Rockwell Beats on Q2 Earnings, Ups FY14 Outlook - Analyst Blog

The aviation and military electronics maker Rockwell Collins Inc. COL reported second quarter fiscal 2014 earnings results ending Mar 31, 2014. The company reported earnings per share of $1.07, beating the Zacks Consensus Estimate by 0.9%. The earnings beat pushed its share price by 1.2% on Apr 17, 2014. However, earnings were down by 8.5% year over year from the year-ago profit level of $1.17 due to higher income tax expenses.

Operational Highlights

Rockwell Collins' total sales in the second quarter of fiscal 2014 were up 12.5% year over year to $1,272.0 million. The top line came above the Zacks Consensus Estimate of $1,232.0 million by 3.2%. The improvement was largely buoyed by higher sales due to the acquisition of ARINC Inc.

The company completed the acquisition of airline communications and information processing solution major, ARINC Inc., a portfolio company of The Carlyle Group, for $1.42 billion during the first quarter of fiscal 2014.

The acquisition reshuffled Rockwell Collins' segment portfolio to 54% commercial and 46% government. Segments have been reclassified as Commercial Systems, Government Systems and Information Management Services. Certain amounts previously included in the Commercial Systems segment have been reclassified to the newly formed Information Management Services segment.

Total research and development (R&D) expenses in the second quarter of fiscal 2014 were $232.0 million, down 2.1% year over year. Total segment operating income during the quarter was $254.0 million compared with $229.0 million in the year-ago quarter, reflecting 10.9% year-over-year growth.

Segmental Revenue

Commercial Systems: In the reported period, Commercial Systems sales of $556.0 million were up 2.6% year over year.

By product category, sales related to aircraft original equipment manufacturers were up 1.6% year over year to $317.0 million driven by higher hardware delivery rates for the Boeing 787 aircraft partially offset by fewer deliveries to light business jet manufacturers.

Aftermarket sales at Commercial Systems were $221.0 million, up 4.2% driven by regulatory mandate upgrades and higher service and support services.

Wide-body in-flight entertainment sales were $18.0 million, in line with the year-ago figure.

Government Systems: Government Systems sales were $567.0 million, down 1.9% year over year.

By product category, Avionics sales were up 3% year over year to $333.0 million due to higher hardware sales for the E-6B aircraft upgrade program/international program and for international programs. These were partially offset by the adverse effect of lower KC-46 and KC-10 development program sales.

Communication product sales decreased 13.0% year over year to $132.0 million due to lower satellite communication sales.

Surface solutions sales decreased 2.0% year over year to $56.0 million, while Navigation products sales increased 2% to $46.0 million.

Information Management Services: Segment sales were $149.0 million, up from $11.0 million in the year-ago period.

This segment includes air-to-ground data and voice communication services, business aviation flight support services, airport information technology systems, and infrastructure security capabilities.

Financial Condition

As of Mar 31, 2014, cash and cash equivalents were $410.0 million versus $391.0 million as of Sep 30, 2013. Long-term debt, net was $1,658.0 million, up from $563.0 million as of Sep 30, 2013.

Cash provided by operating activities at the end of the first half of fiscal 2014 was $63.0 million versus $179.0 million in the year-earlier period.

During the quarter, the company repurchased 0.5 million shares of common stock at a total cost of $39.0 million. This brings the total shares repurchased to 87 million since 2002. Rockwell has remaining repurchase authority of $356 million at the end of the quarter.

Fiscal 2014 Guidance

The company lifted its fiscal 2014 outlook. The company now expects earnings per share in the range of $4.40–$4.55, up from $4.30–$4.55, owing to lower–than-expected intangible asset amortization for ARINC. Total segment operating margins are reaffirmed in the range of 20% to 21%, while ARINC's operating margin is now expected in the range of 11% to 12%, up from the previously guided range of 9% to 10%.

The revenue guidance is maintained in the range of $4.95 billion to $5.05 billion, while ARINC sales will likely fall in the range of $400 million to $430 million. Cash flow from operations is expected in the range of $600.0 million to $700.0 million.

The company also maintained its R&D investment at approximately $950 million for fiscal 2014 while capital expenditure will likely be $160 million.

Our Take

We appreciate Rockwell Collins' efforts in managing risks related to the ongoing defense budget sequestration. The company is currently focusing more on expanding its international businesses, which will in turn help to secure a stable revenue stream going forward. In addition, the company is upgrading its core competence besides engaging in innovation.

The addition of ARINC's high-quality ground network and services will certainly boost Rockwell Collins' existing information management capabilities with its application beyond avionics and cabin technologies. ARINC is a frontrunner in the aviation management industry and offers technical support to almost every sphere of the airline business starting from pilots, operators, maintenance, passengers, and controllers to regulators, security and airport operations. This move will help the company to lower its dependence on government contracts in response to the budget uncertainty while capitalizing on the growing information management market.

Rockwell Collins presently has a Zacks Rank #3 (Hold). However, other better-ranked stocks to look out for in the space are TransDigm Group Inc. TDG, Alliant Techsystems Inc. ATK and B/E Aerospace Inc.  BEAV, all with a Zacks Rank #2 (Buy).