Rockwell Collins reports 48% increase in third quarter earnings per share

CEDAR RAPIDS, Iowa (July 27, 2018) - Rockwell Collins, Inc. (NYSE: COL) today reported sales for the third quarter of fiscal year 2018 of $2.208 billion, a 5% increase from the same period in fiscal year 2017. Third quarter fiscal year 2018 earnings per share were $1.66 compared to $1.12 in the prior year's third quarter. Earnings per share in the third quarter of fiscal year 2018 includes a 23 cent charge relating to the settlement of a contract matter and the write-down to fair value of assets associated with an engineered components business classified as held for sale as of June 30, 2018. In addition, earnings per share in the third quarter of fiscal year 2018 includes a 42 cent discrete benefit from the enactment of the Tax Cuts and Jobs Act.

Adjusted earnings per share for the third quarter of fiscal year 2018 was $1.73 compared to $1.64 in the prior year's third quarter (see the supplemental schedule in this press release for a reconciliation between GAAP earnings per share and adjusted earnings per share).

"In addition to the solid business performance for the quarter, we have spent significant energy preparing for the upcoming merger with United Technologies Corporation," said Rockwell Collins Chief Executive Officer and President, Kelly Ortberg. "I'm confident that those efforts, along with strong market conditions, will allow us to hit the ground running at the anticipated close."

Following is a discussion of fiscal year 2018 third quarter sales and earnings for each business segment.

Commercial Systems

Commercial Systems, which provides aviation electronics systems, products and services to air transport, business and regional aircraft manufacturers and airlines worldwide, achieved 2018 third quarter results as summarized below.

• Original equipment sales increased due to higher air transport narrow-body and business jet product deliveries, partially offset by lower legacy wide-body production rates and customer-funded development program revenues.
• Aftermarket sales decreased due to lower used aircraft equipment sales of $22 million, partially offset by higher service and support and regulatory mandate upgrade activity.
• Commercial Systems operating earnings increased $4 million and operating margin increased 20 basis points over the prior year due to increased earnings from higher sales volume and favorable sales mix, as higher margin equipment sales increased and lower margin customer-funded development revenues and used equipment sales decreased, partially offset by higher company-funded R&D expense and higher pre-production engineering amortization.

Interior Systems

Our Interior Systems segment was created with the acquisition of B/E Aerospace on April 13, 2017. Interior Systems supplies a comprehensive portfolio of cabin interior products and services to aircraft manufacturers and airlines worldwide. Beginning in 2018, thermal and electronic systems product lines previously included in Interior products and services within the Interior Systems segment are now being reported in the Government Systems segment. See the supplemental schedule included in this press release for revised fiscal year 2017 quarterly sales that conform to the current presentation. Results from the third quarter of 2018 are summarized below.

• Interior products and services sales increased $14 million due primarily to the benefit of a full quarter of sales in the current year, partially offset by lower original equipment galley deliveries and the absence of oxygen equipment retrofit deliveries in the prior year.
• Aircraft seating sales decreased $2 million due to the timing of linefit seating sales partially offset by the benefit of a full quarter of sales in the current year.
• Operating earnings increased $34 million and operating margin increased 500 basis points over the prior year. Operating earnings and margin were favorably impacted by:
  • The absence of a $44 million inventory fair value purchase accounting adjustment in the prior year
  • Cost synergy savings
  • Favorable foreign currency exchange rates
  • The benefit of higher sales volume

The above items were partially offset by a $19 million increase to certain product quality reserves and an $11 million increase in intangible asset amortization expense.

Government Systems

Government Systems provides a broad range of electronic products, systems and services to customers including the U.S. Department of Defense, other government agencies, civil agencies, defense contractors and ministries of defense around the world. Beginning in 2018, the product lines referenced above previously included in the Interior Systems segment are now being reported in Communication and navigation within the Government Systems segment. See the supplemental schedule included in this press release for revised fiscal year 2017 quarterly sales that conform to the current presentation. Results from the third quarter of 2018 are summarized below.

• Avionics sales increased $53 million due primarily to higher development program revenues, higher deliveries for various fighter platforms, and higher simulation and training sales.
• Communication and navigation sales increased $25 million due to higher thermal and electronics sales and higher test and training range sales, partially offset by lower legacy communication product deliveries.
• Operating earnings decreased $1 million and operating margin declined 260 basis points from the prior year due to higher company-funded R&D expense. In addition, increased earnings from higher sales volume was unfavorably impacted by lower margins on higher development program revenues and thermal and electronic systems sales.

Information Management Services

Information Management Services (IMS) provides communication services, systems integration and security solutions across the aviation, airport, rail and nuclear security markets.  Results from the third quarter of 2018 are summarized below.

• IMS sales increased due to 7% growth in aviation related revenues driven by increased usage of connectivity services. In addition, non-aviation revenues increased 7% as higher airport program revenues were partially offset by the completion of nuclear security mandate revenues.
• IMS operating earnings and operating margin declined due to the absence of the favorable resolution of certain international business jet support services claims in the prior year as well as an increase in the allowance for doubtful accounts related to specific customer collection risks in the current year, partially offset by increased earnings from higher sales volume.

Corporate and Financial Highlights

Income Taxes

The company's effective income tax rate on GAAP earnings was (2.2)% for the third quarter of fiscal year 2018 compared to a rate of 19.0% for the same period last year. The lower current year effective income tax rate was primarily due to a $70 million reduction in deferred tax liabilities as a result of the enactment of the Tax Cuts and Jobs Act ("the Act"), including the impact of a $387 million discretionary pension contribution made in July of 2018.  In addition, the current year effective income tax rate was lower due to a lower U.S. Federal statutory tax rate under the Act, as well as benefits from the jurisdictional mix of income as a result of the B/E Aerospace acquisition.

The company's effective income tax rate on adjusted earnings was 20.7% in the third quarter of 2018, compared to 27.1% in the same period in the prior year. See the supplemental schedule included in this press release for a reconciliation between GAAP earnings and adjusted earnings.

Cash Flow

Cash provided by operating activities was $196 million for the first nine months of fiscal year 2018, compared to cash provided by operating activities of $416 million in the first nine months of fiscal year 2017. The decrease in cash provided operating activities was due primarily to higher payments for production inventory and other operating costs, as well as higher employee incentive payments, partially offset by higher cash receipts from customers and lower income tax payments.

The Company paid a dividend on its common stock of 33 cent per share, or $54 million, in the third quarter of 2018.

Conference Call

In light of the pending acquisition of Rockwell Collins by United Technologies Corporation ("UTC"), the Company will not hold a conference call for its quarterly results for the third quarter of fiscal year 2018. The Company plans to file its Form 10-Q for the third quarter with the SEC on or about July 27, 2018.

Non-GAAP Financial Information

See the supplemental schedule included in this press release for a reconciliation of non-GAAP measures including adjusted earnings per share, adjusted income, and effective income tax rate on adjusted earnings.

Business Highlights

U.S. Air Force selected Rockwell Collins for expanded avionics support on KC-135s

Rockwell Collins was awarded multiple repair contracts by the U.S. Air Force to support Global Air Traffic Management components on the entire KC-135 tanker fleet.

Los Angeles County Sheriff’s Department selected UrgentLink® for disaster communications

Rockwell Collins has deployed its UrgentLink® disaster communications network to the Los Angeles (LA) County area for the LA County Sheriff’s Department to provide a countywide backup communications system for use during man-made or natural disasters.

Australian Army extended contract with Rockwell Collins for avionics support on CH-47F Chinooks

Rockwell Collins was selected by the Australian Army to provide extended avionics support for its fleet of CH-47F Chinook helicopters through a performance-based logistics contract.

Rockwell Collins awarded contract from CAE to provide training display for CC-295 full-flight simulator

Rockwell Collins was selected by CAE to provide its Panorama™ collimated display for the CC-295 full-flight simulator that CAE will deliver in support of the Royal Canadian Air Force’s Fixed-Wing Search and Rescue program.

Cascade Aerospace selects Rockwell Collins weather radar for Royal Canadian Air Force C-130H fleet

Rockwell Collins was selected by Cascade Aerospace to provide a modern weather radar for the Royal Canadian Air Force C-130H fleet. The upgrade will provide an enhanced level of weather threat detection to help RCAF pilots perform unique search and rescue missions using the C-130.

Rockwell Collins signed agreement with Comlux to provide complete solutions for VIP aircraft

Rockwell Collins and Comlux signed a general terms agreement in which Rockwell Collins will provide its VIP customers with a comprehensive product portfolio, including avionics, cabin management, content and entertainment options, seating, lighting and galley products, as well as ARINCDirectSM connectivity and flight services.

Rockwell Collins’ expanded cabin portfolio selected for first Airbus ACJ320neo VIP aircraft

Switzerland-based AMAC Aerospace has selected a full suite of Rockwell Collins’ cabin products for the world’s first Airbus ACJ320neo VIP aircraft.

TRU Simulation + Training selected Rockwell Collins to provide integrated visual systems on its commercial full flight simulators

TRU Simulation + Training selected Rockwell Collins to provide its integrated visual systems for 15 systems over the next three years for several of TRU’s commercial full flight simulator clients for commercial airlines and airframe manufacturers.

About Rockwell Collins

Rockwell Collins (NYSE: COL) is a leader in aviation and high-integrity solutions for commercial and military customers around the world. Every day we help pilots safely and reliably navigate to the far corners of the earth; keep warfighters aware and informed in battle; deliver millions of messages for airlines and airports; and help passengers stay connected and comfortable throughout their journey. As experts in flight deck avionics, cabin electronics, cabin interiors, information management, mission communications, and simulation and training, we offer a comprehensive portfolio of products and services that can transform our customers' futures. To find out more, please visit www.rockwellcollins.com.

Safe Harbor Statement

This press release contains statements, including statements regarding certain projections, business trends and the proposed acquisition of Rockwell Collins by United Technologies that are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected as a result of certain risks and uncertainties, including but not limited to: the financial condition of our customers and suppliers, including bankruptcies; the health of the global economy, including potential deterioration in economic and financial market conditions; adjustments to the commercial OEM production rates and the aftermarket; the impacts of natural disasters and pandemics, including operational disruption, potential supply shortages and other economic impacts; cybersecurity threats, including the potential misappropriation of assets or sensitive information, corruption of data or operational disruption; delays related to the award of domestic and international contracts; delays in customer programs, including new aircraft programs entering service later than anticipated; the continued support for military transformation and modernization programs; potential impact of volatility in oil prices, currency exchange rates or interest rates on the commercial aerospace industry or our business; the impact of terrorist events, regional conflicts, or governmental sanctions on other nations on the commercial aerospace industry; changes in domestic and foreign government spending, budgetary, procurement and trade policies adverse to our businesses; market acceptance of our new and existing technologies, products and services; reliability of and customer satisfaction with our products and services; potential unavailability of our mission-critical data and voice communication networks; unfavorable outcomes on or potential cancellation or restructuring of contracts, orders or program priorities by our customers; recruitment and retention of qualified personnel; regulatory restrictions on air travel due to environmental concerns; effective negotiation of collective bargaining agreements by us, our customers, and our suppliers; performance of our customers and subcontractors; risks inherent in development and fixed-price contracts, particularly the risk of cost overruns; risk of significant reduction to air travel or aircraft capacity beyond our forecasts; our ability to execute to internal performance plans such as restructuring activities, productivity and quality improvements and cost reduction initiatives; achievement of B/E Aerospace integration and synergy plans; continuing to maintain our planned effective tax rates; our ability to develop contract compliant systems and products on schedule and within anticipated cost estimates; risk of fines and penalties related to noncompliance with laws and regulations including compliance requirements associated with U.S. Government work, export control, anticorruption and environmental regulations; risk of asset impairments; our ability to win new business and convert those orders to sales within the fiscal year in accordance with our annual operating plan; the uncertainties of the outcome of lawsuits, claims and legal proceedings; the ability of Rockwell Collins and United Technologies to receive the required regulatory approvals for the proposed acquisition of Rockwell Collins by United Technologies (and the risk that such approvals may result in the imposition of conditions that could adversely affect the combined company or the expected benefits of the transaction) and to satisfy the other conditions to the closing of the transaction on a timely basis or at all; the occurrence of events that may give rise to a right of one or both of the parties to terminate the merger agreement; negative effects of the announcement or the consummation of the transaction on the market price of United Technologies and/or Rockwell Collins common stock and/or on their respective businesses, financial conditions, results of operations and financial performance; risks relating to the value of United Technologies’s shares to be issued in the transaction, significant transaction costs and/or unknown liabilities; the possibility that the anticipated benefits from the proposed transaction cannot be realized in full or at all or may take longer to realize than expected; risks associated with third party contracts containing consent and/or other provisions that may be triggered by the proposed transaction; risks associated with transaction-related litigation; the possibility that costs or difficulties related to the integration of Rockwell Collins’ operations with those of United Technologies will be greater than expected; the outcome of legally required consultation with employees, their works councils or other employee representatives; and the ability of Rockwell Collins and the combined company to retain and hire key personnel. There can be no assurance that the proposed acquisition will in fact be consummated in the manner described or at all. For additional information on identifying factors that may cause actual results to vary materially from those stated in forward-looking statements, see the reports of United Technologies and Rockwell Collins on forms 10-K, 10-Q and 8-K filed with or furnished to the SEC from time to time. These forward-looking statements are made only as of the date hereof.

Additional Information

In connection with the proposed transaction, United Technologies has filed a registration statement on Form S-4 (File No. 333-220883), which includes a prospectus of United Technologies and a proxy statement of Rockwell Collins (the "proxy statement/prospectus"), and each party will file other documents regarding the proposed transaction with the SEC. The proxy statement/prospectus was declared effective by the SEC and was mailed to Rockwell Collins shareowners. INVESTORS AND SECURITY HOLDERS ARE URGED TO READ THE PROXY STATEMENT/PROSPECTUS (INCLUDING ALL AMENDMENTS AND SUPPLEMENTS FILED THERETO) AND OTHER RELEVANT DOCUMENTS FILED WITH THE SEC WHEN THEY BECOME AVAILABLE, BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION. Investors and security holders may obtain the proxy statement/prospectus free of charge from the SEC's website or from United Technologies or Rockwell Collins. The documents filed by United Technologies with the SEC may be obtained free of charge at United Technologies' website at www.utc.com or at the SEC's website at www.sec.gov. These documents may also be obtained free of charge from United Technologies by requesting them by mail at UTC Corporate Secretary, 10 Farm Springs Road, Farmington, CT, 06032, by telephone at 1-860-728-7870 or by email at corpsec@corphq.utc.com. The documents filed by Rockwell Collins with the SEC may be obtained free of charge at Rockwell Collins' website at www.rockwellcollins.com or at the SEC's website at www.sec.gov. These documents may also be obtained free of charge from Rockwell Collins by requesting them by mail at Investor Relations, 400 Collins Road NE, Cedar Rapids, Iowa 52498, or by telephone at 1-319-295-7575.

No Offer or Solicitation

This communication shall not constitute an offer to sell or the solicitation of an offer to buy any securities, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. No offering of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the U.S. Securities Act of 1933, as amended.

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