Rockwell Collins, Inc. (COL)

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Rockwell Collins Inc. (COL)

FQ210 Earnings Call

January 28, 2010 11:00 AM ET

Executives:

Dan Swenson - VP, Investor Relations

Clayton Jones - Chairman, President, and Chief Executive Officer

Patrick Allen - SVP and Chief Financial Officer

Analysts:

Joe Nadol - J.P. Morgan

Unidentified Analyst - Credit Suisse

David Strauss - UBS

Robert Stallard - Macquarie

Heidi Wood - Morgan Stanley

Carter Copeland - Barclays Capital

Myles Walton - Oppenheimer & Company

Presentation:

Operator

Good morning and welcome to the Rockwell Collins First Quarter Fiscal Year 2010 Earnings Conference Call. Today's call is being recorded. For opening remarks and management introduction, I would like to turn the call over to Rockwell Collins’ Vice President of Investor Relations, Dan Swenson. Please go ahead, sir.

Dan Swenson

Thank you and good morning everyone. With me on the line this morning are Rockwell Collins’ Chairman, President and Chief Executive Officer, Clay Jones; and Senior Vice President and Chief Financial Officer, Patrick Allen.

Today's call is being webcast, and you can view the slides we will be presenting today on our website at www.rockwellcollins.com under the Investor Relations tab. Please note today's presentation and webcast will include certain projections and statements that are forward-looking 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 those detailed on the slide two of this webcast presentation and from time-to-time in the company's Securities and Exchange Commission filings. These forward-looking statements are made as of the date hereof, and the company assumes no obligation to update any forward-looking statement.

With that, I'll now turn the call over to Clay.

Clayton Jones

Thanks Dan and good morning everybody.

Well our first quarter played out just about as we predicted which after last year should give us all some comfort. Specifically total revenues were down 3% from the year ago to $1.03 billion, and EPS declined 20% to $0.76. The overall sales reduction was primarily due to the lingering effects of the global recession, which resulted in a 15% decline in Commercial Systems revenues.

Government Systems revenues increased 7%, thanks to incremental sales from the DataPath and SEOS acquisitions as organic revenues declined 4% due to lower DAGR and F22 related revenues and a delay in new program growth associated with order timing and a late passage of the 2010 Defense Appropriations bill.

But there were encouraging results in Q1 as well. Although combined segment operating margins of 19.7% did decline on a year-over-year basis, they were up on a sequential basis despite lower revenues, higher pension expense, and the diluted impact of two new acquisitions.

These margins were realized through careful cost control and were helped by the hard work of our DataPath integration team, which has been very quick to realize some of their cost synergies generating a better than expected margins from that business.

Finally we realized strong operating cash flow in our first quarter of $84 million, a $63 million increase from last year despite the fact that we put $98 million into a discretionary pension contribution in October and the build up of inventory occurring as part of our efforts to relocate the manufacturing we were doing in San Jose to other facilities.

With this first quarter completed, I really do feel that the worst of the recession impact maybe behind it and I remain cautiously optimistic about improvements to the balance of the year. Now to support that statement let me give you a sense of the market conditions as we see them.

In our commercial markets we’re seeing clear signs of stabilization. Looking first at our after market business, indicators continue to support our view of a low single-digit revenue growth for the entire year. In the business jet environment there has been steady improvement in aircraft utilization and with the December data just released, we now have our first positive year-over-year comparison in over 24 months.

Utilization statistics were still down for the quarter as our maintenance and repair service were, as was our maintenance and repair service were. But these stabilizing trends support the potential for growth in the second half.

Additionally, our avionic dealer network has noted an increase in the number of calls for quotes in information on avionics and cabin upgrades. While these calls have not yet translated to sales, they are indicative of operators getting informations to set their budgets in place and present potential future retrofit opportunity.

Within the air transport sector, airline passenger traffic continues to improve, supporting our view of a 2 to 3% growth for calendar year 2010. This passenger traffic growth is currently being absorbed through higher load factors and greater utilization of in-warranty aircraft.

But we expect to see greater overall flight hours of out-of-warranty aircraft and an associated increase in our maintenance and repair business in the second half of the year. However the airlines are still struggling with yields as ticket prices are down approximately 20% year-over-year and of course oil continues as a concern.

These factors will limit the FY10 potential for growth in our retrofit hardware business but remain inline with our guidance. Passenger traffic trends also present the OEM side of Commercial Systems with some good news.

We believe it is providing airlines increasing confidence in their future capacity needs, which could serve to reduce some of the risk that Boeing and Airbus will reduce narrow body production rates at least in our fiscal year.

Read the rest of this transcript for free on seekingalpha.com