Rockwell Automation, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2013; comparisons are with the corresponding 2012 periods. The interim financial statements are unaudited. Rockwell provides industrial automation products, services, and solutions. Deloitte & Touche performed an interim review, not an audit, and reported no material modifications were needed.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Sales | $1,624.2 million | $1,560.4 million | $4,636.2 million | $4,595.4 million |
| Net income | $203.7 million | $190.7 million | $541.0 million | $541.8 million |
| Diluted EPS | $1.45 | $1.33 | $3.83 | $3.76 |
| Adjusted EPS (non-GAAP) | $1.54 | $1.37 | $4.09 | $3.87 |
| Total segment operating margin (non-GAAP) | 19.6% | 18.7% | 19.0% | 18.7% |
| Cash from operating activities | Not separately stated for quarter | Not separately stated for quarter | $663.8 million | $328.6 million |
| Free cash flow (non-GAAP) | Not separately stated for quarter | Not separately stated for quarter | $599.5 million | $251.0 million |
Balance sheet and liquidity at June 30, 2013
- Cash and cash equivalents were $1,024.7 million and short-term investments were $372.3 million, compared with $903.9 million and $350.0 million, respectively, at September 30, 2012.
- Short- and long-term debt totaled $1,125.1 million ($220.0 million short-term and $905.1 million long-term). The debt-to-total-capital ratio was 35.9%, down from 36.4% at fiscal year-end.
- Current assets were $3,485.1 million and current liabilities were $1,552.3 million. Management reported no expected difficulty meeting domestic or international liquidity needs.
- Approximately 90% of cash, cash equivalents, and short-term investments were held by non-U.S. subsidiaries and treated as permanently reinvested; repatriation would generally be subject to U.S. tax.
- The company had a $750 million unsecured revolving credit facility, expiring May 2018, with no borrowings outstanding. It also reported $220 million in commercial paper borrowings at a weighted average interest rate of 0.18%.
Material changes and operating trends
- Q3 sales rose 4% year over year; nine-month sales increased 1%. Q3 organic sales also grew 4%, with acquisitions reducing reported growth by about 0.3 percentage point and currency contributing modestly.
- Q3 net income increased about 7%, and diluted EPS rose from $1.33 to $1.45. For the nine months, net income was essentially flat while diluted EPS increased from $3.76 to $3.83, aided in part by fewer weighted-average shares.
- Q3 total segment operating earnings increased 9%, driven principally by volume leverage and productivity. Control Products & Solutions sales rose 6% and its margin expanded to 13.6% from 11.9%. Architecture & Software sales rose 1%, with margin at 28.1% versus 27.9%.
- Geographically, Q3 sales grew 21% in Latin America, 8% in Canada, and 4% in the U.S. and EMEA; Asia-Pacific declined 7%. China recorded 5% organic growth for the quarter. Nine-month Asia-Pacific sales declined 11%, while Latin America grew 9%.
- Nine-month operating cash flow and free cash flow were substantially higher than in 2012. The company attributes the comparison primarily to the prior-year $300 million voluntary U.S. pension contribution and lower incentive compensation payments in 2013; the increase should not be read as solely reflecting improved underlying cash generation.
- Capital allocation included $318.0 million of share repurchases during the first nine months and $203.9 million of dividends paid. Approximately $618.6 million remained under the repurchase authorization at June 30.
Outlook, commentary, and risks
- Management expected U.S. market conditions to remain stable through the remainder of fiscal 2013 and stable underlying conditions outside the U.S. It described Europe as in recession, China’s investment levels as weak, India’s economy as weak, and near-term Brazilian growth as slackening. This is commentary, not specific full-year sales or EPS guidance.
- Management expected fiscal 2013 capital expenditures of about $150 million. Long-term financial goals include 6–8% revenue growth, double-digit EPS growth, return on invested capital above 20%, free cash flow around 100% of net income, 60% of revenue outside the U.S., and 30% from emerging markets; these are goals, not current-period forecasts.
- Q3 effective tax rate was 20.9%, including $10.0 million of net discrete tax benefits, primarily from favorable resolutions of tax matters. Nine-month discrete tax benefits were $14.5 million, including the retroactive U.S. research and development tax credit.
- Non-operating pension costs increased to $59.0 million for the nine months from $26.4 million, primarily reflecting a decline in the U.S. discount rate from 5.20% to 4.15%. Adjusted earnings measures exclude these costs and are non-GAAP.
- Risks cited include cyclical customer capital spending, macroeconomic and currency conditions, competition and pricing, supply-chain disruption, technology and IT security, tax disputes, retirement-benefit costs, litigation, and acquisition integration. The company disclosed a few thousand asbestos claimants across lawsuits naming it and many other companies; it believes these matters will not materially affect results, but outcomes are uncertain. It also reported $64.5 million of gross unrecognized tax benefits at June 30.
- Management stated that disclosure controls were effective and that there had been no other material change in internal control over financial reporting during the quarter. The ongoing global process and IT implementation enhanced internal control.
Most important facts for investors to verify
- Whether Q3 margin gains and segment-level productivity persist, especially given weak Asia-Pacific and broader international market conditions.
- How much of reported earnings and tax-rate improvement reflects discrete tax benefits, and how non-GAAP adjusted results reconcile to GAAP results.
- Whether elevated nine-month cash flow is sustainable after accounting for the unusual prior-year pension contribution and changes in incentive compensation payments.
- The accessibility and tax implications of overseas cash, alongside commercial-paper refinancing needs and the terms and covenant capacity of the revolving credit facility.
- Developments in asbestos, environmental, and tax contingencies, as well as the financial impact of the Harbin acquisition and future capital returns.