Rockwell Automation, Inc. — FY2011 Form 10-K
Business context and period: Rockwell Automation provides industrial automation products, software, services and solutions through its Architecture & Software and Control Products & Solutions segments. This annual filing covers the fiscal year ended September 30, 2011; fourth-quarter figures refer to the three months ended that date. Approximately 51% of annual sales were outside the United States.
Financial performance
| Metric | FY2011 | FY2010 |
|---|---|---|
| Sales | $6,000.4 million | $4,857.0 million |
| Gross profit / margin | $2,390.4 million / 39.8% | $1,936.4 million / 39.9% |
| Income from continuing operations | $697.1 million | $440.4 million |
| Net income | $697.8 million | $464.3 million |
| Diluted EPS from continuing operations | $4.79 | $3.05 |
| Cash from continuing operating activities | $643.7 million | $494.0 million |
| Free cash flow (company-defined, non-GAAP) | $561.7 million | $410.7 million |
| Cash and cash equivalents at year-end | $988.9 million | $813.4 million |
| Long-term debt at year-end | $905.0 million | $904.9 million |
Sales increased 24% year over year; organic sales increased 20%, with currency translation and acquisitions contributing to reported growth. Income from continuing operations rose 58%, chiefly on higher volume. Pricing contributed less than one percentage point to overall sales growth. Selling, general and administrative expense rose to $1,461.2 million but declined to 24.4% of sales from 27.2% in FY2010. The effective tax rate was 19.7%, versus 19.1%.
Architecture & Software sales were $2,594.3 million, up 23%, and segment operating margin increased to 25.4% from 22.5%. Control Products & Solutions sales were $3,406.1 million, up 24%, and segment operating margin increased to 10.8% from 8.8%. For both segments, margin gains primarily reflected volume, partly offset by mix and spending to support growth.
Fourth quarter: Sales were $1,654.3 million, gross profit was $663.2 million, income from continuing operations was $201.8 million and diluted EPS from continuing operations was $1.39. In the fourth quarter of FY2010, those figures were $1,356.9 million, $529.2 million, $131.3 million and $0.91, respectively.
Cash, debt and capital allocation
- Capital expenditures were $120.1 million in FY2011; management expected about $140 million in FY2012.
- The company repurchased approximately 4.0 million shares for $299.2 million and paid $211.0 million in dividends during FY2011. The annual dividend rate was increased to $1.70 per share effective with the September 2011 payment.
- Debt-to-total-capital was 34.1% at September 30, 2011, down from 38.3%. No commercial paper or bank borrowings were outstanding at fiscal year-end. The company had a $750 million four-year revolving credit facility, undrawn at year-end, and reported compliance with its covenants.
- After year-end, the company made a discretionary $300 million contribution to its U.S. qualified pension trust, funded with cash and $275 million of commercial paper borrowings. It expected approximately $339 million of worldwide pension contributions in FY2012.
Changes, outlook and management commentary
- Growth was broad-based: emerging-market sales rose 31% (24% organic); Logix sales exceeded $900 million and rose 29%; process-related sales increased 18%. Backlog at September 30 was $1,177.1 million, up from $1,061.6 million, though management cautioned that backlog is not necessarily indicative of future results because most sales are short-cycle.
- Management described the outlook as cautiously optimistic for continued, slower and potentially uneven recovery into FY2012, citing improving U.S. industrial production and capacity utilization but moderating emerging-market growth and European sovereign-debt concerns. The filing gives no specific FY2012 revenue or EPS guidance.
- Long-term financial goals include 6–8% revenue growth, double-digit EPS growth and 60% of revenue outside the United States. The company also targets 3–4% annual cost productivity.
- FY2011 included $25.0 million of net discrete tax benefits. FY2010 included $23.9 million of discontinued-operations income, largely reflecting a $21.3 million tax benefit; FY2011 discontinued-operations income was $0.7 million.
- The company acquired Hiprom and a majority stake in Lektronix in 2011 for an aggregate purchase price of $58.8 million. The acquisitions added mining-process automation and industrial repair/service capabilities.
Risks and contingencies
- Results are exposed to industrial-capital-spending cycles, macroeconomic and sovereign-debt conditions, international operations and foreign-exchange movements. Management noted that a stronger U.S. dollar could adversely affect results.
- Other highlighted risks include competition and pricing pressure, product development and customer acceptance, cybersecurity and IT-system performance (including continuing ERP deployment), execution of engineered-solution projects, dependence on distributors and suppliers, and employee benefit costs.
- Pension plans were underfunded: the reported pension funded status was a liability of $909.7 million at September 30, 2011, versus $693.1 million a year earlier. Global pension expense rose to $91.4 million from $75.0 million; management estimated FY2012 pension expense of approximately $103.9 million.
- In June 2011, RIC and another former contractor agreed to pay $14 million to settle the McGregor, Texas Navy facility cleanup claim; Rockwell Automation stated RIC was responsible for half. Court approval of the consent decree was pending in the filing.
- Environmental matters: the company estimated reasonably possible Superfund remediation costs of $11.2 million, with $3.4 million accrued. For other environmental matters, reasonably possible costs were estimated at $85.3 million, with $38.9 million accrued. The filing states that environmental obligations and asbestos litigation are not expected to have a material adverse effect, while acknowledging outcome uncertainty.
- There were a few thousand asbestos claimants in lawsuits naming the company and many other defendants. The company said it had historically been dismissed from most claims without payment and believed insurance would cover the substantial majority of future Allen-Bradley defense and indemnity costs.
Key investor verification points
- Check whether sales and margin momentum continued after FY2011, especially organic growth, pricing, and performance in emerging markets and Europe.
- Assess cash conversion and the quality of reported free cash flow, including working-capital movements, pension contributions and the company’s non-GAAP free-cash-flow definition.
- Track pension funding, assumptions and expense, including the substantial post-year-end contribution and FY2012 funding expectations.
- Review the final status and company cost of the McGregor consent decree, environmental exposures, asbestos claims and divestiture-related indemnities.
- Monitor the ERP rollout, cybersecurity exposure, distributor and single-source supplier dependencies, and execution risks in solutions contracts.
- Separate recurring earnings from discrete tax benefits and discontinued-operations items; review the filing’s segment disclosures and long-term debt maturities.
The independent auditor issued an unqualified opinion on the consolidated financial statements and reported effective internal control over financial reporting as of September 30, 2011.