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 DECEMBER 31, 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

163,942,914  shares of the registrant's Common Stock were outstanding on January 22, 2018 .

 


ROCKWELL COLLINS, INC.

INDEX


 
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


i

PART I.
FINANCIAL INFORMATION

Item 1.
Condensed Consolidated Financial Statements

ROCKWELL COLLINS, INC.
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Unaudited)
(in millions, except per share amounts)
 
December 31,
2017
 
September 30,
2017
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
583

 
$
703

Receivables, net
1,513

 
1,426

Inventories, net
2,557

 
2,451

Other current assets
173

 
180

Total current assets
4,826

 
4,760

 
 
 
 
Property
1,408

 
1,398

Goodwill
9,206

 
9,158

Customer Relationship Intangible Assets
1,475

 
1,525

Other Intangible Assets
587

 
604

Deferred Income Tax Asset
21

 
21

Other Assets
529

 
531

TOTAL ASSETS
$
18,052

 
$
17,997

LIABILITIES AND EQUITY
 

 
 

Current Liabilities:
 

 
 

Short-term debt
$
877

 
$
479

Accounts payable
758

 
927

Compensation and benefits
272

 
385

Advance payments from customers
332

 
361

Accrued customer incentives
236

 
287

Product warranty costs
186

 
186

Other current liabilities
433

 
444

Total current liabilities
3,094

 
3,069

 
 
 
 
Long-term Debt, Net
6,498

 
6,676

Retirement Benefits
1,124

 
1,208

Deferred Income Tax Liability
250

 
331

Other Liabilities
725

 
663

 
 
 
 
Equity:
 

 
 

Common stock ($0.01 par value; shares authorized: 1,000; shares issued: December 31, 2017, 175.0; September 30, 2017, 175.0)
2

 
2

Additional paid-in capital
4,556

 
4,559

Retained earnings
4,064

 
3,838

Accumulated other comprehensive loss
(1,548
)
 
(1,575
)
Common stock in treasury, at cost (shares held: December 31, 2017, 11.1; September 30, 2017, 12.1)
(720
)
 
(781
)
Total shareowners’ equity
6,354

 
6,043

Noncontrolling interest
7

 
7

Total equity
6,361

 
6,050

TOTAL LIABILITIES AND EQUITY
$
18,052

 
$
17,997

See Notes to Condensed Consolidated Financial Statements.

1

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

 
Three Months Ended
 
December 31
 
2017
 
2016
Sales:
 
 
 
Product sales
$
1,766

 
$
980

Service sales
245

 
213

Total sales
2,011

 
1,193

 
 
 
 
Costs, expenses and other:
 
 
 
Product cost of sales
1,300

 
668

Service cost of sales
163

 
148

Selling, general and administrative expenses
204

 
148

Transaction and integration costs
27

 
11

Interest expense
64

 
20

Other income, net
(4
)
 
(5
)
Total costs, expenses and other
1,754

 
990

 
 
 
 
Income before income taxes
257

 
203

Income tax (benefit) expense
(23
)
 
58

 
 
 
 
Net income
$
280

 
$
145

 
 
 
 
Earnings per share:
 
 
 
Basic earnings per share
$
1.71

 
$
1.11

Diluted earnings per share
$
1.69

 
$
1.10

 
 
 
 
Weighted average common shares:
 
 
 
Basic
163.4

 
130.4

Diluted
165.4

 
131.9

 
 
 
 
Cash dividends per share
$
0.33

 
$
0.33


See Notes to Condensed Consolidated Financial Statements.

2

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

 
Three Months Ended
 
December 31
 
2017
 
2016
Net income
$
280

 
$
145

Unrealized foreign currency translation and other adjustments
15

 
(21
)
Pension and other retirement benefits adjustments (net of taxes for the three months ended December 31, 2017 and 2016 of $8 and $9, respectively)
14

 
16

Foreign currency cash flow hedge adjustments (net of taxes for the three months ended December 31, 2017 and 2016 of $(1) and $0, respectively)
(2
)
 
(3
)
Comprehensive income
$
307

 
$
137


See Notes to Condensed Consolidated Financial Statements.



3

ROCKWELL COLLINS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(in millions)
 
Three Months Ended
 
December 31
 
2017
 
2016
Operating Activities:
 
 
 
Net income
$
280

 
$
145

Adjustments to arrive at cash provided by operating activities:
 
 
 
Depreciation
51

 
37

Amortization of intangible assets, pre-production engineering costs and other
95

 
23

Amortization of acquired contract liability
(30
)
 
—

Stock-based compensation expense
9

 
6

Compensation and benefits paid in common stock
13

 
16

Deferred income taxes
(123
)
 
11

Pension plan contributions
(58
)
 
(58
)
Changes in assets and liabilities, excluding effects of acquisitions and foreign currency adjustments:
 
 
 
Receivables
(74
)
 
47

Production inventory
(96
)
 
(84
)
Pre-production engineering costs
(32
)
 
(38
)
Accounts payable
(151
)
 
(49
)
Compensation and benefits
(114
)
 
(71
)
Advance payments from customers
(30
)
 
(29
)
Accrued customer incentives
(50
)
 
11

Product warranty costs
(1
)
 
(3
)
Income taxes
91

 
(16
)
Other assets and liabilities
(39
)
 
(49
)
Cash (Used for) Operating Activities
(259
)
 
(101
)
Investing Activities:
 
 
 
Property additions
(74
)
 
(52
)
Acquisition of business, net of cash acquired
—

 
(11
)
Other investing activities
6

 
—

Cash (Used for) Investing Activities
(68
)
 
(63
)
Financing Activities:
 
 
 
Repayment of long-term debt, including current portion
(176
)
 
(300
)
Purchases of treasury stock (1)
(11
)
 
(5
)
Cash dividends
(54
)
 
(43
)
Increase in short-term commercial paper borrowings, net
398

 
480

Proceeds from the exercise of stock options
47

 
15

Other financing activities
(2
)
 
(1
)
Cash Provided by Financing Activities
202

 
146

Effect of exchange rate changes on cash and cash equivalents
5

 
(14
)
Net Change in Cash and Cash Equivalents
(120
)
 
(32
)
Cash and Cash Equivalents at Beginning of Period
703

 
340

Cash and Cash Equivalents at End of Period
$
583

 
$
308

(1) Includes net settlement of employee tax withholding upon vesting of share-based payment awards.


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, 2017
162.9

 
$
2

 
$
4,559

 
$
3,838

 
$
(1,575
)
 
$
(781
)
 
$
7

 
$
6,050

Net income
—

 
—

 
—

 
280

 
—

 
—

 
—

 
280

Other comprehensive income
—

 
—

 
—

 
—

 
27

 
—

 
—

 
27

Cash dividends
—

 
—

 
—

 
(54
)
 
—

 
—

 
—

 
(54
)
Shares issued:
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Exercise of stock options
0.8

 
—

 
(5
)
 
—

 
—

 
52

 
—

 
47

Vesting of performance shares and restricted stock units
0.1

 
—

 
(14
)
 
—

 
—

 
3

 
—

 
(11
)
Employee savings plan
0.1

 
—

 
7

 
—

 
—

 
6

 
—

 
13

Stock-based compensation
—

 
—

 
9

 
—

 
—

 
—

 
—

 
9

Balance at December 31, 2017
163.9


$
2


$
4,556


$
4,064


$
(1,548
)

$
(720
)

$
7


$
6,361

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at September 30, 2016
130.2

 
$
1

 
$
1,506

 
$
3,327

 
$
(1,898
)
 
$
(858
)
 
$
6

 
$
2,084

Net income
—

 
—

 
—

 
145

 
—

 
—

 
—

 
145

Other comprehensive income
—

 
—

 
—

 
—

 
(8
)
 
—

 
—

 
(8
)
Cash dividends
—

 
—

 
—

 
(43
)
 
—

 
—

 
—

 
(43
)
Shares issued:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exercise of stock options
0.3

 
—

 
(2
)
 
—

 
—

 
17

 
—

 
15

Vesting of performance shares and restricted stock units
0.1

 
—

 
(12
)
 
—

 
—

 
5

 
—

 
(7
)
Employee stock purchase plan
—

 
—

 
1

 
—

 
—

 
2

 
—

 
3

Employee savings plan
0.1

 
—

 
3

 
—

 
—

 
10

 
—

 
13

Stock-based compensation
—

 
—

 
6

 
—

 
—

 
—

 
—

 
6

Balance at December 31, 2016
130.7

 
$
1

 
$
1,502

 
$
3,429

 
$
(1,906
)
 
$
(824
)
 
$
6

 
$
2,208


See Notes to Condensed Consolidated Financial Statements.



5

ROCKWELL COLLINS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1.
Business Description and Basis of Presentation

Rockwell Collins, Inc. (the Company or Rockwell Collins) designs, produces and supports cabin interior, communications and aviation systems and products for commercial and military customers and provides information management services through voice and data communication networks and solutions worldwide.

The Company operates on a 52/53 week fiscal year with quarters ending on the Friday closest to the last day of the calendar quarter. For ease of presentation, December 31 and September 30 are utilized consistently throughout these financial statements and notes to represent the period end dates.

The Company has 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, 2017 .

In the opinion of management, the unaudited financial statements contain all adjustments, consisting of adjustments of a normal recurring nature, necessary to present fairly the financial position, results of operations and cash flows for the periods presented. The results of operations for the three months ended December 31, 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 September 4, 2017, the Company entered into an Agreement and Plan of Merger (Merger Agreement) with United Technologies Corporation (UTC). The Merger Agreement provides that the Company will be acquired by UTC. Each Company shareowner will receive $93.33 per share in cash and $46.67 in shares of UTC common stock in the merger, subject to a 7.5 percent collar centered on UTC's August 22, 2017 closing share price of $115.69 . The transaction, which is expected to close by the third calendar quarter of 2018, is subject to the satisfaction of customary closing conditions and approval by certain regulators. The Company incurred $ 10 million of merger-related costs during the three months ended December 31, 2017. These costs are included in Transaction and integration costs in the Condensed Consolidated Statement of Operations. At December 31, 2017, $ 18 million of merger-related costs, including amounts expensed in fiscal year 2017, were unpaid and included in Accounts payable and Compensation and benefits on the Condensed Consolidated Statement of Financial Position.

On April 13, 2017, the Company acquired B/E Aerospace, a leading manufacturer of aircraft cabin interior products and services. Prior to 2018, the financial results of the entire B/E Aerospace business were reported in a new Interior Systems segment. Beginning in 2018, the B/E Aerospace thermal and electronic systems product lines, which primarily serve military and government customers, are now being reported in the Government Systems segment. This reorganization is expected to generate additional revenue synergy opportunities for the Company. The results of operations of the acquired B/E Aerospace business are now reported in the Interior Systems and Government Systems business segments.

2.
Recently Issued Accounting Standards

In March 2017, the Financial Accounting Standards Board (FASB) issued a new standard on 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.

6

ROCKWELL COLLINS, INC.

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



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, but 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 into with customers. The new standard is effective for the Company in 2020, with early adoption permitted.

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, among other items, accounting for development costs and associated customer funding related to commercial contracts, increased use of over time 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 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 now intends to utilize the modified retrospective transition approach.

Other new accounting standards issued but not effective until after December 31, 2017 , are not expected to have a material impact on the Company's financial statements.

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

7

ROCKWELL COLLINS, INC.

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


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 Interior Systems and Government Systems business segments (see Note 1).

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 senior unsecured syndicated term loan facility (see Note 7). 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 December 31, 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, acquired contract liabilities, 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
485

Inventories, net (1)
545

Other current assets
56

Property
279

Intangible Assets
1,586

Other Assets
53

Total Identifiable Assets Acquired
3,108

 
 
Accounts payable
(234
)
Compensation and benefits
(75
)
Advance payments from customers
(62
)
Accrued customer incentives
(48
)
Product warranty costs
(117
)
Other current liabilities (2)
(365
)
Long-term Debt, Net
(2,119
)
Retirement Benefits
(12
)
Deferred Income Tax Liability
(335
)
Other Liabilities (2)
(431
)
Total Liabilities Assumed
(3,798
)
Net Identifiable Assets Acquired, excluding Goodwill
(690
)
Goodwill
7,226

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 was amortized as a non-cash increase to Cost of sales during the year ended September 30, 2017 .
(2) As of the acquisition date, the Company made adjustments totaling $486 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. $30 million of the acquired contract liabilities were recognized as a reduction to Cost of sales during the three months ended December 31, 2017 .

During the three months ended December 31, 2017 , revisions were made to the estimated acquisition-date fair value of assets acquired and liabilities assumed. The revisions were primarily due to a change in estimate with respect to the future repatriation of certain foreign earnings and recognition of a liability associated with the KLX Tax Sharing and Indemnification Agreement (see note 14). The measurement period adjustments resulted in a  $41 million  net increase to Goodwill and did not have a material impact on the financial results of prior periods.

The Intangible Assets included above consist of the following:
 
Weighted Average Life (in years)
 
Fair Value
(in millions)
Developed technology
9
 
$
435

Seating customer relationships
6
 
860

Other customer relationships
8
 
291

Total
7
 
$
1,586


The preliminary purchase price allocation resulted in the recognition of  $7.226 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 December 31, 2017 the Company has preliminarily included the goodwill in the Interior Systems and Government Systems segments. The goodwill is a result of expected cost synergies from the consolidation of certain corporate and administrative functions, supply

9

ROCKWELL COLLINS, INC.

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


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 periods subsequent to the completion of the acquisition on April 13, 2017. B/E Aerospace contributed sales of  $716 million  and net income of  $76 million , excluding the discrete impacts of the Tax Cuts and Jobs Act (see Note 11), for the three months ended December 31, 2017 .

Transaction, Integration and Financing Costs
The Company recorded total transaction, integration and financing costs related to the B/E Aerospace acquisition in the Condensed Consolidated Statement of Operations as follows:
 
 
Three Months Ended
 
 
December 31
(in millions)
 
2017
 
2016
Transaction and integration costs
 
$
17

 
$
11

Interest expense
 
—

 
3

Total Transaction, integration and financing costs
 
$
17

 
$
14


At December 31, 2017 , $12 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
 
December 31
 
2017
 
2016
(in millions, except per share amounts)
(as Reported)
 
(Pro forma)
Sales
$
2,011

 
$
1,923

Net income attributable to common shareowners
280

 
197

Basic earnings per share
1.71

 
1.22

Diluted earnings per share
1.69

 
1.21


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.



10

ROCKWELL COLLINS, INC.

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


 
Three Months Ended
 
December 31
(in millions)
2017
 
2016
Increases / (decreases) to pro forma net income:
 
 
 
Net reduction to depreciation resulting from fixed asset adjustments (1)
$
—

 
$
5

Advisory, legal and accounting service fees (2)
—

 
26

Amortization of acquired B/E Aerospace intangible assets, net (3)
—

 
(38
)
Interest expense incurred on acquisition financing, net (4)
—

 
(14
)
Long-term contract program adjustments (5)
—

 
(11
)
Acquired contract liability amortization (6)
—

 
21

Compensation adjustments (7)
—

 
3

(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 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 $16 million , of which $14 million was paid during the year ended September 30, 2017 and $1 million was paid during the three months ended December 31, 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. The Company made contingent consideration payments of $2 million during the year ended September 30, 2017 and $1 million during the three months ended December 31, 2017 . 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.

The B/E Aerosapce acquisition is included in the Interior Systems and Government Systems segments (see Note 1) and the Pulse.aero acquisition is included in the Information Management Services 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 as the effect of the acquisition is not material to the Company's 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, 2017
$
7,223

 
$
325

 
$
506

 
$
1,104

 
$
9,158

B/E Aerospace acquisition adjustments
(344
)
 
—

 
385

 
—

 
41

Foreign currency translation adjustments
7

 
—

 
—

 
—

 
7

Balance at December 31, 2017
$
6,886

 
$
325

 
$
891

 
$
1,104

 
$
9,206



11

ROCKWELL COLLINS, INC.

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


The reorganization of the B/E Aerospace thermal and electronic systems product lines (see Note 1) resulted in the reclassification of $385 million of Goodwill from Interior Systems to Government Systems.

The Company performs an annual impairment test of goodwill and indefinite-lived intangible assets during the fourth 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 fourth quarter 2017 impairment tests resulted in no impairment.

Intangible Assets
Intangible assets are summarized as follows:
 
December 31, 2017
 
September 30, 2017
(in millions)
Gross
 
Accum
Amort
 
Net
 
Gross
 
Accum
Amort
 
Net
Intangible assets with finite lives:
 
 
 
 
 
 
 
 
 
 
 
Developed technology and patents
$
807

 
$
(274
)
 
$
533

 
$
806

 
$
(256
)
 
$
550

Backlog
6

 
(5
)
 
1

 
6

 
(5
)
 
1

Customer relationships:
 

 
 
 
 
 
 
 
 
 
 
Acquired
1,495

 
(263
)
 
1,232

 
1,495

 
(213
)
 
1,282

Up-front sales incentives
340

 
(97
)
 
243

 
336

 
(93
)
 
243

License agreements
16

 
(11
)
 
5

 
15

 
(10
)
 
5

Trademarks and tradenames
15

 
(14
)
 
1

 
15

 
(14
)
 
1

Intangible assets with indefinite lives:
 
 
 
 
 
 
 
 
 
 
 
Trademarks and tradenames
47

 
—

 
47

 
47

 
—

 
47

Intangible assets
$
2,726

 
$
(664
)
 
$
2,062

 
$
2,720

 
$
(591
)
 
$
2,129


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.
Up-front sales incentives consisting of cash payments or customer account credits are amortized as a reduction of sales, whereas incentives consisting of free products are amortized as cost of sales. As of December 31, 2017 , the weighted average amortization period remaining for up-front sales incentives was approximately 10 years.
Anticipated annual amortization expense for intangible assets is as follows:
(in millions)
2018
 
2019
 
2020
 
2021
 
2022
 
Thereafter
Anticipated amortization expense for up-front sales incentives
$
20

 
$
24

 
$
26

 
$
27

 
$
27

 
$
123

Anticipated amortization expense for all other intangible assets
268

 
266

 
265

 
265

 
262

 
515

Total
$
288

 
$
290

 
$
291

 
$
292

 
$
289

 
$
638


Amortization expense for intangible assets for the three months ended December 31, 2017 and 2016 was $73 million and $12 million , respectively.


12

ROCKWELL COLLINS, INC.

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


4.
Receivables, Net

Receivables, net are summarized as follows:
(in millions)
December 31,
2017
 
September 30,
2017
Billed
$
1,118

 
$
1,055

Unbilled
492

 
461

Less progress payments
(84
)
 
(78
)
Total
1,526

 
1,438

Less allowance for doubtful accounts
(13
)
 
(12
)
Receivables, net
$
1,513

 
$
1,426


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 $64 million and $42 million at December 31, 2017 and September 30, 2017 , respectively.

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 generated by participating in these programs was $146 million and $98 million during the three months ended December 31, 2017 and 2016 , respectively. The impact on cash provided by (used for) operating activities during the three months ended December 31, 2017 and 2016 , was $(8) million and $38 million , respectively. The cost of participating in these programs was immaterial to the Company's results.

5.
Inventories, Net

Inventories, net are summarized as follows:
(in millions)
December 31,
2017
 
September 30,
2017
Finished goods
$
271

 
$
259

Work in process
364

 
347

Raw materials, parts and supplies
741

 
677

Less progress payments
(7
)
 
(7
)
Total
1,369

 
1,276

Pre-production engineering costs
1,188

 
1,175

Inventories, net
$
2,557

 
$
2,451


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.

13

ROCKWELL COLLINS, INC.

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



Anticipated annual amortization expense for pre-production engineering costs is as follows:
(in millions)
2018
 
2019
 
2020
 
2021
 
2022
 
Thereafter
Anticipated amortization expense for pre-production engineering costs
$
90

 
$
132

 
$
149

 
$
147

 
$
139

 
$
550


Amortization expense for pre-production engineering costs for the three months ended December 31, 2017 and 2016 was $19 million and $11 million , respectively. As of December 31, 2017 , the weighted average amortization period remaining for pre-production engineering costs included in Inventories, net was approximately 10 years.

6.
Other Assets

Other assets are summarized as follows:
(in millions)
December 31,
2017
 
September 30,
2017
Long-term receivables
$
204

 
$
211

Investments in equity affiliates
6

 
7

Exchange and rental assets (net of accumulated depreciation of $109 at December 31, 2017 and $106 at September 30, 2017)
71

 
71

Other
248

 
242

Other Assets
$
529

 
$
531


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 $50 million and $67 million for the three months ended December 31, 2017 and 2016 , respectively. Deferred profit from sales to equity affiliates was $1 million at December 31, 2017 , and $2 million at September 30, 2017 .

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 $2 million for the three months ended December 31, 2017 and 2016 , respectively.


14

ROCKWELL COLLINS, INC.

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


7.
Debt

Short-term Debt
(in millions, except weighted average amounts)
December 31,
2017
 
September 30,
2017
Short-term commercial paper borrowings outstanding (1)
$
728

 
$
330

Current portion of long-term debt
149

 
149

Short-term debt
$
877

 
$
479

Weighted average annualized interest rate of commercial paper borrowings
1.63
%
 
1.45
%
Weighted average maturity period of commercial paper borrowings (days)
11

 
18

(1) The maximum amount of short-term commercial paper borrowings outstanding during the three months ended December 31, 2017 , was $879 million .

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
The Company has a $1.5 billion five -year senior unsecured revolving credit agreement with various banks. At December 31, 2017 and September 30, 2017 , there were no outstanding borrowings under the Company's revolving credit facility.

Short-term credit facilities available to non-U.S. subsidiaries were $20 million as of December 31, 2017 , of which $2 million was utilized to support commitments in the form of commercial letters of credit. At December 31, 2017 and September 30, 2017 , there were no borrowings outstanding under these credit facilities.

At December 31, 2017 and September 30, 2017 , 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.
Long-term Debt
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 December 31, 2017 , borrowings outstanding under this facility were $694 million and bear interest at LIBOR plus 1.25 percent amortized in equal quarterly installments of 2.5 percent , or $38 million , with the balance payable on April 13, 2020. During the three months ended December 31, 2017 , the Company made principal prepayments of $138 million in accordance with the loan's prepayment provisions. 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). The Company was in compliance with this financial covenant at December 31, 2017 . The credit facilities 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.

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.


15

ROCKWELL COLLINS, INC.

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


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
 
December 31,
2017
 
September 30,
2017
Fixed-rate notes due:
 
 
 
 
 
July 2019
1.95%
 
$
300

 
$
300

July 2019
5.25%
 
300

 
300

November 2021
3.10%
 
250

 
250

March 2022
2.80%
 
1,100

 
1,100

December 2023
3.70%
 
400

 
400

March 2024
3.20%
 
950

 
950

March 2027
3.50%
 
1,300

 
1,300

December 2043
4.80%
 
400

 
400

April 2047
4.35%
 
1,000

 
1,000

Variable-rate term loan due:
 
 
 
 
 
April 2020
1 month LIBOR + 1.25% (1)
 
694

 
870

Fair value swap adjustment (see Notes 12 and 13)
 
 
9

 
14

Total
 
 
6,703

 
6,884

Less unamortized debt issuance costs and discounts
 
 
56

 
59

Less current portion of long-term debt
 
 
149

 
149

Long-term Debt, Net
 
 
$
6,498

 
$
6,676

(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 first quarter of 2018. The one-month LIBOR rate at December 31, 2017 , was approximately 1.57 percent .
   
Cash payments for debt interest and fees during the three months ended December 31, 2017 and 2016 , were $50 million and $41 million , respectively.

8.
Retirement Benefits

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

Components of Expense (Income)
The components of expense (income) for Pension Benefits and Other Retirement Benefits for the three months ended December 31, 2017 and 2016 , are summarized as follows:
 
Pension Benefits
 
Other Retirement Benefits
 
Three Months Ended
 
Three Months Ended
 
December 31
 
December 31
(in millions)
2017
 
2016
 
2017
 
2016
Service cost
$
3

 
$
3

 
$
—

 
$
—

Interest cost
30

 
28

 
1

 
1

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

 
—

Amortization:
 
 
 

 
 
 
 

Prior service credit
—

 
—

 
—

 
—

Net actuarial loss
20

 
23

 
2

 
2

Net benefit expense (income)
$
(7
)
 
$
(6
)
 
$
3

 
$
3


16

ROCKWELL COLLINS, INC.

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



Pension Plan Funding
The Company’s objective with respect to the funding of its pension plans is to provide adequate assets for the payment of future benefits. Pursuant to this objective, the Company will fund its pension plans as required by governmental regulations and may consider discretionary contributions as conditions warrant. In October 2017, the Company voluntarily contributed $55 million to its U.S. qualified pension plan. There is no minimum statutory funding requirement for 2018. Any additional future contributions necessary to satisfy minimum statutory funding requirements are dependent upon actual plan asset returns, interest rates and actuarial assumptions. During the three months ended December 31, 2017 , the Company made contributions to the non-U.S. plans and the U.S. non-qualified pension plan of $3 million .

9.
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
 
December 31
(in millions)
2017
 
2016
Stock-based compensation expense included in:
 
 
 
Product cost of sales
$
3

 
$
2

Selling, general and administrative expenses
6

 
4

Total
$
9

 
$
6

Income tax benefit
$
2

 
$
2


The Company issued awards of equity instruments under the Company's various incentive plans for the three months ended December 31, 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
Three months ended December 31, 2017
—

 
$
—

 
140.8

 
$
138.68

 
252.4

 
$
133.36

Three months ended December 31, 2016
646.6

 
$
17.18

 
125.0

 
$
87.95

 
2.8

 
$
85.37


The maximum number of shares of common stock that can be issued in respect of performance shares granted in 2018 based on the achievement of performance targets for years 2018 through 2020 is approximately 338,000 .

In light of the pending UTC merger, the Company replaced the annual stock option grant with a restricted stock unit grant. As a result, no stock options were granted for the three months ended December 31, 2017 and the number of restricted stock units granted increased when compared to the prior year.

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

Expected dividend yield
 
1.3% - 1.5%

Expected volatility
 
19.0
%
Expected life
 
7 years



17

ROCKWELL COLLINS, INC.

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


Employee Benefits Paid in Company Stock
During the three months ended December 31, 2017 and 2016 , 0.1 million and 0.2 million shares, respectively, of the Company's common stock were issued to employees under the employee stock purchase (ESPP) and defined contribution savings plans at a value of $13 million and $16 million for the respective periods. Further purchases under the ESPP were suspended on September 29, 2017 pursuant to the UTC Merger Agreement. If the UTC merger is completed, the ESPP will be terminated.

Earnings Per Share and Diluted Share Equivalents
The computation of basic and diluted earnings per share is as follows:
 
Three Months Ended
 
December 31
(in millions, except per share amounts)
2017
 
2016
Numerator for basic and diluted earnings per share:
 
 
 
Net income
$
280

 
$
145

Denominator:
 

 
 

Denominator for basic earnings per share – weighted average common shares
163.4

 
130.4

Effect of dilutive securities:
 
 
 
Stock options
1.3

 
1.0

Performance shares, restricted stock and restricted stock units
0.7

 
0.5

Dilutive potential common shares
2.0

 
1.5

Denominator for diluted earnings per share – adjusted weighted average shares and assumed conversion
165.4

 
131.9

Earnings per share:
 

 
 

Basic
$
1.71

 
$
1.11

Diluted
$
1.69

 
$
1.10


The average outstanding diluted shares calculation excludes options with an exercise price that exceeds the average market price of shares during the period. Stock options excluded from the average outstanding diluted shares calculation were 0.0 million and 0.7 million for the three months ended December 31, 2017 and 2016 , respectively.


18

ROCKWELL COLLINS, INC.

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


10.
Accumulated Other Comprehensive Loss

Changes in accumulated other comprehensive loss (AOCL), net of tax, by component for the three months ended December 31, 2017 and 2016 , are as follows:
(in millions)
Foreign Exchange Translation Adjustment
 
Pension and Other Postretirement Adjustments (1)
 
Change in the Fair Value of Effective Cash Flow Hedges
 
Total
Balance at September 30, 2017
$
1

 
$
(1,575
)
 
$
(1
)
 
$
(1,575
)
Other comprehensive income (loss) before reclassifications
15

 
—

 
(1
)
 
14

Amounts reclassified from accumulated other comprehensive loss
—

 
14

 
(1
)
 
13

Net current period other comprehensive income (loss)
15

 
14

 
(2
)
 
27

Balance at December 31, 2017
$
16

 
$
(1,561
)
 
$
(3
)
 
$
(1,548
)
 
 
 
 
 
 
 
 
Balance at September 30, 2016
$
(76
)
 
$
(1,818
)
 
$
(4
)
 
$
(1,898
)
Other comprehensive loss before reclassifications
(21
)
 
—

 
(4
)
 
(25
)
Amounts reclassified from accumulated other comprehensive loss
—

 
16

 
1

 
17

Net current period other comprehensive income (loss)
(21
)
 
16

 
(3
)
 
(8
)
Balance at December 31, 2016
$
(97
)
 
$
(1,802
)
 
$
(7
)
 
$
(1,906
)
(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 $22 million ( $14 million net of tax) and $25 million ( $16 million net of tax) for the three months ended December 31, 2017 and 2016 , respectively. The reclassifications are included in the computation of net benefit expense. See Note 8 for additional details.

11.
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.

On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the Act). The Act amends the Internal Revenue Code to reduce tax rates and modify policies, credits and deductions for individuals and businesses. For businesses, the Act reduces the corporate federal tax rate from a maximum of 35.0 percent to a flat 21.0 percent rate and transitions from a worldwide tax system to a territorial tax system. The Act also adds many new provisions including changes to bonus depreciation, the deduction for executive compensation and interest expense, a tax on global intangible low-taxed income (GILTI), the base erosion anti-abuse tax (BEAT) and a deduction for foreign-derived intangible income (FDII). Many of these provisions, including the tax on GILTI, the BEAT and the deduction for FDII, do not apply to the Company until 2019. The Company is assessing the impact of the provisions of the Act which do not apply until 2019. The Company has elected to account for the tax on GILTI as a period cost and thus has not adjusted any of the deferred tax assets/liabilities of its foreign subsidiaries for the new tax. The two material items that impact the Company for 2018 are the reduction in the tax rate and a one-time tax that is imposed on the Company’s unremitted foreign earnings.

On December 22, 2017, the SEC issued Staff Accounting Bulletin 118 that provides additional guidance allowing companies to use a measurement period, similar to that used in business combinations, to account for the impacts of the Act in their financial statements. The Company has accounted for the impacts of the Act to the extent a reasonable estimate could be made during the three months ended December 31, 2017. The Company will continue to refine its estimates throughout the measurement period or until the accounting is complete.

Due to the Company’s fiscal year, the Company expects its 2018 U.S. federal statutory tax rate to be approximately 24.6 percent . The Company’s U.S. federal statutory tax rate will be 21.0 percent starting in 2019.

19

ROCKWELL COLLINS, INC.

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



As a result of the reduction in the U.S. corporate income tax rate from 35.0 percent to 21.0 percent under the Act, the Company has recorded a provisional reduction to its net deferred tax liability of $102 million , and a corresponding decrease to income tax expense in the Company’s Condensed Consolidated Statement of Operations for the three months ended December 31, 2017. The Company’s revaluation of its deferred tax liability is subject to further adjustments during the measurement period due to the complexity of determining its net deferred tax liability as of the enactment date. Some of the information necessary to determine the accounting impacts of the tax rate change includes final calculations related to the Company’s 2017 tax return as well as refining the analysis of which existing deferred balances at the enactment date will reverse in 2018 at the 24.6 percent tax rate and which deferred balances will reverse after 2018 at the 21.0 percent tax rate.

As of the December 31, 2017 deemed repatriation date, the Company estimates that it had approximately $1.048 billion of unremitted foreign earnings that would be subject to the tax imposed under Section 965 of the Internal Revenue Code. The Act imposes a tax on these earnings at either a 15.5 percent rate or an 8.0 percent rate. The higher rate applies to the extent the Company's foreign subsidiaries have cash and cash equivalents at certain measurement dates, whereas the lower rate applies to any earnings that are in excess of the cash and cash equivalents balance. After accounting for foreign tax credits related to the deemed repatriated earnings, the Company estimates the tax to be approximately $75 million . The Company recorded a provisional amount of $40 million of tax expense in the Company’s Condensed Consolidated Statement of Operations for the three months ended December 31, 2017, and it has established a $35 million liability related to certain B/E Aerospace unremitted foreign earnings through purchase accounting. The Company’s accounting for the tax on unremitted foreign earnings is incomplete due to the complexity of determining the various components of the calculation. Some of the information necessary to determine the amount of the tax includes the future profitability of its foreign subsidiaries, cash balances as of September 30, 2018, and detailed tax computations that need to be completed as part of the Company’s 2017 tax return.
 
During the three months ended December 31, 2017 and 2016 , the effective income tax rate was (8.9) percent and 28.6 percent, respectively. The lower current year effective income tax rate was primarily due to a $102 million reduction in deferred tax liabilities resulting from enactment of the Act, a lower U.S. Federal statutory tax rate under the Act and benefits from the jurisdictional mix of income as a result of the B/E Aerospace acquisition, partially offset by a $40 million obligation related to the tax on unremitted foreign earnings imposed by the Act.

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. 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 an acquired subsidiary for the 2014 calendar year. 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 $7 million and $63 million during the three months ended December 31, 2017 and 2016 , respectively. During the quarter, a provision of $35 million was recorded through purchase accounting related to approximately $250 million of B/E Aerospace’s pre-acquisition foreign earnings that the Company views as available for repatriation.

The Company has gross unrecognized tax benefits recorded within Deferred Income Tax Liability and Other Liabilities in the Condensed Consolidated Statement of Financial Position of $214 million and $201 million as of December 31, 2017 and September 30, 2017 , respectively. The total amount of unrecognized tax benefits that, if recognized, would affect the effective income tax rate was $183 million and $169 million as of December 31, 2017 and September 30, 2017 , respectively. Although the timing and outcome of tax settlements are uncertain, it is reasonably possible that during the next 12 months a reduction in unrecognized tax benefits may occur in the range of $ 0 million to $ 49 million , based on the outcome of tax examinations or as a result of the expiration of various statutes of limitations.

The Company includes interest and penalties related to unrecognized tax benefits in Income tax expense. The total amount of interest and penalties recognized within Other Liabilities in the Condensed Consolidated Statement of Financial Position was $9 million and $8 million as of December 31, 2017 and September 30, 2017 , 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 three months ended December 31, 2017 and 2016 , respectively.

20

ROCKWELL COLLINS, INC.

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



12.
Fair Value Measurements

The FASB defines fair value as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The FASB guidance classifies the inputs used to measure fair value into the following hierarchy:
Level 1 -
quoted prices (unadjusted) in active markets for identical assets or liabilities
Level 2 -
quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument
Level 3 -
unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value

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

Assets and liabilities
The fair value of the Company's financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2017 and September 30, 2017 , are as follows:
 
 
 
December 31, 2017
 
September 30, 2017
(in millions)
Fair Value
Hierarchy
 
Fair Value
Asset (Liability)
 
Fair Value
Asset (Liability)
Deferred compensation plan investments
Level 1
 
$
69

 
$
63

Deferred compensation plan investments
Level 2
 
26

 
24

Interest rate swap assets
Level 2
 
10

 
14

Interest rate swap liabilities
Level 2
 
(1
)
 
—

Foreign currency forward exchange contract assets
Level 2
 
5

 
8

Foreign currency forward exchange contract liabilities
Level 2
 
(5
)
 
(7
)
Acquisition-related contingent consideration
Level 3
 
(16
)
 
(17
)

There were no transfers between Levels of the fair value hierarchy during the three months ended December 31, 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 December 31, 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 International Communications Group (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

21

ROCKWELL COLLINS, INC.

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


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, 2017
$
(17
)
Payment of contingent consideration (see Note 3)
1

Balance at December 31, 2017
$
(16
)

Financial instruments
The carrying amounts and fair values of the Company's financial instruments are as follows:
 
Asset (Liability)
 
December 31, 2017
 
September 30, 2017
(in millions)
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Cash and cash equivalents
$
583

 
$
583

 
$
703

 
$
703

Short-term debt
(877
)
 
(877
)
 
(479
)
 
(479
)
Long-term debt
(6,489
)
 
(6,732
)
 
(6,662
)
 
(6,898
)

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.

13.
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 the 2019 and the 2023 Swaps (the Swaps) as fair value hedges. At December 31, 2017 , the Swaps are recorded within Other Assets at a fair value of $10 million and Other Liabilities at a fair value of $1 million , offset by a fair value adjustment to Long-term Debt (see Note 7) of $9 million . At September 30, 2017 , the Swaps were recorded within Other Assets at a fair value of $14 million , offset by a fair value adjustment to Long-term Debt (see Note 7) of $14 million . Cash payments or receipts between the Company and the counterparties to the Swaps are recorded as an adjustment to interest expense.


22

ROCKWELL COLLINS, INC.

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


Foreign Currency Forward Exchange Contracts
The Company transacts business in various foreign currencies which subjects the Company’s cash flows and earnings to exposure related to changes in foreign currency exchange rates. These exposures arise primarily from purchases or sales of products and services from third parties and intercompany transactions. Foreign currency forward exchange contracts provide for the purchase or sale of foreign currencies at specified future dates at specified exchange rates and are used to offset changes in the fair value of certain assets or liabilities or forecasted cash flows resulting from transactions denominated in foreign currencies. As of December 31, 2017 and September 30, 2017 , the Company had outstanding foreign currency forward exchange contracts with notional amounts of $690 million and $1.312 billion , respectively. The decrease in the notional amount of outstanding foreign currency contracts is due to the maturation of certain foreign currency contracts entered into to offset remeasurement of certain intercompany loans that matured in the current quarter. These notional values consist primarily of contracts for the European euro and British pound sterling, and are stated in U.S. dollar equivalents at spot exchange rates at the respective dates.

Fair Value of Derivative Instruments
Fair values of derivative instruments in the Condensed Consolidated Statement of Financial Position as of December 31, 2017 and September 30, 2017 , are as follows:
 
 
 
Asset Derivatives
(in millions)
Classification
 
December 31,
2017
 
September 30, 2017
Foreign currency forward exchange contracts
Other current assets
 
$
5

 
$
8

Interest rate swaps
Other assets
 
10

 
14

Total
 
 
$
15

 
$
22


 
 
 
Liability Derivatives
(in millions)
Classification
 
December 31,
2017
 
September 30, 2017
Foreign currency forward exchange contracts
Other current liabilities
 
$
5

 
$
7

Interest rate swaps
Other liabilities
 
1

 
—

 
 
 
$
6

 
$
7


The fair values of derivative instruments are presented on a gross basis, as the Company does not have any derivative contracts which are subject to master netting arrangements. As of December 31, 2017 , there were undesignated foreign currency forward exchange contracts classified within Other current assets of $3 million and Other current liabilities of $1 million .


23

ROCKWELL COLLINS, INC.

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


The effect of derivative instruments on the Condensed Consolidated Statement of Operations for the three months ended December 31, 2017 and 2016 , is as follows:
 
 
 
Amount of Gain (Loss)
 
 
 
Three Months Ended
 
 
 
December 31
(in millions)
Location of Gain (Loss)
 
2017
 
2016
Derivatives Designated as Hedging Instruments:
 
 
 
 
 
Fair Value Hedges
 
 
 
 
 
Interest rate swaps
Interest expense
 
$
1

 
$
2

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

 
(1
)
Derivatives Not Designated as Hedging Instruments:
 
 
 
 
 
Foreign currency forward exchange contracts
Cost of sales
 
(4
)
 
(1
)

There was no significant impact to the Company’s earnings related to the ineffective portion of any hedging instruments during the three months ended December 31, 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 months ended December 31, 2017 .

The Company did not have any hedges with credit-risk-related contingent features or that required the posting of collateral as of December 31, 2017 . The cash flows from derivative contracts are recorded in operating activities in the Condensed Consolidated Statement of Cash Flows.

The Company expects to have no net impact from the reclassification of AOCL gains and losses from cash flow hedges into earnings over the next 12 months. The maximum duration of a foreign currency cash flow hedge contract at December 31, 2017 , was 66 months.

14.
Guarantees and Indemnifications

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

Changes in the carrying amount of accrued product warranty costs are summarized as follows:
 
Three Months Ended
 
December 31
(in millions)
2017
 
2016
Balance at beginning of year
$
186

 
$
87

Warranty costs incurred
(21
)
 
(10
)
Product warranty accrual
21

 
9

Changes in estimates for prior years
—

 
(2
)
Balance at December 31, 2017
$
186

 
$
84



24

ROCKWELL COLLINS, INC.

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


Letters of credit
The Company has contingent commitments in the form of letters of credit. Outstanding letters of credit are issued by banks on the Company’s behalf to support certain contractual obligations to its customers. If the Company fails to meet these contractual obligations, these letters of credit may become liabilities of the Company. Total outstanding letters of credit at December 31, 2017 , were $216 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 its acquisition by the Company, 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. During the three months ended December 31, 2017, the Company received notification of the resolution of a competent authority filing between the U.K. and U.S. related to 2010 pre-acquisition U.K. tax adjustments. Pursuant to the Tax Sharing and Indemnification Agreement the Company accrued, through purchase accounting, a $9 million payable to KLX.

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


25

ROCKWELL COLLINS, INC.

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


15.
Environmental Matters

The Company is subject to federal, state and local regulations relating to the discharge of substances into the environment, the disposal of hazardous wastes and other activities affecting the environment that have had and will continue to have an impact on the Company’s manufacturing operations. These environmental protection regulations may require the investigation and remediation of environmental impairments at current and previously owned or leased properties. In addition, lawsuits, claims and proceedings have been asserted on occasion against the Company alleging violations of environmental protection regulations, or seeking remediation of alleged environmental impairments, principally at previously owned or leased properties. As of December 31, 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 December 31, 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.

16.
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.


26

ROCKWELL COLLINS, INC.

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


17. Business Segment Information

Sales and earnings of the Company's operating segments are summarized as follows:
 
Three Months Ended
 
December 31
(in millions)
2017
 
2016
Sales:
 
 
 
Interior Systems
$
656

 
$
—

Commercial Systems
608

 
549

Government Systems
573

 
475

Information Management Services
174

 
169

Total sales
$
2,011

 
$
1,193

 
 
 
 
Segment operating earnings:
 

 
 

Interior Systems
$
94

 
$
—

Commercial Systems
139

 
125

Government Systems
109

 
96

Information Management Services
29

 
30

Total segment operating earnings
371

 
251

 
 
 
 
Interest expense (1)
(64
)
 
(20
)
Stock-based compensation
(9
)
 
(6
)
General corporate, net
(14
)
 
(11
)
Transaction and integration costs (1)
(27
)
 
(11
)
Income before income taxes
257

 
203

Income tax benefit (expense)
23

 
(58
)
Net income
$
280

 
$
145

(1) During the three months ended December 31, 2017 , the Company incurred $17 million of transaction and integration costs related to the B/E Aerospace acquisition and $10 million of transaction costs related to the proposed acquisition of Rockwell Collins by UTC. During the three months ended December 31, 2016 , the Company incurred $11 million of transaction and integration costs related to the B/E Aerospace acquisition. During this period, the Company also incurred $3 million of bridge facility fees related to the B/E Aerospace acquisition, which are included in Interest expense. Therefore, total transaction, integration and financing costs during this period were $14 million .

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.


27

ROCKWELL COLLINS, INC.

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


The following table summarizes sales by category for the three months ended December 31, 2017 and 2016 :
 
Three Months Ended
 
December 31
(in millions)
2017
 
2016
Interior Systems sales categories:
 
 
 
Interior products and services
$
356

 
$
—

Aircraft seating
300

 
—

Interior Systems sales
656

 
—

 
 
 
 
Commercial Systems sales categories:
 
 
 

Air transport aviation electronics
380

 
329

Business and regional aviation electronics
228

 
220

Commercial Systems sales
608

 
549

 
 
 
 
Government Systems sales categories:
 
 
 
Avionics
333

 
319

Communication and navigation
240

 
156

Government Systems sales
573

 
475

 
 
 
 
Information Management Services sales
174

 
169

 
 
 
 
Total sales
$
2,011

 
$
1,193


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 months ended December 31, 2017 and 2016 , sales for air transport aviation electronics include revenue from wide-body in-flight entertainment products and services of $4 million and $6 million , respectively. The Government Systems avionics and communication and navigation sales categories are delineated based upon underlying product technologies.

Beginning in 2018, two of the acquired B/E Aerospace product lines previously included in the Interior products and services sales category within Interior Systems are now being reported in the Communication and navigation sales category in Government Systems (see Note 1).


28

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

OVERVIEW AND OUTLOOK

On September 4, 2017, we entered into a merger agreement providing for the acquisition of Rockwell Collins by United Technologies Corporation (UTC). If the UTC merger is consummated, we will become a wholly owned subsidiary of UTC. The agreement includes covenants and agreements relating to the conduct of our business between the date of signing the merger agreement and the consummation of the UTC merger. The transaction, which is expected to close by the third calendar quarter of 2018, is subject to the satisfaction of customary closing conditions and approval by certain regulators. In light of the announced transaction with UTC, we will not be issuing guidance for fiscal year 2018. During the three months ended December 31, 2017 , the company incurred $10 million of transaction costs associated with the pending UTC merger.

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. Beginning in 2018, the B/E Aerospace thermal and electronic systems product lines previously included in the Interior Systems segment are now being reported in the Government Systems segment. As these product lines primarily serve military and government customers, the reorganization is expected to generate additional revenue synergy opportunities for the Company. The results of operations of the acquired B/E Aerospace business are now reported in the Interior Systems and Government Systems business segments. During the three months ended December 31, 2017, we incurred $17 million of transaction and integration costs associated with the acquisition.

Total sales for the first three months of 2018, compared to the same period in the prior year, increased 69 percent to $2.011 billion , primarily due to the B/E Aerospace acquisition which contributed $716 million of the overall revenue growth. Sales excluding the B/E Aerospace acquisition (organic sales) increased $102 million, or 9 percent, compared to the same period in the prior year, driven by 11 percent growth in Commercial Systems, 8 percent organic sales growth in Government Systems and 3 percent growth in Information Management Services sales.

Total segment operating earnings for the first three months of 2018 were $371 million . The Interior Systems business contributed $94 million of operating earnings, Commercial Systems increased $14 million and Government Systems increased $13 million, while Information Management Services decreased $1 million .

Enactment of the Tax Cuts and Job Act (the Act) resulted in a significant decrease in our effective tax rate, which was (8.9) percent for the three months ended December 31, 2017, compared to 28.6 percent for the same period in the prior year. The Act resulted in a $102 million reduction in deferred tax liabilities, partially offset by a $40 million obligation related to unremitted foreign earnings. In addition to these discrete impacts, the effective tax rate was favorably impacted by a lower U.S. Federal statutory tax rate under the Act and benefits from the jurisdictional mix of income as a result of the B/E Aerospace acquisition.

Earnings per share for the first three months of 2018 increased to $1.69 compared to $1.10 in the prior year. Earnings per share for the first three months of 2018 include 37 cents of discrete benefits from the Tax Cuts and Jobs Act and 11 cents of transaction and integration costs related to the acquisition of B/E Aerospace and pending merger with UTC.

RESULTS OF OPERATIONS

The following management discussion and analysis of results of operations is based on reported financial results for the three months ended December 31, 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.
  

29

Sales

 
Three Months Ended
 
December 31
(in millions)
2017
 
2016
Total sales
$
2,011

 
$
1,193

Percent increase
69
%
 
 

Total sales increased $818 million , or 69 percent , for the three months ended December 31, 2017 , compared to the same period in the prior year. B/E Aerospace, which was acquired on April 13, 2017, contributed $716 million of the overall revenue growth, including $656 million reported within Interior Systems and $60 million reported within Government Systems as described in the Overview and Outlook section above.

Sales excluding the B/E Aerospace acquisition (organic sales) increased $102 million, or 9 percent, compared to the same period in the prior year, driven by a $59 million increase within Commercial Systems, a $38 million organic sales increase within Government Systems and a $5 million increase within Information Management Services.

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
 
December 31
(in millions)
2017
 
2016
Total cost of sales
$
1,463

 
$
816

Percent of total sales
72.7
%
 
68.4
%

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 December 31, 2017 , total cost of sales increased $647 million , or 79 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 $59 million increase from higher organic sales

•
a $13 million organic increase in company-funded R&D, as detailed in the Research and Development expense section below

•
an $8 million increase in amortization of pre-production engineering costs


30

Research and Development Expense

R&D expense is included as a component of cost of sales and is summarized as follows:
 
 
Three Months Ended
 
December 31
(in millions)
2017
 
2016
Customer-funded:
 
 
 
Interior Systems
$
27

 
$
—

Commercial Systems
58

 
65

Government Systems
109

 
98

Information Management Services
2

 
2

Total customer-funded
196

 
165

Company-funded:
 
 
 
Interior Systems
50

 
—

Commercial Systems
40

 
27

Government Systems
19

 
18

Information Management Services (1)
—

 
—

Total company-funded
109

 
45

Total R&D expense
$
305

 
$
210

Percent of total sales
15.2
%
 
17.6
%
(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 $19 million and $11 million for the three months ended December 31, 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 December 31, 2017 , total R&D expense increased $95 million , compared to the same period in the prior year. The customer-funded portion of R&D expense increased $31 million , primarily due to $27 million of customer-funded expenditures from the recently acquired B/E Aerospace business. In addition, customer-funded expenditures for Government Systems increased $11 million due to fixed wing and test and training range programs and Commercial Systems decreased $7 million due to international regional jet programs. Company-funded R&D expense increased $64 million , primarily due to $50 million of company-funded expenditure from the recently acquired B/E Aerospace business. In addition, company-funded expenditures for Commercial Systems increased $13 million due to the Boeing 777X and Airbus A320 FOMAX programs.

In addition to the R&D expenses above, development expenditures incurred primarily for the Bombardier Global 7000/8000 and CSeries programs and the Airbus A350 platform during the three months ended December 31, 2017 resulted in a gross $32 million increase to our investments in pre-production engineering programs capitalized within inventory.

Refer to Note 5 of the Notes to Condensed Consolidated Financial Statements for further discussion of our incremental investments in pre-production engineering effort.

31


Selling, General and Administrative Expenses
 
 
Three Months Ended
 
December 31
(in millions)
2017
 
2016
Selling, general and administrative expenses
$
204

 
$
148

Percent of total sales
10.1
%
 
12.4
%

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 for the three months ended December 31, 2016 have been reclassified to Transaction and integration costs on the Condensed Consolidated Statement of Operations.

For the three months ended  December 31, 2017 , total SG&A expenses  increased   $56 million compared to the same period in the prior year, primarily due to SG&A costs from the recently acquired B/E Aerospace business.

The decrease in SG&A expenses as a percent of sales for the three months ended December 31, 2017, compared to the same period in the prior year, was primarily due to increased sales volume as a result of the B/E Aerospace acquisition.

Interest Expense
 
Three Months Ended
 
December 31
(in millions)
2017
 
2016
Interest expense
$
64

 
$
20

Interest expense increased by $44 million for the three months ended December 31, 2017 , compared to the same period in the prior year, primarily due to incremental interest on the new debt issued to fund the B/E Aerospace acquisition.

See Note 7 of the Notes to Condensed Consolidated Financial Statements for more detail regarding outstanding debt.

Net Income and Diluted Earnings Per Share
 
 
Three Months Ended
 
December 31
(in millions, except per share amounts)
2017
 
2016
Net income
$
280

 
$
145

Percent of sales
13.9
%
 
12.2
%
 
 
 
 
Diluted earnings per share
$
1.69

 
$
1.10

 
 
 
 
Weighted average diluted common shares
165.4

 
131.9


For the three months ended December 31, 2017 , Net income was $280 million , up 93 percent , or $135 million , from the $145 million reported in the same period in the prior year. Diluted earnings per share increased 54 percent to $1.69 during this same period. The rate of increase in diluted earnings per share was less than the rate of increase in net income due to the 31.2 million shares of common stock issued to finance a portion of the B/E Aerospace acquisition.

Net income and diluted earnings per share for the three months ended December 31, 2017 , compared to the same period in the prior year, increased primarily due to:

32


•
$94 million of operating earnings from the new Interior Systems segment, a $14 million increase in Commercial Systems operating earnings and a $13 million increase in Government Systems operating earnings

•
an $81 million decrease in income tax expense primarily due to impacts of the Tax Cuts and Jobs Act as described in the Income Taxes section below

•
partially offset by a $44 million increase in interest expense primarily due to the new debt issued to fund the B/E Aerospace acquisition

•
also offset by a $16 million increase in pre-tax transaction and integration costs associated with the acquisition of B/E Aerospace and the pending acquisition of Rockwell Collins by UTC

Interior Systems Financial Results

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 are primarily reported. As described in the Overview and Outlook section, sales and earnings of the B/E Aerospace thermal and electronic systems product lines, previously included in Interior products and services within the Interior systems segment, are now being reported in the Government Systems segment. See Note 3 of the Notes to Condensed Consolidated Financial Statements for more information regarding the acquisition.

Interior Systems Sales

The following table presents Interior Systems sales by product category:
 
Three Months Ended
 
December 31
(in millions)
2017
 
2016
Interior products and services
$
356

 
$
—

Aircraft seating
300

 
—

Total
$
656


$
—


Interior Systems Pro Forma Sales

Sales for the Interior Systems segment were $656 million and $682 million, on a pro forma basis, for the three months ended December 31, 2017 and 2016, respectively. These results exclude sales of the two B/E Aerospace product lines now being reported within the Government Systems segment. The $26 million, or 4 percent, decrease in the pro forma sales was primarily due to the following:

•
a $42 million decrease in aircraft seating caused by timing of retrofit seating deliveries and continued softening of the super first class market, partially offset by increased linefit seating deliveries

•
partially offset by a $16 million increase in interior products and services sales, primarily due to increased original equipment deliveries of Boeing 737 advanced lavatories and oxygen systems across multiple platforms

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 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.


33

Interior Systems Segment Operating Earnings

 
Three Months Ended
 
December 31
(in millions)
2017
 
2016
Segment operating earnings
$
94

 
$
—

Percent of sales
14.3
%
 
—
%

Operating earnings for the three months ended December 31, 2017 include $58 million of intangible asset amortization expense, partially offset by $30 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
 
December 31
(in millions)
2017
 
2016
Air transport aviation electronics:
 
 
 
Original equipment
$
222

 
$
200

Aftermarket
154

 
123

Wide-body in-flight entertainment (IFE)
4

 
6

Total air transport aviation electronics
380

 
329

Business and regional aviation electronics:
 

 
 

Original equipment
117

 
118

Aftermarket
111

 
102

Total business and regional aviation electronics
228

 
220

Total
$
608

 
$
549

Percent increase
11
%
 
 

For the three months ended December 31, 2017 , total air transport aviation electronics sales increased $51 million , or 16 percent , compared to the same period in the prior year, primarily due to the following:

•
original equipment sales increased $22 million , or 11 percent , primarily due to higher Airbus A350 and Boeing 737 production rates

•
aftermarket sales increased $31 million , or 25 percent , primarily due to higher used aircraft equipment sales of $11 million, higher regulatory mandate upgrade activity, higher spares provisioning and higher service and support activity

•
wide-body IFE sales decreased $2 million , or 33 percent , as airlines decommissioned their legacy IFE systems

For the three months ended December 31, 2017 , total business and regional aviation electronics sales increased $8 million , or 4 percent , compared to the same period in the prior year, primarily due to the following:

•
original equipment sales decreased $1 million , or 1 percent , primarily due to lower customer-funded development program revenues, partially offset by higher business jet equipment deliveries

•
aftermarket sales increased $9 million , or 9 percent , primarily due to higher regulatory mandate upgrades, increased flight deck retrofit activity and higher service and support activity


34

Commercial Systems Segment Operating Earnings
 
 
Three Months Ended
 
December 31
(in millions)
2017
 
2016
Segment operating earnings
$
139

 
$
125

Percent of sales
22.9
%
 
22.8
%

For the three months ended December 31, 2017 , Commercial Systems operating earnings increased $14 million , or 11 percent , compared to the same period in the prior year, primarily due to the following:

•
the $59 million increase in sales volume discussed in the Commercial System sales section above, which resulted in an $27 million increase in cost and incremental earnings of $32 million, or 54 percent of the higher sales volume. The margins on the sales increase were favorably impacted by sales mix as higher margin equipment and aftermarket sales increased and lower margin customer-funded development revenues decreased, partially offset by higher employee compensation costs

•
partially offset by a $13 million increase in company-funded R&D expense

•
also offset by a $5 million increase in amortization of pre-production engineering costs

The increase in operating earnings as a percent of sales for the three months ended December 31, 2017 , compared to the same period in the prior year, was primarily due to higher sales volume and favorable sales mix, partially offset by higher company-funded R&D, pre-production engineering amortization and employee compensation costs.

Government Systems Financial Results

As described in the Overview and Outlook section, sales and earnings of the B/E Aerospace thermal and electronic systems product lines are now being reported in Communication and navigation within the Government Systems segment. See Note 3 of the Notes to Condensed Consolidated Financial Statements for more information regarding the acquisition.

Government Systems Sales
 
The following table presents Government Systems sales by product category:
 
Three Months Ended
 
December 31
(in millions)
2017
 
2016
Avionics
$
333

 
$
319

Communication and navigation
240

 
156

Total
$
573

 
$
475

Percent increase
21
%
 
 

For the three months ended December 31, 2017 , total avionics sales increased $14 million , or 4 percent , compared to the same period in the prior year, primarily due to the following:

•
an $18 million increase from higher fixed wing sales, primarily due to higher development program sales and higher deliveries for various fighter platforms

•
partially offset by $4 million in other net decreases to revenue, primarily due to lower simulation and training sales


35

For the three months ended December 31, 2017 , total communication and navigation sales increased $84 million , or 54 percent , compared to the same period in the prior year, primarily due to the following:

•
a $60 million increase due to the B/E Aerospace acquisition as discussed above

•
$24 million in other net increases to revenue, primarily due to higher test and training range sales and higher legacy communication sales

Government Systems Segment Operating Earnings

 
Three Months Ended
 
December 31
(in millions)
2017
 
2016
Segment operating earnings
$
109

 
$
96

Percent of sales
19.0
%
 
20.2
%

For the three months ended December 31, 2017 , Government Systems operating earnings increased $13 million , or 14 percent , compared to the same period in the prior year, primarily due to the following:

•
the $98 million increase in sales volume discussed in the Government System sales section above, which resulted in an $82 million increase in cost and incremental earnings of $16 million, or 16 percent of the higher sales volume. The margins on the sales increase were unfavorably impacted by lower margins on B/E Aerospace sales and higher employee compensation costs

•
partially offset by a $3 million increase in the amortization of pre-production engineering costs

The decrease in operating earnings as a percent of sales for the three months ended December 31, 2017 , compared to the same period in the prior year, was primarily due to lower margins on B/E Aerospace sales and higher employee compensation costs and pre-production engineering amortization.

Information Management Services Financial Results

Information Management Services Sales

The following table presents Information Management Services sales:
 
Three Months Ended
 
December 31
(in millions)
2017
 
2016
Sales
$
174

 
$
169

Percent increase
3
%
 
 

For the three months ended December 31, 2017 , total Information Management Services sales increased $5 million , or 3 percent , compared to the same period in the prior year. Aviation-related sales grew 8 percent primarily due to increased usage of connectivity services. Non-aviation sales decreased 10 percent for the three months ended December 31, 2017 , primarily due to timing of equipment deliveries on nuclear security mandate programs.

Information Management Services Segment Operating Earnings
 
 
Three Months Ended
 
December 31
(in millions)
2017
 
2016
Segment operating earnings
$
29

 
$
30

Percent of sales
16.7
%
 
17.8
%


36

For the three months ended December 31, 2017 , Information Management Services operating earnings decreased $1 million , or 3 percent , compared to the same period in the prior year, primarily due to the following:

•
a $5 million increase in sales volume discussed in the Information Management Services sales section above, which resulted in a $3 million increase in cost and an increase in earnings of $2 million, or 40 percent of the higher sales volume

•
operating earnings were unfavorably impacted by asset disposition and customer bankruptcy costs

The decrease in operating earnings as a percent of sales for the three months ended December 31, 2017 compared to the same period in the prior year was primarily due to asset disposition and customer bankruptcy costs.

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
 
December 31
(in millions)
2017
 
2016
General corporate, net
$
14

 
$
11


For the three months ended December 31, 2017 , General corporate expenses increased $3 million , 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
 
December 31
(in millions)
2017
 
2016
Pension benefits
$
(7
)
 
$
(6
)
Other retirement benefits
3

 
3

Net benefit (income)
$
(4
)
 
$
(3
)

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.

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

During the three months ended December 31, 2017 , the Company voluntarily contributed $55 million to its U.S. qualified pension plan. There is no minimum statutory funding requirement for 2018. Any additional future contributions necessary to satisfy minimum statutory funding requirements are dependent upon actual plan asset returns, interest rates and actuarial assumptions.

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

37

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 jurisdictional mix of income being outside the U.S. at lower tax rates, and the Domestic Manufacturing Deduction.

On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the Act). The Act amends the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. For businesses, the Act reduces the corporate federal tax rate from a maximum of 35.0 percent to a flat 21.0 percent rate and transitions from a worldwide tax system to a territorial tax system. The Act also adds many new provisions including changes to bonus depreciation, the deduction for executive compensation and interest expense, a tax on global intangible low-taxed income (GILTI), the base erosion anti-abuse tax (BEAT) and a deduction for foreign-derived intangible income (FDII). Many of these provisions, including the tax on GILTI, the BEAT, and the deduction for FDII, do not apply to the Company until 2019. The Company is assessing the impact of the provisions of the Act which do not apply until 2019. The Company has elected to account for the tax on GILTI as a period cost and thus has not adjusted any of the deferred tax assets/liabilities of its foreign subsidiaries for the new tax. The two material items that impact the Company for 2018 are the reduction in the tax rate and a one-time tax that is imposed on the Company’s unremitted foreign earnings.

During the three months ended December 31, 2017 and 2016 , the effective income tax rate was (8.9) percent and 28.6 percent, respectively. The lower current year effective income tax rate was primarily due to a $102 million reduction in deferred tax liabilities resulting from enactment of the Act, a lower U.S. Federal statutory tax rate under the Act and benefits from the jurisdictional mix of income as a result of the B/E Aerospace acquisition, partially offset by a $40 million obligation related to the tax on unremitted foreign earnings imposed by the Act.

FINANCIAL CONDITION AND LIQUIDITY

Cash Flow Summary

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

Operating Activities
 
Three Months Ended
 
December 31
(in millions)
2017
 
2016
Cash (used for) operating activities
$
(259
)
 
$
(101
)

The $158 million increase in cash used for operating activities during the three months ended December 31, 2017 , compared to the same period in the prior year, was primarily due to the following:

•
higher payments for production inventory and other operating costs, which increased $836 million to $1.887 billion for the three months ended December 31, 2017 compared to $1.051 billion in the three months ended December 31, 2016 , primarily due to cash payments of the recently acquired B/E Aerospace business. The increase in cash payments for production inventory and other operating costs was more than the $764 million increase in total costs, expenses and other due to the timing of expenses relative to the payment of supplier invoices

•
payments for employee incentive pay increased $61 million, primarily due to the B/E Aerospace acquisition and a higher annual incentive payout percentage compared to the prior year. Incentive pay is expensed in the year incurred and then paid in the first fiscal quarter of the following year. In the three months ended December 31, 2017 , $182 million was paid for employee incentive pay costs expensed during 2017. This compares to $121 million paid during the three months ended December 31, 2016 for employee incentive pay costs expensed during 2016


38

•
partially offset by higher cash receipts from customers, which increased by $690 million to $1.904 billion in the three months ended December 31, 2017 compared to $1.214 billion in the three months ended December 31, 2016 , primarily due to cash receipts of the recently acquired B/E Aerospace business. The increase in cash receipts from customers was less than the sales volume increase of $818 million due to the timing of sales relative to the collection of receivables from customers

•
also offset by lower cash payments for income taxes, which decreased $56 million to $7 million during the three months ended December 31, 2017 , compared to $63 million during the same period in the prior year. The decrease in cash used for income tax payments was primarily due to a change in the timing of the Company's U.S. Federal extension filing and the receipt of certain tax refunds

Investing Activities
 
Three Months Ended
 
December 31
(in millions)
2017
 
2016
Cash (used for) investing activities
$
(68
)
 
$
(63
)

Cash used for investing activities for the three months ended December 31, 2017 increased $5 million , compared to the three months ended December 31, 2016 , primarily due to the following:

•
a $22 million increase in cash payments for property additions for the three months ended December 31, 2017 , compared to the same period in the prior year

•
partially offset by the absence of an $11 million cash payment in December 2016 for the acquisition of Pulse.aero

Financing Activities
 
Three Months Ended
 
December 31
(in millions)
2017
 
2016
Cash provided by financing activities
$
202

 
$
146


The $56 million increase in cash provided by financing activities during the three months ended December 31, 2017 , compared to the three months ended December 31, 2016 , was primarily due to the following:

•
a $124 million decrease in repayments of long-term debt for the three months ended December 31, 2017 compared to the same period in the prior year

•
a $32 million increase in proceeds received from the exercise of stock options

•
partially offset by an $82 million decrease in the net proceeds from short-term commercial paper borrowings

•
also offset by an $11 million increase in cash dividends due to the 31.2 million shares of common stock issued to finance a portion of the B/E Aerospace acquisition


39

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 December 31, 2017 and September 30, 2017 are as follows:
(in millions)
December 31,
2017
 
September 30,
2017
Cash and cash equivalents
$
583

 
$
703

 
 
 
 
Short-term debt
(877
)
 
(479
)
Long-term debt, net
(6,498
)
 
(6,676
)
Total debt
$
(7,375
)
 
$
(7,155
)
Total equity
$
6,361

 
$
6,050

Debt to total capitalization (1)
54
%
 
54
%
(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 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 with cash generated from operating activities. As of December 31, 2017 , approximately 86 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. With the exception of certain acquired B/E Aerospace cash balances, we do not currently have plans to repatriate cash and cash equivalents held at non-U.S. locations. However, we do intend to further study changes enacted by the Tax Cuts and Jobs Act, costs of repatriation and the current and future cash needs of foreign operations to determine whether there is an opportunity to tax efficiently repatriate additional foreign cash balances in the future.

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 December 31, 2017 , short-term commercial paper borrowings outstanding were $728 million , with a weighted-average annualized interest rate and maturity period of 1.63 percent and 11 days, respectively. At September 30, 2017 , short-term commercial paper borrowings outstanding were $330 million , with a weighted-average annualized interest rate and maturity period of 1.45 percent and 18 days, respectively. The maximum amount of short-term commercial paper borrowings outstanding during the three months ended December 31, 2017 was $879 million .

We have a $1.5 billion five-year senior unsecured revolving credit agreement with various banks that expires in December 2021. At December 31, 2017 and September 30, 2017 , there were no outstanding borrowings under the Company's revolving credit facility.

In December 2016, we entered into a $4.35 billion 364-day senior unsecured bridge term loan credit agreement and a $1.5 billion three-year senior unsecured term loan credit agreement. This bridge facility terminated upon receipt of proceeds from the 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. At December 31, 2017 , the outstanding principal balance of the term loan credit agreement was $694 million .

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 48 percent at December 31, 2017 .

40


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 December 31, 2017 :
Credit Rating Agency
 
Short-Term Rating
 
Long-Term Rating
 
Outlook
Fitch Ratings
 
F2
 
BBB
 
Positive
Moody’s Investors Service
 
P-2
 
Baa2
 
Stable
Standard & Poor’s
 
A-2
 
BBB
 
Positive

We were in compliance with all debt covenants at December 31, 2017 and September 30, 2017 .

ENVIRONMENTAL

For information related to environmental claims, remediation efforts and related matters, see Note 15 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, 2017 . Actual results in these areas could differ from management's estimates.


41

CAUTIONARY STATEMENT

This quarterly report contains statements, including statements regarding certain projections, business trends and the proposed acquisition of Rockwell Collins by United Technologies 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 governmental 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; achievement of B/E Aerospace integration and synergy plans; continuing to maintain our planned effective tax rates; our ability to develop contract compliant systems and products on schedule and within anticipated cost estimates; risk of fines and penalties related to noncompliance with laws and regulations including compliance requirements associated with U.S. Government work, export control and environmental regulations; risk of asset impairments; our ability to win new business and convert those orders to sales within the fiscal year in accordance with our annual operating plan; the uncertainties of the outcome of lawsuits, claims and legal proceedings; the ability of Rockwell Collins and United Technologies to receive the required regulatory approvals for the proposed acquisition of Rockwell Collins by United Technologies (and the risk that such approvals may result in the imposition of conditions that could adversely affect the combined company or the expected benefits of the transaction) and to satisfy the other conditions to the closing of the transaction on a timely basis or at all; the occurrence of events that may give rise to a right of one or both of the parties to terminate the merger agreement; negative effects of the announcement or the consummation of the transaction on the market price of United Technologies and/or Rockwell Collins common stock and/or on their respective businesses, financial conditions, results of operations and financial performance; risks relating to the value of United Technologies’s shares to be issued in the transaction, significant transaction costs and/or unknown liabilities; the possibility that the anticipated benefits from the proposed transaction cannot be realized in full or at all or may take longer to realize than expected; risks associated with third party contracts containing consent and/or other provisions that may be triggered by the proposed transaction; risks associated with transaction-related litigation; the possibility that costs or difficulties related to the integration of Rockwell Collins’ operations with those of United Technologies will be greater than expected; the outcome of legally required consultation with employees, their works councils or other employee representatives; and the ability of Rockwell Collins and the combined company to retain and hire key personnel. There can be no assurance that the proposed acquisition will in fact be consummated in the manner described or at all. For additional information on identifying factors that may cause actual results to vary materially from those stated in forward-looking statements, see the reports of United Technologies and Rockwell Collins on forms 10-K, 10-Q and 8-K filed with or furnished to the SEC from time to time. 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 and make acquisitions. 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.


42

At December 31, 2017 , we had the following unsecured long-term notes outstanding:
 
 
December 31, 2017
(in millions)
 
Interest Rate
 
Carrying Value
 
Fair Value
Fixed-rate notes due:
 
 
 
 
 
 
July 2019
 
1.95%
 
$
300

 
$
298

July 2019
 
5.25%
 
300

 
313

November 2021
 
3.10%
 
250

 
254

March 2022
 
2.80%
 
1,100

 
1,098

December 2023
 
3.70%
 
400

 
413

March 2024
 
3.20%
 
950

 
955

March 2027
 
3.50%
 
1,300

 
1,319

December 2043
 
4.80%
 
400

 
459

April 2047
 
4.35%
 
1,000

 
1,078

Variable-rate term loan due:
 
 
 
 
 
 
April 2020
 
1 month LIBOR + 1.25% (1)
 
694

 
694

(1) We have the option to elect a one-, two-, three- or six-month LIBOR interest rate and have elected the one-month rate during the first quarter of 2018. The one-month LIBOR rate at  December 31, 2017  was approximately  1.57 percent .

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 $123 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 $129 million. The fair value of the $500 million notional value of interest rate swap contracts was a $9 million net asset at December 31, 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 7, 12 and 13 in the Notes to Condensed Consolidated Financial Statements .

43


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 $690 million and $1.312 billion at December 31, 2017 and September 30, 2017 , respectively. The decrease in the notional amount of outstanding foreign currency contracts is primarily due to the maturation of certain foreign currency contracts entered into to offset remeasurement of certain intercompany loans that matured in the current quarter. 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 and British pound sterling. The duration of foreign currency contracts is generally five years or less. The net fair value of these foreign currency contracts was $0 at December 31, 2017 and a $1 million net asset at September 30, 2017 . A 10 percent increase in the value of the U.S. dollar against all currencies would decrease the fair value of our foreign currency contracts at December 31, 2017 by $40 million. A 10 percent decrease in the value of the U.S. dollar against all currencies would increase the fair value of our foreign currency contracts at December 31, 2017 by $39 million. For more information related to outstanding foreign currency contracts, see Notes 12 and 13 in the Notes to Condensed Consolidated Financial Statements .

Item 4. Controls and Procedures

As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, we carried out an evaluation of the effectiveness, as of December 31, 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 December 31, 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.

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.




44

PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information about our purchases of shares of our common stock during the quarter, pursuant to our Board-authorized stock repurchase program:
Period
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (1)
October 1, 2017 through October 31, 2017
 
—

 
$
—

 
—

 
$
285
 million
November 1, 2017 through November 30, 2017
 
—

 
—

 
—

 
285
 million
December 1, 2017 through December 31, 2017
 
—

 
—

 
—

 
285
 million
Total / Average
 
—

 
—

 
—

 
 
(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.



45

EXHIBIT INDEX

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

 
 
 
 
* 10-a-2

 
 
 
 
* 10-f-1

 
 
 
 
* 10-g-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.
 
 
 


46


SIGNATURES

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

Dated: January 26, 2018



S-1


Exhibit 10-a-1



ROCKWELL COLLINS, INC.

2015 LONG-TERM INCENTIVES PLAN

PERFORMANCE SHARE AGREEMENT (2018-2020)


Grant Date: November 13, 2017

We are pleased to confirm that, as a key employee of Rockwell Collins, Inc. (“ Rockwell Collins ” or the “ Company ”) or one of its subsidiaries, you have been granted performance shares denominated in shares of the Company’s common stock. You have been granted the number of target shares set forth in the letter to you from Robert K. Ortberg dated November 13, 2017 (the “ Performance Shares ”) pursuant to this agreement (this “ Agreement ”) and the Rockwell Collins 2015 Long-Term Incentives Plan (the “ Plan ”).

The grant of Performance Shares pursuant to this Agreement is not effective or enforceable until you properly acknowledge your acceptance of this Agreement by completing the electronic acceptance of this Agreement. Upon acceptance, the Agreement will be deemed effective as of the Grant Date. If you do not acknowledge your acceptance of this Agreement within six months of the Grant Date, the Performance Shares will be forfeited. If you reside outside the United States, the Company may require you to complete a written acceptance within this time period in lieu of an electronic acceptance.

Any payout of your Performance Shares will be based on the Company’s achievement of its Cumulative Sales goal and its Free Cash Flow (“ FCF ”) goal, each measured over the Company’s 2018 through 2020 fiscal years (the “ Performance Period ”). These goals are set forth in Exhibit A attached hereto. The Company will be adopting new accounting rules related to revenue recognition in its 2019 fiscal year (“ FY19 ”). To reflect the impact of switching to the new revenue recognition rules in FY19, the Cumulative Sales and FCF goals and/or actual results will be adjusted as described in Exhibit A .

The payout of your Performance Shares, if any, will be subject to further adjustment based upon the Company’s Total Shareowner Return (“ TSR ”) percentile relative to a peer group, as specified below. The terms and conditions of these Performance Shares are as set forth below.

Notwithstanding anything to contrary in this Award, if the previously announced transaction with United Technologies Corporation is completed, the terms and conditions set forth in Exhibit C shall govern the conversion and payout of the Performance Shares.

1. Confirmation of Award . This Agreement, together with the letter to you from Robert K. Ortberg referenced above, confirms your award in accordance with the terms as set forth herein.

2. Amount Payable Pursuant to Awards . Subject to the provisions of this Agreement (including, without limitation, the terms and conditions set forth in Exhibit C ), the shares of the Company’s common stock (“ Common Stock ”), if any, payable to you pursuant to your Performance Shares shall be calculated as follows:

(a) Determine the percentage, which can range from 0-100%, attributable to the Company’s achievement of its Cumulative Sales goal over the Performance Period as set forth in Exhibit A attached hereto (the “ Cumulative Sales Percentage ”). If the Cumulative Sales results that are achieved fall between the performance levels specified in Exhibit A , the percentage will be interpolated consistent with the range in which the Cumulative Sales falls as conclusively determined by the committee of the Board of Directors of the Company administering the Plan (which committee is herein called the “ Committee ” and which, on the date hereof, is the Compensation Committee). Fractional percentages will be rounded to the nearest whole number.

(b) Determine the percentage, which can range from 0-100%, attributable to the Company’s achievement of its FCF goal over the Performance Period as set forth in Exhibit A attached hereto (the “ FCF Percentage ”). If the FCF results that are achieved fall between the performance levels specified in Exhibit A , the percentage will be interpolated consistent with the manner described above in 2(a). Fractional percentages will be rounded to the nearest whole number.


1


(c) Determine the TSR modifier percentage, which can range between 80-120%, attributable to the Company’s TSR (as determined pursuant to Section 3) percentile performance relative to the peers as set forth in Exhibits A and B attached hereto (the “ TSR Percentage ”).

(d) Add the Cumulative Sales Percentage to the FCF Percentage and multiply this sum by the TSR Percentage (such result, the “ Final Award Percentage ”). The Final Award Percentage will be rounded to the nearest whole percentage.

(e) To determine the number of Performance Shares, if any, that are payable, multiply the Final Award Percentage by the target shares specified in Mr. Ortberg’s letter to you referenced above and round to the nearest whole share.

Subject to the provisions of this Agreement, the amount payable to you pursuant to the Performance Shares with respect to the Performance Period shall be paid in shares of Common Stock, less shares to be withheld for taxes and/or other amounts as described below in Section 16, as soon as practicable after the end of the Performance Period and after receipt of the accountant’s letter for the Performance Period pursuant to Section 13, and in any event within the calendar year within which the Performance Period ends. Unless otherwise provided in Section 6 below and subject to applicable law, you will not be considered “vested” in the Performance Shares and will not be entitled to any payment thereunder unless you are employed as of the last day of the Performance Period.

The Performance Shares represent the Company’s unfunded and unsecured promise to issue shares of Common Stock at a future date, subject to the terms of this Agreement and the Plan. You have no rights under the Performance Shares or this Agreement other than the rights of a general unsecured creditor of the Company. Until the distribution of any Common Stock after vesting is evidenced in book entry form at the transfer agent, is placed into a brokerage account or a stock certificate is issued, you shall not have, with respect to the Performance Shares, rights to vote or receive dividends or any other rights as a shareowner.

3. Definitions and Determination of Financial Performance . “ Cumulative Sales ” is the sum of the “Total sales” reported by the Company in its Consolidated Statement of Operations in its audited financial statements for each fiscal year in the Performance Period.

“ FCF ” is the amount reported as “Cash Provided by Operating Activities from Continuing Operations” less the amount reported as “Property additions,” each as reported by the Company in its Consolidated Statement of Cash Flows in its audited financial statements for the fiscal year.

“ Cash Taxes ” is the Company’s net income tax payments as reported by the Company under Income Taxes in its Notes to Consolidated Financial Statements in its audited financial statements for the fiscal year.

Total Sales and FCF will be adjusted for unusual and infrequently occurring income and expense items as determined in accordance with United States Generally Accepted Accounting Principles (“ GAAP ”).

If a divestiture occurs during the Performance Period, the Company’s Total sales and FCF for each fiscal year in the Performance Period will include (without duplication) an amount equal to the divested business’ sales and FCF in the full twelve month period completed immediately prior to the month in which the closing date of the divestiture occurs.

If an acquisition occurs during the Performance Period, and the acquired business’ sales are less than 10% of the Company’s sales as reported by the Company in its audited financial statements over the Company’s last full four fiscal quarters, adjustments for each such acquisition will be made as follows:

(1) the Company’s Total sales and FCF in the fiscal year during the Performance Period in which the acquisition closes will exclude the acquired business’ sales and FCF results for the period of such fiscal year following the acquisition’s closing date;

(2) the Company’s Total sales in each fiscal year during the Performance Period subsequent to the year in which the acquisition closes will be reduced by an amount equal to the acquired business’ sales results for the full twelve month period ending with the Company’s first fiscal year end that occurs after the date of the acquisition;

(3) the Company’s FCF in each fiscal year during the Performance Period subsequent to the year in which the acquisition closes will exclude an amount equal the net income (loss) of the acquired business in the full twelve month period ending prior to the acquisition’s closing date (as reflected in the base case scenario included in the Company’s final decision point review process for the acquisition); and


2


(4) the “fair value” expenses of an acquisition will be adjusted for purposes of calculating net income, including an addition to net income to offset the amortization of acquired intangibles and an addition to net income to offset for the lost opportunity to earn interest on invested funds (equal to the imputed interest on the net cost of the acquisition over the period of Performance Period following the closing date of the acquisition, calculated using the average annual U.S. overnight LIBOR during that period).

The Committee reserves its discretion pursuant to Section 10 below to make necessary or appropriate adjustments to the definitions and measures or otherwise for acquisitions, divestitures and other matters referenced in Section 10.

TSR is measured by adding (i) the total stock price growth for the Performance Period, measured by comparing the average stock price during the Company’s first month of fiscal 2018 (i.e., from September 30 to November 3, 2017) to the average stock price during the Company’s last month of fiscal 2020 (i.e., September 5 to October 2, 2020), and (ii) dividends paid during the Performance Period, measured as if reinvested in stock at the payment date. In the event of substantial changes causing an inability to calculate TSR for one or more of the peer companies listed in the attached Exhibit A (or in the event of spinoffs or similar transactions causing a peer company to split into two or more peer companies), the list of peer companies shall be adjusted accordingly to take such events into account.
 
In connection with the receipt of the accountant’s letter for the Performance Period pursuant to Section 13, the Committee shall determine the Cumulative Sales, FCF and the TSR results and percentile ranking and the Final Award Percentage for the Performance Period after taking into account any adjustment as contemplated in Section 10. The TSR percentile ranking relative to the peer group shall be calculated using a continuous percentile ranking method as described in Exhibit B and then using this result the TSR Percentage shall be determined in accordance with Exhibit A .

4. Payment of Performance Shares Denominated in Shares of Common Stock . The Performance Shares denominated in shares of Common Stock are payable in shares of the Company’s Common Stock; provided, however, that the Committee may, in its sole discretion, make a cash payment equal to the Fair Market Value of shares of Common Stock otherwise required to be issued. The Company may issue shares of Common Stock in book entry form in connection with the payout of Performance Shares. In lieu of fractional shares the Company may determine, in its sole discretion, to pay cash or to round such shares to the closest whole number. The future value of the shares of Common Stock underlying the Performance Shares is unknown and cannot be predicted with certainty.

5. Transferability of Award . The Performance Shares shall not be transferable by you except by will or by the laws of descent and distribution.

6. Termination of Employment for Death, Disability or Retirement . Subject to the terms and conditions set forth in Exhibit C , if your employment by the Company terminates during the Performance Period by reason of your death, disability or retirement (defined as you are age 55 or older at time of termination), you will continue to be eligible to receive a payment, if any, that would otherwise be payable pursuant to Section 2, but any such amount shall be pro-rated for the portion of the Performance Period that elapsed prior to this termination of employment and shall be paid at the time such amount would otherwise be payable as specified in Section 2. “ Disability ” shall be defined for purposes of this Agreement as a disability for a continuous period of at least six months under the Company’s long-term disability plan during the period of your continuous service as an employee of the Company.

7. Termination of Employment for Other Reasons . Except as otherwise provided in Sections 9 through 12, if your employment by the Company terminates during the Performance Period other than by reason of your death, disability, or retirement (as defined above), you will not be entitled to any payment pursuant to Section 2 with respect to the Performance Period. For the avoidance of doubt, your termination of employment will be deemed to occur on the date you are no longer actively providing services as an Employee, which date will not be extended by any notice period that may be required contractually or under applicable law. Notwithstanding the foregoing, the Company’s Senior Vice President of Human Resources or the General Counsel shall have the sole discretion to determine the date of termination for purposes of participation in the Plan and the Performance Shares.

8. Detrimental Activity; Compensation Recovery Policy; Noncompetition and Nonsolicitation Agreement . If you engage in detrimental activity (as defined in this Section 8) at any time (whether before or after termination of your employment), you will not be entitled to any payment hereunder and you will forfeit all rights with respect to the Performance Shares under this Agreement. For purposes of this Section 8, “ detrimental activity ” shall mean willful, reckless or grossly negligent activity that is determined by the Committee to be detrimental to or destructive of the business or property of the Company. Any such determination of the Committee shall be final and binding for all purposes. Notwithstanding the foregoing, no payment hereunder shall be forfeited or become not payable by virtue of this Section 8 on or after the date of a Change of Control (as defined in the

3


Plan) unless the “Cause” standard set forth in Section 11(b) is satisfied. In addition, if you are or subsequently become an executive officer of the Company, a Vice President & General Manager, a Vice President & Controller or another employee who becomes subject to the Policy (as defined below), your Performance Shares and the value you receive upon vesting of the Performance Shares will be subject to the Company’s Compensation Recovery Policy, as amended from time to time, including, without limitation, any amendments required to comply with the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “ Policy ”), except where prohibited by law. Currently, the Company’s executive officers, Vice Presidents & General Managers (those who report to an executive officer) and Vice Presidents & Controllers (band M8) are the only employees subject to the Policy. If you become subject to the Policy, you will be notified by the Company’s Human Resources department. Further, if you have attained the level of Vice President (band M8 or above) with the Company and you have not previously entered into a Noncompetition and Nonsolicitation Agreement with the Company (the “ NCNS Agreement ”), this grant of Performance Shares is contingent on your agreement, if requested by the Company within thirty days of the date of this Agreement, to be bound by the NCNS Agreement by returning a signed copy of the NCNS Agreement to the Company within the time period prescribed by the Company’s General Counsel.

9. Transfer of Employment; Leave of Absence . Except as otherwise required by Internal Revenue Code Section 409A, for the purposes of this Agreement, (a) a transfer of your employment from the Company to a subsidiary or vice versa, or from one subsidiary of the Company to another, without an intervening period, shall not be deemed a termination of employment, and (b) if you are granted in writing a leave of absence, under certain circumstances at the discretion of the Company, you shall be deemed to have remained in the employ of the Company or a subsidiary of the Company during such leave of absence. If your level of employment changes, the Company may adjust your target payment hereunder to pro rate the portion of the Performance Period that elapses (i) prior to the change in employment status at the old target payment level and (ii) after the change at the new target payment level, if any. Any promotion to the ranks of “Designated Senior Executive” requires Committee action to adjust the target payment hereunder. If you are entitled to payment under this Agreement upon a termination of employment, Section 409A’s definition of “separation of service,” including its rules on leaves of absences, to the extent Section 409A is applicable, will be used to determine the date on which you actually terminate employment.

10. Adjustments . (a) In addition to the adjustments provided for in Section 3 of this Agreement, adjustments (which may be increases or decreases) may be made by the Committee in the Cumulative Sales and FCF as well as in the TSR list of peer companies, to take into account changes in law and accounting and tax rules and to make such adjustments as the Committee deems necessary or appropriate to reflect the inclusion or exclusion of the impact of unusual and infrequently occurring items, events or circumstances, including, without limitation, acquisitions or divestitures by or other material changes in the Company or peer companies, provided that no adjustment shall be made which would result in an increase in your compensation if your compensation is subject to the limitation on deductibility under Section 162(m) of the Internal Revenue Code, as amended, or any successor provision, for the year with respect to which the adjustment occurs.

(b) In the event of any change in or affecting the outstanding shares of Common Stock of the Company by reason of a stock dividend or split, merger or consolidation, or various other events, adjustments will be made as appropriate in connection with the Performance Shares as contemplated in the Plan.

(c) Subject to the provisions of Section 11, the determination of the Committee as to the terms of any adjustment made pursuant to this Section 10 shall be binding and conclusive upon you and any other person or persons who are at any time entitled to receipt of any payment pursuant to the award.

11. Change of Control . (a) Notwithstanding any other provision of this Agreement to the contrary (subject to the terms and conditions set forth in Exhibit C ), in the event that during the Performance Period your employment is terminated on or after a Change of Control (as defined in the Plan) (i) by the Company other than for Cause (as defined in Section 11(b)) or (ii) by you for Good Reason (as defined in Section 11(c)), your award shall become nonforfeitable and shall be paid out on the date of your “separation from service” within the meaning of Section 409A to the extent applicable, as if the Performance Period hereunder had been completed or satisfied and as if the Final Award Percentage for the Performance Period enabled a payment to you pursuant to Section 2 of the amount that is equal to your target performance shares for the Performance Period multiplied by the average actual percentage payout for the Company’s long-term incentive performance shares for the prior three completed performance periods.

(b)    For purposes of Sections 8 and 11(a), termination for “ Cause ” shall mean:

(i) your willful and continued failure to perform substantially your duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to you by (x) the Board or the Chief Executive Officer of the Company if you are an executive

4


officer of the Company or (y) the Senior Vice President of Human Resources if you are not an executive officer of the Company. Such notice shall specifically identify the manner in which you have not substantially performed your duties, or

(ii) your willful engaging in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company.

For purposes of this provision, no act or failure to act, on the part of you, shall be considered “willful” unless it is done, or omitted to be done, by you in bad faith or without reasonable belief that your action or omission was in the best interests of the Company. If you are an executive officer of the Company, any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by you in good faith and in the best interests of the Company. The cessation of an executive officer’s employment shall not be deemed to be for Cause unless and until there shall have been delivered to the executive officer a copy of the resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at the meeting of the Board called and held for such purpose (after reasonable notice is provided and the executive officer is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the executive officer was guilty of the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail.

(c) For purposes of this Agreement, “ Good Reason ” shall mean:

(i) the assignment to you of any duties inconsistent in any material respect with your most significant position (including status, offices, titles and reporting requirements), authority, duties or responsibilities held, exercised and assigned at any time during the 120-day period immediately preceding the Change of Control, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by you;
(ii)    requiring you to be based at any office or location other than the location where you were employed immediately preceding the Change of Control unless any office or location is less than 35 miles from such location, or if the distance from the new location to your residence is less than the distance from the old location to the residence;

(iii)    any failure by the Company to maintain your compensation at a level consistent with that generally in effect prior to any Change of Control, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by you;

(iv)    any purported termination by the Company of your employment otherwise than as expressly permitted by this Agreement; or

(v)    any failure by the Company to comply with and satisfy Section 19(b) of this Agreement.

For purposes of this Section 11(c), any good faith determination of “Good Reason” made by you shall be conclusive.
 
(d)    Notwithstanding anything to the contrary in this Agreement (except to the extent that Section 11(a) provides for an earlier payment upon a termination of employment), if a Change of Control occurs during the Performance Period, the payment date for your Performance Shares will be deemed to be November of the last year of the Performance Period.

12. Divestiture . Subject to the terms and conditions set forth in Exhibit C , in the event that your principal employer is a subsidiary of the Company, it is possible that your principal employer may cease to be a subsidiary of the Company during the Performance Period and that your employment with the Company terminates as a result (the date of such cessation is herein called the Divestiture Date). If the divestiture of your principal employer constitutes a “change in control event” that meets the requirements of Section 409A or if you are not subject to Section 409A, then your Performance Shares shall become nonforfeitable (to the extent not already nonforfeitable) and shall be paid out on the Divestiture Date as if the Performance Period hereunder had been completed or satisfied and as if the Final Award Percentage enabled a payment to you pursuant to Section 2 of the amount that is equal to your target performance shares for the Performance Period multiplied by the average actual percentage payout for the Company’s long-term incentive performance shares for the prior three completed performance periods. If you are subject to Section 409A and the divestiture of your principal employer does not meet the requirements of a “change in control event” under Section 409A, then your Performance Shares shall become nonforfeitable (to the extent not already nonforfeitable)

5


on the Divestiture Date and shall be paid out in November of the last year of the Performance Period consistent with the payout amount approved by the Compensation Committee for the Performance Period.

13. Accountant’s Letter . As soon as practicable after the end of the Performance Period, the Committee shall obtain a letter or other communication from the Company’s Senior Vice President and Chief Financial Officer or the Vice President, Finance and Controller, or one of their successors or designees, to the effect that such person has reviewed the determination for the Performance Period of the Cumulative Sales FCF and, TSR results and percentile ranking of the Company, as well as the Final Award Percentage, and that in such person’s opinion such determinations have been made in accordance with Section 3.

14. Employment Rights . The Performance Shares do not and are not intended to constitute or create a contract of employment. You shall not have any rights of employment or continued employment with the Company or any subsidiary as a result of the Performance Shares, other than the payment rights expressly contemplated herein.

15. United States Internal Revenue Code Section 409A.

(a)    Notwithstanding any other provision of this Agreement to the contrary, the Company makes no representation that any amount payable under this Agreement will be exempt from or comply with Section 409A and makes no undertaking to preclude Section 409A from applying to such amount.

(b)    To the extent that any amount payable under this Agreement is paid upon a “separation from service” (within the meaning of Section 409A) to a “specified employee” (within the meaning of Section 409A), then such amount will not be paid during the six (6) month period following such separation from service, but will be paid within ten business days following such period.

16. Tax Withholding . As a condition of the grant and vesting of the Performance Shares, the Company, your employer or an administrative agent shall have the right, in whole in part, upon any payment to you of cash and/or Common Stock hereunder, (a) to deduct an amount equal to the taxes, social contributions, and/or other charges up to the maximum statutory withholding requirement or otherwise in accordance with applicable law in respect of Performance Shares and Common Stock acquired or (b) to require you (or any other person entitled to the Performance Shares) to pay it an amount sufficient to provide for any such taxes, social charges and/or other charges. The company may reduce the number of shares of Common Stock otherwise deliverable to you to satisfy taxes that are due. You agree that (for yourself and on behalf of any other person who becomes entitled to the Performance Shares or the Common Stock) that if the Company, your employer or an administrative agent elects to require you (or such other person) to remit an amount sufficient to pay such taxes, social contributions, and/or other charges, you (or such other person) must remit that amount within three business days after such amount is due. The Company will generally withhold required amounts from your payments, unless the Company has made other arrangements with you for you to promptly remit an amount sufficient to pay such withholding of tax, social contributions, and/or other charges (and may condition delivery of cash and/or Common Stock hereunder upon such payment).  

You acknowledge and agree that you are solely responsible for any and all taxes, social contributions, and/or other charges that may be assessed by any taxing authority in the United States or any other jurisdiction arising from the Performance Shares, the Common Stock or dividends (if any), that such amounts may exceed any amount withheld by the Company, your employer or the administrative agent, and that neither the Company nor any affiliate is liable for any such assessments. You are solely responsible for all relevant documentation that may be required of you in relation to the Performance Shares, such as but not limited to personal income tax returns or reporting statements in relation to the receipt or holding of Stock or any bank or brokerage account, or subsequent sale of Common Stock and the receipt of dividends, if any. You acknowledge and agree that the Company makes no representations regarding the treatment of taxes, social contributions, or other charges and does not commit to and is under no obligation to structure the terms of the Plan or any award to reduce or eliminate your liability for any income taxes, social contributions, or other charges or to achieve any particular tax result. You also understand that applicable laws may require varying Stock or award valuation methods for purposes of calculating taxes, social contributions, and/or other charges, and the Company assumes no responsibility or liability in relation to any such valuation or for any calculation or reporting of income or such amounts that may be required in relation to the award under applicable laws. Further, if you become subject to tax in more than one jurisdiction, the Company, your employer, or an administrative agent may be required to withhold or account for such amounts in more than one jurisdiction. Consult a tax or financial advisor if you have questions.

17. Communications . The Company may, in its sole discretion, decide to deliver any documents related to the Performance Shares, future Performance Shares, the Common Stock, or any other Company-related documents by electronic means. By accepting the Performance Shares, whether electronically or otherwise, you hereby consent to receive such documents by electronic delivery and agree to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third party designated by the Company, including, but not limited to the use of electronic signatures or

6


click-through electronic acceptance of terms and conditions. If you have been provided with a copy of this Agreement, the Plan, or any other relevant documentation in a language other than English, unless otherwise required by applicable law, the English language documents will prevail in case of any ambiguities or divergences as a result of translation.

18. Governing Law and Forum; Severability. This Agreement and the Company’s obligation to issue Common Stock in respect of the Performance Shares shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to the conflict of law principles thereof. If one or more of the provisions herein shall be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby and the invalid, illegal or unenforceable provisions shall be deemed null and void; however, to the extent permissible by law, any provisions that could be deemed null and void shall first be construed, interpreted or revised retroactively to permit this Agreement to be construed so as to foster the intent of this Agreement and the Plan. For purposes of resolving any dispute that may arise directly or indirectly from this Agreement, the parties hereby agree that any such dispute that cannot be resolved by the parties shall be submitted to the exclusive jurisdiction of state and federal courts located in the state of Delaware.
19. Successors . (a) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns.
(b) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, “Company” shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise.

20. Administration . Consistent with Section 8 of the Plan, the Committee shall interpret and administer the Plan, this Agreement and the Performance Shares. The actions and determinations of the Committee on all matters relating to the Plan, this Agreement and the Performance Shares will be final and conclusive.

        21.     Acknowledgement and Waiver. By executing this Agreement, participating in the Plan and accepting the grant of Performance Shares, you hereby agree and acknowledge that: (a) the Plan is discretionary in nature and that the Company can amend, cancel or terminate it at any time; (b) the grant of Performance Shares is voluntary and occasional and does not create any contractual or other right to receive future Performance Shares, or benefits in lieu of any Performance Shares even if Performance Shares have been granted repeatedly in the past; (c) all determinations with respect to any such future grants, including, but not limited to, if and when Performance Shares shall be granted, will be at the sole discretion of the Company; (d) your participation in the Plan is voluntary; (e) the value of the Performance Shares is an extraordinary item of compensation, which is outside the scope of your employment contract, if any; (f) the Performance Shares are not part of normal or expected compensation or salary for any purposes, including, but not limited to, calculating any termination, severance, resignation, redundancy, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments; (g) the Performance Shares cease upon termination of active employment for any reason except as may otherwise be explicitly provided in this Agreement and the Plan; (h) for purposes of the Performance Shares, the termination date shall be deemed effective as of the date that you are no longer actively employed regardless of any “garden leave” or other notice period that may be mandated contractually or under applicable local law, unless otherwise determined by the Company in its sole discretion; (i) the future value of the Common Stock acquired in respect of the Performance Shares, if any, is unknown and cannot be predicted with certainty, and neither the Company nor any affiliate is responsible for any foreign exchange fluctuation between your local currency and the United States Dollar (or the selection by the Company or any affiliates in its sole discretion of an applicable foreign currency exchange rate) that may affect the value of the Performance Shares or any shares of Common Stock received (or the calculation of income or any taxes, social contributions, or other charges thereunder); (j) the Performance Shares do not and are not intended to constitute or create a contract of employment and can in no event be understood or interpreted to mean that the Company or a subsidiary is your employer, or that you have an employment relationship with the Company or a subsidiary or any right to continue in employment, if any, nor will the Performance Shares interfere in any way with the right of your employer to terminate such relationship at any time, subject to applicable law; (k) any cross-border transfer proceeds received upon the sale of the shares of Common Stock received in respect of the Performance Shares must be made through a locally authorized financial institution or registered foreign exchange agency and may require you to provide such entity with certain information regarding the transaction, and (l) no claim or entitlement to compensation or damages arises from the termination of the Performance Shares or reduction in value of the Performance Shares or any Common Stock acquired in respect of the Performance Shares and you irrevocably release the Company and your employer from any such claim that may arise.

        22.     Data Privacy . By executing this Agreement, participating in the Plan and accepting the grant of Performance Shares, you hereby explicitly and unambiguously consent to the collection, use, processing and transfer, in

7


electronic or other form, of personal data by and among, as applicable, your employer, administrative agents (Fidelity is currently the Stock Plan Administrator) and the Company and other subsidiaries for the exclusive purpose of implementing, administering and managing your participation in the Plan. You understand that administrative agents (Fidelity), the Company, your employer and other subsidiaries may hold certain personal information about you, including your name, home address and telephone number, date of birth, social security number or other identification number, salary/compensation, nationality, job title, any stock or directorships held in the Company, details of all Performance Shares or any other entitlement to stock awarded, canceled, purchased or outstanding in your favor, for the purpose of managing and administering the Plan (“Data”). You further understand that Data may be transferred to any third parties assisting the Company in the implementation, administration and management of the Plan. You understand that these recipients may be located in your country of residence, or elsewhere, and that the recipient’s country may have different data privacy laws and protections than your country of residence. You authorize the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing your participation in the Plan. You understand that withdrawing your consent may affect your ability to participate in the Plan.

        23. Compliance with Law . The Company reserves the right to impose other requirements on your participation in the Plan, on the Performance Shares, and on any shares of Common Stock acquired under the Plan, or take any other action to the extent the Company determines it is necessary or advisable in order to comply with any applicable law or facilitate the administration of the Plan, and to require you to sign any additional agreements or undertakings that may be necessary to accomplish the foregoing. Furthermore, you understand that the laws of the country in which you are resident at the time of grant or vesting of the Performance Shares or the holding or disposition of Common Stock (including any rules or regulations governing securities, foreign exchange, tax, labor or other matters) may restrict or prevent the issuance of shares or may subject you to additional procedural or regulatory requirements you are solely responsible for and will have to independently fulfill in relation to the Performance Shares or Common Stock. Notwithstanding any provision herein, the Performance Shares and Common Stock shall be subject to any special terms and conditions or disclosures as set forth in any addendum for your country (the “Addendum to Grant Agreement: Country-Specific Disclosures, Terms and Conditions,” which forms part this Award Agreement).
 
24. Entire Agreement . This Agreement and the other terms applicable to Performance Shares granted under the Plan embody the entire agreement and understanding between the Company and you with respect to the Performance Shares, and there are no representations, promises, covenants, agreements or understandings with respect to the Performance Shares other than those expressly set forth in this Agreement and the Plan. Notwithstanding anything in this Agreement to the contrary, the terms of this Agreement shall be subject to the terms of the Plan and this Agreement is subject to all interpretations, amendments, rules and regulations promulgated by the Committee from time to time pursuant to the Plan, a copy of which may be obtained from the office of the Secretary of the Company.

Sincerely yours,
ROCKWELL COLLINS, INC.



Robert J. Perna
Senior Vice President,
General Counsel and Secretary

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













8


EXHIBIT A
FY2018-2020 Long-Term Incentives  
 
 
 
 
 
 
Performance Level
Cumulative Sales
Free Cash Flow
Total Payout %
Goal ($M)
Payout %
Goal($M)
Payout %
Maximum
$30,783
100%
$4,117
100%
200%
Target
$26,768
50%
$3,580
50%
100%
Minimum
$22,752
0%
$3,043
0%
0%
Weighting
50%
50%
 

The Cumulative Sales and FCF goals and/or actual results will be adjusted as follows:
(i)      Cumulative Sales
Goal. In FY19, the Company expects to adopt new accounting rules related to revenue recognition and, if so, will report its Total sales for its 2019 fiscal year under the new revenue recognition rules and will reconcile in a footnote what its Total sales would have been in such year if the new revenue recognition rules had not been adopted. If there is a difference between the Total sales reported and the reconciled Total sales for the Company’s 2019 fiscal year, an adjustment will be made to the Cumulative Sales goal. If the Total sales reported under the new revenue recognition rules is less than the Total sales that would have been reported if the new revenue recognition rules had not been adopted, the Cumulative Sales goal will be decreased by 200% of the positive difference to reflect the fact that new accounting rules will impact two years of the Performance Period (FY19 and FY20). If the Total sales reported under the new revenue recognition rules is greater than the Total sales that would have been reported if the new revenue recognition rules had not been adopted, the Cumulative Sales goal will be increased by 200% of such difference to reflect the fact that new accounting rules will impact two years of the Performance Period (FY19 and FY20). The example below shows how the Cumulative Sales goal would be increased:
CUMULATIVESALESEXAMPLE.JPG

Actual Results . The actual results will be the sum of (1) the Company’s Total sales reported for the Company’s 2018 fiscal year under the current revenue recognition rules and (2) the Company’s Total sales for its 2019 and 2020 fiscal years reported under the new revenue recognition rules (this assumes the new revenue rules are adopted in FY19).
(ii) FCF
The adoption of the new revenue recognition rules is expected to impact the Cash Taxes payable by the Company. Since FCF is impacted by Cash Taxes, the FCF goal will be adjusted to normalize the impact of Cash Taxes. The FCF results will be increased by the Cash Taxes paid for each fiscal year in the Performance Period and then divided by 128%. 128% represents the prior 5-year average (the average will be rounded to the nearest whole percentage) of pre-tax FCF as a percentage of FCF.
For Example:

9


ACTUALRESULTSEXAMPLE.JPG

(iii) TSR Modifier Percentage
The number of Performance Shares you can receive is subject to adjustment based upon the Company’s TSR performance relative to the following peer companies:
Peer Companies

The Boeing Company
Cobham plc
Embraer S.A.
Esterline Technologies Corporation
General Dynamics Corporation
Hexcel Corporation
L3 Technologies, Inc.
Meggitt plc
Spirit AeroSystems, Inc.
Textron Inc.
Triumph Group, Inc.
Zodiac Aerospace SA

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

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

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
















11


EXHIBIT B

How to Calculate TSR Percentile Rank

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

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

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

CALCULATINGTSRPERCENTILE.JPG
















12


EXHIBIT C

Impact on the Performance Shares
of the Proposed Transaction with United Technologies Corporation

(1)     Proposed Transaction . On September 4, 2017, the Company, United Technologies Corporation (“ UTC ”) and Riveter Merger Sub Corp., a wholly owned subsidiary of UTC (“ Merger Sub ”), entered into an Agreement and Plan of Merger (the “ Merger Agreement ”) that provides for the acquisition of the Company by UTC. Subject to the approval of the Company’s shareowners and the satisfaction or (to the extent permitted by law) waiver of certain other closing conditions, UTC will acquire the Company through the merger of Merger Sub with and into the Company (the “ Merger ”), with the Company surviving the merger and becoming a wholly owned subsidiary of UTC.

(2)     Impact of the Proposed Transaction . If completed, the Merger shall constitute a Change of Control for purposes of this Agreement. Pursuant to the terms of the Merger Agreement, subject to and upon the completion of the Merger, the Performance Shares will be assumed by UTC and converted into a time-based restricted stock unit award of UTC (the “ Converted Awards ”) covering a number of shares of UTC common stock (rounded down to the nearest whole number of shares) equal to the product obtained by multiplying (1) the target number of shares of Common Stock subject to the Performance Shares for the Performance Period by (2) the Equity Award Exchange Ratio (as defined in the Merger Agreement). The Converted Award received in such conversion will be subject to the same time-based vesting schedule applicable to the original Performance Shares, subject only to your continued employment with UTC or an affiliate thereof through October 2, 2020 (the “ Vesting Date ”), but will not be subject to any of the performance conditions described in Section 2 of this Agreement following the completion of the Merger. The Converted Awards will be settled as provided in Section 4 of the Agreement as soon as practicable after the Vesting Date, but in any event within the calendar year within which the Vesting Date occurs. In the event of any conflict between this Section and the terms of the Merger Agreement, the terms of the Merger Agreement shall control.

(3)     Certain Modifications . Pursuant to the terms of the Merger Agreement, effective on or after January 1, 2019, UTC may modify the compensation and benefits provided to certain employees who were employees of B/E Aerospace, Inc. and its subsidiaries as of April 13, 2017 (“ Legacy B/E Aerospace Employees ”), to make the compensation and benefits provided to such Legacy B/E Aerospace Employees substantially comparable in value, in the aggregate, to those provided to other similarly situated employees of the Company and its subsidiaries (other than such Legacy B/E Aerospace Employees) immediately prior to the completion of the Merger. Notwithstanding anything in this Agreement to the contrary, Good Reason shall not include any modification to your compensation and benefits in accordance the terms of the Merger Agreement (if applicable), as described in the preceding sentence.

(4)     Termination of Employment for Death or Disability . If your employment by UTC or an affiliate thereof terminates on or prior to the Vesting Date by reason of your death or Disability, you will continue to be eligible to receive payment of the Converted Awards, but any such amount shall be pro-rated for the period of time that elapsed from the first day of the Company’s 2018 fiscal year (“ FY18 ”) through the date of your termination of employment and shall be paid as soon as practicable after the Vesting Date, but in any event within the calendar year within which the Vesting Date occurs.

(5)     Termination of Employment for Retirement . Except as provided in Section 5 below, if your employment by UTC or an affiliate thereof terminates on or prior to the Vesting Date by reason of your retirement (defined as you are age 55 or older at time of termination), your Converted Awards shall become nonforfeitable and shall be paid out (i) if such termination of employment occurs prior to the second anniversary of the completion of the Merger, as soon as practicable following the date of your “separation from service” within the meaning of Section 409A to the extent applicable, but in any event within the 30 days and (ii) if such termination of employment occurs on or after the second anniversary of the completion of the Merger, as soon as practicable after the Vesting Date, but in any event within 30 days after the Vesting Date, provided that , in each case, any such amount shall be pro-rated for the period of time that elapsed from the first day of FY18 through the date of your termination of employment. If you are or become eligible for retirement, a portion of your Converted Awards may become subject to FICA taxes prior to the Vesting Date despite the fact that no shares of have yet been delivered to you. If FICA applies to you, FICA taxes are required to be withheld by your employer with respect to the pro rata portion of the Converted Awards you would receive if you retired. As an administrative practice in accordance with IRS regulations, your employer will generally delay the application of these FICA taxes on retirement eligible employees until December of the year of withholding. FICA taxes will be computed based upon the fair market value of the shares on the date of the withholding. FICA taxes will be withheld from your regular wages or an annual incentive plan payment.


13


(6)     Qualifying Termination . Notwithstanding any other provision of this Agreement to the contrary, in the event that your employment by UTC or an affiliate thereof is terminated on or after the completion of the Merger (i) by UTC or an affiliate thereof other than for Cause or (ii) by you for Good Reason, your Converted Awards shall become nonforfeitable and shall be paid out in full (i) if such termination of employment occurs prior to the second anniversary of the completion of the Merger, as soon as practicable following the date of your “separation from service” within the meaning of Section 409A to the extent applicable, but in any event within 30 days and (ii) if such termination of employment occurs on or after the second anniversary of the completion of the Merger, as soon as practicable after the Vesting Date, but in any event within 30 days.

(7)     Divestiture . In the event that your principal employer is a subsidiary of UTC, it is possible that your principal employer may cease to be a subsidiary of UTC prior to the Vesting Date and that your employment with UTC terminates as a result (the date of such cessation is herein called the Divestiture Date). If the divestiture of your principal employer constitutes a “change in control event” that meets the requirements of Section 409A or if you are not subject to Section 409A, then your Converted Awards shall become nonforfeitable (to the extent not already nonforfeitable) and shall be paid out in full on the Divestiture Date. If you are subject Section 409A and the divestiture of your principal employer does not meet the requirements of a “change in control event” under Section 409A, then your Converted Awards shall become nonforfeitable (to the extent not already nonforfeitable) on the Divestiture Date and shall be paid out in full as soon as practicable after the Vesting Date, but in any event within30 days.

(8)     Termination of Employment for Other Reasons . Except as otherwise provided in this Exhibit C , if your employment by UTC or an affiliate thereof terminates on or prior to the Vesting Date, you will not be entitled to any payment in respect of the Converted Awards. The date of your termination of employment shall be determined in accordance with Sections 7 and 9 of the Agreement.

(9)     Application . Except as expressly provided in this Exhibit C , the terms of the Agreement shall continue to apply to the Converted Awards. Upon completion of the Merger, where applicable, references in the Agreement to the Company shall include UTC, references to the Performance Shares shall include the Converted Awards, and references to Common Stock shall include the common stock of UTC. The terms and conditions set forth in this Exhibit C are subject to and contingent upon the completion of the Merger, and shall have no force and effect upon the termination of the Merger Agreement prior to the completion of the Merger.
































14


Rockwell Collins, Inc.

2015 Long-Term Incentives Plan

Addendum to Grant Agreement: Country-Specific Disclosures, Terms and Conditions

Introduction: The following country-specific notices, disclaimers, and/or terms and conditions may apply if you reside or work in a particular country at the time of grant, vesting, exercise, or payout of any Restricted Stock Unit, Option, or Performance Share award received under the Plan or while holding or selling Stock received under such award. Such terms and conditions and disclosures may also apply, as from the date of grant, if you move to or otherwise are or become subject to applicable laws or Company policies of a specified country. This information may be material to your participation in the Plan. You solely are responsible for any obligations outlined, as well as general tax or other obligations that may apply. As local laws are often complex and change frequently and the information provided is general in nature and may not apply to your specific situation, the Company cannot assure you of any particular result, and you should seek your own professional legal and tax advice. This Addendum forms part of the Agreement, and unless otherwise noted, capitalized terms shall take the same definitions assigned to them under the Plan and the relevant Agreement.
Securities Law Notice: Unless otherwise noted, neither the Company nor the Stock is registered with any local stock exchange or under the control of any local securities regulator outside the United States. The Plan, grant documentation, and any other communications or materials that you may receive regarding participation in the Plan do not constitute advertising or an offering of securities outside the U.S. The issuance of securities described in any Plan-related documents is not intended for public offering or circulation in your jurisdiction.
European Union
Data Privacy
The following supplements Section 18 of the Restricted Stock Unit Award Terms and Conditions, Section 22 of the Performance Share Agreement, and Section 7 of the Stock Option Agreement Terms and Conditions: You understand that Data will be held only as long as necessary to implement, administer and manage your participation in the Plan. You understand that you may, at any time, review Data, request additional information about the storage, processing, and recipients of Data, require any necessary amendments to Data, or withdraw the consents herein in writing by contacting the Company.
 
Australia
Securities Law Notice
Neither the Plan, the U.S. Plan prospectus, nor any related grant documentation has been lodged with the Australian Securities and Investments Commission (“ ASIC ”).  Any offerings made under the Plan to participants in Australia are being made pursuant to exceptions contained in Section 708 of the Australian Corporations Act 2001 (Cth).  By participating in the Plan, you acknowledge that neither the U.S. Plan prospectus nor any other related grant documentation has been prepared with reference to any participant’s particular investment objectives or financial or tax situation and does not purport to contain all the information that a prospective Plan participant may require. Furthermore, the U.S. Plan prospectus and any other related grant documentation do not contain all the information which would be required in a prospectus prepared in accordance with the requirements of the Australian Corporations Act 2001 (Cth). If you sell shares acquired under the Plan in Australia (i.e., not through a U.S. stock exchange), you may be subject to certain disclosure and/or filing requirements under Australian securities laws. Any advice given to you in connection with the offer is general advice only, and you should consider obtaining their own financial product advice from an independent person who is licensed by ASIC to give such advice.


Settlement and Statement under Section 83A-105 of the Income Tax Assessment Act 1997 (Cth)
Notwithstanding any discretion in the Plan or the Agreement to the contrary, settlement of the RSUs and/or Performance Shares shall be in shares and not, in whole or in part, in the form of cash. Subdivision 83A-C of the Income Tax Assessment Act 1997 (Cth) (the “ Act ”) applies to the Plan and any grants, subject to the requirements of the Act. Accordingly, it is intended for income tax in relation to be deferred until vesting, unless your employment terminates earlier for any reason. However, the Company is not providing tax advice, and you should consult your personal advisor for the precise tax treatment of any grants.
 
Brazil
Foreign Assets Reporting
If you are a resident of Brazil, you will be required to submit an annual declaration of assets and rights held outside of Brazil to the Central Bank of Brazil (“ BACEN ”) if the aggregate value of such assets and rights (including any capital gain, dividend or profit attributable to such assets) is equal to or greater than US $100,000. The reporting should be completed at the beginning of each year.
 

15


Canada
Securities Law Notice
The security represented by the RSUs or Performance Shares was issued pursuant to an exemption from the prospectus requirements of applicable securities legislation in Canada.  Participant acknowledges that as long as the Company is not a reporting issuer in any jurisdiction in Canada, the RSUs and the underlying Shares will be subject to an indefinite hold period in Canada and subject to restrictions on their transfer in Canada. Subject to applicable securities laws, Participant is permitted to sell Shares acquired through the Plan through the designated broker appointed under the Plan, assuming the sale of such Shares takes place outside Canada via the stock exchange on which the Shares are traded.

Settlement
For Canadian federal income tax purposes, the grant is intended to be treated as an agreement by the Company to sell or issue shares to the Employee and, as such, is intended to be subject to the rules in Section 7 of the Income Tax Act  (Canada). Notwithstanding any discretion in the Plan or the Agreement to the contrary, settlement of any grant shall be made only in Stock issued by the Company from treasury and not, in whole or in part, in the form of cash or other consideration.

Foreign Share Ownership Reporting
If you are a Canadian resident, your ownership of certain foreign property (including shares of foreign corporations) in excess of $100,000 may be subject to strict ongoing annual reporting obligations.    Please refer to CRA Form T1135   (Foreign Income Verification Statement) and consult your tax advisor for further details.  It is your responsibility to comply with all applicable tax reporting requirements.

Quebec: Consent to Receive Information in English
This form and related documents are drawn up in English at the express wish of the parties. Ce formulaire ainsi que les documents qui s’y rattachent sont rédigés en anglais à la demande expresse des parties.
 
France
Foreign Ownership Reporting
Residents of France with foreign account balances in excess of EUR 1 million or its equivalent must report monthly to the Bank of France.

Consent to Receive Information in English
By accepting the Restricted Stock Units, you confirm having read and understood the Plan and the Agreement, which were provided in the English language. You accept the terms of those documents accordingly.     En acceptant cette attribution gratuite d’actions, vous confirmez avoir lu et comprenez le Plan et ce Contrat, incluant tous leurs termes et conditions, qui ont été transmis en langue anglaise. Vous acceptez les dispositions de ces documents en connaissance de cause.
 
Hong Kong
Securities Law Notice
The RSUs and Performance Shares and any Stock issued upon vesting do not constitute a public offering of securities under Hong Kong law and are available only to employees of the Company and its affiliates. The Plan, the Agreement, including this Addendum, and other incidental communication materials have not been prepared in accordance with and are not intended to constitute a “prospectus” for a public offering of securities under the applicable companies and securities legislation in Hong Kong and have not been registered with or authorized by any regulatory authority in Hong Kong, including the Securities and Futures Commission. This Plan, the Agreement, and the incidental communication materials are intended only for the personal use of each eligible Participant and not for distribution to any other persons. If you have any questions about any of the contents of the Plan, the Agreement, including this Addendum, or other incidental communication materials, you should obtain independent professional advice.
 
India
Repatriation Requirement
You are required to repatriate to India all proceeds from the subsequent sale of Stock acquired under the Plan within 90 days from the date of sale. You will not take any action or non-action that has the effect of delaying or eliminating the receipt or realization of any such foreign exchange. Upon receipt or realization of foreign exchange in India, you shall surrender such foreign exchange to an authorized person or bank within a period of 180 days from the date of such receipt or realization, as the case may be. Please note that you should keep the remittance certificate received from the bank where foreign currency is deposited in the event that the Reserve Bank of India, the Company or your employer requests proof of repatriation.
 
Ireland
Director Reporting
If you are a director or shadow director of the Company or related company, you
may be subject to special reporting requirements with regard to the acquisition
of Stock or rights over Stock. Please contact your personal legal advisor for further details if you are a director or shadow director.
Japan
Foreign Ownership Information
If you acquire shares of Common Stock valued at more than ¥100,000,000 in a single transaction, you must file a Securities Acquisition Report with the Ministry of Finance (“ MOF ”) through the Bank of Japan within 20 days of the acquisition of the Shares.

Exit Tax
Please note that you may potentially be subject to tax on your Restricted Stock Unit or Performance Share awards (if any), even prior to vesting or exercise or otherwise receiving any value under an award, if you relocate from Japan if you (1) hold financial assets with an aggregate value of ¥100,000,000 or more upon departure from Japan and (2) maintained a principle place of residence ( jusho ) or temporary place of abode ( kyosho ) in Japan for 5 years or more during the 10-year period immediately prior to departing Japan. You should discuss your tax treatment with your personal tax advisor.
 

16


Korea
Repatriation Requirement
Please note that proceeds received from the sale of stock overseas must be repatriated to Korea within three (3) years if such proceeds exceed US $500,000 per sale. Separate sales may be deemed a single sale if the sole purpose of separate sales was to avoid a sale exceeding the US $500,000 per sale threshold.
 
Mexico
Labor Law Acknowledgment
The invitation Rockwell Collins, Inc. is making under the Plan is unilateral and discretionary and is not related to the salary and other contractual benefits granted to you by your employer; therefore, benefits derived from the Plan will not under any circumstance be considered as an integral part of your salary. Rockwell Collins reserves the absolute right to amend the Plan and discontinue it at any time without incurring any liability whatsoever. This invitation and, in your case, the acquisition of shares does not, in any way, establish a labor relationship between you and Rockwell Collins, nor does it establish any rights between you and your employer.
La invitación que Rockwell Collins, Inc. hace en relación con el Plan es unilateral, discrecional y no se relaciona con el salario y otros beneficios que recibe actualmente de su actual empleador, por lo que cualquier beneficio derivado del Plan no será considerado bajo ninguna circunstancia como parte integral de su salario. Por lo anterior, Rockwell Collins se reserva el derecho absoluto para modificar o terminar el mismo, sin incurrir en responsabilidad alguna. Esta invitación y, en su caso, la adquisición de acciones, de ninguna manera establecen relación laboral alguna entre usted y Rockwell Collins y tampoco genera derecho alguno entre usted y su empleador.
 
Philippines
Securities Law Notice. This offering is subject to exemption from the requirements of registration with the Philippines Securities and Exchange Commission under Section 10.1 of the Philippines Securities Regulation Code. THE SECURITIES BEING OFFERED OR SOLD HAVE NOT BEEN REGISTERED WITH THE PHILIPPINES SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES REGULATION CODE. ANY FUTURE OFFER OR SALE THEREOF IS SUBJECT TO REGISTRATION REQUIREMENTS UNDER THE CODE UNLESS SUCH OFFER OR SALE QUALIFIES AS AN EXEMPT TRANSACTION.
 
Singapore
Securities Law Notice
This grant and the Stock to be issued thereunder shall be made available only to an employee of the Company or its Subsidiary, in reliance of the prospectus exemption set out in Section 273(1)(f) of the Securities and Futures Act (Chapter 289) of Singapore (the “SFA”) and is not made with a view to the Stocks so issued being subsequently offered for sale or sold to any other party in Singapore. You understand and acknowledge that this Agreement and/or any other document or material in connection with this offer and the Stock thereunder have not been and will not be lodged, registered or reviewed by the Monetary Authority of Singapore. Any and all Stocks to be issued hereunder shall therefore be subject to the general resale restriction under Section 257 of the SFA, and you undertake not to make any subsequent sale in Singapore, or any offer of sale in Singapore, of any of the shares of Common Stock (received upon vesting of this offer), unless that sale or offer in Singapore is made pursuant to the exemptions under Part XIII Division (1) Subdivision (4) other than Section 280 of the SFA.

Exit Tax and Deemed Exercise Rule
If you have received a grant in relation to your employment in Singapore, please note that if you are 1) a permanent resident of Singapore and leave Singapore permanently or are transferred out of Singapore; or 2) neither a Singapore citizen nor permanent resident and either cease employment in Singapore or leave Singapore for any period exceeding 3 months, you will likely be taxed on your awards on a “deemed exercise” basis, even though your awards have not yet vested, been exercised, or paid out. You should discuss your tax treatment with your personal tax advisor. 

Director Reporting
If you are a director or shadow director of the Company or a Subsidiary, you may be subject to special reporting requirements with regard to the acquisition of Stock or rights over Stock. Please contact your personal legal advisor for further details if you are a director or shadow director.
 
United Arab Emirates
Securities Law Notice
This Plan has not been approved or licensed by the UAE Central Bank or any other relevant licensing authorities or governmental agencies in the United Arab Emirates. This Plan is strictly private and confidential and has not been reviewed by, deposited or registered with the UAE Central Bank or any other licensing authority or governmental agencies in the United Arab Emirates. This Plan is being issued from outside the United Arab Emirates to a limited number of employees of Rockwell Collins, Inc. and affiliated companies and must not be provided to any person other than the original recipient and may not be reproduced or used for any other purpose. Further, the information contained in this report is not intended to lead to the issue of any securities or the conclusion of any other contract of whatsoever nature within the territory of the United Arab Emirates.
 

17


United Kingdom
Withholding of Tax   
The following provision supplements, as applicable, Section 5 or 7 of the Restricted Stock Unit Award Terms and Conditions and Section 16 of the Performance Share Agreement: If payment or withholding of any tax, social contributions, and/or other charges that may be due is not made within ninety (90) days of the event giving rise to such amounts (the “ Due Date ”) or such other period specified in Section 222(1)(c) of the U.K. Income Tax (Earnings and Pensions) Act 2003, the amount of any uncollected amounts will constitute a loan owed by Participant to his employer, effective on the Due Date. Participant agrees that the loan will bear interest at the then-current Official Rate of Her Majesty’s Revenue and Customs (“ HMRC ”), it will be immediately due and repayable, and the Company or the employer may recover it at any time thereafter by any legal means. Notwithstanding the foregoing, if Participant is a director or executive officer of the Company (within the meaning of Section 13(k) of the U.S. Securities and Exchange Act of 1934, as amended), Participant will not be eligible for such a loan to cover such amounts. In the event that Participant is a director or executive officer and the amounts are not collected from or paid by Participant by the Due Date, any uncollected amounts will constitute a benefit to Participant on which additional income tax and national insurance contributions will be payable. Participant will be responsible for reporting and paying any income tax and national insurance contributions due on this additional benefit directly to HMRC under the self-assessment regime.

Settlement
Notwithstanding any discretion in the Plan or the Agreement to the contrary, settlement of the award shall be made only in Stock and not, in whole or in part, in the form of cash.
 






















18


ROCKWELL COLLINS, INC.
2015 LONG-TERM INCENTIVES PLAN
PERFORMANCE SHARES
SUPPLEMENT FOR EMPLOYEES OUTSIDE THE UNITED STATES
This supplement summarizes the likely tax consequences of participating in the Rockwell Collins, Inc. 2015 Long-Term Incentives Plan (the “ Plan ”), assuming you are and will continue to be resident in the country you are resident in at the time of grant. This summary is based on the assumption that you are and will continue to be actively employed by Rockwell Collins, Inc. or an affiliate of Rockwell Collins, Inc. in the country you are resident in at the time of grant. The summary is based upon the relevant tax laws as well as administrative and judicial interpretations, in effect as of November 2017. If these tax laws or interpretations thereof, change in the future, possibly with retroactive effect, the information may no longer be accurate. Note this summary is limited to a general description of the national tax laws and is not intended to address local, city, regional, or other provincial tax laws that may also apply.

The tax consequences of Performance Shares granted under the Plan are based on complex tax laws, which may be subject to varying interpretations, and the application of such laws may depend, in large part, on the surrounding facts and circumstances. This discussion does not apply to every specific transaction that may occur in connection with the Plan, and this discussion does not address the impact of the completion of the Merger on the Performance Shares. Moreover, it may not apply to your particular tax or financial situation, particularly if you move from one country to another, and we are not in a position to assure you of any particular tax result. Therefore, we recommend that you consult with your own tax advisor regularly to determine the consequences of taking or not taking any action concerning your Performance Shares, and to determine how the tax or other laws in your country apply to your specific situation.

This document constitutes part of a prospectus covering securities that have been registered under the Securities Act of 1933, as amended.

Canada
Grant of Performance Shares
You are not subject to tax when your Performance Shares are granted to you.

Vesting of Performance Shares
You are subject to income tax and any applicable social contributions (e.g., Canada Pension Plan, Quebec Pension Plan, and Quebec Parental Insurance Plan contributions, etc.) on the fair market value of the shares that you receive when your Performance Shares vest. Social contributions are subject to annual contribution ceilings.

Sale of Shares
When you sell the shares you received upon vesting of your Performance Shares, you may be subject to capital gains tax. Your gain is equal to the difference between the amount for which you sell the shares and the “tax cost” of the shares. One-half of any capital gain is subject to income tax at your marginal rate in the year of sale, to the extent it cannot be netted out against capital losses sustained on other investments in the year of sale or in certain prior or subsequent tax years.

The tax cost is generally equal to the fair market value of the shares on the date they are acquired. However, if you also own additional Rockwell Collins shares, the tax cost of the shares acquired upon vesting of a Performance Share is derived by averaging the fair market value of such shares on the date they are acquired with the tax cost of the additional Rockwell Collins shares that you already own. As a limited exception to this averaging rule, if you sell the shares acquired on the vesting of your Performance Shares within 30 days after the acquisition date, depending on which method would be most advantageous to you, you may choose the tax cost of the shares to be based either on (1) the averaging method described above, or (2) the fair market value of such shares on the date they are acquired.

Tax Withholding and Reporting Requirement
When your Performance Shares vest, Rockwell Collins may withhold and cause to be sold on the market a sufficient number of the shares otherwise deliverable to you to satisfy income tax and any applicable Canada Pension Plan withholding requirements. Your employer will remit the sale proceeds to the Canada Revenue Agency. Alternatively, your employer will implement such other arrangement as it chooses (including withholding from salary or other employment income) to satisfy its source deduction obligation. You may have an obligation to report details of any tax liabilities arising from the vesting of your Performance Shares, the sale or disposal of shares, and payment of dividends to the Canadian tax authorities.

19


France
Grant of Performance Shares
You are not subject to tax when your Performance Shares are granted to you.

Vesting of Performance Shares
You are subject to income tax and social contributions (including CSG and CRDS) on the fair market value of the shares that you receive when your Performance Shares vest. A surtax may also apply to “High Earners” above the applicable income threshold.

Sale of Shares
When you sell the shares you received upon vesting of your Performance Shares, the gain equal to the difference between the net sale price and the fair market value on the vest date is taxable as capital gains. Capital gains realized upon the sale of the shares will be subject to progressive personal income tax rates and to social contributions (though a certain portion of the global social contribution rate will be deductible in the year of payment).

For the calculation of the personal income tax base only, a rebate depending on the holding period would apply (equal to 50% if the shares have been held between 2 and 8 years, 65% after 8 years of holding). The “High Earners” surtax may also apply. Any capital loss can be offset against capital gains of the same nature realized by you and your household during the same year or during the ten following years.

Tax Withholding and Reporting Requirement
If you are a resident of France, income tax is not withheld and you must instead remit the income tax due as a result of the vesting of your Performance Shares to the France tax authorities. However, social insurance contributions will be withheld. To facilitate the payment of applicable social insurance contributions, Rockwell Collins may withhold a portion of the shares issued upon vesting of the Performance Shares with an aggregate market value sufficient to pay your social insurance contribution withholding obligation. You may then be issued the resulting net shares after taxes. Please note, though, that Rockwell Collins and/or your employer may satisfy social insurance contribution withholding through any means set forth in the grant agreement.

The income will be reported on your pay slip and on the annual wage statement (“ DADS ”). It is also your responsibility to report and pay any taxes resulting from the sale of your shares and the receipt of any dividends. Please note that if you are not a French tax resident, the withholding rules may be different. In addition, withholding rules may change in the future and Rockwell Collins and/or your employer may withhold at vesting and/or sale of shares if required to do so under French law.
Germany
Grant of Performance Shares
You are not subject to tax when your Performance Shares are granted to you.

Vesting of Performance Shares
You are subject to income tax (plus solidarity surcharge and church tax, if applicable) and social insurance contributions (to the extent you have not exceeded the applicable contribution ceiling) on the fair market value of the shares that you receive when your Performance Shares vest.

Sale of Shares
Assuming you receive shares on or after January 1, 2009 as a result of the vesting of Performance Shares, when you sell such shares, you may be subject to capital gains tax and solidarity surcharge. Your gain is equal to the difference between:

(1)the amount for which you sell the shares, and
(2)the aggregate fair market value of the shares on the date when your Performance Shares vest.

A small amount of the capital gain may be exempt. Different rules will apply if you held directly or indirectly 1% or more of Rockwell Collins Inc.’s share capital at any time during the five years preceding the sale.

Tax Withholding and Reporting Requirements
Your employer will withhold and report income tax and social contributions (to the extent you have not exceeded the applicable contribution ceiling) due upon receipt of your shares. You are required to report any income, dividends, and non-exempt capital gain resulting from your participation in the Plan on your annual personal tax return.

20


India
Grant of Performance Shares
You are not subject to tax when your Performance Shares are granted to you.

Vesting of Performance Shares
You are subject to income tax (plus a small education surcharge) on the fair market value of the shares that you receive when your Performance Shares vest. For Indian tax purposes, the Company may impose a specified fair market value.

Sale of Shares
You may be subject to capital gains tax on any difference between the proceeds received from the sale of shares and the fair market value of the shares upon vesting (as determined under the Income Tax Act, 1961). The applicable capital gains tax rate depends upon how long you hold the shares after vesting. You should consult your tax advisor about any capital gains tax that you may owe.

Tax Withholding and Reporting Requirements
Your employer will withhold and report income taxes upon vesting of your Performance Shares. You are required to report any income, dividends, and capital gain resulting from your participation in the Plan on your annual personal tax return.
Japan
Grant of Performance Shares
You are not subject to tax when your Performance Shares are granted to you.

Vesting of Performance Shares
You are subject to income tax on the fair market value of the shares that you receive when your Performance Shares vest. The income will likely be characterized as remuneration income and taxed at your progressive tax rate.

Sale of Shares
When you sell shares you receive upon vesting of your Performance Shares, you may be subject to capital gains tax.    Your gain is equal to the difference between:
(1)the amount for which you sell the shares, and
(2)the aggregate fair market value of the shares on the date when your Performance Shares vest.

Tax Withholding and Reporting Requirements
Your employer will likely not be required to withhold any income tax on vesting or sale of the shares and you must instead remit the income tax due as a result of the vesting of your Performance Shares to the Japanese tax authorities. However, your employer will report the income realized at vesting to the tax authorities on an annual basis. You are required to report any income, dividends, and capital gain resulting from your participation in the Plan on your annual personal tax return.

Exit Tax
Please note that you may potentially be subject to tax on your Performance Shares award, even prior to vesting or otherwise receiving any value under such award, if you relocate from Japan if you (1) hold financial assets with an aggregate value of ¥100,000,000 or more upon departure from Japan and (2) maintained a principle place of residence ( jusho ) or temporary place of abode ( kyosho ) in Japan.
Netherlands
Grant of Performance Shares
You are not subject to tax when your Performance Shares are granted to you.

Vesting of Performance Shares
You are subject to income tax and social insurance contributions on the fair market value of the shares that you receive when your Performance Shares vest.

Sale of Shares
You are not subject to tax when you sell the shares received from your Performance Shares based on the assumption that you do not have a substantial interest in Rockwell Collins (i.e., at least 5% ownership of any type of Rockwell Collins shares).

Tax Withholding and Reporting Requirements
Your employer will withhold and report income tax and social insurance (to the extent you have not exceeded the applicable contribution ceiling) in relation to the vesting of your Performance Shares. However, you may have an obligation to report details of any tax liabilities arising from the vesting of your Performance Shares, the sale or disposal of shares, and payment of dividends to the tax authorities in the Netherlands.

21


Philippines
Grant of Performance Shares
You are not subject to tax when your Performance Shares are granted to you.

Vesting of Performance Shares

For managerial/supervisory employees :
You are not subject to income tax upon vesting as the shares you receive when your Performance Shares vest will be considered a fringe benefit in the Philippines for income tax purposes. However, the fair market value of the shares that you receive when your Performance Shares vest will be subject to social insurance contributions.

For rank and file employees :
You are subject to income tax and social insurance contributions on the fair market value of the shares that you receive when your Performance Shares vest.

Sale of Shares
When you sell shares you receive upon vesting of your Performance Shares, you may be subject to capital gains tax.    Your gain is equal to the difference between:
(1)the amount for which you sell the shares, and
(2)the aggregate fair market value of the shares on the date when your Performance Shares vest.

Because Rockwell Collins stock is stock of a foreign corporation, the amount of your taxable gain will depend on various factors, including whether you held the shares for 12 months or more. Note different treatment may apply for non-Filipino citizens even if tax resident in the Philippines.

Tax Withholding and Reporting Requirements

For managerial/supervisory employees :
Your employer will withhold social contributions (to the extent you have not exceeded the applicable contribution ceiling) due upon receipt of your shares. You are required to report any income from the vesting of your Performance Shares, dividends, and capital gain resulting from your participation in the Plan on your annual personal tax return.

For rank and file employees :
Your employer will withhold and report income tax and social contributions (to the extent you have not exceeded the applicable contribution ceiling) due upon receipt of your shares. You are required to report any income from the vesting of your Performance Shares, dividends, and capital gain resulting from your participation in the Plan on your annual personal tax return.
Singapore
Grant of Performance Shares
You are not subject to tax when your Performance Shares are granted to you.

Vesting of Performance Shares
You are subject to income tax on the fair market value of the shares when your Performance Shares vest.

Sale of Shares
You are not subject to tax when you sell the shares received from your Performance Shares based on the assumption that you are not regarded as carrying out a trade in buying and selling shares.

Tax Withholding and Reporting Requirements

Your employer will not withhold any income tax incurred upon the vesting of your Performance Shares. You are required to report and remit any taxes incurred in connection with the vesting of your Performance Shares. Your employer is required to report income received by you from your Performance Shares.

Exit Tax and Deemed Vesting Rule
If you have received a grant in relation to your employment in Singapore, please note that if you are 1) a permanent resident of Singapore and leave Singapore permanently or are transferred out of Singapore; or 2) neither a Singapore citizen nor permanent resident and either cease employment in Singapore or leave Singapore for any period exceeding 3 months, you will likely be taxed on your awards on a “deemed vesting” basis, even though your Performance Shares have not yet vested. You should discuss your tax treatment with your personal tax advisor.

22


United Kingdom
Grant of Performance Shares
You are not subject to tax when the Performance Shares are granted to you.
 
Vesting of Performance Shares
You are subject to income tax and employee’s National Insurance Contributions (“ NICs ”) on the fair market value of the shares you receive when your Performance Shares vest.

Sale of Shares
When you sell the shares you received under your Performance Shares, you are generally subject to capital gains tax on any gain, which is the excess of the sale price over the total amount on which you have already paid income tax. Your aggregate capital gains will be subject to an annual exemption amount.

Tax Withholding and Reporting Requirements
Your employer will withhold income tax and NICs in relation to the vesting of your Performance Shares. Your employer will report the details of your Performance Shares on its annual tax return to the HM Revenue & Customs (“ HMRC ”).You must report details of any tax liabilities arising from the vesting of your Performance Shares, the sale or disposal of shares, and payment of dividends to the HM Revenue & Customs on your personal self-assessment tax return. You also are responsible for paying any taxes owed as a result of the sale of the shares or the receipt of any dividend.





23


Exhibit 10-a-2
ROCKWELL COLLINS, INC.

2015 LONG-TERM INCENTIVES PLAN

RESTRICTED STOCK UNIT AWARD AGREEMENT


Date:      November 13, 2017 (the “ Grant Date ”)

Rockwell Collins, Inc. (the “ Company ”) hereby grants you an award of Restricted Stock Units (“ RSUs ”) subject to the Company’s 2015 Long-Term Incentives Plan (the “ Plan ”) in accordance with Section 4(d) and Section 6 of the Plan. The number of RSUs granted to you pursuant to this Award is detailed in your letter from Robert K. Ortberg dated as of the same date as the Grant Date. Each RSU represents the right to receive one share of Common Stock of Rockwell Collins in the future in accordance with these terms and conditions.

The grant of RSUs pursuant to this Agreement is not effective or enforceable until you properly acknowledge your acceptance of this Agreement by completing the electronic acceptance of this Agreement. Upon acceptance, the Agreement will be deemed effective as of the above Grant Date. If you do not acknowledge your acceptance of this Agreement within six months of the Grant Date, the RSUs will be forfeited. The Company may also require you to complete a written acceptance within this time period in lieu of an electronic acceptance.

Capitalized terms used in this Award and not otherwise defined herein shall have the respective meanings ascribed to them in the Plan.

Notwithstanding anything to the contrary in this Award, if the previously announced transaction with United Technologies Corporation is completed, the terms and conditions set forth in Exhibit A shall govern the conversion and payout of the RSUs.

The RSUs have been awarded to you upon the following terms and conditions:

1.      Rights of the Participant with Respect to the RSUs .

a)     No Shareowner Rights . The RSUs granted pursuant to this Award do not and shall not entitle you to any rights of a shareowner of Common Stock. The RSUs shall not accrue any rights in respect of ordinary dividends paid on Common Stock. Your rights with respect to the RSUs shall remain forfeitable at all times prior to the date on which such rights become vested, and the restrictions with respect to the RSUs lapse, in accordance with this Agreement.

b)     Conversion of RSUs; Issuance of Common Stock . No shares of Common Stock shall be issued to you prior to the date on which the RSUs vest in accordance with this Agreement. Neither this Section 1(b) nor any action taken pursuant to or in accordance with this Section 1(b) shall be construed to create a trust of any kind. After any RSUs vest pursuant to this Agreement, the Company shall promptly (and in any event within 30 days) cause shares of Common Stock to be issued in book-entry form, registered in your name or in the name of your legal representatives, beneficiaries or heirs, as the case may be, in payment of such vested whole RSUs.

2.      Vesting of RSUs .

(a) You shall vest in the RSUs as follows: (i) one-third (rounded to the nearest whole number) of the RSUs shall vest on the first anniversary of the Grant Date, (ii) an additional one-third (rounded to the nearest whole number) of the RSUs shall vest on the second anniversary of the Grant Date, and (iii) the balance of the RSUs shall vest on the third anniversary of the Grant Date (each, a “ Vesting Date ”); provided in each case that, except as provided below, you remain continuously and actively employed by the Company or a Subsidiary until the applicable Vesting Date.

(b) You shall immediately vest in the unvested RSUs, if (i) you shall die, (ii) your employment is terminated by reason of your Disability (as defined in Section (e)), (iii) your employment is terminated by the Company following a Change of Control (as defined in the Plan) other than for Cause (as defined in Section (c)), or (iv) you terminate your employment following a Change of Control for Good Reason (as defined in Section (d)).

(c)    “ Cause ” shall mean:

1



(i) your willful and continued failure to perform substantially your duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to you by (x) the Board or the Chief Executive Officer of the Company if you are an executive officer or Senior Vice President of the Company or (y) the Senior Vice President of Human Resources if you are not an executive officer or Senior Vice President of the Company. Such notice shall specifically identify the manner in which you have not substantially performed your duties; or
(ii) your willful engaging in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company.
For purposes of this provision, no act or failure to act, on the part of you, shall be considered “willful” unless it is done, or omitted to be done, by you in bad faith or without reasonable belief that your action or omission was in the best interests of the Company. If you are an executive officer or Senior Vice President of the Company, any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by you in good faith and in the best interests of the Company. The cessation of an executive officer’s or Senior Vice President’s employment shall not be deemed to be for Cause unless and until there shall have been delivered to the executive officer or Senior Vice President a copy of the resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at the meeting of the Board called and held for such purpose (after reasonable notice is provided and the executive officer or Senior Vice President is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the executive officer or Senior Vice President was guilty of the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail.

(d)    “ Good Reason ” shall mean:

(i) the assignment to you of any duties inconsistent in any material respect with your most significant position (including status, offices, titles and reporting requirements), authority, duties or responsibilities held, exercised and assigned at any time during the 120-day period immediately preceding the Change of Control, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by you;
    (ii)    requiring you to be based at any office or location other than the location where you were employed immediately preceding the Change of Control unless any office or location is less than 35 miles from such location, or if the distance from the new location to your residence is less than the distance from the old location to the residence;

(iii)    any failure by the Company to maintain your compensation at a level consistent with that generally in effect prior to any Change of Control, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by you;

(iv)    any purported termination by the Company of your employment otherwise than as expressly permitted by this Agreement; or

(v)    any failure by the Company to comply with and satisfy Section 13 of this Agreement.

For purposes of this Section 2(d), any good faith determination of “Good Reason” made by you shall be conclusive.
(e)    “ Disability ” shall mean a disability for a continuous period of at least six months under the Company’s long-term disability plan during the period of your continuous service as an employee of the Company.

(f)    If you cease to be an Employee prior to satisfaction of any of the conditions set forth in Section (a) or (b) of this Section , except as otherwise provided in Section 3 or 4, you shall be deemed not to have vested in any of the unvested RSUs and shall have no further rights with respect to the unvested RSUs. For the avoidance of doubt, you will be deemed to have ceased being an Employee on the day you are no longer actively providing services as an Employee, which date will not be extended by any notice period that may be required contractually or under applicable law. Notwithstanding the foregoing, the Company’s Senior Vice President of Human Resources or General Counsel (or any

2


delegate) shall have the sole discretion to determine when you cease to be an Employee for purposes of participation in the Plan.

3.      Divestiture .      If the Company divests all or substantially all of a business operation of the Company and such divestiture (as defined below) results in the termination of your employment with the Company or its subsidiaries, your unvested RSUs will vest immediately as of the date of such termination and you will receive shares of Common Stock in exchange for unvested RSUs; provided, however, if you are subject to US tax, such termination must qualify as a “separation from service” under Section 409A of the Internal Revenue Code and the regulations thereunder (“ Section 409A ”). If you are subject to US tax and such termination as a result of such divestiture does not qualify as a separation from service under Section 409A, then your unvested RSUs will vest immediately as of the date of the divestiture and within 30 days after each remaining Vesting Date, the Company shall cause shares of Common Stock to be issued in book-entry form, registered in your name or in the name of your legal representatives, beneficiaries or heirs, as the case may be, in payment of each applicable tranche of RSUs. A “ divestiture ” shall mean a transaction which results in the transfer of control of the business operation divested to any person, corporation, association, partnership, joint venture, limited liability company or other business entity of which less than 50% of the voting stock or other equity interests (in the case of entities other than corporations), is owned or controlled directly or indirectly by the Company, by one or more of the Company’s subsidiaries or by a combination thereof.

4.      Retirement .

(a) If you terminate your employment with the company or one of its affiliates due to your retirement (i.e., any termination of employment after you have attained age 55, other than a termination pursuant to Section 2(b) or 3 above) you will receive a pro rata portion of your unvested RSUs (determined in accordance with Section 4(c) below) promptly (and in any event within 30 days) following the date of your retirement; provided, however, if you are subject to US tax, such termination must qualify as a “separation from service” under Section 409A. The Company shall cause shares of Common Stock to be issued in book-entry form, registered in your name or in the name of your legal representatives, beneficiaries or heirs, as the case may be, in payment of such RSUs. In addition, if you engage in Detrimental Activity, whether before or after your termination of employment, your RSUs will be forfeited.
 
(b) “ Detrimental Activity ” shall mean willfull, reckless or grossly negligent activity that is determined by the Committee to be detrimental to or destructive of the business or property of the company. Any such determination by the Committee shall be final and binding for all purposes. Notwithstanding the foregoing, no payment hereunder shall be forfeited or become not payable by virtue of this Section 4(b) on or after the date of a Change of Control (as defined in the Plan) unless the “Cause” standard set forth in Section 2(c) is satisfied. In addition, if you are or subsequently become an executive officer of the Company, a Senior Vice President, a Vice President & General Manager, a Vice President & Controller or another employee who becomes subject to the Policy (as defined below), your RSUs and the value you receive upon vesting of the RSUs will be subject to the Company’s Compensation Recovery Policy, as amended from time to time, including, without limitation, any amendments required to comply with the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “ Policy ”), except where prohibited by law. Currently, the Company’s executive officers, Senior Vice Presidents, Vice Presidents & General Managers and Vice Presidents & Controllers are the only employees subject to the Policy. If you become subject to the Policy, you will be notified by the Company’s Human Resources department. Further, if you have attained the level of Vice President (or above) with the Company and you have not previously entered into a Noncompetition and Nonsolicitation Agreement with the Company (the “ NCNS Agreement ”), this grant of RSUs is contingent on your agreement, if requested by the Company within thirty days of the date of this Agreement, to be bound by the NCNS Agreement by returning a signed copy of the NCNS Agreement to the Company within the time period prescribed by the Company’s General Counsel.

(c) Any pro rata portion of RSUs due to you because of your retirement will be determined by multiplying the number of RSUs granted to you pursuant to this Agreement by a fraction, where the numerator is the number of days from the Grant Date (including the Grant Date) until the date of your retirement and where the denominator is number of days from the Grant Date to the third anniversary of the Grant Date. This pro rata amount will be reduced by the number of RSUs, if any, for which a Vesting Date has already occurred. Any partial shares will be rounded to the nearest whole share.

5.      Restriction on Transfer . The RSUs shall be deliverable, during your lifetime, only to you and are not transferable by you other than by will or by the laws of descent and distribution.

6.      Adjustments to RSUs . In the event of any change in or affecting the outstanding shares of Common Stock of the Company by reason of a stock dividend or split, merger or consolidation, or various other events, adjustments will be made as appropriate in connection with the RSUs as contemplated in the Plan.

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7.      Tax and Withholding . The Common Stock delivered to you in respect of the RSUs will in most circumstances be taxable to you as compensation income, based on the Fair Market Value of the Common Stock on the day that the Common Stock is deliverable to you, subject to applicable law. However, your personal income tax situation may vary depending on a variety of factors, including your jurisdiction. The Company or its related entity will withhold income taxes and any other applicable taxes or required deductions (including social contributions) up to the maximum statutory withholding requirements or otherwise in accordance with applicable law. You may owe additional taxes or other amounts relating to the RSUs or Common Stock in addition to any amount withheld by the Company. If you are subject to FICA, FICA tax withholding will also apply except to the extent FICA taxes have already been collected in the case of retirement-eligible employees as described in Section 8 below. The Company will reduce the number of shares of Common Stock otherwise deliverable to you to satisfy taxes that are due, subject to applicable law.

As a condition of the grant and vesting of the RSUs, the Company or your employer (or an administrative agent) shall have the right, in whole in part, upon any payment to you of cash and/or Common Stock hereunder, (a) to deduct an amount equal to the taxes, social contributions, and/or other charges up to the maximum statutory withholding requirements or otherwise in accordance with applicable law in respect of RSUs and Common Stock acquired or (b) to require you (or any other person entitled to the RSUs) to pay it an amount sufficient to provide for any such taxes, social charges and/or other charges. You agree (for yourself and on behalf of any other person who becomes entitled to the RSUs or the Common Stock) that if the Company or your employer (or an administrative agent) elects to require you (or such other person) to remit an amount sufficient to pay such taxes, social contributions, and/or other charges, you (or such other person) must remit that amount within three business days after such amount is due. The Company will generally withhold required amounts from your payments, unless the Company has made other arrangements with you for you to promptly remit an amount sufficient to pay such withholding of tax, social contributions, and/or other charges (and may condition delivery of cash and/or Common Stock hereunder upon such payment).

You acknowledge and agree that you are solely responsible for any and all taxes, social contributions, and/or other charges that may be assessed by any taxing authority in the United States or any other jurisdiction arising from the RSUs, the Common Stock or dividends (if any), that such amounts may exceed any amount withheld by the Company, your employer or the administrative agent, and that neither the Company nor any affiliate is liable for any such assessments. You are solely responsible for all relevant documentation that may be required of you in relation to the RSUs, such as but not limited to personal income tax returns or reporting statements in relation to the receipt, holding, or subsequent sale of Common Stock and the receipt of dividends, if any. You acknowledge and agree that the Company makes no representations regarding the treatment of taxes, social contributions, or other charges and does not commit to and is under no obligation to structure the terms of the Plan or any award to reduce or eliminate your liability for any income taxes, social contributions, or other charges or to achieve any particular tax result. You also understand that applicable laws may require varying Stock or award valuation methods for purposes of calculating taxes, social contributions, and/or other charges, and the Company assumes no responsibility or liability in relation to any such valuation or for any calculation or reporting of income or such amounts that may be required in relation to the award under applicable laws. Further, if you become subject to tax in more than one jurisdiction, the Company, your employer, or an administrative agent may be required to withhold or account for such amounts in more than one jurisdiction. You should consult a tax or financial advisor if you have questions.

8.      FICA and Retirement and Related Matters . Please note that in certain countries, you may be subject to taxes or other charges prior to the applicable Vesting Dates of the RSUs, despite the fact that no shares of Common Stock have yet been delivered to you. You should seek advice from your personal tax or financial advisor, but the Company or its affiliate will comply with applicable withholding requirements. In particular, if you are subject to FICA, and if you are or become eligible for retirement prior to the final Vesting Date, a portion of your RSUs may become subject to FICA taxes prior to the applicable Vesting Dates of the RSUs despite the fact that no shares of Common Stock have yet been delivered to you. FICA taxes are required to be withheld by the Company with respect to the pro rata portion of the RSUs you would receive if you retired. As an administrative practice in accordance with IRS regulations, the Company will generally delay the application of these FICA taxes on retirement eligible Employees until December of the year of withholding (or when you receive the Common Stock if earlier). FICA taxes will be computed based upon the Fair Market Value of the Common Stock on the date of the withholding. The Company will withhold FICA taxes due from your regular wages or an annual incentive plan payment.

9.      Communications . The Company may, in its sole discretion, decide to deliver any documents related to the RSUs, future RSUs, the Common Stock, or any other Company-related documents by electronic means. By accepting the RSUs, whether electronically or otherwise, you hereby consent to receive such documents by electronic delivery and agree to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third party designated by the Company, including, but not limited to the use of electronic signatures or click-through electronic acceptance of terms and conditions. If you have been provided with a copy of this Agreement, the Plan, or any other relevant documentation in a language

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other than English, unless otherwise required by applicable law, the English language documents will prevail in case of any ambiguities or divergences as a result of translation.

10.      Acknowledgement and Waiver . By executing this Agreement, participating in the Plan and accepting the grant of RSUs, you hereby agree and acknowledge that: (a) the Plan is discretionary in nature and that the Company can amend, cancel or terminate it at any time; (b) the grant of RSUs is voluntary and occasional and does not create any contractual or other right to receive future RSUs, or benefits in lieu of any RSUs even if RSUs have been granted repeatedly in the past; (c) all determinations with respect to any such future grants, including, but not limited to, if and when RSUs shall be granted, will be at the sole discretion of the Company; (d) your participation in the Plan is voluntary; (e) the value of the RSUs is an extraordinary item of compensation, which is outside the scope of your employment contract, if any; (f) the RSUs are not part of normal or expected compensation or salary for any purposes, including, but not limited to, calculating any termination, severance, resignation, redundancy, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments; (g) the RSUs cease upon termination of active employment for any reason except as may otherwise be explicitly provided in this Agreement and the Plan; (h) for purposes of the RSUs, the termination date shall be deemed effective as of the date that you are no longer actively employed regardless of any “garden leave” or other notice period that may be mandated contractually or under applicable local law; (i) the future value of the Common Stock acquired in respect of the RSUs, if any, is unknown and cannot be predicted with certainty, and neither the Company nor any affiliate is responsible for any foreign exchange fluctuation between your local currency and the United States Dollar (or the selection by the Company or any affiliates in its sole discretion of an applicable foreign currency exchange rate) that may affect the value of the RSUs or any shares of Common Stock received (or the calculation of income or any taxes, social contributions, or other charges thereunder); (j) the RSUs do not and are not intended to constitute or create a contract of employment and can in no event be understood or interpreted to mean that the Company or a subsidiary is your employer, or that you have an employment relationship with the Company or a subsidiary or any right to continue in employment, if any, nor will the RSUs interfere in any way with the right of your employer to terminate such relationship at any time, subject to applicable law; (k) any cross-border transfer proceeds received upon the sale of the shares of Common Stock received in respect of the RSUs must be made through a locally authorized financial institution or registered foreign exchange agency and may require you to provide such entity with certain information regarding the transaction; (l) no claim or entitlement to compensation or damages arises from the termination of the RSUs or reduction in value of the RSUs or any Common Stock acquired in respect of the RSUs and you irrevocably release the Company and your employer from any such claim that may arise; and (m) regarding Data Privacy: By executing this Agreement, participating in the Plan and accepting the grant of RSUs, you hereby explicitly and unambiguously consent to the collection, use, processing and transfer, in electronic or other form, of personal data by and among, as applicable, your employer, administrative agents (Fidelity is currently the Stock Plan Administrator) and the Company and other subsidiaries for the exclusive purpose of implementing, administering and managing your participation in the Plan. You understand that administrative agents (Fidelity), the Company, your employer and other subsidiaries may hold certain personal information about you, including your name, home address and telephone number, date of birth, social security number or other identification number, salary/compensation, nationality, job title, any stock or directorships held in the Company, details of all RSUs or any other entitlement to stock awarded, canceled, purchased or outstanding in your favor, for the purpose of managing and administering the Plan (“Data”). You further understand that Data may be transferred to any third parties assisting the Company in the implementation, administration and management of the Plan. You understand that these recipients may be located in your country of residence, or elsewhere, and that the recipient’s country may have different data privacy laws and protections than your country of residence. You authorize the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing your participation in the Plan. You understand that withdrawing your consent may affect your ability to participate in the Plan.


11.      Entire Agreement . This Agreement and the other terms applicable to RSUs granted under the Plan embody the entire agreement and understanding between the Company and you with respect to the RSUs, and there are no representations, promises, covenants, agreements or understandings with respect to the RSUs other than those expressly set forth in this Agreement and the Plan. Notwithstanding anything in this Agreement to the contrary, the terms of this Agreement shall be subject to the terms of the Plan and this Agreement is subject to all interpretations, amendments, rules and regulations promulgated by the Committee from time to time pursuant to the Plan, a copy of which may be obtained from the office of the Secretary of the Company.

12.      Governing Law and Forum; Severability. This Agreement and the Company’s obligation to issue Common Stock in respect of the RSUs shall be governed by and construed in accordance with the laws of the State of Delaware, U.S.A., without regard to the conflict of law principles thereof. If one or more of the provisions herein shall be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby and the invalid, illegal or unenforceable provisions shall be deemed null and void; however, to the extent permissible by

5


law, any provisions that could be deemed null and void shall first be construed, interpreted or revised retroactively to permit this Agreement to be construed so as to foster the intent of this Agreement and the Plan. For purposes of resolving any dispute that may arise directly or indirectly from this Agreement, the parties hereby agree that any such dispute that cannot be resolved by the parties shall be submitted to the exclusive jurisdiction of state and federal courts located in the state of Delaware.
13.      Successors .
(a)
This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns.
(b)
The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, “Company” shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise.

14.      United States Internal Revenue Code Section 409A .

(a)    This Agreement is intended to comply with Section 409A (to the extent applicable) and, to the maximum extent permitted, this Agreement will be interpreted in accordance with such intention. Notwithstanding any other provision of this Agreement to the contrary, the Company makes no representation that the Plan or any amounts payable under this Agreement will be exempt from or comply with Section 409A and makes no undertaking to preclude Section 409A from applying to this Agreement.

(b)    To the extent that any amount payable under this Agreement constitutes an amount payable or benefit to be provided under a “nonqualified deferred compensation plan” (as defined in Section 409A) that is not exempt from Section 409A, and such amount is payable as a result of a Separation from Service and you are a “specified employee” (as defined and determined under Section 409A and any relevant procedures that the Company may establish) at the time of your Separation from Service, then, notwithstanding any other provision in this Agreement to the contrary, such payment or delivery of shares will not be made to you until the day after the date that is six (6) months following your Separation from Service, at which time all payments that otherwise would have been paid to you under this Agreement during that six-month period, but were not paid because of this paragraph, will be paid in a single lump sum. This six-month delay will cease to be applicable in the event of your death.
(c)    For purposes of this Agreement and to the extent you are subject to US tax, “Separation from Service” will have the meaning set forth in Section 409A and all references to termination of employment and similar references will be deemed to be references to “Separation from Service” within the meaning of Section 409A.

15.      United States Prospectus Notification . Copies of the Plan and the summary of the Plan (the “ Prospectus ”) and the most recent Annual Report and Proxy Statement for Rockwell Collins, Inc. are available for review on Fidelity’s website. You may also request copies of any of these documents, free of charge, by contacting Rockwell Collins’ Office of the General Counsel.

16 .     Compliance with Law . The Company shall not be required to deliver any shares of Common Stock upon vesting of any RSUs until the requirements of any federal or state securities laws, rules or regulations or other laws or rules (including the rules of any securities exchange) as may be determined by the Company to be applicable are satisfied, provided that in all cases the delivery of any shares of Common Stock will be made within such time frame following the scheduled payment date as is required to comply with the requirements of Section 409A. Furthermore, the Company reserves the right to impose other requirements on Participant’s participation in the Plan, on the RSUs, and on any shares of Common Stock acquired under the Plan, to the extent the Company determines it is necessary or advisable in order to comply with any applicable law or facilitate the administration of the Plan, and to require Participant to sign any additional agreements or undertakings that may be necessary to accomplish the foregoing. Furthermore, Participant understands that the laws of the country in which he or she is resident at the time of grant or vesting of the RSUs or the holding or disposition of shares (including any rules or regulations governing securities, foreign exchange, tax, labor or other matters) may restrict or prevent the issuance of shares or may subject Participant to additional procedural or regulatory requirements than he or she is solely responsible for and will have to independently fulfill in relation to the RSUs or the shares. Notwithstanding any provision herein, the RSUs and any shares of Common Stock shall be subject to any special terms and conditions or disclosures as set forth in any addendum for Participant’s country (the “Addendum to Grant Agreement: Country-Specific Disclosures, Terms and Condition,” which forms part of this Award Agreement). An original record of this Award and all the terms hereof, executed by the Company, is held on file by the Company. To the extent there is any conflict

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between the terms contained in this Award and the terms contained in the original held by the Company, the terms of the original held by the Company shall control.


ROCKWELL COLLINS, INC.
        
By:

    

Robert J. Perna
Senior Vice President,
General Counsel and Secretary














































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EXHIBIT A

Impact on the RSUs
of the Proposed Transaction with United Technologies Corporation

(1)     Proposed Transaction . On September 4, 2017, the Company, United Technologies Corporation (“ UTC ”) and Riveter Merger Sub Corp., a wholly owned subsidiary of UTC (“ Merger Sub ”), entered into an Agreement and Plan of Merger (the “ Merger Agreement ”) that provides for the acquisition of the Company by UTC. Subject to the approval of the Company’s shareowners and the satisfaction or (to the extent permitted by law) waiver of certain other closing conditions, UTC will acquire the Company through the merger of Merger Sub with and into the Company (the “ Merger ”), with the Company surviving the merger and becoming a wholly owned subsidiary of UTC.

(2)     Impact of the Proposed Transaction . If completed, the Merger shall constitute a Change of Control for purposes of this Agreement. Pursuant to the terms of the Merger Agreement, subject to and upon the completion of the Merger, the RSUs will be assumed by UTC and converted into a time-based restricted stock units of UTC (the “ Converted Awards ”) covering a number of shares of UTC common stock (rounded down to the nearest whole number of shares) equal to the product obtained by multiplying (1) the number of shares of Common Stock subject to the RSUs by (2) the Equity Award Exchange Ratio (as defined in the Merger Agreement). The Converted Awards received in such conversion will be subject to the same time-based vesting schedule applicable to the original RSUs, subject only to your continued employment with UTC or an affiliate thereof through each applicable Vesting Date (subject to the exceptions provided in this Agreement). The Converted Awards will be settled as provided in Section 1(b) of the Agreement as soon as practicable after the applicable Vesting Date, but in any event within 30 days following the applicable Vesting Date. In the event of any conflict between this Section and the terms of the Merger Agreement, the terms of the Merger Agreement shall control.

(3)     Certain Modifications . Pursuant to the terms of the Merger Agreement, effective on or after January 1, 2019, UTC may modify the compensation and benefits provided to certain employees who were employees of B/E Aerospace, Inc. and its subsidiaries as of April 13, 2017 (“ Legacy B/E Aerospace Employees ”), to make the compensation and benefits provided to such Legacy B/E Aerospace Employees substantially comparable in value, in the aggregate, to those provided to other similarly situated employees of the Company and its subsidiaries (other than such Legacy B/E Aerospace Employees) immediately prior to the completion of the Merger. Notwithstanding anything in this Agreement to the contrary, Good Reason shall not include any modification to your compensation and benefits in accordance the terms of the Merger Agreement (if applicable), as described in the preceding sentence.

(4)     Application . Except as expressly provided in this Exhibit A , the terms of the Agreement shall continue to apply to the Converted Awards. Upon completion of the Merger, where applicable, references in the Agreement to the Company shall include UTC, references to the RSUs shall include the Converted Awards, and references to Common Stock shall include the common stock of UTC. The terms and conditions set forth in this Exhibit A are subject to and contingent upon the completion of the Merger, and shall have no force and effect upon the termination of the Merger Agreement prior to the completion of the Merger.
 

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Rockwell Collins, Inc.
2015 Long-Term Incentives Plan
Addendum to Grant Agreement: Country-Specific Disclosures, Terms and Conditions

Introduction: The following country-specific notices, disclaimers, and/or terms and conditions may apply if you reside or work in a particular country at the time of grant, vesting, exercise, or payout of any Restricted Stock Unit award received under the Plan or while holding or selling Stock received under such award. Such terms and conditions and disclosures may also apply, as from the date of grant, if you move to or otherwise are or become subject to applicable laws or Company policies of a specified country. This information may be material to your participation in the Plan. You solely are responsible for any obligations outlined, as well as general tax or other obligations that may apply. As local laws are often complex and change frequently and the information provided is general in nature and may not apply to your specific situation, the Corporation cannot assure you of any particular result, and you should seek your own professional legal and tax advice. This Addendum forms part of the Agreement, and unless otherwise noted, capitalized terms shall take the same definitions assigned to them under the Plan and the relevant Agreement.
  
Securities Law Notice: Unless otherwise noted, neither the Corporation nor the Stock is registered with any local stock exchange or under the control of any local securities regulator outside the United States. The Plan, grant documentation, and any other communications or materials that you may receive regarding participation in the Plan do not constitute advertising or an offering of securities outside the U.S. The issuance of securities described in any Plan-related documents is not intended for public offering or circulation in your jurisdiction.

European Union
Data Privacy .
The following supplements the relevant Data Privacy provision of the Restricted Stock Unit Award Terms and Conditions and/or Section 22 of the Performance Share Agreement: You understand that Data will be held only as long as necessary to implement, administer and manage your participation in the Plan. You understand that you may, at any time, review Data, request additional information about the storage, processing, and recipients of Data, require any necessary amendments to Data, or withdraw the consents herein in writing by contacting the Company.
Australia
Securities Law Notice
Neither the Plan, the U.S. Plan prospectus, nor any related grant documentation has been lodged with the Australian Securities and Investments Commission (“ ASIC ”).  Any offerings made under the Plan to participants in Australia are being made pursuant to exceptions contained in Section 708 of the Australian Corporations Act 2001 (Cth).  By participating in the Plan, you acknowledge that neither the U.S. Plan prospectus nor any other related grant documentation has been prepared with reference to any participant’s particular investment objectives or financial or tax situation and does not purport to contain all the information that a prospective Plan participant may require. Furthermore, the U.S. Plan prospectus and any other related grant documentation do not contain all the information which would be required in a prospectus prepared in accordance with the requirements of the Australian Corporations Act 2001 (Cth). If you sell shares acquired under the Plan in Australia (i.e., not through a U.S. stock exchange), you may be subject to certain disclosure and/or filing requirements under Australian securities laws. Any advice given to you in connection with the offer is general advice only, and you should consider obtaining their own financial product advice from an independent person who is licensed by ASIC to give such advice.

Settlement and Statement under Section 83A-105 of the Income Tax Assessment Act 1997 (Cth)
Notwithstanding any discretion in the Plan or the Agreement to the contrary, settlement of the RSUs and/or Performance Shares shall be in shares and not, in whole or in part, in the form of cash. Subdivision 83A-C of the Income Tax Assessment Act 1997 (Cth) (the “ Act ”) applies to the Plan and any grants, subject to the requirements of the Act. Accordingly, it is intended for income tax in relation to be deferred until vesting, unless your employment terminates earlier for any reason. However, the Company is not providing tax advice, and you should consult your personal advisor for the precise tax treatment of any grants.
Brazil
Foreign Assets Reporting
If you are a resident of Brazil, you will be required to submit an annual declaration of assets and rights held outside of Brazil to the Central Bank of Brazil (“ BACEN ”) if the aggregate value of such assets and rights (including any capital gain, dividend or profit attributable to such assets) is equal to or greater than US $100,000. The reporting should be completed at the beginning of each year.

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Canada
Securities Law Notice
The security represented by the RSUs or Performance Shares was issued pursuant to an exemption from the prospectus requirements of applicable securities legislation in Canada.  Participant acknowledges that as long as the Company is not a reporting issuer in any jurisdiction in Canada, the RSUs and the underlying Shares will be subject to an indefinite hold period in Canada and subject to restrictions on their transfer in Canada. Subject to applicable securities laws, Participant is permitted to sell Shares acquired through the Plan through the designated broker appointed under the Plan, assuming the sale of such Shares takes place outside Canada via the stock exchange on which the Shares are traded.

Settlement
For Canadian federal income tax purposes, the grant is intended to be treated as an agreement by the Corporation to sell or issue shares to the Employee and, as such, is intended to be subject to the rules in Section 7 of the Income Tax Act  (Canada). Notwithstanding any discretion in the Plan or the Agreement to the contrary, settlement of any grant shall be made only in Stock issued by the Corporation from treasury and not, in whole or in part, in the form of cash or other consideration.

Foreign Share Ownership Reporting
If you are a Canadian resident, your ownership of certain foreign property (including shares of foreign corporations) in excess of $100,000 may be subject to strict ongoing annual reporting obligations.    Please refer to CRA Form T1135   (Foreign Income Verification Statement) and consult your tax advisor for further details.  It is your responsibility to comply with all applicable tax reporting requirements.

Quebec: Consent to Receive Information in English
This form and related documents are drawn up in English at the express wish of the parties. Ce formulaire ainsi que les documents qui s’y rattachent sont rédigés en anglais à la demande expresse des parties.
France
Foreign Ownership Reporting
Residents of France with foreign account balances in excess of EUR 1 million or its equivalent must report monthly to the Bank of France.

Consent to Receive Information in English
By accepting the Restricted Stock Units, you confirm having read and understood the Plan and the Agreement, which were provided in the English language. You accept the terms of those documents accordingly.    En acceptant cette attribution gratuite d’actions, vous confirmez avoir lu et comprenez le Plan et ce Contrat, incluant tous leurs termes et conditions, qui ont été transmis en langue anglaise. Vous acceptez les dispositions de ces documents en connaissance de cause.
Hong Kong
Securities Law Notice
The RSUs and Performance Shares and any Stock issued upon vesting do not constitute a public offering of securities under Hong Kong law and are available only to employees of the Company and its affiliates. The Plan, the Agreement, including this Addendum, and other incidental communication materials have not been prepared in accordance with and are not intended to constitute a “prospectus” for a public offering of securities under the applicable companies and securities legislation in Hong Kong and have not been registered with or authorized by any regulatory authority in Hong Kong, including the Securities and Futures Commission. This Plan, the Agreement, and the incidental communication materials are intended only for the personal use of each eligible Participant and not for distribution to any other persons. If you have any questions about any of the contents of the Plan, the Agreement, including this Addendum, or other incidental communication materials, you should obtain independent professional advice.
India
Repatriation Requirement
You are required to repatriate to India all proceeds from the subsequent sale of Stock acquired under the Plan within 90 days from the date of sale. You will not take any action or non-action that has the effect of delaying or eliminating the receipt or realization of any such foreign exchange. Upon receipt or realization of foreign exchange in India, you shall surrender such foreign exchange to an authorized person or bank within a period of 180 days from the date of such receipt or realization, as the case may be. Please note that you should keep the remittance certificate received from the bank where foreign currency is deposited in the event that the Reserve Bank of India, the Corporation or your employer requests proof of repatriation.
Ireland
Director Reporting
If you are a director or shadow director of the Company or related company, you may be subject to special reporting requirements with regard to the acquisition of Stock or rights over Stock. Please contact your personal legal advisor for further details if you are a director or shadow director.
Japan
Foreign Ownership Information
If you acquire shares of Common Stock valued at more than ¥100,000,000 in a single transaction, you must file a Securities Acquisition Report with the Ministry of Finance (“ MOF ”) through the Bank of Japan within 20 days of the acquisition of the Shares.

Exit Tax
Please note that you may potentially be subject to tax on your Restricted Stock Unit or Performance Share awards (if any), even prior to vesting or exercise or otherwise receiving any value under an award, if you relocate from Japan if you (1) hold financial assets with an aggregate value of ¥100,000,000 or more upon departure from Japan and (2) maintained a principle place of residence ( jusho ) or temporary place of abode ( kyosho ) in Japan for 5 years or more during the 10-year period immediately prior to departing Japan. You should discuss your tax treatment with your personal tax advisor.

10


Korea
Repatriation Requirement
Please note that proceeds received from the sale of stock overseas must be repatriated to Korea within three (3) years if such proceeds exceed US $500,000 per sale. Separate sales may be deemed a single sale if the sole purpose of separate sales was to avoid a sale exceeding the US $500,000 per sale threshold.
Mexico
Labor Law Acknowledgment
The invitation Rockwell Collins, Inc. is making under the Plan is unilateral and discretionary and is not related to the salary and other contractual benefits granted to you by your employer; therefore, benefits derived from the Plan will not under any circumstance be considered as an integral part of your salary. Rockwell Collins reserves the absolute right to amend the Plan and discontinue it at any time without incurring any liability whatsoever. This invitation and, in your case, the acquisition of shares does not, in any way, establish a labor relationship between you and Rockwell Collins, nor does it establish any rights between you and your employer.

La invitación que Rockwell Collins, Inc. hace en relación con el Plan es unilateral, discrecional y no se relaciona con el salario y otros beneficios que recibe actualmente de su actual empleador, por lo que cualquier beneficio derivado del Plan no será considerado bajo ninguna circunstancia como parte integral de su salario. Por lo anterior, Rockwell Collins se reserva el derecho absoluto para modificar o terminar el mismo, sin incurrir en responsabilidad alguna. Esta invitación y, en su caso, la adquisición de acciones, de ninguna manera establecen relación laboral alguna entre usted y Rockwell Collins y tampoco genera derecho alguno entre usted y su empleador.
Philippines
Securities Law Notice. This offering is subject to exemption from the requirements of registration with the Philippines Securities and Exchange Commission under Section 10.1 of the Philippines Securities Regulation Code. THE SECURITIES BEING OFFERED OR SOLD HAVE NOT BEEN REGISTERED WITH THE PHILIPPINES SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES REGULATION CODE. ANY FUTURE OFFER OR SALE THEREOF IS SUBJECT TO REGISTRATION REQUIREMENTS UNDER THE CODE UNLESS SUCH OFFER OR SALE QUALIFIES AS AN EXEMPT TRANSACTION.
Singapore
Securities Law Notice
This grant and the Stock to be issued thereunder shall be made available only to an employee of the Corporation or its Subsidiary, in reliance of the prospectus exemption set out in Section 273(1)(f) of the Securities and Futures Act (Chapter 289) of Singapore (the “SFA”) and is not made with a view to the Stocks so issued being subsequently offered for sale or sold to any other party in Singapore. You understand and acknowledge that this Agreement and/or any other document or material in connection with this offer and the Stock thereunder have not been and will not be lodged, registered or reviewed by the Monetary Authority of Singapore. Any and all Stocks to be issued hereunder shall therefore be subject to the general resale restriction under Section 257 of the SFA, and you undertake not to make any subsequent sale in Singapore, or any offer of sale in Singapore, of any of the shares of Common Stock (received upon vesting of this offer), unless that sale or offer  in Singapore is made pursuant to the exemptions under Part XIII Division (1) Subdivision (4) other than Section 280 of the SFA.

Exit Tax and Deemed Exercise Rule
If you have received a grant in relation to your employment in Singapore, please note that if you are 1) a permanent resident of Singapore and leave Singapore permanently or are transferred out of Singapore; or 2) neither a Singapore citizen nor permanent resident and either cease employment in Singapore or leave Singapore for any period exceeding 3 months, you will likely be taxed on your awards on a “deemed exercise” basis, even though your awards have not yet vested, been exercised, or paid out. You should discuss your tax treatment with your personal tax advisor. 

Director Reporting
If you are a director or shadow director of the Corporation or a Subsidiary, you may be subject to special reporting requirements with regard to the acquisition of Stock or rights over Stock. Please contact your personal legal advisor for further details if you are a director or shadow director.
Spain
Foreign Share Ownership Reporting

If the Participant is a Spanish resident, his/her acquisition, purchase, ownership, and/or sale of foreign-listed stock may be subject to ongoing annual reporting obligations with the Dirección General de Politica Comercial e Inversiones Exteriores (“DGPCIE”) of the Ministerio de Economia, the Bank of Spain, and/or the tax authorities. These requirements change periodically, so the Participant should consult his/her personal advisor to determine the specific reporting obligations.

Currently, the Participant must declare the acquisition of Shares to DGPCIE for statistical purposes. The Participant must also declare the ownership of any Shares with the DGPCIE each January while the shares are owned. The relevant forms are Form D6 and, depending on the amount of assets, Form D8.

In addition, if the Participant perform transactions with non-Spanish residents or hold a balance of assets and liabilities with foreign parties higher than EUR 1,000,000, the Participant may be required to report such transactions and accounts to the Bank of Spain. The frequency (monthly, quarterly or annually) of the notification will vary depending on the total value of the transactions or the balance of assets and liabilities.

If the Participant holds assets or rights outside of Spain (including Shares acquired under the Plan), he/she may also have to file Form 720 with the tax authorities, generally if the value of your foreign investments exceeds €50,000. Please note that reporting requirements are based on what the Participant has previously disclosed and the increase in value and the total value of certain groups of foreign assets.

11


United Arab Emirates
Securities Law Notice
This Plan has not been approved or licensed by the UAE Central Bank or any other relevant licensing authorities or governmental agencies in the United Arab Emirates. This Plan is strictly private and confidential and has not been reviewed by, deposited or registered with the UAE Central Bank or any other licensing authority or governmental agencies in the United Arab Emirates. This Plan is being issued from outside the United Arab Emirates to a limited number of employees of Rockwell Collins, Inc. and affiliated companies and must not be provided to any person other than the original recipient and may not be reproduced or used for any other purpose. Further, the information contained in this report is not intended to lead to the issue of any securities or the conclusion of any other contract of whatsoever nature within the territory of the United Arab Emirates.
United Kingdom
Withholding of Tax   
The following provision supplements, as applicable, Section 5 or 7 of the relevant Restricted Stock Unit Award Terms and Conditions and Section 16 of the Performance Share Agreement:
 
If payment or withholding of any tax, social contributions, and/or other charges that may be due is not made within ninety (90) days of the event giving rise to such amounts (the “ Due Date ”) or such other period specified in Section 222(1)(c) of the U.K. Income Tax (Earnings and Pensions) Act 2003, the amount of any uncollected amounts will constitute a loan owed by Participant to his employer, effective on the Due Date. Participant agrees that the loan will bear interest at the then-current Official Rate of Her Majesty’s Revenue and Customs (“ HMRC ”), it will be immediately due and repayable, and the Corporation or the employer may recover it at any time thereafter by any legal means. Notwithstanding the foregoing, if Participant is a director or executive officer of the Corporation (within the meaning of Section 13(k) of the U.S. Securities and Exchange Act of 1934, as amended), Participant will not be eligible for such a loan to cover such amounts. In the event that Participant is a director or executive officer and the amounts are not collected from or paid by Participant by the Due Date, any uncollected amounts will constitute a benefit to Participant on which additional income tax and national insurance contributions will be payable. Participant will be responsible for reporting and paying any income tax and national insurance contributions due on this additional benefit directly to HMRC under the self-assessment regime.

Settlement
Notwithstanding any discretion in the Plan or the Agreement to the contrary, settlement of the award shall be made only in Stock and not, in whole or in part, in the form of cash.



















12






ROCKWELL COLLINS, INC.
2015 LONG-TERM INCENTIVES PLAN
RESTRICTED STOCK UNITS
TAX SUPPLEMENT FOR EMPLOYEES OUTSIDE THE UNITED STATES
This supplement summarizes the likely tax consequences of participating in the Rockwell Collins, Inc. 2015 Long-Term Incentives Plan (the “ Plan ”), assuming you are and will continue to be resident in the country you are resident in at the time of grant. This summary is based on the assumption that you are and will continue to be actively employed by Rockwell Collins, Inc. or an affiliate of Rockwell Collins, Inc. in the country you are resident in at the time of grant. The summary is based upon the relevant tax laws, as well as administrative and judicial interpretations, in effect as of November 2017. If these laws or interpretations thereof change in the future, possibly with retroactive effect, the information provided may no longer be accurate. Note this summary is limited to a general description of the national tax laws and is not intended to address local, city, regional, or other provincial tax laws that may also apply.

The tax consequences of Restricted Stock Units granted under the Plan are based on complex tax laws, which may be subject to varying interpretations, and the application of such laws may depend, in large part, on the surrounding facts and circumstances. This discussion does not apply to every specific transaction that may occur in connection with the Plan, and this discussion does not address the impact of the completion of the Merger on the RSUs. Moreover, it may not apply to your particular tax or financial situation, particularly if you move from one country to another, and we are not in a position to assure you of any particular tax result. Therefore, we recommend that you consult with your own tax advisor regularly to determine the consequences of taking or not taking any action concerning your Restricted Stock Units and to determine how the tax or other laws in your country apply to your specific situation.

This document constitutes part of a prospectus covering securities that have been registered under the Securities Act of 1933, as amended.
Australia
Grant of Restricted Stock Units
You are not subject to tax upon grant as there is a “real risk of forfeiture,” i.e., the Restricted Stock Units will lapse if you do not remain an employee until vesting.

Vesting of Restricted Stock Units
In Australia, you will recognize taxable income at the “taxing point,” which will generally occur upon the earliest of the following events:
When your Restricted Stock Units vest;
When the employment with respect to which the Restricted Stock Units were granted ceases and you retain your Restricted Stock Units prior to vesting.

In the normal course of events, therefore, for continuing employees, Restricted Stock Units are typically taxed when they vest.

If your Restricted Stock Units vest, you will be subject to ordinary income tax upon vesting on the value of the underlying shares when your Restricted Stock Units vest, unless you sell the underlying shares within 30 days of vesting, in which case tax is imposed on the net sale proceeds at the time of sale. The taxable income is subject to income tax at your marginal tax rate and will also be subject to Medicare Levy.

Cessation of Employment
As noted above, if you cease employment and retain any unvested Restricted Stock Units, you may be subject to income tax on your Restricted Stock Units on the value of the underlying shares on the date of cessation of employment (prior to vesting). However, if you sell the underlying shares within 30 days of cessation of employment, tax is imposed on the net sale proceeds at the time of sale.

The taxable income is subject to income tax at your marginal tax rate and will also be subject to Medicare Levy.

If you paid income tax upon cessation of employment and these Restricted Stock Units are subsequently forfeited, please consult our personal tax advisor to determine the tax treatment in your particular circumstances.

13


Australia Continued

Sale of Shares
If you sell the underlying shares after 30 days following the taxing point, you are subject to capital gains tax on any additional gain realized upon the sale of those shares.

If you sell the shares after 30 days following the taxing point but before holding them for at least one year following vesting, the amount included in your net capital gain is the excess of (1) the sale price of the shares, over (2) the “cost base” of the shares. If you sell the shares after holding them for at least one year following vesting, the amount included in your net capital gain is limited to 50% of the excess of (1) the sale price of the shares, over (2) the “cost base” of the shares. The “cost base” of the shares is the market value of the underlying shares that was included in your taxable income for the year in which the taxing point occurs.

If the proceeds received upon sale of your shares is less than the “cost base” of those shares, a capital loss will be available to offset current or future year capital gains. Note that a capital loss may not be used as a deduction from assessable income.

Tax Withholding and Reporting Requirements
Your employer will report the number of your Restricted Stock Units to you and to the Australian Taxation Office in the tax year of grant. Your employer will also report the number and estimated value of your Restricted Stock Units to you and to the Australian Taxation Office in the year of the taxing point. Your employer will not withhold income tax or Medicare Levy contributions in relation to your Restricted Stock Units, and you must instead remit the income tax and Medicare Levy contributions due as a result of the vesting of your Restricted Stock Units to the Australian tax authorities.

Generally, you must report on your personal tax return the taxable amount recognized upon 1) the vesting of your Restricted Stock Units or 2) the sale of the underlying shares within 30 days of vesting. In addition, you must report any taxable capital gain or loss when you sell shares after 30 days following vesting. The Medicare levy typically applies to Australian residents.
Brazil
Grant of Restricted Stock Units
You are not subject to tax when your Restricted Stock Units are granted to you.

Vesting of Restricted Stock Units
You are subject to income tax on the fair market value of the shares that you receive when your Restricted Stock Units vest. Social insurance contributions will also likely apply (to the extent you have not already reached the applicable contribution ceiling).

Sale of Shares
When you sell shares you receive upon vesting of your Restricted Stock Units, you may be subject to capital gains tax.   Your gain is equal to the difference between:

(1)the amount for which you sell the shares, and
(2)the aggregate fair market value of the shares on the date when your Restricted Stock Units vest.

A monthly exemption amount is available.

Tax Withholding and Reporting Requirements
Your employer will withhold and report income tax and social contributions (to the extent you have not exceeded the applicable contribution ceiling) due upon receipt of your shares. You may have an obligation to report details of any tax liabilities arising from the vesting of your Restricted Stock Units, the sale or disposal of shares, and payment of dividends to the Brazilian tax authorities.

14


Canada
Grant of Restricted Stock Units
You are not subject to tax when your Restricted Stock Units are granted to you.

Vesting of Restricted Stock Units
You are subject to income tax and any applicable social contributions (e.g., Canada Pension Plan, Quebec Pension Plan, and Quebec Parental Insurance Plan contributions, etc.) on the fair market value of the shares that you receive when your Restricted Stock Units vest. Social contributions are subject to annual contribution ceilings.

Sale of Shares
When you sell the shares you received upon vesting of your Restricted Stock Units, you may be subject to capital gains tax. Your gain is equal to the difference between the amount for which you sell the shares and the “tax cost” of the shares. One-half of any capital gain is subject to income tax at your marginal rate in the year of sale, to the extent it cannot be netted out against capital losses sustained on other investments in the year of sale or in certain prior or subsequent tax years.

The tax cost is generally equal to the fair market value of the shares on the date they are acquired. However, if you also own additional Rockwell Collins shares, the tax cost of the shares acquired upon vesting of a Restricted Stock Unit is derived by averaging the fair market value of such shares on the date they are acquired with the tax cost of the additional Rockwell Collins shares that you already own. As a limited exception to this averaging rule, if you sell the shares acquired on the vesting of your Restricted Stock Units within 30 days after the acquisition date, depending on which method would be most advantageous to you, you may choose the tax cost of the shares to be based either on (1) the averaging method described above, or (2) the fair market value of such shares on the date they are acquired.

Tax Withholding and Reporting Requirement
When your Restricted Stock Units vest, Rockwell Collins may withhold and cause to be sold on the market a sufficient number of the shares otherwise deliverable to you to satisfy income tax and any applicable withholding requirements and remit such amounts to the Canada Revenue Agency. Alternatively, your employer will implement such other arrangement as it chooses (including withholding from salary or other employment income) to satisfy its source deduction obligation. You may have an obligation to report details of any tax liabilities arising from the vesting of your Restricted Stock Units, the sale or disposal of shares, and payment of dividends to the Canadian tax authorities.
France
Grant of Restricted Stock Units
You are not subject to tax when your Restricted Stock Units are granted to you.

Vesting of Restricted Stock Units
You are subject to income tax and social contributions (including CSG and CRDS) on the fair market value of the shares that you receive when your Restricted Stock Units vest. A surtax may also apply to “High Earners” above the applicable income threshold.

Sale of Shares
When you sell the shares you received upon vesting of your Restricted Stock Units, the gain equal to the difference between the the net sale price and the fair market value on the vest date is taxable as capital gains. Capital gains realized upon the sale of the shares will be subject to progressive personal income tax rates and to social contributions (though a certain portion of the global social contribution rate will be deductible in the year of payment).

For the calculation of the personal income tax base only, a rebate depending on the holding period would apply (equal to 50% if the shares have been held between 2 and 8 years, 65% after 8 years of holding). The “High Earners” surtax may also apply. Any capital loss can be offset against capital gains of the same nature realized by you and your household during the same year or during the ten following years.

Tax Withholding and Reporting Requirement
If you are a resident of France, income tax is not withheld and you must instead remit the income tax due as a result of the vesting of your Restricted Stock Units to the France tax authorities. However, social insurance contributions will be withheld. To facilitate the payment of applicable social insurance contributions, Rockwell Collins may withhold a portion of the shares issued upon vesting of the Restricted Stock Units with an aggregate market value sufficient to pay your social insurance contribution withholding obligation. You may then be issued the resulting net shares after taxes. Please note, though, that Rockwell Collins and/or your employer may satisfy social insurance contribution withholding through any means set forth in the grant agreement.

The income will be reported on your pay slip and on the annual wage statement (“ DADS ”). It is also your responsibility to report and pay any taxes resulting from the sale of your shares and the receipt of any dividends. Please note that if you are not a French tax resident, the withholding rules may be different. In addition, withholding rules may change in the future and Rockwell Collins and/or your employer may withhold at vesting and/or sale of shares if required to do so under French law.

15


Germany
Grant of Restricted Stock Units
You are not subject to tax when your Restricted Stock Units are granted to you.

Vesting of Restricted Stock Units
You are subject to income tax (plus solidarity surcharge and church tax, if applicable) and social insurance contributions (to the extent you have not exceeded the applicable contribution ceiling) on the fair market value of the shares that you receive when your Restricted Stock Units vest.

Sale of Shares
Assuming you receive shares as a result of the vesting of Restricted Stock Units on or after January 1, 2009, when you sell such shares, you may be subject to capital gains tax and solidarity surcharge. Your gain is equal to the difference between:

(1)the amount for which you sell the shares, and
(2)the aggregate fair market value of the shares on the date when your Restricted Stock Units vest.

A small amount of the capital gain may be exempt. Different rules will apply in the unlikely event you held directly or indirectly 1% or more of Rockwell Collins Inc.’s share capital at any time during the five years preceding the sale.

Tax Withholding and Reporting Requirements
Your employer will withhold and report income tax and social contributions (to the extent you have not exceeded the applicable contribution ceiling) due upon receipt of your shares. You are required to report any income, dividends, and non-exempt capital gain resulting from your participation in the Plan on your annual personal tax return.
Hong Kong
Grant of Restricted Stock Units
You are not subject to tax when your Restricted Stock Units are granted to you.

Vesting of Restricted Stock Units
You are subject to income tax on the fair market value of the shares that you receive when your Restricted Stock Units vest.

Sale of Shares
You are not subject to tax when you sell the shares received from your Restricted Stock Units.

Tax Withholding and Reporting Requirements
Your employer will not be required to withhold any income tax on vesting or sale of the shares, and you must instead remit the income tax due as a result of the vesting of your Restricted Stock Units to the Hong Kong tax authorities. However, your employer will report the income realized at vesting to the tax authorities on an annual basis.
India
Grant of Restricted Stock Units
You are not subject to tax when your Restricted Stock Units are granted to you.

Vesting of Restricted Stock Units
You are subject to income tax (plus a small education surcharge) on the fair market value of the shares that you receive when your Restricted Stock Units vest. For Indian tax purposes, the Company may impose a specified fair market value.

Sale of Shares
You may be subject to capital gains tax on any difference between the proceeds received from the sale of shares and the fair market value of the shares upon vesting (as determined under the Income Tax Act, 1961). The applicable capital gains tax rate depends upon how long you hold the shares after vesting. You should consult your tax advisor about any capital gains tax that you may owe.

Tax Withholding and Reporting Requirements
Your employer will withhold and report income taxes upon vesting of your   Restricted Stock Units. You are required to report any income, dividends, and capital gain resulting from your participation in the Plan on your annual personal tax return.

16


Ireland
Grant of Restricted Stock Units
You are not subject to tax when your Restricted Stock Units are granted to you.

Vesting of Restricted Stock Units
You are subject to income tax, Universal Social Charge (USC) and social insurance contributions on the fair market value of the shares that you receive when your Restricted Stock Units vest.

Sale of Shares
When you sell the shares received under your Restricted Stock Units, you are generally subject to capital gains tax on any gain, which is the excess of the sale price over the total amount on which you have already paid income tax. Your aggregate capital gains will be subject to an annual exemption amount.

Tax Withholding and Reporting Requirements
Your employer will withhold and report income tax, USC and social insurance contributions due upon receipt of your shares. You may have an obligation to report details of any tax liabilities arising from the vesting of your Restricted Stock Units, the sale or disposal of shares, and payment of dividends to the Ireland tax authorities.
Japan
Grant of Restricted Stock Units
You are not subject to tax when your Restricted Stock Units are granted to you.

Vesting of Restricted Stock Units
You are subject to income tax on the fair market value of the shares that you receive when your Restricted Stock Units vest. The income will likely be characterized as remuneration income and taxed at your progressive tax rate.

Sale of Shares
When you sell shares you receive upon vesting of your Restricted Stock Units, you may be subject to capital gains tax.    Your gain is equal to the difference between:
(1)the amount for which you sell the shares, and
(2)the aggregate fair market value of the shares on the date when your Restricted Stock Units vest.

Tax Withholding and Reporting Requirements
Your employer will likely not be required to withhold any income tax on vesting or sale of the shares and you must instead remit the income tax due as a result of the vesting of your Restricted Stock Units to the Japanese tax authorities. However, your employer will report the income realized at vesting to the tax authorities on an annual basis. You are required to report any income, dividends, and capital gain resulting from your participation in the Plan on your annual personal tax return.

Exit Tax
Please note that you may potentially be subject to tax on your Restricted Stock Unit award, even prior to vesting or otherwise receiving any value under such award, if you relocate from Japan if you (1) hold financial assets with an aggregate value of ¥100,000,000 or more upon departure from Japan and (2) maintained a principle place of residence ( jusho ) or temporary place of abode ( kyosho ) in Japan.
Korea
Grant of Restricted Stock Units
You are not subject to tax when your Restricted Stock Units are granted to you.

Vesting of Restricted Stock Units
You are subject to income tax and social insurance contributions (to the extent you have not exceeded the applicable contribution ceiling) on the fair market value of the shares that you receive when your Restricted Stock Units vest.

Sale of Shares
When you sell shares you receive upon vesting of your Restricted Stock Units, you may be subject to capital gains tax.    Your gain is equal to the difference between:
(1)the amount for which you sell the shares, and
(2)the aggregate fair market value of the shares on the date when your Restricted Stock Units vest.

An annual exemption amount is available.

Tax Withholding and Reporting Requirements
Your employer will withhold and report income tax and social contributions due upon receipt of your shares. You may have an obligation to report details of any tax liabilities arising from the vesting of your Restricted Stock Units, the sale or disposal of shares, and payment of dividends to the Korean tax authorities.

17


Mexico
Grant of Restricted Stock Units
You are not subject to tax when your Restricted Stock Units are granted to you.

Vesting of Restricted Stock Units
You are subject to income tax and social insurance contributions on the fair market value of the shares that you receive when your Restricted Stock Units vest.

Sale of Shares
When you sell shares you receive upon vesting of your Restricted Stock Units, you may be subject to capital gains tax. Your gain is equal to the difference between:
(1)the amount for which you sell the shares, and
(2)the aggregate fair market value of the shares on the date when your Restricted Stock Units vest.

Your cost basis in the shares may need to be adjusted inflation when you hold the shares more than one month.

Your total capital gain on the sale must be divided into the number of years that you held the stock, up to 20 years. One year’s worth of capital gain will be taxed as ordinary income at your marginal tax rate. The remainder of your capital gain will be taxed at your effective tax rate for the year of sale or, alternatively, at your average effective tax rate for the previous 5 years concluding with the year of sale. For more information on how to calculate the tax due on your capital gain, please consult your personal tax advisor.

Tax Withholding and Reporting Requirements
Your employer will withhold and report income tax and social insurance (to the extent you have not exceeded the applicable contribution ceiling) in relation to the vesting of your Restricted Stock Units. However, you remain responsible for reporting and where necessary paying any taxes incurred at the time your Restricted Stock Units vest.
Netherlands
Grant of Restricted Stock Units
You are not subject to tax when your Restricted Stock Units are granted to you.

Vesting of Restricted Stock Units
You are subject to income tax and social insurance contributions on the fair market value of the shares that you receive when your Restricted Stock Units vest.

Sale of Shares
You are not subject to tax when you sell the shares received from your Restricted Stock Units based on the assumption that you do not have a substantial interest in Rockwell Collins (i.e., at least 5% ownership of any type of Rockwell Collins shares).

Tax Withholding and Reporting Requirements
Your employer will withhold and report income tax and social insurance (to the extent you have not exceeded the applicable contribution ceiling) in relation to the vesting of your Restricted Stock Units. However, you may have an obligation to report details of any tax liabilities arising from the vesting of your Restricted Stock Units, the sale or disposal of shares, and payment of dividends to the tax authorities in the Netherlans.

18


Philippines
Grant of Restricted Stock Units
You are not subject to tax when your Restricted Stock Units are granted to you.

Vesting of Restricted Stock Units

For managerial/supervisory employees :
You are not subject to income tax upon vesting as the shares you receive when your Restricted Stock Units vest will be considered a fringe benefit in the Philippines for income tax purposes. However, the fair market value of the shares that you receive when your Restricted Stock Units vest will be subject to social insurance contributions.

For rank and file employees :
You are subject to income tax and social insurance contributions on the fair market value of the shares that you receive when your Restricted Stock Units vest.

Sale of Shares
When you sell shares you receive upon vesting of your Restricted Stock Units, you may be subject to capital gains tax.    Your gain is equal to the difference between:
(1)the amount for which you sell the shares, and
(2)the aggregate fair market value of the shares on the date when your Restricted Stock Units vest.

Because Rockwell Collins stock is stock of a foreign corporation, the amount of your taxable gain will depend on various factors, including whether you held the shares for 12 months or more. Note different treatment may apply for non-Filipino citizens even if tax resident in the Philippines.

Tax Withholding and Reporting Requirements

For managerial/supervisory employees :
Your employer will withhold social contributions (to the extent you have not exceeded the applicable contribution ceiling) due upon receipt of your shares. You are required to report any income from the vesting of your Restricted Stock Units, dividends, and capital gain resulting from your participation in the Plan on your annual personal tax return.

For rank and file employees :
Your employer will withhold and report income tax and social contributions (to the extent you have not exceeded the applicable contribution ceiling) due upon receipt of your shares. You are required to report any income from the vesting of your Restricted Stock Units, dividends, and capital gain resulting from your participation in the Plan on your annual personal tax return.
Singapore
Grant of Restricted Stock Units
You are not subject to tax when your Restricted Stock Units are granted to you.

Vesting of Restricted Stock Units
You are subject to income tax on the fair market value of the shares when your Restricted Stock Units vest.

Sale of Shares
You are not subject to tax when you sell the shares received from your Restricted Stock Units based on the assumption that you are not regarded as carrying out a trade in buying and selling shares.

Tax Withholding and Reporting Requirements
Your employer will not withhold any income tax incurred upon the vesting of your Restricted Stock Units. Your employer is required to report income received by you from your Restricted Stock Units. You are required to report and remit any taxes incurred in connection with the vesting of your Restricted Stock Units.

Exit Tax and Deemed Vesting Rule
If you have received a grant in relation to your employment in Singapore, please note that if you are 1) a permanent resident of Singapore and leave Singapore permanently or are transferred out of Singapore; or 2) neither a Singapore citizen nor permanent resident and either cease employment in Singapore or leave Singapore for any period exceeding 3 months, you will likely be taxed on your awards on a “deemed vesting” basis, even though your Restricted Stock Units have not yet vested. You should discuss your tax treatment with your personal tax advisor.

19


Spain
Grant of Restricted Stock Units
You are not subject to tax when your Restricted Stock Units are granted to you.

Vesting of Restricted Stock Units
You are subject to income tax and social insurance contributions on the fair market value of the shares that you receive when your Restricted Stock Units vest.

Note that in some circumstances, it may be possible for a portion of the taxable income realized when your Restricted Stock Units vest to be reduced by 30% for purposes of determining the applicable income tax rate. This may result in your taxable income being subject to income tax at a lower rate. However, 100% of the fair market value of the shares that you receive when your Restricted Stock Units vest will be subject to tax at such rate. Please consult with your personal tax advisor for details.

Sale of Shares
When you sell the shares you received upon vesting of your Restricted Stock Units, you may be subject to capital gains tax. Your gain is equal to the difference between the amount for which you sell the shares and the cost basis of the shares. For tax purposes, a first-in first-out (FIFO) principle is applied when determining the cost basis of the shares sold. Under the FIFO principle, the oldest shares acquired are deemed to be the first shares sold.

Tax Withholding and Reporting Requirements
Your employer will withhold and report income tax and social contributions (to the extent you have not exceeded the applicable contribution ceiling) due upon receipt of your shares. You are required to report any income, dividends, and capital gain resulting from your participation in the Plan on your annual personal tax return.
Switzerland
Grant of Restricted Stock Units
You are not subject to tax when your Restricted Stock Units are granted to you.

Vesting of Restricted Stock Units
You are subject to income tax and social contributions on the fair market value of the shares that you receive when your Restricted Stock Units vest. The combined federal, municipal and cantonal tax rates vary depending on the canton in which you reside.

Sale of Shares
There is no tax on private capital gains in Switzerland. Therefore, you are not subject to tax when you sell the shares received from your Restricted Stock Units based on the assumption that you do not qualify as a professional securities dealer.

Tax Withholding and Reporting Requirement
Your employer will withhold income tax in relation to the vesting of your Restricted Stock Units only if you are subject to tax at source. Swiss citizens, C permit holders and their spouses are not subject to tax at source. However, social insurance contrinbutions will be withheld regardless of whether or not you are subject to tax at source.

Your employer will report the income realized at vesting to the tax authorities on an annual basis. However, you may have an obligation to report, and where necessary to pay any taxes incurred at the time your Restricted Stock Units vest.
United Arab Emirates
Grant of Restricted Stock Units
You are not subject to tax when the Restricted Stock Units are granted to you.

Vesting of Restricted Stock Units
Currently, there is no income tax in the UAE. It is expected that you will not be subject to income tax on the shares you receive when your Restricted Stock Units vest.

Sale of Shares
It is expected that no capital gains tax will apply when you sell the shares you received under the RSUs.

Tax Withholding and Reporting Requirements
Your employer will not withhold or report taxes in relation to your RSUs.

20


United Kingdom
Grant of Restricted Stock Units
You are not subject to tax when the Restricted Stock Units are granted to you.

Vesting of Restricted Stock Units
You are subject to income tax and employee’s National Insurance Contributions (“ NICs ”) on the fair market value of the shares you receive when your Restricted Stock Units vest.

Sale of Shares
When you sell the shares received under your Restricted Stock Units, you are generally subject to capital gains tax on any gain, which is the excess of the sale price over the total amount on which you have already paid income tax. Your aggregate capital gains will be subject to an annual exemption amount.

Tax Withholding and Reporting Requirements
Your employer will withhold income tax and NICs in relation to the vesting of your Restricted Stock Units. Your employer will report the details of your Restricted Stock Units on its annual tax return to the HM Revenue & Customs (“ HMRC ”). You must report details of any tax liabilities arising from the vesting of your Restricted Stock Units, the sale or disposal of shares, and payment of dividends to the HMRC on your personal self assessment tax return. You also are responsible for paying any taxes owed as a result of the sale of the shares or the receipt of any dividend.


21


Exhibit 10-f-1



ROCKWELL COLLINS, INC.
APPROVAL OF
AMENDMENT #1
to the
ROCKWELL COLLINS 2005 DEFERRED COMPENSATION PLAN
(as Amended and Restated effective June 27, 2017)

The undersigned, Laura A. Patterson, Vice President, Total Rewards & Labor Strategy, Rockwell Collins, Inc. (the “Company”), for and on behalf of the Company and pursuant to the authority provided to me by the Senior Vice President of Human Resources on September 3, 2014, hereby approves the First Amendment to the Rockwell Collins 2005 Deferred Compensation Plan (as Amended and Restated effective June 27, 2017) in the form attached hereto.
Dated this 29 th day of December 2017.
____________________________________________            
Laura A. Patterson
Vice President
Rewards & Labor Strategy





AMENDMENT #1

to the
ROCKWELL COLLINS 2005 DEFERRED COMPENSATION PLAN
(As Amended and Restated effective June 27, 2017)
The Rockwell Collins 2005 Deferred Compensation Plan, as amended and restated effective June 27, 2017 (the “Plan”), is hereby amended effective January 1, 2018 unless specified otherwise in the following respects:
1.
The second paragraph of Section 3.030 is amended by replacing the phrase “Participant’s ‘Basic After-tax Contributions’ and ‘Basic Pre-Tax Contributions’” with the phrase “Participant’s ‘Basic After-tax Contributions’, ‘Basic Employee Roth Contributions’ and ‘Basic Pre-Tax Contributions’”.

2.
The third paragraph of Section 3.030 is amended by replacing the phrase “deferral election” with “deferral election (whether for pre-tax, roth or after-tax contributions)”.







Exhibit 10-g-1
ROCKWELL COLLINS, INC.
APPROVAL OF
AMENDMENT #2
to the
ROCKWELL COLLINS
2005 NON-QUALIFIED RETIREMENT SAVINGS PLAN
(as Amended and Restated effective December 17, 2010)

The undersigned, Laura A. Patterson, Vice President, Total Rewards, Rockwell Collins, Inc. (the “Company”), for and on behalf of the Company and pursuant to the authority provided to me by the Company’s Senior Vice President of Human Resources, hereby approves Amendment #2 to the Rockwell Collins 2005 Non-Qualified Retirement Savings Plan (as Amended and Restated effective December 17, 2010) in the form attached hereto.
Dated this 29th day of December, 2017.
_______________________________________        
Laura A. Patterson
Vice President
Rewards & Labor Strategy





AMENDMENT #2
to the
ROCKWELL COLLINS
2005 NON-QUALIFIED RETIREMENT SAVINGS PLAN
(as Amended and Restated effective December 17, 2010)

The Rockwell Collins 2005 Non-Qualified Retirement Savings Plan, as amended and restated effective December 17, 2010 (the “Plan”), is hereby amended, effective December 29, 2017, in the following respects.
1.
Section 1.050 is amended and restated to provide:
“ 1.050      Base Compensation Deferral means the amount of compensation a Participant defers under the Plan pursuant to such Participant’s election under Section 2.010(d) after the date the Participant reaches the earlier of the Compensation Limit or the date the Participant would have reached the Annual Additional Limit based on such Participant’s contribution elections under the Qualified Retirement Savings Plan on December 31st of the immediately preceding year.”
2. Section 1.110 is amended and restated to provide:
“ 1.110 Company Matching Contribution Credits means an amount to be credited to the Plan by the Company determined by applying the Company Matching Contribution formula under the Qualified Retirement Savings Plan to the Participant’s Base Compensation Deferrals under this Plan.”
3. Section 2.010(d) is amended and restated to provide:
“(d)
(1) For Plan Years beginning on and after January 1, 2005 and before January 1, 2008, for purposes of determining any Base Compensation Deferrals or Company Matching Contribution Credits with respect to a Participant for such Plan Year, the Participant’s written or electronic election to make Participant Contributions to the Qualified Retirement Savings Plan in effect on December 31st of the year immediately preceding such Plan Year shall be deemed to be fixed and irrevocable except for decreases permitted in accordance with good faith operational compliance with Section 409A and shall be deemed to be the election to defer compensation under this Plan for purposes of Section 409A.
(2) Before January 1, 2018, for purposes of determining any Base Compensation Deferrals or Company Matching Contribution Credits with respect to a Participant described in Section 1.170(a) for any Plan Year, the Participant’s written or electronic election to make Participant Contributions to the Qualified Retirement Savings Plan in effect on December 31st of the year immediately preceding such Plan Year shall be deemed to be fixed and shall be deemed to be the election to defer compensation under this Plan for purposes of Section 409A.
(3) After December 31, 2017, for purposes of determining any Base Compensation Deferrals or Company Matching Contribution Credits with respect to a Participant described in Section 1.170(a) for any Plan Year, the Participant’s written or electronic election (including any default election if no timely election is received) to make Base Compensation Deferrals to the Plan made before the Plan Year is the election to defer compensation under this Plan for purposes of Section 409A. The Participant’s election shall remain in effect until the Participant makes a new Base Compensation Deferral election pursuant to this paragraph. The Participant’s written or electronic election to make Participant Contributions to the Qualified Retirement Savings Plan in effect on December




31st of the year immediately preceding such Plan Year shall be deemed to be fixed and shall be used to determine when the Participant reaches the Annual Additions Limitation.
(4) Effective for Plan Years beginning on and after January 1, 2008, no change to the Participant’s written or electronic election to make Participant Contributions to the Qualified Retirement Savings Plan during such Plan Year shall be effective for purposes of determining Base Compensation Deferrals or Company Matching Contribution Credits under this Plan for such Plan Year.”
4.
Section 2.010(e) is replaced with the following:
“(e)
(1) Notwithstanding any other provision of this Plan to the contrary for Plan Years before January 1, 2018, each Participant described in Section 1.170(b) shall automatically have Base Compensation Deferrals deferred to this Plan for the Plan Year of his or her hire as described in this paragraph. For purposes of determining Base Compensation Deferrals or Company Matching Contribution Credits with respect to such Participant for such Plan Year for Plan Years before January 1, 2018, the Participant’s written or electronic election to make Participant Contributions to the Qualified Retirement Savings Plan for the first pay date for which an election is in effect for such Participant shall be deemed to be fixed and the election to defer compensation under this Plan for purposes of Section 409A; provided, however, that no Base Compensation Deferrals or Company Matching Contributions Credits shall be made to this Plan unless such election occurs prior to or within 30 days after he is eligible to become a Participant in this Plan or any similar deferred compensation plan required to be aggregated with this Plan in accordance with the plan aggregation rules set forth in Section 409A.
No change to such new Participant’s election to make Participant Contributions to the Qualified Retirement Savings Plan after the date of such deemed election shall be effective for purposes of determining Base Compensation Deferrals or Company Matching Contribution Credits under this Plan for such Plan Year.
(2) For Plan Years after December 31, 2017, each Participant described in Section 1.170(b) shall have Based Compensation Deferrals deferred to this Plan of 8 percent of compensation. Such election shall remain in effect until the Participant makes a new election pursuant to Section 2.010(d)(3). The Participant’s written or electronic election to make Participant Contributions to the Qualified Retirement Savings Plan in effect on December 31st of the year immediately preceding such Plan Year shall be deemed to be fixed and shall be used to determine when the Participant reaches the Annual Additions Limitation.
(f)
Effective October 1, 2006, for each pay period that the employee is a Participant in this Plan, the Company will make a Company Retirement Contribution Credit in accordance with the Company Retirement Contribution the employee would have received in the Qualified Retirement Savings Plan. Subject to Section 2.010(a)(5), such contributions shall be allocated to the Sub-Account or Sub-Accounts under this Plan pursuant to separate deemed Participant elections made in the same manner in which the Participant’s elections are made among Investment Funds under the Qualified Retirement





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 December 31, 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:      January 26, 2018
/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 December 31, 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:      January 26, 2018
/s/ Patrick E. Allen
 
Patrick E. Allen
 
Senior Vice President and
 
Chief Financial Officer




Exhibit 32.1

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

In connection with the Quarterly Report of Rockwell Collins, Inc. (the Company) on Form 10-Q for the quarter ended December 31, 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:      January 26, 2018
/s/ Robert K. Ortberg
 
Robert K. Ortberg
 
Chairman, President and Chief Executive Officer




Exhibit 32.2

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

In connection with the Quarterly Report of Rockwell Collins, Inc. (the Company) on Form 10-Q for the quarter ended December 31, 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:      January 26, 2018
/s/ Patrick E. Allen
 
Patrick E. Allen
 
Senior Vice President and
 
Chief Financial Officer