Kelly Ortberg

Chairman, President and Chief Executive Officer

Dear Shareowners,

In fiscal year 2016, Rockwell Collins delivered solid operating results despite challenging conditions in some of our markets. Highlighting this performance was a return to growth by our Government Systems business, strong Information Management Services and air transport original equipment manufacturer revenue, and improved operating margin performance.

Overall, a 6 percent increase in Information Management Services revenue and 1 percent growth in Government Systems were mostly offset by a 2 percent revenue reduction within Commercial Systems, driven by lower business aviation production rates and increased avionics recycling within our air transport aftermarket. As a result, our total revenue was approximately flat year-over-year at $5.3 billion.

As noted in last year’s letter, these challenges were anticipated. The corresponding cost savings initiatives we implemented earlier in the year allowed us to improve total segment operating margins by 10 basis points to 21.2 percent. Income from continuing operations totaled $727 million – a 5 percent increase – and earnings per share from continuing operations grew 6 percent, from $5.19 to $5.50.

Looking ahead, there are many reasons to believe in the long-term value of our company. Let me share why I’m enthusiastic about our recent successes and confident we have the right strategies in place.

Left: The Bombardier C Series celebrated its first delivery with our Pro Line Fusion^® integrated avionics system

Right: In an industry first, Boeing announced
it was bringing touchscreen technology to
the 777X’s primary flight displays, courtesy
of Rockwell Collins

Strong positions

We saw our Pro Line Fusion^® avionics system installed base continue to grow in fiscal year 2016 with the delivery of the Bombardier C Series, the Embraer Legacy 450 entry into service and the first flight of the Mitsubishi Regional Jet. In air transport, we supported the initial flights of the Boeing 737 MAX, which will have 50 percent more of our content than the current 737NG. New commercial programs such as these, along with rate increases on a number of next generation air transport platforms, are expected to drive growth over the balance of the decade.

With improved sentiment around defense spending, we remained focused on delivering increased value and capability across our entire Government Systems portfolio this past year. Rockwell Collins was selected as a key supplier to Northrop Grumman on the B-21 Raider, and our technology aided the Boeing KC-46A’s first tanker refueling flight. We continued to set the standard for C-130 aircraft upgrades with our next generation avionics, and we completed the acquisition of the Matrix™ projector line, giving our customers a broader and deeper range of industry-leading simulation and training solutions.

Additionally, our Information Management Services business continued to be a growth platform for us, capitalizing on increasing demand for aircraft connectivity and positioning us as a market leader in aviation’s information age. In fiscal year 2016, we advanced the breadth of our ARINC global network, and introduced additional value-added services to enhance efficiency and safety. As part of our ARINCDirect^SM offering, private air charter providers such as VistaJet and Zetta Jet were among the first to adopt Inmarsat’s Jet ConneX, the fastest and most reliable broadband-speed connectivity in the cabin of business aircraft.

Left: The first refueling flight for the KC-46 tanker – which also features our advanced avionics –
showcased our Remote Vision System, which uses cutting-edge sensors and stereoscopic
3D displays to allow the operator to remotely control the aerial refueling boom

Right: Rockwell Collins was selected as a key supplier to Northrop
Grumman for the B-21 Raider long-range strike bomber

Rockwell Collins has long been unique in our ability to leverage technologies across the whole of our commercial and government portfolios, enabling us to realize even greater returns on original investments. For example, this past year, the touch-control technology originally developed for primary flight displays on business jets, and later for rotary wing aircraft, led to our selection as a supplier of touchscreen primary flight displays for the Boeing 777X, an industry first for an air transport aircraft.

Investing in customer satisfaction

In my mind, one of the best measures of success is what our customers think about us. In fiscal year 2016, our employees achieved industry-leading overall customer satisfaction across all three businesses due to their responsiveness, innovation and ability to deliver on commitments. This level of superior customer value contributes significantly to our prospects for growth over the long term.

Our Information Management Services business maintained extremely high customer retention rates, including a 100 percent renewal rate for our ARINC GLOBALink^SM subscribers. In Commercial Systems, we were named the top-performing supplier by a number of airlines and original equipment manufacturers, including Airbus and Bombardier, and received awards from all three major aircraft makers in the Asia Pac region – Mitsubishi, AVIC/XAC and COMAC. In Government Systems, our performance with Embraer on the avionics for the KC-390 tanker/transport helped us secure a follow-on award for the aircraft’s cargo handling and aerial delivery control system.

Year ahead

For fiscal year 2017, we remain focused on meeting our commitments to our customers and positioning our business for future growth. Our Information Management Services sales are expected to be up mid-to-high single digits, and Government Systems sales are expected to grow low-to-mid single digits.

We expect that business jet demand will continue to be challenged, as the trends that slowed our 2016 commercial growth are projected to continue into the next fiscal year. However, we also expect air transport and regional jet aircraft production rates to continue to increase, and the Boeing 737 MAX – the largest commercial aircraft program in our company’s history – is scheduled to enter into service. As a result, Commercial Systems revenues are projected to be about flat.

Most important, this year we expect to accelerate our free cash flow performance as development costs wind down and new aircraft production rates increase.

Left: Our Venue™ cabin management system has been installed in more than 850 private and
business aircraft cabins around the world

Right: Rockwell Collins was selected by the U.S. Army as one of three
companies to compete for the Handheld, Manpack and Small
Form Factor program, worth up to $12.7 billion over five years

Accelerating growth

As we look to the future, we’re also writing the next chapter of the Rockwell Collins story.

The acquisition of ARINC provided us with numerous opportunities for synergies across our business to drive new, innovative capabilities and growth. We’re continuing to gain competitive advantages through our synergy strategies. In fact, Norwegian Air Shuttle will be among the first in the industry to experience a true nose-to-tail integrated digital aircraft solution, courtesy of Rockwell Collins’ advanced avionics, cockpit communications, cabin connectivity and information management solutions.

“Norwegian Air Shuttle will be among the first in the industry to experience a true nose-to-tail integrated digital aircraft solution, courtesy of Rockwell Collins.”

We’re also excited about the potential to enhance Rockwell Collins’ overall value with our agreement to acquire B/E Aerospace, expected to close in spring 2017. This transaction will bring together two industry-leading franchises, strengthen our position as a leading supplier of cockpit and cabin solutions, increase our scale and establish a new platform of growth for our company. And, ultimately, the acquisition is expected to deliver significant benefits to our customers and shareowners¹.

I’m proud of the strategies we’ve put in place, the products and services we’re creating and our talented people. We are determined to accelerate long-term growth so that we can continue to reward our shareowners and other stakeholders, and share in the bright future of our company.

Thank you for your continued support.

Kelly Ortberg
Chairman, President and CEO

Enabling the connected aircraft

In today’s aviation ecosphere, connectivity is more essential than ever. In the cockpit, more robust data streams and sophisticated applications enhance operational efficiency, safety and on-time flight performance. In the cabin, broadband connectivity allows passengers to stay connected throughout their flight and provides new ways to enhance the passenger experience.

Rockwell Collins offers a full array of solutions to meet the breadth of those needs, from the pilot in the flight deck to the young family in row 38.

In the Flight Deck:

Our avionics systems for business and commercial aircraft combine advanced situational awareness and intuitive decision-making tools with new connectivity services to enhance safety and efficiency.

Airspace renewal efforts in the United States and Europe are driving new ways of communicating quickly and accurately. Our ARINC global network transmits voice and data link messages rapidly and reliably – 7.5 billion messages a year, all with 99.999% reliability.

We are at the forefront of the fully connected aircraft, providing onboard servers, routers and wireless access points, end-to-end global broadband connectivity services and cybersecurity solutions that protect the entire aviation network.

Pilots, crews, airlines and operators can benefit from a wide range of value-added applications and services, including real-time weather and flight plan updates, live credit card authorizations and ARINC MultiLink^SM global flight tracking.

In the Cabin:

When it comes to in-flight entertainment, today’s passengers seek engagement, entertainment and empowerment. In business aviation, our Venue™ cabin management system helps passengers maximize every moment of their flight with no compromises. And our PAVES™ in-flight entertainment and connectivity portfolio gives airlines a variety of options, from seatback to wireless solutions, and allows them to tailor the experience on and off the aircraft.

Passengers want high-speed connectivity to conduct business or stream content to their personal devices. As a value-added distributor of Inmarsat’s new Global Xpress, the industry’s first global broadband service, we’re keeping them connected throughout their flight.

Throughout the Aircraft:

Real-time maintenance information reduces time on the ground and helps to better manage assets and repairs.

Driving innovations from
commercial to government

In today’s constrained budgetary environment, governments around the globe are turning to commercial technologies to maximize value while ensuring efficiency, functionality and extensibility. Missionizing commercial technologies allows defense organizations to gain access to leading-edge innovations at a fraction of the costs traditionally associated with a clean-sheet, custom-engineered solution.

At Rockwell Collins, we’re making the most of our strength in the commercial and defense industries – and our R&D investment – by engineering our solutions and architectures to migrate easily between commercial and government applications. This business model not only brings next-generation technology to the warfighter more quickly, but at significantly lower cost.

Expanding the visual realm

Whatever the mission, situational awareness is the key to keeping people safe, connected and informed. Today’s technological advances in virtual reality are generating entirely new ways to enhance awareness – in a training facility, in a rescue operation or in the midst of battle.

We’re combining our long-term investments in core technologies, such as synthetic vision, with cutting-edge innovations from our Advanced Technology Center to augment reality – or photo-realistic simulations – with real-time data to enhance safety, reduce costs and more effectively complete missions.

At-a-glance

Our innovative solutions for aviation, defense, rail and critical infrastructure help us keep people safe, connected and informed. Through industry leadership and an unwavering commitment to understanding our customers’ needs and helping them achieve their goals, we strive to be the most trusted source of aviation and high-integrity solutions in the world.

Our solutions

Our hardware, software and services offerings encompass integrated avionics and communications, display and surveillance systems; cabin management; information management services; flight controls; integrated mission & training solutions; navigation; and global service & support.

Our innovations

Innovation is the lifeblood of what we do, and delivering innovation is the passion of our engineers and scientists – some of the most talented minds in the industry. This year we again invested nearly $1 billion in research and development.

Our people

Our 19,000 employees worldwide seek to build trust every day, guided by our core values: relationships, commitment, integrity and innovation.

Our footprint

We operate a global service and support network that crosses more than 150 countries. Our manufacturing, engineering, customer support, sales and marketing teams help build local market understanding and customer intimacy.

Selected financial data

The following selected financial data should be read in conjunction with the consolidated financial statements and notes thereto included in Item 8 on our Form 10-K. The Statement of Operations, Statement of Financial Position and other data have been derived from our audited financial statements. The company operates on a 52/53 week fiscal year ending on the Friday closest to September 30. Fiscal years 2016, 2015, 2013 and 2012 were 52-week fiscal years, while fiscal year 2014 was a 53-week fiscal year. Certain prior data has been reclassified to conform to the current year presentation and to reflect the adoption of new guidance requiring all deferred tax assets and liabilities to be classified as noncurrent on the balance sheet.

View Data

• (a) 

  Income from continuing operations includes a $24 million income tax benefit from the retroactive reinstatement of the previously expired Federal Research and Development Tax Credit and a $41 million income tax benefit due to the release of a valuation allowance for a U.S. capital loss carryforward. In addition, income from continuing operations includes $31 million of restructuring and asset impairment charges ($45 million before income taxes) primarily related to employee severance costs. Approximately $33 million of the pre-tax expense was recorded within cost of sales and $12 million was included within selling, general and administrative expenses.

• (b) 

  Income from continuing operations includes a $22 million income tax benefit from the retroactive reinstatement of the previously expired Federal Research and Development Tax Credit and a $16 million income tax benefit related to the remeasurement of certain prior year tax positions.

• (c) 

  Income from continuing operations includes $18 million of restructuring, pension settlement and ARINC transaction costs ($25 million before income taxes). Approximately $18 million of the pre-tax expense was recorded in selling, general and administrative expenses, $4 million was included within cost of sales, and $3 million was classified as interest expense. Income from continuing operations also includes a $9 million gain ($10 million before income taxes) resulting from the sale of the KOSI business. On December 23, 2013, we acquired ARINC for $1.405 billion. This acquisition was funded through a combination of new long-term debt and short-term commercial paper borrowings.

• (d) 

  Net income includes a $19 million income tax benefit related to the retroactive reinstatement of the previously expired Federal Research and Development Tax Credit. Short-term debt includes commercial paper borrowings incurred to fund a portion of our share repurchase program and also includes $200 million related to debt that matured in December 2013.

• (e) 

  Net income includes $38 million of net restructuring and asset impairment charges ($58 million before income taxes), primarily related to employee severance costs and certain customer bankruptcy charges. Approximately $38 million of the pre-tax charge was recorded in cost of sales, $25 million was included within selling, general and administrative expenses and $5 million was classified as a gain within Other income. Net income also includes a $19 million income tax benefit related to the favorable resolution of certain tax matters in 2012.

• (f) 

  Working capital consists of all current assets and liabilities, including cash and short-term debt.

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*Restated to reflect the results of discontinued operations.

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Safe harbor statement

This Annual Report contains statements, including certain projections and business trends, that are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected as a result of certain risks and uncertainties, including, but not limited to, those detailed herein, in our Form 10-K and from time to time in our other Securities and Exchange Commission filings. These forward-looking statements are made only as of the date hereof.

• (a) 

  The company calculates return on invested capital (ROIC) as net income from continuing operations excluding after-tax interest expense, divided by the average of invested capital at the beginning and end of the fiscal year. Invested capital is calculated as the sum of total shareowners’ equity (excluding defined benefit pension accounting adjustments impacting accumulated other comprehensive loss) and total debt, less cash and cash equivalents.

• (b)

  ROIC has been impacted by debt that was issued to finance the acquisition of ARINC since fiscal year 2014.

• (c) 

  The cumulative total return table and adjacent line graph compare the cumulative total shareowner return on the company’s Common Stock against the cumulative total return of the S&P Aerospace and Defense Select Industry Index (Peer Group) and the S&P 500 Composite Index (S&P 500) for the five-year period ended September 30, 2016. In each case a fixed investment of $100 at the respective closing prices on September 30, 2011, and reinvestment of all dividends are assumed.

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