrolling interest
4
4
Total equity
1,577
1,486
TOTAL LIABILITIES AND EQUITY
$
5,020
$
5,064
See Notes to Condensed Consolidated Financial Statements.
2
ROCKWELL COLLINS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(in millions, except per share amounts)
Three Months Ended
Six Months Ended
March 31
March 31
2011
2010
2011
2010
Sales:
Product sales
$
1,072
$
1,002
$
2,046
$
1,908
Service sales
151
140
287
261
Total sales
1,223
1,142
2,333
2,169
Costs, expenses and other:
Product cost of sales
770
736
1,476
1,389
Service cost of sales
100
92
189
173
Selling, general and administrative expenses
136
119
260
228
Interest expense
4
4
9
10
Other income, net
(6
)
(5
)
(13
)
(8
)
Total costs, expenses and other
1,004
946
1,921
1,792
Income before income taxes
219
196
412
377
Income tax provision
69
48
111
108
Net income
$
150
$
148
$
301
$
269
Earnings per share:
Basic
$
0.97
$
0.94
$
1.94
$
1.71
Diluted
$
0.96
$
0.93
$
1.92
$
1.69
Weighted average common shares:
Basic
154.3
157.1
155.0
157.1
Diluted
156.5
159.4
157.0
159.3
Cash dividends per share
$
0.24
$
0.24
$
0.48
$
0.48
See Notes to Condensed Consolidated Financial Statements.
3
ROCKWELL COLLINS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(in millions)
Six Months Ended
March 31
2011
2010
Operating Activities:
Net income
$
301
$
269
Adjustments to arrive at cash provided by operating activities:
Depreciation
52
55
Amortization of intangible assets
19
18
Stock-based compensation expense
12
11
Compensation and benefits paid in common stock
33
31
Excess tax benefit from stock-based compensation
(3
)
(7
)
Deferred income taxes
40
(5
)
Pension plan contributions
(107
)
(105
)
Changes in assets and liabilities, excluding effects of acquisitions and foreign
currency adjustments:
Receivables
(1
)
95
Inventories
(188
)
(85
)
Accounts payable
39
(10
)
Compensation and benefits
6
16
Advance payments from customers
(42
)
(10
)
Product warranty costs
(16
)
(18
)
Income taxes
31
74
Other assets and liabilities
(49
)
(49
)
Cash Provided by Operating Activities
127
280
Investing Activities:
Property additions
(66
)
(59
)
Acquisition of businesses, net of cash acquired
(17
)
(94
)
Proceeds from sale of short-term investments
18
0
Acquisition of intangible assets
(2
)
(3
)
Other investing activities
3
0
Cash Used for Investing Activities
(64
)
(156
)
Financing Activities:
Purchases of treasury stock
(211
)
(66
)
Cash dividends
(75
)
(75
)
Proceeds from short-term borrowings
15
0
Repayment of short-term borrowings
(10
)
0
Proceeds from the exercise of stock options
12
21
Excess tax benefit from stock-based compensation
3
7
Cash Used for Financing Activities
(266
)
(113
)
Effect of exchange rate changes on cash and cash equivalents
4
0
Net Change in Cash and Cash Equivalents
(199
)
11
Cash and Cash Equivalents at Beginning of Period
435
235
Cash and Cash Equivalents at End of Period
$
236
$
246
See Notes to Condensed Consolidated Financial Statements.
4
ROCKWELL COLLINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Business Description and Basis of Presentation
Rockwell Collins, Inc. (the Company or Rockwell Collins) designs, produces and supports communications and aviation electronics for commercial and military customers worldwide.
The Company operates on a 52/53 week fiscal year, with quarters ending on the Friday closest to the last day of the calendar quarter. For ease of presentation, March 31 and September 30 are utilized consistently throughout these financial statements and notes to represent the period end date.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and with the instructions to Form 10-Q of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended September 30, 2010.
In the opinion of management, the unaudited financial statements contain all adjustments, consisting of adjustments of a normal recurring nature, necessary to present fairly the financial position, results of operations and cash flows for the periods presented. The results of operations for the three and six months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the full year.
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates and assumptions.
Certain prior period amounts on the Condensed Consolidated Statement of Operations were restated to correct the previous presentation of certain sales and cost of sales. Specifically, $32 million and $53 million were reclassified from Product Sales to Service Sales and $20 million and $33 million were reclassified from Product Cost of Sales to Service Cost of Sales for the three and six months ended March 31, 2010, respectively. These adjustments did not impact previously reported net income, nor did they have any effect on the Company’s financial position, net income or cash flows for the three or six months ended March 31, 2010.
2.
Recently Issued Accounting Standards
In April 2010, the Financial Accounting Standards Board (FASB) issued guidance related to the milestone method of accounting for research or development arrangements in which a vendor satisfies its performance obligations over time and all or a portion of the arrangement consideration is contingent upon the achievement of a milestone. This guidance became effective for the Company in the first quarter of 2011 with no significant impact to the Company’s financial statements.
In September 2009, the FASB amended the guidance for allocating revenue to multiple deliverables in a contract. In accordance with the amendment, companies can allocate consideration in a multiple element arrangement in a manner that better reflects the transaction economics. When vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, companies will now be allowed to develop a best estimate of the selling price to separate deliverables and allocate arrangement consideration using the relative selling price method. Additionally, use of the residual method has been eliminated. The Company adopted this guidance in the first quarter of 2011 with no significant impact to the Company's financial position, results of operations or cash flows as the Company generally allocates revenue to deliverables based on the prices charged when sold separately by the Company.
3.
Acquisitions
Computing Technologies for Aviation, Inc.
On January 10, 2011, the Company acquired all of the shares of Computing Technologies for Aviation, Inc. (CTA). The purchase price, net of cash acquired, was approximately $11 million. CTA is headquartered in Charlottesville, Virginia and is a leading provider of flight operations management solutions for corporate flight departments and other aviation customers. The Company is in the process of allocating the purchase price and obtaining a valuation for acquired intangible assets. Based on the Company’s preliminary allocation of the purchase price, $9 million has been allocated to goodwill and $3 million to finite-lived intangible assets with a weighted average life of approximately 9 years. The excess purchase price over net assets acquired reflects the Company’s view that this acquisition will broaden the Company’s information management flight operations' capabilities. None of the goodwill resulting from the acquisition is tax deductible. The goodwill is included within the Commercial Systems segment.
5
ROCKWELL COLLINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Blue Ridge Simulation, Inc.
On December 20, 2010, the Company acquired all the shares of Blue Ridge Simulation, Inc. (Blue Ridge Simulation). Blue Ridge Simulation, with headquarters located in Leesburg, Virginia, is a leading supplier of high-performance sensor simulation for U.S. Department of Defense, commercial and international training applications. The cash purchase price, net of cash acquired, was $6 million. The Company is in the process of allocating the purchase price and obtaining a valuation for acquired intangible assets. Based on the Company’s preliminary allocation of the purchase price, $6 million has been allocated to goodwill and $1 million to finite-lived intangible assets with a weighted average life of approximately 9 years. The excess purchase price over net assets acquired reflects the Company’s view that this acquisition will enhance the Company’s integrated training solutions. All goodwill resulting from the acquisition is tax deductible. The goodwill is included in the Government Systems segment.
AR Group, Inc.
On December 31, 2009, the Company acquired all the shares of AR Group, Inc. and affiliates (Air Routing). Air Routing, with headquarters located in Houston, Texas, is a leading global provider of trip support services for business aircraft flight operations. The cash purchase price, net of cash acquired, was $91 million. In the fourth quarter of 2010, the purchase price allocation was finalized with $58 million allocated to goodwill and $39 million to finite-lived intangible assets with a weighted average life of approximately 14 years. The excess purchase price over net assets acquired reflects the Company’s view that this acquisition will broaden the Company’s information management flight operations' capabilities. None of the goodwill resulting from the acquisition is tax deductible. Air Routing goodwill is included within the Commercial Systems segment.
SEOS Group Limited
On November 24, 2008, the Company acquired all the shares of SEOS Group Limited (SEOS), a leading global supplier of highly realistic visual display solutions for commercial and military flight simulators. The initial purchase price, net of cash acquired, was $28 million. The purchase agreement contemplated additional consideration to be paid post-closing, contingent upon the achievement of certain milestones and not to exceed $8 million. In March 2011, the earn-out contingency was settled in full resulting in no additional consideration being paid. In addition, the Company received $2 million of cash during the second quarter of 2011 related to the favorable settlement of various post-closing disputes. The final purchase price, net of the favorable post-closing settlement adjustment, was $26 million.
4.
Receivables, Net
Receivables, net are summarized as follows:
March 31,
September 30,
(in millions)
2011
2010
Billed
$
690
$
743
Unbilled
390
339
Less progress payments
(49
)
(48
)
Total
1,031
1,034
Less allowance for doubtful accounts
(10
)
(10
)
Receivables, net
$
1,021
$
1,024
Receivables not expected to be collected during the next twelve months are classified as long-term and are included within Other Assets. Total receivables due from the U.S. Government, both directly and indirectly through sub-contracts, were $425 million at March 31, 2011 and $389 million at September 30, 2010. Total U.S. Government receivables include $172 million and $119 million of unbilled receivables net of progress payments at March 31, 2011 and September 30, 2010, respectively.
Unbilled receivables principally represent sales recorded under the percentage-of-completion method of accounting that have not been billed to customers in accordance with applicable contract terms.
6
ROCKWELL COLLINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5.
Inventories, Net
Inventories, net are summarized as follows:
March 31,
September 30,
(in millions)
2011
2010
Finished goods
$
175
$
162
Work in process
292
242
Raw materials, parts and supplies
349
336
Less progress payments
(37
)
(56
)
Total
779
684
Pre-production engineering costs
393
320
Inventories, net
$
1,172
$
1,004
The Company defers certain pre-production engineering costs during the development phase of an aircraft program in connection with long-term supply arrangements that contain contractual guarantees for reimbursement from customers. Such customer guarantees generally take the form of a minimum order quantity with quantified reimbursement amounts if the minimum order quantity is not taken by the customer. These costs are deferred to the extent of the contractual guarantees and are amortized over their estimated useful lives, up to 15 years, as a component of cost of sales. Amortization is typically based on the Company’s expectation of delivery rates on a program-by-program basis. The estimated useful life is limited to the amount of time the Company is virtually assured to earn revenues through a contractually enforceable right included in long-term supply arrangements with the Company’s customers. Pre-production engineering costs incurred pursuant to supply arrangements that do not contain customer guarantees for reimbursement are expensed as incurred.
6.
Property
Property is summarized as follows:
March 31,
September 30,
(in millions)
2011
2010
Land
$
14
$
14
Buildings and improvements
366
362
Machinery and equipment
981
959
Information systems software and hardware
295
282
Furniture and fixtures
63
63
Construction in progress
80
64
Total
1,799
1,744
Less accumulated depreciation
(1,081
)
(1,037
)
Property
$
718
$
707
7.
Goodwill and Intangible Assets
Changes in the carrying amount of goodwill for the six months ended March 31, 2011 are summarized as follows:
Government
Commercial
(in millions)
Systems
Systems
Total
Balance at September 30, 2010
$
509
$
257
$
766
Blue Ridge acquisition
6
0
6
CTA acquisition
0
9
9
Foreign currency translation adjustments
5
0
5
Balance at March 31, 2011
$
520
$
266
$
786
The Company performs an annual impairment test of goodwill and indefinite-lived intangible assets during the second quarter of each fiscal year, or at any time there is an indication of potential impairment. The Company’s 2011 and 2010 impairment tests resulted in no impairment.
7
ROCKWELL COLLINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Intangible assets are summarized as follows:
March 31, 2011
September 30, 2010
Accum
Accum
(in millions)
Gross
Amort
Net
Gross
Amort
Net
Intangible assets with finite lives:
Developed technology and patents
$
218
$
(133
)
$
85
$
214
$
(123
)
$
91
Customer relationships:
Acquired
92
(44
)
48
90
(40
)
50
Up-front sales incentives
175
(13
)
162
153
(11
)
142
License agreements
23
(7
)
16
22
(6
)
16
Trademarks and tradenames
15
(12
)
3
15
(10
)
5
Intangible assets with indefinite lives:
Trademarks and tradenames
2
0
2
2
0
2
Intangible assets
$
525
$
(209
)
$
316
$
496
$
(190
)
$
306
Rockwell Collins provides up-front sales incentives prior to delivering products or performing services to certain commercial customers in connection with sales contracts. Up-front sales incentives are recorded as a Customer Relationship Intangible Asset and amortized over the period the Company has received a contractually enforceable right related to the incentives, up to 15 years. Amortization is typically based on the Company’s expectation of delivery rates on a program-by-program basis. Up-front sales incentives consisting of cash payments or customer account credits are amortized as a reduction of sales whereas incentives consisting of free products are amortized as cost of sales.
Amortization expense for intangible assets for the three and six months ended March 31, 2011 was $11 million and $19 million, respectively, compared to $9 million and $18 million for the three and six months ended March 31, 2010. Annual amortization expense for intangible assets for 2011, 2012, 2013, 2014 and 2015 is expected to be $37 million, $39 million, $34 million, $34 million and $31 million, respectively.
8.
Other Assets
Other assets are summarized as follows:
March 31,
September 30,
(in millions)
2011
2010
Long-term receivables
$
30
$
27
Investments in equity affiliates
6
10
Exchange and rental assets (net of accumulated depreciation of $104 at March 31, 2011 and $106 at September 30, 2010)
52
51
Assets held-for-sale
14
14
Other
96
105
Other assets
$
198
$
207
Investments in Equity Affiliates
Investments in equity affiliates primarily consist of four joint ventures. Each joint venture is 50 percent owned by the Company and accounted for under the equity method. Under the equity method of accounting for investments, the Company’s proportionate share of the earnings or losses of its equity affiliates are included in Net Income and classified as Other Income, Net in the Condensed Consolidated Statement of Operations. For segment performance reporting purposes, Rockwell Collins’ share of earnings or losses of equity affiliates are included in the operating results of the Government Systems segment.
In the normal course of business or pursuant to the underlying joint venture agreements, the Company may sell products or services to equity affiliates. The Company defers a portion of the profit generated from these sales equal to its ownership interest in the equity affiliates until the underlying product is ultimately sold to an unrelated third party. Sales to equity affiliates were $25 million and $50 million for the three and six months ended March 31, 2011, respectively, and $19 million and $39 million for the three and six months ended March 31, 2010, respectively. The deferred portion of profit generated from sales to equity affiliates was $2 million at March 31, 2011 and $4 million at September 30, 2010.
8
ROCKWELL COLLINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Assets Held-for-Sale
Assets held-for-sale includes the carrying cost for the Company's vacated land and facility in San Jose, California. In September 2009, the Company announced plans to close this facility and relocate engineering, production and service work to other existing facilities. In 2010, the San Jose facility was vacated, actively marketed and prepared for sale. The facility is recorded at fair market value based upon ongoing negotiations with a third party.
9.
Other Current Liabilities
Other current liabilities are summarized as follows:
March 31,
September 30,
(in millions)
2011
2010
Customer incentives
$
117
$
132
Contract reserves
19
19
Income taxes payable
21
8
Other
91
83
Other current liabilities
$
248
$
242
The Company provides sales incentives to certain commercial customers in connection with sales contracts. Incentives earned by customers based on purchases of Company products or services are recognized as a liability when the related sale is recorded. Incentives consisting of cash payments or customer account credits are recognized as a reduction of sales while incentives consisting of free-of-charge hardware and account credits where the customer’s use is restricted to future purchases are recognized as cost of sales.
10.
Debt
Short-term Debt
Under the Company’s commercial paper program, the Company may sell up to $850 million face amount of unsecured short-term promissory notes in the commercial paper market. The commercial paper notes may bear interest or may be sold at a discount, and have a maturity of not more than 364 days from the time of issuance. At March 31, 2011, short-term commercial paper borrowings outstanding were $15 million with a weighted average interest rate and maturity period of 0.21 percent and 3 days, respectively. At September 30, 2010, there were no outstanding short-term commercial paper borrowings.
At March 31, 2011, an additional $13 million of short-term debt was outstanding under a five-year unsecured variable rate loan agreement for a non-U.S. subsidiary that was entered into in June 2006 and is due in June 2011. At September 30, 2010, the balance of this variable rate loan facility agreement was $24 million. The variable rate loan facility agreement contains customary loan covenants, none of which are financial covenants. Failure to comply with customary covenants or the occurrence of customary events of default contained in the agreement would require the repayment of any outstanding borrowings under the agreement.
Revolving Credit Facilities
The Company has an $850 million unsecured revolving credit facility with various banks that matures in March 2012. The credit facility has options to extend the term for up to two one-year periods and/or increase the aggregate principal amount up to $1.2 billion. These options are subject to the approval of the lenders. This credit facility exists primarily to support the Company’s commercial paper program, but may be used for other purposes in the event access to the commercial paper market is impaired or eliminated. The credit facility includes one financial covenant requiring the Company to maintain a consolidated debt to total capitalization ratio of not greater than 60 percent. The ratio excludes the accumulated other comprehensive loss equity impact related to defined benefit retirement plans. The ratio was 16 percent as of March 31, 2011. In addition, the credit facility contains other non-financial covenants that require the Company to satisfy certain conditions in order to incur debt secured by liens, engage in sale/leaseback transactions or merge or consolidate with another entity. Borrowings under this credit facility bear interest at the London Interbank Offered Rate (LIBOR) plus a variable margin based on the Company’s unsecured long-term debt rating or, at the Company’s option, rates determined by competitive bid. At March 31, 2011 and September 30, 2010, there were no outstanding borrowings under this revolving credit facility.
9
ROCKWELL COLLINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In addition, short-term credit facilities available to non-U.S. subsidiaries amounted to $61 million as of March 31, 2011, of which $19 million was utilized to support commitments in the form of commercial letters of credit. As of March 31, 2011 and September 30, 2010, there were no short-term borrowings outstanding under the Company’s non-U.S. subsidiaries’ credit facilities.
At March 31, 2011 and September 30, 2010, there were no significant commitment fees or compensating balance requirements under any of the Company’s credit facilities.
Long-term Debt
In addition to the Company’s credit facilities and commercial paper program, the Company has a shelf registration statement filed with the Securities and Exchange Commission pursuant to which the Company can publicly offer and sell securities. This shelf registration covers an unlimited amount of debt securities, common stock, preferred stock or warrants that may be offered in one or more offerings on terms to be determined at the time of sale.
On May 6, 2009, the Company issued $300 million of 5.25 percent fixed rate unsecured debt due July 15, 2019 (the 2019 Notes). The net proceeds to the Company from the sale of the 2019 Notes, after deducting a $2 million discount and $2 million of debt issuance costs, were $296 million. The 2019 Notes are included in the Condensed Consolidated Statement of Financial Position net of the unamortized discount within the caption Long-term Debt, Net. The debt issuance costs are capitalized within Other Assets on the Condensed Consolidated Statement of Financial Position. The discount and debt issuance costs are amortized over the life of the 2019 Notes and recorded in Interest Expense. In January 2010, the Company entered into interest rate swap contracts which effectively converted $150 million of the 2019 Notes to floating rate debt based on six-month LIBOR plus 1.235 percent. See Notes 16 and 17 for additional information relating to the interest rate swap contracts.
On November 20, 2003, the Company issued $200 million of 4.75 percent fixed rate unsecured debt due December 1, 2013 (the 2013 Notes). At the time of the debt issuance, the Company entered into interest rate swap contracts which effectively converted $100 million of the 2013 Notes to floating rate debt based on six-month LIBOR less .075 percent. See Notes 16 and 17 for additional information relating to the interest rate swap contracts.
The 2019 and 2013 Notes each contain covenants that require the Company to satisfy certain conditions in order to incur debt secured by liens, engage in sales/leaseback transactions, merge or consolidate with another entity or transfer substantially all of the Company’s assets.
Long-term debt and a reconciliation to the carrying amount is summarized as follows:
March 31,
September 30,
(in millions)
2011
2010
Principal amount of 2019 Notes, net of discount
$
299
$
299
Principal amount of 2013 Notes
200
200
Fair value swap adjustment (Notes 16 and 17)
10
26
Long-term debt, net
$
509
$
525
The Company was in compliance with all debt covenants at March 31, 2011 and September 30, 2010.
Interest paid on debt for the six months ended March 31, 2011 and 2010 was $8 million and $11 million, respectively.
11.
Retirement Benefits
The Company sponsors defined benefit pension (Pension Benefits) and other postretirement (Other Retirement Benefits) plans which provide monthly pension and other benefits to eligible employees upon retirement.
10
ROCKWELL COLLINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Pension Benefits
The components of expense (income) for Pension Benefits for the three and six months ended March 31, 2011 and 2010 are as follows:
Three Months Ended
Six Months Ended
March 31
March 31
(in millions)
2011
2010
2011
2010
Service cost
$
2
$
1
$
4
$
3
Interest cost
39
39
79
79
Expected return on plan assets
(53
)
(52
)
(106
)
(105
)
Amortization:
Prior service credit
(4
)
(4
)
(9
)
(9
)
Net actuarial loss
12
22
24
45
Net benefit expense (income)
$
(4
)
$
6
$
(8
)
$
13
Other Retirement Benefits
The components of expense (income) for Other Retirement Benefits for the three and six months ended March 31, 2011 and 2010 are as follows:
Three Months Ended
Six Months Ended
March 31
March 31
(in millions)
2011
2010
2011
2010
Service cost
$
1
$
1
$
2
$
2
Interest cost
2
3
5
6
Amortization:
Prior service credit
(4
)
(5
)
(8
)
(11
)
Net actuarial loss
3
3
6
6
Net benefit expense
$
2
$
2
$
5
$
3
Pension Plan Funding
The Company’s objective with respect to the funding of its pension plans is to provide adequate assets for the payment of future benefits. Pursuant to this objective, the Company will fund its pension plans as required by governmental regulations and may consider discretionary contributions as conditions warrant. In January 2011, the Company made a $100 million contribution to the U.S. qualified pension plan. The Company is not required by government regulations to make any additional contributions to the U.S. qualified pension plan in 2011. Any additional future contributions necessary to satisfy the minimum statutory funding requirements are dependent upon actual plan asset returns and interest rates. The Company may elect to make additional discretionary contributions during 2011 to further improve the funded status of this plan. Contributions to the non-U.S. plans and the U.S. non-qualified plan are expected to total $13 million in 2011. For the six months ended March 31, 2011 and 2010, the Company made contributions to the non-U.S. plans and the U.S. non-qualified pension plan of $7 million and $7 million, respectively.
12.
Stock-Based Compensation and Earnings Per Share
Total stock-based compensation expense included within the Condensed Consolidated Statement of Operations is as follows:
Three Months Ended
Six Months Ended
March 31
March 31
(in millions)
2011
2010
2011
2010
Stock-based compensation expense included in:
Product cost of sales
$
1
$
1
$
2
$
2
Service cost of sales
1
1
1
1
Selling, general and administrative expenses
5
4
9
8
Total
$
7
$
6
$
12
$
11
Income tax benefit
$
2
$
2
$
4
$
4
11
ROCKWELL COLLINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company issued awards of equity instruments under the Company’s various incentive plans for the six months ended March 31, 2011 and 2010 as follows:
Performance
Restricted
Restricted
Options
Shares
Stock
Stock Units
Weighted
Weighted
Weighted
Weighted
Number
Average
Number
Average
Number
Average
Number
Average
(shares in thousands)
Issued
Fair Value
Issued
Fair Value
Issued
Fair Value
Issued
Fair Value
Six months ended March 31, 2011
734.5
$
14.74
193.7
$
55.85
0
$
0
73.0
$
57.44
Six months ended March 31, 2010
790.9
$
12.80
190.3
$
53.08
56.6
$
53.08
24.1
$
53.09
The maximum number of shares of common stock that can be issued with respect to the performance shares granted in 2011 based on the achievement of performance targets for fiscal years 2011 through 2013 is 460 thousand.
The fair value of each option granted by the Company was estimated using a binomial lattice pricing model and the following assumptions:
2011
2010
Grants
Grants
Risk-free interest rate
0.5% - 3.9
%
2.7
%
Expected dividend yield
1.7
%
2.3
%
Expected volatility
27.0
%
27.0
%
Expected life
8 years
7 years
In 2010, the risk-free interest rate was equal to a single U.S. Treasury yield based upon the period over which employees were expected to hold options. In 2011, the risk-free interest rate selected was changed to reflect a range of U.S. Treasury yields corresponding to anticipated option exercises over the ten year contractual term. A range of risk-free interest rates more closely aligns with the assumptions used in the binomial lattice pricing model. This change did not significantly impact the fair value of options granted.
Employee Benefits Paid in Company Stock
During the six months ended March 31, 2011 and 2010, 0.5 million and 0.6 million shares, respectively, of Company common stock were issued to employees under the Company’s employee stock purchase and defined contribution savings plans at a value of $33 million and $31 million for the respective periods.
12
ROCKWELL COLLINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Earnings Per Share and Diluted Share Equivalents
The computation of basic and diluted earnings per share is as follows:
Three Months Ended
Six Months Ended
March 31
March 31
(in millions, except per share amounts)
2011
2010
2011
2010
Numerator:
Numerator for basic and diluted earnings per share – Net income
$
150
$
148
$
301
$
269
Denominator:
Denominator for basic earnings per share – weighted average common shares
154.3
157.1
155.0
157.1
Effect of dilutive securities:
Stock options
1.6
1.8
1.5
1.7
Performance shares, restricted shares and restricted stock units
0.6
0.5
0.5
0.5
Dilutive potential common shares
2.2
2.3
2.0
2.2
Denominator for diluted earnings per share – adjusted weighted average shares and assumed conversion
156.5
159.4
157.0
159.3
Earnings per share:
Basic
$
0.97
$
0.94
$
1.94
$
1.71
Diluted
$
0.96
$
0.93
$
1.92
$
1.69
The average outstanding diluted shares calculation excludes options with an exercise price that exceeds the average market price of shares during the period. Stock options excluded from the average outstanding diluted shares calculation were 0.4 million and 0.8 million for the three months ended March 31, 2011 and 2010, respectively, and 0.4 million and 0.8 million for the six months ended March 31, 2011 and 2010, respectively.
The Company has one consolidated subsidiary with income attributable to a noncontrolling interest. The net income and comprehensive income attributable to the noncontrolling interest is insignificant.
13
ROCKWELL COLLINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
14.
Other Income, Net
Other income, net consists of the following:
Three Months Ended
Six Months Ended
March 31
March 31
(in millions)
2011
2010
2011
2010
Royalty income
$
1
$
2
$
1
$
4
Earnings from equity affiliates
4
3
6
5
Interest income
1
1
2
2
Other
0
(1
)
4
(3
)
Other income, net
$
6
$
5
$
13
$
8
15.
Income Taxes
At the end of each interim reporting period, the Company makes an estimate of the annual effective income tax rate. Tax items included in the annual effective income tax rate are pro-rated for the full year and tax items discrete to a specific quarter are included in the effective income tax rate for that quarter. The estimate used in providing for income taxes on a year-to-date basis may change in subsequent interim periods. During the three months ended March 31, 2011 and 2010, the effective income tax rate was 31.5 percent and 24.5 percent, respectively and for the six months ended March 31, 2011 and 2010, the effective income tax rate was 26.9 percent and 28.6 percent, respectively.
The higher effective income tax rate for the three months ended March 31, 2011, as compared to the same period of the prior year, was primarily due to the completion of the Internal Revenue Service (IRS) examination of taxable years ended September 30, 2006 and 2007 which resulted in a benefit to the Company’s effective income tax rate by about 10 percent for the three months ended March 31, 2010. This prior year benefit was partially offset by an increase to the Company’s effective income tax rate for the three months ended March 31, 2010 of about 2 percent related to differences in the availability of the Federal Research and Development Tax Credit (Federal R&D Tax Credit), which expired on December 31, 2009.
The lower effective income tax rate for the six months ended March 31, 2011, as compared to the same period of the prior year which included the favorable IRS adjustments mentioned above, was primarily due to the differences in the availability of the Federal R&D Tax Credit, which expired on December 31, 2009, and the increased tax benefit of the Domestic Manufacturing Deduction (DMD) for fiscal year 2011, as compared to the DMD tax benefit for fiscal year 2010 which was two-thirds of the full benefit.
On December 17, 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was enacted, which retroactively reinstated and extended the Federal R&D Tax Credit from January 1, 2010 to December 31, 2011. The retroactive benefit for the previously expired period from January 1, 2010 to September 30, 2010 was recognized and lowered the Company’s effective income tax rate by about 4 percent for the six months ended March 31, 2011.
The Company’s U.S. Federal income tax returns for the tax years ended September 30, 2007 and prior have been audited by the IRS and are closed to further adjustments by the IRS except for refund claims the Company filed for the tax years ended September 30, 2006 and 2007. The IRS is currently auditing the Company’s tax returns for the tax years ended September 30, 2008 and 2009 as well as refund claims for prior years. The Company is also currently under audit in various U.S. states and non-U.S. jurisdictions. The U.S. state and non-U.S. jurisdictions have statutes of limitations generally ranging from 3 to 5 years. The Company believes it has adequately provided for any tax adjustments that may result from the various audits.
The Company had net income tax payments of $41 million and $54 million during the six months ended March 31, 2011 and 2010, respectively.
The Company had gross unrecognized tax benefits recorded within Other Liabilities in the Condensed Consolidated Statement of Financial Position of $92 million and $78 million as of March 31, 2011 and September 30, 2010, respectively. The total amounts of unrecognized tax benefits that, if recognized, would affect the effective income tax rate were $52 million at both March 31, 2011 and September 30, 2010. Although the timing and outcome of tax settlements are uncertain, it is reasonably possible that during the next 12 months, a reduction in unrecognized tax benefits may occur in the range of $0 to $36 million based on the outcome of tax examinations or as a result of the expiration of various statutes of limitations.
14
ROCKWELL COLLINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company includes interest and penalties related to unrecognized tax benefits in income tax expense. The total amount of interest and penalties recognized within Other Liabilities in the Condensed Consolidated Statement of Financial Position was $6 million and $5 million as of March 31, 2011 and September 30, 2010, respectively. The total amount of interest and penalties recorded as an expense or (income) within Income Tax Expense in the Condensed Consolidated Statement of Operations was $1 million and $(5) million for the three months ended March 31, 2011 and March 31, 2010, respectively, and $1 million and $(4) million for the six months ended March 31, 2011 and March 31, 2010, respectively.
16.
Fair Value Measurements
The FASB defines fair value as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The FASB’s guidance classifies the inputs used to measure fair value into the following hierarchy:
Level 1 -
quoted prices (unadjusted) in active markets for identical assets or liabilities
Level 2 -
quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument
Level 3 -
unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value
A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The fair value of the Company’s financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2011 and September 30, 2010 are as follows:
There were no nonfinancial assets or nonfinancial liabilities recognized at fair value on a nonrecurring basis and there were no transfers between Levels of the fair value hierarchy during the six months ended March 31, 2011.
15
ROCKWELL COLLINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The carrying amounts and fair values of the Company’s financial instruments are as follows:
Asset (Liability)
March 31, 2011
September 30, 2010
Carrying
Fair
Carrying
Fair
(in millions)
Amount
Value
Amount
Value
Cash and cash equivalents
$
236
$
236
$
435
$
435
Short-term investments
0
0
20
20
Short-term debt
(28
)
(28
)
(24
)
(24
)
Long-term debt
(499
)
(541
)
(499
)
(558
)
The fair value of cash and cash equivalents and short-term investments approximate their carrying value due to the short-term nature of the instruments and are within Level 1 of the fair value hierarchy. Short-term investments consist of certificates of deposit with a maturity date of less than one year. The fair value of short-term debt approximates its carrying value due to the short-term nature of the debt. Fair value information for long-term debt is based on current market interest rates and estimates of current market conditions for instruments with similar terms, maturities, and degree of risk. The carrying amount and fair value of long-term debt excludes the interest rate swaps fair value adjustment. These fair value estimates do not necessarily reflect the amounts the Company would realize in a current market exchange.
17.
Derivative Financial Instruments
Interest Rate Swaps
The Company manages its exposure to interest rate risk by maintaining an appropriate mix of fixed and variable rate debt, which over time should moderate the costs of debt financing. When considered necessary, the Company may use financial instruments in the form of interest rate swaps to help meet this objective. In January 2010, the Company entered into two interest rate swap contracts (the 2019 Swaps) which expire on July 15, 2019 and effectively converted $150 million of the 2019 Notes to floating rate debt based on six-month LIBOR plus 1.235 percent. On November 20, 2003, the Company entered into two interest rate swap contracts (the 2013 Swaps) which expire on December 1, 2013 and effectively converted $100 million of the 2013 Notes to floating rate debt based on six-month LIBOR less .075 percent.
The Company has designated the 2019 and 2013 Swaps (the Swaps) as fair value hedges. At March 31, 2011 and September 30, 2010, interest rate swaps were recorded within Other Assets at a fair value of $10 million and $26 million, respectively, offset by a fair value adjustment to Long-term Debt (Note 10) of $10 million and $26 million, respectively. Cash payments or receipts between the Company and the counterparties to the Swaps are recorded as an adjustment to interest expense.
Foreign Currency Forward Exchange Contracts
The Company transacts business in various foreign currencies which subjects the Company’s cash flows and earnings to exposure related to changes in foreign currency exchange rates. These exposures arise primarily from purchases or sales of products and services from third parties and intercompany transactions. Foreign currency forward exchange contracts provide for the purchase or sale of foreign currencies at specified future dates at specified exchange rates and are used to offset changes in the fair value of certain assets or liabilities or forecasted cash flows resulting from transactions denominated in foreign currencies. As of March 31, 2011 and September 30, 2010, the Company had outstanding foreign currency forward exchange contracts with notional amounts of $427 million and $404 million, respectively. These notional values consist primarily of contracts for the European euro and British pound sterling, and are stated in U.S. dollar equivalents at spot exchange rates at the respective dates.
16
ROCKWELL COLLINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Fair Value of Derivative Instruments
Fair values of derivative instruments in the Condensed Consolidated Statement of Financial Position as of March 31, 2011 and September 30, 2010 are as follows:
Asset Derivatives
March 31,
September 30,
(in millions)
Classification
2011
2010
Foreign currency forward exchange contracts
Other current assets
$
10
$
9
Interest rate swaps
Other assets
10
26
Total
$
20
$
35
Liability Derivatives
March 31,
September 30,
(in millions)
Classification
2011
2010
Foreign currency forward exchange contracts
Other current liabilities
$
8
$
8
The fair values of derivative instruments are presented on a gross basis as the Company does not have any derivative contracts which are subject to master netting arrangements. As of March 31, 2011 and September 30, 2010, $1 million and $1 million, respectively, of foreign currency forward exchange contracts, classified within Other current assets, were not designated as hedging instruments.
The effect of derivative instruments on the Condensed Consolidated Statement of Operations for the six months ended March 31, 2011 and 2010 is as follows:
Amount of Gain (Loss)
Three Months Ended
Six Months Ended
Location of
March 31
March 31
(in millions)
Gain (Loss)
2011
2010
2011
2010
Fair Value Hedges
Foreign currency forward exchange contracts
Cost of sales
$
1
$
(2
)
$
1
$
(4
)
Interest rate swaps
Interest expense
2
3
4
4
Cash Flow Hedges
Foreign currency forward exchange contracts:
Amount of gain (loss) recognized in AOCL (effective portion, before deferred tax impact)
AOCL
$
1
$
(3
)
$
3
$
0
Amount of gain (loss) reclassified from AOCL into income
Cost of sales
0
2
(1
)
5
There was no significant impact to the Company’s earnings related to the ineffective portion of any hedging instruments during the three and six months ended March 31, 2011 and 2010. In addition, there was no significant impact to the Company’s earnings when a hedged firm commitment no longer qualified as a fair value hedge or when a hedged forecasted transaction no longer qualified as a cash flow hedge during the three and six months ended March 31, 2011 and 2010.
Cash flow hedges are designated as fair value hedges once the underlying transaction is recorded on the balance sheet, or approximately 60 days from the maturity date of the hedge. The Company expects to reclassify approximately $1 million of net gains into earnings over the next 12 months. The maximum duration of a foreign currency cash flow hedge contract at March 31, 2011 was 112 months.
18.
Guarantees and Indemnifications
Product warranty costs
Accrued liabilities are recorded to reflect the Company’s contractual obligations relating to warranty commitments to customers. Warranty coverage of various lengths and terms is provided to customers depending on standard offerings and negotiated contractual agreements. An estimate for warranty expense is recorded at the time of sale based on the length of the warranty and historical warranty return rates and repair costs.
17
ROCKWELL COLLINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Changes in the carrying amount of accrued product warranty costs are summarized as follows:
Six Months Ended
March 31
(in millions)
2011
2010
Balance at beginning of year
$
183
$
217
Warranty costs incurred
(25
)
(25
)
Product warranty accrual
18
14
Changes in estimates for prior years
(11
)
(7
)
Foreign currency translation adjustments
2
0
Balance at March 31
$
167
$
199
Guarantees
The Company provides a parent company guarantee related to various obligations of its 50 percent owned joint venture, Quest Flight Training Limited (Quest). The Company has guaranteed, jointly and severally with Quadrant Group plc (Quadrant), the other joint venture partner, the performance of Quest in relation to its contract with the United Kingdom Ministry of Defence (which expires in 2030) and the performance of certain Quest subcontractors (up to $2 million). In addition, the Company has also pledged equity shares in Quest to guarantee payment by Quest of a loan agreement executed by Quest. In the event of default on this loan agreement, the lending institution can request that the trustee holding such equity shares surrender them to the lending institution in order to satisfy all amounts then outstanding under the loan agreement. As of March 31, 2011, the outstanding loan balance was approximately $6 million. Quadrant has made an identical pledge to guarantee this obligation of Quest.
Should Quest fail to meet its obligations under these agreements, these guarantees may become a liability of the Company. As of March 31, 2011, the Quest guarantees are not reflected on the Company’s Condensed Consolidated Statement of Financial Position because the Company believes that Quest will meet all of its performance and financial obligations in relation to its contract with the United Kingdom Ministry of Defence and the loan agreement.
Letters of credit
The Company has contingent commitments in the form of letters of credit. Outstanding letters of credit are issued by banks on the Company’s behalf to support certain contractual obligations to its customers. If the Company fails to meet these contractual obligations, these letters of credit may become liabilities of the Company. Total outstanding letters of credit at March 31, 2011 were $85 million. These commitments are not reflected as liabilities on the Company’s Condensed Consolidated Statement of Financial Position.
Indemnifications
The Company enters into indemnifications with lenders, counterparties in transactions such as administration of employee benefit plans and other customary indemnifications with third parties in the normal course of business. The following are other than customary indemnifications based on the judgment of management.
The Company became an independent, publicly held company on June 29, 2001, when Rockwell International Corporation (Rockwell), renamed Rockwell Automation Inc., spun off its former avionics and communications business and certain other assets and liabilities of Rockwell by means of a distribution of all the Company’s outstanding shares of common stock to the shareowners of Rockwell in a tax-free spin-off (the spin-off). In connection with the spin-off, the Company may be required to indemnify certain insurers against claims made by third parties in connection with the Company’s legacy insurance policies.
In connection with agreements for the sale of portions of its business, the Company at times retains various liabilities of a business that relate to events occurring prior to its sale, such as tax, environmental, litigation and employment matters. The Company at times indemnifies the purchaser of a Rockwell Collins business in the event that a third party asserts a claim that relates to a liability retained by the Company.
The Company also provides indemnifications of varying scope and amounts to certain customers against claims of product liability or intellectual property infringement made by third parties arising from the use of Company or customer products or intellectual property. These indemnifications generally require the Company to compensate the other party for certain damages and costs incurred as a result of third party product liability or intellectual property claims arising from these transactions.
18
ROCKWELL COLLINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The amount the Company could be required to pay under its indemnification agreements is generally limited based on amounts specified in the underlying agreements, or in the case of some agreements, the maximum potential amount of future payments that could be required is not limited. When a potential claim is asserted under these agreements, the Company considers such factors as the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. A liability is recorded when a potential claim is both probable and estimable. The nature of these agreements prevents the Company from making a reasonable estimate of the maximum potential amount it could be required to pay should counterparties to these agreements assert a claim; however, the Company currently has no material claims pending related to such agreements.
19.
Environmental Matters
The Company is subject to federal, state and local regulations relating to the discharge of substances into the environment, the disposal of hazardous wastes and other activities affecting the environment that have had and will continue to have an impact on the Company’s manufacturing operations. These environmental protection regulations may require the investigation and remediation of environmental impairments at current and previously owned or leased properties. In addition, lawsuits, claims and proceedings have been asserted on occasion against the Company alleging violations of environmental protection regulations, or seeking remediation of alleged environmental impairments, principally at previously owned or leased properties. As of March 31, 2011, the Company is involved in the investigation or remediation of eight sites under these regulations or pursuant to lawsuits asserted by third parties. Management estimates that the total reasonably possible future costs the Company could incur for seven of these sites is not significant. Management estimates that the total reasonably possible future costs the Company could incur from one of these sites to be approximately $9 million. The Company has recorded environmental reserves for this site of $3 million as of March 31, 2011, which represents management’s best estimate of the probable future cost for this site.
To date, compliance with environmental regulations and resolution of environmental claims has been accomplished without material effect on the Company’s liquidity and capital resources, competitive position or financial condition. Management believes that expenditures for environmental capital investment and remediation necessary to comply with present regulations governing environmental protection and other expenditures for the resolution of environmental claims will not have a material adverse effect on the Company’s business or financial position, but could possibly be material to the results of operations or cash flows of any one quarter.
20.
Legal Matters
The Company is subject to various lawsuits, claims and proceedings that have been or may be instituted or asserted against the Company relating to the conduct of the Company’s business, including those pertaining to product liability, antitrust, intellectual property, safety and health, exporting and importing, contract, employment and regulatory matters. Although the outcome of these matters cannot be predicted with certainty and some lawsuits, claims or proceedings may be disposed of unfavorably to the Company, management believes the disposition of matters that are pending or asserted are not expected to have a material adverse effect on the Company’s business or financial position, but could possibly be material to the results of operations or cash flows of any one quarter.
19
ROCKWELL COLLINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
21.
Business Segment Information
The sales and results of operations of the Company’s operating segments are summarized as follows:
Three Months Ended
Six Months Ended
March 31
March 31
(in millions)
2011
2010
2011
2010
Sales:
Government Systems
$
716
$
693
$
1,366
$
1,309
Commercial Systems
507
449
967
860
Total sales
$
1,223
$
1,142
$
2,333
$
2,169
Segment operating earnings:
Government Systems
$
150
$
150
$
281
$
284
Commercial Systems
92
69
176
137
Total segment operating earnings
242
219
457
421
Interest expense
(4
)
(4
)
(9
)
(10
)
Stock-based compensation
(7
)
(6
)
(12
)
(11
)
General corporate, net
(12
)
(13
)
(24
)
(24
)
Restructuring adjustment
0
0
0
1
Income before income taxes
219
196
412
377
Income tax provision
(69
)
(48
)
(111
)
(108
)
Net income
$
150
$
148
$
301
$
269
The Company evaluates performance and allocates resources based upon, among other considerations, segment operating earnings. The Company’s definition of segment operating earnings excludes income taxes, stock-based compensation, unallocated general corporate expenses, interest expense, gains and losses from the disposition of businesses, restructuring and asset impairment charges and other special items as identified by management from time to time. Intersegment sales are not material and have been eliminated.
The following table summarizes sales by product category for the three and six months ended March 31, 2011 and
2010:
Three Months Ended
Six Months Ended
March 31
March 31
(in millions)
2011
2010
2011
2010
Government Systems product categories:
Airborne solutions
$
497
$
455
$
935
$
865
Surface solutions
219
238
431
444
Government Systems sales
$
716
$
693
$
1,366
$
1,309
Commercial Systems product categories:
Air transport aviation electronics
$
276
$
251
$
526
$
492
Business and regional aviation electronics
231
198
441
368
Commercial Systems sales
$
507
$
449
$
967
$
860
Product category sales for defense-related products in the Government Systems segment are delineated based upon the difference in underlying customer base and market served.
The air transport and business and regional aviation electronics product categories are delineated based upon the difference in underlying customer base, size of aircraft and markets served. For the three and six months ended March 31, 2011, product category sales for air transport aviation electronics include revenue from wide-body in-flight entertainment products and services of $29 million and $56 million, respectively, compared to $35 million and $78 million for the three and six months ended March 31, 2010.
20
ROCKWELL COLLINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
22.
Subsequent Event
On April 20, 2011, the Company entered into an agreement with Bombardier Inc. (Bombardier) to provide them $237 million of cash on a short term, interest free and unsecured basis in connection with their Global Vision aircraft program. The agreement requires Bombardier to repay the amount in full within 60 days of the Company’s successful completion of certain regulatory approvals with the U.S. Federal Aviation Authority that are related to a Commercial Systems avionics development program. The Company successfully met these conditions on April 20, 2011 and, as a result, the repayment by Bombardier is expected to take place on or before June 20, 2011. The Company funded the payment to Bombardier by issuing short term commercial paper borrowings. The Company entered into this agreement with Bombardier to assist them by offsetting some delays they are experiencing in receiving customer advance payments on their Global Vision aircraft program.
21
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
RESULTS OF OPERATIONS
The following management discussion and analysis is based on financial results for the three and six months ended March 31, 2011 and 2010 and should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto in Item 1 of Part I of this quarterly report.
Three Months Ended March 31, 2011 and 2010
Sales
Three Months Ended
March 31
(dollars in millions)
2011
2010
Total sales
$
1,223
$
1,142
Percent increase
7
%
Total sales for the three months ended March 31, 2011 increased $81 million compared to the three months ended March 31, 2010 due to a $58 million increase in Commercial Systems sales and a $23 million increase in Government Systems sales. See the following Government Systems and Commercial Systems Financial Results sections for further discussion of sales.
