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 JUNE 30, 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 ¨ 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
157,646,365
shares of registrant's Common Stock, par value $.01 per share, were outstanding
on July 13, 2009.
ROCKWELL
COLLINS, INC.
INDEX
|
|
|
Page
No.
|
PART
I.
|
FINANCIAL
INFORMATION:
|
|
|
|
|
|
|
Item
1.
|
Condensed
Consolidated Financial Statements:
|
|
|
|
|
|
|
|
Condensed
Consolidated Statement of Financial Position (Unaudited) —
|
|
|
|
June
30, 2009 and September 30, 2008
|
2
|
|
|
|
|
|
|
Condensed
Consolidated Statement of Operations (Unaudited) —
|
|
|
|
Three
and Nine Months Ended June 30, 2009 and 2008
|
3
|
|
|
|
|
|
|
Condensed
Consolidated Statement of Cash Flows (Unaudited) —
|
|
|
|
Nine
Months Ended June 30, 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
|
21
|
|
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
30
|
|
|
|
|
|
Item
4.
|
Controls
and Procedures
|
31
|
|
|
|
|
PART
II.
|
OTHER
INFORMATION:
|
|
|
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
32
|
|
|
|
|
|
Item
6.
|
Exhibits
|
33
|
|
|
|
|
Signatures
|
34
|
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)
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
218 |
|
|
$ |
175 |
|
Receivables,
net
|
|
|
907 |
|
|
|
950 |
|
Inventories
|
|
|
998 |
|
|
|
970 |
|
Current
deferred income taxes
|
|
|
151 |
|
|
|
139 |
|
Other
current assets
|
|
|
118 |
|
|
|
104 |
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
2,392 |
|
|
|
2,338 |
|
|
|
|
|
|
|
|
|
|
Property
|
|
|
714 |
|
|
|
680 |
|
Intangible
Assets
|
|
|
259 |
|
|
|
198 |
|
Goodwill
|
|
|
688 |
|
|
|
609 |
|
Other
Assets
|
|
|
319 |
|
|
|
319 |
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$ |
4,372 |
|
|
$ |
4,144 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREOWNERS'
EQUITY
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Short-term
debt
|
|
$ |
117 |
|
|
$ |
287 |
|
Accounts
payable
|
|
|
350 |
|
|
|
419 |
|
Compensation
and benefits
|
|
|
174 |
|
|
|
295 |
|
Advance
payments from customers
|
|
|
331 |
|
|
|
308 |
|
Product
warranty costs
|
|
|
221 |
|
|
|
226 |
|
Other
current liabilities
|
|
|
234 |
|
|
|
205 |
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
1,427 |
|
|
|
1,740 |
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt, net
|
|
|
530 |
|
|
|
228 |
|
Retirement
Benefits
|
|
|
490 |
|
|
|
600 |
|
Other
Liabilities
|
|
|
191 |
|
|
|
168 |
|
|
|
|
|
|
|
|
|
|
Shareowners'
Equity:
|
|
|
|
|
|
|
|
|
Common
stock ($0.01 par value; shares authorized: 1,000; shares issued:
183.8)
|
|
|
2 |
|
|
|
2 |
|
Additional
paid-in capital
|
|
|
1,391 |
|
|
|
1,378 |
|
Retained
earnings
|
|
|
2,359 |
|
|
|
2,058 |
|
Accumulated
other comprehensive loss
|
|
|
(572 |
) |
|
|
(578 |
) |
Common
stock in treasury, at cost (shares held: June 30, 2009, 26.0; September
30, 2008, 25.2)
|
|
|
(1,446 |
) |
|
|
(1,452 |
) |
Total
shareowners' equity
|
|
|
1,734 |
|
|
|
1,408 |
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND SHAREOWNERS’ EQUITY
|
|
$ |
4,372 |
|
|
$ |
4,144 |
|
See Notes
to Condensed Consolidated Financial Statements.
ROCKWELL
COLLINS, INC.
CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(in
millions, except per share amounts)
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
June 30
|
|
|
June 30
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
sales
|
|
$ |
978 |
|
|
$ |
1,086 |
|
|
$ |
2,965 |
|
|
$ |
3,170 |
|
Service
sales
|
|
|
106 |
|
|
|
108 |
|
|
|
315 |
|
|
|
322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
sales
|
|
|
1,084 |
|
|
|
1,194 |
|
|
|
3,280 |
|
|
|
3,492 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs,
expenses and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
cost of sales
|
|
|
687 |
|
|
|
754 |
|
|
|
2,062 |
|
|
|
2,218 |
|
Service
cost of sales
|
|
|
72 |
|
|
|
73 |
|
|
|
214 |
|
|
|
218 |
|
Selling,
general, and administrative expenses
|
|
|
108 |
|
|
|
119 |
|
|
|
331 |
|
|
|
350 |
|
Interest
expense
|
|
|
5 |
|
|
|
5 |
|
|
|
12 |
|
|
|
15 |
|
Other
income, net
|
|
|
(3 |
) |
|
|
(5 |
) |
|
|
(16 |
) |
|
|
(21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
costs, expenses and other
|
|
|
869 |
|
|
|
946 |
|
|
|
2,603 |
|
|
|
2,780 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
215 |
|
|
|
248 |
|
|
|
677 |
|
|
|
712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision
|
|
|
70 |
|
|
|
74 |
|
|
|
217 |
|
|
|
216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
145 |
|
|
$ |
174 |
|
|
$ |
460 |
|
|
$ |
496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.92 |
|
|
$ |
1.09 |
|
|
$ |
2.91 |
|
|
$ |
3.07 |
|
Diluted
|
|
$ |
0.91 |
|
|
$ |
1.07 |
|
|
$ |
2.89 |
|
|
$ |
3.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
158.0 |
|
|
|
160.3 |
|
|
|
158.0 |
|
|
|
161.5 |
|
Diluted
|
|
|
159.7 |
|
|
|
162.4 |
|
|
|
159.4 |
|
|
|
163.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends per share
|
|
$ |
0.24 |
|
|
$ |
0.24 |
|
|
$ |
0.72 |
|
|
$ |
0.56 |
|
See Notes
to Condensed Consolidated Financial Statements.
ROCKWELL
COLLINS, INC.
CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(in
millions)
|
|
Nine
Months Ended
|
|
|
|
June 30
|
|
|
|
2009
|
|
|
2008
|
|
Operating
Activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
460 |
|
|
$ |
496 |
|
Adjustments
to arrive at cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
84 |
|
|
|
76 |
|
Amortization
of intangible assets
|
|
|
20 |
|
|
|
18 |
|
Stock-based
compensation
|
|
|
15 |
|
|
|
15 |
|
Compensation
and benefits paid in common stock
|
|
|
49 |
|
|
|
46 |
|
Tax
benefit from the exercise of stock options
|
|
|
1 |
|
|
|
7 |
|
Excess
tax benefit from stock-based compensation
|
|
|
(1 |
) |
|
|
(7 |
) |
Deferred
income taxes
|
|
|
27 |
|
|
|
17 |
|
Pension
plan contributions
|
|
|
(87 |
) |
|
|
(11 |
) |
Changes
in assets and liabilities, excluding effects of acquisitions and foreign
currency adjustments:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
60 |
|
|
|
(60 |
) |
Inventories
|
|
|
(33 |
) |
|
|
(161 |
) |
Accounts
payable
|
|
|
(73 |
) |
|
|
(12 |
) |
Compensation
and benefits
|
|
|
(139 |
) |
|
|
(31 |
) |
Advance
payments from customers
|
|
|
7 |
|
|
|
(6 |
) |
Income
taxes
|
|
|
14 |
|
|
|
(53 |
) |
Other
assets and liabilities
|
|
|
(23 |
) |
|
|
(24 |
) |
Cash
Provided by Operating Activities
|
|
|
381 |
|
|
|
310 |
|
|
|
|
|
|
|
|
|
|
Investing
Activities:
|
|
|
|
|
|
|
|
|
Property
additions
|
|
|
(117 |
) |
|
|
(114 |
) |
Acquisition
of businesses, net of cash acquired
|
|
|
(146 |
) |
|
|
(107 |
) |
Acquisition
of intangible assets
|
|
|
(1 |
) |
|
|
(6 |
) |
Other
investing activities
|
|
|
(1 |
) |
|
|
1 |
|
Cash
Used for Investing Activities
|
|
|
(265 |
) |
|
|
(226 |
) |
|
|
|
|
|
|
|
|
|
Financing
Activities:
|
|
|
|
|
|
|
|
|
Purchases
of treasury stock
|
|
|
(95 |
) |
|
|
(492 |
) |
Cash
dividends
|
|
|
(114 |
) |
|
|
(91 |
) |
(Decrease)
increase in short-term borrowings
|
|
|
(170 |
) |
|
|
429 |
|
Net
proceeds from the issuance of long-term debt
|
|
|
296 |
|
|
|
- |
|
Proceeds
from exercise of stock options
|
|
|
10 |
|
|
|
16 |
|
Excess
tax benefit from stock-based compensation
|
|
|
1 |
|
|
|
7 |
|
Cash
Used for Financing Activities
|
|
|
(72 |
) |
|
|
(131 |
) |
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
(1 |
) |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
Net
Change in Cash and Cash Equivalents
|
|
|
43 |
|
|
|
(44 |
) |
Cash
and Cash Equivalents at Beginning of Period
|
|
|
175 |
|
|
|
231 |
|
Cash
and Cash Equivalents at End of Period
|
|
$ |
218 |
|
|
$ |
187 |
|
See Notes
to Condensed Consolidated Financial Statements.
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, June 30 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,
2008.
In the
opinion of management, the unaudited financial statements contain all
adjustments, consisting of adjustments of a normal recurring nature, necessary
to present fairly the financial position, results of operations, and cash flows
for the periods presented. The results of operations for the three
and nine months ended June 30, 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 July
30, 2009, the date the Company’s Form 10-Q was filed with the Securities and
Exchange Commission.
2.
|
Recently
Issued Accounting Standards
|
In June
2009, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 168, FASB Accounting Standards
Codification (Codification) and the Hierarchy of Generally
Accepted Accounting Principles – a replacement of FASB Statement No. 162
(SFAS 168). The purpose of the Codification is to
provide a single source of authoritative U.S. GAAP. SFAS 168 is
effective for the Company in the fourth quarter of fiscal year
2009. The adoption of SFAS 168 is not expected to have a material
effect on the Company’s financial statements.
In
November 2008, the FASB ratified Emerging Issues Task Force (EITF) Issue No.
08-7, Accounting for Defensive
Intangible Assets (EITF 08-7). EITF 08-7 provides guidance for
accounting for defensive intangible assets subsequent to their acquisition in
accordance with SFAS 141R and also provides guidance on establishing 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. EITF 08-7 is effective for the Company at the beginning of
fiscal year 2010. The adoption of EITF 08-7 is not expected to
materially affect the Company’s financial position, results of operations, or
cash flows on the date the standard becomes effective; however, the standard
could have a significant effect on defensive intangible assets the Company
acquires beginning in fiscal year 2010.
In June
2008, the FASB issued Staff Position No. EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities
(FSP EITF 03-6-1). FSP EITF 03-6-1 specifies 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. FSP EITF 03-6-1 is effective for the Company at the beginning
of fiscal year 2010. The Company does not expect this standard will
have a material impact on the Company’s financial statements or computation of
EPS.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS
141R). SFAS 141R 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 SFAS 141R, 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. SFAS 141R also requires, among other
things, 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. This accounting standard is
applied prospectively and is effective for the Company at the beginning of
fiscal year 2010. The adoption of SFAS 141R is not expected to
materially affect the Company’s financial position, results of operations, or
cash flows on the date the standard becomes effective; however, the standard
could have a significant effect on how the Company accounts for business
acquisitions beginning in fiscal year 2010.
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The
Company adopted SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No.
133 (SFAS 161) in the second quarter of fiscal year 2009. The
adoption of SFAS 161 did not have a material effect on the Company’s financial
statements other than providing certain enhanced disclosures. Refer
to Note 17 for additional discussion on derivative instruments and hedging
activities.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS 159). SFAS 159 permits
entities to choose to measure certain eligible financial assets and financial
liabilities at fair value (the fair value option). The Company
adopted SFAS 159 in the first quarter of fiscal year 2009 and has elected not to
measure any additional financial instruments or other items at fair
value. The adoption of SFAS 159 did not have a significant impact on
the Company’s financial statements.
The
Company adopted SFAS No. 157, Fair Value Measurements (SFAS
157) in the first quarter of fiscal year 2009 with the exception of the
application of the statement to nonfinancial assets and nonfinancial liabilities
which is effective for the Company at the beginning of fiscal year
2010. Refer to Note 16 for additional discussion on fair value
measurements.
DataPath,
Inc.
On May
29, 2009, the Company acquired all the shares of DataPath, Inc.
(DataPath). DataPath, with operations in the United States 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 three months ended June 30, 2009 and $7 million is related to certain
change in control related liabilities to be paid within the next two
years. The Company is in the process of allocating the purchase price
and obtaining a valuation for acquired intangible assets. Based on
the Company’s preliminary allocation of the purchase price, $50 million has been
allocated to goodwill and $26 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 augment the Company’s networked communication offerings. The
Company is currently evaluating the portion of the goodwill that may be tax
deductible. DataPath 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 United
States, 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. The Company is in the process of allocating the purchase
price and obtaining a valuation for acquired intangible assets. Based
on the Company’s preliminary allocation of the purchase price, $28 million has
been allocated to goodwill and $7 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 further enhance the Company’s simulation and training capabilities and
provide more innovative and integrated solutions for the Company’s
customers. The Company currently estimates that none of the goodwill
resulting from the acquisition is tax deductible. $20 million of
goodwill is included in the Government Systems segment and $8 million of
goodwill is included in the Commercial Systems segment.
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Athena
Technologies, Inc.
On April
4, 2008, the Company acquired all the shares of Athena Technologies, Inc.
(Athena). Athena, located in Warrenton, Virginia, is a provider of
navigation and control solutions, primarily to the Unmanned Aerial Vehicle
market segment. The total cash purchase price, net of cash acquired,
was $107 million. In the first quarter of fiscal year 2009, the
purchase price allocation was finalized with $66 million allocated to goodwill
and $46 million to finite-lived intangible assets with a weighted average life
of approximately 10 years. The excess purchase price over net assets
acquired reflects the Company’s view that this acquisition will enhance the
Company’s navigation and control solution capabilities. None of the
goodwill resulting from the acquisition is tax deductible. Goodwill
is included within the assets of the Government Systems segment.
Receivables
are summarized as follows (in millions):
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
Billed
|
|
$ |
699 |
|
|
$ |
726 |
|
Unbilled
|
|
|
243 |
|
|
|
254 |
|
Less
progress payments
|
|
|
(24 |
) |
|
|
(21 |
) |
Total
receivables
|
|
|
918 |
|
|
|
959 |
|
Less
allowance for doubtful accounts
|
|
|
(11 |
) |
|
|
(9 |
) |
Receivables,
net
|
|
$ |
907 |
|
|
$ |
950 |
|
The
Company expects to collect net receivables as of June 30, 2009 within the next
twelve months.
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.
Inventories
are summarized as follows (in millions):
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
Finished
goods
|
|
$ |
193 |
|
|
$ |
244 |
|
Work
in process
|
|
|
282 |
|
|
|
270 |
|
Pre-production
engineering costs
|
|
|
222 |
|
|
|
166 |
|
Raw
materials, parts, and supplies
|
|
|
372 |
|
|
|
362 |
|
Total
|
|
|
1,069 |
|
|
|
1,042 |
|
Less
progress payments
|
|
|
(71 |
) |
|
|
(72 |
) |
Inventories
|
|
$ |
998 |
|
|
$ |
970 |
|
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. Beginning in the second quarter of 2009,
pre-production engineering costs have been presented separately within
Inventories. In prior years, such amounts had been presented within
work in process Inventories. Prior year amounts have been
reclassified to conform to the current year presentation.
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Property
is summarized as follows (in millions):
|
|
June
30,
|
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
Land
|
|
$ |
31 |
|
|
$ |
30 |
|
Buildings
and improvements
|
|
|
354 |
|
|
|
342 |
|
Machinery
and equipment
|
|
|
852 |
|
|
|
807 |
|
Information
systems software and hardware
|
|
|
250 |
|
|
|
243 |
|
Furniture
and fixtures
|
|
|
62 |
|
|
|
60 |
|
Construction
in progress
|
|
|
112 |
|
|
|
99 |
|
Total
|
|
|
1,661 |
|
|
|
1,581 |
|
Less
accumulated depreciation
|
|
|
(947 |
) |
|
|
(901 |
) |
Property
|
|
$ |
714 |
|
|
$ |
680 |
|
7.
|
Goodwill
and Intangible Assets
|
Changes
in the carrying amount of goodwill for the nine months ended June 30, 2009 are
summarized as follows (in millions):
|
|
Government
|
|
|
Commercial
|
|
|
|
|
|
|
Systems
|
|
|
Systems
|
|
|
Total
|
|
Balance
at September 30, 2008
|
|
$ |
418 |
|
|
$ |
191 |
|
|
$ |
609 |
|
SEOS
acquisition
|
|
|
20 |
|
|
|
8 |
|
|
|
28 |
|
DataPath
acquisition
|
|
|
50 |
|
|
|
- |
|
|
|
50 |
|
Foreign
currency translation adjustment
|
|
|
2 |
|
|
|
- |
|
|
|
2 |
|
Other
adjustments to goodwill
|
|
|
(1 |
) |
|
|
- |
|
|
|
(1 |
) |
Balance
at June 30, 2009
|
|
$ |
489 |
|
|
$ |
199 |
|
|
$ |
688 |
|
The
Company performs an annual impairment test of goodwill and indefinite-lived
intangible assets during the second quarter of each fiscal year, or at any time
there is an indication of potential impairment. The Company’s 2009
impairment tests resulted in no impairment.
Intangible
assets are summarized as follows (in millions):
|
|
June 30, 2009
|
|
|
September 30, 2008
|
|
|
|
|
|
|
Accum
|
|
|
|
|
|
|
|
|
Accum
|
|
|
|
|
|
|
Gross
|
|
|
Amort
|
|
|
Net
|
|
|
Gross
|
|
|
Amort
|
|
|
Net
|
|
Intangible
assets with finite lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed
technology and patents
|
|
$ |
199 |
|
|
$ |
(99 |
) |
|
$ |
100 |
|
|
$ |
181 |
|
|
$ |
(87 |
) |
|
$ |
94 |
|
License
agreements
|
|
|
21 |
|
|
|
(5 |
) |
|
|
16 |
|
|
|
20 |
|
|
|
(4 |
) |
|
|
16 |
|
Customer
relationships
|
|
|
158 |
|
|
|
(31 |
) |
|
|
127 |
|
|
|
105 |
|
|
|
(25 |
) |
|
|
80 |
|
Trademarks
and tradenames
|
|
|
23 |
|
|
|
(9 |
) |
|
|
14 |
|
|
|
14 |
|
|
|
(8 |
) |
|
|
6 |
|
Intangible
assets with indefinite lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
- |
|
|
|
2 |
|
|
|
2 |
|
|
|
- |
|
|
|
2 |
|
Intangible
assets
|
|
$ |
403 |
|
|
$ |
(144 |
) |
|
$ |
259 |
|
|
$ |
322 |
|
|
$ |
(124 |
) |
|
$ |
198 |
|
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 product are amortized as cost of
sales. The net book value of sales incentives included in Customer
Relationship Intangible Assets was $100 million and $56 million at June 30,
2009 and September 30, 2008, respectively.
Amortization
expense for intangible assets for the three and nine months ended June 30, 2009
was $8 million and $20 million, respectively, compared to $6 million and $18
million for the three and nine months ended June 30, 2008. Annual
amortization expense for intangible assets for 2009, 2010, 2011, 2012, and 2013
is expected to be $29 million, $36 million, $38 million, $35 million, and $33
million, respectively.
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Other
assets are summarized as follows (in millions):
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
Long-term
deferred income taxes
|
|
$ |
112 |
|
|
$ |
144 |
|
Long-term
receivables
|
|
|
89 |
|
|
|
71 |
|
Investments
in equity affiliates
|
|
|
10 |
|
|
|
9 |
|
Exchange
and rental assets, net of accumulated depreciation of $104 at June 30,
2009 and $98 at September 30, 2008
|
|
|
48 |
|
|
|
41 |
|
Other
|
|
|
60 |
|
|
|
54 |
|
Other
assets
|
|
$ |
319 |
|
|
$ |
319 |
|
Investments
in equity affiliates primarily consist of four joint ventures: Vision Systems
International, LLC, Data Link Solutions, LLC, Integrated Guidance Systems, LLC,
and Quest Flight Training Limited (Quest). Each joint venture is 50
percent owned by the Company and accounted for under the equity
method.
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 $33 million and $70 million
for the three and nine months ended June 30, 2009, respectively, and $32 million
and $96 million for the three and nine months ended June 30, 2008,
respectively. The deferred portion of profit generated from sales to
equity affiliates was $2 million at June 30, 2009 and $4 million at September
30, 2008.
9.
|
Other
Current Liabilities
|
Other
current liabilities are summarized as follows (in millions):
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
Customer
incentives
|
|
$ |
123 |
|
|
$ |
119 |
|
Contract
reserves
|
|
|
11 |
|
|
|
13 |
|
Income
taxes payable
|
|
|
10 |
|
|
|
2 |
|
Other
|
|
|
90 |
|
|
|
71 |
|
Other
current liabilities
|
|
$ |
234 |
|
|
$ |
205 |
|
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.
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 June 30, 2009, short-term commercial paper borrowings
outstanding were $113 million with a weighted average interest rate and maturity
period of 0.24 percent and 9 days, respectively.
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Revolving
Credit Facilities
The
Company has an $850 million unsecured revolving credit facility with various
banks through 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
retirements plans. The ratio was 22 percent as of June 30,
2009. In addition, the credit facility contains 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 June 30, 2009 and September 30,
2008, there were no outstanding borrowings under this revolving credit
facility.
In
addition, short-term credit facilities available to foreign subsidiaries
amounted to $60 million as of June 30, 2009, of which $22 million was utilized
to support commitments in the form of letters of credit. As of June
30, 2009, there were $4 million of short-term borrowings outstanding under the
Company’s foreign subsidiaries’ credit facilities. At June 30, 2009
and September 30, 2008, 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 aggregate principal amount of 5.25 percent
fixed rate unsecured debt due July 15, 2019 in an underwritten public offering
(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
will be 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 and 17 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.
As of
June 30, 2009, 17 million euros ($25 million) was outstanding under a five-year
unsecured variable rate loan facility agreement entered into in June
2006. The variable rate loan facility agreement contains customary
loan covenants, none of which are financial covenants.
The
Company was in compliance with all debt covenants at June 30, 2009 and September
30, 2008.
Long-term
debt and a reconciliation to the carrying amount is summarized as follows (in
millions):
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
Principal
amount of notes due July 15, 2019, net of discount
|
|
$ |
298 |
|
|
$ |
- |
|
Principal
amount of notes due December 1, 2013
|
|
|
200 |
|
|
|
200 |
|
Principal
amount of variable rate loan facility due June 2011
|
|
|
25 |
|
|
|
24 |
|
Fair
value swap adjustment
|
|
|
7 |
|
|
|
4 |
|
Long-term
debt
|
|
$ |
530 |
|
|
$ |
228 |
|
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Interest
paid on debt for the nine months ended June 30, 2009 and 2008 was $10 million
and $17 million, respectively.
The
Company sponsors defined benefit pension (Pension Benefits) and other
postretirement (Other Retirement Benefits) plans covering most of its U.S.
employees and certain employees in foreign countries that provide monthly
pension and other benefits to eligible employees upon retirement.
Pension
Benefits
The
components of expense / (income) for Pension Benefits for the three and nine
months ended June 30, 2009 and 2008 are as follows (in millions):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
June 30
|
|
|
June 30
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Service
cost
|
|
$ |
1 |
|
|
$ |
2 |
|
|
$ |
4 |
|
|
$ |
6 |
|
Interest
cost
|
|
|
42 |
|
|
|
41 |
|
|
|
126 |
|
|
|
122 |
|
Expected
return on plan assets
|
|
|
(51 |
) |
|
|
(50 |
) |
|
|
(151 |
) |
|
|
(151 |
) |
Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior
service cost
|
|
|
(5 |
) |
|
|
(5 |
) |
|
|
(14 |
) |
|
|
(14 |
) |
Net
actuarial loss
|
|
|
8 |
|
|
|
12 |
|
|
|
22 |
|
|
|
35 |
|
Net
benefit income
|
|
$ |
(5 |
) |
|
$ |
- |
|
|
$ |
(13 |
) |
|
$ |
(2 |
) |
Other
Retirement Benefits
The
components of expense / (income) for Other Retirement Benefits for the three and
nine months ended June 30, 2009 and 2008 are as follows (in
millions):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
June 30
|
|
|
June 30
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Service
cost
|
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
2 |
|
|
$ |
3 |
|
Interest
cost
|
|
|
4 |
|
|
|
3 |
|
|
|
11 |
|
|
|
11 |
|
Expected
return on plan assets
|
|
|
(1 |
) |
|
|
- |
|
|
|
(1 |
) |
|
|
(1 |
) |
Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior
service cost
|
|
|
(5 |
) |
|
|
(8 |
) |
|
|
(16 |
) |
|
|
(25 |
) |
Net
actuarial loss
|
|
|
2 |
|
|
|
3 |
|
|
|
7 |
|
|
|
10 |
|
Net
benefit expense / (income)
|
|
$ |
1 |
|
|
$ |
(1 |
) |
|
$ |
3 |
|
|
$ |
(2 |
) |
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. The Company made a discretionary contribution of
$75 million to its U.S. qualified pension plan in January 2009. The
Company does not anticipate it will be required to make further contributions to
its U.S. qualified pension plan by governmental regulations in fiscal year
2009. Contributions to the Company’s international plans and the U.S.
non-qualified plan are expected to total $14 million in fiscal year
2009. For the nine months ended June 30, 2009 and 2008, the Company
made contributions to its international plans and the U.S. non-qualified pension
plan of $12 million and $11 million, respectively.
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
12.
|
Stock-Based
Compensation
|
Total
stock-based compensation expense included within the Condensed Consolidated
Statement of Operations is as follows (in millions):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
June 30
|
|
|
June 30
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Stock-based
compensation expense included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
cost of sales
|
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
3 |
|
|
$ |
3 |
|
Service
cost of sales
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
|
1 |
|
Selling,
general and administrative expenses
|
|
|
4 |
|
|
|
4 |
|
|
|
11 |
|
|
|
11 |
|
Total
|
|
$ |
5 |
|
|
$ |
5 |
|
|
$ |
15 |
|
|
$ |
15 |
|
The
Company issued awards of equity instruments under the Company’s various
incentive plans for the nine months ended June 30, 2009 and 2008 as
follows:
|
|
|
|
|
Performance
|
|
|
Restricted
|
|
|
Restricted
|
|
|
|
Options
|
|
|
Shares
|
|
|
Stock
|
|
|
Stock Units
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
Number
|
|
|
Average
|
|
|
Number
|
|
|
Average
|
|
|
Number
|
|
|
Average
|
|
|
Number
|
|
|
Average
|
|
|
|
Issued
|
|
|
Fair Value
|
|
|
Issued
|
|
|
Fair Value
|
|
|
Issued
|
|
|
Fair Value
|
|
|
Issued
|
|
|
Fair Value
|
|
Nine months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2009
|
|
|
1,327,860 |
|
|
$ |
7.12 |
|
|
|
308,705 |
|
|
$ |
30.61 |
|
|
|
98,670 |
|
|
$ |
30.39 |
|
|
|
40,902 |
|
|
$ |
35.83 |
|
Nine
months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2008
|
|
|
355,440 |
|
|
$ |
23.36 |
|
|
|
112,491 |
|
|
$ |
73.37 |
|
|
|
45,900 |
|
|
$ |
72.12 |
|
|
|
19,828 |
|
|
$ |
66.19 |
|
The
maximum number of shares of common stock that can be issued with respect to the
performance shares granted in 2009 based on the achievement of performance
targets for fiscal years 2009 through 2011 is 739,903.
The fair
value of each option granted by the Company was estimated using a binomial
lattice pricing model and the following assumptions:
|
|
2009
|
|
|
2008
|
|
|
|
Grants
|
|
|
Grants
|
|
Risk-free
interest rate (U.S. Treasury zero coupon issues)
|
|
|
2.37 |
% |
|
|
3.86 |
% |
Expected
dividend yield
|
|
|
1.59 |
% |
|
|
0.98 |
% |
Expected
volatility
|
|
|
0.24 |
|
|
|
0.30 |
|
Expected
life
|
|
6.4
years
|
|
|
6.0
years
|
|
Employee
Benefits Paid in Company Stock
During
the nine months ended June 30, 2009 and 2008, 1.4 million and 0.7 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 $49 million and $46 million for the respective periods.
Comprehensive
income consists of the following (in millions):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
June 30
|
|
|
June 30
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net
income
|
|
$ |
145 |
|
|
$ |
174 |
|
|
$ |
460 |
|
|
$ |
496 |
|
Unrealized
foreign currency translation adjustment
|
|
|
15 |
|
|
|
3 |
|
|
|
1 |
|
|
|
14 |
|
Foreign
currency cash flow hedge adjustment
|
|
|
4 |
|
|
|
(2 |
) |
|
|
2 |
|
|
|
(2 |
) |
Amortization
of defined benefit plan costs
|
|
|
3 |
|
|
|
3 |
|
|
|
3 |
|
|
|
5 |
|
Comprehensive
income
|
|
$ |
167 |
|
|
$ |
178 |
|
|
$ |
466 |
|
|
$ |
513 |
|
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Other
income, net consists of the following (in millions):
|
|
Three
Months Ended
|
|
|
Nine Months
Ended
|
|
|
|
June 30
|
|
|
June 30
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Royalty
income
|
|
$ |
2 |
|
|
$ |
1 |
|
|
$ |
6 |
|
|
$ |
10 |
|
Earnings
from equity affiliates
|
|
|
1 |
|
|
|
3 |
|
|
|
5 |
|
|
|
7 |
|
Interest
income
|
|
|
1 |
|
|
|
2 |
|
|
|
4 |
|
|
|
6 |
|
Other
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
1 |
|
|
|
(2 |
) |
Other
income, net
|
|
$ |
3 |
|
|
$ |
5 |
|
|
$ |
16 |
|
|
$ |
21 |
|
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 June 30, 2009 and 2008, the effective income tax rate was
32.6 percent and 29.8 percent, respectively. During the nine months
ended June 30, 2009 and 2008 the effective income tax rate was 32.1 percent and
30.3 percent, respectively.
The
Federal Research and Development Tax Credit (Federal R&D Tax Credit) expired
December 31, 2007. On the last day of fiscal year 2008, the Emergency
Economic Stabilization Act of 2008 was enacted, which retroactively reinstated
and extended the Federal R&D Tax Credit from January 1, 2008 to December 31,
2009. The effective income tax rate for the three and nine months
ended June 30, 2009 reflects a full year benefit from the Federal R&D Tax
Credit in the estimate of the annual effective income tax rate. The
effective income tax rate for the three and nine months ended June 30, 2008
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 2008 fiscal year.
The
effective income tax rate for the three and nine months ended June 30, 2008
reflects the favorable impact of the resolution of certain tax matters resulting
in a benefit to the effective income tax rate for both the three and nine months
ended June 30, 2008 of about 3 percentage points.
The
effective income tax rate for the three and nine months ended June 30, 2009 and
June 30, 2008 include a tax benefit related to the Domestic Manufacturing
Deduction (DMD). The DMD tax benefit available in fiscal year 2009
and fiscal year 2008 is two-thirds of the full benefit that will be available in
fiscal year 2011.
The
Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48) at the beginning of fiscal year 2008. The $5
million cumulative effect of adopting FIN 48 was recorded as a reduction to
retained earnings in the first quarter of 2008. At September 30,
2008, the Company had gross unrecognized tax benefits of $73 million recorded
within Other Liabilities in the Consolidated Statement of Financial Position, of
which $41 million would affect the effective income tax rate if
recognized. At June 30, 2009, the Company had gross unrecognized tax
benefits of $89 million recorded within Other Liabilities in the Condensed
Consolidated Statement of Financial Position, of which $52 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 twelve months a reduction in unrecognized tax benefits may occur in the
range of $0 to $36 million, a significant portion of which would not impact the
effective income tax rate.
The
Company recognizes interest and penalties related to unrecognized tax benefits
in income tax expense. As of September 30, 2008, the total amount of
interest and penalties recognized within Other Liabilities in the Consolidated
Statement of Financial Position was $5 million. As of June 30, 2009, the total
amount of interest and penalties recognized within Other Liabilities in the
Condensed Consolidated Statement of Financial Position was $9
million.
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The
Company's U.S. Federal income tax returns for the tax years ended September 30,
2005 and prior have been audited by the 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 which are
not expected to have a material effect on the Company’s results of operations,
financial condition, or cash flows. The Company is also currently under audit in
various U.S. state and foreign jurisdictions. The U.S. state and
foreign 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 paid income taxes, net of refunds, of $147 million and $233 million
during the nine months ended June 30, 2009 and 2008, respectively.
16.
|
Fair
Value of Financial Instruments
|
Fair
Value Measurements
The
Company adopted the recognition and disclosure provisions of SFAS 157 as of
October 1, 2008 for financial assets and liabilities. In accordance
with FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No.
157 (FSP FAS 157-2), the Company elected to defer until October 1, 2009
the adoption of SFAS 157 for all nonfinancial assets and nonfinancial
liabilities not recognized or disclosed at fair value in the financial
statements on a recurring basis. Nonfinancial assets and nonfinancial
liabilities for which we have not applied the provisions of SFAS 157 include
those measured at fair value in goodwill impairment testing, indefinite-lived
intangible assets measured at fair value for impairment testing, and those
non-recurring nonfinancial assets and nonfinancial liabilities initially
measured at fair value in a business combination. The adoption of
SFAS 157 for those assets and liabilities within the scope of FSP FAS 157-2 is
not expected to have a material impact on the Company’s financial position,
results of operations or cash flows.
SFAS 157
defines fair value, establishes a framework for measuring fair value and expands
the related disclosure requirements. The statement indicates, among
other things, that a fair value measurement assumes that the transaction to sell
an asset or transfer a liability occurs in the principal market for the asset or
liability or, in the absence of a principal market, the most advantageous market
for the asset or liability. SFAS 157 establishes a valuation
hierarchy for disclosure of the inputs to valuation techniques used to measure
fair value. This hierarchy prioritizes the inputs into three broad
levels as follows:
|
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 June 30, 2009 are as follows (in
millions):
|
|
Carrying
|
|
|
Quoted
prices
|
|
|
Significant
other
|
|
|
Significant
|
|
|
|
Amount
|
|
|
in
active
|
|
|
observable
|
|
|
unobservable
|
|
|
|
Asset
|
|
|
markets
|
|
|
inputs
|
|
|
inputs
|
|
|
|
(Liability)
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Deferred
compensation plan investments
|
|
$ |
31 |
|
|
$ |
31 |
|
|
$ |
- |
|
|
$ |
- |
|
Interest
rate swaps
|
|
|
7 |
|
|
|
- |
|
|
|
7 |
|
|
|
- |
|
Foreign
currency forward exchange contracts, net
|
|
|
1 |
|
|
|
- |
|
|
|
1 |
|
|
|
- |
|
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Valuation
Techniques
The
deferred compensation plan investments consist of investments in marketable
securities (primarily mutual funds) and the fair value is determined using the
market approach based on quoted market prices of identical assets in active
markets.
The fair
value of the interest rate swaps is determined using the market approach and is
calculated by a pricing model with observable market inputs.
The fair
value of foreign currency forward exchange contracts is determined using the
market approach and is calculated as the value of the quoted forward currency
exchange rate less the contract rate multiplied by the notional
amount.
As of
June 30, 2009, there has not been any impact to the fair value of our derivative
liabilities due to our own credit risk. Similarly, there has not been any impact
to the fair value of our derivative assets based on our evaluation of our
counterparties’ credit risks.
The
carrying amounts and fair values of the Company’s financial instruments are as
follows (in millions):
|
|
Asset (Liability)
|
|
|
|
June 30, 2009
|
|
|
September 30, 2008
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
218 |
|
|
$ |
218 |
|
|
$ |
175 |
|
|
$ |
175 |
|
Short-term
debt
|
|
|
(117 |
) |
|
|
(117 |
) |
|
|
(287 |
) |
|
|
(287 |
) |
Long-term
debt
|
|
|
(530 |
) |
|
|
(537 |
) |
|
|
(228 |
) |
|
|
(216 |
) |
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 foreign
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.
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 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 June 30, 2009.
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 June 30, 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 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 June 30, 2009 and September 30, 2008, the Swaps were
recorded at a fair value of $7 million and $4 million, within Other Assets,
respectively, offset by a fair value adjustment to Long-Term Debt (Note 10) of
$7 million and $4 million, respectively. Cash payments or receipts
between the Company and the counterparties to the Swaps are recorded as an
adjustment to interest expense.
Foreign
Currency Forward Exchange Contracts
The
Company transacts business in various foreign currencies which subjects the
Company’s cash flows and earnings to exposure related to changes in foreign
currency exchange rates. These exposures arise primarily from
purchases or sales of products and services from third parties and intercompany
transactions. Foreign currency forward exchange contracts provide for
the purchase or sale of foreign currencies at specified future dates at
specified exchange rates and are used to offset changes in the fair value of
certain assets or liabilities or forecasted cash flows resulting from
transactions denominated in foreign currencies. As of June 30, 2009 and
September 30, 2008, the Company had outstanding foreign currency forward
exchange contracts with notional amounts of $335 million and $218 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.
Fair
Value of Derivative Instruments
Fair
values of derivative instruments in the Condensed Consolidated Statement of
Financial Position as of June 30, 2009 are as follows (in
millions):
|
Asset Derivatives
|
|
Liability Derivatives
|
|
|
|
|
Fair
|
|
|
|
Fair
|
|
|
Classification
|
|
Value
|
|
Classification
|
|
Value
|
|
Foreign
currency forward
|
Other
current
|
|
|
|
Other
current
|
|
|
|
exchange
contracts
|
assets
|
|
$ |
11 |
|
liabilities
|
|
$ |
10 |
|
Interest
rate swaps
|
Other
assets
|
|
|
7 |
|
Other
liabilities
|
|
|
- |
|
Total
|
|
|
$ |
18 |
|
|
|
$ |
10 |
|
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The
effect of derivative instruments on the Condensed Consolidated Statement of
Operations for the three and nine months ended June 30, 2009 is as follows (in
millions):
|
|
|
Amount
of Gain (Loss)
|
|
|
|
|
at June 30, 2009
|
|
|
|
|
Three
|
|
|
Nine
|
|
|
Location
of
|
|
Months
|
|
|
Months
|
|
|
Gain (Loss)
|
|
Ended
|
|
|
Ended
|
|
Fair
Value Hedges
|
|
|
|
|
|
|
|
Foreign
currency forward exchange contracts
|
Cost
of sales
|
|
$ |
(1 |
) |
|
$ |
(1 |
) |
Interest
rate swaps
|
Interest
expense
|
|
|
1 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
Cash
Flow Hedges
|
|
|
|
|
|
|
|
|
|
Foreign
currency forward exchange contracts:
|
|
|
|
|
|
|
|
|
|
Amount
of gain recognized in AOCL (effective portion)
|
AOCL
|
|
$ |
7 |
|
|
$ |
1 |
|
Amount
of loss reclassified from AOCL into income
|
Cost
of sales
|
|
|
- |
|
|
|
(2 |
) |
There was
no significant impact to the Company’s earnings related to the ineffective
portion of any hedging instruments during the three and nine months ended June
30, 2009. In addition, there was no significant impact to the
Company’s earnings when a hedged firm commitment no longer qualified as a fair
value hedge or when a hedged forecasted transaction no longer qualified as a
cash flow hedge during the three and nine months ended June 30,
2009.
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. Amounts included in AOCL are reclassified into earnings
when the hedged transaction settles. The Company expects to
reclassify approximately $3 million of net gains into earnings over the next 12
months. The maximum duration of a foreign currency cash flow hedge
contract at June 30, 2009 is 133 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.
Changes
in the carrying amount of accrued product warranty costs are summarized as
follows (in millions):
|
|
Nine
Months Ended
|
|
|
|
June 30
|
|
|
|
2009
|
|
|
2008
|
|
Balance
at beginning of year
|
|
$ |
226 |
|
|
$ |
213 |
|
Warranty
costs incurred
|
|
|
(39 |
) |
|
|
(38 |
) |
Product
warranty accrual
|
|
|
34 |
|
|
|
50 |
|
Increase
from acquisitions
|
|
|
2 |
|
|
|
1 |
|
Pre-existing
warranty adjustments
|
|
|
(2 |
) |
|
|
(1 |
) |
Balance
at June 30
|
|
$ |
221 |
|
|
$ |
225 |
|
Guarantees
In
connection with the fiscal year 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 June 30, 2009, the
outstanding loan balance was approximately $6 million. Quadrant
has made an identical pledge to guarantee this obligation of
Quest.
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Should
Quest fail to meet its obligations under these agreements, these guarantees may
become a liability of the Company. As of June 30, 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 June 30, 2009 were
$109 million. These commitments are not reflected as liabilities on
the Company’s Condensed Consolidated Statement of Financial
Position.
Indemnifications
The
Company enters into indemnifications with lenders, counterparties in
transactions such as administration of employee benefit plans, and other
customary indemnifications with third parties in the normal course of
business. The following are other than customary indemnifications
based on the judgment of management.
The
Company became an independent, publicly held company on June 29, 2001, when
Rockwell International Corporation (Rockwell), renamed Rockwell Automation Inc.,
spun off its former avionics and communications business and certain other
assets and liabilities of Rockwell by means of a distribution of all the
Company’s outstanding shares of common stock to the shareowners of Rockwell in a
tax-free spin-off (the spin-off). In connection with the spin-off,
the Company may be required to indemnify certain insurers against claims made by
third parties in connection with the Company’s legacy insurance
policies.
In
connection with agreements for the sale of portions of its business, the Company
at times retains various liabilities of a business that relate to events
occurring prior to its sale, such as tax, environmental, litigation and
employment matters. The Company at times indemnifies the purchaser of
a Rockwell Collins business in the event that a third party asserts a claim that
relates to a liability retained by the Company.
The
Company also provides indemnifications of varying scope and amounts to certain
customers against claims of product liability or intellectual property
infringement made by third parties arising from the use of Company or customer
products or intellectual property. These indemnifications generally
require the Company to compensate the other party for certain damages and costs
incurred as a result of third party product liability or intellectual property
claims arising from these transactions.
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 June 30, 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 June 30, 2009, which
represents management’s best estimate of the probable future cost for this
site.
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
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.
|
Business
Segment Information
|
The sales
and results of operations of the Company’s operating segments are summarized as
follows (in millions):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
June 30
|
|
|
June 30
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
Systems
|
|
$ |
651 |
|
|
$ |
607 |
|
|
$ |
1,838 |
|
|
$ |
1,730 |
|
Commercial
Systems
|
|
|
433 |
|
|
|
587 |
|
|
|
1,442 |
|
|
|
1,762 |
|
Total
sales
|
|
$ |
1,084 |
|
|
$ |
1,194 |
|
|
$ |
3,280 |
|
|
$ |
3,492 |
|
Segment
operating earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
Systems
|
|
$ |
158 |
|
|
$ |
131 |
|
|
$ |
443 |
|
|
$ |
361 |
|
Commercial
Systems
|
|
|
75 |
|
|
|
139 |
|
|
|
282 |
|
|
|
416 |
|
Total
segment operating earnings
|
|
|
233 |
|
|
|
270 |
|
|
|
725 |
|
|
|
777 |
|
Interest
expense
|
|
|
(5 |
) |
|
|
(5 |
) |
|
|
(12 |
) |
|
|
(15 |
) |
Stock-based
compensation
|
|
|
(5 |
) |
|
|
(5 |
) |
|
|
(15 |
) |
|
|
(15 |
) |
General
corporate, net
|
|
|
(8 |
) |
|
|
(12 |
) |
|
|
(21 |
) |
|
|
(35 |
) |
Income
before income taxes
|
|
|
215 |
|
|
|
248 |
|
|
|
677 |
|
|
|
712 |
|
Income
tax provision
|
|
|
(70 |
) |
|
|
(74 |
) |
|
|
(217 |
) |
|
|
(216 |
) |
Net
income
|
|
$ |
145 |
|
|
$ |
174 |
|
|
$ |
460 |
|
|
$ |
496 |
|
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, non-recurring charges resulting from purchase
accounting such as purchased research and development charges, asset impairment
charges, and other special items as identified by management from time to
time. Intersegment sales are not material and have been
eliminated.
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The
following table summarizes sales by product category for the three and nine
months ended June 30, 2009 and 2008 (in
millions):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
June 30
|
|
|
June 30
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Government
Systems product categories:
|
|
|
|
|
|
|
|
|
|
|
|
|
Airborne
solutions
|
|
$ |
452 |
|
|
$ |
429 |
|
|
$ |
1,286 |
|
|
$ |
1,203 |
|
Surface
solutions
|
|
|
199 |
|
|
|
178 |
|
|
|
552 |
|
|
|
527 |
|
Total
Government Systems sales
|
|
$ |
651 |
|
|
$ |
607 |
|
|
$ |
1,838 |
|
|
$ |
1,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
Systems product categories:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Air
transport aviation electronics
|
|
$ |
244 |
|
|
$ |
306 |
|
|
$ |
723 |
|
|
$ |
927 |
|
Business
and regional aviation electronics
|
|
|
189 |
|
|
|
281 |
|
|
|
719 |
|
|
|
835 |
|
Total
Commercial Systems sales
|
|
$ |
433 |
|
|
$ |
587 |
|
|
$ |
1,442 |
|
|
$ |
1,762 |
|
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.
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
RESULTS OF
OPERATIONS
The
following management discussion and analysis is based on financial results for
the three and nine months ended June 30, 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 June 30, 2009 and 2008
Sales
(dollars
in millions)
|
|
Three
Months Ended
|
|
|
|
June 30
|
|
|
|
2009
|
|
|
2008
|
|
Total
sales
|
|
$ |
1,084 |
|
|
$ |
1,194 |
|
Percent
(decrease)
|
|
|
(9 |
)% |
|
|
|
|
Total
sales for the three months ended June 30, 2009 decreased 9 percent to $1,084
million compared to the three months ended June 30, 2008. Commercial
Systems sales decreased 26 percent partially offset by Government Systems sales
growth of 7 percent. Incremental sales from the May 29, 2009
acquisition of DataPath, Inc. (DataPath) and the November 24, 2008 acquisition
of SEOS Group Limited (SEOS) contributed a total of $28 million, or 2 percentage
points of revenue growth. See the following operating segment
sections for further discussion of sales for the three months ended June 30,
2009 and 2008.
Net Income and Diluted
Earnings Per Share
(dollars
in millions, except per share amounts)
|
|
Three
Months Ended
|
|
|
|
June 30
|
|
|
|
2009
|
|
|
2008
|
|
Net
income
|
|
$ |
145 |
|
|
$ |
174 |
|
Net
income as a percent of sales
|
|
|
13.4 |
% |
|
|
14.6 |
% |
Diluted
earnings per share
|
|
$ |
0.91 |
|
|
$ |
1.07 |
|
Net
income for the three months ended June 30, 2009 decreased 17 percent to $145
million, or 13.4 percent of sales, from net income of $174 million, or 14.6
percent of sales, for the three months ended June 30, 2008. The
decrease in net income was primarily the result of lower Commercial Systems
sales volume and a higher effective income tax rate which were partially offset
by lower employee incentive compensation costs, lower research and development
costs, and lower selling, general and administrative costs. Diluted
earnings per share was $0.91 for the three months ended June 30, 2009 compared
to earnings per share of $1.07 for the three months ended June 30, 2008 as lower
net income was partially offset by the positive impact of our share repurchase
program.
Government
Systems’ Financial Results
Government Systems’
Sales
The
following table presents Government Systems’ sales by product
category:
(dollars
in millions)
|
|
Three
Months Ended
|
|
|
|
June 30
|
|
|
|
2009
|
|
|
2008
|
|
Airborne
solutions
|
|
$ |
452 |
|
|
$ |
429 |
|
Surface
solutions
|
|
|
199 |
|
|
|
178 |
|
Total
|
|
$ |
651 |
|
|
$ |
607 |
|
Percent
increase
|
|
|
7 |
% |
|
|
|
|
Airborne
solutions’ sales increased $23 million, or 5 percent, for the three months ended
June 30, 2009 compared to the three months ended June 30,
2008. Incremental sales from the acquisition of SEOS contributed $4
million, or 1 percentage point of the overall revenue growth. The 4
percent organic sales increase was due primarily to higher sales from simulation
and training solutions, higher production sales of head-down displays for F-15
aircraft, and higher development program revenues on the Common Range Integrated
Instrumentation System (CRIIS) program, partially offset by lower revenues from
international C-130 upgrade programs.
Surface
solutions’ sales increased $21 million, or 12 percent, for the three months
ended June 30, 2009 compared to the three months ended June 30,
2008. Incremental sales from the DataPath acquisition contributed $23
million, or 13 percentage points of revenue growth. The 1 percent
decrease in organic sales was due primarily to lower sales for the Defense
Advanced GPS Receiver (DAGR) and Ground-Based GPS Receiver Application Module
(GB-GRAM) programs, partially offset by higher development program sales from
the Joint Precision Approach and Landing System (JPALS) program.
Government Systems’ Segment
Operating Earnings
(dollars
in millions)
|
|
Three
Months Ended
|
|
|
|
June 30
|
|
|
|
2009
|
|
|
2008
|
|
Segment
operating earnings
|
|
$ |
158 |
|
|
$ |
131 |
|
Percent
of sales
|
|
|
24.3 |
% |
|
|
21.6 |
% |
Government
Systems’ operating earnings increased 21 percent to $158 million, or 24.3
percent of sales, for the three months ended June 30, 2009 compared to operating
earnings of $131 million, or 21.6 percent of sales, for the same period a year
ago. The increase in operating earnings and operating margin is
primarily attributed to lower employee incentive compensation costs and lower
selling, general and administrative expenses.
Commercial
Systems’ Financial Results
Commercial Systems’
Sales
The
following table presents Commercial Systems’ sales by product
category:
(dollars
in millions)
|
|
Three
Months Ended
|
|
|
|
June 30
|
|
|
|
2009
|
|
|
2008
|
|
Wide-body
in-flight entertainment products
|
|
$ |
23 |
|
|
$ |
23 |
|
All
other air transport aviation electronics
|
|
|
221 |
|
|
|
283 |
|
Total
air transport aviation electronics
|
|
|
244 |
|
|
|
306 |
|
Business
and regional aviation electronics
|
|
|
189 |
|
|
|
281 |
|
Total
|
|
$ |
433 |
|
|
$ |
587 |
|
Percent
(decrease)
|
|
|
(26 |
)% |
|
|
|
|
Total air
transport aviation electronics sales decreased $62 million, or 20 percent, for
the three months ended June 30, 2009 compared to the three months ended June 30,
2008. This decrease was due to a decline in Boeing 787 related
revenues, lower order volume due to Boeing’s post-labor strike inventory
rationalization, reduced sales of airline selectable equipment as a
result of production deferrals and rescheduling at the original equipment
manufacturers (OEMs), as well as lower sales from service and
support.
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 plan to support our existing customer base, which
includes on-going service and support activities. All periods have
been presented consistent with the above description.
Business
and regional aviation electronics sales decreased $92 million, or 33 percent,
for the three months ended June 30, 2009 compared to the same period in the
prior year. Original equipment sales declined due to business jet OEM
production rate cuts as the ramifications of global macro-economic factors
continue to impact the business jet market. In addition, aftermarket
sales declined due to decreases in business aircraft utilization.
The
following table presents Commercial Systems’ sales based on the type of product
or service:
(dollars
in millions)
|
|
Three
Months Ended
|
|
|
|
June 30
|
|
|
|
2009
|
|
|
2008
|
|
Original
equipment
|
|
$ |
211 |
|
|
$ |
325 |
|
Aftermarket
|
|
|
199 |
|
|
|
239 |
|
Wide-body
in-flight entertainment products
|
|
|
23 |
|
|
|
23 |
|
Total
|
|
$ |
433 |
|
|
$ |
587 |
|
Original
equipment sales decreased $114 million, or 35 percent, for the three months
ended June 30, 2009 compared to the same period in the prior
year. This sales decline is attributed to reduced production rates at
business jet OEMs as a result of macro-economic factors impacting the global
economy, a decline in Boeing 787 related revenues, lower order volume due to
Boeing’s post-labor strike inventory rationalization, and lower sales of airline
selectable equipment as a result of production deferrals and rescheduling at the
OEMs.
Aftermarket
sales decreased $40 million, or 17 percent, for the three months ended June 30,
2009 compared to the three months ended June 30, 2008. This decrease
is due to lower sales from service and support, Boeing 787 simulator avionics,
and lower aftermarket hardware sales.
Commercial Systems’ Segment
Operating Earnings
(dollars
in millions)
|
|
Three
Months Ended
|
|
|
|
June 30
|
|
|
|
2009
|
|
|
2008
|
|
Segment
operating earnings
|
|
$ |
75 |
|
|
$ |
139 |
|
Percent
of sales
|
|
|
17.3 |
% |
|
|
23.7 |
% |
Commercial
Systems’ operating earnings decreased 46 percent to $75 million, or 17.3 percent
of sales, for the three months ended June 30, 2009 compared to operating
earnings of $139 million, or 23.7 percent of sales for the three months ended
June 30, 2008. The decrease in operating earnings and operating
margin was primarily due to reduced sales volume, partially offset by lower
employee incentive compensation and research and development costs, as well as
reduced employee headcount and other cost saving initiatives.
Nine
Months Ended June 30, 2009 and 2008
Sales
(dollars
in millions)
|
|
Nine
Months Ended
|
|
|
|
June 30
|
|
|
|
2009
|
|
|
2008
|
|
Total
sales
|
|
$ |
3,280 |
|
|
$ |
3,492 |
|
Percent
(decrease)
|
|
|
(6 |
)% |
|
|
|
|
Total
sales for the nine months ended June 30, 2009 decreased 6 percent to $3,280
million compared to the nine months ended June 30, 2008. Commercial
Systems sales decreased 18 percent partially offset by Government Systems sales
growth of 6 percent. Incremental sales from the May 29, 2009
acquisition of DataPath, the November 24, 2008 acquisition of SEOS and the April
4, 2008 acquisition of Athena Technologies, Inc. (Athena) contributed a total of
$49 million, or 1 percentage point of revenue growth. See the
following operating segment sections for further discussion of sales for the
nine months ended June 30, 2009 and 2008.
Net Income and Diluted
Earnings Per Share
(dollars
in millions, except per share amounts)
|
|
Nine
Months Ended
|
|
|
|
June 30
|
|
|
|
2009
|
|
|
2008
|
|
Net
income
|
|
$ |
460 |
|
|
$ |
496 |
|
Net
income as a percent of sales
|
|
|
14.0 |
% |
|
|
14.2 |
% |
Diluted
earnings per share
|
|
$ |
2.89 |
|
|
$ |
3.03 |
|
Net
income for the nine months ended June 30, 2009 decreased 7 percent to $460
million, or 14.0 percent of sales, from net income of $496 million, or 14.2
percent of sales, for the nine months ended June 30, 2008. The
decrease in net income was primarily the result of lower Commercial Systems
sales volume and a higher effective income tax rate, partially offset by lower
employee incentive compensation costs, lower research and development costs, and
lower selling, general and administrative expenses. Diluted earnings
per share decreased to $2.89 for the nine months ended June 30, 2009 from $3.03
for the nine months ended June 30, 2008 primarily due to lower net income
partially offset by the positive impact of our share repurchase
program.
Government
Systems’ Financial Results
Government Systems’
Sales
(dollars
in millions)
|
|
Nine
Months Ended
|
|
|
|
June 30
|
|
|
|
2009
|
|
|
2008
|
|
Airborne
solutions
|
|
$ |
1,286 |
|
|
$ |
1,203 |
|
Surface
solutions
|
|
|
552 |
|
|
|
527 |
|
Total
|
|
$ |
1,838 |
|
|
$ |
1,730 |
|
Percent
increase
|
|
|
6 |
% |
|
|
|
|
Airborne
solutions’ sales increased $83 million, or 7 percent, for the nine months ended
June 30, 2009 compared to the nine months ended June 30,
2008. Incremental sales from the acquisitions of Athena and SEOS
contributed a total of $22 million, or 2 percentage points of the overall
revenue growth. The 5 percent organic sales increase was due
primarily to higher sales from simulation and training solutions, higher
development program revenues on the Common Range Integrated Instrumentation
System (CRIIS) program, and higher production sales on the Eurofighter Tranche 2
program, partially offset by lower revenues from international C-130 upgrade
programs.
Surface
solutions’ sales increased $25 million, or 5 percent, for the nine months ended
June 30, 2009 compared to the nine months ended June 30,
2008. Incremental sales from the DataPath acquisition contributed a
total of $23 million, or 4 percentage points of the overall revenue
growth. The 1 percent organic sales increase was due to higher
development program sales from the Future Combat Systems (FCS) and the Joint
Precision Approach and Landing System (JPALS) programs, partially offset by
lower data link systems and Defense Advanced GPS Receiver (DAGR) program
revenues.
Government Systems’ Segment
Operating Earnings
(dollars
in millions)
|
|
Nine
Months Ended
|
|
|
|
June 30
|
|
|
|
2009
|
|
|
2008
|
|
Segment
operating earnings
|
|
$ |
443 |
|
|
$ |
361 |
|
Percent
of sales
|
|
|
24.1 |
% |
|
|
20.9 |
% |
Government
Systems’ operating earnings increased $82 million, or 23 percent, for the nine
months ended June 30, 2009, compared to the same period a year
ago. The increase in operating earnings and operating margin is
primarily attributed to lower employee incentive compensation costs, incremental
margin on higher sales, and lower research and development costs.
Commercial
Systems’ Financial Results
Commercial Systems’
Sales
The
following table represents Commercial Systems’ sales by product
category:
(dollars
in millions)
|
|
Nine
Months Ended
|
|
|
|
June 30
|
|
|
|
2009
|
|
|
2008
|
|
Wide-body
in-flight entertainment products
|
|
$ |
61 |
|
|
$ |
99 |
|
All
other air transport aviation electronics
|
|
|
662 |
|
|
|
828 |
|
Total
air transport aviation electronics
|
|
|
723 |
|
|
|
927 |
|
Business
and regional aviation electronics
|
|
|
719 |
|
|
|
835 |
|
Total
|
|
$ |
1,442 |
|
|
$ |
1,762 |
|
Percent
(decrease)
|
|
|
(18 |
)% |
|
|
|
|
Total air
transport aviation electronics sales decreased $204 million, or 22 percent, for
the nine months ended June 30, 2009 compared to the nine months ended June 30,
2008. Excluding the $38 million decrease in Wide-body IFE revenues,
air transport aviation electronics sales decreased $166 million, or 20 percent,
for the nine months ended June 30, 2009 compared to the nine months ended June
30, 2008. This decrease was due to lower OEM sales adversely impacted
by Boeing’s labor strike, a decline in Boeing 787 related revenues, lower
service and support revenue, and lower hardware aftermarket
revenues.
Business
and regional aviation electronics sales decreased $116 million, or 14 percent,
for the nine months ended June 30, 2009 compared to the nine months ended June
30, 2008. Original equipment sales declined due to business jet OEM
production rate cuts as the ramifications of global macro-economic factors
continue to impact the business jet market. In addition, aftermarket
sales declined due to decreases in business aircraft utilization.
The
following table represents Commercial Systems’ sales based on the type of
product or service:
(dollars
in millions)
|
|
Nine
Months Ended
|
|
|
|
June 30
|
|
|
|
2009
|
|
|
2008
|
|
Original
equipment
|
|
$ |
750 |
|
|
$ |
936 |
|
Aftermarket
|
|
|
631 |
|
|
|
727 |
|
Wide-body
in-flight entertainment products
|
|
|
61 |
|
|
|
99 |
|
Total
|
|
$ |
1,442 |
|
|
$ |
1,762 |
|
Original
equipment sales decreased $186 million, or 20 percent, for the nine months ended
June 30, 2009 compared to the nine months ended June 30, 2008. This
sales decline is attributed to decreased business jet delivery rates as a result
of macro-economic factors impacting the global economy, Boeing’s labor strike,
and reductions in Boeing 787 related sales.
Aftermarket
sales decreased $96 million, or 13 percent, for the nine months ended June 30,
2009 compared to the nine months ended June 30, 2008. This decline is
due to lower sales from service and support, Boeing 787 simulator avionics, and
lower hardware retrofits.
Commercial Systems’ Segment
Operating Earnings
(dollars
in millions)
|
|
Nine
Months Ended
|
|
|
|
June 30
|
|
|
|
2009
|
|
|
2008
|
|
Segment
operating earnings
|
|
$ |
282 |
|
|
$ |
416 |
|
Percent
of sales
|
|
|
19.6 |
% |
|
|
23.6 |
% |
Commercial
Systems’ operating earnings decreased 32 percent to $282 million, or 19.6
percent of sales, for the nine months ended June 30, 2009 compared to operating
earnings of $416 million, or 23.6 percent of sales, for the nine months ended
June 30, 2008. The decrease in operating earnings and operating
margin was due primarily to lower sales volume, the absence of favorable
adjustments related to contract option exercises and the absence of royalty
income which both benefited the nine months ended June 30, 2008, partially
offset by lower employee incentive compensation and research and development
costs.
Retirement
Benefits
Net
benefit expense / (income) for pension benefits and other retirement benefits
are as follows:
(dollars
in millions)
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
June 30
|
|
|
June 30
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Pension
benefits
|
|
$ |
(5 |
) |
|
$ |
- |
|
|
$ |
(13 |
) |
|
$ |
(2 |
) |
Other
retirement benefits
|
|
|
1 |
|
|
|
(1 |
) |
|
|
3 |
|
|
|
(2 |
) |
Net
benefit income
|
|
$ |
(4 |
) |
|
$ |
(1 |
) |
|
$ |
(10 |
) |
|
$ |
(4 |
) |
Pension
Benefits
The cost
of providing retirement benefits under a defined benefit structure has become
increasingly uncertain due to changes in discount rates and the volatility in
the stock market. As a result, we amended our U.S. qualified and
non-qualified pension plans in 2003 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 (the Pension
Amendment). 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.
Defined
benefit pension income for the full year 2009 is expected to be $17 million
compared to defined benefit pension income of $3 million for the full year
2008. The change is due primarily to the favorable impact of an
increase in the defined benefit pension plan valuation discount rate from 6.6
percent in 2008 to 7.6 percent in 2009 used to measure our pension
expense.
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 make discretionary contributions as conditions
warrant. We made a discretionary contribution of $75 million to our
U.S. qualified pension plan in January 2009. We do not anticipate
being required to make further contributions to our U.S. qualified pension plan
by governmental regulations in fiscal year 2009. Contributions to our
international plans and our U.S. non-qualified plan are expected to total $14
million in fiscal year 2009. For the nine months ended June 30, 2009
and 2008, we made contributions to our international plans and our U.S.
non-qualified pension plan of $12 million and $11 million,
respectively.
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 plan 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 $4 million for the full year
2009 compared to the full year 2008 income of $2 million, primarily due to the
elimination of favorable amortization for a plan amendment that will no longer
benefit other retirement benefits expense (income).
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 June 30, 2009 and 2008, our effective income tax rate was
32.6 percent and 29.8 percent, respectively. During the nine months
ended June 30, 2009 and 2008, our effective income tax rate was 32.1 percent and
30.3 percent, respectively. The higher effective income tax rate for
the three and nine months ended June 30, 2009 was primarily due to the
resolution of certain tax matters that benefited the prior year, partially
offset by differences in the availability of the Federal R&D Tax
Credit. The Federal R&D Tax Credit expired December 31,
2007. On the last day of our 2008 fiscal year, the Emergency Economic
Stabilization Act of 2008 was enacted, which retroactively reinstated and
extended the Federal R&D Tax Credit from January 1, 2008 to December 31,
2009. The effective income tax rate for the three and nine months
ended June 30, 2009 reflects a full year benefit from the Federal R&D Tax
Credit in the estimate of the annual effective income tax rate. The
effective income tax rate for the three and nine months ended June 30, 2008
reflects an 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 2008 fiscal year.
The
effective income tax rate for the three and nine months ended June 30, 2009 and
June 30, 2008 include a tax benefit related to the DMD. The DMD tax
benefit available in fiscal year 2009 and fiscal year 2008 is two-thirds of the
full benefit that will be available beginning in fiscal year 2011.
For 2009,
our projected effective income tax rate is expected to be in the range of 31.5
percent to 32.5 percent.
Outlook
A summary
of our 2009 anticipated results is as follows:
|
·
|
Total
revenues of about $4.55 billion
|
|
·
|
Diluted
earnings per share in the range of $3.70 to
$3.90
|
|
·
|
Cash
flow from operations in the range of $625 million to $675
million
|
|
·
|
R&D
expenditures of about $900 million, or about 20 percent of
sales
|
Our 2009
anticipated results have been updated from previously reported guidance to
include the incremental results expected from the May 2009 DataPath
acquisition.
FINANCIAL
CONDITION AND LIQUIDITY
Cash
Flow Summary
Operating Activities
|
|
|
|
|
|
|
(in
millions)
|
|
Nine
Months Ended
|
|
|
|
June 30
|
|
|
|
2009
|
|
|
2008
|
|
Cash
provided by operating activities
|
|
$ |
381 |
|
|
$ |
310 |
|
The
increase in cash provided by operating activities during the nine months ended
June 30, 2009 compared to the same period last year is primarily due to working
capital improvements related to inventory and accounts receivable as well as
lower income tax payments, partially offset by higher pension plan
contributions, lower net income, and lower levels of accounts
payable.
Investing Activities
|
|
|
|
|
|
|
(in
millions)
|
|
Nine
Months Ended
|
|
|
|
June 30
|
|
|
|
2009
|
|
|
2008
|
|
Cash
used for investing activities
|
|
$ |
(265 |
) |
|
$ |
(226 |
) |
The
increase in cash used for investing activities was due primarily to increased
acquisition activity for the nine months ended June 30, 2009 compared to the
same period for 2008 as follows:
|
·
|
$146
million in 2009 acquisitions including DataPath for $118 million on May
29, 2009 and SEOS for $28 million on November 24,
2008.
|
|
·
|
$107
million in 2008 for the acquisition of Athena on April 4,
2008.
|
Property
additions were $117 million and $114 million for the nine months ended June 30,
2009 and June 30, 2008, respectively. We expect capital expenditures
for the full year 2009 to be approximately $150 million compared to full year
2008 capital expenditures of $171 million.
Financing Activities
|
|
|
|
|
|
|
(in
millions)
|
|
Nine
Months Ended
|
|
|
|
June 30
|
|
|
|
2009
|
|
|
2008
|
|
Cash
used for financing activities
|
|
$ |
(72 |
) |
|
$ |
(131 |
) |
The
change in cash used for financing activities during the nine months ended June
30, 2009 resulted from the following:
|
·
|
$397
million decrease in the amount of treasury share repurchases as a result
of the accelerated share repurchase agreement executed in the first
quarter of fiscal year 2008.
|
|
·
|
$303
million decrease in debt related financing in comparison to the same
period a year ago.
|
|
·
|
$23
million in higher dividend payments in comparison to the same period a
year ago.
|
Liquidity
In
addition to cash provided by normal operating activities, we utilize a
combination of short-term and long-term debt to finance
operations. Our primary source of short-term liquidity is through
borrowings in the commercial paper market. Our access to that market
is facilitated by the strength of our credit ratings and an $850 million
committed credit facility with several banks (Revolving Credit
Facility). Our current ratings as provided by Moody’s Investors
Service, Standard & Poor’s and Fitch, Inc. are A-1 / A / A, respectively,
for long-term debt and P-1 / A-1 / F-1, respectively, for short-term
debt. All three agencies have stable outlooks on our credit
rating.
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 may bear interest or may be sold
at a discount and have a maturity of not more than 364 days from time of
issuance. Borrowings under the commercial paper program are generally
used for working capital needs and other general corporate
purposes. To date, our commercial paper program has not been impacted
by the global credit crisis as our investment grade ratings have enabled
uninterrupted access to the commercial paper markets. 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 the
commercial paper markets and an increase in the cost of borrowing. In
the event that our access to the commercial paper markets is impaired in the
future, we have access to an $850 million Revolving Credit Facility and are
eligible to participate in the Federal Reserve Commercial Paper Funding Facility
(CPFF) up to a maximum of $490 million. The CPFF program is currently
set to expire on February 1, 2010. In addition, alternative sources
of funding could include funds available from the issuance of securities and
potential asset securitization strategies.
At June
30, 2009 short-term commercial paper borrowings outstanding were $113 million
with a weighted average interest rate and maturity period of 0.24 percent and 9
days, respectively.
Our
Revolving Credit Facility consists of an $850 million five-year unsecured
revolving credit agreement entered into on May 24, 2005 and amended in 2007 to
extend the term to 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. The Revolving Credit Facility exists primarily to support
our commercial paper program, but is available to us in the event our access to
the commercial paper market is impaired or eliminated. 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 June 30, 2009 was 22 percent. The Revolving
Credit Facility contains covenants that require us to satisfy certain conditions
in order to incur debt secured by liens, engage in sale/leaseback transactions,
or merge or consolidate with another entity. The Revolving Credit
Facility does not contain any rating downgrade triggers that would accelerate
the maturity of our indebtedness. We had no borrowings at June 30,
2009 under our Revolving Credit Facility.
In
addition short-term credit facilities available to foreign subsidiaries amounted
to $60 million as of June 30, 2009, of which $22 million was utilized to support
commitments in the form of letters of credit. There were $4 million
of short-term borrowings outstanding under our foreign subsidiaries credit
facilities as of June 30, 2009. There are no significant commitment
fees or compensating balance requirements under any of our credit
facilities.
In
addition to our credit facilities and commercial paper program, 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, 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 aggregate principal amount of 5.25 percent
fixed rate unsecured debt due July 15, 2019 in an underwritten public offering
(the 2019 Notes). On November 20, 2003, we issued $200 million of
debt due December 1, 2013 (the 2013 Notes). 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, or merge or consolidate with another entity or transfer
substantially all of the Company’s assets.
In
addition, during June 2006 we entered into a five-year unsecured variable rate
loan facility agreement for 20.4 million euros. Our outstanding
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. As of June 30, 2009, 17 million euros ($25 million) was
outstanding under our variable rate loan facility agreement.
We were
in compliance with all debt covenants at June 30, 2009 and September 30,
2008. We do not anticipate any issues with respect to our debt
covenants.
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, 2008. 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 health of the global economy and the commercial aerospace
industry; further deterioration in economic and financial market
conditions, including the impact of tight credit; the financial condition of our
customers and suppliers; delays related to the award of domestic and
international contracts; the continued support for military transformation and
modernization programs; the impact of the global war on terrorism on U.S.
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; recruitment and
retention of qualified personnel; performance of our customers, suppliers 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; our ability to
develop contract compliant systems and products on schedule and within
anticipated cost estimates; risk of fines and penalties related to noncompliance
with laws and regulations; risk our pension plan assets will not achieve rates
of return consistent with our long-term plan asset return assumptions or that
the discount rates used to calculate our pension liability decline; 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.
At June
30, 2009, we had $200 million of 4.75 percent fixed rate long-term debt
obligations outstanding with a carrying value of $207 million and a fair value
of $206 million. 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 June 30, 2009, we also had $300 million aggregate
principal of 5.25 percent fixed rate long-term debt obligations outstanding with
a carrying value of $298 million and a fair value of $306 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 fixed rate
debt, exclusive of the effects of the interest rate swap contracts, by $11
million and $10 million, respectively. The fair value of the $100
million notional value of interest rate swap contracts was a $7 million asset at
June 30, 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 June 30, 2009, we also had $25 million of variable
rate long-term debt outstanding and variable rate short-term borrowings of $117
million. 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 our operations
or cash flows. For more information related to outstanding debt
obligations and derivative financial instruments, see Notes 10, 16 and 17 in the
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 foreign subsidiaries or enter into derivative financial instruments for
speculative purposes. Notional amounts of outstanding foreign
currency forward exchange contracts were $335 million and $218 million at June
30, 2009 and September 30, 2008, 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 asset of $1 million at
June 30, 2009 and a net liability of $2 million at September 30,
2008. 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 by $8 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 June 30, 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 June 30, 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.
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 Appropriate
Dollar Value) of
Shares that May
Yet Be Purchased
Under the Plans or
Programs 1
|
|
April
1, 2009 through
April
30, 2009
|
|
|
451,600 |
|
|
$ |
35.15 |
|
|
|
451,600 |
|
|
$ |
106
million |
|
May
1, 2009 through
May
31, 2009
|
|
|
315,000 |
|
|
|
40.06 |
|
|
|
315,000 |
|
|
|
93
million |
|
June
1, 2009 through
June
30, 2009
|
|
|
600,000 |
|
|
|
43.99 |
|
|
|
600,000 |
|
|
|
67
million |
|
Total
|
|
|
1,366,600 |
|
|
$ |
40.16 |
|
|
|
1,366,600 |
|
|
$ |
67 million |
|
1 On
November 13, 2007 our Board authorized the repurchase of an additional $500
million of our common stock. This authorization has no stated
expiration.
Item
6. Exhibits
12
|
Computation
of Ratio of Earnings to Fixed Charges for the nine months ended June 30,
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.
|
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:
July 30, 2009
|
By
|
/s/ M. A. Schulte
|
|
|
M.
A. Schulte
|
|
|
Vice
President, Finance and Controller
|
|
|
(Principal
Accounting Officer)
|
|
|
|
Date:
July 30, 2009
|
By
|
/s/ G. R. Chadick
|
|
|
G.
R. Chadick
|
|
|
Senior
Vice President,
|
|
|
General
Counsel and
Secretary
|