Operator: Good morning, and welcome to the Rockwell Collins Third Quarter Fiscal Year 2013 Earnings Conference Call. Today's call is being recorded.
For opening remarks and management introductions, I would like to turn the call over to Rockwell Collins' Vice President of Investor Relations, Steve Buesing. Please go ahead, sir.
Steve Buesing - VP, IR: Thank you, Tina, and good morning to all of you on the call. With me on the line this morning are Rockwell Collins' Chairman and Chief Executive Officer, Clay Jones and Senior Vice President and Chief Financial Officer, Patrick Allen.
Today's call is being webcast and you can view the slides we will be presenting today on our website at www.rockwellcollins.com under the Investor Relations tab.
Please note, today's presentation and webcast will include certain projections and statements that are forward-looking. Actual results may differ materially from those projected due to certain risks and uncertainties, including but not limited to those detailed on Slide 2 of this webcast presentation and from time-to-time in the Company's Securities and Exchange Commission filings. These forward-looking statements are made as of today and the Company assumes no obligation to update any forward-looking statements.
So, with that, I'll turn the call over to Clay.
Clayton M. Jones - Chairman, President and CEO: Thanks Steve and good morning everybody. Late last year I characterized fiscal year 2013 as a year of transition and this quarter's performance illustrates our progress along that journey.
Our third quarter results once again demonstrate the kind of operating performance that this company is capable of delivering, even as we wait for overall revenue growth to return.
So let's start by looking at the sales results. Revenue came in as expected with 7% Commercial Systems growth where most notably our aftermarket increased 13%. That growth was offset by the anticipated decline in Government Systems of 11%. As the impacts of sequestration particularly impacted some of our short cycle products and order timing.
Now the net effect was a 3% decline in revenue which I believe will represent the low watermark in year-over-year percentage comparisons for both Government Systems and Rockwell Collins overall with improvements beginning in our Q4.
Segment operating margin performance was exceptional across both business expanding by 140 basis points up to 22.4% of sales. In commercial systems operating margins were up 340 basis points to 23.4%. The third best quarterly margin rate we have ever posted for this business rivaling the rate we saw in 2008.
In Government Systems operating margins were 21.4%, down just 40 basis points despite a dramatic sales decline as the benefits of cost reduction actions were able to mostly offset the headwind from our lower revenue. Our ability to manage through a very dynamic market environment further demonstrates the strength and resiliency of our company's unique and balanced business model.
Now that performance allowed us to increase operating earnings by 3% and with the benefits of our share repurchase program, we increased earnings per share by 5% to $1.20 a share. And as we’ve done throughout the year, we had another good quarter with cash flow well ahead of last year. As we have seen almost continuously over the last four or five years, there are plenty of changes to note this quarter across our served markets.
Let’s first look at business jets, where our mid-quarter we updated our guidance to incorporate the lower than expected production rates at Cessna. Even after incorporating these changes, we expect our FY '13, business and regional jet OE revenue to increase mid-single-digits. Now that growth is really impressive considering our current expectations for overall business jet deliveries including turbo props is a 2% decline for 2013. Our strategic efforts over the last decade to better position the company with long-range and mid-size business jets is driving OEM revenue growth even as the light end of the market remains very soft.
Another area that has experienced a lot of volatility this year is the commercial aftermarket. First, I will remind that after-market is a bit unique as about half is non-discretionary maintenance repair and overhaul or MRO, while the other half comes from discretionary activities like spares and retrofits. At the beginning of the year, we plan for very strong revenue growth across all portions of the after-market. Then, last quarter, we reduced our guidance for the after-market based on weaker than expected MRO revenue. Even though the market has not performed to our original expectations, we believe that we now have a better understanding of the factors affecting service and support and here's what we see. Overall airline traffic is expected to be up about 4% this year at our estimate. However, the airlines are continuing to push the limits of efficiency with load factors running at historically high levels. This performance coupled with an increasing quantity of new aircraft entering the market is resulting in more aircraft retirements than our original expectations. We now expect over 500 aircraft retirements this year, which is creating a headwind for service and support as the over, out-of -warranty aircraft are replaced by newer in-warranty.
Moreover, some of these retired aircrafts are relatively new and are being torn down and sold for spares and for MRO purposes. This trend is clearly impacting our service and support revenue as well and we expect it to continue for some time into the future. Now, the good news in what is otherwise a negative development, is that we have a business called Intertrade, which deals exclusively in used aircraft components. Our Intertrade business is expected to grow more than 10% this year, providing some offset to the MRO trends I just described. Now, even with those MRO trends, we continue to expect increases in our discretionary aftermarket, specifically in spares, mandates and retrofits, which will drive the majority of the aftermarket growth for us this year.
Now, I'd like to shift over to government where the question on everybody's mind is the implication of sequestration. About one-third of our revenue decline this quarter is because of the implementation of these cuts. As you would expect, we continue to assess order activity anticipated over the balance of the year, and compare that against our original estimates for sequestration and the news is relatively good. If you remember in our original guidance we projected approximately $120 million of sequestration impact this year. Based on our most recent assessment we now believe that the impact will be closer to $70 million and now anticipate our defense revenue will be down 7% in FY '13 compared to our original guidance of 10%.
So based on our performance for the first three quarters, we remain confident that we will meet or exceed the midpoint of our previous revenue guidance and have increased our expectations for both earnings and cash flow towards the top ends of the respective ranges.
As we look ahead to the end of the year. I believe we will have effectively navigated this year of transition and taken the steps necessary to position the company for long-term growth.
With that let me now hand the call over to Pat for a review of the financial results.
Patrick E. Allen - SVP & CFO: Thanks Clay and good morning to everyone as well. I'd now like to walk you through today's presentation slides that summarize our results for the third quarter of 2013.
I'll begin on Slide 3 where we highlight our total company third quarter sales EPS, net income and shares.
Total company sales for the quarter decreased 3% compared to last year sales, while net income declined 1% to $164 million.
Proved operating performance and a continued focus on returning capital shareholders. Earnings per share in the quarter increased $0.06 or 5% to $1.20.
Turning to Slide 4 we have the third quarter results of commercial systems which achieved revenue of $563 million in 2013 up 7% from $526 million in 2012. Sales related to aircraft OEMs increased $14 million or 5% to $309 million, primarily resulted from increased deliveries for the Bombardier Global and Challenger aircraft, a full quarter of production of Beechcraft King Air turboprops. These were partially offset by fewer deliveries to Cessna.
Aftermarket sales increased $27 million or 13% to $235 million due to higher sales of spares in both, the air transport and business jet markets, and increased mandate revenue. Commercial Systems had great earnings performance this quarter as its operating earnings increased 26% to $132 million, with operating margins expanding 340 basis points to 23.4%. The increase in operating earnings and margins were primarily due to higher sales volume and lower Company-funded R&D expense.
Moving on to Slide 5, Government Systems revenues decreased by 11% to $602 million in 2013. The reduction was due to the impacts from sequestration, mostly in our communication products, the completion of certain development programs, lower fighter jet-related sales and the reduction in GPS product sales. These headwinds were partially offset by increased sales in areas such as network communications and international sales. Looking specifically at our product categories, sales of avionics decreased as expected by $52 million or 13%, driven by headwinds from development programs, simulator award delays and lower sales from fighter aircraft. Communication product sales declined $25 million or 14%, primarily due to fewer deliveries of satellite communication and data link products, partially offset by increased deliveries of JTRS Manpack radios.
Surface Solutions sales increased $12 million or 24% from increased international sales of FireStorm targeting systems.
Finally, sales of navigation products declined by $12 million or 21%, resulting from fewer deliveries of our handheld GPS receivers. Government Systems third quarter operating earnings decreased $19 million to $129 million, resulting in operating margins of 21.4%. The decreased operating earnings and margins resulted from lower sales volume which was partially offset by the benefit from cost reduction actions taken up in the past year.
Looking to Page 6, we show our year-to-date results for revenue, net income, earnings per share and operating cash flow. Through the third quarter, we've generated $309 million cash compared to $192 million last year. The increased cash generation resulted from lower incentive compensation payments, as well as improved inventory performance and lower tax payments.
Slide 7, provides an update of our total R&D investment through the third quarter of the year. Total spend remains relatively consistent at 20.5% of sales. Company funded R&D expense declined as we completed development efforts related to certain next generation business jet programs. Meanwhile, we increased investment in pre-production engineering programs or dominantly related to the Boeing 737 MAX program.
Moving to Slide 8, we show the status of our capital structure as of the end of the third quarter compared to the end of last year. In addition to $563 million of long-term debt, we had $602 million of short-term debt outstanding at the end of the quarter. The increase in short-term debt came from the issuance of commercial paper to fund share repurchases, as well as the reclassification of long-term debt, that is due within the next 12 months.
Now, we entered the quarter with a debt-to-capital ratio of 49% and debt to EBITDA of 1.1%. I feel that this level of debt continues to provide us the necessary cost effective access to fund our capital needs and I do expect it to come down over the balance of the year as a larger portion of our cash flow traditionally resolves later in the year and we paid down a portion of that short-term debt.
The updated status of the share repurchase program as of the end of the third quarter is detailed on Slide 9. During the quarter we repurchased 1.4 million shares at an average cost of $63.72 per share, and we have repurchased 7% of our outstanding shares over the past 12 months.
This brings our total repurchase activity since 2002 to about 85 million shares, or $4.2 billion return to shareholders through maintain an active share repurchase program.
As of the end of the quarter we have $473 million remaining and we expect this authorization to fund our repurchases for the balance of 2013 and into 2014.
I'd like to turn now to our final slide, Slide 10. Where we provide the details of our fiscal year 2013 financial guidance.
As Clay outlined before we are narrowing our guidance to the middle of our original sales guidance at $4.65 billion for the year and expect Commercial Systems to be up 5%, but we've actually increased our expectations for Government Systems it will only down about 7%.
Based on operating cash performance to-date we are increasing earnings per share expectations towards the top end of range to between $4.55 and $4.60 and our cash flow guidance to be about $600 million.
Finally, we are slightly adjusting our expectations for capital spending for the year to $125 million from our original expectation of $140 million based on lower than expected spend to the first three quarters.
All other aspects of our financial guidance remain unchanged.
That complete my review of the financial results or projections. So I'd now like to turn the call back over to Clay for some closing remarks.
Clayton M. Jones - Chairman, President and CEO: Thanks Pat. Well as most of you know this is my last earnings call before I retire in just a few days.
At times like this it's hard not to think back to the beginning of our journey as a new public company which began 12 years ago this month. For all of us at Rockwell Collins, the summer of 2001 was filled with the excitement and optimism that usually accompanies an IPO. However, we had no idea how the world would change or impact our business starting just 10 weeks later on 9/11, and frankly extending over the balance of the decade. I'll spare you the walk down memory lane and the associated war stories, but suffice it to say, these were interesting times, that presented both opportunities and challenges that tested our Company's structure, judgment, leadership and resiliency. Along the way, we had great successes, as well as a few disappointments, and I'll leave it up to you and history to judge the overall result. All I'll say is, we did the best we could to serve all our stakeholders and position this Company for success no matter what cards we were dealt.
So let me close with two final thoughts. First, I want to thank all of you who invested both your time and your treasure and our Company along the way. Unlike some CEOs, I actually enjoyed all, well, almost all of my interactions with analysts and investors. You've supported us, challenged us, made numerous suggestions and provided great insight, all of which helped make us a better Company, and to those of you who have put your trust and money in Rockwell Collins, we are profoundly grateful and we'll always work to retain that trust.
Which leads to my final thought, I leave having never been more optimistic about the future of this Company. It has secured great market positions that will be in an annuity for years to come. It is a financial stalwart with abundant flexibility to deploy capital in very value creating ways. It has a value system that provides it the highest standards of integrity and has demonstrated the kind of focus that puts customers and investors above self, and it is blessed with a quality of leadership that will ensure that we not only proceed full speed ahead through this transition, but will meet the inevitable future challenges with experience and resolve. I have every confidence that Kelly Ortberg and his talented, experienced team will take Rockwell Collins to new heights and ensure it achieves its full potential. Thank you all for your support over the years.
With that, I'd like to open the Q&A session. So, operator, we're now ready to open the lines.
Operator: Sam Pearlstein, Wells Fargo.
Samuel Pearlstein - Wells Fargo: I guess, my question is on defense and I'm wondering if you can talk a little bit more about Government Systems in terms of why you believe this is the low watermark in terms of what gets better, and related to it, in the past, at some of the conferences, you've talked about a down 5% to 10% next year. Now that you're going to end this year at a higher level, is that still how you're thinking about next year?
Clayton M. Jones - Chairman, President and CEO: Well, first thing, the immediate fourth quarter is going to be better because of that 11% down I'd say about $25 million of it was surely order timing that didn’t come in as we'd expected it to this third quarter that we've already got the order and it is going to slip over into fourth quarter. If you are to normalize that it's been more like an equitable (77). So we have a little benefit actually from the delay that's going to help us next quarter and that’s what gives me confidence there. Relative to next year obviously it's way too early to call that because we still have a lot yet to learn and know about what the Pentagon is doing relative to sequestration. But both houses of Congress are going to do to relative to 15 budget. But I think all in, and I should say heck we called fourth quarter and I think that’s pretty aggressive but I'd say all in what we do is we look at next year and I think the defense will still be down. But it won't be down at the level we saw this year. I really do believe that most of the lower level supply chain folks Tier 1, Tier 2 have taken the brunt of the cut so far. And eventually we are going to see some of the major OEM cuts come through to resolve the budget they have there. No question some of that will trickle down to us. But I don’t think it will be any worse than it was this year even if you calendarize it through the year. The second thing that gives me even more confidence is remembering this year of transition. We had probably about $100 million of headwind just from programs that are transitioning. Those programs so far all still alive and seem to enjoy a lot of support and they'll be moving from this transitionary period of finishing development and moving into production and we'll see actually a tailwind for some portion of that. So as I kind of look out to next year and frame it. I see some uppers, I see some natural downers and so we've estimated sequestration I think, as accurate as anybody has this year. And as we look at sort of what we think the general environment is for next year and what it's likely to be, that is the -- I will say, the macro view I'm basing that statement on. So yes, I think Government System will be down next year, not as much as it was down this year.
Operator: Myles Walton, Deutsche Bank.
Myles Walton - Deutsche Bank: Could you talk a bit about R&D at a high level? Are we at the tail end of a long, long investment cycle and this is kind of the benefits we're going to reap or is there something related to timing here? Because if I look just isolated to company spend, it looks like the full year could be down $40 million year-on-year, $35 million to $40 million year-on-year, which is obviously better than you were anticipating at the start of the year. So is this a headwind for '14 or is this more efficient use of R&D?
Clayton M. Jones - Chairman, President and CEO: Well, I got some guys scrambling around the room to look and see if we can confirm or deny your estimate on the year. But while they're doing that, let me say that in my view, I think it's just a timing issue. Specifically, what we're seeing this quarter is a sort of a wind down of I'll say the product line, Pro Line Fusion work. It will still have a lot of R&D going in the application of Pro Line Fusion to the roughly 15 platforms we're working on. But that's a good portion of what the company funding is down. However, what we're seeing is a ramp-up of the Max funding. But remember, that's all deferred. And so total R&D spend this quarter actually went up, but it's just in 2 different buckets because of the reduction in this company discretionary or expensed R&D and the deferred R&D that's going into the new projects. I believe when you look at R&D all in, which is what we do, R&D will continue to be flat or a little bit increased, if the Company's successful. If you look at the mix of R&D, you are seeing a decline in the discretionary portion and an increase this year and next in the deferred portion.
Patrick E. Allen - SVP & CFO: The other thing I'd add, Miles, is as we look kind of sequentially quarter-to-quarter, we are expecting to see an uptick in R&D on the Commercial side of the business, just really due to the timing of certain programs.
Operator: Richard Safran, Buckingham Research.
Richard Safran - Buckingham Research: I've got a question on sort of on opportunities. So Boeing looks like it's set to launch the 777X later this year. I want to know if you could possibly discuss here what you might see as the incremental opportunities for share gains? For example, if Boeing were to go to an SFE model for the 777X, would you see that as possible benefit to you?
Clayton M. Jones - Chairman, President and CEO: I think it could be, Rich. It's probably premature for me to talk specifics about what the opportunities are, but if you look at our last two or three runs in the air transport competitions, we fared pretty well in picking up market shares. So I like our chances just based on historicals, but on the 777, as I've said before on this call, a lot of it depends on what Boeing chooses to do, specifically with the avionics systems and there are two very distinct architectural approaches that they're studying and they could look at. I think we have opportunities regardless of which architecture they pick, but one architecture, obviously pointing over the 787 components and the basic flight systems of 787 present a little bit higher opportunity for us. So yeah I would say net we have market share opportunity hard at this point until we get the architecture nailed down to say specifically what and how much.
Operator: Joe Nadol, JPMorgan.
Joseph Nadol - JPMorgan Securities: Clay, congrats you have so much to be proud of over the last 12 years, it's been a great run. My question is on cash flow and what's changed it was really nice to see the guidance go up particularly in the operating cash flow side. Patrick you mentioned inventories, trends for the last couple of years have been going the other way. So it was definitely nice to see that go up. What’s changed in the plan for the year and as you look forward into next year. Any initial sense on how we can think about conversion trends from earnings and cash flow?
Patrick E. Allen - SVP & CFO: Joe what I would say is that the two biggest changes from the original plan, one is a lower deferred R&D spending we talked about that for the last two quarters. And specifically related to the 737 MAX spending and the ramp up of that. The other area that we saw benefit on is in R&D tax credit. We got the benefit of that not only the P&L benefit but the cash flow benefit from the lower R&D tax credit. With that said it also says that we've pretty much hit our numbers with respect to working capital. So we've been able to flow all of that good news to cash flow the year. Now as it relates to the trend for next year. I would put the cash flow conversion pretty much at par with this year. And the big singer is always pension contributions and deferred spending and as we see deferred spending next year, it's going to be probably flat to slightly down. And I wouldn't anticipate pension contributions to be much different than they were this year. So I think our conversion for '14 will be about the same as this year and then improving thereafter as the deferred investment comes down.
Operator: Robert Spingarn, Credit Suisse.
Robert Spingarn - Credit Suisse: Just on Commercial OE, 2 quick things. First, if you could talk about the flattish air transport growth there and how you expect that to trend as your new programs come online. Of course, there was a tough comp from last year. And then going back to the 777X that Rich asked about, I'm wondering if the two different architectures, it looks like in both cases you increased share. It seems like the difference would be a system that has your displays versus a system that has your displays and flight management, just based on what we think we learned in Paris. And so perhaps you could characterize what your content would look like under those scenarios versus your actual content on Max and 787.
Clayton M. Jones - Chairman, President and CEO: Sure. Well, to your first question, Rob, that the -- I'll say the air transport OE was a little non-intuitive this year because there was very little growth there. But there are a couple of 3 things coming on, one, of which you cited and that is the comparables from third and fourth quarter of last year were very high to try to get across. But a couple of other things under the waterline. First, I would say, we got virtually no material help from 787. Remember, we've always said the ramp-up to synchronize our production, which was well ahead of Boeing's, wouldn't really start occurring to this fourth quarter that we're in now. And so we'll begin to see a little help in the fourth quarter and then more of it obviously as we get into next year, so next year is going to be a much bigger contributor than we've seen this year. So that's one thing, then the other two things going on there is, that wouldn't be obvious, is typically rebook any non-recurring engineering that we get from the OEMs into this OE line. It's not a frequent occurrence, but every once in a while when there are changes, both Boeing and Airbus will give us non-recurring payment for making those changes that are out of scope, plus on top of that, we had a lot of work that we were doing on the C919, specifically over in China, both the Boeing component of that and the Chinese component of that are down for the quarter, and so that's having some impact of dampening the growth. The second one we had, which just gets into the real arcane, is that our heads-up display product that is managed out of our air transport area, is often sold on a product basis. One of the great strengths of our Company is selling commercial products into the military. Well, last year, we had a number of HUD sales into 2Z, 3Z, 4Zs into military platforms that went away this year because of the funding. So if you look at those two things alone and were to take away the NRE and the HUD sales, our air transport OE would have been up 5%, which I think is least directionally correct. So that's what the dampening effect that we saw on that side. Relative to your second question on 777, I'm going to go back and give the same answer. It's premature to talk about any specific architectural decisions Boeing would make. I have found over my few years here at Collins, it never pays to get out ahead of your customer, so we won't do that today, but when they make that decision, we have worked very closely with them. I think we have very specifically, what opportunities that would flow from either of those two opportunity sets, and I'm not going to predispose what the answer might be here in public.
Operator: Cai von Rumohr, Cowen & Co.
Cai von Rumohr - Cowen & Co.: So Patrick incentive comp maybe give us some color you've had good numbers here. Where was incentive comp in the quarter and what should we be thinking about for the entire year.
Patrick E. Allen - SVP & CFO: What I'd say Cai is that our incentive comp plan remains on track I think I have talked to you we're around 100% payout, actually a little bit below that. And there were really no material adjustments to incentive comp this year. Now interestingly enough, year-over-year it was a pretty big headwind, because we had almost no incentive compensation in the third quarter of last year because we were adjusting guidance down. So there was about $20 million headwind year-over-year on incentive compensation fortunately we were able to offset that with a number of other I'll say employee related costs that came down in the quarter. But no material change to incentive compensation and I would expect the run rate to continue into the fourth quarter as well.
Operator: David Strauss, UBS.
David Strauss - UBS: Wondered going back to the aftermarket I appreciate your comments what exactly is the after-market guidance now for the full year because I know it's bounced around a bit in my notes I still have mid to high single digits up which looks tough given the comp in the fourth quarter. So maybe just talk about that and then specifically breaking it down on mandates and spares and MRO, what you're seeing, and how far along are you on the mandate side and is that an upper as we head into '14?
Clayton M. Jones - Chairman, President and CEO: Yeah, well, we hadn't changed our guidance for aftermarket since the adjustment we made last quarter to MRO, and I would say, as I said in my prepared remarks, we're not counting on any recovering MRO as we done in the fourth quarter. So all the growth is going to be in that discretionary portion, which are mandates, retrofits and spares. The way, I would look at it this way, I feel pretty good across the board on the mandates, on the spares that we've got loaded in there, and I'd say on most of the retrofits, especially as they involve the air transport side, things like the 767 display program at FedEx is locked and loaded, we're going to get that, I don't think there's any ambiguity to it. There's one area of risk that we're looking at very closely, and that's the discretionary retrofits related to business aviation. Undeniably, because of just the overtone of biz jets, especially at the light end, there should be, and historically has been, a circumstance that when people aren't buying new business jets, they upgrade their older business jets, and so they're typically very lucrative in terms of upgrading display programs or efficiency upgrades. We saw that last year a lot. We saw at the beginning of this year. We are seeing some softening in that, a lot of quote activity, but the dealers that we deal with are struggling to close those quotes. So, I think the biggest risk item we've got going into the fourth quarter is that segment alone. So we're working it really hard. We're watching it very carefully. We don't think it's severe enough that we're willing to come off our guidance right now, but if there's any risk, I think that's where it is. Otherwise, I feel pretty good about it.
Operator: Carter Copeland, Barclays.
Carter Copeland - Barclays: Just a question on Government Systems and the resiliency in the margin there. I know you briefly commented on '14 and the natural uppers and downers, and I wondered if you might kind of put that in context with what you've seen this year in terms of maybe mixed benefits or costs benefits. Maybe just some color around how the margins have been so resilient in the face of the volume declines and what that means for what we should think about profitability levels next year?
Clayton M. Jones - Chairman, President and CEO: I'll be glad to, Carter, as best I can. First, let me say, and I think it's undeniable, the folks at Government Systems and the shared services has been working their butt off. The good news is we saw this coming, we didn't walk past the graveyard where sequestration's concerned. We took the $60 million restructuring. We all remember in the fourth quarter of last year, and so the best thing we did is, we were prepared for it and we acted early and often to try to get our costs down where we could and control what we could control. I think, far and away, I could talk about all of the sub elements, but far and away, that's what's helped us. We cut back on some R&D as we've said, but that should have been cut back because the opportunity set is not as great there and we're able to shift that over into our Commercial Systems. We're also looking at bringing more Commercial Systems product over, so we don't need the R&D. So that certainly helped out. I guess the last thing I would say is we have been a little lucky, and the lucky part is that the cuts that we've been incurred have largely been through the development programs that come at naturally lower margins. And so our stable product the legacy products that we have, have been hanging in there pretty tight and that’s where most of our margin come because a lot of its commercially based, it's derived from what we have in the commercial so it commands those margins and then the final thing I'd say that we are beginning to get traction on and I think it is going to be the bigger contributors we got the next few years is our international sales. Firestorm is the great example of that, where it's surface was the terrible portfolio over the last two years now it’s the jewel in the crown because it has been able to cap it – reset itself quickly and capitalize on this product that’s very attractive in the international market as we began to get more of that kind of opportunity set coming in I think that will help us as well.
Operator: John Godyn, Morgan Stanley.
John Godyn - Morgan Stanley: From your vantage point are you seeing any changes in the marketplace of note on the back of the Cessna production cuts and Clay given your experience in the industry just a best guess as to when we'll see true inflection in demand for new jets? Thanks.
Clayton M. Jones - Chairman, President and CEO: No, I'm not seeing a lot of industry change at the low end as a result of that I think environment and business really hasn’t changed over the years. I think the disappointment there for all of us is that we'd expect that some improvement and in fact we haven’t seen that, we've seen about steady state at the high end and we've seen it worsen at the low end. As I mentioned in my remarks we are expecting to be about 2% down for our business aviation because of that a relatively higher quantities of the low end that’s in deliveries and we would have thought it to maybe flat or up when we started the year. I think but the conditions that bought that on and I am sure that Scott talked about it a lot yesterday so I won't add much to that, but it's just the general economic conditions that are not favorable for people making this particular capital purchase at this particular time, and I think until we see that recovery, I've often said, things in the largest market in the United States, I think over 3% GDP growth, and I think we need some government regulation resolutions on taxes and health care that will restore our general economic confidence, and when that happens, then I think businesses start to reinvest in everything, not just in business aviation, but certainly, that will come along as well. So it's hard to call, I think any of us would be unwise to do it, but I would say, we probably shouldn't expect any meaningful change over the next year.
Operator: Robert Stallard, Royal Bank of Canada.
Robert Stallard - RBC Capital Markets: I thought I'll maybe ask Patrick a question on the buyback. Given your comments about debt repayments in the fourth quarter and the overall leverage of the Company at this point, do you think it's fair to assume that the buyback going forward will be slightly more modest?
Patrick E. Allen - SVP & CFO: Well, we've been talking about that the entire year. We did have a fairly large slug of shares in the first half, particularly in the first quarter, and I said we continue to buy back shares, but at a lower rate. So I think that trend will continue for the balance of the year. The other thing to point out is that fourth quarter by far is our largest cash flow quarter every year and so, we'll already be generating a lot of cash flow. We'll use some of it for share repurchases and some of it to pay down that short-term debt.
Robert Stallard - RBC Capital Markets: So, you'd expect say fourth quarter repayments to maybe be similar to what we saw in the third quarter? It was pretty modest in the third quarter.
Clayton M. Jones - Chairman, President and CEO: I don't want to speculate as to the exact amount, but on that order of magnitude, yeah.
Operator: Yair Reiner, Oppenheimer.
Yair Reiner - Oppenheimer: Patrick, just a follow-up question on that. You have $600 million of short-term debt, some of it is long, some of it is bank debt, kind of where would you like to be – how much of that do you want to term out and if we kind of look ahead 12 months, what do you want the balance sheet to look like?
Patrick E. Allen - SVP & CFO: What I would say is that we'll be terming out a portion of that short-term debt. Exactly how much, I think depends on a couple of different things. First of all, we're still putting a plan together for the next year and there is always variability around cash flow, both for this year and next year. So, I would say, we'll definitely refinance the $200 million of long-term debt that's coming due and then another slug of that commercial paper will probably go long-term as well. I don't know how much at this point in time.
Operator: Noah Poponak, Goldman Sachs.
Noah Poponak - Goldman Sachs: I wanted to ask about fiscal '14, I guess, from a total Company perspective. If you knew nothing about the financial model I think the reference to '13 as a transition year would sort of imply '14 looks much better and so I know you don’t want to get too far ahead of September, but how are you thinking about that. Does revenue grow much more than flat on a total company basis. Is there anything much different next year in the segment incremental margins than you normally see and anything below the line worth noting. It seems to me that the answer to all of that is really no and that everything looks fairly similar to '13 and so given the reference to '13 as a transition year, just want to make sure there isn’t something much different than what I am expecting. Thanks.
Clayton M. Jones - Chairman, President and CEO: The last thing I want to do as I leave is to steal Kelly Ortberg's thunder. So as we typically do in September we'll come out with all the answers to any question that you just ask to try to provide the color that ultimately you are going to want to know what '14 looks like. All I want to do is reiterate what I have already said. I do believe this quarter will be sort of, we'll look back historically and say this is sort of a low watermark. I think it might be lumpy as it goes nothing in this life is a straight line as we all learn especially given the market conditions. But I just have a feeling right now and having done it for a while I guess that I am entitled to a feeling. I have a feeling right now that it is now peaches and cream in the future. But it's going to get better than it has been because the last two, three years it's been pretty darn hard. And I just think we are getting to that point of stabilization if you heard my presentations over the last year, that's what we're looking for. We're looking for that stabilization where we become more predictable. I absolutely believe, as bad as it still is, that Government Systems is approaching that stability. And I've said, by this time next year that market will be as stable as it ever has. I mean, there'll be uncertainties, but we'll be back to a point where sequestration will be baked in, we'll have a strategy out of the Pentagon, we'll have a '15 budget and a sense of what the priorities are. And we'll be much easier able to call it. And as I said before, I don't think it's going to be as far down as it was this year. In Commercial Systems, it completely relies on things outside of my control. What's the economy going to be to help start facilitating a business jet upper on the light end, I think the long range will hang in there. The air transport production rates are locked and loaded. And then as we lace in these market share improvements, we rely totally on our OEMs to get that total development job done. And hopefully, again, we'll do our portion of it. But when they get that job done, there's an annuity there that is undeniable. We're going to see 787, A350, CSeries, MRJ, a whole host of new business jets coming in over the next 3 to 4 years. And what quarter that happens? Yes, I guess, we'd like to call it, but it won't matter. That's going to happen. And that's the undeniable part of this transition I talk about. So that's why I feel good about where this company is. And if you're not in it, you better get in it.
Operator: George Shapiro, Shapiro Research.
George Shapiro - Shapiro Research: Patrick, I wanted to pursue a little bit a question you answered to Cai. You said employee costs were down, offsetting some of the roughly $20 million headwind for comp. Can you quantify how much it was down? And whether it was allocated the normal way across the different sectors because the incremental margin in Commercial was very high and obviously, were even higher whatever the negatives were here.
Patrick E. Allen - SVP & CFO: I would say this, George, it did distribute kind of as you would expect based upon the employee base, across the board. It offset most of that headwind that I talked about from an incentive compensation perspective, and the thing that's going to be hard to predict a little bit is, next quarter we've got – we'll definitely have more headwind on the incentive compensation. The question is, are some of these employee costs, particularly we saw some very favorable medical spending, the question is whether that favorable trend will continue. That tends to be pretty lumpy and harder to predict.
Operator: Jason Gursky, Citi Investment Research.
Jason Gursky - Citi Investment Research: I did want to ask a question on a rarely asked topic, which is in-flight entertainment. Not just the wide-body stuff, of course, I'd like to get a little bit of color on expectations on that wind down and whether these higher rates of retirement of aircraft you're going to have an accelerating impact on wide-body IFE, but I'd be curious to know how the product development cycle is going on with IFE and whether there are some opportunities for you in other areas, narrow-bodies in particular, and how that is going to impact the outlook for your transport OE and this jet OE over the next 12 to 18 months?
Clayton M. Jones - Chairman, President and CEO: Right. Well first relative to wide by the IFE I think the trends are very clearly there is wind down business. We are really producing no hardware for that, it's basically a service and support type business as long as they stay on wing. What I would say even though it's a declining sales revenue it's very profitable now which that business hasn’t been over majority of its life. So we are not in a good place relative to growth nor do we expect to. But it is a good profit and cash generator as it winds down. I don’t think, I think we've properly sized the relative rate of decline I mean it’s been going down about 20% or 25% a year as I recall. I don’t think it's going to continue to kind of (indiscernible) about those levels until it goes away. The good news over time it will just become a foot note in a more declining sense of a drag on commercial systems as the size decreases. Relative to everything else which is what we would call cabin management. We are actually very bullish on that. We are introducing a whole new product line about what we call a client centric product that significantly reduces the cost and improves the reliability of the narrow body product and provides capability at a much lower cost, which we think is going to be an extremely attractive product for the narrow body world as we go. We should get that product certified I want to say by early next year and so as we go into '14 that’s one of the opportunity sets for growth that we have seen commercial systems probably more to the back half of the year but going forward beyond that if you go past like 12 months period I think yes that will be very good contributor and then our biz jet cabin work continues to be good our venue product is selling extremely well really for the same reason highly reliable lower cost system flexible as we go into all cabin sizes. So that is a good business for us now we think that there are some product introductions coming out that will provide us even more growth.
Operator: Howard Rubel, Jefferies.
Howard Rubel - Jefferies: I just wanted to follow-up on one of the R&D things that you talked about. You had some programs that ended and could you elaborate on them? And also talk about the KC-46 and your integral to that, and it sounds like it's making real progress?
Clayton M. Jones - Chairman, President and CEO: Yes. The -- I'd say the biggest effort there that we had that's winding down is the Pro Line Fusion basic product development. As you know, it is sort of 2 different kind of development, the basic product line and then we have application costs, which is certification and tailoring it to the specific OEM. And it's the application costs that will be going on as a steady-state, and in some cases ramping up, but the product line cost is the big kahuna. And that's begun to wind down, Howard. So that's probably the biggest tailwind that we're getting out of R&D. And then the rest of them are just small, I would say, a lot of BFE product upgrades that are finishing. I've mentioned some of the cabin management stuff. We're in the certification work now and not basic product development. So that's what's bringing that down. In terms of KC-46, the program is going very well from our perspective. Obviously, the application of a lot of the commercial products is something we know how to do and that's proceeding at pace. And so everything I see or know of in the KC-46 is favorable.
Operator: Kevin Ciabattoni, KeyBanc Capital Markets.
Michael Ciarmoli - KeyBanc Capital Markets: It's actually Mike Ciarmoli. One area of focus, just on the margins for Commercial, obviously very good in the quarter, how do we think about the sustainability there, maybe over the next six to nine months as you rethink with the 787, I mean, is that going to be sort of a dilutive event to both the corporate margin or the commercial margins and the incremental margins?
Patrick E. Allen - SVP & CFO: Michael, this is Patrick. What I'd say is, if you look at the margin performance for the quarter, there are kind of two key things, one is there was about a 46% incremental flow before research and development. That is probably a little richer than it's been over the past few quarters because we had such a good performance in our aftermarket, and as you know, aftermarket tends to be a little bit higher profitability than the OEM. The second thing is lower R&D. I think, year-over-year, we're down about $10 million in research and development. What I'd say about both of those things is, the product mix is going to vary quarter-by-quarter, but obviously, as 787 starts to ramp-up, it will come in at a lower margin, so discreetly that 787 is going to be dilutive to the incremental margin. The other thing is regarding R&D, as I indicated earlier, we're expecting R&D to go up a little bit from third quarter to fourth quarter. So, I don't think it will be as much of a tailwind over the course of the next few quarters as it was this quarter.
Operator: Michael Derchin, CRT Capital Group.
Michael Derchin - CRT Capital Group: Clay, you mentioned something that's a relatively new phenomena, which is the parting out of relatively new aircraft by the airlines. I'm wondering if you could expand upon that. And also you mentioned a business that you're in, I wasn't familiar with that Intertrade, can you expand on that also?
Clayton M. Jones - Chairman, President and CEO: Sure. Well, I think it's a phenomena that's being talked about a lot more lately because there are a lot more participants in it. In essence, as I said in my opening statements, what you're seeing is some of these retirements, which are accelerating, are relatively new, and especially if they're in the 737 next generation and A320 families, where there's a lot of proliferation of those aircraft, but also where the parts have some utility. And what we're seeing there is a lot of the used parts are particularly attractive to airlines who have aircraft whose maybe service life is somewhat finite, 5 to 6 years, when they know that a refurbished used part will serve them very well and reliably and don't need to go buy a brand new part. And that, I think, is the phenomena that we're seeing. It's always existed, but not in the scale that we're seeing now. So it's a combination of the more availability of these aircraft being retired and the airlines trying to run their operations very efficiently. I want to reiterate, these are very safe parts, they're certified, they're backed by certification just like anything else is. But we're just seeing a higher quantity of them. Interesting enough, we bought this Intertrade business over 10 years ago, essentially to help us broker avionics equipment that we would take as trade in, as used. It's grown far beyond that. And now we're even in some of the engine business brokering now. So we provide an airline just about any part they'd want, whether it's an Avionics or Rockwell Collins part or anyone else. And as I said, it's been very lucrative for us over the last year as we've participated in this phenomena.
Operator: Joe Nadol, JPMorgan.
Joseph Nadol - JPMorgan Securities: I just had a follow-up on cash deployment. Clay, you mentioned during your opening comments, just on the opportunities here for Rockwell Collins to deploy the balance sheet in very value accretive ways. You guys obviously have been really focused on the buyback, even adding a little bit of debt the last couple of years to buy back all that stock, today, we're at 70, so it's the highest it's been since pre-crisis. I'm just wondering, when you look at your stock, when you look at the M&A opportunities out there, both Commercial and Defense, if changing valuations of all types have had any impact on the way you're thinking about deploying capital?
Clayton M. Jones - Chairman, President and CEO: What I would say about that, Joe, is that our basic look at capital deployment has not changed in the period that I've been the CEO. We don't keep a lot of cash laying around because we're a good cash machine, we can get it when we need it. We've got a lot of good backstops. So we dominated the risk there, and will you see what the opportunity set is out there, value creative, strategic acquisitions is always our first priority if we can help grow the business. The environments for that hasn't been all that good in the last two or three years because of the inability to value some of these properties in a way that's reasonable. As those opportunities come up, then we'll continue to take a hard look at that, if they make sense and they pass all of our financial gates, then we'll do one. If not, we'll return that cash to shareowners as we have, as Patrick mentioned, we've returned over $4 billion and significantly reduced our share count over this period, when we haven't been doing acquisitions, but both apply and we've been very clear about that in our capital deployment discussions we've had with all investors. I would expect you would see that same strategy laid out under Kelly's leadership here, Patrick obviously will still be here helping him do that and so I would say no big changes where that's concerned, but we're ever mindful of the conditions out there to ensure that what we do is creating value.
Operator: I'd now like to turn the call back over to Steve Buesing for any closing remark.
Steve Buesing - VP, IR: Thank you. We plan to file our Form 10-Q later today, so please see that document for additional notes and disclosures. I wanted to thank everyone for joining us today and participating in the conference call.
Operator: Thank you, this concludes today's third quarter fiscal year 2013, financial results conference. You may now disconnect your line.