Latest Rockwell Results Could Inform UTC Changes.jpg

Latest Rockwell Results Could Inform UTC Changes

Avionics provider unveiled its second quarter earnings on April 27.

In what could be its last quarterly report as an independent avionics and cabin interiors provider, Rockwell Collins on April 27 said sales for the recently ended second quarter of its fiscal year 2018 rose 62% from the same period a year before, thanks to its acquisition a year ago of B/E Aerospace.

Earnings per share (EPS) for the latest quarter were $1.43 compared to $1.27 in the prior year's quarter.

"Our plan for the year is playing out as we expected, with commercial aftermarket strength, higher business jet utilization, and an improved defense budget environment driving our growth and more than offsetting the anticipated completion of nuclear security mandate-related sales in our Information Management Services business,” according to Rockwell Chairman, CEO and President Kelly Ortberg.

Ortberg spoke via a prepared statement and Rockwell did not host a teleconference with financial analysts due to its own pending takeover by United Technologies (UTC). That acquisition is on track to close this quarter before July, UTC leaders said April 24.

With leaders there openly mulling changes to multi-industrial UTC’s business portfolio once they absorb Rockwell, investors and analysts may scrutinize this last Rockwell quarterly report for clues about potential divestitures or restructuring.

Cowen and Co. analysts noted to its clients that while the results showed legacy Rockwell operations were “strong” in the recent quarter, there was another relative disappointment in the Interiors side that stemmed from the B/E acquisition, as compared with some Wall Street expectations. Specifically, Cowen noted its 19.3% adjusted operating margin, which was below an expectation of 21.6%

Also, a cash flow shortfall may raise questions among investors who were expecting fiscal 2018 free cash of more than $1 billion. Free cash flow of $128 million missed expectations by $76 million on higher working capital use, according to Cowen.

“With [UTC] deal closing approaching, they likely are questions for UTC shareholders,” Cowen observed.

UTC chief executive Greg Hayes originally said he liked all of Rockwell Collins when his company announced the acquisition last September, and that UTC would need the total combined cash generation to help pay off the roughly $30 billion buy. But after corporate taxes were changed under the December tax law in Washington, and with increasing scrutiny, including potentially by activist investors, UTC leaders have since said they will review the whole UTC portfolio post-acquisition.

Analysts have questioned how much of Rockwell, specifically Interiors, UTC would want to keep long term since the deal was announced. Cabin interiors providers have struggled in recent years, leading in part to B/E’s traditional rival Zodiac Aerospace being acquired by Safran in February, as well as the creation in January of a seat joint venture by Boeing and Adient.

On April 24, Zodiac released operating results for the first half of its fiscal year before Safran’s takeover was completed. Sales of its erstwhile aircraft interiors business declined in the first half by 13.9% on an organic basis, i.e., not counting currency exchange effects. Zodiac Seats' revenue, in particular, fell by 22%.

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