ROCKWELLLOGOA16.JPG

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
  þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2017

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


Commission file number 001-16445   
 
Rockwell Collins, Inc .
(Exact name of registrant as specified in its charter)


Delaware
52-2314475
(State or other jurisdiction
(I.R.S. Employer
of incorporation or organization)
Identification No.)
 
 
400 Collins Road NE
 
Cedar Rapids, Iowa
52498
(Address of principal executive offices)
(Zip Code)

Registrant's telephone number, including area code: (319) 295-1000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  R  No  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  R  No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
 
Accelerated filer o
Non-accelerated filer   o
(Do not check if a smaller reporting company)
Smaller reporting company o
 
 
Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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

162,475,866  shares of the registrant's Common Stock were outstanding on July 24, 2017.

 



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)
 
June 30,
2017
 
September 30,
2016
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
578

 
$
340

Receivables, net
1,644

 
1,094

Inventories, net
2,506

 
1,939

Other current assets
167

 
117

Total current assets
4,895

 
3,490

 
 
 
 
Property
1,328

 
1,035

Goodwill
8,602

 
1,919

Customer Relationship Intangible Assets
2,092

 
467

Other Intangible Assets
905

 
200

Deferred Income Tax Asset
29

 
219

Other Assets
500

 
369

TOTAL ASSETS
$
18,351

 
$
7,699

LIABILITIES AND EQUITY
 

 
 

Current Liabilities:
 

 
 

Short-term debt
$
511

 
$
740

Accounts payable
787

 
527

Compensation and benefits
325

 
269

Advance payments from customers
349

 
283

Accrued customer incentives
278

 
246

Product warranty costs
202

 
87

Other current liabilities
422

 
194

Total current liabilities
2,874

 
2,346

 
 
 
 
Long-term Debt, Net
7,268

 
1,374

Retirement Benefits
1,523

 
1,660

Deferred Income Tax Liability
417

 
1

Other Liabilities
660

 
234

 
 
 
 
Equity:
 

 
 

Common stock ($0.01 par value; shares authorized: 1,000; shares issued: June 30, 2017, 175.0; September 30, 2016, 143.8)
2

 
1

Additional paid-in capital
4,542

 
1,506

Retained earnings
3,679

 
3,327

Accumulated other comprehensive loss
(1,806
)
 
(1,898
)
Common stock in treasury, at cost (shares held: June 30, 2017, 12.6; September 30, 2016, 13.6)
(814
)
 
(858
)
Total shareowners’ equity
5,603

 
2,078

Noncontrolling interest
6

 
6

Total equity
5,609

 
2,084

TOTAL LIABILITIES AND EQUITY
$
18,351

 
$
7,699

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
 
Nine Months Ended
 
June 30
 
June 30
 
2017
 
2016
 
2017
 
2016
Sales:
 
 
 
 
 
 
 
Product sales
$
1,836

 
$
1,129

 
$
3,935

 
$
3,198

Service sales
258

 
205

 
694

 
616

Total sales
2,094

 
1,334

 
4,629

 
3,814

 
 
 
 
 
 
 
 
Costs, expenses and other:
 
 
 
 
 
 
 
Product cost of sales
1,352

 
772

 
2,799

 
2,223

Service cost of sales
172

 
143

 
471

 
435

Selling, general and administrative expenses
213

 
158

 
514

 
481

Transaction and integration costs
64

 

 
80

 

Interest expense
77

 
16

 
122

 
48

Other income, net
(5
)
 
(2
)
 
(14
)
 
(12
)
Total costs, expenses and other
1,873

 
1,087

 
3,972

 
3,175

 
 
 
 
 
 
 
 
Income from continuing operations before income taxes
221

 
247

 
657

 
639

Income tax expense
42

 
33

 
165

 
120

Income from continuing operations
179

 
214

 
492

 
519

 
 
 
 
 
 
 
 
Income from discontinued operations, net of taxes

 

 

 
1

 
 
 
 
 
 
 
 
Net income
$
179

 
$
214

 
$
492

 
$
520

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
 
 
 
 
 
 
 
Continuing operations
$
1.13

 
$
1.65

 
$
3.52

 
$
3.97

Discontinued operations

 

 

 
0.01

Basic earnings per share
$
1.13

 
$
1.65

 
$
3.52

 
$
3.98

 
 
 
 
 
 
 
 
Diluted
 
 
 
 
 
 
 
Continuing operations
$
1.12

 
$
1.63

 
$
3.48

 
$
3.92

Discontinued operations

 

 

 
0.01

Diluted earnings per share
$
1.12

 
$
1.63

 
$
3.48

 
$
3.93

 
 
 
 
 
 
 
 
Weighted average common shares:
 
 
 
 
 
 
 
Basic
158.2

 
130.0

 
139.8

 
130.7

Diluted
159.9

 
131.5

 
141.4

 
132.3

 
 
 
 
 
 
 
 
Cash dividends per share
$
0.33

 
$
0.33

 
$
0.99

 
$
0.99


See Notes to Condensed Consolidated Financial Statements.

2


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

 
Three Months Ended
 
Nine Months Ended
 
June 30
 
June 30
 
2017
 
2016
 
2017
 
2016
Net income
$
179

 
$
214

 
$
492

 
$
520

Unrealized foreign currency translation and other adjustments
50

 
(16
)
 
41

 
(16
)
Pension and other retirement benefits adjustments (net of taxes for the three and nine months ended June 30, 2017 of $9 and $27, respectively; net of taxes for the three and nine months ended June 30, 2016 of $7 and $23, respectively)
15

 
14

 
47

 
40

Foreign currency cash flow hedge adjustments (net of taxes for the three and nine months ended June 30, 2017 of $0 and $1, respectively; net of taxes for the three and nine months ended June 30, 2016 of $1 and $2, respectively)
2

 

 
4

 
3

Comprehensive income
$
246

 
$
212

 
$
584

 
$
547


See Notes to Condensed Consolidated Financial Statements.



3


ROCKWELL COLLINS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(in millions)
 
Nine Months Ended
 
June 30
 
2017
 
2016
Operating Activities:
 
 
 
Net income
$
492

 
$
520

Income from discontinued operations, net of tax

 
1

Income from continuing operations
492

 
519

Adjustments to arrive at cash provided by operating activities:
 
 
 
Non-cash restructuring charges

 
6

Depreciation
118

 
107

Amortization of intangible assets, pre-production engineering costs and other
132

 
84

Amortization of acquired contract liability
(42
)
 

Amortization of inventory fair value adjustment
44

 

Stock-based compensation expense
21

 
21

Compensation and benefits paid in common stock
48

 
41

Deferred income taxes
18

 
39

Pension plan contributions
(66
)
 
(66
)
Changes in assets and liabilities, excluding effects of acquisitions and foreign currency adjustments:
 
 
 
Receivables
(60
)
 
(163
)
Production inventory
(88
)
 
(73
)
Pre-production engineering costs
(108
)
 
(141
)
Accounts payable
21

 
3

Compensation and benefits
(19
)
 
(15
)
Advance payments from customers
1

 
(102
)
Accrued customer incentives
(17
)
 
13

Product warranty costs
(4
)
 
(6
)
Income taxes
(56
)
 
3

Other assets and liabilities
(19
)
 
(47
)
Cash Provided by Operating Activities from Continuing Operations
416

 
223

Investing Activities:
 
 
 
Property additions
(165
)
 
(133
)
Acquisition of businesses, net of cash acquired
(3,429
)
 
(17
)
Other investing activities
(5
)
 
(1
)
Cash (Used for) Investing Activities from Continuing Operations
(3,599
)
 
(151
)
Financing Activities:
 
 
 
Repayment of current portion of long-term debt
(338
)
 

Repayment of acquired long-term debt
(2,119
)
 

Purchases of treasury stock
(46
)
 
(261
)
Cash dividends
(140
)
 
(129
)
Increase in long-term borrowings
6,099

 

Increase (decrease) in short-term commercial paper borrowings, net
(78
)
 
364

Proceeds from the exercise of stock options
41

 
15

Other financing activities
(4
)
 
(2
)
Cash Provided by (Used for) Financing Activities from Continuing Operations
3,415

 
(13
)
Effect of exchange rate changes on cash and cash equivalents
6

 
(4
)
Cash Provided by Discontinued Operations

 

Net Change in Cash and Cash Equivalents
238

 
55

Cash and Cash Equivalents at Beginning of Period
340

 
252

Cash and Cash Equivalents at End of Period
$
578

 
$
307



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, 2016
130.2

 
$
1

 
$
1,506

 
$
3,327

 
$
(1,898
)
 
$
(858
)
 
$
6

 
$
2,084

Net income

 

 

 
492

 

 

 

 
492

Other comprehensive income

 

 

 

 
92

 

 

 
92

Cash dividends

 

 

 
(140
)
 

 

 

 
(140
)
Shares issued:
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Exercise of stock options
0.7

 

 
(4
)
 

 

 
45

 

 
41

Vesting of performance shares and restricted stock units
0.2

 

 
(11
)
 

 

 
6

 

 
(5
)
Employee stock purchase plan
0.1

 

 
2

 

 

 
5

 

 
7

Employee savings plan
0.4

 

 
14

 

 

 
27

 

 
41

B/E Aerospace business acquisition
31.2

 
1

 
3,014

 

 

 

 

 
3,015

Stock-based compensation

 

 
21

 

 

 

 

 
21

Treasury share repurchases
(0.4
)
 

 

 

 

 
(39
)
 

 
(39
)
Balance at June 30, 2017
162.4


$
2


$
4,542


$
3,679


$
(1,806
)

$
(814
)

$
6


$
5,609

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at September 30, 2015
131.9

 
$
2

 
$
1,519

 
$
5,124

 
$
(1,699
)
 
$
(3,071
)
 
$
5

 
$
1,880

Net income

 

 

 
520

 

 

 

 
520

Other comprehensive income

 

 

 

 
27

 

 

 
27

Cash dividends

 

 

 
(129
)
 

 

 

 
(129
)
Shares issued:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exercise of stock options
0.3

 

 
(1
)
 

 

 
16

 

 
15

Vesting of performance shares and restricted stock units
0.1

 

 
(12
)
 

 

 
5

 

 
(7
)
Employee stock purchase plan
0.1

 

 
2

 

 

 
6

 

 
8

Employee savings plan
0.4

 

 
10

 

 

 
23

 

 
33

Stock-based compensation

 

 
21

 

 

 

 

 
21

Treasury share repurchases
(2.9
)
 

 

 

 

 
(255
)
 

 
(255
)
Treasury share retirements (1)

 
(1
)
 
(44
)
 
(2,353
)
 

 
2,398

 

 

Other

 

 

 

 

 

 
1

 
1

Balance at June 30, 2016
129.9

 
$
1

 
$
1,495

 
$
3,162

 
$
(1,672
)
 
$
(878
)
 
$
6

 
$
2,114

(1) During the nine months ended June 30, 2016, the Company retired 40 million shares of treasury stock. These shares were retired at a weighted-average price of $59.95 per share, resulting in a $2.4 billion reduction in treasury stock. The retired shares were returned to the status of authorized and unissued.

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) supplies cabin interior products and services to aircraft manufacturers and airlines, 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, June 30 and September 30 are utilized consistently throughout these financial statements and notes to represent the period end dates.

The Company has two consolidated subsidiaries 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, 2016 .

In the opinion of management, the unaudited financial statements contain all adjustments, consisting of adjustments of a normal recurring nature, necessary to present fairly the financial position, results of operations and cash flows for the periods presented. The results of operations for the three and nine months ended June 30, 2017 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.

On April 13, 2017, the Company acquired B/E Aerospace, a leading manufacturer of aircraft cabin interior products and services. As a result of the acquisition, a new Interior Systems segment was created. See Note 3 for additional information.

2.
Recently Issued Accounting Standards

In March 2017, the Financial Accounting Standards Board (FASB) issued a new standard on the presentation of the net periodic cost of postretirement benefit programs. The new standard requires sponsors of defined benefit postretirement plans to present the non-service cost components of net periodic benefit cost separate from the service cost component on the income statement. The new standard also requires that the non-service cost components of net periodic benefit cost no longer be capitalized within assets. The Company is evaluating the effects the standard will have on the Company's consolidated financial statements and related disclosures beyond the change in income statement presentation. This new standard is effective for the Company in 2019, with early adoption permitted.

In January 2017, the FASB issued a new standard which simplifies testing for goodwill impairment. The new standard eliminates Step 2 of the goodwill impairment test, which requires determining the fair value of assets acquired or liabilities assumed in a business combination. Under the amendments in this update, a goodwill impairment test is performed by comparing the fair value of the reporting unit with its carrying amount. This new standard is effective for the Company in 2021, with early adoption permitted. The Company has completed an evaluation of the new standard and does not expect that adoption will have a material impact on the Company's consolidated financial statements.

In June 2016, the FASB issued a new standard on the measurement of credit losses, which will impact the Company's measurement of trade receivables. The new standard replaces the current incurred loss model with a forward-looking expected loss model that is likely to result in earlier recognition of losses. The new standard also increases disclosure requirements and is effective for the Company in 2021, with early adoption permitted, but not earlier than 2020. The Company has completed an

6


ROCKWELL COLLINS, INC.

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


evaluation of the new standard and does not expect that adoption will have a material impact on the Company's consolidated financial statements.

In February 2016, the FASB issued a comprehensive new lease accounting standard, which provides revised guidance on accounting for lease arrangements by both lessors and lessees. The central requirement of the new standard is that lessees must recognize lease-related assets and liabilities for all leases with a term longer than 12 months. The Company is evaluating the effect the standard will have on the Company's consolidated financial statements and related disclosures, and expects a material change to the balance sheet due to the recognition of right-of-use assets and lease liabilities related to the Company's portfolio of real estate leases. The new guidance is not expected to materially impact accounting for those leases the Company enters with customers. The new standard is effective for the Company in 2020, with early adoption permitted.

In April 2015, the FASB issued a new standard on the presentation of debt issuance costs, which requires debt issuance costs to be presented on the balance sheet as a deduction from the carrying amount of the related debt liability, consistent with the presentation of unamortized debt discounts. Previously, debt issuance costs were presented as a deferred asset. The Company adopted the new guidance during the three months ended December 31, 2016 on a retrospective basis, which resulted in the reclassification of $8 million and $10 million of Other assets to Long-term debt, net as of September 30, 2016 and September 30, 2015, respectively.

In May 2014, the FASB issued a comprehensive new revenue recognition standard that effectively replaces all current guidance on the topic. Several amendments to the new standard have been issued, which are intended to resolve potential implementation challenges and drive consistent interpretation and application of the new standard. The new standard is effective for the Company in 2019, with early adoption permitted, but not earlier than 2018. The guidance permits use of either a retrospective or cumulative effect transition method.

The Company's interpretation of the new standard is substantially complete and the Company has prepared an initial assessment of the impacts of adoption on its consolidated financial statements and disclosures. Anticipated changes under the new standard include accounting for development costs and associated customer funding related to commercial contracts, increased use over time of revenue recognition based on costs incurred for government contracts and the elimination of customer relationship intangible assets related to free products provided to customers as up-front sales incentives. The new standard also significantly enhances required disclosures regarding revenue and related assets and liabilities.

Of the anticipated changes, the Company expects that the change in accounting for commercial contract development costs and associated customer funding is likely to have the most significant impact on its financial statements. Customer funding received for development effort is currently recognized as revenue as the development activities are performed. Under the new standard, the Company has concluded that the development effort does not represent a performance obligation. Therefore, customer funding specific to the development effort must be deferred as a contract liability and recognized as revenue when products are delivered to the customer, delaying the timing of revenue recognition. The Company currently expenses development costs associated with commercial contracts unless the arrangement includes a contractual guarantee for reimbursement from the customer. Upon adoption of the new standard, development costs will be expensed as incurred except for those costs incurred pursuant to customer funding. The amount of development costs eligible for deferral will be equivalent to the associated customer funding. Subsequent to adoption, those deferred development costs will be recognized as expense when products are delivered to the customer, consistent with the amortization of deferred development specific customer funding into revenue. Development costs incurred pursuant to contractual guarantees for reimbursement will no longer be capitalized within Inventory as pre-production engineering costs. The balance of capitalized development costs within Inventory as of the adoption date will be eliminated and the related post-adoption amortization expense avoided.

The Company continues to evaluate the impacts associated with the new standard, assess the implications of the B/E Aerospace acquisition on the implementation plan and refine estimated impacts of adoption on the financial statements and related disclosures. The Company is in the process of implementing changes to business processes, systems and internal controls required to implement the new accounting standard. The Company plans to adopt the new standard in 2019 and apply it retrospectively to all periods presented.

Other new accounting standards issued but not effective until after June 30, 2017 are not expected to have a material impact on the Company's financial statements.


7


ROCKWELL COLLINS, INC.

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


3.
Acquisitions, Goodwill and Intangible Assets

Acquisitions

B/E Aerospace
On April 13, 2017, the Company completed the acquisition of B/E Aerospace, a leading manufacturer of aircraft cabin interior products and services, for  $6.5 billion in cash and stock, plus the assumption of  $2.0 billion of debt, net of cash acquired. The transaction combines the Company's capabilities in flight deck avionics, cabin electronics, mission communication and navigation, simulation and training and information management services with B/E Aerospace's range of cabin interior products, which include seating, food and beverage preparation and storage equipment, lighting and oxygen systems, and modular galley and lavatory systems for commercial airliners and business jets. The acquisition advances the Company’s global growth strategy by expanding the Company's previous focus on cockpit, cabin management, communication and connectivity solutions, and diversifies the Company's product portfolio and customer mix. Results of the acquired business are reported in the newly formed Interior Systems business segment.

The $6.5 billion gross purchase price for the acquisition of B/E Aerospace includes the following:
(in millions)
 
Cash consideration
$
3,521

Value of common stock issued for B/E Aerospace common stock (1)
3,015

Total purchase price
$
6,536

(1) 31.2 million shares of common stock issued to B/E Aerospace shareholders at the Company's April 13, 2017 closing share price of $96.63 .

The cash consideration was financed through the issuance of $4.35 billion of senior unsecured notes and  $1.5 billion  borrowed under a new senior unsecured syndicated term loan facility (see Note 9). The remaining proceeds of the debt offering were used to repay assumed B/E Aerospace debt and a portion of the Company's outstanding short-term commercial paper borrowings.

The following table, which is preliminary and subject to change, summarizes the estimated fair value of assets acquired and liabilities assumed at the acquisition date. The final determination of the fair value of assets and liabilities will be completed within the one year measurement period as allowed by FASB Accounting Standards Codification Topic 805, Business Combinations. As of June 30, 2017 , the valuation studies necessary to determine the fair market value of the assets acquired and liabilities assumed are preliminary. The size and breadth of the B/E Aerospace acquisition necessitates use of the one year measurement period to adequately analyze all the factors used in establishing the asset and liability fair values as of the acquisition date, including, but not limited to, intangible assets, inventory, real property, leases, deferred tax liabilities related to the unremitted earnings of foreign subsidiaries, certain reserves and the related tax impacts of any changes made. Any potential adjustments will be made retroactively and could be material to the preliminary values presented below.



8


ROCKWELL COLLINS, INC.

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


(in millions)
April 13, 2017
Cash and cash equivalents
$
104

Receivables, net
496

Inventories, net (1)
556

Other current assets
56

Property
253

Intangible Assets
2,381

Other Assets
59

Total Identifiable Assets Acquired
3,905

 
 
Accounts payable
(251
)
Compensation and benefits
(75
)
Advance payments from customers
(62
)
Accrued customer incentives
(48
)
Product warranty costs
(117
)
Other current liabilities (2)
(361
)
Long-term Debt, Net
(2,119
)
Retirement Benefits
(12
)
Deferred Income Tax Liability
(521
)
Other Liabilities (2)
(448
)
Total Liabilities Assumed
(4,014
)
Net Identifiable Assets Acquired, excluding Goodwill
(109
)
Goodwill
6,645

Net Assets Acquired
$
6,536

(1) Inventories, net includes a $74 million adjustment to state Work in process and Finished goods inventories at their fair value as of the acquisition date. The inventory fair value adjustment is being amortized as a non-cash increase to Cost of sales ratably over the estimated inventory turnover period. $44 million of the fair value adjustment was recognized in Cost of sales in the three months ended June 30, 2017.
(2) As of the acquisition date, the Company made adjustments totaling $457 million related to acquired existing long-term contracts with terms less favorable than could be realized in market transactions as of the acquisition date. The adjustments were primarily recognized within Other current liabilities and Other Liabilities based upon estimates regarding the period in which the liabilities will be amortized to the Condensed Consolidated Statement of Operations as non-cash reductions to Cost of sales. $42 million of the acquired contract liabilities were recognized in Cost of sales in the three months ended June 30, 2017.

The Intangible Assets included above consist of the following:
 
Weighted Average Life (in years)
 
Fair Value
(in millions)
Developed technology
12
 
$
723

Airline customer relationships
10
 
1,450

OEM customer relationships
13
 
208

Total
11
 
$
2,381


The preliminary purchase price allocation resulted in the recognition of  $6.645 billion  of goodwill, none of which is expected to be deductible for tax purposes. The Company is in the process of allocating goodwill by segment, and as of June 30, 2017 the Company has preliminarily included all of the goodwill in the new Interior Systems segment. The goodwill is a result of expected cost synergies from the consolidation of certain corporate and administrative functions, supply chain savings and low-cost manufacturing, expected revenue synergies from the integration of legacy products and technologies with those of B/E Aerospace and intangible assets that do not qualify for separate recognition, such as the assembled B/E Aerospace workforce.

B/E Aerospace's results of operations have been included in the Company's operating results for the period subsequent to the completion of the acquisition on April 13, 2017. B/E Aerospace contributed sales of  $695 million  for the three months ended June 30, 2017, and net income of  $58 million  for the three months ended June 30, 2017.

9


ROCKWELL COLLINS, INC.

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



Transaction, Integration and Financing Costs
During the three and nine months ended June 30, 2017, the Company recorded total transaction, integration and financing costs in the Condensed Consolidated Statement of Operations as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
 
June 30
 
June 30
(in millions)
 
2017
 
2016
 
2017
 
2016
Transaction and integration costs
 
$
64

 
$

 
$
80

 
$

Interest expense
 
18

 

 
29

 

Total Transaction, integration and financing costs
 
$
82

 
$

 
$
109

 
$


During the three months ended June 30, 2017, $16 million of transaction and integration costs previously reported within Selling, general and administrative expense were reclassified to Transaction and integration costs on the Condensed Consolidated Statement of Operations. At June 30, 2017 , $29 million  of transaction, integration and financing costs were unpaid and included in Accounts payable on the Condensed Consolidated Statement of Financial Position.

Supplemental Pro Forma Data
The following unaudited supplemental pro forma data presents consolidated pro forma information as if the acquisition and related financing had been completed as of the beginning of the prior year, or on October 1, 2015.

The unaudited supplemental pro forma financial information does not reflect the potential realization of revenue synergies or cost savings, nor does it reflect other costs relating to the integration of the two companies. This pro forma data should not be considered indicative of the results that would have actually occurred if the acquisition and related financing been consummated on October 1, 2015, nor are they indicative of future results.

The unaudited supplemental pro forma financial information was calculated by combining the Company's results with the stand-alone results of B/E Aerospace for the pre-acquisition periods, which were adjusted to account for certain transactions and other costs that would have been incurred during this pre-acquisition period. The pro forma information included herein is preliminary and may be revised as additional information becomes available and as additional analysis is performed within the one year measurement period allowed by ASC 805. Any potential future adjustments could be material.

 
Three Months Ended
 
Nine Months Ended
 
June 30
 
June 30
(in millions, except per share amounts)
2017
 
2016
 
2017
 
2016
Pro forma sales
$
2,219

 
$
2,087

 
$
6,182

 
$
5,943

Pro forma net income attributable to common shareowners from continuing operations
247

 
263

 
636

 
466

Pro forma basic earnings per share from continuing operations
1.53

 
1.63

 
3.93

 
2.88

Pro forma diluted earnings per share from continuing operations
1.52

 
1.62

 
3.89

 
2.85


The following significant adjustments were made to account for certain transactions and costs that would have occurred if the acquisition had been completed on October 1, 2015. These adjustments are net of any applicable tax impact and were included to arrive at the pro forma results above. As the acquisition of B/E Aerospace was completed on April 13, 2017, the pro forma adjustments for the three and nine months ended June 30, 2017 in the table below include only the required adjustments through April 13, 2017.



10


ROCKWELL COLLINS, INC.

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


 
Three Months Ended
 
Nine Months Ended
 
June 30
 
June 30
(in millions)
2017
 
2016
 
2017
 
2016
Increases/ (decreases) to pro forma net income:
 
 
 
 
 
 
 
Net reduction to depreciation resulting from fixed asset adjustments (1)
$
1

 
$
5

 
$
11

 
$
16

Advisory, legal and accounting service fees (2)
123

 

 
156

 
(123
)
Amortization of acquired B/E Aerospace intangible assets, net (3)
(6
)
 
(36
)
 
(79
)
 
(109
)
Interest expense incurred on acquisition financing, net (4)
8

 
(16
)
 
(17
)
 
(49
)
Long-term contract program adjustments (5)
(6
)
 
(21
)
 
(59
)
 
(104
)
Acquired contract liability amortization (6)
3

 
30

 
62

 
109

Inventory fair value adjustment amortization (7)

 

 

 
(56
)
Compensation adjustments (8)

 
4

 
6

 
10

(1) Captures the net impact to depreciation expense resulting from various purchase accounting adjustments to fixed assets.
(2) Reflects the elimination of transaction-related fees incurred by B/E Aerospace and Rockwell Collins in connection with the acquisition and assumes all of the fees were incurred during the first quarter of 2016.
(3) Eliminates amortization of the historical B/E Aerospace intangible assets and replaces it with the new amortization for the acquired intangible assets.
(4) Reflects the addition of interest expense for the debt incurred by Rockwell Collins to finance the B/E Aerospace acquisition, net of interest expense that was eliminated on the historical B/E Aerospace debt that was repaid at the acquisition date. The adjustment also reflects the elimination of interest expense incurred by Rockwell Collins for bridge loan financing which was assumed to not be required for purposes of the pro forma periods presented.
(5) Eliminates B/E Aerospace capitalized development costs and deferred revenues on certain long-term contracts.
(6) Reflects amortization of liabilities recognized for acquired contracts with terms less favorable than could be realized in market transactions as of the acquisition date.
(7) Reflects amortization of adjustment made to state Work in process and Finished goods inventories at fair value as of the acquisition date.
(8) Reflects reduction in compensation expense due to the vesting of B/E Aerospace stock awards upon the acquisition and the termination of certain B/E Aerospace executives and board members.

Pulse.aero
On December 20, 2016, the Company acquired 100 percent of the outstanding shares of Pulse.aero, a United Kingdom based company specializing in self-bag drop technologies used by airlines and airports. The purchase price, net of cash acquired, was $15 million , of which $14 million was paid during the nine months ended June 30, 2017 . On the acquisition date, the Company recorded a  $5 million  liability for the fair value of post-closing consideration that may be paid, contingent upon the achievement of certain revenue targets and development milestones. During the nine months ended June 30, 2017 , the Company made contingent consideration payments of $2 million . In the third quarter of 2017, the purchase price allocation was finalized, with $12 million allocated to goodwill and $6 million to intangible assets. The intangible assets have a weighted average life of approximately 9 years. None of the 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 expand the Company's airport passenger processing offerings.

Matrix product line
On February 25, 2016, the Company acquired the Matrix series projector product line from Christie Digital Systems, a global visual, audio and collaboration solutions company. The product line acquisition was accounted for as a business combination, and the purchase price, net of cash acquired, was $17 million . In the third quarter of 2016, the purchase price allocation was finalized, with $6 million allocated to goodwill and $11 million to intangible assets. The intangible assets have a weighted average life of approximately 10 years. 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 enhance the Company's industry-leading offerings for military and aviation simulation and training solutions.

International Communications Group, Inc.
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. In the fourth quarter of 2016, the purchase price allocation was finalized, with $51 million allocated to goodwill and $23 million to intangible assets. The intangible assets have a weighted average life of approximately 8 years. All goodwill resulting from the acquisition is tax

11


ROCKWELL COLLINS, INC.

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


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.

The B/E Aerosapce acquisition is included in the new Interior Systems segment, the Pulse.aero acquisition is included in the Information Management Services segment, the Matrix product line acquisition is included in the Government Systems segment and the ICG acquisition is included in the Commercial Systems segment. The results of operations for the acquisitions have been included in the Company's operating results for the periods subsequent to the acquisition dates. Pro forma results of operations have not been presented for Pulse.aero, the Matrix product line or ICG, as the effect of the acquisitions are not material to the Company's condensed consolidated results of operations.

Goodwill
Changes in the carrying amount of goodwill are summarized as follows:
(in millions)
Interior Systems
 
Commercial
Systems
 
Government
Systems
 
Information Management Services
 
Total
Balance at September 30, 2016
$

 
$
326

 
$
503

 
$
1,090

 
$
1,919

B/E Aerospace acquisition
6,645

 

 

 

 
6,645

Pulse.aero acquisition

 

 

 
12

 
12

Foreign currency translation adjustments
24

 

 
1

 
1

 
26

Balance at June 30, 2017
$
6,669

 
$
326

 
$
504

 
$
1,103

 
$
8,602


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 2017 impairment tests resulted in no impairment.

Intangible Assets
Intangible assets are summarized as follows:
 
June 30, 2017
 
September 30, 2016
(in millions)
Gross
 
Accum
Amort
 
Net
 
Gross
 
Accum
Amort
 
Net
Intangible assets with finite lives:
 
 
 
 
 
 
 
 
 
 
 
Developed technology and patents
$
1,092

 
$
(242
)
 
$
850

 
$
354

 
$
(216
)
 
$
138

Backlog
6

 
(4
)
 
2

 
6

 
(3
)
 
3

Customer relationships:
 

 
 
 
 
 
 
 
 
 
 
Acquired
2,001

 
(156
)
 
1,845

 
340

 
(106
)
 
234

Up-front sales incentives
336

 
(89
)
 
247

 
313

 
(80
)
 
233

License agreements
15

 
(10
)
 
5

 
14

 
(10
)
 
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

Intangible assets
$
3,512

 
$
(515
)
 
$
2,997

 
$
1,096

 
$
(429
)
 
$
667


The Company 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.

12


ROCKWELL COLLINS, INC.

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


Up-front sales incentives consisting of cash payments or customer account credits are amortized as a reduction of sales, whereas incentives consisting of free products are amortized as cost of sales. As of June 30, 2017 , the weighted average amortization period remaining for up-front sales incentives was approximately 9 years.
Anticipated annual amortization expense for intangible assets is as follows:
(in millions)
2017
 
2018
 
2019
 
2020
 
2021
 
Thereafter
Anticipated amortization expense for up-front sales incentives
$
13

 
$
19

 
$
25

 
$
28

 
$
28

 
$
143

Anticipated amortization expense for all other intangible assets
143

 
262

 
259

 
257

 
257

 
1,602

Total
$
156

 
$
281

 
$
284

 
$
285

 
$
285

 
$
1,745


Amortization expense for intangible assets for the three and nine months ended June 30, 2017 was $61 million and $86 million , respectively, compared to $15 million and $46 million for the three and nine months ended June 30, 2016 .

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 initial sale price was $3 million , and additional post-closing consideration of $2 million was received in December 2016. During the nine months ended June 30, 2016, the Company recorded $2 million of income from discontinued operations ( $1 million after-tax), primarily due to the favorable settlement of a contractual matter with a customer of the ASES business.

In April 2014, the FASB issued guidance that modifies the definition of a discontinued operation and provides new disclosure requirements for divestitures. This guidance was effective for the Company in 2016. 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
 
Nine Months Ended
 
June 30
 
June 30
(in millions)
2017
 
2016
 
2017
 
2016
Income from discontinued operations before income taxes
$

 
$

 
$

 
$
2

Income tax (expense) from discontinued operations

 

 

 
(1
)

5.
Receivables, Net

Receivables, net are summarized as follows:
(in millions)
June 30,
2017
 
September 30,
2016
Billed
$
1,211

 
$
748

Unbilled
485

 
439

Less progress payments
(44
)
 
(87
)
Total
1,652

 
1,100

Less allowance for doubtful accounts
(8
)
 
(6
)
Receivables, net
$
1,644

 
$
1,094


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 $68 million and $68 million at June 30, 2017 and September 30, 2016 , respectively.


13


ROCKWELL COLLINS, INC.

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


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

The Company sells certain accounts receivable on a non-recourse basis to unrelated financial institutions under factoring agreements arranged by certain customers. Under the terms of the agreements, the Company retains no rights or interest and has no obligations with respect to the sold receivables. The Company accounts for these transactions as sales of receivables and records cash proceeds when received as cash provided by operating activities in the Condensed Consolidated Statement of Cash Flows. Cash provided by operating activities from participating in these programs was $198 million and $8 million during the nine months ended June 30, 2017 and 2016 , respectively. The cost of participating in these programs was immaterial to the Company's results.

6.
Inventories, Net

Inventories, net are summarized as follows:
(in millions)
June 30,
2017
 
September 30,
2016
Finished goods
$
306

 
$
210

Work in process
340

 
236

Raw materials, parts and supplies
702

 
354

Less progress payments
(10
)
 
(1
)
Total
1,338

 
799

Pre-production engineering costs
1,168

 
1,140

Inventories, net
$
2,506

 
$
1,939


The Company defers certain pre-production engineering costs during the development phase of a program, in connection with long-term supply arrangements that contain contractual guarantees for reimbursement from customers. Such customer guarantees generally take the form of a minimum order quantity with quantified reimbursement amounts if the minimum order quantity is not taken by the customer. These costs are deferred to the extent of the contractual guarantees and are amortized over their estimated useful lives using a units-of-delivery method, up to 15 years. This amortization expense is included as a component of cost of sales. Amortization is based on the Company's expectation of delivery rates on a program-by-program basis and begins when the Company starts recognizing revenue as the Company delivers equipment for the program. The estimated useful life is limited to the amount of time the Company is virtually assured to earn revenues 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)
2017
 
2018
 
2019
 
2020
 
2021
 
Thereafter
Anticipated amortization expense for pre-production engineering costs
$
59

 
$
99

 
$
137

 
$
157

 
$
148

 
$
611


Amortization expense for pre-production engineering costs for the three and nine months ended June 30, 2017 was $18 million and $43 million , respectively, compared to $14 million and $37 million for the three and nine months ended June 30, 2016 . As of June 30, 2017 , the weighted average amortization period remaining for pre-production engineering costs included in Inventories, net was approximately 10 years.


14


ROCKWELL COLLINS, INC.

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



7.
Property

Property is summarized as follows:
(in millions)
June 30,
2017
 
September 30, 2016
Land
$
20

 
$
15

Buildings and improvements
569

 
468

Machinery and equipment
1,359

 
1,218

Information systems software and hardware
496

 
435

Furniture and fixtures
85

 
74

Capital leases
58

 
58

Construction in progress
229

 
183

Total
2,816

 
2,451

Less accumulated depreciation
(1,488
)
 
(1,416
)
Property
$
1,328

 
$
1,035


8.
Other Assets

Other assets are summarized as follows:
(in millions)
June 30,
2017
 
September 30,
2016
Long-term receivables
$
199

 
$
146

Investments in equity affiliates
7

 
10

Exchange and rental assets (net of accumulated depreciation of $105 at June 30, 2017 and $101 at September 30, 2016)
71

 
68

Other
223

 
145

Other Assets
$
500

 
$
369


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 seven joint ventures, each 50 percent owned and accounted for under the equity method. 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 $57 million and $193 million for the three and nine months ended June 30, 2017 , respectively, compared to $ 58 million and $ 159 million for the three and nine months ended June 30, 2016 . Deferred profit from sales to equity affiliates was $2 million at June 30, 2017 and $2 million at September 30, 2016 .

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 cost 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 $3 million and $8 million for the three and nine months ended June 30, 2017 , respectively, and $2 million and $7 million for the three and nine months ended June 30, 2016 .


15


ROCKWELL COLLINS, INC.

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


9.
Debt

Short-term Debt
(in millions, except weighted average amounts)
June 30,
2017
 
September 30,
2016
Short-term commercial paper borrowings outstanding (1)
$
362

 
$
440

Current portion of long-term debt
149

 
300

Short-term debt
$
511

 
$
740

Weighted average interest rate of commercial paper borrowings
1.43
%
 
0.79
%
Weighted average maturity period of commercial paper borrowings (days)
12

 
15

(1) The maximum amount of short-term commercial paper borrowings outstanding during the nine months ended June 30, 2017 was $1.058 billion .

Commercial Paper Program
Under the Company’s commercial paper program, the Company may sell up to $1.5 billion face amount of unsecured short-term promissory notes in the commercial paper market. The commercial paper program is supported by the Company's $1.5 billion revolving credit facility.

Revolving Credit Facilities
On December 16, 2016, the Company entered into a new $1.2 billion five -year senior unsecured revolving credit agreement with various banks. The $1.2 billion credit facility increased to $1.5 billion concurrent with the consummation of the B/E Aerospace acquisition on April 13, 2017. This revolving credit facility replaces the previous $1 billion and $200 million revolving credit facilities that would have expired in December 2018 and February 2017, respectively. Both of these revolving credit facilities were terminated upon the closing of the new revolving credit facility. At June 30, 2017 , there were no outstanding borrowings under the Company's revolving credit facility and at September 30, 2016 there were no outstanding borrowings under the previous revolving credit facilities.

Short-term credit facilities available to non-U.S. subsidiaries were $38 million as of June 30, 2017 , of which $2 million was utilized to support commitments in the form of commercial letters of credit. At June 30, 2017 and September 30, 2016 , there were no borrowings outstanding under these credit facilities.

At June 30, 2017 and September 30, 2016 , there were no significant commitment fees or compensating balance requirements under any of the Company’s credit facilities.

Bridge Credit Facility
On December 16, 2016, pursuant to the B/E Aerospace acquisition, the Company entered into a $4.35 billion 364 -day senior unsecured bridge term loan credit agreement with various banks. This bridge facility terminated upon receipt of proceeds from the new notes issued to finance a portion of the B/E Aerospace acquisition.
Term Loan Credit Facility
On December 16, 2016, pursuant to the B/E Aerospace acquisition, the Company entered into a $1.5 billion three -year senior unsecured term loan credit agreement with various banks. As of June 30, 2017 , borrowings under this facility totaled $1.462 billion . As of June 30, 2017 , borrowings under this term loan facility bear interest at LIBOR plus 1.25 percent and amortize in equal quarterly installments of 2.5 percent , or $38 million , with the balance payable on April 13, 2020. Proceeds of borrowings under the term loan facility were used to finance a portion of the B/E Aerospace acquisition and to pay related transaction fees and expenses.

The revolving credit agreement and term loan credit agreement each include one financial covenant requiring the Company to maintain a consolidated debt to total capitalization ratio of not greater than 68 percent (excluding the equity impact on accumulated other comprehensive loss related to defined benefit retirement plans). This financial covenant ratio will decrease to 65 percent on June 30, 2018. The Company was in compliance with this financial covenant at June 30, 2017 . The credit agreements also contain 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.

16


ROCKWELL COLLINS, INC.

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



Long-term Debt
On April 10, 2017, the Company issued $4.65 billion of senior unsecured notes. The net proceeds of the offering were principally used to finance a portion of the B/E Aerospace acquisition and to pay related transaction fees and expenses. Net proceeds of $300 million were used to repay a portion of the Company's outstanding short-term commercial paper borrowings.

The principal amount of long-term debt, net of discount and debt issuance costs, is summarized as follows:
(in millions, except interest rate figures)
Interest Rate
 
June 30,
2017
 
September 30,
2016
Fixed-rate notes due:
 
 
 
 
 
July 2019
1.95%
 
$
300

 
$

July 2019
5.25%
 
300

 
300

November 2021
3.10%
 
250

 
250

March 2022
2.80%
 
1,100

 

December 2023
3.70%
 
400

 
400

March 2024
3.20%
 
950

 

March 2027
3.50%
 
1,300

 

December 2043
4.80%
 
400

 
400

April 2047
4.35%
 
1,000

 

Variable-rate term loan due:
 
 
 
 
 
April 2020
1 month LIBOR + 1.25% (1)
 
1,462

 

Variable-rate note due:
 
 
 
 
 
December 2016
3 month LIBOR + 0.35%
 

 
300

Fair value swap adjustment (see Notes 14 and 15)
 
 
15

 
35

Total
 
 
7,477

 
1,685

Less unamortized debt issuance costs and discounts
 
 
60

 
11

Less current portion of long-term debt
 
 
149

 
300

Long-term Debt, Net
 
 
$
7,268

 
$
1,374

(1)  The Company has the option to elect a one, two, three or six-month LIBOR interest rate and has elected the one-month rate during the third quarter of 2017. The one-month LIBOR rate at June 30, 2017 was approximately 1.13 percent.

As discussed in Note 2, the Company adopted new accounting guidance during the three months ended December 31, 2016 which required debt issuance costs to be presented on the balance sheet as a deduction from the carrying amount of the related debt liability. As a result, $8 million of debt issuance costs were reclassified from Other Assets to Long-term Debt, Net as of September 30, 2016. The notes listed above are included in the Condensed Consolidated Statement of Financial Position, net of any unamortized debt issuance costs and discounts, within the caption Long-term Debt, Net. Debt issuance costs and discounts are amortized over the life of the debt and recorded in Interest expense on the Condensed Consolidated Statement of Operations.

Cash payments for debt interest and fees during the nine months ended June 30, 2017 were $129 million , of which $28 million related to fees incurred in connection with the bridge credit facility. Cash payments for debt interest and fees during the nine months ended June 30, 2016 were $49 million .

10.
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.


17


ROCKWELL COLLINS, INC.

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


Components of Expense (Income)
The components of expense (income) for Pension Benefits and Other Retirement Benefits for the three and nine months ended June 30, 2017 and 2016 are summarized as follows:
 
Pension Benefits
 
Other Retirement Benefits
 
Three Months Ended
 
Three Months Ended
 
June 30
 
June 30
(in millions)
2017
 
2016
 
2017
 
2016
Service cost
$
4

 
$
2

 
$
1

 
$
1

Interest cost
28

 
32

 
1

 
1

Expected return on plan assets
(61
)
 
(60
)
 

 

Amortization:
 
 
 

 
 
 
 

Prior service credit

 

 
(1
)
 
(1
)
Net actuarial loss
23

 
20

 
2

 
2

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

 
$
3

 
Pension Benefits
 
Other Retirement Benefits
 
Nine Months Ended
 
Nine Months Ended
 
June 30
 
June 30
(in millions)
2017
 
2016
 
2017
 
2016
Service cost
$
10

 
$
8

 
$
2

 
$
2

Interest cost
83

 
95

 
4

 
4

Expected return on plan assets
(181
)
 
(179
)
 
(1
)
 
(1
)
Amortization:
 
 
 
 
 
 
 
Prior service credit

 
(1
)
 
(1
)
 
(1
)
Net actuarial loss
69

 
59

 
6

 
6

Net benefit expense (income)
$
(19
)
 
$
(18
)
 
$
10

 
$
10


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 2016, the Company voluntarily contributed $55 million to its U.S. qualified pension plan. There is no minimum statutory funding requirement for 2017 and the Company does not currently expect to make any additional discretionary contributions during 2017 to this plan. 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 2017. During the nine months ended June 30, 2017 , the Company made contributions to the non-U.S. plans and the U.S. non-qualified pension plan of $11 million .


18


ROCKWELL COLLINS, INC.

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


11.
Stock-Based Compensation and Earnings Per Share

Stock-based compensation expense, which is calculated net of an assumed forfeiture rate, and related income tax benefit included within the Condensed Consolidated Statement of Operations is as follows:
 
Three Months Ended
 
Nine Months Ended
 
June 30
 
June 30
(in millions)
2017
 
2016
 
2017
 
2016
Stock-based compensation expense included in:
 
 
 
 
 
 
 
Product cost of sales
$
2

 
$
1

 
$
6

 
$
6

Selling, general and administrative expenses
6

 
5

 
15

 
15

Total
$
8

 
$
6

 
$
21

 
$
21

Income tax benefit
$
3

 
$
2

 
$
7

 
$
7


The Company issued awards of equity instruments for the nine months ended June 30, 2017 and 2016 as follows:
 
Options
 
Performance Shares
 
Restricted Stock Units
(shares in thousands)
Number Issued
Weighted Average Fair Value
 
Number Issued
Weighted Average Fair Value
 
Number Issued
Weighted Average Fair Value
Nine months ended June 30, 2017
667.2

$
17.26

 
129.0

$
87.38

 
224.2

$
91.94

Nine months ended June 30, 2016
641.5

$
17.75

 
131.0

$
85.13

 
70.4

$
85.91


These awards were issued under one of the Company's long-term incentive plans or assumed by the Company under the B/E Aerospace 2005 Long-Term Incentive Plan. The increase in issued Restricted Stock Units was primarily due to the conversion of B/E Aerospace Restricted Stock Units upon completion of the acquisition. Except for Restricted Stock Units, the Company did not assume any other B/E Aerospace equity awards. The maximum number of shares of common stock that can be issued in respect of performance shares granted in 2017 based on the achievement of performance targets for years 2017 through 2019 is approximately 304,000 .

The fair value of each option granted by the Company was estimated using a binomial lattice pricing model and the following weighted average assumptions:
 
2017 Grants
 
2016 Grants
Risk-free interest rate
1.0% - 2.7%

 
0.7% - 2.5%

Expected dividend yield
1.3% - 1.5%

 
1.4% - 1.6%

Expected volatility
19.0
%
 
20.0
%
Expected life
7 years

 
7 years



19


ROCKWELL COLLINS, INC.

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


Employee Benefits Paid in Company Stock
During the nine months ended June 30, 2017 and 2016 , 0.5 million and 0.5 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 $48 million and $41 million for the respective periods.

Earnings Per Share and Diluted Share Equivalents
The computation of basic and diluted earnings per share is as follows:
 
Three Months Ended
 
Nine Months Ended
 
June 30
 
June 30
(in millions, except per share amounts)
2017
 
2016
 
2017
 
2016
Numerator for basic and diluted earnings per share:
 
 
 
 
 
 
 
Income from continuing operations
$
179

 
$
214

 
$
492

 
$
519

Income from discontinued operations, net of taxes

 

 

 
1

Net income
$
179

 
$
214

 
$
492

 
$
520

Denominator:
 

 
 

 
 
 
 
Denominator for basic earnings per share – weighted average common shares
158.2

 
130.0

 
139.8

 
130.7

Effect of dilutive securities:
 
 
 
 
 
 
 
Stock options
1.1

 
1.0

 
1.1

 
1.1

Performance shares, restricted stock and restricted stock units
0.6

 
0.5

 
0.5

 
0.5

Dilutive potential common shares
1.7

 
1.5


1.6


1.6

Denominator for diluted earnings per share – adjusted weighted average shares and assumed conversion
159.9

 
131.5


141.4


132.3

Earnings per share:
 

 
 

 
 
 
 
Basic
 
 
 
 
 
 
 
Continuing operations
$
1.13

 
$
1.65

 
$
3.52

 
$
3.97

Discontinued operations

 

 

 
0.01

Basic earnings per share
$
1.13

 
$
1.65

 
$
3.52

 
$
3.98

Diluted
 
 
 
 
 
 
 
Continuing operations
$
1.12

 
$
1.63

 
$
3.48

 
$
3.92

Discontinued operations

 

 

 
0.01

Diluted earnings per share
$
1.12

 
$
1.63

 
$
3.48

 
$
3.93


The average outstanding diluted shares calculation excludes options with an exercise price that exceeds the average market price of shares during the period. There were no stock options excluded from the average outstanding diluted shares calculation for the three and nine months ended June 30, 2017 and June 30, 2016 .

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


20


ROCKWELL COLLINS, INC.

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


12.
Accumulated Other Comprehensive Loss

Changes in accumulated other comprehensive loss (AOCL), net of tax, by component for the three and nine months ended June 30, 2017 and 2016 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 March 31, 2017
$
(85
)
 
$
(1,786
)
 
$
(2
)
 
$
(1,873
)
Other comprehensive income before reclassifications
50

 

 
2

 
52

Amounts reclassified from accumulated other comprehensive loss

 
15

 

 
15

Net current period other comprehensive income
50

 
15

 
2

 
67

Balance at June 30, 2017
$
(35
)
 
$
(1,771
)
 
$

 
$
(1,806
)
 
 
 
 
 
 
 
 
Balance at September 30, 2016
$
(76
)
 
$
(1,818
)
 
$
(4
)
 
$
(1,898
)
Other comprehensive income before reclassifications
41

 

 
2

 
43

Amounts reclassified from accumulated other comprehensive loss

 
47

 
2

 
49

Net current period other comprehensive income
41

 
47

 
4

 
92

Balance at June 30, 2017
$
(35
)
 
$
(1,771
)
 
$

 
$
(1,806
)
 
 
 
 
 
 
 
 
Balance at March 31, 2016
$
(56
)
 
$
(1,611
)
 
$
(3
)
 
$
(1,670
)
Other comprehensive loss before reclassifications
(16
)
 

 

 
(16
)
Amounts reclassified from accumulated other comprehensive loss

 
14

 

 
14

Net current period other comprehensive income (loss)
(16
)
 
14

 

 
(2
)
Balance at June 30, 2016
$
(72
)
 
$
(1,597
)
 
$
(3
)
 
$
(1,672
)
 
 
 
 
 
 
 
 
Balance at September 30, 2015
$
(56
)
 
$
(1,637
)
 
$
(6
)
 
$
(1,699
)
Other comprehensive loss before reclassifications
(16
)
 

 
(1
)
 
(17
)
Amounts reclassified from accumulated other comprehensive loss

 
40

 
4

 
44

Net current period other comprehensive income (loss)
(16
)
 
40

 
3

 
27

Balance at June 30, 2016
$
(72
)
 
$
(1,597
)
 
$
(3
)
 
$
(1,672
)
(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 $24 million ( $15 million net of tax) and $21 million ( $14 million net of tax) for the three months ended June 30, 2017 and 2016 , respectively, and were $74 million ( $47 million net of tax) and $ 63 million ( $40 million net of tax) for the nine months ended June 30, 2017 and 2016 , respectively. The reclassifications are included in the computation of net benefit expense. See Note 10 for additional details.

13.
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.


21


ROCKWELL COLLINS, INC.

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


During the three months ended June 30, 2017 and 2016 , the effective income tax rate from continuing operations was 19.0 percent and 13.4 percent, respectively. The prior year effective income tax rate from continuing operations was impacted by the release of a $41 million valuation allowance related to a U.S. capital loss carryforward. The current year effective income tax rate was impacted by a lower estimated annual effective tax rate, which applies to year-to-date earnings, due to the jursidictional mix of income as a result of the B/E Aerospace acquisition.

During the nine months ended June 30, 2017 and 2016 , the effective income tax rate from continuing operations was 25.1 percent and 18.8 percent, respectively. The prior year effective income tax rate from continuing operations was impacted by the retroactive reinstatement of the Federal R&D Tax Credit and the release of a $41 million valuation allowance related to a U.S. capital loss carryforward. The current year effective income tax rate was impacted by a lower estimated annual effective tax rate, which applies to year-to-date earnings, due to the jursidictional mix of income as a result of of the B/E Aerospace acquisition.

The Company's U.S. Federal income tax returns for the tax year ended September 30, 2013 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, 2014 and 2015. The IRS is currently auditing the legacy tax filings of certain acquired subsidiaries for the 2012, 2013 and 2014 calendar years. 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.

The Company had net income tax payments of $202 million and $76 million during the nine months ended June 30, 2017 and 2016 , respectively. No  provision has been made as of June 30, 2017 for U.S. federal or state, or additional non-U.S. income taxes related to an estimated amount of  $1.6 billion  of undistributed earnings of our foreign subsidiaries because such earnings are intended to be indefinitely reinvested.

The Company has gross unrecognized tax benefits recorded within Other Liabilities in the Condensed Consolidated Statement of Financial Position of $139 million and $45 million as of June 30, 2017 and September 30, 2016 , respectively. The significant increase in unrecognized tax benefits is primarily due to the inclusion of certain B/E Aerospace tax positions. The total amount of unrecognized tax benefits that, if recognized, would affect the effective income tax rate was $111 million and $20 million as of June 30, 2017 and September 30, 2016 , respectively. Although the timing and outcome of tax settlements are uncertain, the Company does not anticipate any material reduction in the unrecognized tax benefits during the next 12 months.

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 $ 7 million and $ 0 million as of June 30, 2017 and September 30, 2016 , 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 were not significant for the nine months ended June 30, 2017 and 2016 , respectively.

14.
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.


22


ROCKWELL COLLINS, INC.

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


Assets and liabilities
The fair value of the Company's financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2017 and September 30, 2016 are as follows:
 
 
 
June 30, 2017
 
September 30, 2016
(in millions)
Fair Value
Hierarchy
 
Fair Value
Asset (Liability)
 
Fair Value
Asset (Liability)
Deferred compensation plan investments
Level 1
 
$
60

 
$
55

Deferred compensation plan investments
Level 2
 
23

 

Interest rate swap assets
Level 2
 
15

 
35

Foreign currency forward exchange contract assets
Level 2
 
9

 
11

Foreign currency forward exchange contract liabilities
Level 2
 
(6
)
 
(13
)
Contingent consideration for ICG acquisition
Level 3
 
(14
)
 
(13
)
Contingent consideration for Pulse.aero acquisition
Level 3
 
(3
)
 


There were no transfers between Levels of the fair value hierarchy during the nine months ended June 30, 2017  or  2016 .

Valuation Techniques
The Level 1 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 Level 2 deferred compensation plan investments consist of investments in variable insurance trust funds and the fair value is determined using the market approach and is calculated by a pricing model with observable market inputs.

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.

As of June 30, 2017 , 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.

Contingent consideration represents the estimated fair value of post-closing consideration owed to the sellers associated with the ICG acquisition, which occurred on August 6, 2015, and the Pulse.aero acquisition, which occurred on December 20, 2016. The contingent consideration is categorized as Level 3 in the fair value hierarchy and the fair value is determined using a probability-weighted approach. The liabilities recorded were derived from the estimated probability that certain contingent payment milestones will be met in accordance with the terms of the purchase agreements.

The change in fair value of the Level 3 contingent consideration related to the ICG and Pulse.aero acquisitions is as follows:
(in millions)
Fair Value (Liability)
Balance at September 30, 2016
$
(13
)
Acquisition date fair value of Pulse.aero contingent consideration (see Note 3)
(5
)
Payment of contingent consideration (see Note 3)
2

Fair value adjustment (1)
(1
)
Balance at June 30, 2017
$
(17
)
(1) The fair value adjustment is included in Interest expense on the Condensed Consolidated Statement of Operations.


23


ROCKWELL COLLINS, INC.

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


Financial instruments
The carrying amounts and fair values of the Company's financial instruments are as follows:
 
Asset (Liability)
 
June 30, 2017
 
September 30, 2016
(in millions)
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Cash and cash equivalents
$
578

 
$
578

 
$
340

 
$
340

Short-term debt
(511
)
 
(511
)
 
(740
)
 
(740
)
Long-term debt
(7,253
)
 
(7,478
)
 
(1,339
)
 
(1,508
)

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 the current portion of long-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.

15.
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 5.25 percent 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 5.25 percent 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 $15 million , offset by a fair value adjustment to Long-term Debt (Note 9) of $15 million at June 30, 2017 . At September 30, 2016 , the Swaps were recorded within Other Assets at a fair value of $35 million , offset by a fair value adjustment to Long-term Debt (Note 9) of $35 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 June 30, 2017 and September 30, 2016 , the Company had outstanding foreign currency forward exchange contracts with notional amounts of $286 million and $384 million , respectively. These notional values consist primarily of contracts for the European euro, British pound sterling and Japanese yen, and are stated in U.S. dollar equivalents at spot exchange rates at the respective dates.


24


ROCKWELL COLLINS, INC.

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


Fair Value of Derivative Instruments
Fair values of derivative instruments in the Condensed Consolidated Statement of Financial Position as of June 30, 2017 and September 30, 2016 are as follows:
 
 
 
Asset Derivatives
(in millions)
Classification
 
June 30,
2017
 
September 30, 2016
Foreign currency forward exchange contracts
Other current assets
 
$
9

 
$
11

Interest rate swaps
Other assets
 
15

 
35

Total
 
 
$
24

 
$
46


 
 
 
Liability Derivatives
(in millions)
Classification
 
June 30,
2017
 
September 30, 2016
Foreign currency forward exchange contracts
Other current liabilities
 
$
6

 
$
13


The fair values of derivative instruments are presented on a gross basis, as the Company does not have any derivative contracts which are subject to master netting arrangements. As of June 30, 2017 , there were undesignated foreign currency forward exchange contracts classified within Other current assets of $1 million and Other current liabilities of $1 million .

The effect of derivative instruments on the Condensed Consolidated Statement of Operations for the three and nine months ended June 30, 2017 and 2016 is as follows:
 
 
 
Amount of Gain (Loss)
 
Amount of Gain (Loss)
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
June 30
 
June 30
(in millions)
Location of Gain (Loss)
 
2017
 
2016
 
2017
 
2016
Derivatives Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
 
Fair Value Hedges
 
 
 
 
 
 
 
 
 
Interest rate swaps
Interest expense
 
$
2

 
$
3

 
$
6

 
$
8

Cash Flow Hedges
 
 
 
 
 
 
 
 
 
Foreign currency forward exchange contracts:
 
 
 
 
 
 
 
 
 
Amount of gain (loss) recognized in AOCL (effective portion, before deferred tax impact)
AOCL
 
2

 

 
2

 
(1
)
Amount of loss reclassified from AOCL into income
Cost of sales
 

 
(1
)
 
(3
)
 
(6
)
Derivatives Not Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
 
Foreign currency forward exchange contracts
Cost of sales
 

 
(1
)
 
(1
)
 
(1
)

There was no significant impact to the Company’s earnings related to the ineffective portion of any hedging instruments during the nine months ended June 30, 2017 . In addition, there was no significant impact to the Company’s earnings when a hedged firm commitment no longer qualified as a fair value hedge or when a hedged forecasted transaction no longer qualified as a cash flow hedge during the three and nine months ended June 30, 2017 .

The Company did not have any hedges with credit-risk-related contingent features or that required the posting of collateral as of June 30, 2017 . 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 $3 million of AOCL gains from cash flow hedges into earnings over the next 12 months. The maximum duration of a foreign currency cash flow hedge contract at June 30, 2017 was 72 months.

25


ROCKWELL COLLINS, INC.

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



16.
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:
 
Nine Months Ended
 
June 30
(in millions)
2017
 
2016
Balance at beginning of year
$
87

 
$
89

Warranty costs incurred
(39
)
 
(32
)
Product warranty accrual
43

 
29

Changes in estimates for prior years
(6
)
 
(3
)
Increase from acquisitions
117

 

Balance at June 30, 2017
$
202

 
$
83


Letters of credit
The Company has contingent commitments in the form of letters of credit. Outstanding letters of credit are issued by banks on the Company’s behalf to support certain contractual obligations to its customers. If the Company fails to meet these contractual obligations, these letters of credit may become liabilities of the Company. Total outstanding letters of credit at June 30, 2017 were $237 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 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.

Under a 2014 Tax Sharing and Indemnification Agreement entered into by B/E Aerospace prior to the acquisition, the Company assumes certain potential tax liabilities related to the 2014 KLX spin-off from B/E Aerospace. If it is determined that the KLX spin-off by B/E Aerospace fails to qualify for certain tax-free treatment as a result of the Company's merger with B/E Aerospace (for example, if the merger is viewed as part of a plan or series of related transactions that includes the KLX spin-off or the KLX spin-off is found to have been used principally as a device for the distribution of earnings and profits), or because of the failure of the KLX spin-off to initially qualify for the tax-free treatment, the B/E Aerospace subsidiary could incur significant tax liabilities pursuant to the Tax Sharing and Indemnification Agreement or otherwise.

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

26


ROCKWELL COLLINS, INC.

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


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.

17.
Contractual Obligations and Other Commitments

The following table reflects certain of the Company's annual non-cancelable contractual commitments:
 
 
Payments by Period
(in millions)
 
2017
 
2018
 
2019
 
2020
 
2021
 
Thereafter
 
Total
Non-cancelable operating leases
 
$
74

 
$
81

 
$
66

 
$
50

 
$
39

 
$
197

 
$
507

Purchase contracts
 
38

 
35

 
30

 
27

 
24

 
47

 
201

Long-term debt
 
375

 
150

 
750

 
1,125

 

 
5,400

 
7,800

Interest on long-term debt
 
120

 
253

 
254

 
213

 
192

 
1,926

 
2,958

Total
 
$
607

 
$
519

 
$
1,100

 
$
1,415

 
$
255

 
$
7,570

 
$
11,466


Non-cancelable Operating Leases
The Company leases certain office and manufacturing facilities as well as certain machinery and equipment under various lease contracts with terms that meet the accounting definition of operating leases. Some leases include renewal options, which permit extensions of the expiration dates at rates approximating fair market rental rates.

Purchase Contracts
The Company may enter into purchase contracts with suppliers under which there is a commitment to buy a minimum amount of products or pay a specified amount. These commitments are not reflected as a liability on the Company's Condensed Consolidated Statement of Financial Position.

Interest on Long-term Debt
Interest payments under long-term debt obligations exclude the potential effects of the related interest rate swap contracts.

18.
Environmental Matters

The Company is subject to federal, state and local regulations relating to the discharge of substances into the environment, the disposal of hazardous wastes and other activities affecting the environment that have had, and will continue to have, an impact on the Company’s manufacturing operations. These environmental protection regulations may require the investigation and remediation of environmental impairments at current and previously owned or leased properties. In addition, lawsuits, claims and proceedings have been asserted on occasion against the Company, alleging violations of environmental protection regulations, or seeking remediation of alleged environmental impairments, principally at previously owned or leased properties. As of June 30, 2017 , the Company is involved in the investigation or remediation of nine 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 eight of these sites is not significant. Management estimates that the total reasonably possible future costs the Company could incur for one of these sites to be approximately $12 million . The Company has recorded environmental reserves for this site of $6 million as of June 30, 2017 , 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.


27


ROCKWELL COLLINS, INC.

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


19.
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.

20.
Restructuring and Asset Impairment Charges

During the three months ended December 31, 2015, the Company recorded corporate restructuring and asset impairment charges of $45 million . There were no corporate restructuring or asset impairment charges recorded during the nine months ended June 30, 2017 . The $45 million of charges were recorded in 2016 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. All employee separation costs were paid in 2016. Asset impairment charges primarily related to the write-down to fair market value of a corporate asset, as well as the write-off of certain long-lived assets.


28


ROCKWELL COLLINS, INC.

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


21.
Business Segment Information

Sales and earnings from continuing operations of the Company's operating segments are summarized as follows:
 
Three Months Ended
 
Nine Months Ended
 
June 30
 
June 30
(in millions)
2017
 
2016
 
2017
 
2016
Sales:
 
 
 
 
 
 
 
Interior Systems
$
695

 
$

 
$
695

 
$

Commercial Systems
658

 
612

 
1,801

 
1,785

Government Systems
558

 
555

 
1,598

 
1,544

Information Management Services
183

 
167

 
535

 
485

Total sales
$
2,094

 
$
1,334

 
$
4,629

 
$
3,814

 
 
 
 
 
 
 
 
Segment operating earnings:
 

 
 

 
 
 
 
Interior Systems
$
80

 
$

 
$
80

 
$

Commercial Systems
144

 
141

 
401

 
401

Government Systems
123

 
115

 
333

 
309

Information Management Services
39

 
26

 
105

 
79

Total segment operating earnings
386

 
282

 
919

 
789

 
 
 
 
 
 
 
 
Interest expense (1)
(77
)
 
(16
)
 
(122
)
 
(48
)
Stock-based compensation
(8
)
 
(6
)
 
(21
)
 
(21
)
General corporate, net
(16
)
 
(13
)
 
(39
)
 
(36
)
Transaction and integration costs (1)
(64
)
 

 
(80
)
 

Restructuring and asset impairment charges

 

 

 
(45
)
Income from continuing operations before income taxes
221

 
247

 
657

 
639

Income tax expense
(42
)
 
(33
)
 
(165
)
 
(120
)
Income from continuing operations
$
179

 
$
214

 
$
492

 
$
519

(1) During the three and nine months ended June 30, 2017 , the Company incurred $18 million and $29 million , respectively, of bridge facility fees related to the B/E Aerospace acquisition. These costs are included in Interest expense. Therefore, total transaction, integration and financing costs related to the acquisition of B/E Aerospace during the three and nine months ended June 30, 2017 were $82 million and $109 million , respectively.

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, transaction and integration costs, 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.


29


ROCKWELL COLLINS, INC.

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


The following table summarizes sales by category for the three and nine months ended June 30, 2017 and 2016 :
 
Three Months Ended
 
Nine Months Ended
 
June 30
 
June 30
(in millions)
2017
 
2016
 
2017
 
2016
Interior Systems sales categories:
 
 
 
 
 
 
 
Interior products and services
$
400

 
$

 
$
400

 
$

Aircraft seating
295

 

 
295

 

Interior Systems sales
695

 

 
695

 

 
 
 
 
 
 
 
 
Commercial Systems sales categories:
 
 
 

 
 
 
 
Air transport aviation electronics
405

 
370

 
1,098

 
1,052

Business and regional aviation electronics
253

 
242

 
703

 
733

Commercial Systems sales
658

 
612

 
1,801

 
1,785

 
 
 
 
 
 
 
 
Government Systems sales categories:
 
 
 
 
 
 
 
Avionics
342

 
376

 
1,028

 
1,026

Communication and navigation
216

 
179

 
570

 
518

Government Systems sales
558

 
555

 
1,598

 
1,544

 
 
 
 
 
 
 
 
Information Management Services sales
183

 
167

 
535

 
485

 
 
 
 
 
 
 
 
Total sales
$
2,094

 
$
1,334

 
$
4,629

 
$
3,814


The Interior Systems interior products and services and aircraft seating sales categories are delineated based on the nature of underlying products. The Commercial Systems 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 and nine months ended June 30, 2017 , sales for air transport aviation electronics include revenue from wide-body in-flight entertainment products and services of $5 million and $15 million , respectively, compared to $9 million and $30 million for the three and nine months ended June 30, 2016 . The Government Systems avionics and communication and navigation sales categories are delineated based upon underlying product technologies.

The following table summarizes the identifiable assets at June 30, 2017 and September 30, 2016 for each of the operating segments and corporate:
(in millions)
June 30, 2017
 
September 30, 2016
Identifiable assets:
 
 
 
Interior Systems
$
10,346

 
$

Commercial Systems
3,272

 
3,050

Government Systems
2,097

 
2,052

Information Management Services
1,903

 
1,906

Corporate
733

 
691

Total identifiable assets
$
18,351

 
$
7,699



30


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

OVERVIEW AND OUTLOOK

On April 13, 2017, we completed our acquisition of B/E Aerospace for  $6.5 billion in cash and stock, plus the assumption of  $2.0 billion of debt, net of cash acquired. To finance the acquisition and repay assumed debt, we issued 31.2 million shares of common stock, issued $4.35 billion of senior unsecured notes and borrowed $1.5 billion  under a new senior unsecured syndicated term loan facility. The results of operations of the acquired business are reported in a newly formed Interior Systems business segment.

The acquisition expands our reach and broadens our portfolio of aircraft content with the addition of a wide range of cabin interior products for commercial aircraft and business jets including seating, food and beverage preparation and storage equipment, lighting and oxygen systems, and modular galley and lavatory systems. The Company's portfolio of aircraft content now spans the aircraft from cockpit to cabin, communications to connectivity. The acquisition also further diversifies our geographic presence and customer mix as Interior Systems products and services are sold to airlines and original equipment manufacturers across the globe. The transaction is expected to generate run-rate pre-tax cost synergies of approximately $160 million ($125 million after tax). During the nine months ended June 30, 2017, we incurred $109 million of transaction, integration and financing costs associated with the acquisition.

The acquisition enhances our 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.

Total sales for the first nine months of 2017, compared to the same period in the prior year, increased 21 percent to $4.629 billion , primarily due to the B/E Aerospace acquisition which contributed $695 million of the overall revenue growth. Excluding the B/E Aerospace acquisition, revenues increased $120 million, or 3 percent, compared to the same period in the prior year, driven by 10 percent growth in Information Management Services, 3 percent growth in Government Systems and 1 percent growth in Commercial Systems sales. We expect Government Systems sales to grow low-to-mid single-digits in 2017. We expect Information Management Services to have mid-to-high single digit growth in 2017. Commercial Systems sales are expected to be about flat for the year.

Total segment operating earnings for the first nine months of 2017 improved $130 million to $919 million. The Interior Systems business contributed $80 million of operating earnings, while Information Management Services increased $26 million and Government Systems increased $24 million. Earnings per share from continuing operations for the first nine months of 2017 decreased to $3.48 compared to $3.92 in the prior year. Earnings per share from continuing operations for the first nine months of 2017 include 52 cents of transaction, integration and financing costs related to the acquisition of B/E Aerospace. Earnings per share from continuing operations for the first nine months of 2016 included a 49 cent benefit from the release of a capital loss carryforward valuation allowance and the retroactive reinstatement of the Federal Research & Development Tax Credit. In addition, earnings per share from continuing operations in the first nine months of 2016 included a 21 cent restructuring and asset impairment charge, initiated as a result of certain challenging market conditions, particularly in business aviation.

The following is a summary of our company's financial guidance for 2017:

total sales of about $6.8 billion (From $6.7 billion to $6.8 billion)

total segment operating margins of 19.0 percent to 20.0 percent (1)  

earnings per share of $4.85 to $5.05 (From $4.50 to $4.70) (2)  


31


adjusted earnings per share of $5.95 to $6.15 (2)  

cash provided by operating activities of $900 million to $1.0 billion, which includes an expected $50 million net increase in pre-production engineering costs included in inventory

capital expenditures of about $250 million

total research and development investment of about $1.1 billion (From $1.05 billion to $1.15 billion) (3)  

full year income tax rate of 24 percent to 25 percent (From 27 percent to 28 percent) (4)  

(1) Total segment operating margins is a non-GAAP measure and is reconciled to the related GAAP measure, Income from continuing operations before income taxes, in Note 21 of the Notes to Condensed Consolidated Financial Statements. Total segment operating margins is calculated as total segment operating earnings divided by total sales. The non-GAAP total segment operating margin information included in this disclosure is believed to be useful to investors' understanding by excluding certain expenses we believe are not relevant to investors' assessment of our operating results. Interior Systems operating margins are projected to be in the range of 12 percent to 13 percent for fiscal year 2017. The Interior Systems operating margin includes acquisition-related intangible asset amortization of about 750 basis points of operating margin impact and amortization of inventory and acquired contract fair value adjustments of about 100 basis points of net operating margin impact.

(2) The adjusted net income and adjusted earnings per share non-GAAP metrics are believed to be useful to investors' understanding and assessment of our on-going operations and performance of the B/E Aerospace acquisition, which occurred on April 13, 2017. We believe adjusted net income and adjusted earnings per share excludes certain one-time and non-cash expenses not indicative of our on-going operating results. The Company does not intend for the non-GAAP information to be considered in isolation or as a substitute for the related GAAP measures. Adjusted earnings per share is based on a preliminary purchase price allocation and is subject to potential adjustments that could be material. In addition, adjusted earnings per share is based on the weighted average shares for fiscal year 2017, which includes the issuance of 31.2 million shares of Rockwell Collins common stock on April 13, 2017 in connection with the B/E Aerospace acquisition. Due to the timing of the share issuance, the earnings per share impact of the acquisition of B/E Aerospace will be different in our annual results as compared to our quarterly results.
 
 
Year Ending
 
 
September 30, 2017 (estimated)
(dollars in millions, impact to forecasted net income; except per share amounts)
 
Low End of Guidance Range
 
High End of Guidance Range
Forecasted net income (GAAP)
 
$
710

 
$
740

Estimated B/E Aerospace acquisition-related expenses
 
~90
Estimated amortization of acquisition-related intangible assets
 
~100
Estimated amortization of acquired contract liability
 
~(80)
Estimated amortization of inventory fair value adjustment
 
~55
Forecasted adjusted net income (non-GAAP)
 
$
875

 
$
905

 
 
 
 
 
Forecasted earnings per share (GAAP)
 
$
4.85

 
$
5.05

Estimated B/E Aerospace acquisition-related expenses
 
~0.60
Estimated amortization of acquisition-related intangible assets
 
~0.70
Estimated amortization of acquired contract liability
 
~(0.55)
Estimated amortization of inventory fair value adjustment
 
~0.35
Forecasted adjusted earnings per share (non-GAAP)
 
$
5.95

 
$
6.15


(3) 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.

(4) The lower expected full year income tax rate has been adjusted for a change in the jurisdictional mix of projected income due to the B/E Aerospace acquisition as well as deductible transaction, integration and financing costs.

RESULTS OF OPERATIONS

The following management discussion and analysis of results of operations is based on reported financial results for the three and nine months ended June 30, 2017 and 2016 , 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.

32


  
Sales

 
Three Months Ended
 
Nine Months Ended
 
June 30
 
June 30
(in millions)
2017
 
2016
 
2017
 
2016
Total sales
$
2,094

 
$
1,334

 
$
4,629

 
$
3,814

Percent increase
57
%
 
 
 
21
%
 
 

Total sales increased $760 million , or 57 percent , for the three months ended June 30, 2017 , compared to the same period in the prior year. B/E Aerospace, which was acquired on April 13, 2017, contributed $695 million of the overall revenue growth.
Sales excluding the B/E Aerospace acquisition (organic sales) increased $65 million, or 5 percent, compared to the same period in the prior year, driven by a $46 million increase within Commercial Systems, a $16 million increase within Information Management Services and a $3 million increase within Government Systems.

Total sales increased $815 million , or 21 percent , for the nine months ended June 30, 2017 , compared to the same period in the prior year. B/E Aerospace contributed $695 million of the overall revenue growth. Organic sales increased $120 million, or 3 percent, compared to the same period in the prior year, driven by a $54 million increase within Government Systems, a $50 million increase within Information Management Services and a $16 million increase within Commercial Systems.

Refer to the Interior Systems, Commercial Systems, Government Systems and Information Management Services sections of the Segment Financial Results below for detailed sales discussions.

Cost of Sales

 
Three Months Ended
 
Nine Months Ended
 
June 30
 
June 30
(in millions)
2017
 
2016
 
2017
 
2016
Total cost of sales
$
1,524

 
$
915

 
$
3,270

 
$
2,658

Percent of total sales
72.8
%
 
68.6
%
 
70.6
%
 
69.7
%

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.

For the three months ended June 30, 2017 , total cost of sales increased $609 million , or 67 percent , compared to the same period in the prior year, primarily due to the following:

$564 million of cost of sales from the recently acquired B/E Aerospace business

a $37 million increase from higher organic sales, which was favorably impacted by benefits from cost savings initiatives

a $7 million combined increase in employee incentive compensation costs in Commercial Systems and Government Systems

For the nine months ended June 30, 2017 , total cost of sales increased $612 million , or 23 percent , compared to the same period in the prior year, primarily due to the following:

$564 million of cost of sales from the recently acquired B/E Aerospace business

an $86 million increase from higher organic sales, which was unfavorably impacted by sales mix

partially offset by $33 million of asset and restructuring charges recorded in the nine months ended June 30, 2016


33


further offset by benefits from cost savings initiatives and a $7 million combined decrease in company-funded R&D expense in Commercial Systems, Government Systems and Information Management Services, as detailed in the Research and Development Expense section below

Research and Development Expense

R&D expense is included as a component of cost of sales and is summarized as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
June 30
 
June 30
(in millions)
2017
 
2016
 
2017
 
2016
Customer-funded:
 
 
 
 
 
 
 
Interior Systems
$
15

 
$

 
$
15

 
$

Commercial Systems
68

 
58

 
199

 
166

Government Systems
103

 
98

 
316

 
284

Information Management Services
3

 
2

 
7

 
6

Total customer-funded
189

 
158

 
537

 
456

Company-funded:
 
 
 
 
 
 
 
Interior Systems
56

 

 
56

 

Commercial Systems
37

 
36

 
94

 
97

Government Systems
17

 
20

 
53

 
56

Information Management Services (1)

 

 

 
1

Total company-funded
110

 
56

 
203

 
154

Total R&D expense
$
299

 
$
214

 
$
740

 
$
610

Percent of total sales
14.3
%
 
16.0
%
 
16.0
%
 
16.0
%
(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 $18 million and $14 million for the three months ended June 30, 2017 and 2016 , respectively, and totaled $43 million and $37 million for the nine months ended June 30, 2017 and 2016 , respectively.

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 subcontract costs.

For the three months ended June 30, 2017 , total R&D expense increased $85 million , compared to the same period in the prior year. The customer-funded portion of R&D expense increased $31 million , primarily due to $15 million of customer-funded expenditures from the recently acquired B/E Aerospace business. In addition, customer-funded expenditures for Commercial Systems increased $10 million due to international regional jet programs and Government Systems increased $5 million due to fixed wing programs. Company-funded R&D expense increased $54 million , primarily due to $56 million of company-funded expenditure from the recently acquired B/E Aerospace business.

In addition to the R&D expenses above, development expenditures incurred for the Bombardier Global 7000/8000 and CSeries programs and certain military transport programs during the three months ended June 30, 2017 resulted in a gross $32 million increase to our investments in pre-production engineering programs capitalized within inventory.

34



For the nine months ended June 30, 2017 , total R&D expense increased $130 million , compared to the same period in the prior year. The customer-funded portion of R&D expense increased $81 million . Customer-funded expenditures for Commercial Systems increased $33 million due to higher development expenditures for international regional jet programs. Government systems increased $32 million due to increased development effort for fixed wing programs. In addition, the recently acquired B/E Aerospace business contributed $15 million of customer-funded development effort. Company-funded R&D expense increased $49 million , primarily due to $56 million of company-funded expenditure from the recently acquired B/E Aerospace business.

In addition to the R&D expenses above, development expenditures incurred for the Bombardier Global 7000/8000 and CSeries programs, the Boeing 737 MAX platform and certain military transport programs during the nine months ended June 30, 2017 resulted in a gross $108 million increase to our investments in pre-production engineering programs capitalized within inventory.

Refer to Note 6 of the Notes to Condensed Consolidated Financial Statements for further discussion of our incremental investments in pre-production engineering effort.

Selling, General and Administrative Expenses
 
 
Three Months Ended
 
Nine Months Ended
 
June 30
 
June 30
(in millions)
2017
 
2016
 
2017
 
2016
Selling, general and administrative expenses
$
213

 
$
158

 
$
514

 
$
481

Percent of total sales
10.2
%
 
11.8
%
 
11.1
%
 
12.6
%

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.

Transaction costs associated with the acquisition of B/E Aerospace previously reported as SG&A expenses have been reclassified and are now reported as Transaction and integration costs on the Condensed Consolidated Statement of Operations.

For the three months ended  June 30, 2017 , total SG&A expenses  increased   $55 million compared to the same period in the prior year, primarily due to $53 million of SG&A costs from the recently acquired B/E Aerospace business.

For the nine months ended  June 30, 2017 , total SG&A expenses  increased   $33 million compared to the same period in the prior year, primarily due to the following:

$53 million of SG&A costs from the recently acquired B/E Aerospace business

partially offset by $12 million of restructuring and asset impairment charges recorded in the three months ended December 31, 2015 and the benefits of cost savings initiatives

Interest Expense
 
Three Months Ended
 
Nine Months Ended
 
June 30
 
June 30
(in millions)
2017
 
2016
 
2017
 
2016
Interest expense
$
77

 
$
16

 
$
122

 
$
48

Interest expense increased by $61 million for the three months ended June 30, 2017 , compared to the same period in the prior year, primarily due to the following:

$44 million of incremental interest on the new debt issued to fund the B/E Aerospace acquisition


35


$18 million of fees incurred during the three months ended June 30, 2017 associated with the bridge credit agreement entered into in December 2016 pursuant to the acquisition of B/E Aerospace

Interest expense increased by $74 million for the nine months ended June 30, 2017 , compared to the same period in the prior year, primarily due to the following:

$44 million of incremental interest on the new debt issued to fund the B/E Aerospace acquisition

$29 million of fees incurred during the nine months ended June 30, 2017 associated with the bridge credit agreement entered into in December 2016 pursuant to the acquisition of B/E Aerospace

higher interest rates on commercial paper for the nine months ended June 30, 2017 compared to the same period in the prior year

See Note 9 of the Notes to Condensed Consolidated Financial Statements for more detail regarding outstanding debt.

Net Income and Diluted Earnings Per Share
 
 
Three Months Ended
 
Nine Months Ended
 
June 30
 
June 30
(in millions, except per share amounts)
2017
 
2016
 
2017
 
2016
Income from continuing operations
$
179

 
$
214

 
$
492

 
$
519

Percent of sales
8.5
%
 
16.0
%
 
10.6
%
 
13.6
%
 
 
 
 
 
 
 
 
Income from discontinued operations, net of taxes

 

 

 
1

Net income
$
179

 
$
214

 
$
492

 
$
520

 
 
 
 
 
 
 
 
Diluted earnings per share from continuing operations
$
1.12

 
$
1.63

 
$
3.48

 
$
3.92

Diluted earnings per share from discontinued operations

 

 

 
0.01

Diluted earnings per share
$
1.12

 
$
1.63

 
$
3.48

 
$
3.93

 
 
 
 
 
 
 
 
Weighted average diluted common shares
159.9

 
131.5

 
141.4

 
132.3


For the three months ended June 30, 2017 , income from continuing operations, net of taxes, was $179 million , down 16 percent , or $35 million , from the $214 million reported in the same period in the prior year. Diluted earnings per share from continuing operations decreased 31 percent to $1.12 during this same period. The rate of decrease in diluted earnings per share from continuing operations was more than the rate of decrease in income from continuing operations, net of taxes, due to the 31.2 million shares of common stock issued to finance a portion of the B/E Aerospace acquisition.

Income from continuing operations, net of taxes, and diluted earnings per share from continuing operations for the three months ended June 30, 2017 , compared to the same period in the prior year, decreased primarily due to:

36



$82 million of pre-tax transaction, integration and financing costs associated with the acquisition of B/E Aerospace

$44 million of incremental interest expense on the new debt issued principally to fund the B/E Aerospace acquisition

a $9 million increase in income tax expense primarily due to a $41 million valuation allowance release that occurred in the three months ended June 30, 2016, partially offset by an income tax benefit due to a lower estimated annual effective tax rate, which applies to year-to-date earnings

partially offset by an $80 million increase in operating earnings from the recently acquired Interior Systems business, a $13 million increase in Information Management Services operating earnings, an $8 million increase in Government Systems operating earnings and a $3 million increase in Commercial Systems operating earnings

For the nine months ended June 30, 2017 , income from continuing operations, net of taxes, was $492 million , down 5 percent , or $27 million , from the $519 million reported in the same period in the prior year. Diluted earnings per share from continuing operations decreased 11 percent to $3.48 during this same period. The rate of decrease in diluted earnings per share from continuing operations was more than the rate of decrease in income from continuing operations, net of taxes, due to the 31.2 million shares of common stock issued to finance the B/E Aerospace acquisition.

Income from continuing operations, net of taxes, and diluted earnings per share from continuing operations for the nine months ended June 30, 2017 , compared to the same period in the prior year, decreased primarily due to:

$109 million of pre-tax transaction, integration and financing costs associated with the acquisition of B/E Aerospace

a $45 million increase in income tax expense primarily due to the retroactive benefit from the reinstatement of the Federal R&D Tax Credit and a $41 million valuation allowance release that occurred in the nine months ended June 30, 2016, partially offset by an income tax benefit due to a lower estimated annual effective tax rate, which applies to year-to-date earnings

$44 million of incremental interest expense on the new debt issued to fund the B/E Aerospace acquisition

partially offset by an $80 million increase in operating earnings from the recently acquired Interior Systems business, a $26 million increase in Information Management Services operating earnings and a $24 million increase in Government Systems operating earnings

also offset by the absence of $45 million of pre-tax restructuring and asset impairment charges recorded in the nine months ended June 30, 2016

Interior Systems Financial Results

Interior Systems Sales

On April 13, 2017, we acquired B/E Aerospace and formed the new Interior Systems business segment, in which the sales and earnings of the acquired business will be reported. See Note 3 of the Notes to Condensed Consolidated Financial Statements for more information regarding the acquisition.

The Interior Systems business manufactures cabin interior products for the commercial aircraft and business aviation markets. We sell our products and provide our services directly to virtually all of the world’s major airlines and aerospace manufacturers. We have achieved a leading global market position in each of our major product categories, which include:

commercial aircraft seats, including an extensive line of super first class, first class, business class, economy class and regional aircraft seats

a full line of aircraft food and beverage preparation and storage equipment, including coffee and espresso makers, water boilers, beverage containers, refrigerators, freezers, chillers and a line of microwave, high efficiency convection and steam ovens

modular lavatory systems, wastewater management systems and galley systems


37


both chemical and gaseous aircraft oxygen storage, distribution and delivery systems, protective breathing equipment and a broad range of lighting products

business jet and general aviation interior products, including an extensive line of executive aircraft and helicopter seats, direct and indirect overhead lighting systems, exterior lighting systems, passenger and crew oxygen systems, air valve systems and high-end aircraft monuments

The following table presents Interior Systems sales by product category:
 
Three Months Ended
 
Nine Months Ended
 
June 30
 
June 30
(in millions)
2017
 
2016
 
2017
 
2016
Interior products and services
$
400

 
$

 
$
400

 
$

Aircraft seating
295

 

 
295

 

Total
$
695


$


$
695


$


The results above reflect sales by the Interior Systems segment from April 13, 2017 through June 30, 2017.

Interior Systems Pro Forma Sales

Note 3 of the  Notes to Condensed Consolidated Financial Statements  presents supplemental pro forma financial data as if the acquisition of B/E Aerospace had been completed as of the beginning of our prior fiscal year, or on October 1, 2015. The pro forma data included in Note 3 combines the Company's consolidated results with the stand-alone results of B/E Aerospace for the pre-acquisition periods. The supplemental pro forma data is not necessarily indicative of results that actually would have occurred had the acquisition been consummated on October 1, 2015.

On a pro forma basis, sales for the Interior Systems segment would be $820 million and $753 million for the three months ended June 30, 2017 and 2016, respectively. The $67 million, or 9 percent, increase in the pro forma sales was primarily due to the following:

a $65 million increase in interior products and services sales, primarily due to increased original equipment deliveries of Airbus A350 galleys, Boeing 737 advanced lavatories and oxygen systems across multiple platforms

a $2 million increase in aircraft seating as higher deliveries of new economy, business class and business jet seats more than offset declines in super first class deliveries

On a pro forma basis, sales for the Interior Systems segment would be $2.248 billion and $2.129 billion for the nine months ended June 30, 2017 and 2016, respectively. The $119 million, or 6 percent, increase in the pro forma sales was primarily due to the following:

a $177 million increase in interior products and services sales, primarily due to increased original equipment deliveries of Airbus A350 galleys, Boeing 737 advanced lavatories and oxygen systems across multiple platforms. In addition, favorable timing of cooling equipment deliveries offset reduced spares sales in the Middle East

partially offset by a $58 million reduction in aircraft seating driven by lower super first class deliveries to European and Middle East airlines as well as lower deliveries to business jet original equipment manufacturers

Refer to Note 3 of the  Notes to Condensed Consolidated Financial Statements  for additional pro forma disclosures.


38


Interior Systems Segment Operating Earnings

 
Three Months Ended
 
Nine Months Ended
 
June 30
 
June 30
(in millions)
2017
 
2016
 
2017
 
2016
Segment operating earnings
$
80

 
$

 
$
80

 
$

Percent of sales
11.5
%
 
%
 
11.5
%
 
%

The results above reflect operating earnings of the Interior Systems segment from April 13, 2017 through June 30, 2017. Operating earnings for the three and nine months ended June 30, 2017 include $46 million of intangible asset amortization expense and $44 million of inventory fair value adjustment amortization that unfavorably impacted operating earnings, partially offset by $42 million of favorable acquired contract liability amortization.

Commercial Systems Financial Results

Commercial Systems Sales

The following table presents Commercial Systems sales by product category:
 
Three Months Ended
 
Nine Months Ended
 
June 30
 
June 30
(in millions)
2017
 
2016
 
2017
 
2016
Air transport aviation electronics:
 
 
 
 
 
 
 
Original equipment
$
245

 
$
234

 
$
669

 
$
631

Aftermarket
155

 
127

 
414

 
391

Wide-body in-flight entertainment (IFE)
5

 
9

 
15

 
30

Total air transport aviation electronics
405

 
370

 
1,098

 
1,052

Business and regional aviation electronics:
 

 
 

 
 
 
 
Original equipment
129

 
133

 
360

 
402

Aftermarket
124

 
109

 
343

 
331

Total business and regional aviation electronics
253

 
242

 
703

 
733

Total
$
658

 
$
612

 
$
1,801

 
$
1,785

Percent increase
8
%
 
 
 
1
%
 
 

For the three months ended June 30, 2017 , total air transport aviation electronics sales increased $35 million , or 9 percent , compared to the same period in the prior year, primarily due to the following:

original equipment sales increased $11 million , or 5 percent , primarily due to higher Airbus A350 and Boeing 737 production rates, partially offset by lower legacy wide-body production rates

aftermarket sales increased $28 million , or 22 percent , primarily due to higher used aircraft equipment sales of $24 million, higher regulatory mandate upgrade activity and higher spares provisioning, partially offset by lower retrofit and service and support sales

wide-body IFE sales decreased $4 million , or 44 percent , as airlines decommissioned their legacy IFE systems

For the three months ended June 30, 2017 , total business and regional aviation electronics sales increased $11 million , or 5 percent , compared to the same period in the prior year, primarily due to the following:

original equipment sales decreased $4 million , or 3 percent , primarily due to lower business aircraft OEM production rates, partially offset by higher Bombardier CSeries production rates and Global 7000/8000 equipment deliveries in support of entry into service

aftermarket sales increased $15 million , or 14 percent , primarily due to higher flight deck retrofit and regulatory mandate upgrade activity, partially offset by lower simulation hardware sales

39



For the nine months ended June 30, 2017 , total air transport aviation electronics sales increased $46 million , or 4 percent , compared to the same period in the prior year, primarily due to the following:

original equipment sales increased $38 million , or 6 percent , primarily due to higher Airbus A350 production rates, increased customer-funded development program revenues and higher Boeing 737 production rates, partially offset by lower wide-body production rates

aftermarket sales increased $23 million , or 6 percent , primarily due to higher used aircraft equipment sales and higher regulatory mandate upgrade activity, partially offset by lower retrofit and service and support sales

wide-body IFE sales decreased $15 million , or 50 percent , as airlines decommissioned their legacy IFE systems

For the nine months ended June 30, 2017 , total business and regional aviation electronics sales decreased $30 million , or 4 percent , compared to the same period in the prior year, primarily due to the following:

original equipment sales decreased $42 million , or 10 percent , primarily due to lower business aircraft OEM production rates, partially offset by higher product deliveries for the Bombardier CSeries program and higher customer-funded development program revenues

aftermarket sales increased $12 million , or 4 percent , primarily due to higher flight deck retrofit activity

Commercial Systems Segment Operating Earnings
 
 
Three Months Ended
 
Nine Months Ended
 
June 30
 
June 30
(in millions)
2017
 
2016
 
2017
 
2016
Segment operating earnings
$
144

 
$
141

 
$
401

 
$
401

Percent of sales
21.9
%
 
23.0
%
 
22.3
%
 
22.5
%

For the three months ended June 30, 2017 , Commercial Systems operating earnings increased $3 million , or 2 percent , compared to the same period in the prior year, primarily due to the following:

operating earnings were positively impacted by a $46 million increase in sales volume discussed in the Commercial Systems sales section above, however, the benefits were tempered by sales mix as lower margin used aircraft equipment sales increased and higher margin business jet OEM sales decreased

partially offset by a $4 million increase in amortization of pre-production engineering costs and a $3 million increase in employee incentive compensation costs

The decrease in operating earnings as a percent of sales for the three months ended June 30, 2017 compared to the same period in the prior year was primarily due to increased employee incentive compensation costs and amortization of pre-production engineering costs.

For the nine months ended June 30, 2017 , Commercial Systems operating earnings were flat compared to the same period in the prior year, primarily due to the following:

the benefits of a $16 million increase in sales were mostly offset by sales mix, as lower margin customer-funded development revenues and used aircraft equipment sales increased and higher margin business jet OEM sales decreased

SG&A costs decreased, primarily due to cost savings initiatives

The decrease in operating earnings as a percent of sales for the nine months ended June 30, 2017 compared to the same period in the prior year was primarily due to sales mix.


40


Government Systems Financial Results

Government Systems Sales
 
The following table presents Government Systems sales by product category:
 
Three Months Ended
 
Nine Months Ended
 
June 30
 
June 30
(in millions)
2017
 
2016
 
2017
 
2016
Avionics
$
342

 
$
376

 
$
1,028

 
$
1,026

Communication and navigation
216

 
179

 
570

 
518

Total
$
558

 
$
555

 
$
1,598

 
$
1,544

Percent increase
1
%
 
 
 
3
%
 
 

For the three months ended June 30, 2017 , total avionics sales decreased $34 million , or 9 percent , compared to the same period in the prior year, primarily due to the following:

a $15 million decrease from lower fixed wing sales, primarily due to lower deliveries for various fighter platforms as a result of production issues and the wind-down of legacy tanker hardware deliveries, partially offset by higher development program sales

$19 million in other net decreases to revenue, primarily due to lower sales on various rotary wing platforms

For the three months ended June 30, 2017 , total communication and navigation sales increased $37 million , or 21 percent , compared to the same period in the prior year, primarily due to the following:

a $17 million increase from higher legacy communication sales

an $11 million increase due to higher deliveries of GPS-related products

$9 million in other net increases to revenue, primarily due to higher test and training range sales

For the nine months ended June 30, 2017 , total avionics sales increased $2 million , or 0 percent , compared to the same period in the prior year, primarily due to the following:

a $24 million increase from higher simulation and training sales

partially offset by $10 million in lower fixed wing sales, primarily due to the wind-down of legacy tanker hardware deliveries and lower deliveries for various fighter platforms as a result of production issues, net of higher development program sales

in addition, $12 million in other net decreases to revenue, primarily driven by lower deliveries on various rotary wing platforms

For the nine months ended June 30, 2017 , total communication and navigation sales increased $52 million , or 10 percent , compared to the same period in the prior year, primarily due to the following:

a $19 million increase from higher data links sales

a $14 million increase from higher deliveries of GPS-related products

$19 million in other net increases to revenue, primarily due to higher test and training range sales and higher legacy communication sales


41


Government Systems Segment Operating Earnings

 
Three Months Ended
 
Nine Months Ended
 
June 30
 
June 30
(in millions)
2017
 
2016
 
2017
 
2016
Segment operating earnings
$
123

 
$
115

 
$
333

 
$
309

Percent of sales
22.0
%
 
20.7
%
 
20.8
%
 
20.0
%

For the three months ended June 30, 2017 , Government Systems operating earnings increased $8 million , or 7 percent , compared to the same period in the prior year, primarily due to favorable sales mix and a $3 million decrease in company-funded R&D expense, partially offset by a $4 million increase in employee incentive compensation costs.

The increase in operating earnings as a percent of sales for the three months ended June 30, 2017 compared to the same period in the prior year was primarily due to favorable sale mix.

For the nine months ended June 30, 2017 , Government Systems operating earnings increased $24 million, or 8 percent , compared to the same period in the prior year, primarily due to higher sales volume. As discussed in the Government Systems sales section above, total Government Systems sales for the nine months ended June 30, 2017, increased $54 million, which resulted in a $30 million increase in cost and an increase in earnings of $24 million, or 44 percent of the higher sales volume. The margins on the sales increase were favorably impacted by benefits from cost savings initiatives.

The increase in operating earnings as a percent of sales for the nine months ended June 30, 2017 compared to the same period in the prior year was primarily due to higher sales volume.

Information Management Services Financial Results

Information Management Services Sales

The following table presents Information Management Services sales:
 
Three Months Ended
 
Nine Months Ended
 
June 30
 
June 30
(in millions)
2017
 
2016
 
2017
 
2016
Sales
$
183

 
$
167

 
$
535

 
$
485

Percent increase
10
%
 
 
 
10
%
 
 
For the three months ended June 30, 2017 , total Information Management Services sales increased $16 million , or 10 percent , compared to the same period in the prior year. Aviation-related sales grew 9 percent primarily due to increased usage of connectivity services. Non-aviation sales grew 10 percent for the three months ended June 30, 2017, primarily due to nuclear security mandate revenue.

For the nine months ended June 30, 2017 , total Information Management Services sales increased $50 million , or 10 percent , compared to the same period in the prior year. Aviation-related sales grew 10 percent for the nine months ended June 30, 2017, primarily due to increased usage of connectivity services and timing of connectivity related equipment deliveries. Non-aviation sales grew 10 percent for the nine months ended June 30, 2017, primarily due to nuclear security mandate revenue.

Information Management Services Segment Operating Earnings
 
 
Three Months Ended
 
Nine Months Ended
 
June 30
 
June 30
(in millions)
2017
 
2016
 
2017
 
2016
Segment operating earnings
$
39

 
$
26

 
$
105

 
$
79

Percent of sales
21.3
%
 
15.6
%
 
19.6
%
 
16.3
%

For the three months ended June 30, 2017 , Information Management Services operating earnings increased $13 million , or 50 percent , compared to the same period in the prior year, primarily due to the following:

42



a $16 million increase in sales volume discussed in Information Management Services sales section above, which resulted in a $7 million increase in cost and an increase in earnings of $9 million, or 56 percent of the higher sales volume. The margins on the sales increase were favorably impacted by benefits from cost savings initiatives

operating earnings were positively impacted by the favorable resolution of certain prior year claims associated with international business jet support services

For the nine months ended June 30, 2017 , Information Management Services operating earnings increased $26 million , or 33 percent , compared to the same period in the prior year, primarily due to the following:

a $50 million increase in sales volume discussed in the Information Managements Services sales section above, which resulted in a $27 million increase in cost and an increase in earnings of $23 million, or 46 percent of the higher sales volume. The margins on the sales increase were favorably impacted by benefits from cost savings initiatives

operating earnings were positively impacted by the favorable resolution of certain prior year claims associated with international business jet support services

The increase in operating earnings as a percent of sales for the three and nine months ended June 30, 2017 compared to the same periods in the prior year was primarily due to higher sales volume.

General Corporate, Net
 
General corporate, net includes expenses that are not allocated to our business segments. 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
 
Nine Months Ended
 
June 30
 
June 30
(in millions)
2017
 
2016
 
2017
 
2016
General corporate, net
$
16

 
$
13

 
$
39

 
$
36


For the three and nine months ended June 30, 2017, General corporate expenses increased $3 million and $3 million, respectively, compared to the same periods in the prior year, primarily due to costs of the recently acquired B/E Aerospace business.

Retirement Plans

Net benefit expense (income) for pension benefits and other retirement benefits are as follows:
 
Three Months Ended
 
Nine Months Ended
 
June 30
 
June 30
(in millions)
2017
 
2016
 
2017
 
2016
Pension benefits
$
(6
)
 
$
(6
)
 
$
(19
)
 
$
(18
)
Other retirement benefits
3

 
3

 
10

 
10

Net benefit (income)
$
(3
)
 
$
(3
)
 
$
(9
)
 
$
(8
)

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 approximately $24 million in 2017 , compared to $24 million of pension income in 2016.

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

43


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 nine months ended June 30, 2017 , we made a $55 million voluntary contribution to our U.S. qualified pension plan. There is no minimum statutory funding requirement for 2017 and we do not currently expect to make any additional discretionary contributions during 2017 to our U.S. qualified pension plan. 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 approximately $13 million in 2017.

Other Retirement Benefits
We expect other retirement benefits expense of approximately $14 million in 2017 , compared to $14 million of expense in 2016.

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. Significant judgment is involved regarding the application of global income tax laws and regulations and when projecting the jurisdictional mix of income. 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 primarily the result of the tax benefits derived from the Federal R&D Tax Credit, the Domestic Manufacturing Deduction, and the mix of income attributable to various foreign jurisdictions.

During the three months ended June 30, 2017 and 2016 , the effective income tax rate from continuing operations was 19.0 percent and 13.4 percent, respectively. The prior year effective income tax rate from continuing operations was impacted by the release of a $41 million valuation allowance related to a U.S. capital loss carryforward. The current year effective income tax rate was impacted by a lower estimated annual effective tax rate, which applies to year-to-date earnings, due to the jursidictional mix of income as a result of the B/E Aerospace acquisition.

During the nine months ended June 30, 2017 and 2016 , the effective income tax rate from continuing operations was 25.1 percent and 18.8 percent, respectively. The prior year effective income tax rate from continuing operations was impacted by the retroactive reinstatement of the Federal R&D Tax Credit and the release of a $41 million valuation allowance related to a U.S. capital loss carryforward. The current year effective income tax rate was impacted by a lower estimated annual effective tax rate, which applies to year-to-date earnings, due to the jursidictional mix of income as a result of the B/E Aerospace acquisition.

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
 
Nine Months Ended
 
June 30
(in millions)
2017
 
2016
Cash provided by operating activities from continuing operations
$
416

 
$
223


The $193 million increase in cash provided by operating activities during the nine months ended June 30, 2017 , compared to the same period in the prior year, was primarily due to the following:


44


higher cash receipts from customers, which increased by $1.035 billion to $4.579 billion in the nine months ended June 30, 2017 compared to $3.544 billion in the nine months ended June 30, 2016, primarily due to cash receipts of the recently acquired B/E Aerospace business. The increase in cash receipts from customers was more than the sales volume increase of $815 million due to the timing of sales relative to the collection of receivables from customers

the above item was partially offset by higher payments for production inventory and other operating costs, which increased $654 million to $3.694 billion for the nine months ended June 30, 2017, compared to $3.040 billion during the nine months ended June 30, 2016, primarily due to cash payments of the recently acquired B/E Aerospace business

also offset by cash payments for income taxes, which increased $126 million to $202 million during the nine months ended June 30, 2017 , compared to $76 million during the same period in the prior year. The increase 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 in the three months ended December 31, 2015, as well as pre-tax income associated with the recently acquired B/E Aerospace business

further offset by payments for transaction costs associated with the B/E Aerospace acquisition of $80 million during the nine months ended June 30, 2017

Investing Activities
 
Nine Months Ended
 
June 30
(in millions)
2017
 
2016
Cash (used for) investing activities from continuing operations
$
(3,599
)
 
$
(151
)

Cash used for investing activities for the nine months ended June 30, 2017 increased $3.448 billion , compared to the nine months ended June 30, 2016 , primarily due to the following:

$3.417 billion in cash consideration paid, net of cash acquired, related to the April 2017 acquisition of B/E Aerospace

a $32 million increase in cash payments for property additions for the nine months ended June 30, 2017 , compared to the same period in the prior year

Financing Activities
 
Nine Months Ended
 
June 30
(in millions)
2017
 
2016
Cash provided by (used for) financing activities from continuing operations
$
3,415

 
$
(13
)

The $3.428 billion increase in cash provided by financing activities during the nine months ended June 30, 2017 , compared to the nine months ended June 30, 2016 , was primarily due to the following:

$3.980 billion related to financing of the April 2017 B/E Aerospace acquisition. $6.099 billion in net proceeds from the issuance of long-term debt were principally used to repay $2.119 billion of assumed B/E Aerospace debt, finance the cash portion of the B/E Aerospace purchase price, pay related transaction fees and expenses and repay approximately $300 million of the Company's outstanding commercial paper borrowings

a decrease in cash repurchases of common stock of $215 million to $46 million during the nine months ended June 30, 2017 , compared to $261 million repurchased during the same period in the prior year

partially offset by a $442 million decrease in the net proceeds from short-term commercial paper borrowings and repayment of $338 million of long-term debt


45


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 return value to our shareowners.

A comparison of key elements of our financial condition as of June 30, 2017 and September 30, 2016 are as follows:
 
(in millions)
June 30,
2017
 
September 30,
2016
Cash and cash equivalents
$
578

 
$
340

 
 
 
 
Short-term debt
(511
)
 
(740
)
Long-term debt, net
(7,268
)
 
(1,374
)
Total debt
$
(7,779
)
 
$
(2,114
)
Total equity
$
5,609

 
$
2,084

Debt to total capitalization (1)
58
%
 
50
%
(1) Calculated as Total debt divided by the sum of Total debt plus Total equity

On April 13, 2017, we completed our acquisition of B/E Aerospace for $6.5 billion in cash and stock, plus the assumption of $2.0 billion in debt, net of cash acquired. The $6.5 billion purchase price included cash consideration of $3.5 billion and $3.0 billion of common stock issued for B/E Aerospace common stock (31.2 million shares of common stock issued to B/E Aerospace shareholders at the April 13, 2017 closing share price of $96.63). The cash consideration, related transaction fees and expenses and assumed debt were financed through the issuance of $4.35 billion of senior unsecured notes and $1.5 billion borrowed under a new 3-year senior unsecured syndicated term loan facility that was entered into on December 16, 2016.

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 June 30, 2017 , approximately 73 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 $1.5 billion face amount of unsecured short-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 June 30, 2017 , short-term commercial paper borrowings outstanding were $362 million with a weighted-average interest rate and maturity period of 1.43 percent and 12 days, respectively. At September 30, 2016 , short-term commercial paper borrowings outstanding were $440 million , with a weighted-average interest rate and maturity period of 0.79 percent and 15 days, respectively. The maximum amount of short-term commercial paper borrowings outstanding during the nine months ended June 30, 2017 was $1,058 million .

On December 16, 2016, we entered into a new $1.2 billion five-year senior unsecured revolving credit agreement with various banks that expires in December 2021. This revolving credit facility replaces the previous $1 billion and $200 million revolving credit facilities that would have expired in December 2018 and February 2017, respectively. Both of these revolving credit facilities were terminated upon the closing of the new revolving credit facility. The $1.2 billion credit facility increased to $1.5 billion concurrent with the consummation of the B/E Aerospace acquisition.

In December 2016, we entered into a $4.35 billion 364-day senior unsecured bridge term loan agreement and a $1.5 billion 3-year senior unsecured term loan credit agreement. This bridge facility terminated upon receipt of proceeds from the new notes issued to finance a portion of the B/E Aerospace acquisition. Proceeds from borrowings under the term loan facility were used to finance a portion of the B/E Aerospace acquisition and to pay related transaction fees and expenses.

The revolving credit agreement and term loan credit agreement include one financial covenant requiring us to maintain a consolidated debt to total capitalization ratio of not greater than 68 percent (excluding the equity impact on accumulated other comprehensive loss related to defined benefit retirement plans). The ratio was 51 percent at June 30, 2017 .

46



In addition, alternative sources of liquidity could include funds available from the issuance of equity securities, debt securities and potential asset securitization strategies.

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-term and long-term credit markets.

The following is a summary of our credit ratings as of June 30, 2017 :
Credit Rating Agency
 
Short-Term Rating
 
Long-Term Rating
 
Outlook
Fitch Ratings
 
F2
 
BBB
 
Stable
Moody’s Investors Service
 
P-2
 
Baa2
 
Stable
Standard & Poor’s
 
A-2
 
BBB
 
Stable

We were in compliance with all debt covenants at June 30, 2017 and September 30, 2016 .

Contractual Obligations

The following table summarizes certain annual contractual obligations.
 
 
Payments by Period
(in millions)
 
Total
 
2017
 
2018 - 2019
 
2020 - 2021
 
Thereafter
Long-term debt
 
$
7,800

 
$
375

 
$
900

 
$
1,125

 
$
5,400

Interest on long-term debt
 
2,958

 
120

 
507

 
405

 
1,926

Non-cancelable operating leases
 
507

 
74

 
147

 
89

 
197

Non-cancelable capital leases, including interest
 
76

 
6

 
11

 
11

 
48

Purchase obligations:
 
 
 
 
 
 
 
 
 
 
Purchase orders
 
1,841

 
1,490

 
286

 
58

 
7

Purchase contracts
 
201

 
38

 
65

 
51

 
47

Total
 
$
13,383

 
$
2,103

 
$
1,916

 
$
1,739

 
$
7,625


Interest payments under long-term debt obligations exclude the potential effects of the related interest rate swap contracts. See Note 9 of the Notes to Condensed Consolidated Financial Statements .

We lease certain office and manufacturing facilities as well as certain machinery and equipment under various lease contracts. Our commitments under operating leases, in the form of non-cancelable future lease payments, are not reflected as a liability on our Condensed Consolidated Statement of Financial Position. The principal portion of capital lease obligations is reflected within Other Liabilities on our Condensed Consolidated Statement of Financial Position.

Purchase obligations include purchase orders and purchase contracts. Purchase orders are executed in the normal course of business and may or may not be cancelable. Purchase contracts include agreements with suppliers under which there is a commitment to buy a minimum amount of products or pay a specified amount regardless of actual need. Generally, items represented in purchase obligations are not reflected as liabilities on our Condensed Consolidated Statement of Financial Position.

The table excludes obligations with respect to pension and other post-retirement benefit plans (see Note 10 of the Notes to Condensed Consolidated Financial Statements ). In October 2016, we made a voluntary contribution of $55 million to our U.S. qualified pension plan. For years beyond 2017 , the actual amounts required to be contributed to our U.S. qualified pension plan are dependent upon, among other things, interest rates and underlying asset returns. With the exception of certain bargaining unit plans, payments due under other post-retirement benefit plans are funded as the expenses are incurred.

In addition, the table excludes liabilities for unrecognized tax benefits, which totaled $139 million at June 30, 2017 , as we cannot reasonably estimate the ultimate timing of cash settlements to the respective taxing authorities (see Note 13 of the Notes to Condensed Consolidated Financial Statements ).


47


ENVIRONMENTAL

For information related to environmental claims, remediation efforts and related matters, see Note 18 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 the Company 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 the discussion below and in Management's Discussion and Analysis in our Annual Report on Form 10-K for the year ended September 30, 2016 . Actual results in these areas could differ from management's estimates.

Acquired Intangible Assets

In connection with our business acquisitions, identifiable intangible assets are recognized at fair value on the acquisition date. Identifiable intangible assets are recognized if they arise from contractual or other legal rights or if they are capable of being sold, transferred, licensed, rented, or exchanged. The most significant identifiable intangible assets recognized from our acquisitions are customer relationships. The fair value for customer relationships is determined as of the acquisition date based on estimates and judgments regarding expectations for the future after-tax cash flows arising from the follow-on revenue from customer relationships over their estimated lives, including the probability of expected future contract renewals and revenue, less a contributory assets charge, all of which is discounted to present value.

Identifiable intangible assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable and are amortized over their estimated useful lives as the economic benefits are consumed. To the extent events or changes in circumstances indicate the carrying amount of these assets may not be recoverable, we test for impairment based on our projection of the undiscounted future operating cash flows of the related asset group. To the extent such projections indicate that future undiscounted cash flows are not sufficient to recover the carrying amount, we recognize a non-cash impairment charge to reduce the carrying amount to fair value.

Acquired Contract Liabilities

In connection with our acquisition of B/E Aerospace, we assumed existing long-term contracts. Based upon our review of those contracts, we concluded that the terms of certain contracts were less favorable than could be realized in market transactions as of the acquisition date. As a result, we recognized acquired contract liabilities as of the acquisition date based on the present value of the difference between the contractual cash flows of the executory contracts and the estimated cash flows had the contracts been executed at the acquisition date. The liabilities principally relate to long-term contracts that were initially executed several years prior to the acquisition. See Note 3 of the Notes to Condensed Consolidated Financial Statements for further discussion. The acquired contract liabilities are being amortized as non-cash reductions to Cost of sales over the terms of the respective contracts.


48


CAUTIONARY STATEMENT

This quarterly report contains statements, including statements regarding certain projections, business trends and the impact of the acquisition of B/E Aerospace 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 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, regional conflicts, or government sanctions on other nations on the commercial aerospace industry; 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; 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; the uncertainties of the outcome of lawsuits, claims and legal proceedings; failure to realize the anticipated benefits of the acquisition of B/E Aerospace, including as a result of delay in integrating the businesses of Rockwell Collins and B/E Aerospace; risk to the ability of the combined company to implement its business strategy; 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.


49


At June 30, 2017 , we had the following unsecured long-term notes outstanding:
 
 
June 30, 2017
(in millions)
 
Interest Rate
 
Carrying Value
 
Fair Value
$1,000 Notes due 2047
 
4.35%
 
$
1,000

 
$
1,043

$400 Notes due 2043
 
4.80%
 
400

 
442

$1,300 Notes due 2027
 
3.50%
 
1,300

 
1,319

$950 Notes due 2024
 
3.20%
 
950

 
960

$400 Notes due 2023
 
3.70%
 
400

 
417

$1,100 Notes due 2022
 
2.80%
 
1,100

 
1,109

$250 Notes due 2021
 
3.10%
 
250

 
256

$1,500 Term Loan due 2020
 
1 month LIBOR + 1.25%
 
1,462

 
1,462

$300 Notes due 2019
 
5.25%
 
300

 
319

$300 Notes due 2019
 
1.95%
 
300

 
300


In June 2015, we entered into interest rate swap contracts which effectively converted $150 million of the 5.25 percent 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 5.25 percent 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 $121 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 $127 million. The fair value of the $500 million notional value of interest rate swap contracts was a $15 million net asset at June 30, 2017 . A hypothetical 10 percent increase in average market interest rates would decrease the fair value of our interest rate swap contracts by $3 million and a hypothetical 10 percent decrease in average market interest rates would increase the fair value of our interest rate swap contracts by $3 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 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 9, 14 and 15 in the Notes to Condensed Consolidated Financial Statements .

Foreign Currency Risk
We transact business in various foreign currencies which exposes our cash flows and earnings 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 $286 million and $384 million at June 30, 2017 and September 30, 2016 , 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 European euro, British pound sterling 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 $3 million net asset at June 30, 2017 and a $2 million net liability at September 30, 2016 . 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 June 30, 2017 by $5 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 June 30, 2017 by $6 million. For more information related to outstanding foreign currency contracts, see Notes 14 and 15 in the Notes to Condensed Consolidated Financial Statements .


50


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 June 30, 2017 , 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 June 30, 2017 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.

On April 13, 2017, the Company completed the acquisition of B/E Aerospace. The Company is in the process of evaluating the internal controls of the acquired business and integrating B/E Aerospace into our overall system of internal control over financial reporting. There were no other 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.




51


PART II. OTHER INFORMATION
Item 1A. Risk Factors

The following description of risk factors, which also appeared in our Form 10-Q for the prior quarter, includes material changes to, and supersedes the description of, risk factors previously disclosed in Part I, Item 1A of our 2016 Form 10-K under the heading Risks Related to Our B/E Aerospace Transaction .

We may be unable to successfully integrate B/E Aerospace and realize the anticipated benefits of the merger.

The success of the merger will depend, in part, on our ability to successfully combine our business and B/E Aerospace, and realize the anticipated benefits, including synergies, cost savings, innovation and operational efficiencies, from the combination. If we are unable to achieve these objectives within the anticipated time frame, or at all, the anticipated benefits may not be realized fully, or at all, or may take longer to realize than expected and the value of our common stock may be harmed.

The merger involves the integration of B/E Aerospace's business with our existing business, which is a complex, costly and time-consuming process. We have not previously completed a transaction comparable in size or scope to the merger. The integration of the two companies may result in material challenges, including, without limitation:

the diversion of management's attention from ongoing business concerns and performance shortfalls at one or both of the companies as a result of the devotion of management's attention to the merger

managing a larger combined company

maintaining employee morale and retaining key management and other employees

the possibility of faulty assumptions underlying expectations regarding the integration process

retaining existing business and operational relationships and attracting new business and operational relationships
 
consolidating corporate and administrative infrastructures and eliminating duplicative operations
 
coordinating geographically separate organizations

unanticipated issues in integrating information technology, communications and other systems
 
unforeseen expenses or delays associated with the merger.

Many of these factors are outside of our control and any one of them could result in delays, increased costs, decreases in the amount of expected revenues and diversion of management's time and energy, which could materially affect our financial position, results of operations and cash flows.

Between signing and closing of the merger agreement, we were permitted to conduct only limited planning for the integration of the two companies following the merger. The actual integration may result in additional and unforeseen expenses, and the anticipated benefits of the integration plan may not be realized on a timely basis, if at all.

Our stockholders and former B/E Aerospace stockholders have a reduced ownership and voting interest after the merger and exercise less influence over the policies of the combined company.

Immediately after the completion of the merger, pre-existing Rockwell Collins stockholders ownership was approximately 80 percent of our common stock outstanding and pre-existing B/E Aerospace stockholders ownership was approximately 20 percent of our common stock outstanding. As a result, pre-existing Rockwell Collins stockholders and pre-existing B/E Aerospace stockholders have less influence on the policies of the combined company than they had immediately prior to the merger on the policies of each respective company.

Our future results may be adversely impacted if we do not effectively manage the expanded operations following the completion of the B/E Aerospace merger.


52


Following the completion of the merger, our business is significantly larger. Our ability to successfully manage this expanded business depends, in part, upon management's ability to design and implement strategic initiatives that address not only the integration of two discrete companies, but also the increased scale and scope of the combined business with its associated increased costs and complexity. There can be no assurances that we will be successful or that we will realize the expected operating efficiencies, cost savings and other benefits currently anticipated from the merger.

We are incurring substantial expenses related to the merger and the integration of B/E Aerospace.

There are a large number of processes, policies, procedures, operations, technologies and systems that must be integrated, including purchasing, accounting and finance, sales, payroll, pricing, revenue recognition, marketing, employee benefits, legal and compliance, strategic and financial planning, information technology and treasury. The substantial majority of costs for these integration activities will be non-recurring expenses related to the merger (including financing of the merger and the refinancing of certain indebtedness), facilities and systems consolidation costs. We may incur additional costs to maintain employee morale and to retain key employees. We are also incurring transaction fees and costs related to integration plans for the combined business, and the execution of these plans may lead to additional unanticipated costs and time delays. These incremental transaction and merger-related costs may exceed the savings we expect to achieve from the elimination of duplicative costs and the realization of other efficiencies related to the integration of the businesses, particularly in the near term and in the event there are material unanticipated costs.

We are significantly more leveraged.

In connection with the B/E Aerospace merger, we incurred $5.9 billion in additional indebtedness. We have consolidated indebtedness of approximately $8.0 billion, which is greater than what our indebtedness was prior to the merger. The increased indebtedness and higher debt-to-total capitalization ratio may have the effect, among other things, of reducing our flexibility to respond to changing business and economic conditions, requiring us to use substantial amounts of cash flow to repay indebtedness, increasing borrowing costs and placing us in a disadvantage compared to competitors with less leverage.

The financing arrangements entered into in connection with the merger contain restrictions and limitations that could, under certain circumstances, significantly impact our ability to operate the business.

We incurred significant new indebtedness in connection with the merger. The agreements governing the indebtedness incurred in connection with the merger contain covenants that, among other things, may, under certain circumstances, place limitations on the dollar amounts paid or other actions relating to:

consolidating with or merging into any other corporation or conveying or transferring all or substantially all its properties and assets

incurring secured debt
 
entering into sale and leaseback transactions
 
designating subsidiaries as restricted or unrestricted

Such agreements also require us to maintain a debt-to-capitalization ratio below a specified threshold, which may further limit discretion in the operation of our business following the merger. Such agreements also contain additional restrictive covenants. Various risks, uncertainties and events beyond our control could affect our ability to comply with the covenants contained in its debt agreements. Failure to comply with any of the covenants in our existing or future financing agreements could result in a default under those agreements and under other agreements containing cross-default provisions. A default would permit lenders to accelerate the maturity of the debt under these agreements. Under these circumstances, we might not have sufficient funds or other resources to satisfy all of our obligations. In addition, the limitations imposed by financing agreements on our ability to incur additional debt and to take other actions might significantly impair our ability to obtain other financing.

The merger could result in significant liability to us if the merger causes the KLX spin-off to fail to qualify for the KLX spin-off tax treatment.

In 2014, the Consumables Management Segment of B/E Aerospace, which consisted of its aerospace distribution and energy services businesses, was spun-off to form KLX, Inc., which is referred to as KLX. At the time of the KLX spin-off, B/E Aerospace received an opinion of Shearman & Sterling to the effect that, subject to the limitations and assumptions set forth therein, the KLX spin-off that occurred in December 2014 will qualify for the KLX spin-off tax treatment, which generally

53


means a transaction tax-free to B/E Aerospace and its stockholders under the U.S. federal income tax rules for spin-offs in Section 355 of the Code and related provisions. If, however, the KLX spin-off were to fail to qualify for the KLX spin-off tax treatment, B/E Aerospace would be subject to tax on substantial gain as if B/E Aerospace had sold the KLX common stock in a taxable sale for its fair market value at the time of the KLX spin-off. In addition, if the KLX spin-off failed to qualify for tax-free treatment, each B/E Aerospace stockholder at the time of the KLX spin-off would be treated as if it had received a distribution from B/E Aerospace in an amount equal to the fair market value of the KLX common stock that they received; this distribution generally would be taxed as a dividend to the extent of the stockholder's pro rata share of B/E Aerospace's current and accumulated earnings and profits at the time of the KLX spin-off and then treated as a non-taxable return of capital to the extent of the stockholder's basis in the B/E Aerospace common stock and finally as capital gain from the sale or exchange of B/E Aerospace common stock.

Under current U.S. federal income tax law, the KLX spin-off would fail to qualify for the KLX spin-off tax treatment if the KLX spin-off was determined to have been used by B/E Aerospace principally as a device for the distribution of earnings and profits by, for example, facilitating a taxable sale of the stock of B/E Aerospace or KLX through a planned or intended change-in-control transaction identified prior to the KLX spin-off rather than principally to achieve one or more valid corporate business purposes. Furthermore, even if the KLX spin-off were otherwise to qualify for tax-free treatment under Section 355 and related provisions of the Code, it would be taxable to B/E Aerospace (but not to B/E Aerospace's stockholders) under Section 355(e) of the Code, if the KLX spin-off was determined to be part of a plan (or series of related transactions) pursuant to which one or more persons acquire, directly or indirectly, stock representing a 50% or greater interest in B/E Aerospace or KLX.

If it is determined that the KLX spin-off fails to qualify for the KLX spin-off tax treatment as a result of the merger (for example, if the merger is viewed as part of a plan or series of related transactions that includes the KLX spin-off or the KLX spin-off is found to have been used principally as a device for the distribution of earnings and profits), or because of the failure of the KLX spin-off to initially qualify for the KLX spin-off tax treatment, B/E Aerospace could incur significant tax liabilities. Because B/E Aerospace is our wholly owned subsidiary, any such tax liabilities of B/E Aerospace could also adversely affect us. If the KLX spin-off fails to qualify for the KLX spin-off tax treatment, this may also result in adverse tax consequences to stockholders of B/E Aerospace at the time of the KLX spin-off because they would be taxed on the distribution of KLX stock as described above.

In connection with the merger, we received an opinion from our counsel, Skadden, Arps, Slate, Meagher & Flom LLP, which is referred to as Skadden, and Shearman & Sterling to the effect that, subject to the limitations and assumptions set fourth therein, the merger will not cause the KLX spin-off to fail to qualify for the KLX spin-off tax treatment. The tax opinions received in connection with the merger rely on certain representations, assumptions, undertakings and covenants, including representation letters from each of us and B/E Aerospace. These representations relate to, among other items, confirming the accuracy of the representations and warranties originally made with respect to the KLX spin-off, along with compliance with covenants, the actions taken in pursuit of the corporate business purposes of the KLX spin-off, the interaction of the parties, and business developments since the KLX spin-off. If any of the factual representations in any of the representation letters, or any of the assumptions in the tax opinions is untrue or incomplete, an undertaking or covenant is not complied with or the facts upon which a tax opinion is based are materially different from the facts at the time of the merger, the opinions may not be valid. Moreover, opinions of counsel are not binding on the IRS or the courts. As a result, the conclusions expressed in the tax opinions could be challenged by the IRS, and a court may sustain such a challenge. None of Rockwell Collins, B/E Aerospace or KLX has requested a ruling from the IRS regarding the impact of the merger on the qualification of the KLX spin-off for the KLX spin-off tax treatment.

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:

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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)
April 1, 2017 through April 30, 2017
 
200,000

 
$
105.12

 
200,000

 
$
104
 million
May 1, 2017 through May 31, 2017
 
180,000

 
103.42

 
180,000

 
85
 million
June 1, 2017 through June 30, 2017
 

 

 

 
285
 million
Total/Average
 
380,000

 
$
104.32

 
380,000

 
 
(1) On July 7, 2017, we announced that our Board authorized the repurchase of an additional $200 million of our common stock. The authorization has no stated expiration.



55


EXHIBIT INDEX

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

 
 
 
 
* 10-a-2

 
 
 
 
* 10-e-1

 
 
 
 
* 10-e-2

 
 
 
 
* 10-f-1

 
 
 
 
31.1

 
 
 
 
31.2

 
 
 
 
32.1

 
 
 
 
32.2

 
 
 
 
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.
 
 
 


56



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: July 28, 2017



S-1


Exhibit 10-a-1


B/E AEROSPACE, INC. 2005 LONG-TERM INCENTIVE PLAN
RESTRICTED STOCK UNIT AWARD AGREEMENT
THIS RESTRICTED STOCK UNIT AWARD AGREEMENT (the “ Award Agreement ”) is made effective as of November 15, 2016 (the “ Date of Grant ”) between B/E Aerospace, Inc., a Delaware corporation (the “ Company ”), and Werner Lieberherr (the “ Participant ”). Capitalized terms not otherwise defined herein shall have the same meanings as in the BE Aerospace, Inc. 2005 Long-Term Incentive Plan (the “ Plan ”).
WHEREAS, the Company desires to grant the Restricted Stock Units provided for herein to the Participant pursuant to the Plan and the terms and conditions set forth herein;
WHEREAS, the Company has entered into an Agreement and Plan of Merger (the “ Merger Agreement ”) by and among Rockwell Collins, Inc., a Delaware corporation (“ Rockwell ”), a direct, wholly owned subsidiary of Rockwell (“ Merger Sub ”), and the Company, dated October 23, 2016, pursuant to which Merger Sub will be merged with and into the Company (the “ Merger ”), with the Company continuing as the surviving corporation of the Merger as a wholly-owned subsidiary of Rockwell;
NOW THEREFORE, in consideration of the mutual covenants hereinafter set forth, the parties agree as follows:
1. Grant of the Award . Subject to the provisions of this Award Agreement and the Plan, the Company hereby grants to the Participant, an aggregate of 67,282 restricted stock units (the “ RSUs ”) each entitling the Participant to receive one share of Company common stock (the “ Shares ”), subject to adjustment as set forth in the Plan or, in the event of the Merger, a cash payment as described in Section 7. Fifty percent (50%) of the RSUs shall be subject to time-based vesting (the “ Time-Based RSUs ”) and fifty percent (50%) of the RSUs shall be subject to performance-based vesting (the “ Performance-Based RSUs ”). The aggregate number of RSUs set forth above, as well as the 50%-50% allocation between Time-Based RSUs and Performance-Based RSUs, are based on the assumed achievement of target performance with respect to the Performance-Based RSUs; it being understood and agreed that the actual number of Performance-Based RSUs that are earned by the Participant may be more or less than the target number of 33,641 (the “ Target Performance Award ”).
2. Incorporation of Plan and the Transaction Bonus Agreement . The Participant acknowledges receipt of the Plan, a copy of which is attached hereto and represents that he is familiar with its terms and provisions. This Award Agreement and the RSUs shall be subject to the Plan, the terms of which are incorporated herein by reference, and in the event of any conflict or inconsistency between the Plan and this Award Agreement, the Plan shall govern. Notwithstanding anything in this Award Agreement or the Plan to the contrary, the RSUs shall be subject to the terms and conditions of the Transaction Bonus Agreement between the Participant and the Company, dated as of October 23, 2016 (the “ TBA ”) (including, without limitation, Section 2 of the TBA), which are incorporated herein by reference.
3. Vesting Schedule . Subject to the terms and conditions hereof, the Participant shall vest in the RSUs as follows, unless previously vested or canceled in accordance with the provisions of the Plan or this Award Agreement:
 





(a)   Time-Based RSUs .  On each of the first, second and third anniversaries of the Date of Grant, thirty-three and one-third percent (33 1/3%) of the Time-Based RSUs shall vest and no longer be subject to cancellation pursuant to Section 6 or the transfer restrictions set forth in Section 9 hereof (each date, a “ Time Vesting Date ”).
 
(b)   Performance-Based RSUs .  The methodology for determining the final number of Performance-Based RSUs that will be earned and vested as of December 31, 2019 (the “ Performance Vesting Date ”) based on Company performance over the three years of the Performance Period (2017, 2018 and 2019) is set forth on Exhibit 1 attached hereto, which is an integral part of this Award Agreement. 

4. Termination without Cause; Resignation for Good Reason . In the event of the Participant’s termination of employment with the Company prior to the vesting of the RSUs hereunder, on account of a termination without Cause or a resignation for Good Reason, all of the unvested RSUs shall vest immediately and shall no longer be subject to cancellation pursuant to Section 6 or the transfer restrictions set forth in Section 9 hereof. Notwithstanding any relevant provision in an applicable written employment agreement between the Participant and the Company that provides for vesting of all equity awards in such a situation, the exact number of Performance-Based RSUs that will vest and subsequently be delivered upon settlement will be equal to the greater of (i) the Participant’s Target Performance Award or (ii) the non-prorated amount that would be earned and vested in accordance with Exhibit 1 as if the three-year Performance Period had been completed based upon actual performance achieved through the most recently completed year (if any) of the relevant Performance Period (with the Cumulative Average Annual Ranking (as defined in Exhibit 1) determined based on the Average Annual Ranking for the completed year or years in the Performance Period). For purposes of this Award Agreement, the terms “Cause” and “Good Reason” shall have the meanings assigned to them in the applicable written employment agreement between the Participant and the Company.
5. Death or Disability . If, prior to the vesting of the RSUs hereunder, the Participant’s employment with the Company terminates due to death or Disability, all of the unvested RSUs shall vest immediately and shall no longer be subject to cancellation pursuant to Section 6 or the transfer restrictions set forth in Section 9 hereof. Notwithstanding any relevant provision in an applicable written employment agreement between the Participant and the Company that provides for vesting of all equity awards in such a situation, the exact number of Performance-Based RSUs that will vest and subsequently be delivered upon settlement will be calculated assuming maximum performance was achieved (i.e., 200% of the Target Performance Award).
6. Other Termination of Employment . Unless otherwise provided in a written employment agreement between the Participant and the Company, if, prior to the vesting of the RSUs hereunder, the Company terminates the Participant’s employment for Cause or the Participant resigns his or her employment absent Good Reason, all of the unvested RSUs shall be cancelled immediately without consideration as of the date of such termination.
7. Merger . If the Merger is consummated prior to the vesting of all of the RSUs hereunder, all of the unvested RSUs shall convert into a cash-based award (the “ Cash Award ”) with an initial value equal to the sum of (a) the product of (i) the Merger Consideration (with the portion of the Merger Consideration that consists of shares of Parent Common Stock (as defined in the Merger Agreement) converted to a value equal to the product of (x) the number of such shares of Parent Common Stock and (y) the Parent Stock Price (as defined in the Merger Agreement)) and (ii) the number of such unvested RSUs, assuming maximum performance was achieved in the case of the Performance-Vesting RSUs (i.e., 200% of the Target Performance Award), and (b) the aggregate value of any dividend





equivalent rights accumulated with respect to such unvested RSUs prior to the Effective Time (as defined in the Merger Agreement). The Cash Award shall be credited with interest at the prime rate compounded quarterly as published in the Wall Street Journal as of the Effective Time during the period beginning on the Effective Time and ending on the date of payment of the Cash Award. In addition, if the Participant’s federal, state or local income tax rate increases between the Effective Time and the date of payment of the Cash Award, the Cash Award shall be increased such that, after payment by the Participant of all taxes on the Cash Award, the Participant retains an amount equal to the after-tax amount of the Cash Award that would have resulted had the Participant’s federal, state and local income tax rates as of the Effective Time applied to the Cash Award. If the Participant’s federal, state or local income tax rate decreases between the Effective Time and the date of payment of the Cash Award, the Cash Award shall be decreased by an amount equal to the excess of the after-tax amount of the Cash Award otherwise due over the after-tax amount of the Cash Award that would have resulted had the Participant’s federal, state and local income tax rates as of the Effective Time applied to the Cash Award. The Cash Award shall vest and be paid in cash to the Participant on the earlier of (x) the first anniversary of the Closing Date (as defined in the Merger Agreement) and (y) the date of termination of the Participant’s employment for any reason; provided that the Cash Award shall be cancelled immediately without consideration upon a resignation by the Participant absent Good Reason (as defined in the Employment Agreement between the Participant and Rockwell, dated October 21, 2016) prior to the first anniversary of Closing Date. For the avoidance of doubt, Sections 4, 5, 6, 11 and 12 of this Award Agreement shall not apply to the Cash Award. This Section 7 shall be void ab initio if the Merger Agreement is terminated pursuant to its terms.
8. Other Change in Control . If the Merger Agreement is terminated pursuant to its terms, upon a Change in Control (other than the Merger) prior to the vesting of all of the RSUs hereunder, all of the unvested RSUs shall vest immediately and shall no longer be subject to cancellation pursuant to Section 6 or the transfer restrictions set forth in Section 9 hereof. Notwithstanding any relevant provision in an applicable written employment agreement between the Participant and the Company that provides for vesting of all equity awards in such a situation, the exact number of Performance-Based RSUs that will vest and subsequently be delivered upon settlement will be calculated assuming maximum performance was achieved (i.e., 200% of the Target Performance Award).
9. Nontransferability of RSUs and Cash Award . Unless otherwise determined by the Committee, the RSUs and the Cash Award may not be transferred, pledged, alienated, assigned or otherwise attorned other than by last will and testament or by the laws of descent and distribution or pursuant to a domestic relations order, as the case may be; provided , however , that the Committee may, subject to such terms and conditions as it shall specify, permit the transfer of the RSUs or the Cash Award, including, without limitation, for no consideration to a charitable institution or a Permitted Transferee. Any RSUs or Cash Award transferred to a charitable institution may not be further transferable without the Committee’s approval and any of the RSUs or Cash Award transferred to a Permitted Transferee shall be further transferable only by last will and testament or the laws of descent and distribution or, for no consideration, to another Permitted Transferee of the Participant.
10. No Rights as a Stockholder . The RSUs and the Cash Award do not entitle the Participant to any of the rights of a stockholder of the Company, including, the right to vote Shares unless and until the Participant or his nominee becomes the holder of record of Shares.
11. Dividends Equivalent Rights . The Participant shall accumulate dividend equivalent rights on all RSUs in an amount equal to the cash dividends paid with respect to the Shares on each date prior to settlement of the Participant’s RSUs (or the Effective Time of a Change in Control, if earlier) that a cash dividend is paid on Shares; provided, however, that no dividend equivalent rights shall accumulate following the conversion to the Cash Award. The dividend equivalent rights shall be held by the





Company as a bookkeeping account and shall be subject to the same terms and conditions (including vesting terms) as the corresponding RSUs and shall accumulate and be paid if and when the corresponding RSUs are settled.
12. Settlement of RSUs . Unless the Participant has executed and not revoked a valid deferral election under the B/E Aerospace, Inc. 2010 Deferred Compensation Plan, as amended (the “ DC Plan ”) (or has elected an alternative investment allocation with respect to RSUs deferred under the DC Plan), settlement of vested RSUs shall be made within thirty (30) days following the applicable Time Vesting Date or Performance Vesting Date (or such earlier date on which the RSUs vest pursuant to this Award Agreement; but in no event later than March 15 th of the calendar year immediately following the calendar year in which the applicable vesting date occurs). Settlement will be made by delivery of Shares. Notwithstanding the foregoing, the Company shall not be obligated to deliver any Shares if counsel to the Company determines that such sale or delivery would violate any applicable law or any rule or regulation of any governmental authority or any rule or regulation, or agreement of the Company with any securities exchange or association upon which the Shares are listed or quoted. If the Participant has executed and not revoked a valid deferral election, settlement shall be made in accordance with the DC Plan.
13. No Entitlements .
(a) No Right to Continued Employment . This award is not an employment agreement, and nothing in this Award Agreement or the Plan shall (i) alter the Participant’s status as an “at-will” employee of the Company, subject to the terms of any applicable employment agreement, (ii) be construed as guaranteeing the Participant’s employment by the Company or as giving the Participant any right to continue in the employ of the Company during any period (including without limitation the period between the Date of Grant and the applicable vesting date in accordance with Section 3) or (iii) be construed as giving the Participant any right to be reemployed by the Company following any termination of Employment.
(b) No Right to Future Awards . This award of RSUs and all other equity-based awards under the Plan are discretionary. This award does not confer on the Participant any right or entitlement to receive another award of RSUs or any other equity-based or cash-based award at any time in the future or in respect of any future period.
(c) No Effect on Future Employment Compensation . The Company has made this award of RSUs to the Participant in its sole discretion. This award does not confer on the Participant any right or entitlement to receive compensation in any specific amount for any future fiscal year, and does not diminish in any way the Company’s discretion to determine the amount, if any, of the Participant’s compensation. In addition, this award of RSUs and the Cash Award are not part of the Participant’s base salary or wages and will not be taken into account in determining any other employment-related rights the Participant may have, such as rights to pension or severance pay.
14. Taxes and Withholding . No later than the date as of which an amount with respect to the RSUs or the Cash Award first becomes includable in the gross income of the Participant for applicable income tax purposes, the Participant shall pay to the Company or make arrangements satisfactory to the Committee regarding payment of any federal, state or local taxes of any kind required by law to be withheld with respect to such amount. Unless otherwise determined by the Committee, in accordance with rules and procedures established by the Committee, to the extent the RSUs become settled in Shares rather than being converted into the Cash Award, the minimum required withholding obligations with respect to the RSUs may be settled in Shares, including Shares that are issued in settlement of the award that gives rise to the withholding requirement. The obligations of the Company to settle the RSUs and the Cash Award under this Award Agreement shall be conditional upon such payment





or arrangements and the Company shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the Participant, including, without limitation, by withholding Shares to be delivered upon settlement of the RSUs.
15. Securities Laws . In connection with the grant, vesting or settlement of the RSUs and the Cash Award the Participant will make or enter into such written representations, warranties and agreements as the Committee may reasonably request in order to comply with applicable securities laws or with this Award Agreement.
16. Miscellaneous Provisions .
(a) Notices . Any notice necessary under this Award Agreement shall be addressed to the Company in care of its Secretary at the principal executive office of the Company and to the Participant at the address appearing in the records of the Company for the Participant or to either party at such other address as either party hereto may hereafter designate in writing to the other. Notwithstanding the foregoing, the Company may deliver notices to the Participant by means of email or other electronic means that are generally used for employee communications. Any such notice shall be deemed effective upon receipt thereof by the addressee.
(b) Headings . The headings of sections and subsections are included solely for convenience of reference and shall not affect the meaning of the provisions of this Award Agreement.
(c) Counterparts . This Award Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument.
(d) Entire Agreement . This Award Agreement (including Exhibit 1 hereto), the Plan, the TBA and, to the extent applicable, any written employment agreement between the Participant and the Company, constitute the entire agreement between the parties hereto with regard to the subject matter hereof. They supersede all other agreements, representations or understandings (whether oral or written and whether express or implied) that relate to the subject matter hereof.
(e) Amendments . The Board or the Committee shall have the power to alter, amend, modify or terminate the Plan or this Award Agreement at any time; provided , however , that no such termination, amendment or modification may adversely affect, in any material respect, the Participant’s rights under this Award Agreement without the Participant’s consent. Notwithstanding the foregoing, prior to (but not following) the Merger the Company shall have broad authority to amend this Award Agreement without the consent of the Participant to the extent it deems necessary or desirable (i) to comply with or take into account changes in or interpretations of, applicable tax laws, securities laws, employment laws, accounting rules and other applicable laws, rules and regulations, (ii) to ensure that the RSUs and the Cash Award are not subject to taxes, interest and penalties under Section 409A of the Code, (iii) to take into account unusual or nonrecurring events or market conditions, or (iv) to take into account significant acquisitions or dispositions of assets or other property by the Company. Any amendment, modification or termination shall, upon adoption, become and be binding on all persons affected thereby without requirement for consent or other action with respect thereto by any such person. The Committee shall give written notice to the Participant in accordance with Section 16(a) of any such amendment, modification or termination as promptly as practicable after the adoption thereof. The foregoing shall not restrict the ability of the Participant and the Company by mutual consent to alter or amend the terms of the RSUs or the Cash Award in any manner that is consistent with the Plan and approved by the Committee.
(f) Section 409A .





(i)      The RSUs and the Cash Award are intended to constitute “short-term deferrals” for purposes of Section 409A of the Code and the regulations and guidance promulgated thereunder (“ Section 409A ”). If any provision of the Plan or this Award Agreement would, in the reasonable good faith judgment of the Committee, result or likely result in the imposition on the Participant of a penalty tax under Section 409A, the Committee may modify the terms of the Plan or this Award Agreement, without the consent of the Participant, in the manner that the Committee may reasonably and in good faith determine to be necessary or advisable to avoid the imposition of such penalty tax. This Section 16(f) does not create an obligation on the part of the Company to modify the Plan or this Award Agreement and does not guarantee that the RSUs or the Cash Award will not be subject to taxes, interest and penalties under Section 409A.
(ii)    Notwithstanding anything to the contrary in the Plan or this Award Agreement, to the extent that the RSUs or the Cash Award constitute deferred compensation for purposes of Section 409A and the Participant is a “ Specified Employee ” (within the meaning of the Committee’s established methodology for determining “ Specified Employees ” for purposes of Section 409A), no payment or distribution of any amounts with respect to the RSUs or the Cash Award that are subject to Section 409A and are scheduled to be made upon the Participant’s termination of employment may be made before the first business day following the six (6) month anniversary of the Participant’s “Separation from Service” from the Company (as defined in Section 409A) or, if earlier, the date of the Participant’s death.
(iii)    The actual date of settlement pursuant to Section 12 shall be within the sole discretion of the Company. In no event may the Participant be permitted to control the year in which settlement occurs.
(g) Successor . Except as otherwise provided herein, this Award Agreement shall be binding upon and shall inure to the benefit of any successor or successors of the Company, and to any Permitted Transferee pursuant to Section 9 hereof.
(h) Choice of Law . Except as to matters of federal law, this Award Agreement and all actions taken thereunder shall be governed by and construed in accordance with the laws of the State of Delaware (other than its conflict of law rules).


[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]







B/E AEROSPACE, INC.

By: /s/ Amin Khoury
Name: Amin Khoury
Title: Executive Chairman of the Board of
Directors


PARTICIPANT

/s/ Werner Lieberherr
Name: Werner Lieberherr
 





Exhibit 1

B/E Aerospace, Inc.
Performance-Based RSUs
Calculation of Final Performance Award . As of the Performance Vesting Date, you will earn and become vested in a number of Performance-Based RSUs (the “ Final Performance Award ”) determined by multiplying the Target Performance Award by (i) zero, if the Cumulative Average Annual Ranking is less than the 25 th percentile, (ii) between 50% and 100% (linearly interpolated) if the Cumulative Average Annual Ranking is between the 25 th and 50 th percentiles and (iii) between 100% and 200% (linearly interpolated) if the Cumulative Average Annual Ranking is between the 50 th and 75 th (or greater) percentiles.
As used in this Exhibit 1 and the Award Agreement:
(a) Annual Peer Group ” means, for each of 2017, 2018 and 2019, the compensation peer group set forth in the annual proxy statement filed during such year; provided , however , that if any constituent company of such peer group is no longer either in existence or an independent public company as of the end of such year, such company shall be excluded from the Annual Peer Group. In addition, the Committee shall make such adjustments (if any) to the Annual Peer Group and/or the measurements of relative performance against the Annual Peer Group under this Agreement as it may deem necessary or appropriate if and to the extent that there are distortions resulting from fundamental, extraordinary changes to the business of any constituent company in the Annual Peer Group.
(b) Average Annual Ranking ” means, for each of 2017, 2018 and 2019, the average of the EBIT Margin Ranking, EPS Growth Ranking, ROA Ranking and ROIC Ranking for such year.
(c) Cumulative Average Annual Ranking ” means the average of the three Average Annual Rankings for 2017, 2018 and 2019.
(d) EBIT Margin ” means (i) earnings from continuing operations before net interest expense and income taxes for a specified annual measurement period, divided by (ii) net sales for the same measurement period.
(e) EBIT Margin Ranking ” means, for each of 2017, 2018 and 2019, the percentile ranking of the Company for EBIT Margin relative to the Annual Peer Group for such year.
(f) EPS Growth ” means the change (positive or negative) in fully diluted net income from continuing operations per share from one specified annual measurement period to a later specified annual measurement period, expressed as a percentage.
(g) EPS Growth Ranking ” means, for each of 2017, 2018 and 2019, the percentile ranking of the Company for EPS Growth relative to the Annual Peer Group for such year, calculated on a comparable basis for any adjustments or nonrecurring charges.
(h) ROA ” means (i) net operating profit after taxes (NOPAT) calculated as pre-tax operating earnings from continuing operations less income taxes at the Company’s effective tax rate for a specified annual measurement period, divided by (ii) the average balance of total assets for the same annual measurement period, determined by averaging the beginning and ending balances of total assets for such measurement period.





(i) ROA Ranking ” means, for each of 2017, 2018 and 2019, the percentile ranking of the Company for ROA relative to the Annual Peer Group for such year.
(j) ROIC ” means (i) net operating profit after taxes (NOPAT) calculated as pre-tax operating earnings from continuing operations less income taxes at the Company’s effective tax rate for a specified annual measurement period, divided by (ii) the average balance of the combined book value of equity and book value of debt for the same annual measurement period, determined by averaging the beginning and ending balances for such measurement period.
(k) ROIC Ranking ” means, for 2017, 2018 and 2019, the percentile ranking of the Company for ROIC relative to the Annual Peer Group for such year.







EXAMPLE (for illustrative purposes only):
Target Performance Award - 50,000 Performance-Based RSUs

Below are the annual rankings by metric as measured against the applicable Annual Peer Group
 
2017
2018
2019
FINAL
EBIT MARGIN
45 th  Percentile
55 th  Percentile
62 nd  Percentile
 
EPS GROWTH
65
60
58
 
ROA
60
50
55
 
ROIC
70
80
85
 
Average Annual Ranking
60
61.25
65.0
 
Cumulative Average Annual Ranking
 
 
 
62.08
Final Performance Award
 
 
 
148.33 *  X 50,000 = 74,167 Performance-Based RSUs earned and vested

* Interpolation between 100% and 200% for performance between the 50 th and 75 th percentiles.





Exhibit 10-a-2

April 17, 2017

Werner Lieberherr
EVP & COO, Interior Systems


Dear Werner:

Welcome to Rockwell Collins!

As you know, B/E granted you 67,282 of restricted stock units (“RSUs”) on November 15, 2016. Pursuant to Section 7 of your RSU Award agreement, the RSUs have been converted into a cash award of $6,645,306.39 .   Attached is a spreadsheet showing how this amount was calculated. This amount includes accumulated dividend equivalents on the RSUs as of the closing date.

In accordance with your RSU Award Agreement, the cash award will be credited with interest of 4 % compounded quarterly.  4%  is the prime rate as reported in the Wall Street Journal on April 13, 2017.  Your cash award will be subject to the applicable terms of the RSU Award Agreement. 

Please call me if you have any questions.


Sincerely,



/s/ Laura A. Patterson
Laura A. Patterson Vice President, Rewards & Labor Strategy
Rockwell Collins





Exhibit 10-e-1

EMPLOYMENT AGREEMENT

This Employment Agreement (this “ Agreement ”) is entered into October 21, 2016, by and between Rockwell Collins, Inc., a Delaware corporation (the “ Company ”), and Werner Lieberherr (the “ Executive ”). Where context permits, references herein to the Company shall include subsidiaries of the Company.
RECITALS
WHEREAS, concurrently herewith, the Company is entering into an Agreement and Plan of Merger (the “ Merger Agreement ”) by and among B/E Aerospace, Inc., a Delaware corporation (“ B/E Aerospace ”), a direct, wholly owned Subsidiary of the Company (“ Merger Sub” ), and the Company, pursuant to which Merger Sub will be merged with and into B/E Aerospace (the “ Merger ”), with B/E Aerospace continuing as the surviving corporation of the Merger as a wholly-owned subsidiary of the Company;
WHEREAS, the Executive and B/E Aerospace entered into an Amended and Restated Employment Agreement dated July 29, 2013, as amended by the First Amendment dated January 4, 2014, as further amended by the Second Amendment dated May 12, 2014 (the “ B/E Aerospace Employment Agreement ”);
WHEREAS, the Executive and B/E Aerospace entered into that certain Proprietary Rights Agreement effective July 5, 2006 (the “ 2006 Proprietary Rights Agreement ”) and that certain Proprietary Rights Agreement effective January 1, 2011 (the “ 2011 Proprietary Rights Agreement ”);
WHEREAS, in connection with the Merger and the B/E Aerospace Employment Agreement, Executive is receiving certain payments and benefits, including payments and benefits pursuant to the B/E Aerospace Employment Agreement, Executive’s equity award agreements with B/E Aerospace, and the B/E Aerospace transaction bonus program;
WHEREAS, the Company desires to employ the Executive as an employee of the Company or one of its subsidiaries on the terms and conditions set forth herein effective as of the Effective Time (as defined in the Merger Agreement) and the Executive desires to be employed by the Company or one of its subsidiaries on the terms and conditions set forth herein effective as of the Effective Time (as defined in the Merger Agreement);

WHEREAS, the Executive and the Company wish to enter into this Agreement, which shall become effective upon, and subject to the occurrence of, the Effective Time;
WHEREAS, the Executive and the Company desire that with respect to services provided from and after the Effective Time, this Agreement (and not the B/E Aerospace Employment Agreement) will govern the Executive’s employment with the Company or any of its subsidiaries, provided that (i) as set forth herein, certain provisions of the B/E Aerospace Employment Agreement remain in effect and shall not be superseded by this Agreement and (ii) the 2006 Proprietary Rights Agreement and the 2011 Proprietary Rights Agreement incorporated therein by reference shall not be superseded by this Agreement; and
WHEREAS, the Company wishes to secure for its benefit the experience, abilities and services of the Executive and to prevent the loss of such experience, services and abilities subject to the terms and conditions set forth herein;
NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto, each intending to be legally bound, do hereby agree as follows:
1. B/E Aerospace Arrangements and Agreements . For the avoidance of doubt, the parties acknowledge and agree that effective on or prior to the Effective Time (a) Executive shall be paid the payments set forth in Section 5(f) of the B/E Aerospace Employment Agreement pursuant to the terms set forth therein; (b) except as set forth in the Merger Agreement with respect to the B/E Aerospace 2016 LTIP award (the “ 2016 LTIP Award ”), all outstanding B/E Aerospace





equity awards granted on or prior to the Effective Time shall become fully vested; and (c) Executive shall be paid a transaction bonus by B/E Aerospace in connection with the Merger in an amount equal to $8.4 million. From and after the Effective Time, this Agreement (and not the B/E Aerospace Employment Agreement) will govern the Executive’s employment with the Company or any of its subsidiaries; provided, that, notwithstanding the foregoing, Sections 5(g), 13, 17 and 18 of the B/E Aerospace Employment Agreement shall remain in effect in accordance with their terms. Notwithstanding anything contained herein, in the event that either the Merger Agreement is terminated in accordance with its terms or the Effective Time otherwise does not occur for any reason, this Agreement shall not become effective, and, in the event that the Merger Agreement is terminated, this Agreement shall automatically, and without notice, terminate without any obligation due to the Executive, and the provisions of this Agreement shall be of no force or effect. The 2006 Proprietary Rights Agreement shall continue in full force and effect except that it is hereby deemed by each of the Company and the Executive to apply to the period of the Executive’s employment from July 5, 2006 through December 31, 2010 and thereafter subject to its terms. The 2011 Proprietary Rights Agreement shall apply only to the period of the Executive’s employment from January 1, 2011 and continue in effect throughout Executive’s employment hereunder, provided that the Executive agrees to execute any confidentiality or proprietary rights agreement as may be required by the Company following the Effective Time that the Company customarily requires be executed by similarly situated employees. The parties acknowledge and agree that the 2016 LTIP Award shall convert into cash at the Effective Time based on the then fair market value of the underlying shares (and shall not be subject to accelerated vesting at the Effective Time) and shall vest and be paid out in a single lump sum payment on the first anniversary of the Effective Time, subject to full vesting upon a termination of employment for any reason other than due to the Executive’s resignation without Good Reason (as defined herein) prior to the first anniversary of the Effective Time. The cash balance shall be credited with interest at the prime rate compounded quarterly as published in the Wall Street Journal as of the Effective Time during the period beginning on the Effective Time and ending of the date of payment.
2. Employment . The Executive’s employment hereunder shall be effective as of and subject to the Effective Time and shall continue on an at-will basis and may be terminated at any time for any reason or no reason by the Company or the Executive (the period that the Executive remains employed by the Company, the “ Employment Term ”). At no point during the Employment Term shall the Executive compete or take any preparations to compete with the Company.
3. Position and Duties . The Executive shall serve the Company in the capacity of Executive Vice President of the Company and Chief Operating Officer of the Company’s aircraft interior systems business unit, or such other name given to the business unit by the Company (the “ Aircraft Interior Systems Business Unit ”) and shall report directly to the Board of Directors of the Company (the “ Board ”) or the Chief Executive Officer of the Company, and shall be accountable to, and shall have such other powers, duties and responsibilities, consistent with such capacity, as may from time to time be prescribed by the Board or the Chief Executive Officer of the Company. The Executive shall perform and discharge, faithfully, diligently and to the best of his ability, such powers, duties and responsibilities and shall comply with all of the Company’s policies and procedures. The Executive shall devote substantially all of his working time and efforts to the business and affairs of the Company. The Executive’s performance will be reviewed by the Board or the Chief Executive Officer of the Company on an annual basis. During his employment hereunder, the Executive’s principal place of employment shall be in Wellington, Florida or such other location as determined by the Executive in consultation with the Company.
4. Compensation .
(a) Salary . During the Employment Term, the Executive shall receive a salary (the “ Salary ”) payable at the rate of $875,000 per annum. Such rate shall be reviewed for adjustment from time to time by the Compensation Committee of the Board (the “ Compensation Committee ”) (but not less frequently than annually); provided , however , that it shall at no time be adjusted below the Salary then in effect. The Salary shall be payable biweekly or in accordance with the Company’s current payroll practices, less all required deductions. The Salary shall be pro-rated for any period of service less than a full year.
(b) Incentive Bonus . During the Employment Term, the Executive shall be eligible to receive an annual incentive target performance bonus (the “ Bonus ”) in accordance with the Company’s executive bonus plan then in effect, as determined by the Compensation Committee at the end of the applicable fiscal year. The Executive’s incentive





target applicable to the Bonus each year during the Employment Term shall be not less than 90% of the Executive’s Base Salary, the Bonus each year during the Employment Term shall provide for a maximum bonus amount equal to 200% of target and the annual performance goals shall be specific to the Company business unit in which the Executive is engaged. The Bonus shall be paid in accordance with Company policy, but in no event later than March 15th of the year following the year in which the Executive earned such Bonus.
(c) Expenses . During the Employment Term, the Executive shall be entitled to receive prompt reimbursement for all reasonable business expenses incurred by him on behalf of the Company in accordance with the Company’s policies and procedures in effect from time to time, consistent with reimbursement practices during the term of the B/E Aerospace Employment Agreement.
(d) Benefits . During the Employment Term, the Executive shall be entitled to participate in or receive benefits under any life or disability insurance, health, executive medical expense reimbursement, pension, retirement, accident, and other benefit plans, programs and arrangements made generally available by the Company to its executives or to executives of the Aircraft Interior Systems Business Unit, at the Company’s discretion, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements in effect from time to time. In accordance with the Company’s policies in effect from time to time applicable to the Executive, the Executive shall also be entitled to paid vacation in any fiscal year during the Employment Term as well as all paid holidays given by the Company to its employees. In addition, for the avoidance of doubt during the Employment Term and thereafter the Executive and his eligible dependents shall continue to receive those certain benefits provided by Section 5(g) of the B/E Aerospace Employment Agreement (including, without limitation, executive medical, dental and health plan benefits and executive health reimbursement benefits based on his base salary as in effect immediately prior to the Effective Time) and during the Employment Term the annual financial and estate planning benefits that he is eligible to receive from B/E Aerospace immediately prior to the Effective Time.
(e) Automobile . During the Employment Term, the Executive shall receive an automobile allowance (the “ Automobile Allowance ”) of no less than $1,700 per month, less applicable taxes, payable in accordance with Company policy, but in no event later than March 15th of the year following the year in which the Automobile Allowance will accrue.
(f) Equity Awards . Commencing in November 2017 and during the Employment Term, the Executive shall be eligible to participate in any applicable equity compensation program of the Company in effect from time to time as set forth by the Compensation Committee (“ Annual Equity Awards ”). The grant timing, form and amount of the Annual Equity Awards shall be determined by the Compensation Committee in its sole discretion but shall be no less favorable to the Executive than provided to the Company’s other senior executives; provided, that the target grant date value (as determined by the Company consistent with its regular annual equity grant procedures) of Annual Equity Awards for which the Executive shall be eligible will be $1,300,000 and unless otherwise determined by the Compensation Committee shall be comprised (on a grant date fair value basis) of 50% performance-vesting shares and 50% stock options, or as otherwise determined by the Compensation Committee in its discretion and shall have such terms and conditions as are not less favorable than those applicable to the Company’s senior executives.
(g) Retention Award.
(i) The Company will grant to the Executive a cash incentive award (the “ Retention Award ”) with a value of $2,000,000 at or as soon as practicable following the Effective Time. The Retention Award will vest and be paid in a single lump sum on the first anniversary of the date on which the Effective Time occurs, subject to the Executive’s continued employment with Company through such date and subject to earlier vesting as described below.
(ii) Notwithstanding any provision in the applicable award documents or this Agreement to the contrary, and as additional consideration for the Executive’s restrictive non-competition and non-solicitation covenants for the benefit of the Company set forth in Section 6 of this Agreement, in the event the Executive’s employment (A) is terminated by the Company other than for Cause (as defined below), (B) terminates by reason of death or Incapacity or (C) is terminated by the Executive for Good Reason (as defined below), the Retention Award shall vest and be paid in a single cash lump sum on the sixtieth (60th) day following such termination, subject to the Executive’s execution





and non-revocation of the Mutual Waiver (as defined below), provided that such Mutual Waiver shall have become effective no later than the sixtieth (60th) day following the Executive’s Termination Date.
(h) Retirement Compensation . With respect to the BE Aerospace, Inc. 2010 Deferred Compensation Plan (“ DCP ”), the Company will make a tax deferred monthly contribution to the DCP on behalf of the Executive equal to seven-and-one-half percent (7.5%) of the monthly amount of the Salary (1/12 of the Salary) in effect as of the date of contribution. On January 1st of each year the Executive is employed hereunder, the Company will make a tax deferred contribution to the DCP (the “ Retirement Contribution ”) on behalf of the Executive equal to twenty percent (20%) of the Salary in effect as of the date of contribution. The Executive must be employed on the applicable date of contribution to receive a Retirement Contribution. Each Retirement Contribution shall be subject to the terms and conditions of the DCP except that all Retirement Contributions shall vest in full on the date of each such Retirement Contribution. The Retirement Contributions shall be allocated to the Executive’s retirement account under the DCP.
5. Termination and Compensation Thereon .
(a) Termination . Subject to the terms and conditions of this Agreement, the Executive’s employment pursuant to this Agreement may be terminated either by the Executive or the Company at any time and for any reason. The term “ Termination Date ” shall mean if the Executive’s employment is terminated (i) by his death, the date of his death or (ii) for any other reason, the date on which the Executive incurs a Separation from Service. In addition, notwithstanding any other provision of this Section 5, in connection with any termination of Executive’s employment (i) the payment of the Retention Award shall be governed by Section 4(g), (ii) and the payment of the 2016 LTIP Award shall be governed by the applicable award agreement, provided that the terms of such award agreement shall be consistent with Section 1 above, (iii) the treatment of any Annual Equity Awards shall be governed by the applicable award agreements and (iv) the Executive shall be entitled to indemnification rights pursuant to Section 18 (Indemnification) hereof, or other indemnification available to Executive by agreement, insurance, law, equity, or the Company’s organizational documents.
(b) Death .
(i) The Executive’s employment hereunder shall terminate upon his death. In such event, the Company shall, within thirty (30) days following the date of death, pay to such person as the Executive shall have designated in a notice filed with the Company, or, if no such person shall have been designated, to his estate, a lump sum amount equal to (A) any accrued and unpaid Salary, Automobile Allowance, vacation time and benefits through the date of death and (B) any earned but unpaid Bonuses payable to the Executive as determined by the Compensation Committee for any fiscal periods of the Company ending prior to the date of death.
(ii) Upon the Executive’s death at any time during or after the Employment Term, the Company shall, within thirty (30) days following the date of death, also pay to such person as the Executive shall have designated in a notice filed with the Company, or if no such person shall have been designated, to his estate, a lump-sum death benefit in accordance with the Death Benefit Agreement attached hereto as Exhibit A and hereby incorporated by reference.
(c) Incapacity . If, in the reasonable judgment of the Board, as a result of the Executive’s incapacity due to physical or mental illness, the Executive shall have been absent from his full-time duties as described hereunder for the entire period of twelve (12) consecutive months (“ Incapacity ”), the Executive’s employment shall terminate at the end of the twelve (12)-month period. In such event, upon the Termination Date, the Company shall pay to the Executive a lump sum payment equal to (A) any accrued and unpaid Salary, Automobile Allowance, vacation time and benefits through the Termination Date and (B) any earned but unpaid Bonuses payable to the Executive as determined by the Compensation Committee for any fiscal periods of the Company ending prior to the Termination Date. The lump sum payment shall be made within thirty (30) days following the Termination Date. Any dispute between the Board and the Executive with respect to the Executive’s Incapacity shall be settled by reference to a competent medical authority mutually agreed to by the Chief Executive Officer of the Company and the Executive or his personal representative, whose decision shall be binding on all parties.






(d) Other Terminations of Employment .
(i) If the Company terminates the Executive’s employment for any reason other than death or Incapacity, except as otherwise provided by Section 5(a), the Company shall have no further obligations to the Executive hereunder after the Termination Date, except for unpaid Salary, Automobile Allowance, as applicable, vacation time and benefits accrued through the Termination Date, and pursuant to Section 15 , Section 18 (Indemnification) hereof, or other indemnification available to Executive by agreement, insurance, law, equity, or the Company’s organizational documents.
(ii) For purposes of this Agreement, “ Cause ” shall mean (A) after receipt of written notice from the Board, and a reasonable opportunity to cure, the Executive’s willful and continued material failure, refusal or neglect to substantially perform and discharge his powers, duties, obligations or responsibilities hereunder (including duties prescribed by the Board or the Company’s Chief Executive Officer pursuant to Section 3 above), (B) after receipt of written notice from the Board, and a reasonable opportunity to cure, willful, continued and intentional breach of any fiduciary duties the Executive may have because of any position the Executive holds with the Company or any subsidiary or affiliate thereof, or (C) a felony conviction in a judgment that has become final and non-appealable, of a conviction for any crime involving the Executive’s personal dishonesty or moral turpitude, or any indictment by a grand jury for acts detrimental to the Company’s best interests.
(iii) For purposes of this Agreement, “ Good Reason ” means:
(A) a decrease in the Executive’s Salary or a failure by the Company to pay material compensation due and payable to Executive in connection with his employment;
(B) a material adverse change in the Executive’s responsibilities, positions, duties, status, title or reporting relationships, provided that, any changes to the Executive’s responsibilities, duties or reporting relationships that result from the synergies plan contemplated by the Company and B/E Aerospace in connection with the Merger Agreement shall not constitute Good Reason and, provided further, that a change in the number of individuals who report to the Executive as a result of such synergies plan shall not constitute Good Reason;
(C) requiring the Executive to be based at any office or location that is more than twenty-five (25) miles from the Executive’s current principal place of employment; or
(D) a material breach by the Company of any term or provisions of this Agreement or the B/E Aerospace Employment Agreement solely to the extent the B/E Aerospace Employment Agreement remains in effect as set forth in Section 5(f) of this Agreement;
provided, that Executive has given notice thereof to the Company no later than thirty (30) days following the first occurrence of any event or circumstance claimed to constitute Good Reason and the Company has not cured the Good Reason, if applicable, within thirty (30) days after receiving such notice and provided, further, that the Executive’s Termination Date must occur within six (6) months following the date the Executive first gives notice of such event or circumstance claimed to constitute Good Reason.
Notwithstanding anything to the contrary in this Agreement, neither the consummation of the transactions contemplated under the Merger Agreement nor the terms of the Executive’s employment outlined hereunder (as compared to the Executive’s employment terms in effect immediately prior to the Effective Time) shall constitute Good Reason.
(e) Change of Control Agreement . Effective as of immediately following the Effective Time, the Executive shall become a party to the Company’s form of Change of Control Agreement as in effect on the date hereof.
(f) B/E Aerospace Employment Agreement . The Company acknowledges and agrees that the Company is assuming the B/E Aerospace Employment Agreement by operation of law in connection with the Merger and that the Company shall honor all obligations and agreements set forth in the B/E Aerospace Employment Agreement that survive the Effective Date, including without limitation those obligations and agreements set forth in Section 5(g) (Benefit Continuation), Section 13 (Governing Law), Section 17 (Legal Fees) and Section 18 (Indemnification) and nothing in this Agreement or otherwise shall modify or impair the obligations of the Company and its subsidiaries and





affiliates to the Executive thereunder, provided that, for the avoidance of doubt, following the payment of benefits under Section 5(f) of the B/E Aerospace Employment Agreement in connection with the Merger, the Executive shall not become entitled at any time to any further benefits under Section 5 of the B/E Aerospace Employment Agreement other than Section 5(g) of the B/E/ Aerospace Employment Agreement (Benefit Continuation) and the Executive shall not have any obligations under the B/E Aerospace Employment Agreement.
6. Covenants of the Executive . In consideration of the execution of this Agreement, including all of the benefits set forth herein that are beyond or in addition to the benefits the Executive was entitled to receive under the B/E Aerospace Employment Agreement (each benefit separately being sufficient consideration for the Executive’s covenants contained in this Section 6 ), and the Executive’s commencement of employment hereunder (also separately being sufficient consideration for the Executive’s covenants contained in this Section 6 ), the Executive agrees as follows:
(a) Non-Competition .
(i) The Executive shall not during the Executive’s employment with the Company and for three (3) years after the Termination Date (the “ Non-Compete Restrictive Period ”), directly or indirectly:
(A) compete in in any country in which the Company conducts business worldwide or on the internet with respect to any “ Competing Product or Service ,” which is defined to mean those interior cabin aircraft products or services offered and/or under development by the Aircraft Interior Systems Business Unit during the Executive’s employment with the Company of which the Executive has knowledge, or any product or service competitive with or intended to compete with such products or services, or any product or service which the Executive acquired knowledge of as a result of his employment with the Company;
(B) own, invest in, make loans to, operate, manage, control, participate in, consult with, or advise, any entity or person that provides a Competing Product or Service with the Company in the United States or on the internet. This covenant shall not prevent the Executive from having passive investments of less than five percent (5%) of the outstanding equity securities of any entity listed for trading on a national stock exchange (as defined in the Securities Exchange Act of 1934) or any recognized automatic quotation system.
(ii) If the Executive breaches any covenant contained in this Section 6(a) , the Executive agrees and acknowledges that the Non-Compete Restrictive Period shall be extended during the time of such breach. The Executive further agrees and acknowledges that, in the event of the Executive’s breach of any covenants contained in this Section 6(a) , the Non-Compete Restrictive Period may be extended for up to three (3) years, which shall commence upon either (x) a determination by the Company that the Executive has stopped breaching such covenants, or (y) the date of a court’s or arbitrator’s final determination that the Executive breached a covenant contained in Section 6(a) .
(b) Non-Solicitation .
(i) As a separate and independent covenant, the Executive agrees that he shall not during his employment with the Company and for three (3) years after the Termination Date (the “ Non-Solicitation Restrictive Period ”), directly or indirectly:
(A) contact, solicit, perform services for, or accept work or business (in any capacity other than as a Company employee) from any clients or customers of the Company, its subsidiaries or affiliates, with whom the Executive has worked or had contact during the Executive’s employment with the Company, or of whom the Executive had knowledge of due to his employment or access to the Company’s confidential information and/or trade secrets;
(B) contact, solicit or accept contact from any clients, subcontractors, consultants, vendors, suppliers or independent contractors of the Company, its subsidiaries or affiliates, for the purpose of interfering with, causing, inviting, or encouraging any such persons or entities from altering or terminating their business relationship or association with the Company, its subsidiaries or affiliates. This applies to any clients, subcontractors, consultants, vendors, suppliers or independent contractors with whom the Executive has worked or had contact during





his employment with the Company, or of whom the Executive had knowledge due to his employment or access to the Company’s confidential information and/or trade secrets; or
(C) contact, solicit or accept contact from any employee of the Company, its subsidiaries or affiliates for the purpose of interfering with their employment with the Company, its subsidiaries or affiliates, or inviting or encouraging them to terminate their employment with the Company, its subsidiaries or affiliates or which has the effect of altering or terminating their employment with the Company, its subsidiaries or affiliates.
(ii) If the Executive breaches any covenant contained in this Section 6(b) , the Executive agrees and acknowledges that the Non-Solicitation Restrictive Period shall be extended during the time of such breach. The Executive further agrees and acknowledges that, in the event of the Executive’s breach of any covenants contained in this Section 6(b) , the Non-Solicitation Restrictive Period may be extended for up to three (3) years, which shall commence upon either (x) a determination by the Company that the Executive has stopped breaching such covenants, or (y) the date of a court’s or arbitrator’s final determination that the Executive breached a covenant contained in Section 6(b) . Notwithstanding any other provision of this Agreement or the B/E Aerospace Employment Agreement, this Section 6 shall supersede Section 6 of the B/E Aerospace Employment Agreement in its entirety.
7. Amendments . No amendment to this Agreement or any Exhibit hereto shall be effective unless it shall be in writing and signed by each party hereto.
8. Notices . All notices and other communications hereunder shall be in writing and shall be deemed given when delivered personally or sent by telecopy or three (3) days after being mailed by registered or certified mail (return receipt requested) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice):
If to the Company, to it at:
Rockwell Collins, Inc.
400 Collins Road, N.E.
Cedar Rapids, IA 52498
Attention: Chief Executive Officer
with a copy (which shall not constitute notice) to:
Rockwell Collins, Inc.
400 Collins Road, N.E.
Cedar Rapids, IA 52498
Attention: General Counsel
If to the Executive, to him at the Executive’s most recent address on file with the Company.
9. Entire Agreement . This Agreement, the 2006 Proprietary Rights Agreement and the 2011 Proprietary Rights Agreement constitute the entire agreement among the parties hereto pertaining to the Executive’s employment with the Company on and following the Effective Time and supersede all prior and contemporaneous agreements, understandings, negotiations and discussions, whether oral or written, of the parties; provided, that, upon, and subject to the occurrence of, the Effective Time, the Executive shall be entitled to the payments under Section 5(f) thereof arising out of the consummation of the transaction contemplated by the Merger Agreement and Executive’s automatic termination of employment pursuant to the B/E Aerospace Employment Agreement; and, provided, further, that the Company shall honor all obligations under the B/E Aerospace Employment Agreement that survive the Effective Date, including without limitation those obligations set forth in Section 5(g) (Benefit Continuation), Section 13 (Governing Law), Section 17 (Legal Fees) and Section 18 (Indemnification). The non-solicitation and non-competition provisions in this Agreement and in the 2011 Proprietary Rights Agreement shall be deemed separate and distinct provisions and each applicable time period shall run concurrently in accordance with its terms for the benefit of the Company.





10. Mutual Waiver . Except in the event of a termination for Cause, the Executive and the Company agree to sign a mutual waiver and release of claims agreement effective as of the Termination Date, substantially in the form attached hereto as Exhibit B , and hereby incorporated by reference (the “ Mutual Waiver ”).
11. Headings . The headings in this Agreement are for convenience of reference only and shall not alter or otherwise affect the meaning hereof.
12. Counterparts . This Agreement may be executed in any number of counterparts which together shall constitute one instrument.
13. Governing Law . This Agreement shall be governed by and construed in accordance with the laws (other than the conflict of laws rules) of the State of Iowa.
14. Withholding . Without limiting the effect of Section 15 , all payments made by the Company under this Agreement shall be reduced by any tax or other amounts required to be withheld by the Company under applicable law.
15. Section 409A .
(a) If any amounts that become due under this Agreement constitute “nonqualified deferred compensation” within the meaning of Section 409A, payment of such amounts shall not commence until the Executive incurs a Separation from Service if and only if necessary to avoid accelerated taxation or tax penalties in respect of such amounts. For purposes of Section 409A, each installment payment, if any, provided under this Agreement shall be treated as a separate payment. Any payments that constitute “nonqualified deferred compensation” within the meaning of Section 409A to be made under this Agreement upon a termination of employment shall only be made upon a Separation from Service.
(b) Notwithstanding any provision of this Agreement to the contrary, if Executive is a “ Specified Employee ” (as defined below) he shall not be entitled to any payments upon a Separation from Service until the earlier of (i) the date which is the first (1st) business day following the date that is six (6) months after the Executive’s Separation from Service for any reason other than death or (ii) the Executive’s date of death. The provisions of this Section 15(b) shall only apply if required to comply with Section 409A.
(c) For purposes of this Agreement, “ Separation from Service ” shall have the meaning set forth in Section 409A(a)(2)(A)(i) and determined in accordance with the default rules under Section 409A. “ Specified Employee ” shall have the meaning set forth in Section 409A(a)(2)(B)(i), as determined in accordance with the uniform methodology and procedures adopted by the Company and then in effect.
(d) It is intended that the terms and conditions of this Agreement comply with Section 409A. If any provision of this Agreement contravenes any regulations or United States Treasury guidance promulgated under Section 409A, or could cause any amounts or benefits hereunder to be subject to taxes, interest and penalties under Section 409A, the Company may, in its sole discretion and without the Executive’s consent, modify this Agreement to: (i) comply with, or avoid being subject to, Section 409A, (ii) avoid the imposition of taxes, interest and penalties under Section 409A, and/or (iii) maintain, to the maximum extent practicable, the original intent of the applicable provision without contravening the provisions of Section 409A, provided , however , that no such amendment shall have the effect of reducing the amount of any payment or benefit payable to Executive pursuant to this Agreement. This Section 15(d) does not create an obligation on the part of the Company to modify this Agreement and does not guarantee that the amounts or benefits owed under this Agreement will not be subject to interest and penalties under Section 409A.
(e) Anything in this Agreement to the contrary notwithstanding, no reimbursement payable to the Executive pursuant to any provisions of this Agreement or pursuant to any plan or arrangement of the Company group covered by this Agreement shall be paid later than the last day of the calendar year following the calendar year in which the related expense was incurred, except to the extent that the right to reimbursement does not provide for a “deferral of compensation” within the meaning of Section 409A. No amount reimbursed during any calendar year shall affect the amounts eligible for reimbursement in any other calendar year.





16. Defend Trade Secrets Act . Pursuant to section 7 of the Defend Trade Secrets Act of 2016 (which added 18 U.S.C. § 1833(b)), the Executive shall not have criminal or civil liability under any federal or state trade secret law for the disclosure of a trade secret that (x) is made (A) in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney and (B) solely for the purpose of reporting or investigating a suspected violation of law; or (y) is made in a complaint or other document filed in a lawsuit or other proceeding as described in 18 U.S.C. § 1833(b)(2). Nothing in this Agreement is intended to conflict with 18 U.S.C. § 1833(b) or create liability for disclosures of trade secrets that are expressly allowed by such section.
17. Legal Fees . In the event of a dispute between the parties with respect to any payments due hereunder in connection with Incapacity, a termination without Cause, termination “for” or “without” Good Reason or a Change of Control, the Company will pay the costs of all legal fees and dispute related costs and expenses incurred in connection with such dispute. Such costs and expenses shall be provided to Executive in a timely manner, such as on a monthly basis.
18. Indemnification . To the maximum extent permitted under the law of the State of Delaware as from time to time in effect, the Company hereby agrees to indemnify and defend Executive and hold him harmless from and against all liabilities, costs and expenses, including, but not limited to, amounts paid in satisfaction of judgments, in settlement or as fines or penalties, and counsel fees and disbursements, incurred by Executive in connection with the defense or disposition of, or otherwise in connection with or resulting from, any action, suit or other proceeding, whether civil, criminal, administrative or investigative, before any court or administrative or legislative or investigative body, in which Executive may be or may have been involved as a party or otherwise or with which Executive may be or may have been threatened, while in office or thereafter, by reason of Executive’s being an officer or director of the Company or by reason of any action taken or not taken in such capacity.
19. Enforceability; Waiver . If any arbitrator or court of competent jurisdiction determines that any provision of this Agreement is invalid or unenforceable, then such invalidity or unenforceability shall have no effect on the other provisions of this Agreement, which shall remain valid, binding and enforceable and in full force and effect, and such invalid or unenforceable provision shall be construed, blue-penciled or reformed by the court or arbitrator in a manner so as to give the maximum valid and enforceable effect to the intent of the parties expressed in such provision. The Executive’s or the Company’s failure to insist upon strict compliance with any provision hereof or any other provision of this Agreement or the failure to assert any right that the Executive or the Company may have hereunder, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. Similarly, the waiver by any party hereto of a breach of any provision of this Agreement by the other party will not operate or be construed as a waiver of any other or subsequent breach by such other party.
20. Assignment . This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, successors and permitted assigns. This Agreement may be assigned by the Company. The Executive may not assign or delegate his duties under this Agreement without the Board’s prior written approval. Any purported assignment by the Executive without the Board’s prior written approval shall be null and void from the initial date of the purported assignment.
21. Survival . The obligations of the Executive pursuant to the 2006 Proprietary Rights Agreement, the 2011 Proprietary Rights Agreement, the respective obligations of the parties pursuant to Sections 4(f)(iii), 4(g), and 5 through 19 of this Agreement shall each survive any termination or expiration of this Agreement, or any termination or resignation of the Executive’s employment, as the case may be, in accordance with the applicable statute of limitations period(s). The obligations and agreements of the Company and its subsidiaries and affiliates under the B/E Aerospace Employment Agreement that survive the Effective Date, including without limitation those obligations set forth in Section 5(g) (Benefit Continuation), Section 13 (Governing Law), Section 17 (Legal Fees) and Section 18 (Indemnification) shall each survive any termination or expiration of this Agreement, or any termination or resignation of the Executive’s employment, as the case may be.
[Signature Page Follows]






IN WITNESS WHEREOF, the parties hereto execute this Employment Agreement as of the date first written above.
EXECUTIVE:
/s/ Werner Lieberherr     
Werner Lieberherr
Date: 10/20/2016     

COMPANY:
ROCKWELL COLLINS, INC.
/s/ Jeffrey Standerski     
Name: Jeffrey Standerski
Title: Senior Vice President, People & Inclusion








Exhibit A


DEATH BENEFIT AGREEMENT


This Death Benefit Agreement (the “ Agreement ”) is entered into this 30th day of November, 2012, by and between B/E AEROSPACE, INC. , a Delaware corporation, hereinafter called the “ Corporation ,” and WERNER LIEBERHERR , hereinafter called the “ Executive .”

WHEREAS, the Executive has been employed by the Corporation for many years and has rendered valuable services which have contributed to the growth and prosperity of the Corporation;

WHEREAS, the Corporation wishes to provide Esther Lieberherr, as the Executive’s primary beneficiary (the “ Primary Beneficiary ”), or the Trustees of the Trust created under Article IV of the Last Will and Testament of Werner Lieberherr, as the Executive’s contingent or secondary beneficiary (the “ Secondary Beneficiary ”), (the Primary Beneficiary or Secondary Beneficiary, as may be applicable, is referred to herein as the “ Beneficiary ”), with the payment of a $5,000,000 (five million dollars) death benefit pursuant to the terms of this Agreement.

NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and other good and valuable consideration, the parties agree as follows:

1.
DEATH BENEFIT.

A. Upon the Executive’s death at any time, whether during his employment with the Corporation or following the termination of his employment for any reason, the Corporation shall pay to the Beneficiary a payment of $5,000,000 (five million dollars) (the “ Death Benefit ”). The Death Benefit shall be paid in a cash lump sum within thirty (30) days following the Executive’s death.

B. The Death Benefit shall not be payable if the Executive’s death results from suicide, whether sane or insane, within two (2) years after the execution of this Agreement.

2.
CONDITIONS. In order to fund its cash payment obligation under this Agreement, the Corporation may elect, in its absolute discretion, to purchase a life insurance policy. The Executive agrees that in the event the Corporation elects to do so, then the Corporation may insure the life of the Executive and the Executive agrees to cooperate with the Corporation and insurance carrier in order to facilitate the purchase of such insurance. The Executive further agrees that if the Corporation elects to purchase such a life insurance policy, then the Corporation or a Trust (as described in Section 3 of this Agreement) shall be the owner and the beneficiary of that policy.

3.
ESTABLISHMENT OF TRUST. The Corporation may establish a Death Benefit Only Trust (the “ Trust ”). If established, all benefits payable under this Agreement to the Beneficiary shall be paid directly by the Corporation from the Trust. To the extent that such benefits are not paid from the Trust, the benefits shall be paid from the general assets of the Corporation. The Trust, if established, shall be an irrevocable grantor trust which conforms to the terms of the model trust as described in IRS revenue procedure 92-64, I.R.B. 1992-33 except an independent individual third party may be designated as trustee. The assets of the Trust are subject to the claims of the





Corporation’s creditors in the event of the Corporation’s insolvency, as defined therein. Except as provided under the Trust, the Corporation shall not be obligated to set aside, earmark or escrow any funds or other assets to satisfy its obligations under this Agreement, and neither the Executive nor the Beneficiary shall have any property interest in any specific assets of the Corporation other than the unsecured right to receive payments from the Corporation, as provided in this Agreement.

4.
EMPLOYMENT RIGHTS. This Agreement shall not be deemed to create a contract of employment between the Corporation and the Executive and shall create no right in the Executive to continue in the Corporation’s employ for any specific period of time, or to create any other rights in the Executive or obligations on the part of the Corporation, except as are set forth in this Agreement.

5.
EXECUTIVE RIGHT TO ASSETS.
A.
The rights of the Executive, the Beneficiary, or any other person claiming through the Executive under this Agreement, shall be solely those of an unsecured general creditor of the Corporation. The Executive, the Beneficiary, or any other person claiming through the Executive, shall have the right to receive those payments specified under this Agreement only from the Corporation, and has no right to look to any specific or special property separate from the Corporation for payments.

B.
The Executive agrees that he, the Beneficiary, or any other person claiming through the Executive shall have no right or beneficial ownership interest whatsoever in any general asset used or acquired by the Corporation in connection with the liabilities it has assumed under this Agreement. Such assets shall not be deemed to be held under any trust for the benefit of the Executive or the Beneficiary, nor shall any such general assets be considered security for the performance of the obligations of the Corporation. Any such assets shall remain general, unpledged, and unrestricted assets of the Corporation.

C.
The Executive also understands and agrees that his participation in the acquisition of any such general asset for the Corporation shall not constitute a representation to the Executive, the Beneficiary, or any person claiming through the Executive that any of them has a special or beneficial interest in such general asset.

6.
INDEPENDENCE OF BENEFITS.

The benefits payable under this Agreement shall be independent of, and in addition to, any other benefits or compensation, whether by salary, or bonus or otherwise, payable under any other employment agreements that now exist or may hereafter exist from time to time between the Corporation and the Executive. This Agreement between the Corporation and the Executive does not involve a reduction in salary or foregoing of an increase in future salary by the Executive. Nor does the Agreement in any way affect or reduce the existing and future compensation and other benefits of the Executive.

7.
ASSIGNABILITY.

Except in so far as this provision may be contrary to applicable law, no sale, transfer, alienation, assignment, pledge, collateralization, or attachment of any benefits under this Agreement shall be valid or recognized by the Corporation.






8.
AMENDMENT.

This Agreement may be amended at any time by mutual written agreement of the Corporation and the Executive. The Corporation shall have no right to change the benefits under this Agreement without the prior written consent of the Executive.   The   Executive may change the Beneficiary under this Agreement upon prior written notice to the Corporation, Attn. General Counsel, 1400 Corporate Center Way, Wellington, Florida 33414.   If any provision of this Agreement contravenes any regulations or guidance promulgated under Section 409A of the U.S. Internal Revenue Code of 1986 (collectively, “ Section 409A ”), the Corporation shall amend this Agreement or any provision hereof to maintain to the maximum extent practicable the original intent of the applicable provision without violating the provisions of Section 409A.


9.
LAW GOVERNING.
This Agreement shall be governed by the laws of the State of Florida. This Agreement is solely between the Corporation and the Executive. Further, the Executive, the Beneficiary or other persons claiming through the Executive shall only have recourse against the Corporation for enforcement of the Agreement. However, it shall be binding upon the Beneficiary and the beneficiaries, heirs, executors and administrators of the Executive and upon the successors and assigns of the Corporation.





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IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first above written.
 
 
CORPORATION:
B/E AEROSPACE, INC.,
 
 
a Delaware corporation
ATTEST:
 
 
 
 
 
 
By:
/s/ Ryan M. Patch
By:
/s/ Eric J. Wesch
Name:
Ryan M. Patch
Name:
Eric J. Wesch
Title:
Secretary
Title:
Vice President & Treasurer
 
 
 
 
 
 
 
 
 
 
 
 
EXECUTIVE:
/s/ Werner Lieberherr
 
 
 
WERNER LIEBERHERR
 
 





Exhibit B
Form of Mutual Waiver Agreement
SEPARATION AGREEMENT AND MUTUAL RELEASE
This Separation Agreement and Mutual Release (this “ Agreement ”), is made as of ___, 20__, by and between Rockwell Collins, Inc., a Delaware corporation (the “ Company ”) and Werner Lieberherr (“ Employee ”), for the purpose of memorializing the terms and conditions of the Employee’s departure from the Company’s employment.
Now, therefore, in consideration of the sum of one dollar ($1.00) and the mutual promises, agreements and covenants contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged (the “ Settlement Consideration ”), the parties hereto, intending to be legally bound, hereby agree as follows:
1. Termination; Employment Agreement . Effective      , 20__, Employee’s employment with the Company was terminated. Upon Employee’s termination, Employee and the Company shall each have those respective surviving rights, obligations and liabilities described in that certain Amended and Restated Employment Agreement, dated as of October __, 2016, by and between Employee and the Company (the “ Employment Agreement ”). Capitalized terms used in this Agreement, but not defined herein, shall have the meanings ascribed to them in the Employment Agreement.
2. Non-Released Claims .
(a)      Employee Non-Released Claims . It is explicitly agreed, understood and intended that the general release of claims provided for in this Agreement shall not include or constitute a waiver of the Company’s, its agent, representative or designee’s obligations to Employee (i) that are specified in the Employment Agreement as surviving the termination of Employee’s employment, (ii) that arise out of or from respondeat superior principles , (iii) for claims for indemnification and defense under any organizational documents, agreement, insurance policy, or at law or in equity concerning either the Company, its subsidiaries, affiliates, directors, officers or employees, (iv) concerning any deferred compensation plan, 401(k) plan, equity plan or retirement plan, and (v) any claims not waivable under applicable law, collectively, the “ Employee Non-Released Company Claims ”.
(b)      Company Non-Released Claims . It is explicitly agreed, understood and intended that the general release of claims provided for in this Agreement shall not include or constitute a waiver of (i) the Employee’s obligations to the Company concerning the Company’s confidential information and proprietary rights that survive Employee’s termination of employment, including those specified in the Employment Agreement, (ii) any claim of the Company for fraud based on willful and intentional acts or omissions of Employee, other than those taken in good faith and in a manner that Employee believed to be in or not opposed to the interests of the Company, proximately causing a financial restatement by the Company, and (iii) any claims not waivable by the Company under applicable law, collectively, the “ Company Non-Released Employee Claims ”.
3. General Release in Favor of the Company : Employee, for himself and for his heirs, executors, administrators, trustees, legal representatives and assigns (collectively, the “ Releasers ”), hereby forever releases and discharges the Company, its Board of Directors, and any of its past, present, or future parent corporations, subsidiaries, divisions, affiliates, officers, directors, agents, trustees, administrators, attorneys, employees, employee benefit and/or pension plans or funds (including qualified and non-qualified plans or funds), successors and/or assigns and any of its or their past, present or future parent corporations, subsidiaries, divisions, affiliates, officers, directors, agents, trustees, administrators, attorneys, employees, employee benefit and/or pension plans or funds (including qualified and non-qualified plans or funds), successors and/or assigns (whether acting as agents for the Company or in their individual capacities) (collectively, the “ Releasees ”) from any and all claims, demands, causes of action, and liabilities of any kind whatsoever (upon any legal or equitable theory, whether contractual, common-law, statutory, federal, state, local, or otherwise), whether known or unknown, by reason of any act, omission, transaction or occurrence which Releasers ever had, now have or hereafter can, shall or may have against Releasees up to and including the date of the





execution of this Agreement, except for the Employee Non-Released Company Claims. Without limiting the generality of the foregoing, Releasers hereby release and discharge Releasees from:
(a)      any and all claims for backpay, frontpay, minimum wages, overtime compensation, bonus payments, benefits, reimbursement for expenses, or compensation of any kind (or the value thereof), and/or for liquidated damages or punitive damages (under any applicable statute or at common law);
(b)      any and all claims, relating to Employee’s employment by the Company, the terms and conditions of such employment, employee benefits related to Employee’s employment, the termination of Employee’s employment, and/or any of the events relating directly or indirectly to or surrounding such termination;
(c)      any and all claims of discrimination, harassment, whistle blowing or retaliation in employment (whether based on federal, state or local law, statutory or decisional), including without limitation, all claims under the Age Discrimination in Employment Act of 1967, as amended, Title VII of the Civil Rights Act of 1964, as amended, the Americans with Disabilities Act, the Civil Rights Act of 1991, the Civil Rights Act of 1866, 42 USC §§ 1981-86, as amended, the Equal Pay Act, the Fair Labor Standards Act, the Family and Medical Leave Act, the Employee Retirement Income Security Act, the North Carolina Retaliatory Employment Discrimination Act, North Carolina General Statutes, sections 95-240 et seq.; North Carolina Equal Employment Practices Act, North Carolina General Statutes, sections 143-422.1 et m.; North Carolina General Statutes, sections 95-28.1A; North Carolina General Statutes, sections 95-28.2; North Carolina General Statutes, sections 95-78; Handicapped Persons Protection Act, N.C. Gen. Stat. sections 168A-1 et seq .; North Carolina’s Workers’ Compensation Laws (except for any pending workers’ compensation claims by Employee), North Carolina General Statutes, sections 97-1 et seq.; and waivable rights under the North Carolina Constitution;
(d)      any and all claims under any contract, whether express or implied;
(e)      any and all claims for unintentional or intentional torts, for emotional distress and for pain and suffering;
(f)      any and all claims for violation of any statutory or administrative rules, regulations or codes;
(g)      any and all claims for attorneys’ fees, costs, disbursements, wages, bonuses, benefits, vacation and/or the like;
which Releasers ever had, now have or hereafter can, shall or may have against Releasees for, upon or by reason of any act, omission, transaction or occurrence up to and including the date of the execution of this Agreement, except for the Employee Non-Released Company Claims.
4. General Release in Favor of Employee . The Releasees, and each of them, hereby release Releasers, and each of them, from all claims or causes of action whatsoever, known or unknown, including any and all claims of the common law of the State of North Carolina, including but not limited to breach of contract (whether written or oral), promissory estoppel, defamation, unjust enrichment, or claims for attorneys’ fees and costs and all claims which were alleged or could have been alleged against the Employee which arose from the beginning of the world to the date of this Agreement, except for the Company Non-Released Employee Claims.
5. Non-Disparagement . The parties agree that they will not (a) disparage or encourage or induce others to disparage the other party (including, without limitation, the Releasees and the Releasers), or (b) engage in any conduct or induce any other person to engage in any conduct that is any way injurious to either party’s (including, without limitation, the Releasees’ or the Releasers’) reputation and interests (including, without limitation, any negative or derogatory statements or writings).
6. Covenants not to Sue .
(a)      Employee Covenant not to Sue . Employee represents and warrants that to date, he has not filed any lawsuit, action, complaint or charge of any kind with any federal, state, or county court or administrative or public agency against the Company or any other Releasee. Without in any way limiting the generality of the foregoing,





Employee hereby covenants not to sue or to assert, prosecute, or maintain, directly or indirectly, in any form, any claim or cause of action against any person or entity being released pursuant to this Agreement with respect to any matter, cause, omission, act, or thing whatsoever, occurring in whole or in part on or at any time prior to the date of this Agreement, except for the Employee Non-Released Company Claims. Employee agrees that he will not seek or accept any award or settlement from any source or proceeding with respect to any claim or right waived in this Agreement.
(b)      Company Covenant not to Sue . The Company represents and warrants that to date, it has not filed any lawsuit, action, complaint or charge of any kind with any federal, state, or county court or administrative or public agency against Employee or any other Releaser. Without in any way limiting the generality of the foregoing, the Company hereby covenants not to sue or to assert, prosecute, or maintain, directly or indirectly, in any form, any claim or cause of action against any person or entity being released pursuant to this Agreement with respect to any matter, cause, omission, act, or thing whatsoever, occurring in whole or in part on or at any time prior to the date of this Agreement, except for the Company Non-Released Employee Claims. The Company agrees that it will not seek or accept any award or settlement from any source or proceeding with respect to any claim or right waived in this Agreement.
7. No Admission . The making of this Agreement is not intended, and shall not be construed, as an admission that the Company or any of the Releasees, has violated any federal, state or local law (statutory or decisional), ordinance or regulation, breached any contract or committed any wrongdoing whatsoever.
8. Effectiveness . This Agreement shall not become effective until the eighth day following Employee’s signing of this Agreement (“ Effective Date ”) and Employee may at any time prior to the Effective Date revoke this Agreement by giving notice in writing of such revocation to:
Rockwell Collins, Inc.
400 Collins Road, N.E.
Cedar Rapids, IA 52498
Attn: General Counsel
In the event that Employee revokes this Agreement prior to the eighth day after his execution thereof, this Agreement, and the promises contained herein, shall automatically be deemed null and void.
9. Employee Acknowledgement . Employee acknowledges that he has been advised in writing to consult with an attorney before signing this Agreement, and that Employee has been afforded the opportunity to consider the terms of this Agreement for twenty-one (21) days prior to its execution. Employee further acknowledges that he has read this Agreement in its entirety, that he fully understands all of its terms and their significance, that he has signed it voluntarily and of Employee’s own free will, and that Employee intends to abide by its provisions without exception.
10. Severability . If any provision of this Agreement is held by a court of competent jurisdiction to be illegal, void or unenforceable, such provision shall have no effect, however, the remaining provisions shall be enforced to the maximum extent possible.
11. Entire Agreement . This Agreement and the Employment Agreement, taken together, constitute the complete understanding between the parties and supersedes all such prior agreements between the parties and may not be changed orally. Employee acknowledges that neither the Company nor any representative of the Company has made any representation or promises to Employee other than as set forth herein or therein. No other promises or agreements shall be binding unless in writing and signed by the parties.
12. General Provisions .
(a)      Governing Law; Jurisdiction; Venue . This Agreement shall be enforced, governed and interpreted by the laws of the State of Iowa without regard to Iowa’s conflict of laws principles. Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled in a court of competent jurisdiction in the State of Iowa in Linn County. Each party consents to the jurisdiction of such Iowa court in any such civil action or legal proceeding and waives any objection to the laying of venue in such Iowa court.





(b)      Prevailing Party . In the event of any litigation, dispute or contest arising from a breach of this Agreement, the prevailing party shall be entitled to recover from the non-prevailing party all reasonable costs incurred in connection with such litigation, dispute or contest, including without limitation, reasonable attorneys’ fees, disbursement and costs, and experts’ fees and costs.
(c)      Counterparts . This Agreement may be executed in several counterparts, each of which shall be deemed as an original, but all of which together shall constitute one and the same instrument.
(d)      Binding Effect . This Agreement is binding upon, and shall inure to the benefit of, the parties, the Releasers and the Releasees and their respective heirs, executors, administrators, successors and assigns.
(e)      Interpretation . Should any provision of this Agreement require interpretation or construction, it is agreed by the parties that the entity interpreting or construing this Agreement shall not apply a presumption that the provisions hereof shall be more strictly construed against one party who prepared this Agreement, it being agreed that all parties have participated in the preparation of all provisions of this Agreement.
[Signature Page Follows]





IN WITNESS WHEREOF, the parties hereto execute this Separation Agreement and Mutual Release as of the date first written above.
EXECUTIVE:
                            
Werner Lieberherr
Date:__________________________________________     

COMPANY:
ROCKWELL COLLINS, INC.
By:___________________________________________     
Name:_________________________________________     
Title:__________________________________________     






Exhibit 10-e-2

EXECUTION COPY

DEATH BENEFIT AGREEMENT


This Death Benefit Agreement (the “ Agreement ”) is entered into this 30th day of November, 2012, by and between B/E AEROSPACE, INC. , a Delaware corporation, hereinafter called the “ Corporation ,” and WERNER LIEBERHERR , hereinafter called the “ Executive .”

WHEREAS, the Executive has been employed by the Corporation for many years and has rendered valuable services which have contributed to the growth and prosperity of the Corporation;

WHEREAS, the Corporation wishes to provide Esther Lieberherr, as the Executive’s primary beneficiary (the “ Primary Beneficiary ”), or the Trustees of the Trust created under Article IV of the Last Will and Testament of Werner Lieberherr, as the Executive’s contingent or secondary beneficiary (the “ Secondary Beneficiary ”), (the Primary Beneficiary or Secondary Beneficiary, as may be applicable, is referred to herein as the “ Beneficiary ”), with the payment of a $5,000,000 (five million dollars) death benefit pursuant to the terms of this Agreement.

NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and other good and valuable consideration, the parties agree as follows:

1.
DEATH BENEFIT.

A. Upon the Executive’s death at any time, whether during his employment with the Corporation or following the termination of his employment for any reason, the Corporation shall pay to the Beneficiary a payment of $5,000,000 (five million dollars) (the “ Death Benefit ”). The Death Benefit shall be paid in a cash lump sum within thirty (30) days following the Executive’s death.

B. The Death Benefit shall not be payable if the Executive’s death results from suicide, whether sane or insane, within two (2) years after the execution of this Agreement.

2.
CONDITIONS. In order to fund its cash payment obligation under this Agreement, the Corporation may elect, in its absolute discretion, to purchase a life insurance policy. The Executive agrees that in the event the Corporation elects to do so, then the Corporation may insure the life of the Executive and the Executive agrees to cooperate with the Corporation and insurance carrier in order to facilitate the purchase of such insurance. The Executive further agrees that if the Corporation elects to purchase such a life insurance policy, then the Corporation or a Trust (as described in Section 3 of this Agreement) shall be the owner and the beneficiary of that policy.

3.
ESTABLISHMENT OF TRUST. The Corporation may establish a Death Benefit Only Trust (the “ Trust ”). If established, all benefits payable under this Agreement to the Beneficiary shall be paid directly by the Corporation from the Trust. To the extent that such benefits are not paid from the Trust, the benefits shall be paid from the general assets of the Corporation. The Trust, if established, shall be an irrevocable grantor trust which conforms to the terms of the model trust as described in IRS revenue procedure 92-64, I.R.B. 1992-33 except an independent individual third party may be designated as trustee. The assets of the Trust are subject to the claims of the Corporation’s creditors in the event of the Corporation’s insolvency, as defined therein. Except as provided under the Trust, the Corporation shall not be obligated to set aside, earmark or escrow any funds or other assets to satisfy its obligations under this Agreement, and neither the Executive nor the Beneficiary shall have any property interest in any specific assets of the Corporation other than the unsecured right to receive payments from the Corporation, as provided in this Agreement.

4.
EMPLOYMENT RIGHTS. This Agreement shall not be deemed to create a contract of employment between the Corporation and the Executive and shall create no right in the Executive to continue in the Corporation’s employ for any specific period of time, or to create any other rights in the Executive or obligations on the part of the Corporation, except as are set forth in this Agreement.






5.
EXECUTIVE RIGHT TO ASSETS.
A.
The rights of the Executive, the Beneficiary, or any other person claiming through the Executive under this Agreement, shall be solely those of an unsecured general creditor of the Corporation. The Executive, the Beneficiary, or any other person claiming through the Executive, shall have the right to receive those payments specified under this Agreement only from the Corporation, and has no right to look to any specific or special property separate from the Corporation for payments.

B.
The Executive agrees that he, the Beneficiary, or any other person claiming through the Executive shall have no right or beneficial ownership interest whatsoever in any general asset used or acquired by the Corporation in connection with the liabilities it has assumed under this Agreement. Such assets shall not be deemed to be held under any trust for the benefit of the Executive or the Beneficiary, nor shall any such general assets be considered security for the performance of the obligations of the Corporation. Any such assets shall remain general, unpledged, and unrestricted assets of the Corporation.

C.
The Executive also understands and agrees that his participation in the acquisition of any such general asset for the Corporation shall not constitute a representation to the Executive, the Beneficiary, or any person claiming through the Executive that any of them has a special or beneficial interest in such general asset.

6.
INDEPENDENCE OF BENEFITS.

The benefits payable under this Agreement shall be independent of, and in addition to, any other benefits or compensation, whether by salary, or bonus or otherwise, payable under any other employment agreements that now exist or may hereafter exist from time to time between the Corporation and the Executive. This Agreement between the Corporation and the Executive does not involve a reduction in salary or foregoing of an increase in future salary by the Executive. Nor does the Agreement in any way affect or reduce the existing and future compensation and other benefits of the Executive.

7.
ASSIGNABILITY.

Except in so far as this provision may be contrary to applicable law, no sale, transfer, alienation, assignment, pledge, collateralization, or attachment of any benefits under this Agreement shall be valid or recognized by the Corporation.

8.
AMENDMENT.

This Agreement may be amended at any time by mutual written agreement of the Corporation and the Executive. The Corporation shall have no right to change the benefits under this Agreement without the prior written consent of the Executive.   The   Executive may change the Beneficiary under this Agreement upon prior written notice to the Corporation, Attn. General Counsel, 1400 Corporate Center Way, Wellington, Florida 33414.   If any provision of this Agreement contravenes any regulations or guidance promulgated under Section 409A of the U.S. Internal Revenue Code of 1986 (collectively, “ Section 409A ”), the Corporation shall amend this Agreement or any provision hereof to maintain to the maximum extent practicable the original intent of the applicable provision without violating the provisions of Section 409A.


9.
LAW GOVERNING.
This Agreement shall be governed by the laws of the State of Florida. This Agreement is solely between the Corporation and the Executive. Further, the Executive, the Beneficiary or other persons claiming through the Executive shall only have recourse against the Corporation for enforcement of the Agreement. However, it shall be binding upon the Beneficiary and the beneficiaries, heirs, executors and administrators of the Executive and upon the successors and assigns of the Corporation.

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IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first above written.
 
 
CORPORATION:
B/E AEROSPACE, INC.,
 
 
a Delaware corporation
ATTEST:
 
 
 
 
 
 
By:
/s/ Ryan M. Patch
By:
/s/ Eric J. Wesch
Name:
Ryan M. Patch
Name:
Eric J. Wesch
Title:
Secretary
Title:
Vice President & Treasurer
 
 
 
 
 
 
 
 
 
 
 
 
EXECUTIVE:
/s/ Werner Lieberherr
 
 
 
WERNER LIEBERHERR
 
 





Exhibit 10-f-1






ROCKWELL COLLINS 2005
DEFERRED COMPENSATION PLAN



















Amended and Restated June 27, 2017






AMENDED AND RESTATED
ROCKWELL COLLINS 2005
DEFERRED COMPENSATION PLAN

The purpose of this Plan is to provide certain specified benefits to a select group of management and highly compensated employees who contribute materially to the continued growth, development and future business success of Rockwell Collins, Inc. and its affiliates. This Plan is unfunded for tax purposes and for purposes of Title I of ERISA.
This Plan is established effective as of January 1, 2005 for deferred compensation that was earned and vested after December 31, 2004 under the Rockwell Collins Deferred Compensation Plan and for compensation deferred for the period subsequent to the date this Plan is established. The Plan is hereby amended and restated effective June 27, 2017.
ARTICLE I: DEFINITIONS
1.010
Account means one of the accounts established for the purpose of measuring and determining a Participant’s interest in this Plan, such accounts being the Participant’s Salary Deferral Account, Company Match Account, Incentive Compensation Deferral Account, and Performance Award Account.
1.020
Account Balance means, with respect to each Participant, an account in the records of the Company equal to the sum of the Participant’s:
(a)
Salary Deferral Account balance;
(b)
Company Match Account balance;
(c)
Incentive Compensation Deferral Account balance; and
(d)
Performance Award Account balance.
The Account Balance (and each underlying balance making up such Account Balance) is a bookkeeping entry only and will be utilized solely as a device for the measurement and determination of the amounts to be paid to a Participant, or his designated Beneficiary, pursuant to this Plan.
1.030
Affiliate means:
(a)
any corporation incorporated under the laws of one of the United States of America of which the Company owns, directly or indirectly, eighty percent (80%) or more of the combined voting power of all classes of stock or eighty percent (80%) or more of the total value of the shares of all classes of stock (all within the meaning of Code Section 1563);
(b)
any partnership or other business entity organized under such laws, of which the Company owns, directly or indirectly, eighty percent (80%) or more of the voting power or eighty





percent (80%) or more of the total value (all within the meaning of Code Section 414(c)); and
(c)
any other company deemed to be an Affiliate by the Company’s Board of Directors.
1.040
Annual Company Match Amount for any Plan Year means the amount determined in accordance with Section 3.030.
1.050
Annual Deferral Amount means that portion of a Participant’s Base Annual Salary which a Participant elects to have deferred, in accordance with Article III, for any one Plan Year. In the event of a Participant’s Retirement, Disability, death or a Separation from Service prior to the end of a Plan Year, such year’s Annual Deferral Amount will be the actual amount withheld prior to such event.
1.060
Annual Installment Method means a benefit payment method involving a series of annual installment payments over the number of years selected by the Participant in accordance with this Plan, which will be calculated in the manner set forth in this Section. The Account Balance of the Participant will be determined as of the close of business on the last business day of the calendar year. The annual installment will be calculated by multiplying this balance by a fraction, the numerator of which is one (1), and the denominator of which is the remaining number of annual payments due the Participant. (By way of example, if a Participant were to elect a 10-year payment under the Annual Installment Method, the first payment would be one-tenth (1/10) of the Account Balance, calculated as described in this definition. The following year, the payment would be one-ninth (1/9) of the Account Balance, calculated as described in this definition.) Each annual installment will be paid within the first sixty (60) days of the calendar year following the applicable year.
1.070
Base Annual Salary means the Employee’s annualized salary rate for services performed by such Employee on behalf of the Company or an Affiliate, whether or not paid to him in such calendar year or included on the Federal Income Tax Form W‑2 for such calendar year, excluding bonuses, commissions, overtime, fringe benefits, stock options, stock appreciation rights, restricted stock, restricted stock units, relocation expenses, incentive payments, Performance Awards, non-monetary awards, directors fees and other fees, automobile and other allowances (whether or not such allowances are included in the Employee’s gross income) paid to a Participant for employment services rendered. Base Annual Salary will be calculated before reduction for compensation voluntarily deferred or contributed by the Participant pursuant to all qualified or non‑qualified plans of the Company or any Affiliate and will be calculated to include amounts not otherwise included in the Participant’s gross income under Code Section 125, 129, 223, 402(e)(3), 402(h), 403(b) or similar provision, pursuant to plans established by the Company or an Affiliate; provided, however, that all such amounts will be included in compensation only to the extent that, had there been no such plan, the amount would have been payable in cash to the Participant.
1.080
Beneficiary means one or more persons, trusts, estates or other entities, designated in accordance with Article XI who or which are entitled to receive benefits under this Plan upon the death of a Participant.
1.090
Beneficiary Designation Form means the written or electronic form established from time to time by the Committee or its delegate that a Participant completes, signs and returns to the Committee or its delegate, in order to designate one or more Beneficiaries.





1.100
Board of Directors means the Company’s Board of Directors.
1.110
Change of Control means any of the following:
(a)
The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or Section 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (1) the then outstanding shares of common stock of the Company (the “Outstanding Company Common Stock”) or (2) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (w) any acquisition directly from the Company, (x) any acquisition by the Company, (y) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (z) any acquisition pursuant to a transaction which complies with clauses (1), (2) and (3) of subsection (c) of this Section 1.110; or
(b)
Individuals who, as of the date hereof, constitute the Board of Directors of the Company (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board of Directors; provided, however, that any individual becoming a director subsequent to that date whose election, or nomination for election by the Company’s shareowners, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors; or
(c)
Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets of another entity (a “Company Transaction”), in each case, unless, following such Company Transaction, (1) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Company Transaction beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Company Transaction (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Company Transaction of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (2) no Person (excluding any employee benefit plan (or related trust) of the Company or of such corporation resulting from such Company Transaction) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Company Transaction or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Company Transaction and (3) at least a majority of the members of the board of





directors of the corporation resulting from such Company Transaction were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board of Directors, providing for such Company Transaction; or
(d)
Approval by the Company’s shareowners of a complete liquidation or dissolution of the Company.
1.120
Code means the Internal Revenue Code of 1986, as from time to time amended.
1.130
Committee means the Compensation Committee of the Board of Directors.
1.140
Company means Rockwell Collins, Inc., a Delaware corporation.
1.150
Company Match Account means:
(a)
the sum of all of a Participant’s Annual Company Match Amounts,
(b)
adjusted by amounts credited or debited (gains or losses) thereto, in accordance with the provisions of Section 4.020(b), as such provisions relate to such Company Match Account, and
(c)
reduced by any amount debited thereon equal to the amount of all distributions made to the Participant or his Beneficiary pursuant to this Plan which are related to such Company Match Account.
1.160
Deduction Limitation means the following described limitation on a benefit that may otherwise be distributable pursuant to the provisions of this Plan. Except as otherwise provided, this limitation will be applied to all distributions that are “subject to the Deduction Limitation” under this Plan. If the Company determines in good faith prior to a Change of Control that it is reasonably anticipated that any compensation paid to a Participant for a taxable year of the Company would not be deductible by the Company solely by reason of the limitation under Code Section 162(m), then, to the extent deemed necessary by the Company to ensure that the entire amount of any distribution to the Participant pursuant to this Plan prior to the Change of Control is deductible, the Company may defer all or any portion of a distribution under this Plan. Any amounts deferred pursuant to this limitation will continue to be credited/debited with additional amounts in accordance with Section 4.020(b), even if such amount is being paid out in installments. The amounts so deferred and amounts credited thereon will be distributed to the Participant or his Beneficiary (in the event of the Participant’s death) at the earlier of (a) the earliest possible date in the calendar year, as determined in good faith by the Company, on which the deductibility of compensation paid or payable to the Participant for the taxable year of the Company during which the distribution is made will not be limited by Section 162(m), or (b) the Participant’s Separation from Service or Retirement. Notwithstanding anything to the contrary in this Plan, the Deduction Limitation will not apply to any distributions made after a Change of Control.
1.170
Deferral Election means a written or electronic election made pursuant to Article III by a Participant to defer receipt of a part of his Base Annual Salary, or to defer receipt of all or a part of his Incentive Compensation or any Performance Award.
1.180
Deferral Election Form means the form established from time to time by the Committee or its delegate that a Participant completes, signs and returns to the Committee or its delegate to make a





Deferral Election pursuant to Article III, in order to defer receipt of a part of his Base Annual Salary or to defer receipt of all or a part of his Incentive Compensation or any Performance Award.
1.190
Disability has the meanings set forth in Section 409A. Specifically, for purposes of this Plan and Section 409A, a Participant will be considered to have incurred a Disability if the Participant is:
(a)
unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months; or
(b)
by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of less than twelve (12) months, receiving income replacement benefits for a period of not less than three (3) months under an accident or health plan covering employees of the Company or any Affiliate.
1.200
Effective Date means January 1, 2005.
1.210
Eligible Employee means:
(a)
For the Plan Year commencing January 1, 2005, any Employee who is employed in the United States by the Company or any Affiliate whose Base Annual Salary for 2005 is greater than or equal to $110,000.
(b)
For the Plan Year commencing January 1, 2006, any Employee who is employed in the United States by the Company or any Affiliate whose Base Annual Salary for 2006 is greater than or equal to $120,000.
(c)
For Plan Years commencing on or after January 1, 2007, any Employee who is employed in the United States by the Company or an Affiliate whose salary band on or after January 1, 2007 is equal to D5, E6, M0, or M5 through M9 before July 23, 2007, or is equal to D5, E6, M0, M1, or M6 through M9 on or after July 23, 2007.
(d)
For Plan Years commencing on or after January 1, 2014, any Employee who is employed in the United States by the Company or an Affiliate whose salary band is equal to D5, E6, M0, M1, or M6 through M9 prior to May 31, 2014, or is equal to D5, G7, G8, G9, M0, M1, or M6 through M9 on or after May 31, 2014.
Notwithstanding the foregoing, an Eligible Employee shall not include anyone who becomes an Employee of an Affiliate as a result of a corporate transaction unless the Affiliate’s participation in the Plan is approved by the Vice President, Rewards & Labor Strategy. The list of approved Affiliates shall be maintained by the Vice President, Rewards & Labor Strategy or his or her designee.
1.220
Employee means any person who is employed by the Company or by an Affiliate.
1.230
ERISA means the Employee Retirement Income Security Act of 1974, as from time to time amended.
1.240
Exchange Act means the Securities Exchange Act of 1934, as amended.





1.245
409A Change of Control means a “Change of Control Event” as defined in Treasury Regulation Section 1.409A-3(i)(5)(i) and set forth in Treasury Regulation Section 1.409A-3(i)(5)(v)-(vii), applying the default rules and percentages set forth in such Treasury Regulation.
1.250
Incentive Compensation means any award payable to a Participant under an annual incentive compensation plan sponsored by the Company or an Affiliate which, but for a Deferral Election under the Plan, would be paid to the Participant and considered to be “wages” for purposes of United States federal income tax withholding, including without limitation any incentive compensation payable pursuant to the Company’s incentive payment plan(s) and annual incentive compensation plan(s) for Senior Executives, and any change of control agreement entered into between the Company and a Participant.
1.260
Incentive Compensation Deferral means a deferral by a Participant of part or all of his Incentive Compensation otherwise payable to him with respect to a particular fiscal year of the Company. In the event of a Participant’s Retirement, Disability, death or a Separation from Service prior the completion of the fiscal year for which the Incentive Compensation is payable, such year’s Incentive Compensation Deferral will be zero and any Incentive Compensation payable with respect to such partial fiscal year will be paid at the same time Incentive Compensation is paid to employees who did not elect to make a deferral of Incentive Compensation.
1.270
Incentive Compensation Deferral Account means:
(a)
the sum of all of a Participant’s Incentive Compensation Deferrals,
(b)
adjusted by amounts credited or debited (gains or losses) thereto, in accordance with the provisions of Section 4.020(b) which are related to such Incentive Compensation Deferral Account, and
(c)
reduced by any amount debited thereon equal to the amount of all distributions made to the Participant or his Beneficiary pursuant to this Plan which are related to such Incentive Compensation Deferral Account.
1.280
Measurement Funds means the investment vehicles offered under this Plan which are identified and described in communication materials made available to Participants by the Company.
1.290
Named Fiduciary means the Committee, its delegates, the Trustee and, following the occurrence of a Change of Control, the third-party fiduciary described in Section 14.020 of this Plan.
1.300
Non-Qualified Savings Plan means the Rockwell Collins 2005 Non-Qualified Retirement Savings Plan, as amended from time to time.
1.310
Participant means any Eligible Employee:
(a)
who is an employee of Rockwell Collins, Inc. (or one of its Affiliates);
(b)
who elects to participate in the Plan;
(c)
who completes a Participation Agreement and a Beneficiary Designation Form;
(d)
whose completed Participation Agreement and Beneficiary Designation Form are accepted by the Committee or its delegate;





(e)
who commences participation in the Plan; and
(f)
who has not elected to terminate participation in the Plan.
Notwithstanding any other provision of this Plan to the contrary, no Eligible Employee or any other person, individual or entity shall become a Participant in this Plan on or after the day on which a Change of Control occurs.
1.320
Participation Agreement means a written or electronic agreement, as may be amended from time to time, which is provided to an Eligible Employee or Participant by the Committee or its delegate. The Participation Agreement bearing the latest date by the Committee or its delegate will supersede all previous such Participation Agreements in their entirety and will govern the Eligible Employee’s or Participant’s entitlement to benefits hereunder. The terms of any such Participation Agreement may be different for a particular Participant.
1.325
Performance Award means any Performance Share or Performance Unit awarded under (and as defined in) the Company’s 2001 Long-Term Incentives Plan or 2006 Long-Term Incentives Plan.
1.326
Performance Award Deferral means any deferral of a Performance Award made pursuant to and in accordance with the terms of this Plan. In the event of a Participant’s Retirement, Disability, death or a Separation from Service prior to the end of the performance period for which the Performance Award was granted, such Performance Award Deferral will be zero and any Performance Award payable with respect to such partial performance period will be paid at the same time it is paid to employees who did not elect to make a deferral of a Performance Award.
1.328
Performance Award Account means:
(a)
the sum of all of a Participant’s Performance Award Deferrals;
(b)
adjusted by amounts credited or debited (gains or losses) thereto, in accordance with the provisions of Section 4.020(b), as such provisions relate to such Performance Award Account; and
(c)
reduced by any amount debited thereon equal to the amount of all distributions made to the Participant or his Beneficiary pursuant to this Plan which are related to such Performance Award Account.
1.330
Plan means this Amended and Restated Rockwell Collins 2005 Deferred Compensation Plan, which is evidenced by this instrument and by the forms associated with the said instrument, as they may be amended from time to time.
1.340
Plan Year means each twelve-month period ending on the last day of December.
1.350
Pre-Retirement Survivor Benefit means the benefit set forth in Article VII.
1.360
Qualified Savings Plan means the Rockwell Collins Retirement Savings Plan, as amended from time to time.
1.370
Retirement , Retire(s) or Retired means, with respect to an Employee, “separation from service” with the Company and all of its Affiliates, within the meaning of Section 409A, on or after the attainment of age 55, other than for reasons of Disability or death.





1.380
Retirement Benefit means the benefit set forth in Article VI.
1.390
Salary Deferral Account means:
(a)
the sum of all of a Participant’s Base Annual Salary deferral amounts,
(b)
adjusted by amounts credited or debited (gains or losses) thereto, in accordance with the provisions of Section 4.020(b), as such provisions relate to such Salary Deferral Account, and
(c)
reduced by any amount debited thereon equal to the amount of all distributions made to the Participant or his Beneficiary pursuant to this Plan which are related to such Salary Deferral Account.
1.400
Section 409A means Section 409A of the Code and any regulations or other guidance issued thereunder.
1.410
Separation from Service means a “separation from service” from the Company and all of its Affiliates, within the meaning of Section 409A, other than for reasons of Retirement or death.
1.420
Short-Term In-Service Payout means the payout set forth in Section 5.010 of the Plan.
1.430
Specified Employee has the meaning set forth in Section 409A, as determined each year in accordance with procedures established by the Company.
1.440
Termination Benefit means the benefit set forth in Article VIII.
1.450
Third-Party Administrator means an independent third party selected by the Trustee and approved by the individual who, immediately prior to a Change of Control, was the Company’s Chief Executive Officer or, if not so identified, the Company’s highest ranking officer immediately prior to the Change of Control (the “Ex-CEO”).
1.460
Trust means the master trust established by agreement between the Company and the Trustee, which will be a grantor trust.
1.470
Trustee means Wells Fargo Bank N.A., or any successor trustee of the Trust described in Section 1.460 of this Plan.
1.480
Unforeseeable Financial Emergency has the meaning set forth in Section 409A. Specifically, for purposes of this Plan and Section 409A, an Unforeseeable Financial Emergency means a severe financial hardship to the Participant resulting from an illness or accident of the Participant, the Participant’s spouse, or a dependent (as defined in Section 152(a) of the Code) of the Participant, loss of the Participant’s property due to casualty, or other similar extraordinary or unforeseeable circumstances arising as a result of events beyond the control of the Participant. The requirements of this Section 1.480 are met only if, as determined under Section 409A, the amount distributed with respect to the emergency does not exceed the amounts necessary to satisfy such emergency plus amounts necessary to pay taxes reasonably anticipated as a result of the distribution, after taking into account the extent to which such hardship may be relieved through reimbursement or compensation by insurance or otherwise by liquidation of the Participant’s assets (to the extent the liquidation of such assets would not itself cause severe financial hardship).





1.490
Vice President, Rewards & Labor Strategy means the person employed by the Company with this title or a substantially similar title.
ARTICLE II: PARTICIPATION

2.010
Select Group Defined . Since participation in the Plan is intended to be limited to a select group of management and highly compensated Employees, the Plan is only available to Eligible Employees of the Company and its Affiliates.
2.020
Commencement of Participation . As a condition to initial participation in this Plan, each Eligible Employee who wishes to participate in the Plan will be required to complete, execute and return to the Committee or its delegate a written or electronic Deferral Election Form.
In the case of such an Eligible Employee’s initial election to become a Participant in a particular Plan Year (after taking into account the plan aggregation rules of Section 409A), such documentation must be provided by the Eligible Employee to the Committee or its delegate within thirty (30) days following his first becoming an Eligible Employee. Such initial election made shall apply only with respect to amounts paid for services performed after the election and any such initial election to defer Incentive Compensation must be approved by the Vice President, Rewards & Labor Strategy.
If an Eligible Employee has met all enrollment requirements set forth in this Plan and required by the Committee or its delegate (including returning all required documents to the Committee or its delegate) in the time frames described in the above subsections, that the Eligible Employee will become a Plan Participant as soon as administratively practicable after he completes all such enrollment requirements, except that, if an individual becomes an Eligible Employee during the last three months of a calendar year, that Eligible Employee will become a Plan Participant on the first day of the next calendar year.
If an Eligible Employee fails to meet all such requirements within the period required under this Section 2.020 that Eligible Employee will not be entitled to participate in the Plan until the first day of a subsequent Plan Year following the delivery to and acceptance by the Committee or its delegate of the required documents. In addition, the Committee or its delegate will establish from time to time such other enrollment requirements as it determines in its sole discretion are necessary.
2.025 Circumstances in which Eligible Employee Initially Eligible Again . An Eligible Employee who ceased to be an Eligible Employee and who subsequently becomes an Eligible Employee again will be treated as an Eligible Employee for the first time ( i.e. , entitled to make deferrals within the first 30 days of eligibility with respect to services performed after the election as set forth in Sections 2.020 and 3.010(b)) if such employee satisfies either (a) or (b) below.
(a) After 24 Month Break . He or she was not an Eligible Employee or otherwise eligible to participate in the Plan (except with respect to the accrual of earnings on previously deferred amounts) at all times during the 24-month period immediately preceding the date he or she again became an Eligible Employee; or
(b) After Full Distribution . All amounts he or she previously deferred under the Plan have been fully paid, and on and before the date of the last such payment he or she was not an Eligible Employee or otherwise eligible to participate in the Plan for periods after the last payment.






2.030
Termination of Participation and/or Deferrals . If the Committee or its delegate determines in good faith that a Participant no longer qualifies as a member of a select group of management or highly compensated employees, as membership in such group is determined in accordance with ERISA Sections 201(2), 301(a)(3) and 401(a)(1), the Committee will have the right, in its sole discretion, to prevent the Participant from making future deferral elections.
ARTICLE II: DEFERRAL AND COMPANY MATCH CREDITS

3.010
Base Annual Salary Deferral . Each Plan Participant will be permitted to make an irrevocable election to defer (such Deferral Election to be made in whole percentages) receipt of an amount equal to one percent (1%) through fifty percent (50%) of his Base Annual Salary.
(a)
For each Plan Year, a Participant, will be permitted, in his sole discretion, to make an irrevocable election to defer Base Annual Salary for the following Plan Year and must deliver such Deferral Election to the Company or an Affiliate on a new Deferral Election Form before December 31 st of the Plan Year immediately preceding the Plan Year for which the deferral is intended. If no such Deferral Election Form is timely delivered for a Plan Year, the Annual Deferral Amount will be zero for that Plan Year.
(b)
Notwithstanding the foregoing, any Participant who first becomes eligible to participate in the Plan (taking into account the aggregation rules set forth in Section 409A) within the first nine months of a Plan Year may, within thirty (30) days after first becoming eligible to participate in the Plan (taking into account the plan aggregation rules set forth in Section 409A), make an irrevocable election to defer Base Annual Salary for the Plan Year commencing as soon as administratively practicable following the Deferral Election.
(c)
During each Plan Year, the Base Annual Salary Deferral Amount will be withheld from each regularly scheduled Base Annual Salary payroll in equal amounts, as adjusted from time to time for increases and decreases in Base Annual Salary.
3.020
Incentive Compensation Deferral . In addition to the Base Annual Salary deferral described in the preceding Section, each Participant will be permitted to irrevocably elect to defer receipt of an amount equal to one percent (1%) through one hundred percent (100%), such Deferral Election to be made in whole percentages, of the amount of any Incentive Compensation which he might be awarded.
(a)
In general, such Deferral Election will be made on a Deferral Election Form and will apply to Incentive Compensation to which the Participant might be entitled for the fiscal year commencing immediately following such Deferral Election.
(b)
Except as otherwise permitted by Section 409A, any election made pursuant to this Section 3.020 must be made by the close of the fiscal year immediately preceding the fiscal year to which such Incentive Compensation relates commences. Notwithstanding the foregoing, to the extent permitted under Section 409A, if the Company in its sole discretion determines that the Incentive Compensation (or any portion thereof) meets the requirements for “performance-based compensation” within the meaning of Section 409A, the Committee may permit such election to be made after the start of the fiscal year for which the Incentive Compensation may be payable for the portion that qualifies as performance-based compensation, but any such election must be made at least six months prior to the end of the fiscal year for which the Incentive Compensation may be payable. A





Participant will not be permitted to make an election under the preceding sentence unless the Participant is in service with the Company or an Affiliate continually from the later of the beginning of the fiscal year or the date performance criteria are established through the date of the election and no such election may be made with respect to compensation that has become readily ascertainable.
The Incentive Compensation Deferral Amount will be withheld at the time the said Incentive Compensation are or otherwise would be paid to the Participant.
3.025 Performance Award Deferral . If permitted by the Committee or its delegate, each Participant will be permitted to irrevocably elect to defer receipt of an amount equal to one percent (1%) through one hundred percent (100%), such Deferral Election to be made in whole percentages, of his Performance Shares and/or Performance Units.
(a)
In general, such Deferral Election will be made on a Deferral Election Form and will apply to Performance Awards to which the Participant might be granted for the fiscal year commencing immediately following such Deferral Election.
(b)
Except as otherwise permitted by Section 409A, any election made pursuant to this Section 3.025 must be made by the close of the fiscal year immediately preceding the first fiscal year for which the Performance Award is granted. Notwithstanding the foregoing, to the extent permitted under Section 409A, if the Company in its sole discretion determines that the Performance Award (or any portion thereof) meets the requirements for “performance-based compensation” within the meaning of Section 409A, the Committee may permit such election to be made after the Performance Award is granted for the portion that qualifies as performance-based compensation, but any such election must be made at least six months prior to the end of the performance period to which the Performance Award relates. A Participant will not be permitted to make an election under the preceding sentence unless the Participant is in service with the Company or an Affiliate continually from the later of the beginning of the performance period or the date performance criteria are established through the date of the election, and no such election may be made with respect to compensation that has become readily ascertainable.
The Performance Award Deferral Amount will be withheld at the time the said Performance Award otherwise would have been paid to the Participant.
3.030      Annual Company Match Amount . The Plan provided certain matching contributions for Plan Years commencing prior to January 1, 2006. These contributions will be governed by the terms of the Plan as in effect without regard to the November 17, 2009 amendment.
For Plan Years commencing on and after January 1, 2009, a Participant’s Company Match Account will be credited with an amount equal to the “Company Matching Contributions” that would have been made with respect to the Participant under the Qualified Savings Plan and the Non-Qualified Retirement Savings Plan for the Plan Year, but which was not made due to the Participant’s election to participate in this Plan. The Annual Company Match Amount will be determined by applying the applicable matching contribution percentage in the Qualified Savings Plan to the Participant’s “Basic After-tax Contributions” and “Basic Pre-Tax Contributions” for the corresponding period that would apply if “Base Compensation” under the Qualified Savings Plan (as such terms are defined in the Qualified Savings Plan)





included the deferral of Base Annual Salary to this Plan for the corresponding period, reduced by the amount of “Company Matching Contribution” actually payable for such period under the terms of the Qualified Savings Plan and the Rockwell Collins 2005 Non-Qualified Retirement Savings Plan.
For purposes of this calculation, (a) the Participant’s Qualified Savings Plan deferral election shall be deemed to be the Qualified Savings Plan deferral election on file for the Participant as of the last day of the year preceding such Plan Year (or, in the case of a newly hired Participant who makes an election to participate under the second paragraph of Section 2.020, based upon the Participant’s Qualified Savings Plan deferral election in effect on, or soonest made within thirty (30) days following, his first becoming an Eligible Employee); (b) no change to the Participant’s written or electronic deferral election to the Qualified Savings Plan during the applicable Plan Year shall be considered (other than a permitted suspension of contributions due to financial hardship); and (c) “Base Compensation” shall be determined without regard to the Code Section 401(a)(17) limit.
The Annual Company Match Amount which is attributable to a Participant’s deferral of Base Annual Salary for a particular Plan Year will be calculated in the first month of the immediately succeeding Plan Year and will be credited to the Participant’s Company Match Account no later than January 31 st of such succeeding Plan Year. Subject to the provisions of the preceding sentence:
(a)
In the event of a Participant’s Retirement or death, the Participant’s Company Match Account will be credited with the Annual Company Match Amount for the Plan Year in which he retires or dies; and
(b)
If a Participant is not employed by the Company or an Affiliate as of the last day of a Plan Year for any reason other than the Participant’s Retirement or death, the Annual Company Match for such Plan Year will be zero.
Annual Company Match Amounts with respect to Plan Years commencing on and after January 1, 2009, will be paid in accordance with the Participant’s Deferral Election applicable to Base Annual Salary for the corresponding period. Such Annual Company Match Amounts will be available for withdrawal due to Unforeseeable Financial Emergency under Section 5.020.
In accordance with Section 4.020 below, Annual Company Match Amounts with respect to Plan Years commencing on and after January 1, 2009, will be allocated in accordance with the Participant’s investment election, into one or more of the Plan’s available Measurement Funds, that is in effect at the time such Annual Company Match Amount is credited.
ARTICLE IV: PLAN ACCOUNTS
4.010      Vesting .
(a)
A Participant will have a one hundred percent (100%) vested interest in his Account Balance.
(b)
Notwithstanding anything to the contrary contained in this Plan, in the event of a Change of Control, a Participant’s Account Balance and any other interest of his under this Plan at the time of the occurrence of the Change of Control will remain one hundred percent (100%) vested, if such interest is already 100% vested at that time and, if such interest is





not one hundred percent (100%) vested at that time, will immediately become one hundred (100%) vested.
4.020
Crediting/Debiting of Account Balances . In accordance with, and subject to, the rules and procedures that are established from time to time by the Committee or its delegate, in its sole discretion, amounts will be credited or debited to a Participant’s Account Balance in the manner set forth in the provisions of this Section.
(a)
Allocation to Measurement Funds . A Participant, in connection with his initial Deferral Election in accordance with Section 3.010 or 3.020 above, will be permitted to also elect to have one or more Measurement Funds used to determine the amounts to be credited to his Account Balance and his election will continue to be in effect thereafter, unless it should be changed in accordance with subsection (c). If it is determined by the Committee or its delegate that an investment election made by a Participant is invalid or defective, the Participant’s election, until duly corrected by him, will be deemed to have been made in favor of the Fidelity Puritan® Fund or such other Measurement Fund as may be designated by the Vice President, Rewards & Labor Strategy from time to time.
(b)
Crediting or Debiting Method . The performance (either positive or negative) of each elected Measurement Fund will be determined by the Committee or its delegate, based on the performance of the Measurement Funds themselves. A Participant’s Account Balance will be credited or debited on a daily basis based on the performance of each Measurement Fund selected by the Participant, as determined by the Committee or its delegate in its sole discretion, as though:
(1)
a Participant’s Account Balance were actually invested in the Measurement Fund(s) selected by the Participant as of the close of business on any business day, at the closing price on that day;
(2)
the portion of the amount actually deferred during any pay period was invested in the Measurement Fund(s) selected by the Participant, in the percentages applicable on such day, no later than the close of business on the first business day after the day on which such amounts are actually deferred, at the closing price on such date; and
(3)
any distribution made to a Participant that decreases such Participant’s Account Balance ceased being invested in the Measurement Fund(s), in the applicable percentages, no earlier than one business day prior to the distribution, at the closing price on such date.
(c)
Transfers among Measurement Funds . The Participant will be permitted to change, on a daily basis, any previous Measurement Fund election or elections he has made with regard to his Account Balance. The elections and changes to such elections which a Participant makes pursuant to this subsection will be made by means of any method (including any available telephonic or electronic method which is acceptable to the Committee or its delegate at the time the election or change is made by the Participant), and may be made at any time and will be effective as of the New York Stock Exchange closing immediately following the making of that election or change.





(d)
No Actual Investment . Notwithstanding any other provision of this Plan that may be interpreted to the contrary, the Measurement Funds are to be used for measurement purposes only, and a Participant’s election of any such Measurement Fund, the allocation to his Account Balance thereto, the calculation of additional amounts and the crediting or debiting of such amounts to a Participant’s Account Balance will not be considered or construed in any manner as an actual investment of his Account Balance in any such Measurement Fund. In the event that the Company or the Trustee, in its own discretion, decides to invest funds in any or all of the Measurement Funds, no Participant will have any rights in or to such investments themselves. Without limiting the foregoing, a Participant’s Account Balance will at all times be a bookkeeping entry only and will not represent any investment made on his behalf by the Company or the Trust. The Participant will at all times remain an unsecured creditor of the Company.
(e)
Company Reservation of Rights . Consistent with the preceding sentence, nothing to the contrary in this Plan or any of its forms or communication material, nor in any document associated with the Trust, should be interpreted or understood to provide Participants or their Beneficiaries with any current, direct rights with respect to the assets held by the Trustee in the Trust.
4.030      FICA and Other Taxes .
(a)
Deferral Amounts . For each Plan Year, the Company or any Affiliate employing the Participant will withhold from that portion of the Participant’s Base Annual Salary, Incentive Compensation, or Performance Award which is being deferred the Participant’s share of FICA and other employment taxes on such deferrals.
(b)
Annual Company Match Amounts . For each Plan Year in which Company Match Amount is credited to the Participant, the Company or any Affiliate employing the Participant will withhold the Participant’s share of FICA and other employment taxes on the amount credited to such Company Match Account.
(c)
Distributions . The Company or any Affiliate employing the Participant, or the Trustee of the Trust, will withhold from any payments made to a Participant under this Plan all federal, state and local income, employment and other taxes required to be withheld in connection with such payments, in amounts and in a manner to be determined in the sole discretion of the Company and the trustee of the Trust.
ARTICLE V: SHORT-TERM IN SERVICE PAYOUTS, IN-SERVICE WITHDRAWALS AND 409A CHANGE OF CONTROL PAYMENTS
5.010
Short-Term In-Service Payouts . In connection with each election to defer, a Participant may irrevocably elect to receive a future Short-Term In -Service Payout from the Plan with respect to such Salary Deferral Account, Company Match Account, Incentive Compensation Deferral Account, and Performance Award Account. Any such election must be made no later than (i) December 31st of the Plan Year immediately preceding the Plan Year to which the Base Annual Salary deferral relates and (ii) the close of the fiscal year immediately preceding the first fiscal year to which the Incentive Compensation or Performance Award relates; provided, however, that if the Incentive Compensation or Performance Award qualifies as “performance-based compensation” within the meaning of Section 409A, the Committee may permit such election to





be made at any time that is at least six months prior to the end of the performance period to which the Incentive Compensation or Performance Award, as the case may be, relates.
(a)
Subject to the Deduction Limitation, the said Short-Term In-Service Payout will be a lump sum payment in an amount that is equal to the sum of the deferrals and Annual Company Match Amount, as adjusted for amounts credited or debited in the manner provided in Section 4.020 on that amount.
(b)
Subject to the Deduction Limitation and the other terms and conditions of this Plan, each Short‑Term In-Service Payout elected will be paid out during a sixty (60) day period commencing immediately after the last day of any Plan Year designated by the Participant that is at least three Plan Years after the Plan Year in which the deferral occurred. By way of example, if a three-year Short-Term In-Service Payout is elected for amounts that are deferred in the Plan Year commencing January 1, 2008, the three-year Short-Term In-Service Payout would become payable during a sixty (60) day period commencing January 1, 2012.
(c)
Should an event occur that triggers a benefit under Article VI, VII, or VIII any deferrals, plus amounts credited or debited thereon, that is subject to a Short-Term In-Service Payout election under this Section will not be paid in accordance with this Section, but will instead be paid in accordance with the other applicable Article.
5.020
Withdrawal for Unforeseeable Financial Emergencies . In the event that any Participant should encounter an Unforeseeable Financial Emergency, such Participant may:
(a)
petition the Committee or its delegate to suspend any deferrals required to be made on his behalf, and/or
(b)
petition the Committee or its delegate to permit him to receive a partial or full payout from the Plan. Such a payout will not exceed the lesser of:
(1)
the Participant’s Account Balance, calculated as if the Participant were receiving a Termination Benefit; and
(2)
the amount reasonably needed to satisfy the Unforeseeable Financial Emergency.
If, subject to the sole discretion of the Committee or its delegate, the petition for a suspension and/or payout is approved, suspension will take effect on the date of approval and any payout will be made within sixty (60) days of the date of approval. The payment of any amount under this Section will not be subject to the Deduction Limitation.
5.030
409A Change of Control Payments . Notwithstanding any other provision of this Plan to the contrary, a Participant may elect to have his interest in and to Accounts hereunder paid in a lump sum, in the event of the occurrence of a 409A Change of Control, subject to the following:
(a)
To be effective, the election of a Participant pursuant to this Section 5.030 must be made in writing and filed with the Committee or filed electronically on or before the latest of (1) December 31, 2008, (2) December 31st of the calendar year immediately preceding the first Plan Year with respect to which the Participant has deferred Base Annual Salary, Incentive Compensation, Performance Award and/or Annual Company Match Amounts, or (3) the thirtieth day after initial eligibility for the Plan or any similar Company deferred





compensation plan (in which case such election shall apply only with respect to amounts earned after such election is filed). Such election shall apply to the entire Account Balance and, except as otherwise provided in Section 10.020, shall be irrevocable.
(b)
Any lump sum payments which are to be made on account of the occurrence of a 409A Change of Control shall be made within forty-five (45) days following such 409A Change of Control.
(c)
Notwithstanding the foregoing, if the Participant does not file a timely written or electronic election in accordance with Section 5.030(a) to receive or not receive his or her Accounts under the Plan in a lump sum upon a 409A Change of Control, then such Participant’s Accounts under the Plan will automatically be paid in a lump sum upon a 409A Change of Control.
ARTICLE VI: RETIREMENT BENEFITS
6.010
Retirement Benefit . Subject to the Deduction Limitation, a Participant who Retires will receive, as a Retirement Benefit, his Account Balance.
6.020
Payment of Retirement Benefit . A Participant, in connection with his commencement of participation in the Plan, may elect to receive the Retirement Benefit in a lump sum or pursuant to an Annual Installment Method of periods of from two (2) through fifteen (15) years. The Participant may change any election he has previously made to a different payout period permitted hereunder, but only one such a change may be made with respect to any single election. Such change will be accomplished by the Participant notifying the Committee or its delegate, but such change will not be valid, unless it has been submitted by the Participant and accepted by the Committee or its delegate (in the Committee’s or delegate’s discretion) in accordance with the rules set forth in Section 10.020. The Participant’s most recent election accepted by the Committee or its delegate shall govern the payout of the Retirement Benefit. If a Participant does not make any election with respect to the payment of the Retirement Benefit, then such benefit shall be payable in a lump sum. The lump sum payment shall be made, or installment payments shall commence, within the first sixty (60) days following the Plan Year in which the Participant Retires. Any payment made shall be subject to the Deduction Limitation.
6.030
Death Prior to Completion of Retirement Benefit . If a Participant dies after Retirement distributions commence but before the Retirement Benefit is paid in full, the Participant’s unpaid Retirement Benefit payments shall continue and shall be paid to the Participant’s Beneficiary over the remaining number of years and in the same amounts and form and time of payment as that benefit would have been paid to the Participant had the Participant survived.
ARTICLE VII: PRE-RETIREMENT SURVIVOR BENEFIT
7.010
Pre-Retirement Survivor Benefit . Subject to the Deduction Limitation, the Participant’s Beneficiary shall receive a Pre-Retirement Survivor Benefit equal to the Participant’s Account Balance if the Participant dies before he Retires or experiences a Separation from Service.
7.020
Payment of Pre-Retirement Survivor Benefit . Any Pre-Retirement Survivor Benefit payable pursuant to Section 7.010 will be paid in a lump sum within the first sixty days of the calendar year following the year which includes the Participant’s death. Such lump sum payment will be paid to the Participant’s beneficiary as designated on the Beneficiary Designation Form most





recently filed in writing or electronically with the Committee or its delegate prior to the Participant’s death. Any such payment made will be subject to the Deduction Limitation.
ARTICLE VIII: SEPARATION FROM SERVICE BENEFIT
8.010
Separation from Service Benefit . Subject to the Deduction Limitation, the Participant will receive a Separation from Service Benefit, which will be equal to the Participant’s Account Balance if a Participant experiences a Separation from Service prior to his Retirement or death.
8.020
Payment of Separation from Service Benefit . The form of payment of a Participant’s Account Balance, if such payment is due to the Participant’s Separation from Service, will in all cases be a lump sum in cash. Payment of such Separation from Service Benefit will be paid within the first sixty (60) days of the calendar year immediately following the Plan Year which includes the Participant’s Separation from Service.
ARTICLE IX: DISABILITY WAIVER AND BENEFIT
9.010
Disability Waiver .
(a)
Waiver of Deferral . A Participant who is determined by the Committee or its delegate to be suffering from a Disability will be excused from fulfilling deferrals that would otherwise have been withheld from his Base Annual Salary, Incentive Compensation or Performance Awards after he is determined to have suffered a Disability. During the period of Disability, such Participant will continue to be considered a Participant for all other purposes of this Plan.
(b)
Return to Work . If a Participant returns to employment after a Disability ceases, subject to Section 409A, the Participant may continue to defer amounts for the remainder of the Plan Year and for every Plan Year thereafter while he is a Participant in the Plan.
ARTICLE X: SECTION 409A
10.010
Section 409A Generally . This Plan is intended to comply with Section 409A. Notwithstanding any other provision of this Plan to the contrary, the Company makes no representation that this Plan or any amounts payable or benefits provided under this Plan will be exempt from or comply with Section 409A and makes no undertaking to preclude Section 409A from applying to this Plan.
10.020
Changes in Elections . Notwithstanding any other provision of this Plan to the contrary, once an election is made pursuant to this Plan it shall be irrevocable unless all of the following conditions are met:
(a)
the election to change the time or form of payment will not become effective until the date that is one year after the date on which the election to make the change is made;
(b)
except with respect to any payment to be made upon the death of a Participant, the form of payment, as changed, will defer payment for the Plan Year for a minimum of five (5) years later than the date that payment of such Participant’s Account Balances would otherwise have been made under this Plan; and
(c)
with respect to a payment that is to be made upon a fixed date or schedule of dates, the election to change the form of payment is made no less than twelve (12) months before the





date that payment of the Account Balances for that Plan Year was otherwise scheduled to be paid.
For purposes of Section 10.020(b) and (c), all payments scheduled to be made in the form of installments attributable to a particular Plan Year will be treated as scheduled to be made on the date that the first installment of such series of payments is otherwise scheduled to be made (that is, the installments will be treated as an entitlement to a single payment for purposes of Section 409A).
Once a change in election is made and recorded pursuant to the Plan, such election will be irrevocable unless all of the conditions of this Section 10.020 are met. Notwithstanding any other provision of this Plan to the contrary, a Participant will be permitted to make only one change in election pursuant to this Section 10.020 with respect to the Account Balances to which such election relates.
10.030
Six Month Wait for Specified Employees . Notwithstanding any other provision of this Plan to the contrary, to the extent that any Account payable under the Plan constitute an amount payable upon Separation from Service or Retirement to any Participant under the Plan who is deemed to be a Specified Employee, then such amount will not be paid during the six (6) month period following such Separation from Service or Retirement. If the provisions of this Section 10.030 apply to a Participant who incurs a Separation from Service or Retirement, within the first six (6) months of the calendar year, then such amount will be paid within the first sixty (60) days following the close of the calendar year which includes the Participant’s Separation from Service or Retirement. If the provisions of this Section 10.030 apply to a Participant who incurs a Separation from Service or Retirement within the last six (6) months of the calendar year, then such amount will be paid within the first sixty (60) days after June 30th of the calendar year following the year in which includes the Participant’s Separation from Service or Retirement.
ARTICLE XI: BENEFICIARY DESIGNATION
11.010
Beneficiary . Each Participant will have the right, at any time, to designate his Beneficiary or Beneficiaries (both primary and contingent) to receive any benefits payable under the Plan to a beneficiary upon the death of a Participant. The Beneficiary designated under this Plan may be the same as or different from the Beneficiary designation under any other plan of an Employer in which the Participant participates.
11.020
Beneficiary Designation or Change of Designation . A Participant will be permitted to designate his Beneficiary by completing and signing a written or electronic Beneficiary Designation Form , and returning it to the Committee or its delegate. A Participant will have the right to change a Beneficiary by completing, signing and otherwise complying with the terms of the written or electronic Beneficiary Designation Form and the Committee’s or its delegate’s rules and procedures, as in effect from time to time. Upon the acceptance by the Committee or its delegate of a new written or electronic Beneficiary Designation Form, all Beneficiary designations previously filed will be canceled. The Committee or its delegate will be entitled to rely on the last written or electronic Beneficiary Designation Form filed by the Participant and accepted by the Committee or its delegate prior to the Participant’s death.
11.030
Spousal Consent Required . If a Participant names someone other than his spouse as a Beneficiary, a spousal consent, in the written or electronic form designated by the Committee or its delegate, must be signed by that Participant’s spouse and returned to the Committee or its delegate.





11.040
Acknowledgment . No designation or change in designation of a Beneficiary will be effective until received and acknowledged by the Committee or its delegate.
11.050
Absence of Valid Beneficiary Designation . If a Participant fails to designate a Beneficiary as provided in the preceding Sections or, if all designated Beneficia-ries predecease the Participant or die prior to complete distribution of the Participant’s benefits, then the Participant’s designated Beneficiary will be deemed to be his surviving spouse. If the Participant has no surviving spouse, the benefits remaining under the Plan to be paid to a Beneficiary will be payable to the executor or personal representative of the Participant’s estate.
11.060
Doubt as to Beneficiary . Subject to and in accordance with Section 409A, if the Committee or its delegate has any doubt as to the proper Beneficiary to receive payments pursuant to this Plan, the Committee or its delegate will have the right, exercisable in its discretion, to withhold such payments until this matter is resolved to the Committee’s or the delegate’s satisfaction.
11.070
Discharge of Obligations . The payment of benefits under the Plan to a Beneficiary will fully and completely discharge the Company and all of its Affiliates and the Committee from all further obligations under this Plan with respect to the Participant, and that Participant’s participation in this Plan will terminate upon such full payment of benefits.
ARTICLE XII: LEAVE OF ABSENCE
12.010
Paid Leave of Absence . Subject to Section 409A, if a Participant is authorized by the Company or the Affiliate employing the Participant for any reason to take a company-paid leave of absence, the Participant will continue to be considered to be an Eligible Employee and deferrals will continue to be withheld during such paid leave of absence. Notwithstanding the foregoing, such withholding will cease on the date such paid leave of absence is deemed to be a Separation from Service for purposes of Section 409A.
12.020
Unpaid Leave of Absence . Subject to Section 409A, if a Participant is authorized by the Company or the Affiliate employing the Participant to take an unpaid leave of absence, the Participant will continue to be considered an Eligible Employee and the Participant will not be permitted to make deferrals until the Participant returns to a paid employment status. Upon such return, deferrals will resume for the remaining portion of the Plan Year in which the return occurs, based on the deferral election, if any, made for that Plan Year. If no election was made for that Plan Year, no deferral will be withheld.
ARTICLE XIII: TERMINATION, AMENDMENT OR MODIFICATION
13.010
Termination . Although the Company and each Affiliate anticipates that it will continue the Plan for an indefinite period of time, there is no guarantee that the Company or any such Affiliate will continue the Plan or will not terminate the Plan at any time in the future. Accordingly, the Company reserves the right to discontinue sponsorship of the Plan and/or to terminate the Plan at any time with respect to any or all of its participating Employees, by action of the Board of Directors. Notwithstanding the foregoing, except as otherwise permitted by Section 409A, in the event of any termination of the Plan, any amounts payable under the Plan shall continue to be paid in accordance with the terms of the Plan in effect on the date of Plan termination.
13.020
Amendment . The Company may, at any time, amend or modify the Plan in whole or in part by action of the Board of Directors; provided, however, that:





(a)
no amendment or modification shall be effective to decrease or restrict the value of a Participant’s Account Balance in existence at the time the amendment or modification is made, calculated as if the Participant had experienced a Separation from Service as of the effective date of the amendment or modification or, if the amendment or modification occurs after the date upon which the Participant was eligible to Retire, the Participant had Retired as of the effective date of the amendment or modification;
(b)
no amendment or modification of this Section 13.020 Plan shall be effective; and
(c)
the amendment or modification of the Plan shall not affect any Participant or Beneficiary who has become entitled to the payment of benefits under the Plan as of the date of the amendment or modification.
13.030
Effect of Payment . The full payment of all applicable benefits hereunder shall completely discharge all obligations to a Participant and his Beneficiaries under this Plan.
ARTICLE XIV: ADMINISTRATION
14.010
Committee Duties . Except as otherwise provided in this Article, this Plan will be administered by the Committee and its delegates. Members of the Committee may be Participants under this Plan. The Committee will also have the discretion and authority to:
(a)
make, amend, interpret, and enforce all appropriate rules and regulations for the administration of this Plan, and
(b)
decide or resolve any and all questions including interpretations of this Plan, as may arise in connection with the Plan.
Any individual serving on the Committee who is a Participant will not be permitted to vote or act on any matter relating solely to himself or herself. When making a determination or calculation, the Committee will be entitled to rely on information furnished by a Participant or the Company.
14.020
Administration Upon Change of Control . Notwithstanding any other provision of this Plan to the contrary, upon and after the occurrence of a Change of Control, the Plan will be administered by the Third-Party Administrator. The Third-Party Administrator so selected will have the discretionary power to determine all questions arising in connection with the administration of the Plan and the interpretation of the Plan and Trust including, but not limited to, benefit entitlement determinations; provided, however, upon and after the occurrence of a Change of Control, such administrator will have no power to direct the investment of Plan or Trust assets or select any investment manager or custodial firm for the Plan or Trust.
Upon and after the occurrence of a Change of Control, the Company will be required to:
(a)
pay all reasonable administrative expenses and fees of the Third-Party Administrator;
(b)
indemnify the Third-Party Administrator against any costs, expenses and liabilities including, without limitation, attorney’s fees and expenses arising in connection with the performance of such administrator hereunder, except with respect to matters resulting from the gross negligence or willful misconduct of the said administrator or its employees or agents; and





(c)
supply full and timely information to the Third-Party Administrator on all matters relating to the Plan, the Trust, the Participants and their Beneficiaries, the Account Balances of the Participants, the date of circumstances of the Retirement, Disability, death or Separation from Service of the Participants, and such other pertinent information as the Third-Party Administrator may reasonably require.
Upon and after a Change of Control, the Third-Party Administrator may not be terminated by the Company and may only be terminated (and a replacement appointed) by the Trustee, but only with the approval of the Ex-CEO.
14.030
Agents . In the administration of this Plan, the Committee may, from time to time, employ agents and delegate to them such administrative duties as it sees fit (including acting through a duly appointed representative) and may from time to time consult with counsel who may be counsel to the Company or any Affiliate. The Vice President, Rewards & Labor Strategy will at all times, unless otherwise determined by the Committee, be deemed to be and shall be specifically referred to herein as the Committee’s delegate for all purposes herein.
14.040
Binding Effect of Decisions . The decision or action of the Committee or its delegate with respect to any question arising out of or in connection with the administration, interpretation and application of the Plan and the rules and regulations promulgated hereunder will be final and conclusive and binding upon all persons having any interest in the Plan.
14.050
Indemnity of Committee . The Company and its Affiliates shall indemnify and hold harmless the members of the Committee, any Employee to whom the duties of the Committee may be delegated, and the Committee or its delegate against any and all claims, losses, damages, expenses or liabilities arising from any action or failure to act with respect to this Plan, except in the case of willful misconduct by the Committee, any of its members, or such Employee.
14.060
Employer Information . To enable the Committee and its delegates to perform their functions, the Company will supply full and timely information to the Committee and delegates on all matters relating to the compensation of its Participants, the date and circum-stances of the Retirement, Disability, death or circumstances of the Retirement, Disability, death or Separation from Service of its Participants, and such other pertinent information as the Committee or its delegate may reasonably require.
ARTICLE XV: OTHER BENEFITS AND AGREEMENTS
15.10 Coordination with Other Benefits . The benefits provided for a Participant and Participant’s Beneficiary under the Plan are in addition to any other benefits available to such Participant under any other plan or program for employees of the Company and its Affiliates. The Plan will supplement and will not supersede, modify or amend any other such plan or program except as may otherwise be expressly provided.
ARTICLE XVI: CLAIMS PROCEDURE
16.010
Presentation of Claim . Any Participant or Beneficiary of a deceased Participant (such Participant or Beneficiary being referred to below as a “Claimant”) may deliver to the Committee or its delegate a written claim for a determination with respect to the amounts distributable to such Claimant from the Plan. If such a claim relates to the contents of a notice received by the Claimant, the claim must be made within sixty (60) days after such notice was received by the





Claimant. All other claims must be made within one hundred and eighty (180) days of the date on which the event that caused the claim to arise occurred. The claim must state with particularity the determination desired by the Claimant.
16.020
Notification of Decision . The Committee or its delegate will consider a Claimant’s claim within a reasonable time, and will notify the Claimant in writing:
(a)
that the Claimant’s requested determination has been made, and that the claim has been allowed in full; or
(b)
that the Committee or its delegate has reached a conclusion contrary, in whole or in part, to the Claimant’s requested determination, and such notice must set forth in a manner calculated to be understood by the Claimant;
(c)
the specific reason(s) for the denial of the claim, or any part of it;
(1)
specific reference(s) to pertinent provisions of the Plan upon which such denial was based;
(2)
a description of any additional material or information necessary for the Claimant to perfect the claim, and an explanation of why such material or information is necessary; and
(3)
an explanation of the claim review procedure set forth in Section 16.030 below.
16.030
Review of a Denied Claim . Within sixty (60) days after receiving a notice from the Committee or its delegate that a claim has been denied, in whole or in part, a Claimant (or the Claimant’s duly authorized representative) may file with the Committee or its delegate a written request for a review of the denial of the claim. Thereafter, but not later than thirty (30) days after the review procedure began, the Claimant (or the Claimant’s duly authorized representative):
(a)
may review pertinent documents;
(b)
may submit written comments or other documents; and/or
(c)
may request a hearing, which the Committee or its delegate, in its sole discretion, may grant.
16.040
Decision on Review . The Committee or its delegate will render any decision on review promptly, and not later than 60 days after the filing of a written request for review of the denial, unless a hearing is held or other special circumstances require additional time, in which case the Committee’s or its delegate’s decision must be rendered within one hundred and twenty (120) days after such date. Such decision must be written in a manner calculated to be understood by the Claimant, and it must contain:
(a)
specific reasons for the decision;
(b)
specific reference(s) to the pertinent Plan provisions upon which the decision was based; and
(c)
such other matters as the Committee or its delegate deems relevant.





16.050
Legal Action . A Claimant’s compliance with the foregoing provisions of this Article XVI is a mandatory prerequisite to a Claimant’s right to commence any legal action with respect to any claim for benefits under this Plan.
ARTICLE XVII: TRUST
17.010
Establishment of the Trust . The Company shall establish the Trust (which may be referred to herein as a “Rabbi Trust”). The Trust shall become irrevocable upon a Change of Control (to the extent not then irrevocable). Notwithstanding any other provision of this Plan to the contrary, the Trust shall not become irrevocable or funded with respect to this Plan upon the occurrence of an event described in Section 1.110(d). After the Trust has become irrevocable with respect to the Plan, except as otherwise provided in Section 12 of the Trust, the Trust shall remain irrevocable with respect to the Plan until all benefits due under the Plan and benefits and account balances due to participants and beneficiaries under any other plan covered by the Trust have been paid in full. Upon establishment of the Trust, the Company shall provide for funding of the Trust in accordance with the terms of the Trust.
17.020
Interrelationship of the Plan and the Trust . The provisions of the Plan and each Participant’s Participation Agreement will govern the rights of a Participant to receive distributions pursuant to the Plan. The provisions of the Trust will govern the rights of the Company and its Affiliates, Participants and the creditors of the Company and its Affiliates to the assets transferred to the Trust. The Company and each of its Affiliates employing any Participant will at all times remain liable to carry out their obligations under the Plan.
17.030
Distributions From the Trust . The Company’s and each of its Affiliate’s obligations under the Plan may be satisfied with Trust assets distributed pursuant to the terms of the Trust, and any such distribution will reduce their obligations under this Plan.
17.040      Rabbi Trust . The Rabbi Trust shall:
(a)
be a non-qualified grantor trust which satisfies in all material respects the requirement of Revenue Procedure 92-64, 1992-2 CB 122 (or any successor Revenue Procedure or other applicable authority);
(b)
become irrevocable upon a Change of Control, to the extent not then irrevocable (other than an event described in Section 1.110(d)); and
(c)
provide that any successor trustee shall be a bank trust department or other party that may be granted corporate trustee powers under state law.
ARTICLE XVIII: MISCELLANEOUS
18.010
Status of Plan . The Plan is intended to be a plan that is not qualified within the meaning of Code Section 401(a) and that “is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees” within the meaning of ERISA Section 201(2), 301(a)(3) and 401(a)(1). The Plan will be administered and interpreted to the extent possible in a manner consistent with that intent.
18.020
Unsecured General Creditor . Participants and their Bene-ficiaries, heirs, successors and assigns shall have no legal or equitable rights, interests or claims in any property or assets of the Company





or its Affiliates. For purposes of the payment of benefits under this Plan, any and all of the Company’s or Affiliate’s assets shall be, and remain, the general, unpledged unrestricted assets of the Company or Affiliate. The Company or Affiliate’s obligation under the Plan shall be merely that of an unfunded and unsecured promise to pay money in the future.
18.030
Company Liability . The Company’s or an Affiliate’s liability for the payment of benefits will be defined only by the Plan and the Participant’s specific Participation Agreement. The Company and its Affiliates will have no obliga-tion to a Participant under the Plan, except as expressly provided in the Plan and the Participant’s Participation Agreement.
18.040
Nonassignability . Neither a Participant nor any other person will have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate, alienate or convey in advance of actual receipt, the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to which are expressly declared to be, unassignable and non-transfer-able. No part of the amounts payable will, prior to actual payment, be subject to seizure, attachment, garnishment or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, be transferable by operation of law in the event of a Participant’s or any other person’s bankruptcy or insolvency or be transferable to a spouse as a result of a property settlement or otherwise.
18.050
Not a Contract of Employment . The terms and conditions of this Plan shall not be deemed to constitute a contract of employment between the Company or any of its Affiliates and the Participant. Such employment is hereby acknowledged to be an “at will” employment relationship that can be terminated at any time for any reason, or no reason, with or without cause, and with or without notice, unless expressly provided in a written employment agreement. Nothing in this Plan shall be deemed to give a Participant the right to be retained in the service of the Company or an Affiliate or to interfere with the right of the Company or an Affiliate to discipline or discharge the Participant at any time.
18.060
Furnishing Information . A Participant or his Beneficiary will cooperate with the Committee or its delegate by furnishing any and all information requested by the Committee or its delegate and take such other actions as may be requested in order to facilitate the administra-tion of the Plan and the payments of benefits hereunder.
18.070
Terms . Whenever any words are used herein in the masculine, they should be construed as though they were in the feminine in all cases where they would so apply; and whenever any words are used herein in the singular or in the plural, they should be construed as though they were used in the plural or the singular, as the case may be, in all cases where they would so apply.
18.080
Captions . The captions of the articles, sections and paragraphs of this Plan are for convenience only and do not control or affect the meaning or construction of any of its provisions.
18.090
Governing Law . Subject to ERISA, the provisions of this Plan shall be construed and interpreted according to the laws of the State of Iowa.
18.100
Notice . Any notice or filing required or permitted to be given to the Committee under this Plan shall be sufficient if in writing and hand-delivered, or sent by registered or certified mail, to the address below:
Vice President, Rewards & Labor Strategy





Rockwell Collins, Inc.
400 Rockwell Collins Road NE
Cedar Rapids, Iowa 52498
Such notice will be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification.
Any notice or filing required or permitted to be given to a Participant under this Plan shall be sufficient if in writing and hand-delivered, or sent by mail, to the last known address of the Participant.
18.110
Successors . The provisions of this Plan shall bind and inure to the benefit of the Company and its successors and assigns and the Participant and the Participant’s designated Beneficiaries.
18.120
Spouse’s Interest . The interest in the benefits hereunder of a spouse of a Participant who has predeceased the Participant will automatically pass to the Participant and will not be transferable by such spouse in any manner, including but not limited to such spouse’s will, nor will such interest pass under the laws of intestate succession.
18.130
Validity . In case any provision of this Plan should be found to be illegal or invalid for any reason, said illegality or invalidity will not affect the remaining parts hereof, but this Plan should be construed and enforced as if such illegal or invalid provision had never been inserted herein.
18.140
Minors, Incompetent Persons, etc . If the Committee or its delegate determines that a benefit under this Plan is to be paid to a minor, a person declared incompetent or to a person incapable of handling the disposition of that person’s property, the Committee or its delegate may direct payment of such benefit to the guardian, legal representative or person having the care and custody of such minor, incompetent or incapable person. The Committee or its delegate may require proof of minority, incompetence, incapacity or guardianship, as it may deem appropriate prior to distribution of the benefit. Any payment of a benefit shall be a payment for the account of the Participant and the Participant’s Beneficiary, as the case may be, and will be a complete discharge of any liability under the Plan for such payment amount.
18.150
Qualified Domestic Relations Order . The Committee or its delegate is authorized to make any payments directed by court order that qualifies as a “qualified domestic relations order” under Section 414(p) in any action in which the Plan or the Committee has been named as a party.
18.160      Distribution in the Event of Taxation .
(a)
In General . Subject to and in accordance with Section 409A, if, for any reason, all or any portion of a Participant’s benefits under this Plan becomes taxable to the Participant under Section 409A prior to receipt, a Participant may petition the Committee or its delegate before a Change of Control, or the Trustee of the Trust after a Change of Control, for a distribution of that portion of his benefit that has become taxable under Section 409A. Upon the grant of such a petition, which grant should not be unreasonably withheld (and, after a Change of Control, must be granted), the Company or, as applicable, its Affiliate will distribute to the Participant immediately available funds in an amount equal to the taxable portion of his benefit (which amount will not exceed a Participant’s unpaid Account Balance under the Plan). If the petition is granted, the tax liability distribution will be made within 90 days of the date when the Participant’s petition is granted. Such a distribution will affect and reduce the benefits to be paid under this Plan.





(b)
Trust . If the Trust terminates in accordance with provisions thereof and benefits are distributed from the Trust to a Participant in accordance therewith, the Participant’s benefits under this Plan will be reduced to the extent of such distributions.
18.170
Insurance . The Company, on its own behalf or on behalf of the trustee of the Trust, and, in its discretion, may apply for and procure insurance on the life of the Participant, in such amounts and in such forms as the Trust may choose. The Company or the trustee of the Trust, as the case may be, will be the sole owner and beneficiary of any such insurance. The Participant will have no interest whatsoever in any such policy or policies, and at the request of the Company will submit to medical examinations and supply such information and execute such documents as may be required by the insurance company or companies to which the Company has applied for insurance.
18.180
Requirement for Release . Any payment to any Participant or a Participant’s present, future or former spouse or Beneficiary in accordance with the provisions of this Plan will, to the extent thereof, be in full satisfaction of all claims against the Plan, the Trustee and the Company, and the Trustee may require such Participant or Beneficiary, as a condition precedent to such payment to execute a receipt and release to such effect.






Exhibit 31.1

CERTIFICATION
 
I, Robert K. Ortberg, certify that:
 
1.
I have reviewed the quarterly report on Form 10-Q for the quarter ended June 30, 2017 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:      July 28, 2017
/s/ Robert K. Ortberg
 
Robert K. Ortberg
 
Chairman, President and Chief Executive Officer




Exhibit 31.2

CERTIFICATION
 
I, Patrick E. Allen, certify that:

1.
I have reviewed the quarterly report on Form 10-Q for the quarter ended June 30, 2017 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:      July 28, 2017
/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 June 30, 2017 (the Report) filed with the Securities and Exchange Commission, I, Robert K. Ortberg, 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:      July 28, 2017
/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 June 30, 2017 (the Report) filed with the Securities and Exchange Commission, I, Patrick E. Allen, 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:      July 28, 2017
/s/ Patrick E. Allen
 
Patrick E. Allen
 
Senior Vice President and
 
Chief Financial Officer