Rockwell Collins, Inc. (COL)

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Rockwell Collins, Inc. (COL)

F2Q10 (Qtr End 03/31/10) Earnings Call Transcript

April 23, 2010 9:00 am ET

Executives

Dan Swenson – VP, IR

Clay Jones – Chairman, President and CEO

Patrick Allen – SVP and CFO

Analysts

Howard Rubel – Jefferies & Company

Cai von Rumohr – Cowen and Company

Robert Stallard – Macquarie

Troy Lahr – Stifel Nicolaus

Ronald Epstein – Banc of America/Merrill Lynch

David Strauss – UBS

George Shapiro – Access 342

Noah Poponak – Goldman Sachs

Robert Spingarn – Credit Suisse

Joe Nadol – JPMorgan

Peter Arment – Broadpoint Gleacher

Heidi Wood – Morgan Stanley

Samuel Pearlstein – Wells Fargo

Joseph Campbell – Barclays Capital

Carter Leake – Davenport & Company

Richard Safran – Buckingham Research

Presentation

Operator

Good morning and welcome to the Rockwell Collins second quarter fiscal year 2010 earnings conference call. Today's call is being recorded.

For opening remarks and management introductions, 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. 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.

Clay Jones

Thanks, Dan and good morning, everybody. Well, consistency has once again become a prevalent and, I might say, very welcome theme at Rockwell Collins. And after what we experienced last year, it feels pretty good as we posted second quarter financial results that were in line with our expectations for the quarter.

Overall revenues came in at $1.14 billion, generally flat with Q2 of 2009 as Government Systems saw strong growth of 13%, which offset the 14% revenue decline within Commercial Systems. Combined segment operating margins of 19.2% continue to be at the upper end of our guidance range, fueled by Government Systems which turned in another quarter of margins near 22% while Commercial Systems saw margins trough at 15.4%.

Primarily influenced by the absorption of year-over-year increases in compensation and pension expenses, second quarter EPS came at $0.93 a share compared to $1.03 a share last year. I feel it's important to note on a sequential basis, we saw increases in revenues, operating profits, and EPS as we move further into the period of recovery in the commercial aerospace market.

We are also very pleased with our operating cash flow performance, which halfway through the year stands at $280 million, well ahead of the $137 million at this point in 2009. Cumulative results for the first half of 2010 compared to our expectations for the second half of 2010, highlight the story of how this year is a tale of two halves. With our first half results in line with expectations, we are forecasting continued improvements in our business and sequential growth in both revenues and operating profit.

In commercial aviation, we see positive indicators in virtually every aspect of the market. Airlines are seeing passenger and cargo traffic grow faster than expected and anyone who has flown commercial recently appreciates the very high load factors being experienced. This is providing a lift to airline profit expectations even though airlines in aggregate still call for losses through this year. However, even with these near-term losses, airlines are looking at their long-term prospects and remain committed to the delivery slots that they've got on order at Boeing and Airbus.

As a result, we've heard announcements from Airbus of an increase in their narrow-body production rates and from Boeing, an increase of their wide-body production rates. These changes won't have a great impact on our 2010 results, but will provide a key lift to what we are beginning to see in 2011. And that's in addition to the production of the 787 and the 7478 aircraft, all of which will be very meaningful for future growth.

Now, these positive trends in passenger traffic also support our expectations for the air transport aftermarket. As expected, we saw service revenues down year-over-year in the first half, but it's important to note that flight hours were still down just over 1% year-to-date versus 2009. More importantly to our business, flight hours on out-of-warranty aircraft were down 4% during this time period. However, as an indication of the direction of the market, our second quarter air transport aftermarket revenues did show sequential growth. And as we look into the second half of 2010, we see positive drivers that continue to provide lift for the discretionary and the non-discretionary aftermarket.

First, tight capacity in the commercial air system has been accommodated through higher utilization of newer in-warranty aircraft. So we believe that this is reaching a point where airlines will begin to increase utilization of older, out-of-warranty aircraft, which should directly benefit our service business.

Second, improved traffic is leading some airlines to expand their route structure, including flights over open water where avionics upgrades are required as part of the equipment to the aircraft and where enhanced navigation capabilities and the more efficient routes they enable could directly benefit airlines operating cost structure.

Now, to date, airlines have been reluctant to set down any aircraft for a length of time to perform these retrofits and upgrade work, but we believe as they expand the investments in avionics upgrades to optimize that potential route structure and operating efficiency will become increasingly more attractive.

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