Rockwell Automation, Inc. — Q2 FY2011 Form 10-Q
Reporting period: Three and six months ended March 31, 2011; balance-sheet comparisons are with September 30, 2010. The interim financial statements are unaudited. Rockwell supplies industrial automation products, services and solutions through Architecture & Software and Control Products & Solutions.
Financial performance
| Metric | Q2 FY2011 | Q2 FY2010 | Six months FY2011 | Six months FY2010 |
|---|---|---|---|---|
| Sales | $1,464.1m | $1,164.5m | $2,829.9m | $2,232.0m |
| Gross profit | $576.5m | $473.1m | $1,120.4m | $899.9m |
| Income from continuing operations | $166.4m | $111.9m | $316.5m | $189.7m |
| Net income | $166.4m | $137.0m | $316.5m | $213.6m |
| Diluted EPS, continuing operations | $1.14 | $0.77 | $2.17 | $1.31 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $237.8m | $297.9m |
| Free cash flow (company-defined, non-GAAP) | Not provided for quarter | Not provided for quarter | $230.6m | $274.8m |
- Q2 sales rose 26% year over year (24% organic); six-month sales rose 27% (26% organic). Currency contributed 2 percentage points to Q2 growth and 1 point to six-month growth.
- Q2 pretax continuing income increased 52% to $203.6m; six-month pretax income increased 69% to $390.3m. Q2 diluted continuing-operations EPS increased $0.37; six-month EPS increased $0.86.
- Q2 segment operating margins were 24.4% for Architecture & Software (up 0.6 points) and 11.0% for Control Products & Solutions (up 2.6 points). Six-month margins were 24.7% (up 2.2 points) and 10.1% (up 2.7 points), respectively.
- Q2 gross margin was approximately 39.4%, versus 40.6% a year earlier; six-month gross margin was approximately 39.6%, versus 40.3%. Higher volume supported profitability, while inflation, growth-related spending and sales mix weighed on margins.
Liquidity, cash flow and capital
- At March 31, cash and cash equivalents were $1,020.3m, up from $813.4m at September 30, 2010. Current assets were $2,947.8m and current liabilities $1,177.1m.
- Long-term debt was $904.9m, unchanged from September 30; debt-to-total-capital was 32.8%, down from 38.3%. No commercial paper or credit-facility borrowings were outstanding. A new $750m four-year revolving credit facility replaced prior facilities; the company reported compliance with covenants.
- Six-month operating cash flow declined to $237.8m from $297.9m. Management attributed lower free cash flow mainly to higher performance-based compensation payments, which more than offset increased earnings. Capital expenditures were $42.9m; company-defined free cash flow was $230.6m.
- Cash dividends paid were $100.0m; treasury-stock purchases were $104.2m in the cash-flow statement. The company reported approximately $393.9m remaining under its share-repurchase authorization.
Changes, outlook and risks
- Growth was broad across regions and end markets. Q2 sales increased 33% in solutions and services and 22% in products. Emerging markets were 21% of Q2 sales and grew 33% overall; Latin America was the fastest-growing region.
- Management described the industrial recovery as continuing and said it was optimistic that the global recovery would continue through FY2011. It also noted uncertainty from inflation, the Japan earthquake and related supply-chain effects, and unrest in the Middle East and North Africa.
- The filing states long-term financial goals of 6–8% revenue growth, double-digit EPS growth and 60% of revenue outside the U.S. These are long-term goals, not specific FY2011 earnings guidance. Expected FY2011 capital expenditures were approximately $120m.
- Key stated risks include customer capital-spending cycles and macroeconomic conditions, currency movements, competition and pricing, component availability and cost, technology acceptance, cybersecurity and IT-system effectiveness, litigation, tax matters, and execution of cost, restructuring and globalization initiatives.
- Contingencies include asbestos claims and other litigation; management said pending matters were not expected to have a material adverse effect on business or financial condition. In April 2011, the company settled an SEC FCPA matter for approximately $2.8m, which had been accrued; the DOJ had declined to pursue charges in 2010.
- The six-month 2011 effective tax rate was 18.9%, including $8.9m of net discrete tax benefits. Prior-year net income included discontinued-operations income of $23.9m for the six-month period, including a tax benefit and other divested-business estimate adjustments; this makes reported net-income comparisons less like-for-like.
- Goodwill and indefinite-lived intangible assets were assessed during the quarter and were not found impaired. The interim statements received an independent accountant’s review, not an audit opinion.
Important facts for investors to verify
- Whether strong organic growth and rising backlog continued, particularly given the filing’s noted regional and global uncertainties.
- Whether volume gains can offset material, fuel and compensation inflation and less favorable sales mix.
- Cash conversion: operating cash flow and free cash flow fell despite higher earnings; review working-capital movements and incentive-payment timing.
- Capital allocation and liquidity: planned capital spending, pension contributions, dividends, buybacks and use of the new revolving facility.
- Exposure and developments relating to asbestos claims, tax examinations and the settled FCPA matter; assess the assumptions underlying management’s contingency conclusions.