Rockwell Automation, Inc. — Q1 FY2015 Form 10-Q
Reporting period: Three months ended December 31, 2014. Comparisons are to the three months ended December 31, 2013, unless noted. Rockwell provides industrial automation products, solutions and services. The interim financial statements were reviewed by Deloitte; the review was not an audit.
Financial results
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Sales | $1,574.4 million | $1,591.7 million |
| Gross profit / margin | $687.5 million / 43.7% | $663.7 million / 41.7% |
| Income before taxes | $287.5 million | $272.8 million |
| Net income | $214.2 million | $198.1 million |
| Diluted EPS | $1.56 | $1.41 |
| Adjusted diluted EPS (non-GAAP) | $1.64 | $1.47 |
| Operating cash flow | $268.2 million | $203.5 million |
| Free cash flow (non-GAAP) | $232.6 million | $178.6 million |
Sales declined 1.1%, while organic sales rose 2.1%; currency translation reduced reported sales by 3.4 percentage points. Net margin was approximately 13.6%, versus 12.4%. Operating cash flow and free cash flow improved primarily due to better working-capital performance. Capital expenditures were $40.0 million. Dividends paid were $88.1 million; the quarterly dividend per share was $0.65, versus $0.58.
Segments
- Architecture & Software: Sales increased 1.7% to $707.8 million; organic sales increased 5.1%. Operating earnings rose to $221.4 million and margin to 31.3%, from 30.4%.
- Control Products & Solutions: Sales decreased 3.3% to $866.6 million; organic sales decreased 0.3%. Operating earnings increased to $125.4 million and margin to 14.5%, from 13.0%.
Total segment operating earnings, a non-GAAP measure, increased 6% to $346.8 million; segment operating margin rose to 22.0% from 20.6%. Management attributed the improvement mainly to organic growth, productivity and favorable mix, partly offset by currency effects and higher spending.
Balance sheet, debt and liquidity
At December 31, 2014, cash and cash equivalents were $1,291.9 million and short-term investments were $620.8 million. Short-term debt was $508.0 million and long-term debt was $905.6 million; total debt was $1,413.6 million. Cash and short-term investments exceeded debt by approximately $499 million. The current ratio was approximately 2.2, based on current assets of $3,932.5 million and current liabilities of $1,770.8 million.
Debt-to-total-capital was 35.5%, up from 31.6% at September 30, 2014. Commercial paper borrowings increased to $508.0 million from $325.0 million. The company reported $750 million of capacity under its revolving credit facility, no borrowings under that facility, and compliance with its covenants. Approximately 90% of cash, cash equivalents and short-term investments were held by non-U.S. subsidiaries whose undistributed earnings were treated as permanently reinvested.
Changes, outlook and risks
- Reported sales were lower year over year despite organic growth, primarily because of unfavorable currency translation. EMEA sales fell 8.5%; Latin America sales increased 7.2%. U.S. sales were flat.
- Comprehensive income was $146.3 million, down from $222.6 million, primarily reflecting a $92.9 million currency translation loss, compared with a $9.2 million gain in the prior-year quarter.
- The company repurchased approximately 1.55 million shares for a reported total cost of $167.3 million and had about $884 million remaining under its $1.0 billion authorization.
- In October 2014, Rockwell acquired ESC Services, Inc.’s assets for lockout-tagout services and solutions. The filing recorded $14.9 million of goodwill and $5.4 million of intangible assets related to the acquisition.
- No specific near-term quarterly or full-year FY2015 earnings or sales guidance is provided in the supplied filing text. Long-term financial goals include 6–8% revenue growth, double-digit EPS growth, return on invested capital above 20%, and free cash flow around 100% of adjusted income.
- Management described U.S. market conditions as healthy, while noting weaker forecasts outside the U.S. related to lower oil and commodity prices and a stronger dollar, as well as regional challenges. Key stated risks include economic and customer capital-spending cycles, currency movements, competition, technology and cybersecurity, acquisitions, litigation, taxes, and employee benefit costs.
- Contingencies include asbestos-related lawsuits and other legal matters. Management said it did not expect pending matters to have a material effect, while acknowledging litigation uncertainty. The company also reported $41.1 million of gross unrecognized tax benefits.
Important facts for investors to verify
- Whether organic sales growth and operating-margin gains continue as currency translation and regional demand evolve.
- Whether working-capital improvements sustain higher operating and free cash flow, and how cash is allocated among repurchases, dividends, acquisitions and investment.
- Commercial-paper refinancing access, debt levels and the geographic location and repatriation constraints of cash and investments.
- Exposure to asbestos and other contingencies, and potential changes in tax matters or foreign-exchange effects.
- The assumptions and comparability of the company’s non-GAAP measures, including organic sales, adjusted EPS and free cash flow.