Third quarter fiscal year 2009 sales decreased $110 million, or 9%, to $1.084 billion compared to sales of $1.194 billion a year ago. Incremental sales from the acquisitions of DataPath, Inc. and SEOS Group Ltd. contributed $28 million of revenue growth. The organic revenue decline of $138 million resulted from continued market weakness in commercial aerospace, partially offset by growth opportunities in the government marketplace.

Cash provided by operating activities for the first nine months of fiscal year 2009 totaled $381 million compared to the $310 million reported for the same period last year. The increase resulted from working capital improvements as well as lower income tax payments, partially offset by higher pension plan contributions.

"During this time of volatile market conditions we are very focused on effectively managing our business," said Rockwell Collins Chairman, President and Chief Executive Officer Clay Jones. "This was evidenced in our ability to increase cash flow from operations by 23% over last year and to generate total segment operating margins of 21.5% in spite of the overall revenue decline."

Following is a discussion of fiscal year 2009 third quarter sales and earnings for each business segment.

Government Systems

Government Systems, which provides communication and electronic systems, products and services for airborne and surface applications to the U.S. Department of Defense, other government agencies, civil agencies, defense contractors and foreign ministries of defense, achieved third quarter sales of $651 million, an increase of $44 million, or 7%, compared to the $607 million reported for the same period last year. Incremental sales from the acquisitions of DataPath Inc. and SEOS Group Ltd. contributed a total of $27 million, or 4 percentage points of the Government Systems revenue growth.

Airborne solutions' sales increased $23 million, or 5%, to $452 million. Incremental sales from the acquisition of SEOS Group Ltd. contributed $4 million to Airborne solutions' revenue growth. Organic sales increased $19 million, or 4%, due primarily to higher sales from simulation and training solutions, higher production sales of head-down displays for F-15 aircraft, and higher development program revenues on the Common Range Integrated Instrumentation System (CRIIS) program, which were partially offset by lower revenues from international C-130 upgrade programs. Surface solutions' sales increased $21 million, or 12%, to $199 million. Incremental sales from the acquisition of DataPath, Inc. contributed $23 million to Surface solutions' revenue growth. Organic sales declined $2 million as lower sales from Defense Advanced GPS Receiver (DAGR) and Ground-Based GPS Receiver Application Module (GB-GRAM) products were partially offset by higher development revenues on the Joint Precision Approach and Landing System (JPALS) program.

Government Systems' third quarter operating earnings increased 21% to $158 million, resulting in an operating margin of 24.3%, compared to operating earnings of $131 million, or an operating margin of 21.6%, for the same period last year. The increase in operating earnings and margin were primarily due to lower employee incentive compensation costs and lower selling, general and administrative expenses.

Commercial Systems

Commercial Systems, which provides aviation electronics systems, products and services to air transport, business and regional aircraft manufacturers and airlines worldwide, achieved third quarter sales of $433 million, a decrease of $154 million, or 26%, compared to sales of $587 million reported for the same period last year.

Sales related to aircraft OEMs decreased $114 million, or 35%, to $211 million, as a result of reduced production rates at business jet OEMs, a decline in 787 related revenues, lower order volume due to Boeing's post-labor strike inventory rationalization, and reduced sales of airline selectable equipment as a result of production deferrals and rescheduling at the OEMs. Aftermarket sales decreased $40 million, or 17%, to $199 million due primarily to lower avionics service and support revenues, reduced Boeing 787 simulator avionics sales, and lower retrofit hardware sales. Wide-body in-flight entertainment products and systems sales were flat at $23 million compared to the prior year period.

Commercial Systems' third quarter operating earnings decreased 46% to $75 million, resulting in an operating margin of 17.3%, compared to operating earnings of $139 million, or an operating margin of 23.7%, for the same period a year ago. The decrease in operating earnings was due primarily to lower sales volumes, partially offset by lower employee incentive compensation and research and development costs, as well as reduced employee headcount and other cost saving initiatives.

Corporate and Financial Highlights

General corporate expenses that are not allocated to the company's business segments decreased $4 million, or 33%, to $8 million during the third quarter of fiscal year 2009 due to lower employee incentive compensation costs and other cost containment initiatives. The company's effective income tax rate of 32.6% for the third quarter of fiscal year 2009 was higher than the rate of 29.8% for the prior year period due to resolution of certain tax matters in fiscal year 2008 partially offset by differences in the availability of the Federal R&D Tax Credit.

During the third quarter of fiscal year 2009 the company issued $300 million of long-term debt to pay down short-term borrowings, fund the DataPath, Inc. acquisition, and provide for other general corporate uses. The company repurchased 1.4 million shares of its common stock at a total cost of $55 million, leaving $67 million available for authorized share repurchases. The company also paid dividends totaling $38 million, or 24 cents per share on its common stock.

Fiscal Year 2009 Outlook

The company updated its fiscal year 2009 outlook to include the incremental results expected from the May 2009 DataPath acquisition. Excluding the DataPath acquisition, guidance remained the same as the previous (April 28, 2009) release except Government Systems sales growth (which was "about 8%") and Commercial Systems sales decline (which was "about (18%)"). The following table is a summary of the company's fiscal year 2009 financial guidance:

                                              Excluding DataPath       Including DataPath       -- Total sales                              about $4.5 bil.          about $4.55 bil.                                                                                                       -- Segment sales growth / (decline)                                                           -- Government Systems                       about 7%                 about 11%                -- Commercial Systems                       about (20%)              about (20%)                                                                                                            -- Total segment operating margins          about 21.5%              about 21.0%                                                                                                            -- Earnings per share                       $3.70 to $3.90           $3.70 to $3.90                                                                                                         -- Cash provided by operating activities    $625 mil. to $675 mil.   $625 mil. to $675 mil.                                                                                                 -- Research & development costs             about $900 mil.          about $900 mil.                                                                                                        -- Capital expenditures                     about $150 mil.          about $150 mil.           -------------------------------------------------------------------------------  

Business Highlights

Rockwell Collins received contract for U.S. Army Mounted Soldier System program

Rockwell Collins was selected by the U.S. Army as the prime contractor to provide an integrated video display system for the engineering and manufacturing development phase of the Mounted Soldier System (MSS) program, which initially includes select M1 Abrams, M2/M3 Bradley, and M113 Medical Evacuation Variant vehicles. The MSS program will increase mission effectiveness on the network-centric battlefield in the areas of command and control, situational awareness, force protection and survivability.

Rockwell Collins selected for U.S. Army Ground Soldier Ensemble program

Rockwell Collins was awarded a contract for the Technology Development Phase of the U.S. Army Ground Soldier Ensemble (GSE) program. The base contract for Rockwell Collins is valued at $12.1 million. The GSE will incorporate navigation, display, video processing, mass storage, computing and information assurance capabilities of Rockwell Collins and its teammate Elbit Systems of America to bring unmatched situational awareness to the warfighter.

Rockwell Collins flight controls selected for SnowGoose UAV

Rockwell Collins was selected by Mist Mobility Integrated Systems Technology to provide its Athena 411 flight control and navigation system for the CQ-10A SnowGoose Unmanned Aerial Vehicle (UAV). The SnowGoose cargo UAV is a multipurpose aerial platform that autonomously delivers up to 575 pounds of cargo to multiple locations.

Rockwell Collins introduced CORE simulation architecture

Rockwell Collins introduced a next-generation simulation architecture that leverages advanced technologies and a modular design to maximize life cycle value and enhance training effectiveness across military and civil training platforms. Designed from the user and maintainer's point of view, the advanced CORE simulation architecture features common open reusable elements including scalable software adaptable for multiple training devices, integrated tool sets and Rockwell Collins' display and image generation technology.

Rockwell Collins awarded MA-60 and MA-600 aircraft simulator programs

Rockwell Collins was awarded a program to develop simulation and training solutions for the MA-60 and MA-600 flight platforms by Xian Aviation Science and Technology Company (XASC), an AVIC subsidiary. Under the terms of the agreement, Rockwell Collins will utilize its CORE simulation architecture to supply key components of the MA-60 full flight simulator and the MA-600 flight training device.