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Rockwell Collins, Inc. (NYSE:COL)

Q2 FY08 Earnings Call

April 24, 2008, 1:00 PM ET

Executives

Dan Crookshank - VP of Investor. Relations

Clayton M. Jones - Chairman, President and CEO

Patrick E. Allen - Sr. VP & CFO

Analysts

Robert Spingarn - Credit Suisse

Joseph Nadol - J.P. Morgan

Steve Binder - Bear Stearns

David Strauss - UBS

Cai von Rumohr - Cowen & Company

Howard Rubel - Jefferies & Co.

George Shapiro - Citigroup

Ronald Epstein - Merrill Lynch

Operator

Good afternoon and welcome to the Rockwell Collins Second Quarter Fiscal Year 2008 Earnings Conference Call. Today's call is being recorded. For opening remarks and introductions I would like to turn the call over to Rockwell Collins' Vice President of Investor Relations, Mr. Dan Crookshank. Please go ahead sir.

Dan Crookshank - Vice President of Investor. Relations

Thank you very much Dustin and good afternoon, everyone. With me on the line here this afternoon are Rockwell Collins Chairman, President 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 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 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 the date hereof and the company assumes no obligation to update any forward-looking statement.

With that I'll now turn the call over to Clay.

Clayton M. Jones - Chairman, President and Chief Executive Officer

Thanks, Dan and good afternoon everybody. I am please to report another quarter of excellent financial performance. With a strong finish to our first half of 2008 and continued overall solid fundamentals in the aerospace and defense markets. We remain on track to achieve our full year revenue projections and have for a second consecutive quarter raised our full year earnings per share guidance.

I'm extremely pleased with the progress we have made in the second quarter, highlighted by double-digit growth in total company revenues, higher year-over-year segment operating margins in both our commercial and government systems businesses. Acquisition of Athena Technologies serving the fast growing Unmanned Aerial Vehicle market segment and notable platform position wins in the air transport and business aircraft market areas.

In addition we supplemented this strong financial and operating performance by providing additional value to our shareholders through significant share repurchases as well as delivering a 50% increase in our common stock dividend which was approved by our Board shortly after the close of the quarter.

Now over the past few months I had spent a lot of time out on the road meeting with investors. As the stocks of both commercial aerospace companies and the general U.S. equity markets have experienced a very challenging environment. Our shares have certainly been impacted by the sentiment which I believe fails to accurately reflect the market conditions or our very strong positions in those markets for some time to come.

So what I want to do for the first few moments is to share my perspectives on what I perceive to be the concerns that are weighing on the minds of investors as they contemplate making an investment in Rockwell Collins. Hopefully this will also provide some useful insights into the confidence I have in our company's future performance in today's environment and beyond. So, the first concern I hear is that a slowing U.S. economy in combination with last year's peak in orders for Airbus and Boeing will drive a more abrupt down cycle in the commercial aerospace sector.

So let's look at the facts. If you look... if you take a look at the makeup of the current backlog for large commercial aircraft, it stood at just under 7,300 aircrafts at the end of the March. This is more than twice the level of the previous peak in 2000. And business aircraft that used to rely primarily on the North American markets are now experiencing more orders from outside the U.S. than ever before. The obvious conclusion is that our industry is becoming increasingly more global and less dependant on and less directly correlated to the U.S. economy than in any previous cycle.

The make up of the total backup… backlog of large commercial aircraft is very telling in this regard, as North American airlines currently represent less than 15% of the total, versus about 35% of the backlog at the end of the calendar year 2000. Regarding international business demand, over half of the orders of new business aircrafts last year came from outside the United States and market drivers such as the favorable exchange rates, petrodollars and other forms of wealth creation as well as the potential for a liberalization of air space rules in certain countries like India and China support a continuation of this trend. So I believe it's pretty clear that these dynamics do in fact make this cycle different and do make it less directly correlated to the fortunes of the U.S. economy.

The second concern surrounds the status of the 787 program which it seems is being used as a relevant barometer for measuring the future growth potential of our company. As we said before, and as I will confirm for you in a few moments, in the near term, the impact of the delay in the 787 program on our expected financial results is just not that big a deal at this early stage of the program.

The reasons why lies in the balance and diversity of our company and the opportunities that are out there in so many other areas. Increasing rates of production by Boeing and Airbus over the next few years on aircraft other than the 787, will allow us to continue to enjoy higher levels of year-over-year air transport flight deck avionics revenues.

And our business and regional OEM revenues, which represented about 60% of our FY 2007 OEM sales are projected to grow at about an average annual rate of 13% over the next three years. We gained share in the Avionics area with our integrated Pro Line 21 and Pro Line Fusion systems, our Head-Up Guidance Systems as well as a modular pilot controller and electronic actuation systems.

We've also gained share in the cabin with our network communication management systems in the high-end business jets and have begun to win new grounds in smaller size aircrafts with our new non-network venue cabin system offering. This quarter's announcements of new share gains included the selection of Pro Line Fusion for the Cessna Columbus business jet and Embraer's new MLJ and MSJ executive business jets. In addition, our Heads-up Display, pilot control, and actuation systems were selected by Gulfstream for the G650. And as of this point, we've also gained market share on four flight deck platforms and three cabin platforms that had yet to be announced. So I think we're going to do very well in the OEM side of our commercial business both before and after the 787 program gets on track.

And I might mention as a supplement to that, that we were just notified in the last couple of weeks of a major win on the A 350 being selected for the communications global work package. It is the largest of the nine packages that we bid on and it was equal to the displays and the surveillance package combined, which now makes us four out of six with three more to go. And we have already far exceeded our goal, which was to have this to be the largest market share aircraft we've ever had at Airbus.

Now to the third concern, that a slowing U.S. economy will drive a significant slowdown in aftermarket revenue growth. Now before anyone can easily jump to this conclusion, I believe you first have to step back and take full stock of where we are in the cycle and then set your expectations accordingly.

In my view, we are at a point that puts us well beyond the recovery phase, where pent-up demand is greatest and higher than normal relative rate of flight hour and revenue passenger mile growth makes aftermarket comparables easier and growth more impressive. Instead, we've transitioned to the OEM growth phase, one that is particularly robust. So given where we are in the cycle, I believe that the growth rate of our commercial systems aftermarket business this year is indicative of what I would consider to be a reasonable rate of aftermarket revenue growth after you carve out the impact of the non-recurring regulatory mandate revenue spike we saw last year, and the revenue decline that we expected from our light body IFE retrofit and spares business that we're not investing in any more.

Specifically, we should see core growth in the neighborhood of the mid-to-high-single digits. In recent weeks we've heard that several smaller U.S. airlines have declared bankruptcy and many of the major U.S. airlines have made announcements of taking additional capacity out of the system by the end of the year. I can tell, you we did not plan on any meaningful level of upgrade spending from these airlines before they took all these actions. And due to our relatively low content repair activity on the majority of these aircrafts that are being parked,

we expect that the impact to our annual revenues once all the capacity adjustments are implemented will be well under $5 million a year.

Now, outside the United States and possibly because of the dollar is relatively cheap making fuel a less costly operating expense, we are currently not seeing any impacts on our aftermarket revenues from international customers. On the contrary, we've actually seen an increase in demand from our prior lower expectations, principally in the area of IFE wide body system retrofits, where we now believe full year results will come in better than previously expected of about down $50 million for the year.

So, all things considered, we're looking at overall capital market fundamentals that continue to remain solid and will enable us to deliver a pretty good year of core after market revenue growth, once again, highlighting the importance of our exposure to a variety of customers and a number of different market areas with a diverse set of product and system solutions.

Meanwhile, we still have a Government Systems business which makes up approximately 50% of our total company revenues, that continues to do very well in terms of growing revenues, delivering the best margins in the industry, and strategically positioning itself for solid growth going forward.

Speaking of Government Systems, I think this would be a good point to segue into the next item I wanted to touch on and that's the acquisition of Athena Technologies that we closed earlier this month. Athena is a leading provider of integrated flight control and navigation systems for the tactical UAV market, and brings with it several already well-established tactical UAV program positions including the U.S. Army, Marine Corp Shadow, the joint services warrior. And an international presence with the U.K. watch keeper. Athena offers us a very strategic and high quality way to increase our involvement in the tactical UAV market area, an area that we estimate will grow at an average annual rate of about 15% through 2011. And our expectation is that Athena will provide us an incremental revenue growth at rates exceeding that 15% market growth rate.

In 2008, it will add about $15 million in revenues to our results for the back half of the year and be neutral to earnings. And once we get beyond the initial integration efforts planned for the remainder of this year and into next year, we expect it to deliver operating margins that are at least on par with our Government Systems business. So another strategically important acquisition of the size and type that you've seen us do in the past, as well as one that gets our Government Systems position into a fast growing adjacent market area.

Now, before turning the call over to Patrick, I'd like to spend a moment updating you on the impact of the recent 787 program update provided by Boeing earlier this month. I think many of you are intimately familiar with the announcement, essentially pushing first delivery out about six months into the third quarter of calendar year 2009. As we've been saying for a few months now, this program is going to be a big deal for our company but just not at the early stages, the program that we currently find ourselves. And I believe you will find these updated impacts continue to prove that out.

First, we see no additional impact on our FY 2008 R&D budget from this additional delay and due to the progress, we expect to make for the remainder of this fiscal year at completing our systems integration work and qualifying our systems in advance of entering flight tests, there should be no material impact to our 2009 R&D budget. Second, with respect to the earnings impact of the deferred aircraft deliveries, we're now looking at a decline of about 85 airplanes by the end of 2009 from the original plan of 109 airplanes. There is still no impact on 2008 EPS and it results in about a $0.06 to $0.07 impact in our 2009 EPS. And this is compared to the $0.03 to $0.04 impact we told you would result if there was a 50 aircraft deficit.

And third, cash collections. As you know, we are in a group of suppliers that contractually have our receivable reimbursements funded by Boeing for all billable work and equipment once Boeing delivers the first aircraft. And in this regard, we noticed and we're encouraged by the agreement that Boeing worked with Spirit AeroSystems earlier this quarter by being fair to a valued 787 program partner and assisting them with their cash flow issues. For obvious reasons, the resolution of our issues were not at the top of Boeing's list, nor would we have expected them to be. So our conversations on the topic are still ongoing. But I can tell you that based on the tone of recent discussions, we are now more confident that in the coming months we will come to an agreement for some level of cash flow relief from the original contract terms, once again, in the spirit of fairness and in recognition of our excellent performance in the program to date.

That concludes my opening remarks and now I'd like to turn the call over to Patrick for a review of our financial results for the quarter and updating of our financial guidance. Pat?

Patrick E. Allen - Senior Vice President & Chief Financial Officer

Thanks, Clay. Good afternoon to everyone as well. Let's get started by first reviewing our results for the total company beginning on slides three and four. In total, we grew sales at a double-digit rate of 10% increasing by $103 million to $1.186 billion. Our net income increased by $28 million or 20% and our earnings per share increased by $0.21 to $1.03 per share, a growth rate of 26%.

Let me highlight a couple of items here related to our net income and EPS results. First, you can see that our EPS growth rate for the quarter was six percentage points higher than the growth rate we reported for net income, principally driven by the significant impact of our ongoing and recently very active share repurchase program.

And second, you might recall that in our last quarter I advised there was a good chance we would be far enough along in the second quarter to recognize a favorable tax benefit from certain tax matters that were under review. These tax matters related to completion of the IRS examinations for our fiscal year 2004 and 2005 tax years as well as amended returns for the 2002 and 2003 years did get settled and ends up providing $0.10 benefit to our second quarter EPS. This tax benefit was partially offset by $0.03 per share and lower federal R&D tax credits due to their expiration on December 31st, 2007. Our tax rate of 27.6% was essentially in line with the guidance I provided last quarter for a second quarter effective tax rate of about 28%.

Moving on to slides five and six, we highlight the excellent results posted for the second quarter for our Commercial Systems and Government Systems businesses. First, Commercial Systems turned to another very impressive performance, as total revenues increased 13%. Driven by share gains and strong demand for new business, regional and air transport aircraft, OEM revenues increased at a double-digit rate in all three-market areas, resulting in a 29% increase in total OEM revenues.

Partially offsetting this very strong OEM revenue growth was a decline in aftermarket revenues of 4%. Year-over-year growth in service and support activities and additional revenues from equipment sales to 787 simulator manufacturers were more than offset by declines in revenues related to inside entertainment and business and regional retrofit and spares activities as well as lower regulatory mandate revenues. This result was fully anticipated, as we were up against some very difficult year-over-year revenue comparables in each one of those areas.

The amount of the IFE revenue decline was nearly $15 million. And following two quarters of lower year-over-year business and regional retrofit and spare sales, the comparables get much more manageable in the back half of the year. And we're forecasting year-over-year revenue growth in this area over the last six months. And as you look at Commercial Systems margins for the quarter, even though the sales mix went from about 50, 50 OEM aftermarket split last year to a nearly 60, 40 OEM aftermarket split in this year's second quarter, reported operating margins improved 50 basis points even after including a $14 million year-over-year increase in company funded R&D. Once again, I'm making the point that our OEM revenues are nicely profitable and are a real contributor to our operating margin expansion.

Turning to slide six. Another very solid quarter was turned in by Government Systems businesses as well. Revenues increased 6%, a bit higher than we have been anticipating and due to the higher sales volume, operating earnings and margins, each improved over the levels achieved last year.

In addition to higher sales of Defense Advanced GPS Receiver or DAGRs and Ground-Based GPS Receiver Application Modules or GB-GRAM systems in Surface Solutions. The start of an anticipated revenue performance came from several international programs including C-130 integrated electronic systems upgrade programs in Thailand and Singapore. The CH-53 G helicopter modification program in Germany and a U.K. Ministry of Defense precision targeting system program. The ITAC business, Integrated Technology and Applications Corporation acquired this past August, contributed about 1 percentage point to the Government Systems revenue growth. So, as I said, all in all a very solid quarter for Government Systems.

Moving on to slide seven and eight, we'll take a quick look at our total company performance for this first six months of fiscal year. Total sales came in at about $2.3 billion, up $222 million or 11% from last year's first six-month results. Net income and earnings per share were up 14% and 18% respectively, both well in excess to our 11% rate of growth in year-to-date sales. And once again an EPS growth rate that is noticeably higher than our net income growth rate, due to our share repurchase program.

Looking at our cash flow for the first six months, cash provided by operating activities is about $56 million behind last year's pace, which was essentially at the same position we were in at the end of the first quarter and stands at about $130 million.

The main drivers here continue to be approximately $50 million in higher employee incentive compensation payments in this year's first quarter and higher inventory levels to support our growth across the organization in both commercial and government systems. Including the deferral of application engineering cost that was up nearly $20 million year-to-date. These uses of working capital essentially offset the impact of higher current year net income. We remain confident in our ability to achieve our full-year cash flow guidance. However, we are still carrying the risk to this casual guidance related to the collection of $70 million to $80 million of receivables from Boeing, related to the 787 program. And in what we hope to be a positive resolution or discussion on that matter in the coming months.

Slides nine and 10 highlight the performance of our commercial Government Systems businesses for the first six months. As you can see from the numbers displayed here, both businesses turned in strong results in the first half with Commercial Systems delivering a 14% increase in revenues, Government Systems delivering 8% revenue growth and both businesses generating higher operating earnings and operating margins over last year's first six months.

On to chart 11, we will take a look at our capital structure. In order to remain fairly aggressive with the pace of our share repurchase program, while at the same time continuing to fund our future growth investments in share and dividends, we once again utilized the capacity and flexibility of our strong balance sheet.

During the quarter, we borrowed an additional $171 million, increasing our total outstanding short-term debt balance to $361 million and raising our debt-to-total cap ratio to 28%. Our leverage ratio thus still leaves us with plenty of balance sheet flexibility.

Turning to slide 12, where we summarized the current progress and program to date status of our ongoing share repurchase program. As the current progress, the 3 million shares we repurchased this quarter came at a total cost of $190 million, or about $0.64 a share. This further reduced our outstanding share count to 160.7 million shares at the end of the second quarter as compared to $165.8 million at the end of fiscal year 2007.

Program to-date, we've now repurchased nearly $48 million shares at a total cost of $2.2 billion and as of March 31st, we had authorization remaining to repurchase up to 326 million of additional shares, roughly another 5 million shares of capacity at the average price we paid over the last quarter. In addition to enhancing shareholder value through share repurchases, earlier this month, our Board of Directors authorized a 50% increase in the quarterly dividend rate to $0.24 per share, from $0.16 per share affective with the dividend we paid in early June.

Now on to our final slide, slide 13, which contains the updated picture of our financial guidance for the full fiscal year. First, including an incremental $15 million of revenues from the Athena acquisition in the back half of the year, we continue to forecast total company revenue guidance of about $4.75 billion.

We are once again expecting to see the split of full-year total revenues between commercial and government systems at close to 50-50.

As Clay mentioned earlier, due to previously unanticipated international demand for wide-body aircraft, IFE retrofit systems, we now expect IFE Systems retrofit and spares revenues, a decline between $30 million and $40 million, compared to our previous expectation of about $50 million, with about 75% of the remaining decline coming in the fourth quarter.

On operating margins, due to our current projections from a more favorable mix of government systems revenues for the year than we had previously been expecting, we have increased our expectation for Government Systems’ full-year operating margin performance to be slightly higher than last year's segment operating margins of 19.8% compared to our previous forecast which was for 2008 Government Systems operating margins to be slightly lower than last year.

Our expectations to Commercial Systems margins, which we expect to be higher than last year, remain unchanged. Accordingly, we now expect total segment operating margins for the company to be between 22% and 22.5% as compared to our previous forecast of about 22%. As we look specifically at Q3 and Q4, we currently expect both businesses to deliver stronger margin performance in the fourth quarter.

This revision will obviously have a favorable impact on our EPS projection. But before getting to that let me also give you some details regarding the additional revision we're making towards expected effective income tax rate for the year. We're now expecting to see a full year effective income tax rate in the range of 31.5% to 32.5% compared to our prior... previous effective tax rate guidance in the range of 32.5% to 33.5% due to the potential for recognizing additional and previously not forecasted favorable tax matter settlements, most likely in the third quarter. As compared to our prior forecast, the impact of this adjustment represents about a $0.03 favorable impact for our full year EPS projection.

So as a result of this lower than expected effective income tax rate and the upward revision to our forecasted segment operating margin I just mentioned we narrowed as well as lifted our EPS rate range by about $0.07 to $0.08 as measured from the mid points of the prior EPS guidance range of $3.85 to $4 and the new EPS guidance range of $3.95 to $4.05. Achievement of the top end of this EPS range is dependent upon among other things realizing the lower end of the effective tax rate range.

Our cash flow from operating activity guidance still accommodates the pension contribution of up to $75 million and as I mentioned earlier it's still carrying a risk for the potential shift of up to $70 million to $80 million of Boeing 787 program related receivable collections out of our 2008 fiscal year.

Our guidance range for total R&D expenditures remains unchanged at $925 million to $950 million. However, given our higher rate of success and new program competitions in Commercial Systems and the unfavorable outcomes at the JTRS, AMF and Air Force aerial refueling tanker program awards for our Government Systems business, we now expect to see a higher level of investments related to Commercial Systems projects and a lower level of investments related to Government Systems projects.

That concludes my comments on the financial results and updated full year financial guidance. So, with that I'll turn the call back over to Dan.

Dan Crookshank - Vice President of Investor. Relations

Thank you very much Patrick. In order to give everyone the opportunity to ask questions on the call here, we ask that you limit yourself to two questions. And then if you have further questions simply reinsert yourself into the queue and then we'll take those additional items as we have time for. Dustin, we are ready to open the line.

Question and Answer

Operator

Thank you sir. [Operator Instructions]. We'll take our first question from Robert Spingarn with Credit Suisse.

Robert Spingarn - Credit Suisse

Good afternoon. Clay, if you could go back to the aftermarket I think clearly we appreciate you are anticipating the focus on this area and your comments on the macro environment I think it’s very helpful. Could you walk us through the various pieces, maybe with a little bit more granularity, of the aftermarket, the IFE, the large jet and then the business jet and regional? You talked about a high single-digit growth rate ex the mandates and the IFE. But could you talk about that for the second half of the year what the growth rates would be for each of those?

Clayton M. Jones - Chairman, President and Chief Executive Officer

Sure, Rob. We did anticipate that they will be interested in that. And let me try to summarize it, maybe with just a little bit more detail and then we'll talk about the back half of the year. First of all, atmospherically, we’ve said all along there's two parts of our aftermarket, the retrofit part and then the service and spares activity. Service and spares activity is very predictable. I think it's very much on the par of that mid-to-high single digits that we've seen in times passed. In some markets, like some of the commercial air transport markets, the service and parts revenue is actually up higher than that. And so, it remains robust and it remains solid. When you get to the retrofit activity, it's remarkably lumpy and we experienced a lot of the lumps in terms of what we're seeing this year. So with that atmospherically, let me walk you through it. First of all, you have to look at what is clearly non-core activities, and I’ve put two things into that category. The wide body IFE retrofits and spares, as a result of the very clear strategic decision that we've made for some time here to not reinvest in that market. We are seeing reasonably good forward fit as people add to their fleet with the eTES product. But in terms of retrofits of those products, most of that is behind us last year as we introduced the digital server upgrade. So that is clearly in decline and we gave you specifically the numbers, which I won't repeat that Pat talked about of what we expect for that year. And even though we're seeing a little bit better than we thought, we're still looking at $30 million to $40 million down year-over-year and we'll expect that to decline even beyond. The second non-core element are the flight ID mandates that we experienced and the peak of that mandate revenue, which is when the mandate went into effect was the second quarter of 2007... second and third of 2007. So we're right in the middle of the biggest negative comparable to that one-time item which is not recurring this year. So those are the non-core elements.

Robert Spingarn - Credit Suisse

Can you size that, Clay?

Clayton M. Jones - Chairman, President and Chief Executive Officer

Well, I can give you a perspective. If we were down 4% for the year, if you only take those two items out, we would be up 4 for the year.

Robert Spingarn - Credit Suisse

Okay. Because if you just take out the $15 million, I think that number was closer to flat. So that ...

Patrick E. Allen - Senior Vice President & Chief Financial Officer

That's for the quarter by the way, yes.

Clayton M. Jones - Chairman, President and Chief Executive Officer

Yes, I'm sorry, it was not the year, it was the quarter I was referring to Rob.

Robert Spingarn - Credit Suisse

Okay. It's a similarly sized item?

Clayton M. Jones - Chairman, President and Chief Executive Officer

Yeah. So again, you go from down 4 to up 4 if you just take those two pieces out for the quarter. Now let's look at the core elements and I would suggest that there are three things working in there that give us particularly bad comparables that sort of make up the difference. The first is the extraordinarily high volume that we saw in business and regional last year in the second quarter. It was up almost 30% less… in the second quarter of 2007. And those are great quarters when you have them but you have to live through them the following year, and so that made a 15% year-over-year decline just as a function of that element. The other two are less impactful but they still count. One is the 787 simulator sales. If you recall, last year it was all relatively incremental to the previous year of 2006. So it added to that volume. That's relatively flat this year and we are expecting because of the further delays of the 787 program, that that's not going to get a whole lot better over the course of the balance of the year. The second area to illustrate the concerns of the lumpiness and this is lumpy to a fault [ph] is in the narrow body IFE, which is still part of our core. Last year in the second quarter we saw revenues up $4 million in that element. This quarter, because of the lack of activity in the quarter, we saw it down $4 million. That element alone equated to a 3% swing from quarter-to-quarter related to a $4 million plus to a $4 million minus. So when you add all of that up, again, I think you get back to that mid-to high single digit normal… normative level that we were trying to speak to that would indicate what the first two quarters and the back half of the year would continue to be, less those items.

Patrick E. Allen - Senior Vice President & Chief Financial Officer

Rob, I'm going to just throw one thing in. You made an assumption that the IFE downer [ph] and the mandate headwinds were about the same. Now, the way we look at that is we actually take all the revenues out of the calculations and there is... so actually that… and I can explain this to you later, but actually the IFE downer is higher than the mandate revenue downer.

Robert Spingarn - Credit Suisse

Okay. Thanks for the clarification.

Patrick E. Allen - Senior Vice President & Chief Financial Officer

Yes. And then the other thing I just wanted to clarify as well is that we did have actually incremental simulator sales this quarter, but they were actually lower than what we have experienced over the last three quarters as they started. So… but they weren't a significant driver for the quarter, really.

Robert Spingarn - Credit Suisse

Okay. And then my other question to look out further, impressive wins on the A350, Clay. You talked about six bids so far. You've won four. You've got three left. Can you size that for us in terms of a content per airframe kind of number and relative to your previous positions or your existing positions, with Airbus aircraft?

Clayton M. Jones - Chairman, President and Chief Executive Officer

Well, we haven't really sized any of those packages yet, Rob, because we're kind of waiting for all the shouting to be done and then I can tell you when all the competitions are completed, we'll try to give you a dollar figure that represents, as we did for the 787, with the lifetime value that is. But I can't give you a relative impact that the three remaining are relatively less valued than some of the ones we've seen to date. The three remaining by the way are the FlySmart by Airbus, some sensors and navigation sensors like VOR, DME, ADF and then the pilot controls. The largest of those three is the FlySmart by Airbus and it's probably more than twice what the other two are, to give you the relative value there. But I would say if I looked at sort of total value available, we are about 75% to 80% through the total value. So let's say, 20% to 25% remaining in those three.

Robert Spingarn - Credit Suisse

The 75% that you have got rough order of magnitude, how does it compare to some of your other platforms Boeing relative to 787 or something like that?

Clayton M. Jones - Chairman, President and Chief Executive Officer

Well, I'll give you something to size this. If we are as successful as I plan to be, and of course you don't know what that is, but we will end up with about two-thirds of the content on the A350 that we have on the 787.

Robert Spingarn - Credit Suisse

Great. That's what I was looking for. Thanks, Clay.

Operator

We will go next to Joe Nadol with J.P. Morgan.

Joseph Nadol - J.P. Morgan

Good morning or good afternoon at this point.

Clayton M. Jones - Chairman, President and Chief Executive Officer

Hi, Joe.

Joseph Nadol - J.P. Morgan

It's a marathon here.

Clayton M. Jones - Chairman, President and Chief Executive Officer

It is.

Joseph Nadol - J.P. Morgan

Yes. First question is on the 787, you characterized Clay the $0.06 to $0.07 impact of the delay. I'm wondering if we should be thinking about this though beyond FY '09 as a deferral of margin improvement on the program?

Clayton M. Jones - Chairman, President and Chief Executive Officer

Well, I think if you... I guess if you were to compare the original program to the now rescheduled program, it will take longer to see those improvements in margins in the rescheduled program that with the original program.

Joseph Nadol - J.P. Morgan

All right.

Clayton M. Jones - Chairman, President and Chief Executive Officer

So that… so if that's your frame of reference, Joe I would say yes, it will take longer to build the margins up to that point.

Joseph Nadol - J.P. Morgan

Is there… I can cliff at which sort of once you hit a certain number of aircraft in the program, the margins just kind of spike up?

Clayton M. Jones - Chairman, President and Chief Executive Officer

No, I wouldn't say so, because typically as you know, we… our investment part is the nonrecurring engineering and we amortize that through the full period of performance or through a good portion of the performance of those aircraft sale. So I would say it is not a spiky type of thing at all. There is the normal earning curves, there is sort of the volume impacts that you would normally see on any kind of program development, but I wouldn't say it's abnormal here. One thing I would add to that Joe, though that I think is important for us to consider, so we don't look at this in isolation. I believe that it is highly likely and I think on the Boeing call yesterday, there were some conversation around that. That what we will… what we could see with this 787 delay is the same manifestation we saw on the delay of the A380. And that is some of the airlines who desperately need airlift will go to alternative means for that. For example, that was a big assistance to the sales of 777 aircraft, when the A380 delayed. Interestingly enough, if you're looking at near-term impact, our company probably came out far better with that delay because of the sales that we have on those aircrafts that replaced it, and the relatively higher margins we get on those sales. And I think there is a possibility, although we don't know it yet, because none of that has played out that whatever comes in to the market, that near-term takes that airlift in terms of new aircraft, could actually benefit our company given the high share rate we've had on BFE and the content we could get out of that. But that's very difficult to quantify right now.

Joseph Nadol - J.P. Morgan

Okay. Is that factored into your guidance or is the… the $0.06 or $0.07 or is that just pure lower volume?

Clayton M. Jones - Chairman, President and Chief Executive Officer

It is not factored into any guidance that we've given today.

Joseph Nadol - J.P. Morgan

Okay. And the second question is just another sort of twist on the commercial aftermarket questions. Is there a way you can characterize by a driver, your overall commercial aftermarket business, how much of it is what you would call discretionary? How much of it is based on things like flight hours? And how much of it is just based on safety mandates or any combination thereof… I mean any kind of sense you can give just looking at the big picture, what the different drivers are?

Clayton M. Jones - Chairman, President and Chief Executive Officer

If my memory is correct here, Joe, if you were to look at the total aftermarket, then about three quarters of that total aftermarket, about 75% is what I would view as predictable and correlated and… excuse me… and relatively less discretionary. Those are the things that you have to do for maintenance and spare parts and safety upgrades that would go into the safe operation of the aircraft. The other quarter or 25%, I would say is the highly discretionary, I can do it now, I can do it later. If cash is good, if cash is bad, it affects that. That's the lumpy part

Joseph Nadol - J.P. Morgan

Is that three quarters, is that at all based on utilization or is that just a matter of time? So if utilization slows down, is that three quarters going to be effected, or is it just something, is it just sort of this has to be replaced ever year or upgraded every year and so?

Clayton M. Jones - Chairman, President and Chief Executive Officer

There is a component of the predictability that is based on utilization because as you know, typically all of our systems are measured or a maintenance action we measured by meantime between a failure or a maintenance action.

Joseph Nadol - J.P. Morgan

All right.

Clayton M. Jones - Chairman, President and Chief Executive Officer

And so there is a time component to it. I would say that, that's not the only component because if it was that directly correlated, we would all be better at doing this. But definitely that does factor.

Joseph Nadol - J.P. Morgan

Okay.

Patrick E. Allen - Senior Vice President & Chief Financial Officer

And gentlemen, you have one thing there too. In that 25%, that's primarily like the upgrade area and there could even be some safety upgrades in there. So, it might even be less than 25% is actually the discretionary piece. But it's about as close as we can call I think.

Joseph Nadol - J.P. Morgan

Okay, that's helpful. Thank you very much.

Operator

We will go next to Steve Binder with Bear Stearns.

Steve Binder - Bear Stearns

Yes. Patrick, I think you touched on, the movement in R&D to Commercial from Government. I was just wondering does the company [inaudible] 40% or is that still the right number?

Clayton M. Jones - Chairman, President and Chief Executive Officer

I think it will probably take up a point or two Steve. So, I mean it has a better being on 41%, maybe 42%.

Steve Binder - Bear Stearns

So I think 40% is my recollection is pretty much the first half would have represented the entire increase in companies functional R&D, is that right?

Clayton M. Jones - Chairman, President and Chief Executive Officer

That is about right and that's actually pretty close to... but there is going to be a little bit increment in the second half but most of it was in the first half.

Steve Binder - Bear Stearns

Right. And if you just could walk through from the first to second quarter for Commercial Systems, I mean profits were up $3 million on a $45 million sales increase. You did have the apps. In Q2 the absence of the favorable adjustment in Q1, looks like you higher royalty income. I am just wondering if you look on a pre-R&D basis, how did your kind of Commercial Systems profits trend from Q1 to Q2?

Clayton M. Jones - Chairman, President and Chief Executive Officer

Yes, the Q2, historically if you look back at our results, Q2 always suffers a little bit from a margin perspective because of our inventory, our operations, our manufacturing is lighter in the first quarter, which gets deferred and rolls into cost of sales in the second quarter of every year. And so, what you would if you did that same calculation last year, I think you would have a very simpler result. And then it is really just related to unfavorable manufacturing variations that is just due to lighter than lighter volume in the first quarter. So, I think a better comparable is looking at it Q2 to Q2 year-over-year, and in that case we are I think on a pre-R&D basis we are about 45% margins and then you have got to factor out that $40 [ph] million of incremental R&D.

Steve Binder - Bear Stearns

And Clay, maybe you just, I think in the first quarter you touched a little bit on how capacity constraints in the business of regional jet market, probably business jet market with completion centers might have impacted sales growth. And if you kind of, broader picture in the overall after market, where do you see capacity constraints and, I'm talking about not just facility, but also availability of skilled mechanics, is that at all affecting your growth rate, do you think?

Clayton M. Jones - Chairman, President and Chief Executive Officer

Well, I think it's certainly a factor because of the robustness of the market out there Steve. We actually have seen just a slight improvement in those capacity constraints as we go into the completion centers right now. But we also know that as that capacity gets available, it's being fairly quickly not but at least it's turning over a little faster. I can't speak to the trained technicians and mechanics Steve, because I just don't know. So I would hate to tell you yes or no if I'm not certain about that and that's a macro factor. I'll have [inaudible].

Steve Binder - Bear Stearns

All right. Thank you.

Operator

We will go next to David Strauss with UBS.

David Strauss - UBS

Good afternoon and thank you. I guess you walked us through all these different details on the aftermarket side. Can you just give us a number for what you are forecasting for all-in, what your aftermarket is going to look like? For the full year, what kind of growth, if there is going to be any kind of growth?

Clayton M. Jones - Chairman, President and Chief Executive Officer

I think we did that in the script. We said mid-to-high.

Patrick E. Allen - Senior Vice President & Chief Financial Officer

At the core.

Clayton M. Jones - Chairman, President and Chief Executive Officer

Single digits of core.

Patrick E. Allen - Senior Vice President & Chief Financial Officer

And it's low-single digit.

Clayton M. Jones - Chairman, President and Chief Executive Officer

Low-single digit, if you add in the non-recurring items of IFE and mandates.

David Strauss - UBS

Okay. Great. Sorry, if I miss that.

Clayton M. Jones - Chairman, President and Chief Executive Officer

I think you did miss the low-single digits.

David Strauss - UBS

Okay. And then on 787, thanks for the quantification of the impact. But it would seem to, obviously you have never given us your exact ship set value on 787, but it would still seem to the $0.06 to $0.07 impact on the 85 aircraft would still seem to imply a relatively low margin on the program. And I know it's initially but I guess Joe, also talked about in terms of how that's going to ramp up. Can you just maybe talk about that Clay, I know you have said in the past that from a margin perspectives, you expect this program to be very good. It just seems really, really low at the initial stages.

Clayton M. Jones - Chairman, President and Chief Executive Officer

Well, first thing, I appreciate the compliment. As we have tried to do all long because of the 787 overhang, we have tried to be very straightforward with the data which I think all of you need to accurately reflect what the impact is going to be going forward. However, as you have said for competitive reasons, we have been not keen on giving ship set prices and I can't answer the question you specifically asked me there because it gets in the contractual terms that we have with Boeing right now, that deal with certain aspects of the program in the payment of those systems that I would rather not disclose disclosed now. But what I will tell you is if I get through the methodology again there, I'll tell you that the end result is pretty accurate to what you're going to see. And I still stand behind the fact that after the program matures and we get to the initial phases, this is going to be a very good margin program for our company.

David Strauss - UBS

Okay. And the last one on JTRS, obviously with the loss recently, can you just kind of comment where you are, Clay and the outlook for how that program is going to grow now, having lost the last increment?

Clayton M. Jones - Chairman, President and Chief Executive Officer

Well, yes. Unfortunately I guess this just goes to prove you don’t win them all. As we said, that's always a factor at play and obviously we were disappointed we didn't win, but you have to look back on the totality of the program and we really like where we're positioned. By winning the GMR and HMS program, that equates to over $5 billion of revenues we'll get over the 20 plus year life cycle of JTRS. Those two programs are the earliest programs. So we'll see them move into production soonest. That gives us great market share gains in the Army sector where we were weak and I think it is right now a very good sector to be in if you look at the macro dynamics of the DoD. AMF would have added about another $1.5 billion if you want to know specific impact, we disclosed that before. And given that the sector it is in, if we had to lose one, this is I guess one to do. Because first of all, we retain a very strong position for several years to come of our ARC-210 standard airborne multi-frequency radio and we believe the ARC-210 has a lot of life left in it. There are a lot of product improvements that the DoD is asking us to do to that system while we're waiting for whatever replacement might come. I addition, we also have very strong positions in the airborne through our MIDS-JTRS program. And remember that's going to be the earliest one to go into production through that data link capability. And also to remind you, we are the purveyors of the standard airborne networking way form, the TTNT that we worked out of the DARPA program that's going to be moving into the airborne domain. So I think we're going to be players in the airborne side while we're now strengthening to a huge degree our ground positions and so that's sort of where we're positioned at, and I think if the programs continue to progress well and continue to be supported in the Department of Defense.

David Strauss - UBS

Thanks for your color. It is very helpful.

Clayton M. Jones - Chairman, President and Chief Executive Officer

You bet.

Operator

We'll go next to Cai von Rumohr with Cowen and Company.

Cai von Rumohr - Cowen & Company

Yes, thank you. A lot of talk about the aftermarket. Can we talk a little bit about commercial OE, was up 29%

Clayton M. Jones - Chairman, President and Chief Executive Officer

One of my favorite service Cai.

Cai von Rumohr - Cowen & Company

Why was it up quite so much and can it sustain the same absolute level that it achieved in the second quarter as we go to the third and the fourth, because that would be your normal seasonal pattern?

Clayton M. Jones - Chairman, President and Chief Executive Officer

Well. First of all the very simple explanation to why it reached these levels. One is the robust rate of the market increases that we saw in across the board, that's Boeing, Airbus all the business jet OEMs and even the regional jet OEMs, which we've been forecasting to be better this year. And then combine that with the significant market share gains that we've been able to accumulate over the last several years, now beginning to come into play not only in the cockpit but in the cabin, are the primary fuel to that I think greater than normal that you've seen from many of our peer companies, OEM rate. And I might remind you is that’s a future annuity that will ultimately feed into this aftermarket that we like to talk about here, we're going to get a lot aftermarket revenue over the course of many years on that. So we view that as all good things. How they are going to for the rest of the year, I don't think you're going to see it sustain at quite that rate. I don't believe there will be a little bit lessening in the relative rates of growth, but I think it's still going to be very good.

Cai von Rumohr - Cowen & Company

Certainly last rates of growth, but can it sustain the absolute level? Because normally off the second and third quarter... of the second quarter the volume on average is higher in the third and the fourth?

Clayton M. Jones - Chairman, President and Chief Executive Officer

I mean I think our typical… I mean looking at total commercial I know that I have done the exact drill down on the OEM specifically, but typically we run relatively flat to the third quarter and up in the fourth quarter. Now in the fourth quarter we are going to have some headwinds on the aftermarket side with the 75% of the downer remaining on IFE. So, but I don't have the exact specifics that what we have.

Cai von Rumohr - Cowen & Company

But normally the OE is up in the fourth quarter. Yes?

Clayton M. Jones - Chairman, President and Chief Executive Officer

I think what we're going to see is it will come down after the peak we had in the second quarter and then it will be down probably little bit sequentially second quarter to the third quarter and then go up again in the fourth quarter.

Cai von Rumohr - Cowen & Company

Okay. Great. To get back to the R&D question, I think sort of your conference in February you talked of R&D moving up in the second quarter, it did, and then being flat sequentially in the third and the fourth. How much is that changed as a result of this incremental commercial R&D?

Clayton M. Jones - Chairman, President and Chief Executive Officer

Not significantly, Cai.

Cai von Rumohr - Cowen & Company

So essentially we should expect R&D sequentially to be relatively flat in the third and the fourth quarter, at least in the commercial side with the second?

Clayton M. Jones - Chairman, President and Chief Executive Officer

Yes, I think, I think the third actually ticks up a little bit than the fourth ticks down a little bit, but the second half will be roughly flat, yeah.

Cai von Rumohr - Cowen & Company

Okay. Thanks so much.

Operator

We'll go next to Howard Rubel with Jeffries & Co.

Howard Rubel - Jefferies & Co.

Hi. Thank you very much. I want to leave the market to talk about your balance sheet for a minute. I know that if you look at the forecast you're talking about, we'll call it $700 million in cash from operating activities through the first six months is only $130 million.

Clayton M. Jones - Chairman, President and Chief Executive Officer

Yes.

Howard Rubel - Jefferies & Co.

So that's a pretty big hurdle to get to and then you've got short-term debt of... you've increased borrowings $360 million. Kind of two points. One is, is most of this swing... obviously some of it is going to be income, but where is the other biggest swing going to be Patrick? It looks like it's more likely to be in... it's hard to imagine it's going to be in inventories given the continued growth in the business, so could you help a little bit with that?

Clayton M. Jones - Chairman, President and Chief Executive Officer

Howard, let me tell you the two areas that we're targeting for cash flow off of the Balance Sheet. The first area is accounts receivable, and I would say accounts receivable, we're victims as much of anything as timing. The way our calendar lines out, we actually closed the quarter on March 28th so we missed about three days of pretty substantial collections, just to give you a frame of reference, we collected about $150 million in the first two weeks in April, which is roughly 25% higher than a normal two week period would be. So we... I think that's... that issue is strictly timing. On the inventory side, I'm a little disappointed with where we are on inventories right now. I would have anticipated that’s not being quite as high as we are. But our operations group has aggressive plans in place to bring that inventory down over the next couple of quarters. So you are going to see the benefit of higher net income, you are going to see our working capital investment come down over the next two quarters.

Howard Rubel - Jefferies & Co.

You know I'm really surprised you guys didn't use the February 29th or the extra shortage of a day or two to talk about how your revenues could have been a little bit bigger. But that's been the seam I think. We could have called this a leap year quarter... sorry. But the other thing is, with rates as low as they are and the quality of the company as high as it is and with your continued emphasis on repurchasing stock, why wouldn't you also want to borrow 10 years out? It would seem to make some sense to eliminate a little of just too much short term debt?

Clayton M. Jones - Chairman, President and Chief Executive Officer

The short-term debt issue we've right now has been a relatively transitory one. We’ve continued aggressive share repurchase in the first half, which is normally a light cash flow period for us. So although, I agree with you that overall long-term rates are pretty attractive, I'm not sure this is the best time for us to go out.

Howard Rubel - Jefferies & Co.

And then just last on the dividend increase is that going to put you at a roughly a 25% payout ratio. Is this sort of where you feel comfortable going forward, because it was a fairly substantial change?

Clayton M. Jones - Chairman, President and Chief Executive Officer

We've said, we wanted a dividend payout ratio up 20% to 25%, so this was a meaningful move towards the top-end of that range, but we would anticipate over time to come kind of more in the middle of that range. But it's very consistent with our previously stated strategy.

Howard Rubel - Jefferies & Co.

Thank you very much.

Operator

We'll take our next question from George Shapiro with Citigroup.

George Shapiro - Citigroup

Yes, good afternoon. Clay, if you looked at your definition of core aftermarket and also took out 787 simulator, which I probably wouldn't consider core, what would the growth rate have been in the quarter? And how would that have compared to the core in last year's quarter? Or you define core taking our simulator?

Clayton M. Jones - Chairman, President and Chief Executive Officer

I don't think we've done that calculation, George. I'm aware of your concern about us putting it into the aftermarket, but it’s either got to be OEM or aftermarket. And one of the reasons, we categorize it as aftermarket, because it has all the characteristics of an aftermarket sale in terms of the margin opportunities, the sort of periodic nature of it and while that’s certainly subject to the height of the holder. We feel very comfortable of it being considered as an aftermarket component of the sort of bipolar way we categorize that. So I guess, I don't have the numbers or the calculations to give you the quick answer to your question.

Patrick E. Allen - Senior Vice President & Chief Financial Officer

And I don't have a calculation of the core for last year's first or second quarter without a simulators, however, we are defining [inaudible] calculation.

Clayton M. Jones - Chairman, President and Chief Executive Officer

Sorry for that.

George Shapiro - Citigroup

Okay. And then if you looked at the different angle, if you looked at the three quarters of the aftermarket that you consider predictable that includes the simulators, right? It's predictable, but probably somewhat more discretionary. But anyway, what was the mix of growth there between the large commercial business versus the business jets and RJs?

Clayton M. Jones - Chairman, President and Chief Executive Officer

The large commercial business was much more robust than the business in regional. If you are looking at the last, certainly if you are looking at year-over-year, I've already explained that that’s.

George Shapiro - Citigroup

Why.. you had explained why the business jets were relatively weak, but what was the commercial year-over-year... the large commercial?

Clayton M. Jones - Chairman, President and Chief Executive Officer

It was... I think it's up in double-digits.

Patrick E. Allen - Senior Vice President & Chief Financial Officer

It was very good.

Clayton M. Jones - Chairman, President and Chief Executive Officer

It's double digits, George. And again what we're seeing, as you know, for it's a very different characteristic in the way we provide service to the large commercial aircraft versus business and regional. Business and regional, we do real exchange pools a lot and dispatch 100 kind of powered by the hour things. And so what we're beginning to see a little bit over the last couple of quarters is a slightly lower hour rates of operation of business aircrafts. I'm not sure I can tell you why that is. But I think that as compared to the very high utilization rate globally we're seeing in air transport, aircraft is probably contributing a little bit something to the dichotomy of a higher service revenue and core activity out of air transport than comparing it to business and region.

Patrick E. Allen - Senior Vice President & Chief Financial Officer

The other thing I would add George is, we saw very strong used equipment business. We have a used equipment business and services in the air transport market and that was very strong really in the first half of the year.

George Shapiro - Citigroup

Okay. And if I have, and one other maybe, Clay, if you looked at surface solutions on the government side, that $23 million increase, what percent of that was due to what I look at as your kind of army related stuff to what's going on in Iraq like DAGR and the other stuff, primarily DAGR I guess.

Patrick E. Allen - Senior Vice President & Chief Financial Officer

I would say most of the increase was related to both DAGR and we call GB-GRAM, which is another GPS module. And there was a UK targeting system as well.

Clayton M. Jones - Chairman, President and Chief Executive Officer

So it's a good bit of it George, it’s not all of it though. But it's a good bit of the up tempo helping there.

George Shapiro - Citigroup

Okay. Thanks very much guys. Good bye.

Patrick E. Allen - Senior Vice President & Chief Financial Officer

Dustin, I think one more call is all we have time for?

Operator

Thank you Sir. We'll take our last question from Ronald Epstein with Merrill Lynch.

Ronald Epstein - Merrill Lynch

Yes, hey, good afternoon guys.

Clayton M. Jones - Chairman, President and Chief Executive Officer

Hello.

Ronald Epstein - Merrill Lynch

Just want to I guess bring up a little different area that hasn't been brought up too much in the call. In terms of business jet demand, we've just seen eye-popping demand out of all the OEs you have reported. A lot of that has come internationally. When you look at the international market for a lot of your equipment, what's the opportunity for Rockwell Collins in terms of the aftermarket and service and support in these new regions of the world that are becoming I guess best users of business jets?

Clayton M. Jones - Chairman, President and Chief Executive Officer

Well, I think the aftermarket follows the OE equipment, Ron. As you know, we have service centers around the world, so it doesn't require any infrastructure to service these markets that we've been servicing literally for years. And so what... and the other thing about it, which is actually very productive, as I just mentioned, a great deal of the support for business aircraft is through a sort of a power by the hour methodology, which gives us a very predictable revenue flow. So I think what you're going to see is a continued strength and growth in the after market, especially in service and spares revenue, along with the growth of these new OE aircraft. I think one of the things that's clouding it right now is that we're seeing this year-over-year effect and I described earlier of an extraordinarily high spares and a couple of specific retrofit programs that we had last year that are making it sound like it's worse than it is. What we think is going to be very solid. The other thing you have to realize is that as these new equipments come in here, they're initially more reliable and so you're going to have to wait a few years before you get to see any growth, meaningful growth in that service and aftermarket revenue. We also have a lot of new products that we offer, like our in-flight information system, has been a very hot seller of allowing them to put approach plates up in the cockpit of the airplane and get rid of paper. So those are all creation of opportunities. The thing we know is if you get a large installed base, the service revenue absolutely follows it. And so as I said before when I remarked to a question about this OE growth, that is marvelous annuity we're building through increasing our installed base, that's going to be out there in the field for decades and we'll benefit from that.

Ronald Epstein - Merrill Lynch

Super. Maybe just one follow-on. I guess what I was driving at is in markets like say Eastern Europe where I would assume you don't have service centers yet, where other parts of the world and parts of Asia, we are really seeing demands start to search for business jets, is there an opportunity there to put in new service centers to kind of grow the business.

Clayton M. Jones - Chairman, President and Chief Executive Officer

Probably, not right now, in the near term.

Ronald Epstein - Merrill Lynch

Okay.

Patrick E. Allen - Senior Vice President & Chief Financial Officer

We had a pretty significant service centers in Singapore serving Asia and certainly Eastern Europe I think we have got a number of European service.

Clayton M. Jones - Chairman, President and Chief Executive Officer

We've got three services centers in Western Europe that can get the Eastern Europe pretty quick.

Ronald Epstein - Merrill Lynch

Okay, okay. Great. Thanks guys.

Clayton M. Jones - Chairman, President and Chief Executive Officer

You bet.

Patrick E. Allen - Senior Vice President & Chief Financial Officer

Thanks a lot. And I wanted to add one more thing I finally got the right chart in front of me on the Government Systems question that Joe was asking. It was only about I would say less than or about 20% of the growth on the Surface System side that came from DAGR. So actually it's not quite all more than half of that was not related to the [inaudible] probably 25% or less I just wanted to drill that out there. So Dustin, I think we are ready to wrap it up.

Operator

Yes, sir. That does conclude the question-and-answer session at this time. I'd like to turn the call back to Mr. Dan Crookshank for any additional or closing comments.

Dan Crookshank - Vice President of Investor. Relations

Thank you very much. The only thing I have to add is that we will be filing the 10-Q I believe today, so that will be out there with additional information, and I will be available for some calls this afternoon. Thank you very much.

Operator

And that does concludes today's conference call. Again thank you for your participation and you may disconnect at this time.

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Source: Rockwell Collins, Inc. F2Q08 (Qtr. End 03/31/08) Earnings Call Transcript
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