Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
þ QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2010
¨ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
Commission
file number 001-16445
(Exact
name of registrant as specified in its charter)
Delaware
|
52-2314475
|
(State
or other jurisdiction
|
(I.R.S.
Employer
|
of
incorporation or organization)
|
Identification
No.)
|
400
Collins Road NE
|
|
Cedar
Rapids, Iowa
|
52498
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant's
telephone number, including area code: (319) 295-1000
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes þ No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
Yes þ No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer þ
|
Accelerated filer ¨
|
Non-accelerated
filer ¨ (Do not check if a smaller
reporting company)
|
Smaller reporting company
¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨ No þ
154,759,600
shares of registrant's Common Stock, par value $.01 per share, were outstanding
on January 18, 2011.
ROCKWELL
COLLINS, INC.
INDEX
|
|
|
Page No.
|
|
|
|
|
PART
I.
|
FINANCIAL
INFORMATION:
|
|
|
|
|
|
|
Item
1.
|
Condensed
Consolidated Financial Statements:
|
|
|
|
|
|
|
|
Condensed
Consolidated Statement of Financial Position (Unaudited) — December 31,
2010 and September 30, 2010
|
2
|
|
|
|
|
|
|
Condensed
Consolidated Statement of Operations (Unaudited) — Three Months Ended
December 31, 2010 and 2009
|
3
|
|
|
|
|
|
|
Condensed
Consolidated Statement of Cash Flows (Unaudited) — Three Months Ended
December 31, 2010 and 2009
|
4
|
|
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements (Unaudited)
|
5
|
|
|
|
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
20
|
|
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
29
|
|
|
|
|
|
Item
4.
|
Controls
and Procedures
|
30
|
|
|
|
|
PART
II.
|
OTHER
INFORMATION:
|
|
|
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
31
|
|
|
|
|
|
Item
6.
|
Exhibits
|
32
|
|
|
|
|
Signatures
|
|
|
33
|
PART
I.
|
FINANCIAL
INFORMATION
|
Item
1.
|
Condensed
Consolidated Financial Statements
|
ROCKWELL
COLLINS, INC.
CONDENSED
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Unaudited)
(in
millions, except per share amounts)
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2010
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
263 |
|
|
$ |
435 |
|
Receivables,
net
|
|
|
959 |
|
|
|
1,024 |
|
Inventories,
net
|
|
|
1,093 |
|
|
|
1,004 |
|
Current
deferred income taxes
|
|
|
127 |
|
|
|
129 |
|
Other
current assets
|
|
|
104 |
|
|
|
97 |
|
Total
current assets
|
|
|
2,546 |
|
|
|
2,689 |
|
|
|
|
|
|
|
|
|
|
Property
|
|
|
703 |
|
|
|
707 |
|
Goodwill
|
|
|
767 |
|
|
|
766 |
|
Intangible
Assets
|
|
|
318 |
|
|
|
306 |
|
Long-term
Deferred Income Taxes
|
|
|
374 |
|
|
|
389 |
|
Other
Assets
|
|
|
196 |
|
|
|
207 |
|
TOTAL
ASSETS
|
|
$ |
4,904 |
|
|
$ |
5,064 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Short-term
debt
|
|
$ |
12 |
|
|
$ |
24 |
|
Accounts
payable
|
|
|
371 |
|
|
|
420 |
|
Compensation
and benefits
|
|
|
195 |
|
|
|
259 |
|
Advance
payments from customers
|
|
|
316 |
|
|
|
324 |
|
Product
warranty costs
|
|
|
178 |
|
|
|
183 |
|
Other
current liabilities
|
|
|
244 |
|
|
|
242 |
|
Total
current liabilities
|
|
|
1,316 |
|
|
|
1,452 |
|
|
|
|
|
|
|
|
|
|
Long-term
Debt, Net
|
|
|
512 |
|
|
|
525 |
|
Retirement
Benefits
|
|
|
1,403 |
|
|
|
1,420 |
|
Other
Liabilities
|
|
|
194 |
|
|
|
181 |
|
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
Common
stock ($0.01 par value; shares authorized: 1,000; shares issued:
183.8)
|
|
|
2 |
|
|
|
2 |
|
Additional
paid-in capital
|
|
|
1,415 |
|
|
|
1,420 |
|
Retained
earnings
|
|
|
2,930 |
|
|
|
2,816 |
|
Accumulated
other comprehensive loss
|
|
|
(1,256
|
) |
|
|
(1,259
|
) |
Common
stock in treasury, at cost (shares held: December 31, 2010, 29.1;
September 30, 2010, 27.0)
|
|
|
(1,615
|
) |
|
|
(1,497
|
) |
Total
shareowners’ equity
|
|
|
1,476 |
|
|
|
1,482 |
|
Noncontrolling
interest
|
|
|
3 |
|
|
|
4 |
|
Total
equity
|
|
|
1,479 |
|
|
|
1,486 |
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND EQUITY
|
|
$ |
4,904 |
|
|
$ |
5,064 |
|
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
|
|
|
|
December 31
|
|
|
|
2010
|
|
|
2009
|
|
Sales:
|
|
|
|
|
|
|
Product
sales
|
|
$ |
974 |
|
|
$ |
906 |
|
Service
sales
|
|
|
136 |
|
|
|
121 |
|
Total
sales
|
|
|
1,110 |
|
|
|
1,027 |
|
|
|
|
|
|
|
|
|
|
Costs,
expenses and other:
|
|
|
|
|
|
|
|
|
Product
cost of sales
|
|
|
706 |
|
|
|
653 |
|
Service
cost of sales
|
|
|
89 |
|
|
|
81 |
|
Selling,
general and administrative expenses
|
|
|
124 |
|
|
|
109 |
|
Interest
expense
|
|
|
5 |
|
|
|
6 |
|
Other
income, net
|
|
|
(7
|
) |
|
|
(3
|
) |
Total
costs, expenses and other
|
|
|
917 |
|
|
|
846 |
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
193 |
|
|
|
181 |
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
42 |
|
|
|
60 |
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
151 |
|
|
$ |
121 |
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.97 |
|
|
$ |
0.77 |
|
Diluted
|
|
$ |
0.96 |
|
|
$ |
0.76 |
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
155.6 |
|
|
|
157.1 |
|
Diluted
|
|
|
157.5 |
|
|
|
159.2 |
|
|
|
|
|
|
|
|
|
|
Cash
dividends per share
|
|
$ |
0.24 |
|
|
$ |
0.24 |
|
See Notes
to Condensed Consolidated Financial Statements.
ROCKWELL
COLLINS, INC.
CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(in
millions)
|
|
Three Months Ended
|
|
|
|
December 31
|
|
|
|
2010
|
|
|
2009
|
|
Operating
Activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
151 |
|
|
$ |
121 |
|
Adjustments
to arrive at cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
26 |
|
|
|
27 |
|
Amortization
of intangible assets
|
|
|
8 |
|
|
|
9 |
|
Stock-based
compensation expense
|
|
|
5 |
|
|
|
5 |
|
Compensation
and benefits paid in common stock
|
|
|
17 |
|
|
|
17 |
|
Excess
tax benefit from stock-based compensation
|
|
|
0 |
|
|
|
(2
|
) |
Deferred
income taxes
|
|
|
15 |
|
|
|
5 |
|
Pension
plan contributions
|
|
|
(3
|
) |
|
|
(101
|
) |
Changes
in assets and liabilities, excluding effects of acquisitions and foreign
currency adjustments:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
63 |
|
|
|
118 |
|
Inventories
|
|
|
(101
|
) |
|
|
(87
|
) |
Accounts
payable
|
|
|
(38
|
) |
|
|
(31
|
) |
Compensation
and benefits
|
|
|
(63
|
) |
|
|
(13
|
) |
Advance
payments from customers
|
|
|
(8
|
) |
|
|
(7
|
) |
Product
warranty costs
|
|
|
(5
|
) |
|
|
(7
|
) |
Income
taxes
|
|
|
23 |
|
|
|
50 |
|
Other
assets and liabilities
|
|
|
(33
|
) |
|
|
(20
|
) |
Cash
Provided by Operating Activities
|
|
|
57 |
|
|
|
84 |
|
|
|
|
|
|
|
|
|
|
Investing
Activities:
|
|
|
|
|
|
|
|
|
Property
additions
|
|
|
(32
|
) |
|
|
(26
|
) |
Acquisition
of businesses, net of cash acquired
|
|
|
(7
|
) |
|
|
(92
|
) |
Other
investing activities
|
|
|
2 |
|
|
|
(1
|
) |
Cash
Used for Investing Activities
|
|
|
(37
|
) |
|
|
(119
|
) |
|
|
|
|
|
|
|
|
|
Financing
Activities:
|
|
|
|
|
|
|
|
|
Purchases
of treasury stock
|
|
|
(149
|
) |
|
|
(28
|
) |
Cash
dividends
|
|
|
(38
|
) |
|
|
(38
|
) |
(Decrease)
increase in short-term borrowings
|
|
|
(10
|
) |
|
|
62 |
|
Proceeds
from the exercise of stock options
|
|
|
4 |
|
|
|
7 |
|
Excess
tax benefit from stock-based compensation
|
|
|
0 |
|
|
|
2 |
|
Cash
(Used for) Provided by Financing Activities
|
|
|
(193
|
) |
|
|
5 |
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
Net
Change in Cash and Cash Equivalents
|
|
|
(172
|
) |
|
|
(29
|
) |
Cash
and Cash Equivalents at Beginning of Period
|
|
|
435 |
|
|
|
235 |
|
Cash
and Cash Equivalents at End of Period
|
|
$ |
263 |
|
|
$ |
206 |
|
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, with quarters ending on the Friday
closest to the last day of the calendar quarter. For ease of presentation,
December 31 and September 30 are utilized consistently throughout these
financial statements and notes to represent the period end date.
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America and with the instructions to Form 10-Q of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in annual financial statements have been condensed or omitted.
These financial statements should be read in conjunction with the Company’s
Annual Report on Form 10-K for the year ended September 30, 2010.
In the
opinion of management, the unaudited financial statements contain all
adjustments, consisting of adjustments of a normal recurring nature, necessary
to present fairly the financial position, results of operations and cash flows
for the periods presented. The results of operations for the three months ended
December 31, 2010 are not necessarily indicative of the results that may be
expected for the full year.
The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements. Actual results could differ from those estimates and
assumptions.
Certain
prior period amounts on the Condensed Consolidated Statement of Operations were
restated to correct the previous presentation of certain sales and cost of
sales. Specifically, $21 million was reclassified from Product Sales to
Service Sales and $13 million was reclassified from Product Cost of Sales to
Service Cost of Sales for the three months ended December 31, 2009. These
adjustments did not impact previously reported net income, nor did they have any
effect on the Company’s financial position, net income or cash flows for the
three months ended December 31, 2010.
2.
|
Recently
Issued and Adopted Accounting
Standards
|
In April
2010, the Financial Accounting Standards Board (FASB) issued guidance related to
the milestone method of accounting for research or development arrangements in
which a vendor satisfies its performance obligations over time and all or a
portion of the arrangement consideration is contingent upon the achievement of a
milestone. This guidance became effective for the Company in the first quarter
of 2011 with no significant impact to the Company’s financial
statements.
In
September 2009, the FASB amended the guidance for allocating revenue to multiple
deliverables in a contract. In accordance with the amendment, companies can
allocate consideration in a multiple element arrangement in a manner that better
reflects the transaction economics. When vendor specific objective evidence or
third party evidence for deliverables in an arrangement cannot be determined,
companies will now be allowed to develop a best estimate of the selling price to
separate deliverables and allocate arrangement consideration using the relative
selling price method. Additionally, use of the residual method has been
eliminated. The Company adopted this guidance in the first quarter of 2011 with
no significant impact to the Company's financial position, results of operations
or cash flows as the Company generally allocates revenue to deliverables based
on the prices charged when sold separately by the Company.
Blue
Ridge Simulation, Inc.
On
December 20, 2010, the Company acquired all the shares of Blue Ridge Simulation,
Inc. (Blue Ridge Simulation). Blue Ridge Simulation, with headquarters located
in Leesburg, Virginia, is a leading supplier of high-performance sensor
simulation for U.S. Department of Defense, commercial and international training
applications. The cash purchase price, net of cash acquired, was $6 million. The
Company is in the process of allocating the purchase price and obtaining a
valuation for acquired intangible assets and their useful lives. Based on the
Company’s preliminary allocation of the purchase price, $3 million has been
allocated to goodwill and $3 million to finite-lived intangible assets with a
weighted average life of approximately 8 years. The excess purchase price over
net assets acquired reflects the Company’s view that this acquisition will
enhance the Company’s integrated training solutions. The Company is currently
evaluating the portion of the goodwill, if any, that may be tax deductible. The
goodwill is included in the Government Systems segment.
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
AR
Group, Inc.
On
December 31, 2009, the Company acquired all the shares of AR Group, Inc. and
affiliates (Air Routing). Air Routing, with headquarters located in Houston,
Texas, is a leading global provider of trip support services for business
aircraft flight operations. The cash purchase price, net of cash acquired, was
$91 million. In the fourth quarter of 2010, the purchase price allocation was
finalized with $58 million allocated to goodwill and $39 million to finite-lived
intangible assets with a weighted average life of approximately 14 years. The
excess purchase price over net assets acquired reflects the Company’s view that
this acquisition will broaden the Company’s information management flight
operations' capabilities. None of the goodwill resulting from the acquisition is
tax deductible. Air Routing goodwill is included within the Commercial Systems
segment.
Receivables,
net are summarized as follows:
|
|
December 31,
|
|
|
September 30,
|
|
(in
millions)
|
|
2010
|
|
|
2010
|
|
|
|
|
|
|
|
|
Billed
|
|
$ |
633 |
|
|
$ |
743 |
|
Unbilled
|
|
|
381 |
|
|
|
339 |
|
Less
progress payments
|
|
|
(45
|
) |
|
|
(48
|
) |
Total
|
|
|
969 |
|
|
|
1,034 |
|
Less
allowance for doubtful accounts
|
|
|
(10
|
) |
|
|
(10
|
) |
Receivables,
net
|
|
$ |
959 |
|
|
$ |
1,024 |
|
Receivables
not expected to be collected during the next twelve months are classified as
long-term and are included within Other Assets. Total receivables due from the
U.S. Government, both directly and indirectly through sub-contracts, were $412
million at December 31, 2010 and $389 million at September 30, 2010. Total U.S.
Government receivables include $145 million and $119 million of unbilled
receivables net of progress payments at December 31, 2010 and September 30,
2010, respectively.
Unbilled
receivables principally represent sales recorded under the
percentage-of-completion method of accounting that have not been billed to
customers in accordance with applicable contract terms.
Inventories,
net are summarized as follows:
|
|
December 31,
|
|
|
September 30,
|
|
(in
millions)
|
|
2010
|
|
|
2010
|
|
|
|
|
|
|
|
|
Finished
goods
|
|
$ |
169 |
|
|
$ |
162 |
|
Work
in process
|
|
|
278 |
|
|
|
242 |
|
Raw
materials, parts and supplies
|
|
|
342 |
|
|
|
336 |
|
Less
progress payments
|
|
|
(49
|
) |
|
|
(56
|
) |
Total
|
|
|
740 |
|
|
|
684 |
|
Pre-production
engineering costs
|
|
|
353 |
|
|
|
320 |
|
Inventories,
net
|
|
$ |
1,093 |
|
|
$ |
1,004 |
|
The
Company defers certain pre-production engineering costs during the development
phase of an aircraft program in connection with long-term supply arrangements
that contain contractual guarantees for reimbursement from customers. Such
customer guarantees generally take the form of a minimum order quantity with
quantified reimbursement amounts if the minimum order quantity is not taken by
the customer. These costs are deferred to the extent of the contractual
guarantees and are amortized over their estimated useful lives, up to 15 years,
as a component of cost of sales. 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.
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Property
is summarized as follows:
|
|
December 31,
|
|
|
September 30,
|
|
(in
millions)
|
|
2010
|
|
|
2010
|
|
|
|
|
|
|
|
|
Land
|
|
$ |
14 |
|
|
$ |
14 |
|
Buildings
and improvements
|
|
|
364 |
|
|
|
362 |
|
Machinery
and equipment
|
|
|
965 |
|
|
|
959 |
|
Information
systems software and hardware
|
|
|
284 |
|
|
|
282 |
|
Furniture
and fixtures
|
|
|
63 |
|
|
|
63 |
|
Construction
in progress
|
|
|
72 |
|
|
|
64 |
|
Total
|
|
|
1,762 |
|
|
|
1,744 |
|
Less
accumulated depreciation
|
|
|
(1,059
|
) |
|
|
(1,037
|
) |
Property
|
|
$ |
703 |
|
|
$ |
707 |
|
7.
|
Goodwill
and Intangible Assets
|
Changes
in the carrying amount of goodwill for the three months ended December 31, 2010
are summarized as follows:
|
|
Government
|
|
|
Commercial
|
|
|
|
|
(in millions)
|
|
Systems
|
|
|
Systems
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2010
|
|
$ |
509 |
|
|
$ |
257 |
|
|
$ |
766 |
|
Blue
Ridge Simulation acquisition
|
|
|
3 |
|
|
|
0 |
|
|
|
3 |
|
Foreign
currency translation adjustments
|
|
|
(2
|
) |
|
|
0 |
|
|
|
(2
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2010
|
|
$ |
510 |
|
|
$ |
257 |
|
|
$ |
767 |
|
The
Company performs an annual impairment test of goodwill and indefinite-lived
intangible assets during the second quarter of each fiscal year, or at any time
there is an indication of potential impairment.
Intangible
assets are summarized as follows:
|
|
December 31, 2010
|
|
|
September 30, 2010
|
|
|
|
|
|
|
Accum
|
|
|
|
|
|
|
|
|
Accum
|
|
|
|
|
(in millions)
|
|
Gross
|
|
|
Amort
|
|
|
Net
|
|
|
Gross
|
|
|
Amort
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets with finite lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed
technology and patents
|
|
$ |
216 |
|
|
$ |
(127 |
) |
|
$ |
89 |
|
|
$ |
214 |
|
|
$ |
(123 |
) |
|
$ |
91 |
|
Customer
relationships:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired
|
|
|
90 |
|
|
|
(42
|
) |
|
|
48 |
|
|
|
90 |
|
|
|
(40
|
) |
|
|
50 |
|
Up-front
sales incentives
|
|
|
170 |
|
|
|
(11
|
) |
|
|
159 |
|
|
|
153 |
|
|
|
(11
|
) |
|
|
142 |
|
License
agreements
|
|
|
23 |
|
|
|
(6
|
) |
|
|
17 |
|
|
|
22 |
|
|
|
(6
|
) |
|
|
16 |
|
Trademarks
and tradenames
|
|
|
15 |
|
|
|
(12
|
) |
|
|
3 |
|
|
|
15 |
|
|
|
(10
|
) |
|
|
5 |
|
Intangible
assets with indefinite lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
and tradenames
|
|
|
2 |
|
|
|
0 |
|
|
|
2 |
|
|
|
2 |
|
|
|
0 |
|
|
|
2 |
|
Intangible
assets
|
|
$ |
516 |
|
|
$ |
(198 |
) |
|
$ |
318 |
|
|
$ |
496 |
|
|
$ |
(190 |
) |
|
$ |
306 |
|
Rockwell
Collins provides up-front sales incentives prior to delivering products or
performing services to certain commercial customers in connection with sales
contracts. Up-front sales incentives are recorded as a Customer Relationship
Intangible Asset and amortized over the period the Company has received a
contractually enforceable right related to the incentives, up to 15 years.
Up-front sales incentives consisting of cash payments or customer account
credits are amortized as a reduction of sales whereas incentives consisting of
free products are amortized as cost of sales.
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Amortization
expense for intangible assets for the three months ended December 31, 2010 was
$8 million compared to $9 million for the three months ended December 31, 2009.
Annual amortization expense for intangible assets for 2011, 2012, 2013, 2014 and
2015 is expected to be $36 million, $36 million, $33 million, $33 million and
$33 million, respectively.
Other
assets are summarized as follows:
|
|
December 31,
|
|
|
September 30,
|
|
(in
millions)
|
|
2010
|
|
|
2010
|
|
Long-term
receivables
|
|
$ |
28 |
|
|
$ |
27 |
|
Investments
in equity affiliates
|
|
|
9 |
|
|
|
10 |
|
Exchange
and rental assets (net of accumulated depreciation of $108 at December 31,
2010 and $106 at September 30, 2010)
|
|
|
50 |
|
|
|
51 |
|
Assets
held-for-sale
|
|
|
14 |
|
|
|
14 |
|
Other
|
|
|
95 |
|
|
|
105 |
|
Other
assets
|
|
$ |
196 |
|
|
$ |
207 |
|
Investments
in Equity Affiliates
Investments
in equity affiliates primarily consist of four joint ventures. Each joint
venture is 50 percent owned by the Company and accounted for under the equity
method. Under the equity method of accounting for investments, the Company’s
proportionate share of the earnings or losses of its equity affiliates are
included in Net Income and classified as Other Income, Net in the Condensed
Consolidated Statement of Operations. For segment performance reporting
purposes, Rockwell Collins’ share of earnings or losses of equity affiliates are
included in the operating results of the Government Systems
segment.
In the
normal course of business or pursuant to the underlying joint venture
agreements, the Company may sell products or services to equity affiliates. The
Company defers a portion of the profit generated from these sales equal to its
ownership interest in the equity affiliates until the underlying product is
ultimately sold to an unrelated third party. Sales to equity affiliates were $25
million and $20 million for the three months ended December 31, 2010 and 2009,
respectively. The deferred portion of profit generated from sales to equity
affiliates was $4 million at December 31, 2010 and September 30,
2010.
Assets
Held-for-Sale
Assets
held-for-sale includes the carrying cost for the Company's vacated land and
facility in San Jose, California. In September 2009, the Company announced plans
to close this facility and relocate engineering, production and service work to
other existing facilities. In 2010, the San Jose facility was vacated, actively
marketed and prepared for sale. The facility is recorded at fair market value
based upon ongoing negotiations with a third party.
9.
|
Other
Current Liabilities
|
Other
current liabilities are summarized as follows:
|
|
December 31,
|
|
|
September 30,
|
|
(in
millions)
|
|
2010
|
|
|
2010
|
|
Customer
incentives
|
|
$ |
123 |
|
|
$ |
132 |
|
Contract
reserves
|
|
|
17 |
|
|
|
19 |
|
Income
taxes payable
|
|
|
21 |
|
|
|
8 |
|
Other
|
|
|
83 |
|
|
|
83 |
|
Other
current liabilities
|
|
$ |
244 |
|
|
$ |
242 |
|
The
Company provides sales incentives to certain commercial customers in connection
with sales contracts. Incentives earned by customers based on purchases of
Company products or services are recognized as a liability when the related sale
is recorded. Incentives consisting of cash payments or customer account credits
are recognized as a reduction of sales while incentives consisting of
free-of-charge hardware and account credits where the customer’s use is
restricted to future purchases are recognized as cost of sales.
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Short-term
Debt
Under the
Company’s commercial paper program, the Company may sell up to $850 million face
amount of unsecured short-term promissory notes in the commercial paper market.
The commercial paper notes may bear interest or may be sold at a discount, and
have a maturity of not more than 364 days from the time of issuance. At December
31, 2010 and September 30, 2010, there were no outstanding short-term commercial
paper borrowings.
At
December 31, 2010, $12 million of short-term debt was outstanding under a
five-year unsecured variable rate loan agreement for a non-U.S. subsidiary that
was entered into in June 2006 and is due in June 2011. The variable rate loan
facility agreement contains customary loan covenants, none of which are
financial covenants. Failure to comply with customary covenants or the
occurrence of customary events of default contained in the agreement would
require the repayment of any outstanding borrowings under the
agreement.
Revolving
Credit Facilities
The
Company has an $850 million unsecured revolving credit facility with various
banks that matures in March 2012. The credit facility has options to extend the
term for up to two one-year periods and/or increase the aggregate principal
amount up to $1.2 billion. These options are subject to the approval of the
lenders. This credit facility exists primarily to support the Company’s
commercial paper program, but may be used for other purposes in the event access
to the commercial paper market is impaired or eliminated. The credit facility
includes one financial covenant requiring the Company to maintain a consolidated
debt to total capitalization ratio of not greater than 60 percent. The ratio
excludes the accumulated other comprehensive loss equity impact related to
defined benefit retirement plans. The ratio was 16 percent as of December 31,
2010. In addition, the credit facility contains other non-financial covenants
that require the Company to satisfy certain conditions in order to incur debt
secured by liens, engage in sale/leaseback transactions or merge or consolidate
with another entity. Borrowings under this credit facility bear interest at the
London Interbank Offered Rate (LIBOR) plus a variable margin based on the
Company’s unsecured long-term debt rating or, at the Company’s option, rates
determined by competitive bid. At December 31, 2010 and September 30, 2010,
there were no outstanding borrowings under this revolving credit
facility.
In
addition, short-term credit facilities available to non-U.S. subsidiaries
amounted to $57 million as of December 31, 2010, of which $19 million was
utilized to support commitments in the form of commercial letters of credit. As
of December 31, 2010 and September 30, 2010, there were no short-term borrowings
outstanding under the Company’s non-U.S. subsidiaries’ credit
facilities.
At
December 31, 2010 and September 30, 2010, there were no significant commitment
fees or compensating balance requirements under any of the Company’s credit
facilities.
Long-term
Debt
In
addition to the Company’s credit facilities and commercial paper program, the
Company has a shelf registration statement filed with the Securities and
Exchange Commission pursuant to which the Company can publicly offer and sell
securities. This shelf registration covers an unlimited amount of debt
securities, common stock, preferred stock or warrants that may be offered in one
or more offerings on terms to be determined at the time of sale.
On May 6,
2009, the Company issued $300 million of 5.25 percent fixed rate unsecured debt
due July 15, 2019 (the 2019 Notes). The net proceeds to the Company from the
sale of the 2019 Notes, after deducting a $2 million discount and $2 million of
debt issuance costs, were $296 million. The 2019 Notes are included in the
Condensed Consolidated Statement of Financial Position net of the unamortized
discount within the caption Long-term Debt, Net. The debt issuance costs are
capitalized within Other Assets on the Condensed Consolidated Statement of
Financial Position. The discount and debt issuance costs are amortized over the
life of the 2019 Notes and recorded in Interest Expense. In January 2010, the
Company entered into interest rate swap contracts which effectively converted
$150 million of the 2019 Notes to floating rate debt based on six-month LIBOR
plus 1.235 percent. See Notes 16 and 17 for additional information relating to
the interest rate swap contracts.
On
November 20, 2003, the Company issued $200 million of 4.75 percent fixed rate
unsecured debt due December 1, 2013 (the 2013 Notes). At the time of the debt
issuance, the Company entered into interest rate swap contracts which
effectively converted $100 million of the 2013 Notes to floating rate debt based
on six-month LIBOR less .075 percent. See Notes 16 and 17 for additional
information relating to the interest rate swap contracts.
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The 2019
and 2013 Notes each contain covenants that require the Company to satisfy
certain conditions in order to incur debt secured by liens, engage in
sales/leaseback transactions, merge or consolidate with another entity or
transfer substantially all of the Company’s assets.
Long-term
debt and a reconciliation to the carrying amount is summarized as
follows:
|
|
December
31,
|
|
|
September
30,
|
|
(in
millions)
|
|
2010
|
|
|
2010
|
|
Principal
amount of 2019 Notes, net of discount
|
|
$ |
299 |
|
|
$ |
299 |
|
Principal
amount of 2013 Notes
|
|
|
200 |
|
|
|
200 |
|
Principal
amount of variable rate loan due June 2011
|
|
|
12 |
|
|
|
24 |
|
Fair
value swap adjustment (Notes 16 and 17)
|
|
|
13 |
|
|
|
26 |
|
Total
|
|
|
524 |
|
|
|
549 |
|
Less
current portion
|
|
|
(12 |
) |
|
|
(24 |
) |
Long-term
debt, net
|
|
$ |
512 |
|
|
$ |
525 |
|
The
Company was in compliance with all debt covenants at December 31, 2010 and
September 30, 2010.
Interest
paid on debt for the three months ended December 31, 2010 and 2009 was $3
million and $3 million, respectively.
11. Retirement
Benefits
The
Company sponsors defined benefit pension (Pension Benefits) and other
postretirement (Other Retirement Benefits) plans which provide monthly pension
and other benefits to eligible employees upon retirement.
Pension
Benefits
The
components of expense (income) for Pension Benefits for the three months ended
December 31, 2010 and 2009 are as follows:
|
|
Three
Months Ended
|
|
|
|
December 31
|
|
(in
millions)
|
|
2010
|
|
|
2009
|
|
Service
cost
|
|
$ |
2 |
|
|
$ |
2 |
|
Interest
cost
|
|
|
40 |
|
|
|
40 |
|
Expected
return on plan assets
|
|
|
(53 |
) |
|
|
(53 |
) |
Amortization:
|
|
|
|
|
|
|
|
|
Prior
service cost
|
|
|
(5 |
) |
|
|
(5 |
) |
Net
actuarial loss
|
|
|
12 |
|
|
|
23 |
|
Net
benefit expense (income)
|
|
$ |
(4 |
) |
|
$ |
7 |
|
Other
Retirement Benefits
The
components of expense (income) for Other Retirement Benefits for the three
months ended December 31, 2010 and 2009 are as follows:
|
|
Three
Months Ended
|
|
|
|
December 31
|
|
(in
millions)
|
|
2010
|
|
|
2009
|
|
Service
cost
|
|
$ |
1 |
|
|
$ |
1 |
|
Interest
cost
|
|
|
3 |
|
|
|
3 |
|
Amortization:
|
|
|
|
|
|
|
|
|
Prior
service cost
|
|
|
(4 |
) |
|
|
(6 |
) |
Net
actuarial loss
|
|
|
3 |
|
|
|
3 |
|
Net
benefit expense
|
|
$ |
3 |
|
|
$ |
1 |
|
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Pension
Plan Funding
The
Company’s objective with respect to the funding of its pension plans is to
provide adequate assets for the payment of future benefits. Pursuant to this
objective, the Company will fund its pension plans as required by governmental
regulations and may consider discretionary contributions as conditions warrant.
In January 2011, the Company made a $100 million contribution to the U.S.
qualified pension plan. The Company is not required by government regulations to
make any additional contributions to the U.S. qualified pension plan in 2011.
Any additional future contributions necessary to satisfy the minimum statutory
funding requirements are dependent upon actual plan asset returns, interest
rates and any changes to U.S. pension funding legislation. The Company may elect
to make additional discretionary contributions during 2011 to further improve
the funded status of this plan. Contributions to the non-U.S. plans and the U.S.
non-qualified plan are expected to total $13 million in 2011. For the three
months ended December 31, 2010 and 2009, the Company made contributions to the
non-U.S. plans and the U.S. non-qualified pension plan of $3 million and $3
million, respectively.
12. Stock-Based
Compensation and Earnings Per Share
Total
stock-based compensation expense included within the Condensed Consolidated
Statement of Operations is as follows:
|
|
Three
Months Ended
|
|
|
|
December 31
|
|
(in
millions)
|
|
2010
|
|
|
2009
|
|
Stock-based
compensation expense included in:
|
|
|
|
|
|
|
Product
cost of sales
|
|
$ |
1 |
|
|
$ |
1 |
|
Selling,
general and administrative expenses
|
|
|
4 |
|
|
|
4 |
|
Total
|
|
$ |
5 |
|
|
$ |
5 |
|
Income
tax benefit
|
|
$ |
2 |
|
|
$ |
2 |
|
The
Company issued awards of equity instruments under the Company’s various
incentive plans for the three months ended December 31, 2010 and 2009 as
follows:
|
|
|
|
|
Performance
|
|
|
Restricted
|
|
|
Restricted
|
|
|
|
Options
|
|
|
Shares
|
|
|
Stock
|
|
|
Stock
Units
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
(shares
in thousands)
|
|
Number
|
|
|
Average
|
|
|
Number
|
|
|
Average
|
|
|
Number
|
|
|
Average
|
|
|
Number
|
|
|
Average
|
|
|
|
Issued
|
|
|
Fair
Value
|
|
|
Issued
|
|
|
Fair
Value
|
|
|
Issued
|
|
|
Fair
Value
|
|
|
Issued
|
|
|
Fair
Value
|
|
Three
months ended
December
31, 2010
|
|
|
728.1 |
|
|
$ |
14.71 |
|
|
|
191.9 |
|
|
$ |
55.75 |
|
|
|
0 |
|
|
$ |
0 |
|
|
|
60.0 |
|
|
$ |
55.83 |
|
Three
months ended
December
31, 2009
|
|
|
790.9 |
|
|
$ |
12.80 |
|
|
|
190.3 |
|
|
$ |
53.08 |
|
|
|
56.6 |
|
|
$ |
53.08 |
|
|
|
6.8 |
|
|
$ |
51.90 |
|
The
maximum number of shares of common stock that can be issued with respect to the
performance shares granted in 2011 based on the achievement of performance
targets for fiscal years 2011 through 2013 is 460 thousand.
The fair
value of each option granted by the Company was estimated using a binomial
lattice pricing model and the following weighted average
assumptions:
|
|
2011
|
|
|
2010
|
|
|
|
Grants
|
|
|
Grants
|
|
Risk-free
interest rate
|
|
|
0.5%
- 3.1 |
% |
|
|
2.7 |
% |
Expected
dividend yield
|
|
|
1.7 |
% |
|
|
2.3 |
% |
Expected
volatility
|
|
|
27.0 |
% |
|
|
27.0 |
%
|
Expected
life
|
|
8
years
|
|
|
7
years
|
|
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In 2010,
the risk-free interest rate was equal to a single U.S. Treasury yield based upon
the period over which employees were expected to hold options. In 2011, the
risk-free interest rate selected was changed to reflect a range of U.S. Treasury
yields corresponding to anticipated option exercises over the ten year
contractual term. A range of risk-free interest rates more closely aligns with
the assumptions used in the binomial lattice pricing model. This change did not
significantly impact the fair value of options granted.
Employee
Benefits Paid in Company Stock
During
the three months ended December 31, 2010 and 2009, 0.3 million and 0.3 million
shares, respectively, of Company common stock were issued to employees under the
Company’s employee stock purchase and defined contribution savings plans at a
value of $17 million for each of the respective periods.
Earnings
Per Share and Diluted Share Equivalents
The
computation of basic and diluted earnings per share is as follows:
|
|
Three
Months Ended
|
|
|
|
December 31
|
|
(in
millions, except per share amounts)
|
|
2010
|
|
|
2009
|
|
Numerator:
|
|
|
|
|
|
|
Numerator
for basic and diluted earnings per share –
Net
income
|
|
$ |
151 |
|
|
$ |
121 |
|
Denominator:
|
|
|
|
|
|
|
|
|
Denominator
for basic earnings per share –
weighted
average common shares
|
|
|
155.6 |
|
|
|
157.1 |
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
1.5 |
|
|
|
1.7 |
|
Performance
shares, restricted shares and restricted stock units
|
|
|
0.4 |
|
|
|
0.4 |
|
Dilutive
potential common shares
|
|
|
1.9 |
|
|
|
2.1 |
|
Denominator
for diluted earnings per share –
adjusted
weighted average shares and assumed conversion
|
|
|
157.5 |
|
|
|
159.2 |
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.97 |
|
|
$ |
0.77 |
|
Diluted
|
|
$ |
0.96 |
|
|
$ |
0.76 |
|
The
average outstanding diluted shares calculation excludes options with an exercise
price that exceeds the average market price of shares during the period. Stock
options excluded from the average outstanding diluted shares calculation were
0.4 million and 0.8 million for the three months ended December 31, 2010 and
2009, respectively.
13. Comprehensive
Income
Comprehensive
income consists of the following:
|
Three
Months Ended
|
|
|
December 31
|
|
(in
millions)
|
2010
|
|
2009
|
|
Net
income
|
|
$ |
151 |
|
|
$ |
121 |
|
Unrealized
foreign currency translation adjustment
|
|
|
(3
|
) |
|
|
(4
|
) |
Foreign
currency cash flow hedge adjustment
|
|
|
2 |
|
|
|
0 |
|
Amortization
of defined benefit plan costs
|
|
|
4 |
|
|
|
9 |
|
Comprehensive
income
|
|
$ |
154 |
|
|
$ |
126 |
|
The
Company has one consolidated subsidiary with income attributable to a
noncontrolling interest. The net income and comprehensive income attributable to
the noncontrolling interest is insignificant.
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
14. Other
Income, Net
Other
income, net consists of the following:
|
|
Three
Months Ended
|
|
|
|
December 31
|
|
(in
millions)
|
|
2010
|
|
|
2009
|
|
Royalty
income
|
|
$ |
0 |
|
|
$ |
2 |
|
Earnings
from equity affiliates
|
|
|
2 |
|
|
|
2 |
|
Interest
income
|
|
|
1 |
|
|
|
1 |
|
Other,
net
|
|
|
4 |
|
|
|
(2 |
) |
Other
income, net
|
|
$ |
7 |
|
|
$ |
3 |
|
15. Income
Taxes
At the
end of each interim reporting period, the Company makes an estimate of the
annual effective income tax rate. Tax items included in the annual effective
income tax rate are pro-rated for the full year and tax items discrete to a
specific quarter are included in the effective income tax rate for that quarter.
The estimate used in providing for income taxes on a year-to-date basis may
change in subsequent interim periods. During the three months ended December 31,
2010 and 2009, the effective income tax rate was 21.8 percent and 33.1 percent,
respectively.
The lower
effective income tax rate for the three months ended December 31, 2010, as
compared to the same period of the prior year, was primarily due to the
differences in the availability of the Federal Research and Development Tax
Credit (Federal R&D Tax Credit), which expired on December 31, 2009. On
December 17, 2010, the Tax Relief, Unemployment Insurance Reauthorization, and
Job Creation Act of 2010 was enacted, which retroactively reinstated and
extended the Federal R&D Tax Credit from January 1, 2010 to December 31,
2011. The retroactive benefit for the previously expired period from January 1,
2010 to September 30, 2010 is reflected as a discrete item which lowered the
Company’s effective tax rate by about 9 percent for the three months ended
December 31, 2010.
The
Company’s U.S. Federal income tax returns for the tax years ended September 30,
2007 and prior have been audited by the Internal Revenue Service (IRS) and are
closed to further adjustments by the IRS except for refund claims the Company
filed for the tax years ended September 30, 2006 and 2007. The IRS is currently
auditing the Company’s tax returns for the years ended September 30, 2008 and
2009 as well as refund claims for prior years. The Company is also currently
under audit in various U.S. states and non-U.S. jurisdictions. The U.S. state
and non-U.S. jurisdictions have statutes of limitations generally ranging from 3
to 5 years. The Company believes it has adequately provided for any tax
adjustments that may result from the various audits.
The
Company had net income tax payments/(refunds) of $4 million and ($6) million
during the three months ended December 31, 2010 and 2009,
respectively.
The
Company had gross unrecognized tax benefits recorded within Other Liabilities in
the Condensed Consolidated Statement of Financial Position of $88 million
and $78 million as of December 31, 2010 and September 30, 2010,
respectively. The total amounts of unrecognized tax benefits that, if
recognized, would affect the effective income tax rate were $60 million and
$52 million as of December 31, 2010 and September 30, 2010,
respectively. Although the timing and outcome of tax settlements are uncertain,
it is reasonably possible that during the next 12 months, a reduction in
unrecognized tax benefits may occur in the range of $0 to $1 million based
on the outcome of tax examinations or as a result of the expiration of various
statutes of limitations.
The
Company includes interest and penalties related to unrecognized tax benefits in
income tax expense. The total amount of interest and penalties recognized within
Other Liabilities in the Condensed Consolidated Statement of Financial Position
was $5 million and $5 million as of December 31, 2010 and September 30, 2010,
respectively. The total amount of interest and penalties recorded as income
within Income tax expense in the Condensed Consolidated Statement of Operations
was $0 and $1 million for the three months ended December 31, 2010 and December
31, 2009, respectively.
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
16. Fair
Value Measurements
The FASB
defines fair value as the price that would be received to sell an asset or paid
to transfer a liability in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants at the
measurement date. The FASB’s guidance classifies the inputs used to measure fair
value into the following hierarchy:
|
Level
1 -
|
quoted
prices (unadjusted) in active markets for identical assets or
liabilities
|
|
Level
2 -
|
quoted
prices for similar assets and liabilities in active markets or inputs that
are observable for the asset or liability, either directly or indirectly
through market corroboration, for substantially the full term of the
financial instrument
|
|
Level
3 -
|
unobservable
inputs based on the Company’s own assumptions used to measure assets and
liabilities at fair value
|
A
financial asset or liability’s classification within the hierarchy is determined
based on the lowest level input that is significant to the fair value
measurement.
The fair
value of the Company’s financial assets and liabilities measured at fair value
on a recurring basis as of December 31, 2010 and September 30, 2010 are as
follows:
|
|
|
|
December
31, 2010
|
|
|
September
30, 2010
|
|
|
|
Fair
Value
|
|
Fair
Value
|
|
|
Fair
Value
|
|
(in
millions)
|
|
Hierarchy
|
|
Asset
(Liability)
|
|
|
Asset
(Liability)
|
|
Deferred
compensation plan investments
|
|
Level
1
|
|
$ |
41 |
|
|
$ |
37 |
|
Interest
rate swap assets
|
|
Level
2
|
|
|
13 |
|
|
|
26 |
|
Foreign
currency forward exchange contract assets
|
|
Level
2
|
|
|
7 |
|
|
|
9 |
|
Foreign
currency forward exchange contract liabilities
|
|
Level
2
|
|
|
(4 |
) |
|
|
(8 |
) |
There
were no nonfinancial assets or nonfinancial liabilities recognized at fair value
on a nonrecurring basis and there were no transfers between Levels of the fair
value hierarchy during the three months ended December 31, 2010.
The
carrying amounts and fair values of the Company’s financial instruments are as
follows:
|
Asset (Liability)
|
|
|
December 31, 2010
|
|
September 30, 2010
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
(in
millions)
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
|
Cash
and cash equivalents
|
|
$ |
263 |
|
|
$ |
263 |
|
|
$ |
435 |
|
|
$ |
435 |
|
Short-term
investments
|
|
|
20 |
|
|
|
20 |
|
|
|
20 |
|
|
|
20 |
|
Short-term
debt
|
|
|
12 |
|
|
|
12 |
|
|
|
(24
|
) |
|
|
(24
|
) |
Long-term
debt
|
|
|
(499
|
) |
|
|
(531
|
) |
|
|
(499
|
) |
|
|
(558
|
) |
The fair
value of cash and cash equivalents and short-term investments approximate their
carrying value due to the short-term nature of the instruments. Short-term
investments consist of certificates of deposit with a maturity date of less than
one year. The fair value of short-term debt approximates its carrying value due
to the short-term nature of the debt. Fair value information for long-term debt
is based on current market interest rates and estimates of current market
conditions for instruments with similar terms, maturities, and degree of risk.
The carrying amount and fair value of long-term debt excludes the interest rate
swaps fair value adjustment. These fair value estimates do not necessarily
reflect the amounts the Company would realize in a current market
exchange.
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
17. Derivative
Financial Instruments
Interest
Rate Swaps
The
Company manages its exposure to interest rate risk by maintaining an appropriate
mix of fixed and variable rate debt, which over time should moderate the costs
of debt financing. When considered necessary, the Company may use financial
instruments in the form of interest rate swaps to help meet this objective. In
January 2010, the Company entered into two interest rate swap contracts (the
2019 Swaps) which expire on July 15, 2019 and effectively converted $150 million
of the 2019 Notes to floating rate debt based on six-month LIBOR plus 1.235
percent. On November 20, 2003, the Company entered into two interest rate swap
contracts (the 2013 Swaps) which expire on December 1, 2013 and effectively
convert $100 million of the 2013 Notes to floating rate debt based on six-month
LIBOR less .075 percent.
The
Company has designated the 2019 and 2013 Swaps (the Swaps) as fair value hedges.
At December 31, 2010 and September 30, 2010, interest rate swaps were recorded
within Other Assets at a fair value of $13 million and $26 million,
respectively, offset by a fair value adjustment to Long-term Debt (Note 10) of
$13 million and $26 million, respectively. Cash payments or receipts between the
Company and the counterparties to the Swaps are recorded as an adjustment to
interest expense.
Foreign
Currency Forward Exchange Contracts
The
Company transacts business in various foreign currencies which subjects the
Company’s cash flows and earnings to exposure related to changes in foreign
currency exchange rates. These exposures arise primarily from purchases or sales
of products and services from third parties and intercompany transactions.
Foreign currency forward exchange contracts provide for the purchase or sale of
foreign currencies at specified future dates at specified exchange rates and are
used to offset changes in the fair value of certain assets or liabilities or
forecasted cash flows resulting from transactions denominated in foreign
currencies. As of December 31, 2010 and September 30, 2010, the Company had
outstanding foreign currency forward exchange contracts with notional amounts of
$420 million and $404 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 December 31, 2010 and September 30, 2010 are as
follows:
|
|
|
|
Asset
Derivatives
|
|
|
|
|
|
December
31,
|
|
|
September
30,
|
|
(in
millions)
|
|
Classification
|
|
2010
|
|
|
2010
|
|
Foreign
currency forward exchange contracts
|
|
Other
current assets
|
|
$ |
7 |
|
|
$ |
9 |
|
Interest
rate swaps
|
|
Other
assets
|
|
|
13 |
|
|
|
26 |
|
Total
|
|
|
|
$ |
20 |
|
|
$ |
35 |
|
|
|
|
|
Liability
Derivatives
|
|
|
|
|
|
December
31,
|
|
|
September
30,
|
|
(in
millions)
|
|
Classification
|
|
2010
|
|
|
2010
|
|
Foreign
currency forward exchange contracts
|
|
Other
current liabilities
|
|
$
|
4
|
|
|
$
|
8
|
|
The fair
values of derivative instruments are presented on a gross basis as the Company
does not have any derivative contracts which are subject to master netting
arrangements. As of December 31, 2010, $1 million of foreign currency forward
exchange contracts, classified within Other current assets, were not designated
as hedging instruments.
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 months ended December 31, 2010 and 2009 is as
follows:
|
|
|
|
Amount
of Gain (Loss)
|
|
|
|
|
|
Three
Months Ended
|
|
(in
millions)
|
|
Location
of
|
|
December
31
|
|
|
|
Gain
(Loss)
|
|
2010
|
|
|
2009
|
|
Derivatives
Designated as Hedging Instruments:
|
|
|
|
|
|
|
|
|
Fair
Value Hedges
|
|
|
|
|
|
|
|
|
Foreign
currency forward exchange contracts
|
|
Cost
of sales
|
|
$ |
0 |
|
|
$ |
(2 |
) |
Interest
rate swaps
|
|
Interest
expense
|
|
|
2 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flow Hedges
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency forward exchange contracts:
|
|
|
|
|
|
|
|
|
|
|
Amount
of gain recognized in AOCL (effective portion, before deferred tax
impact)
|
|
AOCL
|
|
$ |
2 |
|
|
$ |
3 |
|
Amount
of gain (loss) reclassified from AOCL into income
|
|
Cost
of sales
|
|
|
(1 |
) |
|
|
3 |
|
There was
no significant impact to the Company’s earnings related to the ineffective
portion of any hedging instruments during the three months ended December 31,
2010 and 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 months ended December 31, 2010 and 2009.
The
Company did not have any hedges with credit-risk-related contingent features or
that required the posting of collateral as of December 31, 2010. The cash flows
from derivative contracts are recorded in operating activities in the Condensed
Consolidated Statement of Cash Flows.
Cash flow
hedges are designated as fair value hedges once the underlying transaction is
recorded on the balance sheet, or approximately 60 days from the maturity date
of the hedge. The Company expects to reclassify approximately $2 million of net
gains into earnings over the next 12 months. The maximum duration of a foreign
currency cash flow hedge contract at December 31, 2010 is 115
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:
|
|
Three
Months Ended
|
|
|
|
December 31
|
|
(in
millions)
|
|
2010
|
|
|
2009
|
|
Balance
at beginning of year
|
|
$ |
183 |
|
|
$ |
217 |
|
Warranty
costs incurred
|
|
|
(12 |
) |
|
|
(14 |
) |
Product
warranty accrual
|
|
|
11 |
|
|
|
7 |
|
Pre-existing
warranty adjustments
|
|
|
(4 |
) |
|
|
0 |
|
Balance
at December 31
|
|
$ |
178 |
|
|
$ |
210 |
|
Guarantees
The
Company provides a parent company guarantee related to various obligations of
its 50 percent owned joint venture, Quest Flight Training Limited (Quest). The
Company has guaranteed, jointly and severally with Quadrant Group plc
(Quadrant), the other joint venture partner, the performance of Quest in
relation to its contract with the United Kingdom Ministry of Defence (which
expires in 2030) and the performance of certain Quest subcontractors (up to $2
million). In addition, the Company has also pledged equity shares in Quest to
guarantee payment by Quest of a loan agreement executed by Quest. In the event
of default on this loan agreement, the lending institution can request that the
trustee holding such equity shares surrender them to the lending institution in
order to satisfy all amounts then outstanding under the loan agreement. As of
December 31, 2010, the outstanding loan balance was approximately
$5 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 December 31, 2010, the Quest guarantees
are not reflected on the Company’s Condensed Consolidated Statement of Financial
Position because the Company believes that Quest will meet all of its
performance and financial obligations in relation to its contract with the
United Kingdom Ministry of Defence and the loan agreement.
Letters
of credit
The
Company has contingent commitments in the form of letters of credit. Outstanding
letters of credit are issued by banks on the Company’s behalf to support certain
contractual obligations to its customers. If the Company fails to meet these
contractual obligations, these letters of credit may become liabilities of the
Company. Total outstanding letters of credit at December 31, 2010 were $84
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 December 31, 2010, the Company is
involved in the investigation or remediation of eight sites under these
regulations or pursuant to lawsuits asserted by third parties. Management
estimates that the total reasonably possible future costs the Company could
incur for seven of these sites is not significant. Management estimates that the
total reasonably possible future costs the Company could incur from one of these
sites to be approximately $8 million. The Company has recorded environmental
reserves for this site of $3 million as of December 31, 2010, 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.
20. Legal
Matters
The
Company is subject to various lawsuits, claims and proceedings that have been or
may be instituted or asserted against the Company relating to the conduct of the
Company’s business, including those pertaining to product liability, antitrust,
intellectual property, safety and health, exporting and importing, contract,
employment and regulatory matters. Although the outcome of these matters cannot
be predicted with certainty and some lawsuits, claims or proceedings may be
disposed of unfavorably to the Company, management believes the disposition of
matters that are pending or asserted are not expected to have a material adverse
effect on the Company’s business or financial position, but could possibly be
material to the results of operations or cash flows of any one
quarter.
21. Business
Segment Information
The sales
and results of operations of the Company’s reportable segments are summarized as
follows:
|
|
Three
Months Ended
|
|
|
|
December 31
|
|
(in
millions)
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Sales:
|
|
|
|
|
|
|
Government
Systems
|
|
$ |
650 |
|
|
$ |
616 |
|
Commercial
Systems
|
|
|
460 |
|
|
|
411 |
|
Total
sales
|
|
$ |
1,110 |
|
|
$ |
1,027 |
|
|
|
|
|
|
|
|
|
|
Segment
operating earnings:
|
|
|
|
|
|
|
|
|
Government
Systems
|
|
$ |
131 |
|
|
$ |
134 |
|
Commercial
Systems
|
|
|
84 |
|
|
|
68 |
|
Total
segment operating earnings
|
|
|
215 |
|
|
|
202 |
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(5 |
) |
|
|
(6 |
) |
Stock-based
compensation
|
|
|
(5 |
) |
|
|
(5 |
) |
General
corporate, net
|
|
|
(12 |
) |
|
|
(11 |
) |
Restructuring
adjustment
|
|
|
0 |
|
|
|
1 |
|
Income
before income taxes
|
|
|
193 |
|
|
|
181 |
|
Income
tax provision
|
|
|
(42 |
) |
|
|
(60 |
) |
Net
income
|
|
$ |
151 |
|
|
$ |
121 |
|
The
Company evaluates performance and allocates resources based upon, among other
considerations, segment operating earnings. The Company’s definition of segment
operating earnings excludes income taxes, stock-based compensation, unallocated
general corporate expenses, interest expense, gains and losses from the
disposition of businesses, restructuring and asset impairment charges and other
special items as identified by management from time to time. Intersegment sales
are not material and have been eliminated.
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following
table summarizes sales by product category for the three months ended December
31, 2010 and 2009:
|
|
Three
Months Ended
|
|
|
|
December 31
|
|
(in
millions)
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Government
Systems product categories:
|
|
|
|
|
|
|
Airborne
solutions
|
|
$ |
438 |
|
|
$ |
410 |
|
Surface
solutions
|
|
|
212 |
|
|
|
206 |
|
Government
Systems sales
|
|
$ |
650 |
|
|
$ |
616 |
|
|
|
|
|
|
|
|
|
|
Commercial
Systems product categories:
|
|
|
|
|
|
|
|
|
Air
transport aviation electronics
|
|
$ |
250 |
|
|
$ |
241 |
|
Business
and regional aviation electronics
|
|
|
210 |
|
|
|
170 |
|
Commercial
Systems sales
|
|
$ |
460 |
|
|
$ |
411 |
|
Product
category sales for defense-related products in the Government Systems segment
are delineated based upon the difference in underlying customer base and market
served.
The air
transport and business and regional aviation electronics product categories are
delineated based upon the difference in underlying customer base, size of
aircraft and markets served. For the three months ended December 31, 2010 and
2009, product category sales for air transport aviation electronics include
revenue from wide-body in-flight entertainment products and services of $27
million and $43 million, respectively.
22. Subsequent
Event
On
January 10, 2011, subsequent to the Company’s first fiscal quarter ended
December 31, 2010, the Company acquired Computing Technologies for Aviation,
Inc. (CTA). CTA, located in Charlottesville, Virginia, is a leading provider of
flight operations management solutions for corporate flight departments and
other aviation customers. CTA will be included within the results of the
Commercial Systems segment. The cash purchase price, net of cash acquired, was
$11 million.
Item
2. Management's Discussion
and Analysis of Financial Condition and Results of Operations
RESULTS
OF OPERATIONS
The
following management discussion and analysis is based on financial results for
the three months ended December 31, 2010 and 2009 and should be read in
conjunction with the unaudited condensed consolidated financial statements and
notes thereto in Item 1 of Part I of this quarterly report.
Three
Months Ended December 31, 2010 and 2009
Sales
|
|
Three
Months Ended
|
|
|
|
December 31
|
|
(dollars
in millions)
|
|
2010
|
|
|
2009
|
|
Total
sales
|
|
$ |
1,110 |
|
|
$ |
1,027 |
|
Percent
increase
|
|
|
8 |
% |
|
|
|
|
Total
sales for the three months ended December 31, 2010 increased $83 million
compared to the three months ended December 31, 2009 due to a $34 million
increase in Government Systems sales and a $49 million increase in Commercial
Systems sales. Incremental sales from the December 2009 acquisition of AR Group,
Inc. (Air Routing) contributed $11 million, or 1 percentage point, of revenue
growth. See the following Government Systems and Commercial Systems Financial
Results sections for further discussion of sales.
Cost of
Sales
Total
cost of sales is summarized as follows:
|
|
Three
Months Ended
|
|
|
|
December 31
|
|
(dollars
in millions)
|
|
2010
|
|
|
2009
|
|
Total
cost of sales
|
|
$ |
795 |
|
|
$ |
734 |
|
Percent
of total sales
|
|
|
71.6 |
% |
|
|
71.5 |
% |
Cost of
sales consists of all costs incurred to design and manufacture our products and
includes research and development (R&D), raw material, labor, facility,
product warranty and other related expenses.
Total
cost of sales for the three months ended December 31, 2010 increased $61
million, or 8 percent, from the three months ended December 31, 2009, primarily
due to the following:
|
·
|
A
$48 million increase associated with the $72 million of organic sales
growth in Government Systems and Commercial Systems. See the Government
Systems and Commercial Systems Financial Results sections below for
further discussion.
|
|
·
|
A
$15 million increase attributable to higher employee incentive
compensation expenses. Employee incentive compensation expense included
within cost of sales was $22 million and $7 million for the three months
ended December 31, 2010 and 2009,
respectively.
|
|
·
|
Incremental
cost of sales from the Air Routing acquisition of $6
million.
|
|
·
|
The
above items are partially offset by an $8 million reduction to cost of
sales attributable to lower defined benefit pension expense. As discussed
in the Retirement Plans section below, the reduction in pension expense
was primarily due to a change in the period of time over which actuarial
gains and losses are amortized. For the three months ended December 31,
2010, pension income reduced cost of sales by $4 million, compared to $4
million of pension expense during the same period last
year.
|
R&D
expense is included as a component of cost of sales and is summarized as
follows:
|
|
Three
Months Ended
|
|
|
|
December 31
|
|
(dollars
in millions)
|
|
2010
|
|
|
2009
|
|
Customer-funded:
|
|
|
|
|
|
|
Government
Systems
|
|
$ |
109 |
|
|
$ |
96 |
|
Commercial
Systems
|
|
|
20 |
|
|
|
19 |
|
Total
customer-funded
|
|
|
129 |
|
|
|
115 |
|
Company-funded:
|
|
|
|
|
|
|
|
|
Government
Systems
|
|
|
21 |
|
|
|
22 |
|
Commercial
Systems
|
|
|
58 |
|
|
|
58 |
|
Total
company-funded
|
|
|
79 |
|
|
|
80 |
|
Total
research and development expense
|
|
$ |
208 |
|
|
$ |
195 |
|
Percent
of total sales
|
|
|
18.7 |
% |
|
|
19.0 |
% |
Customer-funded
R&D expenditures are incurred pursuant to contractual arrangements and are
accounted for as contract costs within cost of sales with the reimbursement
accounted for as a sale when earned. Company-funded R&D expense consists
primarily of payroll-related expenses of employees engaged in R&D
activities, engineering related product materials and equipment and
subcontracting costs.
Total
R&D expense for the three months ended December 31, 2010 increased $13
million from the same period last year, primarily due to higher customer-funded
R&D within Government Systems. The increase in Government Systems
customer-funded R&D was primarily due to increased development effort on
special mission and tanker transport applications as well as the Common Range
Integrated Instrumentation System (CRIIS) program.
Selling, General and
Administrative Expenses
Total
selling, general and administrative (SG&A) expenses are summarized
below:
|
|
Three
Months Ended
|
|
|
|
December 31
|
|
(dollars
in millions)
|
|
2010
|
|
|
2009
|
|
Selling,
general and administrative expenses
|
|
$ |
124 |
|
|
$ |
109 |
|
Percent
of total sales
|
|
|
11.2 |
% |
|
|
10.6 |
% |
SG&A
expenses consist primarily of personnel, facility and other expenses related to
employees not directly engaged in manufacturing, research or development
activities. These activities include marketing and business development,
finance, legal, information technology and other administrative and management
functions.
Total
SG&A expenses for the three months ended December 31, 2010 increased $15
million, or 14 percent, compared to the three months ended December 31, 2009,
primarily due to the following:
|
·
|
$4
million of higher employee incentive compensation
costs.
|
|
·
|
$3
million of incremental SG&A expenses from the Air Routing acquisition
within Commercial Systems.
|
|
·
|
$3
million increase from bid and proposal costs associated with new pursuits
and other selling activities.
|
Net Income and Diluted
Earnings Per Share
|
|
Three
Months Ended
|
|
|
|
December 31
|
|
(dollars
in millions, except per share amounts)
|
|
2010
|
|
|
2009
|
|
Net
income
|
|
$ |
151 |
|
|
$ |
121 |
|
Net
income as a percent of sales
|
|
|
13.6 |
% |
|
|
11.8 |
% |
Diluted
earnings per share
|
|
$ |
0.96 |
|
|
$ |
0.76 |
|
Net
income for the three months ended December 31, 2010 increased 25 percent to $151
million, or 13.6 percent of sales, from net income of $121 million, or 11.8
percent of sales, for the three months ended December 31, 2009. Net income for
the three months ended December 31, 2010 includes a benefit of $16 million, or
1.4 percent of sales, related to the retroactive reinstatement of the Federal
Research and Development Tax Credit discussed in the Income Taxes section
below. Diluted
earnings per share increased 26 percent to $0.96 for the three months ended
December 31, 2010 compared to $0.76 for the three months ended December 31,
2009. The increase in net income and diluted earnings per share was primarily
the result of higher earnings from Commercial Systems as discussed in the
Commercial Systems Financial Results section below and a reduction in the
effective income tax rate discussed in the Income Taxes section
below.
Government
Systems Financial Results
Government Systems
Sales
The
following table presents Government Systems sales by product
category:
|
|
Three
Months Ended
|
|
|
|
December 31
|
|
(dollars
in millions)
|
|
2010
|
|
|
2009
|
|
Airborne
solutions
|
|
$ |
438 |
|
|
$ |
410 |
|
Surface
solutions
|
|
|
212 |
|
|
|
206 |
|
Total
|
|
$ |
650 |
|
|
$ |
616 |
|
Percent
increase
|
|
|
6 |
% |
|
|
|
|
Airborne
solutions sales increased $28 million, or 7 percent, for the three months ended
December 31, 2010 compared to the same period in the prior year, primarily due
to the following:
|
·
|
A
$22 million increase from rotary wing avionics sales on various
platforms.
|
|
·
|
A
$10 million increase comprised of higher simulation and training revenues
primarily from recent programs for the E-2 aircraft and increased
development effort on the CRIIS
program.
|
|
·
|
The
above items were partially offset by an $8 million reduction in sales from
the KC-135 Global Air Traffic Management program which is expected to
complete this year.
|
Surface
solutions sales increased $6 million, or 3 percent, for the three months ended
December 31, 2010 compared to the same period in the prior year, primarily due
to the following:
|
·
|
An
$18 million increase to sales resulting from higher deliveries of iForce
systems to the California Highway
Patrol.
|
|
·
|
Partially
offset by a $13 million reduction in revenue resulting from a recently
completed satellite communication upgrade
program.
|
Government Systems Operating
Earnings
|
|
Three
Months Ended
|
|
|
|
December 31
|
|
(dollars
in millions)
|
|
2010
|
|
|
2009
|
|
Operating
earnings
|
|
$ |
131 |
|
|
$ |
134 |
|
Percent
of sales
|
|
|
20.2 |
% |
|
|
21.8 |
% |
Government
Systems operating earnings were $131 million, or 20.2 percent of sales, for the
three months ended December 31, 2010 compared to operating earnings of $134
million, or 21.8 percent of sales, for the same period one year ago. The $3
million reduction in Government Systems operating earnings was primarily due to
the following:
|
·
|
A
$6 million reduction in operating earnings attributable to the combined
impact of a $10 million increase in employee incentive compensation costs
and a $4 million decrease in pension expense as discussed in the
Retirement Plans section below.
|
|
·
|
The
$34 million increase in sales discussed in the Government Systems sales
section above resulted in a $31 million increase to costs and incremental
operating earnings of $3 million. The higher costs primarily resulted from
a lower margin mix of customer-funded development programs and higher
deliveries of iForce systems discussed in the Government Systems Sales
section above.
|
The
decline in Government Systems operating earnings as a percent of sales during
the three months ended December 31, 2010 compared to the same period last year
was primarily due to (i) the higher employee incentive compensation costs
explained above, (ii) an unfavorable change in contract mix related to lower
margin development revenues (iii) partially offset by the reduction in pension
expense.
Commercial
Systems Financial Results
Commercial Systems
Sales
The
following table presents Commercial Systems sales by product category and type
of product or service:
|
|
Three
Months Ended
|
|
|
|
December 31
|
|
(dollars
in millions)
|
|
2010
|
|
|
2009
|
|
Air
transport aviation electronics:
|
|
|
|
|
|
|
Original
equipment
|
|
$ |
115 |
|
|
$ |
98 |
|
Aftermarket
|
|
|
108 |
|
|
|
100 |
|
Wide-body
in-flight entertainment products and services
|
|
|
27 |
|
|
|
43 |
|
Total
air transport aviation electronics
|
|
|
250 |
|
|
|
241 |
|
Business
and regional aviation electronics:
|
|
|
|
|
|
|
|
|
Original
equipment
|
|
|
118 |
|
|
|
103 |
|
Aftermarket
|
|
|
92 |
|
|
|
67 |
|
Total
business and regional aviation electronics
|
|
|
210 |
|
|
|
170 |
|
Total
|
|
$ |
460 |
|
|
$ |
411 |
|
Percent
increase
|
|
|
12 |
% |
|
|
|
|
Total air
transport aviation electronics sales increased $9 million, or 4 percent, for the
three months ended December 31, 2010 compared to the same period in the prior
year due to the following:
|
·
|
Air
transport original equipment manufacturer (OEM) revenues increased $17
million, or 17 percent, driven by higher Boeing 787 revenues and
deliveries of single-aisle in-flight entertainment
products.
|
|
·
|
Air
transport aftermarket sales increased $8 million, or 8 percent, primarily
related to service and support
sales.
|
|
·
|
Wide-body
in-flight entertainment products and services (Wide-body IFE) decreased
$16 million. Wide-body IFE includes sales of twin-aisle IFE products and
systems to customers in the air transport aviation electronics market and
also includes related revenue from wide-body service and support
activities. Previously, revenues from Wide-body IFE service and support
activities were included in air transport aftermarket sales. For the three
months ended December 31, 2009, $25 million was reclassified out of air
transport aftermarket sales and into Wide-body IFE products and services
in order to conform to the current period presentation. We expect revenue
from Wide-body IFE products and services to continue to decline based upon
the Company’s previously announced decision to cease R&D investment in
this product area and as customers continue to retire older aircraft or
replace their IFE systems.
|
Business
and regional aviation electronics sales increased $40 million, or 24 percent,
for the three months ended December 31, 2010 compared to the same period in the
prior year due to the following:
|
·
|
Business
and regional OEM sales increased $15 million, or 15 percent, primarily due
to the combined impact of higher avionics sales for Cessna’s CJ-4 aircraft
which had limited production in the prior year and higher product
deliveries to Bombardier on various
platforms.
|
|
·
|
Incremental
revenue from the Air Routing acquisition contributed $11 million to
business and regional aftermarket
sales.
|
|
·
|
Organic
business and regional aftermarket sales increased $14 million, or 21
percent, due to $8 million of higher retrofits and spares sales and $6
million of higher service and support revenues resulting from improved
aircraft utilization.
|
Commercial Systems Operating
Earnings
|
|
Three
Months Ended
|
|
|
|
December 31
|
|
(dollars
in millions)
|
|
2010
|
|
|
2009
|
|
Operating
earnings
|
|
$ |
84 |
|
|
$ |
68 |
|
Percent
of sales
|
|
|
18.3 |
% |
|
|
16.5 |
% |
Commercial
Systems operating earnings for the three months ended December 31, 2010 were $84
million, or 18.3 percent of sales, compared to operating earnings of $68
million, or 16.5 percent of sales, for the three months ended December 31, 2009.
The $16 million increase in Commercial Systems operating earnings was primarily
due to the following:
|
·
|
The
$49 million increase in sales discussed in the Commercial Systems sales
section above resulted in a $27 million increase to costs and incremental
operating earnings of $22 million.
|
|
·
|
Operating
earnings included a $7 million benefit related to a change in estimate
recorded in 2011 to reduce the provision for certain customer incentives.
This benefit was offset by the absence of a $4 million favorable contract
settlement which occurred in 2010.
|
|
·
|
The
above items were offset by a $9 million reduction in operating earnings
primarily attributable to the combined impact of an increase in selling,
general and administrative expense and higher employee incentive
compensation costs, partially offset by lower pension expenses as
discussed in the Retirement Plans section
below.
|
The
increase in Commercial Systems operating earnings as a percent of sales during
the three months ended December 31, 2010 compared to the same period one year
ago was primarily due to incremental earnings from higher sales and lower
pension expense, partially offset by higher selling, general and administration
expense and increased employee incentive compensation costs explained
above.
General Corporate,
Net
General
corporate expenses that are not allocated to our business segments are included
in general corporate, net, which is summarized as follows:
|
|
Three
Months Ended
|
|
|
|
December 31
|
|
(dollars
in millions)
|
|
2010
|
|
|
2009
|
|
General
corporate, net
|
|
$ |
12 |
|
|
$ |
11 |
|
General
corporate, net was relatively flat during the three months ended December 31,
2010 compared to the three months ended December 31, 2009.
Retirement
Plans
Net
benefit expense (income) for pension benefits and other retirement benefits are
as follows:
|
|
Three
Months Ended
|
|
|
|
December
31
|
|
(in
millions)
|
|
2010
|
|
|
2009
|
|
Pension
benefits
|
|
$ |
(4 |
) |
|
$ |
7 |
|
Other
retirement benefits
|
|
|
3 |
|
|
|
1 |
|
Net
benefit expense (income)
|
|
$ |
(1 |
) |
|
$ |
8 |
|
Pension
Benefits
In 2003,
we amended our U.S. qualified and non-qualified pension plans (the Pension
Amendment) covering all salary and hourly employees not covered by collective
bargaining agreements to discontinue benefit accruals for salary increases and
services rendered after September 30, 2006. Concurrently, we replaced this
benefit by supplementing our existing defined contribution savings plan to
include an additional Company contribution effective October 1, 2006. We believe
this benefit structure achieves our objective of providing benefits that are
valued by our employees and provides more consistency and predictability in
estimating future costs and funding requirements over the long
term.
For the
full year 2011, defined benefit pension plan expense will decrease by
approximately $42 million to $16 million of income, compared to $26 million of
expense for the full year 2010. The decrease is primarily due to a change in the
period of time over which actuarial gains and losses are amortized.
In 2010,
actuarial gains and losses in excess of 10 percent of the greater of the
market-related value of plan assets or the projected benefit obligation (the
corridor) were amortized on a straight-line basis over the average remaining
service period of active participants, which was approximately 11 years.
Beginning in 2011, the amortization of such gains and losses is over the
expected future lifetime of inactive participants, which is approximately 28
years. The extension of the amortization period was required because almost all
of the plan's participants are now inactive due to the pension freeze that went
into effect in 2006 for most employees. This change in amortization period is
driving the reduction in pension expense for 2011.
Our
objective with respect to the funding of our pension plans is to provide
adequate assets for the payment of future benefits. Pursuant to this objective,
we will fund our pension plans as required by governmental regulations and may
consider discretionary contributions as conditions warrant. We believe our
strong financial position continues to provide us the opportunity to make
contributions to our pension fund without inhibiting our ability to pursue
strategic investments.
In
January 2011, subsequent to our first quarter of 2011, we made a $100 million
contribution to our U.S. qualified pension plan. We are not required by
governmental regulations to make any additional contributions to the U.S.
qualified pension plan in 2011. Any additional future contributions necessary to
satisfy the minimum statutory funding requirements are dependent upon actual
plan asset returns, interest rates and any changes to U.S. pension funding
legislation. We may elect to make additional discretionary contributions during
2011 to further improve the funded status of this plan. Contributions to the
non-U.S. plans and the U.S. non-qualified plan are expected to total $13 million
in 2011. For the three months ended December 31, 2010 and 2009, we made
contributions to the non-U.S. plans and the U.S. non-qualified pension plan of
$3 million and $3 million, respectively.
Our
pension expense (income) is impacted by the market performance of our pension
plan assets, our expected long-term return on plan assets and the discount rates
used to determine our pension obligations. If our pension plan assets do not
achieve positive rates of return consistent with our long-term asset return
assumptions or if discount rates trend down, we may experience unfavorable
changes in our pension expense (income) 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 $10 million in 2011 compared
to the full year 2010 expense of $5 million.
Income
Taxes
At the
end of each interim reporting period, we make an estimate of the annual
effective income tax rate. Tax items included in the annual effective income tax
rate are pro-rated for the full year and tax items discrete to a specific
quarter are included in the effective income tax rate for that quarter. The
estimate used in providing for income taxes on a year-to-date basis may change
in subsequent interim periods. The difference between our effective income tax
rate and the statutory income tax rate is primarily the result of the tax
benefits derived from the Federal Research and Development Tax Credit (Federal
R&D Tax Credit) and state research and development tax credits, which
provide tax benefits on certain incremental R&D expenditures, and the
Domestic Manufacturing Deduction (DMD), which provides a tax benefit on U.S.
based manufacturing.
During
the three months ended December 31, 2010 and 2009, our effective income tax rate
was 21.8 percent and 33.1 percent, respectively. The lower effective income tax
rate for the three months ended December 31, 2010 was primarily due to the
differences in the availability of the Federal R&D Tax Credit, which expired
on December 31, 2009. On December 17, 2010, the Tax Relief, Unemployment
Insurance Reauthorization, and Job Creation Act of 2010, was enacted, which
retroactively reinstated and extended the Federal R&D Tax Credit from
January 1, 2010 to December 31, 2011. The retroactive benefit for the previously
expired period from January 1, 2010 to September 30, 2010 was recognized and
lowered the Company’s effective income tax rate by about 9 percent for the three
months ended December 31, 2010. Additionally, the annual effective income tax
rate applied to the three months ended December 31, 2010 reflects twelve months
of benefit from the Federal R&D Tax Credit whereas the annual effective
income tax rate applied to the three months ended December 31, 2009 reflected
only three months of benefit.
The
effective income tax rate for the three months ended December 31, 2010 and
December 31, 2009 include a tax benefit related to the DMD. The DMD tax benefit
available in fiscal year 2010 is two-thirds of the full benefit that is
available in fiscal year 2011.
For
fiscal year 2011, our effective income tax rate is projected to be in the range
of 28.0 percent to 29.0 percent.
Outlook
The
following table is a complete summary of our updated fiscal year 2011 financial
guidance:
|
·
|
total
sales in the range of $4.8 billion to $5.0
billion
|
|
·
|
diluted
earnings per share in the range of $3.85 to
$4.05
|
|
·
|
cash
provided by operating activities in the range of $650 million to $750
million
|
|
·
|
capital
expenditures of about $150 million
|
|
·
|
total
company and customer-funded R&D expenditures in the range of $900
million to $950 million, or about 19 percent of
sales
|
FINANCIAL
CONDITION AND LIQUIDITY
Cash
Flow Summary
Operating
Activities
|
|
Three
Months Ended
|
|
|
|
December 31
|
|
(in
millions)
|
|
2010
|
|
|
2009
|
|
Cash
provided by operating activities
|
|
$ |
57 |
|
|
$ |
84 |
|
The $27
million decrease in cash provided by operating activities during the three
months ended December 31, 2010 compared to the same period last year was
primarily due to the following:
|
·
|
Payments
for inventory and other operating costs increased $97 million to $1,023
million in 2011 compared to $926 in 2010. The increase was primarily due
to higher costs associated with organic sales growth in 2011 as discussed
in the Results of Operations section above, as well as inventory purchases
for anticipated production volume and higher pre-production engineering
effort.
|
|
·
|
Payments
for incentive pay increased $71 million in 2011 compared to 2010.
Incentive pay is expensed in the year it is incurred and paid in the first
fiscal quarter of the following year. During the first three months of
2011, $71 million was paid for employee incentive pay costs incurred
during 2010. For the full fiscal year 2009, no incentive pay costs were
incurred; accordingly, there was no 2010 payment for incentive
pay.
|
|
·
|
Contributions
to our pension plans decreased $98 million in 2011 compared to 2010.
During the first three months of 2011, $3 million was contributed compared
to $101 million during the same period last year. Subsequent to our first
quarter of 2011, we made a $100 million contribution to our U.S. qualified
pension plan. See discussion in Retirement Plans section
above.
|
|
·
|
Cash
receipts from customers increased $40 million to $1,158 million in 2011
compared to $1,118 million in 2010, primarily due to the higher sales in
2011 discussed in the Results of Operations section
above.
|
Investing
Activities
|
|
Three
Months Ended
|
|
|
|
December 31
|
|
(in
millions)
|
|
2010
|
|
|
2009
|
|
Cash
used for investing activities
|
|
$ |
(37 |
) |
|
$ |
(119 |
) |
The
decrease in cash used for investing activities during the three months ended
December 31, 2010 compared to the same period last year was primarily due to the
following:
|
·
|
In
the first three months of 2011 we acquired Blue Ridge Simulation, Inc.
(Blue Ridge Simulation) for $6 million compared to the 2010 acquisition of
Air Routing for $91 million.
|
|
·
|
Partially
offset by a $6 million increase in property additions in 2011 compared to
2010.
|
Financing
Activities
|
|
Three
Months Ended
|
|
|
|
December 31
|
|
(in
millions)
|
|
2010
|
|
|
2009
|
|
Cash
provided by (used for) financing activities
|
|
$ |
(193 |
) |
|
$ |
5 |
|
The
increase in cash used for financing activities during the three months ended
December 31, 2010 compared to the same period last year was primarily due to the
following:
|
·
|
Repurchases
of common stock increased $121 million in 2011 compared to 2010. During
the three months ended December 31, 2010, we had $149 million of cash
repurchases of common stock compared to $28 million during the same period
last year.
|
|
·
|
$72
million of the increase is due to changes in net-borrowings. During the
three months ended December 31, 2010 we had $10 million of net short-term
debt repayments compared to net-borrowings of $62 million during the same
period last year.
|
Financial
Condition and Liquidity
We have
historically maintained a financial structure characterized by conservative
levels of debt outstanding that enables us sufficient access to credit markets.
When combined with our ability to generate strong levels of cash flow from our
operations, this capital structure provides the strength and flexibility
necessary to pursue strategic growth opportunities and to return value to our
shareowners. A comparison of key elements of our financial condition as of
December 31, 2010 and September 30, 2010 are as follows:
|
|
December
31,
|
|
|
September
30,
|
|
(in
millions)
|
|
2010
|
|
|
2010
|
|
Cash
and cash equivalents
|
|
$ |
263 |
|
|
$ |
435 |
|
Short-term
investments
|
|
|
20 |
|
|
|
20 |
|
Short-term
debt
|
|
|
(12 |
) |
|
|
(24 |
) |
Long-term
debt, net
|
|
|
(512 |
) |
|
|
(525 |
) |
Net debt (1)
|
|
$ |
(241 |
) |
|
$ |
(94 |
) |
Total
equity
|
|
$ |
1,479 |
|
|
$ |
1,486 |
|
Debt to total
capitalization (2)
|
|
|
26 |
% |
|
|
27 |
% |
Net debt to total
capitalization (3)
|
|
|
14 |
% |
|
|
6 |
% |
|
(1)
|
Calculated
as total of short-term and long-term debt, net (Total Debt), less cash and
cash equivalents and short-term
investments
|
|
(2)
|
Calculated
as Total Debt divided by the sum of Total Debt plus Total
equity
|
|
(3)
|
Calculated
as Net debt divided by the sum of Net debt plus Total
equity
|
We primarily fund our
contractual obligations, capital expenditures, small to medium sized
acquisitions, dividends and share repurchases from cash generated from operating
activities and from our current cash and cash equivalent balances. Due to the
fluctuations of cash flows, we supplement our internally generated cash flow
from time to time by issuing short-term commercial paper. Under our
commercial paper program, we may sell up to $850 million face amount of
unsecured short-term promissory notes in the commercial paper market. The
commercial paper notes have maturities of not more than 364 days from the date
of issuance. At
December 31, 2010 and September 30, 2010 there were no short-term commercial
paper borrowings outstanding.
In the
event our access to the commercial paper markets is impaired, we have access to
an $850 million Revolving Credit Facility through a network of banks that
matures in 2012, with options to further extend the term for up to two one-year
periods and/or increase the aggregate principal amount up to $1.2 billion. These
options are subject to the approval of the lenders. Our only financial covenant
under the Revolving Credit Facility requires that we maintain a consolidated
debt to total capitalization ratio of not greater than 60 percent, excluding the
accumulated other comprehensive loss equity impact related to defined benefit
retirement plans. Our debt to total capitalization ratio at December 31, 2010
based on this financial covenant was 16 percent. We had no borrowings at
December 31, 2010 under our Revolving Credit Facility.
In addition, alternative
sources of liquidity could include funds available from the issuance of equity
securities, debt securities and potential asset securitization strategies. We
have a shelf registration statement filed with the Securities and Exchange
Commission pursuant to which we can publicly offer and sell securities from time
to time. This shelf registration covers an unlimited amount of debt securities,
common stock, preferred stock or warrants that may be offered in one or more
offerings on terms to be determined at the time of sale. To date,
we have not raised capital through the issuance of equity securities as we
prefer to use debt financing to lower our overall cost of capital and increase
our return on shareowners' equity.
Credit
ratings are a significant factor in determining our ability to access short-term
and long-term financing as well as the cost of such financing in terms of
interest rates. Our strong credit ratings have enabled continued access to both
short and long-term credit markets. If our credit ratings were to be adjusted
downward by the rating agencies, the implications of such actions could include
impairment or elimination of our access to credit markets and an increase in the
cost of borrowing. The following is a summary of our credit ratings as of
December 31, 2010:
Credit Rating Agency
|
|
Short-Term Rating
|
|
Long-Term Rating
|
|
Outlook
|
Fitch
Ratings
|
|
F1
|
|
A
|
|
Stable
|
Moody’s
Investors Service
|
|
P-1
|
|
A1
|
|
Stable
|
Standard
& Poor’s
|
|
A-1
|
|
A
|
|
Stable
|
We were
in compliance with all debt covenants at December 31, 2010 and September 30,
2010.
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 our 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 our financial statements are described in Management's
Discussion and Analysis in our Annual Report on Form 10-K for the year ended
September 30, 2010. Actual results in these areas could differ from management's
estimates.
CAUTIONARY
STATEMENT
This
quarterly report contain statements, including certain projections and business
trends, that are forward-looking statements as defined in the Private Securities
Litigation Reform Act of 1995. Actual results may differ materially from those
projected as a result of certain risks and uncertainties, including but not
limited to the financial condition of our customers (including major U.S.
airlines); the health of the global economy, including potential deterioration
in economic and financial market conditions; the rate of recovery of the
commercial aftermarket; delays related to the award of domestic and
international contracts; the continued support for military transformation and
modernization programs; potential adverse impact of oil prices on the commercial
aerospace industry; the impact of terrorist events on the commercial aerospace
industry; potential declining defense budgets resulting from budget
deficits in the U.S. and abroad; impact from the continued delay in the
resolution of program funding in the 2011 U.S. defense budget; changes in
domestic and foreign government spending, budgetary and trade policies adverse
to our businesses; market acceptance of our new and existing technologies,
products and services; reliability of and customer satisfaction with our
products and services; favorable outcomes on or potential cancellation or
restructuring of contracts, orders or program priorities by our customers;
customer bankruptcies and profitability; recruitment and retention of qualified
personnel; regulatory restrictions on air travel due to environmental concerns;
effective negotiation of collective bargaining agreements by us and our
customers; performance of our customers and subcontractors; risks inherent in
development and fixed-price contracts, particularly the risk of cost overruns;
risk of significant reduction to air travel or aircraft capacity beyond our
forecasts; our ability to execute to our internal performance plans such as our
productivity and quality improvements 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 export
control and environmental regulations; risk of asset impairments; our ability to
win new business and convert those orders to sales within the fiscal year in
accordance with our annual operating plan; and the uncertainties of the outcome
of lawsuits, claims and legal proceedings, 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
December 31, 2010, we had $200 million of 4.75 percent fixed rate long-term debt
obligations outstanding with a carrying value of $200 million and a fair value
of $213 million. In 2004 we converted $100 million of this fixed rate debt to
floating rate debt bearing interest at six-month LIBOR less .075 percent by
executing “receive fixed, pay variable” interest rate swap contracts. At
December 31, 2010, we also had $300 million of 5.25 percent fixed rate long-term
debt obligations outstanding with a carrying value of $299 million and a fair
value of $318 million. In January 2010 we converted $150 million of this fixed
rate debt to floating rate debt based on six-month LIBOR plus 1.235 percent by
executing “receive fixed, pay variable” interest rate swap
contracts.
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 $8
million and $8 million, respectively. The fair value of the $250 million
notional value of interest rate swap contracts was a $13 million asset at
December 31, 2010. 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 $2 million and $2 million, respectively. At December 31,
2010, we also had $12 million of variable rate short-term debt outstanding. 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 non-U.S. subsidiaries or enter into derivative financial
instruments for speculative purposes. Notional amounts of outstanding foreign
currency forward exchange contracts were $420 million and $404 million at
December 31, 2010 and September 30, 2010, 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 and
British pound sterling. 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 $3 million and $1 million at December 31, 2010 and September 30,
2010, respectively. A 10 percent increase or decrease in the value of the U.S.
dollar against all currencies would decrease or increase the fair value of our
foreign currency contracts at December 31, 2010 by $2 million.
Item
4. Controls and Procedures
As
required by Rule 13a-15(b) under the Securities Exchange Act of 1934, we carried
out an evaluation of the effectiveness, as of December 31, 2010, of the design
and operation of our disclosure controls and procedures. This evaluation was
carried out under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer. Based on that
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are adequate and effective
as of December 31, 2010 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
|
|
October
1, 2010 through October 31, 2010
|
|
|
300,000 |
|
|
$ |
60.27 |
|
|
|
300,000 |
|
|
$ |
308
million |
|
November
1, 2010 through November 30, 2010
|
|
|
1,900,000 |
|
|
|
56.75 |
|
|
|
1,900,000 |
|
|
|
200
million |
|
December
1, 2010 through December 31, 2010
|
|
|
300,000 |
|
|
|
58.21 |
|
|
|
300,000 |
|
|
|
182 million |
|
Total
|
|
|
2,500,000 |
|
|
$ |
57.35 |
|
|
|
2,500,000 |
|
|
$ |
182 million |
|
(1)
|
On
September 16, 2010, our Board authorized the repurchase of an additional
$300 million of our common stock. This authorization has no stated
expiration.
|
Item
6. Exhibits
|
10-g-3
|
The
Company’s 2005 Non-Qualified Retirement Savings Plan, as
amended.
|
|
10-h-6
|
The
Company’s 2005 Non-Qualified Pension Plan, as
amended.
|
|
31.1
|
Certification
by Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934.
|
|
31.2
|
Certification
by Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934.
|
|
32.1
|
Certification
by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
32.2
|
Certification
by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
101.INS
|
XBRL
Instance Document
|
|
101.SCH
|
XBRL
Taxonomy Extension Schema
|
|
101.CAL
|
XBRL
Taxonomy Extension Calculation
Linkbase
|
|
101.DEF
|
XBRL
Taxonomy Extension Definition
Linkbase
|
|
101.LAB
|
XBRL
Taxonomy Extension Label Linkbase
|
|
101.PRE
|
XBRL
Taxonomy Extension Presentation
Linkbase
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
ROCKWELL COLLINS, INC.
|
|
|
(Registrant)
|
|
|
|
|
Date:
|
January
28, 2011
|
By
|
/s/ M. A. Schulte
|
|
|
|
M.
A. Schulte
|
|
|
|
Vice
President, Finance and Controller
|
|
|
|
(Principal
Accounting Officer)
|
|
|
|
|
Date:
|
January
28, 2011
|
By
|
/s/ G. R. Chadick
|
|
|
|
G.
R. Chadick
|
|
|
|
Senior
Vice President,
|
|
|
|
General
Counsel and
Secretary
|