Attached files
file | filename |
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EXCEL - IDEA: XBRL DOCUMENT - ROCKWELL COLLINS INC | Financial_Report.xls |
EX-12 - ROCKWELL COLLINS INC | v172298_ex12.htm |
EX-31.1 - ROCKWELL COLLINS INC | v172298_ex31-1.htm |
EX-32.2 - ROCKWELL COLLINS INC | v172298_ex32-2.htm |
EX-32.1 - ROCKWELL COLLINS INC | v172298_ex32-1.htm |
EX-31.2 - ROCKWELL COLLINS INC | v172298_ex31-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
þ QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2009
¨ 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
157,218,806
shares of registrant's Common Stock, par value $.01 per share, were outstanding
on January 18, 2010.
ROCKWELL
COLLINS, INC.
INDEX
Page
No.
|
||||||
PART
I.
|
FINANCIAL
INFORMATION:
|
|||||
Item
1.
|
Condensed
Consolidated Financial Statements:
|
|||||
Condensed
Consolidated Statement of Financial Position (Unaudited) —
December 31, 2009 and September 30, 2009 |
2
|
|||||
Condensed
Consolidated Statement of Operations (Unaudited) —
Three
Months Ended December 31, 2009 and 2008
|
3
|
|||||
Condensed
Consolidated Statement of Cash Flows (Unaudited) —
Three Months Ended December 31, 2009 and 2008 |
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
|
28 |
|
|||
Item
4.
|
Controls
and Procedures
|
29 |
|
|||
PART
II.
|
OTHER
INFORMATION:
|
|||||
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
30 |
|
|||
Item
6.
|
Exhibits
|
31 |
|
|||
Signatures
|
32 |
|
1
PART
I. FINANCIAL INFORMATION
Item
1. Condensed Consolidated Financial
Statements
ROCKWELL
COLLINS, INC.
CONDENSED
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Unaudited)
(in
millions, except per share amounts)
December
31,
|
September
30,
|
|||||||
2009
|
2009
|
|||||||
ASSETS
|
||||||||
Current
Assets:
|
||||||||
Cash
and cash equivalents
|
$ | 206 | $ | 235 | ||||
Receivables,
net
|
825 | 913 | ||||||
Inventories,
net
|
1,022 | 943 | ||||||
Current
deferred income taxes
|
155 | 154 | ||||||
Other
current assets
|
96 | 117 | ||||||
Total
current assets
|
2,304 | 2,362 | ||||||
Property
|
714 | 719 | ||||||
Goodwill
|
761 | 695 | ||||||
Intangible
Assets
|
307 | 269 | ||||||
Long-term
Deferred Income Taxes
|
350 | 371 | ||||||
Other
Assets
|
213 | 229 | ||||||
TOTAL
ASSETS
|
$ | 4,649 | $ | 4,645 | ||||
LIABILITIES
AND EQUITY
|
||||||||
Current
Liabilities:
|
||||||||
Short-term
debt
|
$ | 62 | $ | - | ||||
Accounts
payable
|
339 | 366 | ||||||
Compensation
and benefits
|
185 | 199 | ||||||
Advance
payments from customers
|
342 | 349 | ||||||
Product
warranty costs
|
210 | 217 | ||||||
Other
current liabilities
|
241 | 228 | ||||||
Total
current liabilities
|
1,379 | 1,359 | ||||||
Long-term
Debt, net
|
529 | 532 | ||||||
Retirement
Benefits
|
1,141 | 1,254 | ||||||
Other
Liabilities
|
216 | 205 | ||||||
Equity:
|
||||||||
Common
stock ($0.01 par value; shares authorized: 1,000; shares
issued: 183.8)
|
2 | 2 | ||||||
Additional
paid-in capital
|
1,389 | 1,395 | ||||||
Retained
earnings
|
2,524 | 2,444 | ||||||
Accumulated
other comprehensive loss
|
(1,075 | ) | (1,080 | ) | ||||
Common
stock in treasury, at cost (shares held: December 31, 2009, 26.5;
September
30, 2009, 26.7)
|
(1,459 | ) | (1,469 | ) | ||||
Total
shareowners’ equity
|
1,381 | 1,292 | ||||||
Noncontrolling
interest
|
3 | 3 | ||||||
Total
equity
|
1,384 | 1,295 | ||||||
TOTAL
LIABILITIES AND EQUITY
|
$ | 4,649 | $ | 4,645 |
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
|
||||||||
December
31
|
||||||||
2009
|
2008
|
|||||||
Sales:
|
||||||||
Product
sales
|
$ | 927 | $ | 958 | ||||
Service
sales
|
100 | 100 | ||||||
Total
sales
|
1,027 | 1,058 | ||||||
Costs,
expenses and other:
|
||||||||
Product
cost of sales
|
666 | 664 | ||||||
Service
cost of sales
|
68 | 68 | ||||||
Selling,
general and administrative expenses
|
109 | 105 | ||||||
Interest
expense
|
6 | 4 | ||||||
Other
income, net
|
(3 | ) | (5 | ) | ||||
Total
costs, expenses and other
|
846 | 836 | ||||||
Income
before income taxes
|
181 | 222 | ||||||
Income
tax provision
|
60 | 71 | ||||||
Net
income
|
$ | 121 | $ | 151 | ||||
Earnings
per share:
|
||||||||
Basic
|
$ | 0.77 | $ | 0.96 | ||||
Diluted
|
$ | 0.76 | $ | 0.95 | ||||
Weighted
average common shares:
|
||||||||
Basic
|
157.1 | 158.1 | ||||||
Diluted
|
159.2 | 159.2 | ||||||
Cash
dividends per share
|
$ | 0.24 | $ | 0.24 |
See Notes
to Condensed Consolidated Financial Statements.
3
ROCKWELL
COLLINS, INC.
CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(in
millions)
Three
Months Ended
|
||||||||
December
31
|
||||||||
2009
|
2008
|
|||||||
Operating
Activities:
|
||||||||
Net
income
|
$ | 121 | $ | 151 | ||||
Adjustments
to arrive at cash provided by operating activities:
|
||||||||
Depreciation
|
27 | 26 | ||||||
Amortization
of intangible assets
|
9 | 6 | ||||||
Stock-based
compensation expense
|
5 | 5 | ||||||
Compensation
and benefits paid in common stock
|
17 | 17 | ||||||
Tax
benefit from stock-based compensation
|
2 | - | ||||||
Excess
tax benefit from stock-based compensation
|
(2 | ) | - | |||||
Deferred
income taxes
|
5 | - | ||||||
Pension
plan contributions
|
(101 | ) | (4 | ) | ||||
Changes
in assets and liabilities, excluding effects of acquisitions and
foreign
currency adjustments:
|
||||||||
Receivables
|
118 | 76 | ||||||
Inventories
|
(87 | ) | (63 | ) | ||||
Accounts
payable
|
(31 | ) | (92 | ) | ||||
Compensation
and benefits
|
(13 | ) | (121 | ) | ||||
Advance
payments from customers
|
(7 | ) | (22 | ) | ||||
Income
taxes
|
48 | 86 | ||||||
Other
assets and liabilities
|
(27 | ) | (44 | ) | ||||
Cash
Provided by Operating Activities
|
84 | 21 | ||||||
Investing
Activities:
|
||||||||
Property
additions
|
(26 | ) | (45 | ) | ||||
Acquisition
of businesses, net of cash acquired
|
(92 | ) | (28 | ) | ||||
Other
investing activities
|
(1 | ) | - | |||||
Cash
Used for Investing Activities
|
(119 | ) | (73 | ) | ||||
Financing
Activities:
|
||||||||
Purchases
of treasury stock
|
(28 | ) | (41 | ) | ||||
Cash
dividends
|
(38 | ) | (38 | ) | ||||
Increase
in short-term borrowings
|
62 | 154 | ||||||
Proceeds
from the exercise of stock options
|
7 | 1 | ||||||
Excess
tax benefit from stock-based compensation
|
2 | - | ||||||
Cash
Provided by Financing Activities
|
5 | 76 | ||||||
Effect
of exchange rate changes on cash and cash equivalents
|
1 | 1 | ||||||
Net
Change in Cash and Cash Equivalents
|
(29 | ) | 25 | |||||
Cash
and Cash Equivalents at Beginning of Period
|
235 | 175 | ||||||
Cash
and Cash Equivalents at End of Period
|
$ | 206 | $ | 200 |
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 ending on the Friday closest to the
last day of the quarter. For ease of presentation, December 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, 2009.
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 months ended
December 31, 2009 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.
Management has evaluated subsequent events through January 28, 2010, the date
the Company’s Form 10-Q was filed with the Securities and Exchange
Commission.
2.
|
Recently
Issued Accounting Standards
|
In
September 2009, the Financial Accounting Standards Board (FASB) amended the
guidance for allocating revenue to multiple deliverables in a contract. The
amendment is effective for the Company at the beginning of fiscal year 2011,
with early adoption permitted. 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 adoption of this amendment is not expected to materially affect
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.
In
November 2008, the FASB ratified guidance related to accounting for defensive
intangible assets subsequent to their acquisition. The new guidance also
discusses the treatment of the estimated useful life for such assets. Acquired
defensive intangible assets include assets that an entity does not intend to
actively use, but does intend to hold or “lock up” such that others are
prevented from using the asset. The Company adopted this guidance in the first
quarter of fiscal year 2010 with no impact to the Company’s financial
statements. However, the standard could have a significant effect on any
defensive intangible assets the Company acquires in the future.
In June
2008, the FASB issued a position specifying that unvested share-based awards
that contain nonforfeitable rights to dividends or dividend equivalents are
participating securities and should therefore be included in the computation of
earnings per share (EPS) pursuant to the two-class method. The Company adopted
this standard in the first quarter of fiscal year 2010 with no material effect
on the Company’s financial statements or computation of EPS.
In
December 2007, the FASB issued a standard that significantly changes the way
companies account for business combinations and will generally require more
assets acquired and liabilities assumed to be measured at their acquisition-date
fair value. Under the standard, legal fees and other transaction-related costs
are expensed as incurred and are no longer included in goodwill as a cost of
acquiring the business. The standard also requires acquirers to estimate the
acquisition-date fair value of any contingent consideration and to recognize any
subsequent changes in the fair value of contingent consideration in
earnings. In addition, restructuring costs the acquirer expects, but is not
obligated to incur, will be recognized separately from the business acquisition.
The Company adopted this standard in the first quarter of fiscal year 2010. The
new standard is applied prospectively to all business combinations with an
acquisition date on or after October 1, 2009. See Note 3 for discussion of
business combination transactions occurring during the three months ended
December 31, 2009.
5
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In
December 2007, the FASB issued a standard that changes the way companies account
for and report noncontrolling interests (minority interests) of consolidated
subsidiaries. The Company adopted this standard in the first quarter of fiscal
year 2010 with no impact to the Company’s financial statements other than
the Company has changed the presentation of noncontrolling interests on the
Condensed Consolidated Statement of Financial Position. Noncontrolling interests
of $3 million at December 31, 2009 and at September 30, 2009 are now included
within Equity. Previously, noncontrolling interests were included within Other
Liabilities.
3.
|
Acquisitions
|
AR
Group, Inc.
On
December 31, 2009, the Company acquired all the shares of AR Group, Inc. (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 purchase price, net of cash acquired, was approximately $91
million of which $90 million was paid in cash during the three months ended
December 31, 2009 and $1 million was paid subsequent to the first fiscal quarter
in January 2010. The Company is in the process of allocating the purchase price
and obtaining a valuation for acquired intangible assets and their useful lives.
Based on the Company’s preliminary allocation of the purchase price, $62 million
has been allocated to goodwill and $29 million to finite-lived intangible assets
with a weighted average life of approximately 7 years. The excess purchase price
over net assets acquired reflects the Company’s view that this acquisition will
broaden the Company’s information management and aftermarket service offerings.
The Company is currently evaluating the portion of the goodwill that may be tax
deductible. Air Routing goodwill is included within the Commercial Systems
segment.
DataPath,
Inc.
On May
29, 2009, the Company acquired all the shares of DataPath, Inc. (DataPath).
DataPath, with operations in the U.S. and Sweden, is a global leader in creating
satellite-based communication solutions, primarily for military applications.
The purchase price, net of cash acquired, was approximately $125 million, of
which $118 million was paid in cash during the third fiscal quarter of 2009 and
$2 million was paid in cash during the three months ended December 31, 2009. The
remaining $5 million is to be paid through 2011. The Company is in the process
of allocating the purchase price, finalizing the pre-acquisition income tax
calculation and obtaining the valuation for acquired intangible assets and their
useful lives. Based on the Company’s preliminary allocation of the purchase
price, $59 million has been allocated to goodwill and $29 million to
finite-lived intangible assets with a weighted average life of approximately 6
years. The excess purchase price over net assets acquired reflects the Company’s
view that this acquisition will augment the Company’s networked communication
offerings. The Company currently estimates that none of the goodwill resulting
from the acquisition is tax deductible. The goodwill is included within the
Government Systems segment.
SEOS
Group Limited
On
November 24, 2008, the Company acquired all the shares of SEOS Group Limited
(SEOS). SEOS, with operations in the United Kingdom and the U.S., is a
leading global supplier of highly realistic visual display solutions for
commercial and military flight simulators. SEOS is included within the results
of both the Government Systems and Commercial Systems segments. The cash
purchase price, net of cash acquired, was $28 million. Additional consideration
of up to $8 million may be paid post-closing, contingent upon the achievement of
certain milestones. Any such additional consideration will be accounted for as
goodwill. In the first quarter of 2010, the purchase price allocation was
finalized with $28 million allocated to goodwill and $9 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 further enhance the Company’s simulation and training
capabilities and provide more innovative and integrated solutions for the
Company’s customers. None of the goodwill resulting from the acquisition is tax
deductible. The goodwill is allocated to the Government Systems and Commercial
Systems segments in the amounts of $20 million and $8 million,
respectively.
6
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4.
|
Receivables,
Net
|
Receivables,
net are summarized as follows:
December
31,
|
September
30,
|
|||||||
(in
millions)
|
2009
|
2009
|
||||||
Billed
|
$ | 625 | $ | 734 | ||||
Unbilled
|
243 | 217 | ||||||
Less
progress payments
|
(31 | ) | (27 | ) | ||||
Total
|
837 | 924 | ||||||
Less
allowance for doubtful accounts
|
(12 | ) | (11 | ) | ||||
Receivables,
net
|
$ | 825 | $ | 913 |
Receivables
not expected to be collected during the next twelve months are classified as
long-term and are included within Other Assets.
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.
5.
|
Inventories,
Net
|
Inventories,
net are summarized as follows:
December
31,
|
September
30,
|
|||||||
(in
millions)
|
2009
|
2009
|
||||||
Finished
goods
|
$ | 176 | $ | 177 | ||||
Work
in process
|
294 | 262 | ||||||
Raw
materials, parts and supplies
|
355 | 341 | ||||||
Less
progress payments
|
(57 | ) | (77 | ) | ||||
Total
|
768 | 703 | ||||||
Pre-production
engineering costs
|
254 | 240 | ||||||
Inventories,
net
|
$ | 1,022 | $ | 943 |
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. 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.
7
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6.
|
Property
|
Property
is summarized as follows:
December
31,
|
September
30,
|
|||||||
(in
millions)
|
2009
|
2009
|
||||||
Land
|
$ | 30 | $ | 30 | ||||
Buildings
and improvements
|
350 | 349 | ||||||
Machinery
and equipment
|
899 | 891 | ||||||
Information
systems software and hardware
|
263 | 259 | ||||||
Furniture
and fixtures
|
62 | 62 | ||||||
Construction
in progress
|
92 | 88 | ||||||
Total
|
1,696 | 1,679 | ||||||
Less
accumulated depreciation
|
(982 | ) | (960 | ) | ||||
Property
|
$ | 714 | $ | 719 |
7.
|
Goodwill
and Intangible Assets
|
Changes
in the carrying amount of goodwill for the three months ended December 31, 2009
are summarized as follows:
Government
|
Commercial
|
|||||||||||
(in
millions)
|
Systems
|
Systems
|
Total
|
|||||||||
Balance
at September 30, 2009
|
$ | 496 | $ | 199 | $ | 695 | ||||||
Air
Routing acquisition
|
- | 62 | 62 | |||||||||
DataPath
adjustment
|
6 | - | 6 | |||||||||
Foreign
currency translation adjustments
|
(2 | ) | - | (2 | ) | |||||||
Balance
at December 31, 2009
|
$ | 500 | $ | 261 | $ | 761 |
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.
Intangible
assets are summarized as follows:
December
31, 2009
|
September
30, 2009
|
|||||||||||||||||||||||
Accum
|
Accum
|
|||||||||||||||||||||||
(in
millions)
|
Gross
|
Amort
|
Net
|
Gross
|
Amort
|
Net
|
||||||||||||||||||
Intangible
assets with finite lives:
|
||||||||||||||||||||||||
Developed
technology and patents
|
$ | 226 | $ | (109 | ) | $ | 117 | $ | 214 | $ | (104 | ) | $ | 110 | ||||||||||
Customer
relationships
|
206 | (39 | ) | 167 | 174 | (36 | ) | 138 | ||||||||||||||||
License
agreements
|
20 | (4 | ) | 16 | 17 | (4 | ) | 13 | ||||||||||||||||
Trademarks
and tradenames
|
15 | (10 | ) | 5 | 15 | (9 | ) | 6 | ||||||||||||||||
Intangible
assets with indefinite lives:
|
||||||||||||||||||||||||
Trademarks
and tradenames
|
2 | - | 2 | 2 | - | 2 | ||||||||||||||||||
Intangible
assets
|
$ | 469 | $ | (162 | ) | $ | 307 | $ | 422 | $ | (153 | ) | $ | 269 |
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-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. The net book value of sales incentives included in
Customer Relationship Intangible Assets was $129 million and $109 million
at December 31, 2009 and September 30, 2009, respectively.
Amortization
expense for intangible assets for the three months ended December 31, 2009 was
$9 million compared to $6 million for the three months ended December 31, 2008.
Annual amortization expense for intangible assets for 2010, 2011, 2012, 2013 and
2014 is expected to be $36 million, $38 million, $37 million, $34 million and
$33 million, respectively.
8
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8.
|
Other
Assets
|
Other
assets are summarized as follows:
December
31,
|
September
30,
|
|||||||
(in
millions)
|
2009
|
2009
|
||||||
Long-term
receivables
|
$ | 82 | $ | 97 | ||||
Investments
in equity affiliates
|
11 | 10 | ||||||
Exchange
and rental assets, net of accumulated depreciation of $105 at
December
31, 2009 and $103 at September 30, 2009
|
49 | 50 | ||||||
Other
|
71 | 72 | ||||||
Other
assets
|
$ | 213 | $ | 229 |
Investments
in equity affiliates primarily consist of four joint ventures:
|
·
|
Vision
Systems International, LLC (VSI): VSI is a joint venture with
Elbit Systems, Ltd. for the joint pursuit of helmet mounted cueing systems
for the worldwide military fixed wing aircraft
market
|
|
·
|
Data
Link Solutions LLC (DLS): DLS is a joint venture with BAE
Systems, plc for the joint pursuit of the worldwide military data link
market
|
|
·
|
Integrated
Guidance Systems LLC (IGS): IGS is a joint venture with
Honeywell International Inc. for the joint pursuit of integrated precision
guidance solutions for worldwide guided weapons
systems
|
|
·
|
Quest
Flight Training Limited (Quest): Quest is a joint venture with
Quadrant Group plc (Quadrant) that provides aircrew training services
primarily for the United Kingdom Ministry of
Defence
|
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 VSI, DLS, IGS and
Quest 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 $20
million and $18 million for the three months ended December 31, 2009 and 2008,
respectively. The deferred portion of profit generated from sales to equity
affiliates was $2 million at December 31, 2009 and $3 million at September 30,
2009.
9.
|
Other
Current Liabilities
|
Other
current liabilities are summarized as follows:
December
31,
|
September
30,
|
|||||||
(in
millions)
|
2009
|
2009
|
||||||
Customer
incentives
|
$ | 118 | $ | 122 | ||||
Contract
reserves
|
11 | 11 | ||||||
Income
taxes payable
|
27 | 4 | ||||||
Other
|
85 | 91 | ||||||
Other
current liabilities
|
$ | 241 | $ | 228 |
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.
9
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 December
31, 2009, short-term commercial paper borrowings outstanding were $62 million
with a weighted average interest rate and maturity period of 0.14 percent and 7
days, respectively. At September 30, 2009, there were no outstanding commercial
paper borrowings.
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 corporate 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 19 percent as
of December 31, 2009. 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 December 31, 2009
and September 30, 2009, there were no outstanding borrowings under this
revolving credit facility.
In
addition, short-term credit facilities available to non-U.S. subsidiaries
amounted to $61 million as of December 31, 2009, of which $21 million was
utilized to support commitments in the form of commercial letters of credit. As
of December 31, 2009 and September 30, 2009, there were no short-term borrowings
outstanding under the Company’s non-U.S. subsidiaries’ credit
facilities.
At
December 31, 2009 and September 30, 2009, 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 from time to time. 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.
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 aggregate principal amount of the 2013 Notes
to floating rate debt based on six-month LIBOR less 7.5 basis points. See Notes
16, 17 and 23 for additional information relating to the interest rate swap
contracts.
The 2019
Notes 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.
10
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As of
December 31, 2009, $25 million was outstanding under a five-year unsecured
variable rate loan agreement for a non-U.S. subsidiary that was entered into in
June 2006. 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.
Long-term
debt and a reconciliation to the carrying amount is summarized as
follows:
December
31,
|
September
30,
|
|||||||
(in
millions)
|
2009
|
2009
|
||||||
Principal
amount of 2019 Notes, net of discount
|
$ | 298 | $ | 298 | ||||
Principal
amount of 2013 Notes
|
200 | 200 | ||||||
Principal
amount of variable rate loan due June 2011
|
25 | 26 | ||||||
Fair
value swap adjustment (Notes 16 and 17)
|
6 | 8 | ||||||
Long-term
debt, net
|
$ | 529 | $ | 532 |
The
Company was in compliance with all debt covenants at December 31, 2009 and
September 30, 2009.
Interest
paid on debt for the three months ended December 31, 2009 and 2008 was $3
million and $6 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.
Pension
Benefits
The
components of expense (income) for Pension Benefits for the three months ended
December 31, 2009 and 2008 are as follows:
Three
Months Ended
|
||||||||
December
31
|
||||||||
(in
millions)
|
2009
|
2008
|
||||||
Service
cost
|
$ | 2 | $ | 2 | ||||
Interest
cost
|
40 | 42 | ||||||
Expected
return on plan assets
|
(53 | ) | (49 | ) | ||||
Amortization:
|
||||||||
Prior
service cost
|
(5 | ) | (5 | ) | ||||
Net
actuarial loss
|
23 | 7 | ||||||
Net
benefit expense (income)
|
$ | 7 | $ | (3 | ) |
Other
Retirement Benefits
The
components of expense (income) for Other Retirement Benefits for the three
months ended December 31, 2009 and 2008 are as follows:
Three
Months Ended
|
||||||||
December
31
|
||||||||
(in
millions)
|
2009
|
2008
|
||||||
Service
cost
|
$ | 1 | $ | 1 | ||||
Interest
cost
|
3 | 3 | ||||||
Expected
return on plan assets
|
- | - | ||||||
Amortization:
|
||||||||
Prior
service cost
|
(6 | ) | (6 | ) | ||||
Net
actuarial loss
|
3 | 3 | ||||||
Net
benefit expense
|
$ | 1 | $ | 1 |
11
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 October 2009, the Company made a $98 million contribution to the U.S.
qualified pension plan. The Company does not currently anticipate that it will
be required by governmental regulations to make any additional contributions to
the U.S. qualified pension plan in 2010. Any additional future contributions
necessary to satisfy the minimum statutory funding requirements are dependent
upon actual plan asset returns, interest rates and any changes to the U.S.
pension funding legislation. The Company may elect to make additional
discretionary contributions during 2010 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 2010. For the three months ended
December 31, 2009 and 2008, the Company made contributions to the non-U.S. plans
and the U.S. non-qualified pension plan of $3 million and $4 million,
respectively.
12.
|
Stock-Based
Compensation
|
Total
stock-based compensation expense included within the Condensed Consolidated
Statement of Operations is as follows:
Three
Months Ended
|
||||||||
December
31
|
||||||||
(in
millions)
|
2009
|
2008
|
||||||
Stock-based
compensation expense included in:
|
||||||||
Product
cost of sales
|
$ | 1 | $ | 1 | ||||
Service
cost of sales
|
- | 1 | ||||||
Selling,
general and administrative expenses
|
4 | 3 | ||||||
Total
|
$ | 5 | $ | 5 |
The
Company issued awards of equity instruments under the Company’s various
incentive plans for the three months ended December 31, 2009 and 2008 as
follows:
Performance
|
Restricted
|
Restricted
|
||||||||||||||||||||||||||||||
Options
|
Shares
|
Stock
|
Stock
Units
|
|||||||||||||||||||||||||||||
Weighted
|
Weighted
|
Weighted
|
Weighted
|
|||||||||||||||||||||||||||||
(shares
in thousands)
|
Number
|
Average
|
Number
|
Average
|
Number
|
Average
|
Number
|
Average
|
||||||||||||||||||||||||
Issued
|
Fair
Value
|
Issued
|
Fair
Value
|
Issued
|
Fair
Value
|
Issued
|
Fair
Value
|
|||||||||||||||||||||||||
Three
months ended
December
31, 2009
|
790.9 | $ | 12.80 | 190.3 | $ | 53.08 | 56.6 | $ | 53.08 | 6.8 | $ | 51.90 | ||||||||||||||||||||
Three
months ended
December
31, 2008
|
1,290.7 | $ | 7.07 | 299.9 | $ | 30.39 | 98.7 | $ | 30.39 | 15.5 | $ | 33.83 |
The
maximum number of shares of common stock that can be issued with respect to the
performance shares granted in 2010 based on the achievement of performance
targets for fiscal years 2010 through 2012 is 457 thousand.
The fair
value of each option granted by the Company was estimated using a binomial
lattice pricing model and the following assumptions:
2010
|
2009
|
|||||||
Grants
|
Grants
|
|||||||
Risk-free
interest rate (U.S. Treasury zero coupon issues)
|
2.69 | % | 2.37 | % | ||||
Expected
dividend yield
|
2.33 | % | 1.59 | % | ||||
Expected
volatility
|
27.00 | % | 24.00 | % | ||||
Expected
life
|
7
years
|
6
years
|
12
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Employee
Benefits Paid in Company Stock
During
the three months ended December 31, 2009 and 2008, 0.3 million and 0.5 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 $17 million for each of the respective periods.
Earnings
Per Share and Diluted Share Equivalents
The
computation of basic and diluted earnings per share is as follows:
Three
Months Ended
|
||||||||
December
31
|
||||||||
(in
millions, except per share amounts)
|
2009
|
2008
|
||||||
Numerator:
|
||||||||
Numerator
for basic and diluted earnings per share –
Net
income
|
$ | 121 | $ | 151 | ||||
Denominator:
|
||||||||
Denominator
for basic earnings per share –
weighted
average common shares
|
157.1 | 158.1 | ||||||
Effect
of dilutive securities:
|
||||||||
Stock
options
|
1.7 | 0.9 | ||||||
Performance
shares, restricted shares and restricted stock units
|
0.4 | 0.2 | ||||||
Dilutive
potential common shares
|
2.1 | 1.1 | ||||||
Denominator
for diluted earnings per share –
adjusted
weighted average shares and assumed conversion
|
159.2 | 159.2 | ||||||
Earnings
per share:
|
||||||||
Basic
|
$ | 0.77 | $ | 0.96 | ||||
Diluted
|
$ | 0.76 | $ | 0.95 |
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
0.8 million and 2.3 million for the three months ended December 31, 2009 and
2008, respectively.
13.
|
Comprehensive
Income
|
Comprehensive
income consists of the following:
Three
Months Ended
|
||||||||
December
31
|
||||||||
(in
millions)
|
2009
|
2008
|
||||||
Net
income
|
$ | 121 | $ | 151 | ||||
Unrealized
foreign currency translation adjustment
|
(4 | ) | (7 | ) | ||||
Foreign
currency cash flow hedge adjustment
|
- | (5 | ) | |||||
Amortization
of defined benefit plan costs
|
9 | - | ||||||
Comprehensive
income
|
$ | 126 | $ | 139 |
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
|
||||||||
December
31
|
||||||||
(in
millions)
|
2009
|
2008
|
||||||
Royalty
income
|
$ | 2 | $ | 1 | ||||
Earnings
from equity affiliates
|
2 | 2 | ||||||
Interest
income
|
1 | 2 | ||||||
Other
|
(2 | ) | - | |||||
Other
income, net
|
$ | 3 | $ | 5 |
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 December 31,
2009 and 2008, the effective income tax rate was 33.1 percent and 32.0 percent,
respectively.
The
effective tax rate for the three months ended December 31, 2009 increased as
compared to the three months ended December 31, 2008 primarily due to the
unfavorable impact of the expiration of the Federal Research and Development Tax
Credit (Federal R&D Tax Credit) on December 31, 2009.
The
Company's U.S. Federal income tax returns for the tax years ended September 30,
2005 and prior have been audited by the Internal Revenue Service (IRS) and are
closed to further adjustments by the IRS. The IRS is currently auditing the
Company’s tax returns for the years ended September 30, 2006 and 2007. The
Company has received certain proposed audit adjustments from the IRS for which
the Company believes it is appropriately reserved. The Company is also currently
under audit in various U.S. state 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 refunds of $6 million and $20 million during the
three months ended December 31, 2009 and 2008, respectively.
At
September 30, 2009, the Company had gross unrecognized tax benefits of $98
million recorded within Other Liabilities in the Condensed Consolidated
Statement of Financial Position, of which $56 million would affect the effective
income tax rate if recognized. At December 31, 2009, the Company had gross
unrecognized tax benefits of $104 million recorded within Other Liabilities in
the Condensed Consolidated Statement of Financial Position, of which $60 million
would affect the effective income tax rate if recognized. 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 $33 million.
The
Company recognizes 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 $11 million and $9 million as of December 31, 2009 and September
30, 2009, respectively.
14
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 December 31, 2009 and September 30, 2009 are as
follows:
December
31, 2009
|
September
30, 2009
|
||||||||||
Fair
Value
|
Fair
Value
|
Fair
Value
|
|||||||||
(in
millions)
|
Hierarchy
|
Asset
(Liability)
|
Asset
(Liability)
|
||||||||
Deferred
compensation plan investments
|
Level
1
|
$ | 37 | $ | 35 | ||||||
Interest
rate swaps
|
Level
2
|
6 | 8 | ||||||||
Foreign
currency forward exchange
contract
assets
|
Level
2
|
7 | 8 | ||||||||
Foreign
currency forward exchange
contract
liabilities
|
Level
2
|
(9 | ) | (11 | ) |
There
were no nonfinancial assets or nonfinancial liabilities recognized at fair value
on a nonrecurring basis during the three months ended December 31,
2009.
The
carrying amounts and fair values of the Company’s financial instruments are as
follows:
Asset
(Liability)
|
||||||||||||||||
December
31, 2009
|
September
30, 2009
|
|||||||||||||||
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||||||||
(in
millions)
|
Amount
|
Value
|
Amount
|
Value
|
||||||||||||
Cash
and cash equivalents
|
$ | 206 | $ | 206 | $ | 235 | $ | 235 | ||||||||
Short-term
debt
|
(62 | ) | (62 | ) | - | - | ||||||||||
Long-term
debt
|
(529 | ) | (549 | ) | (532 | ) | (559 | ) |
The fair
value of cash and cash equivalents approximate their carrying value due to the
short-term nature of the instruments. 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. These fair value estimates do not necessarily
reflect the amounts the Company would realize in a current market
exchange.
17.
|
Derivative
Financial Instruments
|
The
Company uses derivative financial instruments in the form of foreign currency
forward exchange contracts and interest rate swap contracts for the purpose of
minimizing exposure to changes in foreign currency exchange rates on business
transactions and interest rates, respectively. The Company’s policy is to
execute such instruments with banks the Company believes to be creditworthy and
not to enter into derivative financial instruments for speculative purposes or
to manage exposure for net investments in non-U.S. subsidiaries. These
derivative financial instruments do not subject the Company to undue risk as
gains and losses on these instruments generally offset gains and losses on the
underlying assets, liabilities, or anticipated transactions that are being
hedged.
15
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
All
derivative financial instruments are recorded at fair value in the Condensed
Consolidated Statement of Financial Position. For a derivative that has not been
designated as an accounting hedge, the change in the fair value is recognized
immediately through earnings. For a derivative that has been designated as an
accounting hedge of an existing asset or liability (a fair value hedge), the
change in the fair value of both the derivative and underlying asset or
liability is recognized immediately through earnings. For a derivative
designated as an accounting hedge of an anticipated transaction (a cash flow
hedge), the change in the fair value net of deferred tax impacts is recorded on
the Condensed Consolidated Statement of Financial Position in Accumulated Other
Comprehensive Loss (AOCL) to the extent the derivative is effective in
mitigating the exposure related to the anticipated transaction. The change in
the fair value related to the ineffective portion of the hedge, if any, is
immediately recognized in earnings. The amount recorded within AOCL is
reclassified into earnings in the same period during which the underlying hedged
transaction affects earnings. The Company does not exclude any amounts from the
measure of effectiveness for both fair value and cash flow hedges. All of the
Company’s derivatives were designated as accounting hedges as of December 31,
2009.
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. The Company does not have any hedges with credit-risk-related
contingent features or that required the posting of collateral as of December
31, 2009. The cash flows from derivative contracts are recorded in operating
activities in the Condensed Consolidated Statement of Cash Flows.
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. On
November 20, 2003, the Company entered into two interest rate swap contracts
(the 2013 Swaps) which expire on December 1, 2013 and effectively convert $100
million of the 4.75 percent fixed rate long-term notes to floating rate debt
based on six-month LIBOR less 7.5 basis points. The Company has designated the
Swaps as fair value hedges. At December 31, 2009 and September 30, 2009, the
Swaps were recorded within Other Assets at a fair value of $6 million and $8
million, respectively, offset by a fair value adjustment to Long-Term Debt (Note
10) of $6 million and $8 million, respectively. Cash payments or receipts
between the Company and the counterparties to the Swaps are recorded as an
adjustment to interest expense. See Note 23 for discussion of interest rate
swaps entered into subsequent to December 31, 2009.
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 December 31, 2009 and September 30, 2009, the Company had
outstanding foreign currency forward exchange contracts with notional amounts of
$360 million and $353 million, respectively. These notional values consist
primarily of contracts for the European euro, British pound sterling and
Japanese yen, 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 December 31, 2009 and September 30, 2009 are as
follows:
Asset
Derivatives
|
|||||||||
December
31,
|
September
30,
|
||||||||
(in
millions)
|
Classification
|
2009
|
2009
|
||||||
Foreign
currency forward
exchange
contracts
|
Other
current assets
|
$
|
7
|
$
|
8
|
||||
Interest
rate swaps
|
Other
assets
|
6
|
8
|
||||||
Total
|
$
|
13
|
$
|
16
|
Liability
Derivatives
|
|||||||||
December
31,
|
September
30,
|
||||||||
(in
millions)
|
Classification
|
2009
|
2009
|
||||||
Foreign
currency forward
exchange
contracts
|
Other
current liabilities
|
$
|
9
|
$
|
11
|
The
effect of derivative instruments on the Condensed Consolidated Statement of
Operations for the three months ended December 31, 2009 and 2008 is as
follows:
Amount
of Gain (Loss)
|
||||||||||
Three
Months Ended
|
||||||||||
(in
millions)
|
Location
of
|
December
31
|
||||||||
Gain
(Loss)
|
2009
|
2008
|
||||||||
Fair
Value Hedges
|
||||||||||
Foreign
currency forward exchange contracts
|
Cost
of sales
|
$ | (2 | ) | $ | 1 | ||||
Interest
rate swaps
|
Interest
expense
|
1 | 1 | |||||||
Cash
Flow Hedges
|
||||||||||
Foreign
currency forward exchange contracts:
|
||||||||||
Amount
of loss recognized in AOCL (effective portion, before deferred tax
impact)
|
AOCL
|
$ | 3 | $ | (7 | ) | ||||
Amount
of loss reclassified from AOCL into income
|
Cost
of sales
|
3 | - |
There was
no significant impact to the Company’s earnings related to the ineffective
portion of any hedging instruments during the three months ended December 31,
2009 and 2008. 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 months ended December 31, 2009 and 2008.
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 $2 million of net
gains into earnings over the next 12 months. The maximum duration of a foreign
currency cash flow hedge contract at December 31, 2009 is 127
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:
Three
Months Ended
|
||||||||
December
31
|
||||||||
(in
millions)
|
2009
|
2008
|
||||||
Balance
at beginning of year
|
$ | 217 | $ | 226 | ||||
Warranty
costs incurred
|
(14 | ) | (13 | ) | ||||
Product
warranty accrual
|
7 | 11 | ||||||
Pre-existing
warranty adjustments
|
- | - | ||||||
Balance
at December 31
|
$ | 210 | $ | 224 |
Guarantees
In
connection with the 2006 acquisition of the Quest joint venture (see Note
8) the Company entered into a parent company guarantee related to various
obligations of 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 December 31, 2009, 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 December 31, 2009, 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 December 31, 2009 were $73
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.
18
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
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 December 31, 2009, 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 $8 million. The Company has recorded environmental
reserves for this site of $3 million as of December 31, 2009, 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.
21.
|
2009
Restructuring and Asset Impairment
Charges
|
In
September 2009, the Company recorded restructuring and asset impairment charges
totaling $21 million. The charges were primarily comprised of employee
separation costs of $10 million and a non-cash real estate impairment charge
related to the Company’s plans to close its Government Systems facility in San
Jose, California and relocate engineering, production and service work to other
existing facilities.
During
the three months ended December 31, 2009, the Company reduced the employee
severance restructuring reserve by $1 million primarily due to lower than
expected employee separation costs.
19
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Changes
in the employee severance reserve during the three months ended December 31,
2009 are as follows:
Employee
|
||||
(in
millions)
|
Separation
Costs
|
|||
Balance
at September 30, 2009
|
$ | 10 | ||
Cash
payments
|
(3 | ) | ||
Reserve
adjustment
|
(1 | ) | ||
Balance
at December 31, 2009
|
$ | 6 |
22.
|
Business
Segment Information
|
The sales
and results of operations of the Company’s operating segments are summarized as
follows:
Three
Months Ended
|
||||||||
December
31
|
||||||||
(in
millions)
|
2009
|
2008
|
||||||
Sales:
|
||||||||
Government
Systems
|
$ | 616 | $ | 574 | ||||
Commercial
Systems
|
411 | 484 | ||||||
Total
sales
|
$ | 1,027 | $ | 1,058 | ||||
Segment
operating earnings:
|
||||||||
Government
Systems
|
$ | 134 | $ | 140 | ||||
Commercial
Systems
|
68 | 97 | ||||||
Total
segment operating earnings
|
202 | 237 | ||||||
Interest
expense
|
(6 | ) | (4 | ) | ||||
Stock-based
compensation
|
(5 | ) | (5 | ) | ||||
General
corporate, net
|
(11 | ) | (6 | ) | ||||
Restructuring
adjustment
|
1 | - | ||||||
Income
before income taxes
|
181 | 222 | ||||||
Income
tax provision
|
(60 | ) | (71 | ) | ||||
Net
income
|
$ | 121 | $ | 151 |
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.
20
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The
following table summarizes sales by product category for the three months ended
December 31, 2009 and 2008:
Three
Months Ended
|
||||||||
December
31
|
||||||||
(in
millions)
|
2009
|
2008
|
||||||
Government
Systems product categories:
|
||||||||
Airborne
solutions
|
$ | 410 | $ | 403 | ||||
Surface
solutions
|
206 | 171 | ||||||
Government
Systems sales
|
$ | 616 | $ | 574 | ||||
Commercial
Systems product categories:
|
||||||||
Air
transport aviation electronics
|
$ | 241 | $ | 220 | ||||
Business
and regional aviation electronics
|
170 | 264 | ||||||
Commercial
Systems sales
|
$ | 411 | $ | 484 |
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.
23.
|
Subsequent
Event
|
In January
of 2010, subsequent to the Company’s fiscal quarter ended December 31, 2009, 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
(see Note 10) to floating rate debt based on six-month LIBOR plus 1.235 percent.
The Company designated the 2019 Swaps as fair value hedges. Cash payments or
receipts between the Company and the counterparties to the 2019 Swaps will be
recorded as an adjustment to interest expense.
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 months ended December 31, 2009 and 2008 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 December 31, 2009 and 2008
Sales
Three
Months Ended
|
||||||||
December
31
|
||||||||
(dollars
in millions)
|
2009
|
2008
|
||||||
Total
sales
|
$ | 1,027 | $ | 1,058 | ||||
Percent
(decrease)
|
(3 | )% |
Total
sales for the three months ended December 31, 2009 decreased 3 percent to $1,027
million compared to the three months ended December 31, 2008. Commercial Systems
sales decreased 15 percent partially offset by Government Systems sales growth
of 7 percent. Incremental sales from the November 2008 acquisition of SEOS Group
Limited (SEOS) and the May 2009 acquisition of DataPath, Inc. (DataPath)
contributed a total of $69 million, or 7 percentage points of revenue growth.
See the following operating segment sections for further discussion of sales for
the three months ended December 31, 2009 and 2008.
Net Income and Diluted
Earnings Per Share
Three
Months Ended
|
||||||||
December
31
|
||||||||
(dollars
in millions)
|
2009
|
2008
|
||||||
Net
income
|
$ | 121 | $ | 151 | ||||
Net
income as a percent of sales
|
11.8 | % | 14.3 | % | ||||
Diluted
earnings per share
|
$ | 0.76 | $ | 0.95 |
Net
income for the three months ended December 31, 2009 decreased 20 percent to $121
million, or 11.8 percent of sales, from net income of $151 million, or 14.3
percent of sales, for the three months ended December 31, 2008. Diluted earnings
per share decreased 20 percent to $0.76 for the three months ended December 31,
2009 compared to $0.95 for the three months ended December 31, 2008. The
decrease in net income and diluted earnings per share was primarily the result
of lower Commercial Systems sales volume, an increase in defined benefit
pension expense and a higher effective income tax rate which was primarily
related to differences in the availability of the Federal R&D Tax Credit
that expired December 31, 2009.
Government
Systems Financial Results
Government Systems
Sales
The
following table presents Government Systems sales by product
category:
Three
Months Ended
|
||||||||
December
31
|
||||||||
(dollars
in millions)
|
2009
|
2008
|
||||||
Airborne
solutions
|
$ | 410 | $ | 403 | ||||
Surface
solutions
|
206 | 171 | ||||||
Total
|
$ | 616 | $ | 574 | ||||
Percent
increase
|
7 | % |
22
Airborne
solutions sales increased $7 million, or 2 percent, for the three months ended
December 31, 2009 compared to the three months ended December 31, 2008.
Incremental sales from the SEOS acquisition contributed a total of $5 million,
or 1 percentage point of the overall revenue growth. Airborne solutions organic
sales were relatively flat as lower revenues related to the F-22 program were
offset by higher tanker and transport program revenues.
Surface
solutions sales increased $35 million, or 20 percent, for the three months ended
December 31, 2009 compared to the three months ended December 31, 2008.
Incremental sales from the DataPath acquisition contributed $60 million, or 35
percentage points of revenue growth. Organic sales decreased $25 million, or 15
percent, primarily due to lower sales for the Defense Advanced GPS Receiver
(DAGR) program.
Government Systems Segment
Operating Earnings
Three
Months Ended
|
||||||||
December
31
|
||||||||
(dollars
in millions)
|
2009
|
2008
|
||||||
Segment
operating earnings
|
$ | 134 | $ | 140 | ||||
Percent
of sales
|
21.8 | % | 24.4 | % |
Government
Systems operating earnings decreased 4 percent to $134 million, or 21.8 percent
of sales, for the three months ended December 31, 2009 compared to operating
earnings of $140 million, or 24.4 percent of sales, for the same period a year
ago. The decrease in operating earnings was primarily due to an increase in
defined benefit pension expense and higher company funded research and
development costs, partially offset by the increased sales volume. Operating
margins were also impacted by lower margin revenues from the DataPath and SEOS
acquisitions.
Commercial
Systems Financial Results
Commercial Systems
Sales
The
following table presents Commercial Systems sales by product
category:
Three
Months Ended
|
||||||||
December
31
|
||||||||
(dollars
in millions)
|
2009
|
2008
|
||||||
Wide-body
in-flight entertainment products
|
$ | 18 | $ | 21 | ||||
All
other air transport aviation electronics
|
223 | 199 | ||||||
Total
air transport aviation electronics
|
241 | 220 | ||||||
Business
and regional aviation electronics
|
170 | 264 | ||||||
Total
|
$ | 411 | $ | 484 | ||||
Percent
(decrease)
|
(15 | )% |
Total air
transport aviation electronics sales increased $21 million, or 10 percent, for
the three months ended December 31, 2009 compared to the three months ended
December 31, 2008. This increase was primarily due to higher original equipment
manufacturer (OEM) sales as air transport OEM sales in the prior year were
adversely impacted by Boeing’s labor strike. This increase was partially offset
by a decline in aftermarket hardware revenue and lower service and support
revenue.
Business
and regional aviation electronics sales decreased $94 million, or 36 percent,
for the three months ended December 31, 2009 compared to the same period in the
prior year. This decrease was primarily due to lower business jet OEM sales
caused by depressed production and delivery rates at the business jet OEMs. In
addition, aftermarket hardware and service and support sales also declined due
to decreased business aircraft utilization compared to the prior year
period.
Wide-body
in-flight entertainment products (Wide-body IFE) relate to sales of twin-aisle
IFE products and systems to customers in the air transport aviation electronics
market. In September 2005 we announced our strategic decision to shift research
and development resources away from traditional IFE systems for next generation
wide-body aircraft. We continue to execute on Wide-body IFE contracts and are
supporting our existing customer base, which includes on-going service and
support activities.
23
The
following table presents Commercial Systems sales based on the type of product
or service:
Three
Months Ended
|
||||||||
December
31
|
||||||||
(in
millions)
|
2009
|
2008
|
||||||
Original
equipment
|
$ | 201 | $ | 244 | ||||
Aftermarket
|
192 | 219 | ||||||
Wide-body
in-flight entertainment products
|
18 | 21 | ||||||
Total
|
$ | 411 | $ | 484 |
Original
equipment sales decreased $43 million, or 18 percent, for the three months ended
December 31, 2009 compared to the same period in the prior year. This sales
decline was primarily due to lower business jet sales related to decreased
production and delivery rates at the business jet OEMs, partially offset by an
increase in air transport OEM sales related to the adverse impact of the Boeing
strike which occurred in the prior year.
Aftermarket
sales decreased $27 million, or 12 percent, for the three months ended December
31, 2009 compared to the three months ended December 31, 2008, due primarily to
lower aftermarket hardware sales and lower service and support
revenue.
Commercial Systems Segment
Operating Earnings
Three
Months Ended
|
||||||||
December
31
|
||||||||
(dollars
in millions)
|
2009
|
2008
|
||||||
Segment
operating earnings
|
$ | 68 | $ | 97 | ||||
Percent
of sales
|
16.5 | % | 20.0 | % |
Commercial
Systems operating earnings decreased 30 percent to $68 million, or 16.5 percent
of sales, for the three months ended December 31, 2009 compared to operating
earnings of $97 million, or 20.0 percent of sales for the three months ended
December 31, 2008. The decrease in operating earnings was due primarily to lower
sales volume and higher defined benefit pension expense, partially offset by
lower research and development costs, a reduction in selling, general and
administrative expenses and a favorable contract settlement.
Retirement
Plans
Net
benefit expense (income) for pension benefits and other retirement benefits are
as follows:
Three
Months Ended
|
||||||||
December
31
|
||||||||
(in
millions)
|
2009
|
2008
|
||||||
Pension
benefits
|
$ | 7 | $ | (3 | ) | |||
Other
retirement benefits
|
1 | 1 | ||||||
Net
benefit expense (income)
|
$ | 8 | $ | (2 | ) |
Pension
Benefits
In 2003,
we amended our U.S. qualified and non-qualified pension plans (the Pension
Amendment) covering all salary and hourly employees not covered by collective
bargaining agreements to discontinue benefit accruals for salary increases and
services rendered after September 30, 2006. Concurrently, we replaced this
benefit by supplementing our existing defined contribution savings plan to
include an additional Company contribution effective October 1, 2006. We believe
this benefit structure achieves our objective of providing benefits that are
valued by our employees and provides more consistency and predictability in
estimating future costs and funding requirements over the long term.
In 2010,
defined benefit pension plan expense is expected to increase by approximately
$44 million to $26 million of expense, compared to $(18) million of income for
the full year 2009. The increase is primarily due to the unfavorable impact of a
decrease in the defined benefit pension plan valuation discount rate used to
measure our U.S. pension expense from 7.60 percent in 2009 to 5.47 percent in
2010.
24
Our
objective with respect to the funding of our pension plans is to provide
adequate assets for the payment of future benefits. Pursuant to this objective,
we will fund our pension plans as required by governmental regulations and may
consider discretionary contributions as conditions warrant. We believe our
strong financial position continues to provide us the opportunity to make
contributions to our pension fund without inhibiting our ability to pursue
strategic investments.
In
October 2009, we made a $98 million contribution to our U.S. qualified pension
plan. We do not currently anticipate that we will be required by governmental
regulations to make any additional contributions to the U.S. qualified pension
plan in 2010. Any additional future contributions necessary to satisfy the
minimum statutory funding requirements are dependent upon actual plan asset
returns, interest rates and any changes to U.S. pension funding legislation. We
may elect to make additional discretionary contributions during 2010 to further
improve the funded status of this plan. Contributions to our non-U.S. plans and
our U.S. non-qualified plan are expected to total $13 million in
2010.
The
recent turmoil in the financial markets has had a significant impact on the
funded status of our pension plans. Our pension expense (income) is
significantly impacted by the market performance of our pension plan assets, our
expected long-term return on plan assets and the discount rates used to
determine our pension obligations. If our pension plan assets do not achieve
positive rates of return consistent with our long-term asset return assumptions
or if discount rates trend down, we may experience unfavorable changes in our
pension expense and could be required to make significant contributions to our
U.S. qualified pension plan. While we believe the actions taken under the
Pension Amendment have had a positive effect on pension expense (income) and
future funding requirements, our plan assets and discount rates are
significantly impacted by changes in the financial markets.
Other
Retirement Benefits
We expect
other retirement benefits expense of approximately $5 million for the full year
2010 compared to the full year 2009 expense of $4 million.
Income
Taxes
At the
end of each interim reporting period we make 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. The difference between our effective income tax rate and the
statutory income tax rate is primarily the result of the tax benefits derived
from the Federal Research and Development Tax Credit (Federal R&D Tax
Credit) and state research and development tax credits, which provide tax
benefits on certain incremental R&D expenditures, and the Domestic
Manufacturing Deduction (DMD), which provides a tax benefit on U.S. based
manufacturing.
During
the three months ended December 31, 2009 and 2008, our effective income tax rate
was 33.1 percent and 32.0 percent, respectively. The higher effective income tax
rate for the three months ended December 31, 2009 was primarily due to the
differences in the availability of the Federal R&D Tax Credit, which expired
December 31, 2009. The effective income tax rate for the three months ended
December 31, 2008 reflects a full year benefit from the Federal R&D Tax
Credit in the estimate of the annual effective income tax rate and the effective
income tax rate for the three months ended December 31, 2009 reflects the
unfavorable impact of lower Federal R&D Tax Credits as a result of
pro-rating the three months of available Federal R&D Tax Credits over the
full 2010 fiscal year.
The
effective income tax rate for the three months ended December 31, 2009 and
December 31, 2008 include a tax benefit related to the DMD. The DMD tax benefit
available in fiscal year 2010 and fiscal year 2009 is two-thirds of the full
benefit that will be available beginning in fiscal year 2011.
For
fiscal year 2010, our effective income tax rate is projected to be in the range
of 30 percent to 31 percent. The estimated rate in 2010 assumes the Federal
R&D Tax Credit is available for the entire fiscal year, although legislation
extending the Federal R&D Tax Credit beyond December 31, 2009 has yet to be
enacted. If the Federal R&D Tax Credit is not extended before the end of our
2010 fiscal year, the impact to our effective tax rate guidance would be an
increase of approximately 2 percentage points.
25
Outlook
The
following table is a complete summary of our fiscal fiscal year 2010 financial
guidance, which is unchanged from the financial guidance initially provided on
September 17, 2009 :
|
·
|
total
sales in the range of $4.6 billion to $4.8
billion
|
|
·
|
diluted
earnings per share in the range of $3.35 to
$3.55
|
|
·
|
cash
provided by operating activities in the range of $600 million to $700
million
|
|
·
|
capital
expenditures of approximately $135
million
|
|
·
|
total
company and customer-funded R&D expenditures in the range of $870
million to $900 million, or about 19 percent of
sales
|
FINANCIAL
CONDITION AND LIQUIDITY
|
Cash
Flow Summary
Operating
Activities
Three
Months Ended
|
||||||||
December
31
|
||||||||
(in
millions)
|
2009
|
2008
|
||||||
Cash
provided by operating activities
|
$ | 84 | $ | 21 |
The
increase in cash provided by operating activities during the three months ended
December 31, 2009 compared to the same period last year is primarily due to
lower employee incentive compensation payments and improved working capital
performance, principally related to receivables and accounts payable, partially
offset by higher pension plan contributions and lower net income.
Investing
Activities
Three
Months Ended
|
||||||||
December
31
|
||||||||
(in
millions)
|
2009
|
2008
|
||||||
Cash
used for investing activities
|
$ | (119 | ) | $ | (73 | ) |
The
increase in cash used for investing activities was due primarily to the December
31, 2009 acquisition of AR Group, Inc., partially offset by a lower level of
capital expenditures during the three months ended December 31, 2009 as compared
to the same period last year.
Financing
Activities
Three
Months Ended
|
||||||||
December
31
|
||||||||
(in
millions)
|
2009
|
2008
|
||||||
Cash
provided by financing activities
|
$ | 5 | $ | 76 |
The
decrease in cash provided by financing activities during the three months ended
December 31, 2009 compared to the same period last year primarily resulted from
the following:
|
·
|
$92
million of the decrease is attributable to lower net borrowings of
short-term debt. Net short-term borrowings were $62 million during the
three months ended December 31, 2009 compared to $154 million during the
same period last year.
|
|
·
|
Partially
offset by a $13 million reduction in repurchases of common stock. During
the three months ended December 31, 2009, we had $28 million of cash
repurchases of common stock compared to $41 million during the same period
last year.
|
26
Financial
Condition and Liquidity
We have
historically maintained a financial structure characterized by conservative
levels of debt outstanding that enables us sufficient access to credit markets.
When combined with our ability to generate strong levels of cash flow from our
operations, this capital structure provides the strength and flexibility
necessary to pursue strategic growth opportunities and to return value to our
shareowners. A comparison of key elements of our financial condition as of
December 31, 2009 and September 30, 2009 are as follows:
December 31,
|
September 30,
|
|||||||
(dollars
in millions)
|
2009
|
2009
|
||||||
Cash
and cash equivalents
|
$ | 206 | $ | 235 | ||||
Short-term
debt
|
(62 | ) | - | |||||
Long-term
debt, net
|
(529 | ) | (532 | ) | ||||
Net
debt (1)
|
$ | (385 | ) | $ | (297 | ) | ||
Total
equity
|
$ | 1,384 | $ | 1,295 | ||||
Debt
to total capitalization (2)
|
30 | % | 29 | % |
(1)
Calculated as total of short-term and long-term debt, net (Total Debt), less
cash and cash equivalents
(2)
Calculated as Total Debt divided by the sum of Total Debt plus total
equity
We primarily fund our contractual
obligations, capital expenditures, small to medium sized acquisitions, dividends
and share repurchases from cash generated from operating activities. Due to the
seasonality of cash flows, we supplement our internally generated cash flow from
time to time by issuing short-term commercial paper. Under our
commercial paper program, we may sell up to $850 million face amount of
unsecured short-term promissory notes in the commercial paper market. The
commercial paper notes have maturities of not more than 364 days from the date
of issuance. At December 31, 2009 short-term commercial paper borrowings
outstanding were $62 million with a weighted average interest rate and maturity
period of 0.14 percent and 7 days, respectively. There were no short-term
commercial paper borrowings outstanding at September 30, 2009.
In the
event our access to the commercial paper markets is impaired, we have access to
an $850 million Revolving Credit Facility through a network of banks that
matures in 2012, with options to further 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. Our only financial covenant
under the Revolving Credit Facility requires that we maintain a consolidated
debt to total capitalization ratio of not greater than 60 percent, excluding the
accumulated other comprehensive loss equity impact related to defined benefit
retirement plans. Our debt to total capitalization ratio at December 31, 2009
based on this financial covenant was 19 percent. We had no borrowings at
December 31, 2009 under our Revolving Credit Facility.
In
addition, alternative sources of liquidity could include funds available from
the issuance of equity securities, debt securities and potential asset
securitization strategies. We have a shelf registration statement filed with the
Securities and Exchange Commission pursuant to which we can publicly offer and
sell securities from time to time. This shelf registration covers an unlimited
amount of debt securities, common stock and preferred stock or warrants
that may be offered in one or more offerings on terms to be determined at the
time of sale. To
date, we have not raised capital through the issuance of equity securities as we
prefer to use debt financing to lower our overall cost of capital and increase
our return on shareowners' equity.
Credit
ratings are a significant factor in determining our ability to access short-term
and long-term financing as well as the cost of such financing in terms of
interest rates. Our strong credit ratings have enabled continued access to both
short and long-term credit markets despite difficult market conditions during
2009. If our credit ratings were to be adjusted downward by the rating agencies,
the implications of such actions could include impairment or elimination of our
access to credit markets and an increase in the cost of borrowing. The following
is a summary of our credit ratings as of December 31, 2009:
Credit
Rating Agency
|
Short-Term
Rating
|
Long-Term
Rating
|
Outlook
|
|||
Fitch
Ratings
|
F1
|
A
|
Stable
|
|||
Moody’s
Investors Service
|
P-1
|
A1
|
Stable
|
|||
Standard
& Poor’s
|
A-1
|
A
|
Stable
|
We were
in compliance with all debt covenants at December 31, 2009 and September 30,
2009.
27
ENVIRONMENTAL
|
For
information related to environmental claims, remediation efforts and related
matters, see Note 19 of the condensed consolidated financial
statements.
CRITICAL
ACCOUNTING POLICIES
|
Preparation
of the Company's financial statements in accordance with accounting principles
generally accepted in the United States of America requires management of
Rockwell Collins to make estimates, judgments and assumptions that affect our
financial condition and results of operations that are reported in the
accompanying condensed consolidated financial statements as well as the related
disclosure of assets and liabilities contingent upon future events. The critical
accounting policies used in preparation of the Company’s financial statements
are described in Management's Discussion and Analysis in the Company's Annual
Report on Form 10-K for the year ended September 30, 2009. Actual results in
these areas could differ from management's estimates.
CAUTIONARY
STATEMENT
|
This
quarterly report 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 major U.S.
airlines); the health of the global economy, including potential deterioration
in the currently volatile economic and financial market conditions; the rate of
recovery of the commercial aftermarket; delays related to the award of domestic
and international contracts; the continued support for military transformation
and modernization programs; potential adverse impact of oil prices on the
commercial aerospace industry; the impact of the global war on terrorism and
declining defense budgets on government military procurement expenditures and
budgets; changes in domestic and foreign government spending, budgetary 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; customer bankruptcies and profitability; 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 improvement and cost reduction initiatives; achievement
of our acquisition and related integration plans; continuing to maintain our
planned effective tax rates which is primarily dependent on legislation
extending the Federal Research and Development Tax Credit beyond December 31,
2009; 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 export control 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 litigation, 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.
Item
3. Quantitative and Qualitative Disclosures about Market
Risk
Interest
Rate Risk
In
addition to using cash provided by normal operating activities, we utilize a
combination of short-term and long-term debt to finance operations. Our
operating results and cash flows are exposed to changes in interest rates that
could adversely affect the amount of interest expense incurred and paid on debt
obligations in any given period. In addition, changes in interest rates can
affect the fair value of our debt obligations. Such changes in fair value are
only relevant to the extent these debt obligations are settled prior to
maturity. We manage our exposure to interest rate risk by maintaining an
appropriate mix of fixed and variable rate debt and when considered necessary,
we may employ financial instruments in the form of interest rate swaps to help
meet this objective.
28
At
December 31, 2009, we had $200 million of 4.75 percent fixed rate long-term debt
obligations outstanding with a carrying value of $200 million and a fair value
of $211 million. In 2004 we converted $100 million of this fixed rate debt to
floating rate debt bearing interest at six-month LIBOR less 7.5 basis points by
executing “receive fixed, pay variable” interest rate swap contracts. At
December 31, 2009, we also had $300 million of 5.25 percent fixed rate long-term
debt obligations outstanding with a carrying value of $298 million and a fair
value of $313 million. A hypothetical 10 percent increase or decrease in average
market interest rates would have decreased or increased the fair value of our
long-term debt, exclusive of the effects of the interest rate swap contracts, by
$11 million and $11 million, respectively. The fair value of the $100 million
notional value of interest rate swap contracts was a $6 million asset at
December 31, 2009. A hypothetical 10 percent increase or decrease in average
market interest rates would decrease or increase the fair value of our interest
rate swap contracts by $1 million and $2 million, respectively. At December 31,
2009, we also had $25 million of variable rate long-term debt outstanding
related to a non-U.S. subsidiary and $62 million of variable rate short-term
borrowings. Our results of operations are affected by changes in market interest
rates related to variable rate debt. Inclusive of the effect of the interest
rate swaps, a hypothetical 10 percent increase or decrease in average market
interest rates would not have a material effect on operations or cash flows. For
more information related to outstanding debt obligations and derivative
financial instruments, see Notes 10, 16 and 17 of the Notes to Condensed
Consolidated Financial Statements.
Foreign
Currency Risk
We
transact business in various foreign currencies which subjects our cash flows
and earnings to exposure related to changes to foreign currency exchange rates.
We attempt to manage this exposure through operational strategies and the use of
foreign currency forward exchange contracts (foreign currency contracts). All
foreign currency contracts are executed with banks we believe to be creditworthy
and are denominated in currencies of major industrial countries. The majority of
our non-functional currency firm and anticipated receivables and payables are
hedged using foreign currency contracts. It is our policy not to manage exposure
to net investments in non-U.S. subsidiaries or enter into derivative financial
instruments for speculative purposes. Notional amounts of outstanding foreign
currency forward exchange contracts were $360 million and $353 million at
December 31, 2009 and September 30, 2009, respectively. Notional amounts are
stated in U.S. dollar equivalents at spot exchange rates at the respective
dates. Principal currencies that are hedged include the European euro, British
pound sterling and Japanese yen. The duration of foreign currency contracts is
generally five years or less. The net fair value of these foreign currency
contracts was a net liability of $2 million and a net liability of $3 million at
December 31, 2009 and September 30, 2009, respectively. A 10 percent increase or
decrease in the value of the U.S. dollar against all currencies would decrease
or increase the fair value of our foreign currency contracts at December 31,
2009 by $3 million.
Item
4. Controls and Procedures
As
required by Rule 13a-15(b) under the Securities Exchange Act of 1934, we carried
out an evaluation of the effectiveness, as of December 31, 2009, of the design
and operation of our disclosure controls and procedures. This evaluation was
carried out under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer. Based on that
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are adequate and effective
as of December 31, 2009 to ensure that information required to be disclosed in
our reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms.
There
were no changes in our internal control over financial reporting (as defined in
Exchange Act Rule 13a-15(f)) that occurred during our last fiscal quarter that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by an issuer in the reports that it files
or submits under the Securities Exchange Act of 1934 is accumulated and
communicated to the issuer’s management, including its principal executive and
principal financial officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required
disclosure.
29
PART
II. OTHER INFORMATION
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
The
following table provides information about our purchases of shares of our common
stock during the quarter pursuant to our board authorized stock repurchase
program:
Period
|
Total Number of
Shares Purchased
|
Average Price
Paid per Share
|
Total Number of
Shares Purchased as
Part of Publicly
Announced
Plans or Programs
|
Maximum Number
(or Approximate Dollar
Value) of Shares that May
Yet Be
Purchased Under
the Plans or Programs(1)
|
||||||||||
October
1, 2009 through October 31, 2009
|
- | $ | - | - | $ |
209
million
|
||||||||
November
1, 2009 through November 30, 2009
|
164,800 | 53.41 | 164,800 |
200
million
|
||||||||||
December
1, 2009 through December 31, 2009
|
340,000 | 55.99 | 340,000 |
181 million
|
||||||||||
Total
|
504,800 | $ | 55.15 | 504,800 | $ |
181
million
|
(1)
|
On
September 16, 2009, our Board authorized the repurchase of an additional
$200 million of our common stock. This authorization has no stated
expiration date.
|
30
Item
6. Exhibits
(a)
|
Exhibits
|
12
|
Computation
of Ratio of Earnings to Fixed Charges for the three months
ended December 31, 2009.
|
|
31.1
|
Certification
by Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934.
|
|
31.2
|
Certification
by Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934.
|
|
32.1
|
Certification
by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
32.2
|
Certification
by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
101.INS
|
XBRL
Instance Document
|
|
101.SCH
|
XBRL
Taxonomy Extension Schema
|
|
101.CAL
|
XBRL
Taxonomy Extension Calculation Linkbase
|
|
101.DEF
|
XBRL
Taxonomy Extension Definition Linkbase
|
|
101.LAB
|
XBRL
Taxonomy Extension Label Linkbase
|
|
101.PRE
|
|
XBRL
Taxonomy Extension Presentation
Linkbase
|
31
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
ROCKWELL COLLINS, INC.
|
||
(Registrant)
|
||
Date: January 28, 2010 |
By
|
/s/ M. A. Schulte
|
M.
A. Schulte
|
||
Vice
President, Finance and Controller
|
||
(Principal
Accounting Officer)
|
||
Date: January 28, 2010 |
By
|
/s/ G. R. Chadick
|
G.
R. Chadick
|
||
Senior
Vice President,
|
||
General
Counsel and
Secretary
|
32