Rockwell Automation, Inc. — Q3 FY2015 Form 10-Q
Reporting period: Fiscal third quarter and nine months ended June 30, 2015; comparisons are with the corresponding 2014 periods unless noted. Rockwell provides industrial automation products, solutions and services. The interim statements are unaudited and were reviewed by Deloitte & Touche.
Key financial results
| Metric | Three months | Nine months |
|---|---|---|
| Sales | $1,575.2 million, down 4.5% | $4,700.4 million, down 2.9% |
| Organic sales growth | 2.2% | 2.3% |
| Gross profit | $678.2 million; gross margin 43.1%, versus 41.3% | $2,038.9 million; gross margin 43.4%, versus 41.3% |
| Income before taxes | $284.6 million, up 4% | $848.6 million, up 7% |
| Net income | $206.1 million, versus $199.7 million | $626.3 million, versus $578.1 million |
| Diluted EPS | $1.52, versus $1.43 | $4.60, versus $4.12 |
| Adjusted diluted EPS (non-GAAP) | $1.59, versus $1.49 | $4.82, versus $4.32 |
| Total segment operating margin (non-GAAP) | 21.8%, versus 19.8% | 21.8%, versus 19.7% |
Currency translation reduced reported sales by 6.8 percentage points in the quarter and 5.4 points year to date; pricing contributed less than 2 points and approximately 1 point, respectively. Segment earnings and productivity improved despite currency headwinds and increased spending.
Cash flow, liquidity and capital
- For the nine months, operating cash flow was $839.7 million, up from $707.4 million. Capital expenditures were $83.2 million. Free cash flow, a company-defined non-GAAP measure, was $768.7 million versus $640.1 million.
- Cash and cash equivalents were $1,567.2 million and short-term investments were $590.6 million at June 30. Current assets totaled $4,174.9 million; current liabilities were $1,416.0 million.
- Long-term debt was $1,492.2 million; there was no commercial paper outstanding at quarter-end. Debt-to-total-capital was 36.9%, versus 31.6% at September 30, 2014. The company reported compliance with credit-facility covenants and no borrowings under its $1.0 billion revolving facility.
- In February, Rockwell issued $600 million of notes due 2020 and 2025, receiving $594.3 million net proceeds, primarily to repay commercial paper. Swaps converted the notes to floating-rate debt.
- Approximately 90% of cash, cash equivalents and short-term investments were held by non-U.S. subsidiaries whose undistributed earnings were considered permanently reinvested. Management said it expected no difficulty meeting liquidity needs.
- Nine-month dividends were $263.3 million and treasury-stock purchases were $404.8 million in the cash-flow statement. The company repurchased approximately 3.65 million shares during the period; $641.7 million remained under the $1.0 billion authorization at June 30.
Material changes and operating performance
- Architecture & Software quarterly sales fell 4.4% to $683.5 million, while organic sales grew 3.1%. Segment operating margin rose to 29.2% from 28.6%.
- Control Products & Solutions quarterly sales fell 4.6% to $891.7 million, while organic sales grew 1.6%. Segment operating margin expanded to 16.1% from 13.0%, reflecting organic growth and strong productivity.
- U.S. sales, 55% of quarterly total, rose 3.1%; automotive and consumer strength was partly offset by oil and gas weakness. Reported sales declined across Canada, EMEA, Asia Pacific and Latin America, substantially reflecting currency translation.
- Quarterly Logix sales declined about 4% reported but grew about 3.5% organically. Process-initiative sales declined about 10% reported and about 3% excluding currency. Emerging-market sales fell 5.5% reported but grew 5.8% organically.
- Cash flow improvement was attributed primarily to stronger working-capital performance and higher earnings. Outstanding shares and weighted-average shares declined year over year, contributing to EPS growth.
Outlook, commentary and risks
- The filing gives long-term financial goals of 6–8% revenue growth, double-digit EPS growth, return on invested capital above 20%, and free cash flow of approximately 100% of adjusted income. These are long-term goals, not a specific current-year forecast; the filing text does not provide a clear numerical FY2015 earnings or sales outlook.
- Management described U.S. indicators as mixed, with industrial production and capacity utilization declining sequentially. It reported softer Chinese manufacturing conditions and weaker outlooks in several emerging economies, while noting expected EMEA improvement and continued long-term automation-market potential in emerging countries.
- Principal cited risks include global economic and customer capital-spending conditions, foreign exchange, commodity prices, competition and pricing, product acceptance, cybersecurity and IT-system effectiveness, supply availability, litigation and tax matters, pension and health-care costs, acquisitions, and execution of productivity and globalization initiatives.
- Pending legal matters include asbestos-related claims involving legacy products and businesses. Management stated it did not expect pending matters to have a material effect, while noting litigation uncertainty and possible significant future indemnification payments in particular circumstances.
- Gross unrecognized tax benefits were $40.5 million. The company said up to $22.4 million could be reduced within the next 12 months through tax resolutions and statute expirations.
- Goodwill and indefinite-lived intangible assets were tested in Q2 and were not impaired. The ESC Services acquisition added $14.9 million of goodwill and $5.4 million of intangible assets. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether organic growth and segment-margin gains persist as foreign-exchange effects and economic weakness continue.
- The drivers and sustainability of higher earnings and free cash flow, including working-capital timing and the company-defined non-GAAP adjustments.
- Debt levels, floating-rate exposure under the new swaps, and the effect of keeping most funds in non-U.S. subsidiaries.
- Share repurchase pace, remaining authorization and the balance between buybacks, dividends, acquisitions and debt.
- Developments in asbestos litigation, indemnification exposure, tax audits and the potential realization of unrecognized tax benefits.
- Actual results against management’s long-term goals; the filing does not give a clear numerical near-term forecast.