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Article by DailyStocks_admin    (10-06-08 01:46 AM)

The Daily Magic Formula Stock for 10/01/2008 is Rockwell Collins Inc. According to the Magic Formula Investing Web Site, the ebit yield is 11% and the EBIT ROIC is 50-75 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.

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Our company, Rockwell Collins, Inc., is a leader in providing design, production and support of communications and aviation electronics for military and commercial customers worldwide. While our products and systems are primarily focused on aviation applications, our Government Systems business also offers products and systems for ground and shipboard applications. We also provide a wide range of services and support to our customers through our network of service centers worldwide, including equipment repair and overhaul, service parts, field service engineering, training, technical information services and aftermarket used equipment sales. We operate in multiple countries and are headquartered in Cedar Rapids, Iowa.
Our company’s heritage is rooted in the Collins Radio Company formed in 1933. Rockwell Collins, Inc., the parent company, is incorporated in Delaware. As used herein, the terms “we”, “us”, “our”, “Rockwell Collins” or the “Company” include subsidiaries and predecessors unless the context indicates otherwise.
Whenever reference is made in any Item of this Annual Report on Form 10-K to information under specific captions of our 2007 Annual Report to Shareowners (the “2007 Annual Report”) or to information in our Proxy Statement for the Annual Meeting of Shareowners to be held on February 12, 2008 (the “2008 Proxy Statement”), such information shall be deemed to be incorporated herein by such reference.
All date references contained herein relate to our fiscal year ending on the Friday closest to September 30 unless otherwise stated. For ease of presentation, September 30 is utilized consistently throughout this report to represent the fiscal year end date.
Financial Information About Our Business Segments
Financial information with respect to our business segments, including product line disclosures, revenues, operating income and total assets, is contained under the caption Segment Financial Results in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2007 Annual Report, and in Note 23 of the Notes to Consolidated Financial Statements in the 2007 Annual Report.
Access to the Company’s Reports and Governance Information
We maintain an Internet website at www.rockwellcollins.com . Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on this site as soon as reasonably practicable after the reports are filed with or furnished to the Securities and Exchange Commission (SEC). All reports we file with the SEC are also available free of charge via EDGAR through the SEC’s website at www.sec.gov . We also post corporate governance information (including our corporate governance guidelines and Board committee charters) and other information related to our company on our Internet website and this information is available free of charge on this site. We will provide, without charge, upon written request, copies of our SEC reports and corporate governance information. Our Internet website and the information contained therein or connected thereto are not incorporated into this Annual Report on Form 10-K.
Description of Business by Segment
We serve our worldwide customer base through our Government Systems and Commercial Systems business segments. These two segments are described in detail below.


Table of Contents

Government Systems
Our Government Systems business supplies defense communications and defense electronics systems, products and services, which include subsystems, displays, navigation equipment and simulation systems, to the U.S. Department of Defense, other government agencies, civil agencies, defense contractors and foreign ministries of defense. These systems, products and services support airborne (fixed wing and rotary), ground and shipboard applications.
Our defense communications and defense electronics systems and products include:
• Communications systems and products designed to help customers transfer information across the communications spectrum, ranging from Very Low and Low Frequency to High, Very High and Ultra High Frequency to satellite communications.

• Military data link systems and products.

• Navigation systems and products, including radio navigation systems, global positioning systems (GPS), handheld navigation systems and multi-mode receivers.

• Subsystems for the flight deck that combine flight operations with navigation and guidance functions and that can include flight controls and displays, information/data processing and communications, navigation and/or safety and surveillance systems.

• Cockpit display systems, including flat panel, multipurpose, wide fields of view, head up, head down and helmet mounted displays for tactical fighter and attack aircraft.

• Integrated computer systems for future combat systems.

• Simulation and training systems, including visual system products, training systems and engineering services.

• Maintenance, repair, parts and after-sales support services.
Highlights for the Government Systems segment in 2007 included:
• The U.S. Army Communications-Electronic s Life Cycle Management Command (C-E LCMC) selected us to supply Global Positioning System (GPS) receivers for the Ground-Based GPS Receiver Application Module (GB-GRAM) program. GB-GRAM incorporates the Selective Availability Anti-Spoofing Module (SAASM) security device and fulfills a GPS Wing initiative to migrate to an open architecture system for ground-based embedded military applications. Under the GB-GRAM contract, we are providing a low-cost, 12-channel Miniature Precision Lightweight GPS Receiver Engine SAASM (MPE TM -S) as a small, lightweight, third-generation GPS receiver. The MPE-S offers geolocation and precise positioning capabilities for military navigation, tactical communications and battlefield computing requirements. Additional features include the ability to reprogram the unit in the field, dual frequencies, direct-Y acquisition and extended jamming protection. The five-year base contract and an additional five-year option represent a total potential contract value of more than $300 million.

• We were awarded contracts from Thai Aviation Industries, Inc. and Singapore Technologies Aerospace to upgrade C-130 aircraft for the Royal Thai Air Force and Republic of Singapore. Both upgrade programs, which will provide an integrated communication/navigation/ surveillance and air traffic management (CNS/ATM) solution, will feature Rockwell Collins Flight2 TM avionics. Flight2 avionics augments and enhances aircraft operational capabilities by providing an open systems architecture that interfaces with multiple products, such as weather radar, guidance systems, and flight and situational awareness displays. Flight2 avionics are designed to improve cockpit efficiency, safety and ease of use, while the system provides a plug-and-play capability that allows for growth with evolving requirements. These awards represent the latest in a number of successful CNS/ATM upgrade programs for Rockwell Collins, including the U.S. Air Force C/KC-135 GATM aircraft fleet upgrade and several other international C-130 programs.

• In December 2006, we delivered our 100,000th Defense Advanced Global Positioning System Receiver (DAGR) for use by U.S. and international warfighters and reached the 225,000 unit sales milestone for our Selective Availability Anti-Spoofing Module (SAASM). Primarily used by the U.S. Army, the DAGR is considered the handheld standard for GPS position, navigation and situational awareness. The receiver provides precise timing to synchronize tactical radios for the digital battlespace and includes a graphical user interface designed to greatly enhance the soldier’s effectiveness and safety. The Rockwell Collins SAASM is a single, tamper-resistant multi-chip security module that can be combined with other components and software into a complete GPS receiver.

• We were awarded a contract with Eurocopter Deutschland for the development of a German Avionics Management System (GAMS) for the German Army CH-53 G helicopter. The GAMS will be based on Rockwell Collins’ Common Avionics Architecture System (CAAS) and integrated into the new glass cockpit of the CH-53 G helicopter. The first two qualification/verificatio n aircraft are scheduled for delivery in mid-2009. A majority of the development and production of GAMS is being performed by our facility in Heidelberg, Germany.

• Boeing elevated us to major subcontractor status on the Family of Advanced Beyond Line-of-Sight Terminals (FAB-T), a transformational Department of Defense (DoD) initiative. The announcement was made in conjunction with our receiving an award for an additional $74 million in technology development contract expansions for the first increment of wideband satellite communications (SATCOM) terminals for the program. Boeing cited our outstanding SATCOM execution performance to date on the program. This award adds to our existing $53 million contract for a total current program worth more than $127 million, with opportunities for further expansions in future increments. The FAB-T program will establish a network centric, Software Communications Architecture (SCA) compliant, family of terminals that uses a common open system architecture to link warfighters to different satellites and enable planned incremental capability for robust, secure, global strategic and tactical communications between ground, air and space platforms. FAB-T represents a key building block in the DoD’s vision of an integrated battlespace of the future, where networked information and communications systems provide a competitive edge to decision makers and military personnel.

• We announced the introduction of our new Software Defined Radio (SDR) Software Communications Architecture Waveform Development System (SCA WDS). Made possible through a strategic relationship with PrismTech, we will bundle our FlexNet Four Radio with PrismTech’s Spectra Software Defined Radio development products. This combination should allow international customers and SDR users to develop their own SCA-compliant waveforms, either new or legacy, on operationally ready FlexNet Four Radio hardware, outside a test or lab environment. This enhanced capability would allow customers to reduce significantly transition time to port newly developed waveforms onto operational hardware as well as to customize their SDRs to host legacy or country-unique waveforms.

• Our visualization systems were selected by Lockheed Martin for Joint Strike Fighter (JSF) pilot training devices and by the UK Ministry of Defence for the UK Army’s Aviation Command and Tactics Trainer. We will provide image generator configurations to be installed in a Full-Mission Simulator and a Deployable Mission Rehearsal Trainer, as well as EPX TM technology-based database generation tools and a database preview station, for the JSF program. For the UK Aviation and Tactics Trainer, we were awarded the fifth phase of the Mission Command Trainer (MCT) TM upgrade program which calls for the delivery of 62 channels of the EPX-50 Image Generator, visual databases, avionics, semi automated forces, weapons and after action review upgrades. EPX technology is designed to deliver flexibility, responsiveness, and performance for the most demanding military training requirements and is capable of running on hardware with varying capabilities.

• We acquired Information Technology & Applications Corporation (ITAC), a privately-held engineering and products company that provides intelligence, surveillance, reconnaissance and communications solutions to support the global war on terror and homeland security, in a cash transaction for approximately $37 million. Founded in 1986, ITAC’s focus is the development of cutting-edge capabilities for warfighters that facilitate access to and use of near real-time geospatial intelligence and other mission-critical information.

• General Dynamics and Rockwell Collins delivered the first Integrated Computer Systems (ICS) for the Future Combat Systems (FCS) program. ICS is the common computing environment for 13 of the 14 platforms in the FCS family of systems, which comprises a network of sensors, unmanned aerial platforms and manned and unmanned ground platforms. The ICS integrates a wide range of traditionally independent computing applications into a single, integrated, secure processing environment and provides FCS-equipped platforms with unprecedented processing, networking, data storage and information assurance capabilities. General Dynamics and Rockwell Collins designed, built, tested and delivered the Current Force ICS on schedule, in just 21 months, in order to support the rapid spin-out of FCS capability into Current Force vehicles. Bradley fighting vehicles, Abrams main battle tanks and Command Variant High-Mobility Multi-purpose Wheeled Vehicles will be equipped with ICS as part of the first spin-out of FCS future force technologies in 2008.

• The United Kingdom Ministry of Defence awarded an $18 million contract to us to meet a war-related urgent operational requirement and provide a suite of products for the next generation Forward Air Controller and Forward Observation Officer (FAC/FOO) system. The FAC/FOO system, as part of the Improved Targeting Geolocation Accuracy program, is comprised of a suite of new lightweight, fully integrated digital hardware and software. At the heart of the system is a tablet computer that hosts the Rockwell Collins Rosetta Joint Fires software package, providing targeting and communication capabilities. The Rockwell Collins Azimuth Augmentation system, an important part of the FAC/FOO package, provides unparalleled targeting precision by correcting Laser Range Finder inaccuracies and enabling the precise delivery of modern GPS-guided weapons. The majority of work for this program will be done at our facility in Reading, England.
Commercial Systems
Our Commercial Systems business supplies aviation electronics systems, products and services to customers located throughout the world. The customer base is comprised of original equipment manufacturers (OEMs) of commercial air transport, regional and business aircraft, commercial airlines, and fractional and other business aircraft operators. These systems and products include flight deck electronic systems and products, including communications, navigation, surveillance, displays and automatic flight control and flight management systems, as well as in-flight entertainment, cabin electronics, information management, electro mechanical pilot controls and actuation and simulation and training.
Our aviation electronics systems, products and services include:
• Integrated avionics systems and products, such as the Pro Line 21 system, which provide advanced avionics such as liquid crystal flight displays, flight management, integrated flight control, automatic flight controls, engine indication and crew alerts.

• Cabin electronics systems and products, including passenger connectivity and entertainment, business support systems, network capabilities, passenger flight information systems and lighting and other environmental controls.

• Communications systems and products, such as data link, High Frequency (HF), Very High Frequency (VHF) and satellite communications systems.

• Navigation systems and products, including multi-mode receivers, radio and geophysical navigation sensors, as well as flight management systems.

• Situational awareness and surveillance systems and products, such as Head-Up Guidance Systems, weather radar and collision avoidance systems.

• Flight deck systems and products, which include a broad offering of multi-function cockpit liquid crystal display (LCD) units, cathode ray tube (CRT) display units and head-up displays (HUDs).

• Integrated information systems to provide information management solutions that help improve flight operations, maintenance and cabin services, as well as provide worldwide TV coverage.

• Electro mechanical pilot controls and actuation systems, including horizontal stabilizer and trim actuation systems, throttle quadrants, cockpit petals and other pilot controls.

• Simulation and training systems, including visual system products, training systems and engineering services.

• Maintenance, repair, parts and after-sales support services.
Highlights for the Commercial Systems segment in 2007 included:
• Cessna Aircraft Company selected Rockwell Collins Pro Line 21 avionics as standard equipment for its new XLS+ aircraft, scheduled to go into service in 2008, and its new CJ4, scheduled to enter service in 2010.

• Rockwell Collins Pro Line 21 avionics and Airshow 21 Cabin Management System were selected by Raytheon Aircraft Company for its Hawker 750 and Hawker 900 aircraft.

• Boeing selected us to provide the avionics system for its new 747-8 airplane family. We will provide the entire suite of displays, autopilot, communication, navigation, surveillance, maintenance, emergency and data management systems.

• Our airline selectable air transport avionics equipment was selected to be included on various new and currently in service Airbus and Boeing aircraft by Air Berlin, Air China, Avianca Airlines, Continental Airlines, Nippon Cargo Airlines, Shandong Airlines, Shanghai Airlines, Sichuan Airlines, Singapore Airlines, Skybus Airlines and TAP Portugal. The avionics equipment selected by several of these airlines included our WXR-2100 MultiScan™ Hazard Detection System and our GLU-925 Multi-mode Receiver.

• Boeing Business Jets and Rockwell Collins introduced an Enhanced Vision System (EVS) offering for Boeing Business Jet (BBJ) operators. The Rockwell Collins EVS presents an image of the external environment on the Head-up Guidance System (HGS®) and head-down displays to enhance pilot situational awareness of terrain and the airport environment at night or in poor weather condition situations, thereby increasing the safety and operational capability of the aircraft.

• Cessna selected our VenueTM next-generation digital cabin management system (CMS) for Cessna CJ4 aircraft. The new CMS, which is optimized to meet the size and weight constraints of the light to super-mid jet market, is high definition-capable and integrates a breadth of portable entertainment devices.

• Gulfstream Aerospace selected us to be its fleet wide Head-Up Guidance System (HGS®) supplier. Beginning in late 2008, the Rockwell Collins HGS-6000, an all new digital display featuring advanced active-matrix LCD technology, will be standard equipment on new Gulfstream G450 and G550 aircraft, and optional equipment on new G150, G200, G350 and G500 aircraft.

• Hawker Beechcraft selected Rockwell Collins Pro Line 21 avionics, featuring three 8-inch by 10-inch active matrix LCD displays and the Rockwell Collins Integrated Flight Information System, for its King Air C90GT aircraft.

• We reintroduced our eXchange TM broadband connectivity offering that now features the ARINC SKYLink SM network service. Under the terms of an agreement with ARINC that is subject to customary closing conditions, we will supply airborne broadband hardware and after sales support, while ARINC SKYLink will provide the Ku-band satellite service. ARINC will continue to provide SKYLink system sales and support until the transition to our eXchange hardware is completed. We are also in negotiations with ViaSat to acquire certain hardware products related to this offering.

• GB Airways will be the launch customer for our new single isle in-flight entertainment offering, dPAVES (digital programmable audio visual system), for it’s new A 320 aircraft.

• We certified the world’s first raster-only liquid crystal on silicon (LCoS) display system to meet the Federal Aviation Administration (FAA) Level D/ICAO 9625 certification standard on a Boeing Alteon B777 full-flight simulator in December 2006. More raster-only display systems combined with the EP-1000CT image generator have been approved by the following regulatory agencies: Civil Aviation Authority (UK), Civil Aviation Safety Authority (Australia), Direction générale de l’Aviation civile (France), and FAA. Based on the successful introduction of this display system, we now have over fifty confirmed orders for LCoS-based visual systems.

• We introduced Pro Line Fusion TM as our next generation of avionics for the business jet market. A new avionics solution that combines the success of Pro Line 21 with key technological advancements, Pro Line Fusion provides an empowering human interface and extensive situational awareness, while offering information enabled capabilities and flexible, adaptable integration.

• Bombardier selected Rockwell Collins as the avionics systems integrator for its new Global Vision TM flight deck for Global 5000 TM and Global Express XRS TM aircraft. This award marks the debut of our avionics in long-range and ultra long-range business jets as well as the debut of Pro Line Fusion™, a new avionics offering featuring the most advanced flight deck technology available. The initial offering will feature high resolution 15-inch diagonal LCD displays working in concert with Head-Up Guidance Systems (HGS™), graphical flight planning, Synthetic-Enhanced Vision and Rockwell Collins’ award-winning MultiScan™ Hazard Detection system.
Customers; Sales and Marketing
We serve a broad range of customers worldwide, including the U.S. Department of Defense, U.S. Coast Guard, civil agencies, defense contractors, foreign ministries of defense, manufacturers of commercial air transport, business and regional aircraft, commercial airlines, and fractional and other business jet operators. We market our systems, products and services directly to Government Systems and Commercial Systems customers through an internal marketing and sales force. In addition, we utilize a worldwide dealer network to distribute our products and international sales representatives to assist with international sales and marketing. In 2007, various branches of the U.S. Government accounted for 36% of our total sales.
Our largest customers have substantial bargaining power with respect to price and other commercial terms. Although we believe that we generally enjoy good relations with our customers, the loss of all or a substantial portion of our sales to any of our large volume customers for any reason, including the loss of contracts, bankruptcy, reduced or delayed customer requirements or strikes or other work stoppages affecting production by these customers, could have a material adverse effect on our business, financial condition, results of operations and cash flows.

We operate in a highly competitive environment. Principal competitive factors include total cost of ownership, product and system performance, quality, service, warranty and indemnification terms, technology, design engineering capabilities, new product innovation and timely delivery. We compete worldwide with a number of United States and international companies, including approximately ten principal competitors in each of our Government Systems and Commercial Systems businesses. Many of these competitors are also our suppliers or customers on some of our programs. Some of our principal competitors include Honeywell International, Inc., Thales S.A., Panasonic, Raytheon Co., Harris Corp., BAE Systems Aerospace, Inc., General Dynamics Corporation, L3 Communications, Inc., The Boeing Company and Northrop Grumman Corp. Several of our competitors are significantly larger than us in terms of resources and market share, and can offer a broader range of products. Some of our competitors have more extensive or more specialized engineering, manufacturing and marketing capabilities than we do in some areas. In addition, some of our competitors offer avionics and communications solutions with fewer features and lower prices that may compete with our solutions. As a result, these competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements or may be able to devote greater resources to the development, promotion and sale of their products. Furthermore, competitors who have greater financial resources may be better able to provide a broader range of financing alternatives to their customers in connection with sales of their products.
Industry consolidation has had a major impact on the competitive environment in which we operate. Over the past several years, our competitors have undertaken a number of mergers, alliances and realignments that have contributed to a very dynamic competitive landscape. During the past three years, we have completed five acquisitions and entered into several strategic alliances to improve our competitive position and expand our market reach.


Clayton M. Jones — Chairman of the Board of Rockwell Collins since June 2002; President and Chief Executive Officer of Rockwell Collins since June 2001

Barry M. Abzug — Senior Vice President, Corporate Development of Rockwell Collins since October 2001

Patrick E. Allen — Senior Vice President and Chief Financial Officer of Rockwell Collins since January 2005; Vice President and Controller of Rockwell Collins’ Commercial Systems business from January 2004 to December 2004; Vice President, Finance and Treasurer of Rockwell Collins prior thereto

John-Paul E. Besong — Senior Vice-President, e-Business of Rockwell Collins since April 2007; Senior Vice President of e-Business & Lean Electronics of Rockwell Collins from February 2003 to April 2007; Vice President of e-Business & Lean Electronics of Rockwell Collins prior thereto

Gary R. Chadick — Senior Vice President, General Counsel and Secretary of Rockwell Collins since July 2001

Gregory S. Churchill — Executive Vice President and Chief Operating Officer, Government Systems of Rockwell Collins since May 2002

Ronald W. Kirchenbauer — Senior Vice President, Human Resources, of Rockwell Collins since April 2003; Senior Vice President, Employee and Workplace Services, of Cadence Design Systems, Inc. (electronic design technologies and services) prior thereto

Nan Mattai — Senior Vice President, Engineering and Technology of Rockwell Collins since November 2004; Vice President, Government Systems Engineering of Rockwell Collins prior thereto

Jeffrey A. Moore — Senior Vice President of Operations of Rockwell Collins since April 2006; Acting Senior Vice President of Operations of Rockwell Collins from October 2005 to April 2006; Vice President of Manufacturing Operations of Rockwell Collins prior thereto

Robert K. Ortberg — Executive Vice President and Chief Operating Officer, Commercial Systems of Rockwell Collins since October 2006; Vice President and General Manager, Air Transport Systems of Rockwell Collins prior thereto

Marsha A. Schulte — Vice President, Finance & Controller of Rockwell Collins since May 2006; Vice President & Controller, Operations of Rockwell Collins from January 2004 to May 2006; Vice President, Strategic & Financial Planning of Rockwell Collins prior thereto


The following management discussion and analysis is based on financial results for the three and nine months ended June 30, 2008 and 2007 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, 2008 and 2007

Total sales for the three months ended June 30, 2008 increased 7 percent to $1,194 million compared to the three months ended June 30, 2007. Commercial Systems sales increased 8 percent and Government Systems sales increased 7 percent for the three months ended June 30, 2008 compared to the same period a year ago. Incremental sales from the August 2007 acquisition of Information Technology & Applications Corporation and the April 2008 acquisition of Athena Technologies contributed a total of $5 million, or less than 1 percentage point of the overall revenue growth. See the following operating segment sections for further discussion of sales for the three months ended June 30, 2008 and 2007.

Net Income and Diluted Earnings Per Share

Net income for the three months ended June 30, 2008 increased 19 percent to $174 million, or 14.6 percent of sales, from net income of $146 million, or 13.1 percent of sales, for the three months ended June 30, 2007. Diluted earnings per share increased 24 percent to $1.07 for the three months ended June 30, 2008 from 86 cents for the three months ended June 30, 2007. The increase in net income and diluted earnings per share for the three months ended June 30, 2008 compared to the same period last year was primarily the result of a combination of increased sales volume, productivity improvements, and lower employee incentive compensation costs. Diluted earnings per share for the three months ended June 30, 2008 grew 5 percentage points higher than the rate of net income due to the impact of our share repurchase program.

Commercial Systems Financial Results

Commercial Systems’ Sales

Beginning in the fourth quarter of 2007, product category sales for Commercial Systems were reclassified to better align sales for products serving both product categories. Sales for the three months ended June 30, 2007 for our air transport aviation electronics and business and regional aviation electronics product categories have been reclassified to conform to the current year presentation.

Air transport aviation electronics sales increased $15 million, or 5 percent, for the three months ended June 30, 2008 compared to the three months ended June 30, 2007. This sales growth is primarily attributed to higher avionics sales to airlines and original equipment manufacturers (OEMs) for new aircraft production, partially offset by lower sales of equipment for Boeing 787 simulators and lower sales of in-flight entertainment systems.

Business and regional aviation electronics sales increased $27 million, or 11 percent, for the three months ended June 30, 2008 compared to the same period in the prior year. This sales growth is attributed primarily to market share gains and increased demand for new business and regional aircraft avionics and cabin electronics systems, partially offset by lower regulatory mandate program revenues.

Original equipment sales increased $54 million, or 20 percent, for the three months ended June 30, 2008 compared to the same period in the prior year. Market share gains and increased demand for new air transport, business and regional aircraft led to higher avionics sales across all three market areas, with particularly strong growth in sales to air transport aircraft OEMs.

Aftermarket sales decreased $12 million, or 4 percent, for the three months ended June 30, 2008 compared to the three months ended June 30, 2007. Lower sales of equipment for Boeing 787 simulators and lower regulatory mandate program revenues were partially offset by slightly higher revenues from service and support activities.

Commercial Systems’ Segment Operating Earnings

Commercial Systems’ operating earnings increased 17 percent to $139 million, or 23.7 percent of sales, for the three months ended June 30, 2008 compared to operating earnings of $119 million, or 21.8 percent of sales for the three months ended June 30, 2007. The increase in operating earnings and operating margin was primarily due to higher sales volume, productivity improvements, and lower employee incentive compensation costs, partially offset by an increase in lower margin customer funded development sales.

Beginning in 2008, product category sales for defense-related products in our Government Systems segment are delineated based upon the difference in underlying customer base and market served. In prior years, defense-related product categories were delineated based upon their underlying technologies. Sales for the three months ended June 30, 2007 for our Government Systems segment product categories have been reclassified to conform to the current year presentation.

Airborne solutions sales increased $25 million, or 6 percent, for the three months ended June 30, 2008 compared to the three months ended June 30, 2007. This increase was primarily due to higher integrated electronics systems revenues from international C-130 upgrade programs and development program revenues from the E-6 mission system upgrade program, partially offset by revenues from a favorable contract termination settlement benefiting the third quarter of last year.

Surface solutions sales increased $14 million, or 9 percent, for the three months ended June 30, 2008 compared to the three months ended June 30, 2007. This increase was primarily due to sales for the Ground-Based GPS Receiver Application Module (GB-GRAM) program and sales related to a United Kingdom Ministry of Defense precision targeting system program.

Government Systems’ operating earnings increased 18 percent to $131 million, or 21.6 percent of sales, for the three months ended June 30, 2008 compared to operating earnings of $111 million, or 19.5 percent of sales, for the same period a year ago. The increase in operating earnings and operating margin was primarily due to higher sales volume, productivity improvements, lower employee incentive compensation costs, and net favorable contract adjustments, partially offset by the absence of a favorable contract termination settlement benefiting the third quarter of last year.


Dan Swenson - Vice President of Investor Relations

Thank you, Teresa and good morning everyone. With me on the line this morning are Rockwell Collins' Chairman, President and Chief Executive Officer, Clay Jones; and Senior Vice President and Chief Financial Officer, Patrick Allen. Today's call is being webcast and you can view the slides we are presenting today on our website at www.rockwellcollins.com under the Investor Relations tab. Please note today's presentation and webcast will include certain projections and statements that are forward-looking as defined in the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those projected as a result of certain risk and uncertainties, including but not limited to those detailed on slide two of this webcast presentation, and from time-to-time in the company's Securities and Exchange Commission filings. These forward-looking statements are made as of the date hereof and the company assumes no obligation to update any forward-looking statement.

With that I'll now turn the call over to Clay.

Clayton M. Jones - Chairman, President and Chief Executive Officer

Thanks Dan, and good morning everybody. Before I get into my introductory comments about the quarter, a couple of things I'd like to cover. First, I want to formally welcome Dan Swenson to our IR team. He could be a great asset and many of you who have had a chance to meet or talk to him and those who haven't, I know you'll look forward to that in the future, so Dan welcome aboard. Second, thing is I want to extend my sincere appreciation to everybody on this call who set... indications of your concern and best wishes during the recent very tragic floods that affected Cedar Rapids in the Iowa area where as you know our headquarters is.

Rockwell Collins was very fortunate to have none of our facilities affected by that, and I can tell you now as many of you already know, there's absolutely no impact to our financial results now or into the future as a result of this flood. However, we had a few employees whose homes were lost, many of our friends and neighbors were affected by this, and so on behalf of us, and them I want to tell you how much we appreciate your best wishes.

Well there is a lot to talk about today, and so let me set the stage by summarizing our very strong third quarter financial performance. We continue to demonstrate the strength of our balanced portfolio of business by delivering third quarter earnings per share of 24% growth and total segment operating profit growth of 17%, and this is on a top-line revenue growth of 7%, clear testimony to our ability to consistently expand margins and grow our profits well in excess of revenues. Patrick is going to cover the details of our financial results later in the call, so, for the balance of my introductory comments I'd like to share with you some of my observations about the current market environment.

I know all of us are reading the same headlines, record oil prices, escalating operating cost at our airline customers, reduction in capacity in the airline fleets, and predicted impacts on the backlog of Boeing and Airbus. Everywhere you look, it seems there is another article or report proclaiming the end of our industry as we note. Meanwhile, we and another companies doing business in commercial aerospace have been caught in a downdraft that these headlines are creating, and as a result we're seeing valuation level similar to the post 9/11 period.

Now all of these items are of concern to us, we pay very close attention to them. But during this time, there is also been a set of bylines that seem to have gone unnoticed. First, record bookings at business jet manufacturers driven in part by the other side of the economic coin of oil, the wealth that it's creating in the Middle East, Russia and other oil producing economies.

Second, continuing new orders and solid delivery demands in the aggregate at Boeing and Airbus. And third, a steady commitment to the protection of our nation, and its allies in the base that fifth budget put in place to assure that protection. These items seem they have been pushed to the side by the doom and gloom reporting on a portion of one market segment.

So, during this time of uncertainly and ambiguity, we thought it would be useful to share with you our view of the market factors affecting our business, and how we're positioned deal with them. And I'll start with that piece of the market that everyone is concerned with air transport business.

As all of you know, many airlines have come out with capacity reduction announcements, but our analysis of the actions being taken suggested a disconnect in how the equity market is reacting. Our analysis based on public announcements to-date and discussions with the airlines leaves us to believe that the impact of oil at current prices will cause about a 5% global capacity reduction. That's 10% in North America, 3% in Western Europe and about 1% in Asia-Pacific.

This 5% reduction corresponds to about 800 to 900 parked airplanes. These actions will certainly create some headwind especially related to the aftermarket. But let's not lose side of the fact that even with these capacity reductions expectation still call for passenger miles to be up on the order of 1% to 3% next year.

On the air transport OEM side, we have an environment in which the OEMs have over 7,200 aircraft orders in backlog or about seven years of production. These OEMs continue to forecast market growth, excluding the 787 program of about 8% through 2010 and including modest 787 delivery assumptions that growth could be 10% or better through 2010.

Now a lot of you, however, I've heard or you have written about the possibility of order cancellations and deferrals. I agree that the likelihood we will see some of these cancellation deferrals is high. But what is open to variance in opinion, is their magnitude. So how great could the magnitude be? To put that in perspective, it's estimated after 9/11, Boeing had cancellations and deferrals of about 12% of its backlog. And that was during a period when consumer demand for air travel literally dried up due to safety concerns. And the industry operating economics allowed those airlines to operate their older best fuel efficient fleets.

If we saw a similar magnitude drop today, that backlog would go from about 7,200 aircraft to about 6,300 aircraft or from seven years of production down to six years. But we're dealing with an environment that still has good consumer demand for aircraft and economics that are making new aircraft even more attractive due to their relative fuel efficiency.

If we move over to the business aviation market, we've been out talking to business jet operators, FBOs and others in the industry. The feedback we're getting is different depending on who you are, at the large corporations and with very high networth individuals they are using their aircraft regardless of the incremental fuel cost of the trip.

However, the mid-sized corporate level like ourselves, we're hearing that travel department is coming under budget pressures due to fuel cost and they are reacting by either deferring maintenance items or flying less.

So we are seeing reductions in spending as flight departments try to rebase line their budget. But let me give you an educated guess about what's going to happen next. I can tell you because my jet of flight officer [ph] has already told Patrick, that he is going to need more money in his budget next year. And chances are I and CEOs like me are going to give it to him, because we intend to keep using these valuable assets to do business.

Also, it's not difficult to anticipate a trend, where more businesses and individuals who can afford it actually look to business jet travel, in order to avoid the impacts that result from the capacity reductions we just talked about the airlines.

So, while in the short-term, you'll see an adjustment period due to higher operating cost, we think at the long-term you still have dynamics that are favorable to the industry. And we're seeing the best evidence of these long-term dynamics coming from business and regional jet OEMs, where demand continues to be strong.

In fact, international demand is so strong that for many models buyers are continuing to pay a premium for early delivery slots. We saw a recent indications of this international demand as the E-BASE business jet ratio in May of this year which had record order announcements of more than $5 billion most of it coming from outside North America.

Now, turning to the other half of our business that everyone seems to have forgotten about. We see relatively stable conditions in the defense market for government systems. We expect the base defense budget will grow about in line with inflation over the next several years. But with areas of greater than inflationary growth related to network communications, open systems architecture application, and advanced munitions guidance, all areas where our business has core strength and where we participate on a wide variety of programs.

So how is Rockwell Collins positioned to deal with the market dynamics that face us now and into the future. Over the past decade, we focused on balance between our segments, and diversification across our businesses and it's at times like today that this approach will serve us very well.

Let me illustrate this point by putting some context around the commercial aftermarket. Our commercial aftermarket revenue makes up about 23% of our total sales for this year and the air transport portion is only about 15% total sale.

As I mentioned earlier, anticipated capacity reductions are likely to be the most significant head-wins we and other companies face over the next year or so. Within that capacity reduction, much of it is from aircraft like the MD-80s, DC-9s, and older 737s where we have frankly very minimal revenues, and low market share in the maintenance and repair of that equipment. That just compared to our greater content on light body aircraft which we see is being used on a more profitable routes and so somewhat less likely to be part.

And we also anticipate opportunities for some growth on items like RNP or Required Navigation Performance, which will allow airplanes so equipped to fly more direct, and fuel efficient flight patterns which as you can imagine is an area of heightened interest by the airlines. One other piece of context here, post 9/11, our maintenance and repair sales were down only 2% from 2001 to 2002. So in this environment for us to see about flat year-over-year MRO sales would be consistent with that experience.

Now regarding air transport OEM sales, although we know there will be cancellations and deferrals, there is more than enough demand to support projected rollout rates and we're expecting more orders at the Farnborough Air Show next year... next week. In fact, we've seen in some cases low cost carriers who have begun to defer orders and some legacy airlines who have actually stepped-in to take those delivery slots, the best example, recently is American Airlines, actually accelerating their equipments [ph] of 737 Next Generation.

This mix shift is actually a very positive trend for us. Now going into 2009, we're also continuing to benefit from incremental share gain in Avionics. If you back to 2006, we've won eight of the last nine business jet cockpit competitions. And have positions on aircraft being introduced in each of the next four years including Cessna's XLS PLUS and CJ4, the Bombardier Global Express XRS 5000 and Learjet 85, and we've been successful with customers where we didn't have any prior position such as Embraer with the MSJ/MLJ aircraft. Our cabin system business will also add to the OEM growth with new aircrafts scheduled to enter delivery including the

Dassault Falcon 2000, 900 and 7X and Hawker Beechcraft Horizon 4000 just to name a few.

Within government systems we're looking at our business that has opportunities on several fronts. With the army, we have key positions on growth platforms such as our integrated computer system and our display systems for FCS along with our CAAS [ph] open systems based avionics packages on the rotary wing market.

We're also moving into higher levels of system and subsystem integration on programs like the E6 on which we're the prime contractor for the upgrade on the backend mission system. And finally, with our acquisition of Athena Technologies recently we expect more content on UAVs where we see a growth opportunity of about 15% over the next several years.

Finally, let me wrap up with a comment about margins. Consistently through our history, we have been able to show margin expansion in times of even modest growth, and the ability to quickly react and manage cost in times when it's needed. If you look to FY 2002 following 9/11, our margins declined only 1 percentage point on a 12% overall sales decline. And the following year we were able to grow margins 60 basis points on only a 2% sales growth.

Now given the growth we're expecting in 2009, we expect to see continued margin expansion. So, all things considered, I see strong industry fundamentals driving commercial OEM revenue growth and that more than offsets any softness we see in the aftermarket.

In addition, to that we have a well position government system business with a broad portfolio of programs and opportunities. If you take those top-line drivers along with the incremental margins, we've consistently been able to deliver it should give you confidence in the ability of our balance and diversified company to continue to outperform the market and our industry.

With that, let me turn the call over to Patrick to walk through the specifics for the quarter. Pat?

Patrick E. Allen - Senior Vice President and Chief Financial Officer

Thanks Clay and good morning to everyone as well. Let's get started by first reviewing our results for the total company moving on slides three and four. In total we grew sales at a rate of 7% increasing by $81 million to $1.194 billion. Our net income increased by $28 million or 19% and our earnings per share increased by $0.21 to $1.07 per share a growth rate of 24%.

Let me highlight a couple of items here relating to our net income and EPS results. First, you'll see the EPS growth rate for the quarter was 5 percentage points higher than the growth rate we reported for net income. Principally driven by the significant impact of our on going share repurchase program. Also our effective income tax rate for the third quarter was 29.8% compared with 30.1% for last year's third quarter. This quarter's rate benefited from the settlement of several open tax years, which I discussed on last quarter's call, plus the impact of higher than anticipated deduction related to domestic manufacturing activity. These benefits more than offset the expiration of the federal research and development tax credit and higher pre-tax earnings.

Moving on to slides five through eight, we have the strong results, posted for the third quarter by our commercial systems and government systems businesses. Commercial systems revenues increased 8% driven by share gains and continued strong demand for new business regional and air transport aircraft. OEM revenues increased a double-digit rate in all three market areas.

In air transport, revenues grew 24% as higher narrow body deliveries and increased capture rates on airline selectable equipment. We're only partially offset by an expected decline in our line in-flight and entertainment sales.

This growth was complimented by 17% growth in business and regional OEM revenues resulting from an increase in customer funded development and from higher avionics and cabin system sales. Partially offsetting this very strong OEM growth was a decline of 4% in our aftermarket revenues.

In our core aftermarket, that is excluding mandate revenues in light body IFE systems, our revenues were down 2% year-over-year. This decline was caused by that previously discussed and anticipated $10 million decline in 787 simulator hardware, which more than offset moderate growth of about 2% in maintenance, spares and retrofits. Tough comparables gets mandate sales in the third quarter of last fiscal year were the main contributor to the remainder of the overall 4% decline.

Moving to page six, and taking a look at commercial system's margins. Even though the sales mix from about 50-50 OEM aftermarket split last year, to about of 55-45 split in this year's third quarter, operating margins improved about a 190 basis points to 23.7%. The improvement came as a result of strong incremental margins on OEM sales, lower employee incentive compensation costs and keeping SG&A expenses flat, on a higher revenue basis. Once again making the point that our shared service business model provides structural operating leverage.

Turning to slide seven, another very solid quarter was turned in by our government systems business as well. Revenues increased 7% for the overall segment. Growth in airborne solutions was up 6% on strong international sales, such as the C-130 integrated electronics systems upgrade programs entitled in the Singapore. And from development programs including the E-6 mission system upgrade.

Growth in surface solutions was up 9% due to higher sales of ground based GPS receiver application modules, or GB-GRAM systems and new system sales to international customers such as the Precision Targeting System to the U.K. Ministry of Defense.

Turning to page eight, earnings growth by our government systems business was 18% driven by higher revenues and a segment operating margin that expanded by 210 basis points to 21.6% this quarter. This margin growth was due to productivity improvements and a reduction in employee incentive compensation costs.

Moving along to slide nine, we'll take a quick look at our total company performance for the first nine months of the fiscal year. Total sales came in at about $3.5 billion, up $303 million or about 10% from last year's first nine month results.

Net income and earnings per share were up 16% and 20% respectively both well in excess of our 10% rate of growth in sales. And once again, an EPS growth rate that is noticeably higher than our net income growth rate due to our share repurchase program.

Looking at our cash flow for the first nine months, cash provided by operating activities caught up to last year's pace from the end of the second quarter and now stands at $310 million. The main drivers here were $67 million higher net income, $74 million lower year-to-date pension plan contributions, and favorable collections against receivables. These were partially offset by less of a build-up in upfront advance payments for our customers, higher employee incentive compensation payments in this year's first quarter, and higher inventory levels to support our growth across both commercial and government systems.

On to chart 10, where we take a look at our capital structure, given our belief in the fundamentals of our business, we once again utilized the capacity and flexibility of our balance sheet along with our free cash flow generation to continue the pace of our share purchase program. During the quarter, we borrowed an additional $68 million increasing our total outstanding short-term debt balance to $429 million and raising our debt to total capital ratio to 29%, a leverage ratio that still leaves us with plenty of balance sheet flexibility.

Turning to slide 11, where we summarize the current progress and program to-date status of our ongoing share repurchase program. This quarter we repurchased 1.4 million shares at a total cost of $81 million or about $58 a share. This further reduced our outstanding share count to 159.7 million shares at the end of the third quarter as compared to 165.8 million at the end of fiscal year 2007.

Program to-date, we've now repurchased nearly 49 million shares at a total cost of $2.3 billion and as of June 30th, we had a authorization remaining to repurchase up to $245 million in additional shares, roughly another 4 million shares of capacity at the average price we paid on the last quarter. In addition to enhancing shareholder value through share repurchases, we paid a $0.24 per share dividend to shareowners in early June, a 50% increase in our quarterly dividend.

Now our final slide, slide 12 which contains the updated picture of our financial guidance for the full fiscal year. We lowered our projective effective tax rate range for FY 2008 from 31.5% to 32.5% to 30.5% to 31% due primarily to higher than anticipated benefits from the domestic manufacturing deduction that I mentioned earlier.

As a result of the rising tax rate range and our enhanced visibility and confidence regarding the balance of the year, we are raising, and narrowing our projected EPS range from $3.95 to $4.05 to $4.05 to $4.10. Also, while our overall cash flow target of $675 million to $725 million remains unchanged, the components of it have. While the negotiations with Boeing for payment of outstanding receivables related to 787 program are moving forward and we are hopeful for a resolution soon. We now view the collection of these receivables as less likely in FY08.

As a result, we have adjusted our cash flow forecast to exclude both, the collection of approximately $70 million of accounts receivable from Boeing, and the pension contribution of up to $75 million. All other elements of our financial guidance remain unchanged.

That concludes my comments on the financial results, and updated full year financial guidance.

So with that I'll turn the call back over to Dan.

Dan Swenson - Vice President of Investor Relations

Thank you, Patrick. In order to give everyone the opportunity to ask questions, we ask that you limit your questions to two per caller. If you have further questions, simply reinsert yourself into the queue and we'll answer those questions if times permits. Operator, we're now ready to open the lines.

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