Rockwell Collins Inc. (COL), a supplier of avionics and military equipment, outpaced the Zacks Consensus Estimate of 87 cents with earnings of 93 cents per share in the second quarter of 2010 ending March 31, 2010. However, earnings per share shrunk 10 cents compared with the prior-year quarter.
Rockwell Collins’ fortunes are tied to the cyclical commercial aerospace market, which is currently undergoing a lean phase. Recently, the commercial aerospace market has witnessed a tepid demand for air travel and cargo services. This has led to a slew of commercial airlines cancelling or deferring their fleet expansion.
Operational Performance
Rockwell Collins’ total sales rose marginally by 0.4% to $1.142 billion compared with sales of $1.138 billion in the year-ago quarter. Incremental sales from the acquisition of DataPath and Air Routing contributed $87 million of revenue growth. The year-over-year organic revenue decline of $83 million resulted primarily from a continued weakness in business and regional jet original equipment manufacturer (OEM) revenues, lower commercial aerospace aftermarket revenues and a decline in sales of Defense Advanced GPS Receivers (DAGRs).
Total quarterly segmental operating margins were 19.2% compared with 22.4% in the year-ago period. Overall, Rockwell Collins reported a net income of $148 million, a decrease of $16 million, or 10% as compared with the year-ago quarter.
Segmental Performance
Government Systems: Government Systems sales climbed 13% or $80 million to $693 million as compared with the prior-year quarter. Incremental sales from the acquisition of DataPath contributed $78 million of revenue growth.
By product category, airborne solutions sales increased $24 million, or 6%, to $455 million year-over-year. This was due to higher revenues related to tanker, transport and special mission aircraft programs, partially offset by lower revenues on fighter jet programs. Surface solutions sales increased $56 million, or 31%, to $238 million. DataPath sales contributed $78 million to revenue growth, while organic sales declined $22 million primarily due to lower sales for the DAGR program.
Government Systems operating earnings increased 3% to $150 million, resulting in an operating margin of 21.6%, compared with operating earnings of $145 million, or an operating margin of 23.7%, in the year-ago quarter. The increase in operating earnings was primarily the result of higher sales volume, while operating margins declined due to higher employee compensation and pension expenses and an increase in company funded R&D expense.
Commercial Systems: Commercial Systems’ sales decreased $76 million or 14% to $449 million, compared with $525 million in the year-ago quarter. Incremental sales from the acquisition of Air Routing contributed $9 million of revenue growth.
By Product Category
Sales related to air transport aviation electronics decreased $8 million or 3% year-over-year to $251 million as lower aftermarket hardware and service revenues and reduced Wide-body IFE product sales. This was partially offset by an increase in air transport OEM sales from higher sales of airline selectable equipment and slightly higher shipset delivery rates to Boeing Company (BA).
Business and regional aviation electronics sales decreased $68 million, or 26% year-over-year to $198 million. Air routing sales contributed $9 million to revenue growth, while organic sales declined $77 million as a result of a reduction in business and regional jet OEM sales from reduced OEM production rates and a reduction in aftermarket hardware sales. This was partially offset by an increase in service revenues.
Commercial Systems’ operating earnings decreased 37% to $69 million in the reported quarter, resulting in an operating margin of 15.4%, compared with operating earnings of $110 million, or an operating margin of 21.0%, in the year-ago period. The decrease in operating earnings and margin was primarily attributable to lower sales volume and higher employee compensation and pension expenses. This was partially offset by lower company funded research and development costs.
Financial Condition
Rockwell Collins ended the quarter with cash and cash equivalents of $246 million. At year-end fiscal 2009 ending on September 30, 2009, the company had $235 million in cash. Long-term debt excluding current maturity was $527 million, versus $532 million at fiscal-end 2009, ending on September 30, 2009.
Rockwell Collins generated $280 million in cash from operating activities in the first half of fiscal 2010 ending on March 31, 2010. At the end of the year-ago period, the company generated $137 million in cash from operating activities.
Outlook
Rockwell Collins has reaffirmed its guidance for fiscal 2010 ending on September 30, 2010. Total sales are expected to be in the range $4.6 billion – $4.8 billion. The company expects operating margins to be in range of 18.5% – 19.5%. Earnings per share are expected to be in the range of $3.35 – $3.55, in line with the Zacks Consensus Estimate of $3.53.
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