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Rockwell Collins Inc. (COL - Analyst Report) reported fourth quarter fiscal 2013 earnings results ending Sep 30, 2013. The company reported adjusted earnings per share of $1.28, missing the Zacks Consensus Estimate by 3 cents. Earnings were however up 20.8% year over year.

The upcast in earnings reflects the absence of a restructuring and asset impairment charge that was incurred in fiscal 2012 and a lower share count. These positives were partially offset by higher employee incentive compensation costs in 2013.

Fiscal year 2013 earnings per share of the company were $4.58, up 10.4% year over year.

Operational Highlights

Rockwell Collins' total sales in the fourth quarter of fiscal 2013 were down 1.1% year over year to $1,252 million. However, revenues easily surpassed the Zacks Consensus Estimate by $28 million. Lower sales at Government Systems were partially offset by higher sales at Commercial Systems.

Rockwell Collins' total sales in fiscal 2013 were down 2.5% year over year to $4,610 million. Revenues missed the Zacks Consensus Estimate by $11 million.

Total research and development (R&D) expenses in the fourth quarter of fiscal 2013 were $199 million, flat year over year. Total operating income during the quarter was $273 million, down 8% year over year.
Segmental Revenue

Commercial Systems: In the reported period, Commercial Systems sales of $583 million were up 3.2% year over year.

By product category, sales related to aircraft original equipment manufacturers were up 0.97% year over year to $310 million driven by higher deliveries for the Bombardier Global and Challenger aircraft partially offset by fewer deliveries for Cessna business jets.

Aftermarket sales at Commercial Systems were $254 million, up 6.3% driven by regulatory mandate upgrades.

Wide-body in-flight entertainment sales were $19 million, flat year over year.

Government Systems: Government Systems sales were $669 million, down 4.6% year over year.

By product category, Avionics sales were up 2.5% year over year to $205 million due to higher international tanker/transport hardware sales partially offset by the impact of lower simulator sales.

Communication product sales decreased 15.9% year over year to $148 million due to lower satellite and secure communication product sales, partially offset by increased deliveries of JTRS Manpack radios.

Surface solutions sales increased 8.6% year over year to $63 million driven by higher international Firestorm targeting systems sales.

Navigation products sales declined 26% to $54 million. The significant decline was due to lower deliveries of airborne and ground navigation products as a result of the withdrawal of troops from Afghanistan and Iraq.

Financial Condition

As of Sep 30, 2013, cash and cash equivalents were $391 million versus $335 million as of Sep 30, 2012. Long-term debt, net was $563 million, down from $779 million as of Sep 30, 2012.

Cash flow from operation at the end of the year was $617 million, up from $537 million in the year-ago period.

During the quarter, the company repurchased 0.9 million shares of common stock at a total cost of $62 million.

Fiscal 2014 Guidance

The company maintained its fiscal 2014 guidance provided on Sep 20, 2013. The company expects revenue in the range of $4.5 billion to $4.6 billion and earnings per share in the range of $4.30 to $4.50 for FY14. Total segment operating margins are expected in the range of 21% to 22% and cash flow from operations in the range of $550 million to $650 million. The guidance excludes the impact of the proposed acquisition of ARINC Inc. The transaction will be closed after receiving the requisite regulatory approval.

The company expects R&D investment to be approximately $950 million in fiscal 2014.

Our Take

Rockwell posted a mixed performance this quarter with revenues topping and earnings missing the Zacks Consensus Estimate. Rockwell’s strong operating performance is however helping it to sustain its investments in R&D. Going forward, these actions would likely help the company in generating savings that are required to sustain margins despite the continued headwinds in the government business.

The company’s short-cycle products, the U.S. government’s delayed funding authorizations, program execution risk, dependence on international sales, high exposure to fixed price contracts and high research & development overhead still keep us concerned. The company presently has a short-term Zacks Rank #5 (Strong Sell).

However, stocks to look out for in the space are B/E Aerospace Inc. (BEAV - Snapshot Report), HEICO Corp. (HEI - Snapshot Report) and Hexcel Corp. (HXL - Snapshot Report), all with a Zacks #2 Rank (Buy).

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