01—Abstract
Summary
Summary of the 10-K filed November 18, 2009. Cited figures are marked; the original filing is the authoritative source.
Rockwell Automation's fiscal 2009 (year ended September 30, 2009) was a sharply down year driven by the global recession.
Sales fell 24% to $4.33 billiona from $5.70 billion, with organic sales down 19%, and income from continuing operations dropped 62% to $217.9 million, or $1.53 per diluted share versus $3.90 in 2008. Restructuring charges of $60.4 million ($0.29 per diluted share) weighed on results, and the segment operating margin fell to 12.9% in Architecture & Software and 7.9% in Control Products & Solutions. Management said demand in the products business stabilized in the latter part of the year and that sales grew sequentially in the fourth quarter, but it described the manufacturing investment outlook as uncertain.
Balance sheet and cash flow remained a relative bright spot. Operating cash flow was $526.4 millionb and free cash flow was $430.8 million, supported by inventory reduction and working capital releases. Cash rose to $643.8 million and there was no commercial paper outstanding.
Shareowners' equity fell to $1.32 billionc from $1.69 billion, largely because of a $360 million pension-related hit to other comprehensive income. Retirement benefit liabilities rose to $849 million. The debt-to-total-capital ratio increased to 40.7% from 37.3%.
Share repurchases were minimal ($50 milliond, all in October 2008), with $621 million left on the authorization. The $0.29 quarterly dividend was maintained. Investors should weigh the cyclical trough against the risks the filing flags: a pension funding and expense increase (estimated 2010 pension expense of $71.2 million, up about $38.5 million), credit rating outlooks that are negative at S&P and Fitch, ongoing legacy litigation (Rocky Flats, the McGregor NWIRP claim, asbestos, and an FCPA investigation), and an ERP rollout that continues through 2013.
02—Key points
Key Highlights
- Sales fell 24% to $4,332.5 million (organic decline of 19%), with Architecture & Software down 29% and Control Products & Solutions down 20%.
- Income from continuing operations declined 62% to $217.9 million; diluted EPS from continuing operations was $1.53 versus $3.90 in 2008, including $0.29 per share of restructuring charges.
- Segment operating margins compressed to 12.9% (Architecture & Software, down 11.3 points) and 7.9% (Control Products & Solutions, down 5.5 points).
- Free cash flow remained strong at $430.8 million, and cash and equivalents increased to $643.8 million with no commercial paper outstanding.
- Shareowners' equity dropped to $1,316.4 million from $1,688.8 million, driven by a $360.3 million after-tax pension-related reduction; the debt-to-capital ratio rose to 40.7%.
- The $1.16 annual dividend was maintained, while buybacks were minimal in 2009 ($50.0 million, all in October 2008), with $621.2 million remaining on the authorization.
- Credit ratings carry negative outlooks at S&P (A/A-1) and Fitch (A/F1), and estimated 2010 pension expense rises to $71.2 million from $32.7 million.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2009, Rockwell Automation kept $0.05.
- Revenue$4.33B100.0%
- Cost of revenue−$2.76B63.8%
- Gross profit$1.57B36.2%
- Operating costs−$1.35B31.2%
- Operating income$217.9M5.0%
- Interest, other & tax$2.8M0.1%
- Net income$220.7M5.1%
Where FY2009 revenue went
$4.33B- Cost of revenue: $2.76B, 64% of revenue
- SG&A: $1.23B, 28% of revenue
- Operating income: $217.9M, 5.0% of revenue
- R&D: $170.0M, 3.9% of revenue
Kept 5.0% as operating incomeOperating income $217.9M · 5.0%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2009filed November 18, 2009Financial Statements
FY2009 against FY2008
| Line item | FY2009FY2008 | Change |
|---|---|---|
| Revenue | $4.33B$5.70B | −24.0% |
| Cost of Revenue | $2.76B$3.36B | −17.7% |
| Gross Profit | $1.57B$2.34B | −32.9% |
| R&D Expenses | $170.00M$191.30M | −11.1% |
| SG&A Expenses | $1.23B$1.48B | −17.1% |
| Operating Income | $217.90M$577.60M | −62.3% |
| Interest Expense | $60.90M$68.20M | −10.7% |
| Net Income | $220.70M$577.60M | −61.8% |
| EPS (Basic) | $1.56$3.94 | −60.4% |
| EPS (Diluted) | $1.55$3.89 | −60.2% |
| Shares Outstanding (Basic) | 141.60M146.50M | −3.3% |
| Shares Outstanding (Diluted) | 142.40M148.10M | −3.8% |
05—Questions
Frequently Asked Questions
How severe was the revenue decline, and did it show signs of stabilizing?
Sales declined 24% to $4.33 billion, with organic sales down 19% and currency translation contributing about 5 points of the decline. Declines were broad-based across regions: U.S. sales fell 22% organically, Canada 28%, EMEA 19%, Asia-Pacific 11%, and Latin America 6%. Management noted that products-business demand began to stabilize in the latter part of the year and that sales grew sequentially in Q4 2009, but it said the outlook for manufacturing investment remains uncertain.
Why did earnings fall so much more than sales?
Operating leverage on lost volume was the main driver. Income from continuing operations fell 62%, mainly due to the significant drop in sales volume. Inflation, unfavorable currency effects, and $60.4 million of restructuring charges also contributed. Cost reductions, lower interest expense ($60.9 million versus $68.2 million), and a lower effective tax rate of 20.4% (versus 28.6%) partially offset these pressures.
Is the dividend safe, and how is the company returning cash to shareholders?
The company paid $1.16 per share in dividends in 2009, unchanged from 2008 and 2007, at a current quarterly rate of $0.29. Dividends totaled $164.5 million. Share repurchases were sharply reduced to $50.0 million in 2009, all made in October 2008, versus $355.1 million in 2008. The company has $621.2 million left under its authorization, and future buybacks depend on business conditions, free cash flow, and stock price. Free cash flow of $430.8 million covered the dividend about 2.6 times.
What are the main balance sheet and pension risks?
Shareowners' equity fell to $1.32 billion because of a $360.3 million after-tax pension-related reduction, and retirement benefit liabilities rose to $848.9 million from $386.8 million. Pension expense is projected to rise to about $71.2 million in 2010 as the U.S. discount rate falls to 6.20%. Management estimates a 25-basis-point change in the discount rate would change the U.S. projected benefit obligation by about $69.3 million. The debt-to-capital ratio increased to 40.7%, and S&P and Fitch have negative outlooks on the company's credit ratings, though liquidity remains supported by $535 million of committed credit facilities.
What material legal and contingent liabilities does the company face?
The most significant items are: the Rocky Flats matter, where a court entered a $598 million judgment against RIC (Rockwell's predecessor) that is on appeal and is being covered by a DOE indemnity; a DOJ claim over more than $50 million in McGregor, Texas environmental cleanup costs, for which exposure cannot yet be estimated; asbestos lawsuits involving thousands of claimants, which the company does not believe are material; and an FCPA investigation with the DOJ and SEC, which the company does not expect to be material. Management believes none of these will have a material adverse effect on financial condition, but the outcomes are uncertain.
06—Continue