Rockwell Automation, Inc. — Q1 FY2011 Form 10-Q
Reporting period: Three months ended December 31, 2010; balance-sheet figures are as of December 31, 2010, compared with September 30, 2010. Income and cash-flow comparisons are against the three months ended December 31, 2009. The interim financial statements are unaudited and were reviewed by Deloitte & Touche.
Business context and results
Rockwell Automation provides industrial automation products, services and solutions. Management attributed the quarter’s growth to the continuing recovery in industrial production and customer spending. Sales increased across regions and end markets; the automotive and tire industry recorded the largest end-market increases.
| Metric | Q1 FY2011 | Q1 FY2010 | Change |
|---|---|---|---|
| Sales | $1,365.8 million | $1,067.5 million | +28% |
| Gross profit | $543.9 million | $426.8 million | +27% |
| Income before taxes from continuing operations | $186.7 million | $97.3 million | +92% |
| Net income | $150.1 million | $76.6 million | +96% |
| Diluted EPS from continuing operations | $1.04 | $0.54 | +$0.50 |
| Cash dividends per share | $0.35 | $0.29 | +$0.06 |
Organic sales also grew 28%; currency translation had a negligible effect overall and there were no acquisition effects in the reconciliation. Product sales rose 32%, while solutions and services sales rose 19%. Pricing contributed less than one percentage point to sales growth. Gross margin was approximately 39.8%, versus 40.0% a year earlier.
Segments and margins
| Segment | Sales | Sales change | Operating earnings | Operating margin |
|---|---|---|---|---|
| Architecture & Software | $613.9 million | +31% | $153.1 million, up 55% | 24.9%, up 3.8 points |
| Control Products & Solutions | $751.9 million | +26% | $68.9 million, up 82% | 9.2%, up 2.9 points |
Management said volume leverage drove margin improvement, partly offset by higher compensation and spending to support growth. Companywide, compensation costs were about $25 million higher year over year, and growth-related spending was about $30 million higher.
Cash flow, balance sheet and liquidity
- Cash from operating activities was $12.6 million, down from $119.4 million; free cash flow, a company-defined non-GAAP measure, was $4.4 million versus $108.0 million. Management primarily attributed the decline to higher performance-based compensation payments. Receivables growth also used $92.9 million of operating cash.
- Capital expenditures were $20.3 million. The company expects fiscal 2011 capital expenditures of about $120 million.
- Cash and equivalents were $769.3 million, down from $813.4 million at September 30. Long-term debt was $904.9 million, unchanged; there were no commercial paper borrowings. Cash less long-term debt was approximately negative $135.6 million.
- Total current assets were $2,631.7 million and current liabilities were $1,120.1 million. The debt-to-total-capital ratio was 36.3%, down from 38.3%. The company reported $567.5 million of available revolving credit capacity, no facility borrowings, and compliance with its covenants; a $300 million facility was due to expire in March 2011, and management was discussing replacement facilities with its banks.
- Financing activities used $37.7 million, including $49.7 million of dividends. The company repurchased about 706,600 shares for a reported total cost of $48.9 million; approximately $452.3 million remained under its authorization. Future repurchases were subject to business conditions, cash generation, other cash needs and share price.
Outlook, risks and unusual items
- Management described economic indicators and forecasts as positive and was optimistic that the global recovery would continue in fiscal 2011. This is commentary, not specific quarterly or full-year earnings guidance. Long-term goals include 6–8% revenue growth, double-digit EPS growth and 60% of revenue outside the U.S.
- The effective tax rate was 19.6%, including $3.5 million of discrete tax benefits primarily from the retroactive extension of the U.S. federal research tax credit. Management noted benefits from lower non-U.S. tax rates and foreign tax credits.
- General corporate expense benefited from a $3.8 million gain on sale of an investment. The prior-year quarter included a $1.2 million after-tax discontinued-operations loss related to an environmental matter.
- Risks identified include economic and cyclical customer spending conditions, currency movements, competition and pricing, product acceptance and technology development, supply availability and cost, IT-system security and disruption, litigation, tax matters, retirement-benefit costs, distribution-channel disruption, and execution of productivity and growth initiatives.
- Rockwell reported a few thousand asbestos claimants across lawsuits naming it and many other companies. It stated that it believes the claims will not materially adversely affect its financial condition, while acknowledging litigation uncertainty and describing insurance and indemnity arrangements.
- Regarding a previously disclosed Foreign Corrupt Practices Act matter, the Department of Justice declined to pursue charges in 2010; the company was working with the SEC toward settlement of possible civil claims. The company said it did not expect related consequences to have a material adverse effect.
Most important facts for investors to verify
- Whether sales growth, backlog and segment margins persisted after this quarter, and how much growth reflects volume versus pricing or currency.
- Whether weak operating cash flow and free cash flow were temporary, particularly the effects of compensation payments, receivables and other working-capital movements.
- Whether the expiring revolving credit facility was replaced on acceptable terms, and how liquidity, debt and pension contributions evolved.
- Whether the SEC resolved the FCPA matter and whether asbestos, other litigation or tax uncertainties resulted in material costs.
- How much reported earnings benefited from the investment-sale gain and discrete tax benefits, and whether the stated long-term goals should be distinguished from formal near-term guidance.