Rockwell Collins, Inc. (COL)

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Rockwell Collins (COL)

Q1 2012 Earnings Call

January 19, 2012 9:00 am ET

Executives

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

Steve Buesing - Vice President of Investor Relations

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

Analysts

George D. Shapiro - Access 3:42, LLC

Kenneth Herbert - Wedbush Securities Inc., Research Division

Richard Tobie Safran - Buckingham Research Group, Inc.

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

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

Robert Stallard - RBC Capital Markets, LLC, Research Division

Noah Poponak - Goldman Sachs Group Inc., Research Division

Seth M. Seifman - JP Morgan Chase & Co, Research Division

Robert Spingarn - Crédit Suisse AG, Research Division

Jason M. Gursky - Citigroup Inc, Research Division

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

Myles A. Walton - Deutsche Bank AG, Research Division

Troy J. Lahr - Stifel, Nicolaus & Co., Inc., Research Division

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

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

David E. Strauss - UBS Investment Bank, Research Division

Presentation

Operator

Good morning, and welcome to the Rockwell Collins First Quarter Fiscal Year 2012 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 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 including, but not limited to, those detailed on Slide 2 of the webcast presentation and from time to time in the 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.

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

Clayton M. Jones

Thanks, Steve, and good morning, everybody on the line. I'm pleased to report that our first quarter 2012 earnings were in line with our expectations. Sales were down slightly, while segment operating earnings increased by 2%.

Earnings per share decreased $0.09, but prior year results included a $0.13 benefit from the Federal Research and Development Tax Credit when compared to this year. If you adjust for the differences in the R&D tax credit, our earnings per share would have been up 5%.

Now I understand that these headline numbers may look relatively unexciting. But it gets a lot more interesting when you look below the headlines, especially considering some of the market conditions we currently face. For example, in Commercial Systems sales increased 13% in the quarter with a robust 14% growth from both OEM and aftermarket segments. And commercial operating margins expanded 170 basis points, fueled by 41% incremental margins after excluding a favorable customer incentive release recorded last year.

During the first quarter, we realized the benefit from initial 787 and 747-8 spare sales as these 2 new Boeing aircraft entered service. In fact, most of our aftermarket growth in both Commercial segments was the increased spare sales. Now these sales, while traditionally the lumpiest portion of our business, are the type of additional volume that we expect to fuel double-digit aftermarket growth for the full year.

I would also note that this performance was delivered without the benefit of any meaningful overall business jet OEM market recovery.

Now meanwhile, Government Systems was able to maintain their industry-leading operating margins above 20% despite a 10% or $67 million decline in sales. In an environment where our top line has become more difficult to predict, I'm really proud of our team's focus on the things within our control as we continue to take aggressive actions to rightsize the infrastructure of this business based on market conditions.

Now as we've been predicting, we face one more quarter of difficult comparability in Government Systems as the effects of program cancellations and a large slowdown in procurement of our Defense Advanced GPS Receiver play through our top line. However, I am increasingly confident that the significant improvements we forecast for the second half of the fiscal year will happen. And here's why.

We expect sales of the KC-46, KC-10 and KC-390 tanker programs to continue to accelerate through the year, along with the F-15 foreign military sale through Boeing to Saudi Arabia. We should also see growing sales of the fifth generation ARC-210 airborne radio system, as well as increased deliveries of our FireStorm targeting system to international customers.

With the risk of an extending -- extended continuing resolution behind us and our backlog strengthening, we believe Government Systems can achieve mid-single digit growth in the second half of the year.

Now as I look out beyond the current fiscal year, I also see opportunities to accelerate growth in both segments. In Commercial Systems, these include 787 production ramp-up, the introduction of the CSeries, the A350 and multiple international regional jets, and a market recovery for business jets. In Government Systems, I expect selected growth opportunities in areas such as tankers, UAVs, the JTRS HMS program, ARC-210 radios, our next-generation GPS products for the MGUE program and international opportunities, including the Saudi F-15 I mentioned earlier, helicopter retrofits, FireStorm targeting systems, KC-390, C-130 upgrades, and various communication programs.

These long-term growth drivers, coupled with our consistent track record of effectively managing through dynamic market cycles, give me confidence there's a bright future ahead for Rockwell Collins.

So with that, let me turn the call over to Patrick to walk through the financial details. Pat?

Patrick E. Allen

Thanks, Clay. Good morning to everyone as well. I'd now like to walk you through today's presentation slides that summarize our results for the first quarter of 2012.

I'll begin on Slides 3 and 4 where we highlight our total company first quarter sales, EPS, net income and operating cash flow.

Total company sales for the quarter decreased $10 million or 1% compared to last year's sales, while income from continuing operations and earnings per share decreased by 13% and 10%, respectively. The decrease in earnings was primarily driven by a higher effective tax rate, which went from 21.5% last year, up to 33% in 2012.

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