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Rockwell Collins Inc. (COL - Analyst Report) reported fourth quarter fiscal 2012 earnings results ending September 30, 2012. The company reported adjusted earnings per share of $1.32, beating our expectation of $1.09 for the quarter. Earnings were up 17.0% year over year.

GAAP earnings per share during the fourth quarter were $1.06 versus $1.02 in the prior-year period. The difference between operating and GAAP earnings in the fourth quarter was due to a restructuring and assets impairment charge of 26 cents.

Fiscal year 2012 earnings per share of the company were $4.41 versus $4.05 in the previous year, reflecting growth of 9%. The year-over-year growth in earnings per share stemmed from an improvement in total segment operating earnings and a favorable impact from share buybacks.

GAAP earnings per share during the fiscal year were $4.15 versus $3.94 in the prior year. The difference between operating and GAAP earnings was due to a restructuring and assets impairment charge of 26 cents.

Total Revenue

Rockwell Collins’ total sales in the fourth quarter of fiscal 2012 were down 2% year over year to $1,266 million. Revenues missed the Zacks Consensus Estimate of $1,324 million.

Rockwell Collins’ total sales in fiscal 2012 were down 2% year over year to $4,726 million. Revenues missed the Zacks Consensus Estimate of $4,786 million.

The year-over-year decline in revenue in both the fourth quarter and the fiscal year 2012 was due to lower sales from Government Systems, marginally offset by higher sales from Commercial Systems.

Segmental Revenue
    
Commercial Systems: In the reported period, Commercial Systems sales of $565 million were up 9% from $517 million in the prior-year period.

By product category, sales related to aircraft original equipment manufacturers were up 15% year over year to $307 million driven by increased sales to Airbus and The Boeing Company (BA - Analyst Report) led by higher production rates of the 787, 737 and A320 aircrafts. However, these positives were partially offset by lower deliveries to Hawker Beechcraft as a result of a temporary production shutdown.

Aftermarket sales at Commercial Systems were up 12% year over year to $239 million.

Government Systems: Government Systems sales were $701 million, down 10% from $779 million in the fourth quarter of fiscal 2011.

By product category, Avionics sales were down 5% year over year due to the completion of certain rotary wing and unmanned aerial system programs, and from lower development sales as the E-6 program transitions to production.

Communication product sales decreased 6.0% year over year, primarily due to the wind down of the JTRS GMR development program.

Surface solutions sales decreased $39 million, or 40%, due to discontinuation of investment in public safety vehicle systems and the completion of certain surface based programs.

Operational Update

Total research and development expenses in fiscal 2012 were $946 million, down 8.2% year over year. Segment operating earnings in the fiscal were $1,008 million, up 3.6% year over year from $973 million.

Financial Condition

As of September 30, 2012, cash and cash equivalents were $335 million versus $530 million as of September 30, 2011. Long-term debt, net was $779 million versus $528 million as of September 30, 2011.

Cash flow from operation at the end of the year was $534 million versus $657 million in the year-ago period.

Rockwell’s disciplined capital management led to enhanced shareholder value during the fourth quarter of fiscal 2012. The company repurchased 0.4 million shares of its common stock for $21 million and paid a dividend of 30 cents per share to its shareholders.

Guidance for Fiscal 2013

For fiscal 2013, Rockwell Collins expects total revenue in the range of $4.60 billion to $4.7 billion. The company expects segment operating margin to be between 21.0% and 22%. It expects earnings in the range of $4.30 to $4.50 per share. It expects research & development expenses to be approximately $1,000 million, with capital expenditure expected to be about $140 million.

Our Take

Rockwell’s share buyback program played an important role in improving its overall performance. We believe the remaining share repurchase authorization of $481 million at the end of the fiscal 2012 will enable the company to shore up shareholder wealth in fiscal 2013.

The majority of Rockwell’s revenue were generated from government contracts. The declining trend at this segment in both the quarter and fiscal year 2012 are a bit alarming.

The U.S. government’s delayed funding authorizations, program execution risk, dependency on international sales, high exposure to fixed price contracts and high research and development overheads are a matter of concern. The company presently retains a short-term Zacks #4 Rank (Sell rating)

Based in Cedar Rapids, Iowa, Rockwell Collins designs, manufactures, and supports software and hardware solutions for aircraft communication, navigation, signals intelligence, and weapons systems as well as surveillance systems for government, military, and commercial applications. With a market capitalization of $7.82 billion, the company has 20,500 full-time employees.

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