Rockwell Collins, Inc. (NYSE: COL) specializes in the production of radios, navigation systems and cockpit displays for military and commercial aircraft. Although the company's largest clients are government agencies like NASA and the Department of Defense, the company generates the majority of its revenue and net income from sales to commercial clients. An important aspect of the company's business model is that it builds new applications for government clients and then adapts these same technologies for its commercial business. As a result, COL is able to take advantage of considerable R&D savings.
The performance of Rockwell Collins' government sector is largely dependent on the allocation of the U.S. defense budget. U.S. government sales comprised 43% of total COL sales, and COL continues to invest heavily in the research and development of new products in order to obtain future government contracts. COL's business is also susceptible to the cyclicality of the aerospace industry, and COL's commercial sector is tied to the fortunes of commercial airlines'. In order to capitalize on perceived market opportunities, COL has begun investing more in data systems for business jet customers (i.e. e-mail and broadcast TV), which it believes will generate higher returns on investment than in-flight entertainments systems for wide body jets.
Rockwell Collins operates two main business segments.
Demand for Rockwell Collins' Commercial Systems products is largely determined by the commercial airlines industry. Although the Government Systems segment reduces COL's exposure to market volatility, the seasonal and cyclical nature of the air travel industry still causes periodic downturns and upturns in COL's business, and extraordinary circumstances like 9/11 or the SARS outbreak negatively impact both airlines and manufacturers like Rockwell Collins.
Fuel costs account for a large part of airline operating budgets. Elevating fuel prices increase costs and reduce profits for airline companies, who may cut down on airplane orders to make ends meet. Furthermore, because a large portion of COL's commercial products are discretionary, airlines may prefer to pass on such goods when times are tough. At the same time, fuel pricing pressure has also increased demand for fuel-efficient aircrafts, a trend which Rockwell Collins hopes will generate additional work contracts as more fuel efficient airplanes are produced.
Uncertainty pertaining to business markets in the US and abroad caused by terrorist attacks and conflicts like the Iraq War adversely affect Rockwell Collins. In fact, international conflicts result in reduced aircraft build rates, decreased demand for upgrades, as well as smaller expenditures on discretionary products like in-flight entertainment. While the Government Systems division may benefit in such circumstances from increased government defense spending, foreign conflicts and terrorist attacks often increase the price of oil, and raise the cost of property and aviation products insurance, both of which raise COL's costs of production.
36% of Rockwell Collins' sales are generated from U.S. government contracts. Indeed, Rockwell Collins' revenues are largely dependent on the US Department of Defense's budget spending, and on their ability to win new contracts. As a result, COL is exposed to a number of risks beyond their control. The U.S. government, for example, is able to terminate without prior notice partially completed government programs and contracts that were previously authorized. Additionally, changes in legislation or political policies regarding military developments often affect the availability of government business. The Department of Defense's budget varies according to perceived threat to the US, and reduced levels of global threat usually require less defense spending.
Rockwell Collins operates in an international landscape and faces domestic and foreign competition. Due to its high barriers of entry, the market for commercial cockpit controls is dominated by Rockwell Collins, Honeywell International (HON), and Thales. The in-flight entertainment industry is similarly concentrated, with COL and Japan's Matsushita Electric Industrial Company (MC) each controlling 50% of market share. Finally, COL's Government Systems division competes primarily with Raytheon Company (RTN).
To a lesser degree, Rockwell Collins also competes with the following companies: Panasonic, Harris (HRS), BAE Systems (BAESY), General Dynamics Corporation, L-3 Communications Holdings (LLL), Boeing Company (BA), and Northrop Grumman (NOC).