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 DECEMBER 31, 2015

£ 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  ý  No  o

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 Regulations S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ý  No  o

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. (Check one):

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

131,131,426 shares of the registrant's Common Stock were outstanding on January 18, 2016.


 

1

ROCKWELL COLLINS, INC.

INDEX


 
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


i

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)
 
December 31,
2015
 
September 30,
2015
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
334

 
$
252

Receivables, net
1,036

 
1,038

Inventories, net
1,938

 
1,824

Other current assets
138

 
110

Total current assets
3,446

 
3,224

 
 
 
 
Property
973

 
964

Goodwill
1,903

 
1,904

Intangible Assets
693

 
703

Deferred Income Taxes
141

 
165

Other Assets
315

 
344

TOTAL ASSETS
$
7,471

 
$
7,304

LIABILITIES AND EQUITY
 

 
 

Current Liabilities:
 

 
 

Short-term debt
$
1,105

 
$
448

Accounts payable
443

 
487

Compensation and benefits
218

 
273

Advance payments from customers
336

 
365

Accrued customer incentives
234

 
232

Product warranty costs
87

 
89

Other current liabilities
152

 
166

Total current liabilities
2,575

 
2,060

 
 
 
 
Long-term Debt, Net
1,370

 
1,680

Retirement Benefits
1,381

 
1,466

Other Liabilities
240

 
218

 
 
 
 
Equity:
 

 
 

Common stock ($0.01 par value; shares authorized: 1,000; shares issued as of December 31, 2015 and September 30, 2015: 183.8)
2

 
2

Additional paid-in capital
1,520

 
1,519

Retained earnings
5,215

 
5,124

Accumulated other comprehensive loss
(1,693
)
 
(1,699
)
Common stock in treasury, at cost (shares held: December 31, 2015, 52.6; September
30, 2015, 51.9)
(3,145
)
 
(3,071
)
Total shareowners’ equity
1,899

 
1,875

Noncontrolling interest
6

 
5

Total equity
1,905

 
1,880

TOTAL LIABILITIES AND EQUITY
$
7,471

 
$
7,304

See Notes to Condensed Consolidated Financial Statements.

1

ROCKWELL COLLINS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(in millions, except per share amounts)

 
Three Months Ended
 
December 31
 
2015
 
2014
Sales:
 
 
 
Product sales
$
968

 
$
1,035

Service sales
201

 
191

Total sales
1,169

 
1,226

 
 
 
 
Costs, expenses and other:
 

 
 

Product cost of sales
691

 
718

Service cost of sales
145

 
139

Selling, general and administrative expenses
163

 
137

Interest expense
15

 
15

Other income, net
(2
)
 
(1
)
Total costs, expenses and other
1,012

 
1,008

 
 
 
 
Income from continuing operations before income taxes
157


218

Income tax expense
24

 
49

Income from continuing operations
133

 
169

 
 
 
 
Income (loss) from discontinued operations, net of taxes
2

 
(2
)
 
 
 
 
Net income
$
135

 
$
167

 
 
 
 
Earnings (loss) per share:
 

 
 

Basic
 
 
 
Continuing operations
$
1.01

 
$
1.28

Discontinued operations
0.02

 
(0.02
)
Basic earnings per share
$
1.03

 
$
1.26

 
 
 
 
Diluted
 
 
 
Continuing operations
$
1.00

 
$
1.26

Discontinued operations
0.02

 
(0.02
)
Diluted earnings per share
$
1.02

 
$
1.24

 
 
 
 
Weighted average common shares:
 
 
 
Basic
131.4

 
133.0

Diluted
132.8

 
134.5

 
 
 
 
Cash dividends per share
$
0.33

 
$
0.30


See Notes to Condensed Consolidated Financial Statements.

2

ROCKWELL COLLINS, INC.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
(in millions)

 
Three Months Ended
 
December 31
 
2015
 
2014
Net income
$
135

 
$
167

Unrealized foreign currency translation adjustments
(8
)
 
(14
)
Pension and other retirement benefits adjustments (net of taxes for the three months ended December 31, 2015 and 2014 of $8 and $7, respectively)
13

 
11

Foreign currency cash flow hedge adjustments (net of taxes for the three months ended December 31, 2015 and 2014 of $0 and $(2), respectively)
1

 
(4
)
Comprehensive income
$
141

 
$
160


See Notes to Condensed Consolidated Financial Statements.



3

ROCKWELL COLLINS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(in millions)

 
Three Months Ended December 31
 
2015
 
2014
Operating Activities:
 
 
 
Net income
$
135

 
$
167

Income (loss) from discontinued operations, net of tax
2

 
(2
)
Income from continuing operations
133

 
169

Adjustments to arrive at cash used for operating activities:
 
 
 
Non-cash restructuring charges
6

 
—

Depreciation
35

 
38

Amortization of intangible assets and pre-production engineering costs
23

 
24

Stock-based compensation expense
6

 
5

Compensation and benefits paid in common stock
12

 
11

Excess tax benefit from stock-based compensation
(3
)
 
(7
)
Deferred income taxes
15

 
13

Pension plan contributions
(58
)
 
(58
)
Changes in assets and liabilities, excluding effects of acquisitions and foreign currency adjustments:
 
 
 
Receivables
16

 
(15
)
Production inventory
(84
)
 
(52
)
Pre-production engineering costs
(49
)
 
(43
)
Accounts payable
(32
)
 
(51
)
Compensation and benefits
(54
)
 
(59
)
Advance payments from customers
(28
)
 
13

Accrued customer incentives
2

 
(1
)
Product warranty costs
(2
)
 
—

Income taxes
7

 
8

Other assets and liabilities
(36
)
 
(55
)
Cash Used for Operating Activities from Continuing Operations
(91
)
 
(60
)
Investing Activities:
 

 
 

Property additions
(48
)
 
(62
)
Other investing activities
—

 
(14
)
Cash Used for Investing Activities from Continuing Operations
(48
)
 
(76
)
Financing Activities:
 

 
 

Purchases of treasury stock
(96
)
 
(173
)
Cash dividends
(43
)
 
(40
)
Increase in short-term commercial paper borrowings, net
357

 
327

Proceeds from the exercise of stock options
3

 
17

Excess tax benefit from stock-based compensation
3

 
7

Other financing activities
(1
)
 
—

Cash Provided by Financing Activities from Continuing Operations
223

 
138

Effect of exchange rate changes on cash and cash equivalents
(2
)
 
(9
)
Discontinued Operations:
 
 
 
Operating activities
—

 
(1
)
Cash (Used for) Discontinued Operations
—

 
(1
)
Net Change in Cash and Cash Equivalents
82

 
(8
)
Cash and Cash Equivalents at Beginning of Period
252

 
323

Cash and Cash Equivalents at End of Period
$
334

 
$
315


See Notes to Condensed Consolidated Financial Statements.



4

ROCKWELL COLLINS, INC.
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(Unaudited)
(in millions)

 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares Outstanding
 
Par Value
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Treasury Stock
 
Noncontrolling Interest
 
Total Equity
Balance at September 30, 2015
131.9

 
$
2

 
$
1,519

 
$
5,124

 
$
(1,699
)
 
$
(3,071
)
 
$
5

 
$
1,880

Net income
 
 
 
 
 
 
135

 
 
 
 
 
 
 
135

Other comprehensive income
 
 
 
 
 
 
 
 
6

 
 
 
 
 
6

Cash dividends
 
 
 
 
 
 
(43
)
 
 
 
 
 
 
 
(43
)
Shares issued:
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Exercise of stock options
0.1

 
 
 
(1
)
 
 
 
 
 
4

 
 
 
3

Vesting of performance shares and restricted stock
0.1

 
 
 
(11
)
 
 
 
 
 
5

 
 
 
(6
)
Excess tax pools
 
 
 
 
3

 
 
 
 
 
 
 
 
 
3

Employee stock purchase plan
—

 
 
 
1

 
 
 
 
 
1

 
 
 
2

Employee savings plan
0.1

 
 
 
3

 
 
 
 
 
6

 
 
 
9

Stock-based compensation
 
 
 
 
6

 
 
 
 
 
 
 
 
 
6

Treasury share repurchases
(1.0
)
 
 
 
 
 
 
 
 
 
(90
)
 
 
 
(90
)
Other
 
 
 
 
 
 
(1
)
 
 
 
 
 
1

 
—

Balance at December 31, 2015
131.2

 
$
2

 
$
1,520

 
$
5,215

 
$
(1,693
)
 
$
(3,145
)
 
$
6

 
$
1,905


 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares Outstanding
 
Par Value
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Treasury Stock
 
Noncontrolling Interest
 
Total Equity
Balance at September 30, 2014
134.0

 
$
2

 
$
1,489

 
$
4,605

 
$
(1,366
)
 
$
(2,846
)
 
$
5

 
$
1,889

Net income
 
 
 
 
 
 
167

 
 
 
 
 
 
 
167

Other comprehensive loss
 
 
 
 
 
 
 
 
(7
)
 
 
 
 
 
(7
)
Cash dividends
 
 
 
 
 
 
(40
)
 
 
 
 
 
 
 
(40
)
Shares issued:
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Exercise of stock options
0.4

 
 
 
(8
)
 
 
 
 
 
25

 
 
 
17

Vesting of performance shares and restricted stock
0.2

 
 
 
(10
)
 
 
 
 
 
4

 
 
 
(6
)
Excess tax pools
 
 
 
 
6

 
 
 
 
 
 
 
 
 
6

Employee stock purchase plan
—

 
 
 
1

 
 
 
 
 
2

 
 
 
3

Employee savings plan
0.1

 
 
 
3

 
 
 
 
 
6

 
 
 
9

Stock-based compensation
 
 
 
 
5

 
 
 
 
 
 
 
 
 
5

Treasury share repurchases
(2.2
)
 
 
 
 
 
 
 
 
 
(174
)
 
 
 
(174
)
Other


 
 
 
 
 
 
 
 
 
 
 
1

 
1

Balance at December 31, 2014
132.5

 
$
2

 
$
1,486

 
$
4,732

 
$
(1,373
)
 
$
(2,983
)
 
$
6

 
$
1,870


See Notes to Condensed Consolidated Financial Statements.



5

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 systems for commercial and military customers and provides information management services through voice and data communication networks and solutions 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, December 31 and September 30 are utilized consistently throughout these financial statements and notes to represent the period end dates.

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.

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, 2015 .

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 months ended December 31, 2015 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.

As discussed in Note 4, Discontinued Operations and Divestitures, on March 10, 2015, the Company divested its Aerospace Systems Engineering and Support (ASES) business, which provides military aircraft integration and modifications, maintenance and logistics and support. As a result, the ASES business has been accounted for as a discontinued operation for all periods presented.

2.
Recently Issued Accounting Standards

In November 2015, the Financial Accounting Standards Board (FASB) issued new guidance requiring all deferred tax assets and liabilities to be classified as noncurrent on the balance sheet instead of separating those balances into current and noncurrent amounts. The new guidance is effective for the Company in 2018, with early adoption permitted. In order to simplify the accounting for income taxes, the Company adopted the new guidance in the current quarter on a retrospective basis, which has resulted in the reclassification of $9 million of current deferred tax assets and $84 million of current deferred tax liabilities to noncurrent as of September 30, 2015.

In May 2014, the FASB issued a comprehensive new revenue recognition standard that effectively replaces all current guidance on the topic and expands disclosures regarding revenue. The guidance permits use of either a retrospective or cumulative effect transition method. Based upon the FASB's decision to approve a one year delay in implementation, the new standard is now effective for the Company in 2019, with early adoption permitted, but not earlier than 2018. The Company is evaluating the transition methods allowed under the new standard and the effect the standard will have on the Company's consolidated financial statements and related disclosures. Given the new standard's impact on business processes, systems and internal controls, analysis of the new guidance will likely extend over several future periods.

Other new accounting standards issued but not effective until after December 31, 2015 are not expected to have a material impact on the Company's financial statements.


6

ROCKWELL COLLINS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


3.
Acquisitions, Goodwill and Intangible Assets

Acquisitions
On August 6, 2015, the Company acquired 100 percent of the outstanding shares of Newport News, Virginia-based International Communications Group, Inc. (ICG), a leading provider of satellite-based global voice and data communication products and services for the aviation industry. The purchase price, net of cash acquired, was $50 million . Additional post-closing consideration of up to $14 million may be paid, contingent upon the achievement of certain milestones. The Company recorded a $12 million liability on the acquisition date for the fair value of the contingent consideration. The Company is in the process of allocating the purchase price and performing a valuation for acquired intangible assets and their useful lives. Based on the Company's preliminary allocation of the purchase price, $38 million has been allocated to goodwill and $24 million to intangible assets. All goodwill resulting from the acquisition is tax deductible. The excess purchase price over net assets acquired, including intangible assets, reflects the Company's view that this acquisition will broaden the Company's flight deck and connectivity portfolio.

On March 20, 2015, the Company acquired 100 percent of the outstanding shares of Pacific Avionics Pty. Limited (Pacific Avionics), a Singapore-based company specializing in technologies used for wireless information distribution, including in-flight entertainment and connectivity. The purchase price, net of cash acquired, was $24 million . In the fourth quarter of 2015, the purchase price allocation was finalized, with $10 million allocated to intangible assets and $15 million to goodwill, none of which is deductible for tax purposes. The excess purchase price over net assets acquired, including intangible assets, reflects the Company's view that this acquisition will further enhance the Company's cabin products and information management services portfolios.

The ICG and Pacific Avionics acquisitions are included in the Commercial Systems segment and the results of operations have been included in the Company's operating results for the periods subsequent to the respective acquisition dates. Pro-forma results of operations have not been presented as the effect of the acquisitions are not material to the Company's consolidated results of operations.

Goodwill
Changes in the carrying amount of goodwill are summarized as follows:
(in millions)
Commercial
Systems
 
Government
Systems
 
Information Management Services
 
Total
Balance at September 30, 2015
$
314

 
$
500

 
$
1,090

 
$
1,904

Foreign currency translation adjustments
—

 
(1
)
 
—

 
(1
)
Balance at December 31, 2015
$
314

 
$
499

 
$
1,090

 
$
1,903


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 goodwill or indefinite-lived intangibles are more-likely-than-not impaired, commonly referred to as triggering events. There have been no such triggering events during any of the periods presented and the Company's second quarter 2015 impairment tests resulted in no impairment.


7

ROCKWELL COLLINS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


Intangible Assets
Intangible assets are summarized as follows:
 
December 31, 2015
 
September 30, 2015
(in millions)
Gross
 
Accum
Amort
 
Net
 
Gross
 
Accum
Amort
 
Net
Intangible assets with finite lives:
 
 
 
 
 
 
 
 
 
 
 
Developed technology and patents
$
346

 
$
(201
)
 
$
145

 
$
346

 
$
(195
)
 
$
151

Backlog
5

 
(2
)
 
3

 
5

 
(2
)
 
3

Customer relationships:
 

 
 
 
 
 
 
 
 
 
 
Acquired
338

 
(91
)
 
247

 
338

 
(87
)
 
251

Up-front sales incentives
305

 
(65
)
 
240

 
301

 
(62
)
 
239

License agreements
13

 
(10
)
 
3

 
13

 
(9
)
 
4

Trademarks and tradenames
15

 
(14
)
 
1

 
15

 
(14
)
 
1

Intangible assets with indefinite lives:
 
 
 
 
 
 
 
 
 
 
 
Trademarks and tradenames
47

 
—

 
47

 
47

 
—

 
47

In process research and development
7

 
—

 
7

 
7

 
—

 
7

Intangible assets
$
1,076

 
$
(383
)
 
$
693

 
$
1,072

 
$
(369
)
 
$
703


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 after entry into service. 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 December 31, 2015 , the weighted average amortization period remaining for up-front sales incentives was approximately 10 years.
Anticipated annual amortization expense for intangible assets is as follows:
(in millions)
2016
 
2017
 
2018
 
2019
 
2020
 
Thereafter
Anticipated amortization expense for up-front sales incentives
$
16

 
$
18

 
$
21

 
$
25

 
$
25

 
$
138

Anticipated amortization expense for all other intangible assets
44

 
39

 
38

 
34

 
32

 
223

Total
$
60

 
$
57

 
$
59

 
$
59

 
$
57

 
$
361


Amortization expense for intangible assets for the three months ended December 31, 2015 and 2014 was $14 million and $12 million , respectively.

4.
Discontinued Operations and Divestitures

On March 10, 2015, the Company sold its ASES business, which provides military aircraft integration and modifications, maintenance and logistics and support to align with the Company's long-term primary business strategies. The sale price was $3 million and additional post-closing consideration of up to $4 million may be received contingent upon the achievement of certain revenue growth by ASES. The Company recognized a pre-tax loss of $5 million ( $3 million after-tax) related to the ASES divestiture. The operating results of ASES have been included in discontinued operations in the Company's Condensed Consolidated Statement of Operations for all periods presented. During the three months ended December 31, 2015 , the Company recorded $3 million of income from discontinued operations ( $2 million after-tax) from the favorable settlement of a contractual matter with a customer of the ASES business.


8

ROCKWELL COLLINS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


In April 2014, the FASB issued guidance that modifies the definition of a discontinued operation and provides new disclosure requirements for divestitures. This guidance is effective for the Company in 2016, and any divestiture in 2016 or after will be subject to the new guidance. The ASES divestiture occurred in 2015 and is being reported based upon the previous guidance for discontinued operations.

Results of discontinued operations are as follows:
 
 
Three Months Ended
 
 
December 31
(in millions)
 
2015
 
2014
Sales
 
$
—

 
$
8

Income (loss) from discontinued operations before income taxes
 
3

 
(3
)
Income tax benefit (expense) from discontinued operations
 
(1
)
 
1


5.
Receivables, Net

Receivables, net are summarized as follows:
(in millions)
December 31,
2015
 
September 30,
2015
Billed
$
729

 
$
752

Unbilled
435

 
403

Less progress payments
(121
)
 
(110
)
Total
1,043

 
1,045

Less allowance for doubtful accounts
(7
)
 
(7
)
Receivables, net
$
1,036

 
$
1,038


Receivables expected to be collected beyond the next twelve months are classified as long-term and are included in Other Assets. Receivables, net due from equity affiliates were $52 million and $64 million at December 31, 2015 and September 30, 2015 , 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.

6.
Inventories, Net

Inventories, net are summarized as follows:
(in millions)
December 31,
2015
 
September 30,
2015
Finished goods
$
248

 
$
216

Work in process
263

 
250

Raw materials, parts and supplies
388

 
353

Less progress payments
(13
)
 
(7
)
Total
886

 
812

Pre-production engineering costs
1,052

 
1,012

Inventories, net
$
1,938

 
$
1,824


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

9

ROCKWELL COLLINS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


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 under long-term supply arrangements with the Company's customers. Pre-production engineering costs incurred pursuant to supply arrangements that do not contain contractual guarantees for reimbursement are expensed as incurred.

Anticipated annual amortization expense for pre-production engineering costs is as follows:
(in millions)
2016
 
2017
 
2018
 
2019
 
2020
 
Thereafter
Anticipated amortization expense for pre-production engineering costs (1)
$
53

 
$
81

 
$
111

 
$
132

 
$
131

 
$
526


(1) On October 29, 2015, Bombardier announced the cancellation of the Learjet 85 program. Pre-production engineering costs associated with the Learjet 85 program have been excluded from anticipated amortization expense, as these costs are expected to be recovered through consideration received from Bombardier pursuant to contractual guarantees and not amortized against future hardware deliveries.

Amortization expense for pre-production engineering costs for the three months ended December 31, 2015 and 2014 was $9 million and $12 million , respectively. As of December 31, 2015 , the weighted average amortization period remaining for pre-production engineering costs included in Inventories, net was approximately 11 years.

7.
Other Assets

Other assets are summarized as follows:
(in millions)
December 31,
2015
 
September 30,
2015
Long-term receivables
$
92

 
$
109

Investments in equity affiliates
11

 
13

Exchange and rental assets (net of accumulated depreciation of $98 at December 31, 2015 and $97 at September 30, 2015)
65

 
66

Other
147

 
156

Other assets
$
315

 
$
344


Long-Term Receivables
Long-term receivables expected to be collected beyond the next twelve months are principally comprised of unbilled accounts receivables pursuant to sales recorded under the percentage-of-completion method of accounting that have not yet been billed to customers in accordance with applicable contract terms.

Investments in Equity Affiliates
The Company's investments in equity affiliates primarily consist of eight joint ventures, each 50 percent owned and accounted for under the equity method. During the second quarter of 2015, the Company established ACCEL (Tianjin) Flight Simulation Co., Ltd (ACCEL), a 50 percent owned joint venture with Beijing Bluesky Aviation Technology. Consistent with the terms of the joint venture agreement, the Company contributed $5 million cash to ACCEL in 2015 and expects to contribute an additional $2 million cash in 2016.

The Company records income or loss from equity affiliates in Other income, net on the Condensed Consolidated Statement of Operations. The Company's sales to equity affiliates were $ 46 million and $39 million for the three months ended December 31, 2015 and 2014, respectively. Deferred profit from sales to equity affiliates was $ 1 million at December 31, 2015 and $ 1 million at September 30, 2015 .


10

ROCKWELL COLLINS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


Exchange and Rental Assets
Exchange and rental assets consist primarily of Company products that are either exchanged or rented to customers on a short-term basis in connection with warranty and other service-related activities. 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 methods and lives are reviewed periodically with any changes recorded on a prospective basis. Depreciation expense for exchange and rental assets was $2 million and $2 million for the three months ended December 31, 2015 and 2014, respectively.

8.
Debt

Short-term Debt
(in millions, except weighted average amounts)
December 31,
2015
 
September 30,
2015
Short-term commercial paper borrowings outstanding (1)
$
805

 
$
448

Current portion of long-term debt
300

 
—

Short-term debt
$
1,105

 
$
448

Weighted average interest rate of commercial paper borrowings
0.67
%
 
0.52
%
Weighted average maturity period of commercial paper borrowings (days)
8

 
25

(1) The maximum amount of short-term commercial paper borrowings outstanding during the three months ended December 31, 2015 was $858 million

Commercial Paper Program
Under the Company’s commercial paper program, the Company may sell up to $1 billion face amount of unsecured short-term promissory notes in the commercial paper market. The commercial paper program is supported by the Company's $1 billion five-year revolving credit facility.

Revolving Credit Facilities
The Company has a five-year $1 billion credit facility that expires in December 2018. At December 31, 2015 and September 30, 2015 , there were no outstanding borrowings under this revolving credit facility.

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 (excluding the equity impact on accumulated other comprehensive loss related to defined benefit retirement plans). The ratio was 41 percent at December 31, 2015 . 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.

Short-term credit facilities available to non-U.S. subsidiaries were $38 million as of December 31, 2015 , of which $8 million was utilized to support commitments in the form of commercial letters of credit. At December 31, 2015 and September 30, 2015 , there were no borrowings outstanding under these credit facilities.

At December 31, 2015 and September 30, 2015 , there were no significant commitment fees or compensating balance requirements under any of the Company’s credit facilities.

11

ROCKWELL COLLINS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)



Long-term Debt
The principal amount of long-term debt, net of discount, is summarized as follows:
(in millions, except interest rate figures)
Interest Rate
 
December 31,
2015
 
September 30,
2015
Fixed-rate notes due:
 
 
 
 
 
December 2043
4.80%
 
$
398

 
$
398

December 2023
3.70%
 
399

 
399

November 2021
3.10%
 
250

 
250

July 2019
5.25%
 
299

 
299

Variable-rate note due:
 
 
 
 
 
December 2016
3 month LIBOR + 0.35% (1)
 
300

 
300

Fair value swap adjustment (see Notes 13 and 14)
 
 
24

 
34

Total
 
 
1,670

 
1,680

Less current portion of long-term debt
 
 
300

 
—

Long-term Debt, Net
 
 
$
1,370

 
$
1,680

(1) The three-month LIBOR rate as of December 31, 2015 was approximately 0.61 percent

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

Interest paid on debt for the three months ended December 31, 2015 and 2014 was $20 million and $20 million , respectively.

9.
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.

Components of Expense (Income)
The components of expense (income) for Pension Benefits and Other Retirement Benefits for the three months ended December 31, 2015 and 2014 are summarized as follows:
 
Pension Benefits
 
Other Retirement Benefits
 
Three Months Ended
 
Three Months Ended
 
December 31
 
December 31
(in millions)
2015
 
2014
 
2015
 
2014
Service cost
$
3

 
$
3

 
$
—

 
$
—

Interest cost
32

 
39

 
1

 
1

Expected return on plan assets
(60
)
 
(60
)
 
—

 
—

Amortization:
 
 
 

 
 
 
 

Prior service credit
—

 
(1
)
 
—

 
(1
)
Net actuarial loss
19

 
18

 
2

 
2

Net benefit expense (income)
$
(6
)
 
$
(1
)
 
$
3

 
$
2


In 2015 and prior, the Company used a single-weighted average discount rate to calculate pension interest and service cost. Beginning in 2016, a "spot rate approach" is being used to calculate pension interest and service cost. The spot rate approach applies separate discount rates for each projected benefit payment in the calculation of pension interest and service cost. This calculation change is considered a change in accounting estimate and is being applied prospectively in 2016. For the three

12

ROCKWELL COLLINS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


months ended December 31, 2015, the use of the spot rate approach resulted in an increase to pension income and pre-tax earnings of $9 million relative to the estimated pension income amount had the Company not changed its approach.

In October 2014, the Society of Actuaries published a new set of mortality tables (RP-2014) and a new mortality improvement scale (MP-2014), which update life expectancy assumptions. The newly published tables generally reflect longer life expectancy than was projected by past tables. For the Company's 2015 year-end pension liability valuation, the Company used the RP-2014 tables with an adjustment for plan experience and the MP-2014 improvement scale adjusted to reflect convergence to an ultimate annual rate of mortality improvement of 0.75 percent by 2022. For the three months ended December 31, 2015, these changes resulted in a decrease to pension income and pre-tax earnings of $4 million relative to the estimated pension income amount had the Company not used new mortality table and improvement scale assumptions.

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. In October 2015, the Company voluntarily contributed $55 million to its U.S. qualified pension plans. There is no minimum statutory funding requirement for 2016 and the Company does not currently expect to make any additional discretionary contributions during 2016 to its U.S. qualified pension plans. Any additional future contributions necessary to satisfy minimum statutory funding requirements are dependent upon actual plan asset returns, interest rates and actuarial assumptions. Contributions to the non-U.S. plans and the U.S. non-qualified pension plan are expected to total $13 million in 2016. During the three months ended December 31, 2015 , the Company made contributions to the non-U.S. plans and the U.S. non-qualified pension plan of $3 million .

10.
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
 
 
December 31
(in millions)
 
2015
 
2014
Stock-based compensation expense included in:
 
 
 
 
Product cost of sales
 
$
2

 
$
2

Selling, general and administrative expenses
 
4

 
3

Total
 
$
6

 
$
5

Income tax benefit
 
$
2

 
$
2


The Company issued awards of equity instruments under the Company's various incentive plans for the three months ended December 31, 2015 and 2014 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
Three months ended December 31, 2015
622.9

$
17.78

 
127.5

$
85.11

 
55.4

$
86.67

Three months ended December 31, 2014
555.6

$
19.60

 
129.7

$
82.63

 
52.8

$
83.60


The maximum number of shares of common stock that can be issued in respect of performance shares granted in 2016 based on the achievement of performance targets for years 2016 through 2018 is approximately 306,000 .


13

ROCKWELL COLLINS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


The fair value of each option granted by the Company was estimated using a binomial lattice pricing model and the following weighted average assumptions:
 
2016 Grants
 
2015 Grants
Risk-free interest rate
0.9% - 2.5%

 
0.5% - 2.6%

Expected dividend yield
1.5
%
 
1.6
%
Expected volatility
20.0
%
 
24.0
%
Expected life
7 years

 
7 years


Employee Benefits Paid in Company Stock
During the three months ended December 31, 2015 and 2014 , 0.1 million and 0.1 million shares, respectively, of the Company's common stock were issued to employees under the Company's employee stock purchase and defined contribution savings plans at a value of $12 million and $11 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
 
 
December 31
(in millions, except per share amounts)
 
2015
 
2014
Numerator for basic and diluted earnings per share:
 
 
 
 
Income from continuing operations
 
$
133

 
$
169

Income (loss) from discontinued operations, net of taxes
 
2

 
(2
)
Net income
 
$
135

 
$
167

Denominator:
 
 

 
 

Denominator for basic earnings per share – weighted average common shares
 
131.4

 
133.0

Effect of dilutive securities:
 
 
 
 
Stock options
 
0.9

 
1.1

Performance shares, restricted stock and restricted stock units
 
0.5

 
0.4

Dilutive potential common shares
 
1.4

 
1.5

Denominator for diluted earnings per share – adjusted weighted average shares and assumed conversion
 
132.8

 
134.5

Earnings (loss) per share:
 
 

 
 

Basic
 
 
 
 
Continuing operations
 
$
1.01

 
$
1.28

Discontinued operations
 
0.02

 
(0.02
)
Basic earnings per share
 
$
1.03

 
$
1.26

Diluted
 
 
 
 
Continuing operations
 
$
1.00

 
$
1.26

Discontinued operations
 
0.02

 
(0.02
)
Diluted earnings per share
 
$
1.02

 
$
1.24


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 zero and 0.6 million for the three months ended December 31, 2015 and 2014 , respectively.


14

ROCKWELL COLLINS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


11.
Accumulated Other Comprehensive Loss

Changes in accumulated other comprehensive loss (AOCL), net of tax, by component for the three months ended December 31, 2015 and 2014 are as follows:
 
 
Foreign Exchange Translation Adjustment
 
Pension and Other Postretirement Adjustments (1)
 
Change in the Fair Value of Effective Cash Flow Hedges
 
Total
Balance at September 30, 2015
 
$
(56
)
 
$
(1,637
)
 
$
(6
)
 
$
(1,699
)
Other comprehensive loss before reclassifications
 
(8
)
 
—

 
(1
)
 
(9
)
Amounts reclassified from accumulated other comprehensive loss
 
—

 
13

 
2

 
15

Net current period other comprehensive income(loss)
 
(8
)
 
13

 
1

 
6

Balance at December 31, 2015
 
$
(64
)
 
$
(1,624
)
 
$
(5
)
 
$
(1,693
)
 
 
Foreign Exchange Translation Adjustment
 
Pension and Other Postretirement Adjustments (1)
 
Change in the Fair Value of Effective Cash Flow Hedges
 
Total
Balance at September 30, 2014
 
$
(15
)
 
$
(1,348
)
 
$
(3
)
 
$
(1,366
)
Other comprehensive loss before reclassifications
 
(14
)
 
—

 
(5
)
 
(19
)
Amounts reclassified from accumulated other comprehensive loss
 
—

 
11

 
1

 
12

Net current period other comprehensive income(loss)
 
(14
)
 
11

 
(4
)
 
(7
)
Balance at December 31, 2014
 
$
(29
)
 
$
(1,337
)
 
$
(7
)
 
$
(1,373
)

(1) Reclassifications from AOCL to net income, related to the amortization of net actuarial losses and prior service credits for the Company's retirement benefit plans, were $ 21 million ($ 13 million net of tax) and $18 million ( $11 million net of tax) for the three months ended December 31, 2015 and 2014, respectively. The reclassifications are included in the computation of net benefit expense. See Note 9, Retirement Benefits, for additional details.

12.
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 December 31, 2015 and 2014 , the effective income tax rate from continuing operations was 15.3 percent and 22.5 percent, respectively. The lower current year effective income tax rate from continuing operations was primarily due to the permanent extension of the Federal R&D Tax Credit which had previously expired on December 31, 2014. On December 18, 2015, the Protecting Americans from Tax Hikes Act was enacted, which retroactively reinstated and permanently extended the Federal R&D Tax Credit.

The Company's U.S. Federal income tax returns for the tax year ended September 30, 2011 and prior years have been audited by the IRS and are closed to further adjustments by the IRS. The IRS is currently auditing the Company's tax returns for the years ended September 30, 2012 and 2013. A subsidiary is also under examination by the IRS for calendar years 2009 and 2012 legacy tax filings. The Company is also currently under audit in various U.S. states and non-U.S. jurisdictions. The U.S. states and non-U.S. jurisdictions 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.

15

ROCKWELL COLLINS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)



The Company had net income tax payments of $2 million and $23 million during the three months ended December 31, 2015 and 2014 , respectively.

The Company has gross unrecognized tax benefits recorded within Other Liabilities in the Condensed Consolidated Statement of Financial Position of $43 million and $39 million as of December 31, 2015 and September 30, 2015 , respectively. The total amount of unrecognized tax benefits that, if recognized, would affect the effective income tax rate was $14 million and $11 million as of December 31, 2015 and September 30, 2015 , 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 in the range of $0 to $13 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 $2 million and $1 million as of December 31, 2015 and September 30, 2015 , respectively. 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 $0 million and $ 0 million during the three months ended December 31, 2015 and 2014 , respectively.

13.
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 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's or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

Assets and liabilities
The fair value of the Company's financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2015 and September 30, 2015 are as follows:
 
 
 
December 31, 2015
 
September 30, 2015
(in millions)
Fair Value
Hierarchy
 
Fair Value
Asset (Liability)
 
Fair Value
Asset (Liability)
Deferred compensation plan investments
Level 1
 
$
54

 
$
50

Interest rate swap assets
Level 2
 
24

 
34

Foreign currency forward exchange contract assets
Level 2
 
8

 
7

Foreign currency forward exchange contract liabilities
Level 2
 
(10
)
 
(11
)
Contingent consideration for ICG acquisition
Level 3
 
(12
)
 
(12
)

During the three months ended December 31, 2015 , a corporate asset was written down to its fair market value of $3 million , resulting in an asset impairment charge of $4 million recorded in Selling, general and administrative expenses on the Condensed Consolidated Statement of Operations (see Note 18). The asset is recognized at fair value on a nonrecurring basis and is classified within Level 2 of the fair value hierarchy.

There were no transfers between Levels of the fair value hierarchy during the three months ended December 31, 2015 or 2014.


16

ROCKWELL COLLINS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


Valuation Techniques
The deferred compensation plan investments consist of investments in marketable securities (primarily mutual funds) and the fair value is determined using the market approach based on quoted market prices of identical assets in active markets.

The fair value of the interest rate swaps is determined using the market approach and is calculated by a pricing model with observable market inputs.

The fair value of foreign currency forward exchange contracts is determined using the market approach and is calculated as the value of the quoted forward currency exchange rate less the contract rate multiplied by the notional amount.

The contingent consideration for the ICG acquisition represents the estimated fair value of post-closing consideration owed to the sellers associated with the acquisition. This is categorized as Level 3 in the fair value hierarchy and the fair value is determined using a probability-weighted approach. The liability recorded was derived from the estimated probability that certain contingent payment milestones will be met in accordance with the terms of the purchase agreement.

As of December 31, 2015 , there has not been any impact to the fair value of derivative liabilities due to the Company's own credit risk. Similarly, there has not been any impact to the fair value of derivative assets based on the Company's evaluation of counterparties' credit risks.

Financial instruments
The carrying amounts and fair values of the Company's financial instruments are as follows:
 
Asset (Liability)
 
December 31, 2015
 
September 30, 2015
(in millions)
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Cash and cash equivalents
$
334

 
$
334

 
$
252

 
$
252

Short-term debt
(1,105
)
 
(1,105
)
 
(448
)
 
(448
)
Long-term debt
(1,346
)
 
(1,429
)
 
(1,646
)
 
(1,750
)

The fair value of cash and cash equivalents, and the commercial paper portion of short-term debt, approximates their carrying value due to the short-term nature of the instruments. These items are within Level 1 of the fair value hierarchy. Fair value information for notes due December 2016 classified as short-term debt and all long-term debt is within Level 2 of the fair value hierarchy. The fair value of these financial instruments was 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 short-term and 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.

14.
Derivative Financial Instruments

Interest Rate Swaps
The Company manages its exposure to interest rate risk by maintaining a mix of fixed and variable rate debt, which over time should moderate the costs of debt financing. To help meet this objective, the Company may use financial instruments in the form of interest rate swaps. In January 2010, the Company entered into two interest rate swap contracts 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 . In June 2015, the Company entered into two interest rate swap contracts which expire on July 15, 2019 and effectively converted the remaining $ 150 million of the 2019 Notes to floating rate debt based on three-month LIBOR plus 3.56 percent (collectively the 2019 Swaps).

In March 2014, the Company entered into three interest rate swap contracts (the 2023 Swaps) which expire on December 15, 2023 and effectively converted $200 million of the 2023 Notes to floating rate debt based on one-month LIBOR plus 0.94 percent .

The Company designated both the 2019 and the 2023 Swaps (the Swaps) as fair value hedges. The Swaps are recorded within Other Assets at a fair value of $24 million , offset by a fair value adjustment to Long-term Debt (Note 8) of $24 million at

17

ROCKWELL COLLINS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


December 31, 2015 . At September 30, 2015 , the Swaps were recorded within Other Assets at a fair value of $34 million , offset by a fair value adjustment to Long-term Debt (Note 8) of $34 million . Cash payments or receipts between the Company and the counterparties to the Swaps are recorded as an adjustment to interest expense.

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 December 31, 2015 and September 30, 2015 , the Company had outstanding foreign currency forward exchange contracts with notional amounts of $323 million and $359 million , respectively. These notional values consist primarily of contracts for the British pound sterling, European euro 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 December 31, 2015 and September 30, 2015 are as follows:
 
 
 
Asset Derivatives
(in millions)
Classification
 
December 31,
2015
 
September 30, 2015
Foreign currency forward exchange contracts
Other current assets
 
$
8

 
$
7

Interest rate swaps
Other assets
 
24

 
34

Total
 
 
$
32

 
$
41

 
 
 
Liability Derivatives
(in millions)
Classification
 
December 31,
2015
 
September 30, 2015
Foreign currency forward exchange contracts
Other current liabilities
 
$
10

 
$
11


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 December 31, 2015 there were undesignated foreign currency forward exchange contracts classified within Other current assets of $1 million and Other current liabilities of $0 million .


18

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 months ended December 31, 2015 and 2014 is as follows:
 
 
 
Amount of Gain (Loss)
 
 
 
Three Months Ended
 
 
 
December 31
(in millions)
Location of Gain (Loss)
 
2015
 
2014
Derivatives Designated as Hedging Instruments:
 
 
 
 
 
Fair Value Hedges
 
 
 
 
 
Interest rate swaps
Interest expense
 
$
3

 
$
3

Cash Flow Hedges
 
 
 
 
 
Foreign currency forward exchange contracts:
 
 
 
 
 
Amount of (loss) recognized in AOCL (effective portion, before deferred tax impact)
AOCL
 
(1
)
 
(7
)
Amount of (loss) reclassified from AOCL into income
Cost of sales
 
(2
)
 
(1
)
Derivatives Not Designated as Hedging Instruments:
 
 
 
 
 
Foreign currency forward exchange contracts
Cost of sales
 
(3
)
 
(2
)

There was no significant impact to the Company’s earnings related to the ineffective portion of any hedging instruments during the three months ended December 31, 2015 . 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 months ended December 31, 2015 .

The Company did not have any hedges with credit-risk-related contingent features or that required the posting of collateral as of December 31, 2015 . The cash flows from derivative contracts are recorded in operating activities in the Condensed Consolidated Statement of Cash Flows.

The Company expects to reclassify approximately $4 million of AOCL losses from cash flow hedges into earnings over the next 12 months. The maximum duration of a foreign currency cash flow hedge contract at December 31, 2015 was 55 months.

15.
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.

Changes in the carrying amount of accrued product warranty costs are summarized as follows:
 
Three Months Ended
 
December 31
(in millions)
2015
 
2014
Balance at beginning of year
$
89

 
$
104

Warranty costs incurred
(10
)
 
(11
)
Product warranty accrual
9

 
11

Changes in estimates for prior years
(1
)
 
—

Foreign currency translation adjustments and other
—

 
(1
)
Balance at December 31
$
87

 
$
103



19

ROCKWELL COLLINS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


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 December 31, 2015 , the outstanding loan balance was approximately $ 3 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 December 31, 2015 , 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 December 31, 2015 were $ 242 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:

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.

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.


20

ROCKWELL COLLINS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


16.
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 December 31, 2015 , 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 December 31, 2015 , 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.

17.
Legal Matters

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 there are no material pending legal proceedings.

18.
Restructuring and Asset Impairment Charges

During the three months ended December 31, 2015, the Company recorded corporate restructuring and asset impairment charges totaling $45 million as follows:
(in millions)
Cost of Sales
 
Selling, General and Administrative Expenses
 
Total
Employee separation costs
$
31

 
$
8

 
$
39

Asset impairment charges
2

 
4

 
6

Restructuring and asset impairment charges
$
33

 
$
12

 
$
45


The employee separation costs primarily resulted from the Company's execution of a voluntary separation incentive program in response to certain challenging market conditions, particularly in business aviation. During the first quarter of 2016, the Company made cash separation payments of $5 million , and as of December 31, 2015 , $34 million of employee separation costs remain to be paid in future periods. Asset impairment charges primarily relate to the write-down to fair market value and write-off of certain long-lived assets.


21

ROCKWELL COLLINS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


19.
Business Segment Information

The sales and earnings of continuing operations of the Company's operating segments are summarized as follows
 
 
Three Months Ended
 
 
December 31
(in millions)
 
2015
 
2014
Sales:
 
 
 
 
Commercial Systems
 
$
562

 
$
568

Government Systems
 
451

 
509

Information Management Services
 
156

 
149

Total sales
 
$
1,169

 
$
1,226

 
 
 
 
 
Segment operating earnings:
 
 

 
 

Commercial Systems
 
$
125

 
$
125

Government Systems
 
86

 
106

Information Management Services
 
24

 
21

Total segment operating earnings
 
235

 
252

 
 
 
 
 
Interest expense
 
(15
)
 
(15
)
Stock-based compensation
 
(6
)
 
(5
)
General corporate, net
 
(12
)
 
(14
)
Restructuring and asset impairment charges
 
(45
)
 
—

 
 
 
 
 
Income from continuing operations before income taxes
 
157

 
218

Income tax expense
 
(24
)
 
(49
)
Income from continuing operations
 
$
133

 
$
169


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.


22

ROCKWELL COLLINS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


The following table summarizes sales by category for the three months ended December 31, 2015 and 2014 :
 
 
Three Months Ended
 
 
December 31
(in millions)
 
2015
 
2014
Commercial Systems sales categories:
 
 
 
 

Air transport aviation electronics
 
$
327

 
$
338

Business and regional aviation electronics
 
235

 
230

Commercial Systems sales
 
562

 
568

 
 
 
 
 
Government Systems sales categories:
 
 

 
 

Avionics
 
293

 
327

Communication and navigation
 
158

 
182

Government Systems sales
 
451

 
509

 
 
 
 
 
Information Management Services sales
 
156

 
149

 
 
 
 
 
Total sales
 
$
1,169

 
$
1,226


The air transport and business and regional aviation electronics sales categories are delineated based on the difference in underlying customer base, size of aircraft and markets served. For the three months ended December 31, 2015 and 2014, sales for air transport aviation electronics include revenue from wide-body in-flight entertainment products and services of $ 11 million and $16 million , respectively.

Beginning in 2016, product category sales for Government Systems have been consolidated as a result of an internal reorganization and are delineated based upon underlying product technologies. The previously reported sales categories of Communication products, Surface solutions and Navigation products are now primarily consolidated into Communication and navigation. Government Systems sales for the three months ended December 31, 2014 have been reclassified to conform to the current year presentation.




23

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

OVERVIEW AND OUTLOOK

We have a diversified and balanced business, serving both commercial and government markets. Our Commercial Systems business supplies aviation electronics systems, products and services to customers located throughout the world. The Commercial Systems customer base is comprised of commercial air transport and business and regional aircraft OEMs, commercial airlines and business aircraft operators. The Government Systems business provides communication and navigation products and avionics to the U.S. Department of Defense, state and local governments, other government agencies, civil agencies, defense contractors and foreign ministries of defense around the world. These systems, products and services support airborne (fixed and rotary wing), ground and shipboard applications. Our Information Management Services business enables mission-critical data and voice communications throughout the world to customers including the U.S. Federal Aviation Administration, commercial airlines, business aircraft operators, airport and critical infrastructure operators and major passenger and freight railroads. These communications are enabled by our high-performance, high-quality and high-assurance proprietary radio and terrestrial networks, enhancing customer efficiency, safety and connectivity.

During the first three months of 2016, total revenues decreased 5 percent, driven primarily by an 11 percent reduction in Government Systems revenue. Segment operating margins decreased 50 basis points to 20.1 percent primarily due to the lower sales volume. As a result of certain challenging market conditions, particularly in business aviation, we initiated restructuring actions in October of 2015. We recorded a $45 million pre-tax restructuring charge in the three months ended December 31, 2015 associated with these actions, consisting primarily of employee separation costs.

On December 18, 2015, the Protecting Americans from Tax Hikes Act was enacted which permanently reinstated the Federal Research and Development Tax Credit (Federal R&D Tax Credit) retroactive to January 1, 2015. This favorable tax credit had previously expired on December 31, 2014. As a result of this legislation, we now expect our effective income tax rate for 2016 to be in the range of 22 to 23 percent (from about 28 percent). We are increasing our 2016 earnings per share guidance by 25 cents primarily due to the benefit of the Federal R&D Tax Credit, partially offset by higher restructuring and incentive compensation expense.
The following is a summary our company's segment guidance for 2016.

•
Commercial Systems 2016 revenue is expected to increase low-single digits when compared with 2015. Air transport aviation electronics sales are expected to grow high-single digits, and business and regional aviation electronics sales are expected to decrease mid-single digits

•
Government Systems 2016 revenue is expected to be up low-single digits when compared to 2015

•
Information Management Services sales are expected to grow high-single digits when compared to 2015

The following table is a summary of our company's updated 2016 guidance for continuing operations.

•
total sales in the range of $5.3 billion to $5.4 billion

•
diluted earnings per share in the range of $5.45 to $5.65 (updated from $5.20 to $5.40)

•
cash provided by operating activities in the range of $750 million to $850 million (updated from $700 million to $800 million)

•
capital expenditures of about $200 million

•
total research and development investment of about $1 billion (1)  

(1) Total research and development (R&D) investment is comprised of company- and customer-funded R&D expenditures and the net increase in pre-production engineering costs capitalized within Inventory.


24

RESULTS OF OPERATIONS

The following management discussion and analysis of results of operations is based on reported financial results for the three months ended December 31, 2015 and 2014 , and should be read in conjunction with our condensed consolidated financial statements and notes thereto in Item 1 of Part I of this quarterly report.
  
As discussed in Note 4 of the Notes to Condensed Consolidated Financial Statements , the results of ASES have been accounted for as discontinued operations for all periods presented. Unless otherwise noted, disclosures pertain to our continuing operations.

Three Months Ended December 31, 2015 and 2014

Sales
 
 
Three Months Ended December 31
(in millions)
 
2015
 
2014
Total sales
 
$
1,169

 
$
1,226

Percent decrease
 
(5
)%
 



Total sales decreased $57 million , or 5 percent , for the three months ended December 31, 2015 , as compared to the three months ended December 31, 2014 . Government Systems sales decreased by $58 million, Commercial Systems sales decreased by $6 million and Information Management Services sales increased by $7 million. Refer to the Government Systems, Commercial Systems and Information Management Services sections of the Segment Financial Results below for a detailed discussion of sales in the first quarter of 2016 as compared to the same period last year.

Cost of Sales
 
 
 
Three Months Ended December 31
(in millions)
 
2015
 
2014
Total cost of sales
 
$
836

 
$
857

Percent of total sales
 
71.5
%
 
69.9
%

Cost of sales consists of all costs incurred to design and manufacture our products and provide our services and includes R&D, raw material, labor, facility, product warranty, depreciation, amortization, service and support and other related expenses. Total cost of sales decreased $21 million , or 2 percent , primarily due to the following:

•
$36 million from lower sales volume in Government Systems and Commercial Systems

•
a $17 million reduction in company-funded R&D expense, as detailed below

•
partially offset by $33 million of restructuring and asset impairment charges recorded in the three months ended December 31, 2015




25

Research and Development Expense

R&D expense is included as a component of cost of sales and is summarized as follows:
 
 
 
Three Months Ended December 31
(in millions)
 
2015
 
2014
Customer-funded:
 
 
 
 
Commercial Systems
 
$
47

 
$
40

Government Systems
 
87

 
89

Information Management Services
 
2

 
2

Total customer-funded
 
136


131

Company-funded:
 
 

 
 

Commercial Systems
 
35

 
50

Government Systems
 
17

 
18

Information Management Services (1)
 
—

 
1

Total company-funded
 
52

 
69

Total R&D expense
 
$
188

 
$
200

Percent of total sales
 
16.1
%
 
16.3
%
(1) R&D expenses for the Information Management Services segment do not include costs of internally developed software and other costs associated with the expansion and construction of network-related assets. These costs are capitalized as Property on the Condensed Consolidated Statement of Financial Position.
We make significant investments in R&D to allow our customers to benefit from the latest technological advancements. Total R&D expense is comprised of both company-funded and customer-funded expenditures. In addition to the R&D expenditures shown in the table above, we capitalize in inventory the cost of certain pre-production engineering effort incurred during the development phase of programs when the customer has provided us a long-term supply arrangement and a contractual guarantee for reimbursement. Pre-production engineering costs are then amortized over their useful lives. This amortization cost is included within customer-funded R&D expense and totaled $9 million and $12 million for the three months ended December 31, 2015 and 2014 , respectively. Refer to Note 6 of the Notes to Condensed Consolidated Financial Statements for further discussion of our investments in pre-production engineering effort.

Customer-funded R&D expenditures are incurred pursuant to contractual arrangements and are typically accounted for as contract costs within cost of sales with the reimbursement accounted for as a sale in accordance with the percentage-of-completion method of accounting.

Company-funded R&D expenditures relate to the development of new products and the improvement of existing products and are expensed as incurred. Company-funded R&D expense consists primarily of payroll-related expenses of employees engaged in R&D activities, engineering-related product materials and equipment and subcontracting costs.

Total R&D expense for the three months ended December 31, 2015 decreased $12 million from the same period last year. The customer-funded portion of R&D expense increased $5 million , primarily due to higher development expenditures in Commercial Systems for international business jet development programs. The $17 million decrease in company-funded R&D was principally driven by lower development expenditures for the Embraer Legacy, Beechcraft King Air and Airbus A350 programs that have entered into service, as well as lower business jet product line development costs.
  
In addition to the R&D expenses above, development expenditures incurred on the Boeing 737 MAX platform and Bombardier CSeries and Global 7000/8000 programs resulted in a net $40 million increase to our investments in pre-production engineering programs capitalized within inventory. The net increase of $40 million for the three months ended December 31, 2015 was $9 million greater than the $31 million net increase in pre-production engineering costs capitalized within inventory during the three months ended December 31, 2014, primarily due to higher costs incurred for certain military transport programs in Government Systems. Refer to Note 6 of the Notes to Condensed Consolidated Financial Statements for further discussion of our incremental investments in pre-production engineering effort.


26

Selling, General and Administrative Expenses
 
 
 
Three Months Ended December 31
(in millions)
 
2015
 
2014
Selling, general and administrative expenses
 
$
163

 
$
137

Percent of total sales
 
13.9
%
 
11.2
%

Selling, general and administrative (SG&A) expenses consist primarily of personnel, facility and other expenses related to employees not directly engaged in manufacturing or R&D activities. These activities include marketing and business development, finance, legal, information technology and other administrative and management functions.

Total SG&A expenses for the three months ended December 31, 2015 increased $26 million primarily due to the following:

•
$12 million of restructuring and asset impairment charges recorded in the three months ended December 31, 2015

•
higher costs from further expansion in international emerging markets

•
incremental costs associated with the acquisitions of Pacific Avionics, which was acquired in March 2015, and International Communications Group (ICG), which was acquired in August 2015
Interest Expense
 
 
Three Months Ended December 31
(in millions)
 
2015
 
2014
Interest expense
 
$
15

 
$
15

See Note 8 of the Notes to Condensed Consolidated Financial Statements for more detail regarding outstanding debt.

Net Income and Diluted Earnings Per Share
 
 
 
Three Months Ended December 31
(in millions, except per share amounts)
 
2015
 
2014
Income from continuing operations
 
$
133

 
$
169

Percent of sales
 
11.4
%
 
13.8
%
 
 
 
 
 
Income (loss) from discontinued operations, net of taxes
 
2

 
(2
)
Net income
 
$
135

 
$
167

 
 
 
 
 
Diluted earnings per share from continuing operations
 
$
1.00

 
$
1.26

Diluted income (loss) per share from discontinued operations
 
0.02

 
(0.02
)
Diluted earnings per share
 
$
1.02

 
$
1.24

 
 
 
 
 
Weighted average diluted common shares
 
132.8

 
134.5


Income from continuing operations, net of taxes, for the three months ended December 31, 2015 was $133 million , down 21 percent , or $36 million , from the $169 million in income from continuing operations, net of taxes, reported for the three months ended December 31, 2014 . Diluted earnings per share from continuing operations decreased 21 percent to $1.00 during this same time period.


27

Income from continuing operations, net of taxes, and diluted earnings per share from continuing operations during the quarter ended December 31, 2015 decreased primarily due to the following:

•
$45 million of pre-tax restructuring and asset impairment charges recorded in the three months ended December 31, 2015

•
a $20 million decrease in operating earnings in Government Systems

•
partially offset by a $25 million decrease in income tax expense due to the retroactive reinstatement of the Federal R&D Tax Credit and lower pre-tax income from continuing operations

Commercial Systems Financial Results

Commercial Systems Sales

The following table presents Commercial Systems sales by product category:
 
 
Three Months Ended December 31
(in millions)
 
2015
 
2014
Air transport aviation electronics:
 
 
 
 
Original equipment
 
$
183

 
$
191

Aftermarket
 
133

 
131

Wide-body in-flight entertainment
 
11

 
16

Total air transport aviation electronics
 
327

 
338

Business and regional aviation electronics:
 
 
 
 

Original equipment
 
130

 
140

Aftermarket
 
105

 
90

Total business and regional aviation electronics
 
235

 
230

Total
 
$
562

 
$
568

Percent decrease
 
(1
)%
 



Total air transport aviation electronics sales decreased $11 million , or 3 percent , primarily due to the following:

•
original equipment sales decreased $8 million , or 4 percent , primarily due to unfavorable airline selectable equipment mix and lower Airbus A330 production rates, partially offset by higher product deliveries for the Airbus A350

•
aftermarket sales increased $2 million , or 2 percent , primarily driven by inorganic sales growth from Pacific Avionics, which was acquired in March 2015, and ICG, which was acquired in August 2015, as well as higher head-up display retrofit sales to customers in China, partially offset by lower regulatory mandate upgrades

•
wide-body IFE sales decreased $5 million , or 31 percent , as airlines decommissioned their legacy IFE systems

Total business and regional aviation electronics sales increased $5 million , or 2 percent , primarily due to the following:

•
original equipment sales decreased $10 million , or 7 percent , primarily due to lower business aircraft OEM production rates, partially offset by higher customer funded development program revenues and higher product deliveries for the Embraer Legacy 500

•
aftermarket sales increased $15 million , or 17 percent , driven by higher regulatory mandate upgrades


28

Commercial Systems Segment Operating Earnings
 
 
 
Three Months Ended December 31
(in millions)
 
2015
 
2014
Segment operating earnings
 
$
125

 
$
125

Percent of sales
 
22.2
%
 
22.0
%

Commercial Systems operating earnings were flat compared to the same period in the prior year primarily due to the following:

•
a $15 million decrease in company-funded R&D expense

•
partially offset by a $7 million increase in SG&A costs from the acquisitions of Pacific Avionics and ICG, as well as higher costs from further expansion in international emerging markets

•
in addition, operating earnings were negatively impacted by sales mix, as lower margin customer-funded development revenues increased in the three months ended December 31, 2015 compared to the same period in the prior year

Government Systems Financial Results

Government Systems Sales
 
Beginning in 2016, product category sales for Government Systems have been consolidated as a result of an internal reorganization and are delineated based upon underlying product technologies. The previously reported sales categories of Communication products, Surface solutions and Navigation products are now primarily consolidated into Communication and navigation. Government Systems sales for the three months ended December 31, 2014 have been reclassified to conform to the current year presentation.

The following table presents Government Systems sales by product category:
 
 
Three Months Ended December 31
(in millions)
 
2015
 
2014
Avionics
 
$
293

 
$
327

Communication and navigation
 
158

 
182

Total
 
$
451

 
$
509

Percent decrease
 
(11
)%
 



Avionics sales decreased $34 million , or 10 percent , primarily due to the following:

•
$15 million decrease from lower deliveries on various rotary wing platforms

•
$19 million in other net decreases to revenue, primarily due to timing differences on both E-6 and various simulation and training programs

Communication and navigation sales decreased $24 million, or 13 percent, primarily due to the following:

•
$13 million decrease due to the wind-down of an international electronic warfare program

•
$11 million in other net decreases to revenue, primarily due to lower international deliveries of targeting systems

Changes in foreign currency exchange rates, primarily the strengthening of the U.S. dollar, resulted in a $6 million reduction to Government Systems sales for the three months ended December 31, 2015 when compared to the same period in the prior year. This $6 million reduction is included within the Government Systems sales categories above.


29

Government Systems Segment Operating Earnings
 
 
 
Three Months Ended December 31
(in millions)
 
2015
 
2014
Segment operating earnings
 
$
86

 
$
106

Percent of sales
 
19.1
%
 
20.8
%

Government Systems operating earnings decreased $20 million , or 19 percent , primarily due to the $58 million reduction in sales volume discussed in the Government Systems sales section above, which resulted in a $34 million decrease in cost and a decrease in earnings of $24 million, or 41 percent of the lower sales volume.

The decrease in Government Systems operating earnings as a percent of sales was primarily due to lower sales volumes.

Information Management Services Financial Results

Information Management Services Sales

The following table presents Information Management Services sales:
 
 
Three Months Ended December 31
(in millions)
 
2015
 
2014
Sales
 
$
156

 
$
149

Percent increase
 
5
%
 
 

Total Information Management Services sales increased $7 million , or 5 percent. The increase in sales was driven by 7 percent growth in aviation-related sales, including GLOBALink SM and ARINCDirect SM .

Information Management Services Segment Operating Earnings
 
 
 
Three Months Ended December 31
(in millions)
 
2015
 
2014
Segment operating earnings
 
$
24

 
$
21

Percent of sales
 
15.4
%
 
14.1
%

Information Management Services operating earnings increased $3 million , or 14 percent, primarily due to the $7 million increase in sales volume discussed in the Information Management Services sales section above, which resulted in a $4 million increase in cost and an increase in earnings of $3 million, or 43 percent of the higher sales volume.

The increase in Information Management Services operating earnings as a percent of sales was primarily due to higher sales volumes.

General Corporate, Net
 
General corporate expenses that are not allocated to our business segments are included in General corporate, net. These costs are included within Cost of sales, SG&A and Other income, net on the Condensed Consolidated Statement of Operations. General corporate, net is summarized as follows:
 
 
Three Months Ended December 31
(in millions)
 
2015
 
2014
General corporate, net
 
$
12

 
$
14



30

Retirement Plans

Net benefit expense (income) for pension benefits and other retirement benefits are as follows:
 
Three Months Ended December 31
(in millions)
2015
 
2014
Pension benefits
$
(6
)
 
$
(1
)
Other retirement benefits
3

 
2

Net benefit expense (income)
$
(3
)
 
$
1


Pension Benefits
U.S. qualified and non-qualified pension plans covering salary and hourly employees not covered by collective bargaining agreements are largely frozen. These plans have substantially no additional benefit accruals for salary increases or services rendered. We expect defined benefit pension income of $24 million in 2016 , compared to $6 million of pension income in 2015. The increase in pension income in 2016 is primarily due to changes in the calculation of interest and service cost and updated mortality assumptions as discussed below.

In 2015 and prior, we used a single-weighted average discount rate to calculate pension interest and service cost. Beginning in 2016, a "spot rate approach" is being used to calculate pension interest and service cost. The spot rate approach applies separate discount rates for each projected benefit payment in the calculation of pension interest and service cost. This calculation change is considered a change in accounting estimate and is being applied prospectively in 2016. The use of the spot rate approach is expected to result in a favorable impact to pension income and pre-tax earnings of $35 million in 2016 relative to the estimated pension income amount had we not changed our approach.

In October 2014, the Society of Actuaries published a new set of mortality tables (RP-2014) and a new mortality improvement scale (MP-2014), which update life expectancy assumptions. The newly published tables generally reflect longer life expectancy than was projected by past tables. For our 2015 year-end pension liability valuation, we used the RP-2014 tables with an adjustment for plan experience and the MP-2014 improvement scale adjusted to reflect convergence to an ultimate annual rate of mortality improvement of 0.75 percent by 2022. These changes are expected to result in an unfavorable impact to 2016 pension income and pre-tax earnings of $15 million.

Our objective with respect to the funding of our pension plans is to provide adequate assets for the payment of future benefits. Pursuant to this objective, we will fund our pension plans as required by governmental regulations and may consider discretionary contributions as conditions warrant. We believe our strong financial position continues to provide us the opportunity to make contributions to our pension funds without inhibiting our ability to pursue strategic investments.

During the three months ended December 31, 2015 , we made a $55 million voluntary contribution to our U.S. qualified pension plans. There is no minimum statutory funding requirement for 2016 and we do not currently expect to make any additional discretionary contributions during 2016 to our U.S. qualified pension plans. Any additional future contributions necessary to satisfy minimum statutory funding requirements are dependent upon actual plan asset returns, interest rates and actuarial assumptions. Contributions to our non-U.S. plans and our U.S. non-qualified plan are expected to total $13 million in 2016.

Other Retirement Benefits
We expect other retirement benefits expense of approximately $14 million in 2016 , compared to $11 million of expense in 2015.

Defined Contribution Savings Plans
We expect expense related to employer contributions to defined contribution savings plans of approximately $90 million in 2016 compared to $86 million in 2015.

Income Taxes

At the end of each interim reporting period, we make 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. The difference between our effective income tax rate and the statutory income tax rate is generally the result of the tax benefits derived from the Federal R&D Tax Credit and the Domestic Manufacturing Deduction.

31


During the three months ended December 31, 2015 and 2014 , the effective income tax rate from continuing operations was 15.3 percent and 22.5 percent, respectively. The lower current year effective income tax rate from continuing operations was primarily due to the permanent extension of the Federal R&D Tax Credit which had previously expired on December 31, 2014. On December 18, 2015, the Protecting Americans from Tax Hikes Act was enacted, which retroactively reinstated and permanently extended the Federal R&D Tax Credit.

For fiscal year 2016, our effective income tax rate is projected to be in the range of 22 to 23 percent and includes a benefit from the permanent extension of the Federal R&D Tax Credit.

FINANCIAL CONDITION AND LIQUIDITY

Cash Flow Summary

Our ability to generate significant cash flow from operating activities, coupled with our expected ability to access the credit markets, enables us to execute our growth strategies and return value to our shareowners. The timing of our cash inflows is historically heavily weighted towards the second half of our fiscal year, particularly our fourth quarter. We expect this trend to continue in the future.

Operating Activities
 
 
Three Months Ended December 31, 2015
(in millions)
 
2015
 
2014
Cash (used for) operating activities from continuing operations
 
$
(91
)
 
$
(60
)

The $31 million increase in cash used for operating activities during the three months ended December 31, 2015 , compared to the same period last year, was primarily due to the following:

•
cash receipts from customers decreased by $61 million to $1.163 billion in the three months ended December 31, 2015 compared to $1.224 billion in the three months ended December 31, 2014. The decrease in cash receipts from customers was primarily due to the $57 million decrease in sales relative to the prior year

•
payments for employee incentive pay increased $23 million. Incentive pay is expensed in the year incurred and then paid in the first fiscal quarter of the following year. In the three months ended December 31, 2015, $137 million was paid for employee incentive pay costs expensed during 2015. This compares to $114 million paid during the three months ended December 31, 2014 for employee incentive pay costs expensed during 2014

•
the above items were partially offset by lower payments for production inventory and other operating costs which decreased $23 million to $1.054 billion for the three months ended December 31, 2015 compared to $1.077 billion during the three months ended December 31, 2014. The decreased payments for operating costs primarily resulted from lower sales volume

•
in addition, cash payments for income taxes decreased $21 million to $2 million during the three months ended December 31, 2015 compared to $23 million during the same period last year. The decrease in cash used for income tax payments was primarily from the retroactive reinstatement of the Federal R&D tax credit as a result of the Protecting Americans from Tax Hikes Act

Investing Activities
 
 
Three Months Ended December 31, 2015
(in millions)
 
2015
 
2014
Cash (used for) investing activities from continuing operations
 
$
(48
)
 
$
(76
)


32

Cash used for investing activities for the three months ended December 31, 2015 decreased $28 million , compared to the three months ended December 31, 2014 , primarily due to the following:

•
a $14 million decrease in cash payments for property additions for the three months ended December 31, 2015 , compared to the same period last year

•
during the three months ended December 31, 2014, $10 million in cash payments were made to remit certain income tax refunds to the previous owners of ARINC, which we acquired in December 2013. No such payments were made in the three months ended December 31, 2015

Financing Activities
 
 
Three Months Ended December 31, 2015
(in millions)
 
2015
 
2014
Cash provided by financing activities from continuing operations
 
$
223

 
$
138


The $85 million increase in cash provided by financing activities during the three months ended December 31, 2015 , compared to the three months ended December 31, 2014 , was primarily due to the following:

•
cash repurchases of common stock decreased by $77 million to $96 million during the three months ended December 31, 2015 , compared to $173 million repurchased during the same period last year

•
net proceeds from short-term commercial paper borrowings increased $30 million

•
partially offset by a decrease in proceeds received from the exercise of stock options of $14 million

Financial Condition and Liquidity

We maintain a capital structure that we believe enables us sufficient access to credit markets. When combined with our ability to generate strong levels of cash flow from our operations, this capital structure has provided the strength and flexibility necessary to pursue strategic growth opportunities and to return value to our shareowners.

A comparison of key elements of our financial condition as of December 31, 2015 and September 30, 2015 are as follows:
 
(in millions)
December 31,
2015
 
September 30,
2015
Cash and cash equivalents
$
334

 
$
252

Short-term debt
(1,105
)
 
(448
)
Long-term debt, net
(1,370
)
 
(1,680
)
Net debt (1)
$
(2,141
)
 
$
(1,876
)
Total equity
$
1,905

 
$
1,880

Debt to total capitalization (2)
57
%
 
53
%
Net debt to total capitalization (3)
53
%
 
50
%

(1) Calculated as total of short-term and long-term debt, net (Total debt), less cash and cash equivalents
(2) Calculated as Total debt divided by the sum of Total debt plus Total equity
(3) Calculated as Net debt divided by the sum of Net debt plus Total equity

We primarily fund our contractual obligations, capital expenditures, small to medium sized acquisitions, dividends and share repurchases from cash generated from operating activities. As of December 31, 2015 , approximately 68 percent of our cash and cash equivalents reside at non-U.S. locations and may not be readily accessible for use in the U.S., due to potential adverse income tax implications and other statutory limitations. We do not currently intend to repatriate cash and cash equivalents held at non-U.S. locations as we anticipate utilizing this cash to fund foreign operations and international growth.

Due to the fluctuations of cash flows, we supplement our internally-generated cash flow from time to time by issuing short-term commercial paper. Under our commercial paper program, we may sell up to $1 billion face amount of unsecured short-

33

term promissory notes in the commercial paper market. The commercial paper notes have maturities of not more than 364 days from the date of issuance. At December 31, 2015 , short-term commercial paper borrowings outstanding were $805 million with a weighted-average interest rate and maturity period of 0.67 percent and 8 days, respectively. At September 30, 2015, short-term commercial paper borrowings outstanding were $448 million with a weighted-average interest rate and maturity period of 0.52 percent and 25 days, respectively. The maximum amount of short-term commercial paper borrowings outstanding during the three months ended December 31, 2015 was $858 million.

We have a five-year $1 billion credit facility that expires in December 2018. The credit facility includes one financial covenant requiring us to maintain a consolidated debt to total capitalization ratio of not greater than 60 percent (excluding the equity impact on accumulated other comprehensive loss related to defined benefit retirement plans). The ratio was 41 percent at December 31, 2015 .

In addition, alternative sources of liquidity could include funds available from the issuance of equity securities, debt securities and potential asset securitization strategies. To date, we have not raised capital through the issuance of equity securities, nor do we have any current plans to do so, as we prefer to use debt financing to lower our overall cost of capital and increase our return on shareowners' equity.

Credit ratings are a significant factor in determining our ability to access short-term and long-term financing, as well as the cost of such financing. Our strong credit ratings have enabled continued access to both short- and long-term credit markets. If our credit ratings were to be adjusted downward by the rating agencies, the implications of such actions could include impairment or elimination of our access to credit markets and an increase in the cost of borrowing. The following is a summary of our credit ratings as of January 20, 2016:
 
Credit Rating Agency
 
Short-Term Rating
 
Long-Term Rating
 
Outlook
Fitch Ratings
 
F2
 
A-
 
Stable
Moody’s Investors Service
 
P-2
 
A3
 
Stable
Standard & Poor’s
 
A-2
 
A-
 
Stable

We were in compliance with all debt covenants at December 31, 2015 and September 30, 2015.

ENVIRONMENTAL

For information related to environmental claims, remediation efforts and related matters, see Note 16 of the Notes to Condensed Consolidated Financial Statements.

CRITICAL ACCOUNTING POLICIES

Preparation of our financial statements in accordance with accounting principles generally accepted in the United States of America requires management of Rockwell Collins to make estimates, judgments and assumptions that affect our financial condition and results of operations that are reported in the accompanying condensed consolidated financial statements as well as the related disclosure of assets and liabilities contingent upon future events. The critical accounting policies used in preparation of our financial statements are described in Management's Discussion and Analysis in our Annual Report on Form 10-K for the year ended September 30, 2015. Actual results in these areas could differ from management's estimates.

CAUTIONARY STATEMENT

This quarterly report contains statements, including certain projections and business trends, that are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected as a result of certain risks and uncertainties, including but not limited to the financial condition of our customers and suppliers, including bankruptcies; the health of the global economy, including potential deterioration in economic and financial market conditions; adjustments to the commercial OEM production rates and the aftermarket; the impacts of natural disasters and pandemics, including operational disruption, potential supply shortages and other economic impacts; cybersecurity threats, including the potential misappropriation of assets or sensitive information, corruption of data or operational disruption; delays related to the award of domestic and international contracts; delays in customer programs, including new aircraft programs

34

entering service later than anticipated; the continued support for military transformation and modernization programs; potential impact of volatility in oil prices, currency exchange rates or interest rates on the commercial aerospace industry or our business; the impact of terrorist events on the commercial aerospace industry; declining defense budgets resulting from budget deficits in the U.S. and abroad; changes in domestic and foreign government spending, budgetary, procurement and trade policies adverse to our businesses; market acceptance of our new and existing technologies, products and services; reliability of and customer satisfaction with our products and services; potential unavailability of our mission-critical data and voice communication networks; unfavorable outcomes on or potential cancellation or restructuring of contracts, orders or program priorities by our customers; recruitment and retention of qualified personnel; regulatory restrictions on air travel due to environmental concerns; effective negotiation of collective bargaining agreements by us, our customers, and our suppliers; performance of our customers and subcontractors; risks inherent in development and fixed-price contracts, particularly the risk of cost overruns; risk of significant reduction to air travel or aircraft capacity beyond our forecasts; our ability to execute to internal performance plans such as restructuring activities, productivity and quality improvements and cost reduction initiatives; achievement of ARINC integration and synergy plans as well as our other acquisition and related integration plans; continuing to maintain our planned effective tax rates; our ability to develop contract compliant systems and products on schedule and within anticipated cost estimates; risk of fines and penalties related to noncompliance with laws and regulations including compliance requirements associated with U.S. Government work, export control and environmental regulations; risk of asset impairments; our ability to win new business and convert those orders to sales within the fiscal year in accordance with our annual operating plan; and the uncertainties of the outcome of lawsuits, claims and legal proceedings, as well as other risks and uncertainties, including but not limited to those detailed herein and from time to time in our Securities and Exchange Commission filings. These forward-looking statements are made only as of the date hereof.

Item 3.
Quantitative and Qualitative Disclosures about Market Risk.

Interest Rate Risk
In addition to using cash provided by normal operating activities, we utilize a combination of short-term and long-term debt to finance operations. Our operating results and cash flows are exposed to changes in interest rates that could adversely affect the amount of interest expense incurred and paid on debt obligations in any given period. In addition, changes in interest rates can affect the fair value of our debt obligations. Such changes in fair value are only relevant to the extent these debt obligations are settled prior to maturity. We manage our exposure to interest rate risk by maintaining an appropriate mix of fixed and variable rate debt and may employ financial instruments in the form of interest rate swaps to help meet this objective.

At December 31, 2015 , we had the following unsecured long-term and short-term notes outstanding:
 
 
December 31, 2015
(in millions)
 
Interest Rate
 
Carrying Value
 
Fair Value
$400 Notes due 2043
 
4.80%
 
$
398

 
$
432

$400 Notes due 2023
 
3.70%
 
399

 
415

$250 Notes due 2021
 
3.10%
 
250

 
255

$300 Notes due 2019
 
5.25%
 
299

 
327

$300 Notes due 2016
 
3 month LIBOR plus 0.35%
 
300

 
300


In June 2015, we entered into interest rate swap contracts which effectively converted $150 million of the Notes due 2019 to floating rate debt based on three-month LIBOR plus 3.56 percent.

In March 2014, we entered into interest rate swap contracts which effectively converted $200 million of the Notes due 2023 to floating rate debt based on one-month LIBOR plus 0.94 percent.

In January 2010, we entered into interest rate swap contracts which effectively converted $150 million of the Notes due 2019 to floating rate debt based on six-month LIBOR plus 1.235 percent.

A hypothetical 10 percent increase in average market interest rates would have decreased the fair value of our long-term fixed rate debt, exclusive of the effects of the interest rate swap contracts, by $31 million. A hypothetical 10 percent decrease in average market interest rates would have increased the fair value of our long-term fixed rate debt, exclusive of the effects of the interest rate swap contracts, by $32 million. The fair value of the $500 million notional value of interest rate swap contracts was a $24 million net asset at December 31, 2015 . A hypothetical 10 percent increase or decrease in average market interest rates would decrease or increase the fair value of our interest rate swap contracts by $4 million. Our results of operations are affected by changes in market interest rates related to variable rate debt. Inclusive of the effect of the interest rate swaps, a

35

hypothetical 10 percent increase or decrease in average market interest rates would not have a material effect on our operations or cash flows. For more information related to outstanding debt obligations and derivative financial instruments, see Notes 8, 13 and 14 in the Notes to Condensed Consolidated Financial Statements .

Foreign Currency Risk
We transact business in various foreign currencies which subjects our cash flows and earnings to exposure related to changes in foreign currency exchange rates. We attempt to manage this exposure through operational strategies and the use of foreign currency forward exchange contracts (foreign currency contracts). All foreign currency contracts are executed with banks we believe to be creditworthy and are primarily denominated in currencies of major industrial countries. The majority of our non-functional currency firm and anticipated receivables and payables are hedged using foreign currency contracts. It is our policy not to manage exposure to net investments in non-U.S. subsidiaries or enter into derivative financial instruments for speculative purposes. Notional amounts of outstanding foreign currency contracts were $323 million and $359 million at December 31, 2015 and September 30, 2015 , respectively. Notional amounts are stated in U.S. dollar equivalents at spot exchange rates at the respective dates. Principal currencies that are hedged include the British pound sterling, European euro and Japanese yen. The duration of foreign currency contracts is generally five years or less. The net fair value of these foreign currency contracts was a $2 million net liability at December 31, 2015 and a $4 million net liability at September 30, 2015 . A 10 percent increase in the value of the U.S. dollar against all currencies would decrease the fair value of our foreign currency contracts at December 31, 2015 by $4 million. A 10 percent decrease in the value of the U.S. dollar against all currencies would increase the fair value of our foreign currency contracts at December 31, 2015 by $5 million. For more information related to outstanding foreign currency contracts, see Notes 13 and 14 in the Notes to Condensed Consolidated Financial Statements .

Item 4.
Controls and Procedures.

As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, we carried out an evaluation of the effectiveness, as of December 31, 2015 , of the design and operation of our disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective as of December 31, 2015 to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

There were no changes in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

36


PART II OTHER INFORMATION

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

The following table provides information about our purchases of shares of our common stock during the quarter, pursuant to our Board authorized stock repurchase program:
Period
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (1)
October 1, 2015 through October 31, 2015
625,000

$
86.01

625,000

$
326
 million
November 1, 2015 through November 30, 2015
265,000

$
89.46

265,000

$
302
 million
December 1, 2015 through December 31, 2015
140,000

$
89.74

140,000

$
290
 million
Total/Average
1,030,000

$
87.40

1,030,000

 

(1) On September 19, 2014 our Board authorized the repurchase of an additional $500 million of our common stock. The authorization has no stated expiration.



37

EXHIBIT INDEX

Item 6.
 
Exhibits
 
 
 
 
 
(a) Exhibits
Exhibit
Number
 
Description
* 10-a-1

 
2006 Annual Incentive Company Plan for Senior Executives, as amended and restated.
 
 
 
* 10-h-1

 
Amendment No. 1 to the Company’s 2005 Non-Qualified Pension Plan, as amended.
 
 
 
* 10-h-2

 
Amendment No. 1 to the Company’s 2005 Non-Qualified Retirement Savings Plan, as amended.
 
 
 
* 10-q-1

 
Form of Three-Year Performance Share Agreement, adopted on November 9, 2015.
 
 
 
* 10-s-1

 
Non-Employee Director Compensation Summary as of November 10, 2015.
 
 
 
31.1

 
Section 302 Certification of Chief Executive Officer.
 
 
 
31.2

 
Section 302 Certification of Chief Financial Officer.
 
 
 
32.1

 
Section 906 Certification of Chief Executive Officer.
 
 
 
32.2

 
Section 906 Certification of Chief Financial Officer.
 
 
 
101.INS

 
XBRL Instance Document.
 
 
 
101.SCH

 
XBRL Taxonomy Extension Schema.
 
 
 
101.CAL

 
XBRL Taxonomy Extension Calculation Linkbase.
 
 
 
101.DEF

 
XBRL Taxonomy Extension Definition Linkbase.
 
 
 
101.LAB

 
XBRL Taxonomy Extension Label Linkbase.
 
 
 
101.PRE

 
XBRL Taxonomy Extension Presentation Linkbase.
 
 
 
 
 
* Management contract or compensatory plan or arrangement.

        

38


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 
 
 
ROCKWELL COLLINS, INC.
 
 
By
/s/ Tatum J. Buse
 
 
 
Tatum J. Buse Vice President, Finance and Controller Principal Accounting Officer and an Authorized Officer

Dated: January 22, 2016



S-1



Exhibit 10-a-1
2006 ANNUAL INCENTIVE COMPENSATION PLAN
FOR SENIOR EXECUTIVES, AS AMENDED AND RESTATED
1. Purpose
       
The purposes of the 2006 Annual Incentive Compensation Plan for Senior Executive Officers (the Plan) are to provide a reward and an incentive to the Corporation’s Senior Executive Officers who have contributed and in the future are likely to contribute to the success of the Corporation, to enhance the Corporation’s ability to attract and retain outstanding persons to serve as its Senior Executive Officers and to preserve for the Corporation the benefit of federal income tax deductions with respect to annual incentive compensation paid to Senior Executive Officers.

2. Definitions
 
(a)
 
Applicable Earnings . For any fiscal year, the pre-tax total segment operating earnings of the Corporation, excluding extraordinary items, gain or loss on the disposal of a segment of a business, restructuring charges, income or loss from discontinued operations, cumulative effects of changes in accounting principles, and other events or transactions of an unusual nature or that occur infrequently, all as defined by or determined in accordance with generally accepted accounting principles. Amounts charged or credited to earnings under the ICP shall not be included in determining Applicable Earnings.
 
 
 
 
 
(b)
 
Board of Directors . The Board of Directors of Rockwell Collins.
 
 
 
 
 
(c)
 
Code . The Internal Revenue Code of 1986, as amended from time to time.
 
 
 
 
 
(d)
 
Committee . The Compensation Committee designated by the Board of Directors from among its members who are not eligible to receive an award under the Plan.
 
 
 
 
 
(e)
 
Corporation . Rockwell Collins and its consolidated subsidiaries.
 
 
 
 
 
(f)
 
ICP . The Corporation’s annual Incentive Compensation Plan for executives other than those eligible under this plan.
 
 
 
 
 
(g)
 
Performance Fund . An incentive compensation fund for each fiscal year in which the Plan is applicable from which awards may be made under the Plan, which shall be equal to 1.5% of the Applicable Earnings for that fiscal year.
 
 
 
 
 
(h)
 
Rockwell Collins . Rockwell Collins, Inc., a Delaware corporation.
 
 
 
 
 
(i)
 
Section 409A . Section 409A of the Internal Revenue Code of 1986, as amended, including any regulations and other guidance issued thereunder.
 
 
 
 
 
(j)
 
Senior Executive Officers . Rockwell Collins’ chief executive officer on the last day of each fiscal year and six other executive officers (as defined in Rule 3b-7 under the Securities Exchange Act of 1934, as amended) which the Committee shall designate on or before the last day of the first quarter of that fiscal year. No member of the Corporation’s Board of Directors who is not also an employee of the Corporation shall be eligible to participate in the Plan.
 
 
 
 
 
(k)
 
2005 DCP. Rockwell Collins, Inc. 2005 Deferred Compensation Plan.

3. Determination of Applicable Earnings and Performance Fund; Allocation of Potential Awards




 
(a)
 
After the end of each fiscal year, the independent certified public accountants who audit the Corporation’s accounts shall compute the Applicable Earnings and the amount of the Performance Fund for that fiscal year. Those computations shall be reported to the Board of Directors, the Committee and other committees as appropriate.
 
 
 
 
 
(b)
 
There shall be allocated from the Performance Fund for each fiscal year potential awards to each of the Senior Executive Officers equal to the following respective percentages of the Performance Fund for that fiscal year:
 
 
 
 
 
 
 
Chief Executive Officer - 25%
 
 
 
 
 
 
 
Six Senior Executive Officers - 12.5% each
 
 
 
 
 
 
 
The maximum potential award to any one Senior Executive Officer under this Plan for any fiscal year shall be Ten Million Dollars ($10,000,000).

4. Awards
 
(a)
 
After the computations and reports prescribed under Section 3(a) have been made, the Committee shall determine the amounts, if any, allocated to the Senior Executive Officers pursuant to Section 3(b) to be awarded from the Performance Fund for that fiscal year. The Committee may determine from time to time the form, terms and conditions of awards, including whether and to what extent awards shall be paid in installments.
 
 
 
 
 
(b)
 
Without limiting the generality of Section 4(a), the Committee may, in its sole discretion, reduce the amount of any award made to any Senior Executive Officer from the amount allocated under Section 3(b), taking into account such factors as it deems relevant, including without limitation: (i) the Applicable Earnings; (ii) other significant financial or strategic achievements during the year; (iii) its subjective assessment of each Senior Executive Officer’s overall performance for the year; and (iv) information about compensation practices at other peer group companies for the purpose of evaluating competitive compensation levels so that the Committee may determine that the amount of the annual incentive award is within the targeted competitive compensation range of the Corporation’s executive compensation program. The Committee shall determine the amount of any reduction in a Senior Executive Officer’s award on the basis of the foregoing and other factors it deems relevant and shall not be required to establish any allocation or weighting formula with respect to the factors it considers. In no event shall any Senior Executive Officer’s award under the Plan exceed the amount of the Performance Fund allocated to a potential award to that Senior Executive Officer.
 
 
 
 
 
(c)
 
The Committee shall have no obligation to disclose the full amount of the Performance Fund for any fiscal year. Amounts allocated but not actually awarded to a Senior Executive Officer may not be re-allocated to other Senior Executive Officers or utilized for awards in respect of other years.
 
 
 
 
 
(d)
 
The Corporation shall promptly notify each person to whom an award has been made and pay the award in accordance with the determinations of the Committee.
 
 
(e)
 
A cash award may be made with respect to a Senior Executive Officer who has died. Any such award shall be paid to the legal representative or representatives of the estate of such Senior Executive Officer.
 
 
 
 
 
(f)
 
No person who is eligible for an award under the Plan for any fiscal year of the Corporation shall be eligible for an award under any other annual management incentive compensation plan of any of the Corporation’s businesses for that fiscal year.
 
 
 
 
 
(g)
 
Notwithstanding any other provision of this Plan to the contrary, except to the extent that a Senior Executive Officer has elected to defer receipt of his or her award pursuant to the 2005 DCP pursuant to subclause (h) below, any award payable under this Plan will be paid no later than March 15th of the calendar year following the end of the fiscal year to which such award relates.
 
 
 
 
 
(h)
 
Any Senior Executive Officer who is eligible to participate in the 2005 DCP may elect to defer an award under this Plan subject to and in accordance with the terms and conditions of the 2005 DCP. It is intended that any such deferral will only be permitted to the extent that such election to defer payment complies with Section 409A. Rockwell Collins will provide the Senior Executive Officer with the appropriate deferral election form pursuant to which the Senior Executive Officer may make his or her deferral election. Once an employee has elected to defer payment into the 2005 DCP, the deferred amounts, including the Senior Executive Officer’s ability to make a change to that deferral election and his or her right to receive payment of such deferred amounts, will be subject in all regards to the terms and conditions of the 2005 DCP and the requirements of Section 409A generally. Notwithstanding any other provision of this Plan to the contrary, the Corporation makes no representation that the Plan or the 2005 DCP or any amount deferred pursuant to this subclause (h) or the 2005 DCP will be exempt from or comply with Section 409A and makes no undertaking to preclude Section 409A from applying to this Plan or the 2005 DCP.





5. Finality of Determinations
          The Committee shall have the power to administer and interpret the Plan. All determinations, interpretations and actions of the Committee and all actions of the Board of Directors under or in connection with the Plan shall be final, conclusive and binding upon all concerned. Any member of the Committee who, at the time of any proposed award or at the time an award is made, is not an “outside director” as defined for purposes of Code Section 162(m) shall abstain from, and take no part in, the Committee’s action on the award.

6. Amendment of the Plan
          The Board of Directors and the Committee shall each have the power, in its sole discretion, to amend, suspend or terminate the Plan at any time, except that:
 
(a)
 
No such action shall adversely affect rights under an award already made, without the consent of the person affected; and
 
 
 
 
 
(b)
 
Without approval of the shareowners of Rockwell Collins, neither the Board of Directors nor the Committee shall (1) so modify the method of determining the Performance Fund as to increase materially the maximum amount that may be allocated to it or (2) after the first 90 days of any fiscal year, amend the plan in a manner that would, directly or indirectly: (i) change the method of calculating the amount allocated to the Performance Fund for that year; (ii) increase the maximum award payable to any Senior Executive Officer for that year; or (iii) remove the amendment restriction set forth in this sentence with respect to that year.

7. Miscellaneous
 
(a)
 
The Corporation shall bear all expenses and costs in connection with the operation of the Plan.
 
 
 
 
 
(b)
 
The Corporation, the Board of Directors, the Committee and the officers of the Corporation shall be fully protected in relying in good faith on the computations and reports made pursuant to or in connection with the Plan by the independent certified public accountants who audit the Corporation’s accounts.

8. Effective Date
          The Plan was approved by the Board of Directors on November 17, 2005, and by shareowners of Rockwell Collins on February 7, 2006 . The Plan is effective for fiscal years commencing on or after September 30, 2006. The Plan was amended and restated on September 12, 2007 effective as of September 30, 2006 to reflect changes in respect of Section 409A. The Plan was further amended and restated effective as of November 9, 2015 to increase the number of Senior Executive Officers from four to six.
 






Exhibit 10-h-1
ROCKWELL COLLINS, INC.
APPROVAL OF
AMENDMENT #1
to the
ROCKWELL COLLINS
2005 NON-QUALIFIED PENSION PLAN
(as Amended and Restated on May 18, 2012)

The undersigned, Laura A. Patterson, Vice President, Total Rewards, Rockwell Collins, Inc. (the “Company”), for and on behalf of the Company and pursuant to the authority provided to me by the Company’s Senior Vice President of Human Resources, hereby approves Amendment #1 to the Rockwell Collins 2005 Non-Qualified Pension Plan (as Amended and Restated effective May 18, 2012) in the form attached to provide for distributions from such plan under circumstances permitted by Internal Revenue Code Section 409A.
Dated this 31st day of December 2015.

/s/ Laura A. Patterson                 
Laura A. Patterson
Vice President, Total Rewards



























AMENDMENT #1
to the
ROCKWELL COLLINS
2005 NON-QUALIFIED PENSION PLAN
(as Amended and Restated on May 18, 2012)
The Rockwell Collins 2005 Non-Qualified Pension Plan, as amended and restated on May 18, 2012 (the “Plan”), is hereby amended, effective as of the date hereof or as specified below, in the following respects:

1.
The Plan is hereby amended, effective January 1, 2015, by adding a new Section 6.015 to read as follows:

6.015      Acceleration of Payment Date .  Notwithstanding the foregoing, the distribution of benefits hereunder may be accelerated, with the consent of the Plan Administrator, under the following circumstances:
(a)
Compliance with Domestic Relations Order .  To permit payment to an individual other than the Participant as necessary to comply with the provisions of a domestic relations order (as defined in Code Section 414(p)(1)(B));
(b)
Conflicts of Interest .  To permit payment as necessary to comply with the provisions of a Federal government ethics agreement or to avoid violation of an applicable Federal, state, local or foreign ethics law or conflicts of interest law;
(c)
Payment of Employment Taxes .  To permit payment of federal employment taxes under Code Sections 3101, 3121(a) or 3121(v)(2), or to comply with any federal tax withholding provisions or corresponding withholding provisions of applicable state, local, or foreign tax laws as a result of the payment of federal employment taxes, and to pay the additional income tax at source on wages attributable to the pyramiding Code Section 3401 wages and taxes; or
(d)
Tax Event .  Upon a good faith, reasonable determination by the Plan Administrator, and upon advice of counsel, that the Plan fails to meet the requirements of Code Section 409A and regulations thereunder.  Such payment may not exceed the amount required to be included in income as a result of the failure to comply with the requirements of Code Section 409A.





Exhibit 10-h-2

ROCKWELL COLLINS, INC.

APPROVAL OF

AMENDMENT #1
to the
ROCKWELL COLLINS
2005 NON-QUALIFIED RETIREMENT SAVINGS PLAN
(Amended and Restated effective December 17, 2010)

The undersigned, Laura A. Patterson, Vice President, Total Rewards, Rockwell Collins, Inc. (the “Company”), pursuant to authority provided to me by the Company’s Senior Vice President of Human Resources, does hereby approve, for and on behalf of the Company, Amendment #1 to the Rockwell Collins 2005 Non-Qualified Retirement Savings Plan (Amended and Restated effective December 17, 2010) that is attached hereto.

Dated this 31 st day of December 2015.

/s/ Laura A. Patterson                 
Laura A. Patterson
Vice President, Total Rewards



































AMENDMENT #1
to the
ROCKWELL COLLINS
NON-QUALIFIED 2005 RETIREMENT SAVINGS PLAN

The Rockwell Collins 2005 Non-Qualified Retirement Savings Plan, as amended and restated December 17, 2010 (the “Plan”), is hereby amended effective as the date hereof as follows:

1.
Section 1.230 of the Plan is amended in its entirety to read as follows:

1.230      Qualified Retirement Savings Plan means for periods (i) on or prior to December 31, 2015, the Rockwell Collins Retirement Savings Plan and (ii) on or after January 1, 2016, the following two sub-plans of such plan: The Rockwell Collins Retirement Savings Plan for Salaried and Certain Hourly Employees and the Rockwell Collins Retirement Savings Plan for IMS Non-Union Employees.





Exhibit 10-q-1

ROCKWELL COLLINS, INC.
2015 LONG-TERM INCENTIVES PLAN
PERFORMANCE SHARE AGREEMENT
Grant Date: November __, 20___

We are pleased to confirm that, as a key employee of Rockwell Collins, Inc. (“Rockwell Collins” or the “Company”) or one of its subsidiaries, you have been granted performance shares denominated in shares of the Company’s common stock. You have been granted the number of target shares set forth in the letter to you from Robert K. Ortberg dated November __, 20___ (the “Performance Shares”) pursuant to this agreement (this “Agreement”) and the Rockwell Collins 2015 Long-Term Incentives Plan (the “Plan”) .
The grant of Performance Shares pursuant to this Agreement is not effective or enforceable until you properly acknowledge your acceptance of this Agreement by completing the electronic acceptance of this Agreement. Upon acceptance, the Agreement will be deemed effective as of the Grant Date. If you do not acknowledge your acceptance of this Agreement within six months of the Grant Date, the Performance Shares will be forfeited. If you reside outside the United States, the Company may require you to complete a written acceptance within this time period in lieu of an electronic acceptance.

Any payout of your Performance Shares will be based on the Company’s achievement of its Cumulative Sales goal and its Free Cash Flow as a Percent of Net Income (“FCF/NI”) goal, each measured over the Company’s ______ through ______ fiscal years (the “Performance Period”) . These goals are set forth in Exhibit A attached hereto. The payout, if any, will be subject to further adjustment based upon the Company’s Total Shareowner Return (“TSR”) percentile relative to a peer group, as specified below. The terms and conditions of these Performance Shares are as set forth below.
The following is a summary of the treatment of the Performance Shares in certain events. It is qualified in its entirety by the terms of the Agreement that follow.
Event
Treatment of Performance Shares
Death, Disability & Retirement (attained age 55 at time of termination)
Entitled to a pro rata payment of any Performance Shares earned. Payment occurs at the end of Performance Period.
Qualifying Termination after a Change of Control/Divestiture
Performance Shares paid out at target multiplied by the average payout over the prior three completed performance periods.
Other Terminations/Detrimental Activity
Performance Shares forfeited.
1. Confirmation of Award . This Agreement, together with the letter to you from Robert K. Ortberg referenced above, confirms your award in accordance with the terms as set forth herein.
2. Amount Payable Pursuant to Awards . Subject to the provisions of this Agreement, the shares of the Company’s common stock (“Common Stock”) , if any, payable to you pursuant to your Performance Shares shall be calculated as follows:
(a) Determine the percentage, which can range from 0-100%, attributable to the Company’s achievement of its Cumulative Sales goal over the Performance Period as set forth in Exhibit A attached hereto (the “Cumulative Sales Percentage”) . If the Cumulative Sales results that are achieved fall between the performance levels specified in Exhibit A, the percentage will be interpolated consistent with the range in which the Cumulative Sales falls as conclusively determined by the committee of the Board of Directors of the Company administering the Plan (which committee is herein called the “Committee” and which, on the date hereof, is the Compensation Committee). Fractional percentages will be rounded to the nearest whole number.
(b) Determine the percentage, which can range from 0-100%, attributable to the Company’s achievement of its FCF/NI goal over the Performance Period as set forth in Exhibit A attached hereto (the “FCF/NI Percentage”) . If the




FCF/NI Percentage results that are achieved fall between the performance levels specified in Exhibit A, the percentage will be interpolated consistent with the manner described above in 2(a). Fractional percentages will be rounded to the nearest whole number.
(c) Determine the TSR modifier percentage, which can range between 80-120%, attributable to the Company’s TSR (as determined pursuant to Section 3) percentile performance relative to the peers as set forth in Exhibits A and B attached hereto (the “TSR Percentage”) .
(d) Add the Cumulative Sales Percentage to the FCF/NI Percentage and multiply this sum by the TSR Percentage (such result, the “Final Award Percentage”) . The Final Award Percentage will be rounded to the nearest whole percentage.
(e) To determine the number of Performance Shares, if any, that are payable, multiply the Final Award Percentage by the target shares specified in Mr. Ortberg’s letter to you referenced above and round to the nearest whole share.
Subject to the provisions of this Agreement, the amount payable to you pursuant to the Performance Shares with respect to the Performance Period shall be paid in shares of Common Stock, less shares to be withheld for taxes and/or other amounts as described below in Section 16, as soon as practicable after the end of the Performance Period and after receipt of the accountant’s letter for the Performance Period pursuant to Section 13, and in any event within the calendar year within which the Performance Period ends. Unless otherwise provided in Section 6 below and subject to applicable law, you will not be considered “vested” in the Performance Shares and will not be entitled to any payment thereunder unless you are employed as of the last day of the Performance Period.
The Performance Shares represent the Company’s unfunded and unsecured promise to issue shares of Common Stock at a future date, subject to the terms of this Agreement and the Plan. You have no rights under the Performance Shares or this Agreement other than the rights of a general unsecured creditor of the Company. Until the distribution of any Common Stock after vesting is evidenced in book entry form at the transfer agent, is placed into a brokerage account or a stock certificate is issued, you shall not have, with respect to the Performance Shares, rights to vote or receive dividends or any other rights as a shareowner.
3. Definitions and Determination of Financial Performance . “Cumulative Sales” is the sum of the “Total sales” reported by the Company in its Consolidated Statement of Operations in its audited financial statements for each fiscal year in the Performance Period.
“FCF” is the amount reported as “Cash Provided by Operating Activities from Continuing Operations” less the amount reported as “Property additions,” each as reported by the Company in its Consolidated Statement of Cash Flows in its audited financial statements for the fiscal year.
“NI” is the amount reported as “Net income from continuing operations” by the Company in its Consolidated Statement of Cash Flows in its audited financial statements for the fiscal year.
“FCF/NI” is the sum of the FCF for each fiscal year in the Performance Period divided by the sum of the NI for each fiscal year in the Performance Period. “FCF/NI” shall be converted into a percentage (i.e., if the fraction is .85, then the FCF/NI Percentage shall be 85%).
Total sales, Cash Provided by Operating Activities from Continuing Operations, Property additions and NI will be adjusted for unusual and infrequently occurring income and expense items as determined in accordance with United States Generally Accepted Accounting Principles (“GAAP”) .
If a divestiture occurs during the Performance Period, adjustments will be made as follows:
(1) the Company’s Total sales, FCF and NI for each fiscal year in the Performance Period will include (without duplication) an amount equal to the divested business’ sales, free cash flow and net income (loss) in the full twelve month period completed immediately prior to the month in which the closing date of the divestiture occurs; and
(2) the gain or loss on the divestiture shall be excluded from the Company’s NI for the Performance Period.
If an acquisition occurs during the Performance Period, and the acquired business’ sales are less than 10% of the Company’s sales as reported by the Company in its audited financial statements over the Company’s last full four fiscal quarters, adjustments for each such acquisition will be made as follows:




(1) the Company’s Total sales, FCF and NI in the fiscal year during the Performance Period in which the acquisition closes will exclude the acquired business’ sales, net income (loss) and free cash flow results for the period of such fiscal year following the acquisition’s closing date;
(2) the Company’s Total sales in each fiscal year during the Performance Period subsequent to the year in which the acquisition closes will be reduced by an amount equal to the acquired business’ sales results for the full twelve month period ending with the Company’s first fiscal year end that occurs after the date of the acquisition;
(3) the Company’s FCF in each fiscal year during the Performance Period subsequent to the year in which the acquisition closes will exclude an amount equal the net income (loss) of the acquired business in the full twelve month period ending prior to the acquisition’s closing date (as reflected in the base case scenario included in the Company’s final decision point review process for the acquisition);
(4) the Company’s NI in each fiscal year during the Performance Period subsequent to the year in which the acquisition closes will exclude an amount equal the cash flow of the acquired business in the full twelve month period ending prior to the acquisition’s closing date (as reflected in the base case scenario included in the Company’s final decision point review process for the acquisition); and
(5) the “fair value” expenses of an acquisition will be adjusted for purposes of calculating net income, including an addition to net income to offset the amortization of acquired intangibles and an addition to net income to offset for the lost opportunity to earn interest on invested funds (equal to the imputed interest on the net cost of the acquisition over the period of Performance Period following the closing date of the acquisition, calculated using the average annual U.S. overnight LIBOR during that period).
The Committee reserves its discretion pursuant to Section 10 below to make necessary or appropriate adjustments to the definitions and measures or otherwise for acquisitions, divestitures and other matters referenced in Section 10.
TSR is measured by adding (i) the total stock price growth for the Performance Period, measured by comparing the average stock price during the Company’s fiscal ______ (i.e., from __________ to ____________) to the average stock price during the Company’s fiscal ________ (i.e., __________ to __________), and (ii) dividends paid during the Performance Period, measured as if reinvested in stock at the payment date. In the event of substantial changes causing an inability to calculate TSR for one or more of the peer companies listed in the attached Exhibit A (or in the event of spinoffs or similar transactions causing a peer company to split into two or more peer companies), the list of peer companies shall be adjusted accordingly to take such events into account.
In connection with the receipt of the accountant's letter for the Performance Period pursuant to Section 13, the Committee shall determine the Cumulative Sales, FCF/NI and the TSR results and percentile ranking and the Final Award Percentage for the Performance Period after taking into account any adjustment as contemplated in Section 10. The TSR percentile ranking relative to the peer group shall be calculated using a continuous percentile ranking method as described in Exhibit B and then using this result the TSR Percentage shall be determined in accordance with Exhibit A.
4. Payment of Performance Shares Denominated in Shares of Common Stock . The Performance Shares denominated in shares of Common Stock are payable in shares of the Company’s Common Stock; provided, however, that the Committee may, in its sole discretion, make a cash payment equal to the Fair Market Value of shares of Common Stock otherwise required to be issued. The Company may issue shares of Common Stock in book entry form in connection with the payout of Performance Shares. In lieu of fractional shares the Company may determine, in its sole discretion, to pay cash or to round such shares to the closest whole number. The future value of the shares of Common Stock underlying the Performance Shares is unknown and cannot be predicted with certainty.
5. Transferability of Award . The Performance Shares shall not be transferable by you except by will or by the laws of descent and distribution.
6. Termination of Employment for Death, Disability or Retirement . If your employment by the Company terminates during the Performance Period by reason of your death, disability or retirement (defined as you are age 55 or older at time of termination), you will continue to be eligible to receive a payment, if any, that would otherwise be payable pursuant to Section 2, but any such amount shall be pro-rated for the portion of the Performance Period that elapsed prior to this termination of employment and shall be paid at the time such amount would otherwise be payable as specified in Section 2. Disability shall be defined for purposes of this Agreement as a disability for a continuous period of at least six months under the Company’s long-term disability plan during the period of your continuous service as an employee of the Company.
7. Termination of Employment for Other Reasons . Except as otherwise provided in Sections 9 through 12, if your employment by the Company terminates during the Performance Period other than by reason of your death, disability, or retirement (as defined above), you will not be entitled to any payment pursuant to Section 2 with respect to the Performance Period. For the avoidance of doubt, your termination of employment will be deemed to occur on the date you are no longer actively




providing services as an Employee, which date will not be extended by any notice period that may be required contractually or under applicable law. Notwithstanding the foregoing, the Company’s Senior Vice President of Human Resources or the General Counsel shall have the sole discretion to determine the date of termination for purposes of participation in the Plan and the Performance Shares.
8. Detrimental Activity; Compensation Recovery Policy; Noncompetition and Nonsolicitation Agreement . If you engage in detrimental activity (as defined in this Section 8) at any time (whether before or after termination of your employment), you will not be entitled to any payment hereunder and you will forfeit all rights with respect to the Performance Shares under this Agreement. For purposes of this Section 8, "detrimental activity" shall mean willful, reckless or grossly negligent activity that is determined by the Committee to be detrimental to or destructive of the business or property of the Company. Any such determination of the Committee shall be final and binding for all purposes. Notwithstanding the foregoing, no payment hereunder shall be forfeited or become not payable by virtue of this Section 8 on or after the date of a Change of Control (as defined in the Plan) unless the “Cause” standard set forth in Section 11(b) is satisfied. In addition, if you are or subsequently become an executive officer of the Company, a Senior Vice President, a Vice President & General Manager, a Vice President & Controller or another employee who becomes subject to the Policy (as defined below), your Performance Shares and the value you receive upon vesting of the Performance Shares will be subject to the Company’s Compensation Recovery Policy, as amended from time to time, including, without limitation, any amendments required to comply with the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Policy”) , except where prohibited by law. Currently, the Company's executive officers, Senior Vice Presidents, Vice Presidents & General Managers and Vice Presidents & Controllers are the only employees subject to the Policy. If you become subject to the Policy, you will be notified by the Company’s Human Resources department. Further, if you have attained the level of Vice President (or above) with the Company and you have not previously entered into a Noncompetition and Nonsolicitation Agreement with the Company (the “NCNS Agreement”) , this grant of Performance Shares is contingent on your agreement, if requested by the Company within thirty days of the date of this Agreement, to be bound by the NCNS Agreement by returning a signed copy of the NCNS Agreement to the Company within the time period prescribed by the Company’s General Counsel.
9. Transfer of Employment; Leave of Absence . Except as otherwise required by Internal Revenue Code Section 409A, for the purposes of this Agreement, (a) a transfer of your employment from the Company to a subsidiary or vice versa, or from one subsidiary of the Company to another, without an intervening period, shall not be deemed a termination of employment, and (b) if you are granted in writing a leave of absence, under certain circumstances at the discretion of the Company, you shall be deemed to have remained in the employ of the Company or a subsidiary of the Company during such leave of absence. If your level of employment changes, the Company may adjust your target payment hereunder to pro rate the portion of the Performance Period that elapses (i) prior to the change in employment status at the old target payment level and (ii) after the change at the new target payment level, if any. Any promotion to the ranks of “Designated Senior Executive” requires Committee action to adjust the target payment hereunder. If you are entitled to payment under this Agreement upon a termination of employment, Section 409A's definition of "separation of service," including its rules on leaves of absences, to the extent applicable, will be used to determine the date on which you actually terminate employment.
10. Adjustments .
(a) In addition to the adjustments provided for in Section 3 of this Agreement, adjustments (which may be increases or decreases) may be made by the Committee in the Cumulative Sales and FCF/NI as well as in the TSR and list of peer companies, to take into account changes in law and accounting and tax rules and to make such adjustments as the Committee deems necessary or appropriate to reflect the inclusion or exclusion of the impact of unusual and infrequently occurring items, events or circumstances, including, without limitation, acquisitions or divestitures by or other material changes in the Company or peer companies, provided that no adjustment shall be made which would result in an increase in your compensation if your compensation is subject to the limitation on deductibility under Section 162(m) of the Internal Revenue Code, as amended, or any successor provision, for the year with respect to which the adjustment occurs.
(b) In the event of any change in or affecting the outstanding shares of Common Stock of the Company by reason of a stock dividend or split, merger or consolidation, or various other events, adjustments will be made as appropriate in connection with the Performance Shares as contemplated in the Plan.
(c) Subject to the provisions of Section 11, the determination of the Committee as to the terms of any adjustment made pursuant to this Section 10 shall be binding and conclusive upon you and any other person or persons who are at any time entitled to receipt of any payment pursuant to the award.
11. Change of Control .




(a) Notwithstanding any other provision of this Agreement to the contrary, in the event that during the Performance Period your employment is terminated on or after a Change of Control (as defined in the Plan) (i) by the Company other than for Cause (as defined in Section 11(b)) or (ii) by you for Good Reason (as defined in Section 11(c)), your award shall become nonforfeitable and shall be paid out on the date of your “separation from service” within the meaning of Section 409A to the extent applicable, as if the Performance Period hereunder had been completed or satisfied and as if the Final Award Percentage for the Performance Period enabled a payment to you pursuant to Section 2 of the amount that is equal to your target performance shares for the Performance Period multiplied by the average actual percentage payout for the Company’s long-term incentive performance shares for the prior three completed performance periods.
(b)    For purposes of Sections 8 and 11(a), termination for "Cause" shall mean:
(i) your willful and continued failure to perform substantially your duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to you by (x) the Board or the Chief Executive Officer of the Company if you are an executive officer or Senior Vice President of the Company or (y) the Senior Vice President of Human Resources if you are not an executive officer or Senior Vice President of the Company. Such notice shall specifically identify the manner in which you have not substantially performed your duties, or
(ii) your willful engaging in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company.
For purposes of this provision, no act or failure to act, on the part of you, shall be considered "willful" unless it is done, or omitted to be done, by you in bad faith or without reasonable belief that your action or omission was in the best interests of the Company. If you are an executive officer or Senior Vice President of the Company, any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by you in good faith and in the best interests of the Company. The cessation of an executive officer’s or Senior Vice President’s employment shall not be deemed to be for Cause unless and until there shall have been delivered to the executive officer or Senior Vice President a copy of the resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at the meeting of the Board called and held for such purpose (after reasonable notice is provided and the executive officer or Senior Vice President is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the executive officer or Senior Vice President was guilty of the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail.
(c) For purposes of this Agreement, "Good Reason" shall mean:
(i) the assignment to you of any duties inconsistent in any material respect with your most significant position (including status, offices, titles and reporting requirements), authority, duties or responsibilities held, exercised and assigned at any time during the 120-day period immediately preceding the Change of Control, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by you;
(ii) requiring you to be based at any office or location other than the location where you were employed immediately preceding the Change of Control unless any office or location is less than 35 miles from such location, or if the distance from the new location to your residence is less than the distance from the old location to the residence;
(iii) any failure by the Company to maintain your compensation at a level consistent with that generally in effect prior to any Change of Control, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by you;
(iv) any purported termination by the Company of your employment otherwise than as expressly permitted by this Agreement; or
(v)    any failure by the Company to comply with and satisfy Section 19(b) of this Agreement.
For purposes of this Section 11(c), any good faith determination of "Good Reason" made by you shall be conclusive.
(d)    Notwithstanding anything to the contrary in this Agreement (except to the extent that Section 11(a) provides for an earlier payment upon a termination of employment), if a Change of Control occurs during the Performance Period, the payment date for your Performance Shares will be deemed to be November of the last year of the Performance Period.
12. Divestiture . In the event that your principal employer is a subsidiary of the Company, it is possible that your principal employer may cease to be a subsidiary of the Company during the Performance Period and that your employment with the Company terminates as a result (the date of such cessation is herein called the Divestiture Date). If the divestiture of your principal employer constitutes a "change in control event" that meets the requirements of Section 409A, then your Performance




Shares shall become nonforfeitable (to the extent not already nonforfeitable) and shall be paid out on the Divestiture Date as if the Performance Period hereunder had been completed or satisfied and as if the Final Award Percentage enabled a payment to you pursuant to Section 2 of the amount that is equal to your target performance shares for the Performance Period multiplied by the average actual percentage payout for the Company’s long-term incentive performance shares for the prior three completed performance periods. If the divestiture of your principal employer does not meet the requirements of a "change in control event" under Section 409A, then your Performance Shares shall become nonforfeitable (to the extent not already nonforfeitable) on the Divestiture Date and shall be paid out in November of the last year of the Performance Period consistent with the payout amount approved by the Compensation Committee for the Performance Period.
13. Accountant's Letter . As soon as practicable after the end of the Performance Period, the Committee shall obtain a letter or other communication from the Company’s Senior Vice President and Chief Financial Officer or the Vice President, Finance and Controller, or one of their successors or designees, to the effect that such person has reviewed the determination for the Performance Period of the Cumulative Sales, FCF/NI, TSR results and percentile ranking of the Company, as well as the Final Award Percentage, and that in such person’s opinion such determinations have been made in accordance with Section 3.
14. Employment Rights . The Performance Shares do not and are not intended to constitute or create a contract of employment. You shall not have any rights of employment or continued employment with the Company or any subsidiary as a result of the Performance Shares, other than the payment rights expressly contemplated herein.
15. Section 409A.
(a)    Notwithstanding any other provision of this Agreement to the contrary, the Company makes no representation that any amount payable under this Agreement will be exempt from or comply with Section 409A and makes no undertaking to preclude Section 409A from applying to such amount.
(b)    To the extent that any amount payable under this Agreement is paid upon a “separation from service” (within the meaning of Section 409A) to a “specified employee” (within the meaning of Section 409A), then such amount will not be paid during the six (6) month period following such separation from service, but will be paid within ten business days following such period.
16. Tax Withholding . As a condition of the grant and vesting of the Performance Shares, the Company, your employer or an administrative agent shall have the right, in whole in part, upon any payment to you of cash and/or Common Stock hereunder, (a) to deduct an amount equal to the taxes, social contributions, and/or other charges required to be withheld or otherwise applicable by law in respect of Performance Shares and Common Stock acquired or (b) to require you (or any other person entitled to the Performance Shares) to pay it an amount sufficient to provide for any such taxes, social charges and/or other charges. You agree that (for yourself and on behalf of any other person who becomes entitled to the Performance Shares or the Common Stock) that if the Company, your employer or an administrative agent elects to require you (or such other person) to remit an amount sufficient to pay such taxes, social contributions, and/or other charges, you (or such other person) must remit that amount within three business days after such amount is due. The Company will generally withhold required amounts from your payments, unless the Company has made other arrangements with you for you to promptly remit an amount sufficient to pay such withholding of tax, social contributions, and/or other charges (and may condition delivery of cash and/or Common Stock hereunder upon such payment).  
You acknowledge and agree that you are solely responsible for any and all taxes, social contributions, and/or other charges that may be assessed by any taxing authority in the United States or any other jurisdiction arising from the Performance Shares, the Common Stock or dividends (if any), that such amounts may exceed the amount withheld by the Company, your employer or the administrative agent, and that neither the Company nor any affiliate is liable for any such assessments. You are solely responsible for all relevant documentation that may be required of you in relation to the Performance Shares, such as but not limited to personal income tax returns or reporting statements in relation to the receipt, holding, or subsequent sale of Common Stock and the receipt of dividends, if any. You acknowledge and agree that the Company makes no representations regarding the treatment of taxes, social contributions, or other charges and does not commit to and is under no obligation to structure the terms of the Plan or any award to reduce or eliminate your liability for any income taxes, social contributions, or other charges or to achieve any particular tax result. You also understand that applicable laws may require varying Stock or award valuation methods for purposes of calculating taxes, social contributions, and/or other charges, and the Company assumes no responsibility or liability in relation to any such valuation or for any calculation or reporting of income or such amounts that may be required in relation to the award under applicable laws. Further, if you become subject to tax in more than one jurisdiction, the Company, your employer, or an administrative agent may be required to withhold or account for such amounts in more than one jurisdiction. Consult a tax or financial advisor if you have questions.




17. Communications . The Company may, in its sole discretion, decide to deliver any documents related to the Performance Shares, future Performance Shares, the Common Stock, or any other Company-related documents by electronic means. By accepting the Performance Shares, whether electronically or otherwise, you hereby consent to receive such documents by electronic delivery and agree to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third party designated by the Company, including, but not limited to the use of electronic signatures or click-through electronic acceptance of terms and conditions. If you have been provided with a copy of this Agreement, the Plan, or any other relevant documentation in a language other than English, unless otherwise required by applicable law, the English language documents will prevail in case of any ambiguities or divergences as a result of translation.
18. Governing Law and Forum; Severability. This Agreement and the Company’s obligation to issue Common Stock in respect of the Performance Shares shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to the conflict of law principles thereof. If one or more of the provisions herein shall be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby and the invalid, illegal or unenforceable provisions shall be deemed null and void; however, to the extent permissible by law, any provisions that could be deemed null and void shall first be construed, interpreted or revised retroactively to permit this Agreement to be construed so as to foster the intent of this Agreement and the Plan. For purposes of resolving any dispute that may arise directly or indirectly from this Agreement, the parties hereby agree that any such dispute that cannot be resolved by the parties shall be submitted to the exclusive jurisdiction of state and federal courts located in the state of Delaware.
19. Successors . (a) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns.
(b) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise.
20. Administration . Consistent with Section 8 of the Plan, the Committee shall interpret and administer the Plan, this Agreement and the Performance Shares. The actions and determinations of the Committee on all matters relating to the Plan, this Agreement and the Performance Shares will be final and conclusive.
.         21.     Acknowledgement and Waiver. By executing this Agreement, participating in the Plan and accepting the grant of Performance Shares, you hereby agree and acknowledge that: (a) the Plan is discretionary in nature and that the Company can amend, cancel or terminate it at any time; (b) the grant of Performance Shares is voluntary and occasional and does not create any contractual or other right to receive future Performance Shares, or benefits in lieu of any Performance Shares even if Performance Shares have been granted repeatedly in the past; (c) all determinations with respect to any such future grants, including, but not limited to, the times when Performance Shares shall be granted, will be at the sole discretion of the Company; (d) your participation in the Plan is voluntary; (e) the value of the Performance Shares is an extraordinary item of compensation, which is outside the scope of your employment contract, if any; (f) the Performance Shares are not part of normal or expected compensation or salary for any purposes, including, but not limited to, calculating any termination, severance, resignation, redundancy, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments; (g) the Performance Shares cease upon termination of active employment for any reason except as may otherwise be explicitly provided in this Agreement and the Plan; (h) for purposes of the Performance Shares, the termination date shall be deemed effective as of the date that you are no longer actively employed regardless of any “garden leave” or other notice period that may be mandated contractually or under applicable local law, unless otherwise determined by the Company in its sole discretion; (i) the future value of the Common Stock acquired in respect of the Performance Shares, if any, is unknown and cannot be predicted with certainty, and neither the Company nor any affiliate is responsible for any foreign exchange fluctuation between your local currency and the United States Dollar (or the selection by the Company or any affiliates in its sole discretion of an applicable foreign currency exchange rate) that may affect the value of the Performance Shares or any shares of Common Stock received (or the calculation of income or any taxes, social contributions, or other charges thereunder); (j) the Performance Shares do not and are not intended to constitute or create a contract of employment and can in no event be understood or interpreted to mean that the Company or a subsidiary is your employer, or that you have an employment relationship with the Company or a subsidiary or any right to continue in employment, if any, nor will the Performance Shares interfere in any way with the right of your employer to terminate such relationship at any time, subject to applicable law; (k) any cross-border transfer proceeds received upon the sale of the shares of Common Stock received in respect of the Performance Shares must be made through a locally authorized financial institution or registered foreign exchange agency and may require you to provide such entity with certain information regarding the transaction, and (l) no claim or entitlement to compensation or damages arises from the termination of the Performance Shares or reduction




in value of the Performance Shares or any Common Stock acquired in respect of the Performance Shares and you irrevocably release the Company and your employer from any such claim that may arise.
        22.     Data Privacy . By executing this Agreement, participating in the Plan and accepting the grant of Performance Shares, you hereby explicitly and unambiguously consent to the collection, use, processing and transfer, in electronic or other form, of personal data by and among, as applicable, your employer, administrative agents (Fidelity is currently the Stock Plan Administrator) and the Company and other subsidiaries for the exclusive purpose of implementing, administering and managing your participation in the Plan. You understand that administrative agents (Fidelity), the Company, your employer and other subsidiaries may hold certain personal information about you, including your name, home address and telephone number, date of birth, social security number or other identification number, salary/compensation, nationality, job title, any stock or directorships held in the Company, details of all Performance Shares or any other entitlement to stock awarded, canceled, purchased or outstanding in your favor, for the purpose of managing and administering the Plan (“Data”). You further understand that Data may be transferred to any third parties assisting the Company in the implementation, administration and management of the Plan. You understand that these recipients may be located in your country of residence, or elsewhere, and that the recipient’s country may have different data privacy laws and protections than your country of residence. You authorize the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing your participation in the Plan. You understand that withdrawing your consent may affect your ability to participate in the Plan.
        23. Compliance with Law . The Company reserves the right to impose other requirements on your participation in the Plan, on the Performance Shares, and on any shares of Common Stock acquired under the Plan, to the extent the Company determines it is necessary or advisable in order to comply with any applicable law or facilitate the administration of the Plan, and to require you to sign any additional agreements or undertakings that may be necessary to accomplish the foregoing. Furthermore, you understand that the laws of the country in which you are resident at the time of grant or vesting of the Performance Shares or the holding or disposition of Common Stock (including any rules or regulations governing securities, foreign exchange, tax, labor or other matters) may restrict or prevent the issuance of shares or may subject you to additional procedural or regulatory requirements you are solely responsible for and will have to independently fulfill in relation to the Performance Shares or Common Stock. Notwithstanding any provision herein, the Performance Shares and Common Stock shall be subject to any special terms and conditions or disclosures as set forth in any addendum for your country (the “Addendum to Grant Agreement: Country-Specific Disclosures, Terms and Conditions,” which forms part this Award Agreement).
        24. Entire Agreement . This Agreement and the other terms applicable to Performance Shares granted under the Plan embody the entire agreement and understanding between the Company and you with respect to the Performance Shares, and there are no representations, promises, covenants, agreements or understandings with respect to the Performance Shares other than those expressly set forth in this Agreement and the Plan. Notwithstanding anything in this Agreement to the contrary, the terms of this Agreement shall be subject to the terms of the Plan and this Agreement is subject to all interpretations, amendments, rules and regulations promulgated by the Committee from time to time pursuant to the Plan, a copy of which may be obtained from the office of the Secretary of the Company.

Sincerely yours,
ROCKWELL COLLINS, INC.
Robert J. Perna
Senior Vice President,
General Counsel and Secretary

Rockwell Collins, Inc.
400 Collins Road NE, M/S 124-323
Cedar Rapids, IA 52498-0001








EXHIBIT A
FY__-__ Long-Term Incentives  
 
 
 
 
 
 
Performance Level
Cumulative Sales
Free Cash Flow as a Percent of Net Income
Total Payout %
Goal ($B)
Payout %
Goal
Payout %
Maximum
____
100%
__%
100%
200%
Target
____
50%
__%
50%
100%
Minimum
____
0%
__%
0%
0%
Weighting
50%
50%
 

TSR Modifier Percentage
The number of Performance Shares you can receive is subject to adjustment based upon the Company’s TSR performance relative to the following peer companies:
Peer Companies
[List of peers applicable to Agreement]

The peer companies are subject to adjustment as described in the Agreement.

The first step in determining the TSR Percentage is to calculate the Company’s TSR percentile rank as described on Exhibit B (“How to Calculate TSR Percentile Rank.”) The TSR Percentile Rank will be rounded to nearest whole percentage. Once the TSR percentile rank is determined, the TSR Percentage will be determined in accordance with the following table:





TSR Percentile Rank
TSR Percent
TSR Percentile Rank
TSR Percent
≥80%
120%
50%
100%
79%
119%
49%
99%
78%
119%
48%
99%
77%
118%
47%
98%
76%
117%
46%
97%
75%
117%
45%
97%
74%
116%
44%
96%
73%
115%
43%
95%
72%
115%
42%
95%
71%
114%
41%
94%
70%
113%
40%
93%
69%
113%
39%
93%
68%
112%
38%
92%
67%
111%
37%
91%
66%
111%
36%
91%
65%
110%
35%
90%
64%
109%
34%
89%
63%
109%
33%
89%
62%
108%
32%
88%
61%
107%
31%
87%
60%
107%
30%
87%
59%
106%
29%
86%
58%
105%
28%
85%
57%
105%
27%
85%
56%
104%
26%
84%
55%
103%
25%
83%
54%
103%
24%
83%
53%
102%
23%
82%
52%
101%
22%
81%
51%
101%
21%
81%
                                                                            ≤20% 80%


















EXHIBIT B

How to Calculate TSR Percentile Rank

The following is an example of how to calculate the TSR percentile using the continuous method. Suppose that the Rockwell Collins has 10 peer companies and ranks 6th with TSR of 36%.

Rank
Company
Three Year TSR
1
Peer 1
50%
2
Peer 2
48%
3
Peer 3
43%
4
Peer 4
39%
5
Peer 5
38%
7
Peer 6
31%
8
Peer 7
30%
9
Peer 8
28%
10
Peer 9
25%
11
Peer 10
19%
 
6
Rockwell Collins
36%

The first step in calculating Rockwell Collins’ TSR percentile rank is to calculate the percentile ranks of the companies that performed just above (peer 5) and just below (peer 6) Rockwell Collins in terms of TSR performances as shown in the first two equations below. The numerator in the first two equations represents the peer’s TSR rank (excluding Rockwell Collins) less one and the denominator is the number of peer companies (excluding Rockwell Collins) less one. Once these are calculated (56% for peer 5 and 44% for peer 6), the next step is to interpolate Rockwell Collins percentile rank between these two data points using the third equation below. In this example, Rockwell Collins’ percentile ranking would be 52%.











Exhibit 10-s-1

Rockwell Collins, Inc.
Non-Employee Director Compensation Summary
As of November 10, 2015

Initial Election to Board
•
Granted restricted stock units ("RSUs") with a value equal to:
◦
$100,000 plus
◦
$110,000 multiplied by a fraction where the numerator is the number of days until the next Annual Meeting of Shareowners and the denominator is 365.

Annual Retainer
•
$100,000 payable in equal quarterly installments at the beginning of each quarter.

Annual Equity Grant
•
At each Annual Meeting of Shareowners, granted RSUs with a value of $110,000.

Annual Lead Independent Director Fees
•
Additional cash retainer of $30,000, payable in equal quarterly installments at the beginning of each quarter.

Annual Committee Chair Fees
•
Audit - $20,000
•
Compensation - $15,000
•
Technology and Cybersecurity - $15,000
•
Nominating and Governance - $10,000
•
Corporate Strategy and Finance - $10,000
•
All chair fees are payable in equal quarterly installments at the beginning of each quarter.

Annual Audit Committee Fees
•
Each Audit Committee member, other than the Chair, receives $5,000, payable in equal quarterly installments at the beginning of each quarter.

Annual Deferral Opportunity
•
Prior to the start of each calendar year, a non-employee director may elect to defer all or a portion of his or her cash fees by electing to receive RSUs in lieu thereof.



* All annual amounts may be prorated for service periods of less than a year.







Exhibit 31.1

CERTIFICATION
 
I, Robert K. Ortberg, Chairman, President and Chief Executive Officer of Rockwell Collins, Inc., certify that:
 
1.
I have reviewed the quarterly report on Form 10-Q for the quarter ended December 31, 2015 of Rockwell Collins, Inc.;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date:      January 22, 2016
/s/ Robert K. Ortberg
 
Robert K. Ortberg
 
Chairman, President and Chief Executive Officer




Exhibit 31.2

CERTIFICATION
 
I, Patrick E. Allen, Senior Vice President and Chief Financial Officer of Rockwell Collins, Inc., certify that:

1.
I have reviewed the quarterly report on Form 10-Q for the quarter ended December 31, 2015 of Rockwell Collins, Inc.;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date:      January 22, 2016
/s/ Patrick E. Allen
 
Patrick E. Allen
 
Senior Vice President and
 
Chief Financial Officer




Exhibit 32.1

CERTIFICATION BY CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Rockwell Collins, Inc. (the Company) on Form 10-Q for the quarter ended December 31, 2015 (the Report) filed with the Securities and Exchange Commission, I, Robert K. Ortberg, Chairman, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)
The Company’s Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date:      January 22, 2016
/s/ Robert K. Ortberg
 
Robert K. Ortberg
 
Chairman, President and Chief Executive Officer




Exhibit 32.2

CERTIFICATION BY CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Rockwell Collins, Inc. (the Company) on Form 10-Q for the quarter ended December 31, 2015 (the Report) filed with the Securities and Exchange Commission, I, Patrick E. Allen, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)
The Company’s Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date:      January 22, 2016
/s/ Patrick E. Allen
 
Patrick E. Allen
 
Senior Vice President and
 
Chief Financial Officer