Academic journal article Journal of Critical Incidents

Weighted Average Cost of Capital at Rockwell Collins, Inc

Academic journal article Journal of Critical Incidents

Weighted Average Cost of Capital at Rockwell Collins, Inc

Article excerpt

In early 2005, Rockwell Collins, Inc. (Rockwell) was considering the acquisition of Teldix GmbH (Teldix) from defense contractor Northrop Grumman. The deal, valued at approximately $100 million, would provide Rockwell an important opportunity to expand defense sales in the European market. (Dow Jones Newswires, 2005, p. 1) Identifying Rockwell's own Weighted Average Cost of Capital (WACC) may provide valuable information in determining an appropriate discount rate for the acquisition. As with any major capital expenditure project, identifying an appropriate discount rate could make the difference between generating and destroying significant amounts of shareholder value.

Company History

Rockwell owes its heritage to the Collins Radio Company, which was founded in 1933 by Arthur Collins in Cedar Rapids, Iowa. Collins Radio specialized in the development and manufacture of short wave radio equipment. Rockwell International, a large technology conglomerate, purchased Collins Radio in 1973. The company began operations in its current form on June 29, 2001 when Rockwell Collins, Inc. was spun off from Rockwell International.

Rockwell specialized in the design, production, marketing and support of electronic communications, avionics and in-flight entertainment systems for commercial, military and government clients internationally. Rockwell aviation equipment and electronics could be found in the aircraft of nearly every airline in the world and its military communications equipment was responsible for almost 70% of U.S. and allied military communications. The company operated in 60 locations in 27 countries and had approximately 17,100 employees. The company was listed on the NYSE under the ticker symbol COL as of March 2007. (Yahoo! Finance, 2006).

Financial Highlights

Only ten weeks after Rockwell Collins was spun off from Rockwell International and became a publicly traded company, the events of 9/11 dealt a serious blow to the United States economy, especially the airline and aviation industries. As a result, Rockwell had a difficult first year of operation. For the fiscal year ended September 30, 2002, Rockwell Collins' total revenue decreased 11.4% to $2.49 billion, with a small increase in government revenue partially offsetting a 21% decline in commercial revenue. (Rockwell Collins, 2002, p. 28)

Rockwell returned to positive sales growth in 2003 when revenues rose 2% to $2.54 billion. This increase was the result of modest increases in government revenue due to increased defense spending in the aftermath of 9/11, offsetting another decline in commercial revenue, again due to significantly reduced demand in the commercial sector as airplane orders plummeted. (Rockwell Collins, 2004, pp. 25-26)

In fiscal 2004, revenues increased for the consolidated company, Government segment and Commercial segment by 15.3%, 20.9% and 9.7%, respectively. (Rockwell Collins, 2004, pp. 2627) Total revenues were $2.93 billion. This dramatic growth resulted from further increases in U.S. defense spending, international military spending increases, further diversification in the Commercial segment to include in-flight entertainment and business aircraft components, and a slight rebound in the international airline and aviation industries.

Net Income for the fiscal years ended September 30, 2002, 2003 and 2004 was $236 million, $258 million and $301 million, respectively. These gains represented percent changes of 70%, 9% and 17%, respectively, over the previous fiscal years. (Rockwell Collins, 2004, p. 24) These financial results were, in part, responsible for Rockwell's impressive stock performance over the same time period. Table 1 summarizes Rockwell Collins consolidated financial performance for the years ended September 30, 2002, 2003 & 2004:

Table 1--Summary Financial Highlights

(in millions)           2004    2003    2002

Sales                   2,930   2,542   2,492
Net income              301     258     236
Stock price increase    52%     13%     56%

Sources: Rockwell Collins annual
reports 2002 & 2004 and www. … 
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