Rockwell Automation, Inc. — Form 10-Q Summary
Business context and reporting period
Rockwell Automation provides industrial automation products, services and solutions. This unaudited report covers the fiscal second quarter and six months ended March 31, 2013; comparisons are with the corresponding 2012 periods. The interim financial statements were reviewed by Deloitte & Touche, not audited.
Financial results and position
- Revenue: Second-quarter sales were $1.523 billion, down 2% year over year (2% lower organically). Six-month sales were $3.012 billion, down 1% (organic sales approximately flat).
- Earnings: Second-quarter net income was $175.9 million, up from $167.8 million; diluted EPS was $1.24 versus $1.16. Six-month net income was $337.3 million versus $351.1 million; diluted EPS was $2.38 versus $2.43. Adjusted EPS, a company-defined non-GAAP measure excluding non-operating pension costs, was $1.33 for the quarter and $2.56 for six months.
- Margins: Second-quarter gross profit was $616.4 million (about 40.5% of sales). Total segment operating margin, a non-GAAP measure, was 18.7% versus 17.7%; six-month margin was 18.6% versus 18.7%. Second-quarter pretax margin was 14.9%, compared with 14.3%.
- Segments: Architecture & Software quarterly sales fell 4% to $639.2 million, with segment operating margin improving to 26.6% from 25.7%. Control Products & Solutions sales fell 1% to $883.6 million, while segment operating earnings rose 9% and margin increased to 13.0% from 11.8%.
- Cash flow: Six-month operating cash flow was $369.9 million versus $64.5 million; company-defined free cash flow was $335.9 million versus $18.8 million. The comparison chiefly reflects the absence of a $300 million discretionary U.S. pension contribution in the current period; the prior-year contribution materially reduced cash flow.
- Liquidity and debt: At March 31, cash and equivalents were $967.1 million and short-term investments were $363.6 million. Short-term debt was $236.0 million and long-term debt $905.0 million. The company reported $750 million of unused revolving credit capacity and compliance with facility covenants. About 90% of cash, cash equivalents and short-term investments was held by non-U.S. subsidiaries whose earnings were permanently reinvested.
- Capital returns: Six-month cash dividends were $131.6 million; the company repurchased approximately 2.6 million shares for $213.7 million. The quarterly dividend per share was $0.47, up from $0.425.
Material changes and management commentary
- Sales declines in EMEA and Asia-Pacific offset growth in the Americas. Asia-Pacific quarterly sales fell 19%; EMEA fell 5%. Management cited Western Europe’s recession and weak Asian markets and project delays. U.S. quarterly sales rose 2%, and Latin America rose 2% reported and 6% organically.
- Management said strong productivity, favorable mix and lower variable compensation offset lower volume in the quarter. For the six-month period, these factors did not fully offset lower volume.
- Non-operating pension costs rose to $19.7 million in the quarter from $8.8 million, and to $39.4 million for six months from $17.6 million. The company attributed the increase primarily to a lower U.S. discount rate. Beginning in fiscal 2013, it presented these costs separately from segment operating earnings.
- Goodwill increased to $1.005 billion, including $71.1 million from the October 2012 acquisition of Harbin’s medium-voltage drives business in China. The company reported no impairment in its second-quarter annual review.
Outlook, risks and contingencies
- Management expected continued growth in the U.S. in the second half of fiscal 2013 based on improving industrial indicators. It described international markets as uneven: Western Europe remained weak, China’s recovery was slower than expected, and India was very weak; some emerging markets and Mexico were more favorable.
- The company’s long-term goals include 6–8% revenue growth, double-digit EPS growth, return on invested capital above 20%, free cash flow around 100% of net income, and 60% of revenue outside the U.S. These are long-term goals, not a specific fiscal 2013 forecast. Expected fiscal 2013 capital expenditures were about $150 million.
- The quarterly effective tax rate was 22.5%, including $4.8 million of net discrete tax benefits, primarily from the retroactive extension of the U.S. research and development tax credit. The six-month effective rate was 24.1%.
- Risks cited include macroeconomic and customer capital-spending conditions, currency rates, competition and pricing, supply-chain disruption, technology and IT security, acquisitions and integration, retirement-benefit costs, litigation, and tax matters. The company disclosed a few thousand asbestos claimants in suits naming it and other companies; it said it believed the claims would not materially affect results, while noting litigation uncertainty. It reported no material change in previously disclosed risk factors or contractual cash obligations.
Important facts for investors to verify
- Whether sales and margin trends persist, particularly in Asia-Pacific and EMEA, and whether U.S. growth continues.
- How much reported cash-flow improvement reflects the prior-year pension contribution rather than recurring operating changes.
- The effect of higher pension costs and the company’s non-GAAP exclusions when comparing earnings periods.
- Accessibility and potential tax consequences of substantial funds held in non-U.S. subsidiaries, as well as debt and liquidity needs.
- Developments in asbestos litigation, indemnification obligations and unrecognized tax benefits.