ROCKWELL AUTOMATION, INC annual report, FY2012

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Business context and reporting period

Rockwell Automation, Inc. is a global industrial automation provider with two segments: Architecture & Software and Control Products & Solutions. This Form 10-K covers the fiscal year ended September 30, 2012; “Q4” refers to the quarter ended that date. Amounts below are in millions of dollars unless stated otherwise.

Financial performance and position

  • FY2012 revenue: $6,259.4, up 4% reported and 6% organically from $6,000.4. Currency translation reduced reported growth by 3 percentage points; acquisitions added 1 point. Volume drove substantially all organic growth, while pricing contributed less than 1 point.
  • Profit and margins: Net income was $737.0 versus $697.8; diluted EPS was $5.13 versus $4.80. Income from continuing operations was $737.0, up from $697.1. Gross profit was $2,522.7, or approximately 40.3% of sales, compared with $2,390.4, or 39.8%. Segment operating margin, as defined for FY2012, was 18.1% versus 17.1%. The company announced a FY2013 segment measure that excludes non-operating pension costs; on that basis, FY2012 margin was 18.6%.
  • Segments: Architecture & Software sales were $2,650.4, up 2%, with a 26.5% operating margin (up 1.1 points). Control Products & Solutions sales were $3,609.0, up 6%, with an 11.9% margin (up 1.1 points).
  • Fourth quarter: Sales were $1,664.0 versus $1,654.3 in Q4 FY2011; net income was $195.2 versus $201.8; diluted EPS was $1.38 versus $1.39. Gross profit was $654.2 versus $663.2.
  • Cash flow: Operating cash flow was $718.7 versus $643.7. Company-defined free cash flow was $597.6 versus $561.7, after capital expenditures of $139.6; both years included discretionary U.S. pension contributions, $300 in FY2012 and $150 in FY2011. Capital expenditures were $139.6 versus $120.1.
  • Liquidity and debt: Cash and cash equivalents were $903.9, with $350.0 of short-term investments. Short-term debt was $157.0 and long-term debt $905.0; debt-to-total-capital was 36.4%, versus 34.1%. The company reported $750.0 of unused revolving credit capacity and compliance with facility covenants.
  • Shareholder returns: FY2012 cash dividends totaled $247.4, or $1.745 per share. The quarterly dividend was raised 11% to $0.47 per share, an indicated annual rate of $1.88. The company repurchased about 3.7 million shares for $265.3.

Material changes versus prior period

  • Sales growth moderated sharply from 24% in FY2011 to 4% in FY2012 reported, though organic growth was 6%.
  • Continuing-operations income rose 6% and diluted continuing-operations EPS increased from $4.79 to $5.13. Segment margins improved in both segments, driven mainly by volume and lower incentive compensation, partly offset by growth investment.
  • The effective tax rate rose to 23.7% from 19.7%, principally because FY2011 included larger discrete tax benefits ($25.0 versus $2.1 in FY2012).
  • Operating cash flow increased, while the larger discretionary pension contribution tempered free-cash-flow growth. Cash declined to $903.9 from $988.9; the company also held $350.0 in short-term investments at year-end.
  • Backlog declined to $1,129.9 from $1,177.1; solutions-and-services backlog was 7% lower year over year, with order delays cited.

Outlook, commentary, risks and unusual items

  • Management described moderating U.S. manufacturing growth and a global slowdown, including Western Europe’s recessionary conditions. It expected improved market conditions in FY2013, but not until the latter part of the year. No specific FY2013 revenue or EPS guidance is provided in the supplied filing text.
  • Long-term financial goals include revenue growth of 6–8%, double-digit EPS growth, return on invested capital above 20%, free cash flow near 100% of net income, and 60% of revenue outside the U.S. (including 30% from emerging markets). These are targets, not FY2013 guidance.
  • FY2013 capital expenditures were expected to be about $150. Management estimated FY2013 pension expense of $168.8, up from $104.7 in FY2012, including higher non-operating pension costs; the U.S. pension discount rate was set to fall to 4.15%.
  • In October 2012, after year-end, the company acquired certain Harbin Jiuzhou medium-voltage-drive assets for a preliminary $84.4. Purchase accounting was incomplete at filing. The company also acquired SoftSwitching assets in March 2012.
  • Key risks include cyclical customer capital spending and macroeconomic weakness, international and currency exposure, competition and pricing, cybersecurity and product-system security, ERP implementation, solutions-project execution, supplier and distributor concentration, acquisitions, pension and healthcare costs, tax disputes, litigation, and environmental liabilities.
  • Environmental liabilities and contingencies include estimated reasonably possible remediation costs at Superfund sites of $14.3, with $8.0 accrued, and other environmental matters estimated at $88.1, with $38.9 accrued. The McGregor, Texas cleanup claim was resolved through a $14 settlement shared equally with another contractor, approved September 30, 2012. A few thousand asbestos claimants remain; management stated it did not expect these cases to materially affect results or financial condition.
  • The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective at September 30, 2012.

Important facts for investors to verify

  • Track whether the expected FY2013 recovery materialized, particularly given delayed orders and lower solutions-and-services backlog.
  • Assess cash generation after pension contributions, planned capital spending, dividends, repurchases, and acquisition outlays; note that about 90% of cash and short-term investments were held in foreign subsidiaries with permanently reinvested earnings.
  • Review pension assumptions and funding sensitivity: the reported pension obligation and expense are sensitive to discount rates, asset returns, and actuarial estimates.
  • Monitor foreign-exchange effects, including the reported unfavorable impact in FY2012, and the potential impact of further U.S. dollar strength.
  • Follow the Harbin acquisition’s final purchase accounting and integration, as well as environmental, asbestos, tax, and other contingent exposures.