COL Beats Earnings, Ups View

Zacks

Rockwell Collins Inc. (COL), the supplier of avionics and military equipment, posted third quarter fiscal year 2013 earnings of $1.20 per share, surpassing the Zacks Consensus Estimate of $1.15 by 4.3% and 5.3% above the year-ago figure of $1.14. The higher numbers reflect enhanced operating performance and the benefit of share repurchases.

Operational Performance

Rockwell Collins’ total sales slipped 3.3% year over year to $1.17 billion. However, the figure came in line with the Zacks Consensus Estimate. In the reported quarter, Government Systems sales plunged as expected, partially countered by higher Commercial Systems sales.

In the reported quarter, total research and development expense was $189.0 million, down 6.0% year over year. Total segment operating earnings increased 3.2% to $261.0 million.

Rockwell Collins reported net income of $164.0 million, down marginally from the year-earlier level of $166 million.

Segmental Performance

Government Systems: Government Systems sales were $602.0 million, a decrease of $77 million from $679.0 million in the same period last year.

By product category, Avionics sales decreased $52 million, or 13.2%, year over year, due to lower sales of development programs and the Eurofighter.

Communication product sales declined approximately 14% due to lower satellite communication product sales and datalink product sales. However, this was mostly offset by increased deliveries of JTRS Manpack radios.

Surface solutions sales improved 24% due to higher international Firestorm targeting systems sales.

Navigation products sales declined $12 million or 21% due to lesser deliveries of Defense Advanced GPS Receiver products.

In the reported quarter, Government Systems generated operating income of $129.0 million, down from $148.0 million in the fiscal third quarter of 2012. The results primarily reflect lower sales. However, this was partially offset by the benefit from cost reduction actions.

Commercial Systems: In the reported period, Commercial Systems sales of $563.0 million were up $37 million from sales of $526.0 million reported for the same period last year.

By product category, sales related to aircraft original equipment manufacturers increased 5% to $309.0 million year over year driven by improved deliveries for the Bombardier Global and Challenger aircraft, and a full quarter of production for Beechcraft King Air aircraft.

Aftermarket sales also surged 13% to $235.0 million driven by higher spares sales and increased retrofits due to airspace mandates.

In the third quarter of fiscal 2013, Commercial Systems’ operating earnings increased 26% to $132.0 million driven by higher sales volume accompanied with lower company-funded research and development expense.

Financial Condition

Rockwell Collins ended the quarter with cash and cash equivalents of $354.0 million. At the end of fiscal 2012, ending on Sep 30, 2012, the company had $335 million in cash. Long-term debt, net was $563 million versus $779 million at fiscal-end 2012, ending on Sep 30, 2012.

During the quarter under review, Rockwell repurchased 1.4 million shares of common stock for $90 million.

Guidance

Rockwell Collins boosted the low end of its previous fiscal 2013 earnings per share expectation to $4.55–$4.60 from $4.45-$4.65. The company now expects its total sales to be around $4.65 billion versus its earlier expectation of $4.6 billion to $4.7 billion. The research & development investment forecast remained at approximately $950 million while the company lowered its capex budget to $125 million from its earlier projection of $140 million.

Cash flow from operations is now expected to be around $600 million compared with the previous expectation of $500 million to $600 million.

Our Take

Rockwell Collins is the foremost global supplier of communications and avionics equipment for both commercial and military customers. Its balanced exposure to both types of customers allows the company to use government funding to develop products for the dual-end market. Going forward, the company’s cash deployment strategy would continue to attract investors.

During the quarter, the company was a beneficiary of a number of contracts from the Department of Defense (DoD). We however note that the contracts were not sizeable. We believe given the cutbacks in the U.S. defense budget leading to a decline in domestic orders, the foreign contracts will offer a stable revenue stream for the company.

We are nevertheless concerned about the company’s high exposure to fixed price contracts and high research & development overhead. The company presently retains a short-term Zacks Rank #3 (Hold).

Stocks worth considering in this space are Zacks Ranked #1 (Strong Buy) Astronics Corporation (ATRO) and HEICO Corporation (HEI), and Zacks Ranked #2 (Buy) Exelis, Inc. (XLS).
 

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