Rockwell Collins, Inc. (COL)

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Rockwell Collins (COL)

Q2 2011 Earnings Call

April 21, 2011 9:00 am ET

Executives

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

Steve Buesing -

Steve Buesing - Vice President of Investor Relations

Patrick Allen - Chief Financial Officer and Senior Vice President

Analysts

Robert Stallard - RBC Capital Markets, LLC

Cai Von Rumohr - Cowen and Company, LLC

Jason Gursky - Citigroup

Howard Rubel - Jefferies & Company, Inc.

George Shapiro - Citi

Joseph Nadol - JP Morgan Chase & Co

Heidi Wood - Morgan Stanley

Robert Spingarn - Crédit Suisse AG

Noah Poponak - Goldman Sachs Group Inc.

Samuel Pearlstein - Wells Fargo Securities, LLC

Myles Walton - Deutsche Bank AG

Troy Lahr - Stifel, Nicolaus & Co., Inc.

David Strauss - UBS Investment Bank

Presentation

Operator

Good morning, and welcome to the Rockwell Collins Second Quarter Fiscal Year 2011 Earnings Conference Call. [Operator Instructions] 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, Darla, 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 at 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 included, but not limited to, those detailed on Slide 2 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 statements.

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

Clayton Jones

Thanks, Steve, and good morning, everybody. Well, we're at the mid-point of our fiscal year, and I'm pleased to report another quarter of solid results. Our revenues grew about 7%, with both business segments posting sales increases above our full year growth target. The balance of our business has allowed us to take advantage of the favorable environment in our Commercial market while still posting positive revenue growth in the more challenging Government sector.

We reported strong operating earnings growth as our total operating margins expanded by 60 basis points, demonstrating the operating leverage of our business. This was led by Commercial Systems, which reported an increase in operating earnings of 33% on 13% sales growth. Now if you exclude the impact of a one-time net tax benefit that we realized last year, the second quarter earnings per share increased by 14%.

Now one factor driving our growth is the success we've talked about often in capturing Commercial market share gain. And we're just beginning to realize the benefits of several program wins over the past couple of years, such as the Boeing 787, the Cessna CJ-4 and the Bombardier Global 5000 and Global Express.

So far this year, we've posted 16% growth in total OEM revenue, driven predominantly on the strength of these market share gains. This is especially evident in the business in regional jet market where sales have grown 15%, while OEM aircraft deliveries have been relatively flat compared to last year. Looking ahead, we'll have more new and updated aircraft entering service, providing an annuity of incremental revenue growth for some time to come.

Another strength of our business is how we're positioned to capitalize on areas that are growing faster than the overall market. For example, the Government rotary wing sector continues to provide above-market growth for us, as we reported a 44% increase in sales this quarter from the continued expansion of our Common Avionics Architecture System, or CAAS, cockpit.

The award of the new KC-46 [KC-46A] air refueling tanker to Boeing will enable accelerating revenues in another high-priority growth segment. And we're looking forward to an announcement very soon on the avionics selection for Brazil's new KC-390 tanker transport aircraft being built by Embraer. Now we've been working for some time on winning this important program that would strengthen our position in one of the faster growing military markets.

In Commercial markets, our investments in key retrofit capabilities, including LCD displays, cabin electronics, GPS-enabled approach capability and other enhancements to improve fuel efficiency, have given us good opportunities as airline and business jet discretionary funding has become more available.

This quarter, we had a total aftermarket growth of 15%, which included a robust 25% growth in Retrofit and Spares sales. Past investments in R&D are beginning to pay dividends in both markets by having the capabilities our customers need in an era where cost savings are more important than ever. That said, we would not be able to take full advantage of these opportunities without a focus on program execution.

In our air transport market, we've fully certified all of our products on the Boeing 787 aircraft. We've also recently completed successful acceptance testing in preparation for lab unit deliveries of the information management onboard package of the A350 program.

This is a significant milestone for the program due to the fact that we have doubled the scope of effort from our original offering, while still adhering to the program schedule. Another example is our ARC-210 Gen5 radio, which recently received NSA certification, enabling it to comply with their cryptographic modernization initiative.

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