Rockwell Collins [COL] on Sunday posted higher fourth quarter income and sales due largely to its government contracting work and the company also announced it has agreed to acquire B/E Aerospace [BEAV] in a $6.4 billion deal that would significantly expand its commercial business.
Net income rose 13 percent to $208 million, $1.58 earnings per share (EPS), from $184 million ($1.38 EPS) a year ago, topping consensus estimates by a penny per share. Sales in the quarter rose 4 percent to just over $1.4 billion from just under $1.4 billion a year ago.
The pending acquisition of B/E Aerospace is expected to close in the spring of 2017 subject to shareholder and regulatory approvals. Rockwell Collins is paying for the deal with a combination of cash and stock. It will also assume $1.9 billion in B/E Aerospace debt, bringing the enterprise value of the deal to $8.3 billion.
B/E Aerospace, which had $2.9 billion in sales for the one-year period that ended Sept. 30, operates in two segments, Commercial Aircraft and Business Jets. The Commercial Aircraft segment accounts for 77 percent of the company’s sales with key products in aircraft seating, galley inserts, passenger oxygen systems, and interior structures.
The Business Jet segment provides products in first class suites, seating, and interior lighting systems.
Kelly Ortberg, chairman, president and CEO of Rockwell Collins, on Monday told analysts on a call that one potential revenue synergy from the acquisition will be to cross sell B/E’s products to his company’s military aircraft customers.
“This is a channel that B/E just doesn’t serve, Ortberg said.
Rockwell Collins also expects to combine its electronics expertise with B/Es cabin products to create integrated solutions, smart network technologies and connectivity solutions.
Operating earnings in Rockwell Collins’ Government Systems segment were up 30 percent to $168 million on higher sales, which were up 14 percent to $662 million, cost savings, and lower research and development expenses. Government sales increase on avionics business with fixed-wing aircraft, a classified program, simulation and training programs, radios, data links, and GPS-based products.
The Commercial Systems business posted an 11 percent decline in operating income in the quarter to $130 million and a 4 percent drop in sales to $610 million. Operating earnings fell on lower business jet sales, a charge related to layoffs, and higher R&D expense. Sales dipped on lower business aircraft production rates, delays in purchases by airlines for some equipment, and lower Airbus A330 production rates.
Rockwell Collins’ Information Management Services segment, which was created with the acquisition of ARINC in 2012, posted a 3 percent dip in operating earnings to $28 million and a 4 percent gain in sales to $173 million,
Rockwell Collins currently provides a range of avionics systems for military and commercial aircraft. It also provides aircraft sensors and actuator solutions as well as in-flight entertainment, routers and broadband connectivity.
If the acquisition clears, Rockwell Collins expects pro forma sales of the combined companies to be around $8.1 billion. In its fiscal year 2016, the company posted $5.3 billion in sales, essentially level with a year ago.
Net income rose 6 percent to $728 million ($5.51 EPS) from $686 million ($5.13 EPS) a year ago. Free cash flow was $530 million.
For its fiscal year 2017, Rockwell Collins expects sales of between $5.3 billion and $5.4 billion, excluding the pending acquisition of B/E, with free cash flow between $600 million and $700 million.
The company said that after it acquires B/E, it expects to continue paying a divided equal to about 25 percent of net income but just buy back its stock to offset dilution.
Rockwell Collins expects the acquisition to generate pre-tax annual cost savings of about $160 million. It expects the one-time costs to achieve these synergies to be about $120 million.
The deal is expected to provide double-digit accretion to per share earnings in the first full fiscal year of the acquisition and combined five-year free cash flow above $6 billion, Rockwell Collins said.
B/E’s financial advisers on the deal are Citigroup and Goldman, Sachs & Co., and Rockwell Collins is being advised by J.P. Morgan Securities.