NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
1.
|
Business Description and Basis of Presentation
|
Rockwell Collins, Inc. (the Company or Rockwell Collins) designs, produces and supports communications and aviation systems 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. Fiscal year
2016
and
2015
were 52-week years while
2014
was a 53-week year. 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.
As discussed in Note 4, Discontinued Operations and Divestitures, on March 10, 2015, the Company divested its Aerospace Systems Engineering and Support (ASES) business, which was acquired as part of the ARINC Incorporated (ARINC) transaction. On July 25, 2014, the Company divested its satellite communication systems business, formerly known as Datapath, Inc. (Datapath). As a result of the divestitures, the operating results of ASES and Datapath have been accounted for as discontinued operations for all periods presented. Unless otherwise noted, disclosures pertain to the Company's continuing operations.
|
|
2.
|
Significant Accounting Policies
|
Consolidation
The consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries. The Company has
one
consolidated subsidiary 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 gains and losses due to the remeasurement of account balances in foreign currencies are included within the Consolidated Statement of Operations and were not material to the Company's results of operations for
2016
,
2015
and
2014
.
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 hardware, engineering services, maintenance services 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 segment and sales and earnings under qualifying contracts are recorded either as products are shipped under the units-of-delivery method (for production effort), 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 (for development effort). 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
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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
$95 million
and
$87 million
at
September 30, 2016
and
2015
, 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 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
-
40
years; machinery and equipment (including internally developed software and other costs associated with the expansion and construction of ARINC's network-related assets),
5
-
15
years; information systems software and hardware,
5
-
10
years; and furniture and fixtures,
12
-
15
years. Depreciation methods and lives are reviewed periodically with any changes recorded on a prospective basis.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, 2016
and
2015
.
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, 2016
the Company had
six
reporting units. Purchased intangible assets with finite lives are amortized 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.
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 second 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.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 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
$224 million
,
$272 million
and
$268 million
for fiscal years ended
September 30, 2016
,
2015
and
2014
, 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.
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 minimizing 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 both fair value and cash flow hedges.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 of 2011 which imposed spending caps and certain reductions in security spending over a ten-year period through 2021. These spending caps and reductions, referred to as sequestration, went into effect in March 2013. In December 2013, Congress enacted the Murray-Ryan Bipartisan Budget Act of 2013, raising government discretionary spending limits temporarily for 2014 and 2015. More recently, the Bipartisan Budget Act of 2015 again raised the government discretionary spending limits temporarily for 2016 and 2017, after which the BCA will again be in force. The continued uncertainty surrounding the 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 continuing resolutions (or until the regular appropriation bills are passed), the Company may experience delays by the government in 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. The government began operations in fiscal year 2017 under a continuing resolution that is set to expire in December 2016. 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 business jet aircraft manufacturers. At
September 30, 2016
, receivables due from these business jet aircraft manufacturers were approximately
$162 million
. 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, 2016
, approximately
12 percent
of the Company's employees in the U.S. were represented by U.S. collective bargaining agreements, most of which were renewed without disruption in May 2013 and are set to expire in 2018.
Recently Adopted Accounting Standards
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, and
requires excess tax benefits from stock-based compensation to be classified within
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
In November 2015, the FASB issued new guidance requiring all deferred tax assets and liabilities to be classified as noncurrent on the balance sheet instead of separating those balances into current and noncurrent amounts. In order to simplify the accounting for income taxes, the Company adopted the new guidance in the first quarter of 2016 on a retrospective basis, which resulted in the reclassification of
$9 million
of current deferred tax assets and
$84 million
of current deferred tax liabilities to noncurrent as of September 30, 2015.
In April 2015, the FASB issued a new standard that provides a practical expedient permitting entities with a fiscal year end that does not coincide with a month end to measure defined benefit plan assets and obligations using the month end date closest to the fiscal year end. The new standard was early adopted by the Company for each of its defined benefit plans effective for the 2015 fiscal year end with no significant impact to the Company's financial statements.
Recently Issued Accounting Standards
In June 2016, the FASB issued a new standard on the measurement of credit losses, which will impact the Company's measurement of trade receivables. The new standard replaces the current incurred loss model with a forward-looking expected loss model that is likely to result in earlier recognition of losses. The new standard also increases disclosure requirements and is effective for the Company in 2021, with early adoption permitted, but not earlier than 2020. The Company has completed an evaluation of the new standard and does not expect that adoption will have a material impact on the Company's consolidated financial statements.
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. 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 replaces all current guidance on the topic and expands disclosures regarding revenue. Several amendments to the new standard have been issued or proposed, which are intended to resolve potential implementation challenges and drive consistent interpretation and application of the new standard. The guidance permits use of either a retrospective or cumulative effect transition method. Based upon the FASB's decision to approve a one year delay in implementation, the new standard is now effective for the Company in 2019, with early adoption permitted, but not earlier than 2018. The Company continues to evaluate the transition methods allowed under the new standard and the effect the standard will have on the Company's consolidated financial statements and related disclosures. Anticipated changes under the new standard include increased use of the percentage-of-completion method of accounting for government contracts, elimination of the units-of-delivery method, and the elimination of Customer relationship intangible assets related to free products provided to customers as up-front sales incentives. The Company continues to monitor the work of standard setters and the interpretive efforts of other non-authoritative groups with respect to other areas of potential material change.
Other new accounting standards issued but not effective until after
September 30, 2016
are not expected to have a material impact on the Company's financial statements.
|
|
3.
|
Acquisitions, Goodwill and Intangible Assets
|
Acquisitions
On February 25, 2016, the Company acquired the Matrix series projector product line from Christie Digital Systems, a global visual, audio and collaboration solutions company. The product line acquisition was accounted for as a business combination,
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
and the purchase price, net of cash acquired, was
$17 million
. In the third quarter of 2016, the purchase price allocation was finalized, with
$6 million
allocated to goodwill and
$11 million
to intangible assets. The intangible assets have a weighted average life of approximately
10
years. All 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 enhance the Company's industry-leading offerings for military and aviation simulation and training solutions.
On August 6, 2015, the Company acquired
100 percent
of the outstanding shares of Newport News, Virginia-based International Communications Group, Inc. (ICG), a leading provider of satellite-based global voice and data communication products and services for the aviation industry. The purchase price, net of cash acquired, was
$50 million
. Additional post-closing consideration of up to
$14 million
may be paid, contingent upon the achievement of certain milestones. The Company recorded a
$12 million
liability on the acquisition date for the fair value of the contingent consideration, which is reflected as a non-cash transaction on the Company's Consolidated Statement of Cash Flows in 2015. In the fourth quarter of 2016, the purchase price allocation was finalized, with
$51 million
allocated to goodwill and
$23 million
to intangible assets. The intangible assets have a weighted average life of approximately
8
years. All 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 broaden the Company's flight deck and connectivity portfolio.
On March 20, 2015, the Company acquired
100 percent
of the outstanding shares of Pacific Avionics Pty. Limited (Pacific Avionics), a Singapore-based company specializing in technologies used for wireless information distribution, including in-flight entertainment and connectivity. The purchase price, net of cash acquired, was
$24 million
. In the fourth quarter of 2015, the purchase price allocation was finalized with
$10 million
allocated to intangible assets and
$15 million
to goodwill,
none
of which is deductible for tax purposes. The intangible assets have a weighted average life of approximately
7
years. The excess purchase price over net assets acquired, including intangible assets, reflects the Company's view that this acquisition will further enhance the Company's cabin products and information management services portfolios.
The ICG and Pacific Avionics acquisitions are included within the Commercial Systems segment and the Matrix product line acquisition is included in the Government Systems segment. The results of operations for all three 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 these acquisitions as the effect of the acquisitions are not material to the Company's consolidated results of operations.
On December 23, 2013, the Company acquired
100 percent
of the outstanding common stock and voting interests of Radio Holdings, Inc., the holding company of ARINC, a leading global provider of air-to-ground data and voice communication services. ARINC develops and operates communications and information processing systems and provides systems engineering and integration solutions to five key industries: commercial aviation, business aviation, airports, rail and nuclear security. Combining ARINC's communication networks and services with the Company's onboard aircraft information systems strengthens the Company's ability to deliver enhanced connectivity to aircraft operators worldwide.
The ARINC purchase price was
$1.405 billion
, net of cash acquired and net of
$10 million
in cash received by the Company in June 2014 from the settlement of various post-closing matters, including adjustments for changes in working capital. As discussed in Note 9, the Company used proceeds from the issuance of long-term debt and commercial paper to finance the cash purchase price. The following table summarizes the fair value of assets acquired and liabilities assumed at the acquisition date:
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
(in millions)
|
December 23, 2013
|
Restricted Cash
(1)
|
$
|
61
|
|
Receivables and Other current assets
|
216
|
|
Building held for sale
(2)
|
81
|
|
Business held for sale
(3)
|
15
|
|
Property
|
49
|
|
Intangible Assets
|
431
|
|
Other Assets
|
11
|
|
Total Identifiable Assets Acquired
|
864
|
|
Payable to ARINC option holders
(1)
|
(61
|
)
|
Current Liabilities
|
(171
|
)
|
Liability related to building held for sale
(2)
|
(81
|
)
|
Liabilities associated with business held for sale
(3)
|
(12
|
)
|
Long-term deferred income taxes
|
(182
|
)
|
Retirement Benefits and Other Long-term Liabilities
|
(39
|
)
|
Total Liabilities Assumed
|
(546
|
)
|
Net Identifiable Assets Acquired, excluding Goodwill
|
318
|
|
Goodwill
|
1,087
|
|
Net Assets Acquired
|
$
|
1,405
|
|
(1)
Option-holders of ARINC were due approximately
$61 million
at the transaction closing date. This payment did not clear until December 24, 2013. Therefore the opening balance sheet, which was prepared as of December 23, 2013, includes restricted cash of
$61 million
and a current liability payable to the ARINC option holders for an equal amount.
(2)
On March 28, 2014, the Company sold a building which was classified as held for sale at the acquisition date.
(3)
Assets and liabilities associated with the Business held for sale relate to ASES, which the Company divested, as detailed in Note 4.
The purchase price allocation resulted in the recognition of
$1.087 billion
of goodwill and
$431 million
of intangible assets with a weighted average useful life of approximately
15
years.
None
of the goodwill is deductible for tax purposes. All of the goodwill is included in the Company’s Information Management Services segment. The goodwill is primarily a result of revenue synergy opportunities generated by the combination of the Company’s aviation electronics and flight services business with ARINC’s network communication solutions and cost synergies resulting from the consolidation of certain corporate and administrative functions. Goodwill also results from the workforce acquired with the business. See Note 21 for additional information relating to the Information Management Services segment.
Transaction-related Expenses
The Company incurred transaction costs related to the acquisition of
$16 million
during the year ended September 30, 2014, of which
$13 million
is recorded within Selling, general and administrative expenses on the Company's Consolidated Statement of Operations. The remaining
$3 million
is recorded within Interest expense and relates to fees incurred in connection with the bridge credit agreement which was entered into in September 2013 to support the financing of the ARINC acquisition.
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 on October 1, 2012.
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, 2012, nor are they indicative of future results.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The unaudited supplemental pro-forma financial information was calculated by combining the Company's results with the stand-alone results of ARINC 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)
|
|
2016 (as Reported)
|
|
2015 (as Reported)
|
|
2014 (Pro-forma)
|
Sales
|
|
$
|
5,259
|
|
|
$
|
5,244
|
|
|
$
|
5,085
|
|
Net income attributable to common shareowners from continuing operations
|
|
$
|
727
|
|
|
$
|
694
|
|
|
$
|
624
|
|
Basic earnings per share from continuing operations
|
|
$
|
5.57
|
|
|
$
|
5.25
|
|
|
$
|
4.62
|
|
Diluted earnings per share from continuing operations
|
|
$
|
5.50
|
|
|
$
|
5.19
|
|
|
$
|
4.56
|
|
The unaudited supplemental pro-forma data above excludes the results of ASES, which the Company divested, as detailed in Note 4. 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, 2012. These adjustments are net of any applicable tax impact and were included to arrive at the pro-forma results above. As the acquisition of ARINC was completed on December 23, 2013, the pro forma adjustments for the year ended September 30, 2014 in the table below include only the required adjustments through December 23, 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2016
|
|
2015
|
|
2014
|
Increases / (decreases) to pro-forma net income:
|
|
|
|
|
|
|
Net reduction to depreciation resulting from fixed asset purchase accounting
adjustments
(1)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2
|
|
Advisory, legal and accounting service fees
(2)
|
|
—
|
|
|
—
|
|
|
21
|
|
Amortization of acquired ARINC intangible assets, net
(3)
|
|
—
|
|
|
—
|
|
|
(4
|
)
|
(1)
This adjustment captures the net impact to depreciation expense resulting from various purchase accounting adjustments to fixed assets
(2)
This adjustment reflects the elimination of transaction-related fees incurred by ARINC and Rockwell Collins in connection with the acquisition and assumes all of the fees were incurred during the first quarter of 2013
(3)
This adjustment eliminates amortization of the historical ARINC intangible assets and replaces it with the new amortization for the acquired intangible assets
Goodwill
Changes in the carrying amount of goodwill are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Commercial
Systems
|
|
Government
Systems
|
|
Information Management Services
|
|
Total
|
Balance at September 30, 2014
|
$
|
262
|
|
|
$
|
508
|
|
|
$
|
1,093
|
|
|
$
|
1,863
|
|
ICG acquisition
|
38
|
|
|
—
|
|
|
—
|
|
|
38
|
|
Pacific Avionics acquisition
|
15
|
|
|
—
|
|
|
—
|
|
|
15
|
|
ARINC acquisition adjustment
|
—
|
|
|
—
|
|
|
(3
|
)
|
|
(3
|
)
|
Foreign currency translation adjustments and other
|
(1
|
)
|
|
(8
|
)
|
|
—
|
|
|
(9
|
)
|
Balance at September 30, 2015
|
314
|
|
|
500
|
|
|
1,090
|
|
|
1,904
|
|
ICG acquisition adjustment
|
13
|
|
|
—
|
|
|
—
|
|
|
13
|
|
Matrix product line acquisition
|
—
|
|
|
6
|
|
|
—
|
|
|
6
|
|
Foreign currency translation adjustments
|
(1
|
)
|
|
(3
|
)
|
|
—
|
|
|
(4
|
)
|
Balance at September 30, 2016
|
$
|
326
|
|
|
$
|
503
|
|
|
$
|
1,090
|
|
|
$
|
1,919
|
|
ICG goodwill increased by
$13 million
during 2016 primarily as a result of purchase accounting adjustments to establish liabilities for product development costs pursuant to certain contractual obligations.
Beginning in the first quarter of fiscal 2014, the Company created the Information Management Services segment. This segment combines the retained portion of the acquired ARINC business with the Company's existing flight services business,
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
which had previously been included in the Commercial Systems segment. As a result of the reorganization of the Company's segments, a portion of the goodwill from the Commercial Systems segment was reclassified to the Information Management Services segment using a fair value allocation method.
The Company performs an annual impairment test of goodwill and indefinite-lived intangible assets during the second quarter of 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
2016
,
2015
and
2014
impairment tests resulted in no impairment.
Intangible Assets
Intangible assets are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
September 30, 2015
|
(in millions)
|
Gross
|
|
Accum
Amort
|
|
Net
|
|
Gross
|
|
Accum
Amort
|
|
Net
|
Intangible assets with finite lives:
|
|
|
|
|
|
|
|
|
|
|
|
Developed technology and patents
|
$
|
354
|
|
|
$
|
(216
|
)
|
|
$
|
138
|
|
|
$
|
346
|
|
|
$
|
(195
|
)
|
|
$
|
151
|
|
Backlog
|
6
|
|
|
(3
|
)
|
|
3
|
|
|
5
|
|
|
(2
|
)
|
|
3
|
|
Customer relationships:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired
|
340
|
|
|
(106
|
)
|
|
234
|
|
|
338
|
|
|
(87
|
)
|
|
251
|
|
Up-front sales incentives
|
313
|
|
|
(80
|
)
|
|
233
|
|
|
301
|
|
|
(62
|
)
|
|
239
|
|
License agreements
|
14
|
|
|
(10
|
)
|
|
4
|
|
|
13
|
|
|
(9
|
)
|
|
4
|
|
Trademarks and tradenames
|
15
|
|
|
(14
|
)
|
|
1
|
|
|
15
|
|
|
(14
|
)
|
|
1
|
|
Intangible assets with indefinite lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and tradenames
|
47
|
|
|
—
|
|
|
47
|
|
|
47
|
|
|
—
|
|
|
47
|
|
In process research and development
|
7
|
|
|
—
|
|
|
7
|
|
|
7
|
|
|
—
|
|
|
7
|
|
Intangible assets
|
$
|
1,096
|
|
|
$
|
(429
|
)
|
|
$
|
667
|
|
|
$
|
1,072
|
|
|
$
|
(369
|
)
|
|
$
|
703
|
|
Amortization expense for intangible assets for
2016
,
2015
and
2014
was
$60 million
,
$53 million
and
$48 million
, respectively. As of
September 30, 2016
, the weighted average amortization period remaining for up-front sales incentives was approximately
10
years.
Anticipated annual amortization expense for intangible assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
Thereafter
|
Anticipated amortization expense for up-front sales incentives
|
$
|
16
|
|
|
$
|
19
|
|
|
$
|
24
|
|
|
$
|
26
|
|
|
$
|
26
|
|
|
$
|
122
|
|
Anticipated amortization expense for all other intangible assets
|
40
|
|
|
38
|
|
|
37
|
|
|
33
|
|
|
32
|
|
|
200
|
|
Total
|
$
|
56
|
|
|
$
|
57
|
|
|
$
|
61
|
|
|
$
|
59
|
|
|
$
|
58
|
|
|
$
|
322
|
|
|
|
4.
|
Discontinued Operations and Divestitures
|
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 sale price
was
$3 million
, and additional post-closing consideration of up to
$2 million
may be received. The Company recognized a pre-tax loss of
$5 million
(
$3 million
after-tax) related to the ASES divestiture. The operating results of ASES have been included in discontinued operations in the Company's Consolidated Statement of Operations for all periods presented. 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.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On July 25, 2014, the Company sold its satellite communication systems business formerly known as Datapath. The sales price, which was subject to post-closing adjustments for working capital and other adjustments, was
$10 million
. The Company recognized a pre-tax loss of
$12 million
(
$2 million
after-tax) related to the divestiture of the Datapath business. The high effective tax rate is primarily attributable to differences in the treatment of goodwill for income tax and financial reporting purposes. The operating results of Datapath, including the loss realized on the disposition, have been included in discontinued operations in the Company's Consolidated Statement of Operations for all periods presented. The Datapath business was formerly included in the Government Systems segment. The divestiture of this business is part of the Company's strategy to reshape the Government Systems segment to align with the changing dynamics of the defense environment and focus on opportunities in addressed markets for the Company's core products and solutions.
Results of discontinued operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30
|
(in millions)
|
|
2016
|
|
2015
|
|
2014
|
Sales
|
|
$
|
—
|
|
|
$
|
18
|
|
|
$
|
94
|
|
Income (loss) from discontinued operations before income taxes
|
|
2
|
|
|
(13
|
)
|
|
(29
|
)
|
Income tax benefit (expense) from discontinued operations
|
|
(1
|
)
|
|
5
|
|
|
15
|
|
During the first quarter of 2014, the Company sold its subsidiary, Kaiser Optical Systems, Inc. (KOSI), a supplier of spectrographic instrumentation and applied holographic technology, to Endress+Hauser. The sale price, after post-closing adjustments for changes in working capital, was
$23 million
. This resulted in a pretax gain of
$10 million
, which was included in Other income, net. The divestiture of this business is part of the Company's strategy to reshape the Government Systems segment to align with the changing dynamics of the defense environment and focus on opportunities in addressed markets for the Company's core products and solutions. As part of the divestiture agreement, the Company entered into a long-term supply agreement with the buyer that allows the Company to continue purchasing certain products from KOSI after completion of the sale. As a result of this continuing involvement, the KOSI divestiture did not qualify for classification as a discontinued operation.
In April 2014, the FASB issued guidance that modifies the definition of a discontinued operation and provides new disclosure requirements for divestitures. This guidance is effective for the Company in 2016, and any divestiture in 2016 or after will be subject to the new guidance. The ASES, Datapath and KOSI divestitures occurred in 2015, 2014 and 2014, respectively, and are reported based upon the previous guidance for discontinued operations.
Receivables, net are summarized as follows:
|
|
|
|
|
|
|
|
|
(in millions)
|
September 30,
2016
|
|
September 30, 2015
|
Billed
|
$
|
748
|
|
|
$
|
752
|
|
Unbilled
|
439
|
|
|
403
|
|
Less progress payments
|
(87
|
)
|
|
(110
|
)
|
Total
|
1,100
|
|
|
1,045
|
|
Less allowance for doubtful accounts
|
(6
|
)
|
|
(7
|
)
|
Receivables, net
|
$
|
1,094
|
|
|
$
|
1,038
|
|
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
$306 million
and
$286 million
at
September 30, 2016
and
2015
, respectively. U.S. Government unbilled receivables, net of progress payments, were
$99 million
and
$91 million
at
September 30, 2016
and
2015
, respectively. Receivables, net due from equity affiliates were
$68 million
at
September 30, 2016
.
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.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. The beneficial impact on cash provided by operating activities from participating in these programs was
$60 million
and
$12 million
in 2016 and 2015, respectively. The cost of participating in these programs was immaterial to our results.
Inventories, net are summarized as follows:
|
|
|
|
|
|
|
|
|
(in millions)
|
September 30,
2016
|
|
September 30, 2015
|
Finished goods
|
$
|
210
|
|
|
$
|
216
|
|
Work in process
|
236
|
|
|
250
|
|
Raw materials, parts and supplies
|
354
|
|
|
353
|
|
Less progress payments
|
(1
|
)
|
|
(7
|
)
|
Total
|
799
|
|
|
812
|
|
Pre-production engineering costs
|
1,140
|
|
|
1,012
|
|
Inventories, net
|
$
|
1,939
|
|
|
$
|
1,824
|
|
As of
September 30, 2016
, pre-production engineering costs related to programs with Bombardier, Boeing and Airbus were
$414 million
,
$253 million
, and
$249 million
, respectively.
Amortization expense for pre-production engineering costs for
2016
,
2015
and
2014
was
$49 million
,
$47 million
and
$36 million
, respectively. As of
September 30, 2016
, the weighted average amortization period remaining for pre-production engineering costs included in Inventories, net was approximately
10
years.
Anticipated annual amortization expense for pre-production engineering costs is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
Thereafter
|
Anticipated amortization expense for pre-production engineering costs
(1)
|
$
|
60
|
|
|
$
|
102
|
|
|
$
|
137
|
|
|
$
|
154
|
|
|
$
|
139
|
|
|
$
|
521
|
|
(1)
On October 29, 2015, Bombardier announced the cancellation of the Learjet 85 program. Pre-production engineering costs associated with the Learjet 85 program have been excluded from anticipated amortization expense, as these costs are expected to be recovered through consideration received from Bombardier pursuant to contractual guarantees and not amortized against future hardware deliveries.
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
$1.130 billion
and
$1.006 billion
at
September 30, 2016
and
2015
, 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.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Property is summarized as follows:
|
|
|
|
|
|
|
|
|
(in millions)
|
September 30,
2016
|
|
September 30, 2015
|
Land
|
$
|
15
|
|
|
$
|
15
|
|
Buildings and improvements
|
468
|
|
|
429
|
|
Machinery and equipment
|
1,218
|
|
|
1,164
|
|
Information systems software and hardware
|
435
|
|
|
406
|
|
Furniture and fixtures
|
74
|
|
|
66
|
|
Capital leases
|
58
|
|
|
58
|
|
Construction in progress
|
183
|
|
|
180
|
|
Total
|
2,451
|
|
|
2,318
|
|
Less accumulated depreciation
|
(1,416
|
)
|
|
(1,354
|
)
|
Property
|
$
|
1,035
|
|
|
$
|
964
|
|
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
,
$19 million
and
$37 million
at
September 30, 2016
,
2015
and
2014
, respectively.
Property additions acquired by incurring capital leases, which are reflected as non-cash transactions in the Company's Consolidated Statement of Cash Flows were
$0 million
,
$0 million
and
$56 million
at
September 30, 2016
,
2015
and
2014
, 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
$10 million
and
$6 million
as of
September 30, 2016
and
2015
, respectively. Amortization of assets under capital lease is recorded as depreciation expense. As of
September 30, 2016
, remaining minimum lease payments for Property under capital leases total
$76 million
, including
$22 million
of interest.
Other assets are summarized as follows:
|
|
|
|
|
|
|
|
|
(in millions)
|
September 30,
2016
|
|
September 30, 2015
|
Long-term receivables
|
$
|
146
|
|
|
$
|
109
|
|
Investments in equity affiliates
|
10
|
|
|
13
|
|
Exchange and rental assets (net of accumulated depreciation of $101 at September 30, 2016 and $97 at September 30, 2015)
|
68
|
|
|
66
|
|
Other
|
153
|
|
|
156
|
|
Other assets
|
$
|
377
|
|
|
$
|
344
|
|
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
eight
joint ventures:
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
•
|
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 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
|
|
|
•
|
Integrated Guidance Systems LLC (IGS): IGS is a joint venture with Honeywell International Inc. for the joint pursuit of integrated precision guidance solutions for worldwide guided weapons systems
|
|
|
•
|
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 and delivery of products related to the C919 program
|
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, IGS 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 $
229 million
, $
196 million
and
$177 million
for the years ended
September 30, 2016
,
2015
and
2014
, respectively. The deferred portion of profit generated from sales to equity affiliates was $
2 million
at
September 30, 2016
and $
1 million
at
September 30, 2015
.
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
$9 million
,
$10 million
and
$10 million
for the years ended
September 30, 2016
,
2015
and
2014
, respectively.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Short-term Debt
|
|
|
|
|
|
|
|
|
(in millions, except weighted average amounts)
|
September 30,
2016
|
|
September 30,
2015
|
Short-term commercial paper borrowings outstanding
(1)
|
$
|
440
|
|
|
$
|
448
|
|
Current portion of long-term debt
|
300
|
|
|
—
|
|
Short-term debt
|
$
|
740
|
|
|
$
|
448
|
|
Weighted average interest rate of commercial paper borrowings
|
0.79
|
%
|
|
0.52
|
%
|
Weighted average maturity period of commercial paper borrowings (days)
|
15
|
|
|
25
|
|
(1)
The maximum amount of short-term commercial paper borrowings outstanding during the year ended
September 30, 2016
was
$929 million
.
Commercial Paper Program
Under the Company’s commercial paper program, the Company may sell up to
$1.2 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 billion
five-year and
$200 million
364-day revolving credit facilities.
Revolving Credit Facilities
The Company has a five-year
$1 billion
credit facility that expires in December 2018 and a 364-day
$200 million
credit facility that was executed in February 2016 and expires in February 2017. At
September 30, 2016
and
2015
, there were no outstanding borrowings under these revolving credit facilities.
The credit facilities include one financial covenant, requiring the Company to maintain a consolidated debt to total capitalization ratio of not greater than
60 percent
(excluding the equity impact on accumulated other comprehensive loss related to defined benefit retirement plans). The Company was in compliance with this financial covenant at
September 30, 2016
. 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.
Short-term credit facilities available to non-U.S. subsidiaries amounted to
$38 million
as of
September 30, 2016
, of which
$3 million
was utilized to support commitments in the form of commercial letters of credit. At
September 30, 2016
and
September 30, 2015
, there were no borrowings outstanding under these credit facilities.
At
September 30, 2016
and
2015
, there were no significant commitment fees or compensating balance requirements under any of the Company’s credit facilities.
Long-term Debt
The principal amount of long-term debt, net of discount, is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
(in millions, except interest rate figures)
|
Interest Rate
|
|
September 30,
2016
|
|
September 30, 2015
|
Fixed-rate notes due:
|
|
|
|
|
|
December 2043
|
4.80%
|
|
$
|
398
|
|
|
$
|
398
|
|
December 2023
|
3.70%
|
|
399
|
|
|
399
|
|
November 2021
|
3.10%
|
|
250
|
|
|
250
|
|
July 2019
|
5.25%
|
|
300
|
|
|
299
|
|
Variable-rate note due:
|
|
|
|
|
|
December 2016
|
3 month LIBOR + 0.35%
(1)
|
|
300
|
|
|
300
|
|
Fair value swap adjustment (Notes 14 and 15)
|
|
|
35
|
|
|
34
|
|
Total
|
|
|
$
|
1,682
|
|
|
$
|
1,680
|
|
Less current portion of long-term debt
|
|
|
300
|
|
|
—
|
|
Long-term Debt, Net
|
|
|
$
|
1,382
|
|
|
$
|
1,680
|
|
(1)
The three-month LIBOR rate at
September 30, 2016
was approximately
0.85
percent.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The notes listed above are included in the Consolidated Statement of Financial Position, net of any unamortized discount, within the caption Long-term Debt, Net. Debt issuance costs are capitalized within Other Assets on the Consolidated Statement of Financial Position. Debt issuance costs and any discount are amortized over the life of the debt and recorded in Interest expense on the Consolidated Statement of Operations.
Interest paid on debt for the years ended
September 30, 2016
,
2015
and
2014
was
$56 million
,
$54 million
and
$47 million
, respectively.
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.
In 2015, the Company early adopted a new accounting standard (see Note 2) that provides a practical expedient permitting entities with a fiscal year end that does not coincide with a month end to measure defined benefit plan assets and obligations using the month end date closest to the fiscal year end. The Company used September 30 as the date closest to its fiscal year end to value plan assets of all its defined benefit plans. There was no material impact of adoption of this accounting standard on the fair value of plan assets in 2015. In 2016, there is no impact due to the fiscal year ending on September 30.
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 June 2003, the Company 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. These changes impacted all of the Company's U.S. pension plans for all salaried and hourly employees who were not covered by collective bargaining agreements. Concurrently, the Company supplemented its existing defined contribution savings plan effective October 1, 2006 to include an additional Company contribution.
The Company also maintains
five
defined benefit pension plans in countries outside of the U.S.,
two
of which are unfunded.
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. 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.
ARINC Pension Plan
With the acquisition of ARINC in 2014, the Company acquired ARINC’s pension plan, which was comprised of two sub-plans, one for union employees and one for non-union employees. Effective April 1, 2006, ARINC froze the majority of its pension plans for employees not covered by bargaining unit agreements. As a result, most of the non-union participants in the ARINC pension plans are no longer accruing contribution credits. The plans generally allow for employees who retire, or terminate, to elect to receive their pension benefits in a lump sum and certain existing participants in the plans continue to earn vesting rights and accrue interest on their account balance at rates established by the plans.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Effective January 1, 2016, ARINC’s pension plan merged with the Company’s legacy pension plan, and the two ARINC sub-plans became sub-plans of the Company’s pension plan.
ARINC Other Retirement Benefits
ARINC also provides postretirement health coverage for many of its current and former employees and postretirement life insurance benefits for certain retirees. These benefits vary by employment status, age, service and salary level at retirement.
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)
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
Service cost
|
$
|
11
|
|
|
$
|
12
|
|
|
$
|
10
|
|
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
3
|
|
Interest cost
|
126
|
|
|
155
|
|
|
168
|
|
|
6
|
|
|
7
|
|
|
9
|
|
Expected return on plan assets
|
(238
|
)
|
|
(242
|
)
|
|
(228
|
)
|
|
(2
|
)
|
|
(1
|
)
|
|
(1
|
)
|
Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service credit
|
(1
|
)
|
|
(3
|
)
|
|
(12
|
)
|
|
(1
|
)
|
|
(5
|
)
|
|
(9
|
)
|
Net actuarial loss
|
78
|
|
|
72
|
|
|
72
|
|
|
8
|
|
|
7
|
|
|
8
|
|
Net benefit expense (income)
|
$
|
(24
|
)
|
|
$
|
(6
|
)
|
|
$
|
10
|
|
|
$
|
14
|
|
|
$
|
11
|
|
|
$
|
10
|
|
In 2015 and prior, the Company used a single-weighted average discount rate to calculate pension interest and service cost. Beginning in 2016, a "spot rate approach" is being 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. This calculation change is considered a change in accounting estimate and was applied prospectively beginning in 2016. The use of the spot rate approach had a favorable impact to pension income and pre-tax earnings of
$35 million
in 2016, relative to the estimated pension income amount had the Company not changed its approach.
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)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
PBO at beginning of period
|
|
$
|
4,167
|
|
|
$
|
4,086
|
|
|
$
|
221
|
|
|
$
|
213
|
|
Service cost
|
|
11
|
|
|
12
|
|
|
3
|
|
|
3
|
|
Interest cost
|
|
126
|
|
|
155
|
|
|
6
|
|
|
7
|
|
Discount rate and other assumption changes
|
|
436
|
|
|
315
|
|
|
17
|
|
|
6
|
|
Actuarial losses (gains)
|
|
29
|
|
|
(52
|
)
|
|
(1
|
)
|
|
7
|
|
Plan participant contributions
|
|
—
|
|
|
—
|
|
|
5
|
|
|
3
|
|
Benefits paid
|
|
(229
|
)
|
|
(330
|
)
|
|
(18
|
)
|
|
(18
|
)
|
Plan amendments
|
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
—
|
|
Other
|
|
(13
|
)
|
|
(19
|
)
|
|
—
|
|
|
—
|
|
PBO at end of period
|
|
4,527
|
|
|
4,167
|
|
|
231
|
|
|
221
|
|
Plan assets at beginning of period
|
|
2,902
|
|
|
3,185
|
|
|
19
|
|
|
18
|
|
Actual return on plan assets
|
|
346
|
|
|
(16
|
)
|
|
1
|
|
|
—
|
|
Company contributions
|
|
69
|
|
|
69
|
|
|
12
|
|
|
16
|
|
Plan participant contributions
|
|
—
|
|
|
—
|
|
|
5
|
|
|
3
|
|
Benefits paid
|
|
(229
|
)
|
|
(330
|
)
|
|
(18
|
)
|
|
(18
|
)
|
Other
|
|
(14
|
)
|
|
(6
|
)
|
|
—
|
|
|
—
|
|
Plan assets at end of period
|
|
3,074
|
|
|
2,902
|
|
|
19
|
|
|
19
|
|
Funded status of plans
|
|
$
|
(1,453
|
)
|
|
$
|
(1,265
|
)
|
|
$
|
(212
|
)
|
|
$
|
(202
|
)
|
Funded status consists of:
|
|
|
|
|
|
|
|
|
Retirement benefits liability
|
|
$
|
(1,448
|
)
|
|
$
|
(1,264
|
)
|
|
$
|
(212
|
)
|
|
$
|
(202
|
)
|
Compensation and benefits liability
|
|
(10
|
)
|
|
(11
|
)
|
|
—
|
|
|
—
|
|
Other assets
|
|
5
|
|
|
10
|
|
|
—
|
|
|
—
|
|
Net liability
|
|
$
|
(1,453
|
)
|
|
$
|
(1,265
|
)
|
|
$
|
(212
|
)
|
|
$
|
(202
|
)
|
During
2015
, the Company's pension plan made
$121 million
of benefit payments for terminated vested lump sum payouts to certain participants.
In October 2014, the Society of Actuaries published a new set of mortality tables (RP-2014) and a new mortality improvement scale (MP-2014), which updated life expectancy assumptions. The tables generally reflect longer life expectancy than was projected by past tables. For the Company's 2016 and 2015 year-end pension liability valuation, the Company used the RP-2014 tables with an adjustment for plan experience and the MP-2014 improvement scale adjusted to reflect convergence to an ultimate annual rate of mortality improvement of
0.75 percent
by 2022.
The Company's non-U.S. defined benefit pension plans represented
5 percent
of the total PBO at
September 30, 2016
and
2015
. The accumulated benefit obligation for all defined benefit pension plans was
$4.509 billion
and
$4.153 billion
at
September 30, 2016
and
2015
, 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, 2016
and
2015
and changes recognized in Other comprehensive loss before tax for the years ended
September 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2014
|
|
$
|
6
|
|
|
$
|
2,035
|
|
|
$
|
(9
|
)
|
|
$
|
99
|
|
Current year net actuarial loss
|
|
—
|
|
|
515
|
|
|
—
|
|
|
14
|
|
Amortization of prior service cost
|
|
3
|
|
|
—
|
|
|
5
|
|
|
—
|
|
Amortization of actuarial loss
|
|
—
|
|
|
(72
|
)
|
|
—
|
|
|
(7
|
)
|
Balance at September 30, 2015
|
|
9
|
|
|
2,478
|
|
|
(4
|
)
|
|
106
|
|
Current year prior service cost
|
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
—
|
|
Current year net actuarial loss
|
|
—
|
|
|
351
|
|
|
—
|
|
|
18
|
|
Amortization of prior service cost
|
|
1
|
|
|
—
|
|
|
1
|
|
|
—
|
|
Amortization of actuarial loss
|
|
—
|
|
|
(78
|
)
|
|
—
|
|
|
(8
|
)
|
Balance at September 30, 2016
|
|
$
|
10
|
|
|
$
|
2,751
|
|
|
$
|
(5
|
)
|
|
$
|
116
|
|
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, 2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Pension
Benefits
|
|
Other
Retirement
Benefits
|
|
Total
|
Prior service cost
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
(1
|
)
|
Net actuarial loss
|
|
92
|
|
|
8
|
|
|
100
|
|
Total
|
|
$
|
92
|
|
|
$
|
7
|
|
|
$
|
99
|
|
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.
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Discount rate
|
|
3.22
|
%
|
|
3.96
|
%
|
|
1.72
|
%
|
|
2.94
|
%
|
|
3.02
|
%
|
|
3.73
|
%
|
Compensation increase rate
|
|
4.00
|
%
|
|
4.00
|
%
|
|
3.03
|
%
|
|
3.04
|
%
|
|
4.00
|
%
|
|
4.00
|
%
|
Discount rates used to determine 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 amended to discontinue benefit accruals for salary increases and services rendered after September 30, 2006 and after April 1, 2006 for ARINC. In the U.S., certain plans associated with collective bargaining agreements continue to accrue benefits, and only the ARINC sub-plans are 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.
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Discount rate
|
|
3.96
|
%
|
|
3.96
|
%
|
|
2.94
|
%
|
|
3.15
|
%
|
|
3.73
|
%
|
|
3.70
|
%
|
Expected long-term return on plan assets
|
|
8.23
|
%
|
|
8.23
|
%
|
|
6.73
|
%
|
|
6.70
|
%
|
|
8.25
|
%
|
|
8.25
|
%
|
Compensation increase rate
|
|
4.00
|
%
|
|
4.00
|
%
|
|
3.04
|
%
|
|
3.48
|
%
|
|
4.00
|
%
|
|
4.00
|
%
|
Health care cost gross trend rate
(1)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7.00
|
%
|
|
7.48
|
%
|
Ultimate trend rate
(1)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5.00
|
%
|
|
4.98
|
%
|
Year that trend reaches ultimate rate
(1)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2019
|
|
|
2019
|
|
(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
25 years
at
September 30, 2016
, 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, 2016
and
2015
were
$3.093 billion
and
$2.921 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, 2016
and
2015
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Target Mix
|
|
2016
|
|
2015
|
Equities
|
|
40%
|
-
|
70%
|
|
53
|
%
|
|
54
|
%
|
Fixed income
|
|
25%
|
-
|
60%
|
|
45
|
%
|
|
44
|
%
|
Alternative investments
|
|
0%
|
-
|
15%
|
|
0
|
%
|
|
0
|
%
|
Cash
|
|
0%
|
-
|
5%
|
|
2
|
%
|
|
2
|
%
|
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, 2016
and
2015
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, 2016
and
2015
, by asset category segregated by level within the fair value hierarchy, as described in Note 14:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
September 30, 2015
|
Asset category (in millions)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. equity
|
|
$
|
560
|
|
|
$
|
347
|
|
|
$
|
—
|
|
|
$
|
907
|
|
|
$
|
533
|
|
|
$
|
362
|
|
|
$
|
—
|
|
|
$
|
895
|
|
Non-U.S. equity
|
|
683
|
|
|
40
|
|
|
—
|
|
|
723
|
|
|
575
|
|
|
93
|
|
|
—
|
|
|
668
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
—
|
|
|
1,143
|
|
|
—
|
|
|
1,143
|
|
|
—
|
|
|
1,088
|
|
|
—
|
|
|
1,088
|
|
U.S. government
|
|
94
|
|
|
89
|
|
|
—
|
|
|
183
|
|
|
65
|
|
|
83
|
|
|
—
|
|
|
148
|
|
Mortgage and asset-backed
|
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
Other
|
|
—
|
|
|
42
|
|
|
3
|
|
|
45
|
|
|
—
|
|
|
40
|
|
|
3
|
|
|
43
|
|
Cash and cash equivalents
|
|
—
|
|
|
93
|
|
|
—
|
|
|
93
|
|
|
—
|
|
|
55
|
|
|
—
|
|
|
55
|
|
Sub-total
|
|
1,337
|
|
|
1,756
|
|
|
3
|
|
|
3,096
|
|
|
1,173
|
|
|
1,723
|
|
|
3
|
|
|
2,899
|
|
Net receivables (payables) related to investment transactions
|
|
|
|
|
|
|
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
3
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
$
|
3,074
|
|
|
|
|
|
|
|
|
$
|
2,902
|
|
The following table presents the fair value of the Company's other retirement benefits plan's assets as of
September 30, 2016
and
2015
, by asset category segregated by level within the fair value hierarchy, as described in Note 14:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
September 30, 2015
|
Asset category (in millions)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. equity
|
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8
|
|
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7
|
|
Non-U.S. equity
|
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
U.S. government
|
|
2
|
|
|
1
|
|
|
—
|
|
|
3
|
|
|
2
|
|
|
1
|
|
|
—
|
|
|
3
|
|
Mortgage and asset-backed
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Cash and cash equivalents
|
|
—
|
|
|
5
|
|
|
—
|
|
|
5
|
|
|
—
|
|
|
6
|
|
|
—
|
|
|
6
|
|
Total
|
|
$
|
11
|
|
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
19
|
|
|
$
|
9
|
|
|
$
|
10
|
|
|
$
|
—
|
|
|
$
|
19
|
|
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.
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.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Contributions
For the years ended
September 30, 2016
and
2015
, the Company made contributions to its pension plans as follows:
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2016
|
|
2015
|
Contributions to U.S. qualified plan
|
|
$
|
55
|
|
|
$
|
55
|
|
Contributions to U.S. non-qualified plan
|
|
9
|
|
|
9
|
|
Contributions to non-U.S. plans
|
|
5
|
|
|
5
|
|
Total
|
|
$
|
69
|
|
|
$
|
69
|
|
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. In October 2016, the Company voluntarily contributed $
55 million
to its U.S. qualified pension plans, subsequent to its
2016
fiscal year end. There is no minimum statutory funding requirement for 2017 and the Company does not currently expect to make any additional discretionary contributions during 2017 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. Contributions to the non-U.S. plans and the U.S. non-qualified plan are expected to total
$13 million
in
2017
.
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
2016
,
$1 million
in
2015
and
$0 million
in
2014
.
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
|
2017
|
|
$
|
241
|
|
|
$
|
16
|
|
2018
|
|
235
|
|
|
16
|
|
2019
|
|
240
|
|
|
17
|
|
2020
|
|
244
|
|
|
17
|
|
2021
|
|
246
|
|
|
16
|
|
2022-2026
|
|
1,249
|
|
|
76
|
|
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.
Defined Contribution Savings Plan
The Company sponsors a defined contribution savings plan that is available to the majority of its employees. The plan allows employees to contribute a portion of their compensation on a pre-tax and/or after-tax basis in accordance with specified guidelines. 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
16.3 million
shares under the defined contribution savings plans, of which
1.1 million
shares are available for future contributions at
September 30, 2016
. 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.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Prior to January 1, 2016, ARINC had a defined contribution savings plan that was available to most of its employees. The plan allowed employees to contribute a portion of their compensation on a pre-tax and/or after-tax basis in accordance with specified guidelines. The Company made certain matching cash contributions to the plan, which totaled
$1 million
for 2016. The ARINC defined contribution savings plan was merged into the Company defined contribution savings plan on January 1, 2016.
The Company's expense related to the defined contribution savings plans for
2016
,
2015
and
2014
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
(in millions)
|
|
Shares
|
|
Expense
|
|
Shares
|
|
Expense
|
|
Shares
|
|
Expense
|
Contribution in shares
|
|
0.6
|
|
|
$
|
49
|
|
|
0.4
|
|
|
$
|
39
|
|
|
0.5
|
|
|
$
|
40
|
|
Contribution in cash
|
|
|
|
|
46
|
|
|
|
|
|
47
|
|
|
|
|
|
50
|
|
Total
|
|
|
|
|
$
|
95
|
|
|
|
|
|
$
|
86
|
|
|
|
|
|
$
|
90
|
|
Employee Stock Purchase Plan
The Company also offers an Employee Stock Purchase Plan (ESPP) which allows 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. As of
September 30, 2016
,
2.5 million
shares are available for future purchase. The ESPP is considered a non-compensatory plan and accordingly no compensation expense is recorded in connection with this benefit. During
2016
,
2015
and
2014
,
0.1 million
,
0.1 million
and
0.1 million
shares, respectively, of Company common stock were issued to employees at a value of
$11 million
,
$11 million
and
$10 million
for the respective periods.
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 Adjustment
|
|
Pension and Other Postretirement Adjustments
(1)
|
|
Change in the Fair Value of Effective Cash Flow Hedges
|
|
Total
|
Balance at September 30, 2013
|
|
$
|
12
|
|
|
$
|
(1,293
|
)
|
|
$
|
(6
|
)
|
|
$
|
(1,287
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
(27
|
)
|
|
(92
|
)
|
|
3
|
|
|
(116
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
|
—
|
|
|
37
|
|
|
—
|
|
|
37
|
|
Net current period other comprehensive income (loss)
|
|
(27
|
)
|
|
(55
|
)
|
|
3
|
|
|
(79
|
)
|
Balance at September 30, 2014
|
|
(15
|
)
|
|
(1,348
|
)
|
|
(3
|
)
|
|
(1,366
|
)
|
Other comprehensive (loss) before reclassifications
|
|
(41
|
)
|
|
(334
|
)
|
|
(7
|
)
|
|
(382
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
|
—
|
|
|
45
|
|
|
4
|
|
|
49
|
|
Net current period other comprehensive (loss)
|
|
(41
|
)
|
|
(289
|
)
|
|
(3
|
)
|
|
(333
|
)
|
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
|
)
|
(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 $
84 million
($
53 million
net of tax),
$71 million
(
$45 million
net of tax) and
$59 million
(
$37 million
net of tax) for
2016
, 2015 and 2014, 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
9 million
at
September 30, 2016
. 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 may consider cumulative sales growth, return on sales and/or free cash flow as a percentage of net income, 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
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
likelihood of a 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
2016
,
2015
and
2014
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2016
|
|
2015
|
|
2014
|
Stock-based compensation expense included in:
|
|
|
|
|
|
|
Product cost of sales
|
|
$
|
8
|
|
|
$
|
7
|
|
|
$
|
7
|
|
Selling, general and administrative expenses
|
|
19
|
|
|
17
|
|
|
17
|
|
Total
|
|
$
|
27
|
|
|
$
|
24
|
|
|
$
|
24
|
|
Income tax benefit
|
|
$
|
9
|
|
|
$
|
8
|
|
|
$
|
8
|
|
General Option Information
The following summarizes the activity of the Company's stock options for
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares (in thousands)
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Life
(in years)
|
|
Aggregate
Intrinsic
Value
(in millions)
|
Outstanding at September 30, 2015
|
|
3,699
|
|
|
$
|
61.02
|
|
|
|
|
|
|
Granted
|
|
642
|
|
|
86.77
|
|
|
|
|
|
|
Exercised
|
|
(387
|
)
|
|
56.31
|
|
|
|
|
|
|
Forfeited or expired
|
|
(40
|
)
|
|
83.85
|
|
|
|
|
|
|
Outstanding at September 30, 2016
|
|
3,914
|
|
|
$
|
65.48
|
|
|
5.5
|
|
$
|
75
|
|
Vested or expected to vest
(1)
|
|
3,905
|
|
|
$
|
65.43
|
|
|
5.5
|
|
$
|
75
|
|
Exercisable at September 30, 2016
|
|
2,759
|
|
|
$
|
57.93
|
|
|
4.2
|
|
$
|
73
|
|
(1)
Represents outstanding options reduced by expected forfeitures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Weighted-average fair value per share of options granted
|
|
$
|
17.75
|
|
|
$
|
19.59
|
|
|
$
|
18.60
|
|
Intrinsic value of options exercised (in millions)
(2)
|
|
$
|
13
|
|
|
$
|
48
|
|
|
$
|
26
|
|
(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
$10 million
,
$10 million
and
$10 million
during the years ended
September 30, 2016
,
2015
and
2014
, respectively. Total unrecognized compensation expense for options that have not vested as of
September 30, 2016
is
$7 million
and will be recognized over a weighted average period of
0.8
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:
|
|
|
|
|
|
|
|
|
|
|
2016 Grants
|
|
2015 Grants
|
|
2014 Grants
|
Risk-free interest rate
|
0.7% - 2.5%
|
|
|
0.5% - 2.6%
|
|
|
0.3% - 3.0%
|
|
Expected dividend yield
|
1.4% - 1.6%
|
|
|
1.6
|
%
|
|
1.9
|
%
|
Expected volatility
|
20.0
|
%
|
|
24.0
|
%
|
|
28.0
|
%
|
Expected life
|
7 years
|
|
|
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
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2015
|
|
438
|
|
|
$
|
68.92
|
|
|
23
|
|
|
$
|
30.24
|
|
|
340
|
|
|
$
|
64.34
|
|
Granted
|
|
131
|
|
|
85.13
|
|
|
—
|
|
|
—
|
|
|
72
|
|
|
85.85
|
|
Vested
|
|
(168
|
)
|
|
56.10
|
|
|
—
|
|
|
—
|
|
|
(54
|
)
|
|
54.37
|
|
Forfeited
|
|
(15
|
)
|
|
79.47
|
|
|
—
|
|
|
—
|
|
|
(7
|
)
|
|
78.68
|
|
Nonvested at September 30, 2016
|
|
386
|
|
|
$
|
79.60
|
|
|
23
|
|
|
$
|
30.24
|
|
|
351
|
|
|
$
|
69.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Performance Shares
|
|
Restricted Stock
|
|
Restricted Stock Units
|
Total unrecognized compensation costs at September 30, 2016
|
|
$
|
12
|
|
|
$
|
—
|
|
|
$
|
5
|
|
Weighted-average life remaining at September 30, 2016, in years
|
|
0.9
|
|
|
0
|
|
|
0.9
|
|
Weighted-average fair value per share granted in 2015
|
|
$
|
82.76
|
|
|
$
|
—
|
|
|
$
|
84.63
|
|
Weighted-average fair value per share granted in 2014
|
|
$
|
71.63
|
|
|
$
|
—
|
|
|
$
|
72.42
|
|
The maximum number of shares of common stock that can be issued in respect of performance shares granted in
2016
based on the achievement of performance targets for
2016
through
2018
is approximately
304,000
. The maximum number of shares of common stock that can be issued in respect of performance shares granted in
2015
based on the achievement of performance targets for
2015
through
2017
is approximately
295,000
. For purposes of determining the maximum number of shares of common stock that can be issued with respect to the performance shares granted in
2015
and
2016
, 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
2014
based on the achievement of performance targets for
2014
through
2016
is approximately
134,000
.
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)
|
|
2016
|
|
2015
|
|
2014
|
Numerator for basic and diluted earnings per share:
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
727
|
|
|
$
|
694
|
|
|
$
|
618
|
|
Income (loss) from discontinued operations, net of taxes
|
|
1
|
|
|
(8
|
)
|
|
(14
|
)
|
Net income
|
|
$
|
728
|
|
|
$
|
686
|
|
|
$
|
604
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share – weighted average common shares
|
|
130.5
|
|
|
132.3
|
|
|
135.1
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
Stock options
|
|
1.0
|
|
|
1.0
|
|
|
1.2
|
|
Performance shares, restricted stock and restricted stock units
|
|
0.6
|
|
|
0.4
|
|
|
0.4
|
|
Dilutive potential common shares
|
|
1.6
|
|
|
1.4
|
|
|
1.6
|
|
Denominator for diluted earnings per share – adjusted weighted average shares and assumed conversion
|
|
132.1
|
|
|
133.7
|
|
|
136.7
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
5.57
|
|
|
$
|
5.25
|
|
|
$
|
4.57
|
|
Discontinued operations
|
|
0.01
|
|
|
(0.06
|
)
|
|
(0.10
|
)
|
Basic earnings per share
|
|
$
|
5.58
|
|
|
$
|
5.19
|
|
|
$
|
4.47
|
|
Diluted
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
5.50
|
|
|
$
|
5.19
|
|
|
$
|
4.52
|
|
Discontinued operations
|
|
0.01
|
|
|
(0.06
|
)
|
|
(0.10
|
)
|
Diluted earnings per share
|
|
$
|
5.51
|
|
|
$
|
5.13
|
|
|
$
|
4.42
|
|
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
0.6 million
,
0.0 million
and
0.0 million
in
2016
,
2015
and
2014
, respectively.
Income tax expense from continuing operations was calculated based on the following components of income before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2016
|
|
2015
|
|
2014
|
U.S. income
|
|
$
|
824
|
|
|
$
|
835
|
|
|
$
|
754
|
|
Non-U.S. income
|
|
111
|
|
|
127
|
|
|
128
|
|
Total
|
|
$
|
935
|
|
|
$
|
962
|
|
|
$
|
882
|
|
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The components of income tax expense from continuing operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2016
|
|
2015
|
|
2014
|
Current:
|
|
|
|
|
|
|
U.S. federal
|
|
$
|
120
|
|
|
$
|
169
|
|
|
$
|
110
|
|
Non-U.S.
|
|
29
|
|
|
38
|
|
|
37
|
|
U.S. state and local
|
|
11
|
|
|
11
|
|
|
4
|
|
Total current
|
|
160
|
|
|
218
|
|
|
151
|
|
Deferred:
|
|
|
|
|
|
|
U.S. federal
|
|
47
|
|
|
49
|
|
|
105
|
|
Non-U.S.
|
|
—
|
|
|
(4
|
)
|
|
(2
|
)
|
U.S. state and local
|
|
1
|
|
|
5
|
|
|
10
|
|
Total deferred
|
|
48
|
|
|
50
|
|
|
113
|
|
Income tax expense
|
|
$
|
208
|
|
|
$
|
268
|
|
|
$
|
264
|
|
The effective income tax rate from continuing operations differed from the U.S. statutory tax rate as detailed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Statutory tax rate
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
Foreign rate differential
|
|
(0.7
|
)
|
|
(1.0
|
)
|
|
(1.1
|
)
|
State and local income taxes
|
|
1.1
|
|
|
1.2
|
|
|
1.3
|
|
Research and development credit
|
|
(6.4
|
)
|
|
(3.2
|
)
|
|
(1.1
|
)
|
Domestic manufacturing deduction
|
|
(2.0
|
)
|
|
(2.0
|
)
|
|
(1.7
|
)
|
Tax settlements
|
|
—
|
|
|
(1.6
|
)
|
|
(0.9
|
)
|
Change in valuation allowance
|
|
(4.5
|
)
|
|
—
|
|
|
—
|
|
Other
|
|
(0.3
|
)
|
|
(0.5
|
)
|
|
(1.6
|
)
|
Effective income tax rate
|
|
22.2
|
%
|
|
27.9
|
%
|
|
29.9
|
%
|
Deferred income tax assets and liabilities are included in the Consolidated Statement of Financial Position as follows:
|
|
|
|
|
|
|
|
|
|
|
|
September 30
|
(in millions)
|
|
2016
|
|
2015
|
Deferred income taxes
|
|
$
|
219
|
|
|
$
|
165
|
|
Other liabilities
|
|
(1
|
)
|
|
(3
|
)
|
Deferred income taxes, net
|
|
$
|
218
|
|
|
$
|
162
|
|
As discussed in Note 2, during 2016, the Company retrospectively adopted a new standard related to the balance sheet classification of deferred taxes. The effects of the accounting change on the September 30, 2015 Consolidated Statement of Financial Position were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2015
|
(in millions)
|
|
Revised
|
|
As Reported
|
Current deferred income tax asset
|
|
$
|
—
|
|
|
$
|
9
|
|
Current deferred income tax liability
|
|
—
|
|
|
(84
|
)
|
Current deferred income taxes, net
|
|
$
|
—
|
|
|
$
|
(75
|
)
|
Long-term deferred income taxes
|
|
$
|
165
|
|
|
$
|
241
|
|
Other liabilities
|
|
(3
|
)
|
|
(4
|
)
|
Long-term deferred income taxes, net
|
|
$
|
162
|
|
|
$
|
237
|
|
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Net long-term deferred income tax benefits (liabilities) consist of the tax effects of temporary differences related to the following:
|
|
|
|
|
|
|
|
|
|
|
|
September 30
|
(in millions)
|
|
2016
|
|
2015
|
Inventory
|
|
$
|
(282
|
)
|
|
$
|
(226
|
)
|
Product warranty costs
|
|
29
|
|
|
29
|
|
Customer incentives
|
|
68
|
|
|
62
|
|
Contract reserves
|
|
6
|
|
|
11
|
|
Retirement benefits
|
|
549
|
|
|
487
|
|
Intangibles
|
|
(171
|
)
|
|
(177
|
)
|
Capital lease liability
|
|
20
|
|
|
21
|
|
Property
|
|
(179
|
)
|
|
(154
|
)
|
Stock-based compensation
|
|
33
|
|
|
30
|
|
Deferred compensation
|
|
16
|
|
|
15
|
|
Capital loss carryover
|
|
41
|
|
|
42
|
|
Compensation and benefits
|
|
28
|
|
|
29
|
|
Valuation allowance
|
|
—
|
|
|
(42
|
)
|
Other
|
|
60
|
|
|
35
|
|
Deferred income taxes, net
|
|
$
|
218
|
|
|
$
|
162
|
|
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. 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 (
$1.549 billion
of U.S. taxable income over the past three years), (b) expectations of future earnings, (c) the extended period of time over which the retirement benefit liabilities will be paid and (d) our ability to implement tax planning strategies.
Changes in the valuation allowance for deferred tax assets are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
Balance at beginning of year
|
$
|
42
|
|
|
$
|
43
|
|
|
$
|
11
|
|
Charged to costs and expenses
(1)
|
—
|
|
|
—
|
|
|
43
|
|
Deductions
(2) (3)
|
(42
|
)
|
|
(1
|
)
|
|
(11
|
)
|
Balance at September 30
|
$
|
—
|
|
|
$
|
42
|
|
|
$
|
43
|
|
(1)
2014 increase was recorded in discontinued operations
(2)
2014 deduction of $11 million was due to the divestiture of a foreign subsidiary
(3)
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, 2011 and prior years have been audited by the IRS and are closed to further adjustments by the IRS. The IRS has closed its audit of the Company's tax returns for the years ended September 30, 2012 and 2013; however, the Company has filed a protest related to the taxation of a foreign subsidiary. An acquired subsidiary is also under examination by the IRS for calendar years 2012 and 2013 legacy tax filings. 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.
No
provision has been made as of
September 30, 2016
for U.S. federal or state, or additional non-U.S. income taxes related to approximately
$551 million
of undistributed earnings of non-U.S. subsidiaries which have been or are intended to be permanently reinvested. Thus, it is not practicable to estimate the amount of tax that might be payable on the undistributed earnings.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company had net income tax payments of
$130 million
,
$182 million
and
$182 million
in
2016
,
2015
and
2014
, respectively.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30
|
(in millions)
|
|
2016
|
|
2015
|
|
2014
|
Beginning balance
|
|
$
|
39
|
|
|
$
|
48
|
|
|
$
|
56
|
|
Additions for tax positions related to the current year
|
|
11
|
|
|
8
|
|
|
13
|
|
Additions for tax positions of prior years
|
|
7
|
|
|
6
|
|
|
1
|
|
Additions for tax positions related to acquisitions
|
|
—
|
|
|
—
|
|
|
8
|
|
Reductions for tax positions of prior years
|
|
(10
|
)
|
|
(17
|
)
|
|
(17
|
)
|
Reductions for tax positions of prior years related to lapse of statute of limitations
|
|
—
|
|
|
(1
|
)
|
|
(2
|
)
|
Reductions for tax positions related to settlements with taxing authorities
|
|
(2
|
)
|
|
(5
|
)
|
|
(11
|
)
|
Ending balance
|
|
$
|
45
|
|
|
$
|
39
|
|
|
$
|
48
|
|
The total amount of unrecognized tax benefits that, if recognized, would affect the effective income tax rate were
$20 million
,
$11 million
and
$25 million
as of
September 30, 2016
,
2015
and
2014
, 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
$1 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 not significant as of
September 30, 2016
and
2015
. The total amount of interest and penalties recorded as an expense or (income) within Income tax expense in the Consolidated Statement of Operations were not significant for the years ended
September 30, 2016
,
2015
and
2014
.
|
|
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.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, 2016
and
2015
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
September 30, 2015
|
(in millions)
|
Fair Value
Hierarchy
|
|
Fair Value
Asset (Liability)
|
|
Fair Value
Asset (Liability)
|
Deferred compensation plan investments
|
Level 1
|
|
$
|
55
|
|
|
$
|
50
|
|
Interest rate swap assets
|
Level 2
|
|
35
|
|
|
34
|
|
Foreign currency forward exchange contract assets
|
Level 2
|
|
11
|
|
|
7
|
|
Foreign currency forward exchange contract liabilities
|
Level 2
|
|
(13
|
)
|
|
(11
|
)
|
Contingent consideration for ICG acquisition
|
Level 3
|
|
(13
|
)
|
|
(12
|
)
|
During 2016, a corporate asset was written down to its fair market value of
$3 million
, resulting in an asset impairment charge of
$4 million
recorded in Selling, general and administrative expenses on the Consolidated Statement of Operations (see Note 20). The asset is recognized at fair value on a nonrecurring basis and is classified within Level 2 of the fair value hierarchy.
The change in fair value of the Level 3 contingent consideration is as follows:
|
|
|
|
|
(in millions)
|
Fair Value (Liability)
|
Balance at September 30, 2015
|
$
|
(12
|
)
|
Fair value adjustment
(1)
|
(1
|
)
|
Balance at September 30, 2016
|
$
|
(13
|
)
|
(1)
The fair value adjustment is included in Interest expense on the Consolidated Statement of Operations.
There were no transfers between Levels of the fair value hierarchy during 2016 or 2015.
Valuation Techniques
The 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 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.
The contingent consideration for the ICG acquisition represents the estimated fair value of post-closing consideration owed to the sellers associated with the acquisition. This is categorized as Level 3 in the fair value hierarchy and the fair value is determined using a probability-weighted approach. The liability recorded was derived from the estimated probability that certain contingent payment milestones will be met in accordance with the terms of the purchase agreement.
As of
September 30, 2016
, 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.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Financial Instruments
The carrying amounts and fair values of the Company's financial instruments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset (Liability)
|
|
September 30, 2016
|
|
September 30, 2015
|
(in millions)
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
Cash and cash equivalents
|
$
|
340
|
|
|
$
|
340
|
|
|
$
|
252
|
|
|
$
|
252
|
|
Short-term debt
|
(740
|
)
|
|
(740
|
)
|
|
(448
|
)
|
|
(448
|
)
|
Long-term debt
|
(1,347
|
)
|
|
(1,508
|
)
|
|
(1,646
|
)
|
|
(1,750
|
)
|
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 notes due December 2016 classified as short-term debt, and all long-term debt, is within Level 2 of the fair value hierarchy. The fair value of these financial instruments was 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 an appropriate mix of fixed and variable rate debt, which over time should moderate the costs of debt financing. To 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 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 2019 Notes to floating rate debt based on three-month LIBOR plus
3.56 percent
(collectively the 2019 Swaps).
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
$35 million
, offset by a fair value adjustment to Long-term Debt (Note 9) of
$35 million
at
September 30, 2016
. At
September 30, 2015
, the Swaps were recorded within Other Assets at a fair value of
$34 million
, offset by a fair value adjustment to Long-term Debt (Note 9) of
$34 million
. Cash payments or receipts between the Company and the counterparties to the Swaps are recorded as an adjustment to interest expense.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Forward Starting Interest Rate Swaps
In September 2013, the Company entered into forward starting interest rate swap agreements with combined notional values of
$200 million
to effectively lock in fixed interest rates on a portion of the long-term debt it incurred in December 2013 to refinance maturing debt and to fund the acquisition of ARINC. In October 2013, the Company entered into an additional
$300 million
notional value of forward starting interest rate swap agreements. These forward starting interest rate swaps were designated as cash flow hedges and were executed to hedge the risk of potentially higher benchmark U.S. Treasury bond yields on long-term debt with maturities ranging from 2023 to 2043 and fixed interest rates ranging between
2.8150 percent
and
3.8775 percent
. The forward starting interest rate swaps were terminated in December 2013 concurrent with the Company's debt issuance. Upon termination, the forward starting swaps were valued at a net loss of
$2 million
. This net loss has been deferred within Accumulated other comprehensive losses in the Consolidated Statement of Financial Position and will be amortized into interest expense over the life of the corresponding debt.
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, 2016
and
September 30, 2015
, the Company had outstanding foreign currency forward exchange contracts with notional amounts of
$384 million
and
$359 million
, respectively. These notional values consist primarily of contracts for the British pound sterling, European euro and Swedish krona, and are stated in U.S. dollar equivalents at spot exchange rates at the respective dates.
Fair Value of Derivative Instruments
Fair values of derivative instruments in the Consolidated Statement of Financial Position as of
September 30, 2016
and
2015
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
(in millions)
|
Classification
|
|
September 30,
2016
|
|
September 30, 2015
|
Foreign currency forward exchange contracts
|
Other current assets
|
|
$
|
11
|
|
|
$
|
7
|
|
Interest rate swaps
|
Other assets
|
|
35
|
|
|
34
|
|
Total
|
|
|
$
|
46
|
|
|
$
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Derivatives
|
(in millions)
|
Classification
|
|
September 30,
2016
|
|
September 30, 2015
|
Foreign currency forward exchange contracts
|
Other current liabilities
|
|
$
|
13
|
|
|
$
|
11
|
|
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, 2016
, there were undesignated foreign currency forward exchange contracts classified within Other current assets of
$2 million
and Other current liabilities of
$2 million
.
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,
2016
and
2015
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss)
|
(in millions)
|
Location of Gain (Loss)
|
|
September 30,
2016
|
|
September 30, 2015
|
Derivatives Designated as Hedging Instruments:
|
|
|
|
|
|
Fair Value Hedges
|
|
|
|
|
|
Interest rate swaps
|
Interest expense
|
|
$
|
10
|
|
|
$
|
11
|
|
Cash Flow Hedges
|
|
|
|
|
|
Foreign currency forward exchange contracts:
|
|
|
|
|
|
Amount of (loss) recognized in AOCL (effective portion, before deferred tax impact)
|
AOCL
|
|
(3
|
)
|
|
(10
|
)
|
Amount of (loss) reclassified from AOCL into income
|
Cost of sales
|
|
(6
|
)
|
|
(6
|
)
|
Derivatives Not Designated as Hedging Instruments:
|
|
|
|
|
|
Foreign currency forward exchange contracts
|
Cost of sales
|
|
(1
|
)
|
|
(8
|
)
|
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, 2016
. 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, 2016
.
The Company did not have any hedges with credit-risk-related contingent features or that required the posting of collateral as of
September 30, 2016
. The cash flows from derivative contracts are recorded in operating activities in the Consolidated Statement of Cash Flows.
The Company expects to reclassify approximately
$1 million
of AOCL losses from cash flow hedges into earnings over the next 12 months. The maximum duration of a foreign currency cash flow hedge contract at
September 30, 2016
was
64
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 within product cost of sales 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)
|
2016
|
|
2015
|
|
2014
|
Balance at beginning of year
|
$
|
89
|
|
|
$
|
104
|
|
|
$
|
121
|
|
Warranty costs incurred
|
(42
|
)
|
|
(46
|
)
|
|
(47
|
)
|
Product warranty accrual
|
46
|
|
|
42
|
|
|
46
|
|
Changes in estimates for prior years
|
(6
|
)
|
|
(10
|
)
|
|
(15
|
)
|
Increase from acquisitions
|
—
|
|
|
1
|
|
|
—
|
|
Foreign currency translation adjustments and other
|
—
|
|
|
(2
|
)
|
|
(1
|
)
|
Balance at September 30
|
$
|
87
|
|
|
$
|
89
|
|
|
$
|
104
|
|
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, 2016
were $
239 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 that 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.
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, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period
|
(in millions)
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
Thereafter
|
|
Total
|
Non-cancelable operating leases
|
|
$
|
63
|
|
|
$
|
52
|
|
|
$
|
39
|
|
|
$
|
28
|
|
|
$
|
21
|
|
|
$
|
113
|
|
|
$
|
316
|
|
Purchase contracts
|
|
34
|
|
|
32
|
|
|
29
|
|
|
27
|
|
|
26
|
|
|
40
|
|
|
188
|
|
Long-term debt
|
|
300
|
|
|
—
|
|
|
300
|
|
|
—
|
|
|
—
|
|
|
1,050
|
|
|
1,650
|
|
Interest on long-term debt
|
|
58
|
|
|
58
|
|
|
58
|
|
|
42
|
|
|
42
|
|
|
473
|
|
|
731
|
|
Total
|
|
$
|
455
|
|
|
$
|
142
|
|
|
$
|
426
|
|
|
$
|
97
|
|
|
$
|
89
|
|
|
$
|
1,676
|
|
|
$
|
2,885
|
|
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, 2016
,
2015
and
2014
was
$77 million
,
$73 million
and
$65 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.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, 2016
,
2015
and
2014
were
$57 million
,
$50 million
and
$38 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.
|
|
18.
|
Environmental Matters
|
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, 2016
, the Company is involved in the investigation or remediation of
seven
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
six
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, 2016
, 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.
|
|
20.
|
Restructuring, Pension Settlement and Asset Impairment Charges, Net
|
During the first quarter of 2016, the Company recorded corporate restructuring and asset impairment charges totaling
$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
|
|
Restructuring and asset impairment charges
|
$
|
33
|
|
|
$
|
12
|
|
|
$
|
45
|
|
The 2016 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. As of
September 30, 2016
, all employee separation costs have been paid. 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.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In 2014, the Company recorded pension settlement and restructuring charges totaling
$9 million
. This amount was comprised of (i)
$5 million
for pension settlement charges (included within Selling, general and administrative expense) and (ii)
$4 million
for employee severance costs related to the consolidation and closure of two service centers as part of a plan to optimize the efficiency of the Company's global service center footprint. These severance costs were included within cost of sales. Through September 30, 2015, the Company completed all cash payments associated with these actions.
21.
Operating Segment Information
Rockwell Collins designs, produces and supports communications and aviation systems for commercial and military customers and provides information management services through voice and data communication networks and solutions worldwide. The Company has three operating segments consisting of the Commercial Systems, Government Systems and Information Management Services businesses.
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.
Government Systems provides avionics, communication products, surface solutions and navigation products to the U.S. Department of Defense, other government agencies, civil agencies, aerospace and 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.
Sales made by the Company to the U.S. Government were
33 percent
,
29 percent
and
30 percent
of total sales for the years ended
September 30, 2016
,
2015
and
2014
, 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, significant gains and losses from the disposition of businesses and other special items as identified by management from time to time, such as significant restructuring and asset impairment charges. 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.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The sales and earnings of continuing operations of the Company's operating segments are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2016
|
|
2015
|
|
2014
|
Sales:
|
|
|
|
|
|
|
Commercial Systems
|
|
$
|
2,395
|
|
|
$
|
2,434
|
|
|
$
|
2,299
|
|
Government Systems
|
|
2,206
|
|
|
2,187
|
|
|
2,209
|
|
Information Management Services
|
|
658
|
|
|
623
|
|
|
471
|
|
Total sales
|
|
$
|
5,259
|
|
|
$
|
5,244
|
|
|
$
|
4,979
|
|
|
|
|
|
|
|
|
Segment operating earnings:
|
|
|
|
|
|
|
|
|
Commercial Systems
|
|
$
|
531
|
|
|
$
|
554
|
|
|
$
|
509
|
|
Government Systems
|
|
477
|
|
|
457
|
|
|
465
|
|
Information Management Services
|
|
107
|
|
|
95
|
|
|
62
|
|
Total segment operating earnings
|
|
1,115
|
|
|
1,106
|
|
|
1,036
|
|
|
|
|
|
|
|
|
Interest expense
(1)
|
|
(64
|
)
|
|
(61
|
)
|
|
(59
|
)
|
Stock-based compensation
|
|
(27
|
)
|
|
(24
|
)
|
|
(24
|
)
|
General corporate, net
|
|
(44
|
)
|
|
(59
|
)
|
|
(59
|
)
|
Gain on divestiture of business
|
|
—
|
|
|
—
|
|
|
10
|
|
ARINC transaction costs
(1)
|
|
—
|
|
|
—
|
|
|
(13
|
)
|
Restructuring, pension settlement and asset impairment charges, net
|
|
(45
|
)
|
|
—
|
|
|
(9
|
)
|
Income from continuing operations before income taxes
|
|
935
|
|
|
962
|
|
|
882
|
|
Income tax expense
|
|
(208
|
)
|
|
(268
|
)
|
|
(264
|
)
|
Income from continuing operations
|
|
$
|
727
|
|
|
$
|
694
|
|
|
$
|
618
|
|
(1)
During the year ended September 30, 2014, the Company incurred
$3 million
of bridge facility fees related to the acquisition of ARINC. These costs are included in interest expense; therefore total transaction costs related to the acquisition of ARINC during this period was
$16 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, 2016
,
2015
and
2014
, 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)
|
|
2016
|
|
2015
|
|
2014
|
Identifiable assets:
|
|
|
|
|
|
|
Commercial Systems
|
|
$
|
3,050
|
|
|
$
|
2,906
|
|
|
$
|
2,655
|
|
Government Systems
|
|
2,052
|
|
|
1,953
|
|
|
1,938
|
|
Information Management Services
|
|
1,906
|
|
|
1,886
|
|
|
1,885
|
|
Corporate
|
|
699
|
|
|
559
|
|
|
527
|
|
Total identifiable assets
|
|
$
|
7,707
|
|
|
$
|
7,304
|
|
|
$
|
7,005
|
|
Investments in equity affiliates:
|
|
|
|
|
|
|
Commercial Systems
|
|
$
|
4
|
|
|
$
|
7
|
|
|
$
|
—
|
|
Government Systems
|
|
6
|
|
|
6
|
|
|
8
|
|
Information Management Services
|
|
—
|
|
|
—
|
|
|
—
|
|
Total investments in equity affiliates
|
|
$
|
10
|
|
|
$
|
13
|
|
|
$
|
8
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
Commercial Systems
|
|
$
|
125
|
|
|
$
|
117
|
|
|
$
|
108
|
|
Government Systems
|
|
74
|
|
|
83
|
|
|
80
|
|
Information Management Services
|
|
54
|
|
|
52
|
|
|
37
|
|
Total depreciation and amortization
|
|
$
|
253
|
|
|
$
|
252
|
|
|
$
|
225
|
|
Capital expenditures for property:
|
|
|
|
|
|
|
Commercial Systems
|
|
$
|
74
|
|
|
$
|
90
|
|
|
$
|
68
|
|
Government Systems
|
|
69
|
|
|
81
|
|
|
66
|
|
Information Management Services
|
|
50
|
|
|
39
|
|
|
29
|
|
Total capital expenditures for property
|
|
$
|
193
|
|
|
$
|
210
|
|
|
$
|
163
|
|
Earnings (loss) from equity affiliates:
|
|
|
|
|
|
|
Commercial Systems
|
|
$
|
(3
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Government Systems
|
|
2
|
|
|
3
|
|
|
7
|
|
Information Management Services
|
|
—
|
|
|
—
|
|
|
—
|
|
Total earnings (loss) from equity affiliates
|
|
$
|
(1
|
)
|
|
$
|
3
|
|
|
$
|
7
|
|
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 and net deferred income tax assets 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, 2016
,
2015
and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2016
|
|
2015
|
|
2014
|
Commercial Systems product categories:
|
|
|
|
|
|
|
Air transport aviation electronics
|
|
$
|
1,430
|
|
|
$
|
1,385
|
|
|
$
|
1,285
|
|
Business and regional aviation electronics
|
|
965
|
|
|
1,049
|
|
|
1,014
|
|
Commercial Systems sales
|
|
2,395
|
|
|
2,434
|
|
|
2,299
|
|
|
|
|
|
|
|
|
Government Systems product categories:
|
|
|
|
|
|
|
|
Avionics
|
|
1,483
|
|
|
1,436
|
|
|
1,409
|
|
Communication and Navigation
|
|
723
|
|
|
751
|
|
|
800
|
|
Government Systems sales
|
|
2,206
|
|
|
2,187
|
|
|
2,209
|
|
|
|
|
|
|
|
|
Information Management Services sales
|
|
658
|
|
|
623
|
|
|
471
|
|
|
|
|
|
|
|
|
Total sales
|
|
$
|
5,259
|
|
|
$
|
5,244
|
|
|
$
|
4,979
|
|
The 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, 2016
,
2015
and
2014
, product category sales for air transport aviation electronics include revenue from wide-body in-flight entertainment products and services of $
38 million
, $
57 million
and
$70 million
, respectively.
Beginning in 2016, product category sales for Government Systems have been consolidated as a result of an internal reorganization and are delineated based upon underlying product technologies. The previously reported sales categories of Communication products, Surface solutions and Navigation products are now primarily consolidated into Communication and navigation. Government Systems sales have been reclassified to conform to the current year presentation.
The following table reflects sales for the years ended
September 30, 2016
,
2015
and
2014
by location of our customers and property at
September 30, 2016
,
2015
and
2014
by geographic region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
Property
|
(in millions)
|
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
U.S.
(1)
|
|
$
|
3,292
|
|
|
$
|
3,174
|
|
|
$
|
2,993
|
|
|
$
|
921
|
|
|
$
|
861
|
|
|
$
|
805
|
|
Europe / Africa / Middle East
|
|
937
|
|
|
1,070
|
|
|
1,040
|
|
|
86
|
|
|
83
|
|
|
90
|
|
Asia-Pacific
|
|
545
|
|
|
503
|
|
|
486
|
|
|
17
|
|
|
15
|
|
|
19
|
|
Americas, excluding U.S.
|
|
485
|
|
|
497
|
|
|
460
|
|
|
11
|
|
|
5
|
|
|
5
|
|
Non U.S.
|
|
1,967
|
|
|
2,070
|
|
|
1,986
|
|
|
114
|
|
|
103
|
|
|
114
|
|
Total
|
|
$
|
5,259
|
|
|
$
|
5,244
|
|
|
$
|
4,979
|
|
|
$
|
1,035
|
|
|
$
|
964
|
|
|
$
|
919
|
|
(1)
For the years ended
September 30, 2016
,
2015
and
2014
, U.S. sales include revenue from foreign military sales of
$171 million
,
$171 million
and
$176 million
, respectively.
Sales are attributable to geographic region based on the location of our customers.
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
22.
|
Quarterly Financial Information (Unaudited)
|
Quarterly financial information for the years ended
September 30, 2016
and
2015
is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 Quarters
|
(in millions, except per share amounts)
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Total
|
Sales
|
|
$
|
1,169
|
|
|
$
|
1,311
|
|
|
$
|
1,334
|
|
|
$
|
1,445
|
|
|
$
|
5,259
|
|
Gross profit (total sales less product and service cost of sales)
|
|
333
|
|
|
404
|
|
|
419
|
|
|
461
|
|
|
1,617
|
|
Income from continuing operations
|
|
133
|
|
|
172
|
|
|
214
|
|
|
208
|
|
|
727
|
|
Income (loss) from discontinued operations, net of taxes
|
|
2
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
1
|
|
Net income
|
|
$
|
135
|
|
|
$
|
171
|
|
|
$
|
214
|
|
|
$
|
208
|
|
|
$
|
728
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
1.01
|
|
|
$
|
1.31
|
|
|
$
|
1.65
|
|
|
$
|
1.60
|
|
|
$
|
5.57
|
|
Discontinued operations
|
|
0.02
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.01
|
|
Basic earnings per share
|
|
$
|
1.03
|
|
|
$
|
1.31
|
|
|
$
|
1.65
|
|
|
$
|
1.60
|
|
|
$
|
5.58
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
1.00
|
|
|
$
|
1.30
|
|
|
$
|
1.63
|
|
|
$
|
1.58
|
|
|
$
|
5.50
|
|
Discontinued operations
|
|
0.02
|
|
|
(0.01
|
)
|
|
—
|
|
|
—
|
|
|
0.01
|
|
Diluted earnings per share
|
|
$
|
1.02
|
|
|
$
|
1.29
|
|
|
$
|
1.63
|
|
|
$
|
1.58
|
|
|
$
|
5.51
|
|
Net income in the first quarter of 2016 includes
$45 million
of pre-tax restructuring and asset impairment charges primarily related to employee separation costs. In addition, net income includes a
$24 million
income tax benefit from the retroactive reinstatement of the Federal R&D Tax Credit.
Net income in the third quarter of 2016 includes a
$41 million
income tax benefit due to the release of a valuation allowance for a U.S. capital loss carryforward.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015 Quarters
|
(in millions, except per share amounts)
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Total
|
Sales
|
|
$
|
1,226
|
|
|
$
|
1,341
|
|
|
$
|
1,293
|
|
|
$
|
1,384
|
|
|
$
|
5,244
|
|
Gross profit (total sales less product and service cost of sales)
|
|
369
|
|
|
404
|
|
|
405
|
|
|
436
|
|
|
1,614
|
|
Income from continuing operations
|
|
169
|
|
|
163
|
|
|
178
|
|
|
184
|
|
|
694
|
|
Income (loss) from discontinued operations, net of taxes
|
|
(2
|
)
|
|
(6
|
)
|
|
—
|
|
|
—
|
|
|
(8
|
)
|
Net income
|
|
$
|
167
|
|
|
$
|
157
|
|
|
$
|
178
|
|
|
$
|
184
|
|
|
$
|
686
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
1.28
|
|
|
$
|
1.23
|
|
|
$
|
1.35
|
|
|
$
|
1.40
|
|
|
$
|
5.25
|
|
Discontinued operations
|
|
(0.02
|
)
|
|
(0.04
|
)
|
|
—
|
|
|
—
|
|
|
(0.06
|
)
|
Basic earnings per share
|
|
$
|
1.26
|
|
|
$
|
1.19
|
|
|
$
|
1.35
|
|
|
$
|
1.40
|
|
|
$
|
5.19
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
1.26
|
|
|
$
|
1.22
|
|
|
$
|
1.33
|
|
|
$
|
1.38
|
|
|
$
|
5.19
|
|
Discontinued operations
|
|
(0.02
|
)
|
|
(0.05
|
)
|
|
—
|
|
|
—
|
|
|
(0.06
|
)
|
Diluted earnings per share
|
|
$
|
1.24
|
|
|
$
|
1.17
|
|
|
$
|
1.33
|
|
|
$
|
1.38
|
|
|
$
|
5.13
|
|
ROCKWELL COLLINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Net income in the first quarter of 2015 includes a
$22 million
income tax benefit from the retroactive reinstatement of the Federal R&D Tax Credit.
Net income in the third quarter of 2015 includes a
$14 million
income tax benefit related to the remeasurement of certain prior year tax positions.
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 October 23, 2016, the Company reached a definitive agreement to acquire B/E Aerospace, a leading manufacturer of aircraft cabin interior products, for approximately
$6.4 billion
in cash and stock, plus the assumption of
$1.9 billion
in net debt. Under the terms of the agreement, each B/E Aerospace shareowner will receive total consideration of
$62.00
per share, comprised of
$34.10
per share in cash and
$27.90
in shares of the Company's common stock, subject to a
7.5 percent
collar.
The transaction, which is expected to close during the spring of 2017, has been unanimously approved by the Boards of Directors of both companies and is subject to the the satisfaction of customary closing conditions and approval by certain regulators, the Company's shareowners and B/E Aerospace shareowners. Upon closing, B/E Aerospace results will be reported as part of a newly created aircraft interior systems segment. The Company intends to finance the cash portion of the transaction with debt financing, of which a significant portion has been committed. For additional information regarding the agreement, refer to the Form 8-K filed by the Company on October 27, 2016.