Rockwell Beats, Raises Outlook - Analyst Blog

Rockwell Collins Inc. (COL), the supplier of avionics and military equipment, outpaced the Zacks Consensus Estimate of 87 cents with earnings of 96 cents per share in the first quarter of fiscal year 2011 ending December 31, 2010. Results also comfortably beat the year-ago quarterly earning per share of 76 cents.

Rockwell Collins fortunes are tied to the cyclical commercial aerospace market, which is currently undergoing a recovery phase. Recently, the commercial aerospace market witnessed higher air traffic precipitated by rising demand for air travel and cargo services.

Operational Performance

Rockwell Collins total sales rose by 8% to $1.11 billion in line with the Zacks Consensus Estimate and higher compared to sales of $1.03 billion in the year-ago quarter. The upside was driven by higher sales in both Commercial Systems and Government Systems. Total quarterly segmental operating margins were 19.4% compared to 19.7% in the year-ago period. Overall Rockwell Collins reported net income of $151 million, an increase of $30 million, or 24.8% as compared to the year-ago quarter.

Segmental performance

Government Systems

Government Systems sales climbed 6% or an increase of $34 million to $650 million as compared to the prior-year quarter.

By product category, Airborne solutions sales increased $28 million, or 7%, to $438 million year-over-year. This was due to higher revenues related to rotary wing platforms, the Common Range Integrated Instrumentation System and the E-2 simulation and training programs. This was partially offset by lower sales on the KC-135 GATM program.

Surface solutions sales increased $6 million, or 3%, to $212 million year-over-year. This was due to increased revenue for deliveries of iForce systems to the California Highway Patrol. This was partially offset by the absence of revenues from a satellite communication upgrade program, which was completed last year.

Government Systems operating earnings decreased 2% to $131 million, resulting in an operating margin of 20.2%, compared to operating earnings of $134 million, or an operating margin of 21.8%, in the year-ago quarter. The decrease in operating earnings and margin was primarily the result of higher employee incentive compensation expenses. This was partially offset by lower pension expense and increased earnings from incremental volume sales.

Commercial Systems

Commercial Systems sales rose $49 million or 12% to $460 million, compared to $411 million in the year-ago quarter.

By product category, Sales related to aircraft original equipment manufacturers increased $32 million, or 16%, to $233 million year-over-year. This was primarily due to higher product deliveries for its commercial aerospace customers. This includes, The Boeing Company (BA) for its 787 series jetliners; Textron Inc. (TXT) for its Cessna CJ4 light corporate jets; and multiple platforms for Canadian aircraft manufacturer, Bombardier Inc.

Aftermarket sales increased $33 million, or 20%, to $200 million year-over-year. Of this, $11 million of sales came from Air Routing International. Rockwell Collins earlier in 2010 acquired the premier provider of trip support services for business aircraft flight operations. Organic revenues rose 13% year-over-year driven by higher sales of avionics service cum support; and hardware sales to business and regional jet customers. However, sales related to wide-body in-flight entertainment products and services decreased $16 million to $27 million year-over-year.

Commercial Systems operating earnings increased 24% year-over-year to $84 million, resulting in an operating margin of 18.3% compared to operating earnings of $68 million, or an operating margin of 16.5%, in the year-ago period. The increase in operating earnings and margin was primarily attributable to sales growth.

Financial Condition

Rockwell Collins ended the quarter with cash and cash equivalents of $263 million. At year-end fiscal 2010 ending on September 30, 2010, the company had $435 million in cash. Long-term debt excluding current maturity was $512 million, versus $525 million at fiscal-end 2010, ending on September 30, 2010. Rockwell Collins generated $57 million of cash from operating activities in the reported quarter. At the end of the year-ago period the company generated $84 million of cash from operating activities. In the reported quarter, the company repurchased 2.5 million shares of its common stock at a total cost of $143 million, leaving $182 million of authorized share repurchase pending.

Outlook

Rockwell Collins raised its fiscal 2011 ending on September 30, 2011 earnings per share guidance. The company now expects earnings per share to be in the range of $3.85 – $4.05, up from the earlier guidance range of $3.75 – $3.95. The company however reaffirmed its fiscal 2011 revenue guidance range of $4.8 billion – $5.0 billion.

Rockwell Collins currently retains its Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we are maintaining our Neutral recommendation on the stock.

 
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