Rockwell Automation, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended June 30, 2012; filed August 2, 2012. Rockwell Automation provides industrial automation products, services and solutions. Financial statements are unaudited; the independent accountant performed an interim review, not an audit.
Financial performance
| Metric | Three months ended June 30, 2012 | Nine months ended June 30, 2012 |
|---|---|---|
| Sales | $1,560.4 million, up 3% reported and 7% organic year over year | $4,595.4 million, up 6% reported and 7% organic |
| Gross profit | $631.5 million, versus $606.8 million | $1,868.5 million, versus $1,727.2 million |
| Income from continuing operations | $190.7 million, versus $178.8 million | $541.8 million, versus $495.3 million |
| Diluted EPS from continuing operations | $1.33, versus $1.22 | $3.76, versus $3.40 |
| Segment operating margin | 18.2%, up 0.8 percentage points | 18.2%, up 1.4 percentage points |
Quarterly sales growth was led by Control Products & Solutions, whose sales rose 6% and segment margin increased to 11.3% from 10.4%. Architecture & Software sales fell 1% reported, but rose 3% organically; its segment margin increased to 27.5% from 26.1%. For the nine months, segment sales and operating earnings increased in both businesses.
Cash flow and liquidity: Nine-month operating cash flow was $328.6 million, down from $462.5 million. Company-defined free cash flow was $251.0 million, versus $424.3 million. Management attributed the decline primarily to a $300 million voluntary contribution to the U.S. qualified pension trust, partly offset by higher earnings and working-capital changes. Capital expenditures were $94.9 million; management expected approximately $140 million for fiscal 2012.
At June 30, cash and cash equivalents were $805.6 million and short-term investments were $350.0 million. Debt comprised $270.0 million of commercial paper and $905.0 million of long-term debt. The debt-to-total-capital ratio was 37.9%, versus 34.1% at September 30, 2011. The company had an undrawn $750 million revolving credit facility, available through March 2015, and reported compliance with its covenants. Approximately 90% of cash, cash equivalents and short-term investments were held in non-U.S. subsidiaries whose undistributed earnings were treated as permanently reinvested.
Cash dividends were $0.895 per share for the quarter and $1.745 for the nine months. The company repurchased approximately 2.3 million shares for $169.5 million during the nine-month period. The board authorized an additional $1 billion share repurchase program in June 2012.
Changes and management commentary
- Currency translation reduced reported sales growth by 4 percentage points for the quarter and 2 points for the nine-month period; acquisitions contributed 1 point to nine-month growth.
- Operating earnings and margins improved primarily through volume leverage, partly offset by growth-related spending and unfavorable sales mix. Lower incentive compensation expense also benefited results, including year-to-date adjustments reflecting reduced expectations for full-year sales and earnings.
- Quarterly sales related to the process initiative grew 15%; emerging-market organic sales grew 10%, but currency reduced reported emerging-market sales growth. Emerging markets represented 21% of company sales.
- The nine-month effective tax rate was 23.8%, versus 19.0% a year earlier; the quarter’s rate was 22.1%, versus 19.2%. The company cited lower non-U.S. tax rates and reported smaller discrete tax benefits than in the prior-year periods.
- Reported cash declined to $805.6 million from $988.9 million at September 30, 2011; the period included purchases of $400 million in short-term investments, a $300 million pension contribution, dividends and share repurchases.
Outlook, risks and unusual items
Management described slowing global industrial growth, with U.S. manufacturing PMI falling below 50 in the quarter, sovereign-debt concerns and a mild recessionary outlook for Western Europe, slower growth in China, and a slowdown in Brazil that delayed customer spending. The company anticipated a period of slower industrial growth. It did not provide a specific near-term revenue or EPS forecast in the supplied filing text. Its stated long-term financial goals were 6–8% revenue growth, double-digit EPS growth and 60% of revenue outside the U.S.
Management identified risks including economic and customer capital-spending cycles, foreign exchange, competition and pricing, product acceptance and technology development, supply availability and cost, cybersecurity and IT systems, distribution disruptions, litigation, tax matters, pension and health-care costs, and execution of productivity and globalization initiatives. The filing describes asbestos claims involving thousands of claimants, among other litigation; management did not believe pending matters would materially adversely affect the company’s business or financial condition, while acknowledging outcome uncertainty. It recorded a $6.9 million charge for two legacy environmental sites during the first nine months. No goodwill or indefinite-lived intangible impairment was identified.
Disclosure controls were reported effective. The company continued phased deployment of enterprise-wide systems and related control changes at certain U.S. and Asia-Pacific locations, with further implementations planned through fiscal 2014.
Key investor verification points
- Check subsequent results against management’s expectation of slower industrial growth, particularly in Europe, China and Brazil, and the reported organic-sales trends.
- Assess cash generation excluding the $300 million pension contribution and monitor further pension funding needs, capital spending and working capital.
- Track commercial-paper usage, liquidity availability, debt-to-capital and the effect of cash held in foreign subsidiaries.
- Review share repurchases and dividends against free cash flow, especially following the additional $1 billion repurchase authorization.
- Monitor tax-rate changes and discrete tax items, legacy environmental costs, asbestos litigation and the phased enterprise-system implementation.