SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: | | | | Title of each class | | Name of each exchange on which registered | | Common Stock, par value $.01 per share | | New York Stock Exchange | SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ☒ No o☐Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o☐ No þ ☒Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ☒ No o ☐Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of RegulationsS-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ☒ No o ☐Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of RegulationS-K is not contained herein, and will not be contained, to the best of the registrant'sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form10-K or any amendment to this Form10-K. ☐o Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large“large accelerated filer," "accelerated” “accelerated filer," "smaller” “smaller reporting company,"” and "emerging“emerging growth company"company” in Rule12b-2 of the Exchange Act. (Check one): | | | | | | | | Large accelerated filer | | ☒ | | Accelerated filer | | ☐ | | | | | Large acceleratedNon-accelerated filerþ
| | Accelerated filer o
| Non-accelerated filer o
☐ | | Smaller reporting companyo | | | ☐ | | | | | | | | | Emerging growth companyo | | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes o☐ No þ ☒The aggregate market value of the registrant'sregistrant’s voting stock held bynon-affiliates of the registrant on March 30, 2018 was approximately $22.1 billion. For purposes of this calculation, the registrant has assumed that its directors and executive officers are affiliates. 164,629,890 shares of the registrant'sregistrant’s Common Stock were outstanding on October 31, 2018. DOCUMENTS INCORPORATED BY REFERENCE None.
Certain information contained in the Proxy Statement for the Annual Meeting of Shareowners of the registrant to be held in 2019 is incorporated by reference into Part III.
ROCKWELL COLLINS, INC.
Annual Report on Form 10-K
Table of contents
General
Rockwell Collins, Inc. (the Company or Rockwell Collins) designs, produces and supports cabin interior, communications and aviation systems and products for commercial and military customers and provides information management services through voice and data communication networks and solutions worldwide. The integrated system solutions and products we provide to our served markets are oriented around a set of core competencies: communications, navigation, automated flight control, displays/surveillance, bespoke interior products, simulation and training, integrated electronics and information management systems. We also provide a wide range of services and support to our customers through a worldwide network of service centers, including equipment repair and overhaul, service parts, field service engineering, training, technical information services and aftermarket used equipment sales. The structure of our business allows us to leverage these core competencies across markets and applications to bring high value solutions to customers. We operate in multiple countries and are headquartered in Cedar Rapids, Iowa.
Our Company's heritage is rooted in the Collins Radio Company, established 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 in our Proxy Statement for the Annual Meeting of Shareowners to be held in 2019 (2019 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. Fiscal years 2018, 2017 and 2016 were 52-week fiscal years.
Proposed Acquisition by United Technologies Corporation
EXPLANATORY NOTE On September 4, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) withNovember 26, 2018, United Technologies Corporation, a Delaware corporation (“UTC”), completed the acquisition of Rockwell Collins, Inc., a Delaware corporation (the “Company” or “Rockwell Collins”), pursuant to the terms of the Agreement and Plan of Merger, dated as of September 4, 2017, among UTC, Riveter Merger Sub Corp., a Delaware corporation and a wholly owned subsidiary of UTC, (“Merger Sub”). Uponand Rockwell Collins, through the terms and subject to the conditions set forth in the Merger Agreement, at the closing,merger of Merger Sub will merge with and into Rockwell Collins, with Rockwell Collins surviving as a wholly owned subsidiary of UTC (the “UTC Merger”“Merger”).
Pursuant toThis Amendment No. 1 on Form 10-K/A (this “Amendment”) amends the Merger Agreement, atCompany’s Annual Report on Form 10-K for the effective time of the UTC Merger (the “Effective Time”), each share of Rockwell Collins common stock, par value $0.01 per share, issued and outstanding immediately prior to the Effective Time (other than (1) shares held by Rockwell Collins as treasury stock, UTC, or any subsidiaries of Rockwell Collins or UTC and (2) shares held by a holder who has properly exercised and perfected (and not effectively withdrawn or lost) such holder’s demand for appraisal rights under Section 262 of the General Corporation Law of the State of Delaware,fiscal year ended September 30, 2018, which in each case will be treated as described in the Merger Agreement) will be converted into the right to receive (1) $93.33 in cash, without interest, plus (2) a fraction of a share of UTC common stock having a value equal to the quotient obtained by dividing $46.67 by the average of the volume-weighted average prices per share of UTC common stock on the New York Stock Exchange for each of the 20 consecutive trading days endingwas filed with the trading day immediately prior toSecurities and Exchange Commission on November 26, 2018 (the “Original Filing”). This Amendment is being filed solely for the closing date (the “UTC stock price”), subject to a two-way collar mechanism described below (together,purpose of providing the “Merger Consideration”), less any applicable withholding taxes.
The fraction of a share of UTC common stock into which each such share of Rockwell Collins common stock will be converted is referred to as the exchange ratio. The exchange ratio will depend upon the UTC stock price. If the UTC stock price is greater than $107.01 but less than $124.37, the exchange ratio will be equal to the quotient of (i) $46.67 divided by (ii) the UTC stock price, which,information required in each case, will result in the stock consideration having a value equal to $46.67. If the UTC stock price is less than or equal to $107.01 or greater than or equal to $124.37, a two-way collar mechanism will apply, pursuant to which (i) if the UTC stock price is greater than or equal to $124.37, the exchange ratio will be fixed at 0.37525 and the value of the stock consideration will be more than $46.67, and (ii) if the UTC stock price is less than or equal to $107.01, the exchange ratio will be fixed at 0.43613 and the value of the stock consideration will be less than $46.67.
The completion of the UTC Merger is subject to customary conditions, including, without limitation, (1) the absence of any order or law that has the effect of enjoining or otherwise prohibiting the completion of the UTC Merger or resulting in the
occurrence of certain conditions specified in the Merger Agreement and (2) the absence of a material adverse effect on Rockwell Collins and UTC. The completion of the UTC Merger is not subject to the approval of UTC’s shareowners or the receipt of financing by UTC.
The Company and UTC have made customary representations and warranties in the Merger Agreement. The Merger Agreement also contains customary covenants and agreements, including covenants and agreements relating to (a) the conduct of eachPart III of the Company’s and UTC’s respective businesses betweenAnnual Report on Form 10-K for the datefiscal year ended September 30, 2018 because, in light of the signing of the Merger Agreement and the consummation of the UTC Merger, and (b)a definitive proxy statement containing such information will not be filed within 120 days after the effortsend of such fiscal year. The reference on the cover page of the partiesOriginal Filing to cause the UTC Mergerincorporation by reference to be completed.
The Merger Agreement includes termination provisions for both Rockwell Collins and UTC. The Merger Agreement provides that the Company may be required to pay UTC a termination fee equal to $695 million if the Merger Agreement is terminated by the Company under certain circumstances described in the Merger Agreement.
Financial Information About Our Operating Segments
Financial information with respect to our operating segments, including product line disclosures, revenues, operating earnings 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 Item 7 below and in Note 21portions of the Notes to Consolidated Financial StatementsCompany’s definitive proxy statement into Part III of the report is hereby deleted. In addition, in Item 8 below.
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) ofaccordance with Rule 12b-15 under the Securities Exchange Act of 1934, as amended are available free(the “Exchange Act”), Item 15 of chargePart IV of the Original Filing is being amended and restated solely to include as exhibits new certifications by the Company’s principal executive officer and principal financial officer.As disclosed in the Company’s Current Report on this site as soon as reasonably practicable after the reports areForm 8-K filed with or furnished to the Securities and Exchange Commission (SEC).on November 26, 2018, as a result of the Merger, changes were made to the Company certificate of incorporation, bylaws, board of directors and officers. In addition, upon consummation of the Merger, as a wholly-owned subsidiary of UTC, the Company became subject to UTC’s policies and procedures. All reports we fileinformation contained in this Amendment, including, without limitation, with respect to the board of directors of the Company (including committees thereof), the officers of the Company and the Company’s governing documents and policies and procedures, is presented without giving effect to the consummation of the Merger. Except as described above, this Amendment does not reflect events occurring after the date of the Original Filing and does not modify or update disclosures contained in the Original Filing, including, without limitation, the financial statements. Accordingly, this Amendment should be read in conjunction with the SEC are also available free of charge via EDGAR throughOriginal Filing and with the SEC website at www.sec.gov. We also post corporate governance information (including our corporate governance guidelines and Board committee charters) andCompany’s other information related to our Company on our internet website where it is available free of charge. We will provide, without charge, upon written request, copies of our SEC reports and corporate governance information. Ourfilings with the SEC. The Company’s internet website and the information contained therein or connected thereto are not incorporated into this Amendment or the Original Filing.1
PART III | Item 10. | Directors, Executive Officers and Corporate Governance. |
DIRECTORS Our Restated Certificate of Incorporation provides that the Board of Directors shall generally consist of three classes of directors with overlapping three-year terms. One class of directors is to be elected each year with terms extending to the third succeeding Annual ReportMeeting after election. The Restated Certificate of Incorporation provides that the Board of Directors shall maintain the three classes so as to be as nearly equal in number as the then total number of directors permits. Class III Directors with Terms Expiring in 2019 John A. Edwardson, age 69, has served as a Director since 2012. Mr. Edwardson is the Chairman of the Corporate Strategy and Finance Committee and is a member of the Compensation Committee and the Executive Committee. Mr. Edwardson was Chairman of the Board of Directors of CDW Corporation (provider of technology solutions) from 2001 to December 2012 and from 2001 to 2011 he also served as CDW’s Chief Executive Officer. Prior to joining CDW, he served as Chairman and Chief Executive Officer of Burns International Services Corporation (security company) from 1999 to 2000 and as a Director (1994-1998), President (1994-1998) and Chief Operating Officer (1995-1998) of UAL Corporation and United Airlines (passenger airline). Prior to UAL Corporation and United Airlines, he served as Executive Vice President and Chief Financial Officer of Ameritech Corporation (telecommunications). He is currently on Form 10-K.the Board of Directors of FedEx Corporation, Chubb Corporation (formerly Ace Limited), The University of Chicago and is a member of the board of other professional and civic organizations. Experience, qualifications, attributes and skills: Management, leadership and business acumen as past Chairman and Chief Executive Officer of CDW Corporation Aerospace and international experiences DescriptionAndrew J. Policano, age 69, has served as a Director since 2006. Dr. Policano is the Chairman of the Board Nominating and Governance Committee and a member of the Audit Committee. Dr. Policano was the Dean of the Paul Merage School of Business by Segment
We servefrom August 2004 through July 2013 and is currently Professor Emeritus, Dean’s Leadership Circle Endowed Chair, Economics/Public Policy. Prior thereto, he served on the faculty and as Dean at the School of Business, University of Wisconsin-Madison. Dr. Policano is a worldwide customer base through our Interior Systems, Commercial Systems, Government SystemsTrustee of Payden & Rygel (investment manager) and Information Management Services operating segments. These four segments are described in detail below.
Interior Systems
On April 13, 2017, we acquired B/E Aerospacea former director of Badger Meter, Inc. (water meter manufacturer) and formed the Interior Systems business segment. Our Interior Systems business manufactures cabin interior products for commercial aircraft and business aviation customers. We sell our products and provide our services directly to virtually allPhysicians Insurance Company of Wisconsin. He is a member of the world’s major airlinesboard of other professional and civic organizations.Experience, qualifications, attributes and skills: Experience in management and leadership as Dean of business schools Significant business acumen and corporate governance knowledge Jeffrey L. Turner, age 67, has served as a Director since 2011. Mr. Turner is a member of the Compensation Committee, the Corporate Strategy and Finance Committee and the Technology and Cybersecurity Committee. Mr. Turner was a director of Spirit AeroSystems Holdings, Inc. (commercial aerospace assemblies and components) from November 2006 to April 2014, and served as its President and Chief Executive Officer from June 2005 to April 2013; he also served as President and Chief Executive Officer of Spirit AeroSystems, Inc. Mr. Turner joined The Boeing Company (aerospace and defense) in 1973, and was appointed as Vice President/General Manager of Boeing, Wichita Division in November 1995. Prior to his appointment as Vice President/General Manager of Boeing Wichita Division, Mr. Turner held various management positions in systems development, quality, production, services and finance in Boeing Computer Services, Boeing Military Airplane Company and Boeing Commercial Airplane Company. Mr. Turner currently serves on the Board of Directors of INTRUST Financial Corporation and is a partner in the privately held Turner Nichols Williams Group and several private companies. Experience, qualifications, attributes and skills: Management, leadership and aerospace manufacturers. We have achievedindustry experience as past President and Chief Executive Officer of Spirit AeroSystems Holdings, Inc. Operational, strategy and international experience Class I Directors with Terms Expiring in 2020 Chris Davis, age 68, has served as a leading global market position in eachDirector since 2002. Ms. Davis is the Chairman of our major product categories, which include:
commercial aircraft seats, including an extensive line of super first class, first class, business class, economy class and regional aircraft seats
a full line of aircraft food and beverage preparation and storage equipment, including coffee and espresso makers, water boilers, beverage containers, refrigerators, freezers, chillersthe Audit Committee and a linemember of microwave, high efficiency convectionthe Executive Committee and steam ovens
modular lavatory systems, wastewater management systemsthe Corporate Strategy and galley systems
both chemicalFinance Committee. She served as a General Partner with Forstmann Little & Co. (private equity firm) from October 2005 to July 2012 after having served them as a Special Limited Partner since August 2001. She served as Chairman of McLeodUSA Incorporated (telecommunications) from August 2005 to January 2006, Chairman and gaseous aircraft oxygen storage, distributionChief Executive Officer of McLeodUSA from April 2002 to August 2005 and delivery systems, protective breathing equipmentChief Operating and Financial Officer of McLeodUSA from August 2001 to April 2002. She served as Executive Vice President, Chief Financial Officer of ONI Systems (telecommunications) from May 2000 to August 2001. She served as Executive Vice President, Chief Financial and Administrative Officer and director of Gulfstream Aerospace Corporation (business aircraft) from July 1993 to April 2000. She is a broad rangeformer member of lighting products
business jetthe Board of Directors of Cytec Industries, Inc., Aviall, Inc., IMG Worldwide, 24 Hour Fitness, ENK International and general aviation interior products, including an extensive lineWolverine Tube, Inc.Experience, qualifications, attributes and skills: Management and leadership experience as past Chair, Chief Executive Officer, Chief Operating Officer and Chief Financial Officer of executive aircraft and helicopter seats, direct and indirect overhead lighting systems, exterior lighting systems, passenger and crew oxygen systems, air valve systems and high-end aircraft monuments
Interior Systems sales are categorized by product type into interior products and services and aircraft seating.
Interior products and services includes a portfolio of interior structure products (galley structures, food and beverage preparation equipment, water and waste systems), integrated engineering services, oxygen and passenger service equipment, cabin lighting systems, de-icing equipment and aftermarket services. These products and services are marketed and sold to original equipment manufacturers (OEMs)McLeodUSA, as well as airliner customers.Executive Vice President and Chief Financial Officer of Gulfstream
Aircraft seating includesFinancial and management oversight experience of portfolio investments at Forstmann Little and audit committee experience on various boards General (Retired) Ralph E. Eberhart, age 71, has served as a portfolio of innovative and bespoke seating products for applications on all classes of commercial, business aviation, executive and helicopter platforms for line fit and retrofit programs. These products are marketed and sold directly to OEMs, airlines and completion centers acrossDirector since 2007. General Eberhart is the globe.
Commercial Systems
Our Commercial Systems segment supplies aviation electronics systems, products and services to customers located throughout the world. The customer base is comprised of OEMs of commercial air transport, business and regional aircraft, commercial airlines and business aircraft operators. Our systems and products are used in both OEM applications as well as in retrofit and upgrade applications designed to increase the efficiency and enhance the value of existing aircraft.
Our commercial aviation electronics systems, products and services include:
| | • | integrated avionics systems, such as Pro Line Fusion®, which provide advanced avionics capabilities to meet the challenges of operating in the next generation global airspace. Pro Line Fusion® capabilities include: touch control primary flight displays, advanced flight and performance management, flight guidance and information management
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integrated cabin electronics solutions, including cabin management systems with touch-screen controls, wireless connectivity equipment, high definition video and audio, and entertainment and information content such as Airshow moving maps
communications systems and products, such as data link, high frequency (HF), very high frequency (VHF) and satellite communications systems
navigation systems and products, including landing sensors to enable fully automatic landings, radio navigation and geophysical sensors, as well as flight management systems
situational awareness and surveillance systems and products, such as synthetic and enhanced vision systems, surface surveillance and guidance solutions, head-up guidance systems, weather radar and collision avoidance systems
integrated flight controls including fly-by-wire, advanced flight guidance with auto-land capability
simulation and training systems, including full-flight simulators for crew training, visual system products, training systems and engineering services
maintenance, repair, parts, after-sales support services and aftermarket used equipment
Commercial Systems sales are categorized into air transport aviation electronics and business and regional aviation electronics. Product category sales are delineated based upon the difference in the underlying customer base, size of aircraft and markets served.
Air transport aviation electronics include avionics, cabin systems and flight control systems for large commercial transport aircraft platforms. We design these items as sub-systems and work with OEMs to integrate with other suppliers' products into the flight deck and broader aircraft systems. Our products offered for OEM applications in the air transport category are marketed directly to aircraft OEMs and airline operators, while our products offered for aftermarket applications are primarily marketed to airline operators.
Business and regional aviation electronics include integrated avionics, cabin management and flight control systems for application on regional and business aircraft platforms. We develop integrated avionics, cabin and flight control solutions for business and regional aircraft OEMs and support them with integration into other aircraft systems. Products offered for OEM applications in the business and regional aircraft category are marketed directly to the aircraft OEMs. Products offered for aftermarket applications are primarily marketed through distributors for business aviation and directly to regional airline operators.
Government Systems
Our Government Systems segment provides a broad range of electronic products, systems and services to customers including the U.S. Department of Defense, various ministries of defense, other government agencies and defense contractors around the world. Our defense electronic solutions are designed to meet a wide range of customer requirements, but tend to share certain characteristics including design for rugged environments and use in size, weight and power constrained applications. These applications also typically have stringent product integrity and certification requirements with a high degree of customer oversight. These products, systems and services support airborne, precision weapon, ground and maritime applications on new equipment as well as in retrofit and upgrade applications designed to extend the service life and enhance the capability of existing aircraft, vehicle and weapon platforms.
Our defense-related systems, products and services include:
communications systems and products designed to enable the transmission of information across the communications spectrum
navigation products and systems, including radio navigation products, global positioning system (GPS) equipment and multi-mode receivers
avionics systems for aircraft flight decks, including cockpit display products (multipurpose flat panel head-down displays, wide field of view head-up and helmet-mounted displays), flight controls, information/data processing and communications, navigation, safety and surveillance systems
precision targeting, electronic warfare and range and training systems
simulation and training systems, including visual system products, training systems and services
space wheels for satellite stabilization
maintenance, repair, parts, after-sales support services and aftermarket used equipment
Government Systems sales are categorized into avionics and communication and navigation products. Product category sales are delineated based upon underlying product technologies.
Avionics consists of electronic solutions for a broad range of airborne platforms including fixed wing aircraft and military and civil rotary wing aircraft, unmanned aerial systems (UAS) and the associated aircrew and maintenance training devices and services. We provide complete avionics solutions, including cockpit avionics, mission system applications and system integration, and also provide individual avionics products to platform integrators. We serve various roles within these markets including system and sub-systems integrator as well as provider of various electronic products. For the UAS market we provide cost effective, high performance integrated flight control, navigation, communication and sensor capabilities. Simulation and training solutions are provided for both fixed and rotary wing aircraft.
Communication and navigation products include full spectrum communication solutions for voice and data connectivity for government and military use in the air, on the ground and at sea. These communication products support military user requirements for high availability, highly secure, jam resistant wireless communication. Products include radio communication, data links, electronic warfare and networked communication systems. The navigation products are primarily comprised of global positioning system based products used for precision navigation and targeting applications. These applications include airborne, vehicular, maritime, soldier navigation devices, precision targeting subsystems, precision-guided weapons products, range and training systems and a variety of embedded GPS applications. Additional offerings include customized fully integrated thermal and power management solutions for participants in the defense industry, OEMs and the airlines.
Information Management Services
Our Information Management Services (IMS) segment provides communications services, systems integration and security solutions across the aviation, airport, rail and nuclear security markets to customers located around the world. The customer base includes commercial airlines, business aircraft operators, the U.S. Federal Aviation Administration (FAA), airport and critical infrastructure operators and major passenger and freight railroads. In October 2018, we announced that IMS will become partChairman of the Commercial Systems segment. This reorganization will enable us to further capitalize on customers' increasing need for aviation connectivity solutions. This change will require us to revise our segment reporting beginning in the first quarter of fiscal 2019 to report the IMS business within the Commercial Systems segment.
Our information management services include:
| | • | voice and data communication services, such as air-to-ground GLOBALinkSM and ground-to-ground AviNet® services, which enable satellite, VHF and HF transmissions between the cockpit, air traffic control, airline operation centers, reservation systems and other third parties ensuring safety and efficiency for commercial airlines and other related entities in the aviation ecosystem
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global, high throughput cabin connectivity solutions enabling airlines to provide an enhanced experience for their passengersCompensation Committee and improved operational efficiency for crews
robust connectivity management services that ensure interoperability between smart aircraft and legacy airline systems, allowing airlines to increase efficiency, reduce costs and enhance operations
cybersecurity asis a service to protect the integrity of our customers’ information systems across a wide variety of domains including aviation, airports, rail and critical infrastructure
| | • | around the clock global flight support services for business aircraft operators, under the ARINCDirectSM brand, including flight planning and datalink, international trip support, cabin connectivity solutions and flight operations management software
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airport communications and information systems designed to ease congestion and improve airport efficiency via airline agent and self-service check-in, airport operations, baggage management, boarding and access control solutions
train dispatching and information systems including solutions to support positive train control as mandated by the 2008 Railroad Safety Improvement Act
mission critical security command and control systems for nuclear power facilities with functions such as intrusion detection, access control, video and credential management and vehicle identification
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, airports, defense contractors, foreign ministries of defense, manufacturers of commercial helicopters, manufacturers of commercial air transport, airframe manufacturers, defense manufacturers, business and regional aircraft, commercial airlines, aerospace OEMs, fractional and other business jet operators, the FAA, critical infrastructure operators and major passenger and freight railroads. We market our systems, products and services directly to our 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 2018, various branchesmember of the Technology and Cybersecurity Committee. He has been President of the Armed Forces Benefit Association since 2005 and Chairman and President since February 2009. He served as Commander of the North American Aerospace Defense Command (NORAD) and U.S. Government, both directlyNorthern Command from October 2002 to January 2005. His active military career spanned 36 years. He is a member of the Board of Directors of VSE Corporation, Jacobs Engineering Group Inc. and indirectly through subcontracts, accounted for 23 percentTriumph Group, Inc., and he is a director of our total sales. Sales to The Boeing Company represented 16 percent of total salesseveral private companies.Experience, qualifications, attributes and skills: 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, strikes or other work stoppages affecting production by these customers, could have a material adverse effect on our business, financial condition, results ofleadership, operations and cash flows.
Competition
We operate in a highly competitive environment. Principal competitive factors include total cost of ownership, product and system performance, network coverage, quality, service, warranty and indemnification terms, technology design engineering capabilities, new product innovation and timely delivery. We compete worldwide with a number of U.S. and non-U.S. companies in each of our businesses. Many of these competitors are also our suppliers or customers. Principal competitors include BAE Systems Aerospace, Inc.; CAE Inc.; Diehl Aerosystems Holding GmBH; Elbit Systems Ltd.; Esterline Technologies Corp.; FlightSafety International; Garmin International Inc.; General Dynamics Corporation; General Electric Co.; Harris Corp.; Honeywell International, Inc.; Jamco America, Inc.; L3 Communications, Inc.; Northrop Grumman Corp.; Raytheon Co.; Recaro Aircraft Seating GmbH & Co. KG; Safran; Satcom Direct, Inc.; SITA; Thales S.A.; The Boeing Company; and Thompson Aero Seating Ltd. Several of our competitors are significantly larger than we are in terms of resources and market share and can offer a broader range of products. We believe that our systems, products and services are well positioned to compete in our served markets.
Industry consolidation has from time to time had a major impact on the competitive environment in which we operate. Our competitors periodically undertake mergers, alliances and realignments that contribute to a dynamic competitive landscape. We have contributed to this changing landscape in the past two years by completing a significant acquisition (B/E Aerospace, Inc.), one smaller acquisition and several strategic alliances to improve our competitive position and expand our market reach.
Raw Materials, Supplies and Working Capital
We believe we have adequate sources for the supply of raw materials and components for our manufacturing and service needs with suppliers located around the world. Electronic components and other raw materials used in the manufacturing of our products are generally available from several suppliers. We continue to work with our supply base for raw materials and components to ensure an adequate source of supply, utilizing strategic alliances, dual sourcing, identification of substitute or alternate parts that meet performance requirements and life-time buys. These life-time buys involve purchases of multiple years of supply in order to meet production and service requirements over the life span of a product. Although historically we have not experienced any significant difficulties in obtaining an adequate supply of raw materials and components necessary for our manufacturing operations or service needs, the loss of a significant supplier or the inability of a supplier to meet performance and quality specifications or delivery schedules could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our investment in inventory is a significant part of our working capital, and historically we have maintained sufficient inventory to meet our customers' requirements on a timely basis. This investment includes production stock, work-in-process, pre-production engineering costs, finished goods, spare parts and goods on consignment. Our accounts receivable also constitute a significant part of our working capital. Accounts receivable includes unbilled receivables which are primarily related to sales recorded under the percentage-of-completion method of accounting in accordance with applicable contract terms that have not been billed to customers. The critical accounting policies involving pre-production engineering costs and long-term contracts are discussed under the caption Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 below. Additional information relating to accounts receivable and inventory is contained in Notes 2, 5 and 6 of the Notes to Consolidated Financial Statements in Item 8 below.
Backlog
The following table summarizes our backlog:
| | | | | | | | | | | | | September 30 | | (in billions) | | 2018 | | 2017 | | Interior Systems | | $ | 3.9 |
| | $ | 3.6 |
| | Commercial Systems | | 2.4 |
| | 2.2 |
| | Government Systems: | | | | | | Funded orders | | 2.8 |
| | 2.7 |
| | Unfunded orders | | 0.7 |
| | 0.8 |
| | Information Management Services | | 0.3 |
| | 0.3 |
| | Total backlog | | $ | 10.1 |
| | $ | 9.6 |
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Our backlog represents the aggregate of the sales price of orders received from customers, but not recognized as revenue, and excludes unexercised options. Although we believe that the orders included in backlog are firm, most of our backlog orders can be modified or terminated by the customer. Our backlog at September 30, 2018 includes approximately $4.4 billion of orders that are expected to be filled after 2019.
Joint Ventures
Joint ventures, strategic alliances, strategic investments and other cooperative arrangements are part of our business strategies to broaden the market for our products and develop new technologies.
We have a 50 percent ownership interest in each of the following:
ACCEL (Tianjin) Flight Simulation Co., Ltd, a joint venture with Haite Group, for the joint development and production of commercial flight simulators in China
ADARI Aviation Technology Company Limited, a joint venture with Aviation Data Communication Corporation Co., LTD, operates remote ground stations around China and develops certain content delivery management software
AVIC Leihua Rockwell Collins Avionics Company, a joint venture with China Leihua Electronic Technology Research Institute, a subsidiary of the Aviation Industry Corporation of China (AVIC), which provides integrated surveillance system products for the C919 aircraft in China
Data Link Solutions LLC, a joint venture with BAE Systems, plc, for joint pursuit of the worldwide military data link market
ESA Vision Systems LLC, a joint venture with Elbit Systems, Ltd., for joint pursuit of helmet-mounted cueing systems for the worldwide military fixed wing aircraft market
Quest Flight Training Limited, a joint venture with Quadrant Group, plc, which provides aircrew training services primarily for the United Kingdom Ministry of Defence
Rockwell Collins CETC Avionics Co., Ltd. a joint venture with CETC Avionics Co., Ltd. to develop, produce and maintain communication and navigation products on Chinese commercial OEM platforms
Acquisitions and Dispositions
We regularly consider various business opportunities, including strategic acquisitions and alliances, licenses and marketing arrangements. We review the prospects of our existing businesses to determine whether any of them should be modified, sold or otherwise discontinued.
We completed two acquisitions in the past two years to augment our growth plans. These acquisitions were:
in April 2017, we acquired B/E Aerospace, which provides aircraft cabin interior products and services
in December 2016, we acquired Pulse.aero, a company specializing in self-bag drop technologies used by airlines and airports
We reached definitive agreements to divest the following three businesses, each of which is still subject to certain conditions to closing:
in August 2018, we reached an agreement to sell our air transport in-flight entertainment (IFE) business, which designs, manufactures and services in-seat video, overhead video and content services and other products for the air transport IFE market
in July 2018, we reached an agreement to sell our ElectroMechanical Systems business, which designs, manufactures and services actuation, pilot control and other specialty products for commercial and military aerospace applications. The business is being sold in order to comply with regulatory commitments associated with the pending UTC merger
in May 2018, we reached an agreement to sell our engineered components business, which manufactures, sells and services diversified engineering components for niche aerospace, military and industrial applications. The business is being sold in order to comply with regulatory commitments associated with the pending UTC merger
Additional information relating to our acquisitions, dispositions and joint ventures is contained in Notes 3, 4 and 8 of the Notes to Consolidated Financial Statements in Item 8 below.
Intellectual Property
Our intellectual property rights include valuable patents, trademarks, copyrights, trade secrets, inventions and other proprietary rights. We own numerous U.S. and foreign patents and have numerous pending patent applications, including patents and patent applications purchased in our acquisitions. We also license certain patents relating to our manufacturing and other activities. While in the aggregate we consider our patents and licenses important to the operation of our business, we do not consider any individual patent or license to be of such importance that the loss or termination of any one patent or license would materially affect us.
Rockwell Automation, Inc. (Rockwell) owns the "Rockwell" name. In connection with our spin-off from Rockwell in 2001, we were granted the exclusive right to continue to use the Rockwell Collins name for use in our business other than in connection with the Rockwell Automation business or industrial automation products. Unless extended, this exclusive right would terminate following certain change of control events, including the completion of the UTC Merger, as described in our distribution agreement with Rockwell.
Employees
As of September 30, 2018, we had approximately 31,200 employees and approximately 67 percent of them were located in the U.S. Approximately 10 percentDefense Department from 36 years of our employees located withinexperience in the U.S. Air Force and 9 percentsenior positions in the U.S. Military, including assignments as Commander of our employees located outsideNORAD and U.S. Northern Command
Knowledge of financial services and life insurance industries as Chairman and President of the U.S. are covered by collective bargaining agreements. Many of our employees located outsideArmed Forces Benefit Association Richard G. Hamermesh, age 70, has served as a Director since 2017. Dr. Hamermesh is a member of the U.S. who are not covered byAudit Committee. He was a collective bargaining agreement are represented by workers' councils or statutory labor unions.director of B/E Aerospace, Inc. from July 1987 to April 2017. Dr. Hamermesh is a Senior Fellow at the Harvard Business School, where he was formerly the MBA Class of 1961 Professor of Management Practice from 2002 to 2015. From 1987 to 2001, he was aco-founder and a Managing Partner of The collective bargaining agreementsCenter for mostExecutive Development, an executive education and development consulting firm. From 1976 to 1987, Dr. Hamermesh was a member of our employees covered by collective bargaining were negotiated in 2018the faculty of Harvard Business School. He is also an active investor and have varying contract terms between 3entrepreneur, having participated as a principal, director and 5 years.
Cyclicality and Seasonality
The markets in which we sell our products are, to varying degrees, cyclical and have experienced periodic upswings and downturns. For example, markets for our commercial aerospace products have experienced downturns during periods of slowdownsinvestor in the commercial airline industryfounding and during periodsearly stages of weak conditionsmore than 15 organizations. Dr. Hamermesh is a member of the Board of Directors of KLX Energy Services Holdings, Inc. (serves oil and gas industry) and SmartCloud (industrial artificial intelligence). He is a former director of KLX Inc. and b.good.2
Experience, qualifications, attributes and skills: Experience in management and leadership as Harvard Business School Professor Business and entrepreneurial acumen David Lilley, age 71, has served as a Director since 2008. Mr. Lilley is a member of the economy in general,Audit Committee, the Board Nominating and Governance Committee and the Corporate Strategy and Finance Committee. He served as demandChairman of Cytec Industries (specialty chemicals and materials) from January 1999 to December 2008, Chief Executive Officer of Cytec Industries from May 1998 to December 2009, andNon-Executive Director of Cytec Industries from January 2009 through April 2009. He was President of Cytec Industries from January 1997 through June 2008. From 1994 until January 1997, he was a Vice President of American Home Products Corporation, responsible for new aircraft generally declines during these periods. We believeits Global Medical Device business. Prior to that, we are currently benefiting from robust backlogs in commercial air transportationhe was a Vice President and increasing content as next generation aircraft enter into service. While we believe our Government Systems business is well positioned, ita member of the Executive Committee of American Cyanamid Company (medical and agricultural products). Mr. Lilley is also subject to some cyclicality, primarilya director of Public Service Enterprise Group Inc. and a former director of Arch Chemicals, Inc. and Andeavor (formerly known as Tesoro Corporation). Experience, qualifications, attributes and skills: U.S. and international management and leadership experience as past Chairman and CEO of Cytec Industries Global business perspective, operational knowledge and financial experience Class II Directors with Terms Expiring in 2021 Anthony J. Carbone, age 77, has served as a resultDirector since 2001. Mr. Carbone is our Lead Independent Director and a member of U.S. Government defense budget cycles. Additional information relatedthe Executive Committee. He served as ourNon-Executive Chairman from August 2014 to November 2015 and he served as our Lead Independent Director from November 2012 until August 2014. Mr. Carbone served as Vice Chairman of the defense budget environment can be found underBoard of Directors of The Dow Chemical Company (chemical, plastic and agricultural products) from February 2000 to October 2005 and Senior Consultant of Dow from November 2000 to October 2005. He served as Executive Vice President of Dow from November 1996 to November 2000. He is a former member of the caption Risk Factors in Item 1A below.
Our business tends to be seasonal with our fourth quarter usually producing relatively higher salesAmerican Chemical Society and cash flowformer Board Member and our first quarter usually producing relatively lower sales and cash flow. A large partChairman of this seasonality variance is attributable to our Government Systems business and relates to the U.S. Government procurement cycle.
Regulatory Matters
As a defense contractor, our contract costs are audited and reviewed on a continual basis by the Defense Contract Management AgencyAmerican Plastics Council and the Defense Contract Audit Agency. Audits and investigations are conducted from time to time to determine if our performance and administrationSociety of our U.S. Government contracts are compliant with applicable contractual requirements and procurement regulations and other applicable federal statutes and regulations. Under present U.S. Government procurement regulations, if indicted or adjudged in violation of procurement or other federal civil laws, a contractor, such as us, could be subject to fines, penalties, repayments or other damages. U.S. Government regulations also provide that certain findings against a contractor may lead to suspension or debarment from eligibility for awards of new U.S. Government contracts for up to three years. In addition, we are subject to various non-U.S. governmental contracting requirements.
The sale, installation and operation of our products in commercial aviation applications is subject to continued compliance with applicable regulatory requirements and future changes to those requirements. In the U.S., our commercial aviation products are
required to comply with FAA regulations governing production and quality systems, airworthiness and installation approvals, repair procedures and continuing operational safety. Some of our products, such as radio frequency transmitters and receivers, must also comply with Federal Communications Commission (FCC) regulations governing authorization and operational approval of telecommunications equipment. Our communication services offered in the Information Management Services business are also subject to certain FCC regulations.
Internationally, similar requirements exist for communication services, airworthiness, installation and operational approvals. These requirements are administered by the national aviation authorities of each country and, in the case of Europe, coordinated by the European Joint Aviation Authorities. Many countries also impose specific telecommunications equipment requirements, administered through their national aviation authorities or telecommunications authorities. In Europe, approval to import products also requires compliance with European Commission directives, such as those associated with electrical safety, electro-magnetic compatibility, use of metric units of measurement and restrictionsPlastics Industries. Mr. Carbone has served on the use of lead.
Products already in service may also become subject to mandatory changes for continued regulatory compliance as a result of any identified safety issue, which can arise from an aircraft accident, incident or service difficulty report.
Our products and technical data are controlled for export and import under various regulatory agencies. Audits and investigations by these agencies are a regular occurrence to ensure compliance with applicable federal statutes and regulations. Violations, including as a successor to an acquired business, can result in fines and penalties assessed against the Company as well as individuals, and the most egregious acts may result in a complete loss of export privileges.
Various anti-bribery and anti-corruption laws, as well as data privacy laws, are applicable to our business operations throughout the world.
Although we do not have any significant regulatory action pending against us, any such action could have a material adverse impact on our business, financial condition, results of operations and cash flows.
Environmental Matters
Federal, state and local requirements relating to the discharge of substances into the environment, the disposal of hazardous waste and other activities affecting the environment have had and will continue to have an impact on our manufacturing operations. To date, compliance with environmental requirements and resolution of environmental claims have been accomplished without material effect on our liquidity and capital resources, competitive position or financial condition. We believe that our expenditures for environmental capital investment and remediation necessary to comply with present regulations governing environmental protection and other expenditures for the resolution of environmental claims will not have a material adverse effect on our business or financial condition. Additional information on environmental matters is contained in Note 18Advisory Council of the Notes to Consolidated Financial StatementsHeritage Foundation.Experience, qualifications, attributes and skills: Experience in Item 8 below.
Risks Related to Our Business/Industry:
Reduction in U.S. Government spending adversely impacts Government Systems salesmanagement, leadership and profitability.
In 2018, 23 percentmanufacturing as an executive and Vice Chairman of our sales were derived from U.S. Government contracts, both directly and indirectly through subcontracts. While in 2018 the U.S. Congress acted to increase defense funding for the government's fiscal 2018 and 2019 budget periods, U.S. defense funding is expected to continue to be under pressure due to the overall economic environment, budget deficits and competing budget priorities. Cost cutting, efficiency initiatives, reprioritization and other affordability analysis by the U.S. Government on defense spending could present opportunities for us, but continued pressure on U.S. Government spending on defense could also adversely impact our Government Systems sales and profitability.
The U.S. Government has implemented various initiatives to address its fiscal challenges. In August 2011, Congress enacted the Budget Control Act (BCA) of 2011 which imposed spending caps and certain reductions in defense spending over a ten-year period through 2021. These spending caps and reductions, referred to as sequestration, went into effect in March 2013. Through a series of bipartisan agreements, Congress has been able to temporarily lift discretionary spending limits every year through 2019. However, unless a new agreement is enacted, the BCA will again be in force beginning in 2020. The continued uncertainty surrounding the U.S. defense budget could have a material adverse effect on theDow Chemical Company and the defense industry in general.
In years when the U.S. Government does not complete its annual budget and appropriations process prior to the beginning of its fiscal year (October 1), government operations are typically funded through a continuing resolution that authorizes agencies of the U.S. Government to continue to operate in the new year, but generally does not authorize new spending initiatives. During periods covered by a continuing resolution (or until the regular appropriation bills are passed), we may experience delays by the government in the procurement of new or existing products and services which can adversely impact our results of operations and cause variability in the timing of revenue between periods. During 2018, the U.S. Government completed the fiscal year 2019 Defense budget authorization and approval timeline on schedule and thus avoided the need for a continuing resolution for this part of government operations. Should the U.S. Government not complete fiscal year 2020 budgeting and appropriations in the same manner, we expect to be exposed to the effects of a continuing resolution in the future.
We offer a diverse range of defense products and services. We believe that this makes it less likely that cuts in any specific contract or program will have a long-term effect on our business; however, delays or termination of multiple or large programs or contracts could adversely affect our business and future financial performance. Potential changes in funding priorities may afford new or additional opportunities for our businesses in terms of existing, follow-on or replacement programs. While we would expect to compete and be well positioned as the incumbent on existing programs, we may not be successful, and any replacement programs may be funded at lower levels.
We depend to a significant degree on U.S. Government contracts, which are subject to unique risks.
In addition to normal business risks, our supply of systems and products to the U.S. Government is subject to unique risks which are largely beyond our control. These risks include:
dependence on Congressional appropriations and administrative allotment of funds
the ability of the U.S. Government to terminate, without prior notice, partially completed government programs and contracts that were previously authorized (although we may recover certain costs if terminated for convenience)
changes in governmental procurement legislation and regulations and other policies which may reflect military and political developments, including U.S. Government initiatives to gain increased access to intellectual property
significant changes in contract scheduling or program structure, which generally result in delays or reductions in deliveries or timing of cash receipts
intense competition for available U.S. Government business necessitating increases in time and investment for design and development
difficulty of forecasting costs and schedules when bidding on developmental and highly sophisticated technical work
changes over the life of U.S. Government contracts, particularly development contracts, which generally result in adjustments of contract prices
claims based on U.S. Government work and violation of associated compliance and other requirements, which may result in fines, the cancellation or suspension of payments or suspension or debarment proceedings affecting potential further business with the U.S. Government
We are subject to risks arising from changes in the competitive environment in which we operate.
We operate in a highly competitive environment. Many of our competitors are also our suppliers or customers on our programs and may be significantly larger than us. Among others, risks in the competitive environment include:
increased competition resulting from industry consolidation and original equipment manufacturers' efforts to vertically integrate
customers seeking more rights in intellectual property developed in connection with their program, price concessions, extensive liability protections and other customer favorable contract terms
competitors offering lower prices and new solutions, developing new technologies or otherwise capturing more market share
International conflicts and terrorism may adversely affect our business.
Conflicts and political turmoil in certain regions outside the United States and the possibility of future terrorist attacks cause significant uncertainty with respect to business and financial markets and may adversely affect our business. These international conflicts also affect the price of oil, which has a significant impact on the financial health of our commercial customers. Although our Government Systems business may experience greater demand for its products as a result of increased government defense spending, factors arising (directly or indirectly) from international conflicts or terrorism which may adversely affect our commercial business include reduced aircraft build rates, upgrades, maintenance and spending on discretionary products, as well as increases in the cost of property and aviation products insurance and increased restrictions placed on our insurance policies.
Our business is heavily concentrated in the aviation industry.
As a provider of products and services to the aviation industry, we are significantly affected by the overall economic condition of that industry. The aviation industry is historically cyclical.
Our business, financial condition, results of operations and cash flows may be adversely impacted, among other things, by the following:
reductions in demand for aircraft and delayed aircraft delivery schedules
increased vertical integration efforts of the original equipment manufacturers of aircraft
bankruptcy or other significant financial difficulties of our existing and potential customers
reductions in the need for, or the deferral of, aircraft maintenance and repair services and spare parts support
deferral of discretionary spending by our airline customers for cabin retrofit activities
retirement or storage of older generation aircraft, resulting in fewer retrofits and less demand for services for those aircraft, as well as the increased availability of used or recycled equipment on the market
limited availability of financing for airlines or aircraft
impact on the aviation industry due to the volatility of fuel prices
disruptions to commercial air travel demand
A global or regional recession may adversely affect us.
If a recession emerges that impacts where we do business, risks may include:
declines in revenues, profitability and cash flows from reduced orders, payment delays or other factors caused by the economic problems of our customers
adverse impacts on our access to short-term commercial paper borrowings or other credit sources
supply problems associated with any financial constraints faced by our suppliers
We derive a significant portion of our revenues from international sales and are subject to the risks of doing business outside the U.S.
In 2018, 48 percent of our total revenues were from sales of our products and services internationally, including foreign military sales. We expect that international sales will continue to account for a significant portion of our total sales. As a result, we are subject to risks of doing business internationally, including:
laws, regulations and policies of non-U.S. governments relating to investments and operations, as well as U.S. laws affecting the activities of U.S. companies abroad
the imposition of tariffs or embargoes, export controls and other trade restrictions, including the recent tariffs imposed by the U.S. and China and the possibility of additional tariffs or other trade restrictions relating to trade between the two countries
regulatory requirements and potential changes, including anti-bribery, anti-money laundering, antitrust and data privacy requirements
changes in government spending on defense programs
uncertainties and restrictions concerning the availability of funding, credit or guarantees
requirements of certain customers which obligate us to specified levels of in-country purchases, manufacturing or investments, known as offsets, and penalties in the event we fail to perform in accordance with the offset requirements
impacts associated with foreign currency volatility
uncertainties as to local laws and enforcement of contract and intellectual property rights
rapid changes in government, economic and political policies, political or civil unrest or the threat of international boycotts or U.S. anti-boycott legislation
We have made, and expect to continue to make, strategic acquisitions and partnerships that involve risks and uncertainties.
We completed two acquisitions in the past two fiscal years. We will consider making minor acquisitions and partnerships in the future in an effort to enhance shareowner value. Acquisitions and partnerships involve certain risks and uncertainties, such as:
difficulty in integrating newly-acquired businesses and commencing partnership operations in an efficient and cost-effective manner and the risk that we encounter significant unanticipated costs or other problems associated with integration or commencement
challenges in achieving strategic objectives, cost and revenue synergies and other expected benefits
risk that our markets do not evolve as anticipated and the targeted technologies do not prove to be those needed to be successful in those markets
risk that we assume significant liabilities that exceed the limitations of any applicable indemnification provisions or the financial resources of any indemnifying parties
loss of key employees of the acquired businesses or joint venture
risk of diverting the attention of senior management from our existing operations
risk of litigation associated with an acquisition
We enter into fixed-price contracts that could subject us to losses in the event that we have cost overruns.
During 2018, approximately 94 percent of our total sales were, and a significant portion of our anticipated future sales will be, from fixed-price contracts. This allows us to benefit from cost savings, but it carries the burden of potential cost overruns since we assume all of the cost risk. If our initial cost estimates are incorrect, we can incur losses on these contracts. These fixed-price contracts can expose us to potentially large losses because the customer may compel us to complete a project or, in the event of a termination for default, pay the entire incremental cost of its replacement by another provider regardless of the size of any cost overruns that occur over the life of the contract. Because many of these projects involve new technologies and applications and can last for years, unforeseen events such as technological difficulties, fluctuations in the price of raw
materials (including added tariffs), problems with subcontractors and cost overruns can result in the contractual price becoming less favorable or even unprofitable to us over time. Furthermore, if we do not meet project deadlines or specifications, we may need to renegotiate contracts on less favorable terms, be forced to pay penalties or liquidated damages or suffer major losses if the customer exercises its right to terminate. In addition, some of our contracts have provisions relating to cost controls and audit rights, and if we fail to meet the terms specified in those contracts we may not realize their full benefits. Our results of operations are dependent on our ability to maximize earnings from our contracts. Lower earnings caused by cost overruns could have an adverse impact on our financial condition, results of operations and cash flows.
We are subject to risks in our integration processes and production systems, including potential issues in meeting stringent performance and reliability standards.
The aerospace and defense business is complex, involving extensive coordination and integration with U.S. and non-U.S. suppliers and customers, highly-skilled labor, stringent regulatory and contractual requirements and performance and reliability standards. As a result, our ability to deliver products and systems on time, satisfy regulatory and customer requirements, and achieve or maintain program profitability is subject to significant risk. Operational delays or defects could result in increased production costs, as well as delayed deliveries and disruption to our customers.
Tax changes could affect our effective tax rate and future profitability.
Our future results could be adversely affected by changes in the effective tax rate as a result of changes in our overall profitability and changes in the mix of earnings in countries with differing statutory tax rates, changes in tax legislation, the results of audits and examination of previously filed tax returns and continuing assessment of our tax exposures. For example, in 2018 the U.S. Government enacted the Tax Cuts and Jobs Act (the Act), which contains significant changes to the U.S. tax system. We are analyzing the Act to determine the full impact of the new tax law, and to the extent any future guidance differs from our preliminary interpretation of the law, it could have a material effect on our financial position and results of operations.
We depend on critical suppliers and subcontractors.
We do not always have alternate sources of supply readily available for certain goods or services, such as liquid crystal displays. A shortage of raw materials or components, the loss of a significant supplier or subcontractor or their inability to meet performance, quality or delivery requirements due to natural disaster, financial stress, capacity constraints, military conflicts or other causes could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We depend on specialized test equipment.
Some of our specialized test equipment that supports the reliability of our products and systems is the result of significant investment. Back-up test equipment may not be readily available. Damage to our specialized test equipment may result in protracted production recovery and may adversely impact our ability to service our products.
A cybersecurity incident, network failure, data privacy breach or other business disruption could have negative impacts.
We face cyber threats, threats to the physical security of our facilities, potential cyber attacks to the integrity of our networks and/or products, and the potential release or theft of our intellectual property or other important data as well as the potential for business disruptions associated with information technology (IT) failures. Possible areas of significant exposure to cyber threats or other disruptions include our enterprise information technology resources, our information management network that provides communication services to customers and our flight deck communication products and solutions. Any of these threats or disruptions may result in a material adverse effect on our business, financial condition, results of operations and cash flows. Risks may include:
adverse effects to future results due to the theft, destruction, loss, corruption or release of personal data, confidential information or intellectual property
operational or business disruptions resulting from the failure of IT or other systems and subsequent mitigation activities
fines, penalties or negative publicity resulting in reputation or brand damage with our customers, suppliers, employees, shareowners and others
Risks Related to Our B/E Aerospace Transaction:
We may be unable to successfully integrate B/E Aerospace's business and realize the anticipated benefits of the merger.
The success of the merger will depend, in part, on our ability to successfully combine our business with B/E Aerospace's business and realize the anticipated benefits, including synergies, cost savings, innovation and operational efficiencies, from the combination. If we are unable to achieve these objectives within the anticipated time frame, or at all, the anticipated benefits may not be realized fully, or at all, or may take longer to realize than expected.
The merger involves the integration of B/E Aerospace's business with our existing business, which is a complex, costly and time-consuming process. We have not previously completed a transaction comparable in size or scope to the merger. The integration of the two companies may result in material challenges, including, without limitation:
the diversion of management's attention from ongoing business concerns and performance shortfalls at one or both of the companies as a result of the devotion of management's attention to the integration
maintaining employee morale and retaining key management and other employees
the possibility of faulty assumptions underlying expectations
retaining existing business and operational relationships and attracting new business and operational relationships
consolidating corporate and administrative infrastructures and eliminating duplicative operations
coordinating geographically separate organizations
unanticipated issues in integrating information technology, communications and other systems
unforeseen expenses or delays associated with the integration
Many of these factors are outside of our control and any one of them could result in delays, increased costs, decreases in the amount of expected revenues and diversion of management's time and energy, which could materially affect our financial position, results of operations and cash flows.
Risks Related to the Pending Acquisition of the Company by UTC:
The UTC Merger is subject to conditions, some or all of which may not be satisfied, or completed on a timely basis, if at all. Failure to complete the UTC Merger could have material adverse effects on us.
The completion of the UTC Merger is subject to a number of conditions. On November 23, 2018, UTC announced that the final regulatory approval required to close its acquisition of Rockwell Collins had been received and that the acquisition was expected to close within three business days.
The failure to satisfy all of the required conditions could delay the completion of the UTC Merger or prevent it from occurring at all. There can be no assurance that the conditions to the closing of the UTC Merger will be satisfied or waived or that the UTC Merger will be completed. Also, subject to limited exceptions, either we or UTC may terminate the Merger Agreement if the UTC Merger has not been completed by 5:00 p.m. (Eastern time) on March 4, 2019.
If the UTC Merger is not completed, our ongoing business may be materially adversely affected and, without realizing any of the benefits of having completed the UTC Merger, we will be subject to a number of risks, including the following:
the market price of our common stock could decline
we could owe a $695 million termination fee to UTC under certain circumstances, including a material breach by us
time and resources, financial and other, committed by our management to integration planning or other matters relating to the UTC Merger could otherwise have been devoted to pursuing other beneficial opportunities
we may experience negative reactions from the financial markets or from our customers, suppliers or employees
we will be required to pay our costs relating to the UTC Merger, such as legal, accounting, financial advisory and printing fees, whether or not the UTC Merger is completed
In addition, if the UTC Merger is not completed, we could be subject to litigation related to any failure to complete the UTC Merger or related to any enforcement proceeding commenced against us to perform our obligations under the UTC Merger Agreement. Any of these risks could materially and adversely impact our ongoing business, financial condition, financial results and stock price.
Similarly, delays in the completion of the UTC Merger could, among other things, result in additional transaction costs, loss of revenue or other negative effects associated with uncertainty about completion of the UTC Merger and could materially and adversely affect our ongoing business, financial condition, financial results and stock price.
The Merger Agreement contains provisions that limit our ability to pursue alternatives to the UTC Merger, could discourage a potential competing acquiror of the Company from making a favorable alternative transaction proposal and, in specified circumstances, could require us to pay a substantial termination fee to UTC.
The Merger Agreement contains provisions that make it more difficult for us to be acquired by any company other than UTC. The Merger Agreement contains certain provisions that restrict our ability to, among other things, initiate, seek, solicit, knowingly facilitate, knowingly encourage, knowingly induce or knowingly take any other action reasonably expected to lead to, or engage in negotiations or discussions relating to, or approve or recommend, any third-party acquisition proposal.
In some circumstances, including a material breach by us, upon termination of the Merger Agreement, we would be required to pay a termination fee of $695 million to UTC.
These provisions could discourage a potential third-party acquiror or merger partner that might have an interest in acquiring all or a significant portion of us or pursuing an alternative transaction from considering or proposing such a transaction, even if it were prepared to pay considerationExperience with a higher per share value than the value proposed to be received in the UTC Merger. In particular, the termination fee, if applicable, would be substantial, and could result in a potential third-party acquiror or merger partner proposing to pay a lower price to our shareowners than it might otherwise have proposed to pay absent such a fee.
If the Merger Agreement is terminated and we determine to seek another business combination, we may not be able to negotiate a transaction with another party on terms comparable to, or better than, the terms of the UTC Merger.
The value of the stock portion of the Merger Consideration is subject to changes based on fluctuations in the value of UTC common stock.
Upon completion of the UTC Merger, each issued and outstanding share of Rockwell Collins common stock (other than certain excluded shares) will be converted into the right to receive the Merger Consideration, which is equal to $93.33 in cash, without interest, plus a fraction of a share of UTC common stock having a value equal to the quotient obtained by dividing $46.67 by the average of the volume-weighted average prices per share of UTC common stock on the NYSE on each of the 20 consecutive trading days ending with the trading day immediately prior to the closing date, subject to adjustment based on a two-way collar mechanism as described below. If the UTC stock price is greater than $107.01 but less than $124.37, the exchange ratio will be equal to the quotient of (1) $46.67 divided by (2) the UTC stock price. However, if the UTC stock price is less than or equal to $107.01 or greater than or equal to $124.37, then a two-way collar mechanism will apply, pursuant to which (a) if the UTC stock price is greater than or equal to $124.37, the exchange ratio will be fixed at 0.37525 and result in more than $46.67 in value, and (b) if the UTC stock price is less than or equal to $107.01, the exchange ratio will be fixed at 0.43613 and result in less than $46.67 in value. Accordingly, the actual number of shares and the value of UTC common stock
delivered to our shareowners will depend on the UTC stock price, and the value of the shares of UTC common stock delivered for each such share of our common stock may be greater than, less than or equal to $46.67. On November 23, 2018, UTC announced that the final regulatory approval required to close its acquisition of Rockwell Collins had been received and that the acquisition was expected to close within three business days.
We are subject to business uncertainties and contractual restrictions while the UTC Merger is pending, which could adversely affect our business and operations.
In connection with the pendency of the UTC Merger, it is possible that some customers, suppliers and other persons with whom we have a business relationship may delay or defer certain business decisions or might decide to seek to terminate, change or renegotiate their relationships with us as a result of the UTC Merger, which could negatively affect our revenues, earnings and/or cash flows, as well as the market price of our common stock, regardless of whether the UTC Merger is completed.
Under the terms of the Merger Agreement, we are subject to certain restrictions on the conduct of our business prior to completing the UTC Merger which may adversely affect our ability to execute certain of our business strategies, including the ability in certain cases to enter into or amend contracts, acquire or dispose of assets, incur indebtedness or incur capital expenditures. Such limitations could adversely affect our business and operations prior to the completion of the UTC Merger. Each of the risks described above may be exacerbated by delays or other adverse developments with respect to the completion of the UTC Merger.
Completion of the UTC Merger will trigger change in control or other provisions in certain customer and other agreements to which we are a party, which may have an adverse impact on our or UTC’s business and results of operations following completion of the UTC Merger.
The completion of the UTC Merger will trigger change in control and other provisions in certain customer and other agreements to which we are a party. If we or UTC are unable to negotiate waivers of those provisions, customers or other counterparties may exercise their rights and remedies under the agreements, potentially terminating the agreements or seeking monetary damages or equitable remedies. Even if we and UTC are able to negotiate consents or waivers, the customers or other counterparties may require a fee for such waivers or seek to renegotiate the agreements on terms less favorable to us or the combined company. Certain of our customers have commented on the potential impact of the UTC Merger, including potential benefits, questions and concerns. Any of the foregoing or similar developments may have an adverse impact on our or UTC’s business and results of operations following completion of the UTC Merger.
Uncertainties associated with the UTC Merger may cause a loss of management personnel and other key employees, which could adversely affect our future business and operations.
We are dependent on the experience and industry knowledge of our officers and other key employees to execute their business plans. Our success will depend in part upon our ability to retain certain key management personnel and employees. Prior to completion of the UTC Merger, current and prospective employees of us and UTC may experience uncertainty about their roles within UTC following the completion of the UTC Merger, which may have an adverse effect on our ability to attract or retain key management and other key personnel. In addition, no assurance can be given that UTC, after the completion of the UTC Merger, will be able to attract or retain key management personnel and other key employees to the same extent that we and UTC have previously been able to attract or retain their own employees.
The UTC common stock to be received by our shareowners upon completion of the UTC Merger will have different rights from shares of Rockwell Collins common stock.
Upon completion of the UTC Merger, our shareowners will no longer be shareowners of Rockwell Collins, but will instead become shareowners of UTC and their rights as UTC shareowners will be governed by the terms of UTC’s certificate of incorporation and by-laws. The terms of UTC’s certificate of incorporation and by-laws are in some respects materially different than the terms of our certificate of incorporation and by-laws, which currently govern the rights of our shareowners.
Cautionary Statement
This Annual Report on Form 10-K, and documents that are incorporated by reference in this Annual Report on Form 10-K, contains statements, including statements regarding certain projections, business trends and the proposed acquisition of Rockwell Collins by UTC, 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 those disclosed in Risk Factors in Item 1A above and otherwise detailed herein, as well as other risks and uncertainties, including but not limited to those detailed from time to time in our SEC filings and, with respect to the proposed acquisition of Rockwell Collins, UTC’s filings with the SEC. With respect to the business and operations of Rockwell Collins, these risks include but are 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 awardvariety of domestic and international contracts; delaysbusiness matters
Robert K. Ortberg, age 58, has served as a Director since 2013. Mr. Ortberg is our Chairman of the Board and is the Chairman of the Executive Committee. He has been our Chief Executive Officer since August 2013 and has served as our President since September 2012. He served as our Executive Vice President, Chief Operating Officer, Government Systems from February 2010 to September 2012 and as our Executive Vice President, Chief Operating Officer, Commercial Systems from October 2006 to February 2010. He served as a director of Bucyrus International, Inc., from July 2008 to July 2011 and joined the Board of Aptiv PLC (automotive technology and mobility) 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 ratesSeptember 2018. He serves on the commercial aerospace industry or our business;Board of Governors for the impactAerospace Industries Association, is a member of terrorist events, regional conflicts or governmental sanctions on other nationsThe Business Council and serves on the commercial aerospace industry; changes in domesticBoard of Directors of FIRST® (For Inspiration and foreign government spending, budgetary, procurementRecognition of Science and trade policies adverse to our businesses; market acceptance of our newTechnology) 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 uncertaintiesHawkeye Council of the outcomeBoy Scouts of lawsuits, claimsAmerica. He also serves on the University of Iowa Engineering Advisory Board and legal proceedings. With respect toon the proposed acquisition, these risks include but are not limited to:Board of Trustees of the abilityUnited Way of East Central Iowa. Experience, qualifications, attributes and skills: Leadership, management and aerospace and defense industry knowledge and experience as CEO and President of Rockwell Collins and UTC to satisfy the conditions to the closingthrough his previous Rockwell Collins positions Strategic and business acumen, engineering and program management experience and operational execution Cheryl L. Shavers, age 64, has served as a Director since 2002. Dr. Shavers is Chairman of the transaction; the occurrence of events that may give rise toTechnology and Cybersecurity Committee and a right of one or bothmember of the partiesBoard Nominating and Governance Committee. Dr. Shavers has been the Chairman and Chief Executive Officer of Global Smarts, Inc. (business advisory services) since February 2001. She served on the Advisory Board for E.W. Scripps Company, and as Under Secretary of Commerce for Technology for the United States Department of Commerce from November 1999 to terminateFebruary 2001 after having served as its Under Secretary Designate from April 1999 to November 1999. She served as Sector Manager, Microprocessor Products Group for Intel Corporation prior to April 1999. 3
She served asNon-Executive Chairman of BitArts Ltd. from 2001 to December 2003 and served as a director of ATMI, Inc. from 2006 to 2014. She served on the merger agreement; negative effectsBoard of Directors of Mentor Graphics Corporation from June 2016 until it was purchased by Siemens AG in April 2017. She is currently on the Board of Knowles Corporation (supplier of micro-acoustic, audio processing and precision device solutions) and ITT Corporation (components and solutions for energy, transportation and industrial markets). Experience, qualifications, attributes and skills: Leadership and operations experience as CEO of Global Smarts, Inc. Experience with developing technology plans and the transition of advanced technology into business opportunities 4
See also the information with respect to executive officers of the announcement orCompany in Part I under the consummationcaption “Item 4A. Executive Officers of the transaction on the market price of UTC 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 UTC’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 UTC 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 risks associated with the proposed merger and on other 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. In addition, in connection with the pending merger, UTC has filed a registration statement that includes a prospectus from UTC and a proxy statement from Rockwell Collins, which is effective and contains important information about UTC, Rockwell Collins, the transaction and related matters. Readers are cautioned not to place undue reliance on forward-looking statements. These forward-looking statements are made only as of the date hereof and Rockwell Collins assumes no obligation to update any forward-looking statement, except as otherwise required by law.
| | Item 1B. | Unresolved Staff Comments. |
None.
As of September 30, 2018, we operated various manufacturing and engineering facilities, sales offices, warehouses and service locations throughout the U.S. and around the world. These facilities have aggregate floor space of approximately 10.8 million square feet. Of this floor space, 47 percent is owned and 53 percent is leased. There are no major encumbrances on any of our plants or equipment. In the opinion of management, our properties have been well maintained, are in sound operating condition and contain all equipment and facilities necessary to operate at present levels. A summary of floor space of these facilities at September 30, 2018 is as follows:
| | | | | | | | | | | | Location (in thousands of square feet) | | Owned Facilities | | Leased Facilities | | Total | | Interior Systems | | | | | | | | U.S. | | 394 |
| | 2,016 |
| | 2,410 |
| | Europe / Africa / Middle East | | 277 |
| | 230 |
| | 507 |
| | Asia-Pacific | | 705 |
| | 150 |
| | 855 |
| | Americas, excluding U.S. | | — |
| | 264 |
| | 264 |
| | Total | | 1,376 |
| | 2,660 |
| | 4,036 |
| | | | | | | | | | Commercial and Government Systems |
|
|
|
|
|
|
|
|
| | U.S. |
| 3,355 |
|
| 1,668 |
|
| 5,023 |
| | Europe / Africa / Middle East |
| 330 |
|
| 225 |
|
| 555 |
| | Asia-Pacific |
| — |
|
| 416 |
|
| 416 |
| | Americas, excluding U.S. |
| — |
|
| 148 |
|
| 148 |
| | Total |
| 3,685 |
|
| 2,457 |
|
| 6,142 |
| | | | | | | | | | Information Management Services | | | | | | | | U.S. | | 39 |
| | 556 |
| | 595 |
| | Europe / Africa / Middle East | | — |
| | 42 |
| | 42 |
| | Asia-Pacific | | — |
| | 26 |
| | 26 |
| | Americas, excluding U.S. | | — |
| | 1 |
| | 1 |
| | Total | | 39 |
| | 625 |
| | 664 |
| | Combined Total | | 5,100 |
| | 5,742 |
| | 10,842 |
| | | | | | | | | | Type of Facility (in thousands of square feet) | | Owned Facilities | | Leased Facilities | | Total | | Interior Systems | | | | | | | | Manufacturing and service | | 1,300 |
| | 2,219 |
| | 3,519 |
| | Sales, engineering and general office space | | 76 |
| | 441 |
| | 517 |
| | | | | | | | | | Commercial and Government Systems | | | | | | | | Manufacturing and service | | 1,247 |
| | 1,017 |
| | 2,264 |
| | Sales, engineering and general office space | | 2,438 |
| | 1,440 |
| | 3,878 |
| | | |
|
|
|
|
|
|
|
| | Information Management Services | | | | | | | | Manufacturing and service | | 39 |
| | 81 |
| | 120 |
| | Sales, engineering and general office space | | — |
| | 544 |
| | 544 |
| | Combined Total | | 5,100 |
| | 5,742 |
| | 10,842 |
|
We have facilities with a total of at least 200,000 square feet (in rounded thousands) in the following cities: Cedar Rapids, Iowa (2,910,000 square feet), Tanauan City, Philippines (770,000 square feet), Winston-Salem, North Carolina (660,000 square feet), Melbourne, Florida (400,000 square feet), Annapolis, Maryland (370,000 square feet), Richardson, Texas (280,000 square feet), Everett, Washington (240,000 square feet), Heidelberg, Germany (240,000 square feet), Nogales, Mexico (230,000 square feet), Irvine, California (210,000 square feet) and Coralville, Iowa (200,000 square feet). Most of our facilities for our Commercial
Systems and Government Systems businesses are shared and have therefore been presented together in the tables above. We have excluded from the tables above hundreds of leased locations wherein our Information Management Services business has radio frequency equipment in various locations throughout the world.
We purchase property insurance covering physical damage to our facilities and resulting business interruption from perils including fire, windstorm, flood and earthquake. This insurance generally provides replacement cost coverage subject to a $10 million deductible with certain exceptions. For example, certain of our facilities, including those located in California and Mexico, are located near major earthquake fault lines. For those facilities we maintain earthquake insurance with limits that may be less than full replacement cost. These exceptions are largely driven by the availability and cost of catastrophe coverage from the insurance markets.
| | Item 3. | Legal Proceedings. |
Various lawsuits, claims and proceedings have been or may be instituted or asserted against us relating to the conduct of our business, including those pertaining to product liability, intellectual property, environmental, safety and health, exporting or importing, contract, employment and regulatory matters. Although the outcome of litigation cannot be predicted with certainty and some lawsuits, claims or proceedings may be disposed of unfavorably to us, management believes there are no material pending legal proceedings.
Related to the acquisition and post-closing compliance review of B/E Aerospace, as previously disclosed, the Company identified and is investigating the circumstances surrounding an employee's submission of certain expense reports for customer entertainment and gifts that preceded the acquisition and do not appear to have complied with applicable company policy. In March 2018, the Company voluntarily notified the Department of Justice (DOJ) and SEC Division of Enforcement of its investigation. The Company's investigation into this and other customer related expenditures is ongoing, and the outcome or the consequences thereof cannot be predicted at this time.
| | Item 4. | Mine Safety Disclosures. |
Not applicable.
| | Item 4A. | Executive Officers of the Company.
|
The name, age, office, position held with us and principal occupations and employment during the past five years of each of our executive officers as of November 26, 2018 are as follows:
| | | | | Name, Office and Position, and Principal Occupations and Employment | | Age | Robert K. Ortberg—Chairman of the Board of Directors since November 2015; Chief Executive Officer and a Director since August 2013; President since September 2012
| | 58 |
| Patrick E. Allen—Senior Vice President and Chief Financial Officer since January 2005
| | 54 |
| Tatum J. Buse—Vice President, Finance and Corporate Controller since September 2013
| | 44 |
| Philip J. Jasper—Executive Vice President and Chief Operating Officer, Government Systems since September 2012
| | 50 |
| Bruce M. King—Senior Vice President, Operations since May 2011
| | 57 |
| Jeffrey D. MacLauchlan—Senior Vice President, Corporate Development since September 2014; Vice President, Corporate Development of Lockheed Martin Corporation prior thereto
| | 59 |
| Colin R. Mahoney—Senior Vice President, International and Service Solutions since February 2013
| | 53 |
| Nan Mattai—Senior Vice President, Engineering and Information Technology since August 2015; Senior Vice President, Engineering and Technology prior thereto
| | 66 |
| David J. Nieuwsma—Executive Vice President and Chief Operating Officer, Interior Systems since October 2018; Senior Vice President, Information Management Services from April 2016 to October 2018; Vice President, Strategy and Business Development, Government Systems prior thereto
| | 54 |
| Robert J. Perna—Senior Vice President, General Counsel and Secretary since February 2014; Senior Vice President, General Counsel from January 2014 to February 2014; Vice President, General Counsel and Secretary for AM Castle & Co. prior thereto
| | 54 |
| Jeffrey A. Standerski—Senior Vice President, Human Resources since April 2016; Senior Vice President, Information Management Services from December 2013 to April 2016; Vice President and General Manager, Business and Regional Systems prior thereto
| | 52 |
| Kent L. Statler—Executive Vice President and Chief Operating Officer, Commercial Systems since February 2010
| | 53 |
| Douglas E. Stenske—Vice President, Treasurer and Risk Management since September 2013
| | 52 |
| Robert A. Sturgell—Senior Vice President, Washington Operations since April 2009
| | 59 |
|
Company.” There are no family relationships, as defined, between any of the above executive officersdirectors and any other executive officerdirector or any director. No officer was selected pursuant to any arrangement or understanding between the officer and any person other than us. All executive officers are elected annually.
| | Item 5. | Market for the Company's Common Equity, Related Stockholder Matters and Company Purchases of Equity Securities. |
Shareowner Return Performance(1)
(including dividend reinvestment)
Fiscal year ended September 30
Cumulative Total Returns(1)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2013 | | 2014 | | 2015 | | 2016 | | 2017 | | 2018 | | Rockwell Collins, Inc. | | $ | 100.00 |
| | $ | 114.61 |
| | $ | 123.58 |
| | $ | 128.73 |
| | $ | 202.17 |
| | $ | 219.40 |
| | S&P 500 | | 100.00 |
| | 118.78 |
| | 120.24 |
| | 136.54 |
| | 161.95 |
| | 190.95 |
| | Peer Group | | 100.00 |
| | 114.97 |
| | 122.29 |
| | 143.03 |
| | 205.32 |
| | 254.10 |
| | Closing market price of COL at fiscal year end | | 68.59 |
| | 77.35 |
| | 82.24 |
| | 84.34 |
| | 130.71 |
| | 140.47 |
|
(1) The cumulative total returns table and adjacent line graph compare the cumulative total shareowner return on the company’s Common Stock against the cumulative total returnofficer.SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the S&P AerospaceSecurities Exchange Act requires our officers and Defense Select Industry Index (Peer Group)directors, and persons who own more than ten percent of a registered class of our equity securities, to file reports of ownership and changes in ownership on Forms 3, 4 and 5 with the S&P 500 Composite Index (S&P 500) for the five-year period ended September 30, 2018. In each case a fixed investment of $100 at the respective closing prices on September 30, 2013SEC and reinvestment of all dividends are assumed.
Market Information
Our common stock, par value $.01 per share, is listed on the New York Stock ExchangeExchange. Officers, directors and trades under the symbol COL. On October 31,greater than ten percent shareowners are required by SEC regulation to furnish us with copies of all Forms 3, 4 and 5 that they file.Based solely on our review of copies of such forms we have received and written representations from certain reporting persons confirming that they were not required to file Forms 5 for fiscal year 2018, there were 15,404 shareowners of recordwe believe that all of our common stock.
Dividends
The following table sets forth the cash dividends per share paid by us during each quarterofficers, directors and greater than ten percent beneficial owners complied with all SEC filing requirements applicable to them under Section 16(a) of our years ended September 30, 2018 and 2017:
| | | | | | | | | | | Fiscal Quarters | | 2018 | | 2017 | | First | | $ | 0.33 |
| | $ | 0.33 |
| | Second | | 0.33 |
| | 0.33 |
| | Third | | 0.33 |
| | 0.33 |
| | Fourth | | 0.33 |
| | 0.33 |
|
Based on our current dividend policy, we have been paying quarterly cash dividends which, on an annual basis, equal $1.32 per share. The declaration and payment of dividends, however, will be at the sole discretion of our Board of Directors, subject to certain restrictions in the Merger Agreement. There can be no assurance that we will continue to pay dividends at our current levels.
Repurchases
Our Board of Directors has authorized certain repurchases of our common stock. During 2018, there were no repurchases of our common stock. During 2017, we repurchased approximately 0.4 million shares of our common stock at a total cost of $39 million, at a weighted average cost of $104.32 per share.
The following table provides information with respect to purchases made by or on behalf of us or any "affiliated purchaser" (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934) of shares of our common stock during the three months ended September 30, 2018:
| | | | | | | | | | | | | | | Period | | Total
Number of
Shares
Purchased
| | Average Price
Paid per Share
| | Total Number of
Shares Purchased as
Part of Publicly
Announced
Plans or Programs
| | Maximum Number
(or Approximate
Dollar Value) of
Shares that May Yet
Be Purchased Under the
Plans or Programs(1)
| July 1, 2018 through July 31, 2018 | | — |
| | $ | — |
| | — |
| | $ | 285 million | August 1, 2018 through August 31, 2018 | | — |
| | — |
| | — |
| | | 285 million | September 1, 2018 through September 30, 2018 | | — |
| | — |
| | — |
| | | 285 million | Total / Average | | — |
| | — |
| | — |
| | | |
(1) On July 7, 2017, we announced that our Board authorized the repurchase of an additional $200 million of our common stock. The authorization has no stated expiration.
| | Item 6. | Selected Financial Data. |
The following selected financial data should be read in conjunction with the consolidated financial statements and notes thereto included in Item 8 below. The Statement of Operations, Statement of Financial Position and other data have been derived from our audited financial statements. The Company operates on a 52/53 week fiscal year ending on the Friday closest to September 30. Fiscal years 2018, 2017, 2016 and 2015 were 52-week fiscal years while fiscal year 2014 was a 53-week fiscal year.
| | | | | | | | | | | | | | | | | | | | | | | | | Years Ended September 30 | | (dollars in millions, except per share amounts) | | 2018(a) | | 2017(b) | | 2016(c) | | 2015(d) | | 2014(e) | | Statement of Operations Data: | | | | | | | | | | | | Sales | | $ | 8,665 |
| | $ | 6,822 |
| | $ | 5,259 |
| | $ | 5,244 |
| | $ | 4,979 |
| | Cost of sales | | 6,382 |
| | 4,868 |
| | 3,642 |
| | 3,630 |
| | 3,469 |
| | Selling, general and administrative expenses | | 817 |
| | 732 |
| | 638 |
| | 606 |
| | 594 |
| | Income from continuing operations | | 1,032 |
| | 705 |
| | 727 |
| | 694 |
| | 618 |
| | Income (loss) from discontinued operations, net of taxes | | — |
| | — |
| | 1 |
| | (8 | ) | | (14 | ) | | Net income | | 1,032 |
| | 705 |
| | 728 |
| | 686 |
| | 604 |
| | Net income as a percent of sales | | 11.9 | % | | 10.3 | % |
| 13.8 | % |
| 13.1 | % |
| 12.1 | % | | Diluted earnings per share from continuing operations | | 6.22 |
| | 4.79 |
| | 5.50 |
| | 5.19 |
| | 4.52 |
| | Statement of Financial Position Data: | | | | | | | | | | | | Working capital(f) | | $ | 1,092 |
| | $ | 1,691 |
| | $ | 1,144 |
| | $ | 1,164 |
| | $ | 1,054 |
| | Property, Net | | 1,429 |
| | 1,398 |
| | 1,035 |
| | 964 |
| | 919 |
| | Goodwill and intangible assets | | 11,299 |
| | 11,287 |
| | 2,586 |
| | 2,607 |
| | 2,551 |
| | Total assets | | 19,026 |
| | 17,997 |
| | 7,699 |
| | 7,294 |
| | 6,994 |
| | Short-term debt | | 2,248 |
| | 479 |
| | 740 |
| | 448 |
| | 504 |
| | Long-term debt, net | | 5,681 |
| | 6,676 |
| | 1,374 |
| | 1,670 |
| | 1,652 |
| | Shareowners' equity | | 7,107 |
| | 6,043 |
| | 2,078 |
| | 1,875 |
| | 1,884 |
| | Other Data: | | | | | | | | | | | | Capital expenditures | | $ | 257 |
| | $ | 240 |
| | $ | 193 |
| | $ | 210 |
| | $ | 163 |
| | Depreciation and amortization | | 449 |
| | 399 |
| | 253 |
| | 252 |
| | 225 |
| | Dividends per share | | 1.32 |
| | 1.32 |
| | 1.32 |
| | 1.26 |
| | 1.20 |
| | Stock Price: | | | | | | | | | | | | High | | $ | 142.61 |
| | $ | 135.31 |
| | $ | 95.11 |
| | $ | 99.37 |
| | $ | 84.06 |
| | Low | | 130.01 |
| | 78.54 |
| | 76.03 |
| | 72.35 |
| | 65.76 |
|
| | (a) | Income from continuing operations includes a $130 million income tax benefit due to the enactment of the Tax Cuts and Jobs Act (the Act). In addition, income from continuing operations includes $57 million of B/E Aerospace acquisition-related costs ($78 million before income taxes) and $31 million of transaction costs associated with the pending acquisition of the Company by UTC ($34 million before income taxes). Income from continuing operations also includes $44 million of restructuring, asset impairment and settlement of a contract matter charges ($39 million before income taxes). Approximately $30 million of the pre-tax expense was recorded within cost of sales and $9 million was included within other income, net. |
| | (b) | On April 13, 2017, we completed the acquisition of B/E Aerospace for $6.5 billion in cash and stock, plus the assumption of $2.0 billion of debt, net of cash acquired. To finance the acquisition and repay assumed debt, we issued 31.2 million shares of common stock, issued $4.35 billion of senior unsecured notes and borrowed $1.5 billion under a new senior unsecured syndicated term loan facility. Income from continuing operations includes $86 million of transaction, integration and financing costs associated with the acquisition of B/E Aerospace ($125 million before income taxes) and $15 million of transaction costs associated with the pending acquisition of the Company by UTC ($24 million before income taxes). |
| | (c) | Income from continuing operations includes a $24 million income tax benefit from the retroactive reinstatement of the previously expired Federal Research and Development Tax Credit and a $41 million income tax benefit due to the release of a valuation allowance for a U.S. capital loss carryforward. In addition, income from continuing operations includes $28 million of restructuring and asset impairment charges ($45 million before income taxes) primarily related to employee severance costs. Approximately $33 million of the pre-tax expense was recorded within cost of sales and $12 million was included within selling, general and administrative expenses. |
| | (d) | Income from continuing operations includes a $22 million income tax benefit from the retroactive reinstatement of the previously expired Federal Research and Development Tax Credit and a $16 million income tax benefit related to the remeasurement of certain prior year tax positions. |
| | (e) | Income from continuing operations includes $18 million of restructuring, pension settlement and ARINC transaction costs ($25 million before income taxes). Approximately $18 million of the pre-tax expense was recorded in selling, general and administrative expenses, $4 million was included within cost of sales, and $3 million was classified as interest expense. Income from continuing operations also includes a $9 million gain ($10 million before income taxes) resulting from the sale of the KOSI business. On December 23, 2013, we acquired ARINC for $1.405 billion. This acquisition was funded through a combination of new long-term debt and short-term commercial paper borrowings. |
| | (f) | Working capital consists of all current assets and liabilities, including cash and short-term debt. |
| | Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations. |
The following discussion and analysis should be read in conjunction with our consolidated financial statements and notes thereto in Item 8 below. The following discussion and analysis contains forward-looking statements and estimates that involve risks and uncertainties. Actual results could differ materially from these estimates. Factors that could cause or contribute to differences from estimates include those discussed under Cautionary Statement and Risk Factors contained in Item 1A above.
We operate on a 52/53 week fiscal year ending on the Friday closest to September 30. For ease of presentation, September 30 is utilized consistently throughout Management's Discussion and Analysis of Financial Condition and Results of Operations to represent the fiscal year end date. Fiscal years 2018, 2017 and 2016 were 52-week fiscal years. All date references contained herein relate to our fiscal year unless otherwise stated.
On September 4, 2017, we entered into the Merger Agreement providing for the acquisition of the Company by UTC. If the UTC Merger is consummated, we will become a wholly owned subsidiary of UTC. The agreement includes covenants and agreements relating to the conduct of our business between the date of signing the Merger Agreement and the consummation of the UTC Merger. In light of the announced transaction with UTC, we do not intend to issue financial guidance for fiscal year 2019. During 2018, we incurred $34 million of transaction costs associated with the pending UTC Merger. On November 23, 2018, UTC announced that the final regulatory approval required to close its acquisition of Rockwell Collins had been received and that the acquisition was expected to close within three business days.
On April 13, 2017, we completed our acquisition of B/E Aerospace for $6.5 billion in cash and stock, plus the assumption of $2.0 billion of debt, net of cash acquired. To finance the acquisition and repay assumed debt, we issued 31.2 million shares of common stock, issued $4.35 billion of senior unsecured notes and borrowed $1.5 billion under a senior unsecured syndicated term loan facility. Beginning in 2018, the B/E Aerospace 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. As these product lines primarily serve military and government customers, the reorganization is expected to generate additional revenue synergy opportunities for the Company. The results of operations of the acquired B/E Aerospace business are now reported in the Interior Systems and Government Systems business segments. Interior Systems and Government Systems sales and operating earnings for the year ended September 30, 2017, have been reclassified to conform to the current year presentation. See Note 3 of the Notes to Consolidated Financial Statements in Item 8 below for more information regarding the acquisition.
The B/E Aerospace acquisition expands our reach and broadens our portfolio of aircraft content with the addition of a wide range of cabin interior products for commercial aircraft and business jets including seating, food and beverage preparation and storage equipment, lighting and oxygen systems and modular galley and lavatory systems. The Company's portfolio of aircraft content now spans the aircraft from cockpit to cabin, communications to connectivity. The acquisition also further diversifies our geographic presence and customer mix as Interior Systems products and services are sold to airlines and original equipment manufacturers across the globe. In addition, the acquisition enhances our diversified and balanced business, serving both commercial and government markets. During 2018, we incurred $78 million of B/E Aerospace acquisition-related expenses.
Our Commercial Systems business supplies aviation electronics systems, products and services to customers located throughout the world. The Commercial Systems customer base is comprised of commercial air transport and business and regional aircraft OEMs, commercial airlines and business aircraft operators. The Government Systems business provides communication and navigation products and avionics to the U.S. Department of Defense, state and local governments, other government agencies, civil agencies, defense contractors and foreign ministries of defense around the world. These systems, products and services
support airborne (fixed and rotary wing), ground and shipboard applications. Our Information Management Services (IMS) business enables mission-critical data and voice communications throughout the world to customers including the U.S. Federal Aviation Administration, commercial airlines, business aircraft operators, airport and critical infrastructure operators and major passenger and freight railroads. These communications are enabled by our high-performance, high-quality and high-assurance proprietary radio and terrestrial networks, enhancing customer efficiency, safety and connectivity. In October 2018, we announced that IMS will become part of the Commercial Systems segment. This reorganization will enable us to further capitalize on customers' increasing need for aviation connectivity solutions. This change will require that we revise our segment reporting beginning in the first quarter of fiscal 2019 to report the IMS business within the Commercial Systems segment.
Total sales increased $1.843 billion, or 27 percent, in 2018 compared to 2017, primarily due to the B/E Aerospace acquisition, which contributed a revenue increase of $1.577 billion. Sales excluding the B/E Aerospace acquisition (organic sales) increased $261 million, or 4 percent, compared to 2017, due to revenue growth across all of our legacy businesses.(1)
Total segment operating earnings(2) increased $290 million to $1.616 billion in 2018 compared to 2017. The Interior Systems business contributed a $238 million increase in operating earnings, in addition, operating earnings increased across each of our legacy businesses.
Our effective tax rate decreased in 2018, primarily due to the Enactment of the Tax Cuts and Jobs Act (the Act) which resulted in a $154 million reduction in deferred tax liabilities, partially offset by a $24 million obligation related to unremitted foreign earnings. In addition to these discrete impacts, the effective tax rate was favorably impacted by a lower U.S. Federal statutory tax rate under the Act.
Diluted earnings per share increased 30 percent to $6.22 in 2018 compared to $4.79 in 2017, as higher segment operating earnings and the benefit of a lower effective tax rate in 2018 were partially offset by higher interest expense from debt issued to fund the B/E Aerospace acquisition and $39 million of pre-tax restructuring, impairment and settlement of a contract matter charges. In addition, diluted earnings per share was negatively impacted in 2018 by higher weighted average shares outstanding from the 31.2 million shares of common stock issued to finance the B/E Aerospace acquisition. Adjusted earnings per share increased 11 percent to $6.81 in 2018 compared to 2017 (see the below reconciliation between GAAP earnings per share and adjusted earnings per share).
Our cash flow used for operating activities was $310 million during 2018, compared to cash flow provided by operating activities of $1.264 billion in 2017. The increase in cash used for operating activities in 2018 was primarily due to higher discretionary contributions to our pension plan (to achieve a tax deduction at the pre-reform rate and reduce future Pension Benefit Guaranty Corporation premiums), higher incentive payments to customers, the timing of other operating cash payments and receipts and the accelerated payment of 2018 employee incentive compensation (consistent with requirements of the Merger Agreement, given that the UTC Merger was expected to close prior to our 2018 fiscal year end), as discussed in the Financial Condition and Liquidity section below. We continued to deploy cash for the benefit of our shareowners in 2018 by paying aggregate dividends of $216 million.
Fiscal year 2018 results are as follows:
| | | | (in billions, except per share amounts) | | FY18 Results | Total sales | | $8.665 | Diluted earnings per share | | $6.22 | Operating cash flow used for continuing operations | | $(0.310) | Capital expenditures | | $0.257 | Total research and development investment(3)
| | $1.348 |
(1) Organic sales, organic growth, and similar measures excluding the effects of the B/E Aerospace acquisition are non-GAAP measures which measure the applicable item (e.g., sales or sales growth) without giving effect to the contribution for such item as a result of the B/E Aerospace acquisition. Such non-GAAP measures are believed to be important indicators of our operations for purposes of period-to-period comparisons of the underlying businesses. The Company does not intend for any of the non-GAAP information to be considered in isolation or as a substitute for the related GAAP measures.
(2) Total segment operating earnings is a non-GAAP measure and is reconciled to the related GAAP measure, Income from continuing operations before income taxes, in Note 21 of the Notes to Consolidated Financial Statements. Total segment operating earnings is calculated as the total of segment operating earnings of our four segments. The non-GAAP total segment operating earnings information included in this disclosure is believed to be useful to investors in comparing our operating performance from period to period by isolating the effects of some items that vary from period to period without any correlation to core operating performance.
(3) Total research and development (R&D) investment is comprised of company- and customer-funded R&D expenditures and the net change in pre-production engineering costs capitalized within Inventory.
Adjusted earnings per share is a non-GAAP metric and is believed to be useful to investors' understanding and assessment of our ongoing operations and performance of the B/E Aerospace acquisition, which occurred on April 13, 2017. Adjusted earnings per share excludes certain one-time and non-cash expenses that we believe are not indicative of our ongoing operating results. We believe these measures are important indicators of the Company's operations for purposes of period-to-period comparison of our operating results. The non-GAAP information is not intended to be considered in isolation or as a substitute for the related GAAP measures.
A reconciliation between GAAP earnings per share and adjusted earnings per share is presented below for 2018 and 2017.
| | | | | | | | | | | | | 2018 | | 2017 | | Earnings per share (GAAP) | | $ | 6.22 |
| | $ | 4.79 |
| | B/E Aerospace acquisition-related expenses | | 0.34 |
| | 0.58 |
| | United Technologies transaction expenses | | 0.19 |
| | 0.10 |
| | Amortization of acquisition-related intangible assets | | 1.25 |
| | 0.71 |
| | Amortization of B/E Aerospace acquired contract liability | | (0.78 | ) | | (0.41 | ) | | Amortization of B/E Aerospace inventory fair value adjustment | | — |
| | 0.38 |
| | Restructuring and impairment charges and settlement of a contract matter | | 0.27 |
| | — |
| | Discrete income tax impact from Tax Cuts and Jobs Act and pension contribution | | (0.68 | ) | | — |
| | Adjusted earnings per share | | $ | 6.81 |
| | $ | 6.15 |
|
The below tables reconcile pre- and post-tax income on a GAAP basis with pre- and post-tax adjusted income for 2018 and 2017.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2018 | | 2017 | | (dollars in millions) | Pre-tax | | Tax Expense | | Net | | Tax Rate | | Pre-tax | | Tax Expense | | Net | | Tax Rate | | Net income (GAAP) | $ | 1,112 |
| | $ | 80 |
| | $ | 1,032 |
| | 7.2 | % | | $ | 931 |
| | $ | 226 |
| | $ | 705 |
| | 24.3 | % | | B/E Aerospace acquisition-related expenses | 78 |
| | 21 |
| | 57 |
| | | | 125 |
| | 39 |
| | 86 |
| | | | United Technologies transaction expenses | 34 |
| | 3 |
| | 31 |
| | | | 24 |
| | 9 |
| | 15 |
| | | | Amortization of acquisition-related intangible assets | 268 |
| | 62 |
| | 206 |
| | | | 149 |
| | 45 |
| | 104 |
| | | | Amortization of B/E Aerospace acquired contract liability | (141 | ) | | (12 | ) | | (129 | ) | | | | (69 | ) | | (8 | ) | | (61 | ) | | | | Amortization of B/E Aerospace inventory fair value adjustment | — |
| | — |
| | — |
| | | | 74 |
| | 18 |
| | 56 |
| | | | Restructuring and impairment charges and settlement of a contract matter | 39 |
| | (5 | ) | | 44 |
| | | | — |
| | — |
| | — |
| | | | Discrete income tax impact from Tax Cuts and Jobs Act and pension contribution | — |
| | 112 |
| | (112 | ) | | | | — |
| | — |
| | — |
| | | | Adjusted net income | $ | 1,390 |
| | $ | 261 |
| | $ | 1,129 |
| | 18.8 | % | | $ | 1,234 |
| | $ | 329 |
| | $ | 905 |
| | 26.7 | % |
Our long-term strategies are focused on the following:
accelerate sales growth
expand operating margins and improve cash flow conversion
deploy capital with priorities on growth and shareowner return
Accelerate sales growth
Accelerating our business growth is a fundamental objective of our management team. For the past decade we have been in a period of significant investment in research and development to support market share gains throughout our businesses. Our
record of success in migrating technologies across the enterprise is a core strength and enables us to realize the benefits of investment even if market conditions change. We are realizing the benefits of completing investments in these programs as new platforms enter service. Our focus on developing solutions aimed at making Rockwell Collins the supplier of choice is evidenced by our significant investment in research and development. Over the past 5 years, we invested approximately $5.3 billion in research and development, which has allowed us to develop new systems, products and software solutions for our customers and capture strategically important positions on a variety of air transport, business aviation and military aircraft.
Highlights of our strategy to accelerate top-line sales growth are as follows:
Strong positions will fuel growth
Our Interior Systems segment was created in April 2017 with the acquisition of B/E Aerospace. The Interior Systems current backlog of $3.9 billion increased $287 million during 2018. Increased aircraft production rates at commercial air transport and business jet OEMs fuel opportunities for continued growth. Backlog growth results from favorable trends in airline selectable equipment, including seating, lighting systems and food preparation and storage, as well as increased production of aircraft with standard Interior Systems equipment. Additionally, the large installed base provides a robust flow of aftermarket retrofit and spares opportunities to support long-term growth.
Within Commercial Systems, over the past several years we have captured key positions and market share gains on platforms such as the Boeing 737 MAX and 777X, as well as the Airbus A220. We successfully completed numerous milestones on these and other aircraft development programs throughout the year, including the certification of ProLine Fusion on the Bombardier Global 7500 which is scheduled to enter into service later this year. We believe these accomplishments have positioned us to continue to grow our market share. We previously announced that Airbus has selected our flight operations and maintenance exchanger solution, called FOMAX, as standard on their A320 family. Under this agreement, we will supply each A320 aircraft with a secure router to wirelessly send aircraft performance and maintenance data to ground-based operations.
Within Government Systems, we increased our backlog by $60 million during 2018. Defense budgets have been improving not only in the United States, but also throughout the world. During 2018, we were selected for our first international E2-D Advanced Hawkeye weapons system trainer, which is an important extension of our E2-D training system capabilities for the U.S. Navy into the Foreign Military Sales (FMS) market. We were also one of two companies selected by the U.S. Air Force for the technology maturation and risk reduction phase of the Airborne Launch Control System Replacement program (ALCS-R). ALCS-R will upgrade the survivable launch control system that is part of the United States' intercontinental ballistic missile deterrent, and is part of the broader initiative to modernize U.S. nuclear capabilities.
We are capitalizing on aviation’s information age
In today’s information-enabled world, the industry continues to trend away from hardware-based solutions to more software-based applications and the needs for connectivity are increasing for airlines, airports and passengers. Through organic innovations and acquisitions, our Information Management Services portfolio positions us as a leader in aviation information management, delivering efficiency and safety to our customers and their passengers.
As traffic on our air-to-ground network increases, we’re taking steps to enhance its capacity and usefulness. In the cockpit, more robust data streams and sophisticated applications are enhancing operational efficiencies, safety and on-time flight performance. In the cabin, broadband connectivity is enabling passengers to stay connected throughout their flight, and it also provides new ways to enhance the passenger experience. In 2018, we introduced our GlobalConnect offering that leverages our standard information management hardware positions on the Airbus A350XWB, A320NEO and A330NEO and the Boeing 787 to expand our portfolio of communications and data management services for airlines. Approximately 10 airlines have already subscribed to the new services.
We will continue to grow globally
Market opportunities outside the United States continue to evolve, driven in part by expanding populations and emerging economies. Security needs are on the rise in places around the globe, as countries seek to establish indigenous capabilities to protect their borders, infrastructure and resources. At the same time, global commercial air travel is expected to increase as we see a growing middle class in developing countries, generating higher traffic and demand for new aircraft. We believe we are positioned to grow by capturing new programs at emerging international OEMs, strategically positioning service centers around the globe and by launching joint ventures.
Expand operating margins and improve cash flow conversion
Operational excellence is a fundamental objective at our Company. We have extended Lean concepts beyond the factory floor to virtually every aspect of our business. We focus on streamlining processes, reducing costs and increasing quality while
enhancing our ability to respond quickly to customer needs. In addition, our shared service model uses a centralized organizational structure to leverage resources across the business. This is evidenced by our product and technology centers of excellence, through which we apply our core competencies to solutions across our segments. By applying common tools and systems across our businesses, we can better manage our cost structure and maximize our R&D investments.
We believe our Company has a proven ability to both react quickly to changing business conditions and to execute business plans. For example, as we faced challenging conditions in business aviation and the defense environment in the past several years, we took actions to manage our cost structure, while focusing on our customers, continuing our commitment to operational excellence and maintaining our balanced business model. We will also distinguish ourselves through strong customer relationships, high returns on invested capital and continued investment in market differentiating technologies and programs. As we grow our Company, our goal is to generate long-term double-digit cash flow growth. In 2018, our operating cash flow was significantly impacted by discretionary cash contributions to our pension plans, an increase in cash incentive payments to customers and the timing of employee incentive compensation payments. See the Financial Condition and Liquidity section below.
Deploy capital with priorities on growth and shareowner return
We plan to allocate capital across our Company to prioritize debt repayment and to fund growth through investments in R&D, capital expenditures and minor acquisitions. On April 13, 2017, the Company completed the acquisition of B/E Aerospace for $6.5 billion in cash and stock, plus the assumption of $2.0 billion in net debt. The transaction combines our capabilities in flight deck avionics, cabin electronics, mission communications, simulation and training and information management systems with B/E Aerospace's range of cabin interior products, which include seating, food and beverage preparation and storage equipment, lighting and oxygen systems, and modular galley and lavatory systems for commercial airliners and business jets. The acquisition significantly increases our scale and diversifies our product portfolio, customer mix and geographic presence.
See the following sections for further discussion of our results of operations. For additional disclosure on segment operating earnings see Note 21 of the Notes to Consolidated Financial Statements in Item 8 below. Please also see our Risk Factors and Cautionary Statement in Item 1A of this Form 10-K.
The following management discussion and analysis of results of operations is based on reported financial results for 2016 through 2018 and should be read in conjunction with our consolidated financial statements and the notes thereto in Item 8 below.
Consolidated Financial Results
Sales
| | | | | | | | | | | | | | | (in millions) | | 2018 | | 2017 | | 2016 | U.S.(1) (2) | | $ | 4,666 |
| | $ | 3,873 |
| | $ | 3,292 |
| Non-U.S.(1) | | 3,999 |
| | 2,949 |
| | 1,967 |
| | Total | | $ | 8,665 |
| | $ | 6,822 |
| | $ | 5,259 |
| | Percent increase | | 27 | % | | 30 | % | | |
|
(1) Sales are attributed to geographic region based on the location of our customers.
(2) For the years ended September 30, 2018, 2017 and 2016, U.S. sales include revenue from foreign military sales of $163 million, $139 million and $171 million, respectively.
Sales for 2018 compared to 2017
Total sales increased $1.843 billion, or 27 percent, for the year ended September 30, 2018, compared to the prior year. B/E Aerospace, which was acquired on April 13, 2017, contributed $1.577 billion of the overall revenue growth. Sales excluding the B/E Aerospace acquisition (organic sales) increased $261 million, or 4 percent, compared to the prior year, driven by a $162 million increase within Commercial Systems, a $107 million increase within Government Systems and a $27 million increase within Information Management Services, partially offset by a $35 million organic revenue decrease within Interior Systems. Refer to the Interior Systems, Commercial Systems, Government Systems and Information Management Services sections of the Segment Financial Results below for a detailed discussion of sales by segment in 2018 and 2017.
U.S. sales increased $793 million, or 20 percent, primarily due to sales from the B/E Aerospace acquisition. The remaining increase results primarily from higher Boeing 737 production rates and increased aftermarket revenues in Commercial Systems, as well as higher Government Systems sales to the U.S. Government.
Non-U.S. sales increased $1.050 billion, or 36 percent, primarily due to sales from the B/E Aerospace acquisition. The remaining variance is primarily driven by higher Airbus A320 and A350 production rates and increased aftermarket revenues in Commercial Systems.
Sales for 2017 compared to 2016
Total sales increased $1.563 billion, or 30 percent, for the year ended September 30, 2017, compared to the prior year. B/E Aerospace, which was acquired on April 13, 2017, contributed $1.406 billion of the overall revenue growth. Sales excluding the B/E Aerospace acquisition (organic sales) increased $157 million, or 3 percent, compared to the prior year, driven by a $74 million increase within Government Systems, a $60 million increase within Information Management Services and a $23 million increase within Commercial Systems. Refer to the Interior Systems, Commercial Systems, Government Systems and Information Management Services section of the Segment Financial Results below for a detailed discussion of sales by segment in 2017 and 2016.
U.S. sales increased $581 million, or 18 percent, primarily due to $567 million of sales from the B/E Aerospace acquisition. The remaining increase results primarily from higher Government Systems sales to the U.S. Government.
Non-U.S. sales increased $982 million, or 50 percent, primarily due to $839 million of sales from the B/E Aerospace acquisition. The remaining variance is primarily driven by higher Airbus A350 production rates, a favorable mix of international airline selectable equipment sales and higher customer-funded development program revenues in Commercial Systems and increased international usage of connectivity services at Information Management Services.
B/E Aerospace Pro Forma Sales (1)
Sales for the recently acquired B/E Aerospace business were $2.983 billion and $2.960 billion, on a pro forma basis, for the years ended September 30, 2018 and 2017, respectively. These pro forma results include sales of the Interior Systems segment and the two B/E Aerospace product lines now reported within the Government Systems segment. The $23 million, or 1 percent, increase in pro forma sales was primarily due to the following:
a $64 million increase in thermal and electronic systems sales in Government Systems, primarily due to higher deliveries of cooling equipment
partially offset by a $41 million decrease in Interior Systems pro forma sales discussed in the Interior Systems sales section below
(1)This pro forma sales information is believed to be useful to investors' understanding of the overall performance of the B/E Aerospace acquisition.
Cost of Sales
| | | | | | | | | | | | | | | (in millions) | | 2018 | | 2017 | | 2016 | | Total cost of sales | | $ | 6,382 |
| | $ | 4,868 |
| | $ | 3,642 |
| | Percent of total sales | | 73.7 | % | | 71.4 | % | | 69.3 | % |
Cost of sales consists of all costs incurred to design and manufacture our products and provide our services and includes R&D, raw material, labor, facility, product warranty, depreciation, amortization, service and support and other related expenses.
Cost of sales for 2018 compared to 2017
Total cost of sales increased $1.514 billion primarily due to the following:
$1.272 billion of inorganic cost of sales from the recently acquired B/E Aerospace business
a $191 million increase from higher organic sales, which was unfavorably impacted by sales mix as discussed in the Government Systems and Information Management Services sections of the Segment Financial Results below
a $65 million organic increase in company-funded R&D, as detailed in the Research and Development expense section below
a $30 million increase due to an impairment charge associated with the settlement of a contract matter and employee separation costs
a $28 million increase in amortization of pre-production engineering costs
partially offset by the absence of $74 million of inventory fair value adjustment amortization recorded in the prior year related to the acquisition of B/E Aerospace
The increase in cost of sales as a percent of revenues was primarily due to sales mix, including impact of the acquired B/E aerospace business, and increased company-funded R&D expenses.
Cost of sales for 2017 compared to 2016
Total cost of sales increased $1.226 billion primarily due to the following:
$1.140 billion of inorganic cost of sales from the recently acquired B/E Aerospace business
an $83 million increase from higher organic sales, which was favorably impacted by benefits from cost savings initiatives
a $40 million increase in employee incentive compensation costs
partially offset by $33 million of asset and restructuring charges recorded in 2016
further offset by a $9 million organic decrease in company-funded R&D expense in Government Systems and Information Management Services, as detailed in the Research and Development Expense section below
The increase in cost of sales as a percent of revenues was primarily due to the recently acquired B/E Aerospace business.
Research and Development Expense
R&D expense is included as a component of cost of sales and is summarized as follows:
| | | | | | | | | | | | | | | (in millions) | | 2018 | | 2017 | | 2016 | | Customer-funded: | | | | | | | | Interior Systems | | $ | 113 |
| | $ | 54 |
| | $ | — |
| | Commercial Systems | | 253 |
| | 262 |
| | 231 |
| | Government Systems | | 483 |
| | 421 |
| | 381 |
| | Information Management Services | | 6 |
| | 9 |
| | 9 |
| | Total customer-funded | | 855 |
|
| 746 |
|
| 621 |
| | Company-funded: | | |
| | |
| | | | Interior Systems | | 208 |
| | 109 |
| | — |
| | Commercial Systems | | 201 |
| | 143 |
| | 143 |
| | Government Systems | | 93 |
| | 75 |
| | 79 |
| Information Management Services (1) | | — |
| | — |
| | 2 |
| | Total company-funded | | 502 |
| | 327 |
| | 224 |
| | Total research and development expense | | $ | 1,357 |
| | $ | 1,073 |
| | $ | 845 |
| | Percent of total sales | | 15.7 | % | | 15.7 | % | | 16.1 | % |
(1) R&D expenses for the Information Management Services segment do not include costs of internally developed software and other costs associated with the expansion and construction of network-related assets. These costs are capitalized as Property on the Consolidated Statement of Financial Position.
We make significant investments in research and development to allow our customers to benefit from the latest technological advancements. Total R&D expense is comprised of both company-funded and customer-funded expenditures. In addition to the
R&D expenditures shown in the table above, we capitalize in inventory the cost of certain pre-production engineering effort incurred during the development phase of programs when the customer has provided us a long-term supply arrangement and a contractual guarantee for reimbursement. Pre-production engineering costs are then amortized over their useful lives. This amortization cost is included within customer-funded R&D expense and totaled $87 million, $59 million and $49 million for 2018, 2017 and 2016, respectively. Refer to Critical Accounting Policies section found in Item 7 below for further discussion of our investments in pre-production engineering effort.
Customer-funded R&D expenditures are incurred pursuant to contractual arrangements and are typically accounted for as contract costs within cost of sales, with the reimbursement accounted for as a sale in accordance with the percentage-of-completion method of accounting.
Company-funded R&D expenditures relate to the development of new products and the improvement of existing products and are expensed as incurred and included in cost of sales, as disclosed in Note 2 of the Notes to Consolidated Financial Statements in Item 8 below. Company-funded R&D expense consists primarily of payroll-related expenses of employees engaged in R&D activities, engineering-related product materials and equipment and subcontracting costs.
Total R&D expense increased $284 million from 2017 to 2018. The customer-funded portion of R&D increased $109 million from 2017 to 2018, primarily due to customer-funded expenditures from the recently acquired B/E Aerospace business. In addition, customer-funded expenditures for Government Systems increased $62 million due to fixed wing and test and training range programs while Commercial Systems decreased $9 million due to international regional jet programs. Company-funded R&D expenditures increased $175 million from 2017 to 2018, primarily due to company-funded expenditures from the recently acquired B/E Aerospace business. In addition, company-funded expenditures for Commercial Systems increased $58 million due to the Bombardier Global 7500 and Boeing 777X programs while Government Systems increased $18 million due to spending on various Avionics programs.
Total R&D expense increased $228 million from 2016 to 2017. The customer-funded portion of R&D increased $125 million from 2016 to 2017, primarily due to $54 million of customer-funded expenditure from the recently acquired B/E Aerospace business. In addition, customer-funded expenditures for Government Systems increased $40 million due to fixed wing programs and Commercial Systems increased $31 million due to international regional jet programs and higher amortization of pre-production engineering costs. Company-funded R&D expenditures increased $103 million from 2016 to 2017 primarily due to $112 million of company-funded expenditures from the recently acquired B/E Aerospace business.
In addition to the R&D expenses above, development expenditures incurred primarily for the Airbus A350 and A220 platforms and the Bombardier Global 7500 program in 2018 resulted in a gross $85 million increase to our investments in pre-production engineering programs capitalized within inventory. The gross increase of $85 million for 2018 was $46 million less than the $131 million gross increase in pre-production engineering costs capitalized within inventory during 2017, primarily due to lower costs incurred on the Bombardier Global 7500 and Boeing 737 MAX platforms, partially offset by an increase in costs incurred for the Airbus A350 program.
Development expenditures incurred on the Bombardier Global 7500, Airbus A220, Boeing 737 MAX and certain military transport programs in 2017 resulted in a gross $131 million increase to our investments in pre-production engineering programs capitalized within inventory. The gross increase of $131 million for 2017 was $46 million less than the $177 million net increase in pre-production engineering costs capitalized within inventory during 2016, primarily due to lower costs incurred for the Boeing 737 MAX platform.
Refer to Note 6 of the Notes to Consolidated Financial Statementsin Item 8 below for further discussion of our investments in pre-production engineering effort.
Selling, General and Administrative Expenses
| | | | | | | | | | | | | | | (in millions) | | 2018 | | 2017 | | 2016 | | Selling, general and administrative expenses | | $ | 817 |
| | $ | 732 |
| | $ | 638 |
| | Percent of total sales | | 9.4 | % | | 10.7 | % | | 12.1 | % |
Selling, general and administrative (SG&A) expenses consist primarily of personnel, facility and other expenses related to employees not directly engaged in manufacturing or R&D activities. These activities include marketing and business development, finance, legal, information technology and other administrative and management functions.
Total SG&A expenses increased $85 million, or 12 percent, in 2018 compared to 2017, primarily due to the following:
SG&A costs from the recently acquired B/E Aerospace business
partially offset by the absence of international customer bankruptcy and employee severance charges recorded in 2017
also offset by the benefits of cost savings initiatives
Total SG&A expenses increased $94 million, or 15 percent, in 2017 compared to 2016, primarily due to the following:
$99 million of SG&A costs from the recently acquired B/E Aerospace business
international customer bankruptcy and employee severance charges in 2017
a $3 million increase in employee incentive compensation costs
partially offset by $12 million of restructuring and asset impairment charges recorded in 2016 and the benefits of cost savings initiatives
| | | | | | | | | | | | | | | (in millions) | | 2018 | | 2017 | | 2016 | | Interest expense | | $ | 262 |
| | $ | 187 |
| | $ | 64 |
|
Interest expense increased by $75 million in 2018 compared to 2017, primarily due to the following:
$89 million of incremental interest on the debt issued to fund the B/E Aerospace acquisition
the combination of higher commercial paper balances and higher interest rates on commercial paper compared to the prior year
partially offset by the absence of $29 million of bridge facility fees incurred in the prior year related to the
B/E Aerospace acquisition
Interest expense increased by $123 million in 2017 compared to 2016, primarily due to to the following:
$92 million of incremental interest on the new debt issued to fund the B/E Aerospace acquisition
$29 million of fees incurred in 2017 associated with the bridge credit agreement entered into in December 2016 pursuant to the acquisition of B/E Aerospace
See Note 9 of the Notes to Consolidated Financial Statements in Item 8 below for more detail regarding outstanding debt.
| | | | | | | | | | | | | | | (in millions) | | 2018 | | 2017 | | 2016 | | Other income, net | | $ | 20 |
| | $ | 16 |
| | $ | 20 |
|
Other income, net increased by $4 million in 2018 compared to 2017, primarily due to favorable resolution of certain claims associated with a divested business, as discussed in the Information Management Services section of the Segment Financial Results below, partially offset by asset impairment charges due to the planned sale of SMR Technologies (see Note 4 of the Notes to Consolidated Financial Statements in Item 8 below).
Other income, net decreased by $4 million in 2017 compared to 2016, primarily due to the absence of a favorable settlement of a contractual matter with a customer of the ASES business. See Note 4 of the Notes to Consolidated Financial Statements in Item 8 below for more detail regarding this settlement.
Income Tax Expense from Continuing Operations
| | | | | | | | | | | | | | | (in millions) | | 2018 | | 2017 | | 2016 | | Income tax expense | | $ | 80 |
| | $ | 226 |
| | $ | 208 |
| | Effective income tax rate | | 7.2 | % | | 24.3 | % | | 22.2 | % |
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the Act). The Act amends the Internal Revenue Code to reduce tax rates and modify policies, credits and deductions for individuals and businesses. For businesses, the Act reduces the corporate federal tax rate from a maximum of 35.0 percent to a flat 21.0 percent rate, effective January 1, 2018, and transitions from a worldwide tax system to a modified territorial tax system. The Act also adds many new provisions including changes to bonus depreciation, changes to the deduction for executive compensation and interest expense, a tax on global intangible low-taxed income (GILTI), the base erosion anti-abuse tax (BEAT) and a deduction for foreign-derived intangible income (FDII). Many of these provisions, including the tax on GILTI, the BEAT and the deduction for FDII, do not apply to the Company until 2019 and the Company continues to assess the impact of these provisions. The Company has elected to account for the tax on GILTI as a period cost and thus has not adjusted any of the deferred tax assets/liabilities of its foreign subsidiaries for the new tax. The two material items that impact the Company for 2018 are the reduction in the tax rate and a one-time tax that is imposed on the Company’s unremitted foreign earnings.
The difference between our effective income tax rate in 2018 and the statutory tax rate is primarily due to the benefit derived from the rate change on our deferred tax liabilities due to the enactment of the Act and the Federal Research and Development Tax Credit (Federal R&D Tax Credit), which provides a tax benefit on certain incremental R&D expenditures, partially offset by the tax on unremitted foreign earnings imposed by the Act.
The effective income tax rate in 2018 decreased from 2017 primarily due to the $154 million reduction in deferred tax liabilities resulting from the Act and the $73 million benefit of the lower U.S. Federal statutory rate on current year earnings, partially offset by the $24 million tax on unremitted foreign earnings imposed by the Act.
The effective income tax rate in 2017 increased from 2016 primarily due to the retroactive reinstatement of the Federal R&D Tax Credit and the release of a $41 million valuation allowance related to a U.S. capital loss carryforward in the prior year. In addition, the effective income tax rate in 2017 was favorably impacted by the jurisdictional mix of income as a result of the B/E Aerospace acquisition.
Net Income and Diluted Earnings Per Share
| | | | | | | | | | | | | | | (in millions, except per share amounts) | | 2018 | | 2017 | | 2016 | | Income from continuing operations | | $ | 1,032 |
| | $ | 705 |
| | $ | 727 |
| | Percent of sales | | 11.9 | % | | 10.3 | % | | 13.8 | % | | | | | | | | | | Income from discontinued operations, net of taxes | | — |
| | — |
| | 1 |
| | Net income | | $ | 1,032 |
| | $ | 705 |
| | $ | 728 |
| | | | | | | | | | Diluted earnings per share from continuing operations | | $ | 6.22 |
| | $ | 4.79 |
| | $ | 5.50 |
| | Diluted earnings per share from discontinued operations | | — |
| | — |
| | 0.01 |
| | Diluted earnings per share | | $ | 6.22 |
| | $ | 4.79 |
| | $ | 5.51 |
| | | | | | | | | | Weighted average diluted common shares | | 165.8 |
| | 147.2 |
| | 132.1 |
|
Income from continuing operations, net of taxes, for 2018 was $1.032 billion, up 46 percent, or $327 million, from the $705 million in income from continuing operations, net of taxes, reported for 2017. Diluted earnings per share from continuing operations increased 30 percent to $6.22 during this same time period. The rate of increase in diluted earnings per share from continuing operations was less than the rate of increase in income from continuing operations, net of taxes, due to the 31.2 million shares of common stock issued to finance the B/E Aerospace acquisition.
Income from continuing operations, net of taxes, and diluted earnings per share from continuing operations in 2018 increased primarily due to:
a $238 million increase in Interior Systems operating earnings, a $38 million increase in Commercial Systems operating earnings, a $13 million increase in Government Systems operating earnings and a $1 million increase in Information Management Services operating earnings
a $146 million decrease in income tax expense as detailed in the Income Taxes section below
an $8 million decrease in pre-tax transaction and integration costs associated with the acquisition of B/E Aerospace and the pending acquisition of Rockwell Collins by UTC
partially offset by a $75 million increase in interest expense, primarily due to the debt issued to fund the B/E Aerospace acquisition
also offset by $39 million of pre-tax restructuring, impairment and settlement of a contract matter charges recorded in 2018 (see Note 20 of the Notes to Consolidated Financial Statements in Item 8 below)
Income from continuing operations, net of taxes, for 2017 was $705 million, down 3 percent, or $22 million, from the $727 million in income from continuing operations, net of taxes, reported for 2016. Diluted earnings per share from continuing operations decreased 13 percent to $4.79 during this same time period. The rate of decrease in diluted earnings per share from continuing operations was more than the rate of decrease in income from continuing operations, net of taxes, due to the 31.2 million shares of common stock issued to finance the B/E Aerospace acquisition.
Income from continuing operations, net of taxes, and diluted earnings per share from continuing operations in 2017 decreased primarily due to:
$125 million of pre-tax transaction, integration and financing costs associated with the acquisition of B/E Aerospace
$92 million of incremental interest expense on the new debt issued to fund the B/E Aerospace acquisition
$24 million of pre-tax transaction costs associated with the pending acquisition of Rockwell Collins by UTC
an $18 million increase in income tax expense as detailed in the Income Tax Expense from Continuing Operations section above
partially offset by a $168 million increase in operating earnings from the recently acquired Interior Systems business, a $30 million increase in Information Management Services operating earnings and a $25 million increase in Government Systems operating earnings, net of a $12 million decrease in Commercial Systems operating earnings
also offset by the absence of $45 million of pre-tax restructuring and asset impairment charges recorded in 2016
Segment Financial Results
One of the key metrics we use to describe year-over-year changes in operating income for each segment is the incremental (or reduced) earnings derived from higher (or lower) sales volumes. Similarly, the gross margin derived from these incremental (or reduced) earnings is often used to describe changes in segment operating margins. The incremental (or reduced) margin realized on the sales volume change tends to be disproportionately higher than the overall operating margin reported for the segment. This is because the overall operating margin for the segment contemplates more elements of our cost structure, such as company-funded R&D expense, depreciation, amortization and selling, general and administrative expenses.
Interior Systems
Overview
On April 13, 2017, we acquired B/E Aerospace and formed the Interior Systems business segment. As described in the Overview and Outlook section, sales and earnings of the B/E Aerospace 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. Interior Systems and Government Systems sales and operating earnings for the year ended
September 30, 2017, have been reclassified to conform to the current year presentation. See Note 3 of the Notes to Consolidated Financial Statements in Item 8 below for more information regarding the acquisition.
The Interior Systems business manufactures cabin interior products for the commercial aircraft and business aviation markets, including aircraft seats, a full line of aircraft food and beverage preparation and storage equipment, modular lavatory systems, wastewater management systems, galley systems, lighting products and oxygen systems. We sell our products and provide our services directly to virtually all of the world’s major airlines and aerospace manufacturers. The near and long-term performance of our Interior Systems business is impacted by general worldwide economic health, commercial airline flight hours, commercial aircraft production and retirement rates and the financial condition of airlines worldwide.
For risks to the Interior Systems segment, see Risk Factors in Item 1A above. For additional disclosure on Interior Systems segment results see Note 21 of the Notes to Consolidated Financial Statements in Item 8 below.
Interior Systems Sales
The following table presents Interior Systems sales by product category:
| | | | | | | | | | | | | | | (in millions) | | 2018 | | 2017 | | 2016 | | Interior products and services | | $ | 1,472 |
| | $ | 717 |
| | $ | — |
| | Aircraft seating | | 1,237 |
| | 585 |
| | — |
| | Total | | $ | 2,709 |
| | $ | 1,302 |
| | $ | — |
| | Percent increase | | 108 | % | | | | |
The 2017 results above reflect sales by the Interior Systems segment from April 13, 2017 through September 30, 2017.
Interior Systems Sales for 2018 compared to 2017
Total interior products and services sales increased $755 million, or 105 percent, compared to the same period in the prior year, primarily due to the following:
a $781 million inorganic revenue increase due to the timing of the April 13, 2017, B/E Aerospace acquisition
partially offset by $26 million in other net decreases to revenue, primarily due to timing of original equipment galley revenues and the absence of oxygen equipment retrofit deliveries which occurred in the prior year
Total aircraft seating sales increased $652 million, or 111 percent, compared to the same period in the prior year, primarily due to the following:
a $661 million inorganic revenue increase due the timing of the April 13, 2017, B/E Aerospace acquisition
partially offset by $9 million in other net decreases to revenue, primarily due to the completion of certain super first class programs
Interior Systems Pro Forma Sales
Note 3 of the Notes to Consolidated Financial Statements in Item 8 below presents supplemental pro forma financial data as if the acquisition of B/E Aerospace had been completed on October 1, 2015. The pro forma data included in Note 3 combines the Company's consolidated results with the stand-alone results of B/E Aerospace for the pre-acquisition periods. The supplemental pro forma data is not necessarily indicative of results that actually would have occurred had the acquisition been consummated on October 1, 2015.
Interior Systems Sales for 2018 compared to Pro Forma Sales for 2017
On a pro forma basis, sales for the Interior Systems segment would be $2.709 billion and $2.750 billion for the years ended September 30, 2018 and 2017, respectively. The $41 million, or 1 percent, decrease in the pro forma sales was primarily due to the following:
a $65 million decrease in aircraft seating sales, primarily due to softening of the super first class seating market and the timing of other new seating equipment deliveries
partially offset by a $24 million increase in interior products and services sales, primarily due to increased original equipment deliveries of galley inserts, advanced lavatories and cabins
Interior Systems Pro Forma Sales for 2017 compared to Pro Forma Sales for 2016
On a pro forma basis, sales for the Interior Systems segment would be $2.750 billion and $2.703 billion for the years ended September 30, 2017 and 2016, respectively. The $47 million, or 2 percent, increase in the pro forma sales was primarily due to the following:
a $159 million increase in interior products and services sales, primarily due to increased original equipment deliveries of Airbus A350 galleys, Boeing 737 advanced lavatories and oxygen generators across multiple platforms
partially offset by a $112 million decrease in aircraft seating, primarily due to the completion of certain super first class and retrofit programs
Refer to Note 3 of the Notes to Consolidated Financial Statements in Item 8 below for additional pro forma disclosures.
Interior Systems Segment Operating Earnings
| | | | | | | | | | | | | | | (in millions) | | 2018 | | 2017 | | 2016 | | Segment operating earnings | | $ | 406 |
| | $ | 168 |
| | $ | — |
| | Percent of sales | | 15.0 | % | | 12.9 | % | | — | % |
Interior Systems Operating Earnings for 2018 compared to 2017
Interior Systems operating earnings increased $238 million, or 142 percent, compared to the same period in the prior year, primarily due to the following:
the $1.442 billion inorganic revenue increase discussed in the Interior Systems sales section above, which resulted in a $1.120 billion increase in cost and incremental earnings of $322 million, or 22 percent of the higher sales volume. The margins on the sales increase were favorably impacted by the benefit of cost synergies in the current year and unfavorably impacted by increases to certain product quality reserves
the absence of $63 million of inventory fair value adjustment amortization recorded in the prior year
partially offset by a $123 million increase in intangible asset amortization expense
further offset by the $35 million organic revenue decrease discussed in the Interior Systems sales section above, which resulted in a $19 million decrease in cost and decreased earnings of $16 million, or 46 percent of the lower sales volume. The margins on the sales decrease were unfavorably impacted by sales mix due to the absence of higher margin oxygen retrofit deliveries which occurred in the prior year
also offset by an $8 million increase in employee incentive compensation costs
2018 operating earnings include $229 million of intangible asset amortization expense, partially offset by $141 million of favorable acquired contract liability amortization. The 2017 results above reflect operating earnings of the Interior Systems segment from April 13, 2017, through September 30, 2017, and include $106 million of intangible asset amortization expense and $63 million of inventory fair value adjustment amortization that unfavorably impacted operating earnings, partially offset by $69 million of favorable acquired contract liability amortization.
Commercial Systems
Overview
Our Commercial Systems business supplies aviation electronics systems, products and services to customers located throughout the world. The customer base is comprised of OEMs of commercial air transport, business and regional aircraft, commercial airlines and business aircraft operators. The near and long-term performance of our Commercial Systems business is impacted by general worldwide economic health, commercial airline flight hours, corporate profits and the financial condition of airlines worldwide.
For risks to the Commercial Systems segment, see Risk Factors in Item 1A above. For additional disclosure on Commercial Systems segment results see Note 21 of the Notes to Consolidated Financial Statements in Item 8 below.
Commercial Systems Sales
The following table presents Commercial Systems sales by product category:
| | | | | | | | | | | | | | | (in millions) | | 2018 | | 2017 | | 2016 | | Air transport aviation electronics: | | | | | | | | Original equipment | | $ | 965 |
| | $ | 910 |
| | $ | 850 |
| | Aftermarket | | 593 |
| | 541 |
| | 542 |
| | Wide-body in-flight entertainment | | 15 |
| | 19 |
| | 38 |
| | Total air transport aviation electronics | | 1,573 |
| | 1,470 |
| | 1,430 |
| | Business and regional aviation electronics: | | | | |
| | |
| | Original equipment | | 495 |
| | 477 |
| | 534 |
| | Aftermarket | | 512 |
| | 471 |
| | 431 |
| | Total business and regional aviation electronics | | 1,007 |
| | 948 |
| | 965 |
| | Total | | $ | 2,580 |
| | $ | 2,418 |
| | $ | 2,395 |
| | Percent increase | | 7 | % | | 1 | % | | |
|
Commercial Systems Sales for 2018 compared to 2017
Total air transport aviation electronics sales increased $103 million, or 7 percent, primarily due to the following:
original equipment sales increased $55 million, or 6 percent, primarily due to higher Boeing 737, Airbus A320 and A350 production rates, partially offset by lower legacy wide-body production rates
aftermarket sales increased $52 million, or 10 percent, primarily due to higher spares provisioning, service and support activity and regulatory mandate upgrade activity
wide-body IFE sales decreased $4 million, or 21 percent, as airlines decommissioned their legacy IFE systems
Total business and regional aviation electronics sales increased $59 million, or 6 percent, primarily due to the following:
original equipment sales increased $18 million, or 4 percent, primarily due to higher business jet equipment deliveries, partially offset by lower customer-funded development program revenues
aftermarket sales increased $41 million, or 9 percent, primarily due to higher service and support, regulatory mandate upgrade and flight deck retrofit activities
Commercial Systems Sales for 2017 compared to 2016
Total air transport aviation electronics sales increased $40 million, or 3 percent, primarily due to the following:
original equipment sales increased $60 million, or 7 percent, primarily due to higher Boeing 737 and Airbus A350 production rates, partially offset by lower legacy wide-body production rates
aftermarket sales decreased $1 million, primarily due to lower retrofit and service and support sales, partially offset by higher regulatory mandate upgrade activity and higher used aircraft equipment sales
wide-body IFE sales decreased $19 million, or 50 percent, as airlines decommissioned their legacy IFE systems
Total business and regional aviation electronics sales decreased $17 million, or 2 percent, primarily due to the following:
original equipment sales decreased $57 million, or 11 percent, primarily due to lower business and regional aircraft OEM production rates, partially offset by higher product deliveries for the Airbus A220 and Global 7500 programs and higher customer-funded development program revenues
aftermarket sales increased $40 million, or 9 percent, primarily due to higher regulatory mandate upgrade and flight deck retrofit activity
Commercial Systems Segment Operating Earnings
| | | | | | | | | | | | | | | (in millions) | | 2018 | | 2017 | | 2016 | | Segment operating earnings | | $ | 557 |
| | $ | 519 |
| | $ | 531 |
| | Percent of sales | | 21.6 | % | | 21.5 | % | | 22.2 | % |
Commercial Systems Operating Earnings for 2018 compared to 2017
Commercial Systems operating earnings increased $38 million, or 7 percent, primarily due to the following:
the $162 million increase in sales volume discussed in the Commercial Systems sales section above, which resulted in a $50 million increase in cost and incremental earnings of $112 million, or 69 percent of the higher sales volume. The margins on the sales increase were favorably impacted by sales mix as higher margin equipment and aftermarket sales increased and lower margin customer-funded development revenues decreased
partially offset by a $58 million increase in company-funded R&D expense
also offset by a $16 million increase in amortization of pre-production engineering
The increase in Commercial Systems operating earnings as a percent of sales was primarily due to higher sales volume and favorable sales mix, partially offset by higher company-funded R&D and pre-production engineering amortization costs.
Commercial Systems Operating Earnings for 2017 compared to 2016
Commercial Systems operating earnings decreased $12 million, or 2 percent, primarily due to the following:
a $19 million increase in employee incentive compensation costs
a $12 million increase in international customer bankruptcy and employee severance charges in 2017
partially offset by benefits from cost savings initiatives
in addition, the benefits of a $23 million increase in sales were unfavorably impacted by sales mix, as lower margin customer-funded development revenues increased and higher margin business jet OEM sales decreased
The decrease in Commercial Systems operating earnings as a percent of sales was primarily due to increased employee incentive compensation costs, international customer bankruptcy and employee severance charges, and unfavorable sales mix, partially offset by the benefits of cost savings initiatives.
Government Systems
Overview
The Government Systems business provides communication and navigation products and avionics to the U.S. Department of Defense, state and local governments, other government agencies, civil agencies, defense contractors and foreign ministries of defense around the world. These systems, products and services support airborne (fixed and rotary wing), ground and shipboard applications. The short- and long-term performance of our Government Systems business is affected by a number of factors, including the amount and prioritization of defense spending by the U.S. and non-U.S. governments, which is generally based on the security environment and underlying political landscape.
As described in the Overview and Outlook section, sales and earnings of the B/E Aerospace 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. Interior Systems and Government Systems sales and operating earnings for the year ended September 30, 2017, have been reclassified to conform to the current year presentation. See Note 3 of the Notes to Consolidated Financial Statements for more information regarding the acquisition.
For risks to the Government Systems segment, see Risk Factors in Item 1A above. For additional disclosure on Government Systems segment results see Note 21 of the Notes to Consolidated Financial Statements in Item 8 below.
Government Systems Sales
The following table presents Government Systems sales by product category:
| | | | | | | | | | | | | | | (in millions) | | 2018 | | 2017 | | 2016 | | Avionics | | $ | 1,503 |
| | $ | 1,472 |
| | $ | 1,483 |
| | Communication and navigation | | 1,128 |
| | 912 |
| | 723 |
| | Total | | $ | 2,631 |
| | $ | 2,384 |
| | $ | 2,206 |
| | Percent increase | | 10 | % | | 8 | % | | |
|
Government Systems Sales for 2018 compared to 2017
Avionics sales increased $31 million, or 2 percent, primarily due to the following:
a $45 million increase from higher fixed wing sales, primarily due to higher development program sales and higher deliveries for various fighter platforms
partially offset by $14 million in other net decreases to revenue, primarily due to lower deliveries on various rotary wing platforms
Communication and navigation sales increased $216 million, or 24 percent, primarily due to the following:
a $170 million increase from higher thermal and electronic systems sales, including a $140 million inorganic revenue increase due to the timing of the April 13, 2017, B/E Aerospace acquisition
$69 million in other net increases to revenue, primarily due to higher test and training range sales and higher deliveries of GPS-related products
partially offset by a $23 million decrease due to lower legacy communication product deliveries
Government Systems Sales for 2017 compared to 2016
Avionics sales decreased $11 million, or 1 percent, primarily due to the following:
a $25 million decrease from lower fixed wing sales, primarily due to the wind-down of legacy tanker hardware deliveries and lower deliveries for various fighter platforms as a result of production issues, net of higher development program sales
partially offset by a $14 million increase from higher simulation and training sales
Communication and navigation product sales increased $189 million, or 26 percent, primarily due to the following:
a $104 million increase due to the B/E Aerospace acquisition as discussed above
a $23 million increase from higher data links sales
a $22 million increase from higher deliveries of GPS-related products
$40 million in other net increases to revenue, primarily due to higher test and training range sales and higher legacy communication sales
Government Systems Segment Operating Earnings
| | | | | | | | | | | | | | | (in millions) | | 2018 | | 2017 | | 2016 | | Segment operating earnings | | $ | 515 |
| | $ | 502 |
| | $ | 477 |
| | Percent of sales | | 19.6 | % | | 21.1 | % | | 21.6 | % |
Government Systems Operating Earnings for 2018 compared to 2017
Government Systems operating earnings increased $13 million, or 3 percent, primarily due to the following:
the $247 million increase in sales volume discussed in the Government Systems sales section above, which resulted in
a $209 million increase in cost and incremental earnings of $38 million, or 15 percent of the higher sales volume. The
margins on the sales increase were unfavorably impacted by sales mix as lower margin customer-funded development
revenues and B/E Aerospace thermal and electronic systems sales increased and higher margin product sales decreased
partially offset by an $18 million increase in company-funded R&D expense
also offset by a $7 million organic increase in amortization of pre-production engineering
The decrease in Government Systems operating earnings as a percent of sales was primarily due to unfavorable sales mix and higher company-funded R&D and preproduction engineering amortization costs.
Government Systems Operating Earnings for 2017 compared to 2016
Government Systems operating earnings increased $25 million, or 5 percent, primarily due to the following:
the $74 million increase in sales volume discussed in the Government Systems sales section above, which resulted in a $43 million increase in cost and incremental earnings of $31 million, or 42 percent of the higher sales volume. The margins on the sales increase were favorably impacted by benefits from cost savings initiatives
a $7 million decrease in company-funded R&D expense
a $6 million increase due to reclassification of the operating earnings of the B/E Aerospace thermal and electronic systems product lines as discussed above
partially offset by a $19 million increase in employee incentive compensation costs
The decrease in Government Systems operating earnings as a percent of sales was primarily due to margins on the B/E Aerospace thermal and electronic systems sales and increased employee incentive compensation costs, partially offset by earnings from the higher sales volume, the benefits of cost savings initiatives and decreased company-funded R&D expense.
Information Management Services
Overview
Our Information Management Services business enables mission-critical data and voice communications throughout the world to customers including the FAA, commercial airlines, business aircraft operators, airport and critical infrastructure operators and major passenger and freight railroads. These communications are enabled by our high-performance, high-quality and high-assurance proprietary radio and terrestrial networks, enhancing customer efficiency, safety and connectivity. The near and long-term performance of our Information Management Services business is impacted by general worldwide economic health, commercial airline and business aircraft flight hours and corporate profits.
For risks to the Information Management Services segment, see Risk Factors in Item 1A above. For additional disclosure on Information Management Services segment results see Note 21 of the Notes to Consolidated Financial Statements in Item 8 below.
Information Management Services Sales
The following table presents Information Management Services sales:
| | | | | | | | | | | | | | | (in millions) | | 2018 | | 2017 | | 2016 | | Sales | | $ | 745 |
| | $ | 718 |
| | $ | 658 |
| | Percent increase | | 4 | % | | 9 | % | | |
|
Information Management Services Sales for 2018 compared to 2017
Total Information Management Services sales increased $27 million, or 4 percent. Aviation-related sales grew 6 percent, primarily due to increased usage of connectivity services, partially offset by the absence of a bulk sale of connectivity related equipment that occurred in the prior year. Non-aviation sales decreased 2 percent, primarily due to the completion of nuclear security mandate revenues.
Information Management Services Sales for 2017 compared to 2016
Total Information Management Services sales increased $60 million, or 9 percent. Aviation-related sales grew 11 percent, primarily due to increased usage of connectivity services and increased connectivity related equipment deliveries. Non-aviation sales grew 6 percent, primarily due to nuclear security mandate revenue.
Information Management Services Segment Operating Earnings
| | | | | | | | | | | | | | | (in millions) | | 2018 | | 2017 | | 2016 | | Segment operating earnings | | $ | 138 |
| | $ | 137 |
| | $ | 107 |
| | Percent of sales | | 18.5 | % | | 19.1 | % | | 16.3 | % |
Information Management Services Operating Earnings for 2018 compared to 2017
Information Management Services operating earnings increased $1 million, or 1 percent, primarily due to:
favorable resolution of certain claims associated with a divested business
a $27 million increase in sales volume discussed in the Information Management Services sales section above, which resulted in a $19 million increase in cost and an increase in earnings of $8 million, or 30 percent of the higher sales volume. The margins on the sales increase were unfavorably impacted by lower margin equipment related sales
partially offset by the absence of favorable resolution of certain international business jet support services claims in the prior year
also offset by asset disposition and customer bankruptcy costs and an increase in the allowance for doubtful accounts related to specific customer collection risks
further offset by a $5 million increase in employee incentive compensation costs
The decrease in operating earnings as a percent of sales was primarily due to the above mentioned favorable claims resolution, partially offset by asset disposition and customer bankruptcy costs, an increase in the allowance for doubtful accounts and increased employee incentive compensation costs.
Information Management Services Operating Earnings for 2017 compared to 2016
Information Management Services operating earnings increased $30 million, or 28 percent, primarily due to:
a $60 million increase in sales volume discussed in the Information Management Services sales section above, which resulted in a $33 million increase in cost and an increase in earnings of $27 million, or 45 percent of the higher sales volume. The margins on the sales increase were favorably impacted by benefits from cost savings initiatives
operating earnings were positively impacted in 2017 by the favorable resolution of certain prior year claims associated with international business jet support services, in excess of the 2016 benefit associated with similar claims
The increase in operating earnings as a percent of sales was primarily due to higher sales volume and the above mentioned favorable resolution of prior year claims.
General Corporate, Net
General corporate expenses that are not allocated to our operating segments are included in General corporate, net. These costs are included within Cost of sales, SG&A and Other income, net on the Consolidated Statement of Operations. General corporate, net is summarized as follows:
| | | | | | | | | | | | | | | (in millions) | | 2018 | | 2017 | | 2016 | | General corporate, net | | $ | 56 |
| | $ | 57 |
| | $ | 44 |
|
General corporate, net expense decreased $1 million during 2018 as compared to 2017.
General corporate, net expense increased $13 million during 2017 as compared to 2016, primarily due to costs of the acquired B/E Aerospace business and higher employee incentive compensation costs.
Retirement Plans
Net benefit expense (income) for pension benefits and other retirement benefits are as follows:
| | | | | | | | | | | | | | (in millions) | 2018 | | 2017 | | 2016 | | Pension benefits | $ | (29 | ) | | $ | (25 | ) | | $ | (24 | ) | | Other retirement benefits | 13 |
| | 14 |
| | 14 |
| | Net benefit (income) expense | $ | (16 | ) | | $ | (11 | ) | | $ | (10 | ) |
Pension Benefits
In 2018, five of the Company's eight collective bargaining agreements were negotiated and participation in the Rockwell Collins Pension Plan is now closed to newly hired employees pursuant to those negotiations. The individuals covered by the agreements will instead receive supplemental Company contributions to the existing defined contribution savings plan. The Company previously amended its U.S. qualified and non-qualified defined benefit pension plans to discontinue benefit accruals for salary increases and services rendered after September 30, 2006 for all salaried and hourly employees who were not covered by collective bargaining agreements. Our total cash contributions to defined contribution savings plans were $69 million, $54 million and $46 million for 2018, 2017 and 2016, respectively.
In October 2014, the Society of Actuaries published a new set of mortality tables (RP-2014). For our 2017 year end pension liability valuation, the Company continued to use the RP-2014 tables with an adjustment for plan experience, but utilized the MP-2016 mortality improvement scale adjusted to reflect convergence to an ultimate annual rate of mortality improvement of 0.75 percent by 2032. For the 2018 year end pension liability valuation, the Company continued to use the RP-2014 tables with an adjustment for plan experience, but utilized the MP-2017 mortality improvement scale adjusted to reflect convergence to an
ultimate annual rate of mortality improvement of 0.75 percent by 2033. Both the MP-2016 and MP-2017 mortality improvement scales indicate that U.S. mortality continues to improve, but at a slower average rate. See additional details in the Critical Accounting Policies section in Item 7A below.
A "spot rate approach" has been used to calculate pension interest and service cost. The spot rate approach applies separate discount rates for each projected benefit payment in the calculation of pension interest and service cost.
Defined benefit pension income for the years ended September 30, 2018, 2017 and 2016 was $29 million, $25 million and $24 million, respectively.
The increase in pension income in 2018 compared to 2017 was primarily due to an anticipated increase in return on plan assets as well as a change in the discount rate, impacting interest costs and amortization of net actuarial losses. The increase in pension income in 2017 compared to 2016 was primarily due to a change in the discount rate, impacting interest costs and amortization of net actuarial losses.
During 2018, the funded status of our pension plans went from a deficit of $1.016 billion at September 30, 2017 to a deficit of $356 million at September 30, 2018. The improvement in funded status was primarily due to an increase in contributions by the Company to its pension plans from $68 million during the year ended September 30, 2017 to $467 million during the year ended September 30, 2018, an increase in plan assets due to favorable market returns during 2018, and the favorable impact from an increase in the discount rate used to measure our U.S. pension obligations from 3.53 percent at September 30, 2017 to 4.02 percent at September 30, 2018.
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 may consider discretionary contributions as conditions warrant. We believe our strong financial position continues to provide us the opportunity to make contributions to our pension plans without inhibiting our ability to pursue strategic investments.
There is no minimum statutory funding requirement for 2019. Any additional future contributions necessary to satisfy minimum statutory funding requirements are dependent upon actual plan asset returns, interest rates and other actuarial assumptions.
Other Retirement Benefits
Other retirement benefits expense for the years ended September 30, 2018, 2017 and 2016 was $13 million, $14 million and $14 million, respectively.
| | FINANCIAL CONDITION AND LIQUIDITY |
Cash Flow Summary
Our ability to generate significant cash flow from operating activities coupled with our expected ability to access the credit markets enables us to execute our growth strategies and return value to our shareowners. The timing of our cash inflows is historically heavily weighted towards the second half of ourtransactions during fiscal year particularly our fourth quarter. We expect this trend to continue in the future.
Operating Activities
| | | | | | | | | | | | | | | (in millions) | | 2018 | | 2017 | | 2016 | | Cash (used for) provided by operating activities from continuing operations | | $ | (310 | ) | | $ | 1,264 |
| | $ | 723 |
|
The $1.574 billion increase in cash used for operating activities in 2018 compared to 2017 was primarily due to the following:
higher payments for production inventory and other operating costs, which increased $2.214 billion to $7.366 billion compared to $5.152 billion in 2017 due to cash payments of the recently acquired B/E Aerospace business and a $234 million increase in cash incentive payments to customers in 2018
payments to our pension plan increased $399 million as we made contributions of $467 million in 2018 compared to $68 million in 2017. The incremental contribution was made to achieve a tax deduction at the pre-reform rate and reduce future Pension Benefit Guaranty Corporation premiums
payments for employee incentive pay increased $213 million, primarily due to the accelerated payment of 2018 employee incentive compensation, as discussed below. In 2017, $121 million was paid for employee incentive pay costs expensed during 2016. In the first fiscal quarter of 2018, $182 million was paid for employee incentive pay costs expensed during 2017. In addition, $152 million was paid in the fourth fiscal quarter of 2018 for employee incentive pay costs expensed during 2018. Payment of 2018 employee incentive compensation was accelerated, consistent with requirements of the Merger Agreement, given that the UTC Merger was expected to close prior to our 2018 fiscal year end. Incentive pay costs expensed in 2018 and 2017 were higher than in 2016 primarily due the acquisition of B/E Aerospace
partially offset by higher cash receipts from customers, which increased by $1.063 billion to $8.010 billion in 2018, compared to $6.947 billion in 2017, primarily due to cash receipts of the recently acquired B/E Aerospace business. The increase in cash receipts from customers was less than the sales volume increase of $1.843 billion primarily due to the timing of sales relative to the collection of receivables from customers as well as a $248 million decrease in cash generated by sales of accounts receivable under factoring arrangements (see Note 5 of the Notes to Consolidated Financial Statements in Item 8 below)
also offset by lower cash payments for income taxes, which decreased $202 million to $28 million in 2018 compared to $230 million in 2017. The decrease in cash used for income tax payments was primarily due to a $387 million discretionary pension contribution made in July 2018, a lower federal income tax rate as a result of the Tax Cuts and Jobs Actand the receipt of certain tax refunds
The $541 million increase in cash provided by operating activities in 2017 compared to 2016 was primarily due to the following:
higher cash receipts from customers, which increased by $1.867 billion to $6.947 billion in 2017 compared to $5.080 billion in 2016, primarily due to cash receipts of the recently acquired B/E Aerospace business. The increase in cash receipts from customers was more than the sales volume increase of $1.563 billion due to the timing of sales relative to the collection of receivables from customers
partially offset by higher payments for production inventory and other operating costs, which increased by $1.135 billion to $5.152 billion in 2017, compared to $4.017 billion in 2016, primarily due to cash payments of the recently acquired B/E Aerospace business
also offset by cash payments for income taxes, which increased $100 million to $230 million in 2017, compared to $130 million in 2016. The increase in cash used for income tax payments was primarily due to the retroactive reinstatement of the Federal R&D tax credit as a result of the Protecting Americans from Tax Hikes Act in 2016, as well as pre-tax income associated with the recently acquired B/E Aerospace business
further offset by payments for transaction costs associated with the B/E Aerospace acquisition of $114 million in 2017
Investing Activities
| | | | | | | | | | | | | | | (in millions) | | 2018 | | 2017 | | 2016 | | Cash (used for) investing activities from continuing operations | | $ | (256 | ) | | $ | (3,674 | ) | | $ | (209 | ) |
The $3.418 billion reduction in cash used for investing activities in 2018 compared to 2017 was primarily due to the following:
$3.429 billion of cash payments for acquisitions in 2017, primarily related to the acquisition of B/E Aerospace
partially offset by a $17 million increase in cash payments for property additions in 2018 compared to the prior year, primarily due to the B/E Aerospace acquisition
The $3.465 billion increase in cash used for investing activities in 2017 compared to 2016 was primarily due to the following:
$3.417 billion in cash consideration paid, net of cash acquired, related to the April 2017 acquisition of B/E Aerospace
a $47 million increase in cash payments for property additions to $240 million in 2017, primarily driven by the B/E Aerospace acquisition
Financing Activities
| | | | | | | | | | | | | | | (in millions) | | 2018 | | 2017 | | 2016 | | Cash provided by (used for) financing activities from continuing operations | | $ | 610 |
| | $ | 2,759 |
| | $ | (422 | ) |
The $2.149 billion decrease in cash provided by financing activities in 2018 compared to 2017 was primarily due to the following:
$3.980 billion of prior year financing activities related to B/E Aerospace acquisition. $6.099 billion in net proceeds from the issuance of long-term debt were principally used to repay $2.119 billion of assumed B/E Aerospace debt, finance the cash portion of the B/E Aerospace purchase price and pay related transaction fees and expenses
partially offset by a $1.280 billion increase in net proceeds from short-term commercial paper borrowings
further offset by a $541 million decrease in repayments of long-term debt
The $3.181 billion increase in cash provided by financing activities in 2017 compared to 2016 was primarily due to the following:
$3.980 billion related to financing of the B/E Aerospace acquisition. $6.099 billion in net proceeds from the issuance of long-term debt were principally used to repay $2.119 billion of assumed B/E Aerospace debt, finance the cash portion of the B/E Aerospace purchase price and pay related transaction fees and expenses
cash repurchases of common stock decreased $215 million to $46 million in 2017, compared to $261 million in 2016
partially offset by a $930 million increase in repayments of long-term debt and a $102 million decrease in the net proceeds from short-term commercial paper borrowings
Share Repurchase Program
Cash flow from operations provided funds for repurchasing our common stock under our share repurchase program as follows:
| | | | | | | | | | | | | | | (in millions, except per share amounts) | | 2018 | | 2017 | | 2016 | | Amount of share repurchases | | $ | — |
| | $ | 39 |
| | $ | 255 |
| | Number of shares repurchased | | — |
| | 0.4 |
| | 2.9 |
| | Weighted average price per share | | $ | — |
| | $ | 104.32 |
| | $ | 87.30 |
|
None of the 2017 or 2016 share repurchases reflected in the table above are included within accounts payable at September 30, 2017 or 2016, respectively.
Dividends
We declared and paid cash dividends of $216 million, $194 million and $172 million in 2018, 2017 and 2016, respectively. Based on our current dividend policy, we expect to pay quarterly cash dividends which, on an annual basis, would equal $1.32 per share. We expect to fund dividends using cash generated from operations. The declaration and payment of future dividends is at the sole discretion of the Board of Directors, subject to certain restrictions in the Merger Agreement.
Financial Condition and Liquidity
We maintain a capital structure that we believe enables us sufficient access to credit markets. When combined with our ability to generate strong levels of cash flow from our operations, this capital structure has provided the strength and flexibility necessary to pursue strategic growth opportunities and to return value to our shareowners.
A comparison of key elements of our financial condition as of September 30, 2018 and 2017 are as follows:
| | | | | | | | | | | September 30 | | (in millions) | 2018 | | 2017 | | Cash and cash equivalents | $ | 738 |
| | $ | 703 |
| | | | | | | Short-term debt | (2,248 | ) | | (479 | ) | | Long-term debt, net | (5,681 | ) | | (6,676 | ) | | Total Debt | $ | (7,929 | ) | | $ | (7,155 | ) | | Total equity | $ | 7,114 |
| | $ | 6,050 |
| Debt to total capitalization (1) | 53 | % | | 54 | % |
(1) Calculated as Total debt divided by the sum of Total debt plus Total equity
On April 13, 2017, we completed our acquisition of B/E Aerospace for $6.5 billion in cash and stock, plus the assumption of $2.0 billion in debt, net of cash acquired. The $6.5 billion purchase price included cash consideration of $3.5 billion and $3.0 billion of common stock issued for B/E Aerospace common stock (31.2 million shares of common stock issued to B/E Aerospace shareholders at the April 13, 2017 closing share price of $96.63). The cash consideration, related transaction fees and expenses and assumed debt were financed through the issuance of $4.35 billion of senior unsecured notes and $1.5 billion borrowed under a 3-year senior unsecured syndicated term loan facility that was entered into on December 16, 2016.
We primarily fund our contractual obligations, capital expenditures, small to medium-sized acquisitions, dividends and share repurchases with cash generated from operating activities.As of September 30, 2018, approximately 60 percent of our cash and cash equivalents reside at non-U.S. locations and may not be readily accessible for use in the U.S. We are studying changes enacted by the Tax Cuts and Jobs Act, costs of repatriation and the current and future cash needs of foreign operations to determine whether there is an opportunity to tax efficiently repatriate additional foreign cash balances in the future.
Due to the fluctuations of cash flows, we supplement our internally-generated cash flow from time to time by issuing short-term commercial paper. Under our commercial paper program, we may sell up to $1.5 billion face amount of unsecured short-term promissory notes in the commercial paper market. The commercial paper notes have maturities of not more than 364 days from the date of issuance. At September 30, 2018, short-term commercial paper borrowings outstanding were $1.5 billion, with a weighted-average annualized interest rate and maturity period of 2.42 percent and 9 days, respectively. At September 30, 2017, short-term commercial paper borrowings outstanding were $330 million, with a weighted-average annualized interest rate and maturity period of 1.45 percent and 18 days, respectively. The maximum amount of short-term commercial paper borrowings outstanding during 2018 was $1.5 billion.
We have a $1.5 billion five-year senior unsecured revolving credit agreement with various banks that expires in December 2021. At September 30, 2018 and September 30, 2017, there were no outstanding borrowings under the Company's revolving credit facility.
In December 2016, we entered into a $4.35 billion 364-day senior unsecured bridge term loan credit agreement and a $1.5 billion three-year senior unsecured term loan credit agreement. The bridge facility terminated upon receipt of proceeds from the notes issued to finance a portion of the B/E Aerospace acquisition. Proceeds from borrowings under the term loan facility were used to finance a portion of the B/E Aerospace acquisition and to pay related transaction fees and expenses. At September 30, 2018, the outstanding principal balance of the term loan credit agreement was $481 million.
The revolving credit agreement and term loan credit agreement include one financial covenant requiring us to maintain a consolidated debt to total capitalization ratio of not greater than 65 percent (excluding the equity impact of accumulated other comprehensive loss related to defined benefit retirement plans). The ratio was 48 percent at September 30, 2018.
In addition, alternative sources of liquidity could include funds available from the issuance of equity securities, debt securities and potential asset securitization strategies.
Credit ratings are a significant factor in determining our ability to access short-term and long-term financing, as well as the cost of such financing. Our strong credit ratings have enabled continued access to both short- and long-term credit markets. The following is a summary of our credit ratings as of September 30, 2018:
| | | | | | | | Credit Rating Agency | | Short-Term Rating | | Long-Term Rating | | Outlook | Fitch Ratings | | F2 | | BBB | | Positive | Moody’s Investors Service | | P-2 | | Baa2 | | Stable | Standard & Poor’s | | A-2 | | BBB | | Positive |
We were in compliance with all debt covenants at September 30, 2018 and September 30, 2017.
Factoring Arrangements
We sell certain accounts receivable on a non-recourse basis to unrelated financial institutions under factoring agreements arranged by certain customers. Under the terms of the agreements, we retain no rights or interest and have no obligations with respect to the sold receivables. We account for these transactions as sales of receivables and record cash proceeds when received as cash provided by operating activities in the Consolidated Statement of Cash Flows. The unfavorable impact on cash used for operating activities during 2018 was $154 million. The favorable impact on cash provided by operating activities during 2017 was $94 million. The cost of participating in these programs was immaterial to our results.
Off-balance Sheet Arrangements
As of September 30, 2018, other than operating leases, we had no material off-balance sheet arrangements, including guarantees, retained or contingent interests in assets transferred to unconsolidated entities, derivative instruments indexed to our stock and classified in shareowners' equity on our Consolidated Statement of Financial Position or variable interests in entities that provide financing, liquidity, market risk or credit risk support to our Company.
Contractual Obligations
The following table summarizes certain of our contractual obligations as of September 30, 2018, as well as when these obligations are expected to be satisfied.
| | | | | | | | | | | | | | | | | | | | | | | | | Payments Due by Period | | (in millions) | | Total | | Less than 1 Year | | 1 - 3 Years | | 4 - 5 Years | | Thereafter | | Long-term debt | | $ | 6,481 |
| | $ | 750 |
| | $ | 331 |
| | $ | 1,350 |
| | $ | 4,050 |
| | Interest on long-term debt | | 2,549 |
| | 231 |
| | 392 |
| | 326 |
| | 1,600 |
| | Non-cancelable operating leases | | 506 |
| | 89 |
| | 134 |
| | 87 |
| | 196 |
| | Non-cancelable capital leases, including interest | | 65 |
| | 6 |
| | 11 |
| | 12 |
| | 36 |
| | Purchase obligations: | | | | | | | | | | | | Purchase orders | | 2,432 |
| | 1,842 |
| | 405 |
| | 176 |
| | 9 |
| | Purchase contracts | | 133 |
| | 35 |
| | 58 |
| | 20 |
| | 20 |
| | Total | | $ | 12,166 |
| | $ | 2,953 |
| | $ | 1,331 |
| | $ | 1,971 |
| | $ | 5,911 |
|
Interest payments under long-term debt obligations exclude the potential effects of the related interest rate swap contracts. See Note 9 of the Notes to Consolidated Financial Statements in Item 8 below.
We lease certain office and manufacturing facilities as well as certain machinery and equipment under various lease contracts. Our commitments under operating leases, in the form of non-cancelable future lease payments, are not reflected as a liability on
our Consolidated Statement of Financial Position. The principal portion of capital lease obligations is reflected within Other Liabilities on our Consolidated Statement of Financial Position.
Purchase obligations include purchase orders and purchase contracts. Purchase orders are executed in the normal course of business and may or may not be cancelable. Purchase contracts include agreements with suppliers under which there is a commitment to buy a minimum amount of products or pay a specified amount regardless of actual need. Generally, items represented in purchase obligations are not reflected as liabilities on our Consolidated Statement of Financial Position.
The table excludes obligations with respect to pension and other post-retirement benefit plans (see Note 10 of the Notes to Consolidated Financial Statements in Item 8 below). There is no minimum statutory funding requirement for 2019 and the Company does not currently expect to make any discretionary contributions during 2019 to these plans. Any additional future contributions necessary to satisfy minimum statutory funding requirements are dependent upon actual plan asset returns, interest rates and actuarial assumptions. With the exception of certain bargaining unit plans, payments due under other post-retirement benefit plans are funded as the expenses are incurred.
In addition, the table excludes liabilities for unrecognized tax benefits, which totaled $214 million at September 30, 2018, as we cannot reasonably estimate the ultimate timing of cash settlements to the respective taxing authorities (see Note 13 of the Notes to Consolidated Financial Statements in Item 8 below).
The following table reflects certain of our commercial commitments as of September 30, 2018:
| | | | | | | | | | | | | | | | | | | | | | | | | Amount of Commitment Expiration by Period | | (in millions) | | Total Amount Committed | | Less than 1 Year | | 1 - 3 Years | | 4 - 5 Years | | Thereafter | Letters of credit (1) | | $ | 364 |
| | $ | 172 |
| | $ | 111 |
| | $ | 69 |
| | $ | 12 |
|
(1) See Note 16 of the Notes to Consolidated Financial Statements in Item 8 below for a discussion of letters of credit.In addition to the obligations disclosed above, we occasionally enter into offset agreements, required by certain customers in some non-U.S. countries, as a condition to obtaining contract awards for our products and services. These agreements, which generally extend over several years, are customary in our industry and are designed to enhance the social and economic environment of the country in which our customers operate. These commitments may be satisfied through activities that do not require us to use cash, including transfer of technology, providing manufacturing and other consulting support to in-country projects, strategic alliances and transactions conducted by third parties (e.g., our vendors). These agreements may also be satisfied through our use of cash for activities such as placement of direct work or vendor orders for supplies and/or services, building or leasing facilities for in-country operations, in-country employment of a non-U.S. country's citizens and other forms of assistance in the applicable country. The offset rules and regulations, as well as the underlying contracts, may differ from one country to another.
We typically do not commit to offset agreements until contract awards for our products or services are definitive. Should we be unable to meet the offset obligations we may be subject to contractual penalties, and our chances of receiving additional business from the applicable customers could be reduced or, in certain cases, eliminated. We historically have not been required to pay material penalties related to offset obligations and are currently in compliance with our offset commitments.
At September 30, 2018, we had outstanding offset obligations totaling approximately $374 million that extend through 2036. The amounts ultimately applied against our offset requirements are based on negotiations with the customer and the cost to fulfill the obligation is typically only a fraction of the original obligation.
| | RECENTLY ISSUED ACCOUNTING STANDARDS |
For information related to recently issued accounting standards, see Note 2 of the Notes to Consolidated Financial Statements in Item 8 below.
For information related to environmental claims, remediation efforts and related matters, see Note 18 of the Notes to Consolidated Financial Statements in Item 8 below.
| | CRITICAL ACCOUNTING POLICIES |
The preparation of our financial statements in accordance with accounting principles generally accepted in the United States of America requires us to make estimates, judgments and assumptions that affect our financial condition and results of operations that are reported in the accompanying consolidated financial statements, as well as the related disclosure of assets and liabilities, contingent upon future events.
Understanding the critical accounting policies discussed below and related risks is important in evaluating our financial condition and results of operations. We believe the following accounting policies used in the preparation of the consolidated financial statements are critical to our financial condition and results of operations as they involve a significant use of management judgment on matters that are inherently uncertain. If actual results differ significantly from management's estimates, there could be a material effect on our financial condition, results of operations and cash flows. Management regularly discusses the identification and development of these critical accounting policies with the Audit Committee of the Board of Directors.
Accounting for Long-Term Contracts
A substantial portion of our sales to government customers and certain of our sales to commercial customers are made pursuant to long-term contracts requiring development and delivery of products over several years and often contain fixed-price purchase options for additional products. Certain of these contracts are accounted for under the percentage-of-completion method of accounting. Sales and earnings under the percentage-of-completion method are recorded either as products are shipped under the units-of-delivery method, or based on the ratio of actual costs incurred to total estimated costs expected to be incurred related to the contract under the cost-to-cost method. Approximately 16 percent of our sales are accounted for under the percentage-of-completion method of accounting.
The percentage-of-completion method of accounting requires management to estimate the profit margin for each individual contract and to apply that profit margin on a uniform basis as sales are recorded under the contract. The estimation of profit margins requires management to make projections of the total sales to be generated and the total costs that will be incurred under a contract. These projections require management to make numerous assumptions and estimates relating to items such as the complexity of design and related development costs, performance of subcontractors, availability and cost of materials, labor productivity and cost, overhead and capital costs and manufacturing efficiency. These contracts often include purchase options for additional quantities and customer change orders for additional or revised product functionality. Sales and costs related to profitable purchase options are included in our estimates only when the options are exercised while sales and costs related to unprofitable purchase options are included in our estimates when exercise is determined to be probable. Sales related to change orders are included in profit estimates only if they can be reliably estimated and collectability is reasonably assured. Purchase options and change orders are accounted for either as an integral part of the original contract or separately, depending upon the nature and value of the item. Anticipated losses on contracts are recognized in full in the period in which losses become probable and estimable.
Estimates of profit margins for contracts are typically reviewed by management on a quarterly basis. Assuming the initial estimates of sales and costs under a contract are accurate, the percentage-of-completion method results in the profit margin being recorded evenly as revenue is recognized under the contract. Changes in these underlying estimates due to revisions in sales and cost estimates, the combining of contracts or the exercise of contract options may result in profit margins being recognized unevenly over a contract as such changes are accounted for on a cumulative basis in the period estimates are revised. Cumulative catch-up adjustments resulting from changes in estimates did not have a material effect on our results of operations during the years ended September 30, 2018, 2017 or 2016.
Program Investments
We defer certain pre-production engineering costs in Inventories, net and record up-front sales incentives in Intangible Assets (collectively referred to as Program Investments). These Program Investments are amortized over their estimated useful lives, up to a maximum of 15 years. Estimated useful lives are limited to the amount of time we are virtually assured to earn revenues through a contractually enforceable right included in long-term supply arrangements with our customers. This provides the best matching of expense over the related period of benefit. The following provides an overview of the Program Investments:
| | | | | | | | | | | | | September 30 | | (in millions) | | 2018 | | 2017 | | Pre-production engineering costs | | $ | 1,166 |
| | $ | 1,175 |
| | Up-front sales incentives | | 578 |
| | 243 |
| | Total Program Investments | | $ | 1,744 |
| | $ | 1,418 |
|
We defer the cost of certain pre-production engineering costs incurred during the development phase of a program in connection with long-term supply arrangements that contain contractual guarantees for reimbursement from customers. These customer guarantees generally take the form of a minimum order quantity with quantified reimbursement amounts if the minimum order quantity is not taken by the customer. These costs are deferred in inventory to the extent of the contractual guarantees and are amortized over their estimated useful lives using a units-of-delivery method, up to 15 years. This amortization expense is included in customer funded R&D as a component of cost of sales. Amortization is based on our expectation of delivery rates on a program-by-program basis and begins when we start recognizing revenue as we deliver equipment for the program. Pre-production engineering costs in excess of the contractual guarantee, and costs incurred pursuant to supply arrangements that do not contain customer guarantees for reimbursement, are expensed as incurred.
We also provide up-front sales incentives prior to delivering products or performing services to certain commercial customers in connection with sales contracts. Up-front sales incentives are recorded as a customer relationship intangible asset and are amortized using a units-of-delivery method over the period we have received a contractually enforceable right related to the incentives, up to 15 years after entry into service. Amortization is based on our expectation of delivery rates on a program-by-program basis. Amortization begins when we start recognizing revenue as we deliver equipment for the program. Up-front sales incentives consisting of cash payments or customer account credits are amortized as a reduction of sales, whereas incentives consisting of free products are amortized as cost of sales.
Risks inherent in recovering the value of our Program Investments include, but are not limited to, the following:
changes in market conditions may affect product sales under a program. In particular, the commercial aerospace market has been historically cyclical and subject to downturns during periods of weak economic conditions, which could be prompted or exacerbated by political or other U.S. or international events
bankruptcy or other significant financial difficulties of our customers
our ability to produce products could be impacted by the performance of subcontractors, the availability of specialized materials and other production risks
We evaluate the carrying amount of Program Investments for recovery at least annually or when potential indicators of impairment exist, such as a change in the estimated number of products to be delivered under a program. No significant impairment charges related to Program Investments were recorded in 2018, 2017 or 2016. While we believe our Program Investments are recoverable over time, the cancellation of a program by a customer coupled with bankruptcy or other financial difficulties, would represent the most significant impairment factor related to Program Investments. We also evaluate our amortization of Program Investments quarterly based on our expectation of delivery rates on a program-by-program basis. The impact of changes in expected delivery rates on the Program Investments' amortization is adjusted as needed on a prospective basis.
Amortization expense for pre-production engineering and up-front sales incentives for 2018, 2017 and 2016 was as follows:
| | | | | | | | | | | | | | (in millions) | 2018 | | 2017 | | 2016 | | Amortization of pre-production engineering | $ | 87 |
| | $ | 59 |
| | $ | 49 |
| | Amortization of up-front sales incentives | 21 |
| | 13 |
| | 18 |
| | Total amortization of Program Investments | $ | 108 |
| | $ | 72 |
| | $ | 67 |
|
As disclosed in Note 3 of the Notes to Consolidated Financial Statements in Item 8 below, the weighted-average amortization period for up-front sales incentives is approximately 12 years. Anticipated amortization expense for the up-front sales incentives at September 30, 2018, for 2019 and beyond is summarized below:
| | | | | | | | | | | | | | | | | | | | (in millions) | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | Thereafter | | Anticipated amortization expense for up-front sales incentives | 24 |
| | 26 |
| | 26 |
| | 26 |
| | 25 |
| | 451 |
|
As discussed in Note 2 of the Notes to Consolidated Financial Statements in Item 8 below, adoption of the new revenue recognition standard on October 1, 2018, resulted in elimination of the $1.166 billion pre-production engineering balance and approximately $120 million of customer relationship intangible assets. Therefore, $120 million of amortization expense associated with customer relationship intangible assets as contemplated in the table above will be avoided.
Pre-production engineering costs comprise 44 percent of our total Inventory balance at September 30, 2018, compared to 48 percent at September 30, 2017. Pre-production engineering costs decreased $9 million from September 30, 2017 to September 30, 2018. The majority of this decrease was attributable to increased amortization of pre-production engineering. Additionally, up-front sales incentives to Commercial Systems customers increased $335 million from September 30, 2017 to September 30, 2018, primarily due to the extension of certain long-term sales contracts.
Growth in our Program Investments continues to be driven by the expanded market share our Company successfully captured over the past several years. Commercial Systems has secured positions on several key platforms in the air transport market, including the Boeing 737 MAX and Airbus A350. In the business and regional jet market, our Pro Line Fusion avionics system has been selected by customers around the globe, including Bombardier, Embraer and Gulfstream.
We believe our Program Investments are recoverable based upon our contractually enforceable rights under long-term supply arrangements and the expected revenues and profits associated with our positions on these aircraft platforms.
Income Taxes
At the end of each quarterly reporting period, we estimate an effective income tax rate that is expected to be applicable for the full fiscal year. The estimate of our effective income tax rate involves significant judgments resulting from uncertainties in the application of complex tax laws and regulations across many jurisdictions, implementation of tax planning strategies and estimates as to the jurisdictions where income is expected to be earned. These estimates may be further complicated by new laws, new interpretations of existing laws and rulings by taxing authorities. For example, in 2018 the United States Government enacted the Tax Cuts and Jobs Act (the Act), which contains significant changes to the U.S. tax system.Due to the subjectivity and complex nature of these underlying issues, our actual effective income tax rate and related tax liabilities may differ from our initial estimates. Differences between our estimated and actual effective income tax rates and related liabilities are recorded in the period they become known or as our estimates are revised based on additional information. The resulting adjustment to our income tax expense could have a material effect on our results of operations in the period the adjustment is recorded. A one percentage point change in our effective income tax rate would change our annual income from continuing operations by approximately $11 million.
Deferred tax assets and liabilities are recorded for tax carryforwards and the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. The future realization of our deferred tax assets ultimately depends on our ability to generate sufficient taxable income of the appropriate character (for example, ordinary income or capital gains) within the carryback and carryforward periods available under the tax law and our ability to execute successful tax planning strategies. Management believes it is more likely than not that the long-term deferred tax assets will be realized through the reduction of future taxable income. A change in the ability of our operations to continue to generate future taxable income, or our ability to implement tax planning strategies, could affect our ability to realize the future tax deductions underlying our net deferred tax assets, and require us to record a valuation allowance against our net
deferred tax assets. The recognition of a valuation allowance would result in a reduction to net income and if significant, could have a material impact on our effective tax rate, results of operations and financial position in any given period.
As part of the determination of our tax liability, management exercises considerable judgment in evaluating tax positions taken by us in determining the income tax provision and establishes reserves for tax contingencies in accordance with the Income Taxes topic of the FASB Accounting Standards Codification. See Note 13 of the Notes to Consolidated Financial Statements in Item 8 below for further detail regarding the impacts of the Act, unrecognized tax benefits, deferred taxes and the factors considered in evaluating deferred tax asset realization.
Goodwill
As of September 30, 2018, we had $9.107 billion of goodwill related to various business acquisitions. We perform goodwill impairment tests on an annual basis during the fourth quarter of each fiscal year, or on an interim basis if events or circumstances indicate that it is more likely than not that impairment has occurred.
Goodwill is potentially impaired if the carrying value of the reporting unit that contains the goodwill exceeds its estimated fair value. The fair values of our reporting units are generally determined using a combination of an income approach, which estimates fair value based upon future discounted cash flows, and a market approach, which estimates fair value using market multiples, ratios and valuations of a set of comparable public companies within our industry. We completed our annual goodwill impairment test in the fourth quarter of 2018 and concluded no impairment of goodwill exists, as all goodwill reporting units had a calculated fair value in excess of carrying value of greater than 20 percent. Although goodwill is not currently impaired, there can be no assurance that future impairments will not occur. Significant negative industry or economic trends, disruptions to our business, failure to achieve synergies from recent acquisitions, or other unexpected significant changes in the use of certain assets could all have a negative effect on fair values in the future.
Pension Benefits
In 2018, five of our eight collective bargaining agreements were negotiated and participation in the Rockwell Collins Pension Plan is now closed to newly hired employees pursuant to those negotiations. The individuals covered by the agreements will instead receive supplemental Company contributions to the existing defined contribution savings plan. We previously amended our U.S. qualified and non-qualified defined benefit pension plans to discontinue benefit accruals for salary increases and services rendered after September 30, 2006 for all salaried and hourly employees who were not covered by collective bargaining agreements. Accounting standards require these plans to be measured on an actuarial basis. These accounting standards will generally reduce, but not eliminate, the volatility of pension expense as actuarial gains and losses resulting from both normal year-to-year changes in valuation assumptions and the differences from actual experience are deferred and amortized. The application of these accounting standards requires management to make numerous assumptions and judgments that can significantly affect these measurements. Critical assumptions made by management in performing these actuarial valuations include the selection of discount rates and expectations regarding the future rate of return on pension plan assets.
In October 2014, the Society of Actuaries published a new set of mortality tables (RP-2014). While accounting standards do not prescribe the use of a specific set of mortality tables in the measurement of pension obligations, mortality is a key assumption in developing actuarial estimates. For our 2017 year end pension liability valuation, we used the RP-2014 tables with an adjustment for plan experience, and utilized the MP-2016 mortality improvement scale adjusted to reflect convergence to an ultimate annual rate of mortality improvement of 0.75 percent by 2032. For the 2018 year end pension liability valuation, we continued to use the RP-2014 tables with an adjustment for plan experience, but utilized the MP-2017 mortality improvement scale adjusted to reflect convergence to an ultimate annual rate of mortality improvement of 0.75 percent by 2033. Both the MP-2016 and MP-2017 mortality improvement scales indicate that U.S. mortality continues to improve, but at a slower average rate. These changes resulted in a decrease to the 2018 projected pension benefit obligation of $18 million.
Discount rates are used to determine the present value of our pension obligations and also affect the amount of pension expense recorded in any given period. We estimate the discount rate based on the rates of return of high quality, fixed-income investments with maturity dates that reflect the expected time horizon over which benefits will be paid (see Note 10 of the Notes to Consolidated Financial Statements in Item 8 below). Changes to the discount rate could have a material effect on our reported pension obligations and would also impact the related pension expense.
A "spot rate approach" has been used to calculate pension and other retirement benefits interest and service costs. The spot rate approach applies separate discount rates for each projected benefit payment in the calculation of pension interest and service cost.
The expected rate of return is our estimate of the long-term earnings rate on our pension plan assets and is based upon both historical long-term actual and expected future investment returns considering the current investment mix of plan assets. Differences between the actual and expected rate of return on plan assets can impact our expense for pension benefits.
Holding all other factors constant, the estimated impact on 2018 pension expense and pension benefit obligation for our U.S. plans caused by hypothetical changes to key assumptions is as follows: | | | | | | | | Change in Assumption (in millions) | Assumption | | 25 Basis Point Increase | | 25 Basis Point Decrease | Pension obligation discount rate | | $97 pension projected benefit obligation decrease | | $102 pension projected benefit obligation increase | Pension obligation discount rate | | $1 pension expense increase | | $1 pension expense decrease | Expected long-term rate of return on plan assets | | $7 pension expense decrease | | $7 pension expense increase |
| | Item 7A. | Quantitative and Qualitative Disclosures about Market Risk. |
Interest Rate Risk
In addition to using cash provided by normal operating activities, we utilize a combination of short-term and long-term debt to finance operations and make acquisitions. Our operating results and cash flows are exposed to changes in interest rates that could adversely affect the amount of interest expense incurred and paid on debt obligations in any given period. In addition, changes in interest rates can affect the fair value of our debt obligations. Such changes in fair value are only relevant to the extent these debt obligations are settled prior to maturity. We manage our exposure to interest rate risk by maintaining an appropriate mix of fixed and variable rate debt and may employ financial instruments in the form of interest rate swaps to help meet this objective.
At September 30, 2018, we had the following unsecured notes outstanding:
| | | | | | | | | | | | | September 30, 2018 | | (in millions, except interest rate figures) | Interest Rate | | Carrying Value | | Fair Value | | Fixed-rate notes due: | | | | | | | July 2019 | 1.95% | | $ | 300 |
| | $ | 298 |
| | July 2019 | 5.25% | | 300 |
| | 305 |
| | November 2021 | 3.10% | | 250 |
| | 246 |
| | March 2022 | 2.80% | | 1,100 |
| | 1,070 |
| | December 2023 | 3.70% | | 400 |
| | 397 |
| | March 2024 | 3.20% | | 950 |
| | 917 |
| | March 2027 | 3.50% | | 1,300 |
| | 1,235 |
| | December 2043 | 4.80% | | 400 |
| | 406 |
| | April 2047 | 4.35% | | 1,000 |
| | 957 |
| | Variable-rate term loan due: | | | | | | | April 2020 | 1 month LIBOR + 1.25% (1) | | 481 |
| | 481 |
|
(1) We have the option to elect a one-, two-, three- or six-month LIBOR interest rate and have elected the one-month rate during the fourth quarter of 2018. The one-month LIBOR rate at September 30, 2018 was approximately 2.26 percent.
In June 2015, we entered into interest rate swap contracts which effectively converted $150 million of the 5.25 percent Notes due 2019 to floating rate debt based on three-month LIBOR plus 3.56 percent.
In March 2014, we entered into interest rate swap contracts which effectively converted $200 million of the Notes due 2023 to floating rate debt based on one-month LIBOR plus 0.94 percent.
In January 2010, we entered into interest rate swap contracts which effectively converted $150 million of the 5.25 percent Notes due 2019 to floating rate debt based on six-month LIBOR plus 1.235 percent.
A hypothetical 10 percent increase in average market interest rates would have decreased the fair value of our long-term fixed rate debt, exclusive of the effects of the interest rate swap contracts, by $125 million. A hypothetical 10 percent decrease in
average market interest rates would have increased the fair value of our long-term fixed rate debt, exclusive of the effects of the interest rate swap contracts, by $131 million. The fair value of the $500 million notional value of interest rate swap contracts was a $2 million net liability at September 30, 2018. A hypothetical 10 percent increase in average market interest rates would decrease the fair value of our interest rate swap contracts by $3 million. A 10 percent decrease in average market interest rates would increase the fair value of our interest rate swap contract by $3 million. Our results of operations are affected by changes in market interest rates related to variable rate debt. Inclusive of the effect of the interest rate swaps, a hypothetical 10 percent increase or decrease in average market interest rates would not have a material effect on our operations or cash flows. For more information related to outstanding debt obligations and derivative financial instruments, see Notes 9, 14 and 15 in the Notes to Consolidated Financial Statements in Item 8 below.
Foreign Currency Risk
We transact business in various foreign currencies which exposes our cash flows and earnings to changes in foreign currency exchange rates. We attempt to manage this exposure through operational strategies and the use of foreign currency forward exchange contracts (foreign currency contracts). All foreign currency contracts are executed with banks we believe to be creditworthy and are primarily denominated in currencies of major industrial countries. The majority of our non-functional currency firm and anticipated receivables and payables are typically hedged using foreign currency contracts. It is our policy not to manage exposure to net investments in non-U.S. subsidiaries or enter into derivative financial instruments for speculative purposes. Notional amounts of outstanding foreign currency contracts were $0 million and $1.312 billion at September 30, 2018 and 2017, respectively. The decrease in the notional amount of outstanding foreign currency contracts is primarily due to the maturation of certain foreign currency contracts entered into to offset remeasurement of certain intercompany loans that matured in 2018. The 2017 notional value consisted primarily of contracts for the British pound sterling and European euro, and are stated in U.S. dollar equivalents at spot exchange rates at September 30, 2017. For more information related to currency forward exchange contracts, see Notes 14 and 15 in the Notes to Consolidated Financial Statements in Item 8 below.
| | Item 8. | Financial Statements and Supplementary Data. |
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Rockwell Collins' internal control over financial reporting is a process designed, under the supervision of the Chief Executive Officer and Chief Financial Officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of Rockwell Collins; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of Rockwell Collins' management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of Rockwell Collins' internal control over financial reporting as of September 30, 2018. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013). Based on this assessment, management determined that Rockwell Collins maintained effective internal control over financial reporting as of September 30, 2018.
Rockwell Collins' internal control over financial reporting as of September 30, 2018 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is included within the Controls and Procedures section in Item 9A of this Form 10-K.
| | | | /s/ ROBERT K. ORTBERG | | /s/ PATRICK E. ALLEN | Robert K. Ortberg
Chairman, President and
Chief Executive Officer
| |
Patrick E. Allen
Senior Vice President and
Chief Financial Officer
|
REPORTCODE OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareowners and the Board of Directors of Rockwell Collins, Inc.:
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial position of Rockwell Collins, Inc. and subsidiaries (the “Company”) as of September 28, 2018 and September 29, 2017, and the related consolidated statements of operations, comprehensive income, cash flows, and equity for each of the three years in the period ended September 28, 2018, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 28, 2018 and September 29, 2017, and the results of its operations and its cash flows for each of the three years in the period ended September 28, 2018, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of September 28, 2018, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated November 26, 2018 expressed an unqualified opinion on the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
Chicago, Illinois
November 26, 2018
We have served as the Company’s auditor since 2001.
ROCKWELL COLLINS, INC.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(in millions, except per share amounts) | | | | | | | | | | | September 30 | | | 2018 | | 2017 | | ASSETS | | | | | Current Assets: | | | | | Cash and cash equivalents | $ | 738 |
| | $ | 703 |
| | Receivables, net | 2,109 |
| | 1,426 |
| | Inventories, net | 2,649 |
| | 2,451 |
| | Businesses held for sale | 91 |
| | — |
| | Other current assets | 191 |
| | 180 |
| | Total current assets | 5,778 |
| | 4,760 |
| | | | | | | Property, Net | 1,429 |
| | 1,398 |
| | Goodwill | 9,107 |
| | 9,158 |
| | Customer Relationship Intangible Assets | 1,654 |
| | 1,525 |
| | Other Intangible Assets | 538 |
| | 604 |
| | Deferred Income Tax Asset | 16 |
| | 21 |
| | Other Assets | 504 |
| | 531 |
| | TOTAL ASSETS | $ | 19,026 |
| | $ | 17,997 |
| | LIABILITIES AND EQUITY | |
| | |
| | Current Liabilities: | |
| | |
| | Short-term debt | $ | 2,248 |
| | $ | 479 |
| | Accounts payable | 821 |
| | 927 |
| | Compensation and benefits | 276 |
| | 385 |
| | Advance payments from customers | 377 |
| | 361 |
| | Accrued customer incentives | 280 |
| | 287 |
| | Product warranty costs | 194 |
| | 186 |
| | Other current liabilities | 490 |
| | 444 |
| | Total current liabilities | 4,686 |
| | 3,069 |
| | | | | | | Long-term Debt, Net | 5,681 |
| | 6,676 |
| | Retirement Benefits | 525 |
| | 1,208 |
| | Deferred Income Tax Liability | 346 |
| | 331 |
| | Other Liabilities | 674 |
| | 663 |
| | | | | | | Equity: | |
| | |
| | Common stock ($0.01 par value; shares authorized: 1,000; shares issued: September 30, 2018, 175.0; September 30, 2017, 175.0) | 2 |
| | 2 |
| | Additional paid-in capital | 4,604 |
| | 4,559 |
| | Retained earnings | 4,654 |
| | 3,838 |
| | Accumulated other comprehensive loss | (1,471 | ) | | (1,575 | ) | Common stock in treasury, at cost (shares held: September 30, 2018, 10.5; September 30, 2017, 12.1) | (682 | ) | | (781 | ) | | Total shareowners’ equity | 7,107 |
| | 6,043 |
| | Noncontrolling interest | 7 |
| | 7 |
| | Total equity | 7,114 |
| | 6,050 |
| | TOTAL LIABILITIES AND EQUITY | $ | 19,026 |
| | $ | 17,997 |
|
See Notes to Consolidated Financial Statements.
ROCKWELL COLLINS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in millions, except per share amounts)
| | | | | | | | | | | | | | | Year Ended September 30 | | | 2018 | | 2017 | | 2016 | | Sales | | | | | | | Product sales | $ | 7,643 |
| | $ | 5,885 |
| | $ | 4,411 |
| | Service sales | 1,022 |
| | 937 |
| | 848 |
| | Total sales | 8,665 |
| | 6,822 |
| | 5,259 |
| | | | | | | | | Costs, expenses and other: | |
| | |
| | | | Product cost of sales | 5,699 |
| | 4,237 |
| | 3,045 |
| | Service cost of sales | 683 |
| | 631 |
| | 597 |
| | Selling, general and administrative expenses | 817 |
| | 732 |
| | 638 |
| | Transaction and integration costs | 112 |
| | 120 |
| | — |
| | Interest expense | 262 |
| | 187 |
| | 64 |
| | Other income, net | (20 | ) | | (16 | ) | | (20 | ) | | Total costs, expenses and other | 7,553 |
| | 5,891 |
| | 4,324 |
| | | | | | | | | Income from continuing operations before income taxes | 1,112 |
| | 931 |
| | 935 |
| | Income tax expense | 80 |
| | 226 |
| | 208 |
| | Income from continuing operations | 1,032 |
| | 705 |
| | 727 |
| | | | | | | | | Income from discontinued operations, net of taxes | — |
| | — |
| | 1 |
| | | | | | | | | Net income | $ | 1,032 |
| | $ | 705 |
| | $ | 728 |
| | | | | | | | | Earnings per share: | |
| | |
| | | | Basic | | | | | | | Continuing operations | $ | 6.29 |
| | $ | 4.85 |
| | $ | 5.57 |
| | Discontinued operations | — |
| | — |
| | 0.01 |
| | Basic earnings per share | $ | 6.29 |
| | $ | 4.85 |
| | $ | 5.58 |
| | | | | | | | | Diluted | | | | | | | Continuing operations | $ | 6.22 |
| | $ | 4.79 |
| | $ | 5.50 |
| | Discontinued operations | — |
| | — |
| | 0.01 |
| | Diluted earnings per share | $ | 6.22 |
| | $ | 4.79 |
| | $ | 5.51 |
| | | | | | | | | Weighted average common shares: | | | | | | | Basic | 164.0 |
| | 145.5 |
| | 130.5 |
| | Diluted | 165.8 |
| | 147.2 |
| | 132.1 |
| | | | | | | | | Cash dividends per share | $ | 1.32 |
| | $ | 1.32 |
| | $ | 1.32 |
|
See Notes to Consolidated Financial Statements.
ROCKWELL COLLINS, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in millions)
| | | | | | | | | | | | | | | Year Ended September 30 | | | 2018 | | 2017 | | 2016 | | Net income | $ | 1,032 |
| | $ | 705 |
| | $ | 728 |
| | Unrealized foreign currency translation and other adjustments | (39 | ) | | 77 |
| | (20 | ) | | Pension and other retirement benefits adjustments (net of taxes: 2018, $(46); 2017, $(140); 2016, $102) | 144 |
| | 243 |
| | (181 | ) | | Foreign currency cash flow hedge adjustments (net of taxes: 2018, $0; 2017, $0; 2016, $1) | (1 | ) | | 3 |
| | 2 |
| | Comprehensive income | $ | 1,136 |
| | $ | 1,028 |
| | $ | 529 |
|
See Notes to Consolidated Financial Statements.
ROCKWELL COLLINS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
| | | | | | | | | | | | | | | Year Ended September 30 | | | 2018 | | 2017 | | 2016 | | Operating Activities: | | | | | | | Net income | $ | 1,032 |
| | $ | 705 |
| | $ | 728 |
| | Income from discontinued operations, net of tax | — |
| | — |
| | 1 |
| | Income from continuing operations | 1,032 |
| | 705 |
| | 727 |
| | Adjustments to arrive at cash (used for) provided by operating activities: | | | | | | | Non-cash restructuring and impairment charges and settlement of a contract matter | 34 |
| | — |
| | 6 |
| | Depreciation | 204 |
| | 168 |
| | 144 |
| | Amortization of intangible assets, pre-production engineering costs and other | 386 |
| | 226 |
| | 109 |
| | Amortization of acquired contract liability | (141 | ) | | (69 | ) | | — |
| | Amortization of inventory fair value adjustment | — |
| | 74 |
| | — |
| | Stock-based compensation expense | 35 |
| | 31 |
| | 27 |
| | Compensation and benefits paid in common stock | 58 |
| | 67 |
| | 59 |
| | Deferred income taxes | (13 | ) | | 43 |
| | 48 |
| | Pension plan contributions | (467 | ) | | (68 | ) | | (69 | ) | | Fair value of acquisition-related contingent consideration | — |
| | — |
| | 1 |
| | Changes in assets and liabilities, excluding effects of acquisitions and foreign currency adjustments: | | | | | | | Receivables | (680 | ) | | 121 |
| | (91 | ) | | Production inventory | (255 | ) | | (50 | ) | | (18 | ) | | Pre-production engineering costs | (85 | ) | | (94 | ) | | (177 | ) | | Accounts payable | (102 | ) | | 141 |
| | 38 |
| | Compensation and benefits | (109 | ) | | 39 |
| | (4 | ) | | Advance payments from customers | 17 |
| | 10 |
| | (82 | ) | | Accrued customer incentives | (7 | ) | | (8 | ) | | 14 |
| | Product warranty costs | 10 |
| | (21 | ) | | (2 | ) | | Income taxes | 64 |
| | (45 | ) | | 25 |
| Other assets and liabilities(1) | (291 | ) | | (6 | ) | | (32 | ) | | Cash (Used for) Provided by Operating Activities from Continuing Operations | (310 | ) | | 1,264 |
| | 723 |
| | Investing Activities: | |
| | |
| | | | Property additions | (257 | ) | | (240 | ) | | (193 | ) | | Acquisition of business, net of cash acquired | — |
| | (3,429 | ) | | (17 | ) | | Other investing activities | 1 |
| | (5 | ) | | 1 |
| | Cash (Used for) Investing Activities from Continuing Operations | (256 | ) | | (3,674 | ) | | (209 | ) | | Financing Activities: | |
| | |
| | | | Repayment of long-term debt, including current portion | (389 | ) | | (930 | ) | | — |
| | Repayment of acquired long-term debt | — |
| | (2,119 | ) | | — |
| Purchases of treasury stock(2) | (12 | ) | | (46 | ) | | (261 | ) | | Cash dividends | (216 | ) | | (194 | ) | | (172 | ) | | Increase in long-term borrowings | — |
| | 6,099 |
| | — |
| | Increase (decrease) in short-term commercial paper borrowings, net | 1,170 |
| | (110 | ) | | (8 | ) | | Proceeds from the exercise of stock options | 63 |
| | 64 |
| | 21 |
| | Other financing activities | (6 | ) | | (5 | ) | | (2 | ) | | Cash Provided by (Used for) Financing Activities from Continuing Operations | 610 |
| | 2,759 |
| | (422 | ) | | Effect of exchange rate changes on cash and cash equivalents | (9 | ) | | 14 |
| | (4 | ) | | Net Change in Cash and Cash Equivalents | 35 |
| | 363 |
| | 88 |
| | Cash and Cash Equivalents at Beginning of Period | 703 |
| | 340 |
| | 252 |
| | Cash and Cash Equivalents at End of Period | $ | 738 |
| | $ | 703 |
| | $ | 340 |
|
(1) Includes $254 million of up-front sales incentive payments made in 2018 (see Note 3)
(2) Includes net settlement of employee tax withholding upon vesting of share-based payment awards
See Notes to Consolidated Financial Statements.
ROCKWELL COLLINS, INC.
CONSOLIDATED STATEMENT OF EQUITY
(in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Common Stock | | | | | | | | | | | | | | | Shares Outstanding | | Par Value | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Noncontrolling Interest | | Total Equity | | Balance at September 30, 2015 | 131.9 |
| | $ | 2 |
| | $ | 1,519 |
| | $ | 5,124 |
| | $ | (1,699 | ) | | $ | (3,071 | ) | | $ | 5 |
| | $ | 1,880 |
| | Net income | — |
| | — |
| | — |
| | 728 |
| | — |
| | — |
| | — |
| | 728 |
| | Other comprehensive income | — |
| | — |
| | — |
| | — |
| | (199 | ) | | — |
| | — |
| | (199 | ) | | Cash dividends | — |
| | — |
| | — |
| | (172 | ) | | — |
| | — |
| | — |
| | (172 | ) | | Shares issued: | | | | | | | | | | | | | | | | | Exercise of stock options | 0.4 |
| | — |
| | (2 | ) | | — |
| | — |
| | 23 |
| | — |
| | 21 |
| | Vesting of performance shares and restricted stock units | 0.1 |
| | — |
| | (10 | ) | | — |
| | — |
| | 4 |
| | — |
| | (6 | ) | | Employee stock purchase plan | 0.1 |
| | — |
| | 2 |
| | — |
| | — |
| | 8 |
| | — |
| | 10 |
| | Employee savings plan | 0.6 |
| | — |
| | 14 |
| | — |
| | — |
| | 35 |
| | — |
| | 49 |
| | Stock-based compensation | — |
| | — |
| | 27 |
| | — |
| | — |
| | — |
| | — |
| | 27 |
| | Treasury share repurchases | (2.9 | ) | | — |
| | — |
| | — |
| | — |
| | (255 | ) | | — |
| | (255 | ) | Treasury share retirements (1) | — |
| | (1 | ) | | (44 | ) | | (2,353 | ) | | — |
| | 2,398 |
| | — |
| | — |
| | Other | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | 1 |
| | Balance at September 30, 2016 | 130.2 |
| | $ | 1 |
| | $ | 1,506 |
| | $ | 3,327 |
| | $ | (1,898 | ) | | $ | (858 | ) | | $ | 6 |
| | $ | 2,084 |
| | Net income | — |
| | — |
| | — |
| | 705 |
| | — |
| | — |
| | — |
| | 705 |
| | Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 323 |
| | — |
| | — |
| | 323 |
| | Cash dividends | — |
| | — |
| | — |
| | (194 | ) | | — |
| | — |
| | — |
| | (194 | ) | | Shares issued: | | | | | | | | | | | | | | | | | Exercise of stock options | 1.1 |
| | — |
| | (5 | ) | | — |
| | — |
| | 69 |
| | — |
| | 64 |
| | Vesting of performance shares and restricted stock units | 0.2 |
| | — |
| | (12 | ) | | — |
| | — |
| | 5 |
| | — |
| | (7 | ) | | Employee stock purchase plan | 0.1 |
| | — |
| | 4 |
| | — |
| | — |
| | 7 |
| | — |
| | 11 |
| | Employee savings plan | 0.5 |
| | — |
| | 21 |
| | — |
| | — |
| | 35 |
| | — |
| | 56 |
| | B/E Aerospace business acquisition | 31.2 |
| | 1 |
| | 3,014 |
| | | | | | | | | | 3,015 |
| | Stock-based compensation | — |
| | — |
| | 31 |
| | — |
| | — |
| | — |
| | — |
| | 31 |
| | Treasury share repurchases | (0.4 | ) | | — |
| | — |
| | — |
| | — |
| | (39 | ) | | — |
| | (39 | ) | | Other | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | 1 |
| | Balance at September 30, 2017 | 162.9 |
| | $ | 2 |
| | $ | 4,559 |
| | $ | 3,838 |
| | $ | (1,575 | ) | | $ | (781 | ) | | $ | 7 |
| | $ | 6,050 |
| | Net income | — |
| | — |
| | — |
| | 1,032 |
| | — |
| | — |
| | — |
| | 1,032 |
| | Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 104 |
| | — |
| | — |
| | 104 |
| | Cash dividends | — |
| | — |
| | — |
| | (216 | ) | | — |
| | — |
| | — |
| | (216 | ) | | Shares issued: | | | | | | | | | | | | | | | | | Exercise of stock options | 1.1 |
| | — |
| | (6 | ) | | — |
| | — |
| | 69 |
| | — |
| | 63 |
| | Vesting of performance shares and restricted stock units | 0.1 |
| | — |
| | (15 | ) | | — |
| | — |
| | 3 |
| | — |
| | (12 | ) | | Employee savings plan | 0.4 |
| | — |
| | 31 |
| | — |
| | — |
| | 27 |
| | — |
| | 58 |
| | Stock-based compensation | — |
| | — |
| | 35 |
| | — |
| | — |
| | — |
| | — |
| | 35 |
| | Balance at September 30, 2018 | 164.5 |
| | $ | 2 |
| | $ | 4,604 |
| | $ | 4,654 |
| | $ | (1,471 | ) | | $ | (682 | ) | | $ | 7 |
| | $ | 7,114 |
|
(1) During the year ended September 30, 2016 the Company retired 40 million shares of treasury stock. These shares were retired at a weighted-average price of $59.95 per share, resulting in a $2.4 billion reduction in treasury stock. The retired shares were returned to the status of authorized and unissued.
See Notes to Consolidated Financial Statements.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | 1. | Business Description and Basis of Presentation |
Rockwell Collins, Inc. (the Company or Rockwell Collins) designs, produces and supports cabin interior, communications and aviation systems and products for commercial and military customers and provides information management services through voice and data communication networks and solutions worldwide.
The Company operates on a 52/53 week fiscal year ending on the Friday closest to September 30. Each of 2018, 2017 and 2016 were 52-week fiscal years. For ease of presentation, September 30 is utilized consistently throughout these financial statements and notes to represent the fiscal year end date. All date references contained herein relate to the Company's fiscal year unless otherwise stated.
On September 4, 2017, the Company entered into an Agreement and Plan of Merger (Merger Agreement) with United Technologies Corporation (UTC). The Merger Agreement provides that the Company will be acquired by UTC. Each Company shareowner will receive $93.33 per share in cash and $46.67 in shares of UTC common stock in the merger, subject to a 7.5 percent collar centered on UTC's August 22, 2017 closing share price of $115.69. The transaction is subject to the satisfaction of customary closing conditions. The Company incurred $34 million and $24 million of merger-related costs for the year ended September 30, 2018 and 2017, respectively. These costs are included in Transaction and integration costs in the Consolidated Statement of Operations. At September 30, 2018 and 2017, there were $12 million and $24 million, respectively, of merger-related costs that were unpaid and included in Accounts payable and Compensation and benefits on the Consolidated Statement of Financial Position.
On April 13, 2017, the Company acquired B/E Aerospace, a leading manufacturer of aircraft cabin interior products and services. Prior to 2018, the financial results of the entire B/E Aerospace business were reported in the Interior Systems segment. Beginning in 2018, the B/E Aerospace thermal and electronic systems product lines, which primarily serve military and government customers, are now being reported in the Government Systems segment. This reorganization is expected to generate additional revenue synergy opportunities for the Company. The results of operations of the acquired B/E Aerospace business are now reported in the Interior Systems and Government Systems business segments. Interior Systems and Government Systems sales and operating earnings for 2017 have been reclassified to conform to the current year presentation.
| | 2. | Significant Accounting Policies |
Consolidation
The consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries. The Company has two consolidated subsidiaries with income attributable to a noncontrolling interest. The net income and comprehensive income attributable to the noncontrolling interest is insignificant. The Company's investments in entities it does not control but over which it has the ability to exercise significant influence are accounted for under the equity method and are included in Other Assets. All intercompany transactions are eliminated.
Foreign Currency Translation and Transactions
The functional currency for significant subsidiaries operating outside the United States is typically their respective local currency. Assets and liabilities of subsidiaries operating outside the United States with a functional currency other than the U.S. dollar are translated into U.S. dollars using the exchange rate at the balance sheet date. Sales, costs and expenses are translated at the average exchange rates in effect during the period. Foreign currency translation gains and losses are included as a component of Accumulated other comprehensive loss within the Consolidated Statements of Comprehensive Income and Equity.
Foreign exchange transaction losses due to the remeasurement of account balances in foreign currencies are included within the Consolidated Statement of Operations and were $23 million for 2017 and were not material to the Company's results of operations for 2018 and 2016.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Revenue Recognition
The Company enters into sales arrangements that may provide for multiple deliverables to a customer. The Company identifies all goods and/or services that are to be delivered separately under a sales arrangement and allocates revenue to each deliverable based on relative fair values. Fair values are generally established based on the prices charged when sold separately by the Company. In general, revenues are separated between products, engineering, maintenance, communication and installation services. The allocated revenue for each deliverable is then recognized using appropriate revenue recognition methods.
Sales related to long-term contracts requiring development and delivery of products over several years are generally accounted for under the percentage-of-completion method of accounting in accordance with the Construction-Type and Production-Type Contracts subtopic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification. The percentage-of-completion method is predominately used in the Government Systems and Interior Systems segments and sales and earnings under qualifying contracts are recorded either as products are shipped under the units-of-delivery method, or based on the ratio of actual costs incurred to total estimated costs expected to be incurred related to the contract under the cost-to-cost method. Purchase options and change orders are accounted for either as an integral part of the original contract or separately depending upon the nature and value of the item. Sales and costs related to profitable purchase options are included in estimates only when the options are exercised whereas sales and costs related to unprofitable purchase options are included in estimates when exercise is determined to be probable. Sales related to change orders are included in estimates only if they can be reliably estimated and collectability is reasonably assured. Anticipated losses on contracts are recognized in full in the period in which losses become probable and estimable. Changes in estimates of profit or loss on contracts are included in earnings on a cumulative basis in the period the estimate is changed.
Sales related to long-term separately priced product maintenance or warranty contracts are accounted for based on the terms of the underlying agreements. Certain contracts are fixed-price contracts with sales recognized ratably over the contractual life, while other contracts have a fixed hourly rate with sales recognized based on actual labor or flight hours incurred. The cost of providing these services is expensed as incurred.
The Company recognizes sales for most other products or services when all of the following criteria are met: an agreement of sale exists, product delivery and acceptance has occurred or services have been rendered, pricing is fixed or determinable and collection is reasonably assured.
As discussed in the Recently Issued Accounting Standards section below, the Company adopted the new accounting guidance with respect to revenue recognition on October 1, 2018.
Cash and Cash Equivalents
Cash and cash equivalents include time deposits, certificates of deposit with original maturity dates of three months or less and money market funds.
Allowance for Doubtful Accounts
Allowances are established in order to report receivables at net realizable value on the Company's Consolidated Statement of Financial Position. The determination of these allowances requires Company management to make estimates and judgments as to the collectability of customer account balances. The allowance for doubtful accounts reflects the Company's best estimate of probable losses inherent in the accounts receivable balance. The Company determines the allowance based on known troubled accounts, historical experience and other currently available evidence.
Inventories
Inventories are stated at the lower of cost or market using costs which approximate the first-in, first-out method, less related progress payments received. Inventoried costs include direct costs of manufacturing, certain engineering costs and allocable overhead costs. The Company regularly compares inventory quantities on hand on a part level basis to estimated forecasts of product demand and production requirements as well as historical usage. Based on these comparisons, management establishes an excess and obsolete inventory reserve as needed. Inventory valuation reserves were $125 million and $89 million at September 30, 2018 and 2017, respectively.
The Company defers certain pre-production engineering costs during the development phase of a program in connection with long-term supply arrangements that contain contractual guarantees for reimbursement from customers. Such customer guarantees generally take the form of a minimum order quantity with quantified reimbursement amounts if the minimum order
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
quantity is not taken by the customer. These costs are deferred to the extent of the contractual guarantees and are amortized over their estimated useful lives using a units-of-delivery method, up to 15 years. This amortization expense is included as a component of cost of sales. Amortization is based on the Company’s expectation of delivery rates on a program-by-program basis and begins when the Company starts recognizing revenue as the Company delivers equipment for the program. The estimated useful life is limited to the amount of time the Company is virtually assured to earn revenues under long-term supply arrangements with the Company’s customers. Pre-production engineering costs incurred pursuant to supply arrangements that do not contain customer guarantees for reimbursement are expensed as incurred.
Progress Payments
Progress payments relate to both receivables and inventories and represent cash collected from government-related contracts whereby the governments have a legal right of offset related to the receivable or legal title to the work-in-process inventory.
Property
Property is stated at acquisition cost, net of accumulated depreciation. Depreciation of property is generally provided using straight-line methods over the following estimated useful lives: buildings and improvements, 15-50 years; machinery and equipment (including internally developed software and other costs associated with the expansion and construction of Information Management Services network-related assets), 5-20 years; information systems software and hardware, 5-17 years; and furniture and fixtures, 12-16 years. Depreciation methods and lives are reviewed periodically with any changes recorded on a prospective basis.
Significant renewals and betterments are capitalized and replaced units are written off. Maintenance and repairs, as well as renewals of minor amounts, are charged to expense in the period incurred. The fair value of liabilities associated with the retirement of property is recorded when there is a legal or contractual requirement to incur such costs and the costs can be reasonably estimated. Upon the initial recognition of a contractual or legal liability for an asset retirement obligation, the Company capitalizes the asset retirement cost by increasing the carrying amount of the property by the same amount as the liability. This asset retirement cost is then depreciated over the estimated useful life of the underlying property. The Company did not have any significant asset retirement obligations at September 30, 2018 and 2017.
Goodwill and Intangible Assets
Goodwill and intangible assets generally result from business acquisitions. The purchase price of the acquisition is assigned to tangible and intangible assets and liabilities assumed based on fair value. The excess of the purchase price over the amounts assigned is recorded as goodwill. Assets acquired and liabilities assumed are allocated to the Company's reporting units based on the Company's integration plans and internal reporting structure. As of September 30, 2018 the Company had seven reporting units. Purchased intangible assets with finite lives are amortized, generally on a straight-line basis, over their estimated useful lives, ranging from 4-23 years. Goodwill and intangible assets with indefinite lives are not amortized, but are reviewed at least annually for impairment.
Customer Relationship Up-Front Sales Incentives
The Company provides up-front sales incentives prior to delivering products or performing services to certain commercial customers in connection with sales contracts. Up-front sales incentives are recorded as a customer relationship intangible asset and are amortized using a units-of-delivery method over the period the Company has received a contractually enforceable right related to the incentives, up to 15 years after entry into service. Amortization is based on the Company’s expectation of delivery rates on a program-by-program basis. Amortization begins when the Company starts recognizing revenue as the Company delivers equipment for the program. Up-front sales incentives consisting of cash payments or customer account credits are amortized as a reduction of sales, whereas incentives consisting of free products are amortized as cost of sales.
Accrued Customer Incentives
Incentives earned by customers based on purchases of Company products or services are recognized as a liability when the related sale is recorded. Incentives consisting of cash payments or customer account credits are recognized as a reduction of sales, while incentives consisting of free products and account credits where the customer's use is restricted to future purchases are recognized as cost of sales.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment when management plans to dispose of assets or when events or circumstances indicate that the carrying amount of a long-lived asset is more-likely-than-not unrecoverable. Assets held for disposal are reported at the lower of the carrying amount or fair value less cost to sell. Management determines fair value using a discounted future cash flow analysis or other accepted valuation techniques. Long-lived assets held for use are reviewed for impairment by comparing the carrying amount of an asset to the undiscounted future cash flows expected to be generated by the asset over its remaining useful life. If an asset is considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the asset exceeds its fair value.
Goodwill and indefinite-lived intangible assets are tested annually for impairment with more frequent tests performed if indications of impairment exist. The Company's annual impairment testing date is in the fourth quarter of each fiscal year. Impairment for intangible assets with indefinite lives exists if the carrying value of the intangible asset exceeds its fair value. Goodwill is potentially impaired if the carrying value of a reporting unit exceeds its estimated fair value.
Advance Payments from Customers
Advance payments from customers represent cash collected from customers in advance of revenue recognition.
Capital Leases
Assets under capital lease and capital lease obligation are initially measured at the lower of estimated fair value or present value of the minimum lease payments. The present value of minimum lease payments is calculated for payments during the noncancelable lease term using the lower of the Company's estimated incremental borrowing rate or the rate implicit in the lease, if known. Capital lease obligation is recorded within Other Liabilities and the related assets are recorded in Property, Net or Other Assets based upon their intended use. Payments are allocated between a reduction of the lease obligation and interest expense using the interest method. Assets under capital lease are depreciated over the noncancelable lease term, ranging from 5-15 years, consistent with the Company's depreciation policy.
Research and Development
The Company performs R&D activities relating to the development of new products and the improvement of existing products. Company-funded R&D programs are expensed as incurred and included in cost of sales. Company-funded R&D expenditures were $502 million, $327 million and $224 million for fiscal years ended September 30, 2018, 2017 and 2016, respectively.
Environmental
Liabilities for environmental matters are recorded in the period in which it is probable that an obligation has been incurred and the cost can be reasonably estimated. At environmental sites in which more than one potentially responsible party has been identified, the Company records a liability for its estimated allocable share of costs related to its involvement with the site as well as an estimated allocable share of costs related to the involvement of insolvent or unidentified parties. At environmental sites in which the Company is the only responsible party, the Company records a liability for the total estimated costs of remediation.
Income Taxes
Current tax liabilities and assets are based upon an estimate of taxes payable or refundable in the current year for each jurisdiction in which the Company is subject to tax. As part of the determination of its tax liability, management exercises considerable judgment in evaluating tax positions taken by the Company in determining the income tax provision and establishes reserves for uncertain tax positions in accordance with the Income Taxes topic of the FASB Accounting Standards Codification. Deferred tax assets and liabilities are recorded for the estimated future tax effects attributable to temporary differences between the carrying amounts of assets and liabilities used for financial reporting purposes and their respective carrying amounts for income tax purposes. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Derivative Financial Instruments
The Company uses derivative financial instruments in the form of foreign currency forward exchange contracts and interest rate swap contracts for the purpose of reducing exposure to changes in foreign currency exchange rates on business transactions and interest rates, respectively. The Company's policy is to execute such instruments with banks the Company believes to be creditworthy and not enter into derivative financial instruments for speculative purposes or to manage exposure for net investments in non-U.S. subsidiaries. These derivative financial instruments do not subject the Company to undue risk as gains and losses on these instruments generally offset gains and losses on the underlying assets, liabilities or anticipated transactions that are being hedged.
All derivative financial instruments are recorded at fair value in the Consolidated Statement of Financial Position. For a derivative that has not been designated as an accounting hedge, the change in fair value is recognized immediately through earnings. For a derivative that has been designated as an accounting hedge of an existing asset or liability (a fair value hedge), the change in the fair value of both the derivative and underlying asset or liability is recognized immediately through earnings. For a derivative designated as an accounting hedge of an anticipated transaction (a cash flow hedge), the change in the fair value is recorded on the Consolidated Statement of Financial Position in Accumulated other comprehensive loss to the extent the derivative is effective in mitigating the exposure related to the anticipated transaction. The change in the fair value related to the ineffective portion of the hedge, if any, is immediately recognized in earnings. The amount recorded within Accumulated other comprehensive loss is reclassified into earnings in the same period during which the underlying hedged transaction affects earnings. The Company does not exclude any amounts from the measure of effectiveness for either fair value or cash flow hedges.
Use of Estimates
The financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America, which require management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. Estimates are used in accounting for, among other items, long-term contracts, allowances for doubtful accounts, inventory obsolescence, product warranty cost liabilities, customer incentives, retirement benefits, income taxes, environmental matters, pre-production engineering costs, recoverability of long-lived assets and contingencies. Estimates and assumptions are reviewed periodically and the effects of changes, if any, are reflected in the Consolidated Statement of Operations in the period they are determined.
Concentration of Risks
The Company's products and services are concentrated within the aerospace and defense industries with customers consisting primarily of military and commercial aircraft manufacturers, commercial airlines, the U.S. Government and non-U.S. governments. As a result of this industry focus, the Company's current and future financial performance is largely dependent upon the overall economic conditions within these industries. In particular, the commercial aerospace market has been historically cyclical and subject to downturns during periods of weak economic conditions, which could be prompted or exacerbated by political or other U.S. or international events. The defense market may be affected by changes in budget appropriations, procurement policies, political developments both in the U.S. and abroad and other factors. The Company depends to a large degree on U.S. Government spending, as a significant portion of the Company's sales are derived from U.S. Government contracts, both directly and indirectly through subcontracts.
The U.S. Government has implemented various initiatives to address its fiscal challenges. In August 2011, Congress enacted the Budget Control Act (BCA) of 2011 which imposed spending caps and certain reductions in defense spending over a ten-year period through 2021. These spending caps and reductions, referred to as sequestration, went into effect in March 2013. Through a series of bipartisan agreements, Congress has been able to temporarily lift discretionary spending limits every year through 2019. However, unless a new agreement is enacted, the BCA will again be in force beginning in 2020. The continued uncertainty surrounding the U.S. defense budget could have a material adverse effect on the Company and the defense industry in general.
In years when the U.S. Government does not complete its annual budget and appropriations process prior to the beginning of its fiscal year (October 1), government operations are typically funded through a continuing resolution that authorizes agencies of the U.S. Government to continue to operate in the new year, but generally does not authorize new spending initiatives. During periods covered by a continuing resolution (or until the regular appropriation bills are passed), the Company may experience delays by the government in the procurement of new or existing products and services which can adversely impact results of operations and cause variability in the timing of revenue between periods. During 2018, the U.S. Government completed the
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
fiscal year 2019 Defense budget authorization and approval timeline on schedule and thus avoided the need for a continuing resolution for this part of government operations. Should the U.S. Government not complete fiscal year 2020 budgeting and appropriations in the same manner, the Company expects to be exposed to the effects of a continuing resolution in the future. The Company remains confident that its product offerings are well positioned to meet the needs of government customers in this uncertain environment and the Company continues to enhance international strategies and make proactive adjustments to the Company's cost structure as necessary.
In addition to the overall business risks associated with the Company's concentration within the aerospace and defense industries, the Company is also exposed to a concentration of collection risk on credit extended to certain aircraft manufacturers and airlines. The Company performs ongoing credit evaluations on the financial condition of all of its customers and maintains allowances for uncollectible accounts receivable based on expected collectability. Although management believes its allowances are adequate, the Company is not able to predict with certainty the changes in the financial stability of its customers. Any material change in the financial status of any one customer or group of customers could have a material adverse effect on the Company's results of operations, financial position or cash flows.
As of September 30, 2018, approximately 10 percent of the Company's employees in the U.S. were represented by U.S. collective bargaining agreements, most of which were negotiated in 2018 and have varying contract terms between 3 and 5 years.
Recently Adopted Accounting Standards
In March 2018, the Financial Accounting Standards Board (FASB) issued an amendment to formally codify the guidance provided by the Securities and Exchange Commission (SEC) in Staff Accounting Bulletin (SAB) 118. SAB 118 provides additional guidance allowing companies to use a one year measurement period, similar to that used in business combinations, to account for the impacts of the Tax Cuts and Jobs Act (the Act) in their financial statements. The Company has accounted for the impacts of the Act, including the use of reasonable estimates where necessary. The Company may continue to refine its estimates throughout the measurement period.
In March 2016, the FASB issued a new standard simplifying certain aspects of accounting for share-based payments (see Note 12). The new standard requires that excess tax benefits and shortfalls be recorded as income tax benefit or expense in the income statement, rather than in equity, andrequires excess tax benefits from stock-based compensation to be classified within operating cash flow. Additionally, the new standard allows a policy election to either estimate the number of awards expected to be forfeited at the time of award issuance or record stock-based compensation for forfeitures as they occur. In order to simplify accounting for share-based payments, the Company adopted the new guidance during the second quarter of 2016, which resulted in a $4 million benefit to tax expense and a favorable impact to operating cash flows of $4 million in 2016. With respect to forfeitures, the Company will continue to estimate the number of awards expected to be forfeited upon award issuance.
Recently Issued Accounting Standards
In February 2018, the FASB issued a new standard giving companies the option to reclassify tax effects stranded in accumulated other comprehensive income as a result of the Act to retained earnings. The guidance can be applied retrospectively or in the period of adoption and is effective for the Company in 2020, with early adoption permitted. The Company is currently evaluating the impact of this standard on the consolidated financial statements.
In March 2017, the FASB issued a new standard on the presentation of the net periodic cost of postretirement benefit programs, which the Company adopted retrospectively on October 1, 2018. The new standard requires sponsors of defined benefit postretirement plans to present the non-service cost components of net periodic benefit cost separate from the service cost component on the income statement. The new standard also requires that the non-service cost components of net periodic benefit cost no longer be capitalized within assets. Applying a practical expedient to estimate the impact of the reclassification, the Company expects adoption of the new standard to result in a decrease to segment operating earnings of approximately $30 million and $27 million for the years ended September 30, 2018 and 2017, respectively, and a corresponding increase in unallocated corporate income, with no impact to net income.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In February 2016, the FASB issued a comprehensive new lease accounting standard, which provides revised guidance on accounting for lease arrangements by both lessors and lessees. Several amendments to the new standard have been issued, which are intended to drive consistent interpretation and application and simplify implementation of the new standard. The central requirement of the new standard is that lessees must recognize lease-related assets and liabilities for all leases with a term longer than 12 months. The Company is evaluating the effect the standard will have on the Company's consolidated financial statements and related disclosures, but expects a material change to the balance sheet due to the recognition of right-of-use assets and lease liabilities related to the Company's portfolio of real estate leases. The new guidance is not expected to materially impact accounting for those leases the Company enters with customers. The new standard is effective for the Company in 2020, with early adoption permitted.
In May 2014, the FASB issued a comprehensive new revenue recognition standard that effectively replaced all guidance on the topic. The Company adopted the new standard and related amendments on October 1, 2018 utilizing the modified retrospective transition method.
The Company has substantially completed its evaluation of the new standard and has assessed the impacts of adoption on its consolidated financial statements and disclosures. Changes under the new standard include, among other items, accounting for development costs and associated customer funding related to commercial contracts, the elimination of customer relationship intangible assets related to free products provided to customers as up-front sales incentives and increased use of over time revenue recognition based on costs incurred for certain contracts satisfying the criteria established in the new standard. The new standard also significantly enhances required disclosures regarding revenue and related assets and liabilities. The most significant changes to the Company are described below.
Under the Company's historical accounting policy, customer funding received for development effort was recognized as revenue as the development activities were performed. Under the new standard, the Company has concluded that the development effort on commercial contracts does not represent a performance obligation. Therefore, customer funding specific to the development effort must be deferred as a contract liability and recognized as revenue when revenue is recognized for the related products, delaying the timing of revenue recognition. The Company currently expenses development costs associated with commercial contracts unless the arrangement includes a contractual guarantee for reimbursement from the customer. Under the new standard, development costs are expensed as incurred except for those costs incurred pursuant to customer funding. Development costs eligible for deferral are limited to an amount equal to the associated customer funding. The development costs will be capitalized as contract fulfillment cost assets and recognized as expense when revenue is recognized for the related products, consistent with the amortization of deferred development specific customer funding into revenue. The Company is still calculating the impact of this change on adoption-date retained earnings.
Further, development costs incurred pursuant to contractual guarantees for reimbursement are no longer capitalized within Inventory as pre-production engineering costs. The $1.166 billion adoption-date balance of capitalized development costs within Inventory was eliminated upon adoption and the related post-adoption amortization expense will be avoided.
Under the Company's historical accounting policy, up-front sales incentives consisting of free products were capitalized as a customer relationship intangible asset. Upon adoption of the new standard, free product provided to the customer is considered a performance obligation and must be expensed when transferred, with revenue allocated when applicable. As a result of this change, approximately $120 million of customer relationship intangible assets were eliminated as of the adoption date and a corresponding contract asset of approximately $20 million was recorded for the uncollected portion of revenue recognized. This change will also result in a decrease in post-adoption amortization expense.
Under the Company’s historical accounting policy, certain contracts either recognized revenue based on shipping terms or used a units-of-delivery method. Under the new standard, many of these contracts meet one or more of the mandatory criteria for over time revenue recognition. The Company is still finalizing the adoption-date retained earnings impact for these contracts, but does not expect the ongoing effect of recognizing revenue using an over time method to be material.
Beginning in 2019, disclosures in the Company's notes to Consolidated Financial Statements related to revenue recognition will be expanded under the new standard to include discussions on the nature, amount, timing and uncertainty of revenue arising from contracts with customers. Disclosures will include qualitative and quantitative information about performance obligations, contract assets and liabilities, cost to fulfill a contract, disaggregation of revenue and the significant judgments made in applying the new standard.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other new accounting standards issued but not effective until after September 30, 2018 are not expected to have a material impact on the Company's financial statements.
| | 3. | Acquisitions, Goodwill and Intangible Assets |
Acquisitions
B/E Aerospace
On April 13, 2017, the Company completed the acquisition of B/E Aerospace, a leading manufacturer of aircraft cabin interior products and services, for $6.5 billion in cash and stock, plus the assumption of $2.0 billion of debt, net of cash acquired. The transaction combines the Company's capabilities in flight deck avionics, cabin electronics, mission communication and navigation, simulation and training and information management services with B/E Aerospace's range of cabin interior products, which include seating, food and beverage preparation and storage equipment, lighting and oxygen systems and modular galley and lavatory systems for commercial airliners and business jets. The acquisition advances the Company’s global growth strategy by expanding the Company's previous focus on cockpit, cabin management, communication and connectivity solutions, and diversifies the Company's product portfolio and customer mix. Results of the acquired business are reported in the Interior Systems and Government Systems business segments (see Note 1).
The $6.5 billion gross purchase price for the acquisition of B/E Aerospace includes the following:
| | | | | | (in millions) | | | Cash consideration | $ | 3,521 |
| Value of common stock issued for B/E Aerospace common stock(1) | 3,015 |
| | Total purchase price | $ | 6,536 |
|
(1) 31.2 million shares of common stock issued to B/E Aerospace shareholders at the Company's April 13, 2017 closing share price of $96.63.
The cash consideration was financed through the issuance of $4.35 billion of senior unsecured notes and $1.5 billion borrowed under a senior unsecured syndicated term loan facility (see Note 9). The remaining proceeds of the debt offering were used to repay assumed B/E Aerospace debt and a portion of the Company's outstanding short-term commercial paper borrowings.
The purchase price allocation was finalized in the second quarter of 2018 and resulted in the recognition of $7.2 billion of goodwill, none of which is deductible for tax purposes. The goodwill is included in the Interior Systems and Government Systems segments. The goodwill is a result of expected cost synergies from the consolidation of certain corporate and administrative functions, supply chain savings and low-cost manufacturing, expected revenue synergies from the integration of legacy products and technologies with those of B/E Aerospace and intangible assets that do not qualify for separate recognition, such as the assembled B/E Aerospace workforce.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes the fair value of assets acquired and liabilities assumed at the acquisition date:
| | | | | | (in millions) | April 13, 2017 | | Cash and cash equivalents | $ | 104 |
| | Receivables, net | 485 |
| Inventories, net (1) | 542 |
| | Other current assets | 45 |
| | Property, net | 271 |
| | Intangible Assets | 1,586 |
| | Other Assets | 53 |
| | Total Identifiable Assets Acquired | 3,086 |
| | | | | Accounts payable | (231 | ) | | Compensation and benefits | (75 | ) | | Advance payments from customers | (62 | ) | | Accrued customer incentives | (48 | ) | | Product warranty costs | (117 | ) | Other current liabilities (2) | (366 | ) | | Long-term Debt, Net | (2,119 | ) | | Retirement Benefits | (12 | ) | | Deferred Income Tax Liability | (287 | ) | Other Liabilities (2) | (433 | ) | | Total Liabilities Assumed | (3,750 | ) | | Net Identifiable Assets Acquired, excluding Goodwill | (664 | ) | | Goodwill | 7,200 |
| | Net Assets Acquired | $ | 6,536 |
|
(1) Inventories, net includes a $74 million adjustment to state Work in process and Finished goods inventories at their fair value as of the acquisition date. The inventory fair value adjustment was amortized as a non-cash increase to Cost of sales during the year ended September 30, 2017.
(2) As of the acquisition date, the Company made adjustments totaling $486 million related to acquired existing long-term contracts with terms less favorable than could be realized in market transactions as of the acquisition date. The adjustments were primarily recognized within Other current liabilities and Other Liabilities based upon estimates regarding the period in which the liabilities will be amortized to the Consolidated Statement of Operations as non-cash reductions to Cost of sales. $141 million of the acquired contract liabilities were recognized as a reduction to Cost of sales during the year ended September 30, 2018.
Before the purchase price allocation was finalized in the second quarter of 2018, revisions were made to the estimated
acquisition-date fair value of assets acquired and liabilities assumed. The revisions were primarily due to a change in estimate
with respect to the future repatriation of certain foreign earnings, adjustments to the income tax accounts as a result of filing the
pre-acquisition returns, recognition of a liability associated with the KLX Tax Sharing and Indemnification Agreement (see
Note 16) and revisions to the fair value of certain acquired property. These fiscal year 2018 measurement period adjustments
resulted in a $15 million net increase to Goodwill and did not have a material impact on the financial results of prior periods.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Intangible Assets included above consist of the following:
| | | | | | | | | Weighted Average Life (in years) | | Fair Value (in millions) | | Developed technology | 9 | | $ | 435 |
| | Seating customer relationships | 6 | | 860 |
| | Other customer relationships | 8 | | 291 |
| | Total | 7 | | $ | 1,586 |
|
B/E Aerospace's results of operations have been included in the Company's operating results for the period subsequent to the completion of the acquisition on April 13, 2017. During 2018 and 2017, B/E Aerospace contributed sales of $2.983 billion and $1.406 billion, respectively. Excluding the discrete impacts of the Tax Cuts and Jobs Act (see Note 13) and transaction, integration and financing costs, B/E Aerospace contributed net income of $349 million and $140 million for 2018 and 2017, respectively.
Transaction, Integration and Financing Costs
The Company recorded total transaction, integration and financing costs related to the B/E Aerospace acquisition in the Consolidated Statement of Operations as follows:
| | | | | | | | | | | | | | | (in millions) | | 2018 | | 2017 | | 2016 | | Transaction and integration costs | | $ | 78 |
| | $ | 96 |
| | $ | — |
| | Bridge facility fees (included in Interest expense) | | — |
| | 29 |
| | — |
| | Total Transaction, integration and financing costs | | $ | 78 |
| | $ | 125 |
| | $ | — |
|
At September 30, 2018, $11 million of transaction, integration and financing costs were unpaid and included in Accounts payable and Compensation and benefits on the Consolidated Statement of Financial Position.
Supplemental Pro-Forma Data
The following unaudited supplemental pro forma data presents consolidated pro forma information as if the acquisition and related financing had been completed as of the beginning of the year prior to acquisition, or on October 1, 2015.
The unaudited supplemental pro-forma financial information does not reflect the potential realization of revenue synergies or cost savings, nor does it reflect other costs relating to the integration of the two companies. This pro-forma data should not be considered indicative of the results that would have actually occurred if the acquisition and related financing had been consummated on October 1, 2015, nor are they indicative of future results.
The unaudited supplemental pro forma financial information was calculated by combining the Company's results with the stand-alone results of B/E Aerospace for the pre-acquisition periods, which were adjusted to account for certain transactions and other costs that would have been incurred during this pre-acquisition period.
| | | | | | | | | | | (in millions, except per share amounts) | | 2017 | | 2016 | | | | (Pro forma) | | (Pro forma) | | Sales | | $ | 8,376 |
| | $ | 8,121 |
| | Net income attributable to common shareowners from continuing operations | | 900 |
| | 696 |
| | Basic earnings per share from continuing operations | | 6.18 |
| | 4.31 |
| | Diluted earnings per share from continuing operations | | 6.11 |
| | 4.26 |
|
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following significant adjustments were made to account for certain transactions and costs that would have occurred if the acquisition had been completed on October 1, 2015. These adjustments are net of any applicable tax impact and were included to arrive at the pro forma results above.
| | | | | | | | | | | (in millions) | | 2017 | | 2016 | | Increases (decreases) to pro forma net income: | | | | | Net reduction to depreciation resulting from fixed asset adjustments (1) | | $ | 12 |
| | $ | 21 |
| Advisory, legal and accounting service fees (2) | | 156 |
| | (123 | ) | Amortization of acquired B/E Aerospace intangible assets, net (3) | | (83 | ) | | (152 | ) | Interest expense incurred on acquisition financing, net (4) | | (17 | ) | | (65 | ) | Long-term contract program adjustments (5) | | (59 | ) | | (128 | ) | Acquired contract liability amortization (6) | | 63 |
| | 124 |
| Inventory fair value adjustment amortization (7) | | 56 |
| | (56 | ) | Compensation adjustments (8) | | 6 |
| | 14 |
|
(1) Captures the net impact to depreciation expense resulting from various purchase accounting adjustments to fixed assets.
(2) Reflects the elimination of transaction-related fees incurred by B/E Aerospace and Rockwell Collins in connection with the acquisition and assumes all of the fees were incurred during the first quarter of 2016.
(3) Eliminates amortization of the historical B/E Aerospace intangible assets and replaces it with the new amortization for the acquired intangible assets.
(4) Reflects the addition of interest expense for the debt incurred by Rockwell Collins to finance the B/E Aerospace acquisition, net of interest expense that was eliminated on the historical B/E Aerospace debt that was repaid at the acquisition date. The adjustment also reflects the elimination of interest expense incurred by Rockwell Collins for bridge loan financing which was assumed to not be required for purposes of the pro forma periods presented.
(5) Eliminates B/E Aerospace capitalized development costs and deferred revenues on certain long-term contracts.
(6) Reflects amortization of liabilities recognized for acquired contracts with terms less favorable than could be realized in market transactions as of the acquisition date.
(7) Reflects amortization of adjustment made to state Work in process and Finished goods inventories at fair value as of the acquisition date.
(8) Reflects reduction in compensation expense due to the vesting of B/E Aerospace stock awards upon the acquisition and the termination of certain B/E Aerospace executives and board members.
Pulse.aero
On December 20, 2016, the Company acquired 100 percent of the outstanding shares of Pulse.aero, a United Kingdom-based company specializing in self-bag drop technologies used by airlines and airports. The purchase price, net of cash acquired, was $18 million, of which $14 million was paid during the year ended September 30, 2017 and $4 million was paid during the year ended September 30, 2018. On the acquisition date, the Company recorded a $5 million liability for the fair value of post-closing consideration that could be paid, contingent upon the achievement of certain revenue targets and development milestones. The Company made contingent consideration payments of $2 million during the year ended September 30, 2017 and $3 million during the year ended September 30, 2018. In the third quarter of 2017, the purchase price allocation was finalized, with $12 million allocated to goodwill and $6 million to intangible assets. The intangible assets have a weighted average life of approximately 9 years. None of the goodwill resulting from the acquisition is tax deductible. The excess purchase price over net assets acquired, including intangible assets, reflects the Company's view that this acquisition will expand the Company's airport passenger processing offerings.
The B/E Aerospace acquisition is included in the Interior Systems and Government Systems segments (see Note 1) and the Pulse.aero acquisition is included in the Information Management Services segment. The results of operations for the acquisitions have been included in the Company's operating results for the periods subsequent to their respective acquisition dates. Pro-forma results of operations have not been presented for Pulse.aero as the effect of the acquisition is not material to the Company's consolidated results of operations.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Goodwill
Changes in the carrying amount of goodwill are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | (in millions) | Interior Systems | | Commercial Systems | | Government Systems | | Information Management Services | | Total | | Balance at September 30, 2016 | $ | — |
| | $ | 326 |
| | $ | 503 |
| | $ | 1,090 |
| | $ | 1,919 |
| | B/E Aerospace acquisition | 7,185 |
| | — |
| | — |
| | — |
| | 7,185 |
| | Pulse.aero acquisition | — |
| | — |
| | — |
| | 12 |
| | 12 |
| | Foreign currency translation adjustments | 38 |
| | (1 | ) | | 3 |
| | 2 |
| | 42 |
| | Balance at September 30, 2017 | 7,223 |
| | 325 |
| | 506 |
| | 1,104 |
| | 9,158 |
| | B/E Aerospace acquisition adjustments | (370 | ) | | — |
| | 385 |
| | — |
| | 15 |
| | Reclassification of business held for sale (See Note 4) | (59 | ) | | — |
| | — |
| | — |
| | (59 | ) | | Foreign currency translation adjustments | (5 | ) | | (1 | ) | | (1 | ) | | — |
| | (7 | ) | | Balance at September 30, 2018 | $ | 6,789 |
| | $ | 324 |
| | $ | 890 |
| | $ | 1,104 |
| | $ | 9,107 |
|
The Company performs an impairment test of goodwill and indefinite-lived intangible assets each fiscal year, or at any time there is an indication goodwill or indefinite-lived intangibles are more-likely-than-not impaired, commonly referred to as triggering events. The Company's 2018, 2017 and 2016 impairment tests resulted in no impairment.
Intangible Assets
Intangible assets are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | September 30, 2018 | | September 30, 2017 | | (in millions) | Gross | | Accum Amort | | Net | | Gross | | Accum Amort | | Net | | Intangible assets with finite lives: | | | | | | | | | | | | | Developed technology and patents | $ | 807 |
| | $ | (324 | ) | | $ | 483 |
| | $ | 806 |
| | $ | (256 | ) | | $ | 550 |
| | Backlog | 6 |
| | (6 | ) | | — |
| | 6 |
| | (5 | ) | | 1 |
| | Customer relationships: | |
| | | | | | | | | | | | Acquired | 1,489 |
| | (413 | ) | | 1,076 |
| | 1,495 |
| | (213 | ) | | 1,282 |
| | Up-front sales incentives | 692 |
| | (114 | ) | | 578 |
| | 336 |
| | (93 | ) | | 243 |
| | License agreements | 18 |
| | (11 | ) | | 7 |
| | 15 |
| | (10 | ) | | 5 |
| | Trademarks and tradenames | 15 |
| | (14 | ) | | 1 |
| | 15 |
| | (14 | ) | | 1 |
| | Intangible assets with indefinite lives: | |
| | | | | | | | | | | | Trademarks and tradenames | 47 |
| | — |
| | 47 |
| | 47 |
| | — |
| | 47 |
| | Intangible assets | $ | 3,074 |
| | $ | (882 | ) | | $ | 2,192 |
| | $ | 2,720 |
| | $ | (591 | ) | | $ | 2,129 |
|
During 2018, up-front sales incentives increased $335 million, primarily due to the extension of certain long-term sales contracts. Pursuant to the terms of contractual agreements, the Company paid $254 million in cash sales incentives during 2018.
Amortization expense for intangible assets for 2018, 2017 and 2016 was $290 million, $162 million and $60 million, respectively. As of September 30, 2018, the weighted average amortization period remaining for up-front sales incentives was approximately 12 years.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Anticipated annual amortization expense for intangible assets is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | (in millions) | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | Thereafter | | Anticipated amortization expense for up-front sales incentives | $ | 24 |
| | $ | 26 |
| | $ | 26 |
| | $ | 26 |
| | $ | 25 |
| | $ | 451 |
| | Anticipated amortization expense for all other intangible assets | 265 |
| | 264 |
| | 264 |
| | 260 |
| | 192 |
| | 322 |
| | Total | $ | 289 |
| | $ | 290 |
| | $ | 290 |
| | $ | 286 |
| | $ | 217 |
| | $ | 773 |
|
As discussed in Note 2, adoption of the new revenue recognition standard on October 1, 2018, resulted in elimination of approximately $120 million of customer relationship intangible assets, therefore, the amortization expense associated with that balance as contemplated in the table above will be avoided.
| | 4. | Discontinued Operations and Divestitures |
Air Transport In-Flight Entertainment Business
On August 24, 2018, the Company reached a definitive agreement to sell its air transport in-flight entertainment (IFE) business. The IFE business designs, manufactures and services in-seat video, overhead video and content services and other products for the air transport IFE market. The sale is subject to customary closing conditions and is expected to close in the fourth calendar quarter of 2018. The business is being sold as a result of the Company's prior decision to cease investment in air transport IFE capabilities. The Company does, however, continue to invest in cabin connectivity solutions for the air transport market.
During the three months ended September 30, 2018, the Company classified the IFE business as held for sale. As of September 30, 2018, assets of $23 million are included within Businesses held for sale and liabilities of $5 million are included within Other current liabilities on the Consolidated Statement of Financial Position. The major classes of assets and liabilities primarily include net Inventories of $19 million and net Property of $4 million. The operating results of the held for sale business are included in the Commercial Systems segment.
ElectroMechanical Systems Business
On July 20, 2018, the Company reached a definitive agreement to sell its ElectroMechanical Systems (EMS) business which operates within the Commercial Systems segment. EMS designs, manufactures and services actuation, pilot control and other specialty products for commercial and military aerospace applications. The sale is subject to regulatory approvals, completion of UTC's pending acquisition of Rockwell Collins and other customary closing conditions, which results in the criteria for held for sale accounting treatment not being satisfied as of September 30, 2018. The business is being sold in order to comply with regulatory commitments associated with the pending UTC merger (see Note 1).
Engineered Components Business
On May 31, 2018, the Company reached a definitive agreement to sell its engineered components business, formerly known as
SMR Technologies. SMR Technologies manufactures, sells and services diversified engineering components for niche
aerospace, military and industrial applications. The sale is subject to customary closing conditions and is expected to close in
the fourth calendar quarter of 2018. The business is being sold in order to comply with regulatory commitments associated with
the pending UTC merger (see Note 1).
During the three months ended June 30, 2018, the Company classified the engineered components business as held for sale and recorded a pre-tax loss of $9 million ($22 million after tax) for the write-down to fair value less costs to sell, which was recorded within Other income, net on the Consolidated Statement of Operations. The high effective tax rate is primarily attributable to the non-deductibility of goodwill for income tax purposes. As of September 30, 2018, assets of $68 million are included within Businesses held for sale and liabilities of $3 million are included within Other current liabilities on the Consolidated Statement of Financial Position. The major classes of assets and liabilities primarily include Goodwill of $59 million and Intangible assets of $8 million. The operating results of the held for sale business are included in the Interior Systems segment.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
ASES Business
On March 10, 2015, the Company sold its ASES business, which provides military aircraft integration and modifications, maintenance and logistics and support, to align with the Company's long-term primary business strategies. The initial sales price was $3 million, and additional post-closing consideration of $2 million was received in December 2016. During 2016, the Company recorded $2 million of income from discontinued operations ($1 million after tax), primarily due to the favorable settlement of a contractual matter with a customer of the ASES business.
Receivables, net are summarized as follows:
| | | | | | | | | | (in millions) | September 30,
2018 | | September 30, 2017 | | Billed | $ | 1,639 |
| | $ | 1,055 |
| | Unbilled | 596 |
| | 461 |
| | Less progress payments | (108 | ) | | (78 | ) | | Total | 2,127 |
| | 1,438 |
| | Less allowance for doubtful accounts | (18 | ) | | (12 | ) | | Receivables, net | $ | 2,109 |
| | $ | 1,426 |
|
Receivables expected to be collected beyond the next twelve months are classified as long-term and are included in Other Assets. Total receivables due from the U.S. Government including the Department of Defense and other government agencies, both directly and indirectly through subcontracts, were $337 million and $279 million at September 30, 2018 and 2017, respectively. U.S. Government unbilled receivables, net of progress payments, were $119 million and $89 million at September 30, 2018 and 2017, respectively. Receivables, net due from equity affiliates were $61 million at September 30, 2018.
Unbilled receivables principally represent sales recorded under the percentage-of-completion method of accounting that have not been billed to customers in accordance with applicable contract terms.
The Company sells certain accounts receivable on a non-recourse basis to unrelated financial institutions under factoring agreements arranged by certain customers. Under the terms of the agreements, the Company retains no rights or interest and has no obligations with respect to the sold receivables. The Company accounts for these transactions as sales of receivables and records cash proceeds when received as cash provided by operating activities in the Consolidated Statement of Cash Flows. Cash generated by participating in these programs was zero and $154 million in 2018 and 2017, respectively. The unfavorable impact on cash used for operating activities during 2018 was $154 million. The favorable impact on cash provided by operating activities during 2017 was $94 million. The cost of participating in these programs was immaterial to the Company's results.
Inventories, net are summarized as follows:
| | | | | | | | | | (in millions) | September 30,
2018 | | September 30, 2017 | | Finished goods | $ | 289 |
| | $ | 259 |
| | Work in process | 381 |
| | 347 |
| | Raw materials, parts and supplies | 828 |
| | 677 |
| | Less progress payments | (15 | ) | | (7 | ) | | Total | 1,483 |
| | 1,276 |
| | Pre-production engineering costs | 1,166 |
| | 1,175 |
| | Inventories, net | $ | 2,649 |
| | $ | 2,451 |
|
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Amortization expense for pre-production engineering costs for 2018, 2017 and 2016 was $87 million, $59 million and $49 million, respectively. As discussed in Note 2, adoption of the new revenue recognition standard on October 1, 2018, resulted in elimination of the $1.166 billion pre-production engineering balance.
In accordance with industry practice, inventories include amounts which are not expected to be realized within one year. These amounts primarily relate to pre-production engineering costs and life-time-buy inventory not expected to be realized within one year of $1.129 billion and $1.160 billion at September 30, 2018 and 2017, respectively. Life-time-buy inventory is inventory that is typically no longer produced by the Company's vendors but for which multiple years of supply are purchased in order to meet production and service requirements over the life span of a product.
Property, net is summarized as follows:
| | | | | | | | | | (in millions) | September 30,
2018 | | September 30, 2017 | | Land | $ | 22 |
| | $ | 22 |
| | Buildings and improvements | 659 |
| | 597 |
| | Machinery and equipment | 1,463 |
| | 1,400 |
| | Information systems software and hardware | 570 |
| | 510 |
| | Furniture and fixtures | 93 |
| | 87 |
| | Capital leases | 58 |
| | 58 |
| | Construction in progress | 246 |
| | 250 |
| | Total | 3,111 |
| | 2,924 |
| | Less accumulated depreciation | (1,682 | ) | | (1,526 | ) | | Property, Net | $ | 1,429 |
| | $ | 1,398 |
|
Property additions acquired by incurring accounts payable, which are reflected as a non-cash transaction in the Company's Consolidated Statement of Cash Flows, were $20 million, $23 million and $20 million at September 30, 2018, 2017 and 2016, respectively.
A portion of the Company's operations are conducted in leased real estate facilities, including both operating and, to a lesser extent, capital leases. Accumulated depreciation relating to assets under capital lease totals $18 million and $14 million as of September 30, 2018 and 2017, respectively. Amortization of assets under capital lease is recorded as depreciation expense. As of September 30, 2018, remaining minimum lease payments for Property under capital leases total $65 million, including $17 million of interest.
Other assets are summarized as follows:
| | | | | | | | | | (in millions) | September 30,
2018 | | September 30, 2017 | | Long-term receivables | $ | 185 |
| | $ | 211 |
| | Investments in equity affiliates | 5 |
| | 7 |
| | Exchange and rental assets (net of accumulated depreciation of $111 at September 30, 2018 and $106 at September 30, 2017) | 71 |
| | 71 |
| | Other | 243 |
| | 242 |
| | Other Assets | $ | 504 |
| | $ | 531 |
|
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Long-term receivables
Long-term receivables expected to be collected beyond the next twelve months are principally comprised of unbilled accounts receivable pursuant to sales recorded under the percentage-of-completion method of accounting that have not yet been billed to customers in accordance with applicable contract terms.
Investments in Equity Affiliates
Investments in equity affiliates primarily consist of seven joint ventures:
ACCEL (Tianjin) Flight Simulation Co., Ltd (ACCEL): ACCEL is a joint venture with Haite Group, for the joint development and production of commercial flight simulators in China
ADARI Aviation Technology Company Limited (ADARI): ADARI is a joint venture with Aviation Data Communication Corporation Co., LTD, that operates remote ground stations around China and develops certain content delivery management software
AVIC Leihua Rockwell Collins Avionics Company (ALRAC): ALRAC is a joint venture with China Leihua Electronic Technology Research Institute (a subsidiary of the Aviation Industry Corporation of China, or AVIC), for the joint production of integrated surveillance system products for the C919 aircraft in China
Data Link Solutions LLC (DLS): DLS is a joint venture with BAE Systems, plc for the joint pursuit of the worldwide military data link market
ESA Vision Systems LLC (ESA): ESA is a joint venture with Elbit Systems, Ltd. for the joint pursuit of helmet-mounted cueing systems for the worldwide military fixed wing aircraft market
Quest Flight Training Limited (Quest): Quest is a joint venture with Quadrant Group plc that provides aircrew training services primarily for the United Kingdom Ministry of Defence
Rockwell Collins CETC Avionics Co., Ltd (RCCAC): RCCAC is a joint venture with CETC Avionics Co., Ltd (CETCA) for the development, production, and maintenance of communication and navigation products on Chinese commercial OEM platforms
Each joint venture is 50 percent owned by the Company and accounted for under the equity method. Under the equity method of accounting for investments, the Company’s proportionate share of the earnings or losses of its equity affiliates are included in Net income and classified as Other income, net in the Consolidated Statement of Operations. For segment performance reporting purposes, Rockwell Collins’ share of earnings or losses of ESA, DLS and Quest are included in the operating results of the Government Systems segment, ACCEL, ALRAC and RCCAC are included in the operating results of the Commercial Systems segment and ADARI is included in the operating results of the Information Management Services segment.
In the normal course of business or pursuant to the underlying joint venture agreements, the Company may sell products or services to equity affiliates. The Company defers a portion of the profit generated from these sales equal to its ownership interest in the equity affiliates until the underlying product is ultimately sold to an unrelated third party. Sales to equity affiliates were $226 million, $262 million and $229 million for the years ended September 30, 2018, 2017 and 2016, respectively. The deferred portion of profit generated from sales to equity affiliates was $1 million at September 30, 2018 and $2 million at September 30, 2017.
Exchange and Rental Assets
Exchange and rental assets consist primarily of Company products that are either exchanged or rented to customers on a short-term basis in connection with warranty and other service related activities. These assets are recorded at acquisition or production cost and depreciated using the straight-line method over their estimated lives, up to 15 years. Depreciation methods and lives are reviewed periodically with any changes recorded on a prospective basis. Depreciation expense for exchange and rental assets was $11 million, $10 million and $9 million for the years ended September 30, 2018, 2017 and 2016, respectively.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Short-term Debt
| | | | | | | | | | (in millions, except weighted average amounts) | September 30,
2018 | | September 30,
2017 | Short-term commercial paper borrowings outstanding (1) | $ | 1,500 |
| | $ | 330 |
| | Current portion of long-term debt | 748 |
| | 149 |
| | Short-term debt | $ | 2,248 |
| | $ | 479 |
| | Weighted average annualized interest rate of commercial paper borrowings | 2.42 | % | | 1.45 | % | | Weighted average maturity period of commercial paper borrowings (days) | 9 |
| | 18 |
|
(1) The maximum amount of short-term commercial paper borrowings outstanding during the year ended September 30, 2018 was $1.5 billion.
Commercial Paper Program
Under the Company’s commercial paper program, the Company may sell up to $1.5 billion face amount of unsecured short-term promissory notes in the commercial paper market. The commercial paper program is supported by the Company's $1.5 billion five-year revolving credit facility.
Revolving Credit Facilities
The Company has a $1.5 billion five-year senior unsecured revolving credit agreement with various banks. At September 30, 2018 and 2017, there were no outstanding borrowings under the Company's revolving credit facility.
Short-term credit facilities available to non-U.S. subsidiaries amounted to $20 million as of September 30, 2018, of which $2 million was utilized to support commitments in the form of commercial letters of credit. At September 30, 2018 and 2017, there were no borrowings outstanding under these credit facilities.
At September 30, 2018 and September 30, 2017, there were no significant commitment fees or compensating balance requirements under any of the Company’s credit facilities.
Bridge Credit Facility
On December 16, 2016, pursuant to the B/E Aerospace acquisition, the Company entered into a $4.35 billion 364-day senior unsecured bridge term loan credit agreement with various banks. This bridge facility terminated upon receipt of proceeds from the notes issued to finance a portion of the B/E Aerospace acquisition.
Long-term Debt
On December 16, 2016, pursuant to the B/E Aerospace acquisition, the Company entered into a $1.5 billion three-year senior unsecured term loan credit agreement with various banks. As of September 30, 2018, borrowings under this facility were $481 million and bear interest at LIBOR plus 1.25 percent amortized in equal quarterly installments of 2.5 percent, or $38 million, with the balance payable on April 13, 2020. During the year ended September 30, 2018, the Company made principal prepayments of $238 million in accordance with the loan's prepayment provisions. Proceeds of borrowings under the term loan facility were used to finance a portion of the B/E Aerospace acquisition and to pay related transaction fees and expenses.
The revolving credit agreement and term loan credit agreement each include one financial covenant requiring the Company to maintain a consolidated debt to total capitalization ratio of not greater than 65 percent (excluding the equity impact of accumulated other comprehensive loss related to defined benefit retirement plans). The Company was in compliance with this financial covenant at September 30, 2018. The credit facilities also contain covenants that require the Company to satisfy certain conditions in order to incur debt secured by liens, engage in sale/leaseback transactions or merge or consolidate with another entity.
On April 10, 2017, the Company issued $4.65 billion of senior unsecured notes. The net proceeds of the offering were principally used to finance a portion of the B/E Aerospace acquisition and to pay related transaction fees and expenses. Net proceeds of $300 million were used to repay a portion of the Company's outstanding short-term commercial paper borrowings.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The principal amount of long-term debt, net of discount and debt issuance costs, is summarized as follows:
| | | | | | | | | | | | (in millions, except interest rate figures) | Interest Rate | | September 30,
2018 | | September 30, 2017 | | Fixed-rate notes due: | | | | | | | July 2019 | 1.95% | | $ | 300 |
| | $ | 300 |
| | July 2019 | 5.25% | | 300 |
| | 300 |
| | November 2021 | 3.10% | | 250 |
| | 250 |
| | March 2022 | 2.80% | | 1,100 |
| | 1,100 |
| | December 2023 | 3.70% | | 400 |
| | 400 |
| | March 2024 | 3.20% | | 950 |
| | 950 |
| | March 2027 | 3.50% | | 1,300 |
| | 1,300 |
| | December 2043 | 4.80% | | 400 |
| | 400 |
| | April 2047 | 4.35% | | 1,000 |
| | 1,000 |
| | Variable-rate term loan due: | | | | | | | April 2020 | 1 month LIBOR + 1.25% (1) | | 481 |
| | 870 |
| | Fair value swap adjustment (Notes 14 and 15) | | | (2 | ) | | 14 |
| | Total | | | 6,479 |
| | 6,884 |
| | Less unamortized debt issuance costs and discounts | | | 50 |
| | 59 |
| | Less current portion of long-term debt | | | 748 |
| | 149 |
| | Long-term Debt, Net | | | $ | 5,681 |
| | $ | 6,676 |
|
(1) The Company has the option to elect a one-, two-, three- or six-month LIBOR interest rate and has elected the one-month rate during the fourth quarter of 2018. The one-month LIBOR rate at September 30, 2018 was approximately 2.26 percent.
Cash payments for debt interest and fees during the year ended September 30, 2018 were $249 million. Cash payments for debt interest and fees during the year ended September 30, 2017 were $192 million, of which $29 million related to fees incurred in connection with the bridge credit facility. Cash payments for debt interest and fees during the year ended September 30, 2016 were $56 million.
The Company sponsors defined benefit pension (Pension Benefits) and other postretirement (Other Retirement Benefits) plans which provide monthly pension and other benefits to eligible employees upon retirement.
Pension Benefits
The Company historically provided pension benefits to most of the Company's U.S. employees in the form of non-contributory, defined benefit plans that are considered qualified plans under applicable laws. The benefits provided under these plans for salaried employees are generally based on years of service and average compensation. The benefits provided under these plans for hourly employees are generally based on specified benefit amounts and years of service. In addition, the Company sponsors an unfunded non-qualified defined benefit plan for certain employees.
In 2018, five of the Company's eight collective bargaining agreements were negotiated and participation in the Rockwell Collins Pension Plan is now closed to newly hired employees pursuant to those negotiations. The individuals covered by the agreements will instead receive supplemental Company contributions to the existing defined contribution savings plan. The Company previously amended its U.S. qualified and non-qualified defined benefit pension plans to discontinue benefit accruals for salary increases and services rendered after September 30, 2006 for all salaried and hourly employees who were not covered by collective bargaining agreements.
The Company also maintains six defined benefit pension plans in countries outside of the U.S., three of which are unfunded.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other Retirement Benefits
Other retirement benefits consist of retiree health care and life insurance benefits that are provided to substantially all of the Company's U.S. employees hired before October 1, 2006 and their beneficiaries. Employees generally become eligible to receive these benefits if they retire after age 55 with at least 10 years of service. Most plans are contributory with retiree contributions generally based upon years of service and adjusted annually by the Company. Retiree medical plans pay a stated percentage of expenses reduced by deductibles and other coverage. The amount the Company will contribute toward retiree medical coverage for most participants is fixed. Additional premium contributions will be required from participants for all costs in excess of the Company's fixed contribution amount. 2018 bargaining unit negotiations closed participation in the retiree health plan to certain newly hired employees and in some instances to individuals retiring after specified dates ranging from 2020 to 2022. Retiree life insurance plans provide coverage at a flat dollar amount or as a multiple of salary. With the exception of certain bargaining unit plans, Other Retirement Benefits are funded as expenses are incurred.
Components of Expense (Income)
The components of expense (income) for Pension Benefits and Other Retirement Benefits are summarized below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | Pension Benefits | | Other Retirement Benefits | | (in millions) | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 | | Service cost | $ | 12 |
| | $ | 13 |
| | $ | 11 |
| | $ | 2 |
| | $ | 3 |
| | $ | 3 |
| | Interest cost | 120 |
| | 111 |
| | 126 |
| | 6 |
| | 5 |
| | 6 |
| | Expected return on plan assets | (243 | ) | | (241 | ) | | (238 | ) | | (2 | ) | | (2 | ) | | (2 | ) | | Amortization: | |
| | |
| | |
| | | | |
| | |
| | Prior service credit | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) | | (1 | ) | | Net actuarial loss | 82 |
| | 92 |
| | 78 |
| | 7 |
| | 9 |
| | 8 |
| | Net benefit expense (income) | $ | (29 | ) | | $ | (25 | ) | | $ | (24 | ) | | $ | 13 |
| | $ | 14 |
| | $ | 14 |
|
A spot rate approach, which applies separate discount rates for each projected benefit payment, has been used to calculate pension interest and service cost.
Funded Status and Net Liability
The Company recognizes the unfunded status of defined benefit retirement plans on the Consolidated Statement of Financial Position as Retirement Benefits. The current portion of the liability is the amount by which the actuarial present value of benefits included in the benefit obligation payable in the next twelve months exceeds the fair value of the plan assets and is reflected in Compensation and benefits in the Consolidated Statement of Financial Position.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table reconciles the projected benefit obligations (PBO), plan assets, funded status and net liability for the Company's Pension Benefits and Other Retirement Benefits:
| | | | | | | | | | | | | | | | | | | | | Pension Benefits | | Other Retirement Benefits | | (in millions) | | 2018 | | 2017 | | 2018 | | 2017 | | PBO at beginning of period | | $ | 4,202 |
| | $ | 4,527 |
| | $ | 213 |
| | $ | 231 |
| | Service cost | | 12 |
| | 13 |
| | 2 |
| | 3 |
| | Interest cost | | 120 |
| | 111 |
| | 6 |
| | 5 |
| | Discount rate and other assumption changes | | (200 | ) | | (156 | ) | | (9 | ) | | (7 | ) | | Actuarial losses (gains) | | 9 |
| | 4 |
| | (5 | ) | | (6 | ) | | Plan participant contributions | | — |
| | — |
| | 4 |
| | 4 |
| | Benefits paid | | (219 | ) | | (223 | ) | | (14 | ) | | (17 | ) | | Group annuity purchase | | — |
| | (101 | ) | | — |
| | — |
| | Plan amendments | | (11 | ) | | — |
| | (7 | ) | | — |
| | B/E Aerospace acquisition | | — |
| | 16 |
| | — |
| | — |
| | Other | | (5 | ) | | 11 |
| | — |
| | — |
| | PBO at end of period | | 3,908 |
| | 4,202 |
| | 190 |
| | 213 |
| | Plan assets at beginning of period | | 3,186 |
| | 3,074 |
| | 20 |
| | 19 |
| | Actual return on plan assets | | 120 |
| | 362 |
| | 2 |
| | 2 |
| | Company contributions | | 467 |
| | 68 |
| | 9 |
| | 12 |
| | Plan participant contributions | | — |
| | — |
| | 4 |
| | 4 |
| | Benefits paid | | (219 | ) | | (223 | ) | | (14 | ) | | (17 | ) | | Group annuity purchase | | — |
| | (103 | ) | | — |
| | — |
| | B/E Aerospace acquisition | | — |
| | 4 |
| | — |
| | — |
| | Other | | (2 | ) | | 4 |
| | — |
| | — |
| | Plan assets at end of period | | 3,552 |
| | 3,186 |
| | 21 |
| | 20 |
| | Funded status of plans | | $ | (356 | ) | | $ | (1,016 | ) | | $ | (169 | ) | | $ | (193 | ) | | Funded status consists of: | | | | | | | | | | Retirement benefits liability | | $ | (356 | ) | | $ | (1,015 | ) | | $ | (169 | ) | | $ | (193 | ) | | Compensation and benefits liability | | (12 | ) | | (11 | ) | | — |
| | — |
| | Other assets | | 12 |
| | 10 |
| | — |
| | — |
| | Net liability | | $ | (356 | ) | | $ | (1,016 | ) | | $ | (169 | ) | | $ | (193 | ) |
In July 2017, an agreement to purchase a group annuity contract was entered into by the Company's pension plan. The pension plan transferred $103 million of plan assets to an insurance company. The agreement resulted in a reduction of the Company's PBO by $101 million and transferred the administrative responsibilities for these participants to the insurance company.
For the Company's 2017 year end pension liability valuation, the Company used the RP-2014 tables with an adjustment for plan experience, and utilized the MP-2016 mortality improvement scale adjusted to reflect convergence to an ultimate annual rate of mortality improvement of 0.75 percent by 2032. For the 2018 year end pension liability valuation, the Company continued to use the RP-2014 tables with an adjustment for plan experience, but utilized the MP-2017 mortality improvement scale adjusted to reflect convergence to an ultimate annual rate of mortality improvement of 0.75 percent by 2033. Both the MP-2016 and MP-2017 mortality improvement scales indicate that U.S. mortality continues to improve, but at a slower average rate.
The Company's non-U.S. defined benefit pension plans represented 5 percent of the total PBO at September 30, 2018 and 2017, respectively. The accumulated benefit obligation for all defined benefit pension plans was $3.903 billion and $4.185 billion at September 30, 2018 and 2017, respectively.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other Comprehensive Loss
The following table summarizes the amounts included in Accumulated other comprehensive loss before tax related to retirement benefits as of September 30, 2018 and 2017 and changes recognized in Other comprehensive loss before tax for the years ended September 30, 2018 and 2017:
| | | | | | | | | | | | | | | | | | | | | Pension Benefits | | Other Retirement Benefits | | (in millions) | | Prior Service Cost (Credit) | | Net Actuarial Loss | | Prior Service Cost (Credit) | | Net Actuarial Loss | | Balance at September 30, 2016 | | $ | 10 |
| | $ | 2,751 |
| | $ | (5 | ) | | $ | 116 |
| | Current year prior service cost | | — |
| | — |
| | — |
| | — |
| | Current year net actuarial gain | | — |
| | (270 | ) | | — |
| | (13 | ) | | Amortization of prior service cost | | — |
| | — |
| | 1 |
| | — |
| | Amortization of actuarial loss | | — |
| | (92 | ) | | — |
| | (9 | ) | | Balance at September 30, 2017 | | 10 |
| | 2,389 |
| | (4 | ) | | 94 |
| | Current year prior service cost | | (11 | ) | | — |
| | (6 | ) | | — |
| | Current year net actuarial gain | | — |
| | (70 | ) | | — |
| | (14 | ) | | Amortization of prior service cost | | — |
| | — |
| | — |
| | — |
| | Amortization of actuarial loss | | — |
| | (82 | ) | | — |
| | (7 | ) | | Balance at September 30, 2018 | | $ | (1 | ) | | $ | 2,237 |
| | $ | (10 | ) | | $ | 73 |
|
The estimated amounts that will be amortized from Accumulated other comprehensive loss into expense (income) for Pension Benefits and Other Retirement Benefits during the year ending September 30, 2019 are as follows:
| | | | | | | | | | | | | | | (in millions) | | Pension Benefits | | Other Retirement Benefits | | Total | | Prior service cost | | $ | — |
| | $ | (2 | ) | | $ | (2 | ) | | Net actuarial loss | | 75 |
| | 5 |
| | 80 |
| | Total | | $ | 75 |
| | $ | 3 |
| | $ | 78 |
|
Actuarial Assumptions
The following table presents the significant assumptions used in determining the benefit obligations:
| | | | | | | | | | | | | | | | | | | | | | | Pension Benefits | | Other Retirement Benefits | | | | U.S. | | Non-U.S. | | U.S. | | | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 | | Discount rate | | 4.02 | % | | 3.53 | % | | 2.28 | % | | 2.29 | % | | 3.94 | % | | 3.39 | % | | Compensation increase rate | | 4.00 | % | | 4.00 | % | | 2.89 | % | | 3.05 | % | | 4.00 | % | | 4.00 | % |
Discount rates used to calculate the benefit obligations are determined by using a weighted average of market-observed yields for high quality, fixed-income securities that correspond to the payment of benefits.
The Company's U.S. qualified and non-qualified plans were previously amended to discontinue benefit accruals for salary increases and services rendered after 2006 for non-union employees. 2018 bargaining unit negotiations closed participation in the Rockwell Collins Pension Plan to certain newly hired employees. In the U.S., certain sub-plans associated with collective bargaining agreements continue to accrue benefits, and only the ARINC Union sub-plan is impacted by increases in compensation.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Significant assumptions used in determining the net benefit expense (income) are as follows:
| | | | | | | | | | | | | | | | | | | | | | | Pension Benefits | | Other Retirement Benefits | | | | U.S. | | Non-U.S. | | U.S. | | | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 | | Discount rate | | 3.53 | % | | 3.22 | % | | 2.29 | % | | 1.72 | % | | 3.39 | % | | 3.39 | % | | Expected long-term return on plan assets | | 8.00 | % | | 8.00 | % | | 6.73 | % | | 6.74 | % | | 8.00 | % | | 8.00 | % | | Compensation increase rate | | 4.00 | % | | 4.00 | % | | 3.05 | % | | 3.03 | % | | 4.00 | % | | 4.00 | % | Health care cost gross trend rate (1) | | — |
| | — |
| | — |
| | — |
| | 7.50 | % | | 7.50 | % | Ultimate trend rate (1) | | — |
| | — |
| | — |
| | — |
| | 5.00 | % | | 5.00 | % | Year that trend reaches ultimate rate (1) | | — |
| | — |
| | — |
| | — |
| | 2022 |
| | 2022 |
|
(1) Due to the effect of the fixed Company contribution, increasing or decreasing the health care cost trend rate by one percentage point would not have a significant impact on the Company's cost of providing Other Retirement Benefits.
Expected long-term return on plan assets for each year presented is based on both historical long-term actual and expected future investment returns considering the current investment mix of plan assets. The Company uses a market-related value of plan assets reflecting changes in the fair value of plan assets over a five-year period. The Company amortizes actuarial gains and losses in excess of 10 percent of the greater of the market-related value of plan assets or the projected benefit obligation (the corridor) on a straight-line basis over the expected future lifetime of inactive participants, which was approximately 24 years at September 30, 2018, as almost all of the plan's participants are considered inactive.
Prior service costs resulting from plan amendments are amortized in equal annual amounts over the average remaining service period of affected active participants or over the remaining life expectancy of affected retired participants.
Plan Assets
Total plan assets for Pension Benefits and Other Retirement Benefits as of September 30, 2018 and 2017 were $3.573 billion and $3.206 billion, respectively. The Company has established investment objectives that seek to preserve and maximize the amount of plan assets available to pay plan benefits. These objectives are achieved through investment guidelines requiring diversification and allocation strategies designed to maximize the long-term returns on plan assets while maintaining a prudent level of investment risk. These investment strategies are implemented using actively managed and indexed assets. Target and actual asset allocations as of September 30, 2018 and 2017 are as follows:
| | | | | | | | | | | | | | | | | Target Mix | | 2018 | | 2017 | | Equities | | 40 | % | - | 70 | % | | 52 | % | | 57 | % | | Fixed income | | 25 | % | - | 60 | % | | 46 | % | | 40 | % | | Alternative investments | | 0 | % | - | 15 | % | | 0 | % | | 0 | % | | Cash | | 0 | % | - | 5 | % | | 2 | % | | 3 | % |
Alternative investments may include real estate, hedge funds, venture capital and private equity. There were no plan assets invested in the securities of the Company as of September 30, 2018 and 2017 or at any time during the years then ended. Target and actual asset allocations are periodically rebalanced between asset classes in order to mitigate investment risk and maintain asset classes within target allocations.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents the fair value of the Company's pension plans' assets as of September 30, 2018 and 2017, by asset category segregated by level within the fair value hierarchy, as described in Note 14:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | September 30, 2018 | | September 30, 2017 | | Asset category (in millions) | Level 1 | | Level 2 | | Level 3 | | Not Leveled(1) | | Total | | Level 1 | | Level 2 | | Level 3 | | Not Leveled(1) | | Total | | Equity securities: | | | | | | | | | | | | | | | | | | | | | U.S. equity | $ | 552 |
| | $ | 8 |
| | $ | — |
| | $ | 592 |
| | $ | 1,152 |
| | $ | 558 |
| | $ | 15 |
| | $ | — |
| | $ | 394 |
| | $ | 967 |
| | Non-U.S. equity | 693 |
| | 10 |
| | — |
| | — |
| | 703 |
| | 814 |
| | 28 |
| | — |
| | — |
| | 842 |
| | Fixed income securities: | | | | | | | | | | | | | | | | | | | | | Corporate | 1 |
| | 713 |
| | — |
| | 313 |
| | 1,027 |
| | — |
| | 795 |
| | — |
| | 305 |
| | 1,100 |
| | U.S. government | 401 |
| | 31 |
| | — |
| | 69 |
| | 501 |
| | 42 |
| | 24 |
| | — |
| | 68 |
| | 134 |
| | Mortgage and asset-backed | — |
| | 1 |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
| | — |
| | — |
| | 1 |
| | Other | — |
| | 29 |
| | 3 |
| | 75 |
| | 107 |
| | — |
| | 50 |
| | 3 |
| | — |
| | 53 |
| | Cash and cash equivalents | — |
| | 47 |
| | — |
| | — |
| | 47 |
| | — |
| | 82 |
| | — |
| | — |
| | 82 |
| | Sub-total | $ | 1,647 |
| | $ | 839 |
| | $ | 3 |
| | $ | 1,049 |
| | 3,538 |
| | $ | 1,414 |
| | $ | 995 |
| | $ | 3 |
| | $ | 767 |
| | 3,179 |
| | Net receivables related to investment transactions | |
| | |
| | |
| | | | 14 |
| | | | | | | | | | 7 |
| Total (2) | |
| | |
| | |
| | | | $ | 3,552 |
| | | | | | | | | | $ | 3,186 |
|
(1) Certain investments measured using the net asset value (NAV) practical expedient have not been classified in the fair value hierarchy.
(2) The Rockwell Collins Pension Plan participates in a securities lending program through its Trustee. Under this program, the Plan's investment securities may be loaned to investment brokers for a fee. Securities so loaned are fully collateralized by cash, letters of credit and securities issued or guaranteed by the U.S. government, its agencies and instrumentalities. At September 30, 2018 and 2017, $424 million and $333 million, respectively, of the Plan's securities were on loan under the Trustee's securities lending program.
The following table presents the fair value of the Company's other retirement benefits plan's assets as of September 30, 2018 and 2017, by asset category segregated by level within the fair value hierarchy, as described in Note 14:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | September 30, 2018 | | September 30, 2017 | | Asset category (in millions) | Level 1 | | Level 2 | | Level 3 | | Not Leveled | | Total | | Level 1 | | Level 2 | | Level 3 | | Not Leveled | | Total | | Equity securities: | | | | | | | | | | | | | | | | | | | | | U.S. equity | $ | 11 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 11 |
| | $ | 9 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 9 |
| | Non-U.S. equity | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | Fixed income securities: | | | | | | | | | | | | | | | | | | | | | Corporate | — |
| | 3 |
| | — |
| | — |
| | 3 |
| | — |
| | 3 |
| | — |
| | — |
| | 3 |
| | U.S. government | 2 |
| | 1 |
| | — |
| | — |
| | 3 |
| | 2 |
| | 1 |
| | — |
| | — |
| | 3 |
| | Mortgage and asset-backed | — |
| | 1 |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
| | — |
| | — |
| | 1 |
| | Cash and cash equivalents | — |
| | 3 |
| | — |
| | — |
| | 3 |
| | — |
| | 4 |
| | — |
| | — |
| | 4 |
| | Total | $ | 13 |
| | $ | 8 |
| | $ | — |
| | $ | — |
| | $ | 21 |
| | $ | 11 |
| | $ | 9 |
| | $ | — |
| | $ | — |
| | $ | 20 |
|
Valuation Techniques
Level 1 assets for the pension plans and other retirement benefits plan are primarily comprised of equity and fixed income securities. Level 1 equity securities are actively traded on U.S. and non-U.S. exchanges and are valued using the market approach at quoted market prices on the measurement date. Level 1 fixed income securities are valued using quoted market prices.
Level 2 equity securities contain equity funds that hold investments with values based on quoted market prices, but for which the funds are not valued on a quoted market basis. Level 2 fixed income securities are primarily valued using pricing models that use observable market data or bids provided by independent investment brokerage firms.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Cash and cash equivalents includes cash which is used to pay benefits and cash invested in a short-term investment fund that holds securities with values based on quoted market prices, but for which the funds are not valued on a quoted market basis. As such, the cash and cash equivalents in our pension and other retirement plan assets are classified as Level 2 in the tables above.
The Level 3 assets represent general insurance company contracts in the pension plans and are not significant. As described in Note 14, the fair value of a Level 3 asset is derived from unobservable inputs that are based on the Company's own assumptions.
Contributions
For the years ended September 30, 2018 and 2017, the Company made contributions to its pension plans as follows:
| | | | | | | | | | | (in millions) | | 2018 | | 2017 | | Contributions to U.S. qualified plans | | $ | 455 |
| | $ | 55 |
| | Contributions to U.S. non-qualified plan | | 8 |
| | 8 |
| | Contributions to non-U.S. plans | | 4 |
| | 5 |
| | Total | | $ | 467 |
| | $ | 68 |
|
The Company’s objective with respect to the funding of its pension plans is to provide adequate assets for the payment of future benefits. Pursuant to this objective, the Company will fund its pension plans as required by governmental regulations and may consider discretionary contributions as conditions warrant. The year over year increase in contributions to U.S. qualified pension plans were discretionary in nature and made by the Company to achieve a tax deduction and reduce future Pension Benefit Guaranty Corporation premiums. There is no minimum statutory funding requirement for 2019 and the Company does not currently expect to make any additional discretionary contributions during 2019 to these plans. Any additional future contributions necessary to satisfy minimum statutory funding requirements are dependent upon actual plan asset returns, interest rates and actuarial assumptions.
The Company participates in a multi-employer arrangement that provides postretirement benefits other than pension benefits. This arrangement provides medical benefits to certain bargaining unit active employees and retirees and their dependents. Contributions to this multi-employer arrangement for postretirement benefits were $1 million in 2018, $1 million in 2017 and $1 million in 2016.
Benefit Payments
The following table reflects estimated benefit payments to be made to eligible participants for each of the next five years and the following five years in the aggregate:
| | | | | | | | | | | (in millions) | | Pension Benefits | | Other Retirement Benefits | | 2019 | | $ | 245 |
| | $ | 15 |
| | 2020 | | 240 |
| | 15 |
| | 2021 | | 242 |
| | 16 |
| | 2022 | | 244 |
| | 16 |
| | 2023 | | 246 |
| | 16 |
| | 2024-2028 | | 1,228 |
| | 69 |
|
Estimated benefit payments for Other Retirement Benefits in the table above are shown net of plan participant contributions and therefore reflect the Company's portion only. Substantially all of the Pension Benefit payments relate to the Company's U.S. qualified funded plans which are paid from the pension trust.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Defined Contribution Savings Plan
The Company sponsors defined contribution savings plans that are available to the majority of its employees. The plans allow employees to contribute a portion of their compensation on a pre-tax and/or after-tax basis in accordance with specified guidelines. For most plans, the Company matches a percentage of employee contributions using common stock of the Company up to certain limits. Employees may transfer at any time all or a portion of their balance in Company common stock to any of the other investment options offered within the plans. The Company is authorized to issue 16.8 million shares under the defined contribution savings plans, of which 0.4 million shares are available for future contributions at September 30, 2018. Additionally, for the majority of the Company's employees, the Company's defined contribution savings plan includes a cash contribution based on an employee's age and service.
The Company's expense related to the defined contribution savings plans for 2018, 2017 and 2016 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | 2018 | | 2017 | | 2016 | | (in millions) | | Shares | | Expense | | Shares | | Expense | | Shares | | Expense | | Contribution in shares | | 0.4 |
| | $ | 58 |
| | 0.5 |
| | $ | 56 |
| | 0.6 |
| | $ | 49 |
| | Contribution in cash | | |
| | 69 |
| | |
| | 54 |
| | |
| | 46 |
| | Total | | |
| | $ | 127 |
| | |
| | $ | 110 |
| | |
| | $ | 95 |
|
The Company's cash contributions for 2018 and 2017 include $11 million and $5 million respectively to the B/E Aerospace defined contribution savings plan.
Employee Stock Purchase Plan
The Company also offered an Employee Stock Purchase Plan (ESPP) which allowed employees to have their base compensation withheld to purchase the Company's common stock each month at 95 percent of the fair market value on the last day of the month. The ESPP is considered a non-compensatory plan and accordingly no compensation expense is recorded in connection with this benefit. During 2018, 2017 and 2016, 0.0 million, 0.1 million and 0.1 million shares, respectively, of Company common stock were issued to employees at a value of $0 million, $11 million and $11 million for the respective periods. Further purchases under the ESPP were suspended on September 29, 2017 pursuant to the Merger Agreement. If the UTC Merger is completed, the ESPP will be terminated.
Common Stock
The Company is authorized to issue one billion shares of common stock, par value $0.01 per share, and 25 million shares of preferred stock, without par value.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss (AOCL), net of tax, by component are as follows:
| | | | | | | | | | | | | | | | | | | | | Foreign Exchange Translation and Other Adjustments | | Pension and Other Postretirement Adjustments (1) | | Change in the Fair Value of Effective Cash Flow Hedges | | Total | | Balance at September 30, 2015 | | $ | (56 | ) | | $ | (1,637 | ) | | $ | (6 | ) | | $ | (1,699 | ) | | Other comprehensive (loss) before reclassifications | | (20 | ) | | (234 | ) | | (2 | ) | | (256 | ) | | Amounts reclassified from accumulated other comprehensive income | | — |
| | 53 |
| | 4 |
| | 57 |
| | Net current period other comprehensive income (loss) | | (20 | ) | | (181 | ) | | 2 |
| | (199 | ) | | Balance at September 30, 2016 | | (76 | ) | | (1,818 | ) | | (4 | ) | | (1,898 | ) | | Other comprehensive income before reclassifications | | 77 |
| | 180 |
| | 1 |
| | 258 |
| | Amounts reclassified from accumulated other comprehensive income | | — |
| | 63 |
| | 2 |
| | 65 |
| | Net current period other comprehensive income | | 77 |
| | 243 |
| | 3 |
| | 323 |
| | Balance at September 30, 2017 | | 1 |
| | (1,575 | ) | | (1 | ) | | (1,575 | ) | | Other comprehensive income (loss) before reclassifications | | (39 | ) | | 79 |
| | (1 | ) | | 39 |
| | Amounts reclassified from accumulated other comprehensive income | | — |
| | 65 |
| | — |
| | 65 |
| | Net current period other comprehensive income (loss) | | (39 | ) | | 144 |
| | (1 | ) | | 104 |
| | Balance at September 30, 2018 | | $ | (38 | ) | | $ | (1,431 | ) | | $ | (2 | ) | | $ | (1,471 | ) |
(1) Reclassifications from AOCL to net income related to the amortization of net actuarial losses and prior service credits for the Company's retirement benefit plans and were $89 million ($65 million net of tax), $100 million ($63 million net of tax) and $84 million ($53 million net of tax) for 2018, 2017 and 2016, respectively. The reclassifications are included in the computation of net benefit expense. See Note 10, Retirement Benefits, for additional details.
| | 12. | Stock-Based Compensation and Earnings Per Share |
Stock-Based Compensation Program Description
In February 2015, the Company's shareholders approved the Company's 2015 Long-Term Incentives Plan (2015 Plan), replacing the 2006 Long-Term Incentives Plan (2006 Plan). Under the 2015 Plan, up to 11 million shares of common stock may be issued by the Company as non-qualified options, performance units, performance shares, stock appreciation rights, restricted shares and restricted stock units. Each share issued pursuant to an award of restricted shares, restricted stock units, performance shares and performance units counts as 3.55 shares against the authorized limit. Shares available for future grant or payment under these plans were 5 million at September 30, 2018. No shares are available for future grant under the 2006 Plan.
Options to purchase common stock of the Company have been granted under various incentive plans to directors, officers and other key employees. All of the Company's stock-based incentive plans require options to be granted at prices equal to or above the fair market value of the common stock on the dates the options are granted. The plans provide that the option price for certain options granted under the plans may be paid by the employee in cash, shares of common stock or a combination thereof. Option awards provide for accelerated vesting if there is a termination of employment in connection with a change in control. Stock options generally expire 10 years from the date they are granted and generally vest ratably over three years.
The Company utilizes performance shares, restricted stock and restricted stock units that generally cliff vest at the end of three years. The fair value of restricted stock and restricted stock units is estimated using the closing share price on the day of grant. The number of performance shares that will ultimately be issued is based on achievement of performance targets over a three-year period that consider cumulative sales growth and free cash flow as a percentage of net income or free cash flow with an additional potential adjustment up or down depending on the Company's total return to shareowners compared to a group of peer companies. The fair value of performance shares is estimated using a Monte Carlo model that considers the likelihood of a
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
payout adjustment for the total shareowner return in comparison to the peer group. Up to 240 percent of the performance shares the Company grants can be earned if maximum performance is achieved.
The Company's stock-based compensation awards are designed to align management's interests with those of the Company's shareowners and to reward outstanding Company performance. The Company has an ongoing share repurchase plan and expects to satisfy stock option exercises and stock award issuances from treasury stock.
Stock-based compensation expense is recognized on a straight-line basis over the requisite service period. Total stock-based compensation expense and related income tax benefit included within the Consolidated Statement of Operations for 2018, 2017 and 2016 is as follows:
| | | | | | | | | | | | | | | (in millions) | | 2018 | | 2017 | | 2016 | | Stock-based compensation expense included in: | | | | | | | | Product cost of sales | | $ | 8 |
| | $ | 9 |
| | $ | 8 |
| | Selling, general and administrative expenses | | 27 |
| | 22 |
| | 19 |
| | Total | | $ | 35 |
| | $ | 31 |
| | $ | 27 |
| | Income tax benefit | | $ | 9 |
| | $ | 10 |
| | $ | 9 |
|
General Option Information
The following summarizes the activity of the Company's stock options for 2018:
| | | | | | | | | | | | | | | | | | Shares (in thousands) | | Weighted Average Exercise Price | | Weighted Average Remaining Life (in years) | | Aggregate Intrinsic Value (in millions) | | Outstanding at September 30, 2017 | | 3,478 |
| | $ | 71.67 |
| | | | |
| | Granted | | — |
| | — |
| | | | |
| | Exercised | | (1,057 | ) | | 59.82 |
| | | | |
| | Forfeited or expired | | (5 | ) | | 87.99 |
| | | | |
| | Outstanding at September 30, 2018 | | 2,416 |
| | $ | 76.82 |
| | 5.8 | | $ | 154 |
| Vested or expected to vest (1) | | 2,413 |
| | $ | 76.81 |
| | 5.8 | | $ | 154 |
| | Exercisable at September 30, 2018 | | 1,782 |
| | $ | 72.75 |
| | 5.1 | | $ | 121 |
|
(1) Represents outstanding options reduced by expected forfeitures
| | | | | | | | | | | | | | | | | 2018 | | 2017 | | 2016 | | Weighted-average fair value per share of options granted | | $ | — |
| | $ | 17.26 |
| | $ | 17.75 |
| Intrinsic value of options exercised (in millions) (2) | | $ | 80 |
| | $ | 49 |
| | $ | 13 |
|
(2) Represents the amount by which the stock price exceeded the exercise price of the options on the date of the exercise
The total fair value of options vested was $11 million, $10 million and $10 million during the years ended September 30, 2018, 2017 and 2016, respectively. Total unrecognized compensation expense for options that have not vested as of September 30, 2018 is $2 million and will be recognized over a weighted average period of 0.5 years.
Stock Option Fair Value Information
The Company's determination of the fair value of option awards on the date of grant using an option-pricing model is affected by the Company's stock price as well as assumptions regarding a number of subjective variables. These assumptions include: the Company's expected stock price volatility, the projected employee stock option exercise term, the expected dividend yield and the risk-free interest rate. Changes in these assumptions can materially affect the estimated value of the stock options.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The fair value of each option granted by the Company was estimated using a binomial lattice pricing model and the following weighted average assumptions:
| | | | | | | | | 2017 Grants | | 2016 Grants | | Risk-free interest rate | 1.0% - 2.7% |
| | 0.7% - 2.5% |
| | Expected dividend yield | 1.3% - 1.5% |
| | 1.4% - 1.6% |
| | Expected volatility | 19.0 | % | | 20.0 | % | | Expected life | 7 years |
| | 7 years |
|
The expected life of employee stock options represents the weighted-average period the stock options are expected to remain outstanding. The binomial lattice model assumes that employees' exercise behavior is a function of the option's remaining expected life and the extent to which the option is in-the-money. The binomial lattice model estimates the probability of exercise as a function of these two variables based on the entire history of exercises and forfeitures on all past option grants made by the Company.
Performance Shares, Restricted Stock and Restricted Stock Units Information
The following summarizes the Company's performance shares, restricted stock and restricted stock units for 2018:
| | | | | | | | | | | | | | | | | | | | | | | | | | Performance Shares | | Restricted Stock | | Restricted Stock Units | | (shares in thousands) | | Shares | | Weighted
Average Grant Date Fair Value | | Shares | | Weighted
Average Grant Date Fair Value | | Shares | | Weighted
Average Grant Date Fair Value | | Nonvested at September 30, 2017 | | 370 |
| | $ | 85.44 |
| | 23 |
| | $ | 30.24 |
| | 512 |
| | $ | 80.56 |
| | Granted | | 142 |
| | 138.66 |
| | — |
| | — |
| | 265 |
| | 133.60 |
| | Vested | | (120 | ) | | 82.77 |
| | — |
| | — |
| | (113 | ) | | 91.28 |
| | Forfeited | | (9 | ) | | 120.03 |
| | — |
| | — |
| | (31 | ) | | 111.13 |
| | Nonvested at September 30, 2018 | | 383 |
| | $ | 105.25 |
| | 23 |
| | $ | 30.24 |
| | 633 |
| | $ | 99.16 |
|
| | | | | | | | | | | | | | | (in millions) | | Performance Shares | | Restricted Stock | | Restricted Stock Units | | Total unrecognized compensation costs at September 30, 2018 | | $ | 17 |
| | $ | — |
| | $ | 30 |
| | Weighted-average life remaining at September 30, 2018, in years | | 1.0 |
| | 0 |
| | 1.1 |
| | Weighted-average fair value per share granted in 2017 | | $ | 88.25 |
| | $ | — |
| | $ | 92.84 |
| | Weighted-average fair value per share granted in 2016 | | $ | 85.13 |
| | $ | — |
| | $ | 85.85 |
|
The maximum number of shares of common stock that can be issued in respect of performance shares granted in 2018 based on the achievement of performance targets for 2018 through 2020 is approximately 328,000. The maximum number of shares of common stock that can be issued in respect of performance shares granted in 2017 based on the achievement of performance targets for 2017 through 2019 is approximately 299,000. For purposes of determining the maximum number of shares of common stock that can be issued with respect to the performance shares granted in 2017 and 2018, the maximums have been updated to reflect reductions arising as a result of terminations and retirements. The number of shares of common stock that will be issued in respect of performance shares granted in 2016 based on the achievement of performance targets for 2016 through 2018 is approximately 159,000.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Earnings Per Share and Diluted Share Equivalents
The computation of basic and diluted earnings per share is as follows:
| | | | | | | | | | | | | | | (in millions, except per share amounts) | | 2018 | | 2017 | | 2016 | | Numerator for basic and diluted earnings per share: | | | | | | | | Income from continuing operations | | $ | 1,032 |
| | $ | 705 |
| | $ | 727 |
| | Income from discontinued operations, net of taxes | | — |
| | — |
| | 1 |
| | Net income | | $ | 1,032 |
| | $ | 705 |
| | $ | 728 |
| | Denominator: | | |
| | |
| | | | Denominator for basic earnings per share – weighted average common shares | | 164.0 |
| | 145.5 |
| | 130.5 |
| | Effect of dilutive securities: | | | | | | | | Stock options | | 1.2 |
| | 1.2 |
| | 1.0 |
| | Performance shares, restricted stock and restricted stock units | | 0.6 |
| | 0.5 |
| | 0.6 |
| | Dilutive potential common shares | | 1.8 |
| | 1.7 |
| | 1.6 |
| | Denominator for diluted earnings per share – adjusted weighted average shares and assumed conversion | | 165.8 |
| | 147.2 |
| | 132.1 |
| | Earnings per share: | | |
| | |
| | | | Basic | | | | | | | | Continuing operations | | $ | 6.29 |
| | $ | 4.85 |
| | $ | 5.57 |
| | Discontinued operations | | — |
| | — |
| | 0.01 |
| | Basic earnings per share | | $ | 6.29 |
| | $ | 4.85 |
| | $ | 5.58 |
| | Diluted | | | | | | | | Continuing operations | | $ | 6.22 |
| | $ | 4.79 |
| | $ | 5.50 |
| | Discontinued operations | | — |
| | — |
| | 0.01 |
| | Diluted earnings per share | | $ | 6.22 |
| | $ | 4.79 |
| | $ | 5.51 |
|
The Company adopted the new standard on accounting for share-based payments (see Note 2) during 2016. This standard requires excess tax benefits or deficiencies associated with share-based payments to be recorded as a discrete income tax benefit or expense in the period incurred, rather than within Additional paid-in capital. The new standard also requires excess tax benefits and deficiencies to be excluded from assumed future proceeds in the calculation of diluted shares outstanding. The Company adopted the standard prospectively, resulting in a $4 million and $0.02 increase to net income from continuing operations and diluted earnings per share from continuing operations, respectively, in 2016.
The average outstanding diluted shares calculation excludes options with an exercise price that exceeds the average market price of shares during the period. Stock options excluded from the average outstanding diluted shares calculation were 0.0 million, 0.0 million and 0.6 million in 2018, 2017 and 2016, respectively.
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the Act). The Act amends the Internal Revenue Code to reduce tax rates and modify policies, credits and deductions for individuals and businesses. For businesses, the Act reduces the corporate federal tax rate from a maximum of 35.0 percent to a flat 21.0 percent rate, effective January 1, 2018, and transitions from a worldwide tax system to a modified territorial tax system. The Act also adds many new provisions including changes to bonus depreciation, changes to the deduction for executive compensation and interest expense, a tax on global intangible low-taxed income (GILTI), the base erosion anti-abuse tax (BEAT) and a deduction for foreign-derived intangible income (FDII). Many of these provisions, including the tax on GILTI, the BEAT and the deduction for FDII, do not apply to the Company until 2019 and the Company continues to assess the impact of these provisions. The Company has elected to account for the tax on GILTI as a period cost and thus has not adjusted any of the deferred tax assets/liabilities of its foreign subsidiaries for the new tax. The two material items that impact the Company for 2018 are the reduction in the tax rate and a one-time tax that is imposed on the Company’s unremitted foreign earnings.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On December 22, 2017, the SEC issued Staff Accounting Bulletin 118 that provides additional guidance allowing companies to use a one year measurement period, similar to that used in business combinations, to account for the impacts of the Act in their financial statements. As of the end of the fiscal year, the Company has accounted for the impacts of the Act, including the use of reasonable estimates where necessary. The Company may continue to refine its estimates throughout the measurement period.
Due to the Company’s fiscal year, the Company’s 2018 blended U.S. federal statutory tax rate was 24.6 percent. The Company’s U.S. federal statutory tax rate will be 21.0 percent starting in 2019.
The Company completed its analysis of the rate impact on the deferred tax accounts due to the reduction in the U.S. corporate income tax rate from 35.0 percent to 21.0 percent under the Act in prior quarters which resulted in a $154 million reduction in deferred tax liabilities.
As of the December 31, 2017 deemed repatriation date, the Company estimates that it had approximately $1.1 billion of unremitted foreign earnings that would be subject to the tax imposed under Section 965 of the Internal Revenue Code. The Act imposes a tax on these earnings at either a 15.5 percent rate or an 8.0 percent rate. The higher rate applies to the extent the Company's foreign subsidiaries have cash and cash equivalents at certain measurement dates, whereas the lower rate applies to any earnings that are in excess of the cash and cash equivalents balance. After accounting for foreign tax credits related to the deemed repatriated earnings, the Company estimates the tax liability to be approximately $69 million and has recorded $24 million of tax expense. Before the purchase price allocation was finalized in the second quarter of 2018, the Company determined that $250 million of certain B/E Aerospace unremitted earnings previously deemed to be permanently reinvested are now available to be repatriated. In connection with this determination, the Company reclassified $35 million of its deferred tax liability to its income tax payable. Additionally, as a result of Section 965, the Company reversed $10 million of an uncertain tax liability. The Company’s accounting for the tax on unremitted foreign earnings is incomplete due to the complexity of determining the various components of the calculation. Some of the information necessary to determine the amount of the tax includes the analysis of current year earnings and of the cash equivalents of its foreign subsidiaries.
Income tax expense from continuing operations was calculated based on the following components of income before income taxes:
| | | | | | | | | | | | | | | (in millions) | | 2018 | | 2017 | | 2016 | | U.S. income | | $ | 723 |
| | $ | 688 |
| | $ | 824 |
| | Non-U.S. income | | 389 |
| | 243 |
| | 111 |
| | Total | | $ | 1,112 |
| | $ | 931 |
| | $ | 935 |
|
The components of income tax expense from continuing operations are as follows:
| | | | | | | | | | | | | | | (in millions) | | 2018 | | 2017 | | 2016 | | Current: | | | | | | | | U.S. federal | | $ | (16 | ) | | $ | 97 |
| | $ | 120 |
| | Non-U.S. | | 105 |
| | 68 |
| | 29 |
| | U.S. state and local | | 4 |
| | 18 |
| | 11 |
| | Total current | | 93 |
| | 183 |
| | 160 |
| | Deferred: | | | | | | | | U.S. federal | | (9 | ) | | 48 |
| | 47 |
| | Non-U.S. | | (16 | ) | | (5 | ) | | — |
| | U.S. state and local | | 12 |
| | — |
| | 1 |
| | Total deferred | | (13 | ) | | 43 |
| | 48 |
| | Income tax expense | | $ | 80 |
| | $ | 226 |
| | $ | 208 |
|
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The effective income tax rate from continuing operations differed from the U.S. statutory tax rate as detailed below:
| | | | | | | | | | | | | | 2018 | | 2017 | | 2016 | | Statutory tax rate | | 24.6 | % | | 35.0 | % | | 35.0 | % | | Impact of International Operations | | (0.7 | ) | | (4.4 | ) | | (0.6 | ) | | State and local income taxes | | 0.7 |
| | 1.6 |
| | 1.1 |
| | Research and development credit | | (5.6 | ) | | (5.0 | ) | | (6.4 | ) | | Domestic manufacturing deduction | | (0.6 | ) | | (2.1 | ) | | (2.0 | ) | | U.S. Tax Reform | | (10.9 | ) | | — |
| | — |
| | Non-deductible goodwill | | 1.3 |
| | — |
| | — |
| | Tax settlements | | (0.7 | ) | | (0.1 | ) | | — |
| | Stock compensation - excess tax benefits | | (1.8 | ) | | (1.3 | ) | | (0.4 | ) | | Change in valuation allowance | | (0.1 | ) | | 0.1 |
| | (4.5 | ) | | Other | | 1.0 |
| | 0.5 |
| | — |
| | Effective income tax rate | | 7.2 | % | | 24.3 | % | | 22.2 | % |
The Company's operations in the Philippines have been granted various tax incentives that will begin to expire in 2019. The tax holiday allows for tax-free operations through various dates based on product lines, followed by a reduced income tax rate of 5 percent. Net income for 2018 increased $21 million ($0.13 per share) as a result of the tax holiday.
Net long-term deferred income tax benefits (liabilities) consist of the tax effects of temporary differences related to the following:
| | | | | | | | | | | | | September 30 | | (in millions) | | 2018 | | 2017 | | Inventory | | $ | (176 | ) | | $ | (276 | ) | | Product warranty costs | | 28 |
| | 45 |
| | Customer incentives | | 31 |
| | 66 |
| | Contract reserves | | 17 |
| | 49 |
| | Retirement benefits | | 116 |
| | 400 |
| | Intangibles | | (352 | ) | | (602 | ) | | Capital lease liability | | 11 |
| | 19 |
| | Property | | (138 | ) | | (196 | ) | | Stock-based compensation | | 20 |
| | 37 |
| | Deferred compensation | | 17 |
| | 27 |
| | Compensation and benefits | | 17 |
| | 38 |
| | Research and development credit carryforward | | 54 |
| | 25 |
| | Valuation allowance | | (22 | ) | | (23 | ) | | Other | | 47 |
| | 81 |
| | Deferred income taxes, net | | $ | (330 | ) | | $ | (310 | ) |
Management believes it is more likely than not that the deferred tax assets, except for certain net operating loss carryforwards and tax credit carryforwards, will be realized through the reduction of future taxable income. Significant factors considered by management in its determination of the probability of the realization of the deferred tax assets include: (a) the historical operating results of the Company ($2.219 billion of U.S. taxable income over the past three years), (b) expectations of future earnings and (c) our ability to implement tax planning strategies.
As of September 30, 2018, the Company had state net operating loss carryforwards of $34 million which begin expiring in 2019, state tax credit carryforwards of $55 million which begin expiring in 2022, a foreign tax credit carryforward of $27 million which will begin to expire in 2027 and federal R&D credit carryforward of $17 million which will begin to expire in 2027.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Changes in the valuation allowance for deferred tax assets are summarized as follows:
| | | | | | | | | | | | | | | September 30 | | (in millions) | 2018 | | 2017 | | 2016 | | Balance at beginning of year | $ | 23 |
| | $ | — |
| | $ | 42 |
| | Charged to costs and expenses | — |
| | 1 |
| | — |
| | B/E Aerospace acquisition | — |
| | 22 |
| | — |
| Deductions(1) | (1 | ) | | — |
| | (42 | ) | | Balance at September 30 | $ | 22 |
| | $ | 23 |
| | $ | — |
|
(1)2016 deduction of $42 million was primarily due to the creation of a tax planning strategy
The Company's U.S. Federal income tax returns for the tax year ended September 30, 2013 and prior years have been audited by the IRS and are closed to further adjustments. The IRS is currently auditing the Company's tax returns for the years ended September 30, 2014 and 2015. The IRS is currently auditing the legacy tax filings of certain acquired subsidiaries for the 2014 calendar year. The Company is also currently under audit in various U.S. states and non-U.S. jurisdictions. The U.S. states and non-U.S. jurisdictions have statutes of limitations generally ranging from 3 to 5 years. The Company believes it has adequately provided for any tax adjustments that may result from the various audits.
The Company has recorded a $14 million liability as of September 30, 2018 for U.S. federal or state income taxes, or additional non-U.S. income taxes related to approximately $250 million of undistributed earnings of non-U.S. subsidiaries which are available to be distributed to the United States. No provision has been made as of September 30, 2018 for U.S. federal or state income taxes, or additional non-U.S. income taxes related to approximately $1.058 billion of undistributed earnings of non-U.S. subsidiaries which have been or are intended to be permanently reinvested. Because of the complexities and uncertainties associated with the Act, it is not practicable to estimate the amount of tax that might be payable on the undistributed earnings.
The Company had net income tax payments of $28 million, $230 million and $130 million in 2018, 2017 and 2016, respectively.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| | | | | | | | | | | | | | | | | September 30 | | (in millions) | | 2018 | | 2017 | | 2016 | | Beginning balance | | $ | 201 |
| | $ | 45 |
| | $ | 39 |
| | Additions for tax positions related to the current year | | 24 |
| | 73 |
| | 11 |
| | Additions for tax positions of prior years | | 16 |
| | 1 |
| | 7 |
| | Additions for tax positions related to acquisitions | | 1 |
| | 86 |
| | — |
| | Reductions for tax positions of prior years | | (24 | ) | | (1 | ) | | (10 | ) | | Reductions for tax positions related to settlements with taxing authorities | | (4 | ) | | (3 | ) | | (2 | ) | | Ending balance | | $ | 214 |
| | $ | 201 |
| | $ | 45 |
|
The total amount of unrecognized tax benefits that, if recognized, would affect the effective income tax rate was $200 million, $169 million and $20 million as of September 30, 2018, 2017 and 2016, respectively. Although the timing and outcome of tax settlements are uncertain, it is reasonably possible that during the next 12 months a reduction in unrecognized tax benefits may occur in the range of $0 to $44 million based on the outcome of tax examinations or as a result of the expiration of various statutes of limitations.
The Company includes income tax-related interest and penalties in income tax expense. The total amount of interest and penalties recognized within Other Liabilities in the Consolidated Statement of Financial Position were $9 million and $8 million as of September 30, 2018 and 2017, respectively. The total amount of interest and penalties recorded as an expense or (income) within Income tax expense in the Consolidated Statement of Operations was not significant for the years ended September 30, 2018, 2017 and 2016.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | 14. | Fair Value Measurements |
The FASB defines fair value as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The FASB’s guidance classifies the inputs used to measure fair value into the following hierarchy:
| | Level 1 - | quoted prices (unadjusted) in active markets for identical assets or liabilities |
| | Level 2 - | quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument |
| | Level 3 - | unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value |
A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
Assets and liabilities
The fair value of the Company's financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2018 and 2017 are as follows:
| | | | | | | | | | | | | | | September 30, 2018 | | September 30, 2017 | | (in millions) | Fair Value Hierarchy | | Fair Value Asset (Liability) | | Fair Value Asset (Liability) | | Deferred compensation plan investments | Level 1 | | $ | 70 |
| | $ | 63 |
| | Deferred compensation plan investments | Level 2 | | 27 |
| | 24 |
| | Interest rate swap assets | Level 2 | | 1 |
| | 14 |
| | Interest rate swap liabilities | Level 2 | | (3 | ) | | — |
| | Foreign currency forward exchange contract assets | Level 2 | | — |
| | 8 |
| | Foreign currency forward exchange contract liabilities | Level 2 | | — |
| | (7 | ) | | Acquisition-related contingent consideration | Level 3 | | (14 | ) | | (17 | ) |
There were no transfers between Levels of the fair value hierarchy during 2018 or 2017.
In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company records certain assets and liabilities at fair value on a nonrecurring basis, generally as a result of acquisitions or the remeasurement of assets related to certain divestitures to reflect the contracted sales price. See Note 3 for further discussion of the fair value of assets and liabilities associated with acquisitions. See Note 4 for further discussion of the fair value of assets and liabilities associated with held for sale businesses.
Valuation Techniques
The Level 1 deferred compensation plan investments consist of investments in marketable securities (primarily mutual funds) and the fair value is determined using the market approach based on quoted market prices of identical assets in active markets. The Level 2 deferred compensation plan investments consist of investments in variable insurance trust funds and the fair value is determined using the market approach and is calculated by a pricing model with observable market inputs.
The fair value of the interest rate swaps is determined using the market approach and is calculated by a pricing model with observable market inputs.
The fair value of foreign currency forward exchange contracts is determined using the market approach and is calculated as the value of the quoted forward currency exchange rate less the contract rate multiplied by the notional amount.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of September 30, 2018, there has not been any impact to the fair value of derivative liabilities due to the Company's own credit risk. Similarly, there has not been any impact to the fair value of derivative assets based on the Company's evaluation of counterparties' credit risks.
As of September 30, 2018, contingent consideration represents the estimated fair value of post-closing consideration owed to the sellers associated with the International Communications Group (ICG) acquisition, which occurred on August 6, 2015. The final contingent consideration payment owed to the sellers associated with the Pulse.aero acquisition, which occurred on December 20, 2016, was made during the year ended September 30, 2018. The contingent consideration is categorized as Level 3 in the fair value hierarchy and the fair value is determined using a probability-weighted approach. The liabilities recorded were derived from the estimated probability that certain contingent payment milestones will be met in accordance with the terms of the purchase agreements.
The change in fair value of the Level 3 contingent consideration related to the ICG and Pulse.aero acquisitions is as follows:
| | | | | | (in millions) | Fair Value (Liability) | | Balance at September 30, 2017 | $ | (17 | ) | | Payment of contingent consideration (see Note 3) | 3 |
| | Balance at September 30, 2018 | $ | (14 | ) |
Financial Instruments
The carrying amounts and fair values of the Company's financial instruments are as follows:
| | | | | | | | | | | | | | | | | | | Asset (Liability) | | | September 30, 2018 | | September 30, 2017 | | (in millions) | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value | | Cash and cash equivalents | $ | 738 |
| | $ | 738 |
| | $ | 703 |
| | $ | 703 |
| | Short-term debt | (2,248 | ) | | (2,252 | ) | | (479 | ) | | (479 | ) | | Long-term debt | (5,683 | ) | | (5,560 | ) | | (6,662 | ) | | (6,898 | ) |
The fair value of cash and cash equivalents and the commercial paper portion of short-term debt approximates their carrying value due to the short-term nature of the instruments. These items are within Level 1 of the fair value hierarchy. Fair value information for the current portion of long-term debt and all long-term debt is within Level 2 of the fair value hierarchy. The fair value of these financial instruments is based on current market interest rates and estimates of current market conditions for instruments with similar terms, maturities and degree of risk. The carrying amount and fair value of short-term and long-term debt excludes the interest rate swaps fair value adjustment. These fair value estimates do not necessarily reflect the amounts the Company would realize in a current market exchange.
| | 15. | Derivative Financial Instruments
|
Interest Rate Swaps
The Company manages its exposure to interest rate risk by maintaining a mix of fixed and variable rate debt, which over time should moderate the costs of debt financing. To help meet this objective, the Company may use financial instruments in the form of interest rate swaps.
In January 2010, the Company entered into two interest rate swap contracts which expire on July 15, 2019 and effectively converted $150 million of the 5.25 percent 2019 Notes to floating rate debt based on six-month LIBOR plus 1.235 percent. In June 2015, the Company entered into two interest rate swap contracts which expire on July 15, 2019 and effectively converted the remaining $150 million of the 5.25 percent 2019 Notes to floating rate debt based on three-month LIBOR plus 3.56 percent (collectively the 2019 Swaps).
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In March 2014, the Company entered into three interest rate swap contracts (the 2023 Swaps) which expire on December 15, 2023 and effectively converted $200 million of the 2023 Notes to floating rate debt based on one-month LIBOR plus 0.94 percent.
The Company designated the 2019 and 2023 Swaps (the Swaps) as fair value hedges. The Swaps are recorded within Other Assets at a fair value of $1 million and Other Liabilities at a fair value of $3 million, offset by a fair value adjustment to Long-term Debt (Note 9) of $(2) million at September 30, 2018. At September 30, 2017, the Swaps were recorded within Other Assets at a fair value of $14 million, offset by a fair value adjustment to Long-term Debt (Note 9) of $14 million. Cash payments or receipts between the Company and the counterparties to the Swaps are recorded as an adjustment to interest expense.
Foreign Currency Forward Exchange Contracts
The Company transacts business in various foreign currencies which subjects the Company’s cash flows and earnings to exposure related to changes in foreign currency exchange rates. These exposures arise primarily from purchases or sales of products and services from third parties and intercompany transactions. Foreign currency forward exchange contracts provide for the purchase or sale of foreign currencies at specified future dates at specified exchange rates and are used to offset changes in the fair value of certain assets or liabilities or forecasted cash flows resulting from transactions denominated in foreign currencies. As of September 30, 2018 and September 30, 2017, the Company had outstanding foreign currency forward exchange contracts with notional amounts of $0 million and $1.312 billion, respectively. The decrease in the notional amount of outstanding foreign currency contracts is primarily due to the maturation of certain foreign currency contracts entered into to offset remeasurement of certain intercompany loans that matured in the current fiscal year. The 2017 notional values consist primarily of contracts for the British pound sterling and European euro, and are stated in U.S. dollar equivalents at spot exchange rates at September 30, 2017.
Fair Value of Derivative Instruments
Fair values of derivative instruments in the Consolidated Statement of Financial Position as of September 30, 2018 and 2017 are as follows:
| | | | | | | | | | | | | | | Asset Derivatives | | (in millions) | Classification | | September 30,
2018 | | September 30, 2017 | | Foreign currency forward exchange contracts | Other current assets | | $ | — |
| | $ | 8 |
| | Interest rate swaps | Other assets | | 1 |
| | 14 |
| | Total | | | $ | 1 |
| | $ | 22 |
|
| | | | | | | | | | | | | | | Liability Derivatives | | (in millions) | Classification | | September 30,
2018 | | September 30, 2017 | | Foreign currency forward exchange contracts | Other current liabilities | | $ | — |
| | $ | 7 |
| | Interest rate swaps | Other liabilities | | 3 |
| | — |
| | Total | | | $ | 3 |
| | $ | 7 |
|
The fair values of derivative instruments are presented on a gross basis as the Company does not have any derivative contracts which are subject to master netting arrangements. As of September 30, 2018, there were no undesignated foreign currency forward exchange contracts classified within Other current assets or Other current liabilities.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The effect of derivative instruments on the Consolidated Statement of Operations for the fiscal years ended September 30, 2018 and 2017 is as follows:
| | | | | | | | | | | | | | | Amount of Gain (Loss) | | (in millions) | Location of Gain (Loss) | | September 30,
2018 | | September 30, 2017 | | Derivatives Designated as Hedging Instruments: | | | | | | | Fair Value Hedges | | | | | | | Interest rate swaps | Interest expense | | $ | 4 |
| | $ | 8 |
| | Cash Flow Hedges | | | | | | | Foreign currency forward exchange contracts: | | | | | | | Amount of gain (loss) recognized in AOCL (effective portion, before deferred tax impact) | AOCL | | (2 | ) | | 1 |
| | Amount of (loss) reclassified from AOCL into income | Cost of sales | | (1 | ) | | (2 | ) | | Derivatives Not Designated as Hedging Instruments: | | | | | | | Foreign currency forward exchange contracts | Cost of sales | | (16 | ) | | (1 | ) | | Foreign currency forward exchange contracts | Transaction and integration costs | | (6 | ) | | — |
|
There was no significant impact to the Company’s earnings related to the ineffective portion of any hedging instruments during the fiscal year ended September 30, 2018. In addition, there was no significant impact to the Company’s earnings when a hedged firm commitment no longer qualified as a fair value hedge or when a hedged forecasted transaction no longer qualified as a cash flow hedge during the fiscal year ended September 30, 2018.
The Company did not have any hedges with credit-risk-related contingent features or that required the posting of collateral as of September 30, 2018. The cash flows from derivative contracts are recorded in operating activities in the Consolidated Statement of Cash Flows.
The Company has no AOCL gains from cash flow hedges to reclassify into earnings over the next 12 months.
| | 16. | Guarantees and Indemnifications |
Product Warranty Costs
Accrued liabilities are recorded to reflect the Company’s contractual obligations relating to warranty commitments to customers. Warranty coverage of various lengths and terms is provided to customers depending on standard offerings and negotiated contractual agreements. An estimate for warranty expense is recorded at the time of sale based on the length of the warranty and historical warranty return rates and repair costs.
Changes in the carrying amount of accrued product warranty costs are summarized as follows:
| | | | | | | | | | | | | | | September 30 | | (in millions) | 2018 | | 2017 | | 2016 | | Balance at beginning of year | $ | 186 |
| | $ | 87 |
| | $ | 89 |
| | Warranty costs incurred | (87 | ) | | (61 | ) | | (42 | ) | | Product warranty accrual | 106 |
| | 59 |
| | 46 |
| | Changes in estimates for prior years | (9 | ) | | (16 | ) | | (6 | ) | | Reclassification of business to held for sale (see Note 4) | (2 | ) | | — |
| | — |
| | Increase from acquisitions | — |
| | 117 |
| | — |
| | Balance at September 30 | $ | 194 |
| | $ | 186 |
| | $ | 87 |
|
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Letters of credit
The Company has contingent commitments in the form of letters of credit. Outstanding letters of credit are issued by banks on the Company’s behalf to support certain contractual obligations to its customers. If the Company fails to meet these contractual obligations, these letters of credit may become liabilities of the Company. Total outstanding letters of credit at September 30, 2018 were $364 million. These commitments are not reflected as liabilities on the Company’s Consolidated Statement of Financial Position.
Indemnifications
The Company enters into indemnifications with lenders, counterparties in transactions, such as administration of employee benefit plans, and other customary indemnifications with third parties in the normal course of business. The following are other than customary indemnifications based on the judgment of management:
In connection with agreements for the sale of portions of its business, the Company at times retains various liabilities of a business that relate to events occurring prior to its sale, such as tax, environmental, litigation and employment matters. The Company at times indemnifies the purchaser of a Rockwell Collins business in the event a third party asserts a claim that relates to a liability retained by the Company.
The Company also provides indemnifications of varying scope and amounts to certain customers against claims of product liability or intellectual property infringement made by third parties arising from the use of Company or customer products or intellectual property. These indemnifications generally require the Company to compensate the other party for certain damages and costs incurred as a result of third party product liability or intellectual property claims arising from these transactions.
Under a 2014 Tax Sharing and Indemnification Agreement entered into by B/E Aerospace prior to its acquisition by the Company, the Company assumes certain potential tax liabilities related to the 2014 KLX spin-off from B/E Aerospace. If it is determined that the KLX spin-off by B/E Aerospace fails to qualify for certain tax-free treatment as a result of the Company's merger with B/E Aerospace (for example, if the merger is viewed as part of a plan or series of related transactions that includes the KLX spin-off or the KLX spin-off is found to have been used principally as a device for the distribution of earnings and profits), or because of the failure of the KLX spin-off to initially qualify for the tax-free treatment, the B/E Aerospace subsidiary could incur significant tax liabilities pursuant to the Tax Sharing and Indemnification Agreement or otherwise. During the three months ended December 31, 2017, the Company received notification of the resolution of a competent authority filing between the U.K. and U.S. related to 2010 pre-acquisition U.K. tax adjustments. Pursuant to the Tax Sharing and Indemnification Agreement the Company accrued a $9 million payable to KLX through purchase accounting during the three months ended December 31, 2017.
The amount the Company could be required to pay under its indemnification agreements is generally limited based on amounts specified in the underlying agreements, or in the case of some agreements, the maximum potential amount of future payments that could be required is not limited. When a potential claim is asserted under these agreements, the Company considers such factors as the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. A liability is recorded when a potential claim is both probable and estimable. The nature of these agreements prevents the Company from making a reasonable estimate of the maximum potential amount it could be required to pay should counterparties to these agreements assert a claim; however, the Company currently has no material claims pending related to such agreements.
| | 17. | Contractual Obligations and Other Commitments |
The following table reflects certain of the Company's non-cancelable contractual commitments as of September 30, 2018:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Payments Due By Period | | (in millions) | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | Thereafter | | Total | | Non-cancelable operating leases | | $ | 89 |
| | $ | 75 |
| | $ | 59 |
| | $ | 49 |
| | $ | 38 |
| | $ | 196 |
| | $ | 506 |
| | Purchase contracts | | 35 |
| | 33 |
| | 25 |
| | 15 |
| | 5 |
| | 20 |
| | 133 |
| | Long-term debt | | 750 |
| | 331 |
| | — |
| | 1,350 |
| | — |
| | 4,050 |
| | 6,481 |
| | Interest on long-term debt | | 231 |
| | 200 |
| | 192 |
| | 173 |
| | 153 |
| | 1,600 |
| | 2,549 |
| | Total | | $ | 1,105 |
| | $ | 639 |
| | $ | 276 |
| | $ | 1,587 |
| | $ | 196 |
| | $ | 5,866 |
| | $ | 9,669 |
|
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Non-cancelable Operating Leases
The Company leases certain office and manufacturing facilities as well as certain machinery and equipment under various lease contracts with terms that meet the accounting definition of operating leases. Some leases include renewal options, which permit extensions of the expiration dates at rates approximating fair market rental rates. Rent expense for the years ended September 30, 2018, 2017 and 2016 was $94 million, $84 million and $77 million, respectively. The Company's commitments under these operating leases, in the form of non-cancelable future lease payments, are not reflected as a liability on the Consolidated Statement of Financial Position.
Purchase Contracts
The Company may enter into purchase contracts with suppliers under which there is a commitment to buy a minimum amount of products or pay a specified amount. These commitments are not reflected as a liability on the Company's Consolidated Statement of Financial Position. Amounts purchased under these agreements for the years ended September 30, 2018, 2017 and 2016 were $38 million, $41 million and $57 million, respectively.
Interest on Long-term Debt
Interest payments under long-term debt obligations exclude the potential effects of the related interest rate swap contracts.
The Company is subject to federal, state and local regulations relating to the discharge of substances into the environment, the disposal of hazardous wastes and other activities affecting the environment that have had and will continue to have an impact on the Company’s manufacturing operations. These environmental protection regulations may require the investigation and remediation of environmental impairments at current and previously owned or leased properties. In addition, lawsuits, claims and proceedings have been asserted on occasion against the Company alleging violations of environmental protection regulations, or seeking remediation of alleged environmental impairments, principally at previously owned or leased properties. As of September 30, 2018, the Company is involved in the investigation or remediation of ten sites under these regulations or pursuant to lawsuits asserted by third parties. Management estimates that the total reasonably possible future costs the Company could incur for nine of these sites is not significant. Management estimates that the total reasonably possible future costs the Company could incur from one of these sites to be approximately $12 million. The Company has recorded environmental reserves for this site of $6 million as of September 30, 2018, which represents management’s best estimate of the probable future cost for this site.
To date, compliance with environmental regulations and resolution of environmental claims has been accomplished without material effect on the Company’s liquidity and capital resources, competitive position or financial condition. Management believes that expenditures for environmental capital investment and remediation necessary to comply with present regulations governing environmental protection and other expenditures for the resolution of environmental claims will not have a material effect on the Company’s business or financial position.
The Company is subject to various lawsuits, claims and proceedings that have been or may be instituted or asserted against the Company relating to the conduct of the Company's business, including those pertaining to product liability, antitrust, intellectual property, safety and health, exporting and importing, contract, employment and regulatory matters. Although the outcome of these matters cannot be predicted with certainty and some lawsuits, claims or proceedings may be disposed of unfavorably to the Company, management believes there are no material pending legal proceedings.
Related to the acquisition and post-closing compliance review of B/E Aerospace, as previously disclosed, the Company identified and is investigating the circumstances surrounding an employee's submission of certain expense reports for customer entertainment and gifts that preceded the acquisition and do not appear to have complied with applicable company policy. In March 2018, the Company voluntarily notified the Department of Justice (DOJ) and SEC Division of Enforcement of its investigation. The Company's investigation into this and other customer related expenditures is ongoing, and the outcome or the consequences thereof cannot be predicted at this time.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of September 30, 2018, the Company employs approximately 3,100 employees under eight collective bargaining agreements. Five of the collective bargaining agreements, representing approximately 2,200 employees were negotiated in 2018. These new agreements have terms varying between 3 and 5 years.
| | 20. | Restructuring and Impairment Charges and Settlement of a Contract Matter |
During the year ended September 30, 2018 the Company recorded corporate charges of $39 million as follows:
| | | | | | | | | | | | | | (in millions) | Cost of Sales | | Other Income, Net | | Total | | Settlement of a contract matter | $ | 25 |
| | $ | — |
| | $ | 25 |
| | Asset impairment charges | — |
| | 9 |
| | 9 |
| | Employee separation costs | 5 |
| | — |
| | 5 |
| | Total | $ | 30 |
| | $ | 9 |
| | $ | 39 |
|
The $25 million charge for the settlement of a contract matter was triggered by the anticipated divestiture of the ElectroMechanical Systems business and included impairment of $7 million and $4 million of Commercial Systems Pre-production engineering costs and Property, net, respectively (see Note 4). Asset impairment charges were due to the planned sale of SMR Technologies (see Note 4). The employee separation costs primarily resulted from the Company's decision to close a facility. At September 30, 2018, the $5 million employee separation costs were unpaid and included in Compensation and benefits on the Consolidated Statement of Financial Position.
There were no corporate restructuring or asset impairment charges recorded during the year ended September 30, 2017. During the first quarter of 2016, the Company recorded corporate restructuring and asset impairment charges of $45 million as follows:
| | | | | | | | | | | | | | (in millions) | Cost of Sales | | Selling, General and Administrative Expenses | | Total | | Employee separation costs | $ | 31 |
| | $ | 8 |
| | $ | 39 |
| | Asset impairment charges | 2 |
| | 4 |
| | 6 |
| | Total | $ | 33 |
| | $ | 12 |
| | $ | 45 |
|
The employee separation costs primarily resulted from the Company's execution of a voluntary separation incentive program in response to certain challenging market conditions, particularly in business aviation. All employee separation costs were paid in 2016. Asset impairment charges primarily relate to the write-down to fair market value of a corporate asset, as well as the write-off of certain long-lived assets.
| | 21. | Business Segment Information |
Rockwell Collins designs, produces and supports cabin interior, communications and aviation systems and products for commercial and military customers and provides information management services through voice and data communication networks and solutions worldwide. The Company currently has four operating segments consisting of the Interior Systems, Commercial Systems, Government Systems and Information Management Services (IMS) businesses. In October 2018, the Company announced that IMS will become part of the Commercial Systems segment. This reorganization will enable the Company to further capitalize on customers' increasing need for aviation connectivity solutions. This change will require the Company to revise its segment reporting beginning in the first quarter of fiscal 2019 to report the IMS business within the Commercial Systems segment.
Interior Systems manufactures cabin interior products for the commercial aircraft and business aviation markets. The Company sells products and provides services directly to virtually all of the world’s major airlines and aerospace manufacturers.
Commercial Systems supplies aviation electronics systems, products and services to customers located throughout the world. The customer base is comprised of OEMs of commercial air transport, business and regional aircraft, commercial airlines and business aircraft operators.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Government Systems provides communication and navigation products and avionics to the U.S. Department of Defense, state and local governments, other government agencies, civil agencies, defense contractors and foreign ministries of defense around the world.
Information Management Services enables mission-critical data and voice communications throughout the world to customers using high-performance, high-quality and high-assurance proprietary radio and terrestrial networks, enhancing customer efficiency, safety and connectivity.
Direct and indirect sales to the U.S. Government were 23 percent, 25 percent and 33 percent of total sales for the years ended September 30, 2018, 2017 and 2016, respectively. Sales to The Boeing Company represented 16 percent and 15 percent of total sales for the years ended September 30, 2018 and 2017, respectively.
The Company evaluates performance and allocates resources based upon, among other considerations, segment operating earnings. The Company's definition of segment operating earnings excludes income taxes, stock-based compensation, unallocated general corporate expenses, interest expense, transaction and integration costs, restructuring and impairment charges and other special items as identified by management from time to time. Intersegment sales are not material and have been eliminated. The accounting policies used in preparing the segment information are consistent with the policies described in Note 2.
The sales and earnings of continuing operations of the Company's operating segments are summarized as follows:
| | | | | | | | | | | | | | | (in millions) | | 2018 | | 2017 | | 2016 | | Sales: | | | | | | | | Interior Systems | | $ | 2,709 |
| | $ | 1,302 |
| | $ | — |
| | Commercial Systems | | 2,580 |
| | 2,418 |
| | 2,395 |
| | Government Systems | | 2,631 |
| | 2,384 |
| | 2,206 |
| | Information Management Services | | 745 |
| | 718 |
| | 658 |
| | Total sales | | $ | 8,665 |
| | $ | 6,822 |
| | $ | 5,259 |
| | | | | | | | | | Segment operating earnings: | | |
| | |
| | | | Interior Systems | | $ | 406 |
| | $ | 168 |
| | $ | — |
| | Commercial Systems | | 557 |
| | 519 |
| | 531 |
| | Government Systems | | 515 |
| | 502 |
| | 477 |
| | Information Management Services | | 138 |
| | 137 |
| | 107 |
| | Total segment operating earnings | | 1,616 |
| | 1,326 |
| | 1,115 |
| | | | | | | | | Interest expense(1) | | (262 | ) | | (187 | ) | | (64 | ) | | Stock-based compensation | | (35 | ) | | (31 | ) | | (27 | ) | | General corporate, net | | (56 | ) | | (57 | ) | | (44 | ) | | Restructuring and impairment charges and settlement of a contract matter (see Note 20) | | (39 | ) | | — |
| | (45 | ) | Transaction and integration costs(1) | | (112 | ) | | (120 | ) | | — |
| | Income from continuing operations before income taxes | | 1,112 |
| | 931 |
| | 935 |
| | Income tax expense | | (80 | ) | | (226 | ) | | (208 | ) | | Income from continuing operations | | $ | 1,032 |
| | $ | 705 |
| | $ | 727 |
|
(1) During the year ended September 30, 2018, the Company incurred $78 million of transaction and integration costs related to the B/E Aerospace acquisition and $34 million of transaction costs related to the proposed acquisition of Rockwell Collins by UTC. During the year ended September 30, 2017, the Company incurred $96 million of transaction and integration costs related to the B/E Aerospace acquisition and $24 million of transaction costs related to the proposed acquisition of Rockwell Collins by UTC. During this period, the Company also incurred $29 million of bridge facility fees related to the B/E Aerospace acquisition, which are included in Interest expense. Therefore, total transaction, integration and financing costs during this period were $149 million.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables summarize the identifiable assets and investments in equity affiliates at September 30, 2018, 2017 and 2016, as well as the provision for depreciation and amortization, the amount of capital expenditures for property and earnings from equity affiliates for each of the three years ended September 30, for each of the operating segments and Corporate:
| | | | | | | | | | | | | | | (in millions) | | 2018 | | 2017 | | 2016 | | Identifiable assets: | | | | | | | | Interior Systems | | $ | 9,534 |
| | $ | 9,896 |
| | $ | — |
| | Commercial Systems | | 3,817 |
| | 3,124 |
| | 3,050 |
| | Government Systems | | 2,802 |
| | 2,156 |
| | 2,052 |
| | Information Management Services | | 1,854 |
| | 1,917 |
| | 1,906 |
| | Corporate | | 1,019 |
| | 904 |
| | 691 |
| | Total identifiable assets | | $ | 19,026 |
| | $ | 17,997 |
| | $ | 7,699 |
| | Investments in equity affiliates: | | | | | | | | Interior Systems | | $ | — |
| | $ | — |
| | $ | — |
| | Commercial Systems | | — |
| | 1 |
| | 4 |
| | Government Systems | | 5 |
| | 6 |
| | 6 |
| | Information Management Services | | — |
| | — |
| | — |
| | Total investments in equity affiliates | | $ | 5 |
| | $ | 7 |
| | $ | 10 |
| | Depreciation and amortization: | | | | | | | | Interior Systems | | $ | 129 |
| | $ | 129 |
| | $ | — |
| | Commercial Systems | | 160 |
| | 132 |
| | 125 |
| | Government Systems | | 93 |
| | 80 |
| | 74 |
| | Information Management Services | | 67 |
| | 58 |
| | 54 |
| | Total depreciation and amortization | | $ | 449 |
| | $ | 399 |
| | $ | 253 |
| | Capital expenditures for property: | | | | | | | | Interior Systems | | $ | 79 |
| | $ | 41 |
| | $ | — |
| | Commercial Systems | | 61 |
| | 72 |
| | 74 |
| | Government Systems | | 67 |
| | 70 |
| | 69 |
| | Information Management Services | | 50 |
| | 57 |
| | 50 |
| | Total capital expenditures for property | | $ | 257 |
| | $ | 240 |
| | $ | 193 |
| | Earnings (loss) from equity affiliates: | | | | | | | | Interior Systems | | $ | — |
| | $ | — |
| | $ | — |
| | Commercial Systems | | (1 | ) | | (2 | ) | | (3 | ) | | Government Systems | | — |
| | — |
| | 2 |
| | Information Management Services | | — |
| | — |
| | — |
| | Total (loss) from equity affiliates | | $ | (1 | ) | | $ | (2 | ) | | $ | (1 | ) |
The Company's operating segments share many common resources, infrastructures and assets in the normal course of business. Certain assets have been allocated between the operating segments primarily based on occupancy or usage, principally property, plant and equipment. Identifiable assets at Corporate consist principally of cash, tax assets and deferred compensation plan investments for all years presented.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes sales by product category for the years ended September 30, 2018, 2017 and 2016:
| | | | | | | | | | | | | | | (in millions) | | 2018 | | 2017 | | 2016 | | Interior Systems sales categories: | | | | | | | | Interior products and services | | $ | 1,472 |
| | $ | 717 |
| | $ | — |
| | Aircraft seating | | 1,237 |
| | 585 |
| | — |
| | Interior Systems sales | | 2,709 |
| | 1,302 |
| | — |
| | | | | | | | | | Commercial Systems sales categories: | | | | | | | | Air transport aviation electronics | | 1,573 |
| | 1,470 |
| | 1,430 |
| | Business and regional aviation electronics | | 1,007 |
| | 948 |
| | 965 |
| | Commercial Systems sales | | 2,580 |
| | 2,418 |
| | 2,395 |
| | | | | | | | | | Government Systems sales categories: | |
|
| | | | | | Avionics | | 1,503 |
| | 1,472 |
| | 1,483 |
| | Communication and navigation | | 1,128 |
| | 912 |
| | 723 |
| | Government Systems sales | | 2,631 |
| | 2,384 |
| | 2,206 |
| | | | | | | | | | Information Management Services sales | | 745 |
| | 718 |
| | 658 |
| | | | | | | | | | Total sales | | $ | 8,665 |
| | $ | 6,822 |
| | $ | 5,259 |
|
The Interior Systems interior products and services and aircraft seating sales categories are delineated based on the nature of underlying products. The Commercial Systems air transport and business and regional aviation electronics sales categories are delineated based on the difference in underlying customer base, size of aircraft and markets served. For the years ended September 30, 2018, 2017 and 2016, sales for air transport aviation electronics include revenue from wide-body in-flight entertainment products and services of $15 million, $19 million and $38 million, respectively. The Government Systems avionics and communication and navigation sales categories are delineated based upon underlying product technologies.
The following table reflects sales for the years ended September 30, 2018, 2017 and 2016 by location of the Company's customers and property at September 30, 2018, 2017 and 2016 by geographic region:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Sales | | Property | | (in millions) | | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 | U.S.(1) | | $ | 4,666 |
| | $ | 3,873 |
| | $ | 3,292 |
| | $ | 1,131 |
| | $ | 1,134 |
| | $ | 921 |
| | Europe / Africa / Middle East | | 2,315 |
| | 1,607 |
| | 937 |
| | 153 |
| | 152 |
| | 86 |
| | Asia-Pacific | | 1,064 |
| | 787 |
| | 545 |
| | 129 |
| | 94 |
| | 17 |
| | Americas, excluding U.S. | | 620 |
| | 555 |
| | 485 |
| | 16 |
| | 18 |
| | 11 |
| | Non U.S. | | 3,999 |
| | 2,949 |
| | 1,967 |
| | 298 |
| | 264 |
| | 114 |
| | Total | | $ | 8,665 |
| | $ | 6,822 |
| | $ | 5,259 |
| | $ | 1,429 |
| | $ | 1,398 |
| | $ | 1,035 |
|
(1) For the years ended September 30, 2018, 2017 and 2016, U.S. sales include revenue from foreign military sales of $163 million, $139 million and $171 million, respectively.
Sales are attributable to geographic region based on the location of the Company's customers.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | 22. | Quarterly Financial Information (Unaudited) |
Quarterly financial information for the years ended September 30, 2018 and 2017 is summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | 2018 Quarters | | (in millions, except per share amounts) | | First | | Second | | Third | | Fourth | | Total | | Sales | | $ | 2,011 |
| | $ | 2,180 |
| | $ | 2,208 |
| | $ | 2,266 |
| | $ | 8,665 |
| | Gross profit (total sales less product and service cost of sales) | | 548 |
| | 582 |
| | 583 |
| | 570 |
| | 2,283 |
| | Net income | | 280 |
| | 237 |
| | 275 |
| | 240 |
| | 1,032 |
| | | | | | | | | | | | | | Earnings per share: | | | | | | | | | | | | Basic earnings per share | | $ | 1.71 |
| | $ | 1.44 |
| | $ | 1.67 |
| | $ | 1.46 |
| | $ | 6.29 |
| | Diluted earnings per share | | $ | 1.69 |
| | $ | 1.43 |
| | $ | 1.66 |
| | $ | 1.44 |
| | $ | 6.22 |
|
Net income includes $17 million, $24 million, $23 million and $14 million of pre-tax transaction and integration costs associated with the B/E Aerospace acquisition for the first, second, third and fourth quarters of 2018, respectively. In addition, Net income includes $10 million, $11 million, $6 million and $7 million of pre-tax transaction and integration costs associated with the pending acquisition of the Company by UTC for the first, second, third and fourth quarters of 2018, respectively. Net income includes $62 million, $(18) million, $70 million and $16 million of discrete tax benefit/(expense) associated with enactment of the Tax Cuts and Jobs Act.
| | | | | | | | | | | | | | | | | | | | | | | | | 2017 Quarters | | (in millions, except per share amounts) | | First | | Second | | Third | | Fourth | | Total | | Sales | | $ | 1,193 |
| | $ | 1,342 |
| | $ | 2,094 |
| | $ | 2,193 |
| | $ | 6,822 |
| | Gross profit (total sales less product and service cost of sales) | | 377 |
| | 412 |
| | 570 |
| | 595 |
| | 1,954 |
| | Net income | | 145 |
| | 168 |
| | 179 |
| | 213 |
| | 705 |
| | | | | | | | | | | | | | Earnings per share: | | | | | | | | | | | | Basic earnings per share | | $ | 1.11 |
| | $ | 1.28 |
| | $ | 1.13 |
| | $ | 1.31 |
| | $ | 4.85 |
| | Diluted earnings per share | | $ | 1.10 |
| | $ | 1.27 |
| | $ | 1.12 |
| | $ | 1.29 |
| | $ | 4.79 |
|
Net income includes $14 million, $13 million, $82 million and $16 million of pre-tax transaction, integration and financing costs associated with the B/E Aerospace acquisition for the first, second, third and fourth quarters of 2017, respectively. In addition, Net income in the fourth quarter of 2017 includes $24 million of pre-tax transaction costs associated with the pending acquisition of the Company by UTC.
Earnings per share amounts are computed independently each quarter. As a result, the sum of each quarter's per share amount may not equal the total per share amount for the respective year.
On November 1, 2018, the Board of Directors declared a quarterly cash dividend of $0.33 per share on its common stock, payable December 10, 2018, to shareholders of record at the close of business on November 16, 2018.
On November 23, 2018, UTC announced that the final regulatory approval required to close its acquisition of Rockwell Collins had been received and that the acquisition was expected to close within three business days.
| | Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
None.
| | Item 9A. | Controls and Procedures. |
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, including controls and procedures designed to ensure that such information is accumulated and communicated to our management, including our Chairman, President and Chief Executive Officer and our Senior Vice President and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management's disclosure control objectives.
We have carried out an evaluation, under the supervision and with the participation of our management, including our Chairman, President and Chief Executive Officer and our Senior Vice President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Annual Report (the "Evaluation Date"). Based upon that evaluation, our Chairman, President and Chief Executive Officer and our Senior Vice President and Chief Financial Officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of the Evaluation Date.
Evaluation of Internal Control Over Financial Reporting
Management's report on internal control over financial reporting as of September 30, 2018 is included within Item 8 of this Annual Report on Form 10-K. The report of Deloitte & Touche LLP on the effectiveness of internal control over financial reporting is included within Item 9A of this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareowners and Board of Directors of Rockwell Collins, Inc.:
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Rockwell Collins, Inc. and subsidiaries (the "Company") as of September 28, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 28, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended September 28, 2018, of the Company and our report dated November 26, 2018 expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Chicago, Illinois
November 26, 2018
| | Item 9B. | Other Information. |
None.
| | Item 10. | Directors, Executive Officers and Corporate Governance. |
See the information under the captions Election of Directors, Information as to Nominees for Directors and Continuing Directors, Audit Committee Report and Section 16(a) Beneficial Ownership Reporting Compliance in the 2019 Proxy Statement. See also the information with respect to executive officers of the Company under Item 4A of Part I.
ETHICSWe have adopted a handbook entitled Rockwell Collins Standards of Business Conduct, and we have supporting policies covering standards of business conduct and conflicts of interest (collectively, the "code“code of ethics"ethics”). The code of ethics applies to our Chief Executive Officer, Chief Financial Officer, Vice President, Finance & Controller (who serves as our principal accounting officer), as well as to all of our other employees and to the members of our Board of Directors. The code of ethics is publicly available on our website at www.rockwellcollins.com.www.rockwellcollins.com. If we make any amendments to the code of ethics or grant any waiver, including any implicit waiver, from a provision of the code applicable to our Chief Executive Officer, Chief Financial Officer or principal accounting officer requiring disclosure under applicable SEC rules, we intend to disclose the nature of such amendment or waiver on our website.AUDIT COMMITTEE The Company has a separately designated standing audit committee (the “Audit Committee”) established in accordance with section 3(a)(58)(A) of the Securities Exchange Act of 1934. The members of the Audit Committee are Chris A. Davis, Richard G. Hamermesh, David Lilley and Andrew J. Policano. The Audit Committee consists entirely of directors who meet the independence and other requirements of the NYSE and applicable law. All four members have been deemed “audit committee financial experts” (as defined by applicable SEC rules) by our Board of Directors. | Item 11. | Executive Compensation. |
COMPENSATION OF DIRECTORS Fiscal Year 2018 Director Compensation Table The following table sets forth information regarding compensation for each of ournon-employee directors for fiscal year 2018. Mr. Ortberg, who is the Chairman of the Board, our President and Chief Executive Officer, does not participate in the compensation program fornon-employee directors. 5
| | | | | | | | | | | | | | | | | Name | | Fees Earned or Paid
in Cash ($) | | | Stock Awards ($) | | | All Other
Compensation ($) | | | Total ($) | | Anthony J. Carbone | | | 130,000 | | | | 179,548 | | | | 17,069 | | | | 326,617 | | Chris A. Davis | | | 125,000 | | | | 179,564 | | | | 8,465 | | | | 313,029 | | Ralph E. Eberhart | | | 120,000 | | | | 148,286 | | | | — | | | | 268,286 | | John A. Edwardson | | | 115,000 | | | | 141,563 | | | | — | | | | 256,563 | | Richard G. Hamermesh | | | 110,000 | | | | 123,567 | | | | — | | | | 233,567 | | David Lilley | | | 110,000 | | | | 166,315 | | | | — | | | | 276,315 | | Andrew J. Policano | | | 125,000 | | | | 154,411 | | | | — | | | | 279,411 | | Cheryl L. Shavers | | | 120,000 | | | | 150,077 | | | | 13,614 | | | | 283,691 | | Jeffery L. Turner | | | 100,000 | | | | 137,172 | | | | — | | | | 237,172 | | John T. Whates* | | | 50,000 | | | | 676 | | | | — | | | | 50,676 | |
| * | Mr. Whates retired from the Board immediately prior to the 2018 Annual Meeting. The amount shown for Stock Awards for Mr. Whates represents divided equivalents. |
The following is an explanation of the above table: Fees. Allnon-employee directors receive an annual retainer fee of $100,000 that they may elect to receive in cash or restricted stock units (RSUs) in lieu of cash. Mr. Carbone was also entitled to additional fees for his service as Lead Independent Director. Please see “Cash Compensation” below for a description of director fees that are paid in addition to the annual retainer. Generally, fees may be paid in cash or in RSUs in lieu of cash, at the election of eachnon-employee director. Director Whates departed the Board in February 2018 pursuant to the terms agreed upon at the time of our acquisition of B/E Aerospace. For fiscal 2018, deferrals of cash fees into RSUs were as follows: Mr. Carbone $25,000, Ms. Davis $31,250, General Eberhart $20,000, Mr. Edwardson $115,000, Mr. Lilley $27,500 and Mr. Turner $100,000. Stock Awards. The dollar value for stock awards represents the aggregate grant date fair value of the RSUs determined in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718 (FASB ASC Topic 718) and does not reflect a reduction for possible forfeitures. Under our long-term incentives plan,non-employee directors receive an annual grant of RSUs determined by dividing a fixed amount by our closing stock price on the date of the Annual Meeting. For fiscal 2018, the fixed amount was $120,000. Dividend equivalents on RSUs accrue quarterly and are included in this column. For more information see “Stock-Based Compensation” below. The outstanding equity awards held at the end of fiscal year 2018 by eachnon-employee director are shown in the following table. | | | | | | | | | Name | | Restricted Stock | | | RSUs | | Anthony J. Carbone | | | 11,984 | | | | 45,599 | | Chris A. Davis | | | 6,413 | | | | 45,612 | | Ralph E. Eberhart | | | — | | | | 21,829 | | John A. Edwardson | | | — | | | | 16,970 | | Richard G. Hamermesh | | | — | | | | 2,934 | | David Lilley | | | — | | | | 35,513 | | Andrew J. Policano | | | — | | | | 26,442 | | Cheryl L. Shavers | | | 4,632 | | | | 23,138 | | Jeffrey L. Turner | | | — | | | | 13,582 | |
All Other Compensation. The amounts shown in the 2018 Director Compensation Table under the column “All Other Compensation” represent dividends paid on restricted stock to Ms. Davis, Dr. Shavers and Mr. Carbone and matching gifts under our charitable matching gift program of $1,250 for Mr. Carbone, $7,500 for Dr. Shavers. 6
Director Compensation Design Ournon-employee director compensation program is reviewed on a periodic basis by the Compensation Committee together with the Compensation Committee’s independent consultant. The Compensation Committee recommends compensation program changes to the Board of Directors. The components of the program are described below. Cash Compensation Allnon-employee directors receive an annual retainer of $100,000 as described above. Additional annual retainers are paid to the Lead Independent Director, to the chairs of certain board committees and to the members of the Audit Committee as shown in the table below. Each annual retainer is payable in advance in equal quarterly installments. | | | | | Lead Independent Director | | $ | 30,000 | | Audit Committee Chair | | $ | 25,000 | | Compensation Committee Chair | | $ | 20,000 | | Technology and Cybersecurity Committee Chair | | $ | 20,000 | | Board Nominating and Governance Committee Chair | | $ | 15,000 | | Corporate Strategy and Finance Committee Chair | | $ | 15,000 | | Audit Committee Member | | $ | 10,000 | |
Non-employee directors are reimbursed for all reasonable expenses associated with attending Board and Committee meetings and otherwise relating to their director duties.Non-employee directors are also eligible to receive up to $5,000 each calendar year in matching charitable gifts under our matching gift program. Stock-Based Compensation Our long-term incentives plan limits the stock-based compensation that can be granted tonon-employee directors. The dollar value of equity awards that can be granted to ournon-employee directors is limited to an aggregate value of $500,000 (determined as of the grant date) in any consecutive twelve-month period. Under our long-term incentives plan, eachnon-employee director is granted RSUs concurrently with the director’s initial election to our Board. The value of these RSUs is equal to $100,000 plus a prorated amount determined by multiplying $120,000 by a fraction, the numerator of which is the number of days remaining until the next Annual Meeting of Shareowners and the denominator of which is 365. Following each Annual Meeting, continuingnon-employee directors are granted RSUs with a value of $120,000 as of the date of the meeting. RSUs, which do not have voting rights, entitle the directors to a contractual right to receive at a future date the number of shares of common stock specified. Pursuant to the terms of the directors’ RSUs, dividend equivalents in the form of additional RSUs accumulate on the date we otherwise pay dividends on our common stock. Deferral Opportunities Under our long-term incentives plan, eachnon-employee director has the option each year to determine whether to defer all or any part of his or her retainer fees by electing to receive RSUs valued at the closing price on the date the cash retainer payment would otherwise be paid. Upon termination of Board service, a director will receive unrestricted shares of our common stock as payment for all RSUs the director then holds. Beginning with calendar year 2017, directors may defer payment of their RSUs for periods extending beyond the termination of their Board service. 7
Director Stock Ownership Guidelines Eachnon-employee director is required to own shares of our common stock with a market value of at least five times the annual retainer amount within six years of joining the Board. All of ournon-employee directors meet the stock ownership guidelines. The following are counted for purposes of meeting these ownership guidelines: shares owned outright (including in trusts and those held by a spouse), shares of restricted stock and RSUs. The Compensation Committee’s independent consultant reviews the ownership guidelines on a periodic basis to ensure that they are aligned with compensation best practices. COMPENSATION DISCUSSION AND ANALYSIS This Compensation Discussion and Analysis section reviews the elements and objectives of our compensation program and how they align with our performance and the decisions we made during 2018 for our Named Executive Officers (NEOs) listed in the Summary Compensation Table. Introduction In the discussion that follows, we provide: an explanation of our compensation philosophy and governance practices; an overview and analysis of our executive compensation program; a review of the compensation decisions made for our NEOs; and the factors considered in making those decisions. Included within the Compensation Discussion and Analysis you will find a series of tables containing specific information about the compensation earned or paid in fiscal 2018 (September 30, 2017 to September 28, 2018) to our NEOs. Unless otherwise noted, references to years in this discussion are to our fiscal years. Our NEOs for 2018 were: | | | | Robert K. Ortberg | | Chairman, President and Chief Executive Officer (CEO) | | Patrick E. Allen | | Senior Vice President, Chief Financial Officer (CFO) | | Werner Lieberherr | | Executive Vice President, Chief Operating Officer, Interior Systems* | | Kent L. Statler | | Executive Vice President, Chief Operating Officer, Commercial Systems | | Philip J. Jasper | | Executive Vice President, Chief Operating Officer, Government Systems |
| * | Mr. Lieberherr’s employment ended on October 29, 2018. |
Executive Summary Acquisition by United Technologies Corporation In September of 2017, we entered into an Agreement and Plan of Merger (Merger Agreement) with United Technologies Corporation, or UTC, and Riveter Merger Sub Corp., a UTC subsidiary. Upon completion of the acquisition we will become a subsidiary of UTC. Under the terms of the Merger Agreement we are restricted from making certain compensation changes, including for our NEOs, without first obtaining UTC’s approval. UTC approved all of the 2018 compensation changes that impacted our NEOs. As described in more detail below, the pending merger also influenced the design of our 2018 long-term incentives program. Addition of Interior Systems Business In April 2017, we completed our $8.6 billion acquisition of B/E Aerospace, Inc. (B/E), and formed our Interior Systems business. The addition of B/E greatly expanded our capabilities, offerings and the size of Rockwell Collins. Given our increased size, our peer group for compensation benchmarking similarly increased. Mr. Lieberherr, the former chief executive officer of B/E, became the Executive Vice President and Chief Operating Officer of Interior Systems when the acquisition was completed. In October of 2016, shortly before we announced that we entered into an agreement to acquire B/E, we entered into an employment agreement with Mr. Lieberherr (Lieberherr Employment Agreement) to help ensure that he would remain employed during the crucial period following the acquisition while we integrated B/E into Rockwell Collins. The Lieberherr Employment Agreement is described in more detail on page 27. None of our other NEOs are a party to an employment agreement with us. 8
Compensation Philosophy The Compensation Committee (Committee) believes inpay-for-performance and approves programs that are aligned with corporate and shareowner goals. To attract and retain top talent, target compensation is set around the median of the competitive market with the opportunity to achieve greater compensation if superior performance is achieved. 2018 Annual Incentive Plan Results The Compensation Committee approved, with UTC’s consent, a payout of annual incentive plan bonuses for all employees, including our NEOs, at 100% of target. For more information, please see 2018 Annual Incentive Results on pages 23-24. 2016–2018 Performance Share Results The Committee approved, with UTC’s consent, a payout of the performance shares at 114% of target. For more information, please see 2016–2018 Performance Share Payments on pages 24-25. Results of 2018 Shareowner Advisory Vote on Executive Compensation Each year, in accordance with its charter, the Committee considers the outcome of the shareowner advisory vote on executive compensation when making future decisions relating to the compensation of the NEOs and our executive compensation program and policies. The Committee also considers other feedback from our shareowners. At our 2018 Annual Meeting, our executive compensation program was approved by 95.5% of the votes cast by shareowners (not counting abstentions and brokernon-votes). The Committee believes this conveys our shareowners’ continued strong support of the philosophy, strategy and objectives of our executive compensation program. Nonetheless, the Committee continues to assess our executive compensation program and policies, based on our strategic needs and external market practices. Executive Compensation – Governance Practices What We Do Believe in pay for performance. A significant portion of the compensation opportunity of our NEOs is tied to both company and individual performance. Annually assess our executive compensation program to ensure that it remains well balanced and that it does not encourage unreasonable risk taking. For more information, see “Board’s Role in Risk Oversight” on page 50. Have robust stock ownership guidelines to help align our executive officers’ interests with those of our other shareowners. The Committee monitors the stock held by our executive officers. For more information, see “Stock Ownership Guidelines” on page 26. Have “double trigger” change of control agreements that require a change of control together with a qualifying termination of employment within atwo-year period following the change of control before benefits can be payable. For more information, see “Employment, Severance and Change of Control Agreements” on pages 27-28. Have a robust clawback policy and other compensation recovery policies to allow us to recover compensation as appropriate. For more information, see “Payment Recovery Provisions” on page 28. Use an independent compensation consultant to advise the Committee and to keep it abreast of compensation best practices. 9
What We Don’t Do Allow hedging of our common stock by our officers and directors. Allow pledging of our common stock by our officers and directors. Pay change of control excise taxgross-ups. Provide excessive perquisites. Provide single trigger benefits under our change of control agreements. Executive Compensation – Roles and Responsibilities Compensation Committee The Committee, which consists entirely of independent directors, has responsibility for the development and oversight of our executive compensation program. The Committee’s duties and responsibilities are described under “Compensation Committee” on page 48. Independent Compensation Consultant The Committee selects and retains the services of a compensation consultant to provide professional advice on our executive compensation program and thenon-employee director compensation program. The Committee assesses the consultant’s independence and whether there are any conflicts of interest annually. In determining that the consultant was independent, the Committee considered the factors set forth in Rule10C-1(b) of the Securities Exchange Act of 1934. The independent consultant, a managing director at Semler Brossy Consulting Group, LLC, is retained directly by the Committee and only provides services related to executive and director compensation. The independent consultant interacts directly with the Committee’s chairman in preparation for meetings, provides advice in Committee meetings, assists with the design of compensation arrangements and provides an independent market assessment of peer companies and general industry compensation and practices. The independent consultant meets with new Committee members to orient them to the policies, plans and programs managed by the Committee. The independent consultant meets with management to collect information, to solicit management’s input and to fully understand our plans, goals and actual performance. The consulting relationship is reviewed by the Committee annually to determine its satisfaction with the services and advice provided by the independent consultant. Management The CEO provides the Committee with his assessment of the performance of the Corporation, our organizational units and of other executive officers. He also discusses the operational and financial plans for future performance periods (annual and long-term) as they relate to compensation decisions. The CEO provides input on the design of compensation programs and policies and makes recommendations for compensation changes for the other NEOs. The CFO provides input on the metrics to use in our compensation programs and on the setting of performance goals. The Senior Vice President, Human Resources provides support, analysis and counsel with respect to the administration of the programs under the supervision of the Committee. Certain members of management, including the CEO and the Senior Vice President, Human Resources, regularly attend Committee meetings. The Committee has delegated authority to the CEO to approve compensation arrangements other than for our executive officers, with limitations that are established by the Committee. The Committee meets for a portion of its meetings in executive session, with its independent consultant and without the CEO or other members of management. The Committee’s deliberations on CEO compensation are held during anon-management executive session of the Committee that typically includes allnon-employee board members. 10
Executive Compensation – Design The design principles of our executive compensation program and how the actions we take are aligned with those principles are shown below: | | | Design Principles | | Alignment to Key Compensation Elements | | Aligned with Shareowner Interests | | | | | Item 11.The interests of our executives should align with the interests of our shareowners. | Executive Compensation. | Our short-term and long-term incentives plans use financial performance measures that correlate well with shareowner value. The value of our long-term incentives is tied to our stock’s performance on both an absolute and relative basis. | | | | Supportive of Our Vision | | | | | | Our compensation should support what we hope to achieve and how we work together to achieve our goals and meet customer and shareowner expectations. | | Our plans are aligned with our growth objectives and encourage collaboration to meet our customer commitments. | | | | Competitive | | | | | | Our total compensation package should be competitive with the general industry peer group and at a level appropriate to attract, retain and motivate highly qualified executives capable of leading us to greater performance. | | Our base salary and annual incentives provide a competitive annual total cash compensation opportunity and our equity incentives provide a competitive opportunity over the long-term. Both support our need to attract, retain and motivate executive talent. | | | | Performance-Based | | | | | | A significant portion of NEO compensation should be at risk and tied to corporate, organizational unit and individual performance. | | A substantial portion of our executive pay is at risk and paid only on the achievement of specificpre-established performance goals. Annual incentive payouts are subject to adjustment based upon organizational unit and/or individual performance. Performance shares are performance-based and at risk. | | | | Balanced | | | | | | Our compensation plan design should promote an appropriate balance between annual and long-term business results. | | Our compensation program is balanced because it provides both annual and long-term incentives dependent on business results. However, as illustrated on pages 15-16, more emphasis is given to long-term incentives because they align an executive’s performance with our long-term success. |
Factors that we use to assess and set NEO compensation include: Our operational and financial performance; Results of the most recent shareowner advisory vote on executive compensation; The executive’s record of performance; Compensation history, including experience in the position; Relative level of responsibility and the impact of his or her position on our performance; The executive’s long-term leadership potential and associated retention risk; Annual share utilization and shareowner dilution levels resulting from the long-term incentive grants; Independent compensation consultant analyses and input; Trends and best practices in executive compensation; 11
Industry and macroeconomic conditions. The Committee believes in ensuring a clear alignment between pay and performance as evidenced by the strong correlation between total shareowner return, financial performance and executive compensation. However, the Committee does not believe that factoring of the various items it considers in making its compensation-related decisions for each NEO should, or can, be reduced to a formula or done by reference to a specific benchmark against peer companies. Final compensation determinations are made by the Committee after review and evaluation of these considerations and the other items discussed in this Compensation Discussion and Analysis. What Our Compensation is Intended to Reward A substantial amount of our executive compensation is variable and tied to the achievement of both annual and long-term incentives plan goals. To support ourpay-for-performance philosophy, performance is evaluated and compensation rewarded and adjusted as follows: Corporate Performance Our annual incentive plan is designed to reward the achievement of annual financial goals that are important to our current and future success. These goals are included in our annual operating plan that is prepared by management and approved by the Board of Directors. Our long-term incentives plan is designed to reward the achievement of long-term financial goals and increased shareowner value. Historically, under this plan, we grant executives three-year performance shares and stock options on an annual basis. In 2018 we granted performance shares and restricted stock units. See page 19 for further discussion on why restricted stock units were granted instead of stock options. Organizational Unit Performance The CEO reviews the informationperformance of each organizational unit based on the achievement of goals included in our annual operating plan. Based on this overall assessment, the CEO has been delegated the discretion by the Committee to adjust the annual incentive plan awards upward or downward by up to five percent to reflect the organizational unit’s or shared service’s performance. In the case of an organizational unit adjustment impacting a NEO, the CEO will make a recommendation to the Committee for its approval. For 2018, there were no organizational unit adjustments. Individual Performance Our performance management approach applies to the majority of our salaried employees, including the NEOs. Under this plan, an employee’s performance is evaluated against the expectations of his or her position, whether he or she exhibits our values in the performance of his or her job and whether he or she met or exceeded his or her individual performance goals. Individual performance goals are established at the beginning of each fiscal year and are aligned with our annual operating plan and/or the Rockwell Collins Vision Roadmap. Performance under the captions plan is evaluated throughout the fiscal year. The CEO reviews the individual performance goals of the NEOs, evaluates their performance and recommends to the Committee any resulting performance adjustments to their salaries and annual incentive payments. The CEO’s personal goals are reviewed and approved by the Committee each year. Following the end of the fiscal year, the Committee, with any input from the other directors, formally evaluates the CEO’s performance, including personal goals, during its executive session and approves any salary adjustment and/or individual performance adjustment to the annual incentive payment. Market Assessment The Committee annually considers market data for total direct compensation (base salary plus annual incentive plan target and long-term incentive target) for the NEOs and other designated senior executives based on the independent consultant’s review of market data. The Committee uses this market data and the analysis by the independent consultant to assess the competitiveness of the compensation paid to our NEOs as well as the mix between fixed (base salary) and variable (annual and long-term incentives) compensation. The Committee generally establishes base salaries as well as annual and long-term incentive targets around the median of the general industry peer group, which is described below. An executive can be paid above or below that amount based on years in the position, prior experience, individual performance and corporate performance. Although the Committee reviews market data, there is no expectation or commitment to tie any particular executive’s compensation to the general industry peer group market data. 12
The general industry peer group market data provides reasonable consistency year-over-year due to the large number of participants in the survey. We use a general industry peer group instead of aerospace and defense (A&D) peers because of the wide range of company revenues, both much larger and smaller than ours, within the A&D industry. The general industry peer group provides a larger sample for comparison than an A&D specific peer group would provide and it also provides a much tighter range of company revenues. A wide variety of positions are reported in the general industry market data, allowing for more specific comparisons to our executive officers. We use this market data because our senior executives have skills that are in demand outside of the A&D industry. In September 2017, the independent consultant provided an analysis using compensation information from 46 companies with revenues ranging from $7 billion to $11 billion to obtain market data to support the compensation decisions made in November 2017. Given the acquisition of B/E Aerospace, which substantially increased our size and annual revenues, the revenue range of companies we benchmark pay to was updated from (i) $4 billion to $8 billion to (ii) $7 billion to $11 billion. Due to the updated compensation peer group, pay for Messrs. Ortberg and Allen increased commensurate with their expanded enterprise-wide oversight and scope of responsibilities. The Committee believes that these companies are good comparators and that this market data allows a robust analysis of executive pay. The companies in the compensation peer group, in addition to Rockwell Collins, are as follows: | | | | | Compensation Peer Group* * Companies from the Willis Towers Watson 2017 Compensation Data Bank with revenues of $7 billion to $11 billion | | Air Products and Chemicals | | Eastman Chemical | | Mosaic | | Alcoa | | Epson America | | Norfolk Southern | | Amway | | FIS | | Occidental Petroleum | | Arkema | | Frontier Communications | | Pharmavite | | Avis Budget Group | | GlobalFoundries | | Praxair | | Ball | | Harris | | PulteGroup | | Barrick Gold of North America | | HD Supply | | Quest Diagnostics | | Baxter | | Hershey | | Rank Group | | BorgWarner | | Hilton Worldwide | | Royal Caribbean Cruises | | Boston Scientific | | Hormel Foods | | S.C. Johnson & Son | | Campbell Soup | | J.M. Smucker | | Sonepar USA | | CGI Technologies and Solutions | | Jacobs Engineering | | United States Steel | | Chicago Bridge & Iron | | L3 Technologies | | W.W. Grainger | | ConAgra Foods | | Leidos | | Zimmer Biomet | | Corning | | LexisNexis Risk | | | | Dean Foods | | Masco | | |
Comprehensive Compensation Review In the course of reviewing data from external sources and making decisions about CEO compensation or considering the CEO’s compensation recommendations for other NEOs, the Committee also reviews comprehensive compensation information for each NEO and other executive officers who may in the future become NEOs. This information is presented in the form of a tally sheet and includes detailed modeling of the current dollar value of all aspects of compensation, including base salary, annual and long-term incentives, perquisites, pension and savings plans, and health and welfare benefits. The Committee also reviews modeling projections on the potential future value of long-term incentive grants. The Committee reviews this information to ensure that the total compensation awarded to each NEO is reasonable and consistent with the compensation philosophy and objectives discussed above. 13
Elements of Our 2018 Compensation Program Below is a graphical presentation of our total direct compensation program (base salary + target annual incentive + target long-term incentives): 
In the table below, we discuss for each compensation element of target direct compensation (base salary plus annual incentive plan target and long-term incentive target) the key characteristics of the element, why we pay the element, and how we determine the amount payable. Each year the Committee approves the design and performance goals for both the annual and long-term incentives consistent with the Committee’s compensation philosophy and objectives. 14
| | | | | | | Compensation
Element | | Key Characteristics | | Why We Pay This Element | | How We Determine the Amount | | Fixed Compensation | | | | | | Base Salary | | Fixed compensation component payable in cash. | | Required for attracting and retaining top executive talent. | | Reflects job scope and responsibilities, individual performance and experience and market data. | | | Variable Compensation | | | | | | Annual Incentive Compensation | | Variable compensation component payable in cash based on performance against annually established goals and assessment of individual and organizational unit performance. | | Aligns compensation with annual performance results. Encourages achievement of annual corporate financial goals. | | Eligible participants are awarded a target bonus equal to a percentage of their salary for the year. The percentage is determined based on job scope, responsibilities and market data. The possibility of organizational unit and individual payout adjustments provide focus on performance at the organizational unit and individual levels. | | | | | | Restricted Stock Units (Long-Term Incentives Plan) | | 50% of the long-term incentive target value. | | Aligns the interests of executives with shareowners and long-term company performance and serves to retain executive talent. | | Target award values based on job scope, responsibilities and market data. | | | | | Performance Shares (Long-Term Incentives Plan) | | 50% of the long-term incentive target value. The number of shares payable depends on our cumulative sales and free cash flow performance and our relative total shareowner return over a three-year period. | | Aligns the interests of executives with shareowners and long-term company performance and serves to retain executive talent. | | Target award values based on job scope, responsibilities and market data. |
Our Compensation Mix Our compensation programs emphasize variable pay that aligns compensation with ourpay-for-performance philosophy and shareowner value. The mix for our NEOs is heavily weighted toward variable, performance-based compensation. The CEO, in particular, has a greater percentage of his pay at risk than our other executives because his actions can have a greater influence on our performance. The allocation of target compensation for our NEOs for 2018 is as follows: 15
To determine the percentages shown above, we assume annual bonuses are earned at target and long-term compensation (restricted stock units and performance shares) have a value equal to the target value at grant. Since these awards have both upside opportunity and downside risk, these percentages may not reflect the actual amounts realized. Short-Term Compensation Base Salary. Each of the NEOs is paid a base salary for performance of their job duties and responsibilities. Base salary targets are set around the median of the competitive data from our compensation peer group companies for each executive role; however, actual salaries can be below, at or above the median depending on performance and experience. Newly promoted executive officers are typically paid below the median of the competitive data with salary increases over time designed to move them to the median or above subject to meeting or exceeding their performance objectives. Base salary is reviewed annually and consideration is given for base salary adjustments based on individual performance and available competitive data from our compensation peer group companies that is presented by the independent consultant. The salaries of the NEOs, excluding the CEO, are approved by the Committee after considering input from the CEO regarding base salary adjustments for the other NEOs and consulting with the independent consultant and the Board of Directors. Annual Bonus. Each of the NEOs is eligible to receive a cash bonus equal to a percentage of base salary for the year. The target percentage is determined based on job scope, responsibilities and market data. Target awards are set around the median of the competitive market data from our compensation peer group companies for each position. In assessing the competitive market data, generally the Committee will make changes to targets only if the competitive market data shows that increases have been sustained over aCompensationtwo-year period. The annual bonus is designed to provide competitive annual incentive payments if target goals are achieved, to provide above-target payments if these goals are exceeded and to provide below target payments or no payments if the goals are not achieved. Annual incentive payments can range from zero to 200% of the annual incentive target based on the performance achieved against the financial goals. Annual incentive payouts are also subject to organizational unit, as well as individual, adjustments. Prior to the beginning of each year, the Committee, with input from other members of the Board of Directors, management and the independent consultant, determines the performance measures that are most important for the Corporation to achieve its goals. The Committee believes that each performance measure in the plan is a key driver of our financial performance and that this combination of measures reflects an accurate representation of our overall annual financial performance. 16
For 2018 the performance measures and the weights for the Rockwell Collins Incentive Compensation Plan (ICP), in which Messrs. Ortberg, Allen, Statler and Jasper were participants, were as follows: 
The weights and measures for the Interior Systems Management Incentive Plan (MIP), in which Mr. Lieberherr was a participant, were as follows. 17
The following table shows the annual incentive target as a percentage of base salary for each of the NEOs for 2018 and 2017. 
Long-Term Incentives The purpose of our long-term incentive compensation plan is to align an executive’s performance with our long-term success. Compensation from long-term incentives makes up a significant portion of our NEOs’ overall compensation with target awards based on job scope, responsibilities and market data from the compensation peer group companies. Actual value is tied to growing our stock price and, in the case of performance shares, contingent on the extent to which the underlying financial performance goals are achieved. Our long-term incentives plan provides the Committee with the flexibility to grant long-term incentive awards in a variety of forms. Our 2018, long-term incentive award mix for our NEOs is shown on the following chart: 18
Both the number of performance shares and restricted stock units granted was determined by dividing 50% of the target dollar grant value by the closing price of our common stock on the date of grant. Restricted Stock Units. Ordinarily, the Committee would grant half of the long-term incentive target in the form of stock options and the other half in performance shares. However, because the long-term incentive grants occurred in November of 2017, which was after the Merger Agreement was signed, the Committee decided to replace stock options with restricted stock units because the restricted stock units better preserved the expected value of the grant whether or not the merger is completed. The restricted stock units provide greater retention value and like the stock options they replaced, vest in three equal amounts on the first, second and third anniversaries of the date of grant. Upon completion of the merger, any of the unvested restricted stock units granted in November of 2017 will be converted into UTC restricted stock units with the same vesting terms. The restricted stock units will fully vest if an executive is terminated without cause or if an executive terminates employment for good reason following the acquisition. Performance Shares. The Committee believes performance shares are an integral component of our executive compensation program. They support the achievement of long-term financial and business success, and our TSR modifier helps ensure that they reflect our shareowner return relative to our TSR modifier peer group helping to further drive shareowner value. The performance shares paid at the end of the three-year performance period can range from zero to 200% of the target based upon the achievement ofpre-established performance goals. As described below, there can be a further positive or negative adjustment of up to 20% based upon our TSR performance. In 2018, the performance goals were free cash flow and cumulative sales. 19
The weighting of the performance measures for the 2018–2020 performance share grant are as follows: 
TSR Modifier. The number of performance shares payable is subject to adjustment based upon our TSR performance relative to the TSR modifier group. TSR is defined as share price growth and dividend yield over the three-year period. This calculation assumes dividends are reinvested. The FY2018–2020 TSR modifier is depicted below. | | | FY2018-2020 TSR Modifier | Rockwell Collins Relative TSR Performance | | Total Shareowner Return Modifier | ³ 80th Percentile | | 1.2 |  | | | | < 20th Percentile | | 0.8 |
Our TSR modifier peer group is reviewed annually by the Committee. In 2017, the Committee evaluated the peer group and expanded the criteria framework to recognize the growing importance of international sales and the Company’s changing commercial and defense mix. The Committee considers both U.S. publicly-traded companies and internationally-traded companies with an aerospace and defense products focus. Preference is given to companies with a similar business and operational perspective (i.e., product focus, mix of sales in U.S. and outside of U.S., customer mix, industrial orientation, analyst coverage). Companies may enter or exit our TSR modifier group given these criteria. With our acquisition of B/E in April 2017, our overall product mix became much more weighted towards commercial sales. As a result, the Committee’s independent consultant recommended that the Committee remove Lockheed Martin, Northrop Grumman and Raytheon from the TSR modifier group because they are defense contractors. No other changes were made to the TSR modifier group. For the 2018–2020 performance period the following companies will be used to determine the TSR percentile rank and modifier: 20
| | | | | Companies - For 2018–2020 TSR Purposes Only | | Cobham plc | | Embraer S.A. | | Esterline Technologies Corporation | | General Dynamics Corporation | | Hexcel Corporation | | L3 Technologies, Inc. | | Meggitt plc | | Spirit AeroSystems Holdings, Inc. | | Textron Inc. | | The Boeing Company | | Triumph Group Inc. | | Zodiac Aerospace SA |
Upon completion of the merger, the performance shares granted in November of 2017 will be converted into UTC restricted stock units that will cliff vest on October 2, 2020, the date 2018–2020 performance period would have been completed but for the acquisition. The replacement UTC restricted stock units will fully vest if an executive is terminated without cause or if an executive terminates his employment for good reason following the acquisition. Equity Grant Practices. The Committee typically grants long-term incentives at its November meeting each year. This meeting typically follows the public release of annual earnings by about two weeks. The Committee on occasion will make grants at other regularly scheduled meetings when a new executive is named either as a result of an internal promotion or external hire. The Committee has delegated the authority to the CEO to make individual equity grants to positions below certain designated senior executive positions within certain parameters. These grants are approved by the CEO on the date of a regularly scheduled meeting of the Board of Directors. The Committee reviews the use of this delegation at its November meeting each year. At its November 2017 meeting, the Committee granted restricted stock units and three-year performance shares for the 2018–2020 performance period to our NEOs and certain other executives under our long-term incentives plan. The target awards in dollars for the NEOs were established after taking into account levels of responsibility, up to three years of competitive market data from the compensation peer group companies and the relative contribution of each position to the business (i.e., internal equity or consistency between positions). The targets for Mr. Ortberg and Mr. Allen were each increased to bring the targets within the competitive range of pay for their respective positions in our updated compensation peer group. The target dollar value of the long-term incentives granted to each of the NEOs for the past two years are shown below: | | | | | | | | | | | | | | | | | | | | | | | | | | | | FY2018 Long-term Incentives
Target Value ($) | | | FY2017 Long-term Incentives
Target Value ($) | | Named Executive Officer | | Performance
Shares | | | RSUs | | | Total
Value | | | Performance
Shares | | | Stock
Options | | | Total
Value | | Robert K. Ortberg | | | 3,650,000 | | | | 3,650,000 | | | | 7,300,000 | | | | 2,600,000 | | | | 2,600,000 | | | | 5,200,000 | | Patrick E. Allen | | | 800,000 | | | | 800,000 | | | | 1,600,000 | | | | 550,000 | | | | 550,000 | | | | 1,100,000 | | Werner Lieberherr | | | 650,000 | | | | 650,000 | | | | 1,300,000 | | | | — | | | | — | | | | — | | Kent L. Statler | | | 550,000 | | | | 550,000 | | | | 1,100,000 | | | | 550,000 | | | | 550,000 | | | | 1,100,000 | | Philip J. Jasper | | | 500,000 | | | | 500,000 | | | | 1,000,000 | | | | 500,000 | | | | 500,000 | | | | 1,000,000 | |
The total number of shares awarded for fiscal 2018 in November 2017 to all executives for restricted stock units and performance shares at target payout represented in the aggregate approximately 0.2% of the total shares outstanding as of the date of grant. In establishing goals for the 2018–2020 performance period, the Committee’s focus was to balance the need to pay for performance, retain executive talent and establish realistic goals that reflect the economic environment in which we are operating. To accomplish this, several factors were considered by the Committee, including: our five-year strategic plan; analysts’ expectations of our performance and of the members of the TSR modifier group; goals and performance achieved in the prior performance period; and our annual operating plan for 2018. The Committee determined that cumulative sales should continue to be used as a performance measure due to the substantial importance of growing sales. The free cash flow goals were set to neutralize the cash tax impact of new revenue recognition rules and the results will also be neutralized for the cash tax impact. This financial metric measures our ability to generate cash and is strongly tied to creating shareowner value. Together, cumulative sales and free cash flow provide strong and balanced goals designed to help drive our long-term financial performance. 21
The cumulative sales target goal was derived by gathering analysts’ expectations of revenue for each of our TSR peer group companies for each of the next three years and then calculating each company’s average annual growth rate. We then calculated the 50th percentile annual growth rate for all peers and applied that amount to our FY2017 actual sales and rounded to the nearest million. The Committee believes this will incent participants to grow company sales at a faster rate than our peers. The free cash flow target goal was calculated by preparing apre-tax free cash flow estimate for FY2018–2020. Next, the prior five-year average ofpre-tax free cash flow as a percent of free cash flow was calculated under the current revenue recognition rules. Finally, to determine the free cash flow dollar target goal, we divided thepre-tax free cash flow estimate for FY2018–2020 by the prior five-year average ofpre-tax free cash flow as a percent of free cash flow that was calculated under the current revenue recognition rules. Thenon-adjusted financial goals for NEOs for the 2018–2020 performance share awards at the maximum, target and minimum performance levels are as follows: | | | | | | | | | | | | | | | | | | | | | Performance Level | | Cumulative Sales | | | Free Cash Flow | | | Total Payout % | | | | Goal ($M) | | | Payout | | | Goal ($M) | | | Payout | | Maximum | | | 30,783 | | | | 100 | % | | | 4,117 | | | | 100 | % | | | 200 | % | Target | | | 26,768 | | | | 50 | % | | | 3,580 | | | | 50 | % | | | 100 | % | Minimum | | | 22,752 | | | | 0 | % | | | 3,043 | | | | 0 | % | | | 0 | % |
Consistent with performance share grants in prior years, the 2018–2020 performance shares are subject to a performance modifier based upon our TSR relative to the TSR modifier group companies. Any dividends paid are treated as reinvested for purposes of determining TSR. For the 2018–2020 performance period, the modifier is calculated using a continuous method to determine the company’s percentile rank against peers and then interpolating to determine the amount of the modifier. The range adjustment for the TSR modifier is 0.8 (80%) to 1.2 (120%). Acquisition by United Technologies The completion of the merger contemplated by the Merger Agreement will impact the compensation that we awarded to our NEOs in fiscal 2018 and prior years. In particular, upon the completion of the merger: The stock options granted in November 2016 and in prior years, whether vested or unvested, will be canceled in exchange for the right to receive the merger consideration for each net option share subject to the stock option. The number of net option shares is calculated by subtracting from the total shares subject to the stock option a number of shares with a value equal to the exercise price of the stock option. We did not grant any stock options to our NEOs after November 2016. The performance shares granted in November 2016 and any other unvested performance shares granted prior to September 4, 2017 will be canceled in exchange for the right to receive the merger consideration for each share subject to the performance share assuming target performance. Performance shares and restricted stock units granted in November 2017 to our employees will vest if the employee’s employment is terminated without cause or by the employee for good reason in accordance with the award agreement following the acquisition. Employees will receive apro-rated payment of their annual incentive bonus for the year in which the merger occurs assuming target level performance. For more information, please see the Interests of Certain Persons section in the Schedule 14A we filed with the SEC on December 11, 2017. 22
Compensation Earned Base Salary Adjustments for 2018 The Committee approved a 14.8% base salary increase for Mr. Ortberg to bring his 2018 salary within the competitive range of pay for CEOs in the updated compensation peer group. Mr. Ortberg recommended, and the Committee approved, annual base salary adjustments for the other NEOs ranging from 1.5% to 3.0%, taking into account market position and performance. As discussed on page 13, our compensation peer group was updated after our acquisition of B/E. The revenue range of compensation peer group companies increased from (i)$4B-$8B to (ii)$7B-$11B. 2018 Annual Incentive Results The Committee used discretion and approved a payout of 100% of the target annual incentive award under the Annual Incentive Plan and under the Interior Systems Management Incentive Plan. Calculation of the annual incentive payout for the Incentive Compensation Plan (ICP) for Messrs. Ortberg, Allen, Statler and Jasper was based on the following formula: 
Calculation of the annual incentive payout for the Management Incentive Plan (MIP) for Mr. Lieberherr was based on the following formula: 
Under the terms of the Merger Agreement, if the acquisition closed on or before September 28, 2018, the ICP and MIP would pay out at 100% of target. If the acquisition closed on or after September 29, 2018, the Merger Agreement provided that the ICP and MIP would pay out on actual results and the payments were to be made within five business days prior to closing. When the Committee met on September 20, 2018, there was a high expectation that the closing of the acquisition would occur very close to the end of the fiscal year. This meant that the Committee might be required to make the ICP and MIP determination prior to the availability of audited financial results in order to determine the final payout percent prior to the closing. Given the extraordinary nature of the year, the expected merger timing, and after receiving input from its independent consultant and a forecast from management that estimated a 95% payout for the ICP and a 59% payout for the MIP, the Committee used its discretion to set the ICP and MIP payout at 100% of target. The Committee’s determination for these payouts was subject to UTC’s consent under the Merger Agreement, which consent was given. The 2018 ICP goals were derived from our annual operating plan and were inclusive of Interior Systems. The following table shows the measures, weights, goals and the forecasted performance and payouts. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Measure | | Sales | | | Operating Margin | | | Free Cash Flow | | | Payout | | | | Goal ($M) | | | Payout | | | Goal | | | Payout | | | Goal ($M) | | | Payout | | Maximum | | | 9,744 | | | | 80 | % | | | 22.00 | % | | | 80 | % | | | 1,035 | | | | 40 | % | | | 200 | % | Target | | | 8,700 | | | | 40 | % | | | 19.50 | % | | | 40 | % | | | 900 | | | | 20 | % | | | 100 | % | Minimum | | | 7,656 | | | | 0 | % | | | 17.00 | % | | | 0 | % | | | 765 | | | | 0 | % | | | 0 | % | 2018 Forecast | | | 8,765 | | | | 42 | % | | | 19.14 | % | | | 34 | % | | | 890 | | | | 19 | % | | | 95 | % |
23
Our 2018 ICP forecasted results were adjusted to exclude B/E and UTC acquisition-related transaction costs and certain other items that developed subsequent to the initial setting of goals, including our higher than planned discretionary pension plan contributions and the early payment of the 2018 ICP and MIP. The 2018 MIP goals were derived from the Interior Systems annual operating plan. The following table shows the financial measures, weights, goals and the forecasted performance and payouts. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Financial Measures (80%) | | | Combined
Financial
Measures
Payout
Percent | | | Strategic
Measures
Payout
Percent
(20%) | | | Total
Payout
Percent | | Bookings (16%) | | | Sales (16%) | | | Operating Margin
(24%) | | | Free Cash Flow
(24%) | | Goal | | Forecast | | | Goal | | | Forecast | | | Goal | | | Forecast | | | Goal | | | Forecast | | 2,633.6 | | | 2,835.1 | | | | 2,817.9 | | | | 2,709.2 | | | | 20.9 | % | | | 18.2 | % | | | 433.9 | | | | 180.8 | | | | 44 | % | | | 15 | % | | | 59 | % |
The strategic goals consisted of three B/E integration goals and a key business pursuit. Each of the strategic goals were equally weighted. Three integration goals were achieved resulting in a 15% strategic measures payout. The table below shows the 2018 annual cash incentives paid to the NEOs. The total annual incentive paid to each NEO is reflected in the“Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table on page 29. | | | | | | | | | | | | | | | | | NEO 2018 Annual Incentive Payments | | Named Executive Officer | | Base Salary ($) | | | Target | | | Actual | | | | Target Annual
Incentive | | | Target Annual Cash
Incentive ($) | | | Final Award ($) | | Robert K. Ortberg | | | 1,135,770 | | | | 150 | % | | | 1,703,655 | | | | 1,703,655 | | Patrick E. Allen | | | 672,057 | | | | 90 | % | | | 604,851 | | | | 604,851 | | Werner Lieberherr | | | 888,125 | | | | 90 | % | | | 799,313 | | | | 799,313 | | Kent L. Statler | | | 666,096 | | | | 80 | % | | | 532,877 | | | | 532,877 | | Philip J. Jasper | | | 560,504 | | | | 80 | % | | | 448,403 | | | | 448,403 | |
2016 – 2018 Performance Share Payments The Committee exercised discretion to pay out the performance shares assuming that the combined cumulative sales and free cash flow as a percent of net income goals was 131%. This result was then multiplied by 0.87 to reflect the TSR performance to arrive at 114% payout. Under the terms of the Merger Agreement, if the acquisition closed on or before September 28, 2018, the 2016–2018 performance shares, as well as any other performance shares subject to performance conditions would pay out at 100% of target. If the acquisition closed on or after September 29, 2018, the Merger Agreement provided that the 2016–2018 performance shares would be paid out at based on actual results because the 2016-2018 performance period ended on September 28, 2018. When the Committee met on September 20, 2018, there was a high expectation that the closing of the acquisition would occur very close to the end of the fiscal year. Given the extraordinary nature of the year, the uncertain merger timing, and after receiving input from its independent consultant and a forecast from management that estimated a 131% payout (before application of the TSR modifier), the Committee used its discretion to set the final payout percentage based on the achievement of the performance metrics at 131% of target. The Committee directed that the 131% payout percentage should then be adjusted based upon the Company’s relative TSR performance through the end of the performance period or the most practicable date prior to the end of the performance period if the merger occurred prior to September 28, 2018. The Committee’s determination was subject to UTC’s consent, which consent was given. 24
The goals for the 2016–2018 performance period were initially set in October 2015 as follows: | | | | | | | | | | | | | | | | | Payout Schedule for 2016-2018 Performance Shares (Prior to B/E Aerospace Acquisition) | | Measure | | Cumulative Sales | | | Free Cash Flow as a Percent
of Net Income | | | | Goal ($M) | | | Payout | | | Goal | | | Payout | | Maximum | | | 19,087 | | | | 100 | % | | | 95.0 | % | | | 100 | % | Target | | | 16,597 | | | | 50 | % | | | 85.0 | % | | | 50 | % | Minimum | | | 14,107 | | | | 0 | % | | | 75.0 | % | | | 0 | % |
Shortly after we acquired B/E Aerospace in April 2017, the Committee adjusted the goals to take into account the impact of the acquisition. The cumulative sales goal was increased due to the additional sales expected from B/E Aerospace, while the free cash flow as a percent of net income was maintained at the same level as it was expected that there would be little impact to that goal as a result of the acquisition. The table below shows the final goals and our performance against them using forecasted results. | | | | | | | | | | | | | | | | | | | | | Payout Schedule for 2016–2018 Performance Shares (After B/E Aerospace Acquisition) | | Measure | | Cumulative Sales | | | Free Cash Flow as a Percent
of Net Income | | | Payout Before TSR
Modifier | | | | Goal ($M) | | | Payout | | | Goal | | | Payout | | Maximum | | | 23,990 | | | | 100 | % | | | 95.0 | % | | | 100 | % | | | 200 | % | Target | | | 20,860 | | | | 50 | % | | | 85.0 | % | | | 50 | % | | | 100 | % | Minimum | | | 17,730 | | | | 0 | % | | | 75.0 | % | | | 0 | % | | | 0 | % | Forecast | | | 20,799 | | | | 49 | % | | | 91.4 | % | | | 82 | % | | | 131 | % |
Our 2018 forecasted payout of 131% (before application of the TSR modifier) was adjusted to exclude B/E and UTC acquisition-related transaction costs and certain other items that developed subsequent to the initial setting of goals, including our higher than planned discretionary pension plan contributions and the early payment of the 2018 ICP and MIP. Because our relative TSR performance over the performance period was at the 31st percentile when measured against the TSR modifier peer group, the 131% payout was multiplied by 0.87 which resulted in a final payout of 114% of target. Employee and Other Benefits Benefits The NEOs generally are covered by the same broad range of benefit programs available to most other U.S. salaried employees, with the exception of Mr. Lieberherr who participated in legacy executive B/E programs. The broad range of programs include medical, prescription drug, dental, vision, wellness, flexible spending accounts, health savings accounts, defined contribution savings plans, employee assistance plan, life insurance, short-term and long-term disability coverage, accidental death and dismemberment coverage and vacation. We provide a broad array of benefit programs to attract and retain a skilled and highly talented workforce and to provide employees with choices to meet their personal needs. These benefits are reviewed periodically to ensure that they remain competitive and cost effective. Deferral Plans To provide atax-effective opportunity to save for retirement or other future needs, we offer plans that allow for the elective deferral of the receipt of base salary and annual incentive awards when earned and otherwise payable to eligible employees. Deferred amounts accrue earnings or losses based on each participant’s selection of investment choices that generally mirror the funds provided in our qualified savings plan. In the case of Mr. Lieberherr, he was also entitled to receive company contributions to B/E’s 2010 Deferred Compensation Plan pursuant to his employment agreement. 25
Perquisites The Committee provides our NEOs with certain annual perquisites, including the following: car allowance, financial planning allowance, reimbursement for an executive physical, event tickets and airline club memberships. In rare circumstances, our NEOs are also permitted to use company aircraft for personal use. When flying for business, an executive officer’s family members may accompany the executive officer on the company aircraft, space permitting. The perquisites we provide are designed to be competitive with market practices. They are reviewed annually by the Committee to assure that they continue to be competitive and consistent with the Committee’s overall compensation philosophy. Details about the perquisites provided to our NEOs are described under the Summary Compensation Table. When an executive relocates to commence employment with us, we will pay for his or her moving costs and cover certain expenses incurred in purchasing a new home. We will also authorize our third party relocation provider to purchase his or her prior home based upon independent appraisals and will pay for the third party relocation provider’s costs incurred in connection with selling the home, including covering carrying costs. We may also provide the executive with a relocation allowance to cover other incidental costs. The relocation allowance is subject to repayment if the executive terminates employment within the first year of employment. Executive Policies and Practices Stock Ownership Guidelines The Committee believes that senior executives should have a significant equity interest in Rockwell Collins. To promote equity ownership and further align the interests of senior executives with our shareowners, the Committee has established ownership guidelines. These guidelines require that our NEOs own our shares with a market value of at least a specified multiple of salary within a predetermined time period. The guidelines for our active NEOs are as follows: | | | | | | | Position | | Multiple of Base Salary | | Met or On Track to Meet | | Achievement Deadline | Mr. Ortberg | | 6 | | Yes | | Achieved | Mr. Allen | | 3 | | Yes | | Achieved | Mr. Statler | | 3 | | Yes | | Achieved | Mr. Jasper | | 3 | | Yes | | Achieved |
Progress toward meeting the guidelines is reviewed by the Committee annually. Based on our 2018 year end stock price of $140.47 per share, the ownership guidelines have been met, or are projected to be met, in accordance with the guidelines. | | | What Counts Toward the Guideline | | What Does Not Count Toward the Guideline | | Shares and share equivalents owned outright, including in trusts and those held by a spouse | | Unexercised stock options | | | | Shares held in the qualified savings plan and share equivalents held in thenon-qualified savings plan | | Unvested performance shares Unvested restricted stock units |
Our stock ownership guidelines also require vice presidents to own shares with a market value of at least a specific multiple of their salary (between 0.5x to 1x depending on role) in order to further align their interests with those of our shareowners. Hedging, Pledging and Other Restrictions Our insider trading guidelines prohibit our directors and executive officers from selling our stock “short,” entering into any puts or calls relating to our stock or hedging. In addition, pledging of our stock by executive officers, directors and certain other executives is also prohibited. The pledging of securities by directors and executive officers could potentially have a detrimental impact if they are forced to sell the pledged security. The forced sale could negatively impact the price of the stock. As a result, we do not allow pledging of securities. 26
Employment, Severance and Change of Control Agreements We generally do not enter into employment contracts with our executive officers, including severance arrangements. None of our NEOs, other than Mr. Lieberherr, have employment contracts. Generally, our executives serve at the will of the Board of Directors. This approach allows for removal of an executive officer prior to retirement whenever it is in our best interest to do so, with discretion on whether to provide any severance benefits. On the rare occasion when an executive officer is removed, the Committee may exercise its business judgment in approving an appropriate separation agreement in consideration of all relevant circumstances, including the individual’s term of employment, past accomplishments and reasons for separation. Lieberherr Employment Agreement. When we entered into the agreement to acquire B/E, we also entered into an employment agreement with Mr. Lieberherr (the “Lieberherr Employment Agreement”), who was the CEO of B/E at the time of the acquisition. Although it is not our policy to enter into employment agreements with our executive officers, we made an exception to help ensure that Mr. Lieberherr would remain employed with us during the crucial period following the completion of the acquisition. Mr. Lieberherr was a party to an employment agreement with B/E (the “Prior Lieberherr Employment Agreement”), but under that agreement his employment was automatically terminated as of the date we acquired B/E. As a result, we felt it was important for the success of the acquisition to retain Mr. Lieberherr’s services and we entered into an employment agreement with him. Under the Lieberherr Employment Agreement, Mr. Lieberherr agreed to serve as the Executive Vice President and Chief Operating Officer of our Interior Systems business, which we created when we completed the B/E acquisition. To help ensure a successful merger and in recognition that as the former CEO of B/E he previously received substantially greater compensation from B/E, we agreed to provide him with an annual base salary of $875,000, an annual incentive target bonus of 90% of his base salary, a long-term incentive plan target award of $1.3 million, company contributions to B/E’s 2010 Deferred Compensation Plan as described underNon-Qualified Deferred Compensation on page 36, and our standard change of control agreement. We also granted him a $2 million cash retention award, which by its terms would be payable on the first anniversary of the B/E acquisition (April 13, 2018), or earlier if we terminated his employment without cause or he if resigned for “good reason.” B/E granted Mr. Lieberherr and its other executive officers with restricted stock units (time-based and performance-based vesting) in November of 2016. Upon the completion of the merger, the restricted stock units granted to these executive officers, with the exception of Mr. Lieberherr, all vested and the performance-based restricted stock units were deemed earned at 200%. Since we wanted to retain Mr. Lieberherr’s services after the acquisition, we did not permit B/E to treat his November 2016 restricted stock units in the same manor. To increase our ability to retain Mr. Lieberherr, we agreed that Mr. Lieberherr’s November 2016 B/E restricted stock units would be canceled and converted to a cash amount (with performance conditions deemed to be satisfied at 200% of target), but the cash amount would be payable on the first anniversary of the completion of the merger, provided that he did not earlier resign without good reason. The cash amount was credited with interest at 4% from the date of the merger agreement and then adjusted to reflect any changes in tax rates in effect at the time of the merger agreement and the time the cash payment was made. In addition, we agreed to honor the commitment under the Prior Lieberherr Employment Agreement to provide Mr. Lieberherr and his spouse, for as long as they each may live, and his eligible dependents, (i) all medical, dental, and health benefits available to B/E’s executive officers and their dependents, respectively, on similar terms and conditions as active employees (provided that the level of such benefits is not less than the benefits available to Mr. Lieberherr on July 1, 2013, as well as 100% payment for and reimbursement of all medical and dental services and costs incurred by Mr. Lieberherr and his family, the cost of which will be fully paid by the Company) and (ii) the benefits available under B/E’s executive medical reimbursement plan as of the date of Mr. Lieberherr’s termination of employment, but in no event less than those in effect as of July 1, 2013. We also assumed the obligation to provide a lump sum benefit of $5 million upon Mr. Lieberherr’s death to his designee. This amount had previously been fully funded by B/E pursuant to an insurance policy. Mr. Lieberherr is subject tonon-competition andnon-solicitation obligations during his employment with Rockwell Collins and for three years thereafter. Under the Lieberherr Employment Agreement, Mr. Lieberherr’s employment could be terminated by either party at any time and for any reason. In the event of a termination of Mr. Lieberherr’s employment due to his death or incapacity, he or his designated beneficiary will receive any accrued and unpaid salary, automobile allowance, vacation time, and benefits through the date of his termination (the “Lieberherr Accrued Amounts”) and any earned but unpaid bonuses payable for any fiscal periods ending prior to the termination. In the event of termination of Mr. Lieberherr’s employment for any reason other than his death or incapacity, Mr. Lieberherr will receive the Lieberherr Accrued Amounts. 27
Lieberherr Termination Agreement. On October 29, 2018 we entered into a letter agreement with Mr. Lieberherr pursuant to which his employment was terminated. Under our change of control agreement, an executive officer who is terminated in anticipation of a change of control may become entitled to receive change of control benefits. Given our pending acquisition by UTC at the time of Mr. Lieberherr’s termination, we agreed to pay Mr. Lieberherr a lump sum severance payment of $4,483,239, which is the amount he would have received under his change of control agreement upon a qualifying termination after the acquisition. The performance shares and restricted stock units granted to Mr. Lieberherr in November 2017 were forfeited when his employment ended. Change of Control Agreements. The Committee has approved change of control agreements for each of the NEOs and our other executive officers. Annually, the Committee reviews our agreements and market practices with the assistance of the Committee’s independent consultant. The Committee adopted the agreements to provide these executives with a strong incentive to continue their employment with us if there is a change of control, or the threat of such a transaction, and to maintain a competitive total compensation program. Our change of control agreements provide severance to executives if they have a qualifying termination of employment following a change of control. The consummation of the merger under the Agreement and Plan of Merger that the Corporation entered into with United Technologies Corporation on September 4, 2017 will constitute a change of control under these agreements. Change of control severance payments are subject to a “double trigger” requiring that a change of control occur and a termination, or constructive termination, of employment also occur within thetwo-year protection period following the change of control. Additionally, our equity awards have “double trigger” vesting. Our NEOs’ change of control agreements are automatically renewed each year with aone-year term unless60-days’ notice ofnon-renewal is given prior to the renewal date. There are no excise taxgross-ups provided upon a change of control. As described in more detail under “Potential Payments Upon Termination or Change of Control,” the severance benefit under the change of control agreement is equal to a multiple of the NEO’s annual compensation, which is the sum of his annual salary and annual incentive bonus target. The Committee determined that the severance benefit will not exceed two times any new executive officer’s annual compensation, except for the severance benefit that may be paid to a new chief executive officer. The multiple for our grandfathered executive officers is three. The Committee has provided for the special treatment of long-term incentive awards upon death, disability and retirement, as well as change of control. The Committee evaluates these provisions from time to time and believes they are appropriate as part of a competitive total compensation program. For additional details about the terms and potential payments in the event of change of control and other separations, see the discussion of “Potential Payments upon Termination or Change of Control.” Payment Recovery Provisions Executive officers are subject to certain restrictive agreements upon a termination of employment, including confidentiality restrictions, mutual arbitration agreements,non-competition covenants and employeenon-solicitation arrangements. An executive could lose all outstanding long-term incentives and/or be required to refund various long-term incentive benefits realized in the priortwo-year period for breaching thenon-compete ornon-solicitation restrictions. Executives may also forfeit equity awards, including vested stock options, for engaging in detrimental conduct. The CEO and CFO could also be required by law to reimburse the Corporation for certain incentive compensation amounts received if associated with misconduct leading to an accounting restatement. In addition to the recovery provisions stated above, we have a clawback policy that allows the Board, at its discretion, to recover annual incentive payments, performance share payments and stock option gains from a covered executive if the Board determines that the covered executive engaged in fraud or illegal activity and as a result there was a substantial negative impact to us or our financial condition. Under the policy, the Board may recover the last three incentive compensation and performance share payments and any gains realized upon the exercise of stock options in the preceding three years. The clawback policy covers all of our executive officers, as well as our Vice Presidents & General Managers and certain other executives. Tax Deductibility of Executive Compensation Under Internal Revenue Code Section 162(m), for tax years beginning prior to January 1, 2018, a public company was generally not permitted to deduct compensation in excess of one million dollars paid in that year to its CEO and its three other most highly compensated NEOs (other than its CFO) unless the compensation qualified as “performance-based compensation.” Among other things, the Tax Cuts and Jobs of 2017 (Act) repealed the performance-based compensation exception, unless certain transition relief is available, and extended the deduction limitation to CFOs. Prior to the Act, the Committee’s general intent was to structure compensation so that it could qualify as deductible while retaining discretion to pay compensation that was not deductible. Under the Act it will be more difficult to design compensation that will be deductible under Section 162(m). The Committee believes that it should not be restricted in its ability to design and maintain executive compensation arrangements that will attract and retain executive talent. As a result, achieving the desired flexibility may result in compensation that is not deductible. 28
COMPENSATION COMMITTEE REPORT The Compensation Committee of the Board of Directors acts on behalf of the Board to establish and oversee the executive compensation program in a manner that serves the interests of the Corporation and its shareowners. For a discussion of the policies and procedures, see “Corporate Governance; Board of Directors and Committees- Compensation Committee” in Item 13. Management of the Corporation prepared the Compensation Discussion and Analysis of the compensation program for named executive officers. We reviewed and discussed the Compensation Discussion and Analysis for fiscal year 2018 (included in this Amendment) with management. Based on this review and discussion, we recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Company’s annual report on Form10-K. The Board has approved that recommendation. Compensation Committee Ralph E. Eberhart, Chairman John A. Edwardson Jeffrey L. Turner SUMMARY COMPENSATION TABLE The following table shows the compensation paid to our Chief Executive Officer, Chief Financial Officer and our three other most highly compensated executive officers serving at the end of our fiscal year. These individuals are referred to as our named executive officers or NEOs. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Name and Principal Position | | Year | | | Salary
($) | | | Bonus ($) | | | Stock
Awards
($) | | | Option
Awards
($) | | | Non-Equity
Incentive Plan
Compensation
($) | | | Change
in
Pension
Value ($) | | | All Other
Compensation
($) | | | Total
($) | | Robert K. Ortberg, Chairman, President and CEO | | | 2018 | | | | 1,135,770 | | | | — | | | | 7,300,140 | | | | — | | | | 1,703,655 | | | | — | | | | 282,847 | | | | 10,422,412 | | | | | 2017 | | | | 1,003,078 | | | | — | | | | 2,730,001 | | | | 2,601,052 | | | | 1,529,694 | | | | — | | | | 209,522 | | | | 8,073,347 | | | | | 2016 | | | | 997,348 | | | | — | | | | 2,525,049 | | | | 2,501,646 | | | | 1,113,290 | | | | 237,792 | | | | 212,715 | | | | 7,587,840 | | Patrick E. Allen, SVP and CFO | | | 2018 | | | | 672,057 | | | | — | | | | 1,600,174 | | | | — | | | | 604,851 | | | | — | | | | 156,615 | | | | 3,033,697 | | | | | 2017 | | | | 640,721 | | | | — | | | | 577,502 | | | | 551,478 | | | | 586,260 | | | | — | | | | 111,416 | | | | 2,467,377 | | | | | 2016 | | | | 633,491 | | | | — | | | | 505,027 | | | | 501,396 | | | | 446,611 | | | | 209,262 | | | | 109,491 | | | | 2,405,278 | | Werner Lieberherr EVP and COO, Interior Systems* | | | 2018 | | | | 884,591 | | | | 8,811,072 | | | | 1,300,090 | | | | — | | | | 799,313 | | | | — | | | | 351,349 | | | | 12,146,415 | | Kent L. Statler, EVP and COO, Commercial Systems | | | 2018 | | | | 666,096 | | | | — | | | | 1,100,036 | | | | — | | | | 532,877 | | | | — | | | | 134,430 | | | | 2,433,439 | | | | | 2017 | | | | 637,644 | | | | — | | | | 577,502 | | | | 551,478 | | | | 622,341 | | | | — | | | | 120,152 | | | | 2,509,117 | | | | | 2016 | | | | 630,932 | | | | — | | | | 555,583 | | | | 551,180 | | | | 450,738 | | | | 265,426 | | | | 119,682 | | | | 2,573,541 | | Philip J. Jasper, EVP and COO, Government Systems | | | 2018 | | | | 560,504 | | | | — | | | | 1,000,008 | | | | — | | | | 448,403 | | | | — | | | | 116,454 | | | | 2,125,369 | | | | | 2017 | | | | 538,756 | | | | — | | | | 525,061 | | | | 501,656 | | | | 525,826 | | | | — | | | | 98,845 | | | | 2,190,144 | | | | | 2016 | | | | 528,995 | | | | — | | | | 505,027 | | | | 501,396 | | | | 377,914 | | | | 81,109 | | | | 96,819 | | | | 2,091,260 | |
* Mr. Lieberherr’s employment ended on October 29, 2018, approximately one month after the completion of our 2018 fiscal year. The following is an explanation of the above table: Salary. Salaries are reported on a fiscal year basis. Since 2018 salary increases were made effective December 23, 2017, the amounts shown for 2018 reflect approximately three months of the salary approved for the 2017 calendar year and nine months of the salary approved for the 2018 calendar year. Salaries include any amounts deferred undertax-qualified retirement savings plans, ournon-qualified retirement savings plan and deferred compensation plans. Since the number of days in our fiscal year may vary from year to year, the annual salary reported could vary, even if the salary was unchanged. 29
Bonus. There were no discretionary bonus payments to any NEO in 2018, except for Mr. Lieberherr. The bonus amount for Mr. Lieberherr represents a $2 million cash retention payment and $6,811,072 in respect of restricted stock units granted by B/E. Each of these payments were made to Mr. Lieberherr on the first anniversary of the B/E acquisition. For more information on these payments, please see the description under Lieberherr Employment Agreement on page 27. Stock Awards. The amounts in this column reflect the grant date value of the restricted stock units and the performance shares and do not reflect any reduction for possible forfeitures. For the performance shares, the grant date value is based upon the probable outcome of the achievement of the predetermined performance goals on the date of grant in accordance with FASB ASC Topic 718. The aggregate grant date fair value is the amount we expect to expense, on the date of grant, in our financial statements over the three-year vesting schedule of these stock awards and does not correspond to the actual value, if any, that may be realized by the NEOs. For FY2018–2020, the vesting of the performance shares is dependent on our achievement of cumulative sales and free cash flow goals over a three year period. The number of shares that can be earned is also subject to adjustment based on our relative TSR as described on pages 20-21. Since the probable outcome of achievement of our cumulative sales and free cash flow goals on the date of grant may vary year over year, and individual performance share targets may also vary, the dollar values reported may vary year over year. If we were to assume that both the cumulative sales and free cash flow goals for the FY 2018–2020 performance shares were achieved at the maximum level of performance and no TSR adjustment was made, the amounts reported in this column for 2018 would be increased by $3,650,070 for Mr. Ortberg, by $800,086 for Mr. Allen, by $650,046 for Mr. Lieberherr, by $550,018 for Mr. Statler and by $500,004 for Mr. Jasper. A discussion of the assumptions used in calculating the grant date fair values of these awards is set forth in Note 12 of the Notes to Consolidated Financial Statements in our 2018 Annual Report on Form10-K. Restricted stock units that were awarded vest in three equal installments on the first, second and third anniversaries of the date of grant. Option Awards. We did not grant stock options in 2018. The amounts in this column for 2016 and 2017 reflect the grant date value of the stock options in accordance with FASB ASC Topic 718 and do not reflect any reduction for possible forfeitures. The aggregate grant date fair value is the amount we will expense, determined on the date of grant, in our financial statements over the three-year vesting schedule of the stock options. Our stock options vest in three equal installments on the first, second and third anniversaries of the date of grant. The amounts in this column represent our expected accounting expense and do not correspond to the actual value, if any, that may be realized by the NEOs upon exercise of the stock options. A discussion of the assumptions used in calculating the grant date fair values of our stock option awards is set forth in Note 12 of the Notes to Consolidated Financial Statements in our 2018 Annual Report on Form 10-K. Non-Equity Incentive Plan Compensation. The amounts in this column represent payments made under our annual incentive plans. For more information see the 2018 Annual Incentive Results section on page 23. Change in Pension Value. The amounts in this column reflect the change, if any, in the year over year actuarial value of our frozen defined benefit pension plans. Our U.S. defined benefit pension plans were frozen in 2006 for our salaried employees and closed for anynon-union new hires. As a result, Mr. Lieberherr does not participate in any of these plans. Any change in pension values is driven by events outside of our control such as changes in the discount rate used to value pension benefits. Although, the actuarial value of the pension benefits increases each year because each NEO with pension benefits is one year closer to the age at which the executive can retire and receive an unreduced pension, this year there was a net overall reduction because the discount rate used to value these benefits increased from 3.54% in 2017 to 4.02% in 2018. In accordance with SEC instructions, a zero was reported even though there was a negative value. The total decrease for each NEO with pension benefits was $(60,528) for Mr. Ortberg (comprised of $(33,060) in the Rockwell Collins Pension Plan, $(8,621) in the Rockwell CollinsNon-Qualified Pension Plan and $(18,847) in the 2005 Rockwell CollinsNon-Qualified Pension Plan), $(66,561) for Mr. Allen (comprised of $(23,236) in the Rockwell Collins Pension Plan, $(12,982) in the Rockwell CollinsNon-Qualified Pension Plan and $(30,343) in the 2005 Rockwell CollinsNon-Qualified Pension Plan), $(86,709) for Mr. Statler (comprised of $(40,462) in the Rockwell Collins Pension Plan, $(11,031) in the Rockwell CollinsNon-Qualified Pension Plan and $(35,216) in the 2005 Rockwell CollinsNon-Qualified Pension Plan) and $(28,708) for Mr. Jasper (comprised of $(27,789) in the Rockwell Collins Pension Plan and $(919) in the 2005 Rockwell CollinsNon-Qualified Pension Plan). All Other Compensation. The following table summarizes the information included in the All Other Compensation column in the Summary Compensation Table. 30
| | | | | | | | | | | | | | | | | | | | | Name | | Contributions to
Savings Plans
($) | | | Contributions to
Deferred
Compensation
Plan ($) | | | Car Allowance
($) | | | Financial
Planning ($) | | | Other ($) | | Mr. Ortberg | | | 216,716 | | | | — | | | | 25,200 | | | | 5,000 | | | | 35,931 | | Mr. Allen | | | 109,102 | | | | — | | | | 20,400 | | | | 6,075 | | | | 21,038 | | Mr. Lieberherr | | | 11,000 | | | | 243,988 | | | | 20,400 | | | | 7,700 | | | | 68,261 | | Mr. Statler | | | 110,611 | | | | — | | | | 20,400 | | | | 2,565 | | | | 854 | | Mr. Jasper | | | 85,251 | | | | — | | | | 20,400 | | | | 7,026 | | | | 3,777 | |
For Messrs. Ortberg, Allen, Statler and Jasper, the amounts shown in the “Contributions to Savings Plans” column are the sum of the matching and retirement contributions made to ourtax-qualified andnon-qualified retirement savings plans. We match 62.5% of participants’ contributions under our retirement saving plans up to the first eight percent of the base salary. We also make retirement savings plan contributions, regardless of whether an employee makes contributions, based upon the combination of an employee’s age and years of service (points). These contributions can range from 0.5% (up to 34 points) to 6% (with 75 points) of the sum of the employee’s base salary and annual incentive plan payment for the year. For Mr. Lieberherr the amount shown in the “Contribution to Savings Plans” column is the company contribution to B/E’stax-qualified savings plan under which B/E matches 100% of the first 3% and 50% of the next 2% of compensation contributed up to a maximum contribution of $11,000. The amount shown in the “Contributions to Deferred Compensation Plan” column were made pursuant to B/E’s 2010 Deferred Compensation Plan and equal to 27.5% of Mr. Lieberherr’s salary. The amounts shown in the “Financial Planning” column are the reimbursements for financial planning. For Mr. Ortberg, the amount in the “Other” column includes event tickets, incidental incremental costs from spousal attendance at offsite meetings, an executive physical, $4,922 in incremental costs for the personal use of company aircraft and a $26,812 tax gross up for his assignment to Florida. We determine the aggregate incremental cost of company aircraft use on a per flight basis and it includes the cost of fuel,on-board catering, weather monitoring costs, landing fees, trip-related hangar and parking costs and variable crew-related costs such as hotels and meals. For Mr. Allen, the amount in the “Other” column includes the cost of membership in airline clubs, incidental incremental costs from spousal attendance at offsite meetings, an executive physical and a $17,056 tax gross up for his assignment to Florida. For Mr. Lieberherr, the amount in the “Other” column represents the medical reimbursement expenses that he is entitled to under B/E’s executive medical reimbursement plan. For Mr. Statler, the amount in the “Other” column includes event tickets, incidental incremental costs from spousal attendance at offsite meetings and an executive physical. For Mr. Jasper, the amount in the “Other” column includes the cost of membership in airline clubs, incidental incremental costs from spousal attendance at offsite meetings and $3,200 for an executive physical. GRANTS OF PLAN-BASED AWARDS FOR FISCAL YEAR 2018 Shown below is information on grants to the NEOs of plan-based awards during 2018. 31
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Name | | | | | | | Estimated Possible
Payouts Under Non-
Equity Incentive Plan
Awards | | | Estimated Future
Payouts Under
Equity Incentive
Plan Awards | | | All
Other
Stock
Awards:
Number
of Shares
of Stock
or Units | | | All Other
Option
Awards:
Number of
Securities
Under-
lying
Options | | | Exercise
or Base
Price of
Option
Awards
($/Sh) | | | Grant Date
Fair Value
of Stock
and Option
Awards
($) | | | | Grant Date and Type | | Target
($) | | | Maximum
($) | | | Target
(#) | | | Maximum
(#) | | Ortberg | | | 9/30/2017 | | | ICP | | | 1,703,655 | | | | 3,407,310 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 11/13/2017 | | | Performance Shares | | | | | | | | | | | 27,368 | | | | 65,683 | | | | | | | | | | | | | | | | 3,650,070 | | | | | 11/13/2017 | | | RSUs | | | | | | | | | | | | | | | | | | | 27,368 | | | | | | | | | | | | 3,650,070 | | Allen | | | 9/30/2017 | | | ICP | | | 604,851 | | | | 1,209,702 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 11/13/2017 | | | Performance Shares | | | | | | | | | | | 5,999 | | | | 14,398 | | | | | | | | | | | | | | | | 800,087 | | | | | 11/13/2017 | | | RSUs | | | | | | | | | | | | | | | | | | | 5,999 | | | | | | | | | | | | 800,087 | | Lieberherr | | | 9/30/2017 | | | MIP | | | 799,313 | | | | 1,598,626 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 11/13/2017 | | | Performance Shares | | | | | | | | | | | 4,874 | | | | 11,698 | | | | | | | | | | | | | | | | 650,045 | | | | | 11/13/2017 | | | RSUs | | | | | | | | | | | | | | | | | | | 4,874 | | | | | | | | | | | | 650,045 | | Statler | | | 9/30/2017 | | | ICP | | | 532,877 | | | | 1,065,754 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 11/13/2017 | | | Performance Shares | | | | | | | | | | | 4,124 | | | | 9,898 | | | | | | | | | | | | | | | | 550,018 | | | | | 11/13/2017 | | | RSUs | | | | | | | | | | | | | | | | | | | 4,124 | | | | | | | | | | | | 550,018 | | Jasper | | | 9/30/2017 | | | ICP | | | 448,403 | | | | 896,806 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 11/13/2017 | | | Performance Shares | | | | | | | | | | | 3,749 | | | | 8,998 | | | | | | | | | | | | | | | | 500,004 | | | | | 11/13/2017 | | | RSUs | | | | | | | | | | | | | | | | | | | 3,749 | | | | | | | | | | | | 500,004 | |
The following is an explanation of the above table: ICP/MIP. The amount in the “ICP” row represents the annual incentive established for each NEO under our Annual Incentive Compensation Plan (ICP), which is an incentive program designed to reward the achievement of annual performance goals. Mr. Lieberherr was a participant in B/E’s Management Incentive Plan (MIP), which is also designed to reward the achievement of annual performance goals. The performance measures and methodology for calculating payouts are described in the “Compensation Discussion and Analysis.” See theNon-Equity Incentive Plan Compensation column in the Summary Compensation Table Grantsfor the amounts paid for 2018. Performance Shares. The amounts in the “Performance Shares” row represent the annual performance share awards granted in November 2017 to each NEO under our 2015 Long-Term Incentives Plan. These long-term incentive grants are designed to reward the achievement of Plan-Based Awards, Outstanding Equity Awards at Fiscal Year End, Option Exercisesfree cash flow and Stock Vested, Pension Benefits, Non-Qualified Deferred Compensation cumulative sales growth goals over a three-year performance period. Payouts can range from 0 to 200% of target and may be further adjusted based on our TSR for the performance period as measured against the aerospace and defense TSR modifier companies. This adjustment is a multiplier that can range from plus 20% to minus 20%. See the “Compensation Discussion and Analysis” for more information. Until the distribution of any common stock after the performance period is complete, executives do not have rights to vote the shares, receive dividends or any other rights as a shareowner. NEOs must remain employed through the performance period to earn an award, althoughpro-rataand Potential vesting will occur if employment terminates earlier due to early or normal retirement, death or disability. See the “Potential Payments Upon Termination ofor Change of Control Control” for further discussion. Restricted Stock Units. The amounts in the “RSUs” row represent the restricted stock units granted in November 2017 to each NEO under our 2015 Long-Term Incentives Plan. Restricted stock units that were awarded vest in three annual equal installments beginning on the first anniversary of the date of grant. NEOs must remain employed through the vesting period to earn an award, althoughpro-rata or full vesting will occur if employment terminates earlier due to early or normal retirement, death or disability. See the “Potential Payments Upon Termination or Change of Control” for further discussion. Stock Options. No stock options were granted in 2018. 32
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END 2018 The following table provides outstanding stock options and unvested stock awards information for the NEOs as of the end of 2018. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Option Awards | | | Stock Awards | | Name | | Grant
Date | | | Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable | | | Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable | | | Option
Exercise
Price ($) | | | Option
Expiration
Date | | | Number
of Shares
or Units
of Stock
That
Have Not
Vested (#) | | | Market
Value of
Shares or
Units of
Stock
That
Have Not
Vested ($) | | | Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares,
Units or
Other
Rights That
Have Not
Vested (#) | | | Equity
Incentive
Plan
Awards:
Market or
Payout
Value
of Unearned
Shares,
Units or
Other Rights
That
Have Not
Vested ($) | | Ortberg | | | 11/17/14 | | | | 114,800 | | | | — | | | | 83.69 | | | | 11/17/24 | | | | | | | | | | | | | | | | | | | | | 11/09/15 | | | | 93,800 | | | | 46,900 | | | | 86.75 | | | | 11/09/25 | | | | | | | | | | | | 57,638 | | | | 8,096,410 | | | | | 11/14/16 | | | | 50,466 | | | | 100,934 | | | | 88.71 | | | | 11/14/26 | | | | | | | | | | | | 58,618 | | | | 8,234,070 | | | | | 11/13/17 | | | | — | | | | — | | | | — | | | | | | | | 27,368 | | | | 3,844,383 | | | | 54,736 | | | | 7,688,766 | | Allen | | | 11/20/09 | | | | 35,200 | | | | — | | | | 53.08 | | | | 11/20/19 | | | | | | | | | | | | | | | | | | | | | 11/19/10 | | | | 34,000 | | | | — | | | | 55.75 | | | | 11/19/20 | | | | | | | | | | | | | | | | | | | | | 11/14/11 | | | | 36,000 | | | | — | | | | 55.01 | | | | 11/14/21 | | | | | | | | | | | | | | | | | | | | | 11/12/12 | | | | 40,200 | | | | — | | | | 54.37 | | | | 11/12/22 | | | | | | | | | | | | | | | | | | | | | 11/11/13 | | | | 27,200 | | | | — | | | | 70.97 | | | | 11/11/23 | | | | | | | | | | | | | | | | | | | | | 11/17/14 | | | | 25,600 | | | | — | | | | 83.69 | | | | 11/17/24 | | | | | | | | | | | | | | | | | | | | | 11/09/15 | | | | 18,800 | | | | 9,400 | | | | 86.75 | | | | 11/09/25 | | | | | | | | | | | | 11,528 | | | | 1,619,338 | | | | | 11/14/16 | | | | 10,700 | | | | 21,400 | | | | 88.71 | | | | 11/14/26 | | | | | | | | | | | | 12,400 | | | | 1,741,828 | | | | | 11/13/17 | | | | — | | | | — | | | | — | | | | | | | | 5,999 | | | | 842,680 | | | | 11,998 | | | | 1,685,359 | | Lieberherr | | | 11/13/17 | | | | — | | | | — | | | | — | | | | | | | | 4,874 | | | | 684,651 | | | | 9,748 | | | | 1,369,302 | | Statler | | | 11/12/12 | | | | 44,300 | | | | — | | | | 54.37 | | | | 11/12/22 | | | | | | | | | | | | | | | | | | | | | 11/11/13 | | | | 29,900 | | | | — | | | | 70.97 | | | | 11/13/23 | | | | | | | | | | | | | | | | | | | | | 11/17/14 | | | | 28,100 | | | | — | | | | 83.69 | | | | 11/17/24 | | | | | | | | | | | | | | | | | | | | | 11/09/15 | | | | 20,666 | | | | 10,334 | | | | 86.75 | | | | 11/09/25 | | | | | | | | | | | | 12,682 | | | | 1,781,441 | | | | | 11/14/16 | | | | 10,700 | | | | 21,400 | | | | 88.71 | | | | 11/14/26 | | | | | | | | | | | | 12,400 | | | | 1,741,828 | | | | | 11/13/17 | | | | — | | | | — | | | | — | | | | | | | | 4,124 | | | | 579,298 | | | | 8,248 | | | | 1,158,597 | | Jasper | | | 11/12/12 | | | | 36,200 | | | | — | | | | 54.37 | | | | 11/12/22 | | | | | | | | | | | | | | | | | | | | | 11/11/13 | | | | 27,200 | | | | — | | | | 70.97 | | | | 11/11/23 | | | | | | | | | | | | | | | | | | | | | 11/17/14 | | | | 25,600 | | | | — | | | | 83.69 | | | | 11/17/24 | | | | | | | | | | | | | | | | | | | | | 11/09/15 | | | | 18,800 | | | | 9,400 | | | | 86.75 | | | | 11/09/25 | | | | | | | | | | | | 11,528 | | | | 1,619,338 | | | | | 11/14/16 | | | | 9,733 | | | | 19,467 | | | | 88.71 | | | | 11/14/26 | | | | | | | | | | | | 11,274 | | | | 1,583,659 | | | | | 11/13/17 | | | | — | | | | — | | | | — | | | | | | | | 3,749 | | | | 526,622 | | | | 7,498 | | | | 1,053,244 | |
The following is an explanation of the prior table: Stock Options. Stock options vest in three equal annual installments beginning on the first anniversary of the date of grant. If an option recipient retires prior to the first anniversary of the grant date of the option, the option is terminated. All stock options are granted with an exercise price equal to our closing share price on the date of grant. Restricted Stock Units. Restricted stock units (RSUs) vest in three equal annual installments beginning on the first anniversary of the date of grant. If an RSU recipient retires, he or she will receive apro-rated numbers of unvested RSUs based on the number of days which have elapsed since the grant date of the RSUs at the time of retirement. 33
Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested. The amounts in the “Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested” column were calculated by multiplying each NEO’s target performance shares by the maximum payout percentage assuming no adjustment for the TSR performance modifier. The actual number of shares that will be awarded, to the extent earned, will be determined after the applicable three-year performance period is complete. Vesting and payment of performance shares for the November 2016 grant (covering the 2017–2019 performance period) will be based on performance for the three-year cycle ending with 2019. Vesting and payment of performance shares for the November 2017 grant (covering the 2018–2020 performance period) will be based on performance for the three-year cycle ending with 2020. If a performance share recipient retires prior to the completion of a three-year performance cycle, the performance share payout is prorated for service that is completed prior to retirement. The market value of performance shares that have not vested as of our fiscal year end was calculated using our year end closing share price of $140.47 multiplied by the number of shares displayed in the prior column. OPTION EXERCISES AND STOCK VESTED FOR FISCAL YEAR 2018 The following table provides information regarding stock options and stock awards, exercised and vested, for the NEOs during 2018. | | | | | | | | | | | | | | | | | | | | Option Awards | | | Stock Awards | | Name | | Number of Shares
Acquired on
Exercise (#) | | | Value Realized on
Exercise ($) | | | Number of Shares
Acquired on Vesting
(#) | | | Value Realized on
Vesting ($) | | Ortberg | | | 398,400 | | | | 31,875,069 | | | | 32,854 | | | | 4,615,001 | | Allen | | | 65,050 | | | | 6,760,089 | | | | 6,571 | | | | 923,028 | | Lieberherr | | | — | | | | — | | | | — | | | | — | | Statler | | | — | | | | — | | | | 7,229 | | | | 1,015,458 | | Jasper | | | 25,100 | | | | 2,027,747 | | | | 6,571 | | | | 923,028 | |
The following is an explanation of the above table: Value Realized on Exercise. The amounts shown in the “Value Realized on Exercise” column were calculated using the spread between the market price at exercise and the stock option exercise price, multiplied by the number of stock options exercised. The stock options exercised may include both incentive stock options andnon-qualified stock options. Messrs. Ortberg, Allen and Jasper exercised a large number of options in order to mitigate potential excise tax in connection with the UTC merger. Value Realized on Vesting. The amounts shown in the “Value Realized on Vesting” column were calculated by multiplying the number of performance shares that vested with respect to the 2016–2018 performance period by $140.47, our year end closing share price. PENSION BENEFITS FOR FISCAL YEAR 2018 The following table provides information as of the end of 2018 (the pension measurement date for purposes of our financial statements) for each NEO eligible for a benefit under our qualified and Proxy Statement.non-qualified defined benefit pension plans. 34
| | | | | | | | | | | | | | | Name | | Plan Name | | Number of Years
Credited Service
(#) | | | Present Value of
Accumulated
Benefit ($) | | | Payments
During Last
Fiscal Year ($) | | Ortberg | | Rockwell Collins Pension Plan | | | 19.2 | | | | 788,493 | | | | — | | | | Rockwell CollinsNon-Qualified Pension Plan | | | 19.2 | | | | 205,603 | | | | — | | | | 2005 Rockwell CollinsNon-Qualified Pension Plan | | | 19.2 | | | | 429,833 | | | | — | | Allen | | Rockwell Collins Pension Plan | | | 11.8 | | | | 364,034 | | | | — | | | | Rockwell CollinsNon-Qualified Pension Plan | | | 11.8 | | | | 203,379 | | | | — | | | | 2005 Rockwell CollinsNon-Qualified Pension Plan | | | 11.8 | | | | 470,135 | | | | — | | Statler | | Rockwell Collins Pension Plan | | | 19.8 | | | | 598,728 | | | | — | | | | Rockwell CollinsNon-Qualified Pension Plan | | | 19.8 | | | | 163,233 | | | | — | | | | 2005 Rockwell CollinsNon-Qualified Pension Plan | | | 19.8 | | | | 514,533 | | | | — | | Jasper | | Rockwell Collins Pension Plan | | | 15.4 | | | | 337,650 | | | | — | | | | Rockwell CollinsNon-Qualified Pension Plan | | | 15.4 | | | | — | | | | — | | | | 2005 Rockwell CollinsNon-Qualified Pension Plan | | | 15.4 | | | | 10,900 | | | | — | |
In September 2006, we froze our qualified andnon-qualified defined benefit pension plans and shifted our emphasis to our savings plans. The number of years of credited service for each NEO shown above reflects the years of service he had when our defined benefit pension plans were frozen. Set forth below is further disclosure relating to our frozen qualified andnon-qualified defined benefit pension plans. We maintain qualified andnon-qualified defined benefit pension plans for our employees. As part of the 2001spin-off from Rockwell International, all of the qualified defined benefit pension plans were merged into one plan and renamed the Rockwell Collins Pension Plan (“Qualified Pension Plan”). Effective September 30, 2006, the Qualified Pension Plan was frozen to discontinue benefit accruals for salary increases and services rendered after that date, other than for employees covered by collective bargaining agreements. Each of the current NEOs, other than Mr. Lieberherr, who was appointed after the plan was frozen, is eligible for pension benefits under the Qualified Pension Plan. Benefit calculations for each NEO in the table is unique depending on age, years of service and average annual covered compensation. Covered compensation includes salary and annual incentive payments. We also maintainnon-qualified defined benefit pension plans (the Rockwell CollinsNon-Qualified Pension Plan (“NQ Pension Plan”) and the 2005 Rockwell CollinsNon-Qualified Pension Plan (“2005 NQ Pension Plan”)) to provide eligible employees with supplemental pension benefits in excess of the maximum benefit allowed under the Qualified Pension Plan by reason of limitations of the Internal Revenue Code. A participant’s supplemental retirement benefit is generally based on a continuation of the participant’s benefit calculation formula under the Qualified Pension Plan if not for the Internal Revenue Code limits. We adopted the 2005 NQ Pension Plan to comply with the requirements of Internal Revenue Code Section 409A fornon-qualified pension benefits earned after 2004.Non-qualified pension benefits for service and compensation earned before 2005 will be paid from the NQ Pension Plan and benefits for service and compensation earned after 2004 will be paid from the 2005 NQ Pension Plan. Executive officers hired on or after January 1, 1993 and before October 1, 2006 are covered by an enhanced earlybuild-up retirement benefit provision broadly available to the other salaried participants hired before 1993. This benefit was also frozen on September 30, 2006. The Qualified Pension Plan does not have a permanent lump sum option except for the distribution of certain small benefits (i.e., with a present value less than $5,000). Payments from the NQ Pension Plan are made in the same form and at the same time as payments from the Qualified Pension Plan. Under the 2005 NQ Pension Plan, participants made an election at the end of calendar year 2008 as to the form and timing of the payments that will be made upon separation from employment. For benefits payable under the 2005 NQ Pension Plan, participants can elect to receive a life annuity, one lump sum or up to ten annual installments. The present value of the accumulated pension benefit for each named executive officer is calculated as required by regulatory standards using a 4.02% discount rate as of September 28, 2018, and a retirement age of 62, the earliest age an executive can retire without a reduction in benefits. For the Qualified Pension Plan and the NQ Pension Plan, the form of payment for the NEOs assumes a weighted average of a joint and 60% survivor annuity and a single life annuity. For the 2005 NQ Pension Plan, the form of payment is based on the NEOs’ election. For further discussion related to our pension assumptions, see Note 10 of the Notes to Consolidated Financial Statements in the 2018 Annual Report on Form10-K. 35
NON-QUALIFIED DEFERRED COMPENSATION FOR FISCAL YEAR 2018 The table below provides information on thenon-qualified deferred compensation of the NEOs in 2018, including the following elements: Rockwell Collins Deferred Compensation Plan For Messrs. Ortberg, Allen, Statler and Jasper, the plan allows them and other eligible employees to defer a portion of their income and earnings until a future date when distributions are received from the plan. Participation in the plan is an annual decision and elections must generally be made during an annual enrollment period. Participants are not allowed to change their deferral election during the year. Participants may elect to defer up to 50% of their base salaries and/or as much as 100% of their annual incentive awards. The 2005 Deferred Compensation Plan also provides for a matching contribution for each participant to the extent participation in the plan reduces the matching contribution the executive would have received under our Qualified Retirement Savings Plan (“Qualified Savings Plan”). Participants may elect to receive their balances on a future specified date whilein-service, at retirement (up to 15 annual installments or as a lump sum) or upon termination (lump sum only). Participants can choose any of the measurement funds offered by the plan, which generally mirror the funds provided in our Qualified Savings Plan, and have the ability to change their investment elections at any time. The measurement fund options are intended to mirror as closely as possible the performance of the underlying investment funds. B/E Aerospace Deferred Compensation Plan Mr. Lieberherr participated in B/E’s 2010 Deferred Compensation Plan. Under this plan we allow Mr Lieberherr and other eligible Interior Systems employees to defer up to 75% of their salaries and 100% of their annual bonuses until a future date when distributions are received from the plan. Participation in the plan is an annual decision and elections must generally be made during an annual enrollment period. Participants are not allowed to change their deferral election during the year. Participants may elect to receive their balances on a future specified date whilein-service, at retirement (up to 15 annual installments or as a lump sum) or upon termination (lump sum only). Participants can choose any of the measurement funds offered by the plan and have the ability to change their investment elections at any time. Pursuant to the Lieberherr Employment Agreement, Rockwell Collins makes a contribution equal to 7.5% of Mr. Lieberherr’s monthly salary and a contribution equal to 20% of his annual salary on January 1 each year while employed. These contributions are fully vested when made. These were contributions were part of Mr. Lieberherr’s prior employment agreement with B/E. Rockwell CollinsNon-Qualified Retirement Savings Plan The primary purpose of ourNon-Qualified Retirement Savings Plan(“Non-Qualified Savings Plan”) is to supplement our Qualified Savings Plan by allowing employees to receive credits for contributions that could not be made to the Qualified Savings Plan due to the Internal Revenue Code compensation limit or annual additions limit. Additionally, participants receive credits to theNon-Qualified Savings Plan for amounts that but for the Internal Revenue Code limits would have been contributed to the Qualified Savings Plan (a) as company matching contributions equal to 62.5% of the first eight percent of employee contributions and (b) as company retirement contributions (such defined contributions are expressed as a specified percentage of eligible compensation determined based on the sum of a participant’s age and years of service). Participants may defer up to 50% of their base salaries to the plan. With respect to distributions, contributions made prior to 2005 permit participants to receive their balances upon termination of employment either through a lump sum payment or in annual installments up to ten years. Contributions made in 2005 through 2007 are paid in a lump sum only upon termination of employment. We adopted the 2005Non-Qualified Savings Plan to comply with Internal Revenue Code Section 409A requirements. Beginning with deferral elections for 2008, participants can receive their resulting balances upon termination of employment either through a lump sum payment or in up to ten annual installments. The investment funds available for the employee and company credits in theNon-Qualified Savings Plan are similar to the investment funds in the Qualified Savings Plan. Mr. Lieberherr is not a participant in the Rockwell CollinsNon-Qualified Savings Plan. 36
| | | | | | | | | | | | | | | | | | | | | | | Name | | Plan | | Executive
Contributions
in Last FY
($) | | | Registrant
Contributions
in Last FY
($) | | | Aggregate
Earnings/
(Losses)
in Last FY
($) | | | Aggregate
Withdrawals/
Distributions
($) | | | Aggregate
Balance at
Last FYE
($) | | Ortberg | | RC DCP | | | — | | | | — | | | | 105,591 | | | | — | | | | 732,771 | | | | NQSP | | | 68,862 | | | | 186,466 | | | | 101,777 | | | | — | | | | 2,249,996 | | Allen | | RC DCP | | | — | | | | — | | | | 87,003 | | | | — | | | | 655,711 | | | | NQSP | | | 31,765 | | | | 78,852 | | | | 154,253 | | | | — | | | | 1,595,068 | | Lieberherr | | B/E DCP | | | 337,568 | | | | 243,988 | | | | 143,997 | | | | — | | | | 6,403,442 | | | | NQSP | | | — | | | | — | | | | — | | | | — | | | | — | | Statler | | RC DCP | | | — | | | | — | | | | — | | | | — | | | | — | | | | NQSP | | | 31,288 | | | | 80,361 | | | | 92,401 | | | | — | | | | 1,486,458 | | Jasper | | RC DCP | | | — | | | | — | | | | 7,887 | | | | — | | | | 121,124 | | | | NQSP | | | 10,114 | | | | 55,001 | | | | 50,247 | | | | — | | | | 559,698 | |
The following is an explanation of the above table: Executive Contributions in Last FY. The amounts in the “Executive Contributions in Last FY” column include contributions that were reported in the Summary Compensation Table in 2018. Registrant Contributions in Last FY. The amounts in the “Registrant Contributions in Last FY” column include company contributions credited to each executive’s NQSP account during 2018. Company contributions for Mr. Ortberg, Mr. Allen, Mr. Statler and Mr. Jasper include credits equal to 62.5% of the first eight percent of the executive’s base salary, and retirement contributions equal to a percentage of eligible compensation (salary and incentive plan payments) based on the sum of the executive’s age and years of service. Contributions are only made to the extent they could not be made to the Qualified Savings Plan. The amounts in this column include registrant contributions that were reported in the Summary Compensation Table as All Other Compensation in 2018. For Mr. Lieberherr, company contributions were equal to 27.5% of his annual salary. Aggregate Earnings/(Losses) in Last FY. The amounts in the “Aggregate Earnings/(Losses) in Last FY” column include actual dividends and market value changes in the plan accounts during 2018. Aggregate Withdrawals/Distributions. The amounts in the “Aggregate Withdrawals/Distributions” column show any withdrawals or distributions from the NEOs’ DCP and/or NQSP accounts during 2018. Aggregate Balance at Last FYE. The fiscalyear-end balances for the NQSP include the following contribution amounts that were previously reported in the Summary Compensation Table for 2017 and 2016: Ortberg ($206,082 for 2017 and $211,587 for 2016), Allen ($91,296 for 2017 and $89,290 for 2016), Statler ($96,896 for 2017 and $99,230 for 2016), Jasper ($68,720 for 2017 and $67,334 for 2016). POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE OF CONTROL The following information and table set forth amounts that would be payable to our NEOs upon certain termination scenarios and also upon the occurrence of a change of control of the Corporation without a termination. We do not generally enter into employment contracts with our executive officers nor do we have any severance plan or arrangement for our executive officers. The executives serve at the will of the Board. This approach allows us to remove an executive officer prior to retirement whenever it is in our best interests to do so, with discretion on whether to provide any severance benefits. On the rare occasion when an executive officer is removed, the Compensation Committee may exercise its business judgment in approving an appropriate separation agreement in consideration of all relevant circumstances, including the individual’s term of employment, past accomplishments and reasons for separation. 37
Executive officers are subject to certain restrictive agreements with us upon termination of employment, including confidentiality restrictions, mutual arbitration agreements andnon-competition covenants and employeenon-solicitation covenants. An executive could lose all outstanding long-term incentives and/or be required to refund various long-term incentive benefits realized in the priortwo-year period for breaching thesenon-compete ornon-solicitation restrictions. Upon a change of control, the executive will no longer be bound by thenon-competition andnon-solicitation covenants, and the forfeiture and repayment obligations described in the immediately preceding sentence will no longer apply. Executives will continue to be subject to our clawback policy following termination of employment. Assumptions and General Principles The following assumptions and general principles apply with respect to the table below and any termination of employment of an NEO. The amounts shown in the table assume that each NEO was terminated at the end of 2018. Accordingly, the table includes estimates of amounts that would be paid to the NEO upon the occurrence of a termination or change of control. The actual amounts to be paid to an NEO can only be determined at the time of the termination or change of control. An NEO is entitled to receive amounts earned during employment regardless of the manner in which his or her employment is terminated. These amounts include base salary, the bonus payable for the completed fiscal year, and unused vacation. These amounts are not shown in the table because they are not specifically related to the termination of employment. Pursuant to the awards under our long-term incentives plans, an NEO who terminates employment by death, disability or retirement during the performance period under the award is eligible to receive apro-rata payment for the portion of the period that elapsed prior to the termination of employment. In the event of a voluntary termination or a termination for cause before the end of the performance period, no payments will be made. See the discussion of “Long-Term Incentives” in the “Compensation Discussion and Analysis” for a description of our long-term incentive compensation plans. An NEO may exercise any stock options that vested prior to the date of termination. Any payments related to these vested stock options are not included in the table because they are not specifically related to the termination of employment. An NEO will be entitled to receive all amounts accrued and vested under our retirement and savings programs, pension plans and deferred compensation plans in which the NEO participates. These amounts will be determined and paid in accordance with the applicable plan and are not included in the table because they are not specifically related to the termination of employment. Certain of these amounts are set forth in the Pension Benefits Table and theNon-Qualified Deferred Compensation Table. Normal and Early Retirement An NEO is eligible to elect normal retirement at age 65 and early retirement between the ages of 55 and 64. All of our full-time salaried employees, other than B/E employees, hired prior to October 1, 2006 with at least ten years of service are eligible for health care and life insurance benefits upon normal retirement subject to the terms of the plans and applicable limits on company contributions. As noted in the description under Lieberherr Employee Agreement, Mr. Lieberherr and his spouse have lifetime medical benefits. In addition, upon normal and early retirement, all outstanding stock options will continue to vest in accordance with their terms and be exercisable for up to five years after retirement. As of the end of 2018, none of our NEOs were eligible for normal retirement. Mr. Ortberg is eligible for early retirement. Death and Disability In the event of the death of an NEO, unvested restricted stock units will vest and all outstanding stock options will immediately vest and become exercisable. The amounts set forth in the table for stock options reflect the difference between the closing price of our common stock at year end 2018 and the exercise prices for each option for which vesting accelerated. In the event of the disability of an NEO, unvested restricted stock units will vest and all stock options will continue to vest in accordance with their terms and the Corporation’s practices. Upon an NEO’s death or disability, the executive’s estate or the executive is entitled to apro-rata payout in respect of outstanding performance shares. The payment will be made following the completion of the applicable performance period and will be based upon the performance achieved over the applicable performance period. Each NEO is eligible for company-paid life insurance. Life insurance benefits are not shown in the table because the amount is based on the same formula that is generally available to our salaried employees. Mr. Lieberherr’s beneficiary is also entitled to a $5 million death benefit. This arrangement was put in place by B/E. 38
Each NEO also participates in our disability insurance programs, which consist of salary continuation, short-term disability, and long-term disability. The disability benefits for NEOs are not shown in the table because they are based on the same formula as those generally available to all salaried employees. Voluntary Termination and Termination for Cause An NEO is not entitled to receive any severance payments or additional benefits upon his or her voluntary decision to terminate employment with us prior to being eligible for retirement or upon termination of employment by us for cause. Change of Control We have entered into change of control agreements with each of the NEOs. Forms of these agreements have been publicly filed as exhibits to our reports filed with the SEC. Each agreement is set to expire in June 2019 with the agreements automatically renewed annually unless60-days advance notice ofnon-renewal is given. Each agreement becomes effective upon a “change of control” during the term, as follows: the acquisition by any individual, entity or group of 20% or more of the combined voting power of our outstanding securities; a change in the composition of a majority of our Board of Directors that is not supported by our current Board of Directors; a major corporate transaction, such as a reorganization, merger or consolidation or sale or other disposition of all or substantially all of our assets, that results in a change in the majority of our Board of Directors or of more than 50% of our shareowners; or approval by our shareowners of our complete liquidation or dissolution. The consummation of the merger with United Technologies Corporation will constitute a change of control under the agreements. Each agreement provides for the continued employment of the executive for two years after the change of control on terms and conditions no less favorable than those in effect before the change of control. Severance benefits are available after a change of control, if an NEO’s employment is terminated without “cause” (termination for reasons other than willful nonperformance of duties after written demand or willful engagement of illegal conduct or gross misconduct) or if the executive terminates employment for “good reason” (including decrease in position, authority, duties or responsibilities, failure to maintain compensation, change in office location by more than 35 miles or certain breaches of the agreement) within thattwo-year period. The agreements do not provide for excise taxgross-ups. The executive is entitled to severance benefits equal to two or three times the executive’s annual compensation, including bonus, and the value of other retirement, health and welfare benefits for two or three years. Our chief executive officer and any executive officer who was already a party to a change of control agreement with us prior to April 2012 will receive severance benefits based upon the three times multiplier. Messrs. Ortberg, Allen and Statler have a three times multiplier. Any executive officers appointed after April 2012, other than a new chief executive officer, will receive severance benefits based upon the two times multiplier. Messrs. Jasper and Lieberherr have a two times multiplier. In addition to the change of control agreements, our long-term incentive agreements also include accelerated vesting and potentially enhanced payout provisions in the event of a loss of employment in connection with a change of control. These long-term incentive arrangements include: performance shares that become fully vested upon a change of control and a qualifying termination of employment and are subsequently paid out at the prior three-year average payout percentage for performance shares; stock options that become fully vested upon a change of control and a qualifying termination of employment; and restricted stock units that become fully vested upon a change of control and qualifying termination of employment. The 2005 NQ Pension Plan provides for a lump sum payment payable upon a change of control without the requirement of a termination of employment if a participant elected this benefit prior to the end of calendar year 2008. 39
The following table presents, as of the end of 2018, the estimated incremental payments potentially payable to the NEOs upon each of the specified events. | | | | | | | | | | | | | | | | | | | | | | Estimated Incremental Payments on Termination or Change of Control | | | | | Ortberg
($) | | | Allen
($) | | | Lieberherr
($) | | | Statler
($) | | | Jasper
($) | | Normal and Early Retirement | | Performance Shares | | | 4,026,151 | | | | 861,502 | | | | 228,217 | | | | 773,708 | | | | 703,427 | | Restricted Stock Units | | | 1,122,496 | | | | 246,103 | | | | 199,889 | | | | 169,126 | | | | 153,815 | | Stock Options | | | 7,743,812 | | | | 1,612,632 | | | | — | | | | 1,662,806 | | | | 1,512,580 | | Death | | Performance Shares | | | 4,026,151 | | | | 861,502 | | | | 228,217 | | | | 773,708 | | | | 703,427 | | Restricted Stock Units | | | 3,844,383 | | | | 842,680 | | | | 684,651 | | | | 579,298 | | | | 526,622 | | Stock Options | | | 7,743,812 | | | | 1,612,632 | | | | — | | | | 1,662,806 | | | | 1,512,580 | | Death Benefit | | | — | | | | — | | | | 5,000,000 | | | | — | | | | — | | Disability | | Performance Shares | | | 4,026,151 | | | | 861,502 | | | | 228,217 | | | | 773,708 | | | | 703,427 | | Restricted Stock Units | | | 3,844,383 | | | | 842,680 | | | | 684,651 | | | | 579,298 | | | | 526,622 | | Stock Options | | | 7,743,812 | | | | 1,612,632 | | | | — | | | | 1,662,806 | | | | 1,512,580 | | Termination Without Cause or for Good Reason After a Change of Control | | Performance Shares | | | 7,430,657 | | | | 1,599,354 | | | | 639,007 | | | | 1,353,531 | | | | 1,230,555 | | Restricted Stock Units | | | 3,844,383 | | | | 842,680 | | | | 684,651 | | | | 579,298 | | | | 526,622 | | Stock Options | | | 7,743,812 | | | | 1,612,632 | | | | — | | | | 1,662,806 | | | | 1,512,580 | | Severance | | | 3,511,500 | | | | 2,029,800 | | | | 1,776,250 | | | | 2,011,800 | | | | 1,092,600 | | Annual Incentive | | | 5,465,650 | | | | 1,924,250 | | | | 1,886,378 | | | | 1,670,062 | | | | 907,004 | | Benefits Continuation | | | 54,719 | | | | 57,044 | | | | 219,228 | | | | 65,614 | | | | 36,813 | | Retirement Benefits | | | 744,165 | | | | 391,352 | | | | 510,469 | | | | 390,172 | | | | 188,741 | | Outplacement Assistance | | | 175,575 | | | | 101,490 | | | | 133,219 | | | | 100,590 | | | | 81,945 | |
The following is an explanation of the above table: Normal and Early Retirement; Death; and Disability. The amounts shown for the “Performance Shares” under the “Normal and Early Retirement; Death; and Disability” header were calculated by multiplying each NEO’s target performance shares by the target payout percent assuming no adjustment for the TSR performance modifier,pro-rating the amount forone-third completion of the 2018–2020 performance period andpro-rating fortwo-thirds completion of the 2017–2019 performance period and then multiplying these amounts by the year end closing share price of $140.47. The amounts shown for the “Restricted Stock Units” under “Normal and Early Retirement” are apro-rated vesting amount based upon a $140.47 stock price that assumes the NEO retires on the last day of the fiscal year. The amounts shown for the Stock Options under “Death; Normal and Early Retirement; and Disability” are the spread value or “in the money” value of all outstanding unvested stock options based upon a $140.47 stock price at the end of the year as if they otherwise had become vested at the end of the year. For details on outstanding unvested stock options see the “Outstanding Equity Awards At Fiscal Year End” table. Death. The amounts shown for the “Performance Shares” and “Stock Options” under the Death header are calculated as described in the “Normal and Early Retirement.” 40
The amounts shown for the “Restricted Stock Units” were determined by multiplying the unvested restricted stock units by theyear-end closing price of $140.47. The amounts shown for the “Death Benefit” for Mr. Lieberherr is the amount his beneficiary will receive. Disability. The amounts shown for the “Performance Shares,” “Restricted Stock Units” and “Stock Options” are calculated as described in the “Normal and Early Retirement.” The amounts shown for the “Restricted Stock Units” were determined by multiplying the unvested restricted stock units by theyear-end closing share price of $140.47. Termination Without Cause or for Good Reason. The amounts shown for “Performance Shares” are based on full participation periods. The amounts were calculated by multiplying each NEO’s target performance shares by the prior three-year average payout percentage for performance shares assuming no adjustment for the TSR performance modifier and then multiplying these amounts by the year end closing price of $140.47. The amounts shown for “Restricted Stock Units” were determined by multiplying the unvested restricted stock units by theyear-end closing price of $140.47. The amounts shown for “Stock Options” are the sum of the spread or “in the money” value of the outstanding unvested stock options at the end of the year that vest upon the occurrence of a change of control and a qualifying termination. The amounts shown for “Severance” are equal to three times the base salary at the end of the year for Messrs. Ortberg, Allen and Statler. Messrs. Jasper and Lieberherr receive two times base salary due to changes made to our change of control agreements for executive officers appointed after April 2012. The amounts shown for “Annual Incentive” were calculated by multiplying each NEO’s base salary by his Incentive Compensation Plan target percent at the end of the year and multiplying this amount by each NEO’s average annual incentive compensation plan payout percent for the prior three years (or in the case of Mr. Lieberherr over two years given he has not been employed with us for three years). This amount was multiplied by three for Messrs. Ortberg, Allen and Statler. For Messrs. Jasper and Lieberherr, this amount was multiplied by two. The amounts shown for “Benefits Continuation” are the estimated cost of providing health and welfare benefits for three years following a termination after a change of control for Messrs. Ortberg, Allen and Statler and the cost of providing these benefits for two years for Messrs. Jasper and Lieberherr. These amounts are grossed up to the extent these benefits would not have been taxable to the executive if the executive had continued employment. The amounts shown for “Retirement Benefits” for each of the NEOs other than Mr. Lieberherr are the equivalent of an additional three years (two years in the case of Mr. Jasper) of contributions to the Qualified Retirement Savings Plan and the 2005Non-Qualified Savings Plan. For Mr. Lieberherr, the amount shown is the equivalent of two years of company contributions under B/E’s 2010 Deferred Compensation Plan and two years of matching contributions under B/E’stax-qualified savings plan. In addition, for Messrs. Allen, Statler and Jasper the amount reported includes the estimated value of an early retirement subsidy payable under the 2005 NQ Pension Plan to plan participants who attained age 50 but not age 55 upon the participant’s termination of employment. This value was estimated to be $47,367 for Mr. Allen and $60,070 for Mr. Statler and $1,399 for Mr. Jasper. These amounts were decreased by $12,786 for Mr. Allen and by $10,569 for Mr. Statler to reflect a corresponding decrease in the value of the lump sum benefit payable under the NQ Pension Plan that would be payable upon a change of control. The decreases under the NQ Pension Plan are largely driven by the use of a higher discount rate in valuing the lump sum payment payable upon a change of control as compared to the discount rate used to value the monthly benefits payable under the NQ Pension Plan absent a change of control. The amounts shown for “Outplacement Assistance” assume a cost equal to 15% of the NEO’s salary. If outplacement assistance is necessary, the actual expense could vary. Fiscal Year 2018 CEO Pay Ratio Disclosure The following table shows the ratio of our CEO’s 2018 total compensation to the median annual total compensation of our employee population. 41
| | | | | CEO 2018 Annual Total Compensation | | Median Employee 2018 Annual Total
Compensation | | 2018 Ratio of CEO to Median
Employee Pay | $10,422,412 | | $74,566 | | 140:1 |
To identify our median employee, we reviewed the 2018 fiscal year total direct compensation or TDC of all our employees other than the CEO as of July 13, 2018. TDC equals total base pay, target annual incentive pay and any long term incentive pay. Contractors that we determine pay for were also included. Independent contractors and other individuals who provide services to the company whose pay is determined by a third party were excluded from the determination of median employee pay. Also, as permitted by SEC rules, we excluded several de minimis country populations from our review because in the aggregate those populations make up less than 5% of our total employee base.¹ Once we determined the median employee TDC, we calculated that employee’s annual total compensation in the same manner in which we calculated the annual compensation for our CEO in the Summary Compensation Table on page 29. Our median employee had base pay of $66,482 (including overtime) and $8,084 in other compensation elements (comprised of employer contributions to the tax qualified savings plan, a spot compensation award and an annual incentive plan payment) for an annual total compensation of $74,566. | (1) | Our employee population, after De Minimis Exemptions, consisted of 30,617 individuals. |
De Minimis Exemption: Total U.S. Employees 21,462 Totalnon-U.S. Employees 10,722 Total Global Workforce 32,184 Total Exemptions 1,567 China (161), Dominican Republic (8), India (1,196), Japan (133), Kenya (9), Malaysia (1), Russia (7), Spain (13), Taiwan (23), Tanzania (1), Thailand (3), Vietnam (12) Total U.S. Employees 21,462 Total non U.S. Employees 9,155 (excluding 1,567 employees) Total Workforce for Median Calculation 30,617 42
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
See the information under the captions Voting SecuritiesandEquity Ownership of Certain Beneficial Owners and Management in the 2019 Proxy Statement.
EQUITY COMPENSATION PLAN INFORMATION Equity Compensation Plan Information
The following table gives information as of September 30, 2018 about our Common Stock that may be issued upon the exercise of options, warrants and rights under all of our existing equity compensation plans: | | | | | | | | | | | | | | | Plan Category |
| (a) Number Of Securities To Be Issued Upon Exercise Of Outstanding Options, Warrants And Rights |
| (b) Weighted-Average Exercise Price Of Outstanding Options, Warrants And Rights |
| (c) Number Of Securities Remaining Available For Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected In Column (a)) | Equity Compensation Plans Approved By Security Holders(1) |
| 3,834,234 |
| (2)(5) |
| $ | 76.83 |
|
| 5,198,335 |
| (3)(4) | | Equity Compensation Plans Not Approved By Security Holders |
| 0 |
| |
| 0 |
|
| 0 |
| | | Total |
| 3,834,234 |
| |
| $ | 76.83 |
|
| 5,198,335 |
| |
(1) Consists of the 2015 Long Term Incentives Plan.
(2) | | | | | | | | | | | | | | Plan Category | | (a) Number Of Securities To Be Issued Upon Exercise Of Outstanding Options, Warrants and Rights | | | (b) Weighted-Average Exercise Price Of Outstanding Options, Warrants and Rights | | | (c) Number Of Securities Remaining Available For Future Issuance Under Equity Compensation Plans
(Excluding Securities Reflected in Column (a)) | | | Equity Compensation Plans Approved By Security Holders(1) | | | 3,834,234 | (2)(5) | | $ | 76.83 | | | | 5,198,355 | (3)(4) | | | | | | | Equity Compensation Plans Not Approved By Security Holders | | | 0 | | | | 0 | | | | 0 | | | | | | Total | | | 3,834,234 | | | $ | 76.83 | | | | 5,198,335 | |
| (1) | Consists of the 2015 Long Term Incentives Plan. |
| (2) | Includes 785,538 performance shares, which is the maximum number of shares that can be issued in the future if maximum performance is achieved under performance agreements granted in November 2016 and 2017. Of these performance shares, 159,097 will be issued in November 2018 based on performance shares granted in November 2015. Also includes 633,249 restricted stock units (RSUs). Such performance shares and RSUs are not included in the weighted average price calculation. |
| (3) | Excludes 2,400,772 shares available under our ESPP. Further purchases under the ESPP were suspended on September 29, 2017 pursuant to the UTC Merger Agreement. If the UTC Merger is completed, the ESPP will be terminated. |
| (4) | Of the 5,198,335 shares available for future grant under the 2015 Long-Term Incentives Plan, each share issued pursuant to an award of restricted stock, restricted stock units, performance shares and performance units counts as 3.55 shares against this limit in accordance with the terms of the plan. |
| (5) | Concurrent with the B/E Aerospace acquisition that occurred in April 2017, Rockwell Collins assumed the B/E Aerospace restricted stock units granted under the B/E Aerospace 2005 Long-Term Incentive Plan. There will be 111,198 Rockwell Collins shares that will be issued when the B/E Aerospace restricted stock units are vested. Rockwell Collins did not assume the B/E Aerospace 2005 Long-Term Incentive Plan and no further awards will be made under this plan. |
EQUITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Principal Shareowners The following table provides information about each shareowner known to us to own beneficially more than five percent of the outstanding shares of our common stock. | | | | | | | | | Name and Address of Beneficial Owner | | Shares | | | Percent of Class(1) | | The Vanguard Group(2)(3) 100 Vanguard Blvd. Malvern, PA 19355 | | | 16,456,733 | | | | 10.0 | % | BlackRock, Inc.(4)(5) 55 East 52nd Street New York, NY 10055 | | | 11,987,278 | | | | 7.3 | % |
| (1) | Percent of class calculation is based on shares of common stock outstanding as of October 31, 2018 |
| (2) | Based on a Schedule 13G/A filed with the SEC by this shareowner reporting beneficial ownership of these shares as of February 28, 2018. |
| (3) | This shareowner has sole voting power with respect to 203,662 shares and sole dispositive power with respect to 16,198,978 shares. |
| (4) | Based on a Schedule 13G filed with the SEC by this shareowner reporting beneficial ownership of these shares as of December 31, 2017. |
| (5) | This shareowner has sole voting power with respect to 10,680,533 shares and sole dispositive power with respect to 11,987,278 shares. |
Management and Director Equity Ownership The following table shows the beneficial ownership, reported to us as of October 31, 2018, of our common stock, including shares as to which a right to acquire ownership within 60 days of that date exists within the meaning of Rule13d-3(d)(1) under the Securities Exchange Act of 1934, as amended, of each director, each executive officer listed in the Summary Compensation Table on page 29 and of such persons and other executive officers as a group. Beneficial ownership includes shares subject to stock options, restricted stock units and performance shares that can be issued in theacquired (including as a result of expected vesting and/or delivery, but excluding any future if maximum performance is achieved under performance agreements granted in November 2016 and 2017. Of these performance shares, 159,097 will be issued in November 2018 baseddividend equivalents payable on performance shares granted in November 2015. Also includes 633,249 restricted stock units (RSUs). Such performance shares and RSUs are not included in the weighted average price calculation. (3) Excludes 2,400,772 shares available under our ESPP. Further purchases under the ESPP were suspended on September 29, 2017 pursuant to the UTC Merger Agreement. If the UTC Merger is completed, the ESPP will be terminated.
(4) Of the 5,198,335 shares available for future grant under the 2015 Long-Term Incentives Plan, each share issued pursuant to an awardheld by directors) within 60 days of restricted stock, restricted stock units, performance shares and performance units counts as 3.55 shares against this limit in accordance with the terms of the plan.October 31, 2018.43
(5) Concurrent with the B/E Aerospace acquisition that occurred in April 2017, Rockwell Collins assumed the B/E Aerospace restricted stock units granted under the B/E Aerospace 2005 Long-Term Incentive Plan. There will be 111,198 Rockwell Collins shares that will be issued when the B/E Aerospace restricted stock units are vested. Rockwell Collins did not assume the B/E Aerospace 2005 Long-Term Incentive Plan and no further awards will be made under this plan.
| | | | | | | | | Name | | Beneficial Ownership on
October 31, 2018 | | | | Shares(1) | | | Percent of
Class(2) | | Robert K. Ortberg | | | 490,825 | (3,4,5) | | | * | | Anthony J. Carbone | | | 70,674 | (6,7) | | | * | | Chris A. Davis | | | 60,719 | (6,7) | | | * | | Ralph E. Eberhart | | | 21,829 | (7) | | | * | | John A. Edwardson | | | 16,970 | (7) | | | * | | Richard G. Hamermesh | | | 10,474 | (7)(8) | | | * | | David Lilley | | | 35,513 | (7) | | | * | | Andrew J. Policano | | | 26,442 | (7) | | | * | | Cheryl L. Shavers | | | 27,770 | (6,7) | | | * | | Jeffrey L. Turner | | | 13,582 | (7) | | | * | | Patrick E. Allen | | | 317,479 | (3,4,5) | | | * | | Werner Lieberherr | | | 10,561 | (9) | | | * | | Philip J. Jasper | | | 167,866 | (3,4,5) | | | * | | Kent L. Statler | | | 211,541 | (3,4,5) | | | * | | All of the above and other executive officers as a group (25 persons) | | | 1,923,425 | (3,4,5,6,7) | | | 1.1 | % |
| (1) | Each person has sole voting and dispositive power with respect to the shares listed unless otherwise indicated. |
| (2) | Percent of class calculation is based on shares of common stock outsatanding as of October, 31, 2018. The shares owned by each person, and by the group, and the shares included in the number of shares outstanding have been adjusted, and the percentage of shares owned has been computed, in accordance with Rule13d-3-(d)(1) under the Securities Exchange Act of 1934, as amended. |
| (3) | Includes shares held under the Rockwell Collinstax-qualified savings plan and under B/E’stax-qualified savings plan as of October, 31, 2018. Does not include 4,347 share equivalents for Mr. Ortberg, 3,638 share equivalents for Mr. Allen, 0 share equivalents for Mr. Lieberherr, 2,004 share equivalents for Mr. Jasper, 3,198 share equivalents for Mr. Statler and 25,649 share equivalents for the entire group, in each case, held under Rockwell Collins’Non-Qualified Savings Plans as of October, 31, 2018. Share equivalents under theNon-Qualified Savings Plans are settled in cash in connection with retirement or termination of employment and may not be voted or transferred. A stock price of $127.70 was used to determine the number of share equivalents under the Retirement Savings Plan and theNon-Qualified Savings Plans. |
| (4) | Includes shares that may be acquired upon the exercise of outstanding stock options that are or will become vested and exercisable within 60 days as follows: 356,433 for Mr. Ortberg, 247,800 for Mr. Allen, 0 for Mr. Lieberherr, 136,666 for Mr. Jasper, 154,700 for Mr. Statler and 1,192,779 for the entire group. |
| (5) | Does not include unvested restricted stock units. Does not include unvested performance based shares held by such persons for which shares of Rockwell Collins common stock may be issued following the completion of the fiscal year 2017–2019 and fiscal year 2018–2020 performance periods, which shares are dependent on the level of achievement of Rockwell Collins performance goals and Rockwell Collins total shareowner return relative to certain peer companies. |
| (6) | Includes 11,984 shares for Mr. Carbone, 6,413 shares for Ms. Davis, and 4,632 shares for Dr. Shavers granted as restricted stock as compensation for service as directors. |
44
| (7) | Includes 45,599 shares for Mr. Carbone, 45,612 shares for Ms. Davis, 21,829 shares for General Eberhart, 16,970 shares for Mr. Edwardson, 2,934 shares for Dr. Hamermesh, 35,513 shares for Mr. Lilley, 26,442 shares for Dr. Policano, 23,138 shares for Dr. Shavers, and 13,582 shares for Mr. Turner granted as restricted stock units as compensation for service as directors. |
| (8) | Includes 620 shares held in a family trust and 44 shares held in a spousal trust. |
| (9) | Includes 3,506 shares held in a family trust. |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence. |
SeeCERTAIN TRANSACTIONS AND OTHER RELATIONSHIPS The Board’s Related Person Transaction Policy requires the review and approval or ratification by the Audit Committee of certain transactions or relationships involving Rockwell Collins and its directors, executive officers, certain shareowners and their affiliates. The Audit Committee is responsible for reviewing these transactions and takes into account the pertinent facts and circumstances presented, and any other information underit deems appropriate, to determine what is in the caption Governance:best interests of the Corporation.This written policy sets forth procedures for the review, approval or ratification and monitoring of transactions involving Rockwell Collins and “related persons.” For the purposes of the policy, “related persons” include executive officers, directors and director nominees or their immediate family members, or shareowners owning five percent or greater of Rockwell Collins’ outstanding stock. The Related Person Transaction Policy defines “related person transactions” in accordance with applicable SEC rules as any transaction in which the Corporation was or is to be a participant and in which a related person has a material direct or indirect interest that exceeds $120,000. The policy requires these related person transactions to be reviewed and approved or ratified by the Audit Committee. In addition, this policy requires related persons to disclose to the Audit Committee the material terms of the related person transaction, including the approximate dollar value of the amount involved in the transaction and the related person’s direct or indirect material interest in, or relationship to, the related person transaction. BOARD OF DIRECTORS AND COMMITTEES Our Board of Directors provides oversight and Committees direction of our business. Our Board seeks to maintain high corporate governance standards.Our corporate governance documents are available free of charge on our website at www.rockwellcollins.com under the Investor Relations tab and within the Corporate Governance link. We will provide, without charge, upon written request, copies of our corporate governance documents. These documents include our Restated Certificate of Incorporation,By-Laws,Certain Transactions Guidelines on Corporate Governance, Committee Charters, Board Membership Criteria, Code of Ethics, Categorical Standards and Other RelationshipsPolicy for Director Independence, and Related Person Transaction Policy. Please see also the section titled “Directors” in Item 10 beginning on page 2. Board Independence The Board of Directors has determined that no director other than Mr. Ortberg has a material relationship with us. Accordingly, nine of our ten directors are “independent” directors based on an affirmative determination by our Board of Directors in accordance with the listing standards of the New York Stock Exchange (NYSE) and Securities and Exchange Commission (SEC) rules. The standards relied upon by the Board in affirmatively determining whether a director is independent are primarily comprised of those objective standards set forth in the 2019 Proxy Statement.NYSE and SEC rules. In addition to these rules, the Board has adopted Categorical Standards and Policy for Director Independence, which is available in the Investor Relations section of our website at www.rockwellcollins.com, to assist the Board in making determinations regarding the independence of its members. There are no family relationships between any of our directors or any of our executive officers.45
Board Committees The Board has established six Committees whose principal functions are briefly described below. The specific functions and responsibilities of each Committee are outlined in more detail in its charter, which is available in the Investor Relations section of our website at www.rockwellcollins.com. The membership of each Committee as of October 31, 2018 is listed below. | | Item 14. | Principal Accounting Fees and Services. |
See the information under the caption Proposal to Approve the Selection of Independent Registered Public Accounting Firm in the 2019 Proxy Statement.
| | Item 15. | Exhibits and Financial Statement Schedules.
|
| | | | | | | (a) | | Audit | | Compensation | | Board
Nominating
and
Governance | | Technology
and
Cybersecurity | | Corporate
Strategy and
Finance | | Executive | Anthony J. Carbone | | | | | | | | | | | | • | Chris A. Davis | | C | | | | | | | | • | | • | Ralph E. Eberhart | | | | C | | | | • | | | | | John A. Edwardson | | | | • | | | | | | C | | • | Richard G. Hamermesh | | • | | | | | | | | | | | David Lilley | | • | | | | • | | | | • | | | Robert K. Ortberg | | | | | | | | | | | | C | Andrew J. Policano | | • | | | | C | | | | | | | Cheryl L. Shavers | | | | | | • | | C | | | | | Jeffrey L. Turner | | | | • | | | | • | | • | | |
46
| | | Audit Committee | | | The Audit Committee has four independent directors. The principal functions of the Audit Committee are to: | | Committee Members: Chris A. Davis (C,I) Richard G. Hamermesh (I) David Lilley (I) Andrew J. Policano (I) Meetings in 2018: 10 | • oversee our accounting and financial reporting processes; • oversee the integrity and audits of our financial statements; • oversee compliance with legal and regulatory requirements; • oversee the qualifications and independence of independent auditors; • oversee the performance of internal and independent auditors; • appoint or replace our independent auditors, with that appointment being subject to shareowner approval; • approve in advance the fees, scope and terms of all audit andnon-audit engagements with our independent auditors; • review and discuss policies with respect to risk management as well as internal controls over financial reporting; • monitor compliance of our employees with our standards of business conduct and conflicts of interest policies; • meet at least quarterly with our senior executive officers, the head of our internal audit department and our independent auditors; and • review and approve at least annually our policies on the use of financial derivative contracts and related hedging strategies. |
C: Chairman; I: Independent 47
| | | Compensation Committee | | | The Compensation Committee has three independent directors. The principal functions of the Compensation Committee are to: | | Committee Members: Ralph E. Eberhart (C,I) John A. Edwardson (I) Jeffrey L. Turner (I) Meetings in 2018: 4 | • evaluate the performance of the CEO and other senior executives; • determine compensation for the CEO and other senior executives; • review and approve the design and competitiveness of compensation plans, executive benefits and perquisites; • review and approve goals under the annual and long-term incentives plans; • review and make recommendations to the Board regarding director compensation; • oversee the Corporation’s annual and long-term incentives plans and deferred compensation plans; • review and evaluate compensation arrangements to assess whether they could encourage unreasonable risk- taking; • periodically review and make recommendations to the Board regarding the competitiveness of compensation; • retain, compensate and terminate, in its sole discretion, an independent compensation consultant used to assist in the evaluation of director, CEO or senior executive compensation; • review the Corporation’s Compensation Discussion and Analysis; • oversee submissions to shareowners for approval relating to compensation; and • consider the most recent advisory vote on executive compensation. |
C: Chairman; I: Independent | | | Board Nominating and Governance Committee | | | The Board Nominating and Governance Committee has three independent directors. For more information regarding the Committee’s role in director nominations, see “Director Nominations” below. The principal functions of the Committee are to: | | Committee Members: Andrew J. Policano (C,I) David Lilley (I) Cheryl L. Shavers (I) Meetings in 2018: 3 | • seek, consider and recommend qualified candidates for election as directors and recommend nominees for election as directors at the Annual Meeting; • periodically prepare and submit to the Board for adoption the Committee’s selection criteria for director nominees (“Board Membership Criteria”); • review and make recommendations on matters involving the general operation of the Board and our corporate governance; • annually recommend nominees for each committee of the Board; • annually facilitate the assessment of the Board’s performance as a whole and of the individual directors and reporting thereon to the Board; and • retain and terminate any search firm to be used to identify director candidates. |
C: Chairman; I: Independent 48
| | | | Technology and Cybersecurity Committee | | | | The Technology and Cybersecurity Committee has three independent directors. The principal functions of the Technology and Cybersecurity Committee are to: | | Committee Members: Cheryl L. Shavers (C,I) Ralph E. Eberhart (I) Jeffrey L. Turner (I) Meetings in 2018: 4 | | • review and provide guidance on important technology-related issues; • review our technology competitiveness; • review the strength and competitiveness of our engineering processes and disciplines; • review our cybersecurity and other information technology risks, controls and procedures, including the threat landscape and our strategy to mitigate risks and potential breaches; • periodically consult with the Board and the Audit Committee regarding information technology systems and processes, including, but not limited to, those relating to cybersecurity; • review our technology planning processes to support our growth objectives; and • review critical technologies development and replacement planning. |
C: Chairman; I: Independent | | | | Corporate Strategy and Finance Committee | | | | The Corporate Strategy and Finance Committee has four independent directors. The principal functions of the Corporate Strategy and Finance Committee are to: | | Committee Members: John A. Edwardson (C,I) Chris A. Davis (I) David Lilley (I) Jeffery L. Turner (I) Meetings in 2018: 1 | | | • provide input regarding our strategic direction, including the development of our strategic plan; • act as advisors in assessing our strategies and the action plans designed to meet our strategic objectives; • as requested, review and advise management on proposed acquisitions and divestitures, strategic investments and other transactions or financial matters; • review our capital structure strategies including dividend policy, share repurchase plans, and debt and financing strategies; and • review and advise management regarding our preliminary annual operating plan. | | |
C: Chairman; I: Independent 49
| | | | Executive Committee | | | | The Executive Committee has four directors. The principal function of the Executive Committee is to discharge certain responsibilities of the Board of Directors between meetings of the Board of Directors. The Committee may exercise all of the powers of the Board of Directors, except it has no power or authority to: | | Committee Members: Robert K. Ortberg (C) Anthony J. Carbone (I) Chris A. Davis (I) John A. Edwardson (I) Meetings in 2018: 3 | • adopt, amend or repeal any sections or articles of ourBy-Laws or Restated Certificate of Incorporation; • elect or remove officers, or fill vacancies in the Board of Directors or in committees; • fix compensation for officers, directors or committee members; • amend or rescind prior resolutions of the Board; • make recommendations to shareowners or approve transactions that require shareowner approval; • issue additional stock of the Corporation or fix or determine the designations and any of the rights and preferences of any series of stock (other than pursuant to a specific delegation of authority from the Board related to a shelf registration statement); or • take certain other actions specifically reserved for the Board. |
C: Chairman; I: Independent Board’s Role in Risk Oversight The Board oversees the management of risks inherent in the operation of the Corporation’s businesses and the implementation of its strategic plan. The Board reviews the risks associated with the Corporation’s strategic plan at an annual strategic planning session and periodically throughout the year as part of its consideration of the strategic direction of the Corporation. In addition, the Board addresses the primary risks associated with the business of the Corporation on an ongoing basis at regular meetings of the Board. Each of the Board’s Committees also oversees the management of risks that fall within the Committee’s areas of responsibility. In performing this function, each Committee has full access to management, as well as the ability to engage advisors.Non-Committee directors routinely attend each of the Committee meetings to help facilitate the Board’s oversight role. The following paragraphs highlight risk matters overseen by two of the Board’s Committees. The Audit Committee oversees the operation of our Enterprise Risk Management program, including a review of the status of matters involving the primary risks for the Corporation. The Vice President and General Auditor, who regularly provides reports to the Audit Committee, assists in identifying, evaluating and monitoring risk management controls to address identified risks. Key risk topics, such as data privacy, anti-bribery and government business systems compliance are periodically reviewed and discussed. The Audit Committee also oversees and monitors management’s internal controls over financial reporting and its preparation of the Corporation’s financial statements. The Committee oversees internal and external audits including the risk based approach used in the selection of audit matters. The Audit Committee provides reports to the Board that include these activities. As part of its oversight of the Corporation’s executive compensation program, the Compensation Committee, with the assistance of its independent compensation consultant, annually conducts a risk assessment of the Corporation’s compensation policies and practices and reviews the internal controls and processes as they apply to compensation decisions and policies. The Compensation Committee provides reports to the Board that include its risk assessment and compensation decisions. Based upon its risk assessment, the Committee has identified several mitigating factors that help reduce the likelihood of undue risk taking related to compensation arrangements, including, but not limited to, the use of multiple measures (operating margin, sales, return on sales, free cash flow and total shareowner return) in a balanced mix of annual and long-term incentives plans, use of multiple types of incentives, use of incentive payout caps in our annual and long-term incentives plans and executive stock ownership requirements that help to align incentives with long-term growth in equity values. Based on its review, the Compensation Committee has concluded that the Corporation’s compensation policies and procedures do not encourage unreasonable risk taking by management. 50
| Item 14. | Principal Accountant Fees and Services. |
FEES PAID TO INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The aggregate fees billable by Deloitte in fiscal years 2018 and 2017 are detailed in the table below. | | | | | | | | | (In Thousands) | | 2018 ($) | | | 2017 ($) | | Audit Fees(1) | | | 8,900 | | | | 9,576 | | Audit-Related Fees(2) | | | 193 | | | | 582 | | Tax Fees(3) | | | 4,792 | | | | 1,496 | | All Other Fees(4) | | | 39 | | | | — | | | | | | | | | | | Total | | | 13,924 | | | | 11,654 | | | | | | | | | | |
| (1) | For the audit of our annual financial statements of our internal controls over financial reporting and review of financial statements included in our quarterly reports on Form10-Q and services that are normally provided in connection with statutory and regulatory filings or engagements. |
| (2) | For audit-related services primarily related to the planned adoption of FASB ASU2014-09,Revenue from Contracts with Customers. |
| (3) | For tax compliance and tax advisory services. Incremental fees in 2018 were B/E related. |
| (4) | For human resources database subscription services. |
PRE-APPROVAL OF AUDIT ANDNON-AUDIT SERVICES The Audit Committee has adopted apre-approval policy requiring it topre-approve the audit and permissiblenon-audit services performed by the independent registered public accounting firm in order to assure that the provision of such services does not impair their independence. The Audit Committeepre-approved all the fiscal year 2017 and 2018 services provided by Deloitte. The Audit Committee alsopre-approved certain audit andnon-audit services contemplated to be performed by Deloitte in fiscal year 2019. Thepre-approval policy requires that the details be provided to the Audit Committee of the particular service or category of service contemplated to be performed and such services are generally subject to a specific budget. The Audit Committee may also separatelypre-approve services to be performed on acase-by-case basis. The Audit Committee may delegatepre-approval authority to one or more of its members, but not to management. Anypre-approvals by a member under this delegation are to be reported to the Audit Committee at its next scheduled meeting. Management and Deloitte are required to periodically report to the Audit Committee on the extent of the services provided by Deloitte pursuant to thepre-approval, including the fees for the services performed to date. 51
PART IV | Item 15. | Exhibits and Financial Statement Schedules. |
| (a) | Financial Statements, Financial Statement Schedules and Exhibits. |
| | (1) | (1 | ) | | Financial Statements |
The financial statements are included under Item 8 of the Original Filing: Consolidated Statement of Financial Position, as of September 30, 2018 and 2017 Consolidated Statement of Operations, years ended September 30, 2018, 2017 and 2016 Consolidated Statement of Comprehensive Income, years ended September 30, 2018, 2017 and 2016 Consolidated Statement of Cash Flows, years ended September 30, 2018, 2017 and 2016 Consolidated Statement of Equity, years ended September 30, 2018, 2017 and 2016 Notes to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm | | (2) | |
| | The financial statements are included under Item 8 of this Annual Report on Form 10-K: | | | |
| | | | | |
| | | | | | | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | | | | | | | | All other schedules not filed herewith are omitted because of the absence of conditions under which they are required or because the information called for is shown in the financial statements or notes thereto. |
| | | | 3-a-1 | | | Exhibits | | | 3-a-1 |
| | | | | | 3-a-2 | | 3-a-2 |
| | | | | | 3-b-1 | | 3-b-1 |
| | | | | | 4-a-1 | | 4-a-1 |
| | | | | | 4-a-2 | | 4-a-2 |
| | | | | | 4-a-3 | | 4-a-3 |
| | Second Supplemental Indenture, dated as of April 10, 2017, between the Company, as Issuer, and The Bank of New York Mellon Trust Company, N.A., as Trustee, filed as Exhibit 4.1 to the Company’s Form8-K dated April 10, 2017, is incorporated herein by reference. | | | | 4-a-4 | | 4-a-4 |
| | | | | | 4-a-5 | | 4-a-5 |
| | | | | | 4-a-6 | | 4-a-6 |
| | Underwriting Agreement, dated December 11, 2013, between the Company and Citigroup Global Markets Inc., J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Wells Fargo Securities, LLC, as representatives of the several Underwriters named in Schedule 1 to the Underwriting Agreement, filed as Exhibit 1 to the Company'sCompany’s Form8-K dated December 17, 2013, is incorporated herein by reference. | | | | 4-a-7 | | 4-a-7 |
| | | | | | 4-a-8 | | 4-a-8 |
| | | | | | 4-a-9 | | 4-a-9 |
| | |
52
| | | | | | | | | 4-a-11 |
| | | | | | 4-a-12 | | 4-a-12 |
| | | | | | 4-a-13 | | 4-a-13 |
| | | | | | 4-a-14 | | 4-a-14 |
| | | | | | 4-a-15 | | 4-a-15 |
| | | | | | *10-a-1 | | *10-a-1 |
| | | | | | *10-a-2 | | *10-a-2 |
| | | | | | *10-a-3 | | *10-a-3 |
| | | | | | *10-a-4 | | *10-a-4 |
| | | | | | *10-a-5 | | *10-a-5 |
| | | | | | *10-a-6 | | *10-a-6 |
| | | | | | *10-a-7 | | *10-a-7 |
| | | | | | *10-a-8 | | *10-a-8 |
| | | | | | *10-a-9 | | *10-a-9 |
| | | | | | *10-a-10 | | *10-a-10 |
| | | | | | *10-a-11 | | *10-a-11 |
| | | | | | *10-a-12 | | *10-a-12 |
| | | | | | *10-a-13 | | *10-a-13 |
| | | | | | *10-a-14 | | *10-a-14 |
| | | | | | *10-a-15 | | *10-a-15 |
| | | | | | *10-b-1 | | *10-b-1 |
| | | | | | *10-b-2 | | *10-b-2 |
| | |
53
| | | | | | | | *10-d-1 | | *10-d-1 |
| | | | | | *10-e-1 | | *10-e-1 |
| | | | | | *10-e-2 | | *10-e-2 |
| | | | | | *10-f-1 | | *10-f-1 |
| | | | | | *10-f-2 | | *10-f-2 |
| | | | | | *10-f-3 | | *10-f-3 |
| | | | | | *10-f-4 | | *10-f-4 |
| | | | | | *10-f-5 | | *10-f-5 |
| | | | | | *10-f-6 | | *10-f-6 |
| | | | | | *10-g-1 | | *10-g-1 |
| | | | | | *10-g-2 | | *10-g-2 |
| | | | | | *10-g-3 | | *10-g-3 |
| | | | | | *10-g-4 | | *10-g-4 |
| | | | | | *10-g-5 | | *10-g-5 |
| | | | | | *10-g-6 | | *10-g-6 |
| | | | | | *10-h-1 | | *10-h-1 |
| | | | | | *10-h-2 | | *10-h-2 |
| | | | | | *10-h-3 | | *10-h-3 |
| | | | | | *10-h-4 | | *10-h-4 |
| | | | | | *10-h-5 | | *10-h-5 |
| | | | | | *10-h-6 | | *10-h-6 |
| | | | | | *10-i-1 | | *10-i-1 |
| | | | | | *10-i-2 | | *10-i-2 |
| | | | | | *10-j-1 | | *10-j-1 |
| | | | | | *10-j-2 | | *10-j-2 |
| | | | | | 10-k-1 | | 10-k-1 |
| | |
54
| | | | | | | | 10-m-1 | | 10-m-1 |
| | | | | | *10-n-1 | | *10-n-1 |
| | | | | | *10-n-2 | | *10-n-2 |
| | | | | | 10-o-1 | | 10-o-1 |
| | | | | | 10-o-2 | | 10-o-2 |
| | | | | | 10-o-3 | | 10-o-3 |
| | | | | | *10-s-1 | | *10-s-1 |
| | | | | | *10-s-2 | | *10-s-2 |
| | | | | | 10-t-1 | | 10-t-1 |
| | Agreement and Plan of Merger, dated as of October 23, 2016, by and among Rockwell Collins, Inc., Quarterback Merger Sub Corp., and B/E Aerospace, Inc., filed as Exhibit 2.1 to the Company’s Form8-K dated October 23, 2016, is incorporated herein by reference. | | | | 10-t-2 | | 10-t-2 |
| | | | | | 21 | | 21 |
| | | | | | 23 | | 23 |
| | | | | | 24 | | 24 |
| | | | | | 31.1 | | 31.1 |
| | | | | | 31.2 | | 31.2 |
| | | | | | 31.3 | | 32.1Section 302 Certification of Chief Executive Officer | |
| | 31.4 | | | | | | 32.1 | | Section 906 Certification of Chief Executive Officer.** | | | | 32.2 | | 32.2 |
| | | | | 101.INS |
| | XBRL Instance Document. | | | 101.SCH |
| | XBRL Taxonomy Extension Schema. | | | 101.CAL |
| | XBRL Taxonomy Extension Calculation Linkbase. | | | 101.DEF |
| | XBRL Taxonomy Extension Definition Linkbase. | | | 101.LAB |
| | XBRL Taxonomy Extension Label Linkbase. | | | 101.PRE |
| | XBRL Taxonomy Extension Presentation Linkbase. |
101.INS XBRL Instance Document. † 101.SCH XBRL Taxonomy Extension Schema. † 101.CAL XBRL Taxonomy Extension Calculation Linkbase. † 101.DEF XBRL Taxonomy Extension Definition Linkbase. † 101.LAB XBRL Taxonomy Extension Label Linkbase. † 101.PRE XBRL Taxonomy Extension Presentation Linkbase. † | * | Management contract or compensatory plan or arrangement. |
| ** | Filed as an exhibit to the Original Filing. |
| † | Submitted with the Original Filing. |
55
* Management contract or compensatory plan or arrangement.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. | | | | | | | | | | | ROCKWELL COLLINS, INC. | | | | By | | By | /s/ ROBERT J. PERNA | | | | Robert J. Perna
Senior Vice President, General Counsel and Secretary
|
Dated: November 26, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on the 26th day of November 2018 by the following persons on behalf of the registrant and in the capacities indicated.
| Patrick E. Allen | | | | | Patrick E. Allen | | | | | | /s/ ROBERT K. ORTBERG | | Chairman, President and Chief Executive Officer (principal executive officer) | Robert K. Ortberg | | ANTHONY J. CARBONE* | | Director | CHRIS A. DAVIS* | | Director | RALPH E. EBERHART* | | Director | JOHN A. EDWARDSON* | | Director | RICHARD G. HAMERMESH* | | Director | DAVID LILLEY* | | Director | ANDREW J. POLICANO* | | Director | CHERYL L. SHAVERS* | | Director | JEFFREY L. TURNER* | | Director | | | | /s/ PATRICK E. ALLEN | | Senior Vice President and Chief Financial Officer (principal financial officer) | Patrick E. Allen | | /s/ TATUM J. BUSE | | Vice President, Finance and Corporate Controller (principal accounting officer) | Tatum J. Buse | | *By | /s/ ROBERT J. PERNA | | | | Robert J. Perna, Attorney-in-fact** | | |
** By authority of the powers of attorney filed herewith.
|
