Rockwell Automation, Inc. — Form 10-Q Summary
Business context and period. Rockwell Automation provides industrial automation power, control and information products, services and solutions. This unaudited report covers the fiscal second quarter and six months ended March 31, 2014; comparisons are with the corresponding 2013 periods unless stated otherwise. The quarter’s results are not necessarily indicative of full-year results.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Sales | $1,600.5 million, up 5%; organic sales up 7% | $3,192.2 million, up 6%; organic sales up 7% |
| Gross profit | $655.8 million vs. $616.4 million; gross margin about 41.0% vs. 40.5% | $1,319.5 million vs. $1,223.7 million; gross margin about 41.3% vs. 40.6% |
| Net income | $180.3 million vs. $175.9 million | $378.4 million vs. $337.3 million |
| Diluted EPS | $1.28 vs. $1.24; adjusted EPS $1.35 vs. $1.33 | $2.70 vs. $2.38; adjusted EPS $2.82 vs. $2.56 |
| Segment operating earnings / margin | $302.1 million / 18.9%, vs. $285.2 million / 18.7% | $630.1 million / 19.7%, vs. $561.2 million / 18.6% |
| Operating cash flow | Six-month cash from continuing operating activities: $406.3 million vs. $369.9 million. Free cash flow, a company-defined non-GAAP measure, was $366.6 million vs. $335.9 million. |
Quarterly income before taxes was $248.4 million, up 9%; six-month income before taxes was $521.2 million, up 17%. The effective tax rate was 27.4% for both 2014 periods, compared with 22.5% for the 2013 quarter and 24.1% for the 2013 half-year. The company attributed the higher rates primarily to reduced U.S. research tax credit benefits and the credit’s expiration, with prior-period tax adjustments also affecting the six-month comparison.
Segments and material changes
- Architecture & Software: Quarterly sales rose 7% to $686.8 million; operating earnings rose 12% to $190.2 million and margin increased to 27.7% from 26.6%. Six-month sales rose 7% to $1,382.7 million and margin reached 29.1%.
- Control Products & Solutions: Quarterly sales rose 3% to $913.7 million, but operating earnings declined 3% to $111.9 million and margin fell to 12.2% from 13.0%, reflecting higher spending, variable compensation and unfavorable currency effects. Six-month sales rose 5% and margin improved to 12.6% from 12.1%.
- Organic sales grew across all regions in the quarter. Oil and gas was the strongest-performing industry. U.S. sales were 52% of quarterly sales; non-U.S. sales were 48%. Currency translation reduced total reported sales growth by 2 percentage points in the quarter and 1 point for the half-year.
- Lower non-operating pension costs supported pretax earnings: $14.0 million in the quarter and $28.0 million for six months, versus $19.7 million and $39.4 million, respectively, a year earlier.
Cash, debt and liquidity
At March 31, 2014, cash and cash equivalents were $1,239.8 million and short-term investments were $485.8 million. Short-term debt was $342.5 million and long-term debt was $905.4 million. Debt-to-total-capital was 31.2%, up from 29.5% at September 30, 2013. Commercial paper outstanding was $342.0 million at a 0.17% weighted-average rate. The company had a $750 million revolving credit facility available through May 2018, had not borrowed under it, and reported compliance with its covenants. Approximately 90% of cash, cash equivalents and short-term investments were held by non-U.S. subsidiaries whose earnings were treated as permanently reinvested.
Six-month investing cash use was $256.0 million, including $81.5 million for acquisitions and $58.3 million of capital expenditures. Financing cash use was $112.7 million, including $160.9 million of dividends and $217.8 million of treasury-stock purchases, partly offset by short-term borrowing and stock-option proceeds. Cash increased $38.9 million over the half-year. The company repurchased about 1.9 million shares for a total cost of $221.4 million and had approximately $313.7 million remaining under its authorization.
Outlook, commentary and risks
- Management said U.S. market conditions were expected to continue improving through the rest of the fiscal year and expected stable underlying conditions outside the U.S. It noted improving European conditions, stabilization in Asia Pacific alongside capital-access and overcapacity concerns, and continued Latin American headwinds from import restrictions, mining softness and currency devaluation.
- Long-term financial goals are revenue growth of 6–8%, double-digit EPS growth, return on invested capital above 20%, and free cash flow of about 100% of adjusted income. These are stated long-term goals, not a specific updated fiscal 2014 forecast.
- Acquisitions during the half-year included vMonitor, a provider of wireless oil-and-gas solutions, and Jacobs Automation, a provider of intelligent track motion control technology. The filing recorded $33.2 million of acquisition-related goodwill and $41.4 million of intangible assets.
- Risks identified include global economic and customer capital-spending conditions, currency movements, competition and pricing, technology and product acceptance, cybersecurity and IT availability, supply constraints, acquisition integration, litigation, tax matters, retirement benefit costs and execution of productivity initiatives.
- The company disclosed a few thousand asbestos claimants in lawsuits naming it and many other companies. It stated that it has historically been dismissed from most claims without payment and does not believe the claims will materially affect its financial condition or results, while noting litigation uncertainties. It also said pending litigation and known indemnification matters were not expected to have a material effect.
- Goodwill and indefinite-lived intangible assets were assessed in the second quarter and were not considered impaired. Deloitte performed an interim review, not a full audit, and reported no material modifications needed for GAAP conformity. Management said disclosure controls were effective and reported no material change in internal control during the quarter.
Important facts for investors to verify
- Whether sales and margin momentum—especially the quarterly margin decline in Control Products & Solutions—persisted in subsequent periods.
- How much reported growth converts to cash, given working-capital movements, acquisition spending, dividends and share repurchases.
- The effect of the higher tax rate and the expiration of the U.S. research tax credit on subsequent earnings.
- The availability and repatriation implications of cash held overseas, and the company’s commercial-paper and credit-facility liquidity position.
- Whether asbestos, other litigation, tax uncertainties or acquisition-integration risks change materially from management’s current assessments.
- Any subsequent update to fiscal-year guidance; this filing provides broad market commentary and long-term goals but no clear numerical fiscal 2014 outlook.