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, 2008
o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
Commission
file number 001-16445
Rockwell Collins,
Inc.
(Exact
name of registrant as specified in its charter)
Delaware
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52-2314475
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(State
or other jurisdiction
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(I.R.S.
Employer
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of
incorporation or organization)
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Identification
No.)
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400
Collins Road NE
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Cedar
Rapids, Iowa
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52498
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(Address
of principal executive offices)
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(Zip
Code)
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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
o
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 o |
Non-accelerated
filer o |
Smaller
reporting company o |
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|
(Do not check
if a smaller reporting
company)
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|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No þ
158,107,343
shares of registrant's Common Stock, par value $.01 per share, were outstanding
on January 19, 2009.
ROCKWELL
COLLINS, INC.
INDEX
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Page
No.
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PART
I.
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FINANCIAL
INFORMATION:
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Item
1.
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Condensed
Consolidated Financial Statements:
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Condensed
Consolidated Statement of Financial Position (Unaudited)
--
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December
31, 2008 and September 30, 2008
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2
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Condensed
Consolidated Statement of Operations (Unaudited) --
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Three
Months Ended December 31, 2008 and 2007
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3
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Condensed
Consolidated Statement of Cash Flows (Unaudited) --
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Three
Months Ended December 31, 2008 and 2007
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4
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Notes
to Condensed Consolidated Financial Statements (Unaudited)
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5
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Item
2.
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Management's
Discussion and Analysis of
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Financial
Condition and Results of Operations
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18
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Item
3.
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Quantitative
and Qualitative Disclosures about Market Risk
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25
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Item
4.
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Controls
and Procedures
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25
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PART
II.
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OTHER
INFORMATION:
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Item
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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26
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Item
6.
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Exhibits
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27
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Signatures
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28
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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)
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|
December
31,
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September
30,
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2008
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2008
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ASSETS
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Current
Assets:
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Cash
and cash equivalents
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$ |
200 |
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$ |
175 |
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Receivables
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852 |
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950 |
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Inventories
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1,026 |
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|
970 |
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Current
deferred income taxes
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141 |
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139 |
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Other
current assets
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88 |
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104 |
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Total
current assets
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2,307 |
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2,338 |
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Property
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|
680 |
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680 |
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Intangible
Assets
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227 |
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198 |
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Goodwill
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628 |
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609 |
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Other
Assets
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351 |
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319 |
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TOTAL
ASSETS
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$ |
4,193 |
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$ |
4,144 |
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LIABILITIES AND
SHAREOWNERS' EQUITY
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Current Liabilities:
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Short-term
debt
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$ |
441 |
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$ |
287 |
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Accounts
payable
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|
310 |
|
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|
419 |
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Compensation
and benefits
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|
174 |
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295 |
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Advance
payments from customers
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301 |
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308 |
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Product
warranty costs
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224 |
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226 |
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Income
taxes payable
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62 |
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2 |
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Other
current liabilities
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204 |
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203 |
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Total
current liabilities
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1,716 |
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1,740 |
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Long-term
Debt
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235 |
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228 |
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Retirement
Benefits
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587 |
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600 |
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Other
Liabilities
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168 |
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168 |
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Shareowners' Equity:
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Common
stock ($0.01 par value; shares authorized: 1,000;
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shares
issued: 183.8)
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2 |
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2 |
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Additional
paid-in capital
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1,379 |
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1,378 |
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Retained
earnings
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2,149 |
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2,058 |
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Accumulated
other comprehensive loss
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(590
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) |
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(578
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) |
Common
stock in treasury, at cost (shares held: December 31, 2008,
25.7;
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September
30, 2008, 25.2)
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(1,453
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) |
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(1,452
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) |
Total
shareowners' equity
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1,487 |
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1,408 |
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TOTAL
LIABILITIES AND SHAREOWNERS’ EQUITY
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$ |
4,193 |
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$ |
4,144 |
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See Notes
to Condensed Consolidated Financial Statements.
ROCKWELL
COLLINS, INC.
CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(in
millions, except per share amounts)
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Three
Months Ended
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December
31
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2008
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2007
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Sales:
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Product
sales
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$ |
958 |
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$ |
1,010 |
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Service
sales
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|
100 |
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102 |
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Total
sales
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1,058 |
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|
1,112 |
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Costs,
expenses and other:
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Product
cost of sales
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664 |
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701 |
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Service
cost of sales
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68 |
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68 |
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Selling,
general and administrative expenses
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105 |
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111 |
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Interest
expense
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4 |
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5 |
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Other
income, net
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(5
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) |
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(5
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) |
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Total
costs, expenses and other
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836 |
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880 |
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Income
before income taxes
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222 |
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232 |
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Income
tax provision
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|
71 |
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|
78 |
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Net
income
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$ |
151 |
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$ |
154 |
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Earnings
per share:
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Basic
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$ |
0.96 |
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$ |
0.95 |
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Diluted
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$ |
0.95 |
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$ |
0.93 |
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Weighted
average common shares:
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Basic
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158.1 |
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162.9 |
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Diluted
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159.2 |
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165.3 |
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Cash
dividends per share
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$ |
0.24 |
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$ |
0.16 |
|
See Notes
to Condensed Consolidated Financial Statements.
ROCKWELL
COLLINS, INC.
CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(in
millions)
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|
Three
Months Ended
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December
31
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2008
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2007
|
|
Operating
Activities:
|
|
|
|
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Net
income
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|
$ |
151 |
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|
$ |
154 |
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Adjustments
to arrive at cash provided by operating activities:
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Depreciation
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|
26 |
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|
25 |
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Amortization
of intangible assets
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|
6 |
|
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|
6 |
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Stock-based
compensation
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|
5 |
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|
|
5 |
|
Compensation
and benefits paid in common stock
|
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|
17 |
|
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13 |
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Tax
benefit from the exercise of stock options
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|
- |
|
|
|
4 |
|
Excess
tax benefit from stock-based compensation
|
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|
- |
|
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|
(4
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) |
Deferred
income taxes
|
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|
- |
|
|
|
(1
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) |
Pension
plan contributions
|
|
|
(4
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) |
|
|
(2
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) |
Changes
in assets and liabilities, excluding effects of
acquisitions
|
|
|
|
|
|
|
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|
and
foreign currency adjustments:
|
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|
|
|
|
|
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|
Receivables
|
|
|
76 |
|
|
|
23 |
|
Inventories
|
|
|
(63
|
) |
|
|
(107
|
) |
Accounts
payable
|
|
|
(92
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) |
|
|
(16
|
) |
Advance
payments from customers
|
|
|
(22
|
) |
|
|
22 |
|
Compensation
and benefits
|
|
|
(121
|
) |
|
|
(90
|
) |
Income
taxes
|
|
|
86 |
|
|
|
51 |
|
Other
assets and liabilities
|
|
|
(44
|
) |
|
|
(51
|
) |
Cash
Provided by Operating Activities
|
|
|
21 |
|
|
|
32 |
|
|
|
|
|
|
|
|
|
|
Investing
Activities:
|
|
|
|
|
|
|
|
|
Property
additions
|
|
|
(45
|
) |
|
|
(43
|
) |
Acquisition
of businesses, net of cash acquired
|
|
|
(28
|
) |
|
|
- |
|
Acquisition
of intangible assets
|
|
|
- |
|
|
|
(2
|
) |
Other
investing
|
|
|
- |
|
|
|
(1
|
) |
Cash
Used for Investing Activities
|
|
|
(73
|
) |
|
|
(46
|
) |
|
|
|
|
|
|
|
|
|
Financing
Activities:
|
|
|
|
|
|
|
|
|
Purchases
of treasury stock
|
|
|
(41
|
) |
|
|
(224
|
) |
Cash
dividends
|
|
|
(38
|
) |
|
|
(26
|
) |
Increase
in short-term borrowings
|
|
|
154 |
|
|
|
190 |
|
Proceeds
from exercise of stock options
|
|
|
1 |
|
|
|
6 |
|
Excess
tax benefit from stock-based compensation
|
|
|
- |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
Cash
Provided by / (Used for) Financing Activities
|
|
|
76 |
|
|
|
(50
|
) |
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
1 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
Net
Change in Cash and Cash Equivalents
|
|
|
25 |
|
|
|
(60
|
) |
Cash
and Cash Equivalents at Beginning of Period
|
|
|
175 |
|
|
|
231 |
|
Cash
and Cash Equivalents at End of Period
|
|
$ |
200 |
|
|
$ |
171 |
|
See Notes
to Condensed Consolidated Financial Statements.
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL STATEMENTS
(Unaudited)
1.
|
Business
Description and Basis of
Presentation
|
Rockwell
Collins, Inc. (the Company or Rockwell Collins) designs, produces, and supports
communications and aviation electronics for commercial and military customers
worldwide.
The
Company operates on a 52/53 week fiscal year ending on the Friday closest to the
last day of the quarter. For ease of presentation, December 31 and
September 30 are utilized consistently throughout these financial statements and
notes to represent the period end date.
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America and with the instructions to Form 10-Q of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in annual financial statements have been condensed
or omitted. These financial statements should be read in conjunction
with the Company’s Annual Report on Form 10-K for the year ended September 30,
2008.
In the
opinion of management, the unaudited financial statements contain all
adjustments, consisting of adjustments of a normal recurring nature, necessary
to present fairly the financial position, results of operations, and cash flows
for the periods presented. The results of operations for the three
months ended December 31, 2008 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.
2.
|
Recently
Issued Accounting Standards
|
In May
2008, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 162, The Hierarchy of Generally Accepted
Accounting Principles (GAAP) (SFAS 162). The purpose of the new
standard is to provide a consistent framework for determining what accounting
principles should be used when preparing U.S. GAAP financial
statements. Previous accounting guidance did not properly rank
the accounting literature. The new standard is effective 60 days
following the Securities and Exchange Commission’s approval of the Public
Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles. The
adoption of SFAS 162 is not expected to have a material effect on the
Company’s financial statements.
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No.
133 (SFAS 161). SFAS 161 requires, among other things,
enhanced disclosure about the volume and nature of derivative and hedging
activities and a tabular summary showing the fair value of derivative
instruments included in the statement of financial position and statement of
operations. SFAS 161 also requires expanded disclosure of
contingencies included in derivative instruments related to credit
risk. SFAS 161 is effective for the Company in the second quarter of
fiscal year 2009. The adoption of SFAS 161 is not expected to have a
material effect on the Company’s financial statements other than providing
certain enhanced disclosures.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS
141R). SFAS 141R significantly changes the way companies account for
business combinations and will generally require more assets acquired and
liabilities assumed to be measured at their acquisition-date fair
value. Under SFAS 141R, legal fees and other transaction-related
costs are expensed as incurred and are no longer included in goodwill as a cost
of acquiring the business. SFAS 141R also requires, among other
things, acquirers to estimate the acquisition-date fair value of any contingent
consideration and to recognize any subsequent changes in the fair value of
contingent consideration in earnings. In addition, restructuring
costs the acquirer expects, but is not obligated to incur, will be recognized
separately from the business acquisition. This accounting standard is
applied prospectively and is effective for the Company at the beginning of
fiscal year 2010. The adoption of SFAS 141R is not expected to
materially affect the Company’s financial position, results of operations, or
cash flows on the date the standard becomes effective; however, the standard
could have a significant effect on business acquisitions the Company makes
subsequent to September 30, 2009.
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL STATEMENTS
(Unaudited)
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51 (SFAS
160). SFAS 160 requires all entities to report noncontrolling
interests in subsidiaries as a separate component of equity in the consolidated
financial statements. SFAS 160 establishes a single method of
accounting for changes in a parent’s ownership interest in a subsidiary that
does not result in deconsolidation. Companies will no longer
recognize a gain or loss on partial disposals of a subsidiary where control is
retained. In partial acquisitions where control is obtained, the
acquiring company will recognize and measure at fair value 100 percent of the
assets and liabilities, including goodwill, as if the entire target company had
been acquired. SFAS 160 is effective for the Company at the beginning
of fiscal year 2010. The adoption of SFAS 160 is not expected to have
a material effect on the Company’s financial statements.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS 159). SFAS 159 permits
entities to choose to measure certain eligible financial assets and financial
liabilities at fair value (the fair value option). SFAS 159 also
establishes presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement attributes for
similar types of assets and liabilities. Unrealized gains and losses
on items for which the fair value option is elected would be reported in
earnings. The Company adopted SFAS 159 in the first quarter of fiscal
2009 and has elected not to measure any additional financial instruments or
other items at fair value. The adoption of SFAS 159 did not have a
significant impact on the Company’s financial statements.
The
Company adopted SFAS No. 157, Fair Value Measurements (SFAS
157) as of October 1, 2008 with the exception of the application of the
statement to nonfinancial assets and nonfinancial liabilities for which the
effective date for the Company is October 1, 2009. Refer to Note 16 for
additional discussion on fair value measurements.
SEOS
Group Limited
On
November 24, 2008, the Company acquired all of the shares of SEOS Group Limited
(SEOS). SEOS, with operations in the United Kingdom and United
States, is a leading global supplier of highly realistic visual display
solutions for commercial and military flight simulators. SEOS will be
included within the results of both the Government Systems and Commercial
Systems segments. The cash purchase price, net of cash acquired, was
$28 million. Additional consideration of up to $8 million may be paid
post-closing, contingent upon the achievement of certain
milestones. Any such additional consideration will be accounted for
as goodwill. The Company is in the process of allocating the purchase
price and obtaining a valuation for acquired intangible assets. Based
on the Company’s preliminary allocation of the purchase price, $22 million has
been allocated to goodwill and $7 million to finite-lived intangible assets with
a weighted average life of approximately 7 years. The excess purchase
price over net assets acquired reflects the Company’s view that this acquisition
will further enhance the Company’s simulation and training capabilities and
provide more innovative solutions for the Company’s customers. The Company
currently estimates that none of the goodwill resulting from the acquisition is
tax deductible. $15 million of goodwill is included in the Government
Systems segment and $7 million of goodwill is included in the Commercial Systems
segment.
Athena
Technologies, Inc.
On April
4, 2008, the Company acquired all of the shares of Athena Technologies, Inc.
(Athena). Athena, located in Warrenton, Virginia, is a provider of
navigation and control solutions, primarily to the Unmanned Aerial Vehicle
market segment. The total cash purchase price, net of cash acquired,
was $107 million. In the first quarter of fiscal year 2009, the
purchase price allocation was finalized with $66 million allocated to goodwill
and $46 million to finite-lived intangible assets with a weighted average life
of approximately 10 years. The excess purchase price over net assets
acquired reflects the Company’s view that this acquisition will enhance the
Company’s navigation and control solution capabilities. None of the
goodwill resulting from the acquisition is tax deductible. Goodwill
is included within the assets of the Government Systems segment.
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL STATEMENTS
(Unaudited)
Receivables
are summarized as follows (in millions):
|
|
December
31,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2008
|
|
Billed
|
|
$ |
642 |
|
|
$ |
726 |
|
Unbilled
|
|
|
239 |
|
|
|
254 |
|
Less
progress payments
|
|
|
(20
|
) |
|
|
(21
|
) |
Total
|
|
|
861 |
|
|
|
959 |
|
Less
allowance for doubtful accounts
|
|
|
(9
|
) |
|
|
(9
|
) |
Receivables
|
|
$ |
852 |
|
|
$ |
950 |
|
The
Company expects to collect all receivables outstanding as of December 31, 2008
within the next twelve months.
Unbilled
receivables principally represent sales recorded under the
percentage-of-completion method of accounting that have not been billed to
customers in accordance with applicable contract terms.
Inventories
are summarized as follows (in millions):
|
|
December
31,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2008
|
|
Finished
goods
|
|
$ |
228 |
|
|
$ |
244 |
|
Work
in process
|
|
|
479 |
|
|
|
436 |
|
Raw
materials, parts, and supplies
|
|
|
382 |
|
|
|
362 |
|
Total
|
|
|
1,089 |
|
|
|
1,042 |
|
Less
progress payments
|
|
|
(63
|
) |
|
|
(72
|
) |
Inventories
|
|
$ |
1,026 |
|
|
$ |
970 |
|
The
Company defers certain pre-production engineering costs as work-in-process
inventory 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. Such costs are typically deferred to the extent of the
contractual guarantees and are generally amortized over a period of 1 to
8 years as a component of Cost of Sales as revenue is recognized on the
minimum order quantity. Deferred pre-production engineering costs
were $184 million and $166 million at December 31, 2008 and September 30, 2008,
respectively. Pre-production engineering costs incurred pursuant to
supply arrangements that do not contain customer guarantees for reimbursement
are expensed as incurred.
Property
is summarized as follows (in millions):
|
|
December
31,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2008
|
|
Land
|
|
$ |
30 |
|
|
$ |
30 |
|
Buildings
and improvements
|
|
|
344 |
|
|
|
342 |
|
Machinery
and equipment
|
|
|
819 |
|
|
|
807 |
|
Information
systems software and hardware
|
|
|
247 |
|
|
|
243 |
|
Furniture
and fixtures
|
|
|
61 |
|
|
|
60 |
|
Construction
in progress
|
|
|
96 |
|
|
|
99 |
|
Total
|
|
|
1,597 |
|
|
|
1,581 |
|
Less
accumulated depreciation
|
|
|
(917
|
) |
|
|
(901
|
) |
Property
|
|
$ |
680 |
|
|
$ |
680 |
|
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL STATEMENTS
(Unaudited)
7.
|
Goodwill
and Intangible Assets
|
Changes
in the carrying amount of goodwill for the three months ended December 31, 2008
are summarized as follows (in millions):
|
|
Government
|
|
|
Commercial
|
|
|
|
|
|
|
Systems
|
|
|
Systems
|
|
|
Total
|
|
Balance
at September 30, 2008
|
|
$ |
418 |
|
|
$ |
191 |
|
|
$ |
609 |
|
SEOS
acquisition
|
|
|
15 |
|
|
|
7 |
|
|
|
22 |
|
Foreign
currency translation adjustment
|
|
|
(1
|
) |
|
|
(1
|
) |
|
|
(2
|
) |
Other
adjustments to goodwill
|
|
|
(1
|
) |
|
|
- |
|
|
|
(1
|
) |
Balance
at December 31, 2008
|
|
$ |
431 |
|
|
$ |
197 |
|
|
$ |
628 |
|
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 (in millions):
|
|
December
31, 2008
|
|
|
September
30, 2008
|
|
|
|
|
|
|
Accum
|
|
|
|
|
|
|
|
|
Accum
|
|
|
|
|
|
|
Gross
|
|
|
Amort
|
|
|
Net
|
|
|
Gross
|
|
|
Amort
|
|
|
Net
|
|
Intangible
assets with finite lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed
technology and patents
|
|
$ |
186 |
|
|
$ |
(91 |
) |
|
$ |
95 |
|
|
$ |
181 |
|
|
$ |
(87 |
) |
|
$ |
94 |
|
License
agreements
|
|
|
20 |
|
|
|
(4
|
) |
|
|
16 |
|
|
|
20 |
|
|
|
(4
|
) |
|
|
16 |
|
Customer
relationships
|
|
|
135 |
|
|
|
(27
|
) |
|
|
108 |
|
|
|
105 |
|
|
|
(25
|
) |
|
|
80 |
|
Trademarks
and tradenames
|
|
|
14 |
|
|
|
(8
|
) |
|
|
6 |
|
|
|
14 |
|
|
|
(8
|
) |
|
|
6 |
|
Intangible
assets with indefinite lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
and tradenames
|
|
|
2 |
|
|
|
- |
|
|
|
2 |
|
|
|
2 |
|
|
|
- |
|
|
|
2 |
|
Intangible
assets
|
|
$ |
357 |
|
|
$ |
(130 |
) |
|
$ |
227 |
|
|
$ |
322 |
|
|
$ |
(124 |
) |
|
$ |
198 |
|
Rockwell
Collins provides sales incentives to certain commercial customers in connection
with sales contracts. Incentives consisting of cash payments or
customer account credits are recognized as a reduction of sales and incentives
consisting of free product are recognized as cost of
sales. Incentives granted to customers prior to delivering products
or performing services are recorded as a Customer Relationship Intangible Asset
and amortized over the period the Company has received a contractually
enforceable right related to the incentive. The net book value of
incentives included in Customer Relationship Intangible Assets was
$84 million and $56 million at December 31, 2008 and
September 30, 2008, respectively.
In
December 2007, the Commercial Systems segment acquired a license agreement
in connection with its purchase of the SKYLink broadband terminal product line
from ARINC Incorporated (ARINC). Under the terms of the six-year
agreement, the Company will sell and support broadband terminals to the business
jet market under the Company’s eXchange brand and ARINC will provide certain
satellite connectivity services. The initial purchase price was $7
million and is subject to adjustment based on future sales volume of the product
line.
Amortization
expense for intangible assets was $6 million for each of the three months ended
December 31, 2008 and 2007. Annual amortization expense for
intangible assets for 2009, 2010, 2011, 2012, and 2013 is expected to be $28
million, $37 million, $39 million, $36 million, and $21 million,
respectively.
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL STATEMENTS
(Unaudited)
Other
assets are summarized as follows (in millions):
|
|
December
31,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2008
|
|
Long-term
deferred income taxes
|
|
$ |
142 |
|
|
$ |
144 |
|
Long-term
receivables
|
|
|
98 |
|
|
|
71 |
|
Investments
in equity affiliates
|
|
|
11 |
|
|
|
9 |
|
Exchange
and rental assets, net of accumulated depreciation of $98
at
|
|
|
|
|
|
|
|
|
December
31, 2008 and $98 at September 30, 2008
|
|
|
40 |
|
|
|
41 |
|
Other
|
|
|
60 |
|
|
|
54 |
|
Other
assets
|
|
$ |
351 |
|
|
$ |
319 |
|
Investments
in equity affiliates primarily consist of four joint ventures: Vision Systems
International, LLC (VSI), Data Link Solutions, LLC (DLS), Integrated Guidance
Systems, LLC (IGS), and Quest Flight Training Limited (Quest). Each
joint venture is 50 percent owned by the Company and accounted for under the
equity method.
In the
normal course of business or pursuant to the underlying joint venture
agreements, the Company may sell products or services to equity
affiliates. The Company defers a portion of the profit generated from
these sales equal to its ownership interest in the equity affiliates until the
underlying product is ultimately sold to an unrelated third
party. Sales to equity affiliates were $18 million and $32 million
for the three months ended December 31, 2008 and 2007,
respectively. The deferred portion of profit generated from sales to
equity affiliates was $3 million at December 31, 2008 and $4 million at
September 30, 2008.
9.
|
Other
Current Liabilities
|
Other
current liabilities are summarized as follows (in millions):
|
|
December
31,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2008
|
|
Customer
incentives
|
|
$ |
113 |
|
|
$ |
119 |
|
Contract
reserves
|
|
|
13 |
|
|
|
13 |
|
Other
|
|
|
78 |
|
|
|
71 |
|
Other
current liabilities
|
|
$ |
204 |
|
|
$ |
203 |
|
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, 2008, short-term commercial paper
borrowings outstanding were $432 million with a weighted average interest rate
and maturity period of 0.75 percent and 34 days, respectively.
Revolving
Credit Facilities
The
Company has an $850 million unsecured revolving credit facility with various
banks through March 2012. The credit facility has options to extend
the term for up to two one-year periods and/or increase the aggregate principal
amount up to $1.2 billion. These options are subject to the approval
of the lenders. This credit facility exists primarily to support the
Company’s commercial paper program, but may be used for other corporate purposes
in the event access to the commercial paper market is impaired or
eliminated. The credit facility includes one financial covenant
requiring the Company to maintain a consolidated debt to total capitalization
ratio of not greater than 60 percent. The ratio excludes the
accumulated other comprehensive loss equity impact related to defined benefit
retirements plans. The ratio was 25 percent as of December 31,
2008. In addition, the credit facility contains covenants that
require the Company to satisfy certain conditions in order to incur debt secured
by liens, engage in sale/leaseback transactions, or merge or consolidate with
another entity. Borrowings under this credit facility bear interest
at the London Interbank Offered Rate (LIBOR) plus a variable margin based on the
Company’s unsecured long-term debt rating or, at the Company’s option, rates
determined by competitive bid. At December 31, 2008 and September 30,
2008, there were no outstanding borrowings under this revolving credit
facility.
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL STATEMENTS
(Unaudited)
In
addition, short-term credit facilities available to foreign subsidiaries
amounted to $59 million as of December 31, 2008, of which $28 million was
utilized to support commitments in the form of letters of credit. At
December 31, 2008 and September 30, 2008, there were no significant commitment
fees or compensating balance requirements under any of the Company’s credit
facilities. As of December 31, 2008, there were $9 million of
short-term borrowings outstanding under the Company’s foreign subsidiaries’
credit facilities.
Long-Term
Debt
In
addition to the Company’s credit facilities and commercial paper program, the
Company has a shelf registration statement filed with the Securities and
Exchange Commission pursuant to which the Company can publicly offer and sell
securities from time to time. This shelf registration covers an
unlimited amount of debt securities, common stock, preferred stock or warrants
that may be offered in one or more offerings on terms to be determined at the
time of sale.
On
November 20, 2003, the Company issued $200 million of 4.75 percent fixed rate
unsecured debt due December 1, 2013 (the Notes). The Notes contain
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. In 2004, the Company entered into
interest rate swap contracts which effectively converted $100 million aggregate
principal amount of the Notes to floating rate debt based on six-month LIBOR
less 7.5 basis points. See Note 16 for additional information
relating to the interest rate swap contracts.
As of
December 31, 2008, 17 million euros ($24 million) was outstanding under a
five-year unsecured variable rate loan facility agreement entered into in June
2006. The variable rate loan facility agreement contains customary
loan covenants, none of which are financial covenants.
The
Company was in compliance with all debt covenants at December 31,
2008.
Long-term
debt and a reconciliation to the carrying amount is summarized as follows (in
millions):
|
|
December
31,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2008
|
|
Principal
amount of notes due December 1, 2013
|
|
$ |
200 |
|
|
$ |
200 |
|
Principal
amount of variable rate loan facility due June 2011
|
|
|
24 |
|
|
|
24 |
|
Fair
value swap adjustment
|
|
|
11 |
|
|
|
4 |
|
Long-term
debt
|
|
$ |
235 |
|
|
$ |
228 |
|
Interest
paid on debt for the three months ended December 31, 2008 and 2007 was $6
million and $7 million, respectively.
The
Company sponsors defined benefit pension (Pension Benefits) and other
postretirement (Other Retirement Benefits) plans covering most of its U.S.
employees and certain employees in foreign countries that provide monthly
pension and other benefits to eligible employees upon retirement.
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL STATEMENTS
(Unaudited)
Components
of Expense / (Income)
The
components of expense / (income) for Pension Benefits and Other Retirement
Benefits are summarized below (in millions):
|
|
|
|
|
|
|
|
Other
|
|
|
|
Pension Benefits
|
|
|
Retirement Benefits
|
|
|
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
December
31
|
|
|
December
31
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Service
cost
|
|
$ |
2 |
|
|
$ |
2 |
|
|
$ |
1 |
|
|
$ |
1 |
|
Interest
cost
|
|
|
42 |
|
|
|
40 |
|
|
|
3 |
|
|
|
4 |
|
Expected
return on plan assets
|
|
|
(49
|
) |
|
|
(50
|
) |
|
|
- |
|
|
|
- |
|
Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior
service cost
|
|
|
(5
|
) |
|
|
(5
|
) |
|
|
(6
|
) |
|
|
(9
|
) |
Net
actuarial loss
|
|
|
7 |
|
|
|
12 |
|
|
|
3 |
|
|
|
3 |
|
Net
benefit expense (income)
|
|
$ |
(3 |
) |
|
$ |
(1 |
) |
|
$ |
1 |
|
|
$ |
(1 |
) |
Pension
Plan Funding
The
Company’s objective with respect to the funding of its pension plans is to
provide adequate assets for the payment of future benefits. Pursuant
to this objective, the Company will fund its pension plans as required by
governmental regulations and may consider discretionary contributions as
conditions warrant. The Company made a contribution of $75 million to
its U.S. qualified pension plan in January 2009. As a result of this
contribution, the Company does not anticipate it will be required to make any
further contributions to its U.S. qualified pension plan by governmental
regulations in fiscal 2009. Contributions to the Company’s
international plans and the U.S. non-qualified plan are expected to total
$13 million in 2009. For the three months ended December 31,
2008 and 2007, the Company made contributions to its international plans and the
U.S. non-qualified pension plan of $4 million and $2 million,
respectively.
12.
|
Stock-Based
Compensation
|
Total
stock-based compensation expense included within the condensed consolidated
statement of operations is as follows (in millions):
|
|
Three
Months Ended
|
|
|
|
December
31
|
|
|
|
2008
|
|
|
2007
|
|
Stock-based
compensation expense included in:
|
|
|
|
|
|
|
Product
cost of sales
|
|
$ |
1 |
|
|
$ |
1 |
|
Service
cost of sales
|
|
|
1 |
|
|
|
1 |
|
Selling,
general and administrative expenses
|
|
|
3 |
|
|
|
3 |
|
Total
|
|
$ |
5 |
|
|
$ |
5 |
|
The
Company issued awards of equity instruments under the Company’s various
incentive plans for the three months ended December 31, 2008 and 2007 as
follows:
|
|
|
|
|
|
|
|
Performance
|
|
|
Restricted
|
|
|
Restricted
|
|
|
|
Options
|
|
|
Shares
|
|
|
Stock
|
|
|
Stock Units
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
Number
|
|
|
Average
|
|
|
Number
|
|
|
Average
|
|
|
Number
|
|
|
Average
|
|
|
Number
|
|
|
Average
|
|
|
|
Issued
|
|
|
Fair Value
|
|
|
Issued
|
|
|
Fair Value
|
|
|
Issued
|
|
|
Fair Value
|
|
|
Issued
|
|
|
Fair Value
|
|
Three
months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2008
|
|
|
1,290,700 |
|
|
$ |
7.07 |
|
|
|
299,948 |
|
|
$ |
30.39 |
|
|
|
98,670 |
|
|
$ |
30.39 |
|
|
|
15,454 |
|
|
$ |
33.83 |
|
Three
months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
|
339,290 |
|
|
$ |
23.60 |
|
|
|
107,484 |
|
|
$ |
74.05 |
|
|
|
38,900 |
|
|
$ |
74.05 |
|
|
|
6,972 |
|
|
$ |
74.31 |
|
The
maximum number of shares of common stock that can be issued in respect to
performance shares granted in 2009 based on the achievement of performance
targets for fiscal years 2009 through 2011 is 718,886.
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL STATEMENTS
(Unaudited)
The fair
value of each option granted by the Company was estimated using a binomial
lattice pricing model and the following assumptions:
|
|
2009
|
|
|
2008
|
|
|
|
Grants
|
|
|
Grants
|
|
Risk-free
interest rate (U.S. Treasury zero coupon issues)
|
|
|
2.36
|
% |
|
|
3.86
|
% |
Expected
dividend yield
|
|
|
1.59
|
% |
|
|
0.98
|
% |
Expected
volatility
|
|
|
0.24 |
|
|
|
0.30 |
|
Expected
life
|
|
6.4
years
|
|
|
6.0
years
|
|
Employee
Benefits Paid in Company Stock
During
the three months ended December 31, 2008 and 2007, 0.5 million and 0.2 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 and $13 million for the respective
periods.
Comprehensive
income consists of the following (in millions):
|
|
Three
Months Ended
|
|
|
|
December
31
|
|
|
|
2008
|
|
|
2007
|
|
Net
income
|
|
$ |
151 |
|
|
$ |
154 |
|
Unrealized
foreign currency translation adjustment
|
|
|
(7
|
) |
|
|
3 |
|
Foreign
currency cash flow hedge adjustment
|
|
|
(5
|
) |
|
|
1 |
|
Amortization
of defined benefit plan costs
|
|
|
- |
|
|
|
1 |
|
Comprehensive
income
|
|
$ |
139 |
|
|
$ |
159 |
|
Other
income, net consists of the following (in millions):
|
|
Three
Months Ended
|
|
|
|
December
31
|
|
|
|
2008
|
|
|
2007
|
|
Earnings
from equity affiliates
|
|
$ |
2 |
|
|
$ |
3 |
|
Interest
income
|
|
|
2 |
|
|
|
2 |
|
Royalty
income
|
|
|
1 |
|
|
|
2 |
|
Other,
net
|
|
|
- |
|
|
|
(2
|
) |
Other
income, net
|
|
$ |
5 |
|
|
$ |
5 |
|
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 tax rate are pro-rated for the full year and tax items discrete to a
specific quarter are included in the effective 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, 2008 and 2007, the effective income tax rate
was 32.0 percent and 33.6 percent, respectively.
The
Federal Research and Development Tax Credit (Federal R&D Tax Credit) expired
December 31, 2007. On the last day of fiscal 2008, the Emergency
Economic Stabilization Act of 2008 was enacted, which retroactively reinstated
and extended the Federal R&D Tax Credit from January 1, 2008 to December 31,
2009. The effective tax rate for the three months ended December 31,
2008 reflects a full year benefit from the Federal R&D Tax Credit in the
estimate of the annual effective tax rate. The effective tax rate for
the three months ended December 31, 2007 reflects the unfavorable impact of
lower Federal R&D Tax Credits as a result of pro-rating the three months of
available Federal R&D Tax Credits over the full 2008 fiscal
year.
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL STATEMENTS
(Unaudited)
The
effective tax rate for the three months ended December 31, 2008 and December 31,
2007 both include a tax benefit related to the Domestic Manufacturing Deduction
(DMD). The DMD tax benefit available in fiscal year 2009 and fiscal
year 2008 is two-thirds of the full benefit that will be available in fiscal
year 2011.
The
Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48) at the beginning of fiscal year 2008. The $5
million cumulative effect of adopting FIN 48 was recorded as a reduction to
retained earnings in the first quarter of 2008. As of the beginning
of fiscal year 2008, the Company had gross unrecognized tax benefits of $84
million recorded within Other Liabilities in the Consolidated Statement of
Financial Position, of which $52 million would affect the effective income tax
rate if recognized.
At
December 31, 2008, the Company had gross unrecognized tax benefits of $77
million recorded within Other Liabilities in the Condensed Consolidated
Statement of Financial Position, of which $45 million would affect the effective
income tax rate if recognized. At September 30, 2008, the Company had
gross unrecognized tax benefits of $73 million recorded within Other Liabilities
in the Consolidated Statement of Financial Position, of which $41 million would
affect the effective income tax rate if recognized. During the next
12 months, the amount of previously unrecognized tax benefits is not expected to
significantly change.
The
Company recognizes interest and penalties related to unrecognized tax benefits
in income tax expense. As of December 31, 2008, the total amount of
interest and penalties recognized within Other Liabilities in the Condensed
Consolidated Statement of Financial Position was $6 million. As of
September 30, 2008, the total amount of interest and penalties recognized within
Other Liabilities in the Consolidated Statement of Financial Position was $5
million.
The
Company's U.S. Federal income tax returns for the tax years ended September 30,
2005 and prior have been audited by the Internal Revenue Service (IRS) and are
closed to further adjustments by the IRS. The IRS is currently
auditing the Company’s tax returns for the years ended September 30, 2006 and
2007. The Company has not received any proposed audit adjustments
from the IRS. The Company is also currently under audit in various
U.S. state and foreign jurisdictions. The U.S. state and foreign
jurisdictions have statutes of limitations generally ranging from 3 to 5
years. The Company believes it has adequately provided for any tax
adjustments that may result from the various audits.
The
Company had net income tax (refunds) / payments of ($20) million and $24 million
during the three months ended December 31, 2008 and 2007,
respectively. The Company filed for and received an income tax refund
during the three months ended December 31, 2008 primarily due to the timing of
the retroactive reinstatement of the Federal R&D Tax Credit on the last day
of the Company’s 2008 fiscal year.
16.
|
Financial
Instruments
|
Fair
Value Measurements
The
Company adopted the recognition and disclosure provisions of SFAS 157 as of
October 1, 2008 for financial assets and liabilities. In accordance
with FASB Staff Position No. FAS 157-2, Effective Date of FASB
StatementNo. 157
(FSP FAS 157-2), the Company elected to defer until October 1, 2009 the adoption
of SFAS 157 for all nonfinancial assets and nonfinancial liabilities not
recognized or disclosed at fair value in the financial statements on a recurring
basis. Nonfinancial assets and nonfinancial liabilities for which we
have not applied the provisions of SFAS 157 include those measured at
fair value in goodwill impairment testing, indefinite lived intangible assets
measured at fair value for impairment testing, and those non-recurring
nonfinancial assets and nonfinancial liabilities initially measured at fair
value in a business combination. The adoption of SFAS 157 for those
assets and liabilities within the scope of FSP FAS 157-2 is not expected to have
a material impact on the Company’s financial position, results of operations or
cash flows.
SFAS 157
defines fair value, establishes a framework for measuring fair value and expands
the related disclosure requirements. The statement indicates, among
other things, that a fair value measurement assumes that the transaction to sell
an asset or transfer a liability occurs in the principal market for the asset or
liability or, in the absence of a principal market, the most advantageous market
for the asset or liability. SFAS 157 establishes a valuation
hierarchy for disclosure of the inputs to valuation techniques used to measure
fair value. This hierarchy prioritizes the inputs into three broad
levels as follows:
Level
1 -
|
quoted prices (unadjusted) in
active markets for identical assets or
liabilities
|
|
|
Level
2 -
|
quoted prices for similar assets
and liabilities in active markets or inputs that are observable
for
|
|
the asset or liability, either
directly or indirectly through market corroboration, for
substantially
|
|
the full term of the financial
instrument
|
|
|
Level
3 -
|
unobservable inputs based on the
Company’s own assumptions used to measure assets
and
|
|
liabilities at fair
value
|
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL STATEMENTS
(Unaudited)
A
financial asset or liability’s classification within the hierarchy is determined
based on the lowest level input thatis 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, 2008 was as follows (in
millions):
|
|
Carrying
|
|
|
Quoted
prices
|
|
|
Significant
other
|
|
|
Significant
|
|
|
|
Amount
|
|
|
in
active
|
|
|
observable
|
|
|
unobservable
|
|
|
|
Asset
|
|
|
markets
|
|
|
inputs
|
|
|
inputs
|
|
|
|
(Liability)
|
|
|
(Level 1)
|
|
|
(Level
2)
|
|
|
(Level 3)
|
|
Deferred
compensation plan investments
|
|
$ |
30 |
|
|
$ |
30 |
|
|
$ |
- |
|
|
$ |
- |
|
Interest
rate swaps
|
|
|
11 |
|
|
|
- |
|
|
|
11 |
|
|
|
- |
|
Foreign
currency forward exchange contracts .
|
|
|
(7
|
) |
|
|
- |
|
|
|
(7
|
) |
|
|
- |
|
Valuation
Techniques
The
deferred compensation plan investments consist of investments in marketable
securities (primarily mutual funds) and the fair value is determined using the
market approach based on quoted market prices of identical assets in active
markets and are classified within Level 1.
The fair
value of the interest rate swaps is determined using the market approach and is
calculated by a pricing model with observable market inputs. Interest
rate swaps are classified within Level 2.
The fair
value of foreign currency forward exchange contracts is determined using the
market approach and is calculated as the value of the quoted forward currency
exchange rate less the contract rate multiplied by thenotional
amount. Foreign currency forward exchange contracts are classified
within Level 2.
As of
December 31, 2008, there has not been any impact to the fair value of our
derivative liabilities due to our own credit risk. Similarly, there has not been
any impact to the fair value of our derivative assets based on our evaluation of
our counterparties’ credit risks.
Interest
Rate Swaps
The
Company manages its exposure to interest rate risk by maintaining an appropriate
mix of fixed and variable rate debt, which over time should moderate the costs
of debt financing. When considered necessary, the Company may use
financial instruments in the form of interest rate swaps to help meet this
objective. On November 20, 2003, the Company entered into two
interest rate swap contracts (the Swaps) which expire on December 1, 2013 and
effectively convert $100 million of the 4.75 percent fixed rate long-term notes
to floating rate debt based on six-month LIBOR less 7.5 basis
points. The Company has designated the Swaps as fair value
hedges. At December 31, 2008 and September 30, 2008, the Swaps were
recorded at a fair value of $11 million and $4 million, within Other Assets,
respectively, offset by a fair value adjustment to Long-Term Debt (Note 10) of
$11 million and $4 million, respectively. Cash payments or receipts
between the Company and the counterparties to the Swaps are recorded as an
adjustment to interest expense.
Foreign
Currency Forward Exchange Contracts
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, 2008 and September 30, 2008, the Company had outstanding foreign
currency forward exchange contracts with notional amounts of $353 million and
$218 million, respectively. These notional values consist primarily
of contracts for the European euro, British pound sterling and Japanese yen, and
are stated in U.S. dollar equivalents at spot exchange rates at the respective
dates.
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL STATEMENTS
(Unaudited)
17.
|
Guarantees
and Indemnifications
|
Product
warranty costs
Accrued
liabilities are recorded to reflect the Company’s contractual obligations
relating to warranty commitments to customers. Warranty coverage of various
lengths and terms is provided to customers depending on standard offerings and
negotiated contractual agreements. An estimate for warranty expense is recorded
at the time of sale based on the length of the warranty and historical warranty
return rates and repair costs.
Changes
in the carrying amount of accrued product warranty costs are summarized as
follows (in millions):
|
|
Three
Months Ended
|
|
|
|
December
31
|
|
|
|
2008
|
|
|
2007
|
|
Balance
at beginning of year
|
|
$ |
226 |
|
|
$ |
213 |
|
Warranty
costs incurred
|
|
|
(13
|
) |
|
|
(13
|
) |
Product
warranty accrual
|
|
|
11 |
|
|
|
16 |
|
Pre-existing
warranty adjustments
|
|
|
- |
|
|
|
- |
|
Balance
at December 31
|
|
$ |
224 |
|
|
$ |
216 |
|
Guarantees
In
connection with the acquisition of Quest from Evans & Sutherland, the
Company entered into a parent company guarantee related to various obligations
of Quest. The Company has guaranteed, jointly and severally with
Quadrant Group plc (Quadrant) (the other joint venture partner), the performance
of Quest in relation to its contract with the United Kingdom Ministry of Defence
(which expires in 2030) and the performance of certain Quest subcontractors (up
to $2 million). In addition, the Company has also pledged equity
shares in Quest to guarantee payment by Quest of a loan agreement executed by
Quest. In the event of default on this loan agreement, the lending
institution can request that the trustee holding such equity shares surrender
them to the lending institution in order to satisfy all amounts then outstanding
under the loan agreement. As of December 31, 2008, the outstanding
loan balance was approximately $6 million. Quadrant has made an
identical pledge to guarantee this obligation of Quest.
Should
Quest fail to meet its obligations under these agreements, these guarantees may
become a liability of the Company. As of December 31, 2008, 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, 2008
were $112 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.
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL STATEMENTS
(Unaudited)
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.
18.
|
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, 2008, the Company is involved in the
investigation or remediation of seven 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 six of these
sites is not significant. Management estimates that the total
reasonably possible future costs the Company could incur from one of these sites
to be approximately $9 million. The Company has recorded
environmental reserves for this site of $3 million as of December 31, 2008,
which represents management’s best estimate of the probable future cost for this
site.
To date,
compliance with environmental regulations and resolution of environmental claims
has been accomplished without material effect on the Company’s liquidity and
capital resources, competitive position or financial
condition. Management believes that expenditures for environmental
capital investment and remediation necessary to comply with present regulations
governing environmental protection and other expenditures for the resolution of
environmental claims will not have a material adverse effect on the Company’s
business or financial position, but could possibly be material to the results of
operations or cash flows of any one quarter.
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, anti-trust,
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.
ROCKWELL
COLLINS, INC.
NOTES
TO CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL STATEMENTS
(Unaudited)
20.
|
Business
Segment Information
|
|
|
|
The
sales and results of operations of the Company’s operating segments are
summarized as follows (in
millions):
|
|
|
Three
Months Ended
|
|
|
|
December
31
|
|
|
|
2008
|
|
|
2007
|
|
Sales:
|
|
|
|
|
|
|
Government
Systems
|
|
$ |
574 |
|
|
$ |
547 |
|
Commercial
Systems
|
|
|
484 |
|
|
|
565 |
|
Total
sales
|
|
$ |
1,058 |
|
|
$ |
1,112 |
|
Segment
operating earnings:
|
|
|
|
|
|
|
|
|
Government
Systems
|
|
$ |
140 |
|
|
$ |
115 |
|
Commercial
Systems
|
|
|
97 |
|
|
|
137 |
|
Total
segment operating earnings
|
|
|
237 |
|
|
|
252 |
|
Interest
expense
|
|
|
(4
|
) |
|
|
(5
|
) |
Stock-based
compensation
|
|
|
(5
|
) |
|
|
(5
|
) |
General
corporate, net
|
|
|
(6
|
) |
|
|
(10
|
) |
Income
before income taxes
|
|
|
222 |
|
|
|
232 |
|
Income
tax provision
|
|
|
71 |
|
|
|
78 |
|
Net
income
|
|
$ |
151 |
|
|
$ |
154 |
|
The
Company evaluates performance and allocates resources based upon, among other
considerations, segment operating earnings. The Company’s definition
of segment operating earnings excludes income taxes, stock-based compensation,
unallocated general corporate expenses, interest expense, gains and losses from
the disposition of businesses, non-recurring charges resulting from purchase
accounting such as purchased research and development charges, asset impairment
charges, and other special items as identified by management from time to
time. Intersegment sales are not material and have been
eliminated.
The
following table summarizes sales by product category for the three months ended
December 31, 2008 and 2007 (in millions):
|
|
Three
Months Ended
|
|
|
|
December
31
|
|
|
|
2008
|
|
|
2007
|
|
Government
Systems product categories:
|
|
|
|
|
|
|
Airborne
solutions
|
|
$ |
403 |
|
|
$ |
375 |
|
Surface
solutions
|
|
|
171 |
|
|
|
172 |
|
Total
Government Systems sales
|
|
$ |
574 |
|
|
$ |
547 |
|
|
|
|
|
|
|
|
|
|
Commercial
Systems product categories:
|
|
|
|
|
|
|
|
|
Air
transport aviation electronics
|
|
$ |
220 |
|
|
$ |
301 |
|
Business
and regional aviation electronics
|
|
|
264 |
|
|
|
264 |
|
Total
Commercial Systems sales
|
|
$ |
484 |
|
|
$ |
565 |
|
Product
category sales for defense-related products in the Government Systems segment
are delineated based upon the difference in underlying customer base and market
served.
The air
transport and business and regional aviation electronics product categories are
delineated based upon the difference in underlying customer base, size of
aircraft, and markets served.
Item
2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations
The
following management discussion and analysis is based on financial results for
the three months ended December 31, 2008 and 2007 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, 2008 and 2007
Sales
|
|
|
|
|
|
|
(dollars
in millions)
|
|
Three
Months Ended
|
|
|
|
December
31
|
|
|
|
2008
|
|
|
2007
|
|
Total
sales
|
|
$ |
1,058 |
|
|
$ |
1,112 |
|
Percent
(decrease)
|
|
|
(5
|
)% |
|
|
|
|
Total
sales for the three months ended December 31, 2008 decreased 5 percent to $1,058
million compared to the three months ended December 31,
2007. Incremental sales from the April 2008 acquisition of Athena
Technologies (Athena) and the November 2008 acquisition of SEOS Group Limited
(SEOS) contributed a total of $9 million, or 1 percentage point of revenue
growth. The organic sales decline of 6 percent was primarily
attributed to a decrease in Commercial Systems sales of 14 percent partially
offset by an increase in Government Systems organic sales of 3
percent. See the following operating segment sections for
further discussion of sales for the three months ended December 31, 2008 and
2007.
Net Income and Diluted
Earnings Per Share
(dollars
in millions, except per share amounts)
|
|
Three
Months Ended
|
|
|
|
December
31
|
|
|
|
2008
|
|
|
2007
|
|
Net
income
|
|
$ |
151 |
|
|
$ |
154 |
|
Net
income as a percent of sales
|
|
|
14.3
|
% |
|
|
13.8
|
% |
Diluted
earnings per share
|
|
$ |
0.95 |
|
|
$ |
0.93 |
|
Net
income for the three months ended December 31, 2008 decreased to $151 million,
or 14.3 percent of sales, from net income of $154 million, or 13.8 percent of
sales, for the three months ended December 31, 2007. The decrease in
net income was primarily the result of lower Commercial Systems sales
volume, partially offset by lower employee incentive compensation costs, lower
research and development costs, and a lower income tax provision due primarily
to the availability of the Federal R&D Tax Credit. Diluted
earnings per share increased 2 percent to 95 cents for the three months ended
December 31, 2008 from 93 cents for the three months ended December 31,
2007. Diluted earnings per share for the three months ended December
31, 2008 benefited from our share repurchase program.
Government
Systems Financial Results
Government Systems’
Sales
The
following table presents Government Systems’ sales by product
category:
(dollars
in millions)
|
|
Three
Months Ended
|
|
|
|
December
31
|
|
|
|
2008
|
|
|
2007
|
|
Airborne
solutions
|
|
$ |
403 |
|
|
$ |
375 |
|
Surface
solutions
|
|
|
171 |
|
|
|
172 |
|
Total
|
|
$ |
574 |
|
|
$ |
547 |
|
Percent
increase
|
|
|
5
|
% |
|
|
|
|
Airborne
solutions sales increased $28 million, or 7 percent, for the three months ended
December 31, 2008 compared to the three months ended December 31,
2007. Incremental sales from the acquisitions of Athena and SEOS
contributed a total of $8 million, or 2 percentage points of the overall revenue
growth. The 5 percent organic sales increase was due primarily to
higher sales from simulation and training solutions, higher production sales on
the Eurofighter Tranche 2 program, and higher development program revenues on
the Common Range Integrated Instrumentation System (CRIIS) program.
Surface
solutions sales were relatively flat for the three months ended December 31,
2008 compared to the three months ended December 31, 2007. Higher
development program sales from the Joint Precision Approach and Landing System
(JPALS) program were offset by lower production volume from the Multifunctional
Information Distribution System-Low Volume Terminal (MIDS-LVT) program and lower
development program sales from the Joint Tactical Radio System Ground
Mobile Radio (JTRS GMR) program.
Government Systems’ Segment
Operating Earnings
(dollars
in millions)
|
|
Three
Months Ended
|
|
|
|
December
31
|
|
|
|
2008
|
|
|
2007
|
|
Segment
operating earnings
|
|
$ |
140 |
|
|
$ |
115 |
|
Percent
of sales
|
|
|
24.4
|
% |
|
|
21.0
|
% |
Government
Systems’ first quarter operating earnings increased 22 percent to $140 million,
or 24.4 percent of sales, for the three months ended December 31, 2008 compared
to operating earnings of $115 million, or 21.0 percent of sales, for the same
period a year ago. The increase in operating earnings and operating
earnings as a percent of sales was primarily due to lower employee incentive
compensation costs, incremental margin on higher sales, lower research and
development costs, and a favorable mix of higher margin hardware
sales.
Commercial
Systems Financial Results
Commercial Systems’
Sales
The
following table presents Commercial Systems’ sales by product
category:
(dollars
in millions)
|
|
Three
Months Ended
|
|
|
|
December
31
|
|
|
|
2008
|
|
|
2007
|
|
Wide-body
in-flight entertainment products
|
|
$ |
21 |
|
|
$ |
41 |
|
All
other air transport aviation electronics
|
|
|
199 |
|
|
|
260 |
|
Total
air transport aviation electronics
|
|
|
220 |
|
|
|
301 |
|
Business
and regional aviation electronics
|
|
|
264 |
|
|
|
264 |
|
Total
|
|
$ |
484 |
|
|
$ |
565 |
|
Percent
(decrease)
|
|
|
(14
|
)% |
|
|
|
|
Wide-body
in-flight entertainment products (Wide-body IFE) relate to sales of twin-aisle
IFE products and systems to customers in the air transport aviation electronics
market. All other air transport aviation electronics sales include
all other air transport sales, including service and support sales for installed
Wide-body IFE. In September 2005 we announced our strategic decision
to shift research and development resources away from traditional IFE systems
for next generation wide-body aircraft. We continue to execute on
Wide-body IFE contracts and plan to support our existing customer base, which
includes on-going service and support activities for Wide-body
IFE. All periods have been presented consistent with the above
description of air transport aviation electronics revenues.
Total air
transport aviation electronics sales decreased $81 million, or 27 percent, for
the three months ended December 31, 2008 compared to the three months ended
December 31, 2007. Excluding the $20 million decrease in Wide-body
IFE revenues, air transport aviation electronics sales decreased $61 million, or
23 percent, for the three months ended December 31, 2008 compared to the three
months ended December 31, 2007. This decrease in sales was due
primarily to lower original equipment manufacturer (OEM) sales as a result of
Boeing’s labor strikes and their aircraft production issues. In
addition, air transport aviation aftermarket sales were impacted by lower Boeing
787 simulator equipment sales and lower service and support
revenues.
Business
and regional aviation electronics sales were unchanged for the three months
ended December 31, 2008 compared to the three months ended December 31,
2007. Sales in business and regional aviation electronics for the
three months ended December 31, 2008 to both OEMs and the aftermarket were flat
compared to the same period a year ago.
The
following table presents Commercial Systems’ sales based on the type of product
or service:
(in
millions)
|
|
Three
Months Ended
|
|
|
|
December
31
|
|
|
|
2008
|
|
|
2007
|
|
Original
equipment
|
|
$ |
244 |
|
|
$ |
283 |
|
Aftermarket
|
|
|
219 |
|
|
|
241 |
|
Wide-body
in-flight entertainment products
|
|
|
21 |
|
|
|
41 |
|
Total
|
|
$ |
484 |
|
|
$ |
565 |
|
See the
discussion below the Commercial Systems’ sales by product category table for a
definition of Wide-body in-flight entertainment products.
Original
equipment sales decreased $39 million, or 14 percent, for the three months ended
December 31, 2008 compared to the three months ended December 31, 2007. This
sales decline is attributed primarily to lower OEM sales as a result of Boeing’s
labor strikes and their aircraft production issues.
Aftermarket
sales decreased $22 million, or 9 percent, for the three months ended December
31, 2008 compared to the three months ended December 31, 2007. This
decrease is due primarily to lower Boeing 787 simulator equipment sales as well
as lower air transport service and support sales.
Commercial Systems’ Segment
Operating Earnings
(dollars
in millions)
|
|
Three
Months Ended
|
|
|
|
December
31
|
|
|
|
2008
|
|
|
2007
|
|
Segment
operating earnings
|
|
$ |
97 |
|
|
$ |
137 |
|
Percent
of sales
|
|
|
20.0
|
% |
|
|
24.2
|
% |
Commercial
Systems operating earnings decreased 29 percent to $97 million, or 20.0 percent
of sales, for the three months ended December 31, 2008 compared to operating
earnings of $137 million, or 24.2 percent of sales for the three months ended
December 31, 2007. The decrease in operating earnings was due
primarily to lower sales volume and the absence of a favorable adjustment
related to a contract option exercise benefiting the three months ended December
31, 2007, partially offset by lower employee incentive compensation costs and
lower research and development costs.
Retirement
Benefits
Net
benefit expense (income) for pension benefits and other retirement benefits are
as follows (in millions):
|
|
Three
Months Ended
|
|
|
|
December
31
|
|
|
|
2008
|
|
|
2007
|
|
Pension
benefits
|
|
$ |
(3 |
) |
|
$ |
(1 |
) |
Other
retirement benefits
|
|
|
1 |
|
|
|
(1
|
) |
Net
benefit expense (income)
|
|
$ |
(2 |
) |
|
$ |
(2 |
) |
Pension
Benefits
Because
the cost of providing retirement benefits under a defined benefit structure has
become increasingly uncertain due to changes in discount rates and the
volatility in the stock market, we amended our U.S. qualified and non-qualified
pension plans in 2003 covering all salary and hourly employees not covered by
collective bargaining agreements to discontinue benefit accruals for salary
increases and services rendered after September 30, 2006 (the Pension
Amendment). Concurrently, we replaced this benefit by supplementing
our existing defined contribution savings plan to include an additional company
contribution effective October 1, 2006. We believe this benefit
structure achieves our objective of providing benefits that are valued by our
employees and enable more consistency and predictability in estimating future
costs and funding requirements over the long term.
Defined
benefit pension income for the full year 2009 is expected to be $17 million
compared to defined benefit pension income of $3 million for the full year
2008. The change is due primarily to the favorable impact of an
increase in the defined benefit pension plan valuation discount rate from 6.6
percent in 2008 to 7.6 percent in 2009 used to measure our pension
expense.
Our
objective with respect to the funding of our pension plans is to provide
adequate assets for the payment of future benefits. Pursuant to this
objective, we will fund our pension plans as required by governmental
regulations and make discretionary contributions as conditions
warrant. We made a contribution of $75 million to our U.S.
qualified pension plan in January 2009. As a result of this
contribution, we do not anticipate being required to make any further
contributions to our U.S. qualified pension plan by governmental regulations in
2009. Contributions to our international plans and our U.S.
non-qualified plan are expected to total $13 million in 2009. For the
three months ended December 31, 2008 and 2007, we made contributions to our
international plans and our U.S. non-qualified pension plan of $4 million and $2
million, respectively.
The
recent turmoil in the financial markets has had a significant impact on the
funded status of our pension plans. Our pension expense (income) is
significantly impacted by the market performance of our pension plan assets, our
expected long-term return on plan assets, and the discount rates used to
determine our pension obligations. If our pension plan assets don't
achieve positive rates of return consistent with our long-term plan asset return
assumptions or if discount rates trend down, we may experience unfavorable
changes in our pension expense and could be required to make significant
contributions to our U.S. qualified pension plan. While we
believe the actions we have taken under the Pension Amendment have had a
positive affect on pension expense (income) and future funding requirements, our
plan assets and discount rates are significantly impacted by changes in the
financial markets.
Other
Retirement Benefits
We expect
Other Retirement Benefits expense of approximately $4 million for the full year
2009 compared to the full year 2008 income of $2 million, primarily due to the
elimination of favorable amortization for a plan amendment that will no longer
benefit other retirement benefits expense (income).
Income
Taxes
At the
end of each interim reporting period we make an estimate of the annual effective
income tax rate. Tax items included in the annual effective tax rate
are pro-rated for the full year and tax items discrete to a specific quarter are
included in the effective 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 tax
rate and the statutory tax rate is primarily the result of the tax benefits
derived from the Federal Research and Development Tax Credit (Federal R&D
Tax Credit), which provides a tax benefit 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, 2008 and 2007, our effective income tax rate
was 32.0 percent and 33.6 percent, respectively. The lower effective
income tax rate for the three months ended December 31, 2008 was primarily due
to differences in the availability of Federal R&D Tax Credits during each
period. The Federal R&D Tax Credit expired December 31,
2007. On the last day of our 2008 fiscal year, the Emergency Economic
Stabilization Act of 2008 was enacted, which retroactively reinstated and
extended the Federal R&D Tax Credit from January 1, 2008 to December 31,
2009. The effective tax rate for the three months ended December 31,
2008 reflects a full year benefit from the Federal R&D Tax Credit in the
estimate of the annual effective tax rate. The effective tax rate for
the three months ended December 31, 2007 reflects an unfavorable impact of lower
R&D Tax Credits as a result of pro-rating the three months of available
R&D Tax Credits over the full 2008 fiscal year.
The
effective tax rate for the three months ended December 31, 2008 and December 31,
2007 both include a tax benefit related to the DMD. The DMD tax
benefit available in fiscal year 2009 and fiscal year 2008 is two-thirds of the
full benefit that will be available in fiscal year 2011.
For 2009,
our projected effective income tax rate is expected to be in the range of 31.5
percent to 32.5 percent.
Outlook
A summary
of our 2009 anticipated results is as follows:
|
·
|
Total
revenues of about $4.70 billion
|
|
·
|
Diluted
earnings per share in the range of $4.10 to
$4.30
|
|
·
|
Cash
flow from operations in the range of $675 million to $725
million
|
|
·
|
R&D
expenditures of about $900 million, or about 19 percent of
sales
|
Our 2009
anticipated results assume the market conditions for our Government Systems
business and the air transport portion of our Commercial Systems business will
continue to track to previously provided guidance over the balance of
2009. However, we have seen a significant deterioration in business
aviation market conditions. As a result of announced and anticipated
production cuts at our OEM customers as well as further reductions in business
aircraft utilization, we have reflected lower Commercial Systems sales in our
2009 full-year forecast from previously reported guidance.
The
projected 2009 cash provided by operating activities range includes a $75
million contribution to the U.S. qualified defined benefit pension plan, which
was contributed in January 2009.
FINANCIAL
CONDITION AND LIQUIDITY
|
Cash
Flow Summary
Operating
Activities
(in
millions)
|
|
Three
Months Ended
|
|
|
|
December
31
|
|
|
|
2008
|
|
|
2007
|
|
Cash
provided by operating activities
|
|
$ |
21 |
|
|
$ |
32 |
|
The
decrease in cash provided by operating activities during the three months ended
December 31, 2008 compared to the same period last year was primarily due to the
timing of payments on accounts payable and employee payroll-related liabilities
and a lower level of advance payments from customers, partially offset by
collections on accounts receivable and the benefit of an income tax refund
received for the three months ended December 31, 2008 compared to net income tax
payments in the same period a year ago.
Investing
Activities
(in
millions)
|
|
Three
Months Ended
|
|
|
|
December
31
|
|
|
|
2008
|
|
|
2007
|
|
Cash
used for investing activities
|
|
$ |
(73 |
) |
|
$ |
(46 |
) |
The
increase in cash used for investing activities was primarily due to the November
2008 acquisition of SEOS for $28 million.
Property
additions were $45 million and $43 million for the three months ended December
31, 2008 and December 31, 2007, respectively. We expect capital
expenditures for the full year 2009 to be approximately $150 million compared to
full year 2008 capital expenditures of $171 million.
Financing
Activities
(in
millions)
|
|
Three
Months Ended
|
|
|
|
December
31
|
|
|
|
2008
|
|
|
2007
|
|
Cash
provided by / (used for) financing activities
|
|
$ |
76 |
|
|
$ |
(50 |
) |
The
change in cash provided by / (used for) financing activities during the three
months ended December 31, 2008 was primarily due to a $183 million decrease in
the amount of treasury share repurchases as a result of the accelerated share
repurchase agreement executed in the three months ended December 31,
2007. This change was partially offset by a $36 million decrease in
financing cash flows related to short-term borrowings and $12 million in higher
dividend payments.
Liquidity
In
addition to cash provided by normal operating activities, we utilize a
combination of short-term and long-term debt to finance operations. Our primary
source of short-term liquidity is through borrowings in the commercial paper
market. Our access to that market is facilitated by the strength of our credit
ratings and an $850 million committed credit facility with several banks
(Revolving Credit Facility). Our current ratings as provided by Moody’s
Investors Service, Standard & Poor’s and Fitch, Inc. are A-1 / A / A,
respectively, for long-term debt and P-1 / A-1 / F-1, respectively, for
short-term debt. All three agencies have stable outlooks on our
credit rating.
Under our
commercial paper program, we may sell up to $850 million face amount of
unsecured short-term promissory notes in the commercial paper market. The
commercial paper notes may bear interest or may be sold at a discount and have a
maturity of not more than 364 days from time of issuance. Borrowings under the
commercial paper program are generally used for working capital needs and other
general corporate purposes. To date, our commercial paper program has
not been impacted by the global credit crisis as our investment grade ratings
have enabled uninterrupted access to the commercial paper markets. If
our credit ratings were to be adjusted downward by the rating agencies, the
implications of such actions could include impairment or elimination of our
access to the commercial paper markets and an increase in the cost of
borrowing. In the event that our access to the commercial paper
markets is impaired in the future, we have access to an $850 million Revolving
Credit Facility and are eligible to participate in the Federal Reserve
Commercial Paper Funding Facility (CPFF) up to a maximum of $490
million. The CPFF program is currently set to expire on April 30,
2009. In addition, alternative sources of funding could include funds
available from the issuance of securities and potential asset securitization
strategies.
At
December 31, 2008 short-term commercial paper borrowings outstanding were $432
million with a weighted average interest rate and maturity period of 0.75
percent and 34 days, respectively.
Our
Revolving Credit Facility consists of an $850 million five-year unsecured
revolving credit agreement entered into on May 24, 2005 and amended in 2007 to
extend the term to 2012, with options to further extend the term for up to two
one-year periods and/or increase the aggregate principal amount up to $1.2
billion. These options are subject to the approval of the
lenders. The Revolving Credit Facility exists primarily to support
our commercial paper program, but is available to us in the event our access to
the commercial paper market is impaired or eliminated. Our only
financial covenant under the Revolving Credit Facility requires that we maintain
a consolidated debt to total capitalization ratio of not greater than 60
percent, excluding the accumulated other comprehensive loss equity impact
related to defined benefit retirement plans. Our debt to total
capitalization ratio at December 31, 2008 was 25 percent. The
Revolving Credit Facility contains covenants that require us to satisfy certain
conditions in order to incur debt secured by liens, engage in sale/leaseback
transactions, or merge or consolidate with another entity. The
Revolving Credit Facility does not contain any rating downgrade triggers that
would accelerate the maturity of our indebtedness. We had no
borrowing at December 31, 2008 under our Revolving Credit
Facility. In addition short-term credit facilities available to
foreign subsidiaries amounted to $59 million as of December 31, 2008, of which
$28 million was utilized to support commitments in the form of letters of
credit. There are no significant commitment fees or compensating balance
requirements under any of our credit facilities. There were $9
million of short-term borrowings outstanding under our foreign subsidiaries
credit facilities as of December 31, 2008.
In
addition to our credit facilities and commercial paper program, we have a shelf
registration statement filed with the Securities and Exchange Commission
pursuant to which we can publicly offer and sell securities from time to
time. This shelf registration covers an unlimited amount of debt
securities, common stock, preferred stock or warrants that may be offered in one
or more offerings on terms to be determined at the time of sale.
On
November 20, 2003, we issued $200 million of debt due December 1, 2013 (the
Notes). The Notes contain covenants that require us to satisfy certain
conditions in order to incur debt secured by liens, engage in sale/leaseback
transactions, or merge or consolidate with another entity. In
addition, during June 2006 we entered into a five-year unsecured variable rate
loan facility agreement for 20.4 million euros ($25 million). Our
outstanding variable rate loan facility agreement contains customary loan
covenants, none of which are financial covenants. Failure to comply
with customary covenants or the occurrence of customary events of default
contained in the agreement would require the repayment of any outstanding
borrowings under the agreement. As of December 31, 2008, 17 million
euros ($24 million) was outstanding under our variable rate loan facility
agreement. The Company is in compliance with all debt covenants at
December 31, 2008.
For
information related to environmental claims, remediation efforts and related
matters, see Note 18 of the condensed consolidated financial
statements.
CRITICAL
ACCOUNTING POLICIES |
Preparation
of the Company's financial statements in accordance with accounting principles
generally accepted in the United States of America requires management of
Rockwell Collins to make estimates, judgments, and assumptions that affect our
financial condition and results of operations that are reported in the
accompanying condensed consolidated financial statements as well as the related
disclosure of assets and liabilities contingent upon future
events. The critical accounting policies used in preparation of the
Company’s financial statements are described in Management's Discussion and
Analysis in the Company's Annual Report on Form 10-K for the year ended
September 30, 2008. Actual results in these areas could differ from management's
estimates.
This
quarterly report contains statements, including certain projections and business
trends, that are forward-looking statements as defined in the Private Securities
Litigation Reform Act of 1995. Actual results may differ materially
from those projected as a result of certain risks and uncertainties, including
but not limited to the health of the global economy and the commercial aerospace
industry; the continued deterioration in economic and financial
market conditions, including the impact of credit tightening; the financial
condition of our customers (including major U.S. airlines); delays related to
the award of domestic and international contracts; the continued support for
military transformation and modernization programs; the impact of the global war
on terrorism on U.S. government military procurement expenditures and budgets;
changes in domestic and foreign government spending, budgetary and trade
policies adverse to our businesses; market acceptance of our new and existing
technologies, products and services; reliability of and customer satisfaction
with our products and services; favorable outcomes on or potential cancellation
or restructuring of contracts, orders or program priorities by our customers;
customer bankruptcies and profitability; recruitment and retention of qualified
personnel; regulatory restrictions on air travel due to environmental concerns;
performance of our suppliers and subcontractors; risks inherent in development
and fixed price contracts, particularly the risk of cost overruns; risk of
significant reduction to air travel or aircraft capacity beyond our forecasts;
our ability to execute to our internal performance plans such as our
productivity improvement and cost reduction initiatives; achievement of our
acquisition and related integration plans; continuing to maintain our planned
effective tax rates; our ability to develop contract compliant systems and
products on schedule and within anticipated cost estimates; risk of fines and
penalties related to noncompliance with export control regulations; risk of
asset impairments and government claims related to our pension plan freeze; our
ability to win new business and convert those orders to sales within the fiscal
year in accordance with our annual operating plan; and the uncertainties of the
outcome of litigation, as well as other risks and uncertainties, including but
not limited to those detailed herein and from time to time in our Securities and
Exchange Commission filings. These forward-looking statements are made only as
of the date hereof.
Item
3. Quantitative
and Qualitative Disclosures about Market Risk
Interest
Rate Risk
In
addition to using cash provided by normal operating activities, we utilize a
combination of short-term and long-term debt to finance operations. Our
operating results and cash flows are exposed to changes in interest rates that
could adversely affect the amount of interest expense incurred and paid on debt
obligations in any given period. In addition, changes in interest
rates can affect the fair value of our debt obligations. Such changes
in fair value are only relevant to the extent these debt obligations are settled
prior to maturity. We manage our exposure to interest rate risk by
maintaining an appropriate mix of fixed and variable rate debt and when
considered necessary, we may employ financial instruments in the form of
interest rate swaps to help meet this objective.
At
December 31, 2008, we had $200 million of 4.75 percent fixed rate long-term debt
obligations outstanding with a carrying value of $211 million and a fair value
of $200 million. We converted $100 million of this fixed rate debt to
floating rate debt bearing interest at six-month LIBOR less 7.5 basis points by
executing “receive fixed, pay variable” interest rate swap
contracts. A hypothetical 10 percent increase or decrease in average
market interest rates would have decreased or increased the fair value of our
long-term debt, exclusive of the effects of the interest rate swap contracts, by
$1 million and $1 million, respectively. The fair value of the $100
million notional value of interest rate swap contracts was an $11 million asset
at December 31, 2008. A hypothetical 10 percent increase or decrease
in average market interest rates would decrease or increase the fair value of
our interest rate swap contracts by $1 million and $1 million,
respectively. At December 31, 2008, we also had $24 million of
variable rate long-term debt outstanding and variable rate short-term borrowings
of $441 million. Our results of operations are affected by changes in
market interest rates related to variable rate debt. Inclusive of the
effect of the interest rate swaps, a hypothetical 10 percent increase or
decrease in average market interest rates would not have a material effect on
operations or cash flows. For more information related to outstanding
debt obligations and derivative financial instruments, see Notes 10 and 16 in
the condensed consolidated financial statements.
Foreign
Currency Risk
We
transact business in various foreign currencies which subjects our cash flows
and earnings to exposure related to changes to foreign currency exchange
rates. We attempt to manage this exposure through operational
strategies and the use of foreign currency forward exchange contracts (foreign
currency contracts). All foreign currency contracts are executed with
banks we believe to be creditworthy and are denominated in currencies of major
industrial countries. The majority of our non-functional currency firm and
anticipated receivables and payables are hedged using foreign currency
contracts. It is our policy not to manage exposure to net investments
in foreign subsidiaries or enter into derivative financial instruments for
speculative purposes. Notional amounts of outstanding foreign
currency forward exchange contracts were $353 million and $218 million at
December 31, 2008 and September 30, 2008, respectively. Notional
amounts are stated in U.S. dollar equivalents at spot exchange rates at the
respective dates. Principal currencies that are hedged include the
European euro, British pound sterling, and Japanese yen. The duration
of foreign currency contracts is generally five years or less. The
net fair value of these foreign currency contracts at December 31, 2008 and
September 30, 2008 were net liabilities of $7 million and $2 million,
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 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, 2008, 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, 2008 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, 2008 through October 31, 2008
|
|
|
450,000 |
|
|
$ |
36.69 |
|
|
|
450,000 |
|
$148
million
|
November
1, 2008 through November
30, 2008
|
|
|
410,000 |
|
|
$ |
32.22 |
|
|
|
410,000 |
|
$135
million
|
December
1, 2008 through December
31, 2008
|
|
|
360,000 |
|
|
$ |
36.57 |
|
|
|
360,000 |
|
$122
million
|
Total
|
|
|
1,220,000 |
|
|
$ |
35.15 |
|
|
|
1,220,000 |
|
$122
million
|
1 On
November 13, 2007 our Board authorized the repurchase of an additional $500
million of our common stock. This authorization has no stated
expiration.
Item
6. |
Exhibits |
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(a)
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Exhibits
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12
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Computation
of Ratio of Earnings to Fixed Charges for the three months ended December
31, 2008.
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31.1
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Certification
by Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934.
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31.2
|
Certification
by Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934.
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32.1
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Certification
by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxlay Act of
2002.
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32.2
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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.
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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.
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ROCKWELL COLLINS,
INC. |
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(Registrant)
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Date: February
3, 2009
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By:
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/s/ M.
A. Schulte |
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M.
A. Schulte |
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Vice President, Finance and
Controller |
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(Principal
Accounting Officer) |
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Date: February
3, 2009
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By:
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/s/ G.
R. Chadick |
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G. R.
Chadick |
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Senior Vice President, |
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General Counsel and
Secretary |
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