Rockwell Collins Inc.
) has been awarded a $54 million full rate production contract,
with unexercised options valued at an additional $241 million, by
the U.S. Navy. Per the contract the company will upgrade 11
aircraft as part of the E-6B Block I Modification program.
The Navy E-6B aircraft is used to conduct the "Take Charge and
Move Out" (TACAMO) and the United States Strategic Command
Airborne Command Post missions. The open system solution provided
by the Block I modification addresses immediate modernization
requirements and enables system expansion in the future. The
initial $54 million award covers the procurement of the material,
installation and associated activities for the aircrafts. The
total program includes production engineering support, field
service support, operator and maintenance crew training classes
and maintenance trainer updates.
The Block I Modification being completed by Rockwell Collins
features an open system approach for mission avionics, a Voice
over Internet Protocol Intercommunications System and an
on-aircraft, multi-level secure network for message processing,
radio control/monitoring and other mission applications. The
program also improves the reliability and availability of the
Ultra High Frequency Command, Control and Communication system
and enhances the electrical power and cooling systems.
The Block I Modification solution modernizes the aircraft's
communication infrastructure to support moving data. This
infrastructure will support ever increasing bandwidth demands in
this emerging age of digital battlespace.
Rockwell Collins recently reported its fourth quarter fiscal
2012 results, ending September 30, 2012. In that quarter the
company reported adjusted earnings of $1.32, beating our
expectation of $1.09. Earnings were up 17.0% year over year. GAAP
earnings per share during the fourth quarter were $1.06 versus
$1.02 in the prior-year period. The difference between operating
and GAAP earnings in the fourth quarter was due to a
restructuring and assets impairment charge.
Rockwell Collins' total sales in the fourth quarter of fiscal
2012 were down 2% year over year to $1,266 million. Revenues
missed the Zacks Consensus Estimate of $1,324 million. The
year-over-year decline in revenue was due to lower sales from
Government Systems, marginally offset by higher sales from
During the quarter, sales related to aircraft original
equipment manufacturers were up 15% year over year to $307
million driven by increased sales of Airbus and
The Boeing Company
), resulting from higher production rates of 787, 737 and A320
For fiscal 2013, Rockwell Collins expects total revenue in the
range of $4.60 billion to $4.7 billion. The company expects
segment operating margin between 21.0% and 22%. It expects
earnings in the range of $4.30 to $4.50 per share. The Zacks
Consensus Estimate for the year is at $4.43 per share. It expects
research & development expenses to be approximately $1,000
million, with capital expenditure expected to be about $140
Based in Cedar Rapids, Iowa, Rockwell Collins designs,
manufactures, and supports software and hardware solutions for
aircraft communication, navigation, signals intelligence, and
weapons systems as well as surveillance systems. Going forward,
Rockwell will benefit from the increasing orders for 737 MAX.
Rockwell Collins is the foremost global supplier of
communications and avionics equipment for both commercial and
military customers. The company's balanced exposure to both types
of customers allows the company to use government funding to
develop products for the dual-end market. The dual-end market
leads to higher volume sales, which create economies of scale in
cost-sensitive government contracts. In the near term, the
Surface solutions portfolio will shore up demand from military
customers, while recovery in the business and regional jet market
will boost commercial sales.
However, we expect growth of the business aviation market to
be hampered by a slower global economic recovery. Also, Rockwell
Collins generated 93% of revenues in fiscal 2012 from fixed
priced contracts, exposing the bottom line to cost over-runs. As
a result, the company will be able to make a profit only if costs
stay under the contracted price.
Finally, a large percentage of Rockwell Collins' business is
generated outside the U.S. (33% of sales in fiscal 2012).
However, as most of the company's products are of dual-use
(military and commercial), acceptance of contracts are governed
by laws, regulations and policies of the U.S. government. The
recent performance of the Government Systems segment has been
lackluster given the adverse impact from delayed funding
authorization and termination of certain programs because of
shifting budget priorities.
We have thus maintained our Neutral recommendation on Rockwell
Collins. The company currently retains a Zacks #3 Rank
(short-term Hold recommendation).
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