Rockwell Collins Earnings Call Nuggets: Incentive Comp Payments and Cost-cutting

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

Incentive Comp Payments

Carter Copeland – Barclays Capital: A quick one on the incentive comp and tax comment you just made Patrick. Can you tell me exactly how the structure that works, so, is the incentive comp payment based on EPS targets, because you said, I think you said $0.15 of the $0.30 benefit was going to get eaten up by higher incentive comp payments, that sounded like what you said. So, can you clarify how – what structure of those payments are?

Patrick E. Allen – SVP & CFO: Sure, let me just going to review the bidding. When we setup the incentive compensation program for this year, we actually setup it at 75% of the target. Usually, we set it about 100% and that target is based upon really four factors; sales, EPS, cash flow and I’ll say board evaluation of our strategic goals. The two factors that this R&D tax credit impacts positively are EPS and cash flow. And although, we haven’t changed our cash flow guidance, we provided for that improvement in that $0.15. So, what you are seeing is actually an increase on our incentive compensation payment from that 75% level closer to actually to the more normal 100% and that will be booked predominately in our second quarter.

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Clayton M. Jones – Chairman, President and CEO: But let me add to that Carter also when we structure those four components, we weight each one of them, and the heaviest weighting that we put on each of those factors is predominately EPS and cash flow consistent with our view of turbulence in the market that these are things we can more likely control and our people control through their actions, as opposed to the sales volume, which obviously is not factored into this. So, that’s why you get an apparent disproportionate share with this tax windfall that we’ve received.

Cost-cutting

David Strauss – UBS: Clay, in Government Systems, the business when you look back two, three years ago, it looks like the business is down about 25% or so when you look at top line and you look at the operating income psyche. Can you give us a sense on the cost cutting side, how much you’ve taken headcount down in that business and what else you think you can do in that business to take the cost structure down, if we see additional pressure even beyond what we expect of sequestration?

Clayton M. Jones – Chairman, President and CEO: David, I don’t think I have at my command right now the exact number of the personnel changes over that period of time, so I can’t give you that number. But what I can say that the major components of reductions have been personnel. They’ve also been reductions of research and development which we’ve been very open about as we’ve not sort of needed that, and then – I guess the third case is some restructuring actions that get to the at least a contribution to the part of the reduction which are some facility reductions and some consolidations that we’re doing most notably in our European operations, a lot of which goes into Government Systems. So, I’d say those are the three big levers that we’ve used in the past and we’ve been able to both quickly and I’d say proportionately reduce that in Government Systems, and more effectively in Government Systems because a great deal of those revenue are non-recurring engineering or development cost that goes into the customer funded R&D line which is also booked as sales in some profitability. So if you look back over the last two years I think your number in reduction is about right, but a great deal of that has been the elimination of development programs I think we’ve had 8 or 9 programs canceled a majority of which of those have been development programs and therefore you’re able to both anticipate the stoppage by the government and then make your headcount adjustments (attending) to that. Second part of your question is how much more of that can we do. I think we’ve got a good bit more of that on the personal side if we have to, a lot of that has already been anticipated in the restructuring action that we took in the fourth quarter of last year and it’s in fact what comes out of the Congressional negotiations is even deeper than what we’ve accommodated in sequestration. We certainly have shown ability to make that move and will do what we have to do to balance that business to the realities of the world.

A Closer Look: Rockwell Collins Earnings Cheat Sheet>>