Rockwell Collins reports Q3 2017 financial results
"This was another good quarter of operating performance underscored by strong cash flow generation," said Rockwell Collins Chairman, President, and Chief Executive Officer, Kelly Ortberg. "We realized revenue growth across all of our segments, and achieved strong operating margins across the entire business."
Ortberg continued, "I'm pleased to welcome the B/E Aerospace team and we continue to be excited about the newly combined company. Integration is progressing well and I'm increasingly confident in our ability to exceed our $160 million cost synergy target. We are making progress on revenue synergies, which will create additional opportunities to our acquisition business case."
Following is a discussion of fiscal year 2017 third quarter sales and earnings for each business segment.
Interior Systems
Interior Systems, which supplies a comprehensive portfolio of cabin interior products and services to aircraft manufacturers and airlines worldwide, achieved 2017 third quarter results as summarized below.
B/E Aerospace, which was acquired on April 13, 2017, represents the entirety of the Interior Systems segment and contributed $695 million of sales and $80 million of operating earnings to third quarter of 2017. Interior Systems operating earnings for the third quarter of 2017 includes $46 million of intangible asset amortization expense.
On a pro-forma basis, sales for Interior Systems increased 9 percent in the third quarter compared to the same period in the prior year. The increase in pro-forma sales was primarily attributable to increased original equipment deliveries for Airbus A350 galleys, Boeing 737 advanced lavatories, as well as oxygen systems across multiple platforms.
Commercial Systems
Commercial Systems, which provides aviation electronics systems, products and services to air transport, business and regional aircraft manufacturers and airlines worldwide, achieved 2017 third quarter results as summarized below.
- Original equipment sales increased due to higher product deliveries in support of Airbus A350, Boeing 737, and Bombardier CSeries rate increases, partially offset by lower legacy wide-body and business aircraft OEM production rates.
- Aftermarket sales increased due to higher used aircraft equipment sales of $24 million, higher regulatory mandate upgrade sales, and higher spares provisioning.
- Commercial Systems operating earnings increased $3 million and operating margin declined 110 basis points over the prior year as increased earnings from higher sales volume were tempered by low margin used equipment sales and higher amortization of pre-production engineering costs.
Government Systems
Government Systems provides a broad range of electronic products, systems and services to customers including the U.S. Department of Defense, other government agencies, civil agencies, defense contractors and ministries of defense around the world. Results from the third quarter of 2017 are summarized below.
- Avionics sales decreased due to lower deliveries for various fighter platforms as a result of production issues, the wind-down of legacy tanker hardware deliveries, and lower rotary wing sales, partially offset by higher development program sales.
- Communication and Navigation sales increased due to higher legacy communication product deliveries, higher deliveries of GPS-related products, and higher test and training range sales.
- Operating earnings and operating margin increased due to higher sales volume and favorable sales mix, partially offset by higher incentive compensation costs.
Information Management Services
Information Management Services (IMS) provides communication services, systems integration and security solutions across the aviation, airport, rail and nuclear security markets. Results from the third quarter of 2017 are summarized below.
- IMS sales increased due to 9 percent growth in aviation related revenues driven by increased usage of connectivity services. In addition, non-aviation revenues increased 10 percent due primarily to increased nuclear security mandate revenue.
- IMS operating earnings and operating margin increased due to higher sales volume and the favorable resolution of certain prior claims associated with international business jet support services.
Corporate and Financial Highlights
Income Taxes
The company's effective income tax rate on GAAP earnings was 19.0% for the third quarter of fiscal year 2017 compared to a rate of 13.4% for the same period last year. The prior year effective income tax rate on GAAP earnings was impacted by the release of a $41 million valuation allowance related to a U.S. capital loss carryforward. The current year effective income tax rate was impacted by a lower estimated effective tax rate, which applies to year-to-date earnings, due to the jurisdictional mix of income as a result of the B/E Aerospace acquisition. The company's effective income tax rate on adjusted earnings was 27.1% in the third quarter, compared to 14.4% in the prior year. See the supplemental schedule included in this press release for a reconciliation between GAAP earnings and adjusted earnings.
Cash Flow
Cash provided by operating activities from continuing operations was $416 million for the first nine months of fiscal year 2017, compared to $223 million in the first nine months of fiscal year 2016. The increase in cash provided by operating activities was due primarily to higher cash collections from customers, partially offset by higher production inventory and other operating costs, higher income tax payments and B/E Aerospace acquisition-related expenses.
The Company paid a dividend on its common stock of 33 cents per share, or $54 million, in the third quarter of 2017.
Fiscal Year 2017 Outlook
The following table is an updated summary of the company's financial guidance for continuing operations for fiscal year 2017. This guidance is based on a preliminary purchase price allocation for the B/E Aerospace acquisition completed on April 13, 2017, and is subject to potential adjustments that could be material to the guidance presented below. In addition, this guidance is based on the weighted average common shares for fiscal year 2017, which includes the issuance of 31.2 million shares of Rockwell Collins' common stock on April 13, 2017 in connection with the acquisition of B/E Aerospace. Due to the timing of the share issuance, the earnings per share impact of the acquisition of B/E Aerospace will be different in our annual results compared to our quarterly results.
Non-GAAP Financial Information
Total segment operating margin is a non-GAAP measure and is reconciled to the related GAAP measure, Income from continuing operations before income taxes, in the Segment Sales and Earnings Information schedule in this press release. Total segment operating margin is calculated as total segment operating earnings divided by total sales. The non-GAAP total segment operating margin information included in this disclosure is believed to be useful to investors' understanding by excluding certain expenses we believe are not relevant to investors' assessment of our operating results.
See also the supplemental schedule included in this press release for a reconciliation of other non-GAAP measures including free cash flow, adjusted earnings, and income tax rate on adjusted earnings.
Conference Call and Webcast Details
Rockwell Collins Chairman, President and CEO, Kelly Ortberg, and Senior Vice President and CFO, Patrick Allen, will conduct an earnings conference call at 9:00 a.m. Eastern Time on July 28, 2017. Individuals may listen to the call and view management's supporting slide presentation on the Internet at www.rockwellcollins.com. Listeners are encouraged to go to the Investor Relations portion of the web site at least 15 minutes prior to the call to download and install any necessary software. The call will be available for replay on the Internet at www.rockwellcollins.com.
Business Highlights
Rockwell Collins selected by Airbus for FOMAX program to digitally connect A320 aircraft and operators
Rockwell Collins was selected by Airbus for the flight operations and maintenance exchanger (FOMAX) program on the Airbus A320 family of aircraft. This solution will keep operators connected to their aircraft by deploying the infrastructure for secure wireless connectivity.
Rockwell Collins’ Kelly Ortberg named a Highest Rated CEO by Glassdoor
Rockwell Collins’ Chairman, President and CEO Kelly Ortberg won a Glassdoor Employees’ Choice Award recognizing the 100 Highest Rated CEOs in large U.S. companies for 2017.
Rockwell Collins and Comlux Aviation sign letter of intent to provide complete cabin solution for VIP aircraft
Rockwell Collins signed a letter of intent with Comlux, a leader in services for VIP aircraft, to provide complete cabin solutions for a number of select VIP aircraft under a global cooperation agreement. The deal includes Rockwell Collins’ Venue™ cabin management system, VIP seating, divans, Nano 3X™ interior lighting and the option for Inmarsat Jet ConneX service for Wi-Fi connectivity.
Airbus recognized Rockwell Collins as a top performer for avionics support
Rockwell Collins was named by Airbus as one of the top performing suppliers in support of Airbus and its customer airlines. The company received an Excellent In-Service Performance award and was honored at a special ceremony at the Paris Air Show.
Rockwell Collins selected by DARPA to apply cybersecurity technology to new platforms
The Defense Advanced Research Projects Agency (DARPA) selected Rockwell Collins to use mathematics-based development methods to secure platforms against cyber attack. These techniques, developed by Rockwell Collins and its partners in DARPA’s High Assurance Cyber Military Systems program, ensure cyber resilience by eliminating important classes of system vulnerabilities.
Canada selected Rockwell Collins’ Android™-based Joint Fires solution
The Canadian Army selected Rockwell Collins’ joint-fires solution for its Digitally-Assisted Close Air Support system to digitally link airborne platforms and ground-based Joint Terminal Attack Controllers via an Android smartphone.
Korea Airports Corporation selected Rockwell Collins passenger processing solution for 14 airports
Korea Airports Corporation selected Rockwell Collins’ ARINC vMUSE common use passenger processing solution for 14 South Korean airports.
Rockwell Collins selected by Air France-KLM to provide visual systems for new 787 Dreamliner and five existing flight simulators
Air France-KLM selected Rockwell Collins to provide its visual systems for a new Boeing 787 Dreamliner simulator and upgrades to their existing flight training devices. The Rockwell Collins systems include the industry-leading EP®-8100 image generator, laser-illuminated projectors, and a Panorama™ collimated display.
Rockwell Collins DispatchSM 100 avionics maintenance and support program selected by Singapore Airlines
Singapore Airlines selected Rockwell Collins’ DispatchSM 100 avionics support and asset and maintenance management program for its Airbus A350 fleet. Under the agreement, Rockwell Collins will provide Singapore Airlines with guaranteed spares availability, technical support, repairs and performance monitoring on Rockwell Collins’ comprehensive suite of avionics systems.
About Rockwell Collins
Rockwell Collins (NYSE: COL) is a leader in aviation and high-integrity solutions for commercial and military customers around the world. Every day we help pilots safely and reliably navigate to the far corners of the earth; keep warfighters aware and informed in battle; deliver millions of messages for airlines and airports; and help passengers stay connected and comfortable throughout their journey. As experts in flight deck avionics, cabin electronics, cabin interiors, information management, mission communications, and simulation and training, we offer a comprehensive portfolio of products and services that can transform our customers' futures. To find out more, please visit www.rockwellcollins.com.
Safe Harbor Statement
This press release contains statements, including statements regarding certain projections, business trends, and the impact of the acquisition of B/E Aerospace that are forward-looking statements 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 the financial condition of our customers and suppliers, including bankruptcies; the health of the global economy, including potential deterioration in economic and financial market conditions; adjustments to the commercial OEM production rates and the aftermarket; the impacts of natural disasters and pandemics, including operational disruption, potential supply shortages and other economic impacts; cybersecurity threats, including the potential misappropriation of assets or sensitive information, corruption of data or operational disruption; delays related to the award of domestic and international contracts; delays in customer programs, including new aircraft programs entering service later than anticipated; the continued support for military transformation and modernization programs; potential impact of volatility in oil prices, currency exchange rates or interest rates on the commercial aerospace industry or our business; the impact of terrorist events, regional conflicts, or government sanctions on other nations on the commercial aerospace industry; changes in domestic and foreign government spending, budgetary, procurement and trade policies adverse to our businesses; market acceptance of our new and existing technologies, products and services; reliability of and customer satisfaction with our products and services; potential unavailability of our mission-critical data and voice communication networks; unfavorable outcomes on or potential cancellation or restructuring of contracts, orders or program priorities by our customers; recruitment and retention of qualified personnel; regulatory restrictions on air travel due to environmental concerns; effective negotiation of collective bargaining agreements by us, our customers, and our suppliers; performance of our customers and subcontractors; risks inherent in development and fixed-price contracts, particularly the risk of cost overruns; risk of significant reduction to air travel or aircraft capacity beyond our forecasts; our ability to execute to internal performance plans such as restructuring activities, productivity and quality improvements and cost reduction initiatives; continuing to maintain our planned effective tax rates; our ability to develop contract compliant systems and products on schedule and within anticipated cost estimates; risk of fines and penalties related to noncompliance with laws and regulations including compliance requirements associated with U.S. Government work, export control and environmental regulations; risk of asset impairments; our ability to win new business and convert those orders to sales within the fiscal year in accordance with our annual operating plan; the uncertainties of the outcome of lawsuits, claims and legal proceedings; failure to realize the anticipated benefits of the acquisition of B/E Aerospace, including as a result of delay in integrating the businesses of Rockwell Collins and B/E Aerospace; risk to the ability of the combined company to implement its business strategy; as well as other risks and uncertainties, including but not limited to those detailed herein and from time to time in our Securities and Exchange Commission filings. These forward-looking statements are made only as of the date hereof and the company assumes no obligation to update any forward-looking statement.
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