Rockwell Collins, Inc. (COL)

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Rockwell Collins (COL)

Q3 2011 Earnings Call

July 22, 2011 9:00 am ET


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

Patrick Allen - Chief Financial Officer and Senior Vice President

Steve Buesing - Vice President of Investor Relations


Kenneth Herbert - Wedbush Securities Inc.

Michael Sang - Morgan Stanley

Cai Von Rumohr - Cowen and Company, LLC

Robert Stallard - RBC Capital Markets, LLC

Howard Rubel - Jefferies & Company, Inc.

George Shapiro - Citi

Joseph Nadol - JP Morgan Chase & Co

Ronald Epstein - BofA Merrill Lynch

Robert Spingarn - Crédit Suisse AG

Jason Gursky - Citigroup Inc

Noah Poponak - Goldman Sachs Group Inc.

Samuel Pearlstein - Wells Fargo Securities, LLC

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

Myles Walton - Deutsche Bank AG

Peter Arment - Gleacher & Company, Inc.

David Strauss - UBS Investment Bank



Good morning, and welcome to the Rockwell Collins Third Quarter Fiscal Year 2011 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, 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 on our website at under the Investor Relations tab. Please note today's presentation and webcast will include certain projections and statements that are forward-looking as defined by 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 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. As I reflect on this quarter, I am reminded of the ancient Chinese curse, may you live in interesting times. Well, this is an interesting quarter in which we achieved 13% earnings per share growth on relatively flat sales. And considering the circumstances, I believe it was great performance. However, to fully appreciate that judgment, you need to understand what happened, so let me try to give some context beginning with Government Systems.

For the past few quarters, I've highlighted risk to that business resulting from the Department of Defense operating under a prolonged continuing resolution. Well, a full measure of that risk was realized in the third quarter, and it was the predominant causal factor of an 11% decline in Government Systems revenue. Specifically, we can trace $53 million in adverse impact to revenue from delays and program funding and award timing. In most cases, we had been selected on the program and are already under contract, but the flow of funding was much slower than anticipated and, therefore, expected revenues were pushed out of the quarter.

In addition to continuing resolution and efficiencies, a re-prioritization in government spending resulted in the cancellation of 3 programs, all of which were at the convenience of the government. One of these contracts was a residual component of the Future Combat Systems program, while the other 2 involved modernization of secure communication systems, where the customers chose to stay with less capable, but more affordable legacy systems. Collectively, $21 million of revenue was lost in the quarter related to those programs.

Now when you couple this total of $74 million resulting from budgetary implications with the top comparable of about $40 million that we had on sales of iForce public safety vehicle systems that we knew going into the quarter, you can easily come to 2 conclusions: one is, we experienced some really bad timing this quarter; and two, the balance of our Government Systems business actually performed very well. As an example of that good performance, we managed to achieve operating margins of 21.1%, an increase of 80 basis points year-over-year, despite an $86 million revenue decline.

We also had some very positive developments this quarter. We received contracts or announced significant positions on the U.S. Air Force KC-46A, the Brazilian KC-390 and most recently, upgrades for the KC-10 tanker fleet. Those, combined with our work on the KC-135 Block 45 upgrade, solidify our long-term position in the tanker market. And in rotary wing platforms, we continue to experience very strong growth, with a 13% increase in sales this quarter and a 28% increase in the year-to-date.

Now I believe that the unusual events that transpired this quarter are mostly transitory, and we're already seeing activity pick up as DOD works to obligate the appropriated funds for FY '11. However, the likely residual impact of these delays and cancellations has caused us to lower Government Systems revenue projections for FY '11 to down 1%.

Now while the market environment was challenging for Government Systems, we had an outstanding quarter in our Commercial Systems business, where we reported a 15% increase in revenue, resulting from both market growth and share gains. And this top line growth translated into a 45% increase in operating earnings and a 420 basis points expansion of operating margins.

Overall, OEM revenues were up 19%, as deliveries on our recently certified Pro Line Fusion flight deck for the Bombardier Global platforms ramped up this quarter, and drove a 26% increase in business in regional jet OEM sales. We also enjoyed continued strength in our aftermarket business, with a robust 15% growth. And most impressively, our air transport portion of the aftermarket really took off with 27% growth. The nondiscretionary revenue from that market grew 17%, while our retrofit and spare sales increased over 50%, albeit on a relatively easy comparable.

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