Rockwell Automation, Inc. — Form 10-Q Summary
Business context and reporting period. Rockwell Automation provides industrial automation, control and information products, services and solutions. This unaudited quarterly report covers the three and nine months ended June 30, 2014, in fiscal 2014. The company reports two segments: Architecture & Software and Control Products & Solutions.
Financial performance
| Metric | Three months ended June 30, 2014 | Nine months ended June 30, 2014 | Prior-year comparison |
|---|---|---|---|
| Sales | $1,649.5 million | $4,841.7 million | Up 2% and 4%, respectively; organic sales up 2% and 5% |
| Gross profit | $681.5 million | $2,001.0 million | Up from $652.9 million and $1,876.6 million |
| Net income | $199.7 million | $578.1 million | Down from $203.7 million; up from $541.0 million |
| Diluted EPS | $1.43 | $4.12 | Down from $1.45; up from $3.83 |
| Segment operating margin | 19.8% | 19.7% | Up from 19.6% and 19.0% |
| Operating cash flow | Not provided for the quarter | $707.4 million | Up from $663.8 million |
| Free cash flow (company-defined, non-GAAP) | Not provided for the quarter | $640.1 million | Up from $599.5 million |
Quarterly segment results were mixed. Architecture & Software sales grew 7% to $715.2 million and its operating margin rose to 28.6% from 28.1%. Control Products & Solutions sales fell 2% to $934.3 million and its margin declined to 13.0% from 13.6%. For the nine months, both segments increased sales and operating earnings.
Balance sheet, liquidity and capital allocation
- At June 30, 2014, cash and cash equivalents were $1,175.1 million and short-term investments were $574.4 million. Cash was $1,200.9 million and short-term investments $372.7 million at September 30, 2013.
- Short-term debt was $279.9 million and long-term debt was $905.4 million, compared with $179.0 million and $905.1 million, respectively, at September 30, 2013. The company reported a 30.3% debt-to-total-capital ratio, versus 29.5% at fiscal year-end.
- Cash and short-term investments totaled $1,749.5 million at quarter-end; reported debt totaled $1,185.3 million. Commercial paper borrowings were $279.0 million at a 0.17% weighted-average rate. A $750 million revolving credit facility was available and undrawn; the company said it complied with its credit-facility covenants.
- Cash declined by $25.8 million over the nine-month period, despite higher operating cash flow, as investing and financing uses exceeded operating inflows. The company repurchased approximately 2.9 million shares for $343.8 million and paid $240.9 million in dividends. The board authorized an additional $1.0 billion share-repurchase program in June 2014.
- Approximately 90% of cash, cash equivalents and short-term investments were held by non-U.S. subsidiaries whose undistributed earnings were considered permanently reinvested.
Changes, outlook and risks
- Income before taxes rose 6% in the quarter and 13% year to date, principally from higher segment earnings and lower non-operating pension costs. Quarterly diluted EPS nevertheless declined, primarily in a period when the effective tax rate rose to 27.1% from 20.9%; the company attributed the increase mainly to the absence of favorable tax matters recorded in the prior-year quarter. The nine-month effective tax rate was 27.3%, versus 22.9%.
- Adjusted EPS, a company-defined non-GAAP measure excluding non-operating pension costs and related tax effects, was $1.49 for the quarter versus $1.54, and $4.32 for nine months versus $4.09. It should be considered alongside, not as a substitute for, GAAP EPS.
- Management described U.S. manufacturing indicators as improving and expected U.S. market conditions to continue improving in fiscal fourth quarter. It expected non-U.S. conditions to improve overall, with mixed regional results. Oil and gas was the strongest-performing industry; emerging-market sales declined 5% in the quarter, while nine-month organic sales there grew 6%.
- The company’s stated long-term financial goals are revenue growth of 6–8%, double-digit EPS growth, return on invested capital above 20%, and free cash flow of about 100% of adjusted income. These are long-term goals, not specific current-year guidance; this filing does not provide a clear full-year fiscal 2014 EPS forecast.
- Acquisitions of vMonitor and Jacobs Automation contributed to goodwill and intangible assets. Management identified risks including global economic and customer capital-spending conditions, currency movements, competition and pricing, technology and IT security, materials availability, acquisition integration, pension and health costs, tax matters, and litigation.
- Rockwell faces asbestos-related claims and other legal matters. Management said pending matters were not expected to have a material effect, while noting uncertainty in litigation outcomes and potential exposure under certain indemnities. Management reported effective disclosure controls; the independent accountant performed an interim review, not an audit.
Important facts for investors to verify
- Whether the higher tax rate persists and how it affects full-year GAAP and adjusted earnings.
- Whether Control Products & Solutions sales and margins recover after the quarterly decline, particularly in solutions and services.
- How much cash is practically available for U.S. uses given the large share held in foreign subsidiaries.
- The pace and price of repurchases under the newly authorized $1.0 billion program, alongside dividends, acquisitions and other cash needs.
- Developments in regional demand, foreign exchange, acquisition integration, asbestos claims and tax exposures.