Business context and reporting period
Rockwell Automation, Inc. filed this Form 10-K for the fiscal year ended September 30, 2013. It supplies industrial automation products, software, solutions and services through Architecture & Software and Control Products & Solutions. Annual results are summarized below; fourth-quarter figures are also noted.
Financial results and key metrics
Amounts are in millions of dollars except per-share data and percentages.
| Metric | FY2013 | FY2012 |
|---|---|---|
| Sales | $6,351.9 | $6,259.4 |
| Gross profit / margin | $2,573.8 / 40.5% | $2,522.7 / 40.3% |
| Income before tax | $980.9 | $965.9 |
| Net income | $756.3 | $737.0 |
| Diluted EPS | $5.36 | $5.13 |
| Adjusted diluted EPS (non-GAAP) | $5.71 | $5.29 |
| Cash from operating activities | $1,014.8 | $718.7 |
| Free cash flow (non-GAAP) | $900.5 | $597.6 |
- Annual sales grew 1.5% reported and 1.7% organically. Total segment operating earnings rose 6% to $1,236.8; segment operating margin expanded to 19.5% from 18.6%.
- Architecture & Software sales were $2,682.0, up 1%; segment margin rose to 28.3% from 27.0%. Control Products & Solutions sales were $3,669.9, up 2%; margin increased to 13.0% from 12.5%.
- Fiscal Q4 sales were $1,715.7 versus $1,664.0; net income was $215.3 versus $195.2; diluted EPS was $1.53 versus $1.38.
- Cash and short-term investments totaled $1,573.6 at year-end. Current assets were $3,679.9 and current liabilities $1,544.7. Total debt was $1,084.1, comprising $179.0 short-term and $905.1 long-term; debt-to-total-capital was 29.5%, down from 36.4%.
- Capital expenditures were $146.2. Dividends paid were $276.3, or $1.98 per share; share repurchases cost $401.5. The reported increase in operating cash flow and free cash flow was primarily associated with a $300 million discretionary U.S. pension contribution in 2012 and lower incentive-compensation payments in 2013.
Material changes versus prior period
- Sales growth was modest compared with 2012, when reported sales rose 4% and organic sales 6%. In 2013, Asia Pacific sales fell 10%; Latin America grew 8% reported and 12% organically.
- Both segments improved operating margins, supported by productivity and, for Control Products & Solutions, favorable mix. Logix sales rose 4%, while process-initiative sales were flat and emerging-market sales declined 1%.
- Non-operating pension costs increased to $78.5 from $35.2, primarily reflecting the lower U.S. pension discount rate used for 2013. The company presents adjusted income and EPS excluding these costs; these are non-GAAP measures.
- Shareowners’ equity increased to $2,585.5 from $1,851.7, reflecting, among other items, favorable pension-related comprehensive income. Retirement-benefit liabilities declined to $595.9 from $1,105.8.
Outlook, commentary, risks and unusual items
- Management expected U.S. growth in fiscal 2014 to be about the same as fiscal 2013 and described underlying non-U.S. market conditions as stable. It expected Asia Pacific to return to growth, Latin American growth to moderate, and emerging markets to remain the fastest-growing automation markets over the longer term.
- Long-term financial goals include 6–8% sales growth, double-digit EPS growth, return on invested capital above 20%, and free cash flow of about 100% of adjusted income. These are goals, not specific fiscal 2014 guidance. Fiscal 2014 capital expenditures were expected to be about $170 million.
- Management cited sluggish markets, weakness in emerging Asia, uncertain European recovery, currency exposure, cyclical customer capital spending, competitive and pricing pressure, supplier and distributor dependence, project-delivery risks, cybersecurity and ERP implementation risks, and pension-cost sensitivity.
- Fiscal 2013 included $22.7 million of net discrete tax benefits, principally from tax resolutions and the retroactive research-credit extension, and a $19.2 million gain from favorable resolution of intellectual-property and commercial legal matters. Higher legacy environmental charges contributed to increased corporate expenses.
- Environmental liabilities were recorded at $52.2 million, net of related receivables, against estimated reasonably possible costs of $117.0 million gross ($102.3 million net). The filing also describes a few thousand asbestos claimants; management did not expect these or other pending matters to materially affect financial condition or results. Outcomes remain uncertain.
- The company corrected prior-year research-and-development classifications, reducing previously reported 2012 and 2011 amounts by $11.5 million and $10.5 million, respectively; it said the corrections were not material to previously issued statements. Deloitte issued an unqualified audit opinion and reported effective internal control over financial reporting.
Most important facts for investors to verify
- Whether modest FY2013 organic growth and the regional weakness in Asia Pacific persist, and whether management’s fiscal 2014 market expectations are borne out.
- How much earnings improvement reflects sustainable productivity and mix versus tax benefits, legal gains, and pension-accounting effects; compare GAAP results with the company’s non-GAAP adjusted measures.
- Cash conversion and capital allocation, including the sustainability of free cash flow, planned capital spending, dividends, repurchases, and potential pension contributions.
- Pension assumptions and funding exposure, environmental remediation estimates, asbestos and other contingencies, and the tax and liquidity implications of cash held in foreign subsidiaries.
- Progress and execution risks in the global ERP rollout scheduled to continue through fiscal 2015, and any resulting effects on operations or controls.