Business context and reporting period
Rockwell Automation, Inc. provides industrial automation, control and information products, solutions and services. This unaudited Form 10-Q covers the fiscal second quarter and six months ended March 31, 2016; the comparable periods ended March 31, 2015. Amounts are in U.S. dollars.
Key financial metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Sales | $1,440.3 million | $1,550.8 million | $2,866.9 million | $3,125.2 million |
| Gross profit | $594.1 million | $673.2 million | $1,206.8 million | $1,360.7 million |
| Income before taxes | $217.0 million | $276.5 million | $453.9 million | $564.0 million |
| Net income | $168.0 million | $206.0 million | $353.5 million | $420.2 million |
| Diluted EPS | $1.28 | $1.51 | $2.68 | $3.08 |
| Segment operating margin (non-GAAP) | 19.3% | 21.6% | 20.0% | 21.8% |
- Q2 sales declined 7.1%; organic sales fell 3.6%, while currency translation reduced sales by 3.5 percentage points. For the six months, sales decreased 8.3% and organic sales 3.5%.
- Reported gross margin was approximately 41.3% in Q2 versus 43.4% a year earlier; six-month gross margin was approximately 42.1% versus 43.5%.
- Adjusted EPS, a company-defined non-GAAP measure excluding non-operating pension costs and related tax effects, was $1.37 for Q2 and $2.86 for six months, versus $1.59 and $3.23, respectively.
- For the six months, operating cash flow was $399.3 million (prior year $553.4 million); free cash flow, as defined by the company, was $347.9 million (prior year $502.0 million). Capital expenditures were $52.6 million.
- At March 31, cash and cash equivalents were $1,396.3 million and short-term investments $913.6 million. Short- and long-term debt totaled $1,790.8 million; debt-to-total-capital was 44.7%, up from 39.9% at September 30, 2015. Commercial paper outstanding was $277.6 million at a 0.45% weighted-average rate.
- Six-month cash dividends were $190.4 million; dividends per share were $1.45 versus $1.30 a year earlier. The company repurchased approximately 2.5 million shares for $248.3 million.
Material changes versus prior comparable period
- Lower sales and unfavorable currency and product mix weighed on results; management attributed weakness particularly to heavy industries, including oil and gas. Modest consumer and automotive growth partly offset the declines.
- Q2 total segment operating earnings declined 17%; income before taxes fell 22%. Architecture & Software margin dropped to 24.6% from 29.8%, reflecting lower sales, currency, mix and increased spending. Control Products & Solutions margin was flat at 15.2%.
- Operating cash flow and free cash flow fell primarily because of lower net income and higher working capital, compared with a working-capital decrease in the prior-year half.
- The effective tax rate fell to 22.6% for Q2 and 22.1% for six months from 25.5% in both prior-year periods, helped by a favorable discrete tax item and, for the half year, the extended U.S. research and development tax credit.
- Debt increased, including $277.6 million of commercial paper; cash and short-term investments together remained $2,309.9 million.
Outlook, commentary, risks and unusual items
- The filing provides no specific full-year 2016 sales or EPS guidance. Management reported mixed U.S. indicators, with industrial production, equipment spending and capacity utilization declining in the quarter, and cited negative third-party U.S. industrial-production growth projections for fiscal 2016. It described EMEA as moderately growing and noted weakness in China, India, Brazil and Canada.
- Long-term goals include above-market organic sales growth, EPS growth above sales growth, return on invested capital above 20%, and free cash flow approximately equal to adjusted income.
- On March 18, 2016, Rockwell acquired MagneMotion, an intelligent conveying systems manufacturer. Purchase accounting was preliminary; the acquisition added $9.2 million of goodwill and $5.7 million of intangible assets.
- On April 6, 2016, after quarter-end, the board authorized an additional $1.0 billion share-repurchase program. Approximately $196.9 million remained under the prior authorization at March 31.
- Approximately 90% of cash, cash equivalents and short-term investments were held by non-U.S. subsidiaries whose undistributed earnings were permanently reinvested; repatriation would generally be subject to U.S. tax. Management said it expected no difficulty meeting liquidity needs. A $1.0 billion revolving credit facility, expiring March 2020, was undrawn; the debt-to-capital covenant limit is 60%, and the company reported compliance.
- Risks include cyclical customer capital spending, macroeconomic and currency conditions, oil-and-gas and other industrial weakness, competition, cybersecurity, acquisition integration, pension and health-care costs, tax uncertainty and litigation. The company said pending matters, including asbestos claims involving thousands of claimants, were not expected to materially affect its financial condition or results; outcomes remain uncertain.
- The interim statements received an independent accountant’s review, not a full audit. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue and segment margins stabilize, particularly in heavy industries, and how much reported performance continues to reflect currency effects.
- Whether working-capital movements and lower earnings continue to constrain operating cash flow and free cash flow.
- Use of the increased buyback authorization relative to cash needs, dividends, debt and the concentration of funds outside the U.S.
- Integration and final purchase accounting for MagneMotion, and any resulting contribution to growth.
- Developments in asbestos and other litigation, tax matters, and the eventual impact of new accounting standards under evaluation.