SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
Rockwell Automation, Inc.(Exact name of registrant as specified in its charter)
(Office of the Corporate Secretary)
Rockwell International Corporation(Former name, former address and formal fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
185,375,288 shares of registrant’s Common Stock, $1.00 par value, were outstanding on April 30, 2002.
TABLE OF CONTENTS
ROCKWELL AUTOMATION, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEET(UNAUDITED)(IN MILLIONS)
See Notes to Condensed Consolidated Financial Statements.
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CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS(UNAUDITED)(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
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CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS(UNAUDITED)(IN MILLIONS)
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles which require the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. The Company believes the following are the critical accounting policies which could have the most significant effect on the Company’s reported results and require the most difficult, subjective or complex judgments by management. Unless otherwise noted, the Company has not made any changes in estimates or assumptions since September 30, 2001 that had a significant effect on the reported amounts.
Revenue Recognition
Sales are generally recorded when all of the following have occurred: an agreement of sale exists, product delivery and acceptance has occurred or services have been rendered, pricing is fixed or determinable, and collection is reasonably assured. Management is required to make judgments about whether the pricing is fixed and determinable and whether or not collectibility is reasonably assured.
The Company records accruals for sales rebates to distributors at the time of shipment based upon historical experience. Changes in such allowances may be required if future rebates differ from historical experience.
Allowance for Doubtful Accounts
The Company records allowances for doubtful accounts based on customer-specific analysis, and general matters such as current assessments of past due balances and economic conditions. Additional allowances for doubtful accounts may be required if there is deterioration in past due balances, if economic conditions are less favorable than the Company has anticipated or for customer-specific circumstances, such as bankruptcy.
Excess and Obsolete Inventory
The Company records inventory allowances for excess and obsolete inventory based on historical and estimated future demand and market conditions. Additional inventory allowances may be required if future demand or market conditions are less favorable than the Company has projected.
Impairment of Long-Lived Assets
The Company evaluates the recoverability of the carrying amount of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. The Company evaluates the recoverability of goodwill and other intangible assets with indefinite useful lives annually or more frequently if events or circumstances indicate that an asset might be impaired. The Company uses judgment when applying the impairment rules to determine when an impairment test is necessary. Factors the Company considers which could trigger an impairment review include significant underperformance relative to historical operating results or forecasted operating results, a significant decrease in the market value of an asset, a significant change in the extent or manner in which an asset is used, and significant negative industry or economic trends.
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Impairment of Long-Lived Assets (Continued)
Impairment losses are measured as the amount by which the carrying value of an asset exceeds its estimated fair value. The Company is required to make estimates of its future cash flows related to the asset subject to review. These forecasts require assumptions about demand for the Company’s products and services, future market conditions and technological developments. Other assumptions include determining the discount rate and future growth rates. Changes to these assumptions could result in an impairment charge in future periods.
Product Warranty Obligations
The Company records a liability for product warranty obligations at the time of sale to a customer based upon historical warranty experience. The Company also records a liability for specific warranty matters when they become known and are reasonably estimable. Additional provision for product warranty obligations may be required if actual product performance is less favorable than anticipated.
Retirement Benefits
Pension obligations are actuarially determined and are affected by assumptions including discount rate and assumed annual rate of compensation increase for plan employees, among other assumptions. Changes in discount rate and differences from actual results for each assumption as well as the actual return on plan assets compared to the expected rate of return on plan assets will affect the amount of pension expense recognized in future periods. In 2002, based on an annual review of actuarial assumptions which includes review of economic indicators for the expected long-term rate of return on plan assets, the Company reduced its long-term expected rate of return on plan assets from 9.75 percent to 9.0 percent for the pension plan covering most of its employees; all other factors being equal, this change will result in incremental pension expense in 2002 of approximately $8 million. The obligation for postretirement benefits other than pension is also actuarially determined and is affected by assumptions including the discount rate and expected future increase in per capita costs of covered postretirement health care benefits. Changes in the discount rate and differences between actual and assumed per capita health care costs may affect the recorded amount of the expense in future periods.
Self-Insurance Liabilities
The Company’s self-insurance programs include health care, product liability, and workers’ compensation. For product liability and workers’ compensation, the Company self-insures from the first dollar of loss up to specified retention levels. Eligible losses in excess of self-insurance retention levels and up to stated limits of liability are covered by policies purchased from third-party insurers. The aggregate self-insurance liability is estimated using the Company’s claim experience and risk exposure levels for the periods being valued. Adjustments to the self-insured liabilities may be required to reflect emerging claims experience and other factors such as inflationary trends or jury awards.
Litigation, Claims and Contingencies
The Company records environmental liabilities based on estimates for known environmental remediation exposures utilizing information received from independent environmental consultants. The liabilities include accruals for sites owned by the Company and third-party sites where the Company was determined to be a potentially responsible party. At third-party sites where more than one potentially responsible party has been identified, the Company records a liability for its estimated allocable share of costs related to its involvement with the site as well as an estimated allocable share of costs related to the involvement of insolvent or unidentified parties. At environmental sites in which the Company is the only responsible party, a liability is recorded for the total estimated costs of remediation. Costs of future expenditures for environmental remediation obligations are not discounted to their present value. Environmental liability estimates may be affected by changing determinations of what constitutes an environmental exposure or an acceptable level of cleanup. To the extent that remediation procedures change or the financial condition of other potentially responsible parties are adversely affected, the estimate of the Company’s environmental liabilities may change.
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Income Taxes
At the end of each interim reporting period, the Company estimates the effective tax rate expected to be applicable for the full fiscal year. The estimated effective tax rate contemplates the expected jurisdiction where income is earned (e.g. United States compared to non-United States) as well as tax planning strategies. If the actual jurisdiction varies from the Company’s expectations or if the results of tax planning strategies are different from the Company’s estimates, adjustments to the effective tax rate may be required in the period such determination is made.
The Company records a liability for potential tax assessments based on its estimate of the potential exposure. Due to the subjectivity and complex nature of the underlying issues, actual payments or assessments may differ from estimates. To the extent the Company’s estimates differ from actual payments or assessments, income tax expense is adjusted.
The Company has recorded a valuation allowance for substantially all of its deferred tax assets related to foreign tax credit carryforwards and net operating loss carryforwards. The valuation allowance is based on an evaluation of the uncertainty of the amount of foreign tax credit carryforwards and net operating loss carryforwards that are expected to be realized. The carryforward period for the majority of the net operating losses is indefinite. The carryforward for all the foreign tax credits ends in 2002. An adjustment to income could be required if the Company determines it could utilize more foreign tax credit carryforwards or net operating loss carryforwards than originally expected.
RESULTS OF OPERATIONS
The Company’s sales and operating earnings by segment, excluding intersegment sales, are summarized below (in millions).
2002 Second Quarter Compared to 2001 Second Quarter
Sales were $958 million in the second quarter of 2002 compared to $1,170 million in the second quarter of 2001. Income from continuing operations before accounting change for the second quarter of 2002 was $58 million, or 31 cents per diluted share, which includes a tax benefit from the favorable resolution of certain tax matters of $18 million, or 10 cents per diluted share, compared to $71 million, or 38 cents per diluted share, for the second quarter of 2001. On a comparable basis (excluding amortization of goodwill and certain other intangible assets), 2001 second quarter earnings would have been $83 million, or 44 cents per diluted share.
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Control Systems
Control Systems’ sales in the 2002 second quarter were $749 million compared to $898 million in the 2001 second quarter. The decrease was primarily the result of depressed market conditions relative to the prior year for automation products in the United States, where sales declined 20 percent. International shipments (which exclude the effect of foreign currency translation) declined five percent compared to last year’s second quarter primarily as a result of a decrease of seven percent in Europe. Despite the overall sales decline, sales in the Global Manufacturing Solutions business increased two percent, Logix™ integrated architecture product sales increased 21 percent and Process Solutions sales increased 90 percent compared to the 2001 second quarter.
On a sequential basis, sales were $26 million, or four percent, higher than first quarter 2002 sales of $723 million, due primarily to strengthening business conditions in North America and Europe. Sales in North America and Europe each increased six percent from the first quarter of 2002.
Segment operating earnings were $81 million in the 2002 second quarter compared to $142 million in the 2001 second quarter. The decline was due primarily to lower volume, especially in higher margin component and platform products. On a sequential basis, segment operating earnings increased $14 million from $67 million in the 2002 first quarter due primarily to increased volume. Control Systems’ return on sales for the second quarter of 2002 was 10.8 percent compared to 15.8 percent in the second quarter of 2001 and 9.3 percent in the first quarter of 2002.
Power Systems
Power Systems’ sales in the 2002 second quarter were $176 million compared to $212 million in the 2001 second quarter. On a sequential basis, sales were flat compared to first quarter 2002 sales, with a small increase in motors sales offsetting a small decrease in mechanical sales. Segment operating earnings were $12 million in the 2002 second quarter compared to $19 million in the 2001 second quarter. The decline was due primarily to lower volume. Segment operating earnings improved by $1 million from the first quarter of 2002. Power Systems’ return on sales for the second quarter of 2002 was 6.8 percent compared to 9.0 percent in the second quarter of 2001 and 6.2 percent in the first quarter of 2002.
FirstPoint Contact
Sales at FirstPoint Contact (formerly Electronic Commerce) were $33 million in the 2002 second quarter compared to $40 million in the 2001 second quarter. Segment operating earnings were $1 million in the 2002 second quarter compared to $5 million in the 2001 second quarter. The decline was due primarily to the lower sales volume.
Interest Expense
Interest expense was $17 million in the second quarter of 2002 compared to $28 million in the second quarter of 2001. The $11 million decrease was due to lower average borrowings and lower weighted average commercial paper borrowing rates.
Six Months Ended March 31, 2002 Compared To Six Months Ended March 31, 2001
Sales in the first six months of 2002 were $1,897 million compared to $2,282 million in the first six months of 2001. Income from continuing operations before accounting change in the first six months of 2002 was $87 million, or 46 cents per diluted share, compared to $140 million, or 76 cents per diluted share, for the first six months of 2001. On a comparable basis (excluding amortization of goodwill and certain other intangible assets), earnings in the first six months of 2001 would have been $163 million, or 88 cents per diluted share. After the effect of the SFAS 142 accounting change, the net loss for the first six months of 2002 was $18 million, or 10 cents per diluted share.
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Control Systems’ sales in the first six months of 2002 were $1,472 million compared to $1,776 million in the first six months of 2001. The decrease was primarily the result of depressed market conditions relative to the prior year for automation products in the United States, where sales declined 21 percent. International shipments (which exclude the effect of foreign currency translation) declined seven percent compared to the first six months of 2001 primarily as a result of a decrease in sales of 12 percent in Europe. Despite the overall sales decline, sales of Logix™ integrated architecture products increased 28 percent and sales in the Global Manufacturing Solutions business were three percent above the first six months in 2001.
Segment operating earnings were $148 million compared to $286 million in the first six months of 2001. The decline was due primarily to lower volume. Control Systems’ return on sales for the first six months of 2002 was 10.1 percent compared to 16.1 percent in the first six months of 2001.
Power Systems’ sales in the first six months of 2002 were $354 million compared to $394 million in the first six months of 2001. Segment operating earnings in the first six months of 2002 were $23 million compared to $28 million in the same period a year ago. The decline was due primarily to lower volume. Power Systems’ return on sales for the first six months of 2002 was 6.5 percent compared to 7.1 percent in the first six months of 2001.
FirstPoint Contact’s sales in the first six months of 2002 were $71 million compared to $74 million in the first six months of 2001. Segment operating earnings in the first six months of 2002 and 2001 were $3 million. FirstPoint Contact’s return on sales for the first six months of 2002 was 4.2 percent compared to 4.1 percent in the first six months of 2001.
General Corporate-Net
General corporate expenses were $34 million in the first six months of 2002 compared to $31 million in the first six months of 2001. Excluding a gain on sale of land in 2001, general corporate expenses were consistent with the first six months of 2001.
Interest expense was $33 million in the first six months of 2002 compared to $46 million in the first six months of 2001. The decrease was due to lower average borrowing and lower commercial paper borrowing rates.
Rockwell Scientific Company LLC
Effective June 29, 2001, the Company and Rockwell Collins, Inc. each owns 50 percent of Rockwell Scientific Company LLC (RSC) (formerly known as Rockwell Science Center). Beginning with the fourth quarter of 2001, the Company’s 50 percent ownership interest in RSC is accounted for using the equity method, and the Company’s proportional share of RSC’s earnings or losses are included in general corporate-net.
The effective income tax rate, excluding the $18 million (or 10 cents per diluted share) benefit from the resolution of tax matters, for the first six months of 2002 of 26.6 percent was lower than the 31.4 percent for the same period in 2001. The lower effective income tax rate reflects the effect of ceasing amortization of goodwill and trademarks in the first quarter of 2002 as a result of adopting Statement of Financial Accounting Standard (SFAS) No. 142,Goodwill and Other Intangible Assets (SFAS 142). The effective income tax rate would have been 30.0 percent had the Company continued to amortize its goodwill and trademarks.
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Accounting Change
Effective October 1, 2001, the Company adopted SFAS 142. This standard requires that companies no longer amortize goodwill and indefinite life intangible assets, such as trademarks. This standard also requires that companies evaluate goodwill and indefinite life intangible assets for impairment. As a result of this analysis, the Company recorded charges of $56 million ($35 million after-tax, or 19 cents per diluted share) related to a trademark impairment and $73 million (before and after-tax, or 39 cents per diluted share) related to goodwill impairment at a Power Systems reporting unit.
Recent Accounting Pronouncements
The Company adopted Emerging Issues Task Force (EITF) Issue No. 00-10,Accounting for Shipping and Handling Fees and Costs, on July 1, 2001 and EITF Issue No. 01-14, Income Statement Characterization of Reimbursements Received for “Out of Pocket” Expenses Incurred, on January 1, 2002. These standards require the Company to classify as sales certain amounts billed to customers that have historically been classified as a reduction of cost of sales. Accordingly, the Company has reclassified an aggregate of $7 million in the three months ended March 31, 2001, and an aggregate of $12 million in the six months ended March 31, 2001 from cost of sales to sales.
Information with respect to accounting pronouncements which have been issued but not yet adopted by the Company is contained in Note 2 of the Notes to Condensed Consolidated Financial Statements.
Business Outlook
Although sequential sales growth was higher than expected for the second quarter of fiscal 2002, management has yet to see evidence of a sustainable recovery in the industrial economy. While management is seeing some indications that business conditions are starting to improve, the Company continues to operate in an uncertain economic environment. Management is assuming modest sequential sales growth in the third quarter of 2002 and expects earnings per share in the range of 25 to 27 cents per diluted share.
FINANCIAL CONDITION
Cash provided by operating activities was $149 million for the six months ended March 31, 2002 compared to $148 million for the same period in 2001. Free cash flow was $102 million for the six months ended March 31, 2002, after a $24 million contribution made to the Company’s qualified pension plan trust related to the spinoff of Rockwell Collins, compared to $80 million for the same period in 2001. The increase in free cash flow was the result of working capital improvements, particularly related to accounts receivable and inventory, along with a decrease in capital expenditures. The Company defines free cash flow, which is used as an internal performance measurement, as cash provided by operating activities reduced by capital expenditures. The Company’s definition of free cash flow may be different from definitions used by other companies.
Cash used for investing activities was $102 million for the six months ended March 31, 2002 compared to $61 million for the same period in 2001. The increase is the result of the acquisitions of Propack Data GmbH and Tesch GmbH in the second quarter of 2002, partially offset by lower capital expenditures in the first six months of 2002 compared to the same period in 2001. The decrease in capital expenditures was in response to less favorable business conditions in the first half of 2002 compared to the same period in 2001. Capital expenditures in 2002 are expected to be $125 million but the Company anticipates that they could be lower if business conditions do not improve.
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FINANCIAL CONDITION (CONTINUED)
Cash provided by financing activities was $44 million for the six months ended March 31, 2002. Debt increased $90 million from September 30, 2001 to March 31, 2002 principally to fund the acquisitions, the pension contribution, and the payment of certain obligations related to discontinued businesses in the second quarter of 2002. The Company did not repurchase any of its shares in the first six months of 2002 compared to $63 million of purchases in the same period of 2001. At March 31, 2002 the Company had approximately $104 million remaining on its current $250 million stock repurchase program.
Future significant uses of cash are expected to include property additions, dividends to shareowners and acquisitions. In addition, the Company’s $150 million of 6.8% notes mature in April 2003. It is expected that each of these future uses of cash will be funded by cash generated by operating activities and commercial paper borrowings, or a new issue of debt or other securities.
The Company elects to utilize commercial paper markets as its principal source of short-term financing. As of March 31, 2002, the Company had an outstanding commercial paper balance of $90 million. The weighted average interest rate on those borrowings was 2.0 percent. During the quarter ended March 31, 2002, the Company had average borrowings of $75 million under its commercial paper program. During the six months ended March 31, 2002, the Company had average borrowings of $65 million under its commercial paper program.
As of March 31, 2002, the Company had $1 billion of unsecured committed credit facilities available to support its commercial paper borrowings. These credit facilities expire December 5, 2002. Prior to that date, the Company expects to enter into similar types of facilities with a group of banks in an amount deemed sufficient to support its operations. Outstanding commercial paper balances reduce the amount of available borrowings under the unsecured committed credit facilities.
The Company’s current commercial paper credit ratings are as follows: Moody’s (P-2), Standard & Poor’s (A-1) and Fitch (F-1). Should the Company’s access to the commercial paper market be adversely affected due to a change in market conditions or otherwise, the Company would expect to rely on a combination of available cash and the unsecured committed credit facilities to provide short-term funding. In such event, the cost of borrowings under the unsecured committed credit facilities could be higher than the cost of commercial paper borrowings.
ENVIRONMENTAL
Information with respect to the effect on the Company and its manufacturing operations of compliance with environmental protection requirements and resolution of environmental claims is contained on pages 41 and 42 in Note 18 of the Notes to Consolidated Financial Statements in Item 8, Consolidated Financial Statements and Supplementary Data, of the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2001. Management believes that at March 31, 2002, there has been no material change to this information.
CAUTIONARY STATEMENT
This Quarterly Report contains statements (including certain projections and business trends) accompanied by such phrases as “believes”, “expects”, “anticipates”, and other similar expressions, that are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected as a result of certain risks and uncertainties, including but not limited to economic and political changes in international markets where the Company competes, such as currency exchange rates, inflation rates, recession, foreign ownership restrictions and other external factors over which the Company has no control; demand for and market acceptance of new and existing products, including levels of capital spending in industrial markets; successful development of advanced technologies; competitive product and pricing pressures; future terrorist attacks; and the uncertainties of litigation, as well as other risks and uncertainties, including but not limited to those detailed from time to time in the Company’s Securities and Exchange Commission filings. These forward-looking statements are made only as of the date hereof, and the Company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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