ROCKWELL COLLINS INC (Form: 10-Q, Received: 07/24/2012 12:42:44)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

R QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2012

£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-16445

Rockwell Collins, Inc .

(Exact name of registrant as specified in its charter)



Delaware	52-2314475
(State or other jurisdiction	(I.R.S. Employer
of incorporation or organization)	Identification No.)

400 Collins Road NE
Cedar Rapids, Iowa	52498
(Address of principal executive offices)	(Zip Code)

Registrant's telephone number, including area code: (319) 295-1000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes R No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes R No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer R		Accelerated filer £
Non-accelerated filer £	(Do not check if a smaller reporting company)	Smaller reporting company £

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No R

142,151,645 shares of the registrant's Common Stock were outstanding on July 19, 2012.

ROCKWELL COLLINS, INC.

INDEX



			Page No.

PART I.	FINANCIAL INFORMATION:

	Item 1.	Condensed Consolidated Financial Statements:

		Condensed Consolidated Statement of Financial Position (Unaudited) — June 30, 2012 and September 30, 2011	1

		Condensed Consolidated Statement of Operations (Unaudited) — Three and Nine Months Ended June 30, 2012 and 2011	2

		Condensed Consolidated Statement of Cash Flows (Unaudited) — Nine Months Ended June 30, 2012 and 2011	3

		Notes to Condensed Consolidated Financial Statements (Unaudited)	4

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	19

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	34

	Item 4.	Controls and Procedures	35

PART II.	OTHER INFORMATION:

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35

	Item 6.	Exhibits	36

Signatures			37


PART I.	FINANCIAL INFORMATION


Item 1.	Condensed Consolidated Financial Statements

ROCKWELL COLLINS, INC.

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

(Unaudited)

(in millions, except per share amounts)



	June 30, 2012			September 30, 2011
ASSETS
Current Assets:
Cash and cash equivalents	$	265		$	530
Receivables, net	967			969
Inventories, net	1,353			1,195
Current deferred income taxes	68			106
Other current assets	100			89
Total current assets	2,753			2,889

Property	750			754
Goodwill	775			780
Intangible Assets	293			308
Long-term Deferred Income Taxes	355			448
Other Assets	222			210
TOTAL ASSETS	$	5,148		$	5,389

LIABILITIES AND EQUITY
Current Liabilities:
Short-term debt	$	201		$	—
Accounts payable	400			485
Compensation and benefits	229			324
Advance payments from customers	274			269
Accrued customer incentives	155			128
Product warranty costs	125			148
Other current liabilities	101			141
Total current liabilities	1,485			1,495

Long-term Debt, Net	778			528
Retirement Benefits	1,461			1,633
Other Liabilities	146			205

Equity:
Common stock ($0.01 par value; shares authorized: 1,000; shares issued: 183.8)	2			2
Additional paid-in capital	1,453			1,437
Retained earnings	3,609			3,288
Accumulated other comprehensive loss	(1,478		)	(1,497		)
Common stock in treasury, at cost (shares held: June 30, 2012, 41.7; September 30, 2011, 30.5)	(2,313		)	(1,707		)
Total shareowners’ equity	1,273			1,523
Noncontrolling interest	5			5
Total equity	1,278			1,528
TOTAL LIABILITIES AND EQUITY	$	5,148		$	5,389

See Notes to Condensed Consolidated Financial Statements.

ROCKWELL COLLINS, INC.

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)

(in millions, except per share amounts)



	Three Months Ended						Nine Months Ended
	June 30						June 30
	2012			2011			2012			2011
Sales	$	1,205		$	1,190		$	3,460		$	3,510

Costs, expenses and other:
Cost of sales	846			833			2,430			2,488
Selling, general and administrative expenses	132			131			393			391
Interest expense	7			5			20			14
Other income, net	(10		)	(6		)	(20		)	(19		)
Total costs, expenses and other	975			963			2,823			2,874

Income from continuing operations before income taxes	230			227			637			636
Income tax expense	64			70			180			179
Income from continuing operations	166			157			457			457

Income from discontinued operations, net of taxes	—			1			—			2

Net income	$	166		$	158		$	457		$	459

Earnings per share:
Basic
Continuing operations	$	1.16		$	1.02		$	3.12		$	2.96
Discontinued operations	—			0.01			—			0.01
Basic earnings per share	$	1.16		$	1.03		$	3.12		$	2.97

Diluted
Continuing operations	$	1.14		$	1.01		$	3.09		$	2.92
Discontinued operations	—			—			—			0.01
Diluted earnings per share	$	1.14		$	1.01		$	3.09		$	2.93

Weighted average common shares:
Basic	143.4			153.8			146.4			154.6
Diluted	145.0			155.9			147.9			156.6

Cash dividends per share	$	0.30		$	0.24		$	0.78		$	0.72

See Notes to Condensed Consolidated Financial Statements.

ROCKWELL COLLINS, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

(in millions)



	Nine Months Ended
	June 30
	2012			2011
Operating Activities:
Net income	$	457		$	459
Adjustments to arrive at cash provided by operating activities:
Depreciation	82			78
Amortization of intangible assets	29			28
Stock-based compensation expense	19			18
Compensation and benefits paid in common stock	53			53
Excess tax benefit from stock-based compensation	(7		)	(7		)
Deferred income taxes	119			68
Pension plan contributions	(120		)	(110		)
Changes in assets and liabilities, excluding effects of acquisitions and foreign currency adjustments:
Receivables	3			(12		)
Inventories	(200		)	(245		)
Accounts payable	(71		)	5
Compensation and benefits	(92		)	10
Advance payments from customers	12			(47		)
Accrued customer incentives	27			(5		)
Product warranty costs	(21		)	(28		)
Income taxes	(85		)	30
Other assets and liabilities	(13		)	(49		)
Cash Provided by Operating Activities	192			246

Investing Activities:
Property additions	(102		)	(104		)
Proceeds from the disposition of property	17			—
Acquisition of businesses, net of cash acquired	—			(17		)
Cash provided to customer	—			(237		)
Collection of cash provided to customer	—			237
Proceeds from sale of short-term investments	—			18
Acquisition of intangible assets	(2		)	(3		)
Other investing activities	(4		)	3
Cash Used for Investing Activities	(91		)	(103		)

Financing Activities:
Purchases of treasury stock	(710		)	(277		)
Cash dividends	(114		)	(112		)
Increase in short-term commercial paper borrowings, net	201			70
Decrease in short-term borrowings	—			(24		)
Increase in long-term borrowings	247			—
Proceeds from the exercise of stock options	17			19
Excess tax benefit from stock-based compensation	7			7
Cash Used for Financing Activities	(352		)	(317		)

Effect of exchange rate changes on cash and cash equivalents	(14		)	7

Net Change in Cash and Cash Equivalents	(265		)	(167		)
Cash and Cash Equivalents at Beginning of Period	530			435
Cash and Cash Equivalents at End of Period	$	265		$	268

See Notes to Condensed Consolidated Financial Statements.

ROCKWELL COLLINS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


1.	Business Description and Basis of Presentation

Rockwell Collins, Inc. (the Company or Rockwell Collins) designs, produces and supports communications and aviation electronics for commercial and military customers worldwide.

The Company operates on a 52/53 week fiscal year, with quarters ending on the Friday closest to the last day of the calendar quarter. For ease of presentation, June 30 and September 30 are utilized consistently throughout these financial statements and notes to represent the period end date.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and with the instructions to Form 10-Q of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended September 30, 2011 .

In the opinion of management, the unaudited financial statements contain all adjustments, consisting of adjustments of a normal recurring nature, necessary to present fairly the financial position, results of operations and cash flows for the periods presented. The results of operations for the three and nine months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the full year.

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates and assumptions.

During the second quarter of fiscal 2012, the Company determined that certain product sales had erroneously been presented as service sales in previously issued financial statements. With the correction, service sales are less than ten percent of total sales for all periods presented. Accordingly, service and product sales are no longer separately presented. This change did not impact previously reported total revenues, total cost of sales, or net income, nor did it have any effect on the Company's financial position or cash flows for any prior periods.

As discussed in Note 4, Discontinued Operations, the Company's Rollmet product line, formerly included within the Commercial Systems segment, was divested in 2011 and has been accounted for as a discontinued operation for all periods presented. Unless otherwise noted, disclosures pertain to the Company's continuing operations.


2.	Recently Issued Accounting Standards

In June 2011, the FASB amended requirements for the presentation of other comprehensive income (OCI), requiring presentation of comprehensive income in either a single, continuous statement of comprehensive income or on separate but consecutive statements, the statement of operations and the statement of OCI. The amendment is effective for the Company at the beginning of fiscal year 2013 with early adoption permitted. The adoption of this guidance will not impact the Company's financial position, results of operations or cash flows and will only impact the presentation of OCI on the financial statements.

In May 2011, the FASB amended the guidance regarding fair value measurement and disclosure. The amended guidance clarifies the application of existing fair value measurement and disclosure requirements. The amendment became effective for the company in the second quarter of 2012 with no significant impact to the Company's financial statements.

ROCKWELL COLLINS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)


3.	Acquisitions

Computing Technologies for Aviation, Inc.

On January 10, 2011, the Company acquired all the shares of Computing Technologies for Aviation, Inc. (CTA). CTA, with headquarters located in Charlottesville, Virginia, is a leading provider of flight operations management solutions for corporate flight departments and other aviation customers. The purchase price, net of cash acquired, was $ 11 million. In the fourth quarter of 2011, the purchase price allocation was finalized with $ 10 million allocated to goodwill and $ 3 million to finite-lived intangible assets with a weighted average life of approximately 9 years. The excess purchase price over net assets acquired reflects the Company’s view that this acquisition will broaden the Company’s flight information solutions capabilities. None of the goodwill resulting from the acquisition is tax deductible. The goodwill is included within the Commercial Systems segment.

Blue Ridge Simulation, Inc.

On December 20, 2010, the Company acquired all the shares of Blue Ridge Simulation, Inc. (Blue Ridge Simulation). Blue Ridge Simulation, with headquarters located in Leesburg, Virginia, is a leading supplier of high-performance sensor simulation for U.S. Department of Defense, commercial and international training applications. The purchase price, net of cash acquired, was $ 6 million. In the first quarter of 2012, the purchase price allocation was finalized with $ 6 million allocated to goodwill and $ 1 million to finite-lived intangible assets with a weighted average life of approximately 9 years. The excess purchase price over net assets acquired reflects the Company’s view that this acquisition will enhance the Company’s integrated training solutions. All goodwill resulting from the acquisition is tax deductible. The goodwill is included within the Government Systems segment.

Pro-forma results for the three and nine months ended June 30, 2012 , assuming the acquisitions were made at the beginning of the year, are not presented as the pro-forma information would not be materially different from the consolidated reported results.


4.	Discontinued Operations

On July 22, 2011, the Company sold its Rollmet product line. The sale price, net of a post-closing adjustment based on the final closing balance sheet, was $41 million . The Rollmet business provides seamless alloy and stainless steel pipes and propulsion system components for the energy, petrochemical and defense industries. The Company divested this non-core business to focus on its primary business strategies. Rollmet's operating results are included in discontinued operations in the Company's Condensed Consolidated Statement of Operations for all periods presented.



Results of discontinued operations are as follows:

	Three Months Ended				Nine Months Ended
	June 30				June 30
(in millions)	2012		2011		2012		2011
Sales	$	—	$	6	$	—	$	19
Income from discontinued operations before income taxes	—		1		—		4

ROCKWELL COLLINS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)


5.	Receivables, Net



Receivables, net are summarized as follows:

(in millions)	June 30, 2012			September 30, 2011
Billed	$	736		$	718
Unbilled	438			404
Less progress payments	(193		)	(143		)
Total	981			979
Less allowance for doubtful accounts	(14		)	(10		)
Receivables, net	$	967		$	969

Receivables expected to be collected beyond the next twelve months are classified as long-term and are included within Other Assets. Total net receivables due from the U.S. Government, including the Department of Defense and state and local agencies, both directly and indirectly through subcontracts, were $ 277 million at June 30, 2012 and $ 388 million at September 30, 2011 . U.S. Government unbilled receivables, net of progress payments, were $ 87 million and $ 136 million at June 30, 2012 and September 30, 2011 , respectively.

Unbilled receivables principally represent sales recorded under the percentage-of-completion method of accounting that have not been billed to customers in accordance with applicable contract terms.

The Company is exposed to a concentration of collection risk on credit extended to certain customers who have filed for Chapter 11 bankruptcy protection, including certain commercial airline customers and Hawker Beechcraft, Inc. (HBC), a business jet manufacturing customer who filed for Chapter 11 bankruptcy protection on May 3, 2012. As of June 30, 2012, total pre-petition accounts receivable due from these financially troubled customers were approximately $38 million , of which $31 million was attributable to HBC. It is reasonably possible that losses related to the pre-petition receivables may occur in the range of $6 million to $35 million . During the nine months ended June 30, 2012, the Company recorded bad debt reserves of $6 million related to these receivable balances. The bad debt charge is included within selling, general, and administrative expenses on the Condensed Consolidated Statement of Operations, with approximately $5 million related to the Company's Commercial Systems segment and the remaining $1 million related to the Government Systems segment.


6.	Inventories, Net



Inventories, net are summarized as follows:

(in millions)	June 30, 2012			September 30, 2011
Finished goods	$	201		$	180
Work in process	270			265
Raw materials, parts and supplies	357			340
Less progress payments	(9		)	(36		)
Total	819			749
Pre-production engineering costs	534			446
Inventories, net	$	1,353		$	1,195

The Company defers certain pre-production engineering costs during the development phase of a program in connection with long-term supply arrangements that contain contractual guarantees for reimbursement from customers. Such customer guarantees generally take the form of a minimum order quantity with quantified reimbursement amounts if the minimum order quantity is not taken by the customer. These costs are deferred to the extent of the contractual guarantees and are amortized over their estimated useful lives using a units-of-delivery method, up to 15 years. This amortization expense is included as a component of cost of sales. Amortization is based on the Company’s expectation of delivery rates on a program-by-program basis and begins when the Company starts recognizing revenue as the Company delivers equipment for the program. The estimated useful life is limited to the amount of time the Company is virtually assured to earn revenues through a contractually enforceable right included in long-term supply arrangements with the Company’s customers. Pre-production engineering costs incurred pursuant to supply arrangements that do not contain customer guarantees for reimbursement are expensed as incurred.



Anticipated annual amortization expense for pre-production engineering costs is as follows:

(in millions)	2012		2013		2014		2015		2016		Thereafter
Anticipated amortization expense	$	19	$	27	$	36	$	50	$	58	$	356

Amortization expense for pre-production engineering costs for the three and nine months ended June 30, 2012 was $6 million and $13 million , respectively, compared with $5 million and $10 million for the three and nine months ended June 30, 2011 . As of June 30, 2012 , the weighted average amortization period remaining for pre-production engineering costs included in Inventories, net was approximately 9 years.


7.	Property



Property is summarized as follows:

(in millions)	June 30, 2012			September 30, 2011
Land	$	9		$	14
Buildings and improvements	372			372
Machinery and equipment	1,021			1,002
Information systems software and hardware	313			310
Furniture and fixtures	65			66
Construction in progress	96			89
Total	1,876			1,853
Less accumulated depreciation	(1,126		)	(1,099		)
Property	$	750		$	754

As of September 30, 2011, Land and Buildings and improvements included $8 million associated with the carrying value of the vacated Irvine, California facility. In June 2012, the Company sold the Irvine facility and realized a gain of $5 million , which is included in Other income, net on the Condensed Consolidated Statement of Operations.

ROCKWELL COLLINS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)


8.	Goodwill and Intangible Assets



Changes in the carrying amount of goodwill are summarized as follows:

(in millions)	Government Systems			Commercial Systems		Total
Balance at September 30, 2011	$	514		$	266	$	780
Foreign currency translation adjustments	(5		)	—		(5		)
Balance at June 30, 2012	$	509		$	266	$	775

The Company performs an annual impairment test of goodwill and indefinite-lived intangible assets during the second quarter of each fiscal year, or at any time there is an indication of potential impairment. The Company's 2012 and 2011 impairment tests resulted in no impairment.



Intangible assets are summarized as follows:

	June 30, 2012							September 30, 2011
(in millions)	Gross		Accum Amort			Net		Gross		Accum Amort			Net
Intangible assets with finite lives:
Developed technology and patents	$	220	$	(155	)	$	65	$	219	$	(140	)	$	79
Customer relationships:
Acquired	90		(53		)	37		90		(48		)	42
Up-front sales incentive assets	203		(24		)	179		190		(17		)	173
License agreements	18		(10		)	8		18		(9		)	9
Trademarks and tradenames	15		(13		)	2		15		(12		)	3
Intangible assets with indefinite lives:
Trademarks and tradenames	2		—			2		2		—			2
Intangible assets	$	548	$	(255	)	$	293	$	534	$	(226	)	$	308

Rockwell Collins provides up-front sales incentives prior to delivering products or performing services to certain commercial customers in connection with sales contracts. Up-front sales incentives are recorded as a Customer relationship intangible asset and are amortized using a units-of-delivery method over the period the Company has received a contractually enforceable right related to the incentives, up to 15 years. Amortization is based on the Company’s expectation of delivery rates on a program-by-program basis. Amortization begins when the Company starts recognizing revenue as the Company delivers equipment for the program. Up-front sales incentives consisting of cash payments or customer account credits are amortized as a reduction of sales, whereas incentives consisting of free products are amortized as cost of sales. As of June 30, 2012 , the weighted average amortization period remaining for up-front sales incentives was approximately 9 years.



Anticipated annual amortization expense for intangible assets is as follows:

(in millions)	2012		2013		2014		2015		2016		Thereafter
Anticipated amortization expense for up-front sales incentives	$	10	$	11	$	16	$	22	$	27	$	100
Anticipated amortization expense for all other intangible assets	30		22		20		16		12		34
Total	$	40	$	33	$	36	$	38	$	39	$	134

Amortization expense for intangible assets for the three and nine months ended June 30, 2012 was $10 million and $29 million , respectively, compared to $9 million and $28 million for the three and nine months ended June 30, 2011 .

The Company reviews Intangible Assets for impairment at least annually, or whenever potential indicators of impairment exist. As of June 30, 2012, Intangible Assets include $14 million of up-front sales incentives related to Hawker Beechcraft, Inc. The Company currently estimates this balance is recoverable.


9.	Other Assets



Other assets are summarized as follows:

(in millions)	June 30, 2012		September 30, 2011
Long-term receivables	$	29	$	32
Investments in equity affiliates	16		11
Exchange and rental assets (net of accumulated depreciation of $101 at June 30, 2012 and $104 at September 30, 2011)	62		57
Other	115		110
Other assets	$	222	$	210

Investments in Equity Affiliates

Investments in equity affiliates primarily consist of four joint ventures. Each joint venture is 50 percent owned by the Company and accounted for under the equity method. Under the equity method of accounting for investments, the Company’s proportionate share of the earnings or losses of its equity affiliates are included in Net income and classified as Other income, net in the Condensed Consolidated Statement of Operations. For segment performance reporting purposes, Rockwell Collins’ share of earnings or losses of equity affiliates are included in the operating results of the Government Systems segment.

In the normal course of business or pursuant to the underlying joint venture agreements, the Company may sell products or services to equity affiliates. The Company defers a portion of the profit generated from these sales equal to its ownership interest in the equity affiliates until the underlying product is ultimately sold to an unrelated third party. Sales to equity affiliates were $ 38 million and $100 million for the three and nine months ended June 30, 2012 , respectively, and $ 21 million and $71 million for the three and nine months ended June 30, 2011 , respectively. The deferred portion of profit generated from sales to equity affiliates was $ 2 million at June 30, 2012 and $ 2 million at September 30, 2011 .

Exchange and Rental Assets

Exchange and rental assets consist primarily of Company products that are either loaned or rented to customers on a short-term basis in connection with warranty and other service related activities or under operating leases. These assets are recorded at acquisition or production cost and depreciated using the straight-line method over their estimated lives up to 15 years. Depreciation expense for exchange and rental assets was $2 million and $7 million for the three and nine months ended June 30, 2012 , respectively, and $1 million and $8 million for the three and nine months ended June 30, 2011 , respectively.

ROCKWELL COLLINS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)


10.	Debt

Short-term Debt

Under the Company’s commercial paper program, the Company may sell up to $850 million face amount of unsecured short-term promissory notes in the commercial paper market. The commercial paper notes may bear interest or may be sold at a discount, and have a maturity of not more than 364 days from the time of issuance. At June 30, 2012 , short-term commercial paper borrowings outstanding were $201 million with a weighted-average interest rate and maturity period of 0.17 percent and 7 days, respectively. At September 30, 2011 , there were no outstanding short-term commercial paper borrowings.

Revolving Credit Facilities

On May 26, 2011, the Company entered into an $850 million five-year unsecured revolving credit facility with various banks. The credit facility includes one financial covenant requiring the Company to maintain a consolidated debt to total capitalization ratio of not greater than 60 percent . The ratio excludes the accumulated other comprehensive loss equity impact related to defined benefit retirement plans. The ratio was 26 percent as of June 30, 2012 . The credit facility includes options to extend the term for up to two one-year periods and/or increase the aggregate principal amount up to $1.2 billion . These options are subject to the approval of the lenders. The credit facility also contains covenants that require the Company to satisfy certain conditions in order to incur debt secured by liens, engage in sale/leaseback transactions or merge or consolidate with another entity. Borrowings under this credit facility bear interest at the London Interbank Offered Rate (LIBOR) plus a variable margin based on the Company’s unsecured long-term debt rating or, at the Company’s option, rates determined by competitive bid. At June 30, 2012 and September 30, 2011 , there were no outstanding borrowings under the revolving credit facility.

In addition, short-term credit facilities available to non-U.S. subsidiaries amounted to $53 million as of June 30, 2012 , of which $21 million supports commitments in the form of commercial letters of credit. As of June 30, 2012 and September 30, 2011 , there were no short-term borrowings outstanding under the Company’s non-U.S. subsidiaries’ credit facilities.

At June 30, 2012 and September 30, 2011 , there were no significant commitment fees or compensating balance requirements under any of the Company’s credit facilities.

Long-term Debt

On November 16, 2011, the Company issued $250 million of 3.10 percent fixed rate unsecured debt due November 15, 2021 (the 2021 Notes). The net proceeds to the Company from the sale of the 2021 Notes, after deducting a $1 million discount and $2 million of debt issuance costs, were $247 million .

On May 6, 2009, the Company issued $300 million of 5.25 percent fixed rate unsecured debt due July 15, 2019 (the 2019 Notes). In January 2010, the Company entered into interest rate swap contracts which effectively converted $150 million of the 2019 Notes to floating rate debt based on six-month LIBOR plus 1.235 percent . See Notes 16 and 17 for additional information relating to the interest rate swap contracts.

On November 20, 2003, the Company issued $200 million of 4.75 percent fixed rate unsecured debt due

December 1, 2013 (the 2013 Notes). At the time of the debt issuance, the Company entered into interest rate swap contracts which effectively converted $100 million of the 2013 Notes to floating rate debt based on six-month LIBOR less 0.075 percent . See Notes 16 and 17 for additional information relating to the interest rate swap contracts.

The 2021, 2019 and 2013 Notes are included in the Condensed Consolidated Statement of Financial Position net of any unamortized discount within the caption Long-term Debt, Net. The debt issuance costs are capitalized within Other Assets on the Condensed Consolidated Statement of Financial Position. The debt issuance costs and any discounts are amortized over the life of the debt and recorded in Interest expense.

The 2021, 2019 and 2013 Notes each contain covenants that require the Company to satisfy certain conditions in order to incur debt secured by liens, engage in sales/leaseback transactions, merge or consolidate with another entity or transfer substantially all of the Company’s assets. The Company was in compliance with all debt covenants at June 30, 2012 and September 30, 2011 .

ROCKWELL COLLINS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



Long-term debt and a reconciliation to the carrying amount is summarized as follows:

(in millions)	June 30, 2012		September 30, 2011
Principal amount of 2021 Notes, net of discount	$	249	$	—
Principal amount of 2019 Notes, net of discount	299		299
Principal amount of 2013 Notes	200		200
Fair value swap adjustment (Notes 16 and 17)	30		29
Long-term Debt, Net	$	778	$	528

Interest paid on debt for the nine months ended June 30, 2012 and 2011 was $16 million and $12 million , respectively.


11.	Retirement Benefits

The Company sponsors defined benefit pension (Pension Benefits) and other postretirement (Other Retirement Benefits) plans which provide monthly pension and other benefits to eligible employees upon retirement.

Pension Benefits



The components of expense (income) for Pension Benefits for the three and nine months ended June 30, 2012 and 2011 are as follows:

	Three Months Ended						Nine Months Ended
	June 30						June 30
(in millions)	2012			2011			2012			2011
Service cost	$	1		$	1		$	5		$	5
Interest cost	38			40			115			119
Expected return on plan assets	(53		)	(53		)	(160		)	(159		)
Amortization:
Prior service credit	(4		)	(5		)	(13		)	(14		)
Net actuarial loss	14			12			43			36
Net benefit income	$	(4	)	$	(5	)	$	(10	)	$	(13	)

Other Retirement Benefits



The components of expense (income) for Other Retirement Benefits for the three and nine months ended June 30, 2012 and 2011 are as follows:

	Three Months Ended						Nine Months Ended
	June 30						June 30
(in millions)	2012			2011			2012			2011
Service cost	$	1		$	1		$	3		$	3
Interest cost	3			4			8			9
Expected return on plan assets	—			(1		)	—			(1		)
Amortization:
Prior service credit	(2		)	(4		)	(5		)	(12		)
Net actuarial loss	3			3			8			9
Net benefit expense	$	5		$	3		$	14		$	8

ROCKWELL COLLINS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Pension Plan Funding

The Company’s objective with respect to the funding of its pension plans is to provide adequate assets for the payment of future benefits. Pursuant to this objective, the Company will fund its pension plans as required by governmental regulations and may consider discretionary contributions as conditions warrant. During the nine months ended June 30, 2012, the company made $110 million of contributions to its U.S. qualified pension plan, of which $47 million related to calendar year 2011 statutory funding requirements and $63 million related to calendar year 2012 statutory funding requirements. In July 2012, subsequent to the Company's third quarter, the Company made a $3 million contribution to its U.S. qualified plan related to calendar year 2012 statutory funding requirements. The combined value of these contributions satisfies the minimum statutory funding requirement for full fiscal year 2012. Contributions to the non-U.S. plans and the U.S. non-qualified plan are anticipated to total $13 million in 2012 . For the nine months ended June 30, 2012 and 2011 , the Company made contributions to the non-U.S. plans and the U.S. non-qualified pension plan of $10 million and $10 million , respectively.


12.	Stock-Based Compensation and Earnings Per Share



Stock-based compensation expense and related income tax benefit included within the Condensed Consolidated Statement of Operations is as follows:

	Three Months Ended				Nine Months Ended
	June 30				June 30
(in millions)	2012		2011		2012		2011
Stock-based compensation expense included in:
Cost of sales	$	2	$	3	$	6	$	6
Selling, general and administrative expenses	4		3		13		12
Total	$	6	$	6	$	19	$	18
Income tax benefit	$	3	$	2	$	7	$	6



The Company issued awards of equity instruments under the Company's various incentive plans for the nine months ended June 30, 2012 and 2011 as follows:

	Options			Performance Shares			Restricted Stock Units
(shares in thousands)	Number Issued	Weighted Average Fair Value		Number Issued	Weighted Average Fair Value		Number Issued	Weighted Average Fair Value
Nine months ended June 30, 2012	758.6	$	13.90	191.5	$	55.04	84.2	$	55.64
Nine months ended June 30, 2011	760.8	$	14.78	200.6	$	55.96	78.3	$	57.82

The maximum number of shares of common stock that can be issued in respect of performance shares granted in 2012 based on the achievement of performance targets for fiscal years 2012 through 2014 is approximately 456,000 .



The fair value of each option granted by the Company was estimated using a binomial lattice pricing model and the following weighted-average assumptions:

	2012 Grants		2011 Grants
Risk-free interest rate	0.3% - 2.2%		0.3% - 3.9%
Expected dividend yield	1.6	%	1.7	%
Expected volatility	27.0	%	27.0	%
Expected life	8 years		8 years

Employee Benefits Paid in Company Stock

During the nine months ended June 30, 2012 and 2011 , 1.0 million and 0.9 million shares, respectively, of Company common stock were issued to employees under the Company’s employee stock purchase and defined contribution savings plans at a value of $53 million and $53 million for the respective periods.

Earnings Per Share and Diluted Share Equivalents



The computation of basic and diluted earnings per share is as follows:

	Three Months Ended				Nine Months Ended
	June 30				June 30
(in millions, except per share amounts)	2012		2011		2012		2011
Numerator for basic and diluted earnings per share:
Income from continuing operations	$	166	$	157	$	457	$	457
Income from discontinued operations, net of taxes	—		1		—		2
Net income	$	166	$	158	$	457	$	459
Denominator:
Denominator for basic earnings per share – weighted average common shares	143.4		153.8		146.4		154.6
Effect of dilutive securities:
Stock options	1.1		1.5		1.1		1.5
Performance shares, restricted stock and restricted stock units	0.5		0.6		0.4		0.5
Dilutive potential common shares	1.6		2.1		1.5		2.0
Denominator for diluted earnings per share – adjusted weighted average shares and assumed conversion	145.0		155.9		147.9		156.6
Earnings per share:
Basic
Continuing operations	$	1.16	$	1.02	$	3.12	$	2.96
Discontinued operations	—		0.01		—		0.01
Basic earnings per share	$	1.16	$	1.03	$	3.12	$	2.97
Diluted
Continuing operations	$	1.14	$	1.01	$	3.09	$	2.92
Discontinued operations	—		—		—		0.01
Diluted earnings per share	$	1.14	$	1.01	$	3.09	$	2.93

The average outstanding diluted shares calculation excludes options with an exercise price that exceeds the average market price of shares during the period. Stock options excluded from the average outstanding diluted shares calculation were 2.9 million and 0.3 million for the three months ended June 30, 2012 and 2011 , respectively, and 1.4 million and 0.4 million for the nine months ended June 30, 2012 and 2011 , respectively.

Earnings per share amounts are computed independently each quarter. As a result, the sum of each quarter's per share amount may not equal the total per share amount for the respective year-to-date period.


13.	Comprehensive Income



Comprehensive income, net of tax, consists of the following:

	Three Months Ended						Nine Months Ended
	June 30						June 30
(in millions)	2012			2011			2012			2011
Net income	$	166		$	158		$	457		$	459
Unrealized foreign currency translation adjustment	(11		)	(3		)	(4		)	6
Foreign currency cash flow hedge adjustment, net of tax	2			—			2			2
Amortization of defined benefit plan costs, net of tax	7			4			21			12
Comprehensive income	$	164		$	159		$	476		$	479

The Company has one consolidated subsidiary with income attributable to a noncontrolling interest. The net income and comprehensive income attributable to the noncontrolling interest is insignificant.


14.	Other Income, Net



Other income, net consists of the following:

	Three Months Ended				Nine Months Ended
	June 30				June 30
(in millions)	2012		2011		2012		2011
Earnings from equity affiliates	2		3		8		9
Gain on sale of property	5		—		5		—
Royalty income	2		—		3		1
Interest income	1		2		2		4
Other	—		1		2		5
Other income, net	$	10	$	6	$	20	$	19


15.	Income Taxes

At the end of each interim reporting period, the Company makes an estimate of the annual effective income tax rate. Tax items included in the annual effective income tax rate are pro-rated for the full year and tax items discrete to a specific quarter are included in the effective income tax rate for that quarter. The estimate used in providing for income taxes on a year-to-date basis may change in subsequent interim periods. During the three months ended June 30, 2012 and 2011 , the effective income tax rate from continuing operations was 27.8 percent and 30.8 percent , respectively, and for the nine months ended June 30, 2012 , and 2011 , the effective income tax rate was 28.3 percent and 28.1 percent , respectively.

The effective income tax rate from continuing operations for the three months ended June 30, 2012 was lower than the same period of the prior year due to a benefit from the remeasurement of uncertain tax positions related to prior periods of about 4 percentage points, partially offset by the unfavorable impact of the expiration of the Federal R&D Tax Credit.

ROCKWELL COLLINS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The effective income tax rate from continuing operations for the nine months ended June 30, 2012 was comparable to the same period of the prior year as the unfavorable impact of the expired Federal R&D Tax Credit was mostly offset by the current year benefits from the remeasurement of uncertain tax positions and the favorable impact of the Internal Revenue Service (IRS) completing its examination of the taxable years ending September 30, 2008 and 2009 .

The Company's U.S. Federal income tax returns for the tax years ended September 30, 2009 and prior have been audited by the IRS and are closed to further adjustments. The Company is also currently under audit in various U.S. state and non-U.S. jurisdictions, which have statutes of limitations generally ranging from 3 to 5 years. The Company believes it has adequately provided for any tax adjustments that may result from the various audits.

The Company's income tax liability was $0 million as of June 30, 2012 and $29 million as of September 30, 2011 and was recorded within Other current liabilities in the Condensed Consolidated Statement of Financial Position. The Company had net income tax payments of $142 million and $83 million during the nine months ended June 30, 2012 and 2011 , respectively.

The Company had gross unrecognized tax benefits recorded within Other Liabilities in the Condensed Consolidated Statement of Financial Position of $41 million and $100 million as of June 30, 2012 and September 30, 2011 , respectively. The total amounts of unrecognized tax benefits that, if recognized, would affect the effective income tax rate were $24 million and $57 million as of June 30, 2012 and September 30, 2011 , respectively. Although the timing and outcome of tax settlements are uncertain, it is reasonably possible that during the next 12 months, a reduction in unrecognized tax benefits may occur of approximately $0 million to $1 million based on the outcome of tax examinations or as a result of the expiration of various statutes of limitations.

The Company includes interest and penalties related to unrecognized tax benefits in income tax expense. The total amount of interest and penalties recognized within Other Liabilities in the Condensed Consolidated Statement of Financial Position was approximately $2 million and $6 million as of June 30, 2012 and September 30, 2011. The total amount of interest and penalties recorded as an expense or (income) within Income tax expense in the Condensed Consolidated Statement of Operations was $(2) million and $1 million for the nine months ended June 30, 2012 and 2011.


16.	Fair Value Measurements

The FASB defines fair value as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The FASB’s guidance classifies the inputs used to measure fair value into the following hierarchy:


Level 1 -	quoted prices (unadjusted) in active markets for identical assets or liabilities


Level 2 -	quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument


Level 3 -	unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value

A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

ROCKWELL COLLINS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The fair value of the Company's financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2012 and September 30, 2011 are as follows:



		June 30, 2012			September 30, 2011
(in millions)	Fair Value Hierarchy	Fair Value Asset (Liability)			Fair Value Asset (Liability)
Deferred compensation plan investments	Level 1	$	42		$	37
Interest rate swap assets	Level 2	30			29
Foreign currency forward exchange contract assets	Level 2	8			8
Foreign currency forward exchange contract liabilities	Level 2	(7		)	(7		)

There were no nonfinancial assets or nonfinancial liabilities recognized at fair value on a nonrecurring basis and there were no transfers between Levels of the fair value hierarchy during the nine months ended June 30, 2012 or 2011 .

The carrying amounts and fair values of the Company’s financial instruments are as follows:



	Asset (Liability)
	June 30, 2012						September 30, 2011
(in millions)	Carrying Amount			Fair Value			Carrying Amount			Fair Value
Cash and cash equivalents	$	265		$	265		$	530		$	530
Short-term debt	(201		)	(201		)	—			—
Long-term debt	(748		)	(825		)	(499		)	(565		)

The fair value of cash and cash equivalents and short-term debt approximate their carrying value due to the short-term nature of the instruments and these items are within Level 1 of the fair value hierarchy. Fair value information for long-term debt is within Level 2 of the fair value hierarchy and is based on current market interest rates and estimates of current market conditions for instruments with similar terms, maturities and degree of risk. The carrying amount and fair value of long-term debt excludes the interest rate swaps fair value adjustment. These fair value estimates do not necessarily reflect the amounts the Company would realize in a current market exchange.


17.	Derivative Financial Instruments

Interest Rate Swaps

The Company manages its exposure to interest rate risk by maintaining an appropriate mix of fixed and variable rate debt, which over time should moderate the costs of debt financing. When considered necessary, the Company may use financial instruments in the form of interest rate swaps to help meet this objective. In January 2010, the Company entered into two interest rate swap contracts (the 2019 Swaps) which expire on July 15, 2019 and effectively converted $150 million of the 2019 Notes to floating rate debt based on six-month LIBOR plus 1.235 percent . On November 20, 2003, the Company entered into two interest rate swap contracts (the 2013 Swaps) which expire on December 1, 2013 and effectively converted $100 million of the 2013 Notes to floating rate debt based on six-month LIBOR less 0.075 percent .

The Company has designated the 2019 and 2013 Swaps (the Swaps) as fair value hedges. At June 30, 2012 and September 30, 2011 , interest rate swaps were recorded within Other Assets at a fair value of $30 million and $29 million , respectively, offset by a fair value adjustment to Long-term Debt (Note 10) of $30 million and $29 million , respectively. Cash payments or receipts between the Company and the counterparties to the Swaps are recorded as an adjustment to interest expense.

ROCKWELL COLLINS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Foreign Currency Forward Exchange Contracts

The Company transacts business in various foreign currencies which subjects the Company’s cash flows and earnings to exposure related to changes in foreign currency exchange rates. These exposures arise primarily from purchases or sales of products and services from third parties and intercompany transactions. Foreign currency forward exchange contracts provide for the purchase or sale of foreign currencies at specified future dates at specified exchange rates and are used to offset changes in the fair value of certain assets or liabilities or forecasted cash flows resulting from transactions denominated in foreign currencies. As of June 30, 2012 and September 30, 2011 , the Company had outstanding foreign currency forward exchange contracts with notional amounts of $408 million and $502 million , respectively. These notional values consist primarily of contracts for the European euro, British pound sterling and Japanese yen, and are stated in U.S. dollar equivalents at spot exchange rates at the respective dates.

Fair Value of Derivative Instruments



Fair values of derivative instruments in the Condensed Consolidated Statement of Financial Position as of June 30, 2012 and September 30, 2011 are as follows:

		Asset Derivatives
(in millions)	Classification	June 30, 2012		September 30, 2011
Foreign currency forward exchange contracts	Other current assets	$	8	$	8
Interest rate swaps	Other assets	30		29
Total		$	38	$	37



		Liability Derivatives
(in millions)	Classification	June 30, 2012		September 30, 2011
Foreign currency forward exchange contracts	Other current liabilities	$	7	$	7

The fair values of derivative instruments are presented on a gross basis as the Company does not have any derivative contracts which are subject to master netting arrangements. As of June 30, 2012 and September 30, 2011 , $0 million and $1 million , respectively, of foreign currency forward exchange contracts, classified within Other current assets, were not designated as hedging instruments.

ROCKWELL COLLINS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



The effect of derivative instruments on the Condensed Consolidated Statement of Operations for the three and nine months ended June 30, 2012 and 2011 is as follows:

		Amount of Gain (Loss)					Amount of Gain (Loss)
		Three Months Ended					Nine Months Ended
		June 30					June 30
(in millions)	Location of Gain (Loss)	2012			2011		2012			2011
Derivatives Designated as Hedging Instruments:
Fair Value Hedges
Foreign currency forward exchange contracts	Cost of sales	$	(2	)	$	2	$	(3	)	$	3
Interest rate swaps	Interest expense	3			3		7			7

Cash Flow Hedges
Foreign currency forward exchange contracts:
Amount of gain recognized in AOCL (effective portion, before deferred tax impact)	AOCL	$	2		$	1	$	2		$	4
Amount of gain reclassified from AOCL into income	Cost of sales	—			2		—			1

Derivatives not Designated as Hedging Instruments:
Foreign currency forward exchange contracts	Cost of sales	1			—		1			—

There was no significant impact to the Company’s earnings related to the ineffective portion of any hedging instruments during the three and nine months ended June 30, 2012 . In addition, there was no significant impact to the Company’s earnings when a hedged firm commitment no longer qualified as a fair value hedge or when a hedged forecasted transaction no longer qualified as a cash flow hedge during the three and nine months ended June 30, 2012 .

The Company did not have any hedges with credit-risk-related contingent features or that required the posting of collateral as of June 30, 2012 . The cash flows from derivative contracts are recorded in operating activities in the Condensed Consolidated Statement of Cash Flows.

Cash flow hedges are designated as fair value hedges once the underlying transaction is recorded on the balance sheet, or approximately 60 days from the maturity date of the hedge. The Company expects to reclassify approximately $1 million of net losses into earnings over the next 12 months. The maximum duration of a foreign currency cash flow hedge contract at June 30, 2012 was 97 months.


18.	Guarantees and Indemnifications

Product warranty costs

Accrued liabilities are recorded to reflect the Company’s contractual obligations relating to warranty commitments to customers. Warranty coverage of various lengths and terms is provided to customers depending on standard offerings and negotiated contractual agreements. An estimate for warranty expense is recorded at the time of sale based on the length of the warranty and historical warranty return rates and repair costs.

ROCKWELL COLLINS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



Changes in the carrying amount of accrued product warranty costs are summarized as follows:

	Nine Months Ended
	June 30
(in millions)	2012			2011
Balance at beginning of year	$	148		$	183
Warranty costs incurred	(35		)	(38		)
Product warranty accrual	32			26
Changes in estimates for prior years	(20		)	(18		)
Foreign currency translation adjustments	—			2
Balance at June 30	$	125		$	155

Guarantees

The Company provides a parent company guarantee related to various obligations of its 50 percent owned joint venture, Quest Flight Training Limited (Quest). The Company has guaranteed, jointly and severally with Quadrant Group plc (Quadrant), the other joint venture partner, the performance of Quest in relation to its contract with the United Kingdom Ministry of Defence (which expires in 2030) and the performance of certain Quest subcontractors (up to $2 million ). In addition, the Company has also pledged equity shares in Quest to guarantee payment by Quest of a loan agreement executed by Quest. In the event of default on this loan agreement, the lending institution can request that the trustee holding such equity shares surrender them to the lending institution in order to satisfy all amounts then outstanding under the loan agreement. As of June 30, 2012 , the outstanding loan balance was approximately $ 5 million . Quadrant has made an identical pledge to guarantee this obligation of Quest.

Should Quest fail to meet its obligations under these agreements, these guarantees may become a liability of the Company. As of June 30, 2012 , the Quest guarantees are not reflected on the Company’s Condensed Consolidated Statement of Financial Position because the Company believes that Quest will meet all of its performance and financial obligations in relation to its contract with the United Kingdom Ministry of Defence and the loan agreement.

Letters of credit

The Company has contingent commitments in the form of letters of credit. Outstanding letters of credit are issued by banks on the Company’s behalf to support certain contractual obligations to its customers. If the Company fails to meet these contractual obligations, these letters of credit may become liabilities of the Company. Total outstanding letters of credit at June 30, 2012 were $ 58 million . These commitments are not reflected as liabilities on the Company’s Condensed Consolidated Statement of Financial Position.

Indemnifications

The Company enters into indemnifications with lenders, counterparties in transactions such as administration of employee benefit plans and other customary indemnifications with third parties in the normal course of business. The following are other than customary indemnifications based on the judgment of management.

The Company became an independent, publicly held company on June 29, 2001, when Rockwell International Corporation (Rockwell), renamed Rockwell Automation Inc., spun off its former avionics and communications business and certain other assets and liabilities of Rockwell by means of a distribution of all the Company’s outstanding shares of common stock to the shareowners of Rockwell in a tax-free spin-off (the spin-off). In connection with the spin-off, the Company may be required to indemnify certain insurers against claims made by third parties in connection with the Company’s legacy insurance policies.

In connection with agreements for the sale of portions of its business, the Company at times retains various liabilities of a business that relate to events occurring prior to its sale, such as tax, environmental, litigation and employment matters. The Company at times indemnifies the purchaser of a Rockwell Collins business in the event that a third party asserts a claim that relates to a liability retained by the Company.

ROCKWELL COLLINS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The Company also provides indemnifications of varying scope and amounts to certain customers against claims of product liability or intellectual property infringement made by third parties arising from the use of Company or customer products or intellectual property. These indemnifications generally require the Company to compensate the other party for certain damages and costs incurred as a result of third party product liability or intellectual property claims arising from these transactions.

The amount the Company could be required to pay under its indemnification agreements is generally limited based on amounts specified in the underlying agreements, or in the case of some agreements, the maximum potential amount of future payments that could be required is not limited. When a potential claim is asserted under these agreements, the Company considers such factors as the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. A liability is recorded when a potential claim is both probable and estimable. The nature of these agreements prevents the Company from making a reasonable estimate of the maximum potential amount it could be required to pay should counterparties to these agreements assert a claim; however, the Company currently has no material claims pending related to such agreements.


19.	Environmental Matters

The Company is subject to federal, state and local regulations relating to the discharge of substances into the environment, the disposal of hazardous wastes and other activities affecting the environment that have had and will continue to have an impact on the Company’s manufacturing operations. These environmental protection regulations may require the investigation and remediation of environmental impairments at current and previously owned or leased properties. In addition, lawsuits, claims and proceedings have been asserted on occasion against the Company alleging violations of environmental protection regulations, or seeking remediation of alleged environmental impairments, principally at previously owned or leased properties. As of June 30, 2012 , the Company is involved in the investigation or remediation of eight sites under these regulations or pursuant to lawsuits asserted by third parties. Management estimates that the total reasonably possible future costs the Company could incur for seven of these sites is not significant. Management estimates that the total reasonably possible future costs the Company could incur from one of these sites to be approximately $ 12 million . The Company has recorded environmental reserves for this site of $ 6 million as of June 30, 2012 , which represents management’s best estimate of the probable future cost for this site.

To date, compliance with environmental regulations and resolution of environmental claims has been accomplished without material effect on the Company’s liquidity and capital resources, competitive position or financial condition. Management believes that expenditures for environmental capital investment and remediation necessary to comply with present regulations governing environmental protection and other expenditures for the resolution of environmental claims will not have a material effect on the Company’s business or financial position, but could possibly be significant to the results of operations or cash flows of any one quarter.


20.	Legal Matters and Other Uncertainties

The Company is subject to various lawsuits, claims and proceedings that have been or may be instituted or asserted against the Company relating to the conduct of the Company's business, including those pertaining to product liability, antitrust, intellectual property, safety and health, exporting and importing, contract, employment and regulatory matters. Although the outcome of these matters cannot be predicted with certainty and some lawsuits, claims or proceedings may be disposed of unfavorably to the Company, management believes the disposition of matters that are pending or asserted are not expected to have a material effect on the Company's business or financial position, but could possibly be significant to the results of operations or cash flows of any one quarter.

The Company depends to a large degree on U.S. Government spending, as a significant portion of the Company's sales are derived from U.S. Government contracts, both directly and indirectly through subcontracts. The Budget Control Act of 2011 (BCA) imposes spending caps and certain reductions in security spending of approximately $490 billion over a ten-year period through 2021. Absent additional Congressional action, further budget cuts (or sequestration) as outlined in the BCA will be implemented on January 3, 2013. Future reductions in U.S. Government security spending could have a significant adverse impact on the financial results of the Company's Government Systems operating segment.

ROCKWELL COLLINS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)


21.	Restructuring and Asset Impairment Charges

In September 2011, the Company recorded restructuring charges totaling $27 million . This amount was primarily comprised of non-cash asset impairment charges of $11 million , employee severance of $7 million , and $9 million of other costs, primarily attributable to a lease termination. The charges related to decisions to implement certain business realignment and facility rationalization actions in response to the global economic factors that have negatively impacted the Company's Government Systems segment. During the nine months ended June 30, 2012 , the Company made cash severance payments of $6 million and contract and lease termination payments of $6 million . As of June 30, 2012 , $4 million of employee severance and lease termination costs related to these actions remain to be paid in future periods.

In June 2012, the Company recorded an additional restructuring charge totaling $6 million . This amount was comprised of employee severance costs and as of June 30, 2012, $4 million related to this action remains to be paid in future periods.


22.	Business Segment Information



The sales and results of continuing operations of the Company’s operating segments are summarized as follows:

	Three Months Ended						Nine Months Ended
	June 30						June 30
(in millions)	2012			2011			2012			2011
Sales:
Government Systems	$	679		$	668		$	1,890		$	2,034
Commercial Systems	526			522			1,570			1,476
Total sales	$	1,205		$	1,190		$	3,460		$	3,510

Segment operating earnings:
Government Systems	$	148		$	141		$	393		$	422
Commercial Systems	105			107			318			280
Total segment operating earnings	253			248			711			702

Interest expense	(7		)	(5		)	(20		)	(14		)
Stock-based compensation	(6		)	(6		)	(19		)	(18		)
General corporate, net	(10		)	(10		)	(35		)	(34		)
Income from continuing operations before income taxes	230			227			637			636
Income tax expense	(64		)	(70		)	(180		)	(179		)
Income from continuing operations	$	166		$	157		$	457		$	457

The Company evaluates performance and allocates resources based upon, among other considerations, segment operating earnings. The Company's definition of segment operating earnings excludes income taxes, stock-based compensation, unallocated general corporate expenses, interest expense, gains and losses from the disposition of businesses, restructuring and asset impairment charges, and other special items as identified by management from time to time. Intersegment sales are not material and have been eliminated.

As discussed in Note 4, the Rollmet product line, formerly included within the Commercial Systems segment, has been accounted for as a discontinued operation.

ROCKWELL COLLINS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



The following table summarizes sales by product category for the three and nine months ended June 30, 2012 and 2011:

	Three Months Ended				Nine Months Ended
	June 30				June 30
(in millions)	2012		2011		2012		2011
Government Systems product categories:
Avionics	$	393	$	353	$	1,082	$	1,020
Communication products	178		164		476		510
Surface solutions	50		82		168		280
Navigation products	58		69		164		224
Government Systems sales	679		668