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The aviation and military electronics maker Rockwell Collins Inc. (COL - Analyst Report) reported first quarter fiscal 2014 earnings results ending Dec 31, 2013. The company reported earnings per share of 96 cents, beating the Zacks Consensus Estimate by a penny. Earnings were also up by 2 cents year over year.

The upcast in earnings reflects solid contribution from its Commercial Systems and Government Systems segments.

Notably, 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.

Operational Highlights

Rockwell Collins' total sales in the first quarter of fiscal 2014 were up 0.8% year over year to $1,071.0 million. The top line came almost at par with the Zacks Consensus Estimate of $1,070.0 million. The improvement was attributable to higher sales at Government Systems and Commercial Systems.

Total research and development (R&D) expenses in the first quarter of fiscal 2014 were $219 million, down 3.5% year over year. Total segment operating income during the quarter was $214.0 million compared with $213.0 million in the year-ago quarter.

Segmental Revenue

Commercial Systems: In the reported period, Commercial Systems sales of $521.0 million were up 3.0% year over year.

By product category, sales related to aircraft original equipment manufacturers were up 1.0% year over year to $286.0 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 $216.0 million, up 10.0% driven by regulatory mandate upgrades, air transport retrofits, and a large delivery of spare parts for the 787 aircraft.

Wide-body in-flight entertainment sales were $19.0 million, down 30.0% year over year.

Government Systems: Government Systems sales were $532.0 million, down 2.6% year over year.

By product category, Avionics sales were up 1.0% year over year to $317.0 million due to higher hardware sales for the E-6B aircraft upgrade program/international program partially offset by the impact of lower KC-46 and KC-10 development program sales.

Communication product sales decreased 11.0% year over year to $118.0 million due to lower satellite and secure communication product and service sales.

Surface solutions sales increased 16.0% year over year to $58.0 million driven by higher international Firestorm targeting systems sales.

Navigation products sales declined 19.0% to $39.0 million. The significant decline was due to lower deliveries of Defense Advanced GPS Receiver (DAGR) product.

Information Management Services: Segment sales were $18.0 million, up from $10 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 Dec 31, 2013, cash and cash equivalents were $439.0 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 used for operating activities at the end of the quarter was $38.0 million versus cash provided by operating activities of $63.0 million in the year-earlier quarter.

During the quarter, the company repurchased 0.2 million shares of common stock at a total cost of $17.0 million.

Fiscal 2014 Guidance

The company lifted its fiscal 2014 outlook. The company now expects revenue in the range of $4.95 billion to $5.05 billion (up from $4.5–$4.6 billion) and earnings per share in the range of $4.35 to $4.55 (up from $4.30–$4.50). Total segment operating margins are expected in the range of 20% to 21% versus its earlier expectation of 21% to 22%.

Cash flow from operations is expected in the range of $600.0 million to $700.0 million versus the earlier projection of $550.0 million to $650.0 million. The guidance includes the impact of the ARINC acquisition.

The company maintained its R&D investment at approximately $950 million for fiscal 2014.

Our Take

We appreciate Rockwell Collins’ efforts towards 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.

Recently, the company has entered into an agreement to form a joint venture (“JV”) with a Chinese company to manufacture commercial flight simulators and training solutions. The 50:50 JV – ACCEL (Tianjin) Flight Simulation Co. LTD. – with Beijing Bluesky Aviation Technology will design, manufacture and market commercial flight simulators primarily for the Chinese market and then spread out worldwide. This collaboration is a significant step in the development of commercial simulation and training in one of the fastest growing regions of the world.

Rockwell Collins presently has a Zacks Rank #2 (Buy). Also, other stocks to look out for in the space are TransDigm Group Inc. (TDG - Analyst Report), Alliant Techsystems Inc. (ATK - Analyst Report) and Orbital Sciences Corp. (ORB - Snapshot Report), all with a Zacks Rank #1 (Strong Buy).

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