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| COL > SEC Filings for COL > Form 10-Q on 30-Jul-2009 | All Recent SEC Filings |
30-Jul-2009
Quarterly Report
The following management discussion and analysis is based on financial results for the three and nine months ended June 30, 2009 and 2008 and should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto in Item 1 of Part I of this quarterly report.
Three Months Ended June 30, 2009 and 2008
Sales
(dollars in millions) Three Months Ended
June 30
2009 2008
Total sales $ 1,084 $ 1,194
Percent (decrease) (9 )%
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Total sales for the three months ended June 30, 2009 decreased 9 percent to $1,084 million compared to the three months ended June 30, 2008. Commercial Systems sales decreased 26 percent partially offset by Government Systems sales growth of 7 percent. Incremental sales from the May 29, 2009 acquisition of DataPath, Inc. (DataPath) and the November 24, 2008 acquisition of SEOS Group Limited (SEOS) contributed a total of $28 million, or 2 percentage points of revenue growth. See the following operating segment sections for further discussion of sales for the three months ended June 30, 2009 and 2008.
Net Income and Diluted Earnings Per Share
(dollars in millions, except per share amounts) Three Months Ended
June 30
2009 2008
Net income $ 145 $ 174
Net income as a percent of sales 13.4 % 14.6 %
Diluted earnings per share $ 0.91 $ 1.07
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Net income for the three months ended June 30, 2009 decreased 17 percent to $145 million, or 13.4 percent of sales, from net income of $174 million, or 14.6 percent of sales, for the three months ended June 30, 2008. The decrease in net income was primarily the result of lower Commercial Systems sales volume and a higher effective income tax rate which were partially offset by lower employee incentive compensation costs, lower research and development costs, and lower selling, general and administrative costs. Diluted earnings per share was $0.91 for the three months ended June 30, 2009 compared to earnings per share of $1.07 for the three months ended June 30, 2008 as lower net income was partially offset by the positive impact of our share repurchase program.
Government Systems' Financial Results
Government Systems' Sales
The following table presents Government Systems' sales by product category:
(dollars in millions) Three Months Ended
June 30
2009 2008
Airborne solutions $ 452 $ 429
Surface solutions 199 178
Total $ 651 $ 607
Percent increase 7 %
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Airborne solutions' sales increased $23 million, or 5 percent, for the three months ended June 30, 2009 compared to the three months ended June 30, 2008. Incremental sales from the acquisition of SEOS contributed $4 million, or 1 percentage point of the overall revenue growth. The 4 percent organic sales increase was due primarily to higher sales from simulation and training solutions, higher production sales of head-down displays for F-15 aircraft, and higher development program revenues on the Common Range Integrated Instrumentation System (CRIIS) program, partially offset by lower revenues from international C-130 upgrade programs.
Surface solutions' sales increased $21 million, or 12 percent, for the three months ended June 30, 2009 compared to the three months ended June 30, 2008. Incremental sales from the DataPath acquisition contributed $23 million, or 13 percentage points of revenue growth. The 1 percent decrease in organic sales was due primarily to lower sales for the Defense Advanced GPS Receiver (DAGR) and Ground-Based GPS Receiver Application Module (GB-GRAM) programs, partially offset by higher development program sales from the Joint Precision Approach and Landing System (JPALS) program.
Government Systems' Segment Operating Earnings
(dollars in millions) Three Months Ended
June 30
2009 2008
Segment operating earnings $ 158 $ 131
Percent of sales 24.3 % 21.6 %
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Government Systems' operating earnings increased 21 percent to $158 million, or 24.3 percent of sales, for the three months ended June 30, 2009 compared to operating earnings of $131 million, or 21.6 percent of sales, for the same period a year ago. The increase in operating earnings and operating margin is primarily attributed to lower employee incentive compensation costs and lower selling, general and administrative expenses.
Commercial Systems' Financial Results
Commercial Systems' Sales
The following table presents Commercial Systems' sales by product category:
(dollars in millions) Three Months Ended
June 30
2009 2008
Wide-body in-flight entertainment products $ 23 $ 23
All other air transport aviation electronics 221 283
Total air transport aviation electronics 244 306
Business and regional aviation electronics 189 281
Total $ 433 $ 587
Percent (decrease) (26 )%
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Total air transport aviation electronics sales decreased $62 million, or 20 percent, for the three months ended June 30, 2009 compared to the three months ended June 30, 2008. This decrease was due to a decline in Boeing 787 related revenues, lower order volume due to Boeing's post-labor strike inventory rationalization, reduced sales of airline selectable equipment as a result of production deferrals and rescheduling at the original equipment manufacturers (OEMs), as well as lower sales from service and support.
Wide-body in-flight entertainment products (Wide-body IFE) relate to sales of twin-aisle IFE products and systems to customers in the air transport aviation electronics market. In September 2005 we announced our strategic decision to shift research and development resources away from traditional IFE systems for next generation wide-body aircraft. We continue to execute on Wide-body IFE contracts and plan to support our existing customer base, which includes on-going service and support activities. All periods have been presented consistent with the above description.
Business and regional aviation electronics sales decreased $92 million, or 33 percent, for the three months ended June 30, 2009 compared to the same period in the prior year. Original equipment sales declined due to business jet OEM production rate cuts as the ramifications of global macro-economic factors continue to impact the business jet market. In addition, aftermarket sales declined due to decreases in business aircraft utilization.
The following table presents Commercial Systems' sales based on the type of
product or service:
(dollars in millions)
Three Months Ended
June 30
2009 2008
Original equipment $ 211 $ 325
Aftermarket 199 239
Wide-body in-flight entertainment products 23 23
Total $ 433 $ 587
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Original equipment sales decreased $114 million, or 35 percent, for the three months ended June 30, 2009 compared to the same period in the prior year. This sales decline is attributed to reduced production rates at business jet OEMs as a result of macro-economic factors impacting the global economy, a decline in Boeing 787 related revenues, lower order volume due to Boeing's post-labor strike inventory rationalization, and lower sales of airline selectable equipment as a result of production deferrals and rescheduling at the OEMs.
Aftermarket sales decreased $40 million, or 17 percent, for the three months ended June 30, 2009 compared to the three months ended June 30, 2008. This decrease is due to lower sales from service and support, Boeing 787 simulator avionics, and lower aftermarket hardware sales.
Commercial Systems' Segment Operating Earnings
(dollars in millions) Three Months Ended
June 30
2009 2008
Segment operating earnings $ 75 $ 139
Percent of sales 17.3 % 23.7 %
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Commercial Systems' operating earnings decreased 46 percent to $75 million, or 17.3 percent of sales, for the three months ended June 30, 2009 compared to operating earnings of $139 million, or 23.7 percent of sales for the three months ended June 30, 2008. The decrease in operating earnings and operating margin was primarily due to reduced sales volume, partially offset by lower employee incentive compensation and research and development costs, as well as reduced employee headcount and other cost saving initiatives.
Nine Months Ended June 30, 2009 and 2008
Sales
(dollars in millions) Nine Months Ended
June 30
2009 2008
Total sales $ 3,280 $ 3,492
Percent (decrease) (6 )%
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Total sales for the nine months ended June 30, 2009 decreased 6 percent to $3,280 million compared to the nine months ended June 30, 2008. Commercial Systems sales decreased 18 percent partially offset by Government Systems sales growth of 6 percent. Incremental sales from the May 29, 2009 acquisition of DataPath, the November 24, 2008 acquisition of SEOS and the April 4, 2008 acquisition of Athena Technologies, Inc. (Athena) contributed a total of $49 million, or 1 percentage point of revenue growth. See the following operating segment sections for further discussion of sales for the nine months ended June 30, 2009 and 2008.
Net Income and Diluted Earnings Per Share
(dollars in millions, except per share amounts) Nine Months Ended
June 30
2009 2008
Net income $ 460 $ 496
Net income as a percent of sales 14.0 % 14.2 %
Diluted earnings per share $ 2.89 $ 3.03
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Net income for the nine months ended June 30, 2009 decreased 7 percent to $460 million, or 14.0 percent of sales, from net income of $496 million, or 14.2 percent of sales, for the nine months ended June 30, 2008. The decrease in net income was primarily the result of lower Commercial Systems sales volume and a higher effective income tax rate, partially offset by lower employee incentive compensation costs, lower research and development costs, and lower selling, general and administrative expenses. Diluted earnings per share decreased to $2.89 for the nine months ended June 30, 2009 from $3.03 for the nine months ended June 30, 2008 primarily due to lower net income partially offset by the positive impact of our share repurchase program.
Government Systems' Financial Results
Government Systems' Sales
(dollars in millions) Nine Months Ended
June 30
2009 2008
Airborne solutions $ 1,286 $ 1,203
Surface solutions 552 527
Total $ 1,838 $ 1,730
Percent increase 6 %
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Airborne solutions' sales increased $83 million, or 7 percent, for the nine months ended June 30, 2009 compared to the nine months ended June 30, 2008. Incremental sales from the acquisitions of Athena and SEOS contributed a total of $22 million, or 2 percentage points of the overall revenue growth. The 5 percent organic sales increase was due primarily to higher sales from simulation and training solutions, higher development program revenues on the Common Range Integrated Instrumentation System (CRIIS) program, and higher production sales on the Eurofighter Tranche 2 program, partially offset by lower revenues from international C-130 upgrade programs.
Surface solutions' sales increased $25 million, or 5 percent, for the nine months ended June 30, 2009 compared to the nine months ended June 30, 2008. Incremental sales from the DataPath acquisition contributed a total of $23 million, or 4 percentage points of the overall revenue growth. The 1 percent organic sales increase was due to higher development program sales from the Future Combat Systems (FCS) and the Joint Precision Approach and Landing System (JPALS) programs, partially offset by lower data link systems and Defense Advanced GPS Receiver (DAGR) program revenues.
Government Systems' Segment Operating Earnings
(dollars in millions) Nine Months Ended
June 30
2009 2008
Segment operating earnings $ 443 $ 361
Percent of sales 24.1 % 20.9 %
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Government Systems' operating earnings increased $82 million, or 23 percent, for the nine months ended June 30, 2009, compared to the same period a year ago. The increase in operating earnings and operating margin is primarily attributed to lower employee incentive compensation costs, incremental margin on higher sales, and lower research and development costs.
Commercial Systems' Financial Results
Commercial Systems' Sales
The following table represents Commercial Systems' sales by product category:
(dollars in millions)
Nine Months Ended
June 30
2009 2008
Wide-body in-flight entertainment products $ 61 $ 99
All other air transport aviation electronics 662 828
Total air transport aviation electronics 723 927
Business and regional aviation electronics 719 835
Total $ 1,442 $ 1,762
Percent (decrease) (18 )%
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Total air transport aviation electronics sales decreased $204 million, or 22 percent, for the nine months ended June 30, 2009 compared to the nine months ended June 30, 2008. Excluding the $38 million decrease in Wide-body IFE revenues, air transport aviation electronics sales decreased $166 million, or 20 percent, for the nine months ended June 30, 2009 compared to the nine months ended June 30, 2008. This decrease was due to lower OEM sales adversely impacted by Boeing's labor strike, a decline in Boeing 787 related revenues, lower service and support revenue, and lower hardware aftermarket revenues.
Business and regional aviation electronics sales decreased $116 million, or 14 percent, for the nine months ended June 30, 2009 compared to the nine months ended June 30, 2008. Original equipment sales declined due to business jet OEM production rate cuts as the ramifications of global macro-economic factors continue to impact the business jet market. In addition, aftermarket sales declined due to decreases in business aircraft utilization.
The following table represents Commercial Systems' sales based on the type of
product or service:
(dollars in millions)
Nine Months Ended
June 30
2009 2008
Original equipment $ 750 $ 936
Aftermarket 631 727
Wide-body in-flight entertainment products 61 99
Total $ 1,442 $ 1,762
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Original equipment sales decreased $186 million, or 20 percent, for the nine months ended June 30, 2009 compared to the nine months ended June 30, 2008. This sales decline is attributed to decreased business jet delivery rates as a result of macro-economic factors impacting the global economy, Boeing's labor strike, and reductions in Boeing 787 related sales.
Aftermarket sales decreased $96 million, or 13 percent, for the nine months ended June 30, 2009 compared to the nine months ended June 30, 2008. This decline is due to lower sales from service and support, Boeing 787 simulator avionics, and lower hardware retrofits.
Commercial Systems' Segment Operating Earnings
(dollars in millions) Nine Months Ended
June 30
2009 2008
Segment operating earnings $ 282 $ 416
Percent of sales 19.6 % 23.6 %
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Commercial Systems' operating earnings decreased 32 percent to $282 million, or 19.6 percent of sales, for the nine months ended June 30, 2009 compared to operating earnings of $416 million, or 23.6 percent of sales, for the nine months ended June 30, 2008. The decrease in operating earnings and operating margin was due primarily to lower sales volume, the absence of favorable adjustments related to contract option exercises and the absence of royalty income which both benefited the nine months ended June 30, 2008, partially offset by lower employee incentive compensation and research and development costs.
Retirement Benefits
Net benefit expense / (income) for pension benefits and other retirement
benefits are as follows:
(dollars in millions)
Three Months Ended Nine Months Ended
June 30 June 30
2009 2008 2009 2008
Pension benefits $ (5 ) $ - $ (13 ) $ (2 )
Other retirement benefits 1 (1 ) 3 (2 )
Net benefit income $ (4 ) $ (1 ) $ (10 ) $ (4 )
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Pension Benefits
The cost of providing retirement benefits under a defined benefit structure has
become increasingly uncertain due to changes in discount rates and the
volatility in the stock market. As a result, we amended our U.S. qualified and
non-qualified pension plans in 2003 covering all salary and hourly employees not
covered by collective bargaining agreements to discontinue benefit accruals for
salary increases and services rendered after September 30, 2006 (the Pension
Amendment). Concurrently, we replaced this benefit by supplementing our existing
defined contribution savings plan to include an additional company contribution
effective October 1, 2006. We believe this benefit structure achieves our
objective of providing benefits that are valued by our employees and provides
more consistency and predictability in estimating future costs and funding
requirements over the long term.
Defined benefit pension income for the full year 2009 is expected to be $17 million compared to defined benefit pension income of $3 million for the full year 2008. The change is due primarily to the favorable impact of an increase in the defined benefit pension plan valuation discount rate from 6.6 percent in 2008 to 7.6 percent in 2009 used to measure our pension expense.
Our objective with respect to the funding of our pension plans is to provide adequate assets for the payment of future benefits. Pursuant to this objective, we will fund our pension plans as required by governmental regulations and make discretionary contributions as conditions warrant. We made a discretionary contribution of $75 million to our U.S. qualified pension plan in January 2009. We do not anticipate being required to make further contributions to our U.S. qualified pension plan by governmental regulations in fiscal year 2009. Contributions to our international plans and our U.S. non-qualified plan are expected to total $14 million in fiscal year 2009. For the nine months ended June 30, 2009 and 2008, we made contributions to our international plans and our U.S. non-qualified pension plan of $12 million and $11 million, respectively.
The recent turmoil in the financial markets has had a significant impact on the funded status of our pension plans. Our pension expense (income) is significantly impacted by the market performance of our pension plan assets, our expected long-term return on plan assets, and the discount rates used to determine our pension obligations. If our pension plan assets do not achieve positive rates of return consistent with our long-term plan asset return assumptions or if discount rates trend down, we may experience unfavorable changes in our pension expense and could be required to make significant contributions to our U.S. qualified pension plan. While we believe the actions taken under the Pension Amendment have had a positive effect on pension expense (income) and future funding requirements, our plan assets and discount rates are significantly impacted by changes in the financial markets.
Other Retirement Benefits
We expect Other Retirement Benefits expense of approximately $4 million for the
full year 2009 compared to the full year 2008 income of $2 million, primarily
due to the elimination of favorable amortization for a plan amendment that will
no longer benefit other retirement benefits expense (income).
Income Taxes
At the end of each interim reporting period we make 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. The difference between our effective income tax rate and the statutory income tax rate is primarily the result of the tax benefits derived from the Federal Research and Development Tax Credit (Federal R&D Tax Credit) and state research and development tax credits, which provide tax benefits on certain incremental R&D expenditures, and the Domestic Manufacturing Deduction (DMD), which provides a tax benefit on U.S. based manufacturing.
During the three months ended June 30, 2009 and 2008, our effective income tax rate was 32.6 percent and 29.8 percent, respectively. During the nine months ended June 30, 2009 and 2008, our effective income tax rate was 32.1 percent and 30.3 percent, respectively. The higher effective income tax rate for the three and nine months ended June 30, 2009 was primarily due to the resolution of certain tax matters that benefited the prior year, partially offset by differences in the availability of the Federal R&D Tax Credit. The Federal R&D Tax Credit expired December 31, 2007. On the last day of our 2008 fiscal year, the Emergency Economic Stabilization Act of 2008 was enacted, which retroactively reinstated and extended the Federal R&D Tax Credit from January 1, 2008 to December 31, 2009. The effective income tax rate for the three and nine months ended June 30, 2009 reflects a full year benefit from the Federal R&D Tax Credit in the estimate of the annual effective income tax rate. The effective income tax rate for the three and nine months ended June 30, 2008 reflects an unfavorable impact of lower Federal R&D Tax Credits as a result of pro-rating the three months of available Federal R&D Tax Credits over the full 2008 fiscal year.
The effective income tax rate for the three and nine months ended June 30, 2009 and June 30, 2008 include a tax benefit related to the DMD. The DMD tax benefit available in fiscal year 2009 and fiscal year 2008 is two-thirds of the full benefit that will be available beginning in fiscal year 2011.
For 2009, our projected effective income tax rate is expected to be in the range of 31.5 percent to 32.5 percent.
Outlook
A summary of our 2009 anticipated results is as follows:
· Total revenues of about $4.55 billion
· Diluted earnings per share in the range of $3.70 to $3.90
· Cash flow from operations in the range of $625 million to $675 million
· R&D expenditures of about $900 million, or about 20 percent of sales
Our 2009 anticipated results have been updated from previously reported guidance to include the incremental results expected from the May 2009 DataPath acquisition.
FINANCIAL CONDITION AND LIQUIDITY
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Cash Flow Summary
Operating Activities
(in millions) Nine Months Ended
June 30
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The increase in cash provided by operating activities during the nine months ended June 30, 2009 compared to the same period last year is primarily due to working capital improvements related to inventory and accounts receivable as well as lower income tax payments, partially offset by higher pension plan contributions, lower net income, and lower levels of accounts payable.
Investing Activities
(in millions) Nine Months Ended
June 30
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The increase in cash used for investing activities was due primarily to increased acquisition activity for the nine months ended June 30, 2009 compared . . .
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