Rockwell Collins Earnings Call Nuggets: Government Systems and Research & Development

Rockwell Collins, Inc. (NYSE:COL) recently reported its third quarter earnings and discussed the following topics in its earnings conference call.

Government Systems

Samuel Pearlstein – Wells Fargo: I guess, my question is on defense and I’m wondering if you can talk a little bit more about Government Systems in terms of why you believe this is the low watermark in terms of what gets better, and related to it, in the past, at some of the conferences, you’ve talked about a down 5% to 10% next year. Now that you’re going to end this year at a higher level, is that still how you’re thinking about next year?

Clayton M. Jones – Chairman, President and CEO: Well, first thing, the immediate fourth quarter is going to be better because of that 11% down I’d say about $25 million of it was surely order timing that didn’t come in as we’d expected it to this third quarter that we’ve already got the order and it is going to slip over into fourth quarter. If you are to normalize that it’s been more like an equitable (77). So we have a little benefit actually from the delay that’s going to help us next quarter and that’s what gives me confidence there. Relative to next year obviously it’s way too early to call that because we still have a lot yet to learn and know about what the Pentagon is doing relative to sequestration. But both houses of Congress are going to do to relative to 15 budget. But I think all in, and I should say heck we called fourth quarter and I think that’s pretty aggressive but I’d say all in what we do is we look at next year and I think the defense will still be down. But it won’t be down at the level we saw this year. I really do believe that most of the lower level supply chain folks Tier 1, Tier 2 have taken the brunt of the cut so far. And eventually we are going to see some of the major OEM cuts come through to resolve the budget they have there. No question some of that will trickle down to us. But I don’t think it will be any worse than it was this year even if you calendarize it through the year. The second thing that gives me even more confidence is remembering this year of transition. We had probably about $100 million of headwind just from programs that are transitioning. Those programs so far all still alive and seem to enjoy a lot of support and they’ll be moving from this transitionary period of finishing development and moving into production and we’ll see actually a tailwind for some portion of that. So as I kind of look out to next year and frame it. I see some uppers, I see some natural downers and so we’ve estimated sequestration I think, as accurate as anybody has this year. And as we look at sort of what we think the general environment is for next year and what it’s likely to be, that is the — I will say, the macro view I’m basing that statement on. So yes, I think Government System will be down next year, not as much as it was down this year.

Research & Development

Myles Walton – Deutsche Bank: Could you talk a bit about R&D at a high level? Are we at the tail end of a long, long investment cycle and this is kind of the benefits we’re going to reap or is there something related to timing here? Because if I look just isolated to company spend, it looks like the full year could be down $40 million year-on-year, $35 million to $40 million year-on-year, which is obviously better than you were anticipating at the start of the year. So is this a headwind for ’14 or is this more efficient use of R&D?

Clayton M. Jones – Chairman, President and CEO: Well, I got some guys scrambling around the room to look and see if we can confirm or deny your estimate on the year. But while they’re doing that, let me say that in my view, I think it’s just a timing issue. Specifically, what we’re seeing this quarter is a sort of a wind down of I’ll say the product line, Pro Line Fusion work. It will still have a lot of R&D going in the application of Pro Line Fusion to the roughly 15 platforms we’re working on. But that’s a good portion of what the company funding is down. However, what we’re seeing is a ramp-up of the Max funding. But remember, that’s all deferred. And so total R&D spend this quarter actually went up, but it’s just in 2 different buckets because of the reduction in this company discretionary or expensed R&D and the deferred R&D that’s going into the new projects. I believe when you look at R&D all in, which is what we do, R&D will continue to be flat or a little bit increased, if the Company’s successful. If you look at the mix of R&D, you are seeing a decline in the discretionary portion and an increase this year and next in the deferred portion.

Patrick E. Allen – SVP & CFO: The other thing I’d add, Miles, is as we look kind of sequentially quarter-to-quarter, we are expecting to see an uptick in R&D on the Commercial side of the business, just really due to the timing of certain programs.

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