Rockwell Collins Edged Past Ests - Analyst Blog

Rockwell Collins Inc. (COL), a supplier of avionics and military equipment, barely outpaced the Zacks Consensus Estimate of 88 cents in the third quarter ending June 30, 2010 with earnings of 89 cents per share. However, earnings per share shrunk 3 cents compared with the prior-year quarter.

Operational Performance

Rockwell Collins' total sales rose by 12% or $130 million to $1.2 billion, compared with sales of $1.1 billion in the year-ago quarter. Incremental sales from the acquisition of DataPath (acquired in May 2010) and Air Routing (acquired in January 2010) contributed $43 million to revenue growth. Year-over-year organic revenue increased by $87 million.

Total quarterly operating margins were 18.8%, compared with 21.5% in the year-ago period. Overall, Rockwell Collins reported net income of $142 million, a decrease of $3 million or 2% compared with the year-ago quarter.

Segment Performance

Government Systems:

Government Systems sales climbed 16% or $103 million to $754 million, compared with the prior-year quarter. Incremental sales from the acquisition of DataPath contributed $34 million to the revenue growth.

Government Systems operating earnings decreased 3% year over year to $153 million, or an operating margin of 20.3%, compared to operating earnings of $158 million, or an operating margin of 24.3%. The decrease in operating earnings was primarily the result of higher employee compensation and pension expenses, transition costs related to the San Jose, California facility shut-down and higher research and development expenditures. This was partially offset by the benefit of a favorable contract adjustment, reduction in warranty expenses and incremental earnings on higher revenues. Operating margin was also negatively impacted by lower margins on DataPath revenues.

Commercial Systems:

Commercial Systems' sales increased $27 million or 6% to $460 million, compared with $433 million in the year-ago quarter. Incremental sales from the acquisition of Air Routing contributed $9 million to the revenue growth.

Commercial Systems' operating earnings were flat with the prior year at $75 million, resulting in an operating margin of 16.3%, compared to an operating margin of 17.3% in the year-ago period. The decrease in operating margin was mainly due to higher employee compensation and pension expenses, partially offset by favorable margins on higher sales volume.

Financial Condition

Rockwell Collins ended the quarter with cash and cash equivalents of $303 million, compared to $218 million at the end of the year-ago period. Long-term debt excluding current maturity was $516 million, versus $532 million at fiscal-end 2009, ending on September 30, 2009.

Rockwell Collins generated $440 million cash from operating activities in the first nine months of fiscal 2010 ending on June 30, 2010. At the end of the year-ago period, the company generated $381 million in cash from operating activities. The increase was primarily due to lower payments for employee incentive compensation.

Outlook

Rockwell Collins' fortunes are tied to the cyclical commercial aerospace market, which is currently undergoing a steady recovery. As per Boeing Company's (BA) Current Market Outlook (CMO), the world economy will continue to rebound, growing above the long-term trend in 2010.

Boeing pointed out that airlines will see a rebound in passenger and cargo traffic revenue this year and should return to profitability in 2011. This would come as a welcome relief for Rockwell Collins, as it generated 42% of its fiscal 2009 revenue from aircraft manufacturing, airlines and business jet owners/operators.

The touch of optimism in Rockwell Collins is reflected by the revised upward guidance for fiscal 2010 ending on September 30, 2010. Total sales are now expected to be about $4.7 billion, compared with the earlier guidance range of $4.6 billion – $4.8 billion. Operating margins are now expected to be about 19% in comparison to the earlier guidance range of 18.5% – 19.5%. Earnings per share are now expected around $3.50 from the previous guidance range of $3.35 – $3.55. However this is lower than the Zacks Consensus Estimate of $3.56 for fiscal 2010. We feel this Zacks #2 Rank ('Buy') stock would present a small window of opportunity for investors in the near term (1 to 3 months).

We currently have a long-term (6 months and higher) Neutral recommendation on Rockwell Collins.

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