Rockwell Automation, Inc. — Q1 FY2014 Form 10-Q
Reporting period: Three months ended December 31, 2013; comparable period is the three months ended December 31, 2012. The interim statements are unaudited and the company cautions that quarterly results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Sales | $1,591.7 million | $1,489.2 million | +7% |
| Gross profit / gross margin | $663.7 million / 41.7% | $607.3 million / 40.8% | Margin +0.9 percentage points |
| Income before taxes | $272.8 million | $217.2 million | +26% |
| Net income | $198.1 million | $161.4 million | +23% |
| Diluted EPS | $1.41 | $1.14 | +$0.27 |
| Adjusted diluted EPS (non-GAAP) | $1.47 | $1.23 | +$0.24 |
| Operating cash flow | $203.5 million | $167.3 million | +$36.2 million |
| Free cash flow (non-GAAP) | $178.6 million | $156.3 million | +$22.3 million |
Sales growth was 7% on both a reported and organic basis; acquisition and currency effects were negligible in total. Products and solutions sales were $1,422.3 million and services sales were $169.4 million. The effective tax rate rose to 27.4% from 25.7%; management attributed the increase mainly to prior-period tax adjustments and the mix of U.S. and non-U.S. earnings.
Segments and material changes
- Architecture & Software: Sales increased 6% to $695.9 million; segment operating earnings rose to $211.9 million from $183.2 million. Margin improved to 30.4% from 27.9%.
- Control Products & Solutions: Sales increased 8% to $895.8 million; segment operating earnings rose to $116.1 million from $92.8 million. Margin improved to 13.0% from 11.2%.
- Total segment operating earnings increased 19% to $328.0 million, and total segment operating margin rose to 20.6% from 18.5%. Management cited higher sales and favorable resolution of certain legal matters; the legal resolutions added approximately 1 percentage point to Architecture & Software’s margin.
- Strongest industry growth came from oil and gas and food and beverage. U.S. sales rose 10%; EMEA rose 10%, Asia Pacific 5%, Canada fell 6%, and Latin America fell 3% on a reported basis.
Cash, debt and liquidity
- Cash and cash equivalents were $1,246.0 million at quarter-end, versus $1,200.9 million at September 30, 2013. Short-term investments were $364.6 million. Cash plus short-term investments totaled $1,610.6 million.
- Short-term commercial paper debt was $251.0 million, up from $179.0 million; long-term debt was $905.1 million. Total debt was $1,156.1 million. The debt-to-total-capital ratio was 30.1%, versus 29.5% at fiscal year-end.
- Current assets were $3,719.8 million and current liabilities $1,538.7 million. The company reported $750 million of capacity under its revolving credit facility, which expires in May 2018, and approximately $122.1 million of separate short-term facilities available to non-U.S. subsidiaries. It reported compliance with credit-facility covenants.
- Operating cash flow increased, while investing activities used $98.9 million and financing activities used $59.7 million. Capital expenditures were $35.6 million; cash dividends were $80.5 million and treasury-stock purchases were $110.0 million.
Outlook, commentary and risks
- Management expected U.S. market conditions to improve modestly through the rest of fiscal 2014 and underlying non-U.S. conditions to remain stable. Europe was described as improving and Asia Pacific as stabilizing, with capital access and industrial overcapacity still concerns.
- Long-term financial goals include 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. The filing does not provide a specific fiscal 2014 revenue or EPS forecast.
- Rockwell acquired vMonitor, a wireless solutions provider serving oil and gas, in November 2013. It acquired Jacobs Automation in January 2014, after quarter-end, adding intelligent track motion control technology.
- About 90% of cash, cash equivalents and short-term investments were held by non-U.S. subsidiaries and generally would be subject to U.S. tax if repatriated. Management said it did not expect difficulty meeting liquidity needs.
- Risks include cyclical customer capital spending, macroeconomic and currency conditions, competition and pricing, technology and cybersecurity, component availability, integration of acquisitions, tax disputes, litigation, and retirement-benefit costs. The company described asbestos-related claims and other contingencies but did not expect pending matters to have a material effect; outcomes remain uncertain.
- Deloitte & Touche reviewed the interim statements and reported that it was not aware of material modifications needed for conformity with U.S. GAAP; this was a review, not an audit.
Important facts for investors to verify
- How much of the quarter’s earnings and segment-margin improvement depended on favorable legal resolutions and other nonrecurring effects.
- Whether reported sales momentum, including organic growth and regional trends, continues in subsequent quarters.
- The effect of the higher effective tax rate and possible resolution of unrecognized tax benefits; gross unrecognized tax benefits were $41.0 million, with up to $31.9 million potentially reducible within 12 months.
- Cash availability and potential tax costs associated with repatriating funds held overseas, and the company’s reliance on commercial paper and committed credit facilities.
- Acquisition integration and the development of asbestos, indemnification and other litigation contingencies.