Rockwell Collins, Inc. (COL)

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Rockwell Collins (COL)

Q1 2013 Earnings Call

January 18, 2013 9:00 am ET

Executives

Steve Buesing - Vice President of Investor Relations

Clayton M. Jones - Chairman, Chief Executive Officer and Member of Executive Committee

Patrick E. Allen - Chief Financial Officer and Senior Vice President

Analysts

Carter Copeland - Barclays Capital, Research Division

David E. Strauss - UBS Investment Bank, Research Division

Robert Spingarn - Crédit Suisse AG, Research Division

Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division

Robert Stallard - RBC Capital Markets, LLC, Research Division

Noah Poponak - Goldman Sachs Group Inc., Research Division

Richard Tobie Safran - The Buckingham Research Group Incorporated

Jason M. Gursky - Citigroup Inc, Research Division

Yair Reiner - Oppenheimer & Co. Inc., Research Division

Samuel J. Pearlstein - Wells Fargo Securities, LLC, Research Division

George Shapiro

Joseph B. Nadol - JP Morgan Chase & Co, Research Division

Myles A. Walton - Deutsche Bank AG, Research Division

Howard A. Rubel - Jefferies & Company, Inc., Research Division

Peter J. Arment - Sterne Agee & Leach Inc., Research Division

Kenneth Herbert - Imperial Capital, LLC, Research Division

F. Carter Leake - BB&T Capital Markets, Research Division

Kristine T. Liwag - BofA Merrill Lynch, Research Division

Cai Von Rumohr - Cowen and Company, LLC, Research Division

Presentation

Operator

Good morning, and welcome to the Rockwell Collins First Quarter Fiscal Year 2013 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, Steve Buesing. Please go ahead, sir.

Steve Buesing

Thank you, Bonnie, and good morning, everyone. With me on the line this morning are Rockwell Collins' Chairman 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. Actual results may differ materially from those projected as a result of certain risks and uncertainties, including, but not limited to, those detailed on Slide 2 of this webcast presentation and from time to time, in the Securities and Exchange Commission filings. These forward-looking statements are made as of today, and the company assumes no obligation to update any forward-looking statements.

So with that, I'll turn the call over to Clay.

Clayton M. Jones

Thanks, Steve, and good morning. Everyone who does business with the U.S. Department of Defense has, over the last year, been waiting for the resolution to one of the worst pieces of legislation that I have seen in my adult life, sequestration. And most of you on this call who follow this sector were hoping, if not planning, for the issue to be resolved as part of the fiscal cliff negotiations as 2012 drew to a close. Well, we all know now that didn't happen. And as a result, the shadow that has hung over defense markets persists and, if anything, has gotten darker.

Fortunately, we anticipated this in our initial guidance last September and factored in the impact of sequestration as we believed it could be. As a result, we've already taken numerous actions and are well prepared for whatever happens in the next round of Congressional negotiations.

Now, uncertainly like -- uncertainty like this, which has persisted over the past 4 years and been a prominent part of the markets we serve, both defense and commercial, makes it challenging to both forecast performance and execute to those forecasts, so it should come as no surprise that I'm extremely pleased with the performance in our first fiscal quarter. Despite an expected decline in revenue, we exceeded our internal expectations for EPS, operating margins and cash flow. We were able to do this largely because of the laser focus of our people on the things we can control even as the uncertainty of the market swirls around us. These controllable items include our operating costs, capital deployment, investments and customer relationships.

For example, our operating margins improved year-over-year by 20 basis points and almost 100 basis points above our guidance targets as a result of early restructuring benefits and an exemplary job of our shared services controlling costs. We generated $63 million of positive cash flow in the first quarter, again, ahead of our expectations.

The strong start for cash generation was aided by lower incentive payouts in the period, which was expected. However, we received an equivalent benefit from better working capital management through improvements in areas such as production inventory and advanced customer payments. And with our strong balance sheet and ability to generate predictable cash flow, we once again used those financial assets to return value to shareholders by repurchasing 4% of our stock in the quarter. This brings the share reduction we've achieved just over the past 15 months to 11% as we've taken advantage of what we believe to be a relatively undervalued stock price.

Finally, our investments in new products and technology, along with the strong performance we've demonstrated delivering those products to our customers, has yielded additional success winning programs that will add to our long-term growth prospects.

In the commercial market, we announced a landmark win at Boeing to provide the display systems for their new 737 MAX. And we broadened our international reach by winning a program to install Pro Line Fusion in the cockpit of the AgustaWestland's 609 tilt rotor aircraft.

We were also able to land 2 significant U.S. government awards that will fuel growth over the next several years. The Air Force awarded us the first production lot of the E-6B aircraft upgrade program, and we also received orders for Low Rate Initial Production of the JTRS HMS Manpack program. HMS production ramp-up is underway, and we've already begun delivery of full function radios to the Army.

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