Rockwell Automation, Inc. — Q3 2010 Form 10-Q
Business context and reporting period
Rockwell Automation provides industrial automation products, services and solutions. This unaudited quarterly report covers the three and nine months ended June 30, 2010 (fiscal Q3 and year to date); comparisons are with the corresponding 2009 periods unless stated otherwise. The interim financial statements received an independent accountant’s review, not an audit.
Financial performance and position
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Sales | $1,268.1 million | $1,010.8 million | $3,500.1 million | $3,258.1 million |
| Gross profit | $507.3 million | $370.2 million | $1,407.2 million | $1,204.2 million |
| Income from continuing operations | $119.4 million | $32.8 million | $309.1 million | $189.0 million |
| Net income | $119.4 million | $32.8 million | $333.0 million | $191.8 million |
| Diluted EPS, continuing operations | $0.83 | $0.23 | $2.14 | $1.33 |
- Q3 sales rose 25%; organic sales also rose 25%, with negligible currency impact. Product revenue increased 37%, while solutions and services increased 6%. Distributor restocking contributed approximately 3 percentage points to sales growth.
- Q3 gross margin was 40.0%, up 3.4 percentage points. Management attributed improvement to volume, restructuring savings and favorable mix, partly offset by higher compensation, pension costs and growth investment.
- For the first nine months, operating cash flow was $433.4 million versus $408.6 million; company-defined free cash flow was $391.5 million versus $342.4 million. Capital expenditures were $54.2 million. Working capital increased, mainly from receivables and inventory.
- At June 30, cash was $826.0 million, current assets $2,518.6 million and current liabilities $1,226.7 million. Long-term debt was $904.8 million; debt-to-total-capital was 39.7%. No commercial paper or revolving-credit-facility borrowings were outstanding. Revolving facilities totaled $567.5 million; the company reported compliance with their covenants.
- Cash dividends were $0.64 per share in Q3. In June, the company raised the quarterly dividend 21% to $0.35 per share, effective with the September 2010 payment. It repurchased approximately 1.7 million shares for $93.1 million in the first nine months and had about $528.1 million remaining under its authorization at June 30.
Material changes versus the prior comparable period
- Q3 income before tax increased to $155.5 million from $50.2 million. SG&A was 26.3% of sales, down 3.9 percentage points, as sales grew faster than expenses.
- Architecture & Software Q3 sales rose 39% to $553.9 million and operating margin increased to 22.6% from 10.8%. Control Products & Solutions sales rose 17% to $714.2 million and margin increased to 10.2% from 7.0%.
- Nine-month reported sales rose 7%, while organic sales rose 4%; currency translation contributed 3 percentage points. Architecture & Software sales grew 18% reported, while Control Products & Solutions sales were essentially flat reported and declined 4% organically.
- Nine-month net income included $23.9 million from discontinued operations, compared with $2.8 million a year earlier. This primarily reflected a $21.3 million tax benefit related to the 2007 sale of the Dodge and Reliance businesses, plus a net $2.6 million benefit from revised estimates for divested-business environmental and legal matters.
Outlook, management commentary, risks and unusual items
- Management said the industrial recovery was stronger than expected and described improvement across most regions, while warning that high unemployment and low capacity utilization left uncertainty about the recovery. No specific full-year sales or EPS forecast is provided in the supplied filing text.
- Management expected about $20 million of additional restructuring savings during the remainder of fiscal 2010. It also expected Q4 employee costs to rise about $70 million and pension and postretirement expense about $10 million versus Q4 2009, plus approximately $10 million of incremental growth investment versus Q3 2010. Expected fiscal 2010 capital expenditures were about $100 million.
- The nine-month effective tax rate was 20.0%, below the 35% U.S. statutory rate, reflecting lower non-U.S. tax rates and $14.6 million of discrete tax benefits, partly offset by $6.7 million of discrete tax expenses. Management said unrecognized tax benefits could decrease by up to $23.6 million over the next 12 months, with offsetting tax benefits also potentially decreasing.
- Restructuring accruals fell to $15.3 million from $60.8 million at September 30, 2009; the company expected to pay the remaining balance over the following 12 months. It recorded $6.3 million of favorable accrual adjustments during the first nine months.
- The company began amortizing its ICS Triplex trademark in January 2010 over an estimated 10-year life. Its annual impairment review found no impairment of goodwill or indefinite-lived intangible assets.
- Risks identified include cyclical customer capital spending and macroeconomic conditions, foreign exchange, competition and pricing, technology and product acceptance, supply availability, information-system security, litigation, tax examinations, and execution of restructuring and productivity initiatives. The filing discusses thousands of asbestos claimants and other legal matters; management did not believe pending matters would materially adversely affect the business or financial condition.
Important facts for investors to verify
- How much of the Q3 sales rebound is sustainable, given the approximately 3-point contribution from distributor restocking and the concentration of growth in products and certain regions?
- Whether working-capital investment—particularly the increases in receivables and inventory—converts into cash as demand normalizes.
- Whether segment margins can hold as restructuring savings taper and compensation, pension and growth spending increase.
- How much reported nine-month earnings growth depends on discontinued-operation tax benefits and other discrete tax items.
- Progress on the remaining restructuring payments, planned capital spending, dividend commitments and share repurchases, alongside the company’s debt and pension obligations.