Rockwell Collins Earnings Call Nuggets: Government R&D Downsizing and Commerical Investment

On Friday, Rockwell Collins, Inc. (NYSE:COL) reported its fourth quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Government R&D Downsizing:

Sam Pearlstein – Wells Fargo: Can you talk a little bit about this $15 million decrease in the company funded R&D in government is that disinvestment in public safety or other spending and really how long can you sustain this $29 million a quarter kind of run rate for company funded R&D?

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Clayton M. Jones – Chairman, President and CEO: Well, first let me say Sam we don’t expect that kind of a rate decline to continue in the next year I think that was a year-over-year comparable that is very explainable by three things. First of all the public safety investment which you rightly cited which was going strong at the end of last year, which we suspended as you recall at the beginning of this year and stopped investing in it so that was a part of it. Then there were two development programs of products that we’ve completed one for a Generation 5 ARC-210 which we had invested lot of our own money in to evolve that under commercial practices and the second was a new micro product for our GPS chip that is a very small GPS driver introduction which also was being developed last year which we had completed. So both of those were completions of internal development and there was as you know not a lot of investment to replace it for future programs because the direction of that market. Now if I were looking at the relative discretionary flow of government systems over FY ’13 it will be basically flat from where we ended in FY ’12. So what we’ve done, we sized our R&D down aggressively in ’12 and according to what the developments we were doing. Now we believe we can sustain that through next year.

Commercial Investment:

Yair Reiner – Oppenheimer: If we assume, you are keeping government R&D flat next year, it would imply that the investment in commercial is actually ramping up very significantly. Can you talk about that for a second?

Clayton M. Jones – Chairman, President and CEO: Sure, I’ll be glad too. First thing, if you look at a year where our overall corporate sales are actually declining slightly, and you look at all in R&D, and by that I mean company discretionary still significant amounts of customer funding from the government, although that’s declining. Then R&D that we’re deferring under our balance sheet, that if you add all that together, our R&D will be increasing 9% in FY ’13. The relative split is mainly as a result of the customer funding decline in Government Systems, it will be going down around I’d say 8% to 10%, and in the commercial funding all in will be increasing somewhere between 25% and 30%. So, we are fishing where the fish are. We are funding these growth initiatives I talked about in my opening remarks, and we’re sizing our government to where it should be with this market. I would also mention that for our Company, a great deal of the sales we anticipate in the government market will be coming from many of these commercial developments such as Pro Line Fusion that we’ll be cross-marketing.

Yair Reiner – Oppenheimer: Then just one more if I could it’s related. It doesn’t seem like R&D – lower R&D was a quarter-on-quarter benefit for margins in the Government Systems business. Was there any type of reversal of accrued comp, and if not, what really drove that 25% margin?

Patrick E. Allen – SVP & CFO: You’re right. Company funded R&D wasn’t a significant driver, it was roughly flat from third quarter to fourth quarter. There was a compensation adjustment in the fourth quarter as sales and cash flow came down from our expectations. So yeah the biggest driver sequentially on the Government Systems side would have been – I’ll call it all in employee related costs, lower headcount and the incentive compensation adjustment.

Clayton M. Jones – Chairman, President and CEO: That’s why I think about normalizing it for ’13, what we’re saying is we believe we can hold those Government operating margins at around 21% level, not at this concluding 25% level that, you’ve seen here in the fourth quarter.

Yair Reiner – Oppenheimer: Got it. Last quarter, I think you said that higher incentive comp would be about a $30 million to $40 million headwind next year. Should we think about this being a little bit higher now?

Patrick E. Allen – SVP & CFO: No, actually it’s about the same. We set our incentive compensation at 75% payout under this sequestration scenario and we were a little bit under 50% for the year this year, so I would say that $30 million have been still about right.

A Closer Look: Rockwell Collins Earnings Cheat Sheet>>

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