Rockwell Automation, Inc. — Q2 FY2012 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2012. Rockwell Automation provides industrial automation products, software, services and solutions. Financial statements are unaudited; Deloitte performed an interim review, not an audit.
Financial performance
| Metric | Q2 FY2012 | Q2 FY2011 | Six months FY2012 | Six months FY2011 |
|---|---|---|---|---|
| Sales | $1,561.1 million | $1,464.1 million | $3,035.0 million | $2,829.9 million |
| Gross profit | $618.3 million | $576.5 million | $1,237.0 million | $1,120.4 million |
| Income before taxes | $223.3 million | $203.6 million | $466.2 million | $390.3 million |
| Net income | $167.8 million | $166.4 million | $351.1 million | $316.5 million |
| Diluted EPS | $1.16 | $1.14 | $2.43 | $2.17 |
| Segment operating margin | 17.2% | 16.7% | 18.2% | 16.5% |
Q2 sales rose 7%; product sales grew approximately 5% and solutions and services approximately 10%. Pricing contributed about one percentage point to sales growth. Gross margin was approximately 39.6% in Q2 versus 39.4%; six-month gross margin was approximately 40.8% versus 39.6%. Segment earnings and margins improved mainly through volume leverage and pricing, partly offset by growth-related spending.
- Segments: Architecture & Software Q2 sales were $664.8 million, up 7%, with a 25.2% operating margin versus 24.4%. Control Products & Solutions sales were $896.3 million, up 7%, with an 11.2% margin versus 11.0%.
- Geography and initiatives: Q2 sales to U.S. customers represented 49% of total and non-U.S. sales 51%. Process-initiative sales grew 23%, Logix sales 8%, and emerging-market sales 8%; emerging markets were 21% of company sales.
- Cash flow: Six-month operating cash flow was $64.5 million, down from $237.8 million. Company-defined free cash flow was $18.8 million versus $230.6 million. The principal reason for the decline was a voluntary $300 million contribution to the U.S. pension trust; capital expenditures were $62.5 million versus $42.9 million.
- Liquidity and debt: March 31 cash and cash equivalents were $811.8 million and short-term investments $312.5 million. Short-term commercial paper debt was $259.0 million and long-term debt $905.0 million. The company had $750 million available under its undrawn revolving facility, expiring March 2015, and reported compliance with its covenants. Debt-to-total-capital was 36.4%, versus 34.1% at September 30, 2011.
- Shareholder returns: Six-month dividends were $121.0 million; Q2 dividend was $0.425 per share. Approximately 0.6 million shares were repurchased during the six months, and $153.4 million remained under the authorization at March 31.
Material changes and unusual items
- Six-month net income rose 11% and diluted EPS rose 12%; Q2 net income increased less than 1% year over year. The Q2 effective tax rate was 24.9%, compared with 18.3% a year earlier; the prior-year quarter benefited from $6.2 million in discrete tax benefits. Six-month effective tax rates were 24.7% and 18.9%, respectively.
- A $6.9 million charge for two legacy environmental sites affected both Q2 and six-month results and increased corporate expense/other expense. The prior-year six-month period also included a $3.8 million investment-sale gain.
- Cash declined from $988.9 million at September 30, 2011 to $811.8 million at March 31, 2012. The company used $312.5 million to purchase short-term investments, reported as investing cash outflow, and issued $259.0 million of commercial paper.
- Retirement-benefit liabilities fell to $762.0 million from $1,059.3 million; the filing reports the $300 million pension contribution. Pension benefit cost increased to $51.9 million for the first six months from $45.7 million.
- In March, the company acquired certain assets and liabilities of SoftSwitching Technologies; the acquisition was not material to reported results or financial position.
Outlook, commentary and risks
Management described U.S. industrial indicators as pointing to continued recovery and was cautiously optimistic about the global recovery through fiscal 2012. It cited European sovereign-debt concerns and a mild recessionary outlook for Western Europe, and moderated growth in emerging markets. The company’s long-term goals include 6–8% revenue growth, double-digit EPS growth and 60% of revenue outside the U.S.; these are long-term goals, not specific fiscal 2012 guidance. Expected fiscal 2012 capital expenditures were about $140 million. Management said it expected to fund cash needs through existing cash and short-term investments, operating cash flow, commercial paper or new debt/securities.
Risks identified include macroeconomic conditions and cyclical customer capital spending, sovereign-debt concerns and currency movements, competition and pricing, product demand and technology execution, supply and component availability, information-system security and implementation, distribution disruptions, litigation, tax disputes, pension and health-care costs, and execution of productivity and globalization initiatives. The filing says pending litigation, including asbestos claims, is not expected to have a material adverse effect on financial condition; outcomes remain uncertain. Approximately 90% of cash, cash equivalents and short-term investments were held in non-U.S. subsidiaries whose earnings were treated as permanently reinvested. Disclosure controls were concluded effective, with no material change in internal control reported.
Investor verification points
- Assess whether sales growth and margin gains persist, particularly given slower Western European conditions and reliance on industrial investment.
- Separate underlying operating cash generation from the $300 million pension contribution, and monitor working capital, capital spending and future pension funding.
- Review liquidity and refinancing exposure, including commercial paper, the availability of committed credit and the concentration of funds in foreign subsidiaries.
- Evaluate the effect of tax-rate normalization, the legacy environmental charge and potential changes in tax positions or litigation liabilities.
- Track execution of the multi-year enterprise technology and process rollout, acquisitions, and progress toward long-term growth goals; the filing provides no specific fiscal 2012 sales or EPS forecast.