Rockwell Automation, Inc. — Q3 FY2009 Form 10-Q
Business and period. Rockwell Automation provides industrial automation products, solutions and services. This unaudited quarterly report covers the three and nine months ended June 30, 2009; comparisons are with the corresponding 2008 periods. The company reported results amid a severe global recession and sharply weaker industrial demand.
Financial results
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Sales | $1,010.8 million, down 31% from $1,475.0 million | $3,258.1 million, down 23% from $4,213.5 million |
| Gross profit | $370.2 million, versus $605.6 million | $1,204.2 million, versus $1,752.4 million |
| Income from continuing operations | $32.8 million, versus $152.6 million | $189.0 million, versus $452.0 million |
| Net income | $32.8 million, versus $152.6 million | $191.8 million, versus $452.0 million, including $2.8 million from discontinued operations |
| Diluted EPS | $0.23, versus $1.03 from continuing operations | $1.33 from continuing operations; $1.35 including discontinued operations, versus $3.03 |
| Operating cash flow | Not presented for the quarter alone | $408.6 million, versus $352.3 million |
| Free cash flow (non-GAAP) | Not presented for the quarter alone | $342.4 million, versus $261.1 million |
Q3 segment operating margins were 10.8% in Architecture & Software (24.7% a year earlier) and 7.0% in Control Products & Solutions (12.2%). For the nine-month period, the respective margins were 14.3% (24.6%) and 8.4% (13.0%). The filing attributes the declines principally to lower volume, with currency, mix and restructuring also affecting results; cost reductions partly offset the pressure.
Liquidity and debt at June 30, 2009. Cash and cash equivalents were $580.5 million, compared with $582.2 million at September 30, 2008. Current assets were $2,106.2 million and current liabilities $956.4 million. Long-term debt was $904.8 million; there was no short-term debt or commercial paper outstanding. The debt-to-total-capital ratio was 36.0%, down from 37.3% at September 30, 2008. The company had not drawn on its new $535 million revolving facilities and reported covenant compliance; an additional approximately $164.2 million of short-term facilities was available to non-U.S. subsidiaries.
For the nine months, operating cash flow exceeded the prior-year period despite lower earnings, supported by working-capital improvements. Capital expenditures were $67.5 million versus $102.8 million; dividends paid were $123.3 million. The company reported cash used for continuing operations of $1.2 million after investing, financing and currency effects.
Material changes and operating context
- Demand fell across regions and most industries. Q3 organic sales declined 27% overall; reported sales were also affected by a 5-percentage-point currency headwind, partly offset by 1 point from acquisitions. All reported regions had lower sales; Canada and EMEA were particularly weak. Asia-Pacific revenue improved sequentially, especially in products, but remained below the prior year.
- Q3 sales declined 36% in Architecture & Software and 28% in Control Products & Solutions. Logix sales fell 25% in the quarter. Solutions businesses declined sequentially, while products businesses were flat sequentially, according to management.
- Working-capital reductions helped cash generation: receivables and inventories declined from September 30, 2008. However, the allowance for excess and obsolete inventory rose to $49.4 million from $39.7 million.
- The company acquired Xi’an Hengsheng and a majority of the assets of Rutter Hinz’s automation business during the period. Preliminary allocations included $16.2 million of goodwill for these acquisitions.
Outlook, commentary and risks
- Management described economic conditions and markets as uncertain, with some indicators showing possible stabilization but remaining at historically low levels. It emphasized cost control, cash management and continued investment in core technologies. The filing provides no specific revenue or earnings guidance.
- Management expected FY2009 capital expenditures of approximately $105 million, pension-plan contributions of approximately $31.2 million and postretirement-plan contributions of approximately $20.3 million.
- Management estimated pension plans could be underfunded by approximately $550 million at June 30, 2009, assuming discount rates consistent with the prior measurement date. If a similar deficit remained at September 30, 2009, it estimated shareowners’ equity could decline by approximately $350 million, net of tax. These were estimates, not final measurement-date amounts.
- Restructuring charges recorded in 2009 were $27.3 million; expected cash expenditures were approximately $26.4 million. The filing also reports prior-year restructuring accruals and ongoing cash payments.
- Tax matters include $125.6 million of unrecognized tax benefits at June 30, 2009. The company said up to $37.5 million could be reduced over the next 12 months as tax matters are resolved or statutes of limitations lapse. The Q3 effective tax rate was 34.7%, including a $4.5 million discrete expense related to a planned disposal of a non-U.S. subsidiary.
- Contingencies include asbestos-related litigation and other legal claims. Management said pending matters were not expected to have a material adverse effect, while noting uncertainty in litigation outcomes. The DOE-related Rocky Flats proceeding had been appealed by DOE, with a cross-appeal by RIC.
- Other stated risks include continued economic and capital-market weakness, industrial spending, currency movements, competition and pricing, customer demand, supply availability, tax examinations, litigation, and execution of restructuring and productivity initiatives. The independent accountant performed an interim review, not an audit, and reported no material modifications it believed were needed.
Important facts for investors to verify
- Whether the sharp sales and margin declines continued or stabilized after June 30, particularly by region and segment.
- Whether reported operating cash flow and non-GAAP free cash flow remain sustainable as working-capital benefits normalize.
- The September 30 pension funded status and its eventual effect on equity and future funding requirements.
- Actual restructuring cash costs, FY2009 capital expenditures and pension contributions versus management’s estimates.
- Developments in tax examinations and unrecognized tax benefits, asbestos claims, and the Rocky Flats appeal.
- Credit-facility availability, covenant headroom and the company’s ability to maintain liquidity if commercial-paper market access weakens.