Rockwell Automation, Inc. — FY2009 Form 10-K
Reporting period: Fiscal year ended September 30, 2009. The filing is an annual report, not a standalone Q4 filing; quarterly results are included. Rockwell supplies industrial automation products, software, services and solutions through Architecture & Software and Control Products & Solutions.
Financial performance and condition
| Metric | FY2009 | FY2008 |
|---|---|---|
| Sales | $4,332.5 million | $5,697.8 million |
| Income from continuing operations | $217.9 million | $577.6 million |
| Diluted EPS, continuing operations | $1.53 | $3.90 |
| Net income | $220.7 million | $577.6 million |
| Gross profit / gross margin | $1,569.5 million / 36.2% | $2,340.7 million / 41.1% |
| Cash provided by operating activities | $526.4 million | $596.8 million |
| Free cash flow (non-GAAP) | $430.8 million | $458.3 million |
| Cash and cash equivalents, year-end | $643.8 million | $582.2 million |
| Long-term debt, year-end | $904.7 million | $904.4 million |
| Short-term debt, year-end | None | $100.1 million |
| Shareowners’ equity, year-end | $1,316.4 million | $1,688.8 million |
Sales fell 24% reported and 19% organically. Currency translation accounted for about five percentage points of the reported decline. Continuing-operations income fell 62%; management attributed the drop chiefly to lower sales volume, with currency effects, inflation and restructuring charges also weighing on results. The effective tax rate was 20.4%, versus 28.6% in 2008.
- Architecture & Software: Sales of $1,723.5 million, down 29%; segment operating earnings of $223.0 million and margin of 12.9%, versus 24.2% in 2008.
- Control Products & Solutions: Sales of $2,609.0 million, down 20%; segment operating earnings of $206.7 million and margin of 7.9%, versus 13.4% in 2008.
- Liquidity and leverage: Current assets were $2,134.8 million and current liabilities $947.2 million at year-end. Debt-to-total-capital was 40.7%, compared with 37.3% in 2008. The company had $535 million in committed revolving credit facilities undrawn and reported covenant compliance.
- Cash returns and investment: Annual dividends were $1.16 per share. Capital expenditures were $98.0 million, down from $151.0 million; management expected approximately $110 million in FY2010.
Material changes and Q4 context
Weakness from the global recession reduced demand across most regions and industries, with plant shutdowns, production cuts and customer spending restraint. Sales declined organically in every reported region: U.S. 22%, Canada 28%, EMEA 19%, Asia-Pacific 11% and Latin America 6%. Backlog declined to $891.9 million from $1,033.8 million. Management cautioned that backlog is not necessarily predictive because most sales are short-cycle.
Sales increased sequentially in Q4 to $1,074.4 million from $1,010.8 million in Q3, after declining through the first three quarters. Q4 continuing-operations income was $28.9 million. Management described demand as beginning to stabilize late in the year but said the outlook for manufacturing investment remained uncertain.
FY2009 restructuring charges were $60.4 million ($41.8 million after tax, or $0.29 per diluted share). The company recorded $35.2 million in Architecture & Software and $25.2 million in Control Products & Solutions. It expected approximately $50.7 million of related cash expenditures. In 2009, a $4.5 million benefit related to a revised estimate for Rocky Flats legal contingencies was reported in discontinued operations.
Outlook, risks and contingencies
- Management planned to continue cost control and cash-management discipline into FY2010, while maintaining investment in technology and global expertise. No specific FY2010 revenue or earnings guidance is provided in the filing text.
- Management expected FY2010 pension expense of approximately $71.2 million, up about $38.5 million from FY2009, and approximately $29 million of pension-plan contributions. It also expected about $19 million of postretirement-benefit contributions.
- Principal risks include prolonged recession or reduced industrial capital spending; foreign-exchange movements and international-market exposure; competitive and pricing pressure; distributor concentration; supplier and commodity availability and cost; execution of cost, globalization and ERP initiatives; IT disruption; and project execution and litigation risks.
- Rocky Flats: A $598 million judgment against predecessor RIC was on appeal and stayed. The Department of Energy confirmed indemnification and acknowledged ultimate financial responsibility; the company said it did not expect a material adverse financial effect.
- Other legal matters: Thousands of asbestos claimants have named the company, though management reported frequent dismissals without payment and believed insurance arrangements would cover most Allen-Bradley claims. A DOJ/SEC investigation into potential FCPA violations remained ongoing following voluntary disclosure and remediation; potential consequences include fines and other costs.
- Environmental exposure: Recorded environmental accruals were $33.4 million net of related receivables. The company estimated reasonably possible costs of $9.5 million at Superfund sites and $113.2 million for other environmental matters; it stated these matters were not expected to materially affect its financial condition.
- The auditor gave an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective at September 30, 2009.
Important facts for investors to verify
- Whether sales and margins recover after the severe FY2009 volume decline, and whether reported Q4 sequential growth continues.
- Cash generation, working-capital performance, and the sustainability of the dividend and planned capital spending under uncertain demand.
- Pension funding and expense sensitivity, including the effect of lower discount rates and weaker plan assets on equity and future cash needs.
- Progress and costs of restructuring and ERP implementation, plus execution of the 2010 cost and productivity plans.
- Developments in the FCPA investigation, asbestos claims, Rocky Flats appeal and environmental matters, including potential costs beyond recorded accruals.
- Currency effects, customer/distributor concentration and access to commercial-paper and credit markets, particularly given negative outlooks from S&P and Fitch.