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 CON