Rockwell Automation, Inc. — Q3 2011 Form 10-Q
Business context and period. Rockwell Automation provides industrial automation, control, information products and services. This unaudited quarterly report covers the three and nine months ended June 30, 2011, compared with the corresponding 2010 periods; the fiscal year ends September 30. The interim financial statements were reviewed by Deloitte & Touche, not audited.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Sales | $1,516.2 million | $1,268.1 million | $4,346.1 million | $3,500.1 million |
| Gross profit | $606.8 million | $507.3 million | $1,727.2 million | $1,407.2 million |
| Income from continuing operations | $178.8 million | $119.4 million | $495.3 million | $309.1 million |
| Net income | $179.5 million | $119.4 million | $496.0 million | $333.0 million |
| Diluted EPS from continuing operations | $1.22 | $0.83 | $3.40 | $2.14 |
| Diluted net EPS | $1.23 | $0.83 | $3.40 | $2.31 |
- Q3 sales grew 20% (organic growth 14%); nine-month sales grew 24% (organic growth 21%). Foreign currency translation contributed 6 percentage points to Q3 reported growth. Pricing had an immaterial effect.
- Gross margin was approximately 40.0% in Q3, compared with 40.0% in Q3 2010. Net income increased 50% in the quarter; nine-month net income growth was also supported by $23.9 million of discontinued-operations income in the prior-year period.
- Q3 Architecture & Software sales were $672.9 million, with a 26.1% segment operating margin (22.6% prior year). Control Products & Solutions sales were $843.3 million, with a 10.4% margin (10.2% prior year).
- Cash provided by operating activities was $462.5 million for nine months, versus $433.4 million. Company-defined free cash flow was $424.3 million, versus $391.5 million; this non-GAAP measure includes an add-back for excess share-based-compensation tax benefits.
- Cash and cash equivalents were $1,021.8 million at June 30, 2011, up from $813.4 million at September 30, 2010. Current assets were $3,095.7 million and current liabilities $1,339.3 million (current ratio approximately 2.31). Long-term debt was $905.0 million; cash exceeded that balance by approximately $116.8 million. No commercial paper or credit-facility borrowings were outstanding.
- Debt-to-total-capital was 32.3%, down from 38.3% at September 30, 2010. The company had a $750 million revolving credit facility and reported compliance with its covenants.
- Nine-month cash uses included $76.0 million of capital expenditures, $45.9 million for business acquisitions, $150.3 million of dividends and $222.7 million of treasury-stock purchases. Cash dividends per share were $0.775 for Q3 and $1.475 for nine months.
Material changes versus prior comparable periods
- Growth was broad-based: Q3 organic sales rose 21% in Latin America, 19% in EMEA, 14% in Asia-Pacific and 11% in the United States. Emerging markets represented 22% of Q3 sales; their total sales increased 29% year over year.
- Management attributed improved earnings primarily to higher volume and operating leverage. Q3 SG&A was 24.4% of sales, down 1.9 percentage points year over year. Nine-month SG&A was 24.7% of sales, down 3.0 points.
- Higher spending to support growth, employee compensation and material and fuel inflation partly offset volume gains. Management cited approximately $25 million of year-over-year compensation impact for the nine-month comparison. Material and fuel costs reduced total segment operating margin by less than one point.
- Q3 effective tax rate was 19.2%, versus 23.2%; the nine-month rate was 19.0%, versus 20.0%. The 2011 periods benefited from discrete tax items, including favorable resolutions of tax matters and, year to date, the retroactive research tax credit.
- Acquisitions of Hiprom and Lektronix during the quarter had an aggregate purchase price of $58.8 million; $34.0 million of goodwill was recorded. The acquired businesses’ results were included from acquisition dates, and management said the acquisitions were not material to reported results or financial position.
Outlook, commentary, risks and unusual items
- Management expressed optimism that the global recovery would continue through fiscal 2011, noting that emerging-market growth exceeded global GDP growth. It forecast fiscal 2011 capital expenditures of about $120 million.
- Long-term financial goals are revenue growth of 6–8%, double-digit EPS growth and 60% of revenue outside the United States. These are long-term goals, not a specific fiscal 2011 earnings forecast; the filing does not provide a clear full-year 2011 sales or EPS guidance figure.
- Management said future cash needs include working capital, capital expenditures, pension contributions, acquisitions, dividends, share repurchases and debt repayment. Stock repurchases depend on business conditions, free cash flow, other cash needs and share price; $279.6 million remained under the authorization at June 30.
- Key stated risks include global economic conditions and customer capital spending, currency movements, competition and pricing, product acceptance and technology development, component availability and cost, IT security and operational disruption, tax matters, litigation, retirement-benefit costs, personnel, and execution of productivity and globalization initiatives.
- Rockwell International and another former contractor agreed to a $14 million settlement with the U.S. government and Navy over NWIRP environmental cleanup costs; Rockwell International is responsible for half. The parties were negotiating a consent decree expected to be filed in the next quarter.
- The company disclosed ongoing asbestos claims and other legal, environmental, intellectual-property and indemnification matters, but stated it did not believe pending matters would have a material adverse effect on its business or financial condition. It could not estimate maximum future payments under certain intellectual-property indemnities.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter. A global process and IT-system implementation was continuing in phases through fiscal 2011–2014.
Important facts for investors to verify
- Whether the sales and earnings recovery persists, particularly given the company’s exposure to cyclical customer capital spending and the moderation in some U.S. indicators.
- Whether Q3’s reported growth and tax rate are repeatable: currency aided reported sales growth, while discrete tax benefits contributed to the lower effective tax rate.
- Whether Control Products & Solutions can sustain margin improvement amid growth-related spending, inflation, currency effects and comparatively lower solutions-and-services margins.
- How working capital, pension contributions, planned capital spending and continued shareholder returns affect cash generation and liquidity.
- Final purchase-price allocations and integration outcomes for Hiprom and Lektronix, and the completion and cost allocation of the NWIRP settlement.
- Developments in asbestos, environmental, tax and other contingencies; management’s stated assessments are subject to litigation and estimation uncertainty.