NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
1.
|
Business Description and Basis of Presentation
|
Rockwell Collins, Inc. (the Company or Rockwell Collins) designs, produces and supports communications and aviation systems for commercial and military customers and provides information management services through voice and data communication networks and solutions worldwide.
The Company operates on a 52/53 week fiscal year with quarters ending on the Friday closest to the last day of the calendar quarter. For ease of presentation,
June 30
and September 30 are utilized consistently throughout these financial statements and notes to represent the period end dates.
The Company has one consolidated subsidiary with income attributable to a noncontrolling interest. The net income and comprehensive income attributable to the noncontrolling interest is insignificant.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and with the instructions to Form 10-Q of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted. These financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended
September 30, 2015
.
In the opinion of management, the unaudited financial statements contain all adjustments, consisting of adjustments of a normal recurring nature, necessary to present fairly the financial position, results of operations and cash flows for the periods presented. The results of operations for the three and nine months ended
June 30, 2016
are not necessarily indicative of the results that may be expected for the full year.
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates and assumptions.
As discussed in Note 4, Discontinued Operations and Divestitures, on March 10, 2015, the Company divested its Aerospace Systems Engineering and Support (ASES) business, which provides military aircraft integration and modifications, maintenance and logistics and support. As a result, the ASES business has been accounted for as a discontinued operation for all periods presented.
|
|
2.
|
Recently Issued Accounting Standards
|
In June 2016, the FASB issued a new standard on the measurement of credit losses, which will impact the Company's measurement of trade receivables. The new standard replaces the current incurred loss model with a forward-looking expected loss model that is likely to result in earlier recognition of losses. The new standard also increases disclosure requirements and is effective for the Company in 2021, with early adoption permitted, but not earlier than 2020. The Company is evaluating the effect the standard will have on the Company's consolidated financial statements.
In March 2016, the FASB issued a new standard simplifying certain aspects of accounting for share-based payments (see Note 10). The new standard requires that excess tax benefits and shortfalls be recorded as income tax benefit or expense in the income statement, rather than in equity, and
requires excess tax benefits from stock-based compensation to be classified within operating cash flow. In order to simplify accounting for share-based payments, the Company adopted the new guidance during the three months ended March 31, 2016, which resulted in a
$3 million
benefit to tax expense during the nine months ended June 30, 2016 and a year-to-date favorable impact to operating cash flows of
$3 million
.
ROCKWELL COLLINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
In February 2016, the FASB issued a comprehensive new lease accounting standard, which provides revised guidance on accounting for lease arrangements by both lessors and lessees. The central requirement of the new standard is that lessees must recognize lease-related assets and liabilities for all leases with a term longer than 12 months. The Company is evaluating the effect the standard will have on the Company's consolidated financial statements and related disclosures, but expects a material change to the balance sheet due to the recognition of right-of-use assets and lease liabilities related to the Company's portfolio of real estate leases. The new guidance is not expected to materially impact accounting for those leases the Company enters with customers. The new standard is effective for the Company in 2020, with early adoption permitted.
In November 2015, the FASB issued new guidance requiring all deferred tax assets and liabilities to be classified as noncurrent on the balance sheet instead of separating those balances into current and noncurrent amounts. In order to simplify the accounting for income taxes, the Company adopted the new guidance during the three months ended December 31, 2015 on a retrospective basis, which has resulted in the reclassification of
$9 million
of current deferred tax assets and
$84 million
of current deferred tax liabilities to noncurrent as of September 30, 2015.
In May 2014, the FASB issued a comprehensive new revenue recognition standard that effectively replaces all current guidance on the topic and expands disclosures regarding revenue. Several amendments to the new standard have been issued or proposed, which are intended to resolve potential implementation challenges and drive consistent interpretation and application of the new standard. The guidance permits use of either a retrospective or cumulative effect transition method. Based upon the FASB's decision to approve a one year delay in implementation, the new standard is now effective for the Company in 2019, with early adoption permitted, but not earlier than 2018. The Company is evaluating the transition methods allowed under the new standard and the effect the standard will have on the Company's consolidated financial statements and related disclosures. Given the new standard's impact on business processes, systems and internal controls, analysis of the new guidance will likely extend over several future periods.
Other new accounting standards issued but not effective until after
June 30, 2016
are not expected to have a material impact on the Company's financial statements.
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|
3.
|
Acquisitions, Goodwill and Intangible Assets
|
Acquisitions
On February 25, 2016, the Company acquired the Matrix series projector product line from Christie Digital Systems, a global visual, audio and collaboration solutions company. The product line acquisition was accounted for as a business combination, and the purchase price, net of cash acquired, was
$17 million
. In the third quarter of 2016, the purchase price allocation was finalized, with
$6 million
allocated to goodwill and
$11 million
to intangible assets. The intangible assets have a weighted average life of approximately
10
years. All goodwill resulting from the acquisition is tax deductible. The excess purchase price over net assets acquired, including intangible assets, reflects the Company's view that this acquisition will enhance the Company's industry-leading offerings for military and aviation simulation and training solutions.
On August 6, 2015, the Company acquired
100 percent
of the outstanding shares of Newport News, Virginia-based International Communications Group, Inc. (ICG), a leading provider of satellite-based global voice and data communication products and services for the aviation industry. The purchase price, net of cash acquired, was
$50 million
. Additional post-closing consideration of up to
$14 million
may be paid, contingent upon the achievement of certain milestones. The Company recorded a
$12 million
liability on the acquisition date for the fair value of the contingent consideration. The Company is in the process of allocating the purchase price and performing a valuation for acquired intangible assets and their useful lives. Based on the Company's preliminary allocation of the purchase price,
$50 million
has been allocated to goodwill and
$23 million
to intangible assets, with a weighted average life of approximately
8
years. All goodwill resulting from the acquisition is tax deductible. The excess purchase price over net assets acquired, including intangible assets, reflects the Company's view that this acquisition will broaden the Company's flight deck and connectivity portfolio.
ROCKWELL COLLINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
On March 20, 2015, the Company acquired
100 percent
of the outstanding shares of Pacific Avionics Pty. Limited (Pacific Avionics), a Singapore-based company specializing in technologies used for wireless information distribution, including in-flight entertainment and connectivity. The purchase price, net of cash acquired, was
$24 million
. In the fourth quarter of 2015, the purchase price allocation was finalized, with
$15 million
allocated to goodwill and
$10 million
allocated to intangible assets, with a weighted average life of approximately
7
years.
None
of the goodwill is deductible for tax purposes. The excess purchase price over net assets acquired, including intangible assets, reflects the Company's view that this acquisition will further enhance the Company's cabin products and information management services portfolios.
The ICG and Pacific Avionics acquisitions are included in the Commercial Systems segment and the Matrix product line acquisition is included in the Government Systems segment. The results of operations for all three acquisitions have been included in the Company's operating results for the periods subsequent to the respective acquisition dates. Pro-forma results of operations have not been presented, as the effect of the acquisitions are not material to the Company's consolidated results of operations.
Goodwill
Changes in the carrying amount of goodwill are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Commercial
Systems
|
|
Government
Systems
|
|
Information Management Services
|
|
Total
|
Balance at September 30, 2015
|
$
|
314
|
|
|
$
|
500
|
|
|
$
|
1,090
|
|
|
$
|
1,904
|
|
ICG acquisition adjustment
|
12
|
|
|
—
|
|
|
—
|
|
|
12
|
|
Matrix product line acquisition
|
—
|
|
|
6
|
|
|
—
|
|
|
6
|
|
Foreign currency translation adjustments
|
(1
|
)
|
|
(3
|
)
|
|
—
|
|
|
(4
|
)
|
Balance at June 30, 2016
|
$
|
325
|
|
|
$
|
503
|
|
|
$
|
1,090
|
|
|
$
|
1,918
|
|
ICG goodwill increased by
$12 million
during the nine months ended June 30, 2016 as a result of purchase accounting adjustments to establish liabilities for product development costs pursuant to certain contractual obligations.
The Company performs an annual impairment test of goodwill and indefinite-lived intangible assets during the second quarter of each fiscal year, or at any time there is an indication goodwill or indefinite-lived intangibles are more-likely-than-not impaired, commonly referred to as triggering events. There have been no such triggering events during any of the periods presented and the Company's second quarter 2016 impairment tests resulted in no impairment.
Intangible Assets
Intangible assets are summarized as follows:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
September 30, 2015
|
(in millions)
|
Gross
|
|
Accum
Amort
|
|
Net
|
|
Gross
|
|
Accum
Amort
|
|
Net
|
Intangible assets with finite lives:
|
|
|
|
|
|
|
|
|
|
|
|
Developed technology and patents
|
$
|
353
|
|
|
$
|
(210
|
)
|
|
$
|
143
|
|
|
$
|
346
|
|
|
$
|
(195
|
)
|
|
$
|
151
|
|
Backlog
|
6
|
|
|
(3
|
)
|
|
3
|
|
|
5
|
|
|
(2
|
)
|
|
3
|
|
Customer relationships:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired
|
340
|
|
|
(102
|
)
|
|
238
|
|
|
338
|
|
|
(87
|
)
|
|
251
|
|
Up-front sales incentives
|
311
|
|
|
(76
|
)
|
|
235
|
|
|
301
|
|
|
(62
|
)
|
|
239
|
|
License agreements
|
14
|
|
|
(10
|
)
|
|
4
|
|
|
13
|
|
|
(9
|
)
|
|
4
|
|
Trademarks and tradenames
|
15
|
|
|
(14
|
)
|
|
1
|
|
|
15
|
|
|
(14
|
)
|
|
1
|
|
Intangible assets with indefinite lives:
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and tradenames
|
47
|
|
|
—
|
|
|
47
|
|
|
47
|
|
|
—
|
|
|
47
|
|
In process research and development
|
7
|
|
|
—
|
|
|
7
|
|
|
7
|
|
|
—
|
|
|
7
|
|
Intangible assets
|
$
|
1,093
|
|
|
$
|
(415
|
)
|
|
$
|
678
|
|
|
$
|
1,072
|
|
|
$
|
(369
|
)
|
|
$
|
703
|
|
ROCKWELL COLLINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The Company provides up-front sales incentives prior to delivering products or performing services to certain commercial customers in connection with sales contracts. Up-front sales incentives are recorded as a customer relationship intangible asset and are amortized using a units-of-delivery method over the period the Company has received a contractually enforceable right related to the incentives, up to
15
years after entry into service. Amortization is based on the Company's expectation of delivery rates on a program-by-program basis. Amortization begins when the Company starts recognizing revenue as the Company delivers equipment for the program.
Up-front sales incentives consisting of cash payments or customer account credits are amortized as a reduction of sales, whereas incentives consisting of free products are amortized as cost of sales. As of
June 30, 2016
, the weighted average amortization period remaining for up-front sales incentives was approximately
11
years.
Anticipated annual amortization expense for intangible assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2016
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
Thereafter
|
Anticipated amortization expense for up-front sales incentives
|
$
|
19
|
|
|
$
|
17
|
|
|
$
|
21
|
|
|
$
|
25
|
|
|
$
|
26
|
|
|
$
|
141
|
|
Anticipated amortization expense for all other intangible assets
|
43
|
|
|
40
|
|
|
38
|
|
|
35
|
|
|
32
|
|
|
233
|
|
Total
|
$
|
62
|
|
|
$
|
57
|
|
|
$
|
59
|
|
|
$
|
60
|
|
|
$
|
58
|
|
|
$
|
374
|
|
Amortization expense for intangible assets for the three and nine months ended
June 30, 2016
was
$15 million
and
$46 million
, respectively, compared to
$15 million
and
$40 million
for the three and nine months ended June 30, 2015.
|
|
4.
|
Discontinued Operations and Divestitures
|
On March 10, 2015, the Company sold its ASES business, which provides military aircraft integration and modifications, maintenance and logistics and support, to align with the Company's long-term primary business strategies. The sale price
was
$3 million
, and additional post-closing consideration of up to
$2 million
may be received. The Company recognized a pre-tax loss of
$5 million
(
$3 million
after-tax) related to the ASES divestiture. The operating results of ASES have been included in discontinued operations in the Company's Condensed Consolidated Statement of Operations for all periods presented. During the nine months ended
June 30, 2016
, the Company recorded
$2 million
of income from discontinued operations (
$1 million
after-tax), primarily due to the favorable settlement of a contractual matter with a customer of the ASES business.
In April 2014, the FASB issued guidance that modifies the definition of a discontinued operation and provides new disclosure requirements for divestitures. This guidance is effective for the Company in 2016, and any divestiture in 2016 or after will be subject to the new guidance. The ASES divestiture occurred in 2015 and is being reported based upon the previous guidance for discontinued operations.
Results of discontinued operations are as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
June 30
|
|
June 30
|
(in millions)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Sales
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
18
|
|
Income (loss) from discontinued operations before income taxes
|
—
|
|
|
—
|
|
|
2
|
|
|
(13
|
)
|
Income tax benefit (expense) from discontinued operations
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
5
|
|
ROCKWELL COLLINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Receivables, net are summarized as follows:
|
|
|
|
|
|
|
|
|
(in millions)
|
June 30,
2016
|
|
September 30,
2015
|
Billed
|
$
|
800
|
|
|
$
|
752
|
|
Unbilled
|
478
|
|
|
403
|
|
Less progress payments
|
(87
|
)
|
|
(110
|
)
|
Total
|
1,191
|
|
|
1,045
|
|
Less allowance for doubtful accounts
|
(7
|
)
|
|
(7
|
)
|
Receivables, net
|
$
|
1,184
|
|
|
$
|
1,038
|
|
Receivables expected to be collected beyond the next twelve months are classified as long-term and are included in Other Assets. Receivables, net due from equity affiliates were
$72 million
and
$64 million
at
June 30, 2016
and
September 30, 2015
, respectively.
Unbilled receivables principally represent sales recorded under the percentage-of-completion method of accounting that have not yet been billed to customers in accordance with applicable contract terms.
Inventories, net are summarized as follows:
|
|
|
|
|
|
|
|
|
(in millions)
|
June 30,
2016
|
|
September 30,
2015
|
Finished goods
|
$
|
236
|
|
|
$
|
216
|
|
Work in process
|
249
|
|
|
250
|
|
Raw materials, parts and supplies
|
376
|
|
|
353
|
|
Less progress payments
|
(2
|
)
|
|
(7
|
)
|
Total
|
859
|
|
|
812
|
|
Pre-production engineering costs
|
1,116
|
|
|
1,012
|
|
Inventories, net
|
$
|
1,975
|
|
|
$
|
1,824
|
|
The Company defers certain pre-production engineering costs during the development phase of a program, in connection with long-term supply arrangements that contain contractual guarantees for reimbursement from customers. Such customer guarantees generally take the form of a minimum order quantity with quantified reimbursement amounts if the minimum order quantity is not taken by the customer. These costs are deferred to the extent of the contractual guarantees and are amortized over their estimated useful lives using a units-of-delivery method, up to
15
years. This amortization expense is included as a component of cost of sales. Amortization is based on the Company's expectation of delivery rates on a program-by-program basis and begins when the Company starts recognizing revenue as the Company delivers equipment for the program. The estimated useful life is limited to the amount of time the Company is virtually assured to earn revenues under long-term supply arrangements with the Company's customers. Pre-production engineering costs incurred pursuant to supply arrangements that do not contain contractual guarantees for reimbursement are expensed as incurred.
Anticipated annual amortization expense for pre-production engineering costs is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2016
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
Thereafter
|
Anticipated amortization expense for pre-production engineering costs
(1)
|
$
|
51
|
|
|
$
|
77
|
|
|
$
|
120
|
|
|
$
|
143
|
|
|
$
|
150
|
|
|
$
|
585
|
|
(1)
On October 29, 2015, Bombardier announced the cancellation of the Learjet 85 program. Pre-production engineering costs associated with the Learjet 85 program have been excluded from anticipated amortization expense, as these costs are expected to be recovered through consideration received from Bombardier, pursuant to contractual guarantees, and not amortized against future hardware deliveries.
ROCKWELL COLLINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Amortization expense for pre-production engineering costs for the three and nine months ended
June 30, 2016
was
$14 million
and
$37 million
, respectively, compared to
$14 million
and
$35 million
for the three and nine months ended June 30, 2015. As of
June 30, 2016
, the weighted average amortization period remaining for pre-production engineering costs included in Inventories, net was approximately
11
years.
Other assets are summarized as follows:
|
|
|
|
|
|
|
|
|
(in millions)
|
June 30,
2016
|
|
September 30,
2015
|
Long-term receivables
|
$
|
122
|
|
|
$
|
109
|
|
Investments in equity affiliates
|
10
|
|
|
13
|
|
Exchange and rental assets (net of accumulated depreciation of $100 at June 30, 2016 and $97 at September 30, 2015)
|
67
|
|
|
66
|
|
Other
|
163
|
|
|
156
|
|
Other assets
|
$
|
362
|
|
|
$
|
344
|
|
Long-Term Receivables
Long-term receivables expected to be collected beyond the next twelve months are principally comprised of unbilled accounts receivables pursuant to sales recorded under the percentage-of-completion method of accounting that have not yet been billed to customers in accordance with applicable contract terms.
Investments in Equity Affiliates
The Company's investments in equity affiliates primarily consist of
eight
joint ventures, each
50 percent
owned and accounted for under the equity method. The Company records income or loss from equity affiliates in Other income, net on the Condensed Consolidated Statement of Operations. The Company's sales to equity affiliates were $
58 million
and
$159 million
for the three and nine months ended
June 30, 2016
, respectively, compared to
$51 million
and
$139 million
for the three and nine months ended June 30, 2015. Deferred profit from sales to equity affiliates was $
1 million
at
June 30, 2016
and $
1 million
at
September 30, 2015
.
Exchange and Rental Assets
Exchange and rental assets consist primarily of Company products that are either exchanged or rented to customers on a short-term basis in connection with warranty and other service-related activities. These assets are recorded at acquisition or production cost and depreciated using the straight-line method over their estimated lives, up to
15
years. Depreciation methods and lives are reviewed periodically with any changes recorded on a prospective basis. Depreciation expense for exchange and rental assets was
$2 million
and
$7 million
for the three and nine months ended
June 30, 2016
, respectively, and
$2 million
and
$7 million
for the three and nine months ended June 30, 2015.
Short-term Debt
|
|
|
|
|
|
|
|
|
(in millions, except weighted average amounts)
|
June 30,
2016
|
|
September 30,
2015
|
Short-term commercial paper borrowings outstanding
(1)
|
$
|
812
|
|
|
$
|
448
|
|
Current portion of long-term debt
|
300
|
|
|
—
|
|
Short-term debt
|
$
|
1,112
|
|
|
$
|
448
|
|
Weighted average interest rate of commercial paper borrowings
|
0.77
|
%
|
|
0.52
|
%
|
Weighted average maturity period of commercial paper borrowings (days)
|
21
|
|
|
25
|
|
(1)
The maximum amount of short-term commercial paper borrowings outstanding during the nine months ended June 30, 2016 was
$929 million
.
ROCKWELL COLLINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Commercial Paper Program
Under the Company’s commercial paper program, the Company may sell up to
$1.2 billion
face amount of unsecured short-term promissory notes in the commercial paper market. The commercial paper program is supported by the Company's $1 billion five-year and $200 million 364-day revolving credit facilities.
Revolving Credit Facilities
The Company has a five-year
$1 billion
credit facility that expires in December 2018 and a 364-day
$200 million
credit facility that was executed in February 2016 and expires in February 2017. At
June 30, 2016
and
September 30, 2015
, there were no outstanding borrowings under these revolving credit facilities.
The credit facilities include one financial covenant, requiring the Company to maintain a consolidated debt to total capitalization ratio of not greater than
60 percent
(excluding the equity impact on accumulated other comprehensive loss related to defined benefit retirement plans). The Company was in compliance with this financial covenant at
June 30, 2016
. The credit facilities also contain covenants that require the Company to satisfy certain conditions in order to incur debt secured by liens, engage in sale/leaseback transactions or merge or consolidate with another entity.
Short-term credit facilities available to non-U.S. subsidiaries were
$37 million
as of
June 30, 2016
, of which
$8 million
was utilized to support commitments in the form of commercial letters of credit. At
June 30, 2016
and
September 30, 2015
, there were no borrowings outstanding under these credit facilities.
At
June 30, 2016
and
September 30, 2015
, there were no significant commitment fees or compensating balance requirements under any of the Company’s credit facilities.
Long-term Debt
The principal amount of long-term debt, net of discount, is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
(in millions, except interest rate figures)
|
Interest Rate
|
|
June 30,
2016
|
|
September 30,
2015
|
Fixed-rate notes due:
|
|
|
|
|
|
December 2043
|
4.80%
|
|
$
|
398
|
|
|
$
|
398
|
|
December 2023
|
3.70%
|
|
399
|
|
|
399
|
|
November 2021
|
3.10%
|
|
250
|
|
|
250
|
|
July 2019
|
5.25%
|
|
299
|
|
|
299
|
|
Variable-rate note due:
|
|
|
|
|
|
December 2016
|
3 month LIBOR + 0.35%
(1)
|
|
300
|
|
|
300
|
|
Fair value swap adjustment (see Notes 13 and 14)
|
|
|
41
|
|
|
34
|
|
Total
|
|
|
1,687
|
|
|
1,680
|
|
Less current portion of long-term debt
|
|
|
300
|
|
|
—
|
|
Long-term Debt, Net
|
|
|
$
|
1,387
|
|
|
$
|
1,680
|
|
(1)
The three-month LIBOR rate at June 30, 2016 was approximately
0.65 percent
.
The notes listed above are included in the Condensed Consolidated Statement of Financial Position, net of any unamortized discount, within the caption Long-term Debt, Net. Debt issuance costs are capitalized within Other Assets on the Condensed Consolidated Statement of Financial Position. Debt issuance costs and any discounts are amortized over the life of the debt and recorded in Interest expense on the Condensed Consolidated Statement of Operations.
Interest paid on debt for the nine months ended
June 30, 2016
and
2015
was
$49 million
and
$47 million
, respectively.
The Company sponsors defined benefit pension (Pension Benefits) and other postretirement (Other Retirement Benefits) plans which provide monthly pension and other benefits to eligible employees upon retirement.
ROCKWELL COLLINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Components of Expense (Income)
The components of expense (income) for Pension Benefits and Other Retirement Benefits for the three and nine months ended
June 30, 2016
and 2015 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Retirement Benefits
|
|
Three Months Ended
|
|
Three Months Ended
|
|
June 30
|
|
June 30
|
(in millions)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Service cost
|
$
|
2
|
|
|
$
|
3
|
|
|
$
|
1
|
|
|
$
|
1
|
|
Interest cost
|
32
|
|
|
39
|
|
|
1
|
|
|
2
|
|
Expected return on plan assets
|
(60
|
)
|
|
(61
|
)
|
|
—
|
|
|
—
|
|
Amortization:
|
|
|
|
|
|
|
|
|
|
Prior service credit
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
|
(2
|
)
|
Net actuarial loss
|
20
|
|
|
18
|
|
|
2
|
|
|
2
|
|
Net benefit expense (income)
|
$
|
(6
|
)
|
|
$
|
(2
|
)
|
|
$
|
3
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Retirement Benefits
|
|
Nine Months Ended
|
|
Nine Months Ended
|
|
June 30
|
|
June 30
|
(in millions)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Service cost
|
$
|
8
|
|
|
$
|
9
|
|
|
$
|
2
|
|
|
$
|
2
|
|
Interest cost
|
95
|
|
|
117
|
|
|
4
|
|
|
6
|
|
Expected return on plan assets
|
(179
|
)
|
|
(182
|
)
|
|
(1
|
)
|
|
(1
|
)
|
Amortization:
|
|
|
|
|
|
|
|
Prior service credit
|
(1
|
)
|
|
(2
|
)
|
|
(1
|
)
|
|
(4
|
)
|
Net actuarial loss
|
59
|
|
|
54
|
|
|
6
|
|
|
5
|
|
Net benefit expense (income)
|
$
|
(18
|
)
|
|
$
|
(4
|
)
|
|
$
|
10
|
|
|
$
|
8
|
|
Prior to 2016, the Company used a single-weighted average discount rate to calculate pension interest and service cost. Beginning in 2016, a "spot rate approach" is being used to calculate pension interest and service cost. The spot rate approach applies separate discount rates for each projected benefit payment in the calculation of pension interest and service cost. This calculation change is considered a change in accounting estimate and is being applied prospectively in 2016. For the three and nine months ended June 30, 2016, the use of the spot rate approach resulted in an increase to pension income and pre-tax earnings of
$9 million
and
$27 million
, respectively, relative to the estimated pension income amount had the Company not changed its approach.
In October 2014, the Society of Actuaries published a new set of mortality tables (RP-2014) and a new mortality improvement scale (MP-2014), which update life expectancy assumptions. The newly published tables generally reflect longer life expectancy than was projected by previous tables. For the Company's 2015 year-end pension liability valuation, the Company used the RP-2014 tables with an adjustment for plan experience and the MP-2014 improvement scale adjusted to reflect convergence to an ultimate annual rate of mortality improvement of
0.75 percent
by 2022. For the three and nine months ended June 30, 2016, these changes resulted in a decrease to pension income and pre-tax earnings of
$4 million
and
$12 million
, respectively, relative to the estimated pension income amount had the Company not used new mortality table and improvement scale assumptions.
ROCKWELL COLLINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Pension Plan Funding
The Company’s objective with respect to the funding of its pension plans is to provide adequate assets for the payment of future benefits. Pursuant to this objective, the Company will fund its pension plans as required by governmental regulations and may consider discretionary contributions as conditions warrant. In October 2015, the Company voluntarily contributed
$55 million
to its U.S. qualified pension plans. There is no minimum statutory funding requirement for 2016 and the Company does not currently expect to make any additional discretionary contributions during 2016 to its U.S. qualified pension plans. Any additional future contributions necessary to satisfy minimum statutory funding requirements are dependent upon actual plan asset returns, interest rates and actuarial assumptions. Contributions to the non-U.S. plans and the U.S. non-qualified pension plan are expected to total
$13 million
in 2016. During the nine months ended
June 30, 2016
, the Company made contributions to the non-U.S. plans and the U.S. non-qualified pension plan of
$11 million
.
|
|
10.
|
Stock-Based Compensation and Earnings Per Share
|
Stock-based compensation expense, which is calculated net of an assumed forfeiture rate, and related income tax benefit included within the Condensed Consolidated Statement of Operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
June 30
|
|
June 30
|
(in millions)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Stock-based compensation expense included in:
|
|
|
|
|
|
|
|
Product cost of sales
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
6
|
|
|
$
|
5
|
|
Selling, general and administrative expenses
|
5
|
|
|
4
|
|
|
15
|
|
|
12
|
|
Total
|
$
|
6
|
|
|
$
|
5
|
|
|
$
|
21
|
|
|
$
|
17
|
|
Income tax benefit
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
7
|
|
|
$
|
6
|
|
The Company issued awards of equity instruments under the Company's various incentive plans for the nine months ended
June 30, 2016
and
2015
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Performance Shares
|
|
Restricted Stock Units
|
(shares in thousands)
|
Number Issued
|
Weighted Average Fair Value
|
|
Number Issued
|
Weighted Average Fair Value
|
|
Number Issued
|
Weighted Average Fair Value
|
Nine months ended June 30, 2016
|
641.5
|
|
$
|
17.75
|
|
|
131.0
|
|
$
|
85.13
|
|
|
70.4
|
|
$
|
85.91
|
|
Nine months ended June 30, 2015
|
561.3
|
|
$
|
19.52
|
|
|
131.0
|
|
$
|
82.30
|
|
|
67.8
|
|
$
|
84.47
|
|
The maximum number of shares of common stock that can be issued in respect of performance shares granted in 2016 based on the achievement of performance targets for years 2016 through 2018 is approximately
0.3 million
.
The fair value of each option granted by the Company was estimated using a binomial lattice pricing model and the following weighted average assumptions:
|
|
|
|
|
|
|
|
2016 Grants
|
|
2015 Grants
|
Risk-free interest rate
|
0.7% - 2.5%
|
|
|
0.5% - 2.6%
|
|
Expected dividend yield
|
1.4% - 1.6%
|
|
|
1.6
|
%
|
Expected volatility
|
20.0
|
%
|
|
24.0
|
%
|
Expected life
|
7 years
|
|
|
7 years
|
|
Employee Benefits Paid in Company Stock
During the nine months ended
June 30, 2016
and
2015
,
0.5 million
and
0.4 million
shares, respectively, of the Company's common stock were issued to employees under the Company's employee stock purchase and defined contribution savings plans at a value of
$41 million
and
$37 million
for the respective periods.
ROCKWELL COLLINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Earnings Per Share and Diluted Share Equivalents
The computation of basic and diluted earnings per share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
June 30
|
|
June 30
|
(in millions, except per share amounts)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Numerator for basic and diluted earnings per share:
|
|
|
|
|
|
|
|
Income from continuing operations
|
$
|
214
|
|
|
$
|
178
|
|
|
$
|
519
|
|
|
$
|
510
|
|
Income (loss) from discontinued operations, net of taxes
|
—
|
|
|
—
|
|
|
1
|
|
|
(8
|
)
|
Net income
|
$
|
214
|
|
|
$
|
178
|
|
|
$
|
520
|
|
|
$
|
502
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share – weighted average common shares
|
130.0
|
|
|
132.1
|
|
|
130.7
|
|
|
132.4
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
Stock options
|
1.0
|
|
|
1.0
|
|
|
1.1
|
|
|
1.0
|
|
Performance shares, restricted stock and restricted stock units
|
0.5
|
|
|
0.5
|
|
|
0.5
|
|
|
0.5
|
|
Dilutive potential common shares
|
1.5
|
|
|
1.5
|
|
|
1.6
|
|
|
1.5
|
|
Denominator for diluted earnings per share – adjusted weighted average shares and assumed conversion
|
131.5
|
|
|
133.6
|
|
|
132.3
|
|
|
133.9
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
1.65
|
|
|
$
|
1.35
|
|
|
$
|
3.97
|
|
|
$
|
3.85
|
|
Discontinued operations
|
—
|
|
|
—
|
|
|
0.01
|
|
|
(0.06
|
)
|
Basic earnings per share
|
$
|
1.65
|
|
|
$
|
1.35
|
|
|
$
|
3.98
|
|
|
$
|
3.79
|
|
Diluted
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
1.63
|
|
|
$
|
1.33
|
|
|
$
|
3.92
|
|
|
$
|
3.81
|
|
Discontinued operations
|
—
|
|
|
—
|
|
|
0.01
|
|
|
(0.06
|
)
|
Diluted earnings per share
|
$
|
1.63
|
|
|
$
|
1.33
|
|
|
$
|
3.93
|
|
|
$
|
3.75
|
|
The Company adopted the new standard on accounting for share-based payments (see Note 2) during the nine months ended June 30, 2016. This standard requires excess tax benefits or deficiencies associated with share-based payments to be recorded as a discrete income tax benefit or expense in the period incurred, rather than within Additional paid-in capital. The new standard also requires excess tax benefits and deficiencies to be excluded from assumed future proceeds in the calculation of diluted shares outstanding. The Company adopted the standard prospectively, resulting in a
$3 million
and
$0.01
increase to net income from continuing operations and diluted earnings per share from continuing operations, respectively, for the nine months ended June 30, 2016.
The average outstanding diluted shares calculation excludes options with an exercise price that exceeds the average market price of shares during the period. No stock options were excluded from the average outstanding diluted shares calculation for the three and nine months ended June 30, 2016 and 2015.
Earnings per share amounts are computed independently each quarter. As a result, the sum of each quarter's per share amount may not equal the total per share amount for the full year.
ROCKWELL COLLINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
|
|
11.
|
Accumulated Other Comprehensive Loss
|
Changes in accumulated other comprehensive loss (AOCL), net of tax, by component for the three and nine months ended
June 30, 2016
and 2015 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Exchange Translation Adjustment
|
|
Pension and Other Postretirement Adjustments
(1)
|
|
Change in the Fair Value of Effective Cash Flow Hedges
|
|
Total
|
Balance at March 31, 2016
|
$
|
(56
|
)
|
|
$
|
(1,611
|
)
|
|
$
|
(3
|
)
|
|
$
|
(1,670
|
)
|
Other comprehensive loss before reclassifications
|
(16
|
)
|
|
—
|
|
|
—
|
|
|
(16
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
14
|
|
|
—
|
|
|
14
|
|
Net current period other comprehensive income (loss)
|
(16
|
)
|
|
14
|
|
|
—
|
|
|
(2
|
)
|
Balance at June 30, 2016
|
$
|
(72
|
)
|
|
$
|
(1,597
|
)
|
|
$
|
(3
|
)
|
|
$
|
(1,672
|
)
|
|
|
|
|
|
|
|
|
Balance at September 30, 2015
|
$
|
(56
|
)
|
|
$
|
(1,637
|
)
|
|
$
|
(6
|
)
|
|
$
|
(1,699
|
)
|
Other comprehensive loss before reclassifications
|
(16
|
)
|
|
—
|
|
|
(1
|
)
|
|
(17
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
40
|
|
|
4
|
|
|
44
|
|
Net current period other comprehensive income (loss)
|
(16
|
)
|
|
40
|
|
|
3
|
|
|
27
|
|
Balance at June 30, 2016
|
$
|
(72
|
)
|
|
$
|
(1,597
|
)
|
|
$
|
(3
|
)
|
|
$
|
(1,672
|
)
|
|
|
|
|
|
|
|
|
Balance at March 31, 2015
|
$
|
(51
|
)
|
|
$
|
(1,325
|
)
|
|
$
|
(6
|
)
|
|
$
|
(1,382
|
)
|
Other comprehensive income before reclassifications
|
9
|
|
|
—
|
|
|
—
|
|
|
9
|
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
10
|
|
|
1
|
|
|
11
|
|
Net current period other comprehensive income
|
9
|
|
|
10
|
|
|
1
|
|
|
20
|
|
Balance at June 30, 2015
|
$
|
(42
|
)
|
|
$
|
(1,315
|
)
|
|
$
|
(5
|
)
|
|
$
|
(1,362
|
)
|
|
|
|
|
|
|
|
|
Balance at September 30, 2014
|
$
|
(15
|
)
|
|
$
|
(1,348
|
)
|
|
$
|
(3
|
)
|
|
$
|
(1,366
|
)
|
Other comprehensive loss before reclassifications
|
(27
|
)
|
|
—
|
|
|
(5
|
)
|
|
(32
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
33
|
|
|
3
|
|
|
36
|
|
Net current period other comprehensive income (loss)
|
(27
|
)
|
|
33
|
|
|
(2
|
)
|
|
4
|
|
Balance at June 30, 2015
|
$
|
(42
|
)
|
|
$
|
(1,315
|
)
|
|
$
|
(5
|
)
|
|
$
|
(1,362
|
)
|
(1)
Reclassifications from AOCL to net income, related to the amortization of net actuarial losses and prior service credits for the Company's retirement benefit plans, were
$21 million
(
$14 million
net of tax) and
$17 million
(
$10 million
net of tax) for the three months ended June 30, 2016 and 2015, respectively, and were $
63 million
($
40 million
net of tax) and
$53 million
(
$33 million
net of tax) for the nine months ended
June 30, 2016
and 2015, respectively. The reclassifications are included in the computation of net benefit expense. See Note 9, Retirement Benefits, for additional details.
At the end of each interim reporting period, the Company makes an estimate of the annual effective income tax rate. Tax items included in the annual effective income tax rate are pro-rated for the full year and tax items discrete to a specific quarter are included in the effective income tax rate for that quarter. The estimate used in providing for income taxes on a year-to-date basis may change in subsequent interim periods.
ROCKWELL COLLINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
During the three months ended
June 30, 2016
and
2015
, the effective income tax rate from continuing operations was
13.4
percent and
24.9
percent, respectively. The lower current year effective income tax rate from continuing operations was primarily due to the release of a
$41 million
valuation allowance related to a U.S. capital loss carryforward. This tax benefit results from the creation of a tax planning strategy and was partially offset by favorable adjustments recorded in the prior year related to the remeasurement of certain tax positions.
During the nine months ended
June 30, 2016
and
2015
, the effective income tax rate from continuing operations was
18.8 percent
and
26.7 percent
, respectively. The lower current year effective income tax rate from continuing operations was primarily due to the permanent extension of the Federal R&D Tax Credit and the release of a
$41 million
valuation allowance related to a U.S. capital loss carryforward. These tax benefits were partially offset by favorable adjustments recorded in the prior year related to the remeasurement of certain tax positions.
The Company's U.S. Federal income tax returns for the tax year ended September 30, 2011 and prior years have been audited by the IRS and are closed to further adjustments by the IRS. The IRS is currently auditing the Company's tax returns for the years ended September 30, 2012 and 2013. An acquired subsidiary is also under examination by the IRS for calendar years 2009 and 2012 legacy tax filings. The Company is also currently under audit in various U.S. states and non-U.S. jurisdictions. The U.S. states and non-U.S. jurisdictions have statutes of limitations generally ranging from
3
to
5
years. The Company believes it has adequately provided for any tax adjustments that may result from the various audits.
The Company had net income tax payments of
$76 million
and
$124 million
during the nine months ended
June 30, 2016
and
2015
, respectively.
The Company has gross unrecognized tax benefits recorded within Other Liabilities in the Condensed Consolidated Statement of Financial Position of
$39 million
and
$39 million
as of
June 30, 2016
and
September 30, 2015
, respectively. The total amount of unrecognized tax benefits that, if recognized, would affect the effective income tax rate was
$17 million
and
$11 million
as of
June 30, 2016
and
September 30, 2015
, respectively. Although the timing and outcome of tax settlements are uncertain, it is reasonably possible that during the next 12 months a reduction in unrecognized tax benefits may occur in the range of
$0
to
$3 million
, based on the outcome of tax examinations or as a result of the expiration of various statutes of limitations.
The Company includes interest and penalties related to unrecognized tax benefits in income tax expense. The total amount of interest and penalties recognized within Other Liabilities in the Condensed Consolidated Statement of Financial Position was
$2 million
and
$1 million
as of
June 30, 2016
and September 30,
2015
, respectively. The total amount of interest and penalties recorded as an expense or (income) within Income tax expense in the Condensed Consolidated Statement of Operations was
$1 million
and
$0 million
during the nine months ended
June 30, 2016
and
2015
, respectively.
|
|
13.
|
Fair Value Measurements
|
The FASB defines fair value as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The FASB guidance classifies the inputs used to measure fair value into the following hierarchy:
|
|
Level 1 -
|
quoted prices (unadjusted) in active markets for identical assets or liabilities
|
|
|
Level 2 -
|
quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument
|
|
|
Level 3 -
|
unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value
|
A financial asset's or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
ROCKWELL COLLINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Assets and liabilities
The fair value of the Company's financial assets and liabilities measured at fair value on a recurring basis as of
June 30, 2016
and
September 30, 2015
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
September 30, 2015
|
(in millions)
|
Fair Value
Hierarchy
|
|
Fair Value
Asset (Liability)
|
|
Fair Value
Asset (Liability)
|
Deferred compensation plan investments
|
Level 1
|
|
$
|
52
|
|
|
$
|
50
|
|
Interest rate swap assets
|
Level 2
|
|
41
|
|
|
34
|
|
Foreign currency forward exchange contract assets
|
Level 2
|
|
13
|
|
|
7
|
|
Foreign currency forward exchange contract liabilities
|
Level 2
|
|
(13
|
)
|
|
(11
|
)
|
Contingent consideration for ICG acquisition
|
Level 3
|
|
(13
|
)
|
|
(12
|
)
|
During the three months ended December 31, 2015, a corporate asset was written down to its fair market value of
$3 million
, resulting in an asset impairment charge of
$4 million
recorded in Selling, general and administrative expenses on the Condensed Consolidated Statement of Operations (see Note 18). The asset is recognized at fair value on a nonrecurring basis and is classified within Level 2 of the fair value hierarchy.
The change in fair value of the Level 3 contingent consideration is as follows:
|
|
|
|
|
(in millions)
|
Fair Value
Asset (Liability)
|
Balance at September 30, 2015
|
$
|
(12
|
)
|
Fair value adjustment
(1)
|
(1
|
)
|
Balance at June 30, 2016
|
$
|
(13
|
)
|
(1)
The fair value adjustment is included in Interest expense on the Condensed Consolidated Statement of Operations.
There were no transfers between Levels of the fair value hierarchy during the nine months ended June 30, 2016 or 2015.
Valuation Techniques
The deferred compensation plan investments consist of investments in marketable securities (primarily mutual funds) and the fair value is determined using the market approach based on quoted market prices of identical assets in active markets.
The fair value of the interest rate swaps is determined using the market approach and is calculated by a pricing model with observable market inputs.
The fair value of foreign currency forward exchange contracts is determined using the market approach and is calculated as the value of the quoted forward currency exchange rate less the contract rate multiplied by the notional amount.
The contingent consideration for the ICG acquisition represents the estimated fair value of post-closing consideration owed to the sellers associated with the acquisition. This is categorized as Level 3 in the fair value hierarchy and the fair value is determined using a probability-weighted approach. The liability recorded was derived from the estimated probability that certain contingent payment milestones will be met in accordance with the terms of the purchase agreement.
As of
June 30, 2016
, there has not been any impact to the fair value of derivative liabilities due to the Company's own credit risk. Similarly, there has not been any impact to the fair value of derivative assets based on the Company's evaluation of counterparties' credit risks.
ROCKWELL COLLINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Financial instruments
The carrying amounts and fair values of the Company's financial instruments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset (Liability)
|
|
June 30, 2016
|
|
September 30, 2015
|
(in millions)
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
Cash and cash equivalents
|
$
|
307
|
|
|
$
|
307
|
|
|
$
|
252
|
|
|
$
|
252
|
|
Short-term debt
|
(1,112
|
)
|
|
(1,112
|
)
|
|
(448
|
)
|
|
(448
|
)
|
Long-term debt
|
(1,346
|
)
|
|
(1,506
|
)
|
|
(1,646
|
)
|
|
(1,750
|
)
|
The fair value of cash and cash equivalents, and the commercial paper portion of short-term debt, approximates their carrying value due to the short-term nature of the instruments. These items are within Level 1 of the fair value hierarchy. Fair value information for notes due December 2016 classified as short-term debt and all long-term debt is within Level 2 of the fair value hierarchy. The fair value of these financial instruments was based on current market interest rates and estimates of current market conditions for instruments with similar terms, maturities and degree of risk. The carrying amount and fair value of short-term and long-term debt excludes the interest rate swaps fair value adjustment. These fair value estimates do not necessarily reflect the amounts the Company would realize in a current market exchange.
|
|
14.
|
Derivative Financial Instruments
|
Interest Rate Swaps
The Company manages its exposure to interest rate risk by maintaining a mix of fixed and variable rate debt, which over time should moderate the costs of debt financing. To help meet this objective, the Company may use financial instruments in the form of interest rate swaps.
In January 2010, the Company entered into two interest rate swap contracts which expire on July 15, 2019 and effectively converted
$150 million
of the 2019 Notes to floating rate debt based on six-month LIBOR plus
1.235 percent
. In June 2015, the Company entered into two interest rate swap contracts which expire on July 15, 2019 and effectively converted the remaining $
150 million
of the 2019 Notes to floating rate debt based on three-month LIBOR plus
3.56
percent (collectively the 2019 Swaps).
In March 2014, the Company entered into three interest rate swap contracts (the 2023 Swaps) which expire on December 15, 2023 and effectively converted
$200 million
of the 2023 Notes to floating rate debt based on one-month LIBOR plus
0.94 percent
.
The Company designated both the 2019 and the 2023 Swaps (the Swaps) as fair value hedges. The Swaps are recorded within Other Assets at a fair value of
$41 million
, offset by a fair value adjustment to Long-term Debt (Note 8) of
$41 million
at
June 30, 2016
. At
September 30, 2015
, the Swaps were recorded within Other Assets at a fair value of
$34 million
, offset by a fair value adjustment to Long-term Debt (Note 8) of
$34 million
. Cash payments or receipts between the Company and the counterparties to the Swaps are recorded as an adjustment to interest expense.
Foreign Currency Forward Exchange Contracts
The Company transacts business in various foreign currencies which subjects the Company’s cash flows and earnings to exposure related to changes in foreign currency exchange rates. These exposures arise primarily from purchases or sales of products and services from third parties and intercompany transactions. Foreign currency forward exchange contracts provide for the purchase or sale of foreign currencies at specified future dates at specified exchange rates and are used to offset changes in the fair value of certain assets or liabilities or forecasted cash flows resulting from transactions denominated in foreign currencies. As of
June 30, 2016
and
September 30, 2015
, the Company had outstanding foreign currency forward exchange contracts with notional amounts of
$296 million
and
$359 million
, respectively. These notional values consist primarily of contracts for the British pound sterling, European euro and Japanese yen, and are stated in U.S. dollar equivalents at spot exchange rates at the respective dates.
ROCKWELL COLLINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Fair Value of Derivative Instruments
Fair values of derivative instruments in the Condensed Consolidated Statement of Financial Position as of
June 30, 2016
and
September 30, 2015
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
(in millions)
|
Classification
|
|
June 30,
2016
|
|
September 30, 2015
|
Foreign currency forward exchange contracts
|
Other current assets
|
|
$
|
13
|
|
|
$
|
7
|
|
Interest rate swaps
|
Other assets
|
|
41
|
|
|
34
|
|
Total
|
|
|
$
|
54
|
|
|
$
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Derivatives
|
(in millions)
|
Classification
|
|
June 30,
2016
|
|
September 30, 2015
|
Foreign currency forward exchange contracts
|
Other current liabilities
|
|
$
|
13
|
|
|
$
|
11
|
|
The fair values of derivative instruments are presented on a gross basis, as the Company does not have any derivative contracts which are subject to master netting arrangements. As of
June 30, 2016
, there were undesignated foreign currency forward exchange contracts classified within Other current assets of
$1 million
and Other current liabilities of
$1 million
.
The effect of derivative instruments on the Condensed Consolidated Statement of Operations for the three and nine months ended
June 30, 2016
and
2015
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss)
|
|
Amount of Gain (Loss)
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
June 30
|
|
June 30
|
(in millions)
|
Location of Gain (Loss)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Derivatives Designated as Hedging Instruments:
|
|
|
|
|
|
|
|
|
|
Fair Value Hedges
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
Interest expense
|
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
8
|
|
|
$
|
8
|
|
Cash Flow Hedges
|
|
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts:
|
|
|
|
|
|
|
|
|
|
Amount of loss recognized in AOCL (effective portion, before deferred tax impact)
|
AOCL
|
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
|
(8
|
)
|
Amount of loss reclassified from AOCL into income
|
Cost of sales
|
|
(1
|
)
|
|
(1
|
)
|
|
(6
|
)
|
|
(4
|
)
|
Derivatives Not Designated as Hedging Instruments:
|
|
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts
|
Cost of sales
|
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
|
(5
|
)
|
There was no significant impact to the Company’s earnings related to the ineffective portion of any hedging instruments during the three and nine months ended
June 30, 2016
. In addition, there was no significant impact to the Company’s earnings when a hedged firm commitment no longer qualified as a fair value hedge or when a hedged forecasted transaction no longer qualified as a cash flow hedge during the three and nine months ended
June 30, 2016
.
The Company did not have any hedges with credit-risk-related contingent features or that required the posting of collateral as of
June 30, 2016
. The cash flows from derivative contracts are recorded in operating activities in the Condensed Consolidated Statement of Cash Flows.
The Company expects to reclassify approximately
$1 million
of AOCL losses from cash flow hedges into earnings over the next 12 months. The maximum duration of a foreign currency cash flow hedge contract at
June 30, 2016
was
49
months.
ROCKWELL COLLINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
|
|
15.
|
Guarantees and Indemnifications
|
Product warranty costs
Accrued liabilities are recorded to reflect the Company’s contractual obligations relating to warranty commitments to customers. Warranty coverage of various lengths and terms is provided to customers depending on standard offerings and negotiated contractual agreements. An estimate for warranty expense is recorded at the time of sale based on the length of the warranty and historical warranty return rates and repair costs.
Changes in the carrying amount of accrued product warranty costs are summarized as follows:
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
June 30
|
(in millions)
|
2016
|
|
2015
|
Balance at beginning of year
|
$
|
89
|
|
|
$
|
104
|
|
Warranty costs incurred
|
(31
|
)
|
|
(34
|
)
|
Product warranty accrual
|
29
|
|
|
33
|
|
Changes in estimates for prior years
|
(3
|
)
|
|
(7
|
)
|
Foreign currency translation adjustments and other
|
(1
|
)
|
|
(2
|
)
|
Balance at June 30, 2016
|
$
|
83
|
|
|
$
|
94
|
|
Letters of credit
The Company has contingent commitments in the form of letters of credit. Outstanding letters of credit are issued by banks on the Company’s behalf to support certain contractual obligations to its customers. If the Company fails to meet these contractual obligations, these letters of credit may become liabilities of the Company. Total outstanding letters of credit at
June 30, 2016
were $
250 million
. These commitments are not reflected as liabilities on the Company’s Condensed Consolidated Statement of Financial Position.
Indemnifications
The Company enters into indemnifications with lenders, counterparties in transactions, such as administration of employee benefit plans, and other customary indemnifications with third parties in the normal course of business. The following are other than customary indemnifications based on the judgment of management:
In connection with agreements for the sale of portions of its business, the Company at times retains various liabilities of a business that relate to events occurring prior to its sale, such as tax, environmental, litigation and employment matters. The Company at times indemnifies the purchaser of a Rockwell Collins business in the event a third party asserts a claim that relates to a liability retained by the Company.
The Company also provides indemnifications of varying scope and amounts to certain customers against claims of product liability or intellectual property infringement made by third parties arising from the use of Company or customer products or intellectual property. These indemnifications generally require the Company to compensate the other party for certain damages and costs incurred as a result of third party product liability or intellectual property claims arising from these transactions.
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.
ROCKWELL COLLINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
|
|
16.
|
Environmental Matters
|
The Company is subject to federal, state and local regulations relating to the discharge of substances into the environment, the disposal of hazardous wastes and other activities affecting the environment that have had, and will continue to have, an impact on the Company’s manufacturing operations. These environmental protection regulations may require the investigation and remediation of environmental impairments at current and previously owned or leased properties. In addition, lawsuits, claims and proceedings have been asserted on occasion against the Company, alleging violations of environmental protection regulations, or seeking remediation of alleged environmental impairments, principally at previously owned or leased properties. As of
June 30, 2016
, the Company is involved in the investigation or remediation of
seven
sites under these regulations or pursuant to lawsuits asserted by third parties. Management estimates that the total reasonably possible future costs the Company could incur for
six
of these sites is not significant. Management estimates that the total reasonably possible future costs the Company could incur for
one
of these sites to be approximately $
12 million
. The Company has recorded environmental reserves for this site of $
6 million
as of
June 30, 2016
, which represents management’s best estimate of the probable future cost for this site.
To date, compliance with environmental regulations and resolution of environmental claims has been accomplished without material effect on the Company’s liquidity and capital resources, competitive position or financial condition. Management believes that expenditures for environmental capital investment and remediation necessary to comply with present regulations governing environmental protection and other expenditures for the resolution of environmental claims will not have a material effect on the Company’s business or financial position.
The Company is subject to various lawsuits, claims and proceedings that have been, or may be, instituted or asserted against the Company relating to the conduct of the Company's business, including those pertaining to product liability, antitrust, intellectual property, safety and health, exporting and importing, contract, employment and regulatory matters. Although the outcome of these matters cannot be predicted with certainty, and some lawsuits, claims or proceedings may be disposed of unfavorably to the Company, management believes there are no material pending legal proceedings.
|
|
18.
|
Restructuring and Asset Impairment Charges
|
During the first quarter of 2016, the Company recorded corporate restructuring and asset impairment charges totaling
$45 million
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Cost of Sales
|
|
Selling, General and Administrative Expenses
|
|
Total
|
Employee separation costs
|
$
|
31
|
|
|
$
|
8
|
|
|
$
|
39
|
|
Asset impairment charges
|
2
|
|
|
4
|
|
|
6
|
|
Restructuring and asset impairment charges
|
$
|
33
|
|
|
$
|
12
|
|
|
$
|
45
|
|
The employee separation costs primarily resulted from the Company's execution of a voluntary separation incentive program in response to certain challenging market conditions, particularly in business aviation. During the three months ended December 31, 2015, March 31, 2016 and June 30, 2016, the Company made cash separation payments of
$5 million
,
$33 million
and
$1 million
, respectively. As of
June 30, 2016
, all employee separation costs have been paid. Asset impairment charges primarily relate to the write-down to fair market value of a corporate asset, as well as the write-off of certain long-lived assets.
ROCKWELL COLLINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
|
|
19.
|
Business Segment Information
|
Sales and earnings from continuing operations of the Company's operating segments are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
June 30
|
|
June 30
|
(in millions)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Sales:
|
|
|
|
|
|
|
|
Commercial Systems
|
$
|
612
|
|
|
$
|
611
|
|
|
$
|
1,785
|
|
|
$
|
1,798
|
|
Government Systems
|
555
|
|
|
530
|
|
|
1,544
|
|
|
1,606
|
|
Information Management Services
|
167
|
|
|
152
|
|
|
485
|
|
|
456
|
|
Total sales
|
$
|
1,334
|
|
|
$
|
1,293
|
|
|
$
|
3,814
|
|
|
$
|
3,860
|
|
|
|
|
|
|
|
|
|
Segment operating earnings:
|
|
|
|
|
|
|
|
|
|
Commercial Systems
|
$
|
141
|
|
|
$
|
141
|
|
|
$
|
401
|
|
|
$
|
408
|
|
Government Systems
|
115
|
|
|
108
|
|
|
309
|
|
|
328
|
|
Information Management Services
|
26
|
|
|
23
|
|
|
79
|
|
|
66
|
|
Total segment operating earnings
|
282
|
|
|
272
|
|
|
789
|
|
|
802
|
|
|
|
|
|
|
|
|
|
Interest expense
|
(16
|
)
|
|
(15
|
)
|
|
(48
|
)
|
|
(45
|
)
|
Stock-based compensation
|
(6
|
)
|
|
(5
|
)
|
|
(21
|
)
|
|
(17
|
)
|
General corporate, net
|
(13
|
)
|
|
(15
|
)
|
|
(36
|
)
|
|
(44
|
)
|
Restructuring and asset impairment charges
|
—
|
|
|
—
|
|
|
(45
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
247
|
|
|
237
|
|
|
639
|
|
|
696
|
|
Income tax expense
|
(33
|
)
|
|
(59
|
)
|
|
(120
|
)
|
|
(186
|
)
|
Income from continuing operations
|
$
|
214
|
|
|
$
|
178
|
|
|
$
|
519
|
|
|
$
|
510
|
|
The Company evaluates performance and allocates resources based upon, among other considerations, segment operating earnings. The Company's definition of segment operating earnings excludes income taxes, stock-based compensation, unallocated general corporate expenses, interest expense, gains and losses from the disposition of businesses, restructuring and asset impairment charges and other special items as identified by management from time to time. Intersegment sales are not material and have been eliminated.
ROCKWELL COLLINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table summarizes sales by category for the three and nine months ended
June 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
June 30
|
|
June 30
|
(in millions)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Commercial Systems sales categories:
|
|
|
|
|
|
|
|
|
Air transport aviation electronics
|
$
|
370
|
|
|
$
|
337
|
|
|
$
|
1,052
|
|
|
$
|
1,030
|
|
Business and regional aviation electronics
|
242
|
|
|
274
|
|
|
733
|
|
|
768
|
|
Commercial Systems sales
|
612
|
|
|
611
|
|
|
1,785
|
|
|
1,798
|
|
|
|
|
|
|
|
|
|
Government Systems sales categories:
|
|
|
|
|
|
|
|
Avionics
|
376
|
|
|
338
|
|
|
1,026
|
|
|
1,036
|
|
Communication and navigation
|
179
|
|
|
192
|
|
|
518
|
|
|
570
|
|
Government Systems sales
|
555
|
|
|
530
|
|
|
1,544
|
|
|
1,606
|
|
|
|
|
|
|
|
|
|
Information Management Services sales
|
167
|
|
|
152
|
|
|
485
|
|
|
456
|
|
|
|
|
|
|
|
|
|
Total sales
|
$
|
1,334
|
|
|
$
|
1,293
|
|
|
$
|
3,814
|
|
|
$
|
3,860
|
|
The air transport and business and regional aviation electronics sales categories are delineated based on the difference in underlying customer base, size of aircraft and markets served. For the three and nine months ended
June 30, 2016
, sales for air transport aviation electronics include revenue from wide-body in-flight entertainment products and services of
$9 million
and
$30 million
, respectively, compared to
$13 million
and
$44 million
for the three and nine months ended June 30, 2015.
Beginning in 2016, product category sales for Government Systems have been consolidated as a result of an internal reorganization and are delineated based upon underlying product technologies. The previously reported sales categories of Communication products, Surface solutions and Navigation products are now primarily consolidated into Communication and navigation. Government Systems sales for the three and nine months ended June 30, 2015 have been reclassified to conform to the current year presentation.