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Rockwell Collins, Inc. at Cowen and Company Aerospace/Defense Conference - Final.

Article Excerpt
CAI VON RUMOHR, ANALYST, COWEN & COMPANY: Our next presentation is going to be from Rockwell Collins' Chairman and CEO Clay Jones. Clay?

CLAY JONES, CHAIRMAN & CEO, ROCKWELL COLLINS, INC.: Thank you, Cai, and good morning everybody and good morning to those listening on the webcast. I've got just a few charts that I want to use before Cai and I get our little fireside chat going that may help illustrate a couple things about our Company that might be particularly useful given the markets and economic circumstances we're going through today.

Chart two has the usual Safe Harbor Statement that says that some of the things in here are forward looking, so be advised.

Go to chart three. This is a chart that we normally use when we're making a presentation that says, "What do we do?" I think it's particularly important now because there's three fundamental, I would say, characterizations of our business that are really coming through and having the intended effect we want them to in today's world and that is balance, diversity and integration. As you can see, the balances between the two businesses that we have, Government and Commercial, which has always been fairly equal, a little bit over-weighted right now in Defense but not much.

Diversity - Diversity of products, capability and customer base which gives us, I think, an ability to diversify across a lot of customers and products and prevent -- and a stability comes from that.

And then integration, I've long said I don't think there's any company in the world that is as highly and well-integrated between all of its segments and all of its functions as Rockwell Collins. And you'll see in a minute some of the benefits of these characterizations.

Go to the next chart. In this day and age when we're seeing the financial difficulties in the credit market I think it's important to look at some of the fundamental components of our credit worthiness and clearly I believe we have had to date and will not have any problem accessing the credit markets. And one of the reasons is because of these metrics. As you can see, the top two quadrant charts are there. They demonstrate our coverage ratios and by any measure against either our peers or the S&P 500 we are well better than most of those peers in terms of our coverage ratios for the debt that we have.

And if you look at our cash generation, obviously cash is king now and we've always had very strong cash flows. And then our debt to capital is at a reasonable level even with the slight increase that we saw this last quarter, we're up to about 31% now, and the worst cash generating quarter of our seasonal fiscal year and we're on par, basically, with our aerospace and defense peers and I would expect that to improve over the course of the year.

The other thing about our model is indicated in the next chart and that is the efficiency by which we run our Company. And I think, again, that's another watch word now when we're seeing weakness in our Commercial markets is, "Can you match the infrastructure?" and all the things you need to do to run your business in a way that matches what the market is.

And these two charts clearly indicate by function of profitability what we've been able to do. Well above the return on invested capital of any of our peers, 33%, and a return on sales that's at 14%. In fact, even in the first quarter with declining revenues we were able to improve our quarter-over-quarter return on sales by 40, 50 basis points.

Now let's look at the next chart and say we all know that the markets are difficult and especially the Commercial markets which represent roughly half of our business are challenging, so what are we doing to manage this Company in this difficult time?

Well first thing, we're taking the actions necessary to size our business. If you look at what we've done since the beginning of our fiscal year in October to today we've, unfortunately, had to reduce our workforce by about 5%, that's about 1,000 equivalent units. We've lowered our discretionary research and development by about $50 million and we have the flexibility to do that. We'd be quick to say none of those were customer commitments; they were truly discretionary projects that we think the market conditions suggest that we can defer.

We've frozen our salary ranges to last year's level and so we've not increased that and we've, obviously, gone across the Company and made general cost saving actions to just reduce overhead and discretionary expenditures. And then with that we've been able to leverage that particularly well using our shared service business model. And so this gives us the ability to know where the cost is and attack that cost very directly. I'll give you one example.

All of our manufacturing operations are consolidated under one business unit and supporting all of our businesses. So when we go to size that and look at what we need to do to bring the inventories and revenues down we can do that in one organization across the businesses. We don't have to hunt for that in each one of our businesses.

And then you saw the benefits of that in the first quarter where those cost take-outs had a direct effect on the improvement in the operating margins in our Government Systems businesses which are growing and are strong and they came in above 24% operating margins which is a world record for them and it is off the charts for any company doing business in military or defense-type products.

We're also benefiting from that balance I talked about before. While we are struggling and we saw about a 14% decline in our Commercial businesses, our Government business grew 5% in the first quarter and we're expecting that growth will actually be solid or increased in the rest of the year so we have half of our business growing at 8%. An 8% growth for, again, any comparable defense business is very strong right now and so that's the advantage of that stability with the balance between commercial and government.

And then finally, in the midst of all this we have our eyes clearly set on the future. Just as we did back in the post-911 period where we experienced a similar downturn in Commercial, we are reducing our discretionary R&D but we are not eating our seed corn. We will still invest at historic averages, which is about 19% of sales and total R&D, and...

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