Rockwell Automation, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2010. Financial statements are unaudited; Deloitte & Touche performed an interim review, not an audit. Rockwell Automation provides industrial automation, control, software, and related services.
Financial performance
| Metric | Three months ended Mar. 31, 2010 | Six months ended Mar. 31, 2010 |
|---|---|---|
| Sales | $1,164.5 million, up 10% year over year; organic sales up 5% | $2,232.0 million, down 1%; organic sales down 6% |
| Income from continuing operations | $111.9 million; diluted EPS $0.77 | $189.7 million; diluted EPS $1.31 |
| Net income | $137.0 million; diluted EPS $0.95 | $213.6 million; diluted EPS $1.48 |
| Gross margin | 40.6%, up 6.2 percentage points year over year | Approximately 3 percentage points higher year over year |
| Operating margin | 15.2%, up 7.1 percentage points year over year | Not stated as a consolidated percentage |
| Cash from operating activities | Not provided quarterly in this filing | $297.9 million, versus $218.7 million |
| Free cash flow | Not provided quarterly in this filing | $274.8 million, versus $173.9 million |
Second-quarter sales growth reflected improved demand, currency translation (5 percentage points of reported growth), and distributor restocking (about 3 percentage points). Q2 income from continuing operations before taxes rose to $133.6 million from $55.4 million. Six-month pretax income was $230.9 million versus $194.9 million.
Balance sheet, debt, and liquidity
- At March 31, 2010, cash and cash equivalents were $817.2 million; long-term debt was $904.8 million, essentially unchanged from September 30, 2009.
- Current assets were $2,436.5 million and current liabilities were $1,115.7 million. Total shareowners’ equity was $1,419.3 million.
- Debt-to-total-capital was 38.9%, down from 40.7% at September 30, 2009. No commercial paper or revolving-credit borrowings were outstanding.
- Available revolving credit capacity was $567.5 million, plus approximately $133.7 million in short-term facilities for non-U.S. subsidiaries. The company was in compliance with facility covenants; the principal covenant threshold is a 60% debt-to-total-capital ratio.
- Six-month capital expenditures were $30.5 million. Dividends paid were $82.7 million, and treasury-stock purchases were $22.6 million in cash-flow reporting. The company reported approximately $595.7 million remaining under its share-repurchase authorization.
Material changes and segment results
- Q2 Architecture & Software sales rose 31% to $516.2 million; segment operating earnings increased to $122.6 million from $33.2 million, and margin rose to 23.8% from 8.4%.
- Q2 Control Products & Solutions sales fell 2% to $648.3 million; segment operating earnings were $54.7 million versus $53.0 million, and margin was 8.4% versus 8.0%. Solutions and services remained weak, while product sales improved.
- For the six-month period, Architecture & Software sales increased 9% and operating earnings rose to $221.6 million from $142.8 million. Control Products & Solutions sales declined 7% and operating earnings fell to $92.5 million from $121.0 million.
- Q2 regional organic sales increased 10% in the United States, 4% in Canada, and 12% in Asia-Pacific; they declined 7% in Europe, Middle East and Africa and 4% in Latin America. For the six months, organic sales declined 6% in the United States, 8% in Canada, 12% in Latin America, and 12% in EMEA, while Asia-Pacific grew 7%.
- Cash from continuing operations increased year over year, aided by improved earnings, lower capital spending and incentive-compensation payments, and timing of tax payments. Working-capital movements included cash uses of $78.0 million for receivables and $94.1 million for inventories.
Outlook, commentary, risks, and unusual items
- Management described an industrial recovery as underway but said its shape remained uncertain. Demand improved particularly in maintenance, repair and operations and smaller capital projects; restocking also contributed. The company noted continued weakness in resource-based industries and uncertainty from unemployment and low capacity utilization in developed markets.
- Management expects about $40 million of additional restructuring-related savings in the remainder of fiscal 2010 compared with the prior-year period. It also expects approximately $100 million of higher employee costs, including performance-based compensation; $20 million of higher pension and postretirement expense; and $50 million of incremental second-half spending on customer-facing resources and innovation compared with the first half.
- Expected fiscal 2010 capital expenditures are about $100 million. The company expects to pay the remaining $28.3 million restructuring accrual over the next 12 months. No specific full-year EPS or revenue guidance is stated in the provided filing text. Long-term financial goals include 6–8% revenue growth, double-digit EPS growth, and 60% of revenue outside the U.S.
- Unusual items materially affected reported results: Q2 included $25.1 million of income from discontinued operations; six-month discontinued-operations income was $23.9 million, including a $21.3 million tax benefit from resolution of a matter related to divested businesses and a net $2.6 million after-tax benefit from estimate changes. The six-month continuing-operations tax rate was 17.8%, including an $11.3 million discrete tax benefit, partly offset by a $2.4 million expense related to a Mexican tax-law change.
- Fiscal 2009 cost reductions supported margins, but the company reversed temporary employee pay and benefit reductions effective January 1, 2010 and planned wage and salary increases. Pension and postretirement expense also increased. The ICS Triplex trademark began amortization in January 2010 after its useful-life assessment changed; the company reported no impairment of goodwill or indefinite-lived intangibles.
- Risks identified include cyclical customer capital spending and macroeconomic conditions, currency movements, competition and pricing, component availability and cost, technology acceptance, information-system security and disruption, tax examinations, litigation, and execution of restructuring and productivity initiatives. Asbestos-related claims and other legal contingencies remain; management believes pending matters will not materially adversely affect financial condition, while acknowledging litigation uncertainty.
Investor facts to verify
- How much of Q2’s reported sales and earnings improvement is sustainable after excluding currency, distributor restocking, restructuring savings, and discrete tax benefits?
- Whether the recovery in Architecture & Software and product businesses offsets continuing weakness in Control Products & Solutions services and solutions.
- Whether forecast employee, pension, and second-half investment costs materially reduce the expected restructuring savings.
- Future working-capital requirements, particularly receivables and inventory, and the conversion of operating cash flow into free cash flow.
- Developments in tax examinations, asbestos and other contingencies, credit ratings, and implementation of the enterprise-wide systems program.