Rockwell Automation, Inc. — Q1 FY2012 Form 10-Q
Reporting period: Three months ended December 31, 2011; comparator is the three months ended December 31, 2010. Amounts are U.S. dollars. The interim financial statements were reviewed by Deloitte & Touche, not audited.
Business context and results
Rockwell Automation provides industrial automation, control, information, and related services. Demand depends on manufacturing investment and industrial activity. Sales were split 49% to U.S. customers and 51% to non-U.S. customers. Management described the recovery as continuing but slow and uneven.
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Sales | $1,473.9 million | $1,365.8 million | +8% |
| Gross profit / margin | $618.7 million / 42.0% | $543.9 million / 39.8% | Margin +2.2 points |
| Income before taxes | $242.9 million | $186.7 million | +30% |
| Net income | $183.3 million | $150.1 million | +22% |
| Diluted EPS | $1.27 | $1.04 | +$0.23 |
| Cash dividends per share | $0.425 | $0.35 | Increased |
Reported sales grew 8%; organic sales also grew 8%, with acquisitions contributing 1 percentage point and currency translation reducing growth by 1 point. Pricing added approximately 1 point. Products grew 6%, while solutions and services grew 12%. Segment results were:
- Architecture & Software: Sales of $650.5 million, up 6%; operating earnings of $186.3 million, up 22%; operating margin rose to 28.6% from 24.9%. Logix sales increased 10%.
- Control Products & Solutions: Sales of $823.4 million, up 10%; operating earnings of $97.5 million, up 42%; operating margin rose to 11.8% from 9.2%.
Management attributed improved gross and operating margins mainly to higher volume, with positive contributions from price and lower performance-based compensation expense. Increased growth-support spending partly offset these benefits. The effective tax rate was 24.5%, versus 19.6%; the prior-year rate benefited from a $3.5 million research tax credit benefit.
Cash flow, balance sheet, and liquidity
- Operating cash flow: Used $189.0 million, compared with $12.6 million provided in the prior-year quarter. Free cash flow, a company-defined non-GAAP measure, was a use of $210.8 million versus a source of $4.4 million.
- Principal cash-flow driver: A voluntary $300 million contribution to the U.S. qualified pension trust. Inventory growth and compensation/benefit payments also used cash.
- Cash and investments: Cash and equivalents were $884.0 million at December 31, 2011, down from $988.9 million at September 30, 2011. Short-term investments were $150.0 million, versus none at September 30.
- Debt: Total debt was $1.255 billion, including $350 million of commercial paper and $905 million of long-term debt; total debt was $905 million at September 30. Commercial paper averaged 0.33% interest and a 10-day maturity. Debt-to-total-capital was 40.4%, up from 34.1%.
- Liquidity: Current assets were $3.114 billion and current liabilities $1.513 billion at quarter-end. The company had a $750 million revolving facility available, undrawn, expiring March 2015, plus approximately $125 million of non-U.S. subsidiary facilities. It reported compliance with facility covenants, which require debt-to-total-capital not to exceed 60%.
- Equity and pension: Shareowners’ equity was $1.855 billion, compared with $1.748 billion at September 30. Retirement-benefit liabilities declined to $763.6 million from $1.059 billion; the filing reports the pension contribution and other balance-sheet movements.
Outlook, risks, and unusual items
No specific full-year FY2012 revenue or EPS guidance is stated. Management expected approximately $140 million of FY2012 capital expenditures and identified potential cash uses including working capital, pension contributions, acquisitions, dividends, buybacks, and debt repayments. Its long-term financial goals are 6–8% revenue growth, double-digit EPS growth, and 60% of revenue outside the U.S.; these are goals, not quarterly guidance. Management was cautiously optimistic about continued global recovery, while noting deteriorating European industrial forecasts and moderated emerging-market growth.
- Emerging-market sales increased only 3%; emerging markets represented 21% of quarterly sales. Asia-Pacific organic sales were flat, with inflation concerns and liquidity issues weighing on investment.
- Key disclosed risks include macroeconomic conditions and customer capital spending, currency movements, sovereign-debt concerns, competition and pricing, product acceptance, supply availability, IT security and disruption, litigation, tax matters, retirement-benefit costs, and execution of productivity and globalization initiatives.
- The company faced a few thousand asbestos claimants in lawsuits involving it and other companies. It said it had historically been dismissed from most claims without payment and did not expect pending matters to have a material adverse effect, while acknowledging litigation uncertainty and potential exposure on certain divested-business claims.
- Gross unrecognized tax benefits were $75.7 million ($30.8 million net of offsets). The company said up to $9.3 million of gross benefits could be reduced within 12 months as tax matters resolve or statutes lapse.
- Foreign-currency forward contracts had $860.9 million notional value. Management said expected hedge gains reclassified into earnings should be offset by the hedged items; hedge ineffectiveness was not significant.
- The quarter included completion of the Lektronix minority-share purchase for $10.9 million. The $300 million pension contribution was a major nonrecurring cash-flow item. No material change to previously disclosed risk factors or contractual cash obligations was reported.
Most important facts for investors to verify
- Whether revenue growth, pricing, and segment margin improvement persist, particularly amid weak emerging-market and Asia-Pacific demand.
- The impact of the $300 million pension contribution on cash generation, future pension funding needs, and reported benefit liabilities.
- Commercial-paper refinancing and liquidity capacity, including the 40.4% debt-to-capital ratio and available credit facilities.
- Whether anticipated $140 million capital spending and other planned cash uses are supported by operating cash flow.
- Developments in asbestos and other legal matters, tax examinations and unrecognized tax benefits, and foreign-exchange exposures.
- The filing’s non-GAAP organic-sales and free-cash-flow definitions and reconciliations; results are for one quarter and are not necessarily indicative of the full fiscal year.