At Rockwell Collins, we spend a lot of time focusing on trust — how we earn it, how we retain it, and how we support our customers, investors, communities and employees who rely on the work we do.

As the world and our markets have become less predictable, trust is more essential than ever. Since 2008, we have experienced a series of challenges, including global economic weakness, U.S. defense cuts and customer bankruptcies. As market conditions evolved, we responded with quick and strategically appropriate actions that have preserved shareowner value, kept our company financially strong and positioned us for a successful future.

Our balanced and integrated business model has been tested during the past few years, and continues to serve us well...

In fiscal year 2012, Commercial Systems revenue grew 7 percent, reflecting the strength of the air transport market and the beginnings of a recovery, albeit a modest one, in business aviation. The more difficult defense market conditions resulted in an 8 percent reduction in Government Systems sales. Even though overall revenue declined slightly to $4.7 billion, our ability to respond quickly to changing conditions and effectively manage costs allowed us to improve total segment operating margins by 110 basis points to 21.3 percent.

Earnings per share grew 5 percent, from $3.94 to $4.15, driven in part by the deployment of substantial capital to buy back shares. In addition, we increased our dividend by 25 percent, reflecting a continued commitment to return capital to shareowners.

While the impact of the conditions faced by our industry and our company will likely linger through fiscal year 2013, I am confident that, going forward, we can continue to earn your trust. Here's how:

Seizing opportunities for growth

Our balanced and integrated business model has been tested during the past few years, and continues to serve us well, as does our ability to leverage shared technology, innovation and business practices. That design has seldom proved more important than in the past year, as Commercial Systems revenue growth mostly offset Government Systems reductions.

This growth in Commercial Systems was led by the air transport sector, which saw Boeing celebrate a year of 787 Dreamliner deliveries, as well as the entry into service of the 747-8, both featuring extensive Rockwell Collins avionics. We also look forward in 2013 to the first flight of the A350 XWB, which contains the most Rockwell Collins content ever installed on an Airbus platform.

Although the business aviation market's recovery has been slower than anticipated, we still enjoyed a number of significant milestones in 2012. The highlight was certification and entry into service of our Pro Line Fusion^® advanced avionics system on the Bombardier Global 5000/6000. In fact, our successful collaboration with Bombardier led them to select the system for their upcoming Global 7000 and 8000 jets as well. We also gained certification on the Gulfstream G280, the most recent of more than 15 platforms featuring Pro Line Fusion scheduled to debut in the next five years.

Knowing sales growth would be hard to come by in Government Systems, our focus this year was on sustaining profit margin performance, and that's exactly what we did — actually increasing operating margins 90 basis points to 21.9 percent. Although overall Government Systems sales were down 8 percent, avionics — which comprises more than half of our government business — rose 3 percent, primarily through deliveries on domestic and international tankers, transports and fighters.

We also deepened our relationship with Embraer as they added communications equipment to our existing avionics position on the KC-390 in Brazil. And Boeing selected Data Link Solutions, our joint venture with BAE Systems, to provide Link 16 connectivity through MIDS LVT radios for the U.S. Air Force's KC-46A tanker program. One of our future growth areas — targeting systems — saw awards totaling more than $100 million in Australia and the Middle East for programs based on our FireStorm^™ integrated targeting system.

For several years, we've recognized the increasing importance of growth beyond our U.S. markets. In fiscal year 2012, we achieved 10 percent growth internationally — exceeding our projections — and enjoyed particular success in emerging markets. To better serve global markets, we announced a project that will continue throughout fiscal year 2013 to restructure our operations in Europe, while enhancing investment in faster-growing regions. And we continued to explore partnership and joint venture opportunities, like this year's agreement to form AVIC Leihua Rockwell Collins Avionics Company, a joint venture between Rockwell Collins and a subsidiary of the Aviation Industry Corporation of China (AVIC), focused on bringing the latest surveillance products to the COMAC C919 aircraft.

We are also providing new ways for our customers to interact with Rockwell Collins solutions...

Investing in the future

Rockwell Collins' success today is built on our unwavering commitment to trusted innovation. In good years and bad, we consistently dedicate 18-20 percent of our revenue to research and development (R&D). In fiscal year 2012, we allocated nearly $950 million toward R&D investments, and next year we plan to raise that figure to about $1 billion, or 22 percent of sales, even as revenue growth remains challenged.

This dedication to innovation — driven by the needs of customers — is producing results. Our engineers reduced size, weight, power and cost to bring Pro Line Fusion to an ever-broader range of aircraft. The initial application of this new configuration, featuring the industry's first touch-screen primary flight displays, will enter service in 2014 as a retrofit option on Hawker Beechcraft's King Air B200, B300 and C90 families of aircraft. Future versions will feature synthetic vision on a compact Head-up Guidance System (HGS^™), another industry first.

In Government Systems, our fifth generation ARC-210 became the first certified airborne software defined radio to incorporate the Soldier Radio Waveform, allowing new levels of connectivity between airborne and ground-based warfighters to exchange information and improve mission effectiveness.

We are also providing new ways for our customers to interact with Rockwell Collins solutions. Our Ascend Flight Manager Mobile iPad^® application allows pilots, schedulers and maintenance personnel to view, edit and share crucial data. And we launched an Airshow^® app for tablets, bringing new portability and functionality to our industry-leading moving map solution.

Our Advanced Technology Center continued to explore important new areas through contracts from the Defense Advanced Research Projects Agency (DARPA) for a variety of forward-focused research projects, from cyber security for unmanned vehicles to software defined radio advancements.

Finally, we are encouraged when others recognize our innovative spirit. This year, Flightglobal named Rockwell Collins "Innovator of the Year" for introducing touch-screen primary flight displays. Our parasitic switched array antenna — a high-performing, low-cost airborne antenna one-fifth the size, weight and cost of traditional airborne directional antennas — earned Aviation Week's Innovation Challenge Award. And we also were recognized in the 2011 Wall Street Journal Technology Innovation Awards for our Head-up Guidance System with synthetic vision.

Controlling what we can control

Even in today's volatile world, Rockwell Collins' leadership team and employees across the globe are prepared to adapt to those challenges beyond our grasp, while effectively managing things that are within our control.

Throughout the year, we took appropriate actions to right-size our company's infrastructure as market conditions evolved. Government Systems began the process of narrowing its focus on core capabilities, including the elimination of areas with questionable growth prospects. Staffing levels and investment budgets were adjusted across the enterprise, aligning resources with areas of market demand.

These significant efforts were paired with a relentless pursuit of operational excellence. Lean Electronics^℠ helped us reduce costs to enable operating margin expansion in an environment where our top line was challenged. We also furthered efforts to extend this efficiency throughout the supply chain by incorporating Lean principles into our Rockwell Collins Trusted Supplier program, which recognizes high-performing suppliers and provides valuable guidance on how they can grow their business with us.

Moving forward

Despite the difficult market environment, Rockwell Collins' commitment to trusted innovation and superior program performance has resulted in strong customer relationships and expanded market share. By continuing to invest in the future, managing the things within our control and staying financially strong, I am increasingly confident in Rockwell Collins' ability to grow profitably in the years ahead.

We should enjoy solid growth across our Commercial Systems markets as we begin to see the benefits of increased production and record orders for new air transport aircraft like the Boeing 787, 747-8 and Airbus A350 XWB. And we will continue to benefit from the growth of our Pro Line Fusion avionics system as it proliferates to new platforms like the Bombardier Global family, CSeries and Lear 85, the Embraer Legacy 450 and 500, and the Mitsubishi MRJ.

In the years ahead, after U.S. military budgets are reset, stability should be restored in Government Systems, followed by growth in core product areas. These areas of core strength include avionics for tanker and rotary wing platforms, networked communications products, next-generation GPS technology and numerous international opportunities.

We also are focused on developing a seasoned, agile leadership team to guide us. In September, we took the next step on this path by appointing Kelly Ortberg — formerly executive vice president and chief operating officer of Government Systems — as our company's president. This move will bring even greater focus on operational excellence over this important transitional period and ensure leadership continuity for the future.

Near-term market conditions will likely require additional difficult choices, and the company is ready to respond just as it has in the past. With the threat of sequestration and future reductions in U.S. defense budgets, we have instituted a number of actions in anticipation of the uncertain economic conditions that await us in fiscal year 2013. While I believe those steps will properly position us for the year ahead, we remain poised to act as market conditions dictate, to help us deliver long-term shareowner value.

Rockwell Collins' commitment to trusted innovation and superior program performance has resulted in strong customer relationships and expanded market share...

I am extremely grateful to our employees, who have embraced the values critical for success during turbulent times — teamwork, integrity, innovation, customer focus and leadership — complemented by what I like to call the "secret sauce" of Rockwell Collins: a passion to win and a true spirit of working together. These attributes have not only sustained us through some difficult years, but also enabled our company to be well-positioned for the future.

Finally, I want to thank our shareowners for your confidence in us. In the best of times, trust is important. But in difficult times, it's essential. We will continue to work hard to earn that trust — every day.

Clayton M. Jones

Chairman and Chief Executive Officer