ROCKWELL COLLINS INC - 10-Q filing on 2016-04-21

Inventories, Net

6 Months Ended

Mar. 31, 2016

Inventories, net are summarized as follows:



(in millions)	March 31, 2016			September 30, 2015
Finished goods	$	248		$	216
Work in process	257			250
Raw materials, parts and supplies	387			353
Less progress payments	(10		)	(7		)
Total	882			812
Pre-production engineering costs	1,086			1,012
Inventories, net	$	1,968		$	1,824

The Company defers certain pre-production engineering costs during the development phase of a program in connection with long-term supply arrangements that contain contractual guarantees for reimbursement from customers. Such customer guarantees generally take the form of a minimum order quantity with quantified reimbursement amounts if the minimum order quantity is not taken by the customer. These costs are deferred to the extent of the contractual guarantees and are amortized over their estimated useful lives using a units-of-delivery method, up to 15 years. This amortization expense is included as a component of cost of sales. Amortization is based on the Company's expectation of delivery rates on a program-by-program basis and begins when the Company starts recognizing revenue as the Company delivers equipment for the program. The estimated useful life is limited to the amount of time the Company is virtually assured to earn revenues under long-term supply arrangements with the Company's customers. Pre-production engineering costs incurred pursuant to supply arrangements that do not contain contractual guarantees for reimbursement are expensed as incurred.

Anticipated annual amortization expense for pre-production engineering costs is as follows:



(in millions)	2016		2017		2018		2019		2020		Thereafter
Anticipated amortization expense for pre-production engineering costs ⁽¹⁾	$	53	$	77	$	114	$	135	$	144	$	559

⁽¹⁾On October 29, 2015, Bombardier announced the cancellation of the Learjet 85 program. Pre-production engineering costs associated with the Learjet 85 program have been excluded from anticipated amortization expense, as these costs are expected to be recovered through consideration received from Bombardier pursuant to contractual guarantees and not amortized against future hardware deliveries.

Amortization expense for pre-production engineering costs for the three and six months ended March 31, 2016 was $14 million and $23 million, respectively, compared to $9 million and $21 million for the three and six months ended March 31, 2015. As of March 31, 2016, the weighted average amortization period remaining for pre-production engineering costs included in Inventories, net was approximately 11 years.