Rockwell Collins Inc. (COL) reported its third quarter fiscal 2012 earnings results ending June 30, 2012. The company reported adjusted earnings per share of $1.15, in line with our expectation. Earnings were up 13.9% year over year.
Including an adverse impact of 6 cents per share due to the recent bankruptcy and production delays at Hawker Beechcraft and a lower income tax rate benefit of 5 cents, income from continuing operations were $1.14 per share, up 13% year over year.
Operational Performance
Rockwell Collins’ total sales were up 1.26% year over year to $1,205 million. Revenues also surpassed the Zacks Consensus Estimate by $39 million.
Total research and development expenses in the quarter were $201 million, down 11.5% year over year. Segment operating earnings in the quarter under review was $253 million, up 2% year over year from $248 million.
Rockwell Collins reported net income from continuing operations of $166 million, up 5.7% year over year. The company’s earnings per share growth was approximately twice the rate of net income growth attributable to its share repurchase program.
Segmental Performance
Commercial Systems: In the reported period, Commercial Systems sales of $526 million were up 0.76% from $522 million in the previous-year period.
By product category, sales related to aircraft original equipment manufacturers was up 4% year over year to $295 million driven by increased sales to Airbus and The Boeing Company (BA) led by higher production rates of the 787, 737 and A320 aircrafts. However, these positives were partially offset by lower deliveries to Hawker Beechcraft as a result of a temporary production shutdown.
Aftermarket sales at Commercial Systems were down 0.5% year over year to $208 million.
The segment generated operating earnings of $105 million, down $2 million from the comparable year-ago period. Operating margin was 20% versus 20.5% in the year-ago quarter. The decline reflects increased bad debt expense related to the Hawker Beechcraft bankruptcy.
Government Systems: Government Systems sales were $679 million, up 1.65% from $668 million in the third quarter of 2011.
By product category, Avionics sales were up 11.3% year over year to $393 million driven by higher sales of Saudi F-15 fighters and the KC-46, KC-10 and KC-390 tanker programs. Communication product sales increased to $178 million, up 8.5% year over year, driven by higher sales of networked communication and data link products.
Surface solutions sales amounted to $50 million, down from $82 million in the third quarter of 2011 due to the impact of two programs that got terminated in 2011; lower sales on the Joint Precision Approach and Landing System program and reductions in deliveries of optical products for surface based programs. Navigation products sales were $58 million, down 15.9% year over year due to fewer deliveries of Defense Advanced GPS Receiver products.
Segment earnings increased by 4.96% year over year to $148 million. Operating margin was 21.8% versus 21.1% in the year-ago period. The increase reflects lower discretionary spending, partially offset by the absence of a favorable warranty adjustment in the last year.
Financial Condition
At the end of June 30, 2012, cash and cash equivalents were $265 million versus $268 million at the end of June 30, 2011. Long-term debt, net was $778 million versus $514 million as of June 30, 2011.
During the quarter, the company repurchased 3.8 million shares of common stock for $204 million and also increased the share repurchase authorization by $500 million. The company had also increased its dividend by 25% to 30 cents per share in April this year, which was paid in June 2012.
Guidance
The company has revised its guidance due to the slowdown in global economic recovery and the bankruptcy of Hawker Beechcraft, one of the company’s customers. However, the company is confident of long-term term growth as it is looking forward to a number of product launches in the future.
For fiscal 2012, Rockwell Collins lowered its revenue guidance to $4.80 billion versus its previous expectation of $4.85 billion. The company now expects segment operating margin to be 21.5% versus its prior expectation range of 20.5% to 21.5%. It expects earnings to be in the range of $4.40 to $4.50 per share. It expects research & development expenses to be approximately $850 million lower from its prior expectation of $900 million.
Outlook
Rockwell’s share buyback program played an important role in improving its third quarter earnings. The company’s balanced business model and capital deployment strategies provide stability to the shareholders of the company in the current challenging environment.
Moreover, the company’s balanced exposure to commercial and military customers allows it to use government funding to develop products for its communications and avionics market.
However, the U.S. government’s delayed funding authorizations, program execution risk, dependency on international sales, high exposure to fixed price contracts and high research and development overheads are a matter of concern for the company. The company presently retains a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock.
Based in Cedar Rapids, Iowa, Rockwell Collins designs, manufactures, and supports software and hardware solutions for aircraft communication, navigation, signals intelligence, and weapons systems as well as surveillance systems for government, military, and commercial applications.
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