Rockwell Automation, Inc. — Q2 FY2015 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2015. Rockwell Automation provides industrial automation products, solutions and services. Figures below are unaudited; the independent accountant performed a review, not an audit.
Financial performance and position
- Quarter revenue: $1.551 billion, down 3.1% year over year; organic sales rose 2.7%, while currency translation reduced reported sales by 6.0 percentage points. Six-month sales were $3.125 billion, down 2.1%; organic sales increased 2.4%.
- Quarter earnings: Net income was $206.0 million versus $180.3 million; diluted EPS was $1.51 versus $1.28. Adjusted EPS, a company-defined non-GAAP measure excluding non-operating pension costs and related tax, was $1.59 versus $1.35. Six-month net income was $420.2 million and diluted EPS was $3.08, compared with $378.4 million and $2.70.
- Operating performance: Quarter gross profit was $673.2 million versus $655.8 million. Segment operating earnings were $334.2 million versus $302.1 million, and segment operating margin was 21.6% versus 18.9%. Pre-tax margin was 17.8% versus 15.5%. The effective tax rate was 25.5%, down from 27.4%.
- Segments: Architecture & Software quarterly sales were $674.3 million (down 1.8%) and operating margin was 29.8% (up 2.1 points). Control Products & Solutions sales were $876.5 million (down 4.1%) and operating margin was 15.2% (up 3.0 points). Currency weighed on reported sales in both segments.
- Cash flow: Six-month operating cash flow was $553.4 million, compared with $406.3 million. Company-defined free cash flow was $502.0 million versus $366.6 million, attributed primarily to higher earnings and working-capital performance. Capital expenditures were $58.0 million.
- Liquidity and debt: At March 31, cash and cash equivalents were $1.403 billion and short-term investments were $634.7 million. Long-term debt was $1.505 billion; there was no commercial paper outstanding. Debt-to-total-capital was 37.0%, versus 31.6% at September 30, 2014. The company issued $600 million of notes in February, receiving $594.3 million net, primarily to repay commercial paper. A new $1.0 billion revolving credit facility expires in March 2020; it was undrawn, and the company reported covenant compliance.
- Capital returns: Six-month dividends were $1.30 per share, versus $1.16. The company repurchased approximately 2.69 million shares for $294.4 million and reported about $757 million remaining under its $1.0 billion authorization.
Changes and management commentary
- Reported quarterly sales fell despite organic growth, principally because of unfavorable foreign currency translation. Stronger U.S. dollar effects and lower oil-and-gas capital spending were notable pressures; automotive, consumer-based industries and chemicals were among the stronger areas.
- Management attributed higher segment earnings to organic sales growth, productivity and favorable mix, partly offset by currency and increased spending. The prior-year comparison also included unfavorable non-recurring tax matters; the current-year tax rate benefited from the retroactive extension of the U.S. research and development tax credit.
- Quarterly sales to U.S. customers were 56% of total; non-U.S. sales were 44%. U.S. indicators declined sequentially in the quarter. Management expected U.S. market growth for FY2015 to be below FY2014, while industrial production was expected to grow in the second half. The filing describes mixed international conditions, including further manufacturing deceleration in China and weakness in parts of Latin America and Canada.
- The company’s stated 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 approximately 100% of adjusted income. These are long-term goals, not a specific FY2015 forecast; the filing does not provide a clear full-year earnings or sales guidance figure.
Risks, contingencies and unusual items
- Risks include global economic and customer capital-spending conditions, foreign exchange, commodity prices, competition and pricing, product and technology acceptance, supply availability, cybersecurity and IT systems, litigation, tax matters, pension and health-care costs, and acquisition integration and execution of productivity initiatives.
- Approximately 90% of cash, cash equivalents and short-term investments were held by non-U.S. subsidiaries; repatriation would generally be subject to U.S. tax. Management said it expected no difficulty meeting domestic or international liquidity needs.
- The company faces asbestos-related lawsuits involving a few thousand claimants, along with other legal matters. Management said it believed pending matters would not materially affect the business, financial condition or results, while noting litigation outcomes are uncertain and certain indemnity payments could be significant.
- Currency translation contributed to a six-month other comprehensive loss of $160.6 million; total six-month other comprehensive loss was $92.7 million. The company uses foreign-exchange and interest-rate derivatives to hedge exposures and does not enter into derivatives for speculative purposes.
- Management’s annual impairment review found goodwill and indefinite-lived intangible assets were not impaired. The new revenue-recognition standard was under evaluation and was effective for the company beginning October 1, 2017.
Key facts for investors to verify
- Whether organic sales growth and segment margin improvement continue to offset currency pressure and softer oil-and-gas spending.
- How exchange rates, particularly the U.S. dollar, affect reported revenue, earnings and accumulated other comprehensive loss.
- Cash generation, share repurchases and dividends relative to debt levels and the company’s offshore cash position.
- Progress against management’s long-term goals; do not treat those goals as specific FY2015 guidance.
- Developments in asbestos litigation, tax examinations and unrecognized tax benefits, and compliance with credit-facility covenants.