Rockwell Automation, Inc. — Q1 FY2013 10-Q
Reporting period: Three months ended December 31, 2012; comparisons are with the three months ended December 31, 2011 unless stated otherwise. Rockwell Automation provides industrial automation power, control and information products, services and solutions. Interim results are unaudited and are not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Sales | $1,489.2 million | $1,473.9 million |
| Gross profit | $607.3 million | $618.7 million |
| Gross margin | 40.8% | 42.0% |
| Income before income taxes | $217.2 million | $242.9 million |
| Net income | $161.4 million | $183.3 million |
| Diluted EPS | $1.14 | $1.27 |
| Adjusted EPS (non-GAAP) | $1.23 | $1.31 |
| Total segment operating margin (non-GAAP) | 18.5% | 19.8% |
| Cash provided by operating activities | $167.3 million | Cash used: $189.0 million |
| Free cash flow (non-GAAP) | $156.3 million | Cash used: $210.8 million |
Sales rose 1% as reported and 1.5% organically; currency translation reduced reported growth by less than one percentage point. Gross profit fell despite modest sales growth. Management attributed lower operating earnings and margins to annualized investment spending, operating pension costs and employee compensation growing faster than volume.
- Segments: Architecture & Software sales were $657.5 million (+1%); operating earnings were $183.2 million and margin was 27.9%, down from 29.1%. Control Products & Solutions sales were $831.7 million (+1%); operating earnings were $92.8 million and margin was 11.2%, down from 12.5%.
- Geographies and markets: U.S. sales grew 6% and Latin America grew 4% reported (7% organic). EMEA sales declined 6% reported (2% organic); Asia-Pacific declined 7% reported (9% organic), with weakness particularly in China and India. Transportation and oil and gas were among the strongest end markets; metals and mining were among the weakest. Emerging markets were 20% of sales and essentially flat organically.
- Margins and pension: Reported pretax income fell 11%. Non-operating pension costs were $19.7 million versus $8.8 million; the company changed its segment earnings presentation to exclude these costs. Adjusted EPS and adjusted tax rate are non-GAAP measures.
Cash, liquidity and balance sheet
- Cash and cash equivalents were $954.3 million at December 31, 2012, versus $903.9 million at September 30, 2012; short-term investments were $350.0 million at both dates.
- Total debt was $1,158.0 million: $253.0 million of commercial paper and $905.0 million of long-term debt. Commercial paper carried a 0.27% weighted-average rate and had a nine-day weighted-average maturity. Debt-to-total-capital was 37.0% (36.4% at fiscal year-end).
- The company reported $750 million of available capacity under its undrawn revolving credit facility, plus approximately $121.7 million in non-U.S. subsidiary credit facilities. It reported covenant compliance and no difficulty meeting liquidity needs.
- Approximately 90% of cash, cash equivalents and short-term investments were held by non-U.S. subsidiaries whose undistributed earnings were considered permanently reinvested; repatriation would generally be subject to U.S. tax.
- Operating cash flow improved substantially year over year, primarily because the prior-year quarter included a $300 million voluntary U.S. pension trust contribution and higher incentive compensation payments. Q1 FY2013 investing cash use included $84.4 million for acquisitions. The company repurchased approximately 1.17 million shares for a reported $87.8 million in the quarter.
Outlook, risks and notable items
- Management expected stronger U.S. growth in the second half of FY2013, citing modest improvement in industrial production and equipment spending, stable capacity utilization and a PMI above 50. It described global growth as stabilizing, with regional variation: Western Europe remained recessionary, China was stabilizing, India was weak, and Brazil was returning to positive growth.
- Following extension of the U.S. research and development tax credit, management lowered its FY2013 adjusted effective tax-rate expectation to 25%–26%, from 26% previously. It expected FY2013 capital expenditures of about $150 million. The filing does not provide a clear specific full-year sales or EPS forecast.
- The company’s stated 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, and 60% of revenue outside the U.S., including 30% from emerging markets. These are goals, not near-term guidance.
- In October 2012, the company acquired certain assets of Harbin Jiuzhou Electric’s medium-voltage drives business for $84.8 million, adding $70.7 million of goodwill to Control Products & Solutions.
- Risks identified include cyclical customer capital spending and macroeconomic conditions, currency movements, competition and pricing, product and technology acceptance, supply-chain or IT disruption, tax disputes, retirement-benefit costs, litigation, acquired-business integration and execution of productivity initiatives. The company described asbestos-related claims and other legal contingencies; management did not expect pending matters to materially affect financial condition or results, while noting litigation outcomes are uncertain.
- The independent accountant performed an interim review, not an audit, and reported no awareness of material modifications needed for GAAP conformity. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the expected second-half improvement in U.S. demand materialized, particularly given regional weakness and the company’s exposure to cyclical industrial investment.
- Whether margin pressure, especially in Control Products & Solutions, persisted or reversed as volumes and spending changed.
- Whether operating cash flow and free cash flow remained strong after the prior-year pension contribution comparison normalized, and how cash was allocated among acquisitions, repurchases, dividends and debt.
- Whether the 25%–26% adjusted tax-rate expectation and approximately $150 million FY2013 capital expenditure outlook were achieved.
- How foreign-cash concentration and repatriation taxes, commercial-paper access, pension obligations, asbestos claims and acquisition integration affected liquidity and results.