Rockwell Automation - 10-Q quarterly report FY

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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.

(Office of the Corporate Secretary)

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.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

185,663,153 shares of registrant’s Common Stock, $1.00 par value, were outstanding on January 31, 2003.

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PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

ROCKWELL AUTOMATION, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

See Notes to Condensed Consolidated Financial Statements.

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CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

See Notes to Condensed Consolidated Financial Statements.

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CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

See Notes to Condensed Consolidated Financial Statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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ROCKWELL AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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INDEPENDENT ACCOUNTANTS’ REPORT

To the Board of Directors and Shareowners of
Rockwell Automation, Inc.:

We have reviewed the accompanying condensed consolidated balance sheet of Rockwell Automation, Inc. and subsidiaries (the “Company”) as of December 31, 2002, and the related condensed consolidated statements of operations and cash flows for the three-month periods ended December 31, 2002 and 2001. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to such condensed consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of the Company as of September 30, 2002, and the related consolidated statements of operations, shareowners’ equity, cash flows, and comprehensive income for the year then ended (not presented herein); and, in our report dated November 6, 2002, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of September 30, 2002 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

DELOITTE & TOUCHE LLP

Milwaukee, Wisconsin
February 4, 2003

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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 accounting principles generally accepted in the United States 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. Information with respect to the Company’s critical accounting policies which the Company believes could have the most significant effect on the Company’s reported results and require subjective or complex judgments by management is contained on pages 14-16 in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2002. Management believes that at December 31, 2002, there has been no material change to this information.

RESULTS OF OPERATIONS

The Company’s sales and operating earnings by segment, excluding intersegment sales, are summarized below (in millions).

Demand for the Company’s products is largely driven by trends in industrial spending. Sales are affected by the level of industrial production activity, customers’ new product introductions, upgrades and expansions of existing manufacturing facilities and the creation of new manufacturing facilities. Due to recent weak business conditions, especially in the manufacturing economy, manufacturers have been operating at historically low levels of plant capacity utilization. This condition results in the tendency to defer significant amounts of capital investment until the environment improves. Capacity utilization in the United States, as published by the Federal Reserve, remains at historically low levels and decreased from 75.5 percent in September 2001 to 75.4 percent in December 2002. However, manufacturing activity in the United States showed some improvement in December 2002 as reflected in the purchasing managers’ index (PMI), as published by the Institute for Supply Management (ISM), which increased to 54.7 percent in December 2002 from 46.2 percent in September 2001. According to the ISM, a PMI measure above 50 percent indicates that the manufacturing economy is generally expanding while a measure below 50 percent indicates that it is generally contracting. Consistent with these economic indicators, demand for the Company’s products has showed some improvement in the first quarter of 2003. The Company continues to assess the state of the global manufacturing environment.

2003 First Quarter Compared to 2002 First Quarter

Sales were $984 million in the first quarter of 2003 compared to $939 million in the first quarter of 2002. Income before cumulative effect of accounting change for the first quarter of 2003 was $42 million, or 22 cents per diluted share, compared to $29 million, or 16 cents per diluted share, for the first quarter of 2002. The first quarter of 2002’s results included a charge of $129 million ($108 million after tax, or 58 cents per diluted share) related to the adoption of Statement of Financial Accounting Standards (SFAS) No. 142,Goodwill and Other Intangible Assets (SFAS 142), which resulted in a net loss of $79 million (42 cents per diluted share).

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Control Systems

Control Systems’ sales in the 2003 first quarter were $787 million compared to $723 million in the 2002 first quarter. Sales increased approximately 6 percent in North America, with relative strength in the automotive, food and beverage, and life sciences industries. In addition, Logix™ integrated architecture product sales continued to exhibit strong growth, with an increase of 37 percent over the first quarter of 2002. Global Manufacturing Solutions’ sales for the first quarter of 2003, which included the revenues from the acquisition of Propack Data, increased 8 percent over the first quarter of 2002. International shipments (which exclude the effect of foreign currency translation) increased 12 percent compared to last year’s first quarter, led by a 27 percent increase in Asia Pacific shipments. International shipments (excluding the effect of acquisitions) increased 7 percent over the first quarter of 2002.

Segment operating earnings of $86 million in the 2003 first quarter were $19 million higher than in the 2002 first quarter due to higher sales volume. Control Systems’ return on sales for the first quarter of 2003 was 10.9 percent compared to 9.3 percent for the first quarter of 2002 driven by an increase in sales volume in higher margin products.

Power Systems

Power Systems’ sales in the 2003 first quarter were $171 million compared to $178 million in the 2002 first quarter. Electrical sales decreased 3 percent versus the first quarter of 2002, while Mechanical sales decreased 5 percent. Segment operating earnings were $8 million in the 2003 first quarter compared to $11 million in the 2002 first quarter. The decrease resulted from lower sales volume. Power Systems’ return on sales for the first quarter of 2003 was 4.7 percent compared to 6.2 percent for the first quarter of 2002.

FirstPoint Contact

FirstPoint Contact’s sales were $26 million in the 2003 first quarter compared to $38 million in the 2002 first quarter. The decrease is primarily due to continued decreased customer capital spending for telecommunication products. Segment operating earnings were break even in the 2003 first quarter compared to $2 million in the 2002 first quarter. Reduced spending and savings from cost reduction actions partially offset the effect of the lower sales volume.

General Corporate-Net

General corporate expenses were $12 million in the first quarter of 2003 compared to $18 million in the first quarter of 2002. Expenses were lower as a result of lower corporate staff costs and an increase of approximately $2 million in the earnings from the Company’s investment in Rockwell Scientific Company LLC.

Income Taxes

The effective income tax rate for the first three months of 2003 was 30.0 percent compared to 26.6 percent for the same period in 2002. The increase in the effective tax rate is primarily due to higher projected 2003 pre-tax income and utilization in 2002 of foreign tax credit carryforwards. In the second quarter of 2003, the Company anticipates filing a federal research and experimentation credit refund claim for the years 1997 through 2001. Based on preliminary discussions with the Internal Revenue Service (IRS) in the first quarter of 2003, the maximum benefit of the claim is currently estimated to be $70 to $75 million. Certain aspects have been tentatively agreed to with the IRS as a result of the discussions; however, the ultimate claim amount will be subject to audit by the IRS. As the ultimate resolution of this claim is not currently known, no benefit has been recognized for financial reporting purposes.

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Accounting Change

Effective October 1, 2001, the Company adopted SFAS 142. This standard requires that companies no longer systematically amortize goodwill and indefinite life intangible assets, such as trademarks. This standard also requires that companies annually evaluate goodwill and indefinite life intangible assets for impairment. As a result of the transitional impairment test performed upon adoption, in 2002 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. The Company will perform its annual evaluation of goodwill and indefinite life intangible assets for impairment during the second quarter of 2003.

Business Outlook

The pace of the recovery in the global manufacturing sector continues to be uneven. While customer demand showed some improvement in the first quarter of 2003, it is not yet clear whether this is a sustainable trend. Barring any economic disruption, management believes that the Company’s markets will remain generally stable for the remainder of the fiscal year. In this environment, the Company expects to deliver earnings growth of at least 20 percent resulting in diluted earnings per share of $1.10. If business conditions improve modestly, then full year diluted earnings per share is expected to be approximately $1.20.

FINANCIAL CONDITION

The Company’s cash flows from operating, investing and financing activities, as reflected in the Condensed Consolidated Statement of Cash Flows, are summarized in the following tables (in millions):

The following table summarizes free cash flow for the Company. The Company’s definition of free cash flow, which is an internal performance measurement, may be different from definitions used by other companies.

Cash provided by operating activities was $104 million for the three months ended December 31, 2002 compared to $87 million in the same period in 2002. Free cash flow was $89 million for the three months ended December 31, 2002, an increase of $21 million from the same period in 2002. The increase in free cash flow was the result of increased earnings, along with a decrease in capital expenditures.

Cash used for investing activities was $20 million in the three months ended December 31, 2002, compared to $19 million in the three months ended December 31, 2001. The increase related to the purchase of computer numerical control (CNC) technology from Power Automation, GmbH, offset by lower capital expenditures in the 2003 first quarter compared to the 2002 first quarter. Capital expenditures in 2003 are expected to be $125 million to $150 million but management anticipates that they will be lower if business conditions deteriorate from current levels.

Cash used for financing activities was $55 million in the three months ended December 31, 2002, compared to $25 million for the same period in 2002. The Company repurchased approximately 1.4 million shares at a cost of $28 million in the first quarter of 2003, but did not repurchase shares in the same quarter of 2002. At December 31, 2002, the Company had approximately $75 million remaining on its current $250 million stock repurchase program.

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FINANCIAL CONDITION (Continued)

Future significant uses of cash are expected to include capital expenditures, dividends to shareowners, acquisitions, repurchases of common stock in connection with the Company’s stock repurchase program and may include contributions to the qualified pension plan trust. 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. In addition, the Company’s $150 million of 6.80% notes mature in April 2003. It is expected that the payment of the notes will be funded by existing cash or a combination of cash and commercial paper borrowings.

In addition to cash generated by operating activities, the Company has access to existing financing sources, including the public debt markets and unsecured credit facilities with various banks. The Company’s debt-to-total-capital ratio was 36.6 percent at December 31, 2002 and September 30, 2002.

The Company elects to utilize commercial paper markets as its principal source of short-term financing. During and at the end of the quarter ended December 31, 2002, the Company had no borrowings outstanding under its commercial paper program.

As of December 31, 2002, the Company had $675 million of unsecured committed credit facilities available to support its commercial paper borrowings, $337.5 million expiring in October 2003 and $337.5 million expiring in October 2005. Prior to October 2003, the Company expects to enter into a new credit facility similar to the credit facility expiring at that time in an amount deemed sufficient to support its operations. The terms of the credit facility contain a covenant under which the Company would be in default if the Company’s debt to capital ratio were to exceed 60 percent. 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 (F1). 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 54 and 55 in Note 19 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, 2002. Management believes that at December 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”, “estimates”, “expect(s)”, “anticipates”, “will”, “intends” 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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CERTIFICATION OF CHIEF EXECUTIVE OFFICER

          I, Don H. Davis, Jr., Chairman of the Board and Chief Executive Officer of Rockwell Automation, Inc., certify that:

Date: February 6, 2003

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CERTIFICATION OF CHIEF FINANCIAL OFFICER

          I, Michael A. Bless, Senior Vice President and Chief Financial Officer of Rockwell Automation, Inc., certify that:

Date: February 6, 2003

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INDEX TO EXHIBITS