UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2006
Commission file number 001-16445
Rockwell Collins, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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52-2314475
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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400 Collins Road NE
Cedar Rapids, Iowa
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52498
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(Address of principal executive offices)
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(Zip Code)
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Registrant’s telephone number, including area code: (319) 295-1000
SECURITIES REGISTERED PURSUANT
TO SECTION 12(b) OF THE ACT:
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Title of each class
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Name of each exchange on which registered
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Common Stock, par value $.01 per share
(including the associated Preferred Share Purchase Rights)
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New York Stock Exchange
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SECURITIES REGISTERED PURSUANT
TO SECTION 12(g) OF THE ACT: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
x
No
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
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No
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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
x
No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated filer
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Accelerated filer
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Non-accelerated
filer
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Indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
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No
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The aggregate market value of the registrant’s voting stock held
by non-affiliates of the registrant on March 31, 2006 was approximately $9.7 billion. For purposes of this calculation, the registrant has assumed that its directors and executive officers are affiliates.
167,202,668 shares of the registrant’s Common Stock were outstanding on October 27, 2006.
DOCUMENTS INCORPORATED BY REFERENCE
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(1)
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Certain information contained in the Annual Report to Shareowners of the registrant for the fiscal year ended September 30, 2006 is incorporated by reference into Part I, Part
II and Part IV.
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(2)
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Certain information contained in the Proxy Statement for the Annual Meeting of Shareowners of the registrant to be held on February 13, 2007 is incorporated by reference into
Part III.
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Rockwell Collins, Inc.
Annual Report on Form 10-K
Table of Contents
PART I
Item 1.
Business.
General
Our company, Rockwell Collins, Inc., is a leader in providing design, production and support of communications and aviation electronics for military and commercial customers worldwide. While our products and systems
are primarily focused on aviation applications, our Government Systems business also offers products and systems for ground and shipboard applications. We also provide a wide range of services and support to our customers through our network of
service centers worldwide, including equipment repair and overhaul, service parts, field service engineering, training, technical information services and aftermarket used equipment sales. We operate in multiple countries and are headquartered in
Cedar Rapids, Iowa.
Our company’s heritage is rooted in the Collins Radio Company formed in 1933. Rockwell Collins, Inc., the parent company, is
incorporated in Delaware. As used herein, the terms “we”, “us”, “our”, “Rockwell Collins” or the “Company” include subsidiaries and predecessors unless the context indicates otherwise.
Whenever reference is made in any Item of this Annual Report on Form 10-K to information under specific captions of our 2006 Annual Report to Shareowners (the “2006
Annual Report”) or to information in our Proxy Statement for the Annual Meeting of Shareowners to be held on February 13, 2007 (the “2007 Proxy Statement”), such information shall be deemed to be incorporated herein by such
reference.
All date references contained herein relate to our fiscal year ending on the Friday closest to September 30 unless otherwise stated. For
ease of presentation, September 30 is utilized consistently throughout this report to represent the fiscal year end date.
Financial Information
About Our Business Segments
Financial information with respect to our business segments, including product line disclosures, revenues, operating income
and total assets, is contained under the caption
Segment Financial Results
in
Management’s Discussion and Analysis of Financial Condition and Results of Operations
in the 2006 Annual Report, and in Note 22 of the
Notes to Consolidated Financial Statements
in the 2006 Annual Report.
Access to the Company’s Reports
We maintain an Internet website at
www.rockwellcollins.com
. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on this site as soon as reasonably practicable after the reports
are filed with or furnished to the Securities and Exchange Commission (SEC). All reports we file with the SEC are also available free of charge via EDGAR through the SEC’s website at
www.sec.gov
. We also post corporate governance
information (including our corporate governance guidelines and committee charters) and other information related to our company on our Internet website and this information is available free of charge on this site. We will provide, without charge,
upon written request, copies of our SEC reports and corporate governance information. Our Internet website and the information contained therein or connected thereto are not incorporated into this Annual Report on Form 10-K.
Description of Business by Segment
We serve our worldwide customer
base through our Government Systems and Commercial Systems business segments. These two segments are described in detail below.
1
Government Systems
Our Government Systems business supplies defense communications systems and products as well as defense electronics systems and products, which include subsystems, navigation and displays, to the U.S. Department of Defense, other government
agencies, civil agencies, defense contractors and foreign ministries of defense. These systems and products support airborne (fixed wing and rotary), ground and shipboard applications.
Our defense communications and defense electronics systems and products include:
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Communications systems and products designed to help customers transfer information across the communications spectrum, ranging from Very Low and Low Frequency to High, Very High
and Ultra High Frequency to satellite communications.
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Military data link systems and products.
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Navigation systems and products, including radio navigation systems, global positioning systems (GPS), handheld navigation systems and multi-mode receivers.
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Subsystems for the flight deck that combine flight operations with navigation and guidance functions and that can include flight controls and displays, information/data processing
and communications, navigation and/or safety and surveillance systems.
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Cockpit display systems, including flat panel, multipurpose, wide fields of view, head up, head down and helmet mounted displays for tactical fighter and attack aircraft.
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Integrated computer systems for future combat systems.
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Simulation and training systems, including visual system products, training systems and engineering services.
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Maintenance, repair, parts and after-sales support services.
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Highlights for the Government Systems segment in 2006 included:
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We reached delivery milestones on DAGR and C/KC-135 GATM programs by delivering the 40,000th Defense Advanced Global Positioning System Receiver (DAGR) and the 100th C/KC-135 Global
Air Traffic Management (GATM) modified aircraft.
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The DAGR, used primarily by the U.S. Army, is considered the standard for handheld GPS position and navigation units. The DAGR provides the capability to synchronize tactical radios
for the U.S. Army’s digital battlespace and includes a graphical user interface designed to enhance soldier effectiveness and safety. Additionally, the DAGR incorporates anti-jam capabilities for enhanced protection and is the first U.S. device
to include the next generation security module, known as the Selective Availability Anti-Spoofing Module (SAASM), for handheld GPS receivers.
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As the prime avionics systems integrator for the U.S. Air Force C/KC-135 GATM program, Rockwell Collins is providing technology that allows military aircraft to effectively operate
in commercial airspace by meeting worldwide Communication/Navigation/Surveillance and Air Traffic Management mandates. The program has been touted as a model program by the U.S. Air Force. If options for all 417 aircraft are executed by the
U.S. Air Force, the estimated total revenues from the program are expected to be approximately $780 million.
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The U.S. Air Force awarded Rockwell Collins a contract to develop next-generation Global Positioning System (GPS) technology as part of the Modernized User Equipment (MUE) Receiver
Card Development program. The $28 million contract calls for the preliminary design of modernized receiver cards for ground and airborne applications, establishing first proof of design for the modernized GPS architecture.
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Completion of the receiver card development, test and security certification would be accomplished under
a government exercisable contract option for these tasks. This program represents the military user equipment portion of a next-generation GPS system that adds a new military signal and security architecture, enabling enhanced integrity, exclusivity
and improved anti-jam capabilities.
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We signed a strategic agreement with Thales for the joint development and pursuit of international programs for tactical ground communications through a new product line of radios
called FlexNet. The new single- and multi-channel FlexNet radios will be capable of supporting the FlexNet waveform, which provides for high data rate ad-hoc networked communications and multimedia services. This enhanced capability is expected to
increase the level of information which can be exchanged between users, introduce new possibilities of cooperative combat engagement between different units, and provide the mobility required by armed forces. Based on an open and secure architecture
– compliant with Software Communication Architecture – the FlexNet radios are designed to accommodate future technology insertions or requirement upgrades.
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We completed the following acquisitions:
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Evans & Sutherland’s military and commercial simulation business, a developer of simulation visual systems for military and commercial applications throughout the
world.
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IP Unwired, Inc., a developer of high data rate HF/VHF/UHF modems and networking products and services for U.S. and international military customers.
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Anzus, Inc., a developer of software enabling high-speed tactical data link processing and sensor correlation for the U.S. Department of Defense and foreign governments.
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The Evans & Sutherland simulation business will augment our simulation and training solutions capabilities while IP
Unwired and Anzus will augment our current Network-Centric Operations capabilities and facilitate penetration into new market areas.
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We were selected by DARPA and AFRL for the next phase of the advanced networking program. The Defense Advanced Research Projects Agency (DARPA) and the Air Force Research Laboratory
(AFRL) awarded Phase 2 of the QUINT Networking Technology (QNT) program to a team led by us. The QNT program will seek to develop robust, affordable miniature networked data link technologies suitable for use on weapons and by tactical unmanned air
vehicles and dismounted soldiers. These data links will enable precision strike and efficient targeting against time-critical and mobile targets. They will also allow secure weapons handoff from the launch platform to any of several air or ground
control platforms in the combat area. Along with our teammates Thales, Boeing and Launch Pad Labs, we conducted initial architecture studies and hardware risk reduction as part of Phase 1, valued at $3.5 million. Phase 2 is a contract option valued
at $19 million.
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Along with DARPA and AFRL, we successfully demonstrated Tactical Targeting Network Technology (TTNT) in operational tactical aircraft. TTNT, a high throughput, low-latency solution
for addressing the sensor to shooter link and providing other real-time information, is an Internet Protocol (IP) based, high-speed, dynamic ad hoc network designed to enable the U.S. military to quickly target moving and time-critical objects. To
date, we have been awarded $55 million for Phase 3/Phase T (Transition) of the program to mature the technology, demonstrate it on operationally relevant aircraft in a Multifunctional Information Distribution System (MIDS) form factor, perform
software development to make the TTNT waveform Software Communications Architecture (SCA) compliant, and perform hardware development tasks to facilitate the transition of TTNT into the Joint Tactical Radio System.
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Sikorsky selected our Avionics Management System (AMS) for the U.S. Marine Corps’ new CH-53K Heavy Lift Replacement (HLR) helicopter. Our AMS provides the CH-53K helicopter
with a modular open systems architecture cockpit and mission management system that incorporates fully integrated flight and navigation displays, as well as Network Centric capabilities including tactical data link integration, correlation and data
fusion. These features reduce crew workloads, while providing a communication, navigation, surveillance and air traffic management (CNS/ATM)-compliant flight management capability that is fully interoperable with civil airspace requirements.
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The U. S. Navy and Air Force each awarded a contract to us for simulation and training system programs. The U.S. Navy award was for its MH-60 Weapons Load Trainer (WLT) program. The
contract, valued at $26 million, calls for us to modify an existing H-60F trainer and build four new H-60 WLTs. The U.S. Air Force award is for the provision of concurrency updates, training modifications and support for the U.S. Air Force’s
B-1B Training System.
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We were selected to participate in the assessment phase of the U.K. Ministry of Defense Land Environment Air Picture Provision (LEAPP) program as a member of the Lockheed Martin-led
Team Athena. LEAPP will provide a near real-time correlated air picture for the Land Component worldwide, either alone or as an element of Integrated Air Defense, to enable a graduated and enduring contribution to the Networked Enhanced Capability
community in national and multinational operations. In this first significant networked Software Communications Architecture (SCA)-compliant software defined radio system for the U.K. MoD, we will provide a broadband, ground networked communications
capability utilizing the fully SCA 2.2-compliant, FlexNet-Four
TM
software defined radio.
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The Armed Reconnaissance Helicopter (ARH), equipped with our Common Avionics Architecture System (CAAS), completed its first successful test flights from Bell Helicopter’s
Arlington, Texas facility. The system incorporates common, reusable processing elements in each piece of hardware, and employs an open systems architecture based on commercial standards. The cockpit features two 6- by 8-inch active matrix liquid
crystal multi-function displays, control display units, as well as helmet-mounted displays and general purpose processing units. The software design, development and test of the avionics system for this application were completed seven months after
contract signing; contributing to the ARH program being recognized as one of the fastest “contract-to-flight” programs ever completed, setting a new standard for such acquisitions.
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Commercial Systems
Our Commercial Systems business supplies
air transport aviation electronics systems and products as well as business and regional aviation electronics systems and products. These systems and products include flight deck electronic systems and products, including communications, navigation,
surveillance, displays and automatic flight control and flight management systems, as well as in-flight entertainment, cabin electronics and information management systems. We also provide a wide range of services to our commercial customers.
Commercial Systems customers include manufacturers of commercial air transport, regional and business aircraft, commercial airlines, regional airlines, fractional jet operators and business jet operators.
Our air transport aviation electronics and business and regional aviation electronics systems and products include:
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Integrated avionics systems and products, such as the Pro Line 21 system, which provide advanced avionics such as liquid crystal flight displays, flight management, integrated
flight control, automatic flight controls, engine indication and crew alerts.
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Cabin electronics systems and products, including passenger connectivity and entertainment, business support systems, network capabilities, passenger flight information systems and
lighting and other environmental controls.
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Communications systems and products, such as data link, High Frequency (HF), Very High Frequency (VHF) and satellite communications systems.
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Navigation systems and products, including multi-mode receivers, radio and geophysical navigation sensors, as well as flight management systems.
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Situational awareness and surveillance systems and products, such as Head-Up Guidance Systems, weather radar and collision avoidance systems.
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Flight deck systems and products, which include a broad offering of multi-function cockpit liquid crystal display (LCD) units, CRT display units and head-up displays (HUDs).
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Integrated information systems to provide information management solutions that help improve flight operations, maintenance and cabin services, as well as provide worldwide TV
coverage.
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Simulation and training systems, including visual system products, training systems and engineering services.
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Maintenance, repair, parts and after-sales support services.
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Highlights for the Commercial Systems segment in 2006 included:
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We made our first deliveries of hardware systems on the Boeing 787 Dreamliner. This includes the core network cabinet, flight deck display system and crew alerting system, pilot
controls, communication and surveillance systems and the aircraft’s common data network. We also serve as the systems integrator for each of these elements.
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Our Pro Line 21 integrated avionics system was selected by Bombardier for inclusion on its new Learjet 60XR and Challenger 605 business jets, by Cessna for the flight deck of its
new Encore+ business jet, and by the U.S. Government for the upgrade of six Beech King Air 300 special use aircraft (with an option for 12 additional aircraft). In each installation, the fully integrated system will include our Integrated
Flight Information System, which provides enhanced safety, pilot efficiency and situational awareness by enabling electronic charts, graphical weather and enhanced map overlays. The first installation of the Pro Line 21 avionics system into the
Beech King Air 300 aircraft is currently underway while the system is expected to be available on the new Bombardier and Cessna aircraft beginning in 2007.
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We have expanded selectable avionics positions in Asian markets over the last several years. Recent customers selecting our avionics include All Nippon Airways, AirAsia, Air China,
Batavia, China Eastern Airlines, China Southern Airlines, Hainan Airlines, IndiGo, JAL, Korean Airlines, Shenzhen Airlines, Sichuan Airlines, Spice Jet, Thai Airways, Jet Airways and Vietnam Airlines. Most avionics packages include communications
and navigation equipment as well as our fully automatic WXR-2100 MultiScan Weather Radar.
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We were selected by Singapore Airlines to provide a comprehensive eFlight
TM
information management solution that will streamline air-to-ground communications for the airline. eFlight will replace paper-intensive manual processes with electronic database and document management
services. Under the terms of the agreement, we will implement Class 1 Electronic Flight Bags (EFBs) on Singapore Airlines’ Boeing 747s, and will work with Boeing to provide applications for Class 3 EFBs on Singapore’s Boeing 777
fleet. We will also implement the eFlight ground system to support information delivery to Singapore Airlines’ fleet and to their back office systems. Rockwell Collins eFlight is an end-to-end solution set for the airlines that enables secure
exchange, processing, storage and retrieval of information among airborne and ground equipment throughout the entire operational chain. eFlight offers a broad range of database, document and communication management solutions that enhance aircraft
operations and passenger experiences by using real-time connections to the ground operations center.
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Our SAT-2100 high speed data satellite communication system has been selected as a supplier furnished equipment option on Airbus A318, A319, A320 and A321 aircraft. This expands the
SAT-2100 positions beyond Boeing 737, 747, 777 and 787 platforms. The certification, expected in January 2007, will mark the first Airbus certification for the SAT-2100. Small, lightweight, reliable and economical, the SAT-2100 system provides
multi-channel voice, facsimile and data capability. The SAT 2100 product family has earned broad market adoption and is offerable on multiple aircraft types.
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We announced our next generation of weather radar, the MultiScan Hazard Detection
TM
system, which we believe will enable safer, smoother and more efficient flights. The system includes five groundbreaking
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technologies that go beyond today’s most advanced radar systems by adding predictive weather
analysis and hazard detection features. These technologies include: Directed Sequential Hazard Assessment, Flight Path Hazard Analysis, Storm Top Information, Predictive Overflight Protection and Enhanced Turbulence Detection. Since its inception,
the MultiScan Hazard Detection system is on over 80 airlines worldwide.
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Our HGS-4200 Head-up Guidance System (HGS
®
) was selected by Air Canada Jazz and Lufthansa CityLine for their respective fleets of Bombardier CRJ705 and 900 aircraft.
Our HGS-4200, which displays critical flight information
in the pilot’s forward field of view, expands the operational capability of these aircraft by reducing the airplane’s approved approach minima to Category III, thereby reducing the decision height from 100 feet to 50 feet and the Runway
Visual Range from 1,800 to 650 feet (550 meters to 200 meters). These selections closely follow the recent certification of the HGS-4200 for use on these specific Bombardier aircraft types by the European Aviation Safety Agency, the Federal Aviation
Administration and Transport Canada.
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Aviacsa, JSSI
®
and Mexicana Airlines selected us to provide maintenance and support services.
Under a three-year contract we will provide Aviacsa, a leader in Mexico’s airline industry, with repair and maintenance
services at a fixed price per repair for their fleet of 23 Boeing 737-200 aircraft. Jet Support Services, Inc. (JSSI) signed a 5-year agreement under which we will provide forward exchange support, which includes maintenance and component repairs,
reliability upgrades, and equipment removal and refit coverage, for all of its equipment on JSSI’s extensive, customer-owned fleet of Rockwell Collins-equipped aircraft. Mexicana Airlines signed a three-year time and material agreement with us
for service and support for all our equipment on Mexicana’s entire fleet of Airbus, Boeing and Fokker aircraft.
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Customers; Sales and
Marketing
We serve a broad range of customers worldwide, including the U.S. Department of Defense, U.S. Coast Guard, civil agencies, defense
contractors, foreign ministries of defense, manufacturers of commercial air transport, business and regional aircraft, commercial airlines, regional airlines, fractional jet operators, and business jet operators. We market our systems, products and
services directly to Government Systems and Commercial Systems customers through an internal marketing and sales force. In addition, we utilize a worldwide dealer network to distribute our products and international sales representatives to assist
with international sales and marketing. In 2006, various branches of the U.S. Government accounted for 39% of our total sales.
Our largest customers have
substantial bargaining power with respect to price and other commercial terms. Although we believe that we generally enjoy good relations with our customers, the loss of all or a substantial portion of our sales to any of our large volume customers
for any reason, including the loss of contracts, bankruptcy, reduced or delayed customer requirements or strikes or other work stoppages affecting production by these customers, could have a material adverse effect on our business, financial
condition, results of operations and cash flows.
Competition
We operate in a highly competitive environment. Principal competitive factors include total cost of ownership, product and system performance, quality, service, warranty and indemnification terms, technology, design engineering
capabilities, new product innovation and timely delivery. We compete worldwide with a number of United States and international companies, including approximately ten principal competitors in each of our Government Systems and Commercial Systems
businesses. Some of our principal competitors include Honeywell International, Inc., Thales S.A., Matsushita, Raytheon Co., Harris Corp., BAE Systems Aerospace, Inc., General Dynamics Corporation, L3 Communications, Inc., and Northrop Grumman Corp.
Several of our competitors are significantly larger than us in terms of resources and market share, and can offer a broader range of products. Some of our competitors have more extensive or more specialized engineering, manufacturing and marketing
capabilities than we do in some areas. In addition, some of our competitors offer avionics and communications solutions with fewer features and lower prices that may compete with our solutions. As a result, these competitors may be able to adapt
more quickly to new or emerging technologies and changes in customer requirements or may be able to devote greater resources to the development, promotion and sale of their products. Furthermore, competitors who have greater financial resources may
be better able to provide a broader range of financing alternatives to their customers in connection with sales of their products.
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Industry consolidation has had a major impact on the competitive environment in which we operate. Over the past several
years, our competitors have undertaken a number of mergers, alliances and realignments that have contributed to a very dynamic competitive landscape. During the past three years, we have completed five acquisitions and entered into several strategic
alliances to improve our competitive position and expand our market reach.
Raw Materials, Supplies and Working Capital
We believe we have adequate sources for the supply of raw materials and components for our manufacturing and service needs with suppliers located around the world.
Electronic components and other raw materials used in the manufacture of our products are generally available from several suppliers. We continue to work with our supply base for raw materials and components to ensure an adequate source of supply,
utilizing strategic alliances, dual sourcing, identification of substitute or alternate parts that meet performance requirements and life-time buys. These life-time buys involve purchases of multiple years of supply in order to meet production and
service requirements over the life span of a product. Although historically we have not experienced any significant difficulties in obtaining an adequate supply of raw materials and components necessary for our manufacturing operations or service
needs, the loss of a significant supplier or the inability of a supplier to meet performance and quality specifications or delivery schedules could have a material adverse effect on our business, financial condition, results of operations and cash
flows.
Our investment in inventory is a significant part of our working capital and historically we have maintained sufficient inventory to meet our
customers’ requirements on a timely basis. This investment includes production stock, finished goods, spare parts and goods on consignment with airlines. Our accounts receivable also constitute a significant part of our working capital.
Accounts receivable includes unbilled receivables related to sales recorded under the percentage-of-completion method of accounting that have not been billed to customers in accordance with applicable contract terms. The critical accounting policies
involving inventory valuation reserves are discussed under the caption
Management’s Discussion and Analysis of Financial Condition and Results of Operations
in the 2006 Annual Report.
Backlog
The following table
summarizes our backlog (in billions):
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September 30
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2006
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2005
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Commercial Systems
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$
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0.9
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$
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0.5
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Government Systems:
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Funded Orders
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2.5
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2.4
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Unfunded Orders
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0.3
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0.3
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Total Backlog
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$
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3.7
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$
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3.2
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Our backlog represents the aggregate of the sales price of orders received from customers, but not recognized as
revenue, and excludes unexercised options. Although we believe that the orders included in backlog are firm, some orders may be canceled by the customer without penalty, and we may elect to permit cancellation of orders without penalty where
management believes that it is in our best interest to do so. Our backlog includes approximately $1.5 billion of orders not expected to be filled by us in 2007.
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Joint Ventures
Joint
ventures, strategic investments and other cooperative arrangements are part of our business strategies to broaden the market for our products and develop new technologies. We currently have interests in several non-majority owned joint ventures.
We have a 50% ownership interest in each of the following:
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Data Link Solutions LLC (DLS), a joint venture with BAE Systems, plc, for joint pursuit of the worldwide military data link market;
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Vision Systems International, LLC (VSI), a joint venture with Elbit Systems, Ltd., for joint pursuit of helmet mounted cueing systems for the worldwide military fixed wing
marketplace;
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Integrated Guidance Systems LLC, a joint venture with Honeywell International, Inc., for joint pursuit of the development of weapons guidance and navigation solutions; and
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Quest Flight Training Limited, a joint venture with Quadrant Group plc, which provides aircrew training services for the United Kingdom Ministry of Defense under a contract expiring
in 2030.
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Highlights for our Joint Ventures in 2006 included:
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DLS and Thales agreed to cooperatively produce and sell Multifunctional Information Distribution System-Joint Tactical Radio System (MIDS-JTRS) terminals for the global market. DLS
is currently developing MIDS JTRS under an $82 million contract and is also performing under an additional $9 million development contract to insert the Tactical Targeting Networking Technology waveform into the MIDS-JTRS terminal. The base
MIDS-JTRS terminal, which will provide current MIDS Link 16 and tactical air navigation functions, as well as three additional programmable channels to run various communications, navigation and command-and-control waveforms, is scheduled to be
complete in September 2007; with additional European-unique developments running through 2009.
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DLS has received a $34 million order for Multifunctional Information Distribution System-Low Volume Terminals. MIDS-LVT are designed to provide secure, high-capacity, jam-resistant
digital data and voice communications capability for Navy, Air Force, and Army platforms. The order is for 193 terminals to be used on U.S. platforms and, via Foreign Military Sales, for the governments of Switzerland, Poland, Japan, Australia, and
Germany. In addition, DLS was selected to supply MIDS-LVT to the Hellenic Air Force and their F-16 aircraft.
|
|
|
•
|
|
DLS successfully completed the Critical Design Review for its MIDS-JTRS 4-channel software defined radio design. MIDS-JTRS is a 4-channel Software Communications Architecture
compliant radio with one channel dedicated to the complex Link-16 JTRS waveform and three additional 2 MHz – 2 GHz channels capable of hosting a variety of other JTRS waveforms. The radio includes an internal 200W Radio Frequency Amplifier to
power the embedded functionality. The initial build focuses on fielding Link-16, TACAN and J-Voice. MIDS-JTRS is an evolutionary acquisition strategy that builds from the combat-proven MIDS-LVT production program involving the five nation consortium
of the United States, France, Germany, Italy and Spain. Using the same radio form factor and MIDS-LVT specification as a foundation, this incremental JTRS development reduces risk by minimizing platform integration impacts and leveraging mature
production components from the MIDS-LVT design. In addition, it allows enhanced JTRS technologies to be incorporated as they mature.
|
|
|
•
|
|
VSI was selected to provide the Night Vision Cueing and Display (NVCD) system for the US Air Force and US Navy. The NVCD system, which is designed to be compatible with the Joint
Helmet Mounted Cueing System (JHMCS), enables out of the cockpit Night Vision with superimposed JHMCS targeting and navigation symbology. The NVCD system is expected to be employed on all aircraft using the JHMCS which could generate total estimated
revenues of $100 million.
|
8
|
|
•
|
|
VSI received a contract from Boeing for JHMCS Full Rate Production Lot 3 for $83 million. The JHMCS will be installed on US and international F-16s, F/A-18s and F-15s, to provide
high off boresite targeting capability for pilots. Over 1500 systems have now been delivered. The JHMCS is being successfully used by US forces in Iraq and is a valuable and revolutionary tool for fighter pilots.
|
|
|
•
|
|
Rockwell Collins and Honeywell established a joint venture to offer integrated guided weapons technologies.
Through a newly formed 50/50 joint venture called Integrated
Guidance Systems LLC, Rockwell Collins and Honeywell will offer customers a new series of integrated precision guidance solutions for precision guided weapons. The new guidance offerings will be made possible through the combination of Rockwell
Collins’ military Global Positioning System (GPS) receiver technology and Honeywell’s Micro Electronic Mechanical Systems Inertial Measurement Units and navigation processing technologies. By using an advanced coupling process called Deep
Integration, the joint venture will seek to develop weapons guidance and navigation solutions to enable customers to meet new and emerging enhanced performance requirements by reducing hardware content and providing increased reliability in GPS
jammed or denied environments.
|
Acquisitions and Dispositions
We continually consider various business opportunities, including strategic acquisitions and alliances, licenses and marketing arrangements, and we review the prospects of our existing businesses to determine whether
any of them should be modified, sold or otherwise discontinued.
We completed five acquisitions in the past three years to augment our internal growth
plans. These acquisitions were:
|
|
•
|
|
software applications: the September 2006 acquisition of Anzus, Inc.;
|
|
|
•
|
|
digital communications and networking technology: the September 2006 acquisition of IP Unwired Inc.;
|
|
|
•
|
|
visual systems for military and commercial simulation: the May 2006 acquisition of certain assets of Evans & Sutherland;
|
|
|
•
|
|
military aviation electronics: the April 2005 acquisition of TELDIX GmbH; and
|
|
|
•
|
|
flight simulators: the December 2003 acquisition of NLX Holding Corporation.
|
In September 2006, we completed the disposition of our 50% interest in the joint venture, Rockwell Scientific Company LLC, to Teledyne Brown Engineering, Inc.
Additional information relating to our acquisitions and disposition is contained in Note 3 and Note 8, respectively, of the
Notes to Consolidated Financial Statements
in the 2006 Annual Report.
Research and Development
We have significant
research, development, engineering and product design capabilities. At September 30, we employed approximately 4,600 engineers.
Amounts attributed to our research and development activities are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Customer-funded
1
|
|
$
|
443
|
|
$
|
348
|
|
$
|
327
|
|
Company-funded
|
|
|
279
|
|
|
243
|
|
|
218
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
722
|
|
$
|
591
|
|
$
|
545
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
Customer-funded research and development includes activities relating to the development of new products and the improvement of existing products.
|
9
Intellectual Property
We own numerous United States and foreign patents and have numerous pending patent applications, including patents and patent applications purchased in our acquisitions. We also license certain patents relating to our manufacturing and
other activities. While in the aggregate we consider our patents and licenses important to the operation of our business, we do not consider any individual patent or license to be of such importance that the loss or termination of any one patent or
license would materially affect us.
Rockwell Automation, Inc. (Rockwell) continues to own the “Rockwell” name. In connection with our spin-off
from Rockwell in 2001, we were granted the exclusive right to continue to use the Rockwell Collins name for use in our business other than in connection with the Rockwell Automation business or industrial automation products. This exclusive right
would terminate following certain change of control events applicable to us as described in the distribution agreement among Rockwell, RSC and us.
Employees
As of September 30, 2006, we had approximately 18,600 full-time employees. Approximately 2,300 of our employees in the
United States are covered by collective bargaining agreements. The collective bargaining agreements are generally set to expire between September 2007 and May 2008.
Cyclicality and Seasonality
The avionics and communications markets in which we sell our products are, to varying
degrees, cyclical and have experienced periodic downturns. For example, markets for our commercial aviation electronic products have experienced downturns during periods of slowdowns in the commercial airline industry and during periods of weak
conditions in the economy in general, as demand for new aircraft generally declines during these periods. Although we believe that our Government Systems business and aftermarket demand for many of our products reduces our exposure to these business
downturns, we may experience downturns in the future. Our Government Systems business is also subject to some cyclicality primarily as a result of U.S. Government defense budget cycles.
Our business tends to be seasonal with our fourth quarter usually producing relatively higher sales and cash flow and our first quarter usually producing relatively lower sales and cash flow. A large part of this
seasonality variance is attributable to our Government Systems business and relates to the U.S. Government procurement cycle.
Regulatory Matters
As a defense contractor, our contract costs are audited and reviewed on a continual basis by the Defense Contract Audit Agency. Audits and
investigations are conducted from time to time to determine if our performance and administering of our U.S. Government contracts are compliant with applicable contractual requirements and procurement and other applicable Federal statutes and
regulations. Under present U.S. Government procurement regulations, if indicted or adjudged in violation of procurement or other Federal civil laws, a contractor, such as us, could be subject to fines, penalties, repayments or other damages. U.S.
Government regulations also provide that certain findings against a contractor may lead to suspension or debarment from eligibility for awards of new U.S. Government contracts for up to three years.
The sale, installation and operation of our products in commercial aviation applications is subject to continued compliance with applicable regulatory requirements and
future changes to those requirements. In the U.S., our commercial aviation products are required to comply with Federal Aviation Administration regulations governing production and quality systems, airworthiness and installation approvals, repair
procedures and continuing operational safety. Some of our products, such as radio frequency transmitters and receivers, must also comply with Federal Communications Commission regulations governing authorization and operational approval of
telecommunications equipment.
10
Internationally, similar requirements exist for airworthiness, installation and operational approvals. These requirements
are administered by the national aviation authorities of each country and, in the case of Europe, coordinated by the European Joint Aviation Authorities. Many countries also impose specific telecommunications equipment requirements, administered
through their national aviation authorities or telecommunications authorities. In Europe, approval to import products also requires compliance with European Commission directives, such as those associated with electrical safety, electro-magnetic
compatibility, the use of metric units of measurement and restrictions on the use of lead.
Products already in service may also become subject to
mandatory changes for continued regulatory compliance as a result of any identified safety issue, which can arise from an aircraft accident, incident or service difficulty report.
Our products and technical data are controlled for export and import under various regulatory agencies. Audits and investigations by these agencies are a regular occurrence to ensure compliance with applicable Federal
statutes and regulations. Violations, including as a successor to an acquired business, can result in fines and penalties assessed against the corporation as well as individuals, and the most egregious acts may result in a complete loss of export
privileges.
Although we do not have any significant regulatory action pending against us, any such action could have a material adverse impact on our
business, financial condition, results of operations and cash flows.
Environmental Matters
Federal, state and local requirements relating to the discharge of substances into the environment, the disposal of hazardous wastes, and other activities affecting the
environment have had and will continue to have an impact on our manufacturing operations. To date, compliance with environmental requirements and resolution of environmental claims have been accomplished without material effect on our liquidity and
capital resources, competitive position or financial condition. We believe that our 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 adverse effect on our business or financial condition, but could possibly be material to the results of operations or cash flows of any one period. Additional
information on environmental matters is contained in Note 20 of the
Notes to Consolidated Financial Statements
in the 2006 Annual Report.
Geographic Information
Our principal markets outside the United States are in France, Canada, the United Kingdom, Australia, Japan,
Germany, Israel, Singapore, China, India, Mexico and Brazil. In addition to normal business risks, operations outside the United States are subject to other risks, including political, economic and social environments, governmental laws and
regulations, and currency revaluations and fluctuations.
Selected financial information by major geographic area for each of the three years in the period
ended September 30, 2006 is contained in Note 22 of the
Notes to Consolidated Financial Statements
in the 2006 Annual Report.
Item 1A.
Risk Factors
.
Our business, financial condition, operating results and cash flows can be
impacted by a number of factors, many of which are beyond our control, including but not limited to those set forth below and elsewhere in this Annual Report on Form 10-K, any one of which could cause our results to vary materially from recent
results or from our anticipated future results.
International conflicts and global war on terror may adversely affect our business.
International conflicts such as the war in Iraq, political turmoil in the Middle and Far East and the possibility of future terrorist attacks cause
significant uncertainty with respect to U.S. and other business and financial markets and adversely affect our business. These international conflicts also affect the price of oil, which has a significant
11
impact on the financial health of our air transport and regional customers. Although our Government Systems business may
experience greater demand for its products as a result of increased government defense spending, factors arising (directly or indirectly) from international conflicts which may adversely affect our business include reduced aircraft build rates,
upgrades, maintenance and spending on discretionary products such as in-flight entertainment, as well as increases in the cost of property and aviation products insurance and increased restrictions placed on our insurance policies. The war in Iraq
creates the risk that our Government Systems’ customers may need to reprogram funding from our existing business to pay for war-related activities. Furthermore, we currently hold only nominal insurance related to the effects of terrorist acts
on our assets and our aircraft products.
We depend to a significant degree on U.S. government contracts, which are subject to unique risks.
In 2006, 39% of our sales were derived from United States government contracts. In addition to normal business risks, our supply of systems and
products to the United States government is subject to unique risks which are largely beyond our control. These risks include:
|
|
•
|
|
dependence on Congressional appropriations and administrative allotment of funds;
|
|
|
•
|
|
the ability of the U.S. government to terminate, without prior notice, partially completed government programs and contracts that were previously authorized;
|
|
|
•
|
|
changes in governmental procurement legislation and regulations and other policies which may reflect military and political developments;
|
|
|
•
|
|
significant changes in contract scheduling or program structure, which generally result in delays or reductions in deliveries;
|
|
|
•
|
|
intense competition for available United States government business necessitating increases in time and investment for design and development;
|
|
|
•
|
|
difficulty of forecasting costs and schedules when bidding on developmental and highly sophisticated technical work;
|
|
|
•
|
|
changes over the life of United States government contracts, particularly development contracts, which generally result in adjustments of contract prices; and
|
|
|
•
|
|
claims based on United States government work, which may result in fines, the cancellation or suspension of payments or suspension or debarment proceedings affecting potential
further business with the United States government.
|
New airspace management technologies may impact future sales.
The aerospace industry is experiencing a global transition from traditional communications, navigation, surveillance and air traffic control systems to air traffic
management systems utilizing satellite-based technologies that will allow pilots to fly at desired paths and speeds selected in real time, while still complying with instrument flight regulations. The transition to these technologies will require
the use of digital communications systems, global positioning system navigation, satellite surveillance techniques and ground surveillance systems. These technologies are expected to result in more direct and efficient flight routes, fewer flight
delays and reduced airport congestion. Although we believe that we are well positioned to participate in this market evolution, our ability to capitalize on the transition to these airspace management technologies is subject to various risks,
including:
|
|
•
|
|
delays in the development of the necessary satellite and ground infrastructure by U.S. and foreign governments;
|
|
|
•
|
|
delays in adopting national and international regulatory standards;
|
12
|
|
•
|
|
competitors developing better products;
|
|
|
•
|
|
failure of our product development investments in communications, navigation and surveillance products that enable airspace management technologies to coincide with market evolution
to, and demand for, these products; and
|
|
|
•
|
|
the ability and desire of customers to invest in products enabling airspace management technologies.
|
We derive a significant portion of our revenues from international sales and are subject to the risks of doing business outside the United States.
In 2006, revenues from products and services exported from the U.S. or manufactured and serviced abroad were 32% of our total sales. We expect that international sales
will continue to account for a significant portion of our total sales. As a result, we are subject to risks of doing business internationally, including:
|
|
•
|
|
laws, regulations and policies of non-U.S. governments relating to investments and operations, as well as U.S. laws affecting the activities of U.S. companies abroad;
|
|
|
•
|
|
changes in regulatory requirements, including imposition of tariffs or embargoes, export controls and other trade restrictions and antitrust and data privacy requirements;
|
|
|
•
|
|
uncertainties and restrictions concerning the availability of funding, credit or guarantees;
|
|
|
•
|
|
import and export licensing requirements and regulations;
|
|
|
•
|
|
uncertainties as to local laws and enforcement of contract and intellectual property rights; and
|
|
|
•
|
|
rapid changes in government, economic and political policies, political or civil unrest or the threat of international boycotts or U.S. anti-boycott legislation.
|
While these factors or the impact of these factors are difficult to predict, any one or more of them could adversely affect our business,
financial condition, operating results and cash flows in the future.
We have made, and expect to continue to make, strategic acquisitions that
involve significant risks and uncertainties.
We completed five acquisitions in the last three years and we intend to enter into acquisitions in the
future in an effort to enhance shareowner value. Acquisitions involve a certain amount of risks and uncertainties such as:
|
|
•
|
|
the difficulty in integrating newly-acquired businesses and operations in an efficient and cost-effective manner and the risk that we encounter significant unanticipated costs or
other problems associated with integration;
|
|
|
•
|
|
the challenges in achieving strategic objectives, cost savings and other benefits expected from acquisitions;
|
|
|
•
|
|
the risk that our markets do not evolve as anticipated and that the technologies acquired do not prove to be those needed to be successful in those markets;
|
|
|
•
|
|
the risk that we assume significant liabilities that exceed the limitations of any applicable indemnification provisions or the financial resources of any indemnifying parties;
|
|
|
•
|
|
the potential loss of key employees of the acquired businesses; and
|
|
|
•
|
|
the risk of diverting the attention of senior management from our existing operations.
|
We enter into fixed-price contracts that could subject us to losses in the event that we have cost overruns.
During 2006, approximately 89% of our total sales were from, and a significant portion of our anticipated future sales will be from, firm, fixed-price contracts. This allows us to benefit from cost savings, but it carries the burden of
potential cost overruns since we assume all of the cost risk. If our initial estimates are incorrect, we can lose
13
money on these contracts. These fixed-price contracts can expose us to potentially large losses because the customer may
compel us to complete a project or, in the event of a termination for default, pay the entire incremental cost of its replacement by another provider regardless of the size of any cost overruns that occur over the life of the contract. Because many
of these projects involve new technologies and applications and can last for years, the following items can result in the contractual price becoming less favorable or even unprofitable to us over time: unforeseen events, such as technological
difficulties, fluctuations in the price of raw materials, problems with subcontractors and cost overruns. Furthermore, if we do not meet project deadlines or specifications, we may need to renegotiate contracts on less favorable terms, be forced to
pay penalties or liquidated damages or suffer major losses if the customer exercises its right to terminate. In addition, some of our contracts have provisions relating to cost controls and audit rights, and if we fail to meet the terms specified in
those contracts we may not realize their full benefits. Our results of operations are dependent on our ability to maximize our earnings from our contracts. Lower earnings caused by cost overruns could have an adverse impact on our financial
condition, operating results and cash flows.
Costs of certain employee and retiree benefits may continue to rise.
Over the last few years, we have experienced significant volatility in the costs related to medical and pension benefits. Although we have taken action seeking to contain
this cost volatility, including making material changes to these plans, there are risks that our costs for these benefits will increase as a result of:
|
|
•
|
|
continued increases in medical costs related to current employees due to increased usage of medical benefits and medical inflation in the United States;
|
|
|
•
|
|
the effect declines in the stock and bond markets have on the performance of our pension plan assets; and
|
|
|
•
|
|
potential reductions in the discount rate used to determine the present value of our benefit obligations.
|
Tax law changes expected to impact our effective tax rate.
Our
effective tax rate has been lower than the statutory tax rate primarily as a result of the tax benefits derived from the Research and Development Tax Credit (“R&D Tax Credit”), which provides a tax benefit on certain incremental
R&D expenditures, the Extraterritorial Income Exclusion (“ETI”), which provides a tax benefit on export sales, and the Domestic Manufacturing Deduction under Section 199 (“Domestic Manufacturing Deduction”), which
provides a tax benefit on U.S. based manufacturing. The R&D Tax Credit expired effective December 31, 2005.
In October 2004, the American Jobs
Creation Act of 2004 (the “Act”) was signed into law. The Act repeals and replaces the ETI with a new deduction for income generated from qualified production activities by U.S. manufacturers. The ETI export tax benefit completely phases
out December 31, 2006 and the Domestic Manufacturing Deduction benefit will be phased in through fiscal 2010. As a result, the Act is expected to have an adverse impact on our effective tax rate for years 2007 through 2010.
Cautionary Statement
This Annual Report on Form 10-K, and documents
that are incorporated by reference in this Annual Report on Form 10-K, contain statements, including certain projections and business trends, accompanied by such phrases as “believes”, “estimates”, “expects”,
“could”, “likely”, “anticipates”, “will”, “intends”, and other similar expressions, 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 potential impacts of geopolitical events, the financial condition of our customers (including major U.S. airlines),
the health of the global economy, the continued recovery of the commercial aerospace industry and the continued support for military transformation and modernization programs; the potential adverse impact of oil prices on the commercial aerospace
industry; the cost of the global war on terrorism on U.S. government military procurement expenditures and program budgets; changes in domestic and foreign government spending, budgetary and trade policies adverse to our businesses; market
acceptance of our new and existing technologies, products and
14
services; reliability of and customer satisfaction with our products and services; favorable outcomes on or potential
cancellation or restructuring of contracts, orders or program priorities by our customers; customer bankruptcies and profitability; recruitment and retention of qualified personnel; performance of our suppliers and subcontractors; risks inherent in
fixed price contracts, particularly the risk of cost overruns; risk of significant disruption to air travel; our ability to execute to our internal performance plans such as our productivity improvement and cost reduction initiatives; achievement of
our acquisition and related integration plans; continuing to maintain our planned effective tax rates, including the risk that Congress will not enact research and development tax credit legislation retroactive to the beginning of fiscal year 2007;
risk of contract price reductions and payment withholds related to non compliance with U.S. Defense Department specialty metal requirements; our ability to develop contract compliant systems and products and satisfy our contractual commitments; risk
of fines and penalties related to noncompliance with export control regulations; risk of asset impairments and government claims related to our pension plan freeze; our ability to win new business and convert those orders to sales within the fiscal
year in accordance with our annual operating plan; and the uncertainties of the outcome of litigation, as well as other risks and uncertainties, including but not limited to those detailed herein and from time to time in our Securities and Exchange
Commission filings. These forward-looking statements are made only as of the date hereof.
Item 1B.
Unresolved Staff Comments
.
None
Item 2.
Properties
.
As of September 30, 2006, we operated 16 manufacturing facilities
throughout the United States and one manufacturing facility each in Mexico, France, Germany and the United Kingdom. The Company also had engineering facilities, sales offices, warehouses and service locations in approximately 20 countries around the
world. These facilities have aggregate floor space of approximately 6.2 million square feet, substantially all of which is in use. Of this floor space, approximately 62% is owned and approximately 38% is leased. There are no major encumbrances
on any of our plants or equipment, other than financing arrangements which in the aggregate are not significant. In the opinion of management, our properties have been well maintained, are in sound operating condition and contain all equipment and
facilities necessary to operate at present levels. A summary of floor space of these facilities at September 30, 2006 is as follows:
|
|
|
|
|
|
|
|
|
Location
|
|
Owned
Facilities
|
|
Leased
Facilities
|
|
Total
|
|
|
|
(in thousands of square feet)
|
|
United States
|
|
3,488
|
|
1,947
|
|
5,435
|
|
Europe
|
|
329
|
|
189
|
|
518
|
|
Canada and Mexico
|
|
—
|
|
121
|
|
121
|
|
Asia Pacific
|
|
—
|
|
86
|
|
86
|
|
South America
|
|
—
|
|
7
|
|
7
|
|
|
|
|
|
|
|
|
|
Total
|
|
3,817
|
|
2,350
|
|
6,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of Facility
|
|
Owned
Facilities
|
|
Leased
Facilities
|
|
Total
|
|
|
|
(in thousands of square feet)
|
|
Manufacturing
|
|
2,116
|
|
538
|
|
2,654
|
|
Sales, engineering, service and general office space
|
|
1,701
|
|
1,812
|
|
3,513
|
|
|
|
|
|
|
|
|
|
Total
|
|
3,817
|
|
2,350
|
|
6,167
|
|
|
|
|
|
|
|
|
We have facilities with a total of at least 100,000 square feet in the following cities: Cedar Rapids, Iowa
(2,560,000 square feet), Richardson, Texas (280,000 square feet), Melbourne, Florida (275,000 square feet), Pomona, California (240,000 square feet), Heidelberg, Germany (240,000 square feet), San Jose, California (225,000 square feet), Irvine,
California (220,000 square feet), Tustin, California (216,000 square feet), Coralville, Iowa (180,000 square feet), Sterling, Virginia (138,000 square feet), Salt Lake City (132,000 square feet), Toulouse, France (130,000
15
square feet) and Mexicali, Mexico (105,000 square feet). Most of our facilities are generally shared for the benefit of
our Government Systems and Commercial Systems businesses. One owned facility with 77,000 total square feet of space is currently vacant.
Certain of our
facilities, including those located in California and Mexicali, Mexico, are located near major earthquake fault lines. We maintain earthquake insurance with a $40 million deductible with respect to these facilities. We also maintain property
insurance for wind damage, including hurricanes and tornados, for our facilities. This insurance covers physical damage to property and any resulting business interruption. All losses are subject to a $5 million deductible with certain exceptions
that could affect the deductible.
Item 3.
Legal Proceedings
.
Various lawsuits, claims and proceedings have been or may be instituted
or asserted against us relating to the conduct of our business, including those pertaining to product liability, intellectual property, environmental, safety and health, exporting or importing, contract, employment and regulatory matters. Although
the outcome of litigation cannot be predicted with certainty and some lawsuits, claims or proceedings may be disposed of unfavorably to us, management believes the disposition of matters that are pending or asserted will not have a material adverse
effect on our business or financial condition, but could possibly be material to the results of operations or cash flows of any one period.
Item 4.
Submission of Matters to a Vote of Security Holders
.
No
matters were submitted to a vote of security holders during the fourth quarter of 2006.
Item 4A.
Executive Officers of the Company
.
The name, age, office and position held with us, and
principal occupations and employment during the past five years of each of our executive officers as of November 9, 2006 are as follows:
|
|
|
|
|
Name, Office and Position, and Principal Occupations and Employment
|
|
Age
|
|
|
|
|
Clayton M. Jones
— Chairman of the Board of Rockwell Collins since June 2002; President and Chief Executive Officer of
Rockwell Collins since June 2001
|
|
57
|
|
|
|
|
Barry M. Abzug
— Senior Vice President, Corporate Development of Rockwell Collins since October 2001
|
|
54
|
|
|
|
|
Patrick E. Allen
— Senior Vice President and Chief Financial Officer of Rockwell Collins since January 2005; Vice President
and Controller of Rockwell Collins’ Commercial Systems business from January 2004 to December 2004; Vice President, Finance and Treasurer of Rockwell Collins prior thereto
|
|
42
|
|
|
|
|
John-Paul E. Besong
— Senior Vice President of e-Business & Lean Electronics of Rockwell Collins since February 2003;
Vice President of e-Business & Lean Electronics of Rockwell Collins from January 2002 to February 2003; Vice President of e-Business of Rockwell Collins prior thereto
|
|
53
|
|
|
|
|
Gary R. Chadick
— Senior Vice President, General Counsel and Secretary of Rockwell Collins since July 2001
|
|
45
|
16
|
|
|
|
|
Name, Office and Position, and Principal Occupations and Employment
|
|
Age
|
|
|
|
|
Robert M. Chiusano
— Executive Vice President and Special Assistant to the Chief Executive Officer of Rockwell Collins
since October 2006; Executive Vice President and Chief Operating Officer, Commercial Systems of Rockwell Collins from May 2002 to October 2006; Executive Vice President and Chief Operating Officer, Government Systems of Rockwell Collins prior
thereto
|
|
56
|
|
|
|
|
Gregory S. Churchill
— Executive Vice President and Chief Operating Officer, Government Systems of Rockwell Collins since
May 2002; Vice President and General Manager of Business and Regional Systems for Commercial Systems of Rockwell Collins prior thereto
|
|
49
|
|
|
|
|
Ronald W. Kirchenbauer
— Senior Vice President, Human Resources, of Rockwell Collins since April 2003; Senior Vice
President, Employee and Workplace Services, of Cadence Design Systems, Inc. (electronic design technologies and services) prior thereto
|
|
59
|
|
|
|
|
Nan Mattai
— Senior Vice President, Engineering and Technology of Rockwell Collins since November 2004; Vice President,
Government Systems Engineering of Rockwell Collins prior thereto
|
|
54
|
|
|
|
|
Jeffrey A. Moore
— Senior Vice President of Operations of Rockwell Collins since April 2006; Acting Senior Vice President
of Operations of Rockwell Collins from October 2005 to April 2006; Vice President of Manufacturing Operations of Rockwell Collins from October 2002 to October 2005; Senior Director, Melbourne Production of Rockwell Collins prior
thereto
|
|
53
|
|
|
|
|
Robert K. Ortberg
— Executive Vice President and Chief Operating Officer, Commercial Systems of Rockwell Collins since
October 2006; Vice President and General Manager, Air Transport Systems of Rockwell Collins from October 2002 to October 2006; and Vice President and General Manager, Communication Systems of Rockwell Collins prior thereto.
|
|
46
|
|
|
|
|
Marsha A. Schulte
— Vice President, Finance & Controller of Rockwell Collins since May 2006; Vice President &
Controller, Operations of Rockwell Collins from January 2004 to May 2006; Vice President, Strategic & Financial Planning of Rockwell Collins prior thereto
|
|
49
|
|
|
|
|
Kent L. Statler
— Executive Vice President, Rockwell Collins Services since October 2006; Senior Vice President and General
Manager of Rockwell Collins Services from October 2005 to October 2006; Senior Vice President of Operations of Rockwell Collins from January 2003 to October 2005; Vice President of Manufacturing Operations of Rockwell Collins from January 2002 to
January 2003; Vice President Lean Electronics of Rockwell Collins prior thereto
|
|
41
|
|
|
|
|
Douglas E. Stenske
—Treasurer of Rockwell Collins since February 2004; Senior Director, Risk and Asset Management of
Rockwell Collins prior thereto
|
|
40
|
There are no family relationships, as defined, between any of the above executive officers and any other executive
officer or any director. No officer was selected pursuant to any arrangement or understanding between the officer and any person other than us. All executive officers are elected annually.
17
PART II
Item 5.
Market for the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
.
Market Information
Our common stock, par value $.01 per share, is listed on the New York Stock Exchange and trades
under the symbol “COL”. On October 31, 2006, there were 32,382 shareowners of record of our common stock.
The following table sets forth
the high and low sales price of our common stock on the New York Stock Exchange—Composite Transactions reporting system during each quarter of our years ended September 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
Fiscal Quarters
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
First
|
|
$
|
48.80
|
|
$
|
43.25
|
|
$
|
40.94
|
|
$
|
34.40
|
|
Second
|
|
|
56.63
|
|
|
43.49
|
|
|
48.47
|
|
|
37.22
|
|
Third
|
|
|
60.41
|
|
|
49.13
|
|
|
49.80
|
|
|
42.88
|
|
Fourth
|
|
|
56.61
|
|
|
51.34
|
|
|
49.75
|
|
|
45.32
|
Dividends
The
following table sets forth the cash dividends per share paid by us during each quarter of our years ended September 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
Fiscal Quarters
|
|
2006
|
|
2005
|
|
First
|
|
$
|
0.12
|
|
$
|
0.12
|
|
Second
|
|
|
0.12
|
|
|
0.12
|
|
Third
|
|
|
0.16
|
|
|
0.12
|
|
Fourth
|
|
|
0.16
|
|
|
0.12
|
Based on our current dividend policy, we will pay quarterly cash dividends which, on an annual basis, will equal
$0.64 per share. The declaration and payment of dividends by us, however, will be at the sole discretion of our Board of Directors.
Repurchases
Our Board of Directors has authorized certain repurchases of our common stock. During 2006, we repurchased approximately 9.3 million shares of our
common stock at a total cost of $492 million, which resulted in a weighted average cost of $52.82 per share. During 2005, we repurchased approximately 10.6 million shares at a total cost of $498 million, which resulted in a weighted average
cost of $47.20 per share.
18
The following table provides information with respect to purchases made by or on behalf of us or any “affiliated
purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934) of shares of our common stock during the three months ended September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
July 1, 2006 through July 31, 2006
|
|
—
|
|
|
|
—
|
|
—
|
|
$
|
330.6 million
|
|
August 1, 2006 through August 31, 2006
|
|
—
|
|
|
|
—
|
|
—
|
|
$
|
330.6 million
|
|
September 1, 2006 through September 30, 2006
|
|
4,700,000
|
(2)
|
|
$
|
54.63
|
|
4,700,000
|
|
$
|
73.8 million
|
|
Total
|
|
4,700,000
|
|
|
$
|
54.63
|
|
4,700,000
|
|
$
|
73.8 million
|
|
(1)
|
On February 7, 2006, we announced that our Board authorized the repurchase of an additional $500 million of our common stock. This authorization has no stated expiration.
|
|
(2)
|
In September 2006, we entered into an accelerated share repurchase agreement with an investment bank under which we purchased 4.7 million shares of our outstanding common
stock. This repurchase agreement provides for a future price adjustment based on the volume weighted average market trading price of our common stock over a period of up to three months.
|
Item 6.
Selected Financial Data
.
See the information in the table
captioned
Selected Financial Data
in the 2006 Annual Report.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
.
See the discussion and analysis under the caption
Management’s Discussion and Analysis of Financial Condition and Results of Operations
in the 2006 Annual Report.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
.
See the discussion and
analysis under the caption
Management’s Discussion and Analysis of Financial Condition and Results of Operations
in the 2006 Annual Report.
Item 8.
Financial Statements and Supplementary Data
.
See
Management’s Report on Internal
Control Over Financial Reporting, Reports of Independent Registered Public Accounting Firm, Consolidated Statement of Financial Position, Consolidated Statement of Operations, Consolidated Statement of Cash Flows, Consolidated Statement of
Shareowners’ Equity and Comprehensive Income,
and
Notes to Consolidated Financial Statements
in the 2006 Annual Report.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
.
None.
19
Item 9A.
Controls and Procedures
.
Evaluation of Disclosure Controls and Procedures.
We maintain disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) that are designed to ensure that information required to be
disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, including controls and procedures designed to
ensure that such information is accumulated and communicated to our management, including our Chairman, President and Chief Executive Officer and Senior Vice President and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management’s disclosure control
objectives.
We have carried out an evaluation, under the supervision and with the participation of our management, including our Chairman, President and
Chief Executive Officer and Senior Vice President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Annual Report (the “Evaluation
Date”). Based upon that evaluation, our Chairman, President and Chief Executive Officer and Senior Vice President and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the Evaluation Date.
Evaluation of Internal Control Over Financial Reporting
Management’s report on internal control over financial reporting as of September 30, 2006 is included within Item 8 of this Annual Report Form 10-K and is incorporated herein by reference. The report of Deloitte &
Touche LLP on management’s assessment and the effectiveness of internal control over financial reporting is included within Item 8 of this Annual Report Form 10-K and is incorporated herein by reference.
Changes in Internal Control Over Financial Reporting
There were no
changes in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
Item 9B
.
Other Information.
None.
PART III
Item 10
.
Directors and Executive Officers of the Company.
See the information under the captions
Election of Directors, Information as to Nominees for Directors and Continuing Directors
and
Section 16(a) Beneficial Ownership Reporting Compliance
in the 2006 Proxy Statement. See also the information with respect
to executive officers of the Company under Item 4A of Part I.
No nominee for director was selected pursuant to any arrangement or understanding
between the nominee and any person other than us pursuant to which such person is or was to be selected as a director or nominee.
The members of the Audit
Committee of our board of directors are: Joseph F. Toot, Jr., Chris A. Davis, Richard J. Ferris and Andrew J. Policano. The board of directors has determined that all these members are “independent” as defined under applicable SEC and New
York Stock Exchange rules and that Messrs. Toot and Ferris and Ms. Davis are “audit committee financial experts”. The Board’s affirmative determination with respect to Messrs. Toot and Ferris was based upon their extensive
experience as chief executive officers of public companies in actively supervising chief financial officers and their extensive audit committee experience. The Board’s affirmative determination with respect to Ms. Davis was based upon her
education and more than twenty years in chief financial officer positions of public companies and her extensive audit committee experience.
20
We have adopted a handbook entitled Rockwell Collins Standards of Business Conduct and we have supporting policies
covering standards of business conduct and conflicts of interest (collectively, the “code of ethics”). The code of ethics applies to our Chief Executive Officer, Chief Financial Officer, Vice President, Finance & Controller (who
serves as our principal accounting officer), as well as to all of our other employees and to the members of our Board of Directors. The code of ethics is publicly available on our website at
www.rockwellcollins.com
. If we make any amendments
to the code of ethics or grant any waiver, including any implicit waiver, from a provision of the code applicable to our Chief Executive Officer, Chief Financial Officer or principal accounting officer requiring disclosure under applicable SEC
rules, we intend to disclose the nature of such amendment or waiver on our website.
Item 11.
Executive Compensation.
See the information under the captions
Compensation of Directors,
Executive Compensation, Option Grants, Long-Term Incentive Plans – Awards in Last Fiscal Year, Aggregated Option Exercises and Fiscal Year-End Values, Retirement Benefits, Compensation Committee Report on Executive Compensation
and
Shareowner Return Performance Presentation
in the 2007 Proxy Statement.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
See the information under the captions
Voting Securities
and
Equity Ownership of Certain Beneficial Owners and Management
in the 2007 Proxy Statement.
Equity Compensation Plan Information
The following table gives information as of
September 30, 2006, about our common stock that may be issued upon the exercise of options, warrants and rights under all of our existing equity compensation plans:
|
|
|
|
|
|
|
|
|
|
|
|
Plan Category
|
|
(a) Number of
securities to be issued
upon exercise of
outstanding options,
warrants and
rights
|
|
|
(b) Weighted-average
exercise price of
outstanding options,
warrants and rights
|
|
(c) Number of
securities remaining
available for
future
issuance under equity
compensation plans
(excluding securities
reflected in column (a))
|
|
|
Equity compensation plans approved by security holders
(1)
|
|
8,295,362
|
(2)
|
|
$
|
28.16
|
|
16,043,136
|
(
3)(4)
|
|
Equity compensation plans not approved by security holders
|
|
None
|
|
|
|
None
|
|
None
|
|
|
Total
|
|
8,295,362
|
|
|
$
|
28.16
|
|
16,043,136
|
|
|
(1)
|
Consists of the following equity compensation plans: 2001 Stock Option Plan, 2001 Long-Term Incentives Plan, Directors Stock Plan and 2006 Long-Term Incentives Plan.
|
|
(2)
|
Includes 185,350 performance shares, which is the maximum number of shares that can be issued in the future if maximum performance is achieved under existing performance agreements.
Also includes 18,523 restricted stock units (RSUs). Such performance shares and RSUs are not included in the weighted average price calculation.
|
21
|
(3)
|
Also includes 4,658,970 shares available under our Employee Stock Purchase Plan (ESPP), which allows employees to have withheld up to 15 percent of their base compensation toward
the purchase of our common stock. Shares are purchased each month by participants at 95 percent of the fair market value on the last day of the month pursuant to the ESPP.
|
|
(4)
|
Of the 10,891,574 shares available for future grant under the 2006 Long-Term Incentives Plan, each share issued pursuant to an award of restricted stock, restricted stock units,
performance shares and performance units counts as 3 shares against this limit.
|
Item 13.
Certain Relationships and Related Transactions.
See the information under the caption
Corporate Governance; Board of Directors and Committees
and
Certain Transactions and Other Relationships
in the 2007 Proxy Statement.
Item 14.
Principal Accountant Fees and Services.
See the information
under the caption
Proposal to Approve the Selection of Auditors
in the 2007 Proxy Statement.
PART IV
Item 15.
Exhibits and Financial Statement Schedules.
|
|
|
|
|
|
|
(a)
|
|
|
|
Financial Statements, Financial Statement Schedules and Exhibits.
|
|
|
|
|
|
|
|
(1)
|
|
Financial Statements (all financial statements listed below are those of the Company and its consolidated subsidiaries and are incorporated by reference in Item 8 of this Form 10-K from the 2006
Annual Report).
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Financial Position, as of September 30, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Operations, years ended September 30, 2006, 2005 and 2004.
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Cash Flows, years ended September 30, 2006, 2005 and 2004.
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Shareowners’ Equity and Comprehensive Income, years ended September 30, 2006, 2005 and 2004.
|
|
|
|
|
|
|
|
|
|
Notes to Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
Reports of Independent Registered Public Accounting Firm.
|
|
|
|
|
|
|
|
(2)
|
|
Financial Statement Schedule for the years ended September 30, 2006, 2005 and 2004.
|
|
|
|
|
|
|
|
|
|
|
|
Schedules not filed herewith are omitted because of the absence of conditions under which they are required or because the information called for is shown in the financial statements or notes
thereto.
|
|
|
|
|
|
|
|
(3)
|
|
Exhibits
|
|
|
|
|
|
|
|
3-a-1
|
|
Restated Certificate of Incorporation of the Company, as amended, filed as Exhibit 3-a-1 to the Company’s Form 10-K for year ended September 30, 2001, is incorporated herein by
reference.
|
|
|
|
|
|
|
|
3-a-2
|
|
Certificate of Merger effecting name change of the Company from “New Rockwell Collins, Inc.” to “Rockwell Collins, Inc.”, filed as Exhibit 3-a-2 to the Company’s Form
10-K for year ended September 30, 2001, is incorporated herein by reference.
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
3-b-1
|
|
Amended By-Laws of the Company, filed as Exhibit 3-b-1 to the Company’s Form 10-Q for quarter ended June 30, 2004, is incorporated herein by reference.
|
|
|
|
|
|
|
|
4-a-1
|
|
Rights Agreement dated as of June 28, 2001 by and between the Company and Mellon Investor Services LLC, as Rights Agent, filed as Exhibit 4.1 to the Company’s current report on Form 8-K
dated July 11, 2001, is incorporated herein by reference.
|
|
|
|
|
|
|
|
4-a-2
|
|
Indenture dated as of November 1, 2001 between the Company and Citibank, N.A., as Trustee, filed as Exhibit 4.b to the Company’s Registration Statement on Form S-3 (No. 333-72914), is
incorporated herein by reference.
|
|
|
|
|
|
|
|
4-a-3
|
|
Form of certificate for the Company’s 4
3
/
4
% Notes
due 2013, filed as Exhibit 4-a to the Company’s current report on Form 8-K dated November 21, 2003, is incorporated herein by reference.
|
|
|
|
|
|
|
|
*10-a-1
|
|
The Company’s 2001 Long-Term Incentives Plan, as amended by the Company’s Board of Directors on September 8, 2005, filed as Exhibit 10-a-1 to the Company’s Form 10-K for year
ended September 30, 2005, is incorporated herein by reference.
|
|
|
|
|
|
|
|
*10-a-2
|
|
Forms of Stock Option Agreements under the Company’s 2001 Long-Term Incentives Plan, filed as Exhibit 10-a-2 to the Company’s Form 10-K for year ended September 30, 2001, are
incorporated herein by reference.
|
|
|
|
|
|
|
|
*10-a-3
|
|
Form of Stock Option Agreement under the Company’s 2001 Long-Term Incentives Plan for stock option grants to the non-executive Chairman of the Board of Directors, filed as Exhibit 10-a-3 to
the Company’s Form 10-K for year ended September 30, 2001, is incorporated herein by reference.
|
|
|
|
|
|
|
|
*10-a-4
|
|
Form of Restricted Stock Agreement under the Company’s 2001 Long-Term Incentives Plan for restricted stock grants to the non-executive Chairman of the Board of Directors, filed as Exhibit
10-a-4 to the Company’s Form 10-K for year ended September 30, 2001, is incorporated herein by reference.
|
|
|
|
|
|
|
|
*10-a-5
|
|
The Company’s 2006 Long-Term Incentives Plan, attached as Appendix B to the Company’s 2006 Proxy Statement dated December 12, 2005, is incorporated herein by
reference.
|
|
|
|
|
|
|
|
*10-a-6
|
|
The Company’s 2006 Annual Incentive Compensation Plan for Senior Executives, attached as Appendix C to the Company’s 2006 Proxy Statement dated December 12, 2005, is incorporated
herein by reference.
|
|
|
|
|
|
|
|
*10-a-7
|
|
Form of Restricted Stock Unit Award under the Company’s 2006 Long-Term Incentives Plan, filed as Exhibit 10.1 to the Company’s Form 8-K dated February 7, 2006, is incorporated herein
by reference.
|
|
|
|
|
|
|
|
*10-a-8
|
|
Forms of Stock Option Agreements under the Company’s 2006 Long-Term Incentives Plan.
|
|
|
|
|
|
|
|
*10-b-1
|
|
The Company’s Directors Stock Plan, adopted by the Company’s Board of Directors on June 1, 2001 and approved by the Company’s shareowners at the 2002 Annual Meeting of
Shareowners, filed as Exhibit 10.2 to the Company’s Registration Statement on Form 10 (File No. 001-16445) (the “Form 10”), is incorporated herein by reference.
|
|
|
|
|
|
|
|
*10-b-2
|
|
Form of Stock Option Agreement under the Company’s Directors Stock Plan, filed as Exhibit 10-b-2 to the Company’s Form 10-K for year ended September 30, 2001, is incorporated herein by
reference.
|
|
|
|
|
|
|
|
*10-b-3
|
|
Form of Restricted Stock Agreement under the Company’s Directors Stock Plan, filed as Exhibit 10-b-3 to the Company’s Form 10-K for year ended September 30, 2001, is incorporated
herein by reference.
|
|
|
|
|
|
|
|
*10-c-1
|
|
The Company’s Annual Incentive Compensation Plan for Senior Executive Officers, adopted by the Company’s Board of Directors on June 1, 2001 and approved by the Company’s
shareowners at the 2002 Annual Meeting of Shareowners, filed as Exhibit 10.4 to the Form 10, is incorporated herein by reference.
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
*10-d-1
|
|
The Company’s Incentive Compensation Plan, adopted by the Company’s Board of Directors on June 11, 2003, filed as Exhibit 10-d-1 to the Company’s Form 10-Q for quarter ended
June 30, 2003, is incorporated herein by reference.
|
|
|
|
|
|
|
|
*10-e-1
|
|
The Company’s 2001 Stock Option Plan, adopted by the Company’s Board of Directors on June 1, 2001, filed as Exhibit 10.3 to the Form 10, is incorporated herein by
reference.
|
|
|
|
|
|
|
|
*10-f-1
|
|
The Company’s Deferred Compensation Plan, adopted by the Company’s Board of Directors on June 13, 2001, filed as Exhibit 10-f-1 to the Company’s Form 10-K for year ended
September 30, 2001, is incorporated herein by reference.
|
|
|
|
|
|
|
|
*10-g-1
|
|
The Company’s Non-Qualified Savings Plan, adopted by the Company’s Board of Directors on June 13, 2001, filed as Exhibit 10-g-1 to the Company’s Form 10-K for year ended
September 30, 2001, is incorporated herein by reference.
|
|
|
|
|
|
|
|
*10-h-1
|
|
The Company’s Non-Qualified Pension Plan, adopted by the Company’s Board of Directors on June 13, 2001, filed as Exhibit 10-h-1 to the Company’s Form 10-K for year ended
September 30, 2001, is incorporated herein by reference.
|
|
|
|
|
|
|
|
*10-h-2
|
|
The Company’s Memorandum of Proposed Amendments to the Non-Qualified Pension Plan, adopted by the Company’s Board of Directors on November 6, 2003, filed as Exhibit 10-h-2 to the
Company’s Form 10-Q for quarter ended December 31, 2003, is incorporated herein by reference.
|
|
|
|
|
|
|
|
*10-i-1
|
|
The Company’s Master Trust — Deferred Compensation and Non-Qualified Savings and Non-Qualified Pension Plans, adopted by the Company’s Board of Directors on June 13, 2001,
filed as Exhibit 10-i-1 to the Company’s Form 10-K for year ended September 30, 2001, is incorporated herein by reference.
|
|
|
|
|
|
|
|
10-k-1
|
|
Distribution Agreement dated as of June 29, 2001 by and among Rockwell International Corporation, the Company and Rockwell Scientific Company LLC, filed as Exhibit 2.1 to the Company’s
current report on Form 8-K dated July 11, 2001, is incorporated herein by reference.
|
|
|
|
|
|
|
|
10-l-1
|
|
Employee Matters Agreement dated as of June 29, 2001 by and among Rockwell International Corporation, the Company and Rockwell Scientific Company LLC, filed as Exhibit 2.2 to the Company’s
current report on Form 8-K dated July 11, 2001, is incorporated herein by reference.
|
|
|
|
|
|
|
|
10-m-1
|
|
Tax Allocation Agreement dated as of June 29, 2001 by and between Rockwell International Corporation and the Company, filed as Exhibit 2.3 to the Company’s current report on Form 8-K dated
July 11, 2001, is incorporated herein by reference.
|
|
|
|
|
|
|
|
*10-n-1
|
|
Form of Change of Control Agreement between the Company and certain executives of the Company (Three-Year Agreement), filed as Exhibit 10-n-1 to the Company’s Form 8-K dated June 29, 2005,
is incorporated herein by reference.
|
|
|
|
|
|
|
|
*10-n-2
|
|
Schedule identifying executives of the Company who are party to a Change of Control Agreement (Three-Year Agreement), filed as Exhibit 10-n-2 to the Company’s Form 8-K dated April 27, 2006,
is incorporated herein by reference.
|
|
|
|
|
|
|
|
*10-n-3
|
|
Form of Change of Control Agreement between the Company and certain executives of the Company (Two-Year Agreement), filed as Exhibit 10-n-3 to the Company’s Form 8-K dated June 29, 2005, is
incorporated herein by reference.
|
|
|
|
|
|
|
|
*10-n-4
|
|
Schedule identifying executives of the Company who are party to a Change of Control Agreement (Two-Year Agreement), filed as Exhibit 10-n-4 to the Company’s Form 8-K dated April 27, 2006,
is incorporated herein by reference.
|
|
|
|
|
|
|
|
10-o-1
|
|
Five-Year Credit Agreement dated as of May 24, 2005 among the Company, the Banks listed therein, JPMorgan Chase Bank, N.A., as Administrative Agent, and Citibank, N.A., as Syndication Agent,
filed as Exhibit 99 to the Company’s Form 8-K dated May 24, 2005, is incorporated herein by reference.
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
*10-p-1
|
|
Form of Three-Year Performance Unit Agreement for Persons With a Change of Control Agreement under the Company’s 2001 Long-Term Incentives Plan, filed as Exhibit 10-p-1 to the
Company’s Form 10-K for year ended September 30, 2004, is incorporated herein by reference.
|
|
|
|
|
|
|
|
*10-p-2
|
|
Form of Three-Year Performance Unit Agreement for Persons Not With a Change of Control Agreement under the Company’s 2001 Long-Term Incentives Plan, filed as Exhibit 10-p-2 to the
Company’s Form 10-K for year ended September 30, 2004, is incorporated herein by reference.
|
|
|
|
|
|
|
|
*10-p-3
|
|
Form of Performance Unit Agreement for FY03-05 for Persons With a Change of Control Agreement under the Company’s 2001 Long-Term Incentives Plan, filed as Exhibit 10-p-3 to the
Company’s Form 10-K for year ended September 30, 2002, is incorporated herein by reference.
|
|
|
|
|
|
|
|
*10-p-4
|
|
Form of Performance Unit Agreement for FY03-05 for Persons Not With a Change of Control Agreement under the Company’s 2001 Long-Term Incentives Plan, filed as Exhibit 10-p-4 to the
Company’s Form 10-K for year ended September 30, 2002, is incorporated herein by reference.
|
|
|
|
|
|
|
|
*10-p-5
|
|
Form of Performance Unit Agreement for FY04-06 for Persons With a Change of Control Agreement under the Company’s 2001 Long-Term Incentives Plan, filed as Exhibit 10-p-5 to the
Company’s Form 10-Q for quarter ended December 31, 2003, is incorporated herein by reference.
|
|
|
|
|
|
|
|
*10-p-6
|
|
Form of Performance Unit Agreement for FY04-06 for Persons Not With a Change of Control Agreement under the Company’s 2001 Long-Term Incentives Plan, filed as Exhibit 10-p-6 to the
Company’s Form 10-Q for quarter ended December 31, 2003, is incorporated herein by reference.
|
|
|
|
|
|
|
|
*10-q-1
|
|
Form of Three-Year Performance Awards Agreement for Persons With a Change of Control Agreement under the Company’s 2001 Long-Term Incentives Plan, filed as Exhibit 10-q-1 to the
Company’s Form 10-K for year ended September 30, 2005, is incorporated herein by reference.
|
|
|
|
|
|
|
|
*10-q-2
|
|
Form of Three-Year Performance Awards Agreement for Persons Not With a Change of Control Agreement under the Company’s 2001 Long-Term Incentives Plan, filed as Exhibit 10-q-2 to the
Company’s Form 10-K for year ended September 30, 2005, is incorporated herein by reference.
|
|
|
|
|
|
|
|
*10-q-3
|
|
Form of Three-Year Performance Awards Agreement for Persons With a Change of Control Agreement under the Company’s 2006 Long-Term Incentives Plan.
|
|
|
|
|
|
|
|
*10-q-4
|
|
Form of Three-Year Performance Awards Agreement for Persons Not With a Change of Control Agreement under the Company’s 2006 Long-Term Incentives Plan.
|
|
|
|
|
|
|
|
*10-s-1
|
|
Directors’ Compensation Summary, filed as Exhibit 10-s-1 to the Company’s Form 10-Q for quarter ended March 31, 2006, is incorporated herein by reference.
|
|
|
|
|
|
|
|
10-t-1
|
|
Purchase Agreement dated August 16, 2005, between Company and UBS AG, London Branch acting through UBS Securities LLC (TRANCHE 1), filed as Exhibit 10.1 to the Company’s Form 8-K dated
August 16, 2005, is incorporated herein by reference.
|
|
|
|
|
|
|
|
10-t-2
|
|
Purchase Agreement dated August 16, 2005, between Company and UBS AG, London Branch acting through UBS Securities LLC (TRANCHE 2), filed as Exhibit 10.2 to the Company’s Form 8-K dated
August 16, 2005, is incorporated herein by reference.
|
|
|
|
|
|
|
|
10-t-3
|
|
Purchase Agreement dated September 26, 2006, between the Company and Bank of America, N.A., filed as Exhibit 10.1 to the Company’s Form 8-K dated September 26, 2006, is incorporated herein
by reference.
|
|
|
|
|
|
|
|
12
|
|
Statement re: Computation of Ratio of Earnings to Fixed Charges.
|
|
|
|
|
|
|
|
13
|
|
Portions of the 2005 Annual Report to Shareowners of the Company incorporated herein by reference.
|
|
|
|
|
|
|
|
21
|
|
List of subsidiaries of the Company.
|
|
|
|
|
|
|
|
23
|
|
Consent of Independent Registered Public Accounting Firm.
|
|
|
|
|
|
|
|
24
|
|
Powers of Attorney authorizing certain persons to sign this Annual Report on Form 10-K on behalf of certain directors and officers of the Company.
|
25
|
|
|
|
|
|
|
|
|
31.1
|
|
Section 302 Certification of Chief Executive Officer.
|
|
|
|
|
|
|
|
31.2
|
|
Section 302 Certification of Chief Financial Officer.
|
|
|
|
|
|
|
|
32.1
|
|
Section 906 Certification of Chief Executive Officer.
|
|
|
|
|
|
|
|
32.2
|
|
Section 906 Certification of Chief Financial Officer.
|
|
*
|
Management contract or compensatory plan or arrangement.
|
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
|
|
|
|
|
R
OCKWELL
C
OLLINS
, I
NC
.
|
|
|
|
|
By
|
|
/s/ Gary R. Chadick
|
|
|
|
Gary R. Chadick
|
|
|
|
Senior Vice President, General Counsel and
|
|
|
|
Secretary
|
Dated: November 13, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on the 13th day of November, 2006 by the following persons on
behalf of the registrant and in the capacities indicated.
|
|
|
|
|
/s/ Clayton M. Jones
Clayton M. Jones
|
|
Chairman of the Board, President and Chief Executive
Officer (principal executive officer)
|
|
|
|
|
D
ONALD
R. B
EALL
*
|
|
Director
|
|
|
|
|
A
NTHONY
J. C
ARBONE
*
|
|
Director
|
|
|
|
|
M
ICHAEL
P.C. C
ARNS
*
|
|
Director
|
|
|
|
|
C
HRIS
A. D
AVIS
*
|
|
Director
|
|
|
|
|
M
ARK
D
ONEGAN
*
|
|
Director
|
|
|
|
|
R
ICHARD
J. F
ERRIS
*
|
|
Director
|
|
|
|
|
A
NDREW
J. P
OLICANO
*
|
|
Director
|
|
|
|
|
C
HERYL
L. S
HAVERS
*
|
|
Director
|
|
|
|
|
J
OSEPH
F. T
OOT
, J
R
.*
|
|
Director
|
|
|
|
|
/s/ Patrick E. Allen
Patrick E. Allen
|
|
Senior Vice President and Chief Financial Officer
(principal financial officer)
|
|
|
|
|
/s/ Marsha A. Schulte
Marsha A. Schulte
|
|
Vice President, Finance and Controller
(principal accounting officer)
|
|
|
|
|
|
*By
|
|
/s/ Gary R. Chadick
|
|
|
|
Gary R. Chadick, Attorney-in-fact**
|
|
**
|
By authority of the powers of attorney filed herewith.
|
27
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareowners of Rockwell Collins, Inc.
We have audited the consolidated financial statements of Rockwell Collins, Inc. and subsidiaries (the “Company”) as of September 29, 2006
and September 30, 2005, and for each of the three years in the period ended September 29, 2006, management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of September 29,
2006, and the effectiveness of the Company’s internal control over financial reporting as of September 29, 2006, and have issued our reports thereon dated November 1, 2006 (which report on the consolidated financial statements
expressed an unqualified opinion and included an explanatory paragraph regarding the Company’s change as of October 1, 2005, in its method of accounting for employee stock-based compensation); such consolidated financial statements and
reports are included in your 2006 Annual Report to Shareowners and are incorporated herein by reference. Our audits also included the consolidated financial statement schedule of the Company, listed in Item 15(a)(2). This consolidated financial
statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
November 1, 2006
S-1
SCHEDULE II
ROCKWELL COLLINS, INC.
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended September 30,
2006, 2005 and 2004
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Balance at
Beginning
of Year
|
|
Charged to
Costs and
Expenses
|
|
Other
|
|
|
Deductions (b)
|
|
|
Balance at
End of
Year
|
|
Year ended September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
11
|
|
$
|
1
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12
|
|
Allowance for excess and obsolete inventories
|
|
|
103
|
|
|
13
|
|
|
12
|
(c)
|
|
|
(18
|
)
|
|
|
110
|
|
Year ended September 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
|
16
|
|
|
1
|
|
|
—
|
|
|
|
(6
|
)
|
|
|
11
|
|
Allowance for excess and obsolete inventories
|
|
|
102
|
|
|
21
|
|
|
9
|
(a)
|
|
|
(29
|
)
|
|
|
103
|
|
Year ended September 30, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
|
17
|
|
|
3
|
|
|
—
|
|
|
|
(4
|
)
|
|
|
16
|
|
Allowance for excess and obsolete inventories
|
|
|
98
|
|
|
32
|
|
|
—
|
|
|
|
(28
|
)
|
|
|
102
|
|
(a)
|
Amount relates to the TELDIX GmbH acquisition.
|
|
(c)
|
Amount relates to acquisition of the E&S Simulation Business.
|
S-2
EXHIBIT INDEX
|
|
|
|
|
Exhibit
Number
|
|
Description
|
|
*10-a-8
|
|
Forms of Stock Option Agreements under the Company’s 2006 Long-Term Incentives Plan.
|
|
|
|
|
*10-q-3
|
|
Form of Three-Year Performance Awards Agreement for Persons With a Change of Control Agreement under the Company’s 2006 Long-Term Incentives Plan.
|
|
|
|
|
*10-q-4
|
|
Form of Three-Year Performance Awards Agreement for Persons Not With a Change of Control Agreement under the Company’s 2006 Long-Term Incentives Plan.
|
|
|
|
|
12
|
|
Statement re: Computation of Ratio of Earnings to Fixed Charges.
|
|
|
|
|
13
|
|
Portions of the 2006 Annual Report to Shareowners of the Company incorporated herein by reference.
|
|
|
|
|
21
|
|
List of subsidiaries of the Company.
|
|
|
|
|
23
|
|
Consent of Independent Registered Public Accounting Firm.
|
|
|
|
|
24
|
|
Powers of Attorney authorizing certain persons to sign this Annual Report on Form 10-K on behalf of certain directors and officers of the Company.
|
|
|
|
|
31.1
|
|
Section 302 Certification of Chief Executive Officer.
|
|
|
|
|
31.2
|
|
Section 302 Certification of Chief Financial Officer.
|
|
|
|
|
32.1
|
|
Section 906 Certification of Chief Executive Officer.
|
|
|
|
|
32.2
|
|
Section 906 Certification of Chief Financial Officer.
|
|
*
|
Management contract or compensatory plan or arrangement.
|
E-1
Exhibit 10-a-8
[SAMPLE AWARD LETTER UNDER 2006 LONG-TERM INCENTIVES PLAN,
FORMING A PART OF STOCK OPTION
AGREEMENT—INCLUDING
ARBITRATION OR NONCOMPETE LETTER]
[Date]
[Name]
Dear
:
I am pleased to inform
you that you have been awarded a long-term incentive grant. This grant is made up of stock options and a performance award (comprised of cash and shares). This long-term incentive grant is designed to reward us if we meet or exceed our goals of
profitable growth and building shareowner value, key drivers of success for our business.
Total direct compensation for executive positions is typically
made up of three components—base salary, annual incentive (ICP) and long-term incentives. Your total compensation statement includes the value of each of these elements of your compensation package. Your new long-term incentive award is
outlined below:
|
|
•
|
|
Half of your target long-term incentive compensation is awarded to you in the form of stock options and you have been granted
Rockwell Collins stock options
(
Incentive Stock Options (ISOs) and
non-qualified stock options) on [date] at an exercise price of $
per share.
|
|
|
•
|
|
You have also been granted
a performance award of
for the achievement of our three year goals
(FY
-
) for Cumulative Sales and Return on Sales. The target award is made up of
cash and
performance shares
. The goals have been set to reflect the strategic
importance of profitable growth on our business. You will have the opportunity to earn from 0 to 200% of the target award based on the company’s performance against these pre-established goals shown on the enclosed performance matrix. A further
adjustment of plus or minus 20% of the final award amount will potentially be made for our relative performance on Total Shareowner Return when compared to ten peer companies.
|
|
|
•
|
|
The stock options and performance awards are subject to the provisions of the 2006 Long-Term Incentives Plan and to the attached terms and conditions. The stock options and
performance award are also subject to other requirements covered in the enclosed letter from Gary Chadick, Senior Vice President,
|
General Counsel and Secretary, dated [date]. Please read these documents and your copy of the Plan and
Prospectus carefully and retain them for future reference.
As a key member of the Rockwell Collins leadership team, you play a significant role in the
attainment of our growth and shareowner return goals. The potential value of these awards is related directly to our achievements and our pay-for-performance philosophy. Our company will be successful when we provide superior value to our customers
and shareowners.
Congratulations on your receipt of this long-term incentive grant. As we strive to achieve our vision and values, I am confident that we
will continue working together to fulfill the high expectations that we have for Rockwell Collins.
Sincerely,
Clay Jones
- 2 -
[FORM OF LETTER ENCLOSING MUTUAL AGREEMENT TO ARBITRATE CLAIMS]
[Date]
|
Re:
|
Mutual Agreement to Arbitrate Claims
|
Dear
:
The
long-term incentive or equity award granted to you as noted in a letter from Clay Jones dated [date] is subject to the condition that you sign and return one copy of the Mutual Agreement to Arbitrate Claims to me at the following address:
Gary R. Chadick, Secretary
Rockwell Collins, Inc.
400 Collins Road NE, M/S 124-323
Cedar Rapids, IA 52498
The long-term incentive or equity award will be of no effect if the copy of the Mutual Agreement to Arbitrate Claims, properly signed by you, is not received by the
undersigned on or before [date], unless Rockwell Collins, Inc. (in its sole discretion) elects in writing to extend that date.
Sincerely,
Gary Chadick
[FORM OF MUTUAL AGREEMENT TO ARBITRATE CLAIMS]
MUTUAL AGREEMENT TO ARBITRATE CLAIMS
Rockwell Collins, Inc. seeks to
work with its employees to resolve differences as soon as possible after they arise. Often times, differences can be eliminated through internal discussions between an employee and his/her supervisor. Other times, it may be helpful for Human
Resources or other Rockwell Collins, Inc. employees to become involved to help resolve a dispute. If this fails (unless provided otherwise below), Rockwell Collins, Inc. (as described below) is required (and you likewise are required) to resolve the
dispute by using a third-party neutral arbitrator.
|
A.
|
Employee’s Agreement to Arbitrate
|
By signing this Arbitration
Agreement (“Agreement”), you agree to use final and binding arbitration to resolve workplace issues between you and Rockwell Collins, Inc. By agreeing to final and binding arbitration, you also agree to waive your right to a court action,
including a jury trial, in accordance with the terms of this Agreement. Please read this Agreement carefully. Management representatives are available to answer your questions. You may consult with an attorney before signing. By signing this you
agree to arbitrate any and all disputes, claims, or controversies (“claim”) against Rockwell Collins, Inc., any and all related or affiliated entities or divisions, and all current and former officers, directors, employees, successors and
assigns (“Rockwell Collins, Inc.” or “the Company”) including, without limitation, those arising out of your employment, the termination of your employment or any other dispute, including any claim that could have been presented
to or could have been brought before any court.
This Agreement includes, without limitation, claims under the Age Discrimination in Employment Act, Title
VII of the Civil Rights Act of 1964; the Fair Labor Standards Act; the Americans with Disabilities Act of 1990; Section 1981 through 1988 of Title 42 of the United States Code; and the human rights, fair employment or non-discrimination law of
the state where you are employed including, without limitation, the California Fair Employment and Housing Act (Cal. Gov’t Code § 12900 et seq.); or any other law or cause of action; and, any other federal, state, or local law, ordinance
or regulation, or based on any public policy, contract, tort, or common law or any claim for costs, fees, or other expenses or relief, including attorney’s fees. You cannot be a class representative or a member of a class with respect to any
dispute you may have against the Company because your personal claim is subject to arbitration. All claims and defenses that could be raised before a government administrative agency or court must be raised in arbitration and the arbitrator shall
apply the law accordingly.
|
B.
|
Rockwell Collins, Inc.’s Agreement to Arbitrate
|
Because this
problem resolution policy is intended to resolve all disputes between us (other than as explained below), Rockwell Collins, Inc. reciprocally and in consideration hereof shall initiate or participate in arbitration regarding any matter covered by
this
Agreement or any dispute with you (unless otherwise stated herein or in a written agreement that explicitly limits the
obligation to arbitrate). Claims not covered by this Agreement are claims: (i) for workers’ compensation benefits; (ii) for unemployment compensation benefits; (iii) for injunctive, equitable or other relief relating to unfair
competition, restrictive covenant (non-compete) and/or use of unauthorized disclosure of trade secrets or confidential information, as to which the Company or you may seek and obtain relief from a court of competent jurisdiction; (iv) based
upon the Company’s current, future or successor stock plans, employee benefits and/or welfare plans that contain an appeal procedure or other procedure for the resolution of disputes under the plan(s); (v) a violation of the National Labor
Relations Act; (vi) brought by federal, state, or local governmental officials in criminal court against you or the Company; and, (vii) already filed with a court or government agency before implementation of this Agreement. Nothing in
this Agreement shall prevent you from filing a claim with or participating in any investigation conducted by any federal, state, or local government agency.
Your [month] [year] long-term incentive or equity
award is consideration for your signing this Agreement. You understand that any such long-term incentive or equity award will lapse unless you agree to participate in this Agreement and return it to the Company’s Secretary at 400 Collins Road
NE, Cedar Rapids, IA 52498, signed, within 21 calendar days after you received it, unless the Company agrees (in its sole discretion) in writing to extend that date. You further understand that, as additional consideration for signing this
Agreement, Rockwell Collins, Inc. has agreed to pay all costs of arbitration charged by the AAA and to be bound by the arbitration procedure set forth in this Agreement. Yet additional consideration in support of this Agreement is each party’s
promise to resolve claims by arbitration in accordance with the provisions of this Agreement, rather than through the courts.
|
D.
|
Arbitrator’s Decision Final
|
The decision or award of the
arbitrator, which shall be written, shall be final and binding upon the parties. The arbitrator shall have the power to award any type of legal or equitable relief available in a court of competent jurisdiction including, without limitation,
attorney’s fees and/or costs, to the extent such damages are available under law. Because any arbitral award may be entered as a judgment or order in any court of competent jurisdiction, any relief or recovery to which you may be entitled upon
any claim (including those arising out of your employment, the termination of your employment, or any claim of unlawful discrimination) shall be limited to that awarded by the arbitrator.
- 2 -
A party may appeal a decision of an arbitrator to a court
of appropriate jurisdiction within thirty (30) calendar days of receipt of the arbitrator’s decision. The court to which the appeal is brought shall review the arbitrator’s decision as if it is a court of appellate jurisdiction
reviewing a lower court’s decision. To this end, either party, at its own expense, may have the arbitration transcribed. If the arbitration is not transcribed, a court of appropriate jurisdiction still may evaluate the arbitrator’s
decision based on the decision itself as well as any other evidence it deems appropriate to consider. No bond shall be required in the case of an appeal. A judgment that is not appealed may be entered in any court having jurisdiction as a final
order. The award may be vacated or modified only on the grounds specified in the Federal Arbitration Act or other applicable law. An interlocutory appeal of an arbitrator’s decision may be brought in a court of appropriate jurisdiction where an
arbitrator has breached the explicit rules of this Agreement and/or a party seeks to recuse or remove an arbitrator for legally sufficient grounds.
|
F.
|
Applicable Time Limits and Procedural Rules
|
Any claim for
arbitration will be timely only if brought within the time in which an administrative charge or complaint would have been filed if the claim is one that could be filed with an administrative agency. If the arbitration claim raises an issue that
could not have been filed with an administrative agency, then the claim must be filed within the time set by the appropriate statute of limitation.
The
arbitration shall be arbitrated by a single arbitrator in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association (“AAA”). In accordance with Federal Rule of Civil Procedure
54(d), costs of the proceeding may be recovered by the prevailing party to the extent permitted by law, except when express provision is made therefor either in a statute of the United States or in the Federal Rules of Civil Procedure.
A copy
of the AAA National Rules for the Resolution of Employment Disputes is available for your review at the Human Resource Department, or you may contact the AAA to request a copy of these rules at 140 West 51
st
Street, New York, New York 10020-1203, telephone number: (212) 484-3266, facsimile number: (212) 307-4387, or you may obtain them from AAA’s
website at
www.adr.org
.
The terms of this Agreement are not intended to
create a contract of employment for a specific duration of time. By signing this Agreement you confirm that you entered into employment with the Company voluntarily and that you understand you are free to resign at any time. Similarly, the Company
may terminate the employment relationship at any time. Nothing written herein or contained in any other statement, whether oral or written, can create a contract of employment or alter the at-will nature of your employment.
- 3 -
|
H.
|
Governing Law and Interpretation
|
This Agreement, as well as all
terms and conditions of your employment, shall be governed by and shall be interpreted in accordance with the laws of the state where you were employed by the Company, without regard to its choice or conflict of laws provisions, to create a binding
agreement. If for any reason this Agreement is declared unenforceable, a court shall interpret or modify this Agreement, to the extent necessary, for it to be enforceable. If any term or provision of this Agreement is declared unenforceable by any
court of competent jurisdiction and cannot be modified to be enforceable, such term or provision shall immediately become null and void, leaving the remainder of this Agreement in full force and effect.
You and Rockwell Collins, Inc. agree that a court or arbitrator can interpret or modify this Agreement to the extent necessary for it to be enforceable and to give
effect to the parties’ expressed intent to create a valid and binding arbitration procedure to resolve all disputes not expressly excluded above in the fifth unnumbered paragraph. If any term or provision of this Agreement is found unlawful or
unenforceable and a court or arbitrator declines to modify this Agreement to give effect to the parties’ intent to create a valid and binding arbitration agreement then the parties agree that this Agreement shall be self-amending, meaning it
automatically, immediately and retroactively shall be amended, modified, and/or altered to be enforceable. Other than as set forth in the above provision all other modifications of this Agreement shall be in writing and signed by an authorized
senior executive of the Company and by you.
|
I.
|
Sole and Entire Agreement
|
This is the complete agreement of the
parties regarding arbitration of disputes, except for any arbitration provision contained in any pension or benefit plan. This Agreement replaces any prior or contemporaneous oral or written agreement or understanding on the subject. In signing this
Agreement, neither party is relying on any representation, oral or written, on the subject of the effect, enforceability nor meaning of this Agreement, except as specifically stated herein.
THIS ARBITRATION AGREEMENT IS VOLUNTARY. YOU HAVE AT LEAST
21 CALENDAR DAYS TO CONSIDER WHETHER TO BE COVERED BY THIS AGREEMENT OR TO OPT OUT AND NOT BE COVERED. YOU MAY USE ALL OR PART OF THAT TIME. YOU AGREE THAT IF YOU DECIDE TO BE COVERED BY THIS AGREEMENT, YOU HAVE DONE SO KNOWINGLY, VOLUNTARILY, AND
FREE FROM DURESS OR COERCION. IN ADDITION, YOU HAVE THE RIGHT TO CONSULT WITH COUNSEL REGARDING THIS AGREEMENT.
- 4 -
Please indicate either (1) your agreement to be covered by this Agreement or (2) your decision to opt out and
not be covered by this Agreement by signing below in the appropriate box and returning the Agreement to the Company’s Secretary at 400 Collins Road NE, Cedar Rapids, IA 52498 within 21 calendar days after you receive this Agreement. IF YOU
DECIDE TO OPT OUT AND NOT BE COVERED BY THIS AGREEMENT, THE LONG-TERM INCENTIVE OR EQUITY AWARD REFERRED TO IN PARAGRAPH C ABOVE WILL LAPSE.
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(1)
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I understand and agree to arbitrate any and all claims I may have against Rockwell Collins, Inc. and that Rockwell Collins, Inc. will pay the costs of said arbitration.
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Employee’s Signature
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Gary R. Chadick
Senior Vice President,
General Counsel & Secretary
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Date: [date]
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PRINT NAME LEGIBLY
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Date:
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** OR **
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(2)
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I understand and agree that I am eligible to arbitrate any and all claims I may have against Rockwell Collins, Inc. and that Rockwell Collins, Inc. will pay the costs of said
arbitration. Nonetheless, I elect to opt out and decline to be bound by the Arbitration Agreement.
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Employee’s Signature
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Date
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PRINT NAME LEGIBLY
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Please return this Mutual Agreement to Arbitrate Claims to the Company within 21 calendar days of receiving it,
having decided either (1) to participate in this Agreement or (2) to opt out and not participate in this Agreement. You must sign and date this Agreement where indicated above.
- 5 -
[FORM OF NONCOMPETE AND NONSOLICITATION LETTER AGREEMENT
FOR VICE PRESIDENTS AND ABOVE]
[Date]
[Name]
Personnel Number:
Dear
:
Your
agreement to the noncompete and nonsolicit terms below is required in exchange for the
long-term incentives granted to you.
In partial consideration for the grant of stock options, performance units and performance shares in [month] [year] to you, you undertake and agree by your acceptance of
these long-term incentives that
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(a)
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during your employment with the Corporation (as defined in the 2006 Long-Term Incentives Plan or any successor plan) and for two years after the date of your retirement or other
termination of such employment for any reason, you shall not, in any geographic area in which the Corporation does business, (i) directly or indirectly, except with the approval of the Corporation, engage or otherwise participate in any
business which is competitive with any line of business of the Corporation or any of its affiliates to or for which you provided services or about which you obtained confidential information (otherwise than through ownership of not more than 5% of
the voting securities of any such competitive business) or (ii) solicit, induce or participate in the hiring of any employee of the Corporation or any of its affiliates to leave his or her employment with the Corporation or any of its
affiliates to accept employment or other engagement with any business; and
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(b)
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in the event that you breach this undertaking, in addition to any and all other remedies the Corporation may have, (i) the Corporation shall have the right to determine by
written notice to you that any of your past, present or future long-term incentives granted by the Corporation that are then outstanding shall immediately lapse and cease to be exercisable or otherwise effective; and (ii) you agree to pay the
Corporation upon written demand (A) the amount of the excess of the Fair Market Value (as defined in the Plan) of any shares of the Corporation’s Common Stock you acquired upon exercise of stock options (other than options exercised more
than two years before the date of your retirement or other termination of employment) over the exercise price for those shares and (B) the aggregate Fair Market Value of all other long-term incentive
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awards paid out to you (other than such awards paid out more than two years before the date of your
retirement or other termination of employment).
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(c)
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This Agreement shall be construed, interpreted and enforced in accordance with the internal laws of the State of Iowa and you agree to submit to the personal jurisdiction of any
state or federal court in Iowa and consent to service of process in connection with any action arising out of this Agreement.
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If a Change of Control (as defined in the Plan) shall occur, however, the foregoing provisions (a) and (b) shall immediately terminate as of, and shall not limit your activities after, the date of such Change of Control.
The stock options, performance units and performance shares granted in [month] [year] will lapse and be of no effect if a copy of this
agreement properly signed by you is not received by the Secretary of Rockwell Collins, Inc. at the above address on or before [date], unless Rockwell Collins, Inc. (in its sole discretion) elects in writing to extend that date. To the extent any
future long-term incentives are granted to you by the Corporation, this noncompete and nonsolicit agreement shall be relied upon by the Corporation as partial consideration.
Please note that you previously signed an agreement along these lines with Rockwell Collins. You are being requested to replace the previously signed
document because the prior agreement only referred to stock options. This new agreement now also includes stock options and other forms of long-term incentives such as performance shares and performance units.
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Agreed to:
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ROCKWELL COLLINS, INC.
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Date:
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By:
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Employee Signature
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Gary R. Chadick
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Senior Vice President
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Personnel Number
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General Counsel & Secretary
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- 2 -
[SAMPLE AWARD LETTER UNDER 2006 LONG-TERM INCENTIVES PLAN,
FORMING A PART OF STOCK OPTION AGREEMENT]
[Date]
[Name]
Dear
:
I am pleased to inform you that you have been awarded a long-term incentive grant. This grant is made up of stock options and a performance award (comprised of cash and
shares). This long-term incentive grant is designed to reward us if we meet or exceed our goals of profitable growth and building shareowner value, key drivers of success for our business.
Total direct compensation for executive positions is typically made up of three components—base salary, annual incentive (ICP) and long-term incentives. Your total
compensation statement includes the value of each of these elements of your compensation package. Your new long-term incentive award is outlined below:
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•
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Half of your target long-term incentive compensation is awarded to you in the form of stock options and you have been granted
Rockwell Collins stock options
on [date] at an exercise price of $
per share.
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•
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You have also been granted
a performance award of
for the achievement of our three year
goals (FY
-
) for Cumulative Sales and Return on Sales. The target award is made up of
cash and
performance shares
. The goals have been set to reflect the
strategic importance of profitable growth on our business. You will have the opportunity to earn from 0 to 200% of the target award based on the company’s performance against these pre-established goals shown on the enclosed performance matrix.
A further adjustment of plus or minus 20% of the final award amount will potentially be made for our relative performance on Total Shareowner Return when compared to ten peer companies.
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•
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The stock options and performance awards are subject to the provisions of the 2006 Long-Term Incentives Plan and to the attached terms and conditions. Please read these documents
and your copy of the Plan and Prospectus carefully and retain them for future reference.
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As a key member of the Rockwell Collins leadership team, you play a significant role in the attainment of our growth and
shareowner return goals. The potential value of these awards is related directly to our achievements and our pay-for-performance philosophy. Our company will be successful when we provide superior value to our customers and shareowners.
Congratulations on your receipt of this long-term incentive grant. As we strive to achieve our vision and values, I am confident that we will continue working
together to fulfill the high expectations that we have for Rockwell Collins.
Sincerely,
Clay Jones
- 2 -
[TERMS AND CONDITIONS – EXECUTIVE OFFICERS]
ROCKWELL COLLINS, INC.
2006
LONG-TERM INCENTIVES PLAN
STOCK OPTION AGREEMENT
STOCK OPTION TERMS AND CONDITIONS
As used in these Stock
Option Terms and Conditions, the following words and phrases shall have the respective meanings ascribed to them below unless the context in which any of them is used clearly indicates a contrary meaning:
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(a)
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Cashless Exercise
: Cashless Exercise shall have the meaning set forth in Section 3(a)(ii) herein.
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(b)
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Change of Control
: Change of Control shall have the same meaning as such term has in Section 10(a) of the Plan.
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(c)
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Charles Schwab
: Charles Schwab & Co., Inc., the Stock Option Administrator whom the Corporation has engaged to administer and process all Option exercises.
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(d)
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Committee
: The Compensation Committee of the Board of Directors of the Corporation.
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(e)
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Corporation:
Rockwell Collins, Inc., a Delaware corporation, and any successor thereto.
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(f)
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Customer Service Center
: Charles Schwab’s Customer Service Center that is used to facilitate Option transactions. Contact Charles Schwab at (888) 852-2135.
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(g)
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Employee
: Employee shall have the same meaning as such term has in Section 2(j) of the Plan.
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(h)
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Exercise Request and Attestation Form
: The form attached as
Exhibit 1
or any other form accepted by Charles Schwab in connection with the use of already-owned
Stock to pay all or part of the exercise price for the Option Stock to be purchased on exercise of any of the Options.
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(i)
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Notice of Exercise Form
: The form attached as
Exhibit 2
or any other form accepted by the Secretary of Rockwell Collins in his sole discretion.
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(j)
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Options
: The stock options listed in the letter dated [Grant Date], to which these Stock Option Terms and Conditions are attached and which together with these Stock
Option Terms and Conditions constitute the Stock Option Agreement.
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(k)
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Option Stock
: The Stock issuable or transferable on exercise of the Options.
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(l)
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Plan
: Rockwell Collins 2006 Long-Term Incentives Plan, as such Plan may be amended and in effect at the relevant time.
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(m)
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Stock
: Stock shall have the same meaning as such term has in Section 2(dd) of the Plan.
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(n)
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Stock Option Agreement
: These Stock Option Terms and Conditions together with the letter dated [Grant Date], to which they are attached.
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(o)
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Subsidiary
: Subsidiary shall have the same meaning as such term has in Section 2(ee) of the Plan.
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2.
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When Options May be Exercised
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The
Options may be exercised, in whole or in part (but only for a whole number of shares) and at one time or from time to time, as to one-third (rounded to the nearest whole number) of the Option Stock granted pursuant to nonqualified stock options
(NQs) and incentive stock options (ISOs) during the period beginning on [First Anniversary of Grant Date] and ending on [Tenth Anniversary of Grant Date], as to an additional one-third (rounded to the nearest whole number) of the Option Stock
granted pursuant to NQs and ISOs during the period beginning on [Second Anniversary of Grant Date] and ending on [Tenth Anniversary of Grant Date] and as to the balance of the Option Stock granted pursuant to NQs and ISOs during the period beginning
on [Third Anniversary of Grant Date] and ending on [Tenth Anniversary of Grant Date], and only during those periods, and
provided that
:
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(a)
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if you die while an Employee, any person who holds the Options as permitted by Section 4 herein may exercise all the Options not theretofore exercised within (and only
within) the period beginning on your date of death (even if you die before you have become entitled to exercise all or any part of the Options) and ending three years thereafter; and
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- 2 -
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(b)
|
if your employment by the Corporation or a Subsidiary terminates other than by death, then:
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(i)
|
if your retirement or other termination date is before [First Anniversary of Grant Date], the Options shall lapse on your retirement or other termination and may not be exercised
at any time;
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(ii)
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if your employment by the Corporation or a Subsidiary is terminated for cause, as determined by the Committee, the Options shall expire forthwith upon your termination and may
not be exercised thereafter;
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(iii)
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if your employment by the Corporation or a Subsidiary terminates on or after [First Anniversary of Grant Date] by reason of your retirement under a retirement plan of the
Corporation, or under a retirement plan of a Subsidiary, you (or any person who holds the Options as permitted by Section 4 herein) may thereafter exercise Options which are exercisable prior to the date of your retirement or that will become
exercisable within (and only within) the period between the date of your retirement and ending on the fifth anniversary of your retirement date; or if you retire prior to age 62, the earlier of (x) the fifth anniversary of your retirement date
or (y) such earlier date as the Committee shall determine by action taken not later than 60 days after your retirement date; and
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(iv)
|
if your employment by the Corporation or a Subsidiary terminates on or after [First Anniversary of Grant Date] for any reason not specified in subparagraph (a) or in clauses
(ii) or (iii) of this subparagraph (b), you (or any person who holds the Options as permitted by Section 4 herein) may thereafter exercise the Options within (and only within) the period ending three months after your termination date
but only to the extent such Options were exercisable on your termination date.
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In no event shall the provisions of the
foregoing subparagraphs (a) and (b) extend to a date after [Tenth Anniversary of Grant Date], the period during which the Options may be exercised.
Notwithstanding any other provision of this Agreement, if a Change of Control shall occur, then all Options then outstanding pursuant to this Agreement shall forthwith become fully exercisable whether or not then
otherwise exercisable in accordance with their terms.
- 3 -
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(a)
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To exercise all or any part of the Options, you (or any person who holds the Options as permitted by Section 4 herein) must first obtain authorization from Rockwell
Collins’ Office of the Secretary by submitting a Notice of Exercise Form to Rockwell Collins’ Office of the Secretary (Attention: Stock Option Administration; facsimile number (319) 295-3599) or by other means acceptable to the
Secretary of Rockwell Collins and then contact the Stock Option Administrator, Charles Schwab, by using the Customer Service Center, as follows:
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(i)
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contact the Customer Service Center by calling (888) 852-2135 Monday through Friday, 9:00 a.m. to 9:00 p.m. Eastern Time and follow the instructions provided;
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(ii)
|
full payment of the exercise price for the Option Stock to be purchased on exercise of the Options may be made by:
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•
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check (wire) to your Charles Schwab account; or
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•
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in already-owned Stock; or
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•
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by authorizing Charles Schwab or a third party approved by the Corporation to sell the Stock (or a sufficient portion of the Stock) acquired upon exercise of the Option
(“Cashless Exercise”); or
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•
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in a combination of check (wire) to your Charles Schwab account and Stock (whether already-owned Stock or Stock issued and subsequently sold in connection with a Cashless
Exercise); and
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(iii)
|
in the case of an exercise of the Options by any person other than you seeking to exercise the Options, such documents as Charles Schwab or the Secretary of the Corporation shall
require to establish to their satisfaction that the person seeking to exercise the Options is entitled to do so.
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(b)
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An exercise of the whole or any part of the Options shall be effective:
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(i)
|
if you elect (or any person who holds the Options as permitted by Section 4 herein elects) to pay the exercise price for the Option Stock entirely by check (wire), upon
(A) completion of your transaction by using the Customer Service Center and full payment of the exercise price and withholding taxes (if
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- 4 -
applicable) are received by Charles Schwab within three business days following the exercise; and
(B) receipt of any documents required pursuant to Section 3(a)(iii) herein; and
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(ii)
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if you elect (or any person who holds the Options as permitted by Section 4 herein elects) to pay the exercise price of the Option Stock in Stock (whether already-owned
Stock or Stock issued and subsequently sold in connection with a Cashless Exercise) or in a combination of Stock (whether already-owned Stock or Stock issued and subsequently sold in connection with a Cashless Exercise) and check, upon
(A) completion of your transaction by using the Customer Service Center and full payment of the exercise price (as described in Section 3(d)(i) herein) and withholding taxes (if applicable) are received by Charles Schwab within three
business days following the exercise; and (B) receipt of any documents required pursuant to Section 3(a)(iii) herein.
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(c)
|
If you choose (or any person who holds the Options as permitted by Section 4 herein chooses) to pay the exercise price for the Option Stock to be purchased on exercise of
any of the Options entirely by check, payment must be made by:
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|
•
|
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delivering to Charles Schwab a check (wire) in the full amount of the exercise price for those Option Stock; or
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•
|
|
arranging with a stockbroker, bank or other financial institution to deliver to Charles Schwab full payment, by check or (if prior arrangements are made with Charles
Schwab) by wire transfer, of the exercise price of those Option Stock.
|
In either event, in accordance with
Section 3(e) herein, full payment of the exercise price for the Option Stock purchased must be made within three business days after the exercise has been completed through the Customer Service Center.
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(d)
|
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(i)
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If you choose (or any person who holds the Options as permitted by Section 4 herein chooses) to use already-owned Stock to pay all or part of the exercise price for the Option Stock to
be purchased on exercise of any of the Options, you (or any person who holds the Options as permitted by Section 4 herein) must deliver to Charles Schwab an Exercise Request and Attestation Form and cash to cover the purchase of Option Stock as
specified in such form. To perform such a transaction,
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- 5 -
the Exercise Request and Attestation Form must be submitted via fax (720) 785-8874 by 4:00 p.m.
Eastern Time on the date of exercise and any questions concerning this type of transaction should be referred to (877) 636-7551 (Stock Option Administration Group Hotline). The Exercise Request and Attestation Form must attest to your ownership
of Stock representing:
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•
|
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at least the number of shares of Stock whose value, based on the closing price of the Stock on the New York Stock Exchange — Composite Transactions on the day you
have exercised your Options through the Customer Service Center, equals the exercise price for the Option Stock; or
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•
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any lesser number of shares of Stock you desire (or any person who holds the Options as permitted by Section 4 herein desires) to use to pay the exercise price for
such Option Stock and a check in the amount of such exercise price less the value of the Stock delivered, based on the closing price of the Stock on the New York Stock Exchange — Composite Transactions on the day you have exercised your
Options through the Customer Service Center.
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(ii)
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If you choose (or any person who holds the Options as permitted by Section 4 herein chooses) to use Option Stock obtained by Cashless Exercise to pay all or part of the
exercise price for the remaining Option Stock to be purchased on exercise of any of the Options, you (or any person who holds the Options as permitted by Section 4 herein) must contact the Customer Service Center at (888) 852-2135.
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(iii)
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Charles Schwab will advise you (or any other person who, being entitled to do so, exercises the Options) of the exact number of shares of Stock, valued at the closing price on
the New York Stock Exchange — Composite Transactions on the effective date of exercise under Section 3(b)(ii) herein, and any funds required to pay in full the exercise price for the Option Stock purchased. In accordance with
Section 3(e) herein, you (or such other person) must pay, by check, in Stock or in a combination of check and Stock, any balance required to pay in full the exercise price of the Option Stock purchased within three business days following the
effective date of such exercise of the Options under Section 3(b)(ii) herein.
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- 6 -
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(iv)
|
Notwithstanding any other provision of this Stock Option Agreement, the Secretary of the Corporation may limit the number, frequency or volume of successive exercises of any of
the Options in which payment is made, in whole or in part, by delivery of Stock pursuant to this subparagraph (d) to prevent unreasonable pyramiding of such exercises.
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(e)
|
An exercise completed through the Customer Service Center, whether or not full payment of the exercise price for the Option Stock is received by Charles Schwab, shall constitute
a binding contractual obligation by you (or the other person entitled to exercise the Options) to proceed with and complete that exercise of the Options (but only so long as you continue, or the other person entitled to exercise the Options
continues, to be entitled to exercise the Options on that date). By your acceptance of this Stock Option Agreement, you agree (for yourself and on behalf of any other person who becomes entitled to exercise the Options) to pay to Charles Schwab in
full the exercise price for that Option Stock, that payment being by check, wire transfer, in Stock or in a combination of check and Stock, on or before the third business day after the date on which you complete the transaction through the Customer
Service Center. If such payment is not made, you (for yourself and on behalf of any other person who becomes entitled to exercise the Options) authorize the Corporation and your employer, in their discretion, to set off against salary payments or
other amounts due to you (or the other person entitled to exercise the Options) any balance of the exercise price for such Option Stock remaining unpaid thereafter.
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(f)
|
An Exercise Confirmation representing the amount of Option Stock purchased will be issued the third business day (trade date plus three business days) (i) after Charles
Schwab has received full payment therefor or (ii) at the Corporation’s or Charles Schwab’s election in their sole discretion, after the Corporation or Charles Schwab has received (x) full payment of the exercise price of that
Option Stock and (y) any reimbursement in respect of withholding taxes due pursuant to Section 5 herein.
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4.
|
Transferability; Nonassignability
|
You
are not entitled to transfer the Options except by will or by the laws of descent and distribution.
- 7 -
The Corporation, your
employer or Charles Schwab shall have the right, in connection with the exercise of the Options, in whole or in part, to deduct from any payment to be made by the Corporation, your employer or Charles Schwab an amount equal to the taxes required to
be withheld by law with respect to such exercise or to require you (or any other person entitled to exercise the Options) to pay to it an amount sufficient to provide for any such taxes so required to be withheld. By your acceptance of this Stock
Option Agreement, you agree (for yourself and on behalf of any other person who becomes entitled to exercise the Options) that if the Corporation, your employer or Charles Schwab elects to require you (or such other person) to remit an amount
sufficient to pay such withholding taxes, you (or such other person) must remit that amount within three business days after the completion of the Option exercise as provided in Section 3(a)(ii) herein. If such payment is not made, the
Corporation and your employer, in their discretion, shall have the same right of set-off as provided under Section 3(e) herein with respect to payment of the exercise price for Option Stock.
The section headings contained
in these Stock Option Terms and Conditions are solely for the purpose of reference, are not part of the agreement of the parties and shall in no way affect the meaning or interpretation of this Stock Option Agreement.
All references in these Stock
Option Terms and Conditions to Sections, paragraphs, subparagraphs or clauses shall be deemed to be references to Sections, paragraphs, subparagraphs and clauses of these Stock Option Terms and Conditions unless otherwise specifically provided.
This Stock Option
Agreement and the other terms applicable to Stock Options granted under the Plan embody the entire agreement and understanding between the Corporation and you with respect to the Options, and there are no representations, promises, covenants,
agreements or understandings with respect to the Options other than those expressly set forth in this Stock Option Agreement and the Plan.
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9.
|
Applicable Laws and Regulations
|
This
Stock Option Agreement and the Corporation’s obligation to issue Option Stock hereunder are subject to applicable laws and regulations.
- 8 -
Exhibit 1 Exercise Request and Attestation Form (For Use With Already-Owned Stock)
Exhibit 2 Notice of Exercise Form
- 9 -
Exhibit 2
NOTICE OF EXERCISE FORM
|
To:
|
Rockwell Collins, Inc.
|
Office of the Secretary
400 Collins Road NE
Cedar
Rapids, IA 52498
Fax No. (319) 295-3599
1.
OPTIONS EXERCISED
: Subject to the terms and conditions of my Stock Option Agreement(s) with Rockwell Collins, Inc. (Rockwell Collins) thereunder, I hereby exercise the following stock option(s):
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Date of
Grant
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Number of
Shares
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Exercise
Price
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Total
Purchase Price
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$
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$
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$
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$
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$
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$
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2.
PAYMENT
: The following must be received by Charles Schwab & Co., Inc. (Charles
Schwab) within three business days following the date of exercise:
|
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•
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A check payable to Rockwell Collins Employee Stock Option Program or a wire transfer to Charles Schwab for credit to the Rockwell Collins Employee Stock Option Program in the amount
of the Total Purchase Price of the above-itemized stock option(s); or
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•
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A number of shares of Rockwell Collins Common Stock surrendered or sold to pay the Total Purchase Price of the above-itemized stock option(s); or
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•
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A combination of (i) check payable to Rockwell Collins Employee Stock Option Program or a wire transfer to Charles Schwab for credit to the Rockwell Collins Employee Stock
Option Program, and (ii) a number of shares of Stock surrendered or sold, which together amount to the Total Purchase Price of the above-itemized stock option(s).
|
Notice of Exercise Form
For Officers and Directors Only
Page 2
If full payment of the Total Purchase Price of the stock option(s) listed in
Item 1
is not delivered within three (3) business days
after the exercise date, Rockwell Collins is authorized forthwith to set off the balance due against any amounts due or which may become due me to satisfy my obligation to pay the Total Purchase Price.
This Stock Option Exercise may not be revoked or changed after delivery of this form, properly completed, dated and signed, to Rockwell Collins whether or not payment
accompanies this form and whether this form is dated before, on or after the date of such receipt.
- 2 -
[TERMS AND CONDITIONS – NON-EXECUTIVE OFFICERS VICE PRESIDENT &
ABOVE NQs AND ISOs]
ROCKWELL
COLLINS, INC.
2006 LONG-TERM INCENTIVES PLAN
STOCK OPTION AGREEMENT
STOCK OPTION TERMS AND CONDITIONS
As used in these Stock
Option Terms and Conditions, the following words and phrases shall have the respective meanings ascribed to them below unless the context in which any of them is used clearly indicates a contrary meaning:
|
|
(a)
|
Cashless Exercise
: Cashless Exercise shall have the meaning set forth in Section 3(a)(iv) herein.
|
|
|
(b)
|
Change of Control
: Change of Control shall have the same meaning as such term has in Section 10(a) of the Plan.
|
|
|
(c)
|
Charles Schwab
: Charles Schwab & Co., Inc., the Stock Option Administrator whom the Corporation has engaged to administer and process all Option exercises.
|
|
|
(d)
|
Committee
: The Compensation Committee of the Board of Directors of the Corporation.
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(e)
|
Corporation:
Rockwell Collins, Inc., a Delaware corporation, and any successor thereto.
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|
|
(f)
|
Customer Service Center
: Charles Schwab’s Customer Service Center that is used to facilitate Option transactions. Contact Charles Schwab at (888) 852-2135.
|
|
|
(g)
|
Employee
: Employee shall have the same meaning as such term has in Section 2(j) of the Plan.
|
|
|
(h)
|
Exercise Request and Attestation Form
: The form attached as
Exhibit 1
or any other form accepted by Charles Schwab in connection with the use of already-owned Stock
to pay all or part of the exercise price for the Option Stock to be purchased on exercise of any of the Options.
|
|
|
(i)
|
Options
: The stock options listed in the letter dated [Grant Date], to which these Stock Option Terms and Conditions are attached and which together with these Stock
Option Terms and Conditions constitute the Stock Option Agreement.
|
|
|
(j)
|
Option Stock
: The Stock issuable or transferable on exercise of the Options.
|
|
|
(k)
|
Plan
: Rockwell Collins 2006 Long-Term Incentives Plan, as such Plan may be amended and in effect at the relevant time.
|
|
|
(l)
|
Schwab OptionCenter
®
: Charles Schwab’s stock option management website which you can use to access your stock option account and to facilitate stock option transactions securely on
the web at www.schwab.com/optioncenter.
|
|
|
(m)
|
Stock
: Stock shall have the same meaning as such term has in Section 2(dd) of the Plan.
|
|
|
(n)
|
Stock Option Agreement
: These Stock Option Terms and Conditions together with the letter dated [Grant Date], to which they are attached.
|
|
|
(o)
|
Subsidiary
: Subsidiary shall have the same meaning as such term has in Section 2(ee) of the Plan.
|
|
2.
|
When Options May be Exercised
|
The
Options may be exercised, in whole or in part (but only for a whole number of shares) and at one time or from time to time, as to one-third (rounded to the nearest whole number) of the Option Stock granted pursuant to nonqualified stock options
(NQs) and incentive stock options (ISOs) during the period beginning on [First Anniversary of Grant Date] and ending on [Tenth Anniversary of Grant Date], as to an additional one-third (rounded to the nearest whole number) of the Option Stock
granted pursuant to NQs and ISOs during the period beginning on [Second Anniversary of Grant Date] and ending on [Tenth Anniversary of Grant Date] and as to the balance of the Option Stock granted pursuant to NQs and ISOs during the period beginning
on [Third Anniversary of Grant Date] and ending on [Tenth Anniversary of Grant Date], and only during those periods, and
provided that
:
|
|
(a)
|
if you die while an Employee, any person who holds the Options as permitted by Section 4 herein may exercise all the Options not theretofore exercised within (and only
within) the period beginning on your date of death (even if you die before you have become entitled to exercise all or any part of the Options) and ending three years thereafter; and
|
- 2 -
|
|
(b)
|
if your employment by the Corporation or a Subsidiary terminates other than by death, then:
|
|
|
(i)
|
if your retirement or other termination date is before [First Anniversary of Grant Date], the Options shall lapse on your retirement or other termination and may not be exercised
at any time;
|
|
|
(ii)
|
if your employment by the Corporation or a Subsidiary is terminated for cause, as determined by the Committee, the Options shall expire forthwith upon your termination and may
not be exercised thereafter;
|
|
|
(iii)
|
if your employment by the Corporation or a Subsidiary terminates on or after [First Anniversary of Grant Date] by reason of your retirement under a retirement plan of the
Corporation, or under a retirement plan of a Subsidiary, you (or any person who holds the Options as permitted by Section 4 herein) may thereafter exercise Options which are exercisable prior to the date of your retirement or that will become
exercisable within (and only within) the period between the date of your retirement and ending on the fifth anniversary of your retirement date; or if you retire prior to age 62, the earlier of (x) the fifth anniversary of your retirement date
or (y) such earlier date as the Committee shall determine by action taken not later than 60 days after your retirement date; and
|
|
|
(iv)
|
if your employment by the Corporation or a Subsidiary terminates on or after [First Anniversary of Grant Date] for any reason not specified in subparagraph (a) or in clauses
(ii) or (iii) of this subparagraph (b), you (or any person who holds the Options as permitted by Section 4 herein) may thereafter exercise the Options within (and only within) the period ending three months after your termination date
but only to the extent such Options were exercisable on your termination date.
|
In no event shall the provisions of the
foregoing subparagraphs (a) and (b) extend to a date after [Tenth Anniversary of Grant Date], the period during which the Options may be exercised.
Notwithstanding any other provision of this Agreement, if a Change of Control shall occur, then all Options then outstanding pursuant to this Agreement shall forthwith become fully exercisable whether or not then
otherwise exercisable in accordance with their terms.
- 3 -
|
|
(a)
|
To exercise all or any part of the Options, you (or any person who holds the Options as permitted by Section 4 herein) must contact the Stock Option Administrator, Charles
Schwab, by using the Customer Service Center or Schwab OptionCenter
®
, as follows:
|
|
|
(i)
|
contact the Customer Service Center by calling (888) 852-2135 Monday through Friday, 9:00 a.m. to 9:00 p.m. Eastern Time and follow the instructions provided, or exercise
via the Web through the Schwab OptionCenter
®
at
www.schwab.com/ optioncenter
;
|
|
|
(ii)
|
confirm the Option transaction through the Customer Service Center or Schwab OptionCenter
®
;
|
|
|
(iii)
|
at any time you may speak to a Customer Service Representative for assistance by calling 888-852-2135;
|
|
|
(iv)
|
full payment of the exercise price for the Option Stock to be purchased on exercise of the Options may be made by:
|
|
|
•
|
|
check (wire) to your Charles Schwab account; or
|
|
|
•
|
|
in already-owned Stock; or
|
|
|
•
|
|
by authorizing Charles Schwab or a third party approved by the Corporation to sell the Stock (or a sufficient portion of the Stock) acquired upon exercise of the Option
(“Cashless Exercise”); or
|
|
|
•
|
|
in a combination of check (wire) to your Charles Schwab account and Stock (whether already-owned Stock or Stock issued and subsequently sold in connection with a Cashless
Exercise); and
|
|
|
(v)
|
in the case of an exercise of the Options by any person other than you seeking to exercise the Options, such documents as Charles Schwab or the Secretary of the Corporation shall
require to establish to their satisfaction that the person seeking to exercise the Options is entitled to do so.
|
- 4 -
|
|
(b)
|
An exercise of the whole or any part of the Options shall be effective:
|
|
|
(i)
|
if you elect (or any person who holds the Options as permitted by Section 4 herein elects) to pay the exercise price for the Option Stock entirely by check (wire), upon
(A) completion of your transaction by using the Customer Service Center or Schwab OptionCenter
®
and full payment of the exercise price and withholding taxes (if applicable) are received by Charles Schwab within three business days following the exercise; and (B) receipt of any documents required pursuant to
Section 3(a)(v) herein; and
|
|
|
(iii)
|
if you elect (or any person who holds the Options as permitted by Section 4 herein elects) to pay the exercise price of the Option Stock in Stock (whether already-owned
Stock or Stock issued and subsequently sold in connection with a Cashless Exercise) or in a combination of Stock (whether already-owned Stock or Stock issued and subsequently sold in connection with a Cashless Exercise) and check, upon
(A) completion of your transaction by using the Customer Service Center or Schwab OptionCenter
®
and full payment of the exercise price (as described in Section 3(d)(i) herein) and withholding taxes (if applicable) are received by Charles Schwab within three business days following the exercise; and (B) receipt of any
documents required pursuant to Section 3(a)(v) herein.
|
|
|
(c)
|
If you choose (or any person who holds the Options as permitted by Section 4 herein chooses) to pay the exercise price for the Option Stock to be purchased on exercise of
any of the Options entirely by check, payment must be made by:
|
|
|
•
|
|
delivering to Charles Schwab a check (wire) in the full amount of the exercise price for those Option Stock; or
|
|
|
•
|
|
arranging with a stockbroker, bank or other financial institution to deliver to Charles Schwab full payment, by check or (if prior arrangements are made with Charles
Schwab) by wire transfer, of the exercise price of those Option Stock.
|
In either event, in accordance with
Section 3(e) herein, full payment of the exercise price for the Option Stock purchased must be made within three business days after the exercise has been completed through the Customer Service Center or Schwab OptionCenter
®
.
- 5 -
|
|
|
|
|
|
|
(d)
|
|
(i)
|
|
If you choose (or any person who holds the Options as permitted by Section 4 herein chooses) to use already-owned Stock to pay all or part of the exercise price for the Option Stock to
be purchased on exercise of any of the Options, you (or any person who holds the Options as permitted by Section 4 herein) must deliver to Charles Schwab an Exercise Request and Attestation Form and cash to cover the purchase of Option Stock as
specified in such form. To perform such a transaction, the Exercise Request and Attestation Form must be submitted via fax (720) 785-8874 by 4:00 p.m. Eastern Time on the date of exercise and any questions concerning this type of transaction
should be referred to (877) 636-7551 (Stock Option Administration Group Hotline). The Exercise Request and Attestation Form must attest to your ownership of Stock representing:
|
|
|
•
|
|
at least the number of shares of Stock whose value, based on the closing price of the Stock on the New York Stock Exchange — Composite Transactions on the day you
have exercised your Options through the Customer Service Center or Schwab OptionCenter
®
, equals
the exercise price for the Option Stock; or
|
|
|
•
|
|
any lesser number of shares of Stock you desire (or any person who holds the Options as permitted by Section 4 herein desires) to use to pay the exercise price for
such Option Stock and a check in the amount of such exercise price less the value of the Stock delivered, based on the closing price of the Stock on the New York Stock Exchange — Composite Transactions on the day you have exercised your Options
through the Customer Service Center or Schwab OptionCenter
®
.
|
|
|
(ii)
|
If you choose (or any person who holds the Options as permitted by Section 4 herein chooses) to use Option Stock obtained by Cashless Exercise to pay all or part of the
exercise price for the remaining Option Stock to be purchased on exercise of any of the Options, you (or any person who holds the Options as permitted by Section 4 herein) must contact the Customer Service Center at (888) 852-2135 or
Schwab OptionCenter
®
.
|
|
|
(iii)
|
Charles Schwab will advise you (or any other person who, being entitled to do so, exercises the Options) of the exact number of shares of Stock, valued at the closing price on
the
|
- 6 -
New York Stock Exchange — Composite Transactions on the effective date of exercise under
Section 3(b)(ii) herein, and any funds required to pay in full the exercise price for the Option Stock purchased. In accordance with Section 3(e) herein, you (or such other person) must pay, by check, in Stock or in a combination of check
and Stock, any balance required to pay in full the exercise price of the Option Stock purchased within three business days following the effective date of such exercise of the Options under Section 3(b)(ii) herein.
|
|
(iv)
|
Notwithstanding any other provision of this Stock Option Agreement, the Secretary of the Corporation may limit the number, frequency or volume of successive exercises of any of
the Options in which payment is made, in whole or in part, by delivery of Stock pursuant to this subparagraph (d) to prevent unreasonable pyramiding of such exercises.
|
|
|
(e)
|
An exercise completed through the Customer Service Center or Schwab OptionCenter
®
, whether or not full payment of the exercise price for the Option Stock is received by Charles Schwab, shall constitute a binding
contractual obligation by you (or the other person entitled to exercise the Options) to proceed with and complete that exercise of the Options (but only so long as you continue, or the other person entitled to exercise the Options continues, to be
entitled to exercise the Options on that date). By your acceptance of this Stock Option Agreement, you agree (for yourself and on behalf of any other person who becomes entitled to exercise the Options) to pay to Charles Schwab in full the exercise
price for that Option Stock, that payment being by check, wire transfer, in Stock or in a combination of check and Stock, on or before the third business day after the date on which you complete the transaction through the Customer Service Center.
If such payment is not made, you (for yourself and on behalf of any other person who becomes entitled to exercise the Options) authorize the Corporation and your employer, in their discretion, to set off against salary payments or other amounts due
to you (or the other person entitled to exercise the Options) any balance of the exercise price for such Option Stock remaining unpaid thereafter.
|
|
|
(f)
|
An Exercise Confirmation representing the amount of Option Stock purchased will be issued the third business day (trade date plus three business days) (i) after Charles
Schwab has received full payment therefor or (ii) at the Corporation’s or Charles Schwab’s election in their sole discretion, after the Corporation or Charles Schwab has received (x) full payment of the exercise price of that
Option Stock and (y) any reimbursement in respect of withholding taxes due pursuant to Section 5 herein.
|
- 7 -
|
4.
|
Transferability; Nonassignability
|
You
are not entitled to transfer the Options except by will or by the laws of descent and distribution.
The Corporation, your
employer or Charles Schwab shall have the right, in connection with the exercise of the Options, in whole or in part, to deduct from any payment to be made by the Corporation, your employer or Charles Schwab an amount equal to the taxes required to
be withheld by law with respect to such exercise or to require you (or any other person entitled to exercise the Options) to pay to it an amount sufficient to provide for any such taxes so required to be withheld. By your acceptance of this Stock
Option Agreement, you agree (for yourself and on behalf of any other person who becomes entitled to exercise the Options) that if the Corporation, your employer or Charles Schwab elects to require you (or such other person) to remit an amount
sufficient to pay such withholding taxes, you (or such other person) must remit that amount within three business days after the completion of the Option exercise as provided in Section 3(a)(ii) herein. If such payment is not made, the
Corporation and your employer, in their discretion, shall have the same right of set-off as provided under Section 3(e) herein with respect to payment of the exercise price for Option Stock.
The section headings contained
in these Stock Option Terms and Conditions are solely for the purpose of reference, are not part of the agreement of the parties and shall in no way affect the meaning or interpretation of this Stock Option Agreement.
All references in these Stock
Option Terms and Conditions to Sections, paragraphs, subparagraphs or clauses shall be deemed to be references to Sections, paragraphs, subparagraphs and clauses of these Stock Option Terms and Conditions unless otherwise specifically provided.
This Stock Option
Agreement and the other terms applicable to Stock Options granted under the Plan embody the entire agreement and
- 8 -
understanding between the Corporation and you with respect to the Options, and there are no representations, promises,
covenants, agreements or understandings with respect to the Options other than those expressly set forth in this Stock Option Agreement and the Plan.
|
9.
|
Applicable Laws and Regulations
|
This
Stock Option Agreement and the Corporation’s obligation to issue Option Stock hereunder are subject to applicable laws and regulations.
Exhibit 1
Exercise Request and Attestation Form (For Use With Already - Owned Stock)
- 9 -
[TERMS AND CONDITIONS – NON-EXECUTIVE OFFICERS VICE PRESIDENT &
ABOVE NQs ONLY]
ROCKWELL COLLINS,
INC.
2006 LONG-TERM INCENTIVES PLAN
STOCK OPTION AGREEMENT
STOCK OPTION TERMS AND CONDITIONS
As used in these Stock
Option Terms and Conditions, the following words and phrases shall have the respective meanings ascribed to them below unless the context in which any of them is used clearly indicates a contrary meaning:
|
|
(a)
|
Cashless Exercise
: Cashless Exercise shall have the meaning set forth in Section 3(a)(iv) herein.
|
|
|
(b)
|
Change of Control
: Change of Control shall have the same meaning as such term has in Section 10(a) of the Plan.
|
|
|
(c)
|
Charles Schwab
: Charles Schwab & Co., Inc., the Stock Option Administrator whom the Corporation has engaged to administer and process all Option exercises.
|
|
|
(d)
|
Committee
: The Compensation Committee of the Board of Directors of the Corporation.
|
|
|
(e)
|
Corporation:
Rockwell Collins, Inc., a Delaware corporation, and any successor thereto.
|
|
|
(f)
|
Customer Service Center
: Charles Schwab’s Customer Service Center that is used to facilitate Option transactions. Contact Charles Schwab at (888) 852-2135.
|
|
|
(g)
|
Employee
: Employee shall have the same meaning as such term has in Section 2(j) of the Plan.
|
|
|
(h)
|
Exercise Request and Attestation Form
: The form attached as
Exhibit 1
or any other form accepted by Charles Schwab in connection with the use of already-owned Stock
to pay all or part of the exercise price for the Option Stock to be purchased on exercise of any of the Options.
|
|
|
(i)
|
Options
: The stock options listed in the letter dated [Grant Date], to which these Stock Option Terms and Conditions are attached and which together with these Stock
Option Terms and Conditions constitute the Stock Option Agreement.
|
|
|
(j)
|
Option Stock
: The Stock issuable or transferable on exercise of the Options.
|
|
|
(k)
|
Plan
: Rockwell Collins 2006 Long-Term Incentives Plan, as such Plan may be amended and in effect at the relevant time.
|
|
|
(l)
|
Schwab OptionCenter
®
: Charles Schwab’s stock option management website which you can use to access your stock option account and to facilitate stock option transactions securely on the web at
www.schwab.com/optioncenter
.
|
|
|
(m)
|
Stock
: Stock shall have the same meaning as such term has in Section 2(dd) of the Plan.
|
|
|
(n)
|
Stock Option Agreement
: These Stock Option Terms and Conditions together with the letter dated [Grant Date], to which they are attached.
|
|
|
(o)
|
Subsidiary
: Subsidiary shall have the same meaning as such term has in Section 2(ee) of the Plan.
|
|
2.
|
When Options May be Exercised
|
The
Options may be exercised, in whole or in part (but only for a whole number of shares) and at one time or from time to time, as to one-third (rounded to the nearest whole number) of the Option Stock during the period beginning on [First Anniversary
of Grant Date] and ending on [Tenth Anniversary of Grant Date], as to an additional one-third (rounded to the nearest whole number) of the Option Stock during the period beginning on [Second Anniversary of Grant Date] and ending on [Tenth
Anniversary of Grant Date] and as to the balance of the Option Stock during the period beginning on [Third Anniversary of Grant Date] and ending on [Tenth Anniversary of Grant Date], and only during those periods, and
provided
that
:
|
|
(a)
|
if you die while an Employee, any person who holds the Options as permitted by Section 4 herein may exercise all the Options not theretofore exercised within (and only
within) the period beginning on your date of death (even if you die before you have become entitled to exercise all or any part of the Options) and ending three years thereafter; and
|
- 2 -
|
|
(b)
|
if your employment by the Corporation or a Subsidiary terminates other than by death, then:
|
|
|
(i)
|
if your retirement or other termination date is before [First Anniversary of Grant Date], the Options shall lapse on your retirement or other termination and may not be exercised
at any time;
|
|
|
(ii)
|
if your employment by the Corporation or a Subsidiary is terminated for cause, as determined by the Committee, the Options shall expire forthwith upon your termination and may
not be exercised thereafter;
|
|
|
(iii)
|
if your employment by the Corporation or a Subsidiary terminates on or after [First Anniversary of Grant Date] by reason of your retirement under a retirement plan of the
Corporation, or under a retirement plan of a Subsidiary, you (or any person who holds the Options as permitted by Section 4 herein) may thereafter exercise Options which are exercisable prior to the date of your retirement or that will become
exercisable within (and only within) the period between the date of your retirement and ending on the fifth anniversary of your retirement date; or if you retire prior to age 62, the earlier of (x) the fifth anniversary of your retirement date
or (y) such earlier date as the Committee shall determine by action taken not later than 60 days after your retirement date; and
|
|
|
(iv)
|
if your employment by the Corporation or a Subsidiary terminates on or after [First Anniversary of Grant Date] for any reason not specified in subparagraph (a) or in clauses
(ii) or (iii) of this subparagraph (b), you (or any person who holds the Options as permitted by Section 4 herein) may thereafter exercise the Options within (and only within) the period ending three months after your termination date
but only to the extent such Options were exercisable on your termination date.
|
In no event shall the provisions of the
foregoing subparagraphs (a) and (b) extend to a date after [Tenth Anniversary of Grant Date], the period during which the Options may be exercised.
Notwithstanding any other provision of this Agreement, if a Change of Control shall occur, then all Options then outstanding pursuant to this Agreement shall forthwith become fully exercisable whether or not then
otherwise exercisable in accordance with their terms.
- 3 -
|
|
(a)
|
To exercise all or any part of the Options, you (or any person who holds the Options as permitted by Section 4 herein) must contact the Stock Option Administrator, Charles
Schwab, by using the Customer Service Center or Schwab OptionCenter
®
, as follows:
|
|
|
(i)
|
contact the Customer Service Center by calling (888) 852-2135 Monday through Friday, 9:00 a.m. to 9:00 p.m. Eastern Time and follow the instructions provided, or exercise
via the Web through the Schwab OptionCenter
®
at
www.schwab.com
/ optioncenter;
|
|
|
(ii)
|
confirm the Option transaction through the Customer Service Center or Schwab OptionCenter
®
;
|
|
|
(iii)
|
at any time you may speak to a Customer Service Representative for assistance by calling 888-852-2135;
|
|
|
(iv)
|
full payment of the exercise price for the Option Stock to be purchased on exercise of the Options may be made by:
|
|
|
•
|
|
check (wire) to your Charles Schwab account; or
|
|
|
•
|
|
in already-owned Stock; or
|
|
|
•
|
|
by authorizing Charles Schwab or a third party approved by the Corporation to sell the Stock (or a sufficient portion of the Stock) acquired upon exercise of the Option
(“Cashless Exercise”); or
|
|
|
•
|
|
in a combination of check (wire) to your Charles Schwab account and Stock (whether already-owned Stock or Stock issued and subsequently sold in connection with a Cashless
Exercise); and
|
|
|
(v)
|
in the case of an exercise of the Options by any person other than you seeking to exercise the Options, such documents as Charles Schwab or the Secretary of the Corporation shall
require to establish to their satisfaction that the person seeking to exercise the Options is entitled to do so.
|
|
|
(b)
|
An exercise of the whole or any part of the Options shall be effective:
|
- 4 -
|
|
(i)
|
if you elect (or any person who holds the Options as permitted by Section 4 herein elects) to pay the exercise price for the Option Stock entirely by check (wire), upon
(A) completion of your transaction by using the Customer Service Center or Schwab OptionCenter
®
and full payment of the exercise price and withholding taxes (if applicable) are received by Charles Schwab within three business days following the exercise; and (B) receipt of any
documents required pursuant to Section 3(a)(v) herein; and
|
|
|
(ii)
|
if you elect (or any person who holds the Options as permitted by Section 4 herein elects) to pay the exercise price of the Option Stock in Stock (whether already-owned
Stock or Stock issued and subsequently sold in connection with a Cashless Exercise) or in a combination of Stock (whether already-owned Stock or Stock issued and subsequently sold in connection with a Cashless Exercise) and check, upon
(A) completion of your transaction by using the Customer Service Center or Schwab OptionCenter
®
and full payment of the exercise price (as described in Section 3(d)(i) herein) and withholding taxes (if applicable) are received by Charles Schwab within three business days
following the exercise; and (B) receipt of any documents required pursuant to Section 3(a)(v) herein.
|
|
|
(c)
|
If you choose (or any person who holds the Options as permitted by Section 4 herein chooses) to pay the exercise price for the Option Stock to be purchased on exercise of
any of the Options entirely by check, payment must be made by:
|
|
|
•
|
|
delivering to Charles Schwab a check (wire) in the full amount of the exercise price for those Option Stock; or
|
|
|
•
|
|
arranging with a stockbroker, bank or other financial institution to deliver to Charles Schwab full payment, by check or (if prior arrangements are made with Charles Schwab) by
wire transfer, of the exercise price of those Option Stock.
|
In either event, in accordance with Section 3(e)
herein, full payment of the exercise price for the Option Stock purchased must be made within three business days after the exercise has been completed through the Customer Service Center or Schwab OptionCenter
®
.
|
|
|
|
|
|
|
(d)
|
|
(i)
|
|
If you choose (or any person who holds the Options as permitted by Section 4 herein chooses) to use already-owned
|
- 5 -
Stock to pay all or part of the exercise price for the Option Stock to be purchased on exercise of
any of the Options, you (or any person who holds the Options as permitted by Section 4 herein) must deliver to Charles Schwab an Exercise Request and Attestation Form and cash to cover the purchase of Option Stock as specified in such form. To
perform such a transaction, the Exercise Request and Attestation Form must be submitted via fax (720) 785-8874 by 4:00 p.m. Eastern Time on the date of exercise and any questions concerning this type of transaction should be referred to
(877) 636-7551 (Stock Option Administration Group Hotline). The Exercise Request and Attestation Form must attest to your ownership of Stock representing:
|
|
•
|
|
at least the number of shares of Stock whose value, based on the closing price of the Stock on the New York Stock Exchange — Composite Transactions on the day you have
exercised your Options through the Customer Service Center or Schwab OptionCenter
®
, equals the exercise price for the Option Stock; or
|
|
|
•
|
|
any lesser number of shares of Stock you desire (or any person who holds the Options as permitted by Section 4 herein desires) to use to pay the exercise price for such
Option Stock and a check in the amount of such exercise price less the value of the Stock delivered, based on the closing price of the Stock on the New York Stock Exchange — Composite Transactions on the day you have exercised your Options
through the Customer Service Center or Schwab OptionCenter
®
.
|
|
|
(ii)
|
If you choose (or any person who holds the Options as permitted by Section 4 herein chooses) to use Option Stock obtained by Cashless Exercise to pay all or part of the
exercise price for the remaining Option Stock to be purchased on exercise of any of the Options, you (or any person who holds the Options as permitted by Section 4 herein) must contact the Customer Service Center at (888) 852-2135 or
Schwab OptionCenter
®
.
|
|
|
(iii)
|
Charles Schwab will advise you (or any other person who, being entitled to do so, exercises the Options) of the exact number of shares of Stock, valued at the closing price on
the New York Stock Exchange — Composite Transactions on the effective date of exercise under Section 3(b)(ii) herein, and any
|
- 6 -
funds required to pay in full the exercise price for the Option Stock purchased. In accordance with
Section 3(e) herein, you (or such other person) must pay, by check, in Stock or in a combination of check and Stock, any balance required to pay in full the exercise price of the Option Stock purchased within three business days following the
effective date of such exercise of the Options under Section 3(b)(ii) herein.
|
|
(iv)
|
Notwithstanding any other provision of this Stock Option Agreement, the Secretary of the Corporation may limit the number, frequency or volume of successive exercises of any of
the Options in which payment is made, in whole or in part, by delivery of Stock pursuant to this subparagraph (d) to prevent unreasonable pyramiding of such exercises.
|
|
|
(e)
|
An exercise completed through the Customer Service Center or Schwab OptionCenter
®
, whether or not full payment of the exercise price for the Option Stock is received by Charles Schwab, shall constitute a binding contractual
obligation by you (or the other person entitled to exercise the Options) to proceed with and complete that exercise of the Options (but only so long as you continue, or the other person entitled to exercise the Options continues, to be entitled to
exercise the Options on that date). By your acceptance of this Stock Option Agreement, you agree (for yourself and on behalf of any other person who becomes entitled to exercise the Options) to pay to Charles Schwab in full the exercise price for
that Option Stock, that payment being by check, wire transfer, in Stock or in a combination of check and Stock, on or before the third business day after the date on which you complete the transaction through the Customer Service Center. If such
payment is not made, you (for yourself and on behalf of any other person who becomes entitled to exercise the Options) authorize the Corporation and your employer, in their discretion, to set off against salary payments or other amounts due to you
(or the other person entitled to exercise the Options) any balance of the exercise price for such Option Stock remaining unpaid thereafter.
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(f)
|
An Exercise Confirmation representing the amount of Option Stock purchased will be issued the third business day (trade date plus three business days) (i) after Charles
Schwab has received full payment therefor or (ii) at the Corporation’s or Charles Schwab’s election in their sole discretion, after the Corporation or Charles Schwab has received (x) full payment of the exercise price of that
Option Stock and (y) any reimbursement in respect of withholding taxes due pursuant to Section 5 herein.
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- 7 -
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4.
|
Transferability; Nonassignability
|
You
are not entitled to transfer the Options except by will or by the laws of descent and distribution.
The Corporation, your
employer or Charles Schwab shall have the right, in connection with the exercise of the Options, in whole or in part, to deduct from any payment to be made by the Corporation, your employer or Charles Schwab an amount equal to the taxes required to
be withheld by law with respect to such exercise or to require you (or any other person entitled to exercise the Options) to pay to it an amount sufficient to provide for any such taxes so required to be withheld. By your acceptance of this Stock
Option Agreement, you agree (for yourself and on behalf of any other person who becomes entitled to exercise the Options) that if the Corporation, your employer or Charles Schwab elects to require you (or such other person) to remit an amount
sufficient to pay such withholding taxes, you (or such other person) must remit that amount within three business days after the completion of the Option exercise as provided in Section 3(a)(ii) herein. If such payment is not made, the
Corporation and your employer, in their discretion, shall have the same right of set-off as provided under Section 3(e) herein with respect to payment of the exercise price for Option Stock.
The section headings contained
in these Stock Option Terms and Conditions are solely for the purpose of reference, are not part of the agreement of the parties and shall in no way affect the meaning or interpretation of this Stock Option Agreement.
All references in these Stock
Option Terms and Conditions to Sections, paragraphs, subparagraphs or clauses shall be deemed to be references to Sections, paragraphs, subparagraphs and clauses of these Stock Option Terms and Conditions unless otherwise specifically provided.
This Stock Option
Agreement and the other terms applicable to Stock Options granted under the Plan embody the entire agreement and understanding between the Corporation and you with respect to the Options, and there are no representations, promises, covenants,
agreements or understandings with respect to the Options other than those expressly set forth in this Stock Option Agreement and the Plan.
- 8 -
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9.
|
Applicable Laws and Regulations
|
This
Stock Option Agreement and the Corporation’s obligation to issue Option Stock hereunder are subject to applicable laws and regulations.
Exhibit 1 Exercise Request and Attestation Form (For Use With Already-Owned Stock)
- 9 -
[TERMS AND CONDITIONS – STANDARD BELOW VICE PRESIDENT]
ROCKWELL COLLINS, INC.
2006
LONG-TERM INCENTIVES PLAN
STOCK OPTION AGREEMENT
STOCK OPTION TERMS AND CONDITIONS
As used in these Stock
Option Terms and Conditions, the following words and phrases shall have the respective meanings ascribed to them below unless the context in which any of them is used clearly indicates a contrary meaning:
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(a)
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Cashless Exercise
: Cashless Exercise shall have the meaning set forth in Section 3(a)(iv) herein.
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(b)
|
Change of Control
: Change of Control shall have the same meaning as such term has in Section 10(a) of the Plan.
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(c)
|
Charles Schwab
: Charles Schwab & Co., Inc., the Stock Option Administrator whom the Corporation has engaged to administer and process all Option exercises.
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(d)
|
Committee
: The Compensation Committee of the Board of Directors of the Corporation.
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(e)
|
Corporation:
Rockwell Collins, Inc., a Delaware corporation, and any successor thereto.
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(e)
|
Customer Service Center
: Charles Schwab’s Customer Service Center that is used to facilitate Option transactions. Contact Charles Schwab at (800) 654-2593.
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(f)
|
Employee
: Employee shall have the same meaning as such term has in Section 2(j) of the Plan.
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(g)
|
Exercise Request and Attestation Form
: The form attached as
Exhibit 1
or any other form accepted by Charles Schwab in connection with the use of already-owned Stock
to pay all or part of the exercise price for the Option Stock to be purchased on exercise of any of the Options.
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(h)
|
Options
: The stock options listed in the first paragraph of the letter dated [Grant Date], to which these Stock Option Terms and Conditions are attached and which together
with these Stock Option Terms and Conditions constitute the Stock Option Agreement.
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(i)
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Option Stock
: The Stock issuable or transferable on exercise of the Options.
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(j)
|
Plan
: Rockwell Collins 2006 Long-Term Incentives Plan, as such Plan may be amended and in effect at the relevant time.
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(k)
|
Schwab OptionCenter
®
: Charles Schwab’s stock option management website which you can use to access your stock option account and to facilitate stock option transactions securely on the web at
www.schwab.com/optioncenter.
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(l)
|
Stock
: Stock shall have the same meaning as such term has in Section 2(dd) of the Plan.
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(m)
|
Stock Option Agreement
: These Stock Option Terms and Conditions together with the letter dated [Grant Date], to which they are attached.
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(n)
|
Subsidiary
: Subsidiary shall have the same meaning as such term has in Section 2(ee) of the Plan.
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2.
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When Options May be Exercised
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The
Options may be exercised, in whole or in part (but only for a whole number of shares) and at one time or from time to time, as to one-third (rounded to the nearest whole number) of the Option Stock during the period beginning on [First Anniversary
of Grant Date] and ending on [Tenth Anniversary of Grant Date], as to an additional one-third (rounded to the nearest whole number) of the Option Stock during the period beginning on [Second Anniversary of Grant Date] and ending on [Tenth
Anniversary of Grant Date] and as to the balance of the Option Stock during the period beginning on [Third Anniversary of Grant Date] and ending on [Tenth Anniversary of Grant Date], and only during those periods, and
provided
that
:
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(a)
|
if you die while an Employee, any person who holds the Options as permitted by Section 4 herein may exercise all the Options not theretofore exercised within (and only
within) the period beginning on your date of death (even if you die before you have become entitled to exercise all or any part of the Options) and ending three years thereafter; and
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- 2 -
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(b)
|
if your employment by the Corporation or a Subsidiary terminates other than by death, then:
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(i)
|
if your retirement or other termination date is before [First Anniversary of Grant Date] the Options shall lapse on your retirement or other termination and may not be exercised
at any time;
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(ii)
|
if your employment by the Corporation or a Subsidiary is terminated for cause, as determined by the Committee, the Options shall expire forthwith upon your termination and may
not be exercised thereafter;
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(iii)
|
if your employment by the Corporation or a Subsidiary terminates on or after [First Anniversary of Grant Date] by reason of your retirement under a retirement plan of the
Corporation, or under a retirement plan of a Subsidiary, you (or any person who holds the Options as permitted by Section 4 herein) may thereafter exercise Options which are exercisable prior to the date of your retirement or that will become
exercisable within (and only within) the period between the date of your retirement and ending on the fifth anniversary of your retirement date; or if you retire prior to age 62, the earlier of (x) the fifth anniversary of your retirement date
or (y) such earlier date as the Committee shall determine by action taken not later than 60 days after your retirement date; and
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(iv)
|
if your employment by the Corporation or a Subsidiary terminates on or after [First Anniversary of Grant Date] for any reason not specified in subparagraph (a) or in clauses
(ii) or (iii) of this subparagraph (b), you (or any person who holds the Options as permitted by Section 4 herein) may thereafter exercise the Options within (and only within) the period ending three months after your termination date
but only to the extent such Options were exercisable on your termination date.
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In no event shall the provisions of the
foregoing subparagraphs (a) and (b) extend to a date after [Tenth Anniversary of Grant Date], the period during which the Options may be exercised.
Notwithstanding any other provision of this Agreement, if a Change of Control shall occur, then all Options then outstanding pursuant to this Agreement shall forthwith become fully exercisable whether or not then
otherwise exercisable in accordance with their terms.
- 3 -
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(a)
|
To exercise all or any part of the Options, you (or any person who holds the Options as permitted by Section 4 herein) must contact the Stock Option Administrator, Charles
Schwab, by using the Customer Service Center or Schwab OptionCenter
®
, as follows:
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(i)
|
contact the Customer Service Center by calling (800) 654-2593 Monday through Friday, 9:00 a.m. to 9:00 p.m. Eastern Time and follow the instructions provided, or exercise
via the Web through the Schwab OptionCenter
®
at
www.schwab.com/ optioncenter;
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(ii)
|
confirm the Option transaction through the Customer Service Center or Schwab OptionCenter
®
;
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(iii)
|
at any time you may speak to a Customer Service Representative for assistance by calling (800) 654-2593;
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(iv)
|
full payment of the exercise price for the Option Stock to be purchased on exercise of the Options may be made by:
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|
•
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|
check (wire) to your Charles Schwab account; or
|
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•
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|
in already-owned Stock; or
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•
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|
by authorizing Charles Schwab or a third party approved by the Corporation to sell the Stock (or a sufficient portion of the Stock) acquired upon exercise of the Option
(“Cashless Exercise”); or
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•
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in a combination of check (wire) to your Charles Schwab account and Stock (whether already-owned Stock or Stock issued and subsequently sold in connection with a Cashless
Exercise); and
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(v)
|
in the case of an exercise of the Options by any person other than you seeking to exercise the Options, such documents as Charles Schwab or the Secretary of the Corporation shall
require to establish to their satisfaction that the person seeking to exercise the Options is entitled to do so.
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(b)
|
An exercise of the whole or any part of the Options shall be effective:
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- 4 -
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(i)
|
if you elect (or any person who holds the Options as permitted by Section 4 herein elects) to pay the exercise price for the Option Stock entirely by check (wire), upon
(A) completion of your transaction by using the Customer Service Center or Schwab OptionCenter
®
and full payment of the exercise price and withholding taxes (if applicable) are received by Charles Schwab within three business days following the exercise; and (B) receipt of any
documents required pursuant to Section 3(a)(v) herein; and
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(ii)
|
if you elect (or any person who holds the Options as permitted by Section 4 herein elects) to pay the exercise price of the Option Stock in Stock (whether already-owned
Stock or Stock issued and subsequently sold in connection with a Cashless Exercise) or in a combination of Stock (whether already-owned Stock or Stock issued and subsequently sold in connection with a Cashless Exercise) and check, upon
(A) completion of your transaction by using the Customer Service Center or Schwab OptionCenter
®
and full payment of the exercise price (as described in Section 3(d)(i) herein) and withholding taxes (if applicable) are received by Charles Schwab within three business days
following the exercise; and (B) receipt of any documents required pursuant to Section 3(a)(v) herein.
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(c)
|
If you choose (or any person who holds the Options as permitted by Section 4 herein chooses) to pay the exercise price for the Option Stock to be purchased on exercise of
any of the Options entirely by check, payment must be made by:
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•
|
|
delivering to Charles Schwab a check (wire) in the full amount of the exercise price for those Option Stock; or
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•
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arranging with a stockbroker, bank or other financial institution to deliver to Charles Schwab full payment, by check or (if prior arrangements are made with Charles Schwab) by
wire transfer, of the exercise price of those Option Stock.
|
In either event, in accordance with Section 3(e)
herein, full payment of the exercise price for the Option Stock purchased must be made within three business days after the exercise has been completed through the Customer Service Center or Schwab OptionCenter
®
.
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(d)
|
|
(i)
|
|
If you choose (or any person who holds the Options as permitted by Section 4 herein chooses) to use already-owned
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- 5 -
Stock to pay all or part of the exercise price for the Option Stock to be purchased on exercise of
any of the Options, you (or any person who holds the Options as permitted by Section 4 herein) must deliver to Charles Schwab an Exercise Request and Attestation Form and cash to cover the purchase of Option Stock as specified in such form. To
perform such a transaction, the Exercise Request and Attestation Form must be submitted via fax (720) 785-8874 by 4:00 p.m. Eastern Time on the date of exercise and any questions concerning this type of transaction should be referred to
(877) 636-7551 (Stock Option Administration Group Hotline). The Exercise Request and Attestation Form must attest to your ownership of Stock representing:
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•
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at least the number of shares of Stock whose value, based on the closing price of the Stock on the New York Stock Exchange — Composite Transactions on the day you have
exercised your Options through the Customer Service Center or Schwab OptionCenter
®
, equals the exercise price for the Option Stock; or
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|
•
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any lesser number of shares of Stock you desire (or any person who holds the Options as permitted by Section 4 herein desires) to use to pay the exercise price for such
Option Stock and a check in the amount of such exercise price less the value of the Stock delivered, based on the closing price of the Stock on the New York Stock Exchange — Composite Transactions on the day you have exercised your Options
through the Customer Service Center or Schwab OptionCenter
®
.
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(ii)
|
If you choose (or any person who holds the Options as permitted by Section 4 herein chooses) to use Option Stock obtained by Cashless Exercise to pay all or part of the
exercise price for the remaining Option Stock to be purchased on exercise of any of the Options, you (or any person who holds the Options as permitted by Section 4 herein) must contact the Customer Service Center at (800) 654-2593 or
Schwab OptionCenter
®
.
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(iii)
|
Charles Schwab will advise you (or any other person who, being entitled to do so, exercises the Options) of the exact number of shares of Stock, valued at the closing price on
the New York Stock Exchange — Composite Transactions on the effective date of exercise under Section 3(b)(ii) herein, and any
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- 6 -
funds required to pay in full the exercise price for the Option Stock purchased. In accordance with
Section 3(e) herein, you (or such other person) must pay, by check, in Stock or in a combination of check and Stock, any balance required to pay in full the exercise price of the Option Stock purchased within three business days following the
effective date of such exercise of the Options under Section 3(b)(ii) herein.
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(iv)
|
Notwithstanding any other provision of this Stock Option Agreement, the Secretary of the Corporation may limit the number, frequency or volume of successive exercises of any of
the Options in which payment is made, in whole or in part, by delivery of Stock pursuant to this subparagraph (d) to prevent unreasonable pyramiding of such exercises.
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(e)
|
An exercise completed through the Customer Service Center or Schwab OptionCenter
®
, whether or not full payment of the exercise price for the Option Stock is received by Charles Schwab, shall constitute a binding contractual
obligation by you (or the other person entitled to exercise the Options) to proceed with and complete that exercise of the Options (but only so long as you continue, or the other person entitled to exercise the Options continues, to be entitled to
exercise the Options on that date). By your acceptance of this Stock Option Agreement, you agree (for yourself and on behalf of any other person who becomes entitled to exercise the Options) to pay to Charles Schwab in full the exercise price for
that Option Stock, that payment being by check, wire transfer, in Stock or in a combination of check and Stock, on or before the third business day after the date on which you complete the transaction through the Customer Service Center. If such
payment is not made, you (for yourself and on behalf of any other person who becomes entitled to exercise the Options) authorize the Corporation and your employer, in their discretion, to set off against salary payments or other amounts due to due
you (or the other person entitled to exercise the Options) any balance of the exercise price for such Option Stock remaining unpaid thereafter.
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(f)
|
An Exercise Confirmation representing the amount of Option Stock purchased will be issued the third business day (trade date plus three business days) (i) after Charles
Schwab has received full payment therefor or (ii) at the Corporation’s or Charles Schwab’s election in their sole discretion, after the Corporation or Charles Schwab has received (x) full payment of the exercise price of that
Option Stock and (y) any reimbursement in respect of withholding taxes due pursuant to Section 5 herein.
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- 7 -
|
4.
|
Transferability; Nonassignability
|
You
are not entitled to transfer the Options except by will or by the laws of descent and distribution.
The Corporation, your
employer or Charles Schwab shall have the right, in connection with the exercise of the Options, in whole or in part, to deduct from any payment to be made by the Corporation, your employer or Charles Schwab an amount equal to the taxes required to
be withheld by law with respect to such exercise or to require you (or any other person entitled to exercise the Options) to pay to it an amount sufficient to provide for any such taxes so required to be withheld. By your acceptance of this Stock
Option Agreement, you agree (for yourself and on behalf of any other person who becomes entitled to exercise the Options) that if the Corporation, your employer or Charles Schwab elects to require you (or such other person) to remit an amount
sufficient to pay such withholding taxes, you (or such other person) must remit that amount within three business days after the completion of the Option exercise as provided in Section 3(a)(ii) herein. If such payment is not made, the
Corporation and your employer, in their discretion, shall have the same right of set-off as provided under Section 3(e) herein with respect to payment of the exercise price for Option Stock.
The section headings contained
in these Stock Option Terms and Conditions are solely for the purpose of reference, are not part of the agreement of the parties and shall in no way affect the meaning or interpretation of this Stock Option Agreement.
All references in these Stock
Option Terms and Conditions to Sections, paragraphs, subparagraphs or clauses shall be deemed to be references to Sections, paragraphs, subparagraphs and clauses of these Stock Option Terms and Conditions unless otherwise specifically provided.
This Stock Option
Agreement and the other terms applicable to Stock Options granted under the Plan embody the entire agreement and understanding between the Corporation and you with respect to the Options, and there are no representations, promises, covenants,
agreements or
- 8 -
understandings with respect to the Options other than those expressly set forth in this Stock Option
Agreement and the Plan.
|
9.
|
Applicable Laws and Regulations
|
This
Stock Option Agreement and the Corporation obligation to issue Option Stock hereunder are subject to applicable laws and regulations.
Exhibit 1
Exercise Request and Attestation Form (For Use With Already-Owned Stock)
- 9 -
Exhibit 10-q-3
For Persons With a Change of Control Agreement
ROCKWELL COLLINS, INC.
PERFORMANCE AWARDS AGREEMENT
[Date]
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Target Cash Performance Unit:
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__________
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Target Performance Shares:
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shares of Company Common
Stock
|
PERSONAL AND CONFIDENTIAL
[Name]
Personnel Number:
Dear
:
We are pleased to confirm that, as
a key employee of Rockwell Collins, Inc. and its subsidiaries (“Rockwell Collins” or the “Company”), you have been granted the following two performance awards (collectively, the “Performance Awards”) pursuant to this
agreement (this “Agreement”) and under the Rockwell Collins 2006 Long-Term Incentives Plan, as amended (the “Plan”):
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•
|
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Performance Unit
denominated in cash and based on the target cash amount stated above
|
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•
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Performance Shares
denominated in shares of Common Stock of the Company and based on the target shares stated above
|
Any payout of your Performance Awards is based on the achievement by Rockwell Collins of the goals for Cumulative Sales and Return on Sales for its fiscal years of
through
[covering three fiscal years] (the “Performance Period”)
as set forth in the matrix attached as Exhibit A (the “Matrix”). Any payout based on performance pursuant to the Matrix is to be further adjusted based on Shareowners Return as specified below. The terms and conditions of these Performance
Awards are as set forth in more detail below.
1.
Confirmation of Award
. Together with any letter transmitting this document to you,
this Agreement confirms your award in accordance with the terms as set forth herein.
1
2.
Amount Payable Pursuant to Awards
. Subject to the provisions of this Agreement, the cash and/or
share amounts payable to you pursuant to your Performance Awards shall be determined as follows:
(a) The percentage of
target awards earned will be the percentage found at the intersection in the Matrix of the final results achieved for Cumulative Sales and for Return on Sales for the Performance Period (as determined pursuant to paragraph 3).
(b) If the final results achieved for the Performance Period fall between the levels of performance specified in the Matrix, the
percentage of target awards payable will be interpolated consistent with the range in which the Cumulative Sales and Return on Sales falls as conclusively determined by the Committee (as defined below).
(c) No amount shall be payable for the Performance Period if the Cumulative Sales or Return on Sales (as determined pursuant to paragraph
3) for the Performance Period is less than the minimum level for the Performance Period as indicated in the Matrix.
(d) The
payments as determined for achievement against goals for Cumulative Sales and for Return on Sales for the Performance Period will be further adjusted for the Company’s Shareowners Return (TSR) performance (as determined pursuant to paragraph 3)
relative to the 10 peer companies listed on Exhibit B. If relative performance is among the top 3 of the peer companies, the payments will be adjusted upward by 20%. If relative performance is among the lowest 3 of the peer companies, the payments
will be reduced by 20%. If the relative performance is not one of the top 3 companies or one of the lowest 3 companies, it will be deemed to be in the middle group of companies and there will be no adjustment.
Subject to the provisions of this Agreement, including your ability to defer payment under this Agreement in accordance with paragraph 16, the amount
payable to you pursuant to the Performance Awards with respect to the Performance Period shall be paid in a lump sum of cash and/or Common Stock, less applicable taxes, by Rockwell Collins 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 paragraph 14, but in no event later than the March 15th immediately following the end of the Performance Period. The Performance Awards represent
the Company’s unfunded and unsecured promise to pay cash and/or 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 Awards 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 (or a stock certificate is issued), you shall not have, with respect to the
Performance Awards, rights to vote or receive dividends or any other rights as a shareowner.
2
3.
Definitions and Determination of Financial Performance
. “Cumulative Sales” means, for
the Performance Period, the total Sales as reported by the Company in its audited financial statements. “Return on Sales” means, for the Performance Period, the rate determined by dividing Net Income by Sales. Both Net Income and Sales
will be the three year cumulative values as reported in the Company’s audited financial statements after adjusting for extraordinary income and expense items. The foregoing definitions and measures will exclude the base Net Income and Sales of
acquisitions and divestitures that involve at least 1% of Sales but less than 10% of Sales, however, such definitions and measures will include post-acquisition growth related to these acquisitions. With respect to acquisitions that involve at least
1% of Sales but less than 10% of Sales, Net Income will also be adjusted for “fair value” expenses of the acquisition including investment banker charges, amortization of intangibles, physical property step-ups, and imputed interest on the
acquisition value. The Committee reserves its discretion pursuant to paragraph 11 below to make necessary or appropriate adjustments to the definitions and measures or otherwise for acquisitions, divestitures and other matters referenced in
paragraph 11.
“Shareowners Return” or “TSR” is measured by adding (i) the total stock price growth for the
Performance Period, measured by comparing the average stock price during October
[the first year of the Performance Period] to the average stock price during September
[the last year of the Performance Period], and (ii) dividends paid, measured as if reinvested in stock at the payment date. In the event of substantial changes
causing an inability to calculate Shareowners Return for one or more of the peer companies listed on Exhibit B (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 and the new group of peer companies shall for purposes of paragraph 2(d) be divided into a top, middle and lowest third; provided, however, that if such new group of peer
companies is not equally divisible into three parts, then the excess number of peer companies shall be assigned to the middle third.
In
connection with the receipt of the accountant’s letter for the Performance Period pursuant to paragraph 14, the committee of the Board of Directors of Rockwell Collins administering the Plan (which committee is herein called the
“Committee” and which, on the date hereof, is the Compensation Committee) shall determine the Cumulative Sales, Return on Sales and the Shareowners Return results and ranking for the Performance Period after taking into account any
adjustment as contemplated in paragraph 11.
4.
Payment of Performance Unit Award Denominated in Cash
. The Performance Unit
denominated in cash is payable in cash and/or in Common Stock of the Company. The Committee will determine whether payment will be made in Common Stock and whether such payment in Common Stock will be automatic or elected at the discretion of each
recipient. The number of shares of Common Stock of the Company to be issued pursuant to the payment made in the form of Common Stock for this Performance Unit denominated in cash is to be determined by dividing (1) the payment amount, net of
income tax withholdings (which withholdings are to be paid in cash), to be paid in the form of Common Stock of the Company by (2) the Fair Market Value (as defined in the Plan) of the Common Stock of the Company on the day immediately preceding
the payout date for the Performance Unit.
3
5.
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 Awards. 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 Award is unknown and cannot be predicted with certainty.
6.
Transferability of Award
. The Performance Awards shall not be transferable by you except by will or by the laws of descent and distribution.
7.
Termination of Employment for Death or Disability
. If your employment by the Company terminates during the Performance Period by reason of your
death, disability or retirement under a retirement plan of the Company, you will continue to be eligible to receive a payment, if any, that would otherwise be payable pursuant to paragraph 2, but any such amount shall be pro rated for the portion of
the Performance Period that elapsed prior to this termination of employment.
8.
Termination of Employment for Other Reasons
. Except
as otherwise provided in paragraphs 10 through 13, if your employment by the Company terminates during the Performance Period other than by reason of your death, disability, or retirement under a retirement plan of the Company, you will not be
entitled to any payment pursuant to paragraph 2 with respect to the Performance Period.
9.
Forfeiture of Award for Detrimental
Activity
. If you engage in detrimental activity (as defined in this paragraph 9) 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 Awards under this Agreement. For purposes of this paragraph 9, “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 paragraph 9
on or after the date of a Change of Control (as defined in the Plan) unless the “Cause” standard set forth in paragraph 12(b) is satisfied.
10.
Transfer of Employment; Leave of Absence
. For the purposes of this Agreement, (a) a transfer of your employment from Rockwell Collins to a subsidiary or vice versa, or from one subsidiary of Rockwell
Collins 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, you shall be deemed to have remained in the employ of Rockwell Collins or a subsidiary
of Rockwell Collins during such leave of absence. If
4
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. Notwithstanding anything in this paragraph 10 to the contrary, to the extent that your Performance Awards are subject to Internal Revenue Code Section 409A, as
amended from time to time, including any proposed and final regulations and other guidance issued thereunder by the Department of the Treasury and/or the Internal Revenue Service (collectively, “Section 409A”) and you are entitled to
payment under the Performance Awards upon a termination of employment, Section 409A’s definition of “separation of service,” including its rules on leaves of absences, will be used to determine the date on which you actually
terminate employment.
11.
Adjustments
. (a) Adjustments (which may be increases or decreases) may be made by the Committee in
the Cumulative Sales and Return on Sales as well as in the Shareowners Return and list of peer companies, to take into account changes in law and accounting and tax rules and to make such adjustments as the Committee deems necessary or appropriate
to reflect the inclusion or exclusion of the impact of extraordinary or unusual 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 Awards as contemplated in the Plan.
(c) Subject to the provisions of paragraph 12, the determination of the Committee as to the terms of any adjustment made pursuant to this paragraph 11
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.
12.
Change of Control
. (a) Notwithstanding any other provision of this Agreement to the contrary, in the event that during the Performance Period your employment is terminated on or after a Change of
Control (as defined in the Plan) (i) by the Company other than for Cause (as defined in paragraph 12(b)) or (ii) by you for Good Reason (as defined in paragraph 12(c)), your award shall become nonforfeitable and shall be paid out on the
date your employment is so terminated, but subject to your ability to defer payment under this Agreement in accordance with paragraph 16, as if the Performance Period hereunder had been completed or satisfied and as if the Cumulative Sales and
Return on Sales as well as
TSR
for the Company for the Performance Period were sufficient to enable a payment to you pursuant to paragraph 2 of the amount that is equal to your target awards set forth on the first page of this letter
5
multiplied by the greater of (Y) 100% and (Z) the average actual percentage payout for the Company’s
long-term incentive performance awards for the prior three completed performance periods (or the average of two performance periods if three performance periods have not been completed), not to exceed the maximum allowed in the cycle being paid.
(b) For purposes of paragraphs 9 and 12(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 the Board or the Chief Executive Officer of the Company which specifically identifies the manner in which the
Board or the Chief Executive Officer of the Company believes that 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. 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 your employment shall not be deemed to be for Cause unless and until there shall have been
delivered to you 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 to
you and you are given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, you are 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 respect with your position (including status, offices, titles and reporting requirements),
authority, duties or responsibilities generally in effect prior to any 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) 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;
6
(iii) the Company’s requiring you to be based at any office or location other than as provided on
the day preceding the Change of Control hereof or the Company’s requiring you to travel on Company business to a substantially greater extent than required immediately prior to the Change of Control;
(iv) any purported termination by the Company of your employment otherwise than for Cause; or
(v) any failure by the Company to comply with and satisfy Section 19(b) of this Agreement.
For purposes of this paragraph 12(c), any good faith determination of “Good Reason” made by you shall be conclusive. Anything in this Agreement
to the contrary notwithstanding, a termination by you for any reason during the 30-day period immediately following the first anniversary of the Change of Control (the “Thirteenth Month Election”) shall be deemed to be a termination for
Good Reason for all purposes of this Agreement. Notwithstanding the provisions of Section 12(a) to the contrary, you shall be entitled to only 50% of the amount otherwise provided in Section 12(a) in the event you terminate employment for
Good Reason based on the Thirteenth Month Election.
(d) Notwithstanding any other provision of this Agreement to the contrary, if a Change
of Control (as defined in the Plan) occurs during the Performance Period the Cumulative Sales and Return on Sales for the Company for the Performance Period shall be deemed to be not less than the 100% level set forth in the attached Matrix and the
Company’s Shareowners Return shall be deemed to rank among the top 3 of the peer companies. Notwithstanding anything to the contrary in this Agreement (except to the extent that paragraph 12(a) provides for an earlier payment upon a termination
of employment or you defer payment under this Agreement in accordance with paragraph 16), if a Change of Control occurs during the Performance Period, the payment date for your Performance Awards will be deemed to be November 2009.
13.
Divestiture
. In the event that your principal employer is a subsidiary of Rockwell Collins, it is possible that your principal employer may
cease to be a subsidiary of Rockwell Collins during the Performance Period (the date of such cessation is herein called the Divestiture Date). If your Performance Awards (a) are forfeitable at the time of the Divestiture Date such that your
Performance Awards are not then subject to Section 409A, or (b) are nonforfeitable at the time of the Divestiture Date such that your Performance Awards are then subject to Section 409A and the divestiture of your principal employer
at that time constitutes a “change in control event” that meets the requirements of Section 409A, then your Performance Awards shall become nonforfeitable (to the extent not already nonforfeitable) and shall be paid out on the
Divestiture Date (x) as if the Performance Period hereunder had been completed or satisfied and as if the Cumulative Sales and Return on Sales as well as
TSR
for the Company for the Performance Period were sufficient to enable a payment
to you
7
pursuant to paragraph 2 of the amount that is equal to 100% of your target awards set forth on the first page of this
letter, but (y) pro rated for the portion of the Performance Period that elapsed prior to the Divestiture Date, all as conclusively determined by the Committee. If your Performance Awards are nonforfeitable at the time of the Divestiture Date
such that your Performance Awards are then subject to Section 409A, but the divestiture of your principal employer at that time does not meet the requirements of a “change in control event” under Section 409A, then your
Performance Awards shall become nonforfeitable (to the extent not already nonforfeitable) on the Divestiture Date and shall be paid out in November 2009 (x) as if the Cumulative Sales and Return on Sales as well as Shareowners Return for the
Company for the Performance Period were sufficient to enable a payment to you pursuant to paragraph 2 of the amount that is equal to 100% of your target awards set forth on the first page of this letter, but (y) pro rated for the portion of the
Performance Period that elapsed prior to the Divestiture Date, all as conclusively determined by the Committee.
14.
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 and Return on Sales as well as Shareowners Return results and ranking of the
Company and that in such person’s opinion such determinations have been made in accordance with paragraph 3.
15.
Employment
Rights
. You shall not have any rights of continued employment with the Company as a result of the Performance Awards, other than the payment rights expressly contemplated herein.
16.
Deferrals
. You shall be permitted to defer any payment due to you under this Agreement in accordance with the terms of the Company’s
Deferred Compensation Plan (the “DCP”), as amended from time to time, including to comply with Section 409A. Any such deferral will only be permitted to the extent that your election to defer payment complies with Section 409A.
The Company will provide you with the appropriate deferral election form pursuant to which you may make your deferral election. Once you have deferred your payment into the DCP, the deferred amounts, including your ability to make a change to that
deferral and your right to receive payment of any deferred amounts, will be subject in all regards to the terms and conditions of the DCP and the requirements of Section 409A.
17.
Tax Withholding
. Upon any payment to you of cash and/or Common Stock of the Corporation hereunder, Federal income and other tax withholding
(and state and local income tax withholding, if applicable) may be required by the Company in respect of taxes on income realized by you. The Company will withhold such 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 taxes.
8
18.
Governing Law
. This Agreement and the awards provided for hereunder shall be governed by and
construed in accordance with the laws of 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 Awards. The actions and determinations of the Committee on all matters relating to the Plan, this Agreement and the Performance Awards will be final and
conclusive.
21.
Entire Agreement
. This Agreement and the other terms applicable to Performance Units and Performance Shares granted
under the Plan embody the entire agreement and understanding between Rockwell Collins and you with respect to the Performance Awards, and there are no representations, promises, covenants, agreements or understandings with respect to the Performance
Awards 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, a copy of which may be obtained from the
office of the Secretary of the Company.
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Sincerely yours,
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ROCKWELL COLLINS, INC.
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Gary R. Chadick
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Senior Vice President,
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General Counsel and Secretary
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Rockwell Collins, Inc.
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400 Collins Road NE, M/S 124-323
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Cedar Rapids, IA 52498-0001
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9
Exhibit 10-q-4
For Persons Not With a Change of Control Agreement
ROCKWELL COLLINS, INC.
PERFORMANCE AWARDS AGREEMENT
[Date]
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Target Cash Performance Unit:
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_________
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Target Performance Shares:
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shares of Company Common Stock
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PERSONAL AND CONFIDENTIAL
[Name]
Personnel Number:
Dear
:
We are pleased to confirm that, as a key employee of Rockwell Collins,
Inc. and its subsidiaries (“Rockwell Collins” or the “Company”), you have been granted the following two performance awards (collectively, the “Performance Awards”) pursuant to this agreement (this
“Agreement”) and under the Rockwell Collins 2006 Long-Term Incentives Plan, as amended (the “Plan”):
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•
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Performance Unit
denominated in cash and based on the target cash amount stated above
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•
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Performance Shares
denominated in shares of Common Stock of the Company and based on the target shares stated above
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Any payout of your Performance Awards is based on the achievement by Rockwell Collins of the goals for Cumulative Sales and Return on Sales for its fiscal years of
through
[covering three fiscal years]
(the “Performance Period”) as set forth in the matrix attached as Exhibit A (the “Matrix”). Any payout based on performance pursuant to the Matrix is to be further adjusted based on Shareowners Return as specified below. The
terms and conditions of these Performance Awards are as set forth in more detail below.
1.
Confirmation of Award
. Together with any
letter transmitting this document to you, this Agreement confirms your award in accordance with the terms as set forth herein.
1
2.
Amount Payable Pursuant to Awards
. Subject to the provisions of this Agreement, the cash and/or
share amounts payable to you pursuant to your Performance Awards shall be determined as follows:
(a) The percentage of
target awards earned will be the percentage found at the intersection in the Matrix of the final results achieved for Cumulative Sales and for Return on Sales for the Performance Period (as determined pursuant to paragraph 3).
(b) If the final results achieved for the Performance Period fall between the levels of performance specified in the Matrix, the
percentage of target awards payable will be interpolated consistent with the range in which the Cumulative Sales and Return on Sales falls as conclusively determined by the Committee (as defined below).
(c) No amount shall be payable for the Performance Period if the Cumulative Sales or Return on Sales (as determined pursuant to paragraph
3) for the Performance Period is less than the minimum level for the Performance Period as indicated in the Matrix.
(d) The
payments as determined for achievement against goals for Cumulative Sales and for Return on Sales for the Performance Period will be further adjusted for the Company’s Shareowners Return (TSR) performance (as determined pursuant to paragraph 3)
relative to the 10 peer companies listed on Exhibit B. If relative performance is among the top 3 of the peer companies, the payments will be adjusted upward by 20%. If relative performance is among the lowest 3 of the peer companies, the payments
will be reduced by 20%. If the relative performance is not one of the top 3 companies or one of the lowest 3 companies, it will be deemed to be in the middle group of companies and there will be no adjustment.
Subject to the provisions of this Agreement, including your ability to defer payment under this Agreement in accordance with paragraph 16, the amount
payable to you pursuant to the Performance Awards with respect to the Performance Period shall be paid in a lump sum of cash and/or Common Stock, less applicable taxes, by Rockwell Collins 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 paragraph 14, but in no event later than the March 15th immediately following the end of the Performance Period. The Performance Awards represent
the Company’s unfunded and unsecured promise to pay cash and/or 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 Awards 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 (or a stock certificate is issued), you shall not have, with respect to the
Performance Awards, rights to vote or receive dividends or any other rights as a shareowner.
2
3.
Definitions and Determination of Financial Performance
. “Cumulative Sales” means, for
the Performance Period, the total Sales as reported by the Company in its audited financial statements. “Return on Sales” means, for the Performance Period, the rate determined by dividing Net Income by Sales. Both Net Income and Sales
will be the three year cumulative values as reported in the Company’s audited financial statements after adjusting for extraordinary income and expense items. The foregoing definitions and measures will exclude the base Net Income and Sales of
acquisitions and divestitures that involve at least 1% of Sales but less than 10% of Sales, however, such definitions and measures will include post-acquisition growth related to these acquisitions. With respect to acquisitions that involve at least
1% of Sales but less than 10% of Sales, Net Income will also be adjusted for “fair value” expenses of the acquisition including investment banker charges, amortization of intangibles, physical property step-ups, and imputed interest on the
acquisition value. The Committee reserves its discretion pursuant to paragraph 11 below to make necessary or appropriate adjustments to the definitions and measures or otherwise for acquisitions, divestitures and other matters referenced in
paragraph 11.
“Shareowners Return” or “TSR” is measured by adding (i) the total stock price growth for the
Performance Period, measured by comparing the average stock price during October
[the first year of the Performance Period] to the average stock price during September
[the last year of the Performance Period], and (ii) dividends paid, measured as if reinvested in stock at the payment date. In the event of substantial changes
causing an inability to calculate Shareowners Return for one or more of the peer companies listed on Exhibit B (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 and the new group of peer companies shall for purposes of paragraph 2(d) be divided into a top, middle and lowest third; provided, however, that if such new group of peer
companies is not equally divisible into three parts, then the excess number of peer companies shall be assigned to the middle third.
In
connection with the receipt of the accountant’s letter for the Performance Period pursuant to paragraph 14, the committee of the Board of Directors of Rockwell Collins administering the Plan (which committee is herein called the
“Committee” and which, on the date hereof, is the Compensation Committee) shall determine the Cumulative Sales, Return on Sales and the Shareowners Return results and ranking for the Performance Period after taking into account any
adjustment as contemplated in paragraph 11.
4.
Payment of Performance Unit Award Denominated in Cash
. The Performance Unit
denominated in cash is payable in cash and/or in Common Stock of the Company. The Committee will determine whether payment will be made in Common Stock and whether such payment in Common Stock will be automatic or elected at the discretion of each
recipient. The number of shares of Common Stock of the Company to be issued pursuant to the payment made in the form of Common Stock for this Performance Unit denominated in cash is to be determined by dividing (1) the payment amount, net of
income tax withholdings (which withholdings are to be paid in cash), to be paid in the form of Common Stock of the Company by (2) the Fair Market Value (as defined in the Plan) of the Common Stock of the Company on the day immediately preceding
the payout date for the Performance Unit.
3
5.
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 Awards. 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 Award is unknown and cannot be predicted with certainty.
6.
Transferability of Award
. The Performance Awards shall not be transferable by you except by will or by the laws of descent and distribution.
7.
Termination of Employment for Death or Disability
. If your employment by the Company terminates during the Performance Period by reason of your
death, disability or retirement under a retirement plan of the Company, you will continue to be eligible to receive a payment, if any, that would otherwise be payable pursuant to paragraph 2, but any such amount shall be pro rated for the portion of
the Performance Period that elapsed prior to this termination of employment.
8.
Termination of Employment for Other Reasons
. Except
as otherwise provided in paragraphs 10 through 13, if your employment by the Company terminates during the Performance Period other than by reason of your death, disability, or retirement under a retirement plan of the Company, you will not be
entitled to any payment pursuant to paragraph 2 with respect to the Performance Period.
9.
Forfeiture of Award for Detrimental
Activity
. If you engage in detrimental activity (as defined in this paragraph 9) 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 Awards under this Agreement. For purposes of this paragraph 9, “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 paragraph 9
on or after the date of a Change of Control (as defined in the Plan) unless the “Cause” standard set forth in paragraph 12(b) is satisfied.
10.
Transfer of Employment; Leave of Absence
. For the purposes of this Agreement, (a) a transfer of your employment from Rockwell Collins to a subsidiary or vice versa, or from one subsidiary of Rockwell
Collins 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, you shall be deemed to have remained in the employ of Rockwell Collins or a subsidiary
of Rockwell Collins during such leave of absence. If
4
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. Notwithstanding anything in this paragraph 10 to the contrary, to the extent that your Performance Awards are subject to Internal Revenue Code Section 409A, as
amended from time to time, including any proposed and final regulations and other guidance issued thereunder by the Department of the Treasury and/or the Internal Revenue Service (collectively, “Section 409A”) and you are entitled to
payment under the Performance Awards upon a termination of employment, Section 409A’s definition of “separation of service,” including its rules on leaves of absences, will be used to determine the date on which you actually
terminate employment.
11.
Adjustments
. (a) Adjustments (which may be increases or decreases) may be made by the Committee in
the Cumulative Sales and Return on Sales as well as in the Shareowners Return and list of peer companies, to take into account changes in law and accounting and tax rules and to make such adjustments as the Committee deems necessary or appropriate
to reflect the inclusion or exclusion of the impact of extraordinary or unusual 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 Awards as contemplated in the Plan.
(c) Subject to the provisions of paragraph 12, the determination of the Committee as to the terms of any adjustment made pursuant to this paragraph 11
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.
12.
Change of Control
. (a) Notwithstanding any other provision of this Agreement to the contrary, in the event that during the Performance Period your employment is terminated on or after a Change of
Control (as defined in the Plan) (i) by the Company other than for Cause (as defined in paragraph 12(b)) or (ii) by you for Good Reason (as defined in paragraph 12(c)), your award shall become nonforfeitable and shall be paid out on the
date your employment is so terminated, but subject to your ability to defer payment under this Agreement in accordance with paragraph 16, as if the Performance Period hereunder had been completed or satisfied and as if the Cumulative Sales and
Return on Sales as well as
TSR
for the Company for the Performance Period were sufficient to enable a payment to you pursuant to paragraph 2 of the amount that is equal to your target awards set forth on the first page of this letter
5
multiplied by the greater of (Y) 100% and (Z) the average actual percentage payout for the Company’s
long-term incentive performance awards for the prior three completed performance periods (or the average of two performance periods if three performance periods have not been completed), not to exceed the maximum allowed in the cycle being paid.
(b) For purposes of paragraphs 9 and 12(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 the Company which specifically identifies the manner in which the Company believes that 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. 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.
(c) For purposes of this Agreement, “Good Reason” shall mean:
(i) the assignment to you of any duties inconsistent in any respect with your position (including status, offices, titles and reporting
requirements), authority, duties or responsibilities generally in effect prior to any 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) 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;
(iii) the Company’s requiring you to be based at any office or location other than as provided on the day preceding the Change of Control hereof or
the Company’s requiring you to travel on Company business to a substantially greater extent than required immediately prior to the Change of Control;
6
(iv) any purported termination by the Company of your employment otherwise than for Cause; or
(v) any failure by the Company to comply with and satisfy Section 19(b) of this Agreement.
For purposes of this paragraph 12(c), any good faith determination of “Good Reason” made by you shall be conclusive.
(d) Notwithstanding any other provision of this Agreement to the contrary, if a Change of Control (as defined in the Plan) occurs during the Performance
Period the Cumulative Sales and Return on Sales for the Company for the Performance Period shall be deemed to be not less than the 100% level set forth in the attached Matrix and the Company’s Shareowners Return shall be deemed to rank among
the top 3 of the peer companies. Notwithstanding anything to the contrary in this Agreement (except to the extent that paragraph 12(a) provides for an earlier payment upon a termination of employment or you defer payment under this Agreement in
accordance with paragraph 16), if a Change of Control occurs during the Performance Period, the payment date for your Performance Awards will be deemed to be November 2009.
13.
Divestiture
. In the event that your principal employer is a subsidiary of Rockwell Collins, it is possible that your principal employer may
cease to be a subsidiary of Rockwell Collins during the Performance Period (the date of such cessation is herein called the Divestiture Date). If your Performance Awards (a) are forfeitable at the time of the Divestiture Date such that your
Performance Awards are not then subject to Section 409A, or (b) are nonforfeitable at the time of the Divestiture Date such that your Performance Awards are then subject to Section 409A and the divestiture of your principal employer
at that time constitutes a “change in control event” that meets the requirements of Section 409A, then your Performance Awards shall become nonforfeitable (to the extent not already nonforfeitable) and shall be paid out on the
Divestiture Date (x) as if the Performance Period hereunder had been completed or satisfied and as if the Cumulative Sales and Return on Sales as well as
TSR
for the Company for the Performance Period were sufficient to enable a payment
to you pursuant to paragraph 2 of the amount that is equal to 100% of your target awards set forth on the first page of this letter, but (y) pro rated for the portion of the Performance Period that elapsed prior to the Divestiture Date, all as
conclusively determined by the Committee. If your Performance Awards are nonforfeitable at the time of the Divestiture Date such that your Performance Awards are then subject to Section 409A, but the divestiture of your principal employer at
that time does not meet the requirements of a “change in control event” under Section 409A, then your Performance Awards shall become nonforfeitable (to the extent not already nonforfeitable) on the Divestiture Date and shall be paid
out in November 2009 (x) as if the Cumulative Sales and Return on Sales as well as Shareowners Return for the Company for the Performance Period were sufficient to enable a payment to you pursuant to paragraph 2 of the amount that is equal to
100% of your target awards set forth on the first page of this letter, but (y) pro rated for the portion of the Performance Period that elapsed prior to the Divestiture Date, all as conclusively determined by the Committee.
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14.
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 and Return on Sales as well as Shareowners Return results and ranking of the Company and that in such person’s opinion such determinations have been made in
accordance with paragraph 3.
15.
Employment Rights
. You shall not have any rights of continued employment with the Company as a
result of the Performance Awards, other than the payment rights expressly contemplated herein.
16.
Deferrals
. You shall be
permitted to defer any payment due to you under this Agreement in accordance with the terms of the Company’s Deferred Compensation Plan (the “DCP”), as amended from time to time, including to comply with Section 409A. Any such
deferral will only be permitted to the extent that your election to defer payment complies with Section 409A. The Company will provide you with the appropriate deferral election form pursuant to which you may make your deferral election. Once
you have deferred your payment into the DCP, the deferred amounts, including your ability to make a change to that deferral and your right to receive payment of any deferred amounts, will be subject in all regards to the terms and conditions of the
DCP and the requirements of Section 409A.
17.
Tax Withholding
. Upon any payment to you of cash and/or Common Stock of the
Corporation hereunder, Federal income and other tax withholding (and state and local income tax withholding, if applicable) may be required by the Company in respect of taxes on income realized by you. The Company will withhold such 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 taxes.
18.
Governing Law
. This Agreement and the awards provided for hereunder shall be governed by and construed in accordance with the laws of the State of Delaware.
8
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 Awards. The actions and determinations of the Committee on all matters relating to the Plan, this Agreement and the Performance Awards will be final and conclusive.
21.
Entire Agreement
. This Agreement and the other terms applicable to Performance Units and Performance Shares granted under the Plan embody the
entire agreement and understanding between Rockwell Collins and you with respect to the Performance Awards, and there are no representations, promises, covenants, agreements or understandings with respect to the Performance Awards 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, a copy of which may be obtained from the office of the Secretary
of the Company.
|
|
|
Sincerely yours,
|
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|
ROCKWELL COLLINS, INC.
|
|
|
|
Gary R. Chadick
|
|
Senior Vice President,
|
|
General Counsel and Secretary
|
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|
|
Rockwell Collins, Inc.
|
|
400 Collins Road NE, M/S 124-323
|
|
Cedar Rapids, IA 52498-0001
|
9
Exhibit 12
ROCKWELL COLLINS, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
YEAR ENDED SEPTEMBER 30, 2006
(in
millions, except ratio)
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
Earnings available for fixed charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
689
|
|
|
$
|
547
|
|
|
$
|
430
|
|
|
$
|
368
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|
|
$
|
341
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|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from equity affiliates
|
|
|
(8
|
)
|
|
|
(11
|
)
|
|
|
(8
|
)
|
|
|
(5
|
)
|
|
|
(4
|
)
|
|
Gain on sale of equity affiliate
|
|
|
(20
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)
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|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Equity affiliate distributions
|
|
|
10
|
|
|
|
8
|
|
|
|
5
|
|
|
|
1
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
671
|
|
|
|
544
|
|
|
|
427
|
|
|
|
364
|
|
|
|
337
|
|
|
Add fixed charges included in earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
13
|
|
|
|
11
|
|
|
|
8
|
|
|
|
3
|
|
|
|
6
|
|
|
Interest element of rentals
|
|
|
9
|
|
|
|
8
|
|
|
|
9
|
|
|
|
8
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earnings available for fixed charges
|
|
$
|
693
|
|
|
$
|
563
|
|
|
$
|
444
|
|
|
$
|
375
|
|
|
$
|
351
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed charges included in earnings
|
|
$
|
22
|
|
|
$
|
19
|
|
|
$
|
17
|
|
|
$
|
11
|
|
|
$
|
14
|
|
|
Capitalized Interest
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed charges
|
|
$
|
22
|
|
|
$
|
19
|
|
|
$
|
17
|
|
|
$
|
11
|
|
|
$
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of earnings to fixed charges (1)
|
|
|
31.5
|
|
|
|
29.6
|
|
|
|
26.1
|
|
|
|
34.1
|
|
|
|
25.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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(1)
|
In computing the ratio of earnings to fixed charges, earnings are defined as income before income taxes, adjusted for income or loss attributable to minority interests in
subsidiaries, undistributed earnings of less than majority owned subsidiaries, and fixed charges excluding capitalized interest. Fixed charges are defined as interest on borrowings (whether expensed or capitalized) and that portion of rental expense
applicable to interest. Our ratio of earnings to combined fixed charges and preferred stock dividends for the period above are the same as our ratio of earnings to fixed charges because we had no shares of preferred stock outstanding for the period
presented and currently have no shares of preferred stock outstanding.
|
Exhibit 13
Portions of the Rockwell Collins, Inc. – 2006 Annual Report to Shareowners
Incorporated by
reference in our Form 10-K
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our consolidated financial statements and notes thereto as well as our Annual
Report on Form 10-K for the year ended September 30, 2006 filed with the Securities and Exchange Commission (SEC). The following discussion and analysis contains forward-looking statements and estimates that involve risks and uncertainties.
Actual results could differ materially from these estimates. Factors that could cause or contribute to differences from estimates include those discussed under “Cautionary Statement” below and under “Risk Factors” in our Annual
Report on Form 10-K for the year ended September 30, 2006.
We operate on a 52/53 week fiscal year ending on the Friday closest to September 30.
For ease of presentation, September 30 is utilized consistently throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations to represent the fiscal year end date. All date references contained herein
relate to our fiscal year unless otherwise stated.
OVERVIEW AND OUTLOOK
In 2006 we generated financial results that once again reflect the continuing strength of our Government Systems and Commercial Systems businesses and improved
enterprise-wide operating performance, highlighted by:
|
|
•
|
|
A 12 percent increase in total revenues to $3.86 billion
|
|
|
•
|
|
A 24 percent increase in diluted earnings per share to $2.73, double the growth rate of our revenues
|
|
|
•
|
|
Operating cash flow of $595 million, or 125 percent of net income
|
Our
projections of performance in these same areas for 2007 are as follows:
|
|
•
|
|
Total revenues in the range of $4.2 billion to $4.3 billion, a 10 percent growth rate over 2006
|
|
|
•
|
|
Diluted earnings per share in the range of $3.10 to $3.20, a 15 percent growth rate over 2006
|
|
|
•
|
|
Operating cash flow of about $600 million
|
Assuming the attainment of
these projections, 2007 will mark our fourth consecutive year of achieving, or exceeding, our stated long-term average annual financial performance targets for each of these areas:
|
|
•
|
|
Sales growth of 10 percent including 8 percent organic
|
|
|
•
|
|
Earnings per share growth in the range of 13 to 15 percent
|
|
|
•
|
|
Cash flow from operations of 100 to 130 percent of net income
|
Our
ability to deliver high levels of revenue growth, accompanied by even higher rates of growth in profitability, strong operating cash flow, and an industry-leading level of return on invested capital has been, and in 2007 is expected to continue to
be driven by the following factors:
Favorable business conditions:
Over the past several years, as evidenced by, among other things, strong economic
conditions, growing global defense budgets, increasing rates of production of commercial aircraft, and increasing utilization of airline and corporate jet operator fleets – both our Government and Commercial Systems businesses have been
operating in an environment of overall favorable market conditions. Fiscal year 2007 presents another year of anticipated favorable defense and commercial market conditions, particularly in the commercial aerospace market, that should contribute to
continued revenue growth for both our businesses.
Market share gains in faster growing areas of our businesses:
Through the combination of
delivering on our customer commitments, developing desirable new product offerings and capabilities, and strategically positioning ourselves in faster growing areas of our markets, we have recognized meaningful gains in market share that are
enabling better-than-market rates of revenue growth in certain areas of both our Government and Commercial Systems businesses.
1
Management’s Discussion and Analysis (continued)
Acquisitions:
Complementing our revenue growth in both 2006 and 2007 are revenues from four acquisitions we
completed over the last two years – TELDIX, Evans & Sutherland Computer Corporation’s military and commercial simulation business (the E&S Simulation Business), IP Unwired, Inc., and Anzus, Inc. These business acquisitions
accounted for 2 percentage points of our revenue growth in 2006 and are expected to account for 1 to 2 percentage points of our revenue growth in 2007.
Execution of our strategic business model:
The balanced exposure of our revenue base to our served defense and commercial customers, our integrated shared service infrastructure, and our diverse program and customer base are
important contributors to our ability to deliver long-term average annual revenue and earnings growth in line with our stated targets.
High levels of
investment in product innovation:
We’ve historically invested significantly in product and systems innovation, at a rate of about 17 to 19 percent of revenues annually, to continue to fuel our future growth. 2006 and 2007 are not exceptions
as we spent $722 million, or 19 percent of sales, on research and development in 2006 and expect to spend at the same rate of sales, or about $800 million, in 2007.
Disciplined Capital Deployment Strategy:
Our strong balance sheet and cash flow generation enable us to execute a capital deployment strategy that includes business acquisitions, paying a competitive dividend
with a payout ratio targeted at about 20 to 25 percent of net income, with the remainder of our operating cash flow directed toward enhancing shareowner value and earnings per share growth through share repurchases. During 2006 we deployed our
capital into each of these areas: we completed three acquisitions for $100 million; paid cash dividends totaling $96 million as we increased our quarterly dividend by 33 percent to 16 cents per share; and repurchased 9.3 million shares of our
common stock for $492 million.
See the following operating segment sections for further discussion of 2006 and anticipated 2007 segment results.
RESULTS OF OPERATIONS
The following
management discussion and analysis of results of operations is based on reported financial results for 2004 through 2006 and should be read in conjunction with our consolidated financial statements and the notes thereto.
Consolidated Financial Results
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Domestic
|
|
$
|
2,616
|
|
|
$
|
2,312
|
|
|
$
|
1,957
|
|
International
|
|
|
1,247
|
|
|
|
1,133
|
|
|
|
973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,863
|
|
|
$
|
3,445
|
|
|
$
|
2,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent increase
|
|
|
12
|
%
|
|
|
18
|
%
|
|
|
|
Total sales in 2006 increased 12 percent to $3,863 million compared to 2005. TELDIX, acquired on March 31,
2005, and the E&S Simulation Business, acquired on May 26, 2006, provided $44 million and $20 million, respectively, or a total of 2 percentage points of this sales growth. The remainder of the sales increase resulted from 11 percent
organic revenue growth in our Commercial Systems business and 10 percent organic revenue growth in our Government Systems business. Domestic sales growth continues to be driven by strong demand from the U.S. government for defense related products
and a strengthening commercial aerospace market, evidenced by increasing production rates at original equipment manufacturers and higher aircraft flight hours which have resulted in increased sales of commercial avionics products and services.
International sales growth was also due to the strengthening of the commercial aerospace market as well as the acquisitions of TELDIX and the E&S Simulation Business.
Total sales in 2005 increased $515 million, or 18 percent, compared to 2004. TELDIX provided $51 million of incremental sales, or about 2 percentage points of the total sales growth. Rockwell Collins Simulation and
Training Solutions, acquired on December 1, 2003, provided $21 million of incremental sales, or about 1 percentage point of the total sales growth. The remainder of the sales increase resulted from 17 percent organic revenue growth in our
Commercial Systems business and 13 percent organic revenue growth in our Government Systems business. Domestic sales growth was driven by continued strong demand from the U.S. government for defense related products and the continuing recovery of
the commercial aerospace market, which resulted in increased
2
Management’s Discussion and Analysis (continued)
sales of commercial avionics products and services. International sales growth was due to the continuing global recovery of the commercial aerospace market
and the acquisition of TELDIX.
Cost of Sales
Total cost of sales is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Total cost of sales
|
|
$
|
2,752
|
|
|
$
|
2,502
|
|
|
$
|
2,144
|
|
|
Percent of total sales
|
|
|
71.2
|
%
|
|
|
72.6
|
%
|
|
|
73.2
|
%
|
Cost of sales consists of all costs incurred to design and manufacture our products and includes research and
development, raw material, labor, facility, product warranty and other related expenses. The improvement in cost of sales as a percentage of total sales in 2006 in comparison to 2005 is due primarily to higher sales volume combined with productivity
improvements, lower employee incentive compensation costs, and the absence of the $15 million write-off of certain indefinite-lived Kaiser tradenames from 2005. These improvements were partially offset by $11 million of restructuring charges
included in cost of sales, higher pension costs, expensing stock-based compensation, and the impact of incremental lower margin revenues from our TELDIX and E&S Simulation Business acquisitions.
The improvement in cost of sales as a percentage of total sales in 2005 in comparison to 2004 is due primarily to higher sales combined with our continued focus on cost
containment and operational efficiency initiatives, partially offset by the $15 million write-off of certain indefinite-lived Kaiser tradenames, higher employee incentive compensation costs, and the impact of incremental lower margin revenues from
our TELDIX and Rockwell Collins Simulation and Training Solutions acquisitions.
Research and development (R&D)
expense is included as a component of cost of sales and is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Customer-funded
|
|
$
|
443
|
|
|
$
|
348
|
|
|
$
|
327
|
|
|
Company-funded
|
|
|
279
|
|
|
|
243
|
|
|
|
218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
722
|
|
|
$
|
591
|
|
|
$
|
545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of total sales
|
|
|
19
|
%
|
|
|
17
|
%
|
|
|
19
|
%
|
R&D expense consists primarily of payroll-related expenses of employees engaged in research and development
activities, engineering related product materials and equipment, and subcontracting costs. Total research and development expense increased $131 million, or 22 percent, from 2005 to 2006. The customer-funded portion of research and development
expense has increased over the past two years primarily due to several defense-related programs that are in their development phases, including Ground Element Minimum Essential Emergency Communications Network System (GEMS), Future Combat Systems
(FCS), and other advanced communication and advanced data link programs. The company-funded portion of research and development expense increased over the past two years due to increased spending on the ARJ-21 regional jet, the Boeing 787 program,
and various new business jet programs. Looking forward to 2007, total research and development expenditures are expected to increase by approximately 11 percent over 2006 to about $800 million. Company funded initiatives in 2007 are anticipated to
total approximately $330 million, or 7.7 percent of projected sales, compared to $279 million, or 7.2 percent of sales in 2006. The increased spending on company funded initiatives in 2007 will be due to higher spending on commercial products and
programs, primarily related to the development of new avionics and cabin electronics solutions for business jet programs, partially offset by lower spending on the Boeing 787 program as development activities on this program begin to decline.
Selling, General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Selling, general and administrative expenses
|
|
$
|
441
|
|
|
$
|
402
|
|
|
$
|
356
|
|
|
Percent of total sales
|
|
|
11.4
|
%
|
|
|
11.7
|
%
|
|
|
12.2
|
%
|
3
Management’s Discussion and Analysis (continued)
Selling, general and administrative (SG&A) expenses consist primarily of personnel, facility, and other expenses
related to employees not directly engaged in manufacturing, research or development activities. These activities include marketing and business development, finance, legal, information technology, and other administrative and management functions.
SG&A expenses increased $39 million in 2006 as compared to 2005, due primarily to higher payroll and pension expenses, expensing stock-based compensation, $3 million of restructuring charges included in SG&A, as well as our acquisitions of
the E&S Simulation Business and TELDIX. These increases were partially offset by productivity improvements and lower employee incentive compensation costs. When measured as a percentage of sales, SG&A expenses decreased to 11.4 percent in
2006 from 11.7 percent in 2005.
SG&A expenses increased $46 million in 2005 as compared to 2004, due primarily to higher payroll and employee
incentive compensation expenses as well as our acquisition of TELDIX. When measured as a percentage of sales, SG&A expenses in 2005 decreased to 11.7 percent as compared to 12.2 percent in 2004 as the continued growth in sales volume outpaced
the increase in SG&A expenses as a result of cost containment and operational efficiency initiatives, partially offset by higher employee incentive compensation costs.
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2006
|
|
2005
|
|
2004
|
|
Interest expense
|
|
$
|
13
|
|
$
|
11
|
|
$
|
8
|
The increase in interest expense from 2005 to 2006 is due primarily to an increase in the average interest rate
related to the variable portion of our long-term debt as well as two variable rate loan agreements entered into in June 2006 to facilitate our implementation of the cash repatriation provisions of the American Jobs Creation Act of 2004. Interest
expense increased in 2005 compared to 2004 due to a full year outstanding of our $200 million long-term debt issued on November 20, 2003, slightly offset by lower average short-term borrowings.
Other Income, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Other income, net
|
|
$
|
(32
|
)
|
|
$
|
(17
|
)
|
|
$
|
(8
|
)
|
For information regarding the fluctuations in other income, net, see Note 15 in the consolidated financial
statements.
Income Tax Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Income tax expense
|
|
$
|
212
|
|
|
$
|
151
|
|
|
$
|
129
|
|
|
Effective income tax rate
|
|
|
30.8
|
%
|
|
|
27.6
|
%
|
|
|
30.0
|
%
|
The effective income tax rate differed from the United States statutory tax rate
for the reasons set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Statutory tax rate
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
|
Research and development credit
|
|
(0.8
|
)
|
|
(3.9
|
)
|
|
(2.4
|
)
|
|
Extraterritorial income exclusion
|
|
(3.0
|
)
|
|
(2.9
|
)
|
|
(2.3
|
)
|
|
Domestic manufacturing deduction
|
|
(0.4
|
)
|
|
—
|
|
|
—
|
|
|
State and local income taxes
|
|
0.5
|
|
|
1.4
|
|
|
(0.1
|
)
|
|
Resolution of pre-spin deferred tax matters
|
|
—
|
|
|
(1.9
|
)
|
|
—
|
|
|
Other
|
|
(0.5
|
)
|
|
(0.1
|
)
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
30.8
|
%
|
|
27.6
|
%
|
|
30.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
The difference between our effective tax rate and the statutory tax rate is primarily the result of the tax
benefits derived from the Research and Development Tax Credit (“R&D Tax Credit”), which provides a tax benefit on certain incremental R&D expenditures, the Extraterritorial Income Exclusion (“ETI”), which provides a tax
benefit on export sales, and the Domestic Manufacturing Deduction under Section 199 (“Domestic Manufacturing Deduction”), which provides a tax benefit on U.S. based manufacturing.
4
Management’s Discussion and Analysis (continued)
The R&D Tax Credit expired effective December 31, 2005. The effective tax rate for 2006 reflects 3 months of
benefit related to the R&D Tax Credit.
In October 2004, the American Jobs Creation Act of 2004 (the “Act”) was signed into law. The Act
repeals and replaces the ETI with a new deduction for income generated from qualified production activities by U.S. manufacturers. The ETI export tax benefit completely phases out December 31, 2006 and the Domestic Manufacturing Deduction
benefit will be phased in through fiscal 2010. As a result, the Act is expected to have an adverse impact on our effective tax rate for years 2007 through 2010.
The Act provides for a special one-time deduction of 85 percent of certain foreign earnings repatriated into the U.S. from non-U.S. subsidiaries through September 30, 2006. During 2006 we repatriated $91 million in cash from non-U.S.
subsidiaries into the U.S. under the provisions of the Act. The repatriation did not impact our effective income tax rate for the year ended September 30, 2006 as a $2 million tax liability was established during 2005 when the decision was made
to repatriate the foreign earnings.
Assuming a full year benefit from the R&D Tax Credit or a tax benefit equivalent and the impact of the repealed
ETI benefit, including the phased in benefit under the Domestic Manufacturing Deduction, we currently expect our effective income tax rate to be in the range of 31.5 percent to 32.0 percent in 2007. If the R&D Tax Credit or a tax benefit
equivalent is not extended for our full year fiscal 2007, our effective tax rate is expected to be about 34.5 percent in 2007.
Net Income and
Diluted Earnings Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars and shares in millions, except per share amounts)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net income
|
|
$
|
477
|
|
|
$
|
396
|
|
|
$
|
301
|
|
|
Net income as a percent of sales
|
|
|
12.3
|
%
|
|
|
11.5
|
%
|
|
|
10.3
|
%
|
|
Diluted earnings per share
|
|
$
|
2.73
|
|
|
$
|
2.20
|
|
|
$
|
1.67
|
|
|
Weighted average diluted common shares
|
|
|
174.5
|
|
|
|
180.2
|
|
|
|
180.0
|
|
Net income in 2006 increased 20 percent to $477 million, or 12.3 percent of sales, from net income in 2005 of $396
million, or 11.5 percent of sales. Diluted earnings per share increased 24 percent in 2006 to $2.73, compared to $2.20 in 2005. Earnings per share growth exceeded the growth rate in net income due to the favorable effect of our share repurchase
program. These increases were due primarily to higher sales volume coupled with productivity improvements. Other items affecting comparability between 2006 and 2005 are detailed below.
Net income in 2005 increased 32 percent to $396 million, or 11.5 percent of sales, from net income in 2004 of $301 million, or 10.3 percent of sales. Diluted earnings per share also increased 32 percent in 2005 to
$2.20, compared to $1.67 in 2004. These increases were due primarily to higher sales volumes coupled with cost containment and operational efficiency initiatives. Other items affecting comparability between 2005 and 2004 are detailed below.
5
Management’s Discussion and Analysis (continued)
Items Affecting Comparability
Net income and diluted earnings per share were impacted by the items affecting comparability summarized in the table below. The identification of these items is important to the understanding of our results of
operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions, except per share amounts)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Gain on sale of corporate-level equity affiliate
(A)
|
|
$
|
20
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Stock-based compensation
|
|
|
(18
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Restructuring charge
(B)
|
|
|
(14
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Tradenames write-off
(C)
|
|
|
—
|
|
|
|
(15
|
)
|
|
|
—
|
|
|
Contract dispute settlement
(D)
|
|
|
—
|
|
|
|
—
|
|
|
|
7
|
|
|
Insurance settlements
|
|
|
—
|
|
|
|
—
|
|
|
|
5
|
|
|
Loss on equity investment
(E)
|
|
|
—
|
|
|
|
—
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) to income before income taxes
|
|
|
(12
|
)
|
|
|
(15
|
)
|
|
|
5
|
|
|
Impact on income tax provision
|
|
|
4
|
|
|
|
5
|
|
|
|
(2
|
)
|
|
Resolution of pre-spin deferred tax matters
(F)
|
|
|
—
|
|
|
|
10
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) to net income
|
|
$
|
(8
|
)
|
|
$
|
—
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) to diluted earnings per share
|
|
$
|
(0.05
|
)
|
|
$
|
—
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income as a percent of sales, excluding the above items
|
|
|
12.6
|
%
|
|
|
11.5
|
%
|
|
|
10.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
Gain on the sale of Rockwell Scientific Company, LLC, an equity affiliate that was jointly owned with Rockwell Automation, Inc. (See Note 8 in the consolidated financial
statements).
|
|
(B)
|
Restructuring charge related to decisions to implement certain business realignment and facility rationalization actions.
|
|
(C)
|
The tradenames write-off relates to certain indefinite-lived Kaiser tradenames (see Note 7 in the consolidated financial statements).
|
|
(D)
|
The contract dispute settlement gain relates to the resolution of a legal matter from a divested business.
|
|
(E)
|
The loss on equity investment relates to our investment in Tenzing Communications, Inc., a developer of passenger connectivity solutions for commercial aircraft.
|
|
(F)
|
The resolution of pre-spin deferred tax matters relates to certain deferred tax matters that existed at the time of our spin-off in 2001 (see Note 16 in the consolidated financial
statements).
|
Segment Financial Results
Government Systems
Overview and Outlook:
Our Government Systems business supplies defense communications and defense electronics systems and products, which include subsystems, navigation and displays, to the U.S. Department of Defense, other government agencies, civil agencies,
defense contractors and foreign Ministries of Defense. The short and long-term performance of our Government Systems business is affected by a number of factors, including the amount and prioritization of defense spending by the U.S. and non-U.S.
governments, which are generally based on the underlying political landscape, security environment and budgetary considerations.
The past few years have
seen significant increases in the U.S. defense budget that have driven higher demand for the systems and products supplied by our Government Systems business resulting in four consecutive years of double-digit revenue growth. While we expect global
defense budgets to continue to increase, we anticipate the rate of such increases to moderate, with global defense budgets growing at about an average annual rate of three percent from 2006 to 2010. As it relates more specifically to our Government
Systems business, we expect a higher proportion of global defense budget funds will continue to be allocated to the modernization and replacement of current weapons systems as well as higher priority military transformation initiatives. We expect
that this, combined with our strengthening positions in certain faster growing areas of our served defense electronics and communications markets, specifically transformational defense communications, open systems architecture, and next generation
global positioning systems (GPS) solutions, areas where we have secured or continue to compete for significant program positions that are the foundation of enabling the military objective of network centric operations across the battle space, should
enable us to
6
Management’s Discussion and Analysis (continued)
continue to deliver above-market rates of organic revenue growth. Our involvement in various elements of the Joint Tactical Radio System (JTRS) and FCS
programs, our wide range of positions for fixed wing and rotary wing cockpit and mission electronics systems (including KC-135 refueling tankers and C-130 cargo aircraft, as well as Blackhawk, Chinook, Sea Stallion, and Armed Reconnaissance
helicopters), and our strong positions in the development and production of handheld navigation devices and precision guidance systems for missiles and munitions are examples of significant programs in these faster growing areas that have been, and
are expected to continue to be, drivers of our growth going forward.
Risks affecting future performance of our Government Systems business include, but
are not limited to, the potential impacts of geopolitical events, the overall funding and prioritization of the U.S. defense budget, funding for programs we have won at projected levels and without program delays, and our ability to win new
business, successfully develop products, and execute on programs pursuant to contractual requirements.
Our projections for 2007 include Government Systems
revenue growth in the range of 7 to 9 percent over 2006, including about 1.5 percentage points of incremental E&S Simulation Business revenues, due to double-digit growth from programs aimed at enabling network-centric operations, enhanced
situational awareness, and weapons systems modernization. Higher revenues from these areas are expected to more than offset anticipated lower demand for certain legacy products and systems. We also anticipate maintaining operating margins in the
range of 19 to 20 percent as the positive impact of lower pension costs and holding company funded research and development and selling, general and administrative costs essentially flat, will be offset by incrementally lower margin E&S
Simulation Business revenues.
Government Systems’ Sales:
The following table represents Government Systems’ sales by product category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Defense electronics
|
|
$
|
1,413
|
|
|
$
|
1,232
|
|
|
$
|
956
|
|
Defense communications
|
|
|
630
|
|
|
|
578
|
|
|
|
579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,043
|
|
|
$
|
1,810
|
|
|
$
|
1,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent increase
|
|
|
13
|
%
|
|
|
18
|
%
|
|
|
|
Defense electronics sales increased $181 million, or 15 percent, in 2006 compared to 2005. TELDIX, acquired on
March 31, 2005, provided $44 million, or 4 percentage points of this sales growth. The E&S Simulation Business, acquired on May 26, 2006, provided $12 million, or 1 percentage point of this sales growth. Defense electronics organic
sales increased $125 million, or 10 percent, in 2006 compared to 2005. This sales growth is due primarily to higher revenues from the following:
|
|
•
|
|
Global positioning system equipment programs
|
|
|
•
|
|
Flight deck and mission electronic systems programs, including various programs for new and upgraded military helicopters, based on our open systems architecture
|
|
|
•
|
|
Helmet mounted tactical aircraft display programs
|
These increases in
defense electronics sales were partially offset by a decrease in simulation and training revenues due primarily to delayed customer procurements.
Defense
communications sales increased $52 million, or 9 percent, in 2006 compared to 2005. This increase in sales is attributable to higher advanced communications and data link development programs and ARC-210 radio equipment revenues which more than
offset lower JTRS development program revenues.
7
Management’s Discussion and Analysis (continued)
Defense electronics sales increased $276 million, or 29 percent, in 2005 compared to 2004. TELDIX, acquired on
March 31, 2005, and Rockwell Collins Simulation and Training Solutions, acquired on December 1, 2003, provided $51 million and $21 million, respectively, or a total of 8 percentage points of this sales growth. Defense electronics organic
sales increased $204 million, or 21 percent, in 2005 compared to 2004. This sales growth is due primarily to higher revenues from the following:
|
|
•
|
|
Electronics systems upgrades for fixed-wing aircraft and U.S Army, Navy and Special Operations Forces helicopter programs
|
|
|
•
|
|
Global positioning system equipment programs
|
|
|
•
|
|
U. S. Army helicopter simulator programs
|
Defense communications sales
decreased $1 million in 2005 compared to 2004. This decline in sales is attributable to higher sales of ARC-210 radios, which were more than offset by lower revenues primarily related to the completion of certain legacy data link projects, including
the Swedish RA-90 program.
Government Systems’ Segment Operating Earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Segment operating earnings
|
|
$
|
402
|
|
|
$
|
328
|
|
|
$
|
282
|
|
|
Percent of sales
|
|
|
19.7
|
%
|
|
|
18.1
|
%
|
|
|
18.4
|
%
|
Government Systems’ operating earnings increased $74 million, or 23 percent, in 2006 compared to 2005 due
primarily to increased sales volume. Government Systems’ operating earnings as a percent of sales for 2006 was 19.7 percent compared with 18.1 percent for 2005. Operating margins were impacted by productivity improvements and lower employee
incentive compensation costs partially offset by higher pension costs and the impact of incremental lower margin revenues from our TELDIX and E&S Simulation Business acquisitions.
Government Systems’ operating earnings increased $46 million, or 16 percent, in 2005 compared to 2004 due primarily to increased sales volume. Government Systems’ operating earnings as a percent of sales for
2005 was 18.1 percent compared with 18.4 percent for 2004. Operating margins were impacted by cost containment and operational efficiency initiatives offset by increased employee incentive compensation costs and incremental lower margin sales from
Rockwell Collins Simulation and Training Solutions and TELDIX.
Commercial Systems
Overview and Outlook:
Our Commercial Systems business is a supplier
of aviation electronics to customers located throughout the world. The customer base is comprised of original equipment manufacturers (OEMs) of commercial air transport, regional and business aircraft, commercial airlines, fractional operators and
business jet operators. The near and long-term performance of our Commercial Systems business is impacted by general worldwide economic health, commercial airline flight hours, the financial condition of airlines worldwide, as well as corporate
profits.
As we approach the end of calendar year 2006, nearly all areas of the commercial aerospace market provide evidence of strong cyclical market
conditions. Calendar year 2006 will be the second consecutive year of air transport aircraft original equipment manufacturers (OEMs), Airbus and Boeing, booking aggregate new aircraft orders at a higher rate than annual production, once again adding
to their backlog. It will also be the second consecutive year of higher production rates of new air transport aircraft. Historically, up-cycles in this area of the commercial aerospace market have been characterized by increasing year-over-year
production rates for up to 4 to 5 consecutive years. The market area for new business jets continues to be strong as order books continue to improve as business aviation OEMs update their product offerings and continue to increase production rates.
The market for regional aircraft is expected to be flat to slightly up as a result of a resurgence in the market for turboprop aircraft offset by a decline in the market for 50 seat jets. Conditions supporting continued growth in aftermarket service
and support and equipment upgrade activities also remain strong. Increasing revenue passenger miles, coupled with slight increases in capacity, are leading to higher passenger load factors and therefore improved profitability for airlines in all
regions of the world.
We believe the current commercial aerospace market up-cycle, as defined by year-over-year increases in production rates of new air
transport aircraft, will continue for at least another 2 to 3 years, with a reasonably good probability for a prolonged up-cycle due to the impact on future aircraft delivery rates from a number of factors, including: the successful and timely
introduction of new more
8
Management’s Discussion and Analysis (continued)
efficient commercial aircraft types, such as the Boeing 787 and the Airbus A350-XWB; the continuation of high demand for business jet aircraft in markets
outside the United States; a more significant return of U.S. and European legacy airlines to the market for new fuel-efficient aircraft; and a continuation of high airline load factors. These factors are expected to be accompanied by annual
mid-single-digit rates of growth in aircraft flight hours.
Risks to the commercial aerospace market include, among other
things:
|
|
•
|
|
The occurrence of an unexpected geopolitical event that could have a significant impact on demand for air travel and airline demand for new aircraft
|
|
|
•
|
|
The potential ramifications of the negative impact that the current high level of fuel prices are having on the profitability of our airline and other aircraft operator customers
|
|
|
•
|
|
The continued poor financial condition of certain major U.S. airlines, some of which continue to operate while under the protection of bankruptcy regulations
|
Risks related to our ability to capitalize on the commercial aerospace market recovery and attain our stated enterprise long-term growth
targets include, among other things:
|
|
•
|
|
Our ability to develop products and execute on programs pursuant to contractual requirements, such as the development of systems and products for the Boeing 787 and business jet
OEMs
|
|
|
•
|
|
The development and market acceptance of our Information Management products and systems
|
Looking forward to 2007, we expect Commercial Systems’ sales to increase 12 to 14 percent over 2006; 11 to 13 percent organically, with about 1 percentage point of growth coming from incremental visualization
systems revenues from the E&S Simulation Business acquired in May 2006. In addition to higher revenues expected to be generated from market share gains related to initial Boeing 787 equipment deliveries, avionics selectable equipment, and new
business jet avionics and cabin systems, double-digit growth in both OEM and aftermarket avionics and cabin electronics revenues is based in part on the following market dynamic and company specific assumptions:
|
|
•
|
|
An approximate 11 percent increase in new air transport, business, and regional aircraft production rates will lead to higher revenues from airlines and aircraft OEMs.
|
|
|
•
|
|
New product offerings, out-of-warranty installed base expansion, and continuing strong global economic conditions and corporate profitability will drive higher aftermarket revenues.
|
In-flight entertainment revenues are expected to be flat as higher aftermarket systems upgrade revenues will be offset by lower original
equipment line-fit revenues.
Commercial Systems segment operating margins are expected to increase for a fourth consecutive year and be in the range of 21
to 22 percent as the positive impact of increased revenues, productivity gains, and lower pension expense, will more than offset higher company funded research and development costs as a percent of sales and incremental lower margin E&S
Simulation Business revenues.
Commercial Systems’ Sales:
The following table represents Commercial Systems’ sales by product category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Air transport aviation electronics
|
|
$
|
996
|
|
|
$
|
911
|
|
|
$
|
798
|
|
Business and regional jet aviation electronics
|
|
|
824
|
|
|
|
724
|
|
|
|
597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,820
|
|
|
$
|
1,635
|
|
|
$
|
1,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent increase
|
|
|
11
|
%
|
|
|
17
|
%
|
|
|
|
Air transport aviation electronics sales increased $85 million, or 9 percent, in 2006 compared to 2005. The
E&S Simulation Business, acquired on May 26, 2006, provided $8 million, or 1 percentage point of this sale growth. Air transport aviation electronics organic sales increase is due primarily to higher sales of flight-deck avionics related to
higher OEM deliveries and retrofit and spares activities partially offset by lower in-flight entertainment system and regulatory mandate revenues. Business and regional aviation electronics sales increased $100 million, or 14 percent, in 2006
compared to 2005. This sales growth is attributed to significantly higher sales of business jet flight-deck avionics and cabin electronics systems and products and higher service and support revenues partially offset by lower avionics sales to
regional jet OEMs and lower regulatory mandate program revenues.
9
Management’s Discussion and Analysis (continued)
Air transport aviation electronics sales increased $113 million, or 14 percent, in 2005 compared to 2004. This
increase is due primarily to higher sales to airlines and air transport OEMs in support of higher new aircraft production rates as well as strong growth in demand for retrofit and service and support activity. Business and regional aviation
electronics sales increased $127 million, or 21 percent, in 2005 compared to 2004. This sales growth is due primarily to significantly higher sales to business jet OEMs and higher aftermarket revenues that more than offset the impact of lower
regional jet OEM sales.
The following table represents Commercial Systems’ sales based on the type of product or service:
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
2006
|
|
2005
|
|
2004
|
|
Original equipment
|
|
$
|
929
|
|
$
|
778
|
|
$
|
657
|
|
Aftermarket
|
|
|
891
|
|
|
857
|
|
|
738
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,820
|
|
$
|
1,635
|
|
$
|
1,395
|
|
|
|
|
|
|
|
|
|
|
|
Original equipment sales increased $151 million, or 19 percent, in 2006 compared to 2005 due to significantly
higher sales of flight-deck avionics and cabin electronics systems and products for new business jet aircraft and higher sales of flight-deck avionics for new air transport aircraft. These sales increases were partially offset by lower avionics
systems sales to regional jet OEMs and lower in-flight entertainment system sales. Aftermarket sales increased $34 million, or 4 percent, in 2006 compared to 2005 as a result of higher avionics retrofit and spares sales, higher service and support
revenues, and incremental E&S Simulation Business revenues, partially offset by lower regulatory mandate program and in-flight entertainment system retrofit revenues.
Original equipment sales increased $121 million, or 18 percent, in 2005 compared to 2004 as higher sales to business jet OEMs and air transport airlines and OEMs in support of higher new aircraft production rates were
partially offset by the impact of lower sales to regional jet OEMs and an anticipated shift of in-flight entertainment revenues from original equipment line-fit to aftermarket retrofit installations. Aftermarket sales increased $119 million, or 16
percent, in 2005 compared to 2004 as a result of increased service and support activity and stronger demand for avionics retrofit applications and aircraft regulatory mandate programs.
Commercial Systems’ Segment Operating Earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Segment operating earnings
|
|
$
|
370
|
|
|
$
|
296
|
|
|
$
|
200
|
|
|
Percent of sales
|
|
|
20.3
|
%
|
|
|
18.1
|
%
|
|
|
14.3
|
%
|
Commercial Systems’ operating earnings increased $74 million, or 25 percent, to $370 million, or 20.3 percent
of sales, in 2006 compared to $296 million, or 18.1 percent of sales, in 2005. These significant increases were due primarily to the combination of increased sales volume, productivity improvements, and lower employee incentive compensation costs
which more than offset higher research and development and pension costs.
Commercial Systems’ operating earnings increased $96 million, or 48
percent, to $296 million, or 18.1 percent of sales, in 2005 compared to $200 million, or 14.3 percent of sales, in 2004. These significant increases were due primarily to the combination of increased sales volume, including higher margin aftermarket
revenues, and cost containment and operational efficiency initiatives, which more than offset higher research and development and employee incentive compensation costs.
General Corporate, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
General corporate, net
|
|
$
|
(60
|
)
|
|
$
|
(55
|
)
|
|
$
|
(47
|
)
|
The increase in general corporate, net in 2006 over 2005 is due primarily to higher pension costs partially offset
by lower employee incentive compensation costs.
10
Management’s Discussion and Analysis (continued)
The increase in general corporate, net in 2005 over 2004 is due primarily to higher employee incentive compensation
costs as well as a net $5 million increase from the absence of Items Affecting Comparability in 2004 detailed above, including the contract dispute settlement, insurance settlements, and loss on equity investment.
Retirement Plans
Net benefit
expense for pension benefits and other retirement benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2006
|
|
|
2005
|
|
2004
|
|
Pension benefits
|
|
$
|
70
|
|
|
$
|
31
|
|
$
|
31
|
|
Other retirement benefits
|
|
|
(2
|
)
|
|
|
1
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net benefit expense
|
|
$
|
68
|
|
|
$
|
32
|
|
$
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
We provide pension benefits to most of our employees in the form of defined benefit pension plans. Over the past number of years, the cost of providing retirement benefits under a defined benefit structure has become increasingly uncertain
due to changes in discount rates and the volatility in the stock market. In response, we made significant contributions to our pension plans and amended our U.S. qualified and non-qualified pension plans in 2003 covering all salary and hourly
employees not covered by collective bargaining agreements to discontinue benefit accruals for salary increases and services rendered after September 30, 2006 (the Pension Amendment). Concurrently, we plan to replace this benefit by
supplementing our existing defined contribution savings plan to include an additional company contribution effective October 1, 2006. We believe this new benefit structure will achieve our objective of providing benefits that are both valued by
our employees and whose costs and funding requirements are more consistent and predictable over the long term.
Pension expense for the years ended
September 30, 2006, 2005, and 2004 was $70 million, $31 million, and $31 million, respectively. Decreases in the funded status of our pension plans, due primarily to decreases in the discount rate used to measure our pension obligations and
higher than anticipated pensionable earnings, drove this increase in pension expense. During 2006, the funded status of our pension plans improved from a deficit of $681 million at September 30, 2005 to a deficit of $275 million at
September 30, 2006, due primarily to an increase in the discount rate used to measure our pension obligations from 5.3 percent to 6.5 percent.
As a
result of the Pension Amendment, we expect the defined benefit pension expense to decrease from $70 million in 2006 to $12 million in 2007. Concurrently, we plan to make an additional company contribution to our existing defined contribution savings
plan of approximately $28 million in 2007. The combined impact of significantly lower defined benefit pension expense partially off-set by incremental savings plan contributions is expected to result in lower expense in 2007 of approximately $30
million in comparison to 2006.
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 discretionary contributions to our pension fund without inhibiting our ability to pursue strategic investments.
Other Retirement
Benefits
We provide retiree medical and life insurance benefits to substantially all of our employees. We have undertaken two major actions over the
past few years with respect to these benefits that have lowered both the current and future costs of providing these benefits:
|
|
•
|
|
In July of 2002, the pre-65 and post-65 retiree medical plans were amended to establish a fixed contribution to be paid by the company. Additional premium contributions will be
required from participants for all costs in excess of this fixed contribution amount. This amendment has eliminated the risk to our company related to health care cost escalations for retiree medical benefits going forward as additional
contributions will be required from retirees for all costs in excess of our fixed contribution amount.
|
11
Management’s Discussion and Analysis (continued)
|
|
•
|
|
As a result of the Medicare Prescription Drug, Improvement and Modernization Act of 2003, we amended our retiree medical plans on June 30, 2004 to discontinue post-65
prescription drug coverage effective January 1, 2008. Upon termination of these benefits, post-65 retirees will have the option of receiving these benefits through Medicare. On average, we expect that the prescription drug benefit to be
provided by Medicare will be better than the benefit provided by our current post-65 drug plan as a result of the fixed contribution plan design implemented in 2002.
|
Other retirement benefits expense (income) for the years ended September 30, 2006, 2005, and 2004 was $(2) million, $1 million, and $19 million, respectively. The decrease in other retirement benefits expense in
2006 and 2005 was due primarily to the major actions discussed above. We expect other retirement benefits income of approximately $4 million in 2007, due primarily to the actions discussed above.
FINANCIAL CONDITION AND LIQUIDITY
Cash Flow
Summary
Our ability to generate significant cash flow from operating activities coupled with our access to the credit markets enables our company
to execute our growth strategies and return value to our shareowners. During 2006, significant cash expenditures aimed at future growth and enhanced shareowner value were as follows:
|
|
•
|
|
$492 million of share repurchases
|
|
|
•
|
|
$144 million of property additions
|
|
|
•
|
|
$96 million of dividend payments
|
|
|
•
|
|
$100 million for business acquisitions
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2006
|
|
2005
|
|
2004
|
|
Cash provided by operating activities
|
|
$
|
595
|
|
$
|
574
|
|
$
|
399
|
The increase in cash flows provided by operating activities of $21 million in 2006 compared to 2005 was
principally due to higher net income of $81 million and lower pension plan contributions of $48 million partially offset by $104 million in higher income tax payments.
The increase in cash flows provided by operating activities of $175 million in 2005 compared to 2004 was principally due to the following items:
|
|
•
|
|
Increase in net income of $95 million
|
|
|
•
|
|
Lower incremental inventory growth of $30 million, principally due to working capital management initiatives
|
|
|
•
|
|
Higher tax benefits from employee stock option exercises of $20 million
|
|
|
•
|
|
Lower pension plan contributions of $18 million
|
These increases in cash
provided by operating activities in 2005 compared to 2004 were partially offset by an increase in receivables due to higher sales volumes and due to a customer withholding payments of $36 million as a result of performance related matters on an
in-flight entertainment contract that were resolved in 2006.
Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Cash used for investing activities
|
|
$
|
(159
|
)
|
|
$
|
(134
|
)
|
|
$
|
(228
|
)
|
Net cash paid for the 2006 business acquisitions was $100 million compared to $19 million of net cash paid for the
TELDIX acquisition in 2005. Proceeds from the sale of Rockwell Scientific Company, LLC, an equity affiliate that was jointly owned with Rockwell Automation, Inc. were $84 million in 2006. Capital expenditures increased to $144 million in 2006 from
$111 million in 2005. We expect capital expenditures for 2007 to be approximately $140 million. Demand for new test equipment and facility renovation and expansion to support new programs are the primary drivers of capital expenditures in 2007.
12
Management’s Discussion and Analysis (continued)
The decrease in cash used for investing activities from 2004 to 2005 was primarily due to $126 million of net cash
paid for the Rockwell Collins Simulation and Training Solutions acquisition in December 2003, partially offset by $19 million of net cash paid for the TELDIX acquisition completed in March 2005. Capital expenditures increased to $111 million in 2005
from $92 million in 2004.
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Cash used for financing activities
|
|
$
|
(441
|
)
|
|
$
|
(487
|
)
|
|
$
|
(37
|
)
|
The decrease in cash used for financing activities is primarily due to two variable rate loan agreements entered
into in 2006 that provided $46 million of cash to facilitate our implementation of the cash repatriation provisions of the American Jobs Creation Act of 2004. Other factors impacting cash used for financing activities in 2006 include the following:
|
|
•
|
|
In the current year we repurchased 9.3 million shares of common stock at a cost of $492 million compared to 10.6 million shares at a cost of $498 million last year.
|
|
|
•
|
|
In the current year we received $73 million from the exercise of stock options compared to $96 million last year.
|
|
|
•
|
|
We paid cash dividends of $96 million compared to $85 million last year reflecting an increase in our dividend from 12 cents to 16 cents per share effective the third quarter of
2006.
|
|
|
•
|
|
We received a $28 million excess tax benefit from the exercise of stock options in 2006. In connection with the adoption of SFAS 123R as of October 1, 2005, the excess tax
benefit from the exercise of stock options is classified as a financing activity in 2006. During 2005, excess tax benefits from the exercise of stock options were classified as an operating activity.
|
The increase in cash used for financing activities in 2005 over 2004 is primarily due to an increase in treasury stock repurchases of $319 million as well as the absence
of $198 million in long-term debt borrowings, partially offset by the absence of $42 million in short-term borrowing repayments and an increase of $41 million in proceeds received from the exercise of stock options.
Share Repurchase Program
Strong cash flow from operations provided
funds for repurchasing our common stock under our share repurchase program as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except per share amounts)
|
|
2006
|
|
2005
|
|
2004
|
|
Amount of share repurchases
|
|
$
|
492
|
|
$
|
498
|
|
$
|
179
|
|
Number of shares repurchased
|
|
|
9.3
|
|
|
10.6
|
|
|
5.8
|
|
Weighted average price per share
|
|
$
|
52.82
|
|
$
|
47.20
|
|
$
|
31.16
|
In September 2006 we entered into an accelerated share repurchase agreement with an investment bank under which we
repurchased 4.7 million shares of our outstanding common shares. See Note 18 in the consolidated financial statements for further discussion of this agreement.
We plan to continue repurchasing shares of our common stock up to the amount approved by our Board of Directors as our cash flow allows. As of September 30, 2006, we can repurchase up to $74 million in additional
shares under our current Board of Directors authorization, although the Board of Directors may in its discretion authorize additional repurchases. Historically, we have executed share repurchases when cash flow from operations is not being used for
other investing or financing activities, such as acquisitions or short-term debt reduction.
Dividends
We declared and paid cash dividends of $96 million, $85 million, and $69 million in 2006, 2005, and 2004, respectively. The increase in cash dividends in 2006 over 2005
was the result of an increase in the quarterly cash dividend from 12 cents to 16 cents per share
13
Management’s Discussion and Analysis (continued)
beginning with the dividend paid June 5, 2006. The increase in cash dividends in 2005 over 2004 was the result of an increase in the quarterly cash
dividend from 9 cents to 12 cents per share beginning with the dividend paid September 7, 2004. Based on our current dividend policy, we will pay quarterly cash dividends which, on an annual basis, will equal $0.64 per share. We expect to fund
dividends using cash generated from operations. The declaration and payment of dividends, however, will be at the sole discretion of the Board of Directors.
Liquidity
In addition to cash provided by operating activities, we utilize a combination of short-term and long-term debt to finance
operations. Our primary source of short-term liquidity is through borrowings in the commercial paper market. Our access to that market is facilitated by the strength of our credit ratings and an $850 million committed credit facility with several
banks (Revolving Credit Facility). Our current ratings as provided by Moody’s Investors Service (Moody’s), Standard & Poor’s and Fitch, Inc. are A-2 / A / A, respectively, for long-term debt and P-1 / A-1 / F-1, respectively,
for short-term debt. Moody’s, Standard & Poor’s and Fitch, Inc. have stable outlooks on our credit rating.
Under our commercial paper
program, we may sell up to $850 million face amount of unsecured short-term promissory notes in the commercial paper market. The commercial paper notes may bear interest or may be sold at a discount and have a maturity of not more than 364 days from
time of issuance. Borrowings under the commercial paper program are available for working capital needs and other general corporate purposes. There were no commercial paper borrowings outstanding at September 30, 2006.
Our Revolving Credit Facility consists of an $850 million five-year unsecured revolving credit agreement entered into on May 24, 2005. The Revolving Credit Facility
exists primarily to support our commercial paper program, but is available to us in the event our access to the commercial paper market is impaired or eliminated. Our only financial covenant under the Revolving Credit Facility requires that we
maintain a consolidated debt to total capitalization ratio of not greater than 60 percent. Our debt to total capitalization ratio at September 30, 2006 was 17 percent. The Revolving Credit Facility contains covenants that require us to satisfy
certain conditions in order to incur debt secured by liens, engage in sale/leaseback transactions, or merge or consolidate with another entity. The Revolving Credit Facility does not contain any rating downgrade triggers that would accelerate the
maturity of our indebtedness. In addition, short-term credit facilities available to foreign subsidiaries amounted to $57 million as of September 30, 2006, of which $25 million was utilized to support commitments in the form of commercial
letters of credit. There were no significant commitment fees or compensating balance requirements under any of our credit facilities. At September 30, 2006, there were no borrowings outstanding under any of the Company’s credit facilities.
In addition to our credit facilities and commercial paper program, we have a shelf registration statement filed with the Securities and Exchange
Commission covering up to $750 million in debt securities, common stock, preferred stock or warrants that may be offered in one or more offerings on terms to be determined at the time of sale. On November 20, 2003, we issued $200 million of
debt due December 1, 2013 (the Notes) under the shelf registration statement. The Notes contain covenants that require us to satisfy certain conditions in order to incur debt secured by liens, engage in sale/leaseback transactions, or merge or
consolidate with another entity. At September 30, 2006, $550 million of the shelf registration was available for future use.
During June 2006 we
entered into two variable rate loan agreements to facilitate our implementation of the cash repatriation provisions of the American Jobs Creation Act of 2004 as follows:
|
|
•
|
|
Five-year unsecured variable rate loan facility agreement for 20.4 million Euros ($25 million)
|
|
|
•
|
|
Five-year unsecured variable rate loan facility agreement for 11.5 million British pounds ($21 million)
|
The variable rate loan facility agreements contain customary loan covenants, none of which are financial. Failure to comply with customary covenants or the occurrence of
customary events of default contained in the agreements would require the repayment of any outstanding borrowings under such agreements. As of September 30, 2006, $47 million was outstanding under the variable rate loan facility agreements.
If our credit ratings were to be adjusted downward by the rating agencies, the implications of such actions could include elimination of access to the
commercial paper market and an increase in the cost of borrowing. In the event
14
Management’s Discussion and Analysis (continued)
that we do not have access to the commercial paper market, alternative sources of funding could include borrowings
under the Revolving Credit Facility, funds available from the issuance of securities under our shelf registration, and potential asset securitization strategies.
Contractual Obligations
The following table summarizes certain of our contractual obligations as of September 30, 2006, as well
as when these obligations are expected to be satisfied:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
(in millions)
|
|
Total
|
|
Less than
1 Year
|
|
1 - 3
Years
|
|
4 - 5
Years
|
|
Thereafter
|
|
Long-term debt
|
|
$
|
247
|
|
$
|
—
|
|
$
|
—
|
|
$
|
47
|
|
$
|
200
|
|
Interest on long-term debt
|
|
|
80
|
|
|
12
|
|
|
24
|
|
|
24
|
|
|
20
|
|
Non-cancelable operating leases
|
|
|
146
|
|
|
33
|
|
|
40
|
|
|
24
|
|
|
49
|
|
Purchase obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase orders
|
|
|
888
|
|
|
676
|
|
|
179
|
|
|
33
|
|
|
—
|
|
Purchase contracts
|
|
|
50
|
|
|
22
|
|
|
22
|
|
|
6
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,411
|
|
$
|
743
|
|
$
|
265
|
|
$
|
134
|
|
$
|
269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest payments under long-term debt obligations exclude the potential effects of the related interest rate swap
contracts. See Note 10 in the consolidated financial statements.
We lease certain office and manufacturing facilities as well as certain machinery and
equipment under various lease contracts with terms that meet the accounting definition of operating leases. Our commitments under these operating leases, in the form of non-cancelable future lease payments, are not reflected as a liability on our
Statement of Financial Position.
Purchase obligations include purchase orders and purchase contracts. Purchase orders are executed in the normal course of
business and may or may not be cancelable. Purchase contracts include agreements with suppliers under which there is a commitment to buy a minimum amount of products or pay a specified amount regardless of actual need. Generally, items represented
in purchase obligations are not reflected as liabilities on our Statement of Financial Position.
We also have obligations with respect to pension and
other post-retirement benefit plans. See Note 11 in the consolidated financial statements.
RECENTLY ISSUED ACCOUNTING STANDARDS
For information related to recently issued accounting standards, see Note 2 in the consolidated financial statements.
ENVIRONMENTAL
For information related
to environmental claims, remediation efforts and related matters, see Note 20 in the consolidated financial statements.
CRITICAL
ACCOUNTING POLICIES
The preparation of our financial statements in accordance with accounting principles generally accepted in the United States of
America requires us to make estimates, judgments, and assumptions that affect our financial condition and results of operations that are reported in the accompanying consolidated financial statements as well as the related disclosure of assets and
liabilities contingent upon future events.
Understanding the critical accounting policies discussed below and related risks is important in evaluating our
financial condition and results of operations. We believe the following accounting policies used in the preparation of the consolidated financial statements are critical to our financial condition and results of operations as they involve a
significant use of management judgment on matters that are inherently uncertain. If actual results differ significantly from management’s estimates, there could be a material effect on our financial condition, results of operations and cash
flows. Management regularly discusses the identification and development of these critical accounting policies with the Audit Committee of the Board of Directors.
15
Management’s Discussion and Analysis (continued)
Accounting for Long-Term Contracts
A substantial portion of our sales to government customers and certain of our sales to commercial customers are made pursuant to long-term contracts requiring development and delivery of products over several years
and often contain fixed-price purchase options for additional products. Certain of these contracts are accounted for under the percentage-of-completion method of accounting under the American Institute of Certified Public Accountants’ Statement
of Position 81-1,
Accounting for Performance of Construction-Type and Certain Production-Type Contracts
. Sales and earnings under the percentage-of-completion method are recorded either as products are shipped under the units-of-delivery
method (for production effort), or based on the ratio of actual costs incurred to total estimated costs expected to be incurred related to the contract under the cost-to-cost method (for development effort).
The percentage-of-completion method of accounting requires management to estimate the profit margin for each individual contract and to apply that profit margin on a
uniform basis as sales are recorded under the contract. The estimation of profit margins requires management to make projections of the total sales to be generated and the total costs that will be incurred under a contract. These projections require
management to make numerous assumptions and estimates relating to items such as the complexity of design and related development costs, performance of subcontractors, availability and cost of materials, labor productivity and cost, overhead and
capital costs, and manufacturing efficiency. These contracts often include purchase options for additional quantities and customer change orders for additional or revised product functionality. Sales and costs related to profitable purchase options
are included in our estimates only when the options are exercised while sales and costs related to unprofitable purchase options are included in our estimates when exercise is determined to be probable. Sales related to change orders are included in
profit estimates only if they can be reliably estimated and collectibility is reasonably assured. Purchase options and change orders are accounted for either as an integral part of the original contract or separately depending upon the nature and
value of the item. Anticipated losses on contracts are recognized in full in the period in which losses become probable and estimable.
Estimates of profit
margins for contracts are typically reviewed by management on a quarterly basis. Assuming the initial estimates of sales and costs under a contract are accurate, the percentage-of-completion method results in the profit margin being recorded evenly
as revenue is recognized under the contract. Changes in these underlying estimates due to revisions in sales and cost estimates, the combining of contracts, or the exercise of contract options may result in profit margins being recognized unevenly
over a contract as such changes are accounted for on a cumulative basis in the period estimates are revised. Significant changes in estimates related to accounting for long-term contracts may have a material effect on our results of operations in
the period in which the revised estimate is made.
Income Taxes
At the end of each quarterly reporting period, we estimate an effective income tax rate that is expected to be applicable for the full fiscal year. The estimate of our effective income tax rate involves significant
judgments resulting from uncertainties in the application of complex tax regulations across many jurisdictions, implementation of tax planning strategies, and estimates as to the jurisdictions where income is expected to be earned. These estimates
may be further complicated by new laws, new interpretations of existing laws, and rulings by taxing authorities. Due to the subjectivity and complex nature of these underlying issues, our actual effective income tax rate and related tax liabilities
may differ from our initial estimates. Differences between our estimated and actual effective income tax rates and related liabilities are recorded in the period they become known or as our estimates are revised based on additional information. The
resulting adjustment to our income tax expense could have a material effect on our results of operations in the period the adjustment is recorded. A one percentage point change in our effective income tax rate would change our annual net income by
approximately $7 million.
Deferred tax assets and liabilities are recorded for tax carryforwards and the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting and income tax purposes. Management believes it is more likely than not that the current and long-term deferred tax assets will be realized through the reduction of future
taxable income. See Note 16 in the consolidated financial statements for further detail regarding deferred taxes and the factors considered in evaluating deferred tax asset realization.
16
Management’s Discussion and Analysis (continued)
Goodwill and Indefinite-Lived Intangible Assets
As of September 30, 2006, we had $517 million of goodwill resulting from various acquisitions and $2 million of indefinite-lived intangible assets consisting of
trademarks and tradenames (herein referred to as “trademarks”). We perform impairment tests on both goodwill and indefinite-lived intangible assets on an annual basis during the second quarter of each fiscal year, or on an interim basis if
events or circumstances indicate that it is more likely than not that impairment has occurred.
Goodwill is potentially impaired if the carrying value of
the “reporting unit” that contains the goodwill exceeds its estimated fair value. The fair values of our reporting units are determined with the assistance of third-party valuation experts using a combination of an “income
approach”, which estimates fair value based upon future discounted cash flows, and a “market approach”, which estimates fair value using market multiples, ratios, and valuations of a set of comparable public companies within our
industry. An indefinite-lived intangible asset is impaired if its carrying value exceeds its fair value. The fair values of our trademarks are determined with the assistance of third-party valuation experts using a “royalty savings”
method, which is based upon a hypothetical royalty rate that would be charged by a licensor of the trademarks against discounted projected revenues attributable to products using those trademarks.
The valuation methodology and underlying financial information that is used to estimate the fair value of our reporting units and trademarks requires significant
judgments to be made by management. These judgments include, but are not limited to, the long-term projections of future financial performance, the selection of appropriate discount rates used to present value future cash flows, and the
determination of appropriate royalty rates. Our five-year strategic operating plan serves as the basis for these valuations and represents our best estimate of future business conditions in our industry as well as our ability to compete. Discount
rates are determined based upon the weighted average cost of capital for a set of comparable companies adjusted for risks associated with our different operations. Royalty rates used for the trademark valuations are determined by considering market
competition, customer base, the age of the trademark, quality, absolute and relative profitability, and market share. Our goodwill and indefinite-lived intangible asset impairment tests that were performed in the second quarter of 2006 yielded no
impairments. If there was a significant downturn in our business, or if our plans with respect to utilization of acquired trademarks changed significantly, we could incur an impairment of one or more of these intangible assets.
Warranty
Accrued liabilities are recorded on our Statement of
Financial Position to reflect our contractual obligations relating to warranty commitments to our customers. We provide warranty coverage of various lengths and terms to our customers depending on standard offerings and negotiated contractual
agreements. We record an estimate for warranty expense at the time of sale based on historical warranty return rates and repair costs. We believe our primary source of warranty risk relates to our in-flight entertainment products and extended
warranty terms across all businesses. At September 30, 2006, we have recorded $189 million of warranty liabilities. Should future warranty experience differ materially from our historical experience, we may be required to record additional
warranty liabilities which could have a material adverse effect on our results of operations and cash flows in the period in which these additional liabilities are required.
Pension Benefits
We provide retirement benefits to most of our employees in the form of defined benefit
pension plans. Accounting standards require the cost of providing these pension plans be measured on an actuarial basis. These accounting standards will generally reduce, but not eliminate, the volatility of the reported pension obligation and
related pension expense as actuarial gains and losses resulting from both normal year-to-year changes in valuation assumptions and the differences from actual experience are deferred and amortized. The application of these accounting standards
requires management to make numerous assumptions and judgments that can significantly affect these measurements. Critical assumptions made by management in performing these actuarial valuations include the selection of discount rates and
expectations on the future rate of return on pension plan assets.
Discount rates are used to determine the present value of our pension obligation and
also affect the amount of pension expense recorded in any given period. We estimate this discount rate based on the rates of return of high quality, fixed-income investments with maturity dates that reflect the expected time horizon that benefits
will be paid (see Note 11 in the consolidated financial statements). Changes in the discount rate could have a material effect on our reported pension obligation and related pension expense.
17
Management’s Discussion and Analysis (continued)
The expected rate of return is our estimate of the long-term earnings rate on our pension plan assets and is based
upon both historical long-term actual and expected future investment returns considering the current investment mix of plan assets. Differences between the actual and expected rate of return on plan assets can impact our expense for pension
benefits.
Holding all other factors constant, the estimated impact on 2007 pension expense caused by hypothetical changes to key assumptions is as
follows:
|
|
|
|
|
|
|
(dollars in millions)
|
|
Change in Assumption
|
|
Assumption
|
|
25 Basis Point Increase
|
|
25 Basis Point Decrease
|
|
Pension obligation discount rate
|
|
$5 pension expense decrease
|
|
$5 pension expense increase
|
|
Expected long-term rate of return on plan assets
|
|
$5 pension expense decrease
|
|
$5 pension expense increase
|
Inventory Valuation Reserves
Inventory valuation reserves are recorded in order to report inventories at the lower of cost or market value on our Statement of Financial Position. The determination of inventory valuation reserves requires
management to make estimates and judgments on the future salability of inventories. Valuation reserves for excess, obsolete, and slow-moving inventory are estimated by comparing the inventory levels of individual parts to both future sales forecasts
or production requirements and historical usage rates in order to identify inventory that is unlikely to be sold above cost. Other factors that management considers in determining these reserves include overall market conditions and other inventory
management initiatives. Management can generally react to reduce the likelihood of severe excess and slow-moving inventory issues by changing purchasing behavior and practices provided there are no abrupt changes in market conditions.
Management believes its primary source of risk for excess and obsolete inventory is derived from the following:
|
|
•
|
|
Our in-flight entertainment inventory, which tends to experience quicker technological obsolescence than our other products. In-flight entertainment inventory at September 30,
2006 was $119 million.
|
|
|
•
|
|
Life-time buy inventory, which consists of inventory that is typically no longer being produced by our vendors but for which we purchase multiple years of supply in order to meet
production and service requirements over the life span of a product. Total life-time buy inventory on hand at September 30, 2006 was $74 million.
|
At September 30, 2006, we had $110 million of inventory valuation reserves recorded on $929 million of total inventory on hand. Although management believes these reserves are adequate, any abrupt changes in
market conditions may require us to record additional inventory valuation reserves which could have a material adverse effect on our results of operations in the period in which these additional reserves are required.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Interest Rate Risk
In addition to using cash provided by normal operating activities, we utilize a combination of short-term and
long-term debt to finance operations. Our operating results and cash flows are exposed to changes in interest rates that could adversely affect the amount of interest expense incurred and paid on debt obligations in any given period. In addition,
changes in interest rates can affect the fair value of our debt obligations. Such changes in fair value are only relevant to the extent these debt obligations are settled prior to maturity. We manage our exposure to interest rate risk by maintaining
an appropriate mix of fixed and variable rate debt and when considered necessary, we may employ financial instruments in the form of interest rate swaps to help meet this objective.
At September 30, 2006, we had $200 million of 4.75 percent fixed rate long-term debt obligations outstanding with a carrying value of $198 million and a fair value of $193 million. We converted $100 million of
this fixed rate debt to floating rate debt bearing interest at six-month LIBOR less 7.5 basis points by executing “receive fixed, pay variable” interest rate swap contracts. A hypothetical 10 percent increase or decrease in average market
interest rates would have decreased or increased the fair value of our
18
Management’s Discussion and Analysis (continued)
long-term debt, exclusive of the effects of the interest rate swap contracts, by $5 million and $5 million, respectively. The fair value of the $100 million
notional value of interest rate swap contracts was a $2 million liability at September 30, 2006. A hypothetical 10 percent increase or decrease in average market interest rates would decrease or increase the fair value of our interest rate swap
contracts by $3 million and $3 million, respectively. 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 pretax income. For more
information related to outstanding debt obligations and derivative financial instruments, see Notes 10 and 17 in the consolidated financial statements.
Foreign Currency Risk
We transact business in various foreign currencies which subjects our cash flows and earnings to exposure
related to changes to 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 creditworthy banks and are 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 foreign subsidiaries or enter into derivative financial instruments for speculative purposes. Notional amounts of outstanding foreign currency forward exchange contracts were $190 million and $234 million
at September 30, 2006 and 2005, respectively. Notional amounts are stated in U.S. dollar equivalents at spot exchange rates at the respective dates. Principal currencies that are hedged include the European euro, British pound sterling, and
Japanese yen. The duration of foreign currency contracts is generally two years or less. The net fair value of these foreign currency contracts at September 30, 2006 and 2005 were net liabilities of $3 million and $5 million, respectively. If
the US dollar increased or decreased in value against all currencies by a hypothetical 10 percent, the effect on the fair value of the foreign currency contracts, our results of operations, cash flows, or financial condition would not be significant
at September 30, 2006.
For more information related to outstanding foreign currency forward exchange contracts, see Note 17 in the consolidated
financial statements.
CAUTIONARY STATEMENT
This Annual Report to Shareowners, and documents that are incorporated by reference to our Annual Report on Form 10-K filed with the SEC, contain statements, including certain projections and business trends, accompanied by such phrases as
“believes”, “estimates”, “expects”, “could”, “likely”, “anticipates”, “will”, “intends”, and other similar expressions, 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 potential impacts of geopolitical events, the financial
condition of our customers (including major U.S. airlines), the health of the global economy, the continued recovery of the commercial aerospace industry and the continued support for military transformation and modernization programs; the potential
adverse impact of oil prices on the commercial aerospace industry; the cost of the global war on terrorism on U.S. government military procurement expenditures and program budgets; changes in domestic and foreign government spending, budgetary 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; favorable outcomes on or potential cancellation or
restructuring of contracts, orders or program priorities by our customers; customer bankruptcies and profitability; recruitment and retention of qualified personnel; performance of our suppliers and subcontractors; risks inherent in fixed price
contracts, particularly the risk of cost overruns; risk of significant disruption to air travel; our ability to execute to our internal performance plans such as our productivity improvement and cost reduction initiatives; achievement of our
acquisition and related integration plans; continuing to maintain our planned effective tax rates, including the risk that Congress will not enact research and development tax credit legislation retroactive to the beginning of fiscal year 2007; risk
of contract price reductions and payment withholds related to non compliance with U.S. Defense Department specialty metal requirements; our ability to develop contract compliant systems and products and satisfy our contractual commitments; risk of
fines and penalties related to noncompliance with export control regulations; risk of asset impairments and government claims related to our pension plan freeze; our ability to win new business and convert those orders to sales within the fiscal
year in accordance with our annual operating plan; and the uncertainties of the outcome of litigation, as well as other risks and uncertainties, including but not limited to those detailed herein and from time to time in our Securities and Exchange
Commission filings. These forward-looking statements are made only as of the date hereof.
19
MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS
We, the management team of Rockwell Collins, are responsible for the preparation, integrity and objectivity of the financial statements and other financial information
we have presented in this report. The financial statements were prepared in accordance with accounting principles generally accepted in the United States of America, applying our estimates and judgments.
Deloitte & Touche LLP, our independent registered public accounting firm, is retained to audit our financial statements. Their accompanying report is based on
audits conducted in accordance with standards of the Public Company Accounting Oversight Board (United States), which include the consideration of our internal controls to determine the nature, timing and extent of audit tests to be applied.
Our Board of Directors exercises its responsibility for these financial statements through its Audit Committee, which consists entirely of independent,
non-management Board members. The Audit Committee meets regularly with the independent registered public accounting firm and with the Company’s internal auditors, both privately and with management present, to review accounting, auditing,
internal control and financial reporting matters.
|
|
|
|
|
|
|
/s/ Clayton M. Jones
|
|
|
|
/s/ Patrick E. Allen
|
|
Clayton M. Jones
|
|
|
|
Patrick E. Allen
|
|
Chairman, President &
|
|
|
|
Senior Vice President &
|
|
Chief Executive Officer
|
|
|
|
Chief Financial Officer
|
20
MANAGEMENT’S REPORT ON
INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and
maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Rockwell Collins’ internal control over financial reporting is a process designed, under
the supervision of the Chief Executive Officer and Chief Financial Officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of America. Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of Rockwell Collins; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in
accordance with accounting principles generally accepted in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of Rockwell Collins’ management and directors; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of Rockwell Collins’ internal control over financial reporting as of September 29, 2006. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in
Internal Control-Integrated Framework
. Based on this assessment, management determined that Rockwell Collins, Inc. maintained
effective internal control over financial reporting as of September 29, 2006.
Management’s assessment of the effectiveness of Rockwell
Collins’ internal control over financial reporting as of September 29, 2006 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is included herein.
|
|
|
|
|
|
|
/s/ Clayton M. Jones
|
|
|
|
/s/ Patrick E. Allen
|
|
Clayton M. Jones
|
|
|
|
Patrick E. Allen
|
|
Chairman, President &
|
|
|
|
Senior Vice President &
|
|
Chief Executive Officer
|
|
|
|
Chief Financial Officer
|
21
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareowners of
Rockwell Collins, Inc.
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that
Rockwell Collins, Inc. and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of September 29, 2006, based on criteria established in
Internal Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting,
evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the
company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel 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. A company’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of September 29, 2006, is fairly
stated, in all material respects, based on the criteria established in
Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in
all material respects, effective internal control over financial reporting as of September 29, 2006, based on the criteria established in
Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of
the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated financial statements as of and for the year ended September 29, 2006 of the Company and our report dated November 1, 2006, expressed an unqualified opinion on those financial statements and included an explanatory paragraph
regarding the Company’s change as of October 1, 2005, in its method of accounting for employee stock-based compensation.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
November 1, 2006
22
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareowners of
Rockwell Collins, Inc.
We have audited the accompanying consolidated statement of financial position of Rockwell Collins, Inc. and subsidiaries (the “Company”) as of
September 29, 2006 and September 30, 2005, and the related consolidated statements of operations, cash flows, and shareowners’ equity and comprehensive income for each of the three years in the period ended September 29, 2006.
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of
September 29, 2006 and September 30, 2005, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 29, 2006, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 13 to the consolidated financial statements as of October 1, 2005, the Company changed
its method of accounting for employee stock-based compensation.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of September 29, 2006, based on the criteria established in
Internal Control—Integrated Framework
issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated November 1, 2006 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial
reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ Deloitte & Touche
LLP
Minneapolis, Minnesota
November 1, 2006
23
ROCKWELL COLLINS, INC.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(in millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30
|
|
|
|
|
2006
|
|
|
2005
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
144
|
|
|
$
|
145
|
|
|
Receivables
|
|
|
821
|
|
|
|
736
|
|
|
Inventories
|
|
|
727
|
|
|
|
678
|
|
|
Current deferred income taxes
|
|
|
168
|
|
|
|
178
|
|
|
Other current assets
|
|
|
67
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,927
|
|
|
|
1,780
|
|
|
|
|
|
|
Property
|
|
|
552
|
|
|
|
473
|
|
|
Intangible Assets
|
|
|
137
|
|
|
|
113
|
|
|
Goodwill
|
|
|
517
|
|
|
|
458
|
|
|
Other Assets
|
|
|
145
|
|
|
|
324
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
3,278
|
|
|
$
|
3,148
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREOWNERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
324
|
|
|
$
|
283
|
|
|
Compensation and benefits
|
|
|
268
|
|
|
|
272
|
|
|
Advance payments from customers
|
|
|
246
|
|
|
|
194
|
|
|
Product warranty costs
|
|
|
189
|
|
|
|
172
|
|
|
Income taxes payable
|
|
|
54
|
|
|
|
48
|
|
|
Other current liabilities
|
|
|
243
|
|
|
|
215
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,324
|
|
|
|
1,184
|
|
|
|
|
|
|
Long-Term Debt
|
|
|
245
|
|
|
|
200
|
|
|
Retirement Benefits
|
|
|
421
|
|
|
|
758
|
|
|
Other Liabilities
|
|
|
82
|
|
|
|
67
|
|
|
|
|
|
|
Shareowners’ Equity:
|
|
|
|
|
|
|
|
|
|
Common stock ($0.01 par value; shares authorized: 1,000; shares issued: 183.8)
|
|
|
2
|
|
|
|
2
|
|
|
Additional paid-in capital
|
|
|
1,305
|
|
|
|
1,263
|
|
|
Retained earnings
|
|
|
1,105
|
|
|
|
771
|
|
|
Accumulated other comprehensive loss
|
|
|
(393
|
)
|
|
|
(604
|
)
|
|
Common stock in treasury, at cost (shares held: 2006, 16.7; 2005, 11.3)
|
|
|
(813
|
)
|
|
|
(493
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total shareowners’ equity
|
|
|
1,206
|
|
|
|
939
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREOWNERS’ EQUITY
|
|
$
|
3,278
|
|
|
$
|
3,148
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
24
ROCKWELL COLLINS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
3,482
|
|
|
$
|
3,072
|
|
|
$
|
2,604
|
|
|
Service sales
|
|
|
381
|
|
|
|
373
|
|
|
|
326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
|
3,863
|
|
|
|
3,445
|
|
|
|
2,930
|
|
|
|
|
|
|
|
Costs, expenses and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product cost of sales
|
|
|
2,491
|
|
|
|
2,242
|
|
|
|
1,913
|
|
|
Service cost of sales
|
|
|
261
|
|
|
|
260
|
|
|
|
231
|
|
|
Selling, general and administrative expenses
|
|
|
441
|
|
|
|
402
|
|
|
|
356
|
|
|
Interest expense
|
|
|
13
|
|
|
|
11
|
|
|
|
8
|
|
|
Other income, net
|
|
|
(32
|
)
|
|
|
(17
|
)
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs, expenses and other
|
|
|
3,174
|
|
|
|
2,898
|
|
|
|
2,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
689
|
|
|
|
547
|
|
|
|
430
|
|
|
|
|
|
|
|
Income tax provision
|
|
|
212
|
|
|
|
151
|
|
|
|
129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
477
|
|
|
$
|
396
|
|
|
$
|
301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.77
|
|
|
$
|
2.24
|
|
|
$
|
1.70
|
|
|
Diluted
|
|
$
|
2.73
|
|
|
$
|
2.20
|
|
|
$
|
1.67
|
|
|
|
|
|
|
|
Weighted average common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
172.0
|
|
|
|
177.0
|
|
|
|
177.4
|
|
|
Diluted
|
|
|
174.5
|
|
|
|
180.2
|
|
|
|
180.0
|
|
|
|
|
|
|
|
Cash dividends per share
|
|
$
|
0.56
|
|
|
$
|
0.48
|
|
|
$
|
0.39
|
|
See Notes to Consolidated Financial Statements.
25
ROCKWELL COLLINS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
477
|
|
|
$
|
396
|
|
|
$
|
301
|
|
|
Adjustments to arrive at cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of equity affiliate
|
|
|
(20
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Restructuring charge and tradenames write-off
|
|
|
14
|
|
|
|
15
|
|
|
|
—
|
|
|
Depreciation
|
|
|
85
|
|
|
|
85
|
|
|
|
92
|
|
|
Amortization of intangible assets
|
|
|
21
|
|
|
|
19
|
|
|
|
17
|
|
|
Stock-based compensation
|
|
|
18
|
|
|
|
—
|
|
|
|
—
|
|
|
Compensation and benefits paid in common stock
|
|
|
50
|
|
|
|
69
|
|
|
|
57
|
|
|
Tax benefit from exercise of stock options
|
|
|
28
|
|
|
|
35
|
|
|
|
15
|
|
|
Excess tax benefit from stock-based compensation
|
|
|
(28
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Deferred income taxes
|
|
|
33
|
|
|
|
31
|
|
|
|
38
|
|
|
Pension plan contributions
|
|
|
(66
|
)
|
|
|
(114
|
)
|
|
|
(132
|
)
|
|
Changes in assets and liabilities, excluding effects of acquisitions and foreign currency adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(78
|
)
|
|
|
(108
|
)
|
|
|
(65
|
)
|
|
Inventories
|
|
|
(43
|
)
|
|
|
(9
|
)
|
|
|
(39
|
)
|
|
Accounts payable
|
|
|
35
|
|
|
|
39
|
|
|
|
21
|
|
|
Advance payments from customers
|
|
|
24
|
|
|
|
32
|
|
|
|
26
|
|
|
Income taxes
|
|
|
(12
|
)
|
|
|
34
|
|
|
|
21
|
|
|
Compensation and benefits
|
|
|
(16
|
)
|
|
|
30
|
|
|
|
36
|
|
|
Other assets and liabilities
|
|
|
73
|
|
|
|
20
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Provided by Operating Activities
|
|
|
595
|
|
|
|
574
|
|
|
|
399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property additions
|
|
|
(144
|
)
|
|
|
(111
|
)
|
|
|
(92
|
)
|
|
Acquisition of businesses, net of cash acquired
|
|
|
(100
|
)
|
|
|
(19
|
)
|
|
|
(126
|
)
|
|
Proceeds from sale of investment in equity affiliate
|
|
|
84
|
|
|
|
—
|
|
|
|
—
|
|
|
Acquisition of intangible assets
|
|
|
—
|
|
|
|
(7
|
)
|
|
|
(11
|
)
|
|
Proceeds from disposition of property
|
|
|
1
|
|
|
|
3
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Used for Investing Activities
|
|
|
(159
|
)
|
|
|
(134
|
)
|
|
|
(228
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of treasury stock
|
|
|
(492
|
)
|
|
|
(498
|
)
|
|
|
(179
|
)
|
|
Cash dividends
|
|
|
(96
|
)
|
|
|
(85
|
)
|
|
|
(69
|
)
|
|
Proceeds from exercise of stock options
|
|
|
73
|
|
|
|
96
|
|
|
|
55
|
|
|
Net proceeds from issuance of long-term debt
|
|
|
46
|
|
|
|
—
|
|
|
|
198
|
|
|
Excess tax benefit from stock-based compensation
|
|
|
28
|
|
|
|
—
|
|
|
|
—
|
|
|
Decrease in short-term borrowings, net
|
|
|
—
|
|
|
|
—
|
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Used for Financing Activities
|
|
|
(441
|
)
|
|
|
(487
|
)
|
|
|
(37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
4
|
|
|
|
(4
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Change in Cash and Cash Equivalents
|
|
|
(1
|
)
|
|
|
(51
|
)
|
|
|
130
|
|
|
Cash and Cash Equivalents at Beginning of Year
|
|
|
145
|
|
|
|
196
|
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Year
|
|
$
|
144
|
|
|
$
|
145
|
|
|
$
|
196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
26
ROCKWELL COLLINS, INC.
CONSOLIDATED STATEMENT OF SHAREOWNERS’ EQUITY
AND COMPREHENSIVE INCOME
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning and ending balance
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Paid-In Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
1,263
|
|
|
|
1,228
|
|
|
|
1,213
|
|
|
Tax benefit from exercise of stock options
|
|
|
28
|
|
|
|
35
|
|
|
|
15
|
|
|
Stock-based compensation
|
|
|
18
|
|
|
|
—
|
|
|
|
—
|
|
|
Other
|
|
|
(4
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
1,305
|
|
|
|
1,263
|
|
|
|
1,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
771
|
|
|
|
492
|
|
|
|
273
|
|
|
Net income
|
|
|
477
|
|
|
|
396
|
|
|
|
301
|
|
|
Cash dividends
|
|
|
(96
|
)
|
|
|
(85
|
)
|
|
|
(69
|
)
|
|
Shares issued under stock option and benefit plans
|
|
|
(47
|
)
|
|
|
(32
|
)
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
1,105
|
|
|
|
771
|
|
|
|
492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
(604
|
)
|
|
|
(397
|
)
|
|
|
(516
|
)
|
|
Minimum pension liability adjustment
|
|
|
199
|
|
|
|
(200
|
)
|
|
|
114
|
|
|
Currency translation gain (loss)
|
|
|
11
|
|
|
|
(6
|
)
|
|
|
6
|
|
|
Foreign currency cash flow hedge adjustment
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
(393
|
)
|
|
|
(604
|
)
|
|
|
(397
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock in Treasury
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
(493
|
)
|
|
|
(192
|
)
|
|
|
(139
|
)
|
|
Share repurchases
|
|
|
(492
|
)
|
|
|
(498
|
)
|
|
|
(179
|
)
|
|
Shares issued from treasury
|
|
|
172
|
|
|
|
197
|
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
(813
|
)
|
|
|
(493
|
)
|
|
|
(192
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Shareowners’ Equity
|
|
$
|
1,206
|
|
|
$
|
939
|
|
|
$
|
1,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
477
|
|
|
$
|
396
|
|
|
$
|
301
|
|
|
Other comprehensive income (loss), net of deferred taxes (2006, $(117); 2005, $117; 2004, $(67))
|
|
|
211
|
|
|
|
(207
|
)
|
|
|
119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
688
|
|
|
$
|
189
|
|
|
$
|
420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
1.
|
Business Description and Basis of Presentation
|
Rockwell Collins, Inc. (the Company or Rockwell Collins) provides design, production and support of communications and aviation electronics for military and commercial customers worldwide.
The Company operates on a 52/53 week fiscal year ending on the Friday closest to September 30. For ease of presentation, September 30 is
utilized consistently throughout these financial statements and notes to represent the fiscal year end date. All date references contained herein relate to the Company’s fiscal year unless otherwise stated.
In the current year, Advance Payments From Customers are presented on a separate line in the Statement of Financial Position. In prior years, such amounts
had been presented within Other Current Liabilities. Prior year Advance Payments From Customers have been reclassified to conform to the current year presentation. In addition, certain other prior year amounts have been reclassified to conform to
the current year presentation.
|
2.
|
Significant Accounting Policies
|
Consolidation
The consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries. The Company’s
investments in entities it does not control but over which it has the ability to exercise significant influence are accounted for under the equity method and are included in Other Assets. All intercompany transactions are eliminated.
Revenue Recognition
The Company
enters into sales arrangements that may provide for multiple deliverables to a customer. The Company identifies all goods and/or services that are to be delivered separately under a sales arrangement and allocates revenue to each deliverable based
on relative fair values. Fair values are generally established based on the prices charged when sold separately by the Company. In general, revenues are separated between hardware, engineering services, maintenance services, and installation
services. The allocated revenue for each deliverable is then recognized using appropriate revenue recognition methods.
Sales related to
long-term contracts requiring development and delivery of products over several years are accounted for under the percentage-of-completion method of accounting under the American Institute of Certified Public Accountants’ Statement of Position
81-1,
Accounting for Performance of Construction-Type and Certain Production-Type Contracts
. Sales and earnings under these contracts are recorded either as products are shipped under the units-of-delivery method (for production effort), or
based on the ratio of actual costs incurred to total estimated costs expected to be incurred related to the contract under the cost-to-cost method (for development effort). Purchase options and change orders are accounted for either as an integral
part of the original contract or separately depending upon the nature and value of the item. Sales and costs related to profitable purchase options are included in estimates only when the options are exercised while sales and costs related to
unprofitable purchase options are included in estimates when exercise is determined to be probable. Sales related to change orders are included in estimates only if they can be reliably estimated and collectibility is reasonably assured. Anticipated
losses on contracts are recognized in full in the period in which losses become probable and estimable. Changes in estimates of profit or loss on contracts are included in earnings on a cumulative basis in the period the estimate is changed.
Sales related to long-term separately priced product maintenance or warranty contracts are accounted for based on the terms of the
underlying agreements. Certain contracts are fixed price contracts with sales recognized ratably over the contractual life, while other contracts have a fixed hourly rate with sales recognized based on actual labor or flight hours incurred. The cost
of providing these services is expensed as incurred.
The Company recognizes sales for all other products or services when all of the
following criteria are met: an agreement of sale exists, product delivery and acceptance has occurred or services have been rendered, pricing is fixed or determinable, and collection is reasonably assured.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Research and Development
The Company performs research and development activities relating to the development of new products and the improvement of existing products.
Company-funded research and development programs are expensed as incurred and included in Cost of Sales. Customer-funded research and development expenditures are accounted for as contract costs within Cost of Sales, and the reimbursement is
accounted for as a sale.
Cash and Cash Equivalents
Cash and cash equivalents includes time deposits and certificates of deposit with original maturity dates of three months or less.
Allowance for Doubtful Accounts
Allowances are established in order to report receivables at net
realizable value on the Company’s Statement of Financial Position. The determination of these allowances requires management of the Company to make estimates and judgments as to the collectibility of customer account balances. These allowances
are estimated for customers who are considered credit risks by reviewing the Company’s collection experience with those customers as well as evaluating the customers’ financial condition. The Company also considers both current and
projected economic and market conditions. Special attention is given to accounts with invoices that are past due. Past due is defined as any invoice for which payment has not been received by the due date specified on the billing invoice. The
uncollectible portion of receivables is charged against the allowance for doubtful accounts when collection efforts have ceased. Recoveries of receivables previously charged-off are recorded when received.
Inventories
Inventories are stated
at the lower of cost or market using costs which approximate the first-in, first-out method, less related progress payments received. Inventoried costs include direct costs of manufacturing, certain engineering costs and allocable overhead costs.
The Company regularly compares inventory quantities on hand on a part level basis to estimated forecasts of product demand and production requirements as well as historical usage. Based on these comparisons, management establishes an excess and
obsolete inventory reserve on an aggregate basis.
The Company defers certain pre-production engineering costs as work-in-process inventory
in connection with long-term supply arrangements that contain contractual guarantees for reimbursement from customers. Such customer guarantees typically take the form of a minimum order quantity with quantified reimbursement amounts if the minimum
order quantity is not taken by the customer. Such costs are deferred to the extent of the contractual guarantees and are generally amortized over a period of 2 to 6 years as a component of Cost of Sales as revenue is recognized on the minimum order
quantity. Deferred pre-production engineering costs were $96 million and $68 million at September 30, 2006 and 2005, respectively. Pre-production engineering costs incurred pursuant to customer contracts that do not contain customer guarantees
for reimbursement are expensed as incurred.
Progress Payments
Progress payments relate to both receivables and inventories and represent cash collected from government-related contracts whereby the governments have a
legal right of offset related to the receivable or legal title to the work-in-process inventory.
Property
Property is stated at acquisition cost. Depreciation of property is generally provided using accelerated and straight-line methods over the following
estimated useful lives: buildings and improvements, 15-40 years; machinery and equipment, 6-12 years; and information systems software and hardware, 3-10 years. Depreciation methods and lives are reviewed periodically with any changes recorded on a
prospective basis. Effective at the beginning of 2005, the Company changed its estimated useful lives for machinery and equipment from 8-10 years to 6-12 years.
Significant renewals and betterments are capitalized and replaced units are written off. Maintenance and repairs, as well as renewals of minor amounts, are charged to expense in the period incurred. The fair value of
liabilities associated with the retirement of property is recorded when there is a legal or contractual requirement to incur such costs and the costs are reasonably estimable. Upon the initial recognition of a contractual or legal liability for an
asset retirement obligation, the Company capitalizes the asset retirement cost by increasing the carrying amount of the property by the same amount as the liability. This asset retirement cost is then depreciated over the estimated useful life of
the underlying property. The Company has no significant asset retirement obligations as of September 30, 2006.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill and Intangible Assets
Goodwill and intangible assets generally result from business acquisitions. Business acquisitions are accounted for under the purchase method by assigning
the purchase price to tangible and intangible assets acquired and liabilities assumed, including research and development projects which have not yet reached technological feasibility and have no alternative future use (purchased research and
development). Assets acquired and liabilities assumed are recorded at their fair values; the fair value of purchased research and development is immediately charged to expense; and the excess of the purchase price over the amounts assigned is
recorded as goodwill. Assets acquired and liabilities assumed are allocated to the Company’s “reporting units” based on the Company’s integration plans and internal reporting structure. Purchased intangible assets with finite
lives are amortized over their estimated useful lives. Goodwill and intangible assets with indefinite lives are not amortized, but reviewed at least annually for impairment.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment when management plans to dispose of assets or when events or circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. Assets held for disposal are reported
at the lower of the carrying amount or fair value less cost to sell. Management determines fair value using a discounted future cash flow analysis or other accepted valuation techniques. Long-lived assets held for use are reviewed for impairment by
comparing the carrying amount of an asset to the undiscounted future cash flows expected to be generated by the asset over its remaining useful life. If an asset is considered to be impaired, the impairment to be recognized is measured as the amount
by which the carrying amount of the asset exceeds its fair value.
Goodwill and indefinite-lived intangible assets are tested annually for
impairment with more frequent tests performed if indications of impairment exist. The Company’s annual impairment testing date is in the second quarter of each fiscal year. Impairment for intangible assets with indefinite lives exists if the
carrying value of the intangible asset exceeds its fair value. Goodwill is potentially impaired if the carrying value of a “reporting unit” exceeds its estimated fair value. Management determines fair value using a discounted future cash
flow analysis or other accepted valuation techniques. The Company’s annual impairment testing performed in the second quarter of 2006, 2005, and 2004 yielded no impairments. See Note 7 for a discussion of the tradenames write-off recorded in
the fourth quarter of 2005.
Advance Payments from Customers
Advance payments from customers represent cash collected from customers in advance of revenue recognition.
Customer Incentives
Rockwell Collins
provides sales incentives to certain commercial customers in connection with sales contracts. These incentives are recognized as a reduction of the sales price for cash payments or customer account credits or charged to cost of sales for products or
services to be provided, when the related sale is recorded. The liability for these incentives is included in Other Current Liabilities.
Environmental
Liabilities for environmental matters are recorded in the period in which it is probable that an obligation
has been incurred and the cost can be reasonably estimated. At environmental sites in which more than one potentially responsible party has been identified, the Company records a liability for its estimated allocable share of costs related to its
involvement with the site as well as an estimated allocable share of costs related to the involvement of insolvent or unidentified parties. At environmental sites in which the Company is the only responsible party, the Company records a liability
for the total estimated costs of remediation. Costs of future expenditures for environmental remediation obligations do not consider inflation and are not discounted to present values. If recovery from insurers or other third parties is determined
to be probable, the Company records a receivable for the estimated recovery.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes
Current tax liabilities and assets are based upon an estimate of taxes payable or refundable in the current year for each of the jurisdictions in which the Company transacts business. As part of the determination of
its tax liability, management exercises considerable judgment in assessing the positions taken by the Company in its tax returns and establishes reserves for probable tax exposures. These reserves represent the best estimate of amounts expected to
be paid and are adjusted over time as more information regarding tax audits becomes available. Deferred tax assets and liabilities are recorded for the estimated future tax effects attributable to temporary differences between the carrying amounts
of assets and liabilities used for financial reporting purposes and their respective carrying amounts for income tax purposes. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not
that some portion or all of the deferred tax assets will not be realized.
Derivative Financial Instruments
The Company uses derivative financial instruments in the form of foreign currency forward exchange contracts and interest rate swap contracts for the
purpose of minimizing exposure to changes in foreign currency exchange rates on business transactions and interest rates, respectively. The Company’s policy is to execute such instruments with creditworthy banks and not to enter into derivative
financial instruments for speculative purposes or to manage exposure for net investments in foreign subsidiaries. These derivative financial instruments do not subject the Company to undue risk as gains and losses on these instruments generally
offset gains and losses on the underlying assets, liabilities, or anticipated transactions that are being hedged.
All derivative financial
instruments are recorded at fair value in the Statement of Financial Position. For a derivative that has not been designated as an accounting hedge, the change in the fair value is recognized immediately through earnings. For a derivative that has
been designated as an accounting hedge of an existing asset or liability (a fair value hedge), the change in the fair value of both the derivative and underlying asset or liability is recognized immediately through earnings. For a derivative
designated as an accounting hedge of an anticipated transaction (a cash flow hedge), the change in the fair value is recorded on the Statement of Financial Position in Accumulated Other Comprehensive Loss to the extent the derivative is effective in
mitigating the exposure related to the anticipated transaction. The amount recorded within Accumulated Other Comprehensive Loss is reclassified in earnings in the same period during which the underlying hedged transaction affects earnings. The
Company does not exclude any amounts from the measure of effectiveness for both fair value and cash flow hedges. The change in the fair value related to the ineffective portion of a hedge, if any, is immediately recognized in earnings.
Use of Estimates
The financial
statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America, which require management to make estimates and assumptions that affect the amounts reported in the financial
statements. Actual results could differ from those estimates. Estimates are used in accounting for, among other items, long-term contracts, allowances for doubtful accounts, inventory obsolescence, product warranty cost liabilities, customer
incentive liabilities, retirement benefits, income taxes, environmental matters, recoverability of long-lived assets and contingencies. Estimates and assumptions are reviewed periodically and the effects of changes, if any, are reflected in the
Statement of Operations in the period that they are determined.
Concentration of Risks
The Company’s products and services are concentrated within the aerospace and defense industries with customers consisting primarily of military and
commercial aircraft manufacturers, commercial airlines, and the United States and foreign governments. As a result of this industry focus, the Company’s current and future financial performance is largely dependent upon the overall economic
conditions within these industries. In particular, the commercial aerospace market has been historically cyclical and subject to downturns during periods of weak economic conditions which could be prompted by or exacerbated by political or other
domestic or international events. The defense market may be affected by changes in budget appropriations, procurement policies, political developments both domestically and abroad, and other factors. While management believes the Company’s
product offerings are well positioned to meet the needs of its customer base, any material deterioration in the economic and environmental factors that impact the aerospace and defense industries could have a material adverse effect on the
Company’s results of operations, financial position or cash flows.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition to the overall business risks associated with the Company’s concentration within the
aerospace and defense industries, the Company is also exposed to a concentration of collection risk on credit extended to commercial airlines. Accounts receivable due from U.S. and international commercial airlines at September 30, 2006 was
approximately $42 million and $115 million, respectively. The Company performs ongoing credit evaluations on the financial condition of all of its commercial airline customers and maintains allowances for uncollectible accounts receivable based on
expected collectibility. Although management believes its allowances are adequate, the Company is not able to predict with certainty the changes in the financial stability of its customers. Any material change in the financial status of any one or
group of customers could have a material adverse effect on the Company’s results of operations, financial position or cash flows.
Recently Issued Accounting Standards
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 158,
Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R)
(SFAS 158)
.
Under SFAS 158,
companies must: a) recognize a net liability or asset to report the funded status of their plans on their statement of financial position, b) measure a plan’s assets and its obligations that determine its funded status as of the end of the
employer’s fiscal year, and c) recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur in comprehensive income. The provisions of SFAS 158 requiring a change in the plan measurement
date to the end of the employer’s fiscal year become effective for the Company no later than September 30, 2009. The Company must adopt all other provisions of SFAS 158 no later than September 30, 2007. The Company is currently
evaluating the impact of SFAS 158 on the Company’s financial statements and expects to complete its evaluation of adoption alternatives in the first quarter of fiscal 2007.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS 157). SFAS 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements. SFAS 157 indicates, among
other things, a fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the
asset or liability. SFAS 157 is effective for the Company’s year ending September 30, 2009. The Company is currently evaluating the impact of SFAS 157 on the Company’s financial statements.
In June 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48). FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in an entity’s financial statements. FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that
a company has taken or expects to take on a tax return. FIN 48 is effective for the Company no later than October 1, 2007. The Company is currently evaluating the impact of FIN 48 on the Company’s financial statements.
In March 2005, the FASB issued FASB Interpretation No. 47,
Accounting for Conditional Asset Retirement Obligations – an interpretation of
FASB Statement No. 143
(FIN 47). FIN 47 provides clarification with respect to the timing of liability recognition for conditional asset retirement obligations when the timing and/or method of settlement of the obligation are conditional on
a future event that may or may not be within the control of a company. FIN 47 also clarifies when a company would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The Company adopted FIN 47 in the
fourth quarter of fiscal 2006. The adoption of FIN 47 did not have a material effect on the Company’s financial statements.
In
December 2004, the FASB issued SFAS No. 123 (revised 2004),
Share-Based Payment
(SFAS 123R), which requires the Company to measure the cost of employee services received in exchange for an award of equity instruments based on the
grant-date fair value of the award beginning in 2006. The cost of the employee services is recognized as compensation cost over the period that an employee provides service in exchange for the award. SFAS 123R may be adopted using a prospective
method or a retrospective method. The Company adopted the prospective method effective October 1, 2005, see Note 13.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the years ended
September 30, 2006, 2005 and 2004, the Company completed five acquisitions that are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year
Acquired
|
|
Cash
Purchase
Price
|
|
Goodwill
|
|
Intangible Assets
|
|
(dollars in millions)
|
|
|
|
|
Finite
Lived
|
|
Weighted
Average
Life in
Years
|
|
Anzus, Inc.
|
|
2006
|
|
$
|
19
|
|
$
|
14
|
|
$
|
7
|
|
6
|
|
IP Unwired, Inc.
|
|
2006
|
|
|
10
|
|
|
7
|
|
|
3
|
|
10
|
|
E&S Simulation Business
|
|
2006
|
|
|
71
|
|
|
34
|
|
|
25
|
|
8
|
|
TELDIX GmbH
|
|
2005
|
|
|
19
|
|
|
45
|
|
|
15
|
|
11
|
|
NLX Holding Corporation
|
|
2004
|
|
|
126
|
|
|
102
|
|
|
17
|
|
5
|
Anzus, Inc.
On September 25, 2006, the Company acquired 100 percent of the shares of Anzus, Inc. (Anzus). Anzus, located in Poway, California, is a developer of software that enables high-speed tactical data link processing
and sensor correlation for the U.S. Department of Defense as well as foreign governments. The total cash purchase price was $19 million. The Company is in the process of allocating the purchase price and obtaining a valuation for acquired intangible
assets. Based on the Company’s preliminary allocation of purchase price, $14 million has been allocated to goodwill and $7 million to intangible assets with a weighted average life of approximately 6 years. The excess purchase price over net
assets acquired reflects the Company’s view that this acquisition will enhance the Company’s tactical data link integration solutions. None of the goodwill resulting from the acquisition is tax deductible. Goodwill is included within the
assets of the Government Systems segment.
IP Unwired, Inc.
On September 5, 2006, the Company acquired 100 percent of the shares of IP Unwired, Inc. (IP Unwired). IP Unwired, located in Ottawa, Canada, is a
provider of advanced digital communications and networking technology for U.S. and international military customers. The total cash purchase price was $10 million. The Company is in the process of allocating the purchase price and obtaining a
valuation for acquired intangible assets. Based on the Company’s preliminary allocation of purchase price, $7 million has been allocated to goodwill and $3 million to intangible assets with a weighted average life of approximately 10 years. The
excess purchase price over net assets acquired reflects the Company’s view that this acquisition will strengthen the Company’s network-centric operational capabilities. None of the goodwill resulting from the acquisition is tax deductible.
Goodwill is included within the assets of the Government Systems segment.
E&S Simulation Business
On May 26, 2006, the Company acquired Evans & Sutherland Computer Corporation’s (E&S) military and commercial simulation assets and
certain liabilities, including operations in the United States and United Kingdom (the E&S Simulation Business). The E&S Simulation Business produces hardware and software to create visual images for simulation, training, engineering, and
other applications throughout the world. In connection with this transaction, the Company also entered into a laser projection systems agreement with Evans & Sutherland whereby the Company has exclusive and non-exclusive rights to laser
projectors for the acquired business and certain of the Company’s other related businesses.
The total cash purchase price was
approximately $71 million and is subject to potential post-closing adjustments. The Company is in the process of allocating the purchase price and obtaining a valuation for acquired intangible and tangible assets. Based on the Company’s
preliminary allocation of purchase price, $34 million has been allocated to goodwill and $25 million to intangible assets with a weighted average life of approximately 8 years. The excess purchase price over net assets acquired reflects the
Company’s view that this acquisition will further enhance the Company’s simulation and training capabilities and provide more robust solutions for the Company’s customers. All goodwill resulting from the acquisition is tax deductible.
Based on the preliminary allocation of purchase price, $20 million of goodwill is included in the Government Systems segment and $14 million of goodwill is included in the Commercial Systems segment.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TELDIX GmbH
On March 31, 2005, the Company acquired 100 percent of the stock of TELDIX GmbH (TELDIX), a leading provider of military aviation electronics products and services, based in Heidelberg, Germany. TELDIX supplies a
broad portfolio of complex military aircraft computer products, advanced mechanical space mechanisms and related support services to major prime contractors throughout Europe. The acquisition of TELDIX has broadened the Company’s European
presence and provides complementary product lines that will allow the Company to enhance its offerings to customers worldwide and should provide new channel-to-market opportunities for the Company’s current products and services. In 2006 TELDIX
was combined with the Company’s existing German operations and is now called Rockwell Collins Deutschland GmbH. In 2006 the purchase price and purchase price allocation were finalized. The cash purchase price, net of cash acquired, was $19
million of which $45 million was allocated to goodwill and $15 million to finite lived intangible assets with a weighted average life of approximately 11 years. The excess purchase price over net assets acquired reflects the Company’s view that
there are opportunities to expand its market share in the European region. Approximately 18 percent of the goodwill resulting from this acquisition is tax deductible. Goodwill is included within the assets of the Government Systems segment.
NLX Holding Corporation
In December 2003, the Company acquired 100 percent of NLX Holding Corporation (NLX), a provider of integrated training and simulation systems. This business is now called Rockwell Collins Simulation and Training Solutions and provides
simulators ranging from full motion simulators to desktop simulators, training, upgrades, modifications, and engineering and technical services primarily to branches of the United States military. The acquisition of Rockwell Collins Simulation and
Training Solutions extends the Company’s capabilities in the areas of training and simulation and enables the Company to provide a more complete service offering to its customers. The excess purchase price over net assets acquired reflects the
Company’s view that there are significant opportunities to expand its market share in the areas of simulation and training. Approximately 20 percent of the goodwill resulting from this acquisition is tax deductible. Goodwill is included within
the assets of the Government Systems segment.
The results of operations of these acquired businesses are included in the Statement of
Operations since their respective dates of acquisition. Pro forma financial information is not presented as the effect of these acquisitions is not material to the Company’s results of operations.
Receivables are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
September 30
|
|
|
|
2006
|
|
|
2005
|
|
|
Billed
|
|
$
|
665
|
|
|
$
|
613
|
|
|
Unbilled
|
|
|
203
|
|
|
|
201
|
|
|
Less progress payments
|
|
|
(35
|
)
|
|
|
(67
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
833
|
|
|
|
747
|
|
|
Less allowance for doubtful accounts
|
|
|
(12
|
)
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
$
|
821
|
|
|
$
|
736
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2006 and 2005, the portion of receivables outstanding that are not
expected to be collected within the next twelve months is approximately $7 million and $3 million, respectively.
Unbilled receivables
principally represent sales recorded under the percentage-of-completion method of accounting that have not been billed to customers in accordance with applicable contract terms.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventories are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
September 30
|
|
|
|
2006
|
|
|
2005
|
|
|
Finished goods
|
|
$
|
172
|
|
|
$
|
162
|
|
|
Work in process
|
|
|
318
|
|
|
|
272
|
|
|
Raw materials, parts, and supplies
|
|
|
329
|
|
|
|
319
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
819
|
|
|
|
753
|
|
|
Less progress payments
|
|
|
(92
|
)
|
|
|
(75
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
727
|
|
|
$
|
678
|
|
|
|
|
|
|
|
|
|
|
|
In accordance with industry practice, inventories include amounts which are not expected to be
realized within one year. These amounts primarily relate to life-time buy inventory and pre-production engineering costs. Life-time buy inventory is inventory that is typically no longer being produced by the Company’s vendors but for which
multiple years of supply are purchased in order to meet production and service requirements over the life span of a product. Inventory not expected to be realized within one year is $146 million at both September 30, 2006 and 2005.
Property is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
September 30
|
|
|
|
2006
|
|
|
2005
|
|
|
Land
|
|
$
|
30
|
|
|
$
|
30
|
|
|
Buildings and improvements
|
|
|
281
|
|
|
|
249
|
|
|
Machinery and equipment
|
|
|
709
|
|
|
|
655
|
|
|
Information systems software and hardware
|
|
|
264
|
|
|
|
236
|
|
|
Construction in progress
|
|
|
63
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,347
|
|
|
|
1,214
|
|
|
Less accumulated depreciation
|
|
|
(795
|
)
|
|
|
(741
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Property
|
|
$
|
552
|
|
|
$
|
473
|
|
|
|
|
|
|
|
|
|
|
|
Depreciable lives are reviewed by the Company periodically with any changes recorded on a
prospective basis. In the beginning of 2005, the Company changed its useful lives for certain classes of depreciable property. The range of estimated useful lives for machinery and equipment was changed from 8—10 years to 6—12 years. As a
result of the change, depreciation expense decreased $9 million ($6 million after taxes or 3 cents per share) for 2005 compared to 2004.
Property additions acquired by incurring accounts payable, which are reflected as a non-cash transaction in the Company’s Consolidated Statement of Cash Flows, were $14 million, $14 million, and $10 million at September 30, 2006,
2005, and 2004, respectively.
|
7.
|
Goodwill and Intangible Assets
|
Changes in the
carrying amount of goodwill are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Government
Systems
|
|
|
Commercial
Systems
|
|
|
Total
|
|
|
Balance at September 30, 2004
|
|
$
|
237
|
|
|
$
|
182
|
|
|
$
|
419
|
|
|
TELDIX acquisition
|
|
|
45
|
|
|
|
—
|
|
|
|
45
|
|
|
Resolution of Kaiser pre-acquisition tax contingency
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
Currency translation adjustment
|
|
|
(4
|
)
|
|
|
—
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2005
|
|
|
278
|
|
|
|
180
|
|
|
|
458
|
|
|
E&S Simulation Business acquisition
|
|
|
20
|
|
|
|
14
|
|
|
|
34
|
|
|
IP Unwired acquisition
|
|
|
7
|
|
|
|
—
|
|
|
|
7
|
|
|
Anzus acquisition
|
|
|
14
|
|
|
|
—
|
|
|
|
14
|
|
|
Currency translation adjustment
|
|
|
4
|
|
|
|
—
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006
|
|
$
|
323
|
|
|
$
|
194
|
|
|
$
|
517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Intangible assets are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006
|
|
September 30, 2005
|
|
(in millions)
|
|
Gross
|
|
Accum
Amort
|
|
|
Net
|
|
Gross
|
|
Accum
Amort
|
|
|
Net
|
|
Intangible assets with finite lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed technology and patents
|
|
$
|
143
|
|
$
|
(58
|
)
|
|
$
|
85
|
|
$
|
121
|
|
$
|
(46
|
)
|
|
$
|
75
|
|
License agreements
|
|
|
24
|
|
|
(6
|
)
|
|
|
18
|
|
|
21
|
|
|
(5
|
)
|
|
|
16
|
|
Customer relationships
|
|
|
41
|
|
|
(14
|
)
|
|
|
27
|
|
|
22
|
|
|
(7
|
)
|
|
|
15
|
|
Trademarks and tradenames
|
|
|
11
|
|
|
(6
|
)
|
|
|
5
|
|
|
10
|
|
|
(5
|
)
|
|
|
5
|
|
Intangible assets with indefinite lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and tradenames
|
|
|
2
|
|
|
—
|
|
|
|
2
|
|
|
2
|
|
|
—
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
$
|
221
|
|
$
|
(84
|
)
|
|
$
|
137
|
|
$
|
176
|
|
$
|
(63
|
)
|
|
$
|
113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the fourth quarter of 2005, the Company completed a company-wide branding initiative and
announced to its customers that it will no longer use certain indefinite lived tradenames related to Kaiser Aerospace and Electronics Corporation (Kaiser), acquired in December 2000. As a result, the Company recorded a $15 million pre-tax write-off
in the fourth quarter of 2005. The tradenames write-off was recorded in Cost of Sales.
During the year ended September 30, 2004, the
Commercial Systems segment acquired license agreements for $18 million, of which $11 million was paid in 2004 and $7 million was paid in 2005. These license agreements relate primarily to a strategic agreement with The Boeing Company to provide a
global broadband connectivity solution for business aircraft through the Company’s Collins eXchange product. On August 17, 2006, The Boeing Company announced they will exit the high-speed broadband communications connectivity markets. The
Company and The Boeing Company are in the process of negotiating a settlement which could include a number of different alternatives. In all cases, the Company believes the carrying value of the license agreements is recoverable.
Amortization expense for intangible assets for the years ended September 30, 2006, 2005 and 2004 was $21 million, $19 million, and $17 million,
respectively. Annual amortization expense for intangible assets for 2007, 2008, 2009, 2010, and 2011 is expected to be $25 million, $22 million, $19 million, $17 million, and $12 million, respectively.
Other assets are summarized as
follows:
|
|
|
|
|
|
|
|
|
(in millions)
|
|
September 30
|
|
|
2006
|
|
2005
|
|
Long-term deferred income taxes (Note 16)
|
|
$
|
34
|
|
$
|
173
|
|
Investments in equity affiliates
|
|
|
13
|
|
|
71
|
|
Exchange and rental assets, net of accumulated depreciation of $91 at September 30, 2006 and $85 at September 30,
2005
|
|
|
37
|
|
|
37
|
|
Other
|
|
|
61
|
|
|
43
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
$
|
145
|
|
$
|
324
|
|
|
|
|
|
|
|
|
Investments in equity affiliates consist of investments in joint ventures, each of which is 50
percent owned by the Company and accounted for under the equity method.
As of September 30, 2006, the Company’s joint ventures
consist of Vision Systems International, LLC (VSI), Data Link Solutions, LLC (DLS), Integrated Guidance Systems, LLC (IGS), and Quest Flight Training Limited (Quest).
As of September 30, 2005, the Company’s joint ventures included VSI, DLS, and Rockwell Scientific Company, LLC (RSC).
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RSC was a joint venture with Rockwell Automation, Inc. (Rockwell Automation) that was engaged in
advanced research and development of technologies in electronics, imaging and optics, material and computational sciences and information technology. On September 15, 2006, the Company and Rockwell Automation sold RSC to Teledyne Brown
Engineering, Inc. (Teledyne) for $167.5 million in cash, of which the Company received approximately $84 million (50 percent), excluding expenses and certain retained liabilities. As part of the sale, the Company entered into a service agreement to
continue funding certain research performed by RSC for $7 million, $7 million, and $4 million for 2007, 2008, and 2009, respectively. In addition, Teledyne agreed to license certain intellectual property of RSC to the Company. The Company recorded a
pre-tax gain of $20 million ($13 million after taxes, or 7 cents per share) related to the sale of RSC. This pre-tax gain is recorded in Other Income, Net. RSC performed research and development efforts on behalf of the Company in the amount of $9
million for each of the years ended September 30, 2006, 2005, and 2004, respectively.
VSI is a joint venture with Elbit Systems, Ltd.
for the joint pursuit of helmet mounted cueing systems for the worldwide military fixed wing aircraft market.
DLS is a joint venture with
BAE Systems, plc for the joint pursuit of the worldwide military data link market.
IGS is a joint venture with Honeywell International Inc.
established in November of 2005 for the joint pursuit of integrated precision guidance solutions for worldwide guided weapons systems.
Quest is a joint venture with Quadrant Group plc (Quadrant) and provides aircrew training services for the United Kingdom Ministry of Defense. The 50 percent investment in Quest, which was preliminarily valued at $2 million, was acquired
from Evans & Sutherland on May 26, 2006.
Under the equity method of accounting for investments, the Company’s
proportionate share of the earnings or losses of its equity affiliates are included in net income and classified as Other Income, Net in the Statement of Operations. For segment performance reporting purposes, Rockwell Collins’ share of
earnings or losses of VSI, DLS, IGS, and Quest is included in the operating results of the Government Systems segment. RSC was considered a corporate-level investment.
In the normal course of business or pursuant to the underlying joint venture agreements, the Company may sell products or services to equity affiliates. The Company defers a portion of the profit generated from these
sales equal to its ownership interest in the equity affiliates until the underlying product is ultimately sold to an unrelated third party. Sales to equity affiliates were $139 million, $126 million, and $123 million for the years ended
September 30, 2006, 2005, and 2004, respectively. The deferred portion of profit generated from sales to equity affiliates was $7 million, $3 million, and $4 million as of September 30, 2006, 2005, and 2004, respectively.
Exchange and Rental Assets
Exchange
and rental assets consist of Company products that are either loaned or rented to customers on a short-term basis in connection with warranty and other service related activities or under operating leases. These assets are recorded at acquisition or
production cost and depreciated using the straight-line method over their estimated lives which range from 3-11 years. Depreciation methods and lives are reviewed periodically with any changes recorded on a prospective basis.
|
9.
|
Other Current Liabilities
|
Other current
liabilities are summarized as follows:
|
|
|
|
|
|
|
|
|
(in millions)
|
|
September 30
|
|
|
2006
|
|
2005
|
|
Customer incentives
|
|
$
|
125
|
|
$
|
116
|
|
Contract reserves
|
|
|
37
|
|
|
36
|
|
Other
|
|
|
81
|
|
|
63
|
|
|
|
|
|
|
|
|
|
Other current liabilities
|
|
$
|
243
|
|
$
|
215
|
|
|
|
|
|
|
|
|
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revolving Credit Facility
In May 2005, the Company entered into an $850 million five-year unsecured revolving credit facility with various banks. This credit facility exists
primarily to support the Company’s commercial paper program, but may be used for other corporate purposes in the event access to the commercial paper market is impaired or eliminated. The credit facility includes one financial covenant
requiring the Company to maintain a consolidated debt to total capitalization ratio of not greater than 60 percent. The ratio was 17 percent as of September 30, 2006. In addition, the credit facility contains covenants that require the Company
to satisfy certain conditions in order to incur debt secured by liens, engage in sale/leaseback transactions, or merge or consolidate with another entity. Borrowings under this credit facility bear interest at the London Interbank Offered Rate
(LIBOR) plus a variable margin based on the Company’s unsecured long-term debt rating or, at the Company’s option, rates determined by competitive bid. In addition, short-term credit facilities available to foreign subsidiaries were $57
million as of September 30, 2006, of which $25 million was utilized to support commitments in the form of commercial letters of credit. There were no significant commitment fees or compensating balance requirements under any of the
Company’s credit facilities.
Long-Term Debt
In June 2006, the Company entered into a five-year unsecured variable rate loan facility agreement for 20.4 million Euros ($25 million). The interest rate is variable at the Euro Interbank Offered Rate plus 35
basis points and interest is payable quarterly. As of September 30, 2006 the interest rate was 3.77 percent.
In June 2006, the Company
entered into a five-year unsecured variable rate loan facility agreement for 11.5 million British pounds ($21 million). The interest rate is variable at LIBOR plus 35 basis points and interest is payable quarterly. As of September 30, 2006
the interest rate was 5.42 percent.
Both of the variable rate loan facilities contain customary loan covenants, none of which are financial
covenants. Failure to comply with customary covenants or the occurrence of customary events of default contained in the agreements would require the repayment of any outstanding borrowings under such agreements.
In addition, the Company has a shelf registration statement filed with the Securities and Exchange Commission covering up to $750 million in debt
securities, common stock, preferred stock or warrants that may be offered in one or more offerings on terms to be determined at the time of sale. On November 20, 2003, the Company issued $200 million of 4.75 percent fixed rate unsecured debt
under the shelf registration due December 1, 2013 (the Notes). Interest payments on the Notes are due on June 1 and December 1 of each year. The Notes contain certain covenants and events of default, including requirements that the
Company satisfy certain conditions in order to incur debt secured by liens, engage in sale/leaseback transactions, or merge or consolidate with another entity. The Company entered into interest rate swap contracts which effectively converted $100
million aggregate principal amount of the Notes to floating rate debt based on six-month LIBOR less 7.5 basis points. See Note 17 for additional information relating to the interest rate swap contracts. At September 30, 2006, $550 million of
the shelf registration statement was available for future use.
Long-term debt and a reconciliation to the carrying amount is summarized as
follows :
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
September 30
|
|
|
2006
|
|
|
2005
|
|
Principal amount of Notes due December 1, 2013
|
|
$
|
200
|
|
|
$
|
200
|
|
Principal amount of variable rate loan facilities due June 2011
|
|
|
47
|
|
|
|
—
|
|
Fair value adjustment (Note 17)
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
245
|
|
|
$
|
200
|
|
|
|
|
|
|
|
|
|
Interest paid on debt for the years ended September 30, 2006, 2005, and 2004 was $11 million,
$10 million, and $7 million, respectively.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company sponsors defined
benefit pension (Pension Benefits) and other postretirement (Other Retirement Benefits) plans covering most of its U.S. employees and certain employees in foreign countries which provide monthly pension and other benefits to eligible employees upon
retirement. The components of expense for Pension Benefits and Other Retirement Benefits are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Pension Benefits
|
|
|
Other Retirement Benefits
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Service cost
|
|
$
|
50
|
|
|
$
|
36
|
|
|
$
|
39
|
|
|
$
|
4
|
|
|
$
|
3
|
|
|
$
|
5
|
|
|
Interest cost
|
|
|
140
|
|
|
|
141
|
|
|
|
135
|
|
|
|
15
|
|
|
|
18
|
|
|
|
24
|
|
|
Expected return on plan assets
|
|
|
(181
|
)
|
|
|
(177
|
)
|
|
|
(175
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
|
(18
|
)
|
|
|
(15
|
)
|
|
|
(14
|
)
|
|
|
(39
|
)
|
|
|
(39
|
)
|
|
|
(30
|
)
|
|
Net actuarial loss
|
|
|
79
|
|
|
|
46
|
|
|
|
46
|
|
|
|
19
|
|
|
|
20
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net benefit expense
|
|
$
|
70
|
|
|
$
|
31
|
|
|
$
|
31
|
|
|
$
|
(2
|
)
|
|
$
|
1
|
|
|
$
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table reconciles the projected benefit obligations, plan assets, funded status, and
net asset (liability) for the Company’s Pension Benefits and the Other Retirement Benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Pension Benefits
|
|
|
Other Retirement Benefits
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Projected benefit obligation at beginning of year
|
|
$
|
2,742
|
|
|
$
|
2,314
|
|
|
$
|
301
|
|
|
$
|
302
|
|
|
Service cost
|
|
|
50
|
|
|
|
36
|
|
|
|
4
|
|
|
|
3
|
|
|
Interest cost
|
|
|
140
|
|
|
|
141
|
|
|
|
15
|
|
|
|
18
|
|
|
Discount rate change
|
|
|
(357
|
)
|
|
|
302
|
|
|
|
—
|
|
|
|
11
|
|
|
Actuarial losses (gains)
|
|
|
5
|
|
|
|
32
|
|
|
|
(19
|
)
|
|
|
(1
|
)
|
|
Acquisitions
|
|
|
—
|
|
|
|
41
|
|
|
|
—
|
|
|
|
—
|
|
|
Plan amendments
|
|
|
(36
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Benefits paid
|
|
|
(129
|
)
|
|
|
(122
|
)
|
|
|
(30
|
)
|
|
|
(33
|
)
|
|
Other
|
|
|
8
|
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at end of year
|
|
|
2,423
|
|
|
|
2,742
|
|
|
|
271
|
|
|
|
301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan assets at beginning of year
|
|
|
2,061
|
|
|
|
1,928
|
|
|
|
14
|
|
|
|
14
|
|
|
Actual return on plan assets
|
|
|
143
|
|
|
|
146
|
|
|
|
2
|
|
|
|
1
|
|
|
Company contributions
|
|
|
71
|
|
|
|
108
|
|
|
|
30
|
|
|
|
33
|
|
|
Benefits paid
|
|
|
(129
|
)
|
|
|
(122
|
)
|
|
|
(30
|
)
|
|
|
(33
|
)
|
|
Other
|
|
|
2
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan assets at end of year
|
|
|
2,148
|
|
|
|
2,061
|
|
|
|
15
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status of plans
|
|
|
(275
|
)
|
|
|
(681
|
)
|
|
|
(256
|
)
|
|
|
(287
|
)
|
|
Contributions after measurement date
|
|
|
1
|
|
|
|
6
|
|
|
|
—
|
|
|
|
—
|
|
|
Unamortized amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
|
(158
|
)
|
|
|
(140
|
)
|
|
|
(173
|
)
|
|
|
(212
|
)
|
|
Net actuarial loss
|
|
|
802
|
|
|
|
1,192
|
|
|
|
242
|
|
|
|
281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset (liability) in the Statement of Financial Position
|
|
$
|
370
|
|
|
$
|
377
|
|
|
$
|
(187
|
)
|
|
$
|
(218
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset (liability) consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset
|
|
$
|
234
|
|
|
$
|
351
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Accrued benefit liability
|
|
|
(264
|
)
|
|
|
(573
|
)
|
|
|
(187
|
)
|
|
|
(218
|
)
|
|
Accumulated other comprehensive loss
|
|
|
400
|
|
|
|
599
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset (liability) in the Statement of Financial Position
|
|
$
|
370
|
|
|
$
|
377
|
|
|
$
|
(187
|
)
|
|
$
|
(218
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accumulated benefit obligation for all defined benefit pension plans was $2,404 million and
$2,640 million at September 30, 2006 and 2005, respectively.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Actuarial Assumptions
Plan assets and benefit obligations as of September 30 as well as net periodic benefit expense for the following fiscal years are measured on an
annual basis using a measurement date of June 30 each year. Significant assumptions used in determining the benefit obligations and related expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Retirement Benefits
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Assumptions used to determine benefit obligations at September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
6.50
|
%
|
|
5.30
|
%
|
|
6.50
|
%
|
|
5.30
|
%
|
|
Compensation increase rate
|
|
4.50
|
%
|
|
4.50
|
%
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
Assumptions used to determine net benefit expense for years ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
5.30
|
%
|
|
6.25
|
%
|
|
5.30
|
%
|
|
6.25
|
%
|
|
Expected long-term return on plan assets
|
|
8.75
|
%
|
|
8.75
|
%
|
|
8.75
|
%
|
|
8.75
|
%
|
|
Compensation increase rate
|
|
4.50
|
%
|
|
4.50
|
%
|
|
—
|
|
|
—
|
|
|
Pre-65 health care cost gross trend rate*
|
|
—
|
|
|
—
|
|
|
11.00
|
%
|
|
11.00
|
%
|
|
Post-65 health care cost gross trend rate*
|
|
—
|
|
|
—
|
|
|
11.00
|
%
|
|
11.00
|
%
|
|
Ultimate trend rate*
|
|
—
|
|
|
—
|
|
|
5.50
|
%
|
|
5.50
|
%
|
|
Year that trend reaches ultimate rate
|
|
—
|
|
|
—
|
|
|
2012
|
|
|
2011
|
|
|
*
|
Due to the effect of the fixed Company contribution, the net impact of any change in trend rate is not significant.
|
The discount rates used to determine the September 30, 2006 and 2005 benefit obligations were based on individual bond-matching models comprised of
portfolios of high-quality corporate bonds with projected cash flows and maturity dates reflecting the expected time horizon that benefits will be paid. Bonds included in the model portfolios are from a cross-section of different issuers, are rated
AA- or better, are non-callable, and have at least $25 million outstanding at the measurement date. Expected long-term return on plan assets for each year presented is based on both historical long-term actual and expected future investment returns
considering the current investment mix of plan assets.
Actuarial gains and losses in excess of 10 percent of the greater of the projected
benefit obligation or market-related value of assets are amortized on a straight-line basis over the average remaining service period of active participants. Prior service costs resulting from plan amendments are amortized in equal annual amounts
over the average remaining service period of affected active participants or over the remaining life expectancy of affected retired participants. The Company uses a five-year, market-related value asset method of amortizing the difference between
actual and expected returns on plan assets.
The Company is currently evaluating the impact of SFAS 158 on the Company’s financial
statements and expects to complete its evaluation of adoption alternatives in the first quarter of fiscal 2007. See
Recently Issued Accounting Standards
in Note 2.
Pension Benefits
The Company provides pension benefits to most of the Company’s U.S. employees
in the form of non-contributory, defined benefit plans that are considered qualified plans under applicable laws. The benefits provided under these plans for salaried employees are generally based on years of service and average compensation. The
benefits provided under these plans for hourly employees are generally based on specified benefit amounts and years of service. In addition, the Company sponsors an unfunded non-qualified defined benefit plan for certain employees. The Company also
maintains two pension plans in foreign countries, one of which is unfunded.
In June 2003, the Company’s U.S. qualified and
non-qualified defined benefit pension plans were amended to discontinue benefit accruals for salary increases and services rendered after September 30, 2006. These changes will affect all of the Company’s domestic pension plans for all
salaried and hourly employees not covered by collective bargaining agreements. Concurrently, the Company plans to supplement its existing defined contribution savings plan effective October 1, 2006 to include additional Company contributions.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 2006, the Company’s U.S. qualified defined benefit pension plan was also amended to
discontinue pre-retirement and post retirement lump sum ancillary death benefits. The amendment is effective for active employees who are entitled to a deferred vested benefit that die on or after October 1, 2006, and for retirees under the
plan who die on or after January 1, 2007. The effect of this plan amendment was to both reduce the benefit obligation and increase the funded status of the Company’s U.S. qualified pension plan by $28 million at September 30, 2006.
Also during 2006, the Company’s United Kingdom defined benefit pension plan was amended to discontinue benefit accruals for salary
increases and services rendered after February 28, 2009 for all participants. Concurrently, the Company plans to replace the defined benefit by expanding its existing defined contribution savings plan effective March 1, 2006 to include
additional Company contributions. New hires on or after March 1, 2006 participate only in the defined contribution plan. Existing employees may choose to move to the new plan any time after March 1, 2006. The effect of this plan amendment
was to both reduce the benefit obligation and increase the funded status of the Company’s United Kingdom pension plan by $8 million at September 30, 2006.
For the years ended September 30, 2006 and 2005, the Company made contributions to its pension plans as follows:
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2006
|
|
2005
|
|
Discretionary contributions to U.S. qualified plan
|
|
$
|
50
|
|
$
|
100
|
|
Contributions to international plans
|
|
|
9
|
|
|
8
|
|
Contributions to U.S. non-qualified plan
|
|
|
7
|
|
|
6
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
66
|
|
$
|
114
|
|
|
|
|
|
|
|
|
The Company’s objective with respect to the funding of its pension plans is to provide
adequate assets for the payment of future benefits. Pursuant to this objective, the Company will fund its pension plans as required by governmental regulations and may consider discretionary contributions as conditions warrant. During 2006 and 2005,
the Company made discretionary contributions to its U.S. qualified pension plan of $50 million and $100 million, respectively. These contributions resulted in a reduction of a previously established deferred tax benefit and as a result, there was no
effect on the Company’s effective income tax rate or related income tax expense during 2006 and 2005.
The Company is not required to
make any contributions to its U.S. qualified pension plan in 2007 pursuant to governmental regulations; however, the Company plans to make a $75 million discretionary contribution to the U.S. qualified pension plan in 2007. Contributions to the
Company’s international plans and the U.S. non-qualified plan are expected to total $13 million in 2007.
Other Retirement Benefits
Other retirement benefits consist of retiree health care and life insurance benefits that are provided to substantially all of the
Company’s U.S. employees and covered dependents. Employees generally become eligible to receive these benefits if they retire after age 55 with at least 10 years of service. Most plans are contributory with retiree contributions generally based
upon years of service and adjusted annually by the Company. Retiree medical plans pay a stated percentage of expenses reduced by deductibles and other coverage, principally Medicare. The amount the Company will contribute toward retiree medical
coverage for most plans is fixed. Additional premium contributions will be required from participants for all costs in excess of the Company’s fixed contribution amount. As a result, increasing or decreasing the health care cost trend rate by
one percentage point would not have a significant impact on the Company’s cost of providing these benefits. Retiree life insurance plans provide coverage at a flat dollar amount or as a multiple of salary. With the exception of certain
bargaining unit plans, Other Retirement Benefits are funded as expenses are incurred.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Plan Assets
Total plan assets for Pension Benefits and Other Retirement Benefits as of September 30, 2006 and 2005 were $2,163 million and $2,075 million, respectively. The Company has established investment objectives that
seek to preserve and maximize the amount of plan assets available to pay plan benefits. These objectives are achieved through investment guidelines requiring diversification and allocation strategies designed to maximize the long-term returns on
plan assets while maintaining a prudent level of investment risk. These investment strategies are implemented using actively managed and indexed assets. Target and actual asset allocations as of September 30 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Target Mix
|
|
2006
|
|
|
2005
|
|
|
Equities
|
|
40% - 70%
|
|
68
|
%
|
|
66
|
%
|
|
Fixed income
|
|
25% - 60%
|
|
28
|
%
|
|
26
|
%
|
|
Alternative investments
|
|
0% - 15%
|
|
—
|
|
|
—
|
|
|
Cash
|
|
0% - 5%
|
|
4
|
%
|
|
8
|
%
|
Alternative investments may include real estate, hedge funds, venture capital, and private equity.
There were no plan assets invested in the securities of the Company as of September 30, 2006 and 2005 or at any time during the years then ended. Target and actual asset allocations are periodically rebalanced between asset classes in order to
mitigate investment risk and maintain asset classes within target allocations.
Benefit Payments
The following table reflects estimated benefit payments to be made to eligible participants for each of the next five years and the following five years
in aggregate:
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Pension
Benefits
|
|
Other
Retirement
Benefits
|
|
2007
|
|
$
|
135
|
|
$
|
28
|
|
2008
|
|
|
140
|
|
|
26
|
|
2009
|
|
|
144
|
|
|
25
|
|
2010
|
|
|
148
|
|
|
24
|
|
2011
|
|
|
153
|
|
|
23
|
|
2012 - 2016
|
|
|
859
|
|
|
111
|
Substantially all of the Pension Benefit payments relate to the Company’s qualified funded
plans which are paid from the pension trust. Estimated benefit payments for Other Retirement Benefits are presented net of $7 million of federal subsidies that the Company expects to receive under the Medicare Reform Act between 2007 and 2008.
Common Stock
The Company is authorized to issue one billion shares of common stock, par value $0.01 per share, and 25 million shares of
preferred stock, without par value, of which 2.5 million shares are designated as Series A Junior Participating Preferred Stock for issuance in connection with the exercise of preferred share purchase rights. At September 30, 2006,
11.4 million shares of common stock were reserved for issuance under various employee incentive plans.
Preferred Share Purchase
Rights
Each outstanding share of common stock provides the holder with one Preferred Share Purchase Right (Right). The Rights will
become exercisable only if a person or group acquires, or offers to acquire, without prior approval of the Board of Directors, 15 percent or more of the Company’s common stock. However, the Board of Directors is authorized to reduce the 15
percent threshold for triggering the Rights to not less than 10 percent. Upon exercise, each Right entitles the holder to 1/100
th
of a share of Series A Junior Participating Preferred Stock of the Company (Junior Preferred Stock) at a price of $125, subject to adjustment.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Upon acquisition of the Company, each Right (other than Rights held by the acquirer) will generally
be exercisable for $250 worth of either common stock of the Company or common stock of the acquirer for $125. In certain circumstances, each Right may be exchanged by the Company for one share of common stock or 1/100
th
of a share of Junior Preferred Stock. The Rights will expire on June 30, 2011, unless earlier exchanged or redeemed at
$0.01 per Right. The Rights have the effect of substantially increasing the cost of acquiring the Company in a transaction not approved by the Board of Directors.
Treasury Stock
The Company repurchased shares of its common stock as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2006
|
|
2005
|
|
2004
|
|
Amount of share repurchases
|
|
$
|
492
|
|
$
|
498
|
|
$
|
179
|
|
Number of shares repurchased
|
|
|
9.3
|
|
|
10.6
|
|
|
5.8
|
In September 2006, the Company entered into an accelerated share repurchase agreement with an
investment bank under which the Company repurchased 4.7 million shares of its outstanding common shares at an initial price of $54.63 per share, representing the September 28, 2006 closing price of the Company’s common shares. Total
consideration paid to repurchase the shares of approximately $257 million was recorded as a treasury stock repurchase which resulted in a reduction of Shareowners’ Equity. The agreement is subject to a future contingent purchase price
adjustment based on the volume-weighted average price of the Company’s shares over a period of time that ends no later than December 29, 2006 (see Note 18 for further discussion of the contingent purchase price adjustment).
At September 30, 2006, the Company is authorized to repurchase an additional $74 million of outstanding stock under the Company’s share
repurchase program.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
September 30
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Minimum pension liability adjustment, net of taxes of $234 for 2006, $351 for 2005 and $234 for 2004
|
|
$
|
(400
|
)
|
|
$
|
(599
|
)
|
|
$
|
(399
|
)
|
|
Foreign currency translation adjustment
|
|
|
8
|
|
|
|
(3
|
)
|
|
|
3
|
|
|
Foreign currency cash flow hedge adjustment
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
$
|
(393
|
)
|
|
$
|
(604
|
)
|
|
$
|
(397
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13.
|
Stock-Based Compensation
|
Adoption of SFAS 123R
Prior to October 1, 2005, the Company accounted for employee stock-based compensation using the intrinsic value method in
accordance with Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees
. Under the intrinsic value method, compensation expense is recorded for the excess of the stock’s quoted market price at the time
of grant over the amount an employee had to pay to acquire the stock. As the Company’s various incentive plans require stock options to be granted at prices equal to or above the fair market value of the Company’s common stock on the grant
dates, no compensation expense was recorded prior to October 1, 2005 under the intrinsic value method.
The Company has adopted SFAS
123R using the modified prospective method as of October 1, 2005. Under this method, stock-based compensation expense for the year ended September 30, 2006 includes the requisite service period portion of the grant date fair value of:
(a) all awards of equity instruments granted prior to, but not yet vested as of, September 30, 2005; and (b) all awards of equity instruments granted subsequent to September 30, 2005. In addition, the Company has elected the
alternative transition method to compute the beginning additional paid-in capital pool in accordance with Financial Staff Position No. FAS 123(R)-3,
Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards
.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock-based compensation expense is recognized on a straight-line basis over the requisite service
period. Total stock-based compensation expense included within the Consolidated Statement of Operations for the year ended September 30, 2006 is as follows:
|
|
|
|
|
|
(in millions, except per share amounts)
|
|
2006
|
|
Stock-based compensation expense included in:
|
|
|
|
|
Product cost of sales
|
|
$
|
4
|
|
Service cost of sales
|
|
|
1
|
|
Selling, general and administrative expenses
|
|
|
13
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
18
|
|
|
|
|
|
|
Net income
|
|
$
|
12
|
|
|
|
|
|
|
Basic and diluted earnings per share
|
|
$
|
0.07
|
|
|
|
|
|
In accordance with the prospective adoption method of SFAS 123R, financial results for the prior
periods have not been restated.
Stock-Based Compensation Program Description
Under the Company’s 2001 Long-Term Incentives Plan and Directors Stock Plan, up to 14.3 million shares of common stock may be issued by the
Company as non-qualified options, incentive stock options, performance units, performance shares, stock appreciation rights, and restricted stock. Shares available for future grant or payment under these plans were 0.5 million at
September 30, 2006.
Under the Company’s 2006 Long-Term Incentives Plan, up to 11.0 million shares of common stock may be
issued by the Company as non-qualified options, incentive stock options, performance units, performance shares, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights, and other awards. Each share issued
pursuant to an award of restricted stock, restricted stock units, performance shares, and performance units counts as three shares against the authorized limit. Shares available for future grant or payment under this plan were 10.9 million at
September 30, 2006.
Options to purchase common stock of the Company have been granted under various incentive plans to directors,
officers, and other key employees. All of the Company’s stock-based incentive plans require options to be granted at prices equal to or above the fair market value of the common stock on the dates the options are granted. The plans provide that
the option price for certain options granted under the plans may be paid by the employee in cash, shares of common stock, or a combination thereof. Certain option awards provide for accelerated vesting if there is a change in control. Stock options
generally expire ten years from the date they are granted and generally vest ratably over three years. The Company has an ongoing share repurchase plan and expects to satisfy share option exercises from treasury stock.
Historically the Company has utilized stock options as the primary component of stock-based compensation awards under its long-term incentive plans for
officers and other key employees. In 2006, the Company elected to use fewer stock options as part of these awards and introduced multi-year performance shares and restricted stock. Both the performance shares and restricted stock granted in 2006
cliff vest at the end of three years. The number of performance shares that will ultimately be issued is based on achievement of performance targets for fiscal years 2006 through 2008 that consider cumulative sales growth and return on sales with an
additional potential adjustment up or down depending on the Company’s total return to shareowners compared to a group of peer companies. The Company’s stock-based compensation awards are designed to align management’s interests with
those of the Company’s shareowners and to reward outstanding Company performance. The Company’s stock-based compensation awards serve as an important retention tool because the awards generally vest over a three-year period.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pro Forma Information for Periods Prior to Fiscal 2006
The following table illustrates the effect on net income and earnings per share if the Company had accounted for its stock-based compensation plans using
the fair value method for the years ended September 30, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
(in millions, except per share amounts)
|
|
2005
|
|
|
2004
|
|
|
Net income, as reported
|
|
$
|
396
|
|
|
$
|
301
|
|
|
Stock-based employee compensation expense included in reported net income, net of tax
|
|
|
—
|
|
|
|
—
|
|
|
Stock-based employee compensation expense determined under the fair value based method, net of tax
|
|
|
(13
|
)
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
383
|
|
|
$
|
286
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
Basic – as reported
|
|
$
|
2.24
|
|
|
$
|
1.70
|
|
|
Basic – pro forma
|
|
$
|
2.16
|
|
|
$
|
1.62
|
|
|
|
|
|
|
Diluted – as reported
|
|
$
|
2.20
|
|
|
$
|
1.67
|
|
|
Diluted – pro forma
|
|
$
|
2.13
|
|
|
$
|
1.59
|
|
General Option Information
The following summarizes the activity of the Company’s stock options for 2006, 2005, and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
(shares in thousands)
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
Number of shares under option:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning of year
|
|
10,428
|
|
|
$
|
26.52
|
|
13,311
|
|
|
$
|
24.37
|
|
14,208
|
|
|
$
|
22.93
|
|
Granted
|
|
590
|
|
|
|
45.22
|
|
1,337
|
|
|
|
36.88
|
|
1,983
|
|
|
|
28.24
|
|
Exercised
|
|
(2,848
|
)
|
|
|
25.52
|
|
(4,172
|
)
|
|
|
22.96
|
|
(2,791
|
)
|
|
|
19.72
|
|
Forfeited or expired
|
|
(79
|
)
|
|
|
34.49
|
|
(48
|
)
|
|
|
28.14
|
|
(89
|
)
|
|
|
27.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
8,091
|
|
|
|
28.16
|
|
10,428
|
|
|
|
26.52
|
|
13,311
|
|
|
|
24.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
5,979
|
|
|
|
25.26
|
|
7,146
|
|
|
|
23.78
|
|
10,014
|
|
|
|
23.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average fair value of options granted during 2006, 2005, and 2004 was $13.46, $10.06,
and $9.55 per option, respectively. The intrinsic value of options exercised during 2006, 2005, and 2004 was $75 million, $88 million, and $36 million, respectively, which resulted in a tax deduction of $27 million, $33 million, and $13 million,
respectively. The intrinsic value of options outstanding and options exercisable at September 30, 2006 was $216 million and $177 million, respectively.
The following table summarizes the status of the Company’s stock options outstanding at September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
(shares in thousands; remaining life in years)
|
|
Shares
|
|
Weighted Average
|
|
Shares
|
|
Weighted Average
|
|
Range of Exercise Prices
|
|
|
Remaining
Life
|
|
Exercise
Price
|
|
|
Remaining
Life
|
|
Exercise
Price
|
|
$ 15.30 to $ 22.08
|
|
2,006
|
|
|
|
$
|
19.72
|
|
2,006
|
|
|
|
$
|
19.72
|
|
$ 22.09 to $ 27.95
|
|
1,703
|
|
|
|
|
22.87
|
|
1,643
|
|
|
|
|
22.72
|
|
$ 27.96 to $ 32.14
|
|
1,424
|
|
|
|
|
28.04
|
|
841
|
|
|
|
|
28.05
|
|
$ 32.15 to $ 58.45
|
|
2,958
|
|
|
|
|
37.00
|
|
1,489
|
|
|
|
|
33.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
8,091
|
|
5.6
|
|
|
28.16
|
|
5,979
|
|
4.8
|
|
|
25.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summarizes the activity of the Company’s stock options that have not vested for
the years ended September 30, 2006, 2005, and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
(shares in thousands)
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
Nonvested at beginning of year
|
|
3,282
|
|
|
$
|
32.49
|
|
3,297
|
|
|
$
|
27.51
|
|
3,590
|
|
|
$
|
23.07
|
|
Granted
|
|
590
|
|
|
|
45.22
|
|
1,337
|
|
|
|
36.88
|
|
1,983
|
|
|
|
28.24
|
|
Vested
|
|
(1,703
|
)
|
|
|
34.35
|
|
(1,311
|
)
|
|
|
26.35
|
|
(2,201
|
)
|
|
|
22.79
|
|
Forfeited or expired
|
|
(57
|
)
|
|
|
36.12
|
|
(41
|
)
|
|
|
29.21
|
|
(75
|
)
|
|
|
27.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at end of year
|
|
2,112
|
|
|
|
36.39
|
|
3,282
|
|
|
|
32.49
|
|
3,297
|
|
|
|
27.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total fair value of options vested was $17 million, $11 million, and $16 million during the
years ended September 30, 2006, 2005, and 2004, respectively. Total unrecognized compensation expense for options that have not vested as of September 30, 2006 is $11 million and will be recognized over a weighted average period of 1.6
years.
Stock Option Fair Value Information
The Company’s determination of fair value of option awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of subjective
variables. These assumptions include, but are not limited to, the Company’s expected stock price volatility over the term of the awards, the projected employee stock option exercise term, the expected dividend yield, and the risk-free interest
rate. Changes in these assumptions can materially affect the estimated value of the stock options.
The fair value of each option granted by
the Company was estimated using a binomial lattice pricing model for 2006 and 2005 and the Black-Scholes pricing model for 2004 and the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
Grants
|
|
|
2005
Grants
|
|
|
2004
Grants
|
|
|
Risk-free interest rate
|
|
4.40
|
%
|
|
3.55
|
%
|
|
3.37
|
%
|
|
Expected dividend yield
|
|
1.08
|
%
|
|
1.50
|
%
|
|
1.51
|
%
|
|
Expected volatility
|
|
0.30
|
|
|
0.30
|
|
|
0.40
|
|
|
Expected life
|
|
5 years
|
|
|
5 years
|
|
|
5 years
|
|
The Company’s shares have only been publicly traded since the Company’s spin-off from
Rockwell International on June 29, 2001. As a result, the Company cannot evaluate historical volatility prior to June 29, 2001. To estimate expected volatility for the Company’s stock options, the Company considered its own volatility
since the spin-off as well as the expected volatility of similar public companies.
The expected life of employee stock options represents
the weighted-average period the stock options are expected to remain outstanding. The binomial lattice model assumes that employees’ exercise behavior is a function of the option’s remaining expected life and the extent to which the option
is in-the-money. The binomial lattice model estimates the probability of exercise as a function of these two variables based on the entire history of exercises and forfeitures on all past option grants made by the Company.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
General Performance Shares, Restricted Shares, and Restricted Stock Units Information
The following summarizes the performance shares, restricted shares, and restricted stock units as of September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except shares and per share amounts, remaining life in years)
|
|
Performance
Shares
|
|
|
Restricted
Shares
|
|
|
Restricted
Stock Units
|
|
Granted
|
|
|
79,127
|
|
|
|
62,875
|
|
|
|
18,523
|
|
Forfeited
|
|
|
(1,898
|
)
|
|
|
(1,400
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year *
|
|
|
77,229
|
|
|
|
61,475
|
|
|
|
18,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unrecognized compensation cost
|
|
$
|
5
|
|
|
$
|
2
|
|
|
$
|
—
|
|
Weighted average grant date fair value per share
|
|
$
|
45.18
|
|
|
$
|
46.37
|
|
|
$
|
52.40
|
|
Weighted average life remaining
|
|
|
2.1 years
|
|
|
|
1.9 years
|
|
|
|
—
|
|
*
|
The maximum number of performance shares that can be issued based on the achievement of performance targets for fiscal years 2006 through 2008 is 185,350.
|
Diluted Share Equivalents
Dilutive stock options outstanding resulted in an increase in average outstanding diluted shares of 2.5 million, 3.2 million, and 2.6 million for 2006, 2005, and 2004, respectively. The average outstanding diluted shares
calculation excludes options with an exercise price that exceeds the average market price of shares during the year. Less than 0.1 million stock options were excluded from the average outstanding diluted shares calculation in 2006 and 2005 and
2.3 million stock options were excluded from the calculation in 2004. Dilutive performance shares, restricted shares, and restricted stock units resulted in an increase in average outstanding dilutive shares of less than 0.1 million in
2006.
Employee Benefits Paid in Company Stock
The Company offers an Employee Stock Purchase Plan (ESPP) which allows employees to have their base compensation withheld to purchase the Company’s common stock.
Prior to June 1, 2005, shares of the Company’s common stock could be purchased under the ESPP at six month intervals at 85 percent of the lower
of the fair market value on the first or the last day of the offering period. There were two offering periods during the year, each lasting six months, beginning on December 1 and June 1.
Effective June 1, 2005, the ESPP was amended whereby shares of the Company’s common stock are purchased each month by participants at 95 percent
of the fair market value on the last day of the month.
The Company is authorized to issue 9.0 million shares under the ESPP, of which
4.7 million shares are available for future grant at September 30, 2006. The ESPP is considered a non-compensatory plan and accordingly no compensation expense is recorded in connection with this benefit.
The Company also sponsors defined contribution savings plans that are available to the majority of its employees. The plans allow employees to contribute
a portion of their compensation on a pre-tax and/or after-tax basis in accordance with specified guidelines. The Company matches a percentage of employee contributions using common stock of the Company up to certain limits. Employees may transfer at
any time all or a portion of their balance in Company common stock to any of the alternative investment options offered within the plans. The Company’s expense related to the savings plans was $39 million, $35 million, and $33 million for 2006,
2005 and 2004, respectively.
During 2006, 2005, and 2004, 1.0 million, 1.9 million, and 2.2 million shares, respectively, of
Company common stock were issued to employees under the Company’s employee stock purchase and defined contribution savings plans at a value of $50 million, $69 million, and $57 million for the respective periods.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
14.
|
Research and Development
|
Research and development
expense consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2006
|
|
2005
|
|
2004
|
|
Customer-funded
|
|
$
|
443
|
|
$
|
348
|
|
$
|
327
|
|
Company-funded
|
|
|
279
|
|
|
243
|
|
|
218
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development
|
|
$
|
722
|
|
$
|
591
|
|
$
|
545
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net consists of
the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Gain on sale of equity affiliate
(A)
|
|
$
|
(20
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Earnings from equity affiliates
|
|
|
(8
|
)
|
|
|
(11
|
)
|
|
|
(8
|
)
|
|
Interest income
|
|
|
(5
|
)
|
|
|
(5
|
)
|
|
|
(2
|
)
|
|
Royalty income
|
|
|
(5
|
)
|
|
|
(3
|
)
|
|
|
(4
|
)
|
|
Contract dispute settlement
(B)
|
|
|
—
|
|
|
|
—
|
|
|
|
(7
|
)
|
|
Insurance settlements
|
|
|
—
|
|
|
|
—
|
|
|
|
(5
|
)
|
|
Loss on equity investment
(C)
|
|
|
—
|
|
|
|
—
|
|
|
|
7
|
|
|
Other, net
|
|
|
6
|
|
|
|
2
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net
|
|
$
|
(32
|
)
|
|
$
|
(17
|
)
|
|
$
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
See Note 8 for a discussion of the gain on sale of Rockwell Scientific Company, LLC.
|
|
(B)
|
The contract dispute settlement gain relates to the resolution of a legal matter from a divested business.
|
|
(C)
|
The loss on equity investment relates to the Company’s investment in Tenzing Communications, Inc., a developer of passenger connectivity solutions for commercial aircraft.
|
The components of income tax expense
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2006
|
|
2005
|
|
2004
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
United States federal
|
|
$
|
161
|
|
$
|
104
|
|
$
|
85
|
|
|
Non-United States
|
|
|
12
|
|
|
11
|
|
|
7
|
|
|
United States state and local
|
|
|
6
|
|
|
5
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
179
|
|
|
120
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
United States federal
|
|
|
27
|
|
|
25
|
|
|
39
|
|
|
Non-United States
|
|
|
3
|
|
|
—
|
|
|
(2
|
)
|
|
United States state and local
|
|
|
3
|
|
|
6
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
33
|
|
|
31
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
212
|
|
$
|
151
|
|
$
|
129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current deferred income tax benefits consist of the tax effects of temporary differences
related to the following:
|
|
|
|
|
|
|
|
|
(in millions)
|
|
September 30
|
|
|
2006
|
|
2005
|
|
Inventory
|
|
$
|
8
|
|
$
|
43
|
|
Product warranty costs
|
|
|
67
|
|
|
62
|
|
Customer incentives
|
|
|
28
|
|
|
25
|
|
Contract reserves
|
|
|
10
|
|
|
10
|
|
Compensation and benefits
|
|
|
31
|
|
|
21
|
|
Other, net
|
|
|
24
|
|
|
17
|
|
|
|
|
|
|
|
|
|
Current deferred income taxes
|
|
$
|
168
|
|
$
|
178
|
|
|
|
|
|
|
|
|
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net long-term deferred income tax benefits included in Other Assets consist of the tax effects of
temporary differences related to the following:
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
September 30
|
|
|
|
2006
|
|
|
2005
|
|
|
Retirement benefits
|
|
$
|
119
|
|
|
$
|
283
|
|
|
Intangibles
|
|
|
(4
|
)
|
|
|
—
|
|
|
Property
|
|
|
(68
|
)
|
|
|
(64
|
)
|
|
Stock-based compensation
|
|
|
6
|
|
|
|
—
|
|
|
Other, net
|
|
|
(19
|
)
|
|
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Long-term deferred income taxes
|
|
$
|
34
|
|
|
$
|
173
|
|
|
|
|
|
|
|
|
|
|
|
Management believes it is more likely than not that the current and long-term deferred tax assets
will be realized through the reduction of future taxable income. Significant factors considered by management in its determination of the probability of the realization of the deferred tax assets include: (a) the historical operating results of
Rockwell Collins ($1,012 million of United States taxable income over the past three years), (b) expectations of future earnings, and (c) the extended period of time over which the retirement benefit liabilities will be paid.
The effective income tax rate differed from the United States statutory tax rate for the reasons set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Statutory tax rate
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
|
Research and development credit
|
|
(0.8
|
)
|
|
(3.9
|
)
|
|
(2.4
|
)
|
|
Extraterritorial income exclusion
|
|
(3.0
|
)
|
|
(2.9
|
)
|
|
(2.3
|
)
|
|
Domestic manufacturing deduction
|
|
(0.4
|
)
|
|
—
|
|
|
—
|
|
|
State and local income taxes
|
|
0.5
|
|
|
1.4
|
|
|
(0.1
|
)
|
|
Resolution of pre-spin deferred tax matters
|
|
—
|
|
|
(1.9
|
)
|
|
—
|
|
|
Other
|
|
(0.5
|
)
|
|
(0.1
|
)
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
30.8
|
%
|
|
27.6
|
%
|
|
30.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense was calculated based on the following components of income before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2006
|
|
2005
|
|
2004
|
|
United States income
|
|
$
|
642
|
|
$
|
512
|
|
$
|
413
|
|
Non-United States income
|
|
|
47
|
|
|
35
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
689
|
|
$
|
547
|
|
$
|
430
|
|
|
|
|
|
|
|
|
|
|
|
During 2006, the Company settled an Internal Revenue Service (IRS) tax return audit for the years
ended September 30, 2002 and 2003 for all items other than the Extraterritorial Income Exclusion. The results of the audit were settled without a material impact on the Company’s financial statements. The IRS has begun its audit of the tax
returns for the years ended September 30, 2004 and 2005. The IRS has not proposed any audit adjustments to date. The Company believes that it has adequately provided for any tax contingencies that may result from the IRS income tax examination.
During 2005, the Company settled an IRS tax return audit for the short period return filed for the three months ended September 30,
2001. The completion of the IRS’s audit of the Company’s tax returns for the three month short-period ended September 30, 2001 enabled the Company to resolve estimates involving certain deferred tax matters existing at the time of the
spin-off. The resolution of these pre-spin deferred tax matters during 2005 resulted in a $10 million decrease to the Company’s 2005 income tax expense.
The American Jobs Creation Act of 2004 (the Act) provides for a special one-time deduction of 85 percent of certain foreign earnings repatriated into the U.S. from non-U.S. subsidiaries through September 30,
2006. During 2006 the Company repatriated $91 million in cash from non-U.S. subsidiaries into the U.S. under the provisions of the Act. The repatriation did not impact the Company’s effective income tax rate for the year ended
September 30, 2006 as a $2 million tax liability was established during 2005 when the decision was made to repatriate the foreign earnings.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
No provision has been made for United States federal or state, or additional foreign income taxes
related to approximately $46 million of undistributed earnings of foreign subsidiaries which have been or are intended to be permanently reinvested.
The Company paid income taxes, net of refunds, of $164 million, $60 million, and $51 million, in 2006, 2005, and 2004, respectively.
|
17.
|
Financial Instruments
|
Fair Value of Financial
Instruments
The carrying amounts and fair values of the Company’s financial instruments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset (Liability)
|
|
|
|
|
September 30, 2006
|
|
|
September 30, 2005
|
|
|
(in millions)
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Cash and cash equivalents
|
|
$
|
144
|
|
|
$
|
144
|
|
|
$
|
145
|
|
|
$
|
145
|
|
|
Long-term debt
|
|
|
(245
|
)
|
|
|
(240
|
)
|
|
|
(200
|
)
|
|
|
(197
|
)
|
|
Interest rate swaps
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Foreign currency forward exchange contracts
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
(5
|
)
|
|
|
(5
|
)
|
|
Accelerated share repurchase agreements (Note 18)
|
|
|
—
|
|
|
|
2
|
|
|
|
—
|
|
|
|
6
|
|
The fair value of cash and cash equivalents approximate their carrying value due to the short-term
nature of the instruments. Fair value information for long-term debt and interest rate swaps is obtained from third parties and is based on current market interest rates and estimates of current market conditions for instruments with similar terms,
maturities, and degree of risk. The fair value of foreign currency forward exchange contracts is estimated based on quoted market prices for contracts with similar maturities. The fair value of the accelerated share repurchase agreements are based
on the estimated settlement amount under the agreements as discussed in Note 18. These fair value estimates do not necessarily reflect the amounts the Company would realize in a current market exchange.
Interest Rate Swaps
The Company
manages its exposure to interest rate risk by maintaining an appropriate mix of fixed and variable rate debt, which over time should moderate the costs of debt financing. When considered necessary, the Company may use financial instruments in the
form of interest rate swaps to help meet this objective. On November 20, 2003, the Company entered into two interest rate swap contracts (the Swaps) which expire on December 1, 2013 and effectively convert $100 million of the 4.75 percent
fixed rate long-term notes to floating rate debt based on six-month LIBOR less 7.5 basis points. The Company has designated the Swaps as fair value hedges and uses the “short-cut” method for assessing effectiveness. Accordingly, changes in
the fair value of the Swaps are assumed to be entirely offset by changes in the fair value of the underlying debt that is being hedged with no net gain or loss recognized in earnings. At September 30, 2006 and 2005, the Swaps are recorded at a
fair value of $2 million and zero, respectively, within Other Liabilities, offset by a fair value adjustment to Long-Term Debt (Note 10) of $2 million and zero, respectively. Cash payments or receipts between the Company and the counterparties to
the Swaps are recorded as an adjustment to interest expense.
Foreign Currency Forward Exchange Contracts
The Company transacts business in various foreign currencies which subjects the Company’s cash flows and earnings to exposure related to changes in
foreign currency exchange rates. These exposures arise primarily from purchases or sales of products and services from third-parties and intercompany inventory and royalty transactions. The Company has established a program that utilizes foreign
currency forward exchange contracts (foreign currency contracts) and attempts to minimize its exposure to fluctuations in foreign currency exchange rates relating to these transactions. Foreign currency contracts provide for the exchange of
currencies at specified future prices and dates and reduce exposure to currency fluctuations by generating gains and losses that are intended to offset gains and losses on the underlying transactions. Principal currencies that are hedged include the
European euro, British pound, and Japanese yen. The duration of foreign currency contracts is generally two years or less. The maximum duration of a foreign currency contract at September 30, 2006 was 166 months. The majority of the
Company’s non-functional currency firm and anticipated receivables and payables that are denominated in major currencies that can be traded on open markets are hedged using foreign currency contracts. The Company does not manage exposure to net
investments in foreign subsidiaries.
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notional amounts of outstanding foreign currency forward exchange contracts were $190 million and
$234 million at September 30, 2006 and 2005, respectively. Notional amounts are stated in U.S. dollar equivalents at spot exchange rates at the respective dates. The net fair value of these foreign currency contracts at September 30, 2006
and 2005 were net liabilities of $3 million and $5 million, respectively. Net losses of $1 million and $2 million were deferred within Accumulated Other Comprehensive Loss relating to cash flow hedges at September 30, 2006 and 2005,
respectively. The Company expects to re-classify approximately $1 million of these net losses into earnings over the next 12 months. There was no significant impact to the Company’s earnings related to the ineffective portion of any hedging
instruments during the three years ended September 30, 2006. Gains and losses related to all foreign currency contracts are recorded in Cost of Sales.
|
18.
|
Guarantees and Indemnifications
|
Product
warranty costs
Accrued liabilities are recorded to reflect the Company’s contractual obligations relating to warranty commitments
to customers. Warranty coverage of various lengths and terms is provided to customers depending on standard offerings and negotiated contractual agreements. An estimate for warranty expense is recorded at the time of sale based on the length of the
warranty and historical warranty return rates and repair costs.
Changes in the carrying amount of accrued product warranty costs are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
September 30
|
|
|
|
2006
|
|
|
2005
|
|
|
Balance at beginning of year
|
|
$
|
172
|
|
|
$
|
154
|
|
|
Warranty costs incurred
|
|
|
(52
|
)
|
|
|
(53
|
)
|
|
Product warranty accrual
|
|
|
69
|
|
|
|
67
|
|
|
Acquisitions
|
|
|
1
|
|
|
|
2
|
|
|
Pre-existing warranty adjustments
|
|
|
(1
|
)
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30
|
|
$
|
189
|
|
|
$
|
172
|
|
|
|
|
|
|
|
|
|
|
|
Guarantees
In connection with the acquisition of Quest from Evans & Sutherland, the Company entered into a parent company guarantee related to various obligations of Quest. The Company guarantees, jointly and severally
with Quadrant, the performance of Quest in relation to its contract with the United Kingdom Ministry of Defense (which expires in 2030).
In
addition, the Company guarantees, jointly and severally with Quadrant, the performance of certain Quest subcontractors. This guarantee is in place until 2020 and is subject to a maximum amount of 1 million British sterling pounds (approximately
$2 million).
The Company has also pledged equity shares in Quest to guarantee payment by Quest of a loan agreement executed by Quest. The
loan agreement terminates in 2020. The pledge of the Company’s equity shares in Quest will expire at such time as Quest’s obligations under the loan agreement are satisfied or the date on which the loan agreement is otherwise terminated.
In the event of default on this loan agreement, the lending institution can request that the trustee holding such equity shares surrender them to the lending institution in order to satisfy all amounts then outstanding under the loan agreement. As
of September 30, 2006, the outstanding loan balance was approximately $8 million. Quadrant has made an identical pledge to guarantee this obligation of Quest.
Should Quest fail to meet its obligations under these agreements, these guarantees may become a liability of the Company and Quadrant. As of September 30, 2006, the Quest guarantees are not reflected on the
Company’s Consolidated Statement of Financial Position because the Company believes that Quest will meet all of its performance and financial obligations in relation to its contract with the United Kingdom Ministry of Defense and the loan
agreement.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Letters of credit
The Company has contingent commitments in the form of commercial 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
September 30, 2006 were $115 million. These commitments are not reflected as liabilities on the Company’s Statement of Financial Position.
Accelerated Share Repurchases
In September 2006, the Company entered into an accelerated share
repurchase agreement with an investment bank under which the Company repurchased 4.7 million shares of its outstanding common shares at an initial price of $54.63 per share, representing the September 28, 2006 closing price of the
Company’s common shares. Total consideration paid to repurchase the shares of approximately $257 million was recorded as a treasury stock repurchase which resulted in a reduction of Shareowners’ Equity.
The agreement contains a forward sale contract whereby the 4.7 million borrowed shares held by the investment bank that were sold to the Company are
covered by share purchases by the investment bank in the open market over a subsequent period of time that ends no later than December 29, 2006. The initial purchase price is subject to a future contingent purchase price adjustment based on the
volume-weighted average price of the Company’s shares purchased by the investment bank during the period less a discount as defined in the agreement. The purchase price adjustment will settle, at the Company’s option, in cash or in shares
of its common stock. In the event the Company elects to net-share settle, the maximum number of shares that the Company would issue under the agreement is 30 million. Assuming the volume-weighted average price of the Company’s common stock over
the applicable period is $54.84, which was the volume-weighted average price of the Company’s common stock on September 29, 2006, then the investment bank would be required to pay the Company approximately $2 million or less than
0.1 million shares (net of related settlement fees and expenses) in cash or shares to settle the transaction. A one dollar increase or decrease in the volume-weighted average price of the Company’s common stock over the applicable period
would change the fair value of the settlement by $5 million or less than 0.1 million shares.
The Company accounted for the agreement
as two separate transactions, the repurchase of shares as a treasury stock transaction and the forward sale contract as an equity instrument. As long as the forward sale contract continues to meet the requirements for classification as an equity
instrument, no accounting for the forward sale contract will be required until settlement. Any amounts (either cash or shares) subsequently paid or received at settlement will be recorded in Shareowners’ Equity.
In August 2005, the Company entered into accelerated share repurchase agreements with an investment bank under which the Company repurchased
4 million shares of its outstanding common shares at an initial price of $196 million, or $49.10 per share. The initial purchase price was subject to a purchase price adjustment based on the volume-weighted average price of the Company’s
shares during the period from August 2005 through December 2005, less a discount. The purchase price adjustment could have been settled, at the Company’s option, in cash or in shares of its common stock. In December 2005, the Company received
$8 million (net of related settlement fees and expenses) in shares of its common stock from the investment bank in full settlement of the agreements (0.2 million shares).
Indemnifications
The Company enters into indemnifications with lenders, counterparties in
transactions such as administration of employee benefit plans, and other customary indemnifications with third parties in the normal course of business. The following are other than customary indemnifications based on the judgment of management.
The Company became an independent, publicly held company on June 29, 2001, when Rockwell International Corporation (Rockwell), renamed
Rockwell Automation, spun off its former avionics and communications business and certain other assets and liabilities of Rockwell by means of a distribution of all the Company’s outstanding shares of common stock to the shareowners of Rockwell
in a tax-free spin-off (the spin-off). In connection with the spin-off, the Company may be required to indemnify certain insurers against claims made by third parties in connection with the Company’s legacy insurance policies.
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with agreements for the sale of portions of its business, the Company at times retains
the liabilities of a business of varying amounts which relate to events occurring prior to its sale, such as tax, environmental, litigation and employment matters. The Company at times indemnifies the purchaser of a Rockwell Collins’ business
in the event that a third party asserts a claim that relates to a liability retained by the Company.
The Company also provides
indemnifications of varying scope and amounts to certain customers against claims of product liability or intellectual property infringement made by third parties arising from the use of Company or customer products or intellectual property. These
indemnifications generally require the Company to compensate the other party for certain damages and costs incurred as a result of third party product liability or intellectual property claims arising from these transactions.
The amount the Company could be required to pay under its indemnification agreements is generally limited based on amounts specified in the underlying
agreements, or in the case of some agreements, the maximum potential amount of future payments that could be required is not limited. When a potential claim is asserted under these agreements, the Company considers such factors as the degree of
probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. A liability is recorded when a potential claim is both probable and estimable. The nature of these agreements prevents the Company from making
a reasonable estimate of the maximum potential amount it could be required to pay should counterparties to these agreements assert a claim; however, the Company currently has no material claims pending related to such agreements.
|
19.
|
Contractual Obligations and Other Commitments
|
The
following table reflects certain of the Company’s non-cancelable contractual commitments as of September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Payments Due By Period
|
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
Thereafter
|
|
Total
|
|
Non-cancelable operating leases
|
|
$
|
33
|
|
$
|
24
|
|
$
|
16
|
|
$
|
13
|
|
$
|
11
|
|
$
|
49
|
|
$
|
146
|
|
Purchase contracts
|
|
|
22
|
|
|
12
|
|
|
10
|
|
|
3
|
|
|
3
|
|
|
—
|
|
|
50
|
|
Long-term debt
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
47
|
|
|
200
|
|
|
247
|
|
Interest on long-term debt
|
|
|
12
|
|
|
12
|
|
|
12
|
|
|
12
|
|
|
12
|
|
|
20
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
67
|
|
$
|
48
|
|
$
|
38
|
|
$
|
28
|
|
$
|
73
|
|
$
|
269
|
|
$
|
523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cancelable Operating Leases
The Company leases certain office and manufacturing facilities as well as certain machinery and equipment under various lease contracts with terms that
meet the accounting definition of operating leases. Some leases include renewal options, which permit extensions of the expiration dates at rates approximating fair market rental rates. Rent expense for the years ended September 30, 2006, 2005,
and 2004 was $27 million, $25 million, and $26 million, respectively. The Company’s commitments under these operating leases, in the form of non-cancelable future lease payments, are not reflected as a liability on its Statement of Financial
Position.
Purchase Contracts
The Company may enter into purchase contracts with suppliers under which there is a commitment to buy a minimum amount of products or pay a specified amount. These commitments are not reflected as a liability on the Company’s Statement
of Financial Position.
Interest on Long-term Debt
Interest payments under long-term debt obligations exclude the potential effects of the related interest rate swap contracts.
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
20.
|
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. The
Company is currently involved in the investigation or remediation of ten sites under these regulations or pursuant to lawsuits asserted by third parties. Certain of these sites relate to properties purchased in connection with the Company’s
acquisition of Kaiser. Rockwell Collins has certain rights to indemnification from escrow funds set aside at the time of acquisition that management believes are sufficient to address the Company’s potential liability related to the Kaiser
related environmental matters. As of September 30, 2006, management estimates that the total reasonably possible future costs the Company could incur from these matters to be approximately $10 million. The Company has recorded environmental
reserves for these matters of $3 million as of September 30, 2006, which represents management’s best estimate of the probable future cost for these matters.
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 adverse effect on the Company’s business or financial position, but could possibly be material to the results of operations or cash flows of any one period.
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, intellectual property, safety and health,
exporting and importing, contract, employment and regulatory matters. Although the outcome of these matters cannot be predicted with certainty and some lawsuits, claims or proceedings may be disposed of unfavorably to the Company, management
believes the disposition of matters that are pending or asserted will not have a material adverse effect on the Company’s business or financial position, but could possibly be material to the results of operations or cash flows of any one
period.
|
22.
|
Business Segment Information
|
Rockwell Collins
provides design, production and support of communications and aviation electronics for military and commercial customers worldwide. The Company has two operating segments consisting of the Government Systems and Commercial Systems businesses.
The Government Systems business supplies defense communications systems and products as well as defense electronics systems and products,
which include subsystems, navigation and displays, to the U.S. Department of Defense, other government agencies, civil agencies, defense contractors and foreign Ministries of Defense. These product lines support airborne, ground, and shipboard
applications.
Products sold by the Commercial Systems business include air transport aviation electronics systems and products and business
and regional aviation electronics systems and products. These systems and products include communications, navigation, surveillance, displays and automatic flight control and flight management systems, as well as in-flight entertainment, cabin
electronics and information management systems. Customers include manufacturers of commercial air transport, business and regional aircraft, commercial airlines, fractional operators and business jet operators.
Sales made to the United States Government were 39 percent, 41 percent, and 42 percent of total sales for the years ended September 30, 2006, 2005,
and 2004, respectively.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table reflects the sales and operating results for each of the Company’s operating
segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government Systems
|
|
$
|
2,043
|
|
|
$
|
1,810
|
|
|
$
|
1,535
|
|
|
Commercial Systems
|
|
|
1,820
|
|
|
|
1,635
|
|
|
|
1,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$
|
3,863
|
|
|
$
|
3,445
|
|
|
$
|
2,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government Systems
|
|
$
|
402
|
|
|
$
|
328
|
|
|
$
|
282
|
|
|
Commercial Systems
|
|
|
370
|
|
|
|
296
|
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating earnings
|
|
|
772
|
|
|
|
624
|
|
|
|
482
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(13
|
)
|
|
|
(11
|
)
|
|
|
(8
|
)
|
|
Earnings from corporate-level equity affiliate
|
|
|
2
|
|
|
|
4
|
|
|
|
3
|
|
|
Stock-based compensation
|
|
|
(18
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Gain on sale of equity affiliate.
|
|
|
20
|
|
|
|
—
|
|
|
|
—
|
|
|
Restructuring charge and tradenames write-off
|
|
|
(14
|
)
|
|
|
(15
|
)
|
|
|
—
|
|
|
General corporate, net
|
|
|
(60
|
)
|
|
|
(55
|
)
|
|
|
(47
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
689
|
|
|
$
|
547
|
|
|
$
|
430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company evaluates performance and allocates resources based upon, among other considerations,
segment operating earnings. The Company’s definition of segment operating earnings excludes income taxes, stock-based compensation, unallocated general corporate expenses, interest expense, gains and losses from the disposition of businesses,
non-recurring charges resulting from purchase accounting such as purchased research and development charges, earnings and losses from corporate-level equity affiliates, asset impairment charges, and other special items as identified by management
from time to time. Intersegment sales are not material and have been eliminated. The accounting policies used in preparing the segment information are consistent with the policies described in Note 2.
The September 2006 restructuring charge is related to decisions to implement certain business realignment and facility rationalization actions related to
the operating segments as follows: Government Systems, $6 million, and Commercial Systems, $8 million.
The 2005 tradenames write-off
related to the write-off of certain indefinite-lived Kaiser tradenames related to the operating segments as follows: Government Systems, $9 million, and Commercial Systems, $6 million.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables summarize the identifiable assets and investments in equity affiliates at
September 30, as well as the provision for depreciation and amortization, the amount of capital expenditures for property, and earnings (losses) from equity affiliates for each of the three years ended September 30, for each of the
operating segments and Corporate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2006
|
|
2005
|
|
|
2004
|
|
|
Identifiable assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Government Systems
|
|
$
|
1,361
|
|
$
|
1,169
|
|
|
$
|
1,057
|
|
|
Commercial Systems
|
|
|
1,528
|
|
|
1,402
|
|
|
|
1,290
|
|
|
Corporate
|
|
|
389
|
|
|
577
|
|
|
|
527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total identifiable assets
|
|
$
|
3,278
|
|
$
|
3,148
|
|
|
$
|
2,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in equity affiliates:
|
|
|
|
|
|
|
|
|
|
|
|
|
Government Systems
|
|
$
|
13
|
|
$
|
12
|
|
|
$
|
10
|
|
|
Commercial Systems
|
|
|
—
|
|
|
—
|
|
|
|
1
|
|
|
Corporate
|
|
|
—
|
|
|
59
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments in equity affiliates
|
|
$
|
13
|
|
$
|
71
|
|
|
$
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Government Systems
|
|
$
|
48
|
|
$
|
43
|
|
|
$
|
45
|
|
|
Commercial Systems
|
|
|
58
|
|
|
61
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization
|
|
$
|
106
|
|
$
|
104
|
|
|
$
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures for property:
|
|
|
|
|
|
|
|
|
|
|
|
|
Government Systems
|
|
$
|
75
|
|
$
|
48
|
|
|
$
|
42
|
|
|
Commercial Systems
|
|
|
69
|
|
|
63
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures for property
|
|
$
|
144
|
|
$
|
111
|
|
|
$
|
92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (losses) from equity affiliates:
|
|
|
|
|
|
|
|
|
|
|
|
|
Government Systems
|
|
$
|
6
|
|
$
|
8
|
|
|
$
|
6
|
|
|
Commercial Systems
|
|
|
—
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
Corporate
|
|
|
2
|
|
|
4
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earnings from equity affiliates
|
|
$
|
8
|
|
$
|
11
|
|
|
$
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The majority of the Company’s businesses are centrally located and share many common
resources, infrastructures and assets in the normal course of business. Certain assets have been allocated between the operating segments primarily based on occupancy or usage, principally property, plant and equipment. Identifiable assets at
Corporate consist principally of cash and net deferred income tax assets for all years presented and the investment in Rockwell Scientific Company, LLC for the years ended September 30, 2005 and 2004.
The following table summarizes sales by product category for the years ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2006
|
|
2005
|
|
2004
|
|
Defense electronics
|
|
$
|
1,413
|
|
$
|
1,232
|
|
$
|
956
|
|
Defense communications
|
|
|
630
|
|
|
578
|
|
|
579
|
|
Air transport aviation electronics
|
|
|
996
|
|
|
911
|
|
|
798
|
|
Business and regional aviation electronics
|
|
|
824
|
|
|
724
|
|
|
597
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,863
|
|
$
|
3,445
|
|
$
|
2,930
|
|
|
|
|
|
|
|
|
|
|
|
Product line disclosures for defense-related products are delineated based upon their underlying
technologies while the air transport and business and regional aviation electronics product lines are delineated based upon the difference in underlying customer base, size of aircraft, and markets served.
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table reflects sales for the years ended September 30 and property at
September 30 by geographic region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Sales
|
|
Property
|
|
|
2006
|
|
2005
|
|
2004
|
|
2006
|
|
2005
|
|
2004
|
|
United States
|
|
$
|
2,616
|
|
$
|
2,312
|
|
$
|
1,957
|
|
$
|
505
|
|
$
|
428
|
|
$
|
387
|
|
Europe
|
|
|
674
|
|
|
612
|
|
|
544
|
|
|
39
|
|
|
36
|
|
|
21
|
|
Asia-Pacific
|
|
|
234
|
|
|
231
|
|
|
165
|
|
|
5
|
|
|
6
|
|
|
7
|
|
Canada
|
|
|
223
|
|
|
208
|
|
|
171
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Africa / Middle East
|
|
|
74
|
|
|
55
|
|
|
70
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Latin America
|
|
|
42
|
|
|
27
|
|
|
23
|
|
|
3
|
|
|
3
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,863
|
|
$
|
3,445
|
|
$
|
2,930
|
|
$
|
552
|
|
$
|
473
|
|
$
|
418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales are attributed to the geographic regions based on the country of destination.
|
23.
|
Quarterly Financial Information (Unaudited)
|
Quarterly financial information for the years ended September 30, 2006 and 2005 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except per share amounts)
|
|
2006 Quarters
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Total
|
|
Sales
|
|
$
|
881
|
|
$
|
957
|
|
$
|
964
|
|
$
|
1,061
|
|
$
|
3,863
|
|
Cost of sales
|
|
|
630
|
|
|
681
|
|
|
676
|
|
|
765
|
|
|
2,752
|
|
Net income
|
|
|
104
|
|
|
114
|
|
|
121
|
|
|
138
|
|
|
477
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.60
|
|
$
|
0.66
|
|
$
|
0.71
|
|
$
|
0.80
|
|
$
|
2.77
|
|
Diluted
|
|
$
|
0.59
|
|
$
|
0.65
|
|
$
|
0.70
|
|
$
|
0.79
|
|
$
|
2.73
|
|
(in millions, except per share amounts)
|
|
2005
Quarters
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Total
|
|
Sales
|
|
$
|
763
|
|
$
|
829
|
|
$
|
890
|
|
$
|
963
|
|
$
|
3,445
|
|
Cost of sales
|
|
|
545
|
|
|
600
|
|
|
641
|
|
|
716
|
|
|
2,502
|
|
Net income
|
|
|
90
|
|
|
95
|
|
|
101
|
|
|
110
|
|
|
396
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.51
|
|
$
|
0.53
|
|
$
|
0.57
|
|
$
|
0.63
|
|
$
|
2.24
|
|
Diluted
|
|
$
|
0.50
|
|
$
|
0.52
|
|
$
|
0.56
|
|
$
|
0.62
|
|
$
|
2.20
|
Net income in the fourth quarter of 2006 includes $13 million ($20 million before taxes), or 7
cents per share, related to the gain on sale of Rockwell Scientific Company, LLC. Net income in the fourth quarter of 2006 also includes $9 million ($14 million before taxes), or 5 cents per share, for a restructuring charge related to decisions to
implement certain business realignment and facility rationalization actions. Cost of sales includes $11 million related to the restructuring charge in the fourth quarter of 2006.
Cost of sales and net income in the fourth quarter of 2005 include a tradenames write-off of $15 million ($10 million after taxes), or 6 cents per share,
related to the write-off of certain indefinite-lived Kaiser tradenames (see Note 7).
Net income in the fourth quarter of 2005 includes $10
million, or 6 cents per share, in favorable income tax adjustments resulting from the resolution of certain deferred tax matters that existed at the time of the Company’s spin-off in 2001 (see Note 16).
57
Selected Financial Data
The following selected financial data should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this annual report. The Statement of Operations, Statement of
Financial Position and other data has been derived from our audited financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30
|
|
|
|
2006
(a)
|
|
2005
(b)
|
|
2004
(c)
|
|
2003
(d)
|
|
2002
(e)
|
|
|
|
(in millions, except per share amounts)
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
3,863
|
|
$
|
3,445
|
|
$
|
2,930
|
|
$
|
2,542
|
|
$
|
2,492
|
|
Cost of sales
|
|
|
2,752
|
|
|
2,502
|
|
|
2,144
|
|
|
1,866
|
|
|
1,863
|
|
Selling, general and administrative expenses
|
|
|
441
|
|
|
402
|
|
|
356
|
|
|
341
|
|
|
307
|
|
Income before income taxes
|
|
|
689
|
|
|
547
|
|
|
430
|
|
|
368
|
|
|
341
|
|
Net income
|
|
|
477
|
|
|
396
|
|
|
301
|
|
|
258
|
|
|
236
|
|
Diluted earnings per share
|
|
|
2.73
|
|
|
2.20
|
|
|
1.67
|
|
|
1.43
|
|
|
1.28
|
|
|
|
|
|
|
|
|
Statement of Financial Position Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
(f)
|
|
$
|
603
|
|
$
|
596
|
|
$
|
699
|
|
$
|
530
|
|
$
|
402
|
|
Property
|
|
|
552
|
|
|
473
|
|
|
418
|
|
|
401
|
|
|
411
|
|
Goodwill and intangible assets
|
|
|
654
|
|
|
571
|
|
|
550
|
|
|
440
|
|
|
456
|
|
Total assets
|
|
|
3,278
|
|
|
3,148
|
|
|
2,874
|
|
|
2,591
|
|
|
2,555
|
|
Short-term debt
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
42
|
|
|
132
|
|
Long-term debt
|
|
|
245
|
|
|
200
|
|
|
201
|
|
|
—
|
|
|
—
|
|
Shareowners’ equity
|
|
|
1,206
|
|
|
939
|
|
|
1,133
|
|
|
833
|
|
|
987
|
|
|
|
|
|
|
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
144
|
|
$
|
111
|
|
$
|
92
|
|
$
|
69
|
|
$
|
62
|
|
Depreciation and amortization
|
|
|
106
|
|
|
104
|
|
|
109
|
|
|
105
|
|
|
105
|
|
Dividends per share
|
|
|
0.56
|
|
|
0.48
|
|
|
0.39
|
|
|
0.36
|
|
|
0.36
|
|
|
|
|
|
|
|
|
Stock Price:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
60.41
|
|
$
|
49.80
|
|
$
|
38.08
|
|
$
|
27.67
|
|
$
|
27.70
|
|
Low
|
|
|
43.25
|
|
|
34.40
|
|
|
25.18
|
|
|
17.20
|
|
|
12.99
|
|
(a)
|
Includes (i) $20 million gain on the sale of Rockwell Scientific Company, LLC, an equity affiliate that was jointly owned with Rockwell Automation, Inc. ($13 million after
taxes) and (ii) $14 million restructuring charge related to decisions to implement certain business realignment and facility rationalization actions ($9 million after taxes).
|
|
(b)
|
Includes (i) $10 million reduction in income tax expense related to the resolution of certain deferred tax matters that existed prior to our spin-off in 2001 and (ii) $15
million write-off of certain indefinite-lived Kaiser tradenames ($10 million after taxes). The tradename write-off was recorded in Cost of sales.
|
|
(c)
|
Includes (i) $5 million gain ($3 million after taxes) related to favorable insurance settlements, (ii) $7 million gain ($4 million after taxes) related to the resolution
of a legal matter brought by us, and (iii) $7 million loss ($4 million after taxes) related to our investment in Tenzing Communications, Inc.
|
|
(d)
|
Includes a $20 million gain ($12 million after taxes) related to a favorable tax ruling on an over-funded life insurance reserve trust fund.
|
|
(e)
|
Includes (i) $12 million net gain ($7 million after taxes) related to certain legal matters, and (ii) $4 million ($2 million after taxes) reversal of a portion of the 2001
restructuring charge.
|
|
(f)
|
Working capital consists of all current assets and liabilities, including cash and short-term debt.
|
58
Exhibit 21
List of Subsidiaries of Rockwell Collins, Inc.
|
|
|
|
|
Name
|
|
State/Country of
Incorporation
|
|
|
|
|
Anzus, Inc.
|
|
Pennsylvania
|
|
|
|
|
Intertrade Limited
|
|
Iowa
|
|
|
|
|
K Systems, Inc.
|
|
California
|
|
|
|
|
Kaiser Optical Systems, Inc.
|
|
Michigan
|
|
|
|
|
NLX Holding Corporation
|
|
Delaware
|
|
|
|
|
Rockwell Collins Aerospace & Electronics, Inc.
|
|
Delaware
|
|
|
|
|
Rockwell Collins Government Systems (Canada), Inc.
|
|
Canada
|
|
|
|
|
Rockwell Collins ElectroMechanical Systems, Inc.
|
|
Nevada
|
|
|
|
|
Rockwell Collins Optronics, Inc.
|
|
California
|
|
|
|
|
Rockwell Collins Simulation & Training Solutions LLC
|
|
Delaware
|
|
|
|
|
Rockwell Collins Technologies LLC
|
|
Delaware
|
|
|
|
|
Rockwell Collins Danmark ApS
|
|
Denmark
|
|
|
|
|
Rockwell Collins Deutschland Holdings GmbH
|
|
Germany
|
|
|
|
|
Rockwell Collins European Holdings S.à r.l.
|
|
Luxembourg
|
|
|
|
|
Rockwell-Collins France S.A.S.
|
|
France
|
|
|
|
|
Rockwell Collins International Financing LIMITED
|
|
Bermuda
|
|
|
|
|
Rockwell Collins International Holdings LIMITED
|
|
Bermuda
|
|
|
|
|
Rockwell-Collins (U.K.) Limited
|
|
United Kingdom
|
|
|
|
|
Rockwell Collins Deutschland GmbH
|
|
Germany
|
|
|
|
|
Rockwell Collins Deutschland Services GmbH
|
|
Germany
|
Listed above are certain consolidated subsidiaries included in the consolidated financial statements of the
Company. Unlisted subsidiaries, considered in the aggregate, do not constitute a significant subsidiary.
Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos.
333-63100, 333-63120, 333-72814, and 333-132764 on Form S-8 and Nos. 333-63142 and 333-72914 on Form S-3 of our reports dated November 1, 2006 (which report on the consolidated financial statements expressed an unqualified opinion and included
an explanatory paragraph regarding the Company’s change as of October 1, 2005, in its method of accounting for employee stock-based compensation), relating to the consolidated financial statements and consolidated financial statement schedule
of Rockwell Collins, Inc. and subsidiaries (the “Company”) and management’s report on the effectiveness of internal control over financial reporting, appearing in and incorporated by reference in this Annual Report on Form 10-K of the
Company for the year ended September 29, 2006.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
November 13, 2006
Exhibit 24
POWER OF ATTORNEY
I, the undersigned Director of Rockwell Collins, Inc., a Delaware corporation
(the “Company”), hereby constitute GARY R. CHADICK
,
PATRICK E. ALLEN and MARSHA A. SCHULTE, and each of them singly, my true and lawful attorneys with full power to them and each of them to sign for me, and in my name and in the
capacity or capacities indicated below, the Company’s Annual Report on Form 10-K for the fiscal year ended September 29, 2006, and any amendments thereto.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
/s/ Donald R. Beall
Donald R. Beall
|
|
Director
|
|
November 9, 2006
|
|
|
|
|
|
/s/ Anthony J. Carbone
Anthony J. Carbone
|
|
Director
|
|
November 9, 2006
|
|
|
|
|
|
/s/ Michael P.C. Carns
Michael P.C. Carns
|
|
Director
|
|
November 9, 2006
|
|
|
|
|
|
/s/ Chris A. Davis
Chris A. Davis
|
|
Director
|
|
November 7, 2006
|
|
|
|
|
|
/s/ Mark Donegan
Mark Donegan
|
|
Director
|
|
November 9, 2006
|
|
|
|
|
|
/s/ Richard J. Ferris
Richard J. Ferris
|
|
Director
|
|
November 9, 2006
|
|
|
|
|
|
/s/ Andrew J. Policano
Andrew J. Policano
|
|
Director
|
|
November 9, 2006
|
|
|
|
|
|
/s/ Cheryl L. Shavers
Cheryl L. Shavers
|
|
Director
|
|
November 9, 2006
|
|
|
|
|
|
/s/ Joseph F. Toot, Jr.
Joseph F. Toot, Jr.
|
|
Director
|
|
November 9, 2006
|
Exhibit 31.1
CERTIFICATION
I, Clayton M. Jones, Chairman, President and Chief Executive Officer
of Rockwell Collins, Inc., certify that:
|
1.
|
I have reviewed the annual report on Form 10-K ended September 30, 2006 of Rockwell Collins, Inc.;
|
|
2.
|
Based on my knowledge, this annual 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 annual report;
|
|
3.
|
Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 15-d-15(f) for the registrant and we 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 annual 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 function):
|
|
|
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: November 13, 2006
|
|
/s/ Clayton M. Jones
|
|
|
|
Clayton M. Jones
|
|
|
|
Chairman, President and
|
|
|
|
Chief Executive Officer
|
Exhibit 31.2
CERTIFICATION
I, Patrick E. Allen, Senior Vice President and Chief Financial
Officer of Rockwell Collins, Inc., certify that:
|
1.
|
I have reviewed the annual report on Form 10-K for September 30, 2006 of Rockwell Collins, Inc.;
|
|
2.
|
Based on my knowledge, this annual 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 annual report;
|
|
3.
|
Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 15-d-15(f) for the registrant and we 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 annual 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 function):
|
|
|
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: November 13, 2006
|
|
/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 Annual Report of Rockwell Collins, Inc. (the “Company”) on Form
10-K for the fiscal year ended September 30, 2006 (the “Report”) filed with the Securities and Exchange Commission, I, Clayton M. Jones, Chairman, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
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(1)
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The Company’s Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
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(2)
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The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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Date: November 13, 2006
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/s/ Clayton M. Jones
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Clayton M. Jones
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Chairman, President and
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Chief Executive Officer
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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 Annual Report of Rockwell Collins, Inc. (the “Company”) on Form
10-K for the fiscal year ended September 30, 2006 (the “Report”) filed with the Securities and Exchange Commission, I, Patrick E. Allen, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
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(1)
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The Company’s Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
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(2)
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The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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Date: November 13, 2006
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/s/ Patrick E. Allen
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Patrick E. Allen
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Senior Vice President and
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Chief Financial Officer
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