Rockwell Automation, Inc. — Q1 FY2010 Form 10-Q
Reporting period: Three months ended December 31, 2009; comparisons are with the three months ended December 31, 2008 unless stated otherwise. Rockwell Automation supplies industrial automation products, software, services, and solutions. The interim financial statements are unaudited and were reviewed by Deloitte & Touche.
Financial performance
| Metric | Q1 FY2010 | Q1 FY2009 | Change |
|---|---|---|---|
| Sales | $1,067.5 million | $1,189.2 million | Down 10.2% reported; organic sales down 15.5% |
| Gross profit / gross margin | $426.8 million / 40.0% | $470.4 million / 39.6% | Gross profit lower; margin modestly higher |
| Income from continuing operations before tax | $97.3 million | $139.5 million | Down 30.3% |
| Income from continuing operations | $77.8 million | $115.6 million | Down 32.7% |
| Net income | $76.6 million | $118.4 million | Down 35.3% |
| Diluted EPS | $0.53; $0.54 from continuing operations | $0.83; $0.81 from continuing operations | Net EPS down $0.30 |
| Cash provided by operating activities | $119.4 million | $48.8 million | Increased |
| Free cash flow (non-GAAP) | $108.0 million | $21.8 million | Increased |
Cash and cash equivalents were $716.3 million at December 31, 2009, versus $643.8 million at September 30, 2009. Current assets were $2,257.1 million and current liabilities $995.0 million. Long-term debt was $904.8 million, with no commercial paper outstanding; reported debt-to-total-capital was 39.8%, compared with 40.7% at September 30. The company had $535 million of committed revolving facilities undrawn and approximately $141.6 million of additional short-term facilities available to non-U.S. subsidiaries. Quarterly dividends were $0.29 per share.
Segments and material changes
- Architecture & Software: Sales were $469.0 million, down 7.4%; segment operating earnings were $99.0 million, down 9.7%. Operating margin was 21.1%, versus 21.6%. Management reported 10.6% sequential sales growth, the segment’s third consecutive quarter of sequential growth.
- Control Products & Solutions: Sales were $598.5 million, down 12.3%; segment operating earnings were $37.8 million, down 44.4%. Operating margin fell to 6.3% from 10.0%. Solutions and services accounted for about two-thirds of the segment’s year-over-year sales decline.
- Organic sales fell in the United States (18.4%), Canada (19.1%), EMEA (16.4%) and Latin America (18.7%); Asia-Pacific grew 2.7%, led by emerging markets. Currency translation added 4.4 percentage points to reported sales growth and acquisitions added 0.9 points, partly offsetting the organic decline.
- Management attributed lower pretax income principally to reduced volume, higher incentive compensation, and higher pension and postretirement expense. Cost reductions and favorable sales mix partly offset those pressures. Sales volume was weak across end markets, particularly resource-based industries.
Outlook, risks, and unusual items
- Management described the recovery as early and uncertain: some industrial indicators and order rates were improving, but unemployment remained high, capacity utilization low, and customer capital-spending plans cautious. No specific full-year revenue or EPS guidance is provided in the supplied filing text.
- The company expected approximately $80 million of additional fiscal 2010 savings from fiscal 2009 restructuring actions. It reversed temporary employee pay and benefit reductions in January 2010, and expected the remainder of fiscal 2010 to include about $35 million of higher employee costs, $70 million of higher incentive compensation, and $30 million of higher pension and postretirement expense, each compared with the same period of 2009. Expected fiscal 2010 capital expenditures were about $110 million.
- Long-term financial goals are revenue growth of 6–8% and double-digit EPS growth; the company also aims for 60% of revenue outside the U.S. by 2013. These are stated as long-term goals, not near-term quarterly guidance.
- The Q1 effective tax rate was 20.0%, versus 17.1% a year earlier. The current quarter included a $4.7 million tax benefit from favorable tax resolutions, partly offset by $3.5 million of expense related to a Mexican tax-law change. Management anticipated a second-quarter reduction in unrecognized tax benefits of about $28 million gross ($26.9 million net of offsets), largely associated with a divested business.
- Discontinued operations included a $2.0 million environmental accrual ($1.2 million after tax); the prior-year quarter included a $4.5 million benefit ($2.8 million after tax) for a change in estimate on Rocky Flats legal contingencies. Quarterly pension and postretirement benefit expense increased by about $9.6 million year over year. Net losses on non-hedging foreign-exchange contracts recorded in other expense were $17.8 million, compared with $26.6 million of gains in the prior-year quarter.
- Risks include cyclical industrial demand and customer capital spending, competition and pricing, currency movements, execution of restructuring and productivity plans, tax examinations, litigation, and technology, supply, and operational risks. The filing discusses asbestos claims and other legal matters; management believes pending matters will not materially adversely affect business or financial condition. Restructuring accruals were $42.1 million, expected to be spent within 12 months. The company reported compliance with credit-facility covenants.
- Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter. A multi-year rollout of common global processes and enterprise IT systems is planned through fiscal 2010–2013.
Investor verification priorities
- Track whether the recovery and order-rate improvement translate into sustained organic sales growth, especially in Control Products & Solutions and solutions/services.
- Compare realized restructuring savings with expected higher compensation and pension costs, and assess the resulting segment margins.
- Review cash conversion and working-capital movements: receivables and inventories increased from September 30, while reported free cash flow benefited from timing of bonus and tax payments and prior restructuring payments.
- Monitor tax examinations and the expected resolution of unrecognized tax benefits, including which amounts affect continuing operations.
- Assess liquidity and refinancing access, including the planned replacement of the 364-day credit facility, credit-rating outlooks, and the company’s substantial asbestos and other contingent exposures.