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,
March 31
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, 2016
.
In the opinion of management, the unaudited financial statements contain all adjustments, consisting of adjustments of a normal recurring nature, necessary to present fairly the financial position, results of operations and cash flows for the periods presented. The results of operations for the three and six months ended
March 31, 2017
are not necessarily indicative of the results that may be expected for the full year.
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates and assumptions.
On October 23, 2016, the Company reached a definitive agreement to acquire B/E Aerospace, a leading manufacturer of aircraft cabin interior products. On April 13, 2017, the transaction was consummated for
$6.6 billion
in cash and stock, plus the assumption of
$2.0 billion
in net debt. The Company financed the cash portion of the transaction with debt financing (see Notes 8 and 20). In future periods, B/E Aerospace results will be reported as part of a newly created Interior Systems segment. For additional information regarding the acquisition, refer to Note 20.
|
|
2.
|
Recently Issued Accounting Standards
|
In March 2017, the Financial Accounting Standards Board (FASB) issued a new standard on the presentation of the net periodic cost of postretirement benefit programs. The new standard requires sponsors of defined benefit postretirement plans to present the non-service cost components of net periodic benefit cost separate from the service cost component on the income statement. The new standard also requires that the non-service cost components of net periodic benefit cost no longer be capitalized within assets. The Company is evaluating the effects the standard will have on the Company's consolidated financial statements and related disclosures beyond the change in income statement presentation. This new standard is effective for the Company in 2019, with early adoption permitted.
In January 2017, the FASB issued a new standard which simplifies testing for goodwill impairment. The new standard eliminates Step 2 of the goodwill impairment test, which requires determining the fair value of assets acquired or liabilities assumed in a business combination. Under the amendments in this update, a goodwill impairment test is performed by comparing the fair value of the reporting unit with its carrying amount. This new standard is effective for the Company in 2021, with early adoption permitted. The adoption of this guidance by the Company is not expected to have a material impact on its consolidated financial statements.
In June 2016, the FASB issued a new standard on the measurement of credit losses, which will impact the Company's measurement of trade receivables. The new standard replaces the current incurred loss model with a forward-looking expected loss model that is likely to result in earlier recognition of losses. The new standard also increases disclosure requirements and is
ROCKWELL COLLINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
effective for the Company in 2021, with early adoption permitted, but not earlier than 2020. The Company has completed an evaluation of the new standard and does not expect that adoption will have a material impact on the Company's consolidated financial statements.
In 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 April 2015, the FASB issued a new standard on the presentation of debt issuance costs, which requires debt issuance costs be presented on the balance sheet as a deduction from the carrying amount of the related debt liability, consistent with the presentation of unamortized debt discounts. Previously, debt issuance costs were presented as a deferred asset. The Company adopted the new guidance during the three months ended December 31, 2016 on a retrospective basis, which resulted in the reclassification of
$8 million
and
$10 million
of Other assets to Long-term debt, net as of September 30, 2016 and September 30, 2015, respectively.
In May 2014, the FASB issued a comprehensive new revenue recognition standard that effectively replaces all current guidance on the topic. Several amendments to the new standard have been issued, which are intended to resolve potential implementation challenges and drive consistent interpretation and application of the new standard. The new standard is effective for the Company in 2019, with early adoption permitted, but not earlier than 2018. The guidance permits use of either a retrospective or cumulative effect transition method.
The Company's interpretation of the new standard is substantially complete and the Company has prepared an initial assessment of the impacts of adoption on its consolidated financial statements and disclosures. Anticipated changes under the new standard include accounting for development costs and associated customer funding related to commercial contracts, increased use of over time revenue recognition based on costs incurred for government contracts and the elimination of Customer relationship intangible assets related to free products provided to customers as up-front sales incentives. The new standard also significantly enhances required disclosures regarding revenue and related assets and liabilities.
Of the anticipated changes, the Company expects that the change in accounting for commercial contract development costs and associated customer funding is likely to have the most significant impact on the financial statements. Customer funding received for development effort is currently recognized as revenue as the development activities are performed. Under the new standard, the Company has concluded that the development effort does not represent a performance obligation. Therefore, customer funding specific to the development effort must be deferred as a contract liability and recognized as revenue when products are delivered to the customer, delaying the timing of revenue recognition. The Company currently expenses development costs associated with commercial contracts unless the arrangement includes a contractual guarantee for reimbursement from the customer. Upon adoption of the new standard, development costs will be expensed as incurred except for those costs incurred pursuant to customer funding, which will be capitalized. Development costs incurred pursuant to contractual guarantees for reimbursement will no longer be capitalized as pre-production engineering costs within Inventory.
The Company continues to evaluate the impacts associated with the new standard, assess the implications of the B/E Aerospace acquisition (see Note 20) on the implementation plan and refine estimated impacts of adoption on the financial statements and related disclosures. The Company is in the process of implementing changes to business processes, systems and internal controls required to implement the new accounting standard. The Company has not yet selected an adoption date or transition method.
Other new accounting standards issued but not effective until after
March 31, 2017
are not expected to have a material impact on the Company's financial statements.
ROCKWELL COLLINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
|
|
3.
|
Acquisitions, Goodwill and Intangible Assets
|
Acquisitions
On December 20, 2016, the Company acquired
100 percent
of the outstanding shares of Pulse.aero, a United Kingdom based company specializing in self-bag drop technologies used by airlines and airports. The purchase price, net of cash acquired, was
$13 million
, of which
$11 million
was paid during the six months ended
March 31, 2017
. Additional post-closing consideration of up to
$5 million
may be paid, contingent upon the achievement of certain revenue targets and development milestones. The Company recorded a
$5 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,
$12 million
has been allocated to goodwill and
$6 million
to intangible assets. The intangible assets have a weighted average life of approximately
9
years. None of the goodwill resulting from the acquisition is tax deductible. The excess purchase price over net assets acquired, including intangible assets, reflects the Company's view that this acquisition will expand the Company's airport passenger processing offerings.
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. In the fourth quarter of 2016, the purchase price allocation was finalized, with
$51 million
allocated to goodwill and
$23 million
to intangible assets. The intangible assets have a weighted average life of approximately
8
years. All goodwill resulting from the acquisition is tax deductible. The excess purchase price over net assets acquired, including intangible assets, reflects the Company's view that this acquisition will broaden the Company's flight deck and connectivity portfolio.
The Pulse.aero acquisition is included in the Information Management Services segment, the Matrix product line acquisition is included in the Government Systems segment, and the ICG acquisition is included in the Commercial Systems segment. The results of operations for the acquisitions have been included in the Company's operating results for the periods subsequent to the acquisition dates. Pro-forma results of operations have not been presented, as the effect of the acquisitions are not material to the Company's condensed consolidated results of operations.
Goodwill
Changes in the carrying amount of goodwill are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Commercial
Systems
|
|
Government
Systems
|
|
Information Management Services
|
|
Total
|
Balance at September 30, 2016
|
$
|
326
|
|
|
$
|
503
|
|
|
$
|
1,090
|
|
|
$
|
1,919
|
|
Pulse.aero acquisition
|
—
|
|
|
—
|
|
|
12
|
|
|
12
|
|
Foreign currency translation adjustments
|
(1
|
)
|
|
(3
|
)
|
|
1
|
|
|
(3
|
)
|
Balance at March 31, 2017
|
$
|
325
|
|
|
$
|
500
|
|
|
$
|
1,103
|
|
|
$
|
1,928
|
|
The Company performs an annual impairment test of goodwill and indefinite-lived intangible assets during the second quarter of each fiscal year, or at any time there is an indication goodwill or indefinite-lived intangibles are more-likely-than-not impaired, commonly referred to as triggering events. There have been no such triggering events during any of the periods presented and the Company's second quarter 2017 impairment tests resulted in no impairment.
ROCKWELL COLLINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Intangible Assets
Intangible assets are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
September 30, 2016
|
(in millions)
|
Gross
|
|
Accum
Amort
|
|
Net
|
|
Gross
|
|
Accum
Amort
|
|
Net
|
Intangible assets with finite lives:
|
|
|
|
|
|
|
|
|
|
|
|
Developed technology and patents
|
$
|
360
|
|
|
$
|
(224
|
)
|
|
$
|
136
|
|
|
$
|
354
|
|
|
$
|
(216
|
)
|
|
$
|
138
|
|
Backlog
|
6
|
|
|
(4
|
)
|
|
2
|
|
|
6
|
|
|
(3
|
)
|
|
3
|
|
Customer relationships:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired
|
342
|
|
|
(116
|
)
|
|
226
|
|
|
340
|
|
|
(106
|
)
|
|
234
|
|
Up-front sales incentives
|
335
|
|
|
(86
|
)
|
|
249
|
|
|
313
|
|
|
(80
|
)
|
|
233
|
|
License agreements
|
14
|
|
|
(10
|
)
|
|
4
|
|
|
14
|
|
|
(10
|
)
|
|
4
|
|
Trademarks and tradenames
|
15
|
|
|
(14
|
)
|
|
1
|
|
|
15
|
|
|
(14
|
)
|
|
1
|
|
Intangible assets with indefinite lives:
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and tradenames
|
47
|
|
|
—
|
|
|
47
|
|
|
47
|
|
|
—
|
|
|
47
|
|
In process research and development
|
7
|
|
|
—
|
|
|
7
|
|
|
7
|
|
|
—
|
|
|
7
|
|
Intangible assets
|
$
|
1,126
|
|
|
$
|
(454
|
)
|
|
$
|
672
|
|
|
$
|
1,096
|
|
|
$
|
(429
|
)
|
|
$
|
667
|
|
The Company provides up-front sales incentives prior to delivering products or performing services to certain commercial customers in connection with sales contracts. Up-front sales incentives are recorded as a customer relationship intangible asset and are amortized using a units-of-delivery method over the period the Company has received a contractually enforceable right related to the incentives, up to
15
years after entry into service. Amortization is based on the Company's expectation of delivery rates on a program-by-program basis. Amortization begins when the Company starts recognizing revenue as the Company delivers equipment for the program.
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
March 31, 2017
, the weighted average amortization period remaining for up-front sales incentives was approximately
10
years.
Anticipated annual amortization expense for intangible assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
Thereafter
|
Anticipated amortization expense for up-front sales incentives
|
$
|
13
|
|
|
$
|
20
|
|
|
$
|
26
|
|
|
$
|
28
|
|
|
$
|
28
|
|
|
$
|
140
|
|
Anticipated amortization expense for all other intangible assets
|
40
|
|
|
38
|
|
|
37
|
|
|
35
|
|
|
34
|
|
|
204
|
|
Total
|
$
|
53
|
|
|
$
|
58
|
|
|
$
|
63
|
|
|
$
|
63
|
|
|
$
|
62
|
|
|
$
|
344
|
|
Amortization expense for intangible assets for the three and six months ended
March 31, 2017
was
$13 million
and
$25 million
, respectively, compared to
$17 million
and
$31 million
for the three and six months ended
March 31, 2016
.
|
|
4.
|
Discontinued Operations and Divestitures
|
On March 10, 2015, the Company sold its ASES business, which provides military aircraft integration and modifications, maintenance and logistics and support, to align with the Company's long-term primary business strategies. The initial sale price
was
$3 million
, and additional post-closing consideration of
$2 million
was received in December 2016. During the three months ended December 31, 2015, the Company recorded
$3 million
of income from discontinued operations (
$2 million
after-tax), primarily due to the favorable settlement of a contractual matter with a customer of the ASES business.
In April 2014, the FASB issued guidance that modifies the definition of a discontinued operation and provides new disclosure requirements for divestitures. This guidance was effective for the Company in 2016. The ASES divestiture occurred in 2015 and is being reported based upon the previous guidance for discontinued operations.
ROCKWELL COLLINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Results of discontinued operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
March 31
|
|
March 31
|
(in millions)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Income (loss) from discontinued operations before income taxes
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
2
|
|
Income tax expense from discontinued operations
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
Receivables, net are summarized as follows:
|
|
|
|
|
|
|
|
|
(in millions)
|
March 31,
2017
|
|
September 30,
2016
|
Billed
|
$
|
699
|
|
|
$
|
748
|
|
Unbilled
|
505
|
|
|
439
|
|
Less progress payments
|
(63
|
)
|
|
(87
|
)
|
Total
|
1,141
|
|
|
1,100
|
|
Less allowance for doubtful accounts
|
(6
|
)
|
|
(6
|
)
|
Receivables, net
|
$
|
1,135
|
|
|
$
|
1,094
|
|
Receivables expected to be collected beyond the next twelve months are classified as long-term and are included in Other Assets. Receivables, net due from equity affiliates were
$90 million
and
$68 million
at
March 31, 2017
and
September 30, 2016
, respectively.
Unbilled receivables principally represent sales recorded under the percentage-of-completion method of accounting that have not yet been billed to customers in accordance with applicable contract terms.
The Company sells certain accounts receivable on a non-recourse basis to unrelated financial institutions under factoring agreements arranged by certain customers. Under the terms of the agreements, the Company retains no rights or interest and has no obligations with respect to the sold receivables. The Company accounts for these transactions as sales of receivables and records cash proceeds when received as cash provided by operating activities in the Condensed Consolidated Statement of Cash Flows. Cash provided by operating activities from participating in these programs was
$136 million
and
$9 million
during the six months ended
March 31, 2017
and
2016
, respectively. The cost of participating in these programs was immaterial to the Company's results.
Inventories, net are summarized as follows:
|
|
|
|
|
|
|
|
|
(in millions)
|
March 31,
2017
|
|
September 30,
2016
|
Finished goods
|
$
|
246
|
|
|
$
|
210
|
|
Work in process
|
237
|
|
|
236
|
|
Raw materials, parts and supplies
|
381
|
|
|
354
|
|
Less progress payments
|
(15
|
)
|
|
(1
|
)
|
Total
|
849
|
|
|
799
|
|
Pre-production engineering costs
|
1,164
|
|
|
1,140
|
|
Inventories, net
|
$
|
2,013
|
|
|
$
|
1,939
|
|
The Company defers certain pre-production engineering costs during the development phase of a program, in connection with long-term supply arrangements that contain contractual guarantees for reimbursement from customers. Such customer
ROCKWELL COLLINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
guarantees generally take the form of a minimum order quantity with quantified reimbursement amounts if the minimum order quantity is not taken by the customer. These costs are deferred to the extent of the contractual guarantees and are amortized over their estimated useful lives using a units-of-delivery method, up to
15
years. This amortization expense is included as a component of cost of sales. Amortization is based on the Company's expectation of delivery rates on a program-by-program basis and begins when the Company starts recognizing revenue as the Company delivers equipment for the program. The estimated useful life is limited to the amount of time the Company is virtually assured to earn revenues under long-term supply arrangements with the Company's customers. Pre-production engineering costs incurred pursuant to supply arrangements that do not contain contractual guarantees for reimbursement are expensed as incurred.
Anticipated annual amortization expense for pre-production engineering costs is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
Thereafter
|
Anticipated amortization expense for pre-production engineering costs
|
$
|
57
|
|
|
$
|
97
|
|
|
$
|
137
|
|
|
$
|
158
|
|
|
$
|
148
|
|
|
$
|
592
|
|
Amortization expense for pre-production engineering costs for the three and six months ended
March 31, 2017
was
$14 million
and
$25 million
, respectively, compared to
$14 million
and
$23 million
for the three and six months ended
March 31, 2016
. As of
March 31, 2017
, the weighted average amortization period remaining for pre-production engineering costs included in Inventories, net was approximately
10
years.
Other assets are summarized as follows:
|
|
|
|
|
|
|
|
|
(in millions)
|
March 31,
2017
|
|
September 30,
2016
|
Long-term receivables
|
$
|
175
|
|
|
$
|
146
|
|
Investments in equity affiliates
|
8
|
|
|
10
|
|
Exchange and rental assets (net of accumulated depreciation of $102 at March 31, 2017 and $101 at September 30, 2016)
|
68
|
|
|
68
|
|
Other
|
165
|
|
|
145
|
|
Other Assets
|
$
|
416
|
|
|
$
|
369
|
|
Long-Term Receivables
Long-term receivables expected to be collected beyond the next twelve months are principally comprised of unbilled accounts receivables pursuant to sales recorded under the percentage-of-completion method of accounting that have not yet been billed to customers in accordance with applicable contract terms.
Investments in Equity Affiliates
The Company's investments in equity affiliates primarily consist of
seven
joint ventures, each
50 percent
owned and accounted for under the equity method. The Company records income or loss from equity affiliates in Other income, net on the Condensed Consolidated Statement of Operations. The Company's sales to equity affiliates were
$69 million
and
$136 million
for the three and six months ended
March 31, 2017
, respectively, compared to $
55 million
and $
101 million
for the three and six months ended
March 31, 2016
. Deferred profit from sales to equity affiliates was
$4 million
at
March 31, 2017
and
$2 million
at
September 30, 2016
.
Exchange and Rental Assets
Exchange and rental assets consist primarily of Company products that are either exchanged or rented to customers on a short-term basis in connection with warranty and other service-related activities. These assets are recorded at acquisition cost or production cost and depreciated using the straight-line method over their estimated lives, up to
15
years. Depreciation methods and lives are reviewed periodically with any changes recorded on a prospective basis. Depreciation expense for exchange and rental assets was
$3 million
and
$5 million
for the three and six months ended
March 31, 2017
, respectively, and
$3 million
and
$5 million
for the three and six months ended
March 31, 2016
.
ROCKWELL COLLINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Short-term Debt
|
|
|
|
|
|
|
|
|
(in millions, except weighted average amounts)
|
March 31,
2017
|
|
September 30,
2016
|
Short-term commercial paper borrowings outstanding
(1)
|
$
|
855
|
|
|
$
|
440
|
|
Current portion of long-term debt
|
—
|
|
|
300
|
|
Short-term debt
|
$
|
855
|
|
|
$
|
740
|
|
Weighted average interest rate of commercial paper borrowings
|
1.22
|
%
|
|
0.79
|
%
|
Weighted average maturity period of commercial paper borrowings (days)
|
10
|
|
|
15
|
|
(1)
The maximum amount of short-term commercial paper borrowings outstanding during the six months ended
March 31, 2017
was
$1.058 billion
.
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 $1.2 billion revolving credit facility.
Revolving Credit Facilities
On December 16, 2016, the Company entered into a new
$1.2 billion
five-year senior unsecured revolving credit agreement with various banks. This revolving credit facility replaces the previous
$1 billion
and
$200 million
revolving credit facilities that would have expired in December 2018 and February 2017, respectively. Both of these revolving credit facilities were terminated upon the closing of the new revolving credit facility. The $1.2 billion credit facility increased to
$1.5 billion
concurrent with the consummation of the B/E Aerospace acquisition (see Note 20, Subsequent Events). At
March 31, 2017
, there were no outstanding borrowings under the Company's revolving credit facility and at
September 30, 2016
there were no outstanding borrowings under the previous revolving credit facilities.
Short-term credit facilities available to non-U.S. subsidiaries were
$36 million
as of
March 31, 2017
, of which
$3 million
was utilized to support commitments in the form of commercial letters of credit. At
March 31, 2017
and
September 30, 2016
, there were no borrowings outstanding under these credit facilities.
At
March 31, 2017
and
September 30, 2016
, there were no significant commitment fees or compensating balance requirements under any of the Company’s credit facilities.
Bridge Credit Facility
On December 16, 2016, pursuant to the B/E Aerospace acquisition, the Company entered into a
$4.35 billion
364-day senior unsecured bridge term loan credit agreement with various banks. As of
March 31, 2017
, there were no outstanding borrowings under this facility. This bridge facility terminated upon receipt of proceeds from the new notes issued to finance a portion of the B/E Aerospace acquisition (see Note 20).
Term Loan Credit Facility
On December 16, 2016, pursuant to the B/E Aerospace acquisition, the Company entered into a
$1.5 billion
3-year senior unsecured term loan credit agreement with various banks. Borrowings under the term loan facility are subject to customary closing conditions as well as, among other conditions, the substantially concurrent consummation of the B/E Aerospace acquisition. Borrowings under this term loan facility bear interest at LIBOR plus a variable margin based on the Company’s unsecured long-term debt rating and will amortize in equal quarterly installments of
2.5 percent
, with the balance payable on the maturity date. As of
March 31, 2017
, there were no outstanding borrowings under this facility. As discussed in Note 20, proceeds of borrowings under the term loan facility were used to finance a portion of the B/E Aerospace acquisition and to pay related transaction fees and expenses.
Unamortized facility fees related to the revolving credit agreement, bridge credit agreement and term loan credit agreement entered into in December 2016 totaled
$19 million
as of
March 31, 2017
. The facility fees are capitalized within Other Assets on the Condensed Consolidated Statement of Financial Position.
ROCKWELL COLLINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The revolving credit agreement, bridge credit agreement and term loan credit agreement each include one financial covenant requiring the Company to maintain a consolidated debt to total capitalization ratio of not greater than
68 percent
(excluding the equity impact on accumulated other comprehensive loss related to defined benefit retirement plans) which will be reduced to
65 percent
on the earlier of 1) the last day of the fourth full fiscal quarter following the closing of the B/E Aerospace acquisition, or 2) 45 days following the termination of the B/E Aerospace merger agreement. The Company was in compliance with this financial covenant at
March 31, 2017
. The credit agreements also contain covenants that require the Company to satisfy certain conditions in order to incur debt secured by liens, engage in sale/leaseback transactions or merge or consolidate with another entity.
Long-term Debt
The principal amount of long-term debt, net of discount and debt issuance costs, is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
(in millions, except interest rate figures)
|
Interest Rate
|
|
March 31,
2017
|
|
September 30,
2016
|
Fixed-rate notes due:
|
|
|
|
|
|
July 2019
|
5.25%
|
|
$
|
300
|
|
|
$
|
300
|
|
November 2021
|
3.10%
|
|
250
|
|
|
250
|
|
December 2023
|
3.70%
|
|
400
|
|
|
400
|
|
December 2043
|
4.80%
|
|
400
|
|
|
400
|
|
Variable-rate note due:
|
|
|
|
|
|
December 2016
|
3 month LIBOR + 0.35%
|
|
—
|
|
|
300
|
|
Fair value swap adjustment (see Notes 13 and 14)
|
|
|
15
|
|
|
35
|
|
Total
|
|
|
1,365
|
|
|
1,685
|
|
Less unamortized debt issuance costs and discounts
|
|
|
11
|
|
|
11
|
|
Less current portion of long-term debt
|
|
|
—
|
|
|
300
|
|
Long-term Debt, Net
|
|
|
$
|
1,354
|
|
|
$
|
1,374
|
|
As discussed in Note 2, the Company adopted new accounting guidance during the three months ended December 31, 2016 which required debt issuance costs to be presented on the balance sheet as a deduction from the carrying amount of the related debt liability. As a result,
$8 million
of debt issuance costs were reclassified from Other Assets to Long-term Debt, Net as of September 30, 2016. The notes listed above are included in the Condensed Consolidated Statement of Financial Position, net of any unamortized debt issuance costs and discounts, within the caption Long-term Debt, Net. Debt issuance costs and discounts are amortized over the life of the debt and recorded in Interest expense on the Condensed Consolidated Statement of Operations.
Cash payments for debt interest and fees during the six months ended
March 31, 2017
were
$59 million
, of which
$26 million
related to fees incurred in connection with the bridge credit facility. Cash payments for debt interest and fees during the six months ended
March 31, 2016
was
$28 million
.
The Company sponsors defined benefit pension (Pension Benefits) and other postretirement (Other Retirement Benefits) plans which provide monthly pension and other benefits to eligible employees upon retirement.
Components of Expense (Income)
The components of expense (income) for Pension Benefits and Other Retirement Benefits for the three and six months ended
March 31, 2017
and
2016
are summarized as follows:
ROCKWELL COLLINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Retirement Benefits
|
|
Three Months Ended
|
|
Three Months Ended
|
|
March 31
|
|
March 31
|
(in millions)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Service cost
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
1
|
|
|
$
|
1
|
|
Interest cost
|
27
|
|
|
31
|
|
|
2
|
|
|
2
|
|
Expected return on plan assets
|
(60
|
)
|
|
(59
|
)
|
|
(1
|
)
|
|
(1
|
)
|
Amortization:
|
|
|
|
|
|
|
|
|
|
Prior service credit
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
Net actuarial loss
|
23
|
|
|
20
|
|
|
2
|
|
|
2
|
|
Net benefit expense (income)
|
$
|
(7
|
)
|
|
$
|
(6
|
)
|
|
$
|
4
|
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Retirement Benefits
|
|
Six Months Ended
|
|
Six Months Ended
|
|
March 31
|
|
March 31
|
(in millions)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Service cost
|
$
|
6
|
|
|
$
|
6
|
|
|
$
|
1
|
|
|
$
|
1
|
|
Interest cost
|
55
|
|
|
63
|
|
|
3
|
|
|
3
|
|
Expected return on plan assets
|
(120
|
)
|
|
(119
|
)
|
|
(1
|
)
|
|
(1
|
)
|
Amortization:
|
|
|
|
|
|
|
|
Prior service credit
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
Net actuarial loss
|
46
|
|
|
39
|
|
|
4
|
|
|
4
|
|
Net benefit expense (income)
|
$
|
(13
|
)
|
|
$
|
(12
|
)
|
|
$
|
7
|
|
|
$
|
7
|
|
Pension Plan Funding
The Company’s objective with respect to the funding of its pension plans is to provide adequate assets for the payment of future benefits. Pursuant to this objective, the Company will fund its pension plans as required by governmental regulations and may consider discretionary contributions as conditions warrant. In October 2016, the Company voluntarily contributed
$55 million
to its U.S. qualified pension plans. There is no minimum statutory funding requirement for 2017 and the Company does not currently expect to make any additional discretionary contributions during 2017 to those 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 2017. During the six months ended
March 31, 2017
, the Company made contributions to the non-U.S. plans and the U.S. non-qualified pension plan of
$8 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
|
|
Six Months Ended
|
|
March 31
|
|
March 31
|
(in millions)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Stock-based compensation expense included in:
|
|
|
|
|
|
|
|
Product cost of sales
|
$
|
2
|
|
|
$
|
3
|
|
|
$
|
4
|
|
|
$
|
5
|
|
Selling, general and administrative expenses
|
5
|
|
|
6
|
|
|
9
|
|
|
10
|
|
Total
|
$
|
7
|
|
|
$
|
9
|
|
|
$
|
13
|
|
|
$
|
15
|
|
Income tax benefit
|
$
|
2
|
|
|
$
|
3
|
|
|
$
|
4
|
|
|
$
|
5
|
|
ROCKWELL COLLINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The Company issued awards of equity instruments under the Company's various incentive plans for the six months ended
March 31, 2017
and
2016
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Performance Shares
|
|
Restricted Stock Units
|
(shares in thousands)
|
Number Issued
|
Weighted Average Fair Value
|
|
Number Issued
|
Weighted Average Fair Value
|
|
Number Issued
|
Weighted Average Fair Value
|
Six months ended March 31, 2017
|
650.4
|
|
$
|
17.19
|
|
|
125.7
|
|
$
|
87.96
|
|
|
15.6
|
|
$
|
90.04
|
|
Six months ended March 31, 2016
|
628.9
|
|
$
|
17.76
|
|
|
128.6
|
|
$
|
85.05
|
|
|
68.3
|
|
$
|
85.75
|
|
The maximum number of shares of common stock that can be issued in respect of performance shares granted in 2017 based on the achievement of performance targets for years 2017 through 2019 is approximately
299,000
.
The fair value of each option granted by the Company was estimated using a binomial lattice pricing model and the following weighted average assumptions:
|
|
|
|
|
|
|
|
2017 Grants
|
|
2016 Grants
|
Risk-free interest rate
|
1.0% - 2.7%
|
|
|
0.7% - 2.5%
|
|
Expected dividend yield
|
1.5
|
%
|
|
1.4% - 1.6%
|
|
Expected volatility
|
19.0
|
%
|
|
20.0
|
%
|
Expected life
|
7 years
|
|
|
7 years
|
|
Employee Benefits Paid in Company Stock
During the six months ended
March 31, 2017
and
2016
,
0.4 million
and
0.3 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
$33 million
and
$27 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
|
|
Six Months Ended
|
|
March 31
|
|
March 31
|
(in millions, except per share amounts)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Numerator for basic and diluted earnings per share:
|
|
|
|
|
|
|
|
Income from continuing operations
|
$
|
168
|
|
|
$
|
172
|
|
|
$
|
313
|
|
|
$
|
305
|
|
Income (loss) from discontinued operations, net of taxes
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
1
|
|
Net income
|
$
|
168
|
|
|
$
|
171
|
|
|
$
|
313
|
|
|
$
|
306
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share – weighted average common shares
|
130.9
|
|
|
130.8
|
|
|
130.7
|
|
|
131.1
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
Stock options
|
1.0
|
|
|
1.0
|
|
|
0.9
|
|
|
1.1
|
|
Performance shares, restricted stock and restricted stock units
|
0.5
|
|
|
0.5
|
|
|
0.5
|
|
|
0.5
|
|
Dilutive potential common shares
|
1.5
|
|
|
1.5
|
|
|
1.4
|
|
|
1.6
|
|
Denominator for diluted earnings per share – adjusted weighted average shares and assumed conversion
|
132.4
|
|
|
132.3
|
|
|
132.1
|
|
|
132.7
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
1.28
|
|
|
$
|
1.31
|
|
|
$
|
2.39
|
|
|
$
|
2.33
|
|
Discontinued operations
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Basic earnings per share
|
$
|
1.28
|
|
|
$
|
1.31
|
|
|
$
|
2.39
|
|
|
$
|
2.33
|
|
Diluted
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
1.27
|
|
|
$
|
1.30
|
|
|
$
|
2.37
|
|
|
$
|
2.30
|
|
Discontinued operations
|
—
|
|
|
(0.01
|
)
|
|
—
|
|
|
0.01
|
|
Diluted earnings per share
|
$
|
1.27
|
|
|
$
|
1.29
|
|
|
$
|
2.37
|
|
|
$
|
2.31
|
|
The average outstanding diluted shares calculation excludes options with an exercise price that exceeds the average market price of shares during the period. There were no stock options excluded from the average outstanding diluted shares calculation for the three and six months ended
March 31, 2017
, compared to
0.6 million
and
0 million
for the three and six months ended
March 31, 2016
, respectively.
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 six months ended
March 31, 2017
and
2016
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Exchange Translation Adjustment
|
|
Pension and Other Postretirement Adjustments
(1)
|
|
Change in the Fair Value of Effective Cash Flow Hedges
|
|
Total
|
Balance at December 31, 2016
|
$
|
(97
|
)
|
|
$
|
(1,802
|
)
|
|
$
|
(7
|
)
|
|
$
|
(1,906
|
)
|
Other comprehensive income before reclassifications
|
12
|
|
|
—
|
|
|
4
|
|
|
16
|
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
16
|
|
|
1
|
|
|
17
|
|
Net current period other comprehensive income
|
12
|
|
|
16
|
|
|
5
|
|
|
33
|
|
Balance at March 31, 2017
|
$
|
(85
|
)
|
|
$
|
(1,786
|
)
|
|
$
|
(2
|
)
|
|
$
|
(1,873
|
)
|
|
|
|
|
|
|
|
|
Balance at September 30, 2016
|
$
|
(76
|
)
|
|
$
|
(1,818
|
)
|
|
$
|
(4
|
)
|
|
$
|
(1,898
|
)
|
Other comprehensive loss before reclassifications
|
(9
|
)
|
|
—
|
|
|
—
|
|
|
(9
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
32
|
|
|
2
|
|
|
34
|
|
Net current period other comprehensive income (loss)
|
(9
|
)
|
|
32
|
|
|
2
|
|
|
25
|
|
Balance at March 31, 2017
|
$
|
(85
|
)
|
|
$
|
(1,786
|
)
|
|
$
|
(2
|
)
|
|
$
|
(1,873
|
)
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
$
|
(64
|
)
|
|
$
|
(1,624
|
)
|
|
$
|
(5
|
)
|
|
$
|
(1,693
|
)
|
Other comprehensive income before reclassifications
|
8
|
|
|
—
|
|
|
—
|
|
|
8
|
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
13
|
|
|
2
|
|
|
15
|
|
Net current period other comprehensive income
|
8
|
|
|
13
|
|
|
2
|
|
|
23
|
|
Balance at March 31, 2016
|
$
|
(56
|
)
|
|
$
|
(1,611
|
)
|
|
$
|
(3
|
)
|
|
$
|
(1,670
|
)
|
|
|
|
|
|
|
|
|
Balance at September 30, 2015
|
$
|
(56
|
)
|
|
$
|
(1,637
|
)
|
|
$
|
(6
|
)
|
|
$
|
(1,699
|
)
|
Other comprehensive loss before reclassifications
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
26
|
|
|
4
|
|
|
30
|
|
Net current period other comprehensive income
|
—
|
|
|
26
|
|
|
3
|
|
|
29
|
|
Balance at March 31, 2016
|
$
|
(56
|
)
|
|
$
|
(1,611
|
)
|
|
$
|
(3
|
)
|
|
$
|
(1,670
|
)
|
(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
$25 million
(
$16 million
net of tax) and
$21 million
(
$13 million
net of tax) for the three months ended
March 31, 2017
and
2016
, respectively, and were
$50 million
(
$32 million
net of tax) and $
42 million
(
$26 million
net of tax) for the six months ended
March 31, 2017
and
2016
, 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
March 31, 2017
and
2016
, the effective income tax rate from continuing operations was
27.9
percent and
26.8
percent, respectively. The higher current year effective income tax rate from continuing operations was primarily due to the adoption of new share-based compensation accounting guidance, which resulted in a retroactive benefit to income tax expense in the prior year.
During the six months ended
March 31, 2017
and
2016
, the effective income tax rate from continuing operations was
28.2
percent and
22.2
percent, respectively. The higher current year effective income tax rate from continuing operations was primarily due to the retroactive reinstatement of the Federal R&D Tax Credit in the prior year, which had previously expired on December 31, 2014. On December 18, 2015, the Protecting Americans from Tax Hikes Act was enacted, which retroactively reinstated and permanently extended the Federal R&D Tax Credit.
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 has closed its audit of the Company's tax returns for the years ended September 30, 2012 and 2013; however, the Company has filed a protest related to the taxation of a foreign subsidiary. The IRS is currently auditing the Company's tax returns for the years ended September 30, 2014 and 2015. An acquired subsidiary is also under examination by the IRS for calendar years 2012 and 2013 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
$145 million
and
$31 million
during the six months ended
March 31, 2017
and
2016
, respectively.
The Company has gross unrecognized tax benefits recorded within Other Liabilities in the Condensed Consolidated Statement of Financial Position of
$48 million
and
$45 million
as of
March 31, 2017
and
September 30, 2016
, respectively. The total amount of unrecognized tax benefits that, if recognized, would affect the effective income tax rate was
$21 million
and
$20 million
as of
March 31, 2017
and
September 30, 2016
, 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
$2 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 were not significant as of
March 31, 2017
and September 30,
2016
, respectively. The total amount of interest and penalties recorded as an expense or (income) within Income tax expense in the Condensed Consolidated Statement of Operations were not significant for the six months ended
March 31, 2017
and
2016
, 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
March 31, 2017
and
September 30, 2016
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
September 30, 2016
|
(in millions)
|
Fair Value
Hierarchy
|
|
Fair Value
Asset (Liability)
|
|
Fair Value
Asset (Liability)
|
Deferred compensation plan investments
|
Level 1
|
|
$
|
57
|
|
|
$
|
55
|
|
Interest rate swap assets
|
Level 2
|
|
15
|
|
|
35
|
|
Foreign currency forward exchange contract assets
|
Level 2
|
|
11
|
|
|
11
|
|
Foreign currency forward exchange contract liabilities
|
Level 2
|
|
(10
|
)
|
|
(13
|
)
|
Contingent consideration for ICG acquisition
|
Level 3
|
|
(13
|
)
|
|
(13
|
)
|
Contingent consideration for Pulse.aero acquisition
|
Level 3
|
|
(5
|
)
|
|
—
|
|
There were no transfers between Levels of the fair value hierarchy during the six months ended
March 31, 2017
or
2016
.
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.
Contingent consideration represents the estimated fair value of post-closing consideration owed to the sellers associated with the ICG acquisition, which occurred on August 6, 2015, and the Pulse.aero acquisition, which occurred on December 20, 2016. The contingent consideration is categorized as Level 3 in the fair value hierarchy and the fair value is determined using a probability-weighted approach. The liabilities recorded were derived from the estimated probability that certain contingent payment milestones will be met in accordance with the terms of the purchase agreements.
As of
March 31, 2017
, there has not been any impact to the fair value of derivative liabilities due to the Company's own credit risk. Similarly, there has not been any impact to the fair value of derivative assets based on the Company's evaluation of counterparties' credit risks.
Financial instruments
The carrying amounts and fair values of the Company's financial instruments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset (Liability)
|
|
March 31, 2017
|
|
September 30, 2016
|
(in millions)
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
Cash and cash equivalents
|
$
|
281
|
|
|
$
|
281
|
|
|
$
|
340
|
|
|
$
|
340
|
|
Short-term debt
|
(855
|
)
|
|
(855
|
)
|
|
(740
|
)
|
|
(740
|
)
|
Long-term debt
|
(1,339
|
)
|
|
(1,420
|
)
|
|
(1,339
|
)
|
|
(1,508
|
)
|
The fair value of cash and cash equivalents and the commercial paper portion of short-term debt approximates their carrying value due to the short-term nature of the instruments. These items are within Level 1 of the fair value hierarchy. Fair value information for the notes due December 2016 classified as short-term debt at September 30, 2016 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
ROCKWELL COLLINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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
$15 million
, offset by a fair value adjustment to Long-term Debt (Note 8) of
$15 million
at
March 31, 2017
. At
September 30, 2016
, the Swaps were recorded within Other Assets at a fair value of
$35 million
, offset by a fair value adjustment to Long-term Debt (Note 8) of
$35 million
. Cash payments or receipts between the Company and the counterparties to the Swaps are recorded as an adjustment to interest expense.
Foreign Currency Forward Exchange Contracts
The Company transacts business in various foreign currencies which subjects the Company’s cash flows and earnings to exposure related to changes in foreign currency exchange rates. These exposures arise primarily from purchases or sales of products and services from third parties and intercompany transactions. Foreign currency forward exchange contracts provide for the purchase or sale of foreign currencies at specified future dates at specified exchange rates and are used to offset changes in the fair value of certain assets or liabilities or forecasted cash flows resulting from transactions denominated in foreign currencies. As of
March 31, 2017
and
September 30, 2016
, the Company had outstanding foreign currency forward exchange contracts with notional amounts of
$306 million
and
$384 million
, respectively. These notional values consist primarily of contracts for the European euro, British pound sterling and Japanese yen, and are stated in U.S. dollar equivalents at spot exchange rates at the respective dates.
Fair Value of Derivative Instruments
Fair values of derivative instruments in the Condensed Consolidated Statement of Financial Position as of
March 31, 2017
and
September 30, 2016
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
(in millions)
|
Classification
|
|
March 31,
2017
|
|
September 30, 2016
|
Foreign currency forward exchange contracts
|
Other current assets
|
|
$
|
11
|
|
|
$
|
11
|
|
Interest rate swaps
|
Other assets
|
|
15
|
|
|
35
|
|
Total
|
|
|
$
|
26
|
|
|
$
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Derivatives
|
(in millions)
|
Classification
|
|
March 31,
2017
|
|
September 30, 2016
|
Foreign currency forward exchange contracts
|
Other current liabilities
|
|
$
|
10
|
|
|
$
|
13
|
|
ROCKWELL COLLINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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
March 31, 2017
, there were undesignated foreign currency forward exchange contracts classified within Other current assets of
$0 million
and Other current liabilities of
$1 million
.
The effect of derivative instruments on the Condensed Consolidated Statement of Operations for the three and six months ended
March 31, 2017
and
2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss)
|
|
Amount of Gain (Loss)
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
March 31
|
|
March 31
|
(in millions)
|
Location of Gain (Loss)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Derivatives Designated as Hedging Instruments:
|
|
|
|
|
|
|
|
|
|
Fair Value Hedges
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
Interest expense
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
4
|
|
|
$
|
5
|
|
Cash Flow Hedges
|
|
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts:
|
|
|
|
|
|
|
|
|
|
Amount of gain (loss) recognized in AOCL (effective portion, before deferred tax impact)
|
AOCL
|
|
4
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
Amount of loss reclassified from AOCL into income
|
Cost of sales
|
|
(2
|
)
|
|
(3
|
)
|
|
(3
|
)
|
|
(5
|
)
|
Derivatives Not Designated as Hedging Instruments:
|
|
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts
|
Cost of sales
|
|
—
|
|
|
(2
|
)
|
|
(1
|
)
|
|
(5
|
)
|
There was no significant impact to the Company’s earnings related to the ineffective portion of any hedging instruments during the six months ended
March 31, 2017
. In addition, there was no significant impact to the Company’s earnings when a hedged firm commitment no longer qualified as a fair value hedge or when a hedged forecasted transaction no longer qualified as a cash flow hedge during the three and six months ended
March 31, 2017
.
The Company did not have any hedges with credit-risk-related contingent features or that required the posting of collateral as of
March 31, 2017
. The cash flows from derivative contracts are recorded in operating activities in the Condensed Consolidated Statement of Cash Flows.
The Company expects to 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
March 31, 2017
was
65
months.
|
|
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.
ROCKWELL COLLINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Changes in the carrying amount of accrued product warranty costs are summarized as follows:
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
March 31
|
(in millions)
|
2017
|
|
2016
|
Balance at beginning of year
|
$
|
87
|
|
|
$
|
89
|
|
Warranty costs incurred
|
(20
|
)
|
|
(21
|
)
|
Product warranty accrual
|
19
|
|
|
18
|
|
Changes in estimates for prior years
|
(5
|
)
|
|
(2
|
)
|
Balance at March 31
|
$
|
81
|
|
|
$
|
84
|
|
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
March 31, 2017
were
$224 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
March 31, 2017
, 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
March 31, 2017
, which represents management’s best estimate of the probable future cost for this site.
To date, compliance with environmental regulations and resolution of environmental claims has been accomplished without material effect on the Company’s liquidity and capital resources, competitive position or financial condition. Management believes that expenditures for environmental capital investment and remediation necessary to comply with present regulations governing environmental protection and other expenditures for the resolution of environmental claims will not have a material effect on the Company’s business or financial position.
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 three months ended December 31, 2015, the Company recorded corporate restructuring and asset impairment charges of
$45 million
. There were no corporate restructuring or asset impairment charges recorded during the six months ended
March 31, 2017
. The $45 million of charges were recorded in 2016 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Cost of Sales
|
|
Selling, General and Administrative Expenses
|
|
Total
|
Employee separation costs
|
$
|
31
|
|
|
$
|
8
|
|
|
$
|
39
|
|
Asset impairment charges
|
2
|
|
|
4
|
|
|
6
|
|
Restructuring and asset impairment charges
|
$
|
33
|
|
|
$
|
12
|
|
|
$
|
45
|
|
The employee separation costs primarily resulted from the Company's execution of a voluntary separation incentive program in response to certain challenging market conditions, particularly in business aviation. All employee separation costs were paid in 2016. Asset impairment charges primarily related to the write-down to fair market value of a corporate asset, as well as the write-off of certain long-lived assets.
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
|
|
Six Months Ended
|
|
March 31
|
|
March 31
|
(in millions)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Sales:
|
|
|
|
|
|
|
|
Commercial Systems
|
$
|
594
|
|
|
$
|
611
|
|
|
$
|
1,143
|
|
|
$
|
1,173
|
|
Government Systems
|
565
|
|
|
538
|
|
|
1,040
|
|
|
989
|
|
Information Management Services
|
183
|
|
|
162
|
|
|
352
|
|
|
318
|
|
Total sales
|
$
|
1,342
|
|
|
$
|
1,311
|
|
|
$
|
2,535
|
|
|
$
|
2,480
|
|
|
|
|
|
|
|
|
|
Segment operating earnings:
|
|
|
|
|
|
|
|
|
|
Commercial Systems
|
$
|
132
|
|
|
$
|
135
|
|
|
$
|
257
|
|
|
$
|
260
|
|
Government Systems
|
114
|
|
|
108
|
|
|
210
|
|
|
194
|
|
Information Management Services
|
36
|
|
|
29
|
|
|
66
|
|
|
53
|
|
Total segment operating earnings
|
282
|
|
|
272
|
|
|
533
|
|
|
507
|
|
|
|
|
|
|
|
|
|
Interest expense
(1)
|
(25
|
)
|
|
(17
|
)
|
|
(45
|
)
|
|
(32
|
)
|
Stock-based compensation
|
(7
|
)
|
|
(9
|
)
|
|
(13
|
)
|
|
(15
|
)
|
General corporate, net
|
(12
|
)
|
|
(11
|
)
|
|
(23
|
)
|
|
(23
|
)
|
Transaction costs for B/E Aerospace acquisition
(1)
|
(5
|
)
|
|
—
|
|
|
(16
|
)
|
|
—
|
|
Restructuring and asset impairment charges
|
—
|
|
|
—
|
|
|
—
|
|
|
(45
|
)
|
Income from continuing operations before income taxes
|
233
|
|
|
235
|
|
|
436
|
|
|
392
|
|
Income tax expense
|
(65
|
)
|
|
(63
|
)
|
|
(123
|
)
|
|
(87
|
)
|
Income from continuing operations
|
$
|
168
|
|
|
$
|
172
|
|
|
$
|
313
|
|
|
$
|
305
|
|
(1)
During the three and six months ended
March 31, 2017
, the Company incurred
$8 million
and
$11 million
, respectively, of bridge facility fees related to the B/E Aerospace acquisition. These costs are included in Interest expense. Therefore total transaction costs related to the acquisition of B/E Aerospace during the three and six months ended
March 31, 2017
were
$13 million
and
$27 million
, respectively. At
March 31, 2017
,
$2 million
of transaction costs were unpaid and included in Accounts payable on the Condensed Consolidated Statement of Financial Position.
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 six months ended
March 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
March 31
|
|
March 31
|
(in millions)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Commercial Systems sales categories:
|
|
|
|
|
|
|
|
|
Air transport aviation electronics
|
$
|
364
|
|
|
$
|
355
|
|
|
$
|
693
|
|
|
$
|
682
|
|
Business and regional aviation electronics
|
230
|
|
|
256
|
|
|
450
|
|
|
491
|
|
Commercial Systems sales
|
594
|
|
|
611
|
|
|
1,143
|
|
|
1,173
|
|
|
|
|
|
|
|
|
|
Government Systems sales categories:
|
|
|
|
|
|
|
|
Avionics
|
367
|
|
|
357
|
|
|
686
|
|
|
650
|
|
Communication and navigation
|
198
|
|
|
181
|
|
|
354
|
|
|
339
|
|
Government Systems sales
|
565
|
|
|
538
|
|
|
1,040
|
|
|
989
|
|
|
|
|
|
|
|
|
|
Information Management Services sales
|
183
|
|
|
162
|
|
|
352
|
|
|
318
|
|
|
|
|
|
|
|
|
|
Total sales
|
$
|
1,342
|
|
|
$
|
1,311
|
|
|
$
|
2,535
|
|
|
$
|
2,480
|
|
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 six months ended
March 31, 2017
sales for air transport aviation electronics include revenue from wide-body in-flight entertainment products and services of
$4 million
and
$10 million
, respectively, compared to
$10 million
and
$21 million
for the three and six months ended
March 31, 2016
.
ROCKWELL COLLINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
On April 13, 2017, the Company completed the acquisition of B/E Aerospace for
$6.6 billion
in cash and stock, plus the assumption of
$2.0 billion
in net debt. The transaction combines the Company's capabilities in flight deck avionics, cabin electronics, mission communication and navigation, simulation and training, and information management systems with B/E Aerospace's range of cabin interior products, which include seating, food and beverage preparation and storage equipment, lighting and oxygen systems, and modular galley and lavatory systems for commercial airliners and business jets.
The total gross consideration paid was
$3.5 billion
in cash and
31.2 million
shares of Rockwell Collins common stock. The cash consideration was financed through the issuance of senior unsecured notes and
$1.5 billion
borrowed under a new senior unsecured syndicated term loan facility. The Company priced
$4.65 billion
of senior unsecured notes on March 28, 2017 and settlement occurred on April 10, 2017.
The new senior unsecured notes are summarized as follows:
|
|
|
|
|
|
|
(in millions, except interest rate figures)
|
Interest Rate
|
|
Amount
|
Fixed-rate notes due:
|
|
|
|
July 2019
|
1.95%
|
|
$
|
300
|
|
March 2022
|
2.80%
|
|
1,100
|
|
March 2024
|
3.20%
|
|
950
|
|
March 2027
|
3.50%
|
|
1,300
|
|
April 2047
|
4.35%
|
|
1,000
|
|
Total
|
|
|
4,650
|
|
Less unamortized debt issuance costs and discounts
|
|
|
41
|
|
Long-term Debt, Net
|
|
|
$
|
4,609
|
|
The net proceeds of the offering were principally used to finance a portion of the B/E Aerospace acquisition and to pay related transaction fees and expenses. Approximately
$300 million
of the net proceeds were used to repay a portion of the Company's outstanding short-term commercial paper borrowings.
In connection with the issuance of the senior unsecured notes, the
$4.35 billion
364-day senior unsecured bridge term loan credit agreement described in Note 8 was terminated. In addition, the Company's
$1.2 billion
five-year senior unsecured revolving credit agreement described in Note 8 was increased to
$1.5 billion
upon completion of the acquisition.