01—Abstract
Summary
Summary of the 10-K filed November 18, 2010. Cited figures are marked; the original filing is the authoritative source.
Rockwell Automation (ROK) reported a strong fiscal 2010 rebound after the 2009 recession.
Sales rose 12% to $4.86 billiona, with organic growth of 10% and a 2-point currency benefit. Income from continuing operations more than doubled to $440.4 million, and diluted EPS from continuing operations rose to $3.05 from $1.53. Gross margin expanded 3.7 points to 39.9%, helped by volume recovery, roughly $120 million of savings from 2009 restructuring, and a favorable mix shift toward the higher-margin Architecture & Software segment, whose operating margin climbed to 22.5%.
Cash generation and balance sheet items were mixed. Operating cash flow fell to $494.0 million and free cash flow declined to $410.7 millionb, mainly because of a discretionary $150 million U.S. pension contribution and a working capital build in inventory and receivables. Shareholders received $173.6 million in dividends, and the company repurchased about $120 million of stock.
The board raised the quarterly dividend 21% to $0.35c, and about $501 million remained under the buyback authorization. Commercial paper was undrawn, $567.5 million of revolving credit capacity was available, and the company was rated A/A3/A.
Key risks include pension expense rising to an expected $90.9 milliond in 2011, the ongoing DOJ claim over the McGregor, Texas environmental site (cleanup costs above $50 million, with no exposure estimate given), asbestos litigation, an open SEC negotiation over Foreign Corrupt Practices Act matters, and heavy dependence on distributors, which handle about 90% of U.S. and Canadian sales. Management expects 2011 capital expenditures of about $120 million and continued revenue growth against its 6-8% long-term target.
02—Key points
Key Highlights
- Sales rose 12% to $4,857.0 million in fiscal 2010, with organic growth of 10% and currency adding 2 points; Architecture & Software grew 23% and Control Products & Solutions grew 5%.
- Diluted EPS from continuing operations more than doubled to $3.05 (from $1.53), and income from continuing operations rose to $440.4 million.
- Gross profit margin expanded 3.7 points to 39.9%, aided by volume, about $120 million of restructuring savings, and favorable mix toward higher-margin Architecture & Software (22.5% segment operating margin).
- Free cash flow declined to $410.7 million from $430.8 million, reflecting a discretionary $150 million U.S. pension contribution and a working capital build; operating cash flow was $494.0 million.
- Capital returns continued: $173.6 million in dividends (quarterly rate raised 21% to $0.35) and about $120 million in share repurchases, with roughly $501 million left under the authorization.
- Balance sheet is solid: $813.4 million cash, no commercial paper outstanding, $567.5 million of undrawn revolving credit capacity, debt-to-capital of 38.3%, and A/A3/A credit ratings.
- Legal and pension exposures to monitor: a DOJ claim over the McGregor, Texas site (cleanup costs above $50 million, exposure not estimable), asbestos suits, an open SEC FCPA negotiation, and pension expense rising to about $90.9 million in 2011.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2010, Rockwell Automation kept $0.10.
- Revenue$4.86B100.0%
- Cost of revenue−$2.92B60.1%
- Gross profit$1.94B39.9%
- Operating costs−$1.50B30.8%
- Operating income$440.4M9.1%
- Interest, other & tax$23.9M0.5%
- Net income$464.3M9.6%
Where FY2010 revenue went
$4.86B- Cost of revenue: $2.92B, 60% of revenue
- SG&A: $1.32B, 27% of revenue
- Operating income: $440.4M, 9.1% of revenue
- R&D: $198.9M, 4.1% of revenue
Kept 9.1% as operating income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2010filed November 18, 2010Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $4.86B$4.33B | +12.1% |
| Cost of Revenue | $2.92B$2.76B | +5.7% |
| Gross Profit | $1.94B$1.57B | +23.4% |
| R&D Expenses | $198.90M$170.00M | +17.0% |
| SG&A Expenses | $1.32B$1.23B | +7.8% |
| Operating Income | $440.40M$217.90M | +102.1% |
| Interest Expense | $60.50M$60.90M | −0.7% |
| Net Income | $464.30M$220.70M | +110.4% |
| EPS (Basic) | $3.26$1.56 | +109.0% |
| EPS (Diluted) | $3.22$1.55 | +107.7% |
| Shares Outstanding (Basic) | 142.00M141.60M | +0.3% |
| Shares Outstanding (Diluted) | 144.00M142.40M | +1.1% |
05—Questions
Frequently Asked Questions
What drove Rockwell Automation's earnings rebound in fiscal 2010?
Sales volume recovered as industrial production improved, with organic sales up 10%. Restructuring savings of about $120 million from 2009 actions, lower restructuring charges (about $60 million less than in 2009), and a mix shift toward higher-margin Architecture & Software all contributed. Those gains were partly offset by roughly $200 million of higher employee compensation and $41 million of higher pension and postretirement expense.
Why did free cash flow decline in 2010 despite higher earnings?
Free cash flow fell to $410.7 million from $430.8 million. The main causes were a discretionary $150 million pre-tax contribution to the U.S. pension trust and a working capital increase, mostly inventory and receivables, that restored working capital to levels consistent with current demand. Incentive payments were lower than normal in 2010 and partly offset the decline.
How much pension and legal risk does Rockwell carry?
Global pension expense rose to $75.0 million in 2010 and is expected to reach about $90.9 million in 2011. The U.S. discount rate falls to 5.60%, which will raise costs. Litigation includes the DOJ's claim over the McGregor, Texas NWIRP site, where the DOJ says it has spent over $50 million on cleanup; Rockwell says it cannot estimate its exposure. Asbestos suits are ongoing but are largely defended, and the SEC FCPA matter remains under negotiation. Management does not believe any of these will have a material adverse effect.
Is Rockwell's dividend and buyback capacity intact?
Yes. The quarterly dividend was increased 21% to $0.35 ($1.40 annualized), and 2010 dividends totaled $1.22 per share. The company repurchased about 2.2 million shares for $120 million in 2010 and had roughly $501 million remaining under its authorization. Management noted that future repurchases depend on business conditions, free cash flow, other cash needs, and stock price.
How concentrated are Rockwell's sales channels and geographies?
In the U.S. and Canada, about 90% of sales go through independent distributors, and the largest distributor accounts for about 10% of total sales. The United States represents 51% of 2010 sales, with the remainder spread across Canada, EMEA, Asia-Pacific and Latin America. Emerging markets exceeded 20% of total sales. Distributor disruption and international risks are highlighted as material risk factors.
06—Continue