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).
185,328,442 shares of registrant’s Common Stock, $1.00 par value, were outstanding on March 31, 2003.
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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INDEPENDENT ACCOUNTANTS’ REPORT
To the Board of Directors and Shareowners ofRockwell Automation, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of Rockwell Automation, Inc. and subsidiaries (the “Company”) as of March 31, 2003, and the related condensed consolidated statements of operations and cash flows for the three- and six-month periods ended March 31, 2003 and 2002. 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 (such report includes an explanatory paragraph relating to the adoption of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”). 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, WisconsinApril 30, 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 March 31, 2003, 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 as follows (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. The table below depicts the trend since September 2001 in capacity utilization in the United States, as published by the Federal Reserve, and in manufacturing activity in the United States, as reflected in the purchasing managers’ index (PMI), published by the Institute for Supply Management (ISM). 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.
In this mixed environment, the Company’s business has been generally stable since the beginning of 2003.
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2003 Second Quarter Compared to 2002 Second Quarter
Sales were $1,029 million in the second quarter of 2003 compared to $958 million in the second quarter of 2002. Net income for the second quarter of 2003 was $49 million, or 26 cents per diluted share, compared to $61 million, or 33 cents per diluted share, for the second quarter of 2002. Included in the second quarter of 2003 was a charge of $8 million ($3 million after tax, or 1 cent per diluted share) related to the sale of a majority of the Company’s ownership interest in Reliance Electric Limited Japan (REJ). Last year’s second quarter net income included a tax benefit of $18 million, or 10 cents per diluted share, and a net benefit of $3 million, or 2 cents per diluted share, related to discontinued operations.
Control Systems
Control Systems’ sales in the second quarter of 2003 were $830 million, an increase of 11 percent compared to sales of $749 million in the second quarter of 2002. Approximately 4 percent of the sales growth was due to the favorable impact of currency translation, primarily resulting from the relative strength of the euro to the U.S. dollar. From a regional perspective, sales outside of the U.S. increased 22 percent (12 percent excluding currency translation). U.S. sales increased 4 percent, primarily driven by market share gains. The Logix™ and Process Solutions businesses each increased approximately 40 percent from last year’s second quarter and the Global Manufacturing Solutions business grew 12 percent compared to 2002.
Segment operating earnings of $93 million in the 2003 second quarter were $12 million higher than in the 2002 second quarter due to higher sales volume, particularly in the Logix™ business. Control Systems’ return on sales for the second quarter of 2003 was 11.2 percent compared to 10.8 percent for the second quarter of 2002.
Power Systems
Power Systems’ sales in the 2003 second quarter were $175 million compared to $176 million in the 2002 second quarter. An increase in sales in the Mechanical business of 6 percent over the second quarter of 2002 was offset by a corresponding decrease in sales in the Electrical business. Segment operating earnings were $16 million in the 2003 second quarter compared to $12 million in the 2002 second quarter. The increase resulted from continued cost reduction efforts and favorable product mix. Power Systems’ return on sales for the second quarter of 2003 was 9.1 percent compared to 6.8 percent for the second quarter of 2002.
FirstPoint Contact
FirstPoint Contact’s sales were $24 million in the 2003 second quarter compared to $33 million in the 2002 second quarter. The decrease was primarily due to continued excess capacity in the telecommunication equipment industry and weak capital spending for such products. Segment operating earnings were break even in the 2003 second quarter compared to $1 million in the 2002 second quarter. Reduced spending and savings from cost reduction actions substantially offset the effect of the lower sales volume.
General Corporate-Net
General corporate expenses were $14 million in the second quarter of 2003 compared to $16 million in the second quarter of 2002. The decrease was driven primarily by lower corporate staff costs.
Loss on Disposition of a Business
In the second quarter of 2003, the Company sold a majority of its ownership interest in REJ resulting in a loss of approximately $8 million ($3 million after tax, or 1 cent per diluted share). The after-tax loss on the sale includes a $2 million benefit resulting from the Company’s ability to utilize capital loss carryforwards for which a valuation allowance had been previously provided. The proceeds from the transaction totaled approximately $10 million, including cash of approximately $2 million received in the second quarter and a note for approximately $8 million which is due in the fourth quarter of 2003.
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Six Months Ended March 31, 2003 Compared to Six Months Ended March 31, 2002
Sales in the first six months of 2003 were $2,013 million compared to $1,897 million in the first six months of 2002. Net income in the first six months of 2003 was $91 million, or 48 cents per diluted share, compared to a net loss of $18 million, or 10 cents per diluted share, for the first six months of 2002. The first six months of 2002 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).
Control Systems’ sales in the first six months of 2003 were $1,617 million, an increase of 10 percent compared to sales of $1,472 million in the first six months of 2002. Approximately 2 percent of the sales growth was due to the favorable impact of currency translation, primarily resulting from the relative strength of the euro to the U.S. dollar. From a regional perspective, sales outside of the U.S. increased 17 percent (12 percent excluding currency translation) and U.S. sales increased 5 percent. The Company’s Logix™ business grew approximately 40 percent compared to the first six months of 2002. In addition, the Process Solutions business, including Propack Data GmbH which was acquired in March 2002, grew approximately 40 percent over the first six months of 2002.
Segment operating earnings were $179 million compared to $148 million in the first six months of 2002. The increase was due primarily to higher volume. Control Systems’ return on sales for the first six months of 2003 was 11.1 percent compared to 10.1 percent in the first six months of 2002.
Power Systems’ sales in the first six months of 2003 were $346 million compared to $354 million in the first six months of 2002. Sales in the Electrical business decreased 5 percent which was partially offset by a slight increase in sales in the Mechanical business. Segment operating earnings in the first six months of 2003 were $24 million compared to $23 million in the same period a year ago. Segment operating earnings remained stable despite the decrease in sales due to savings from cost reduction efforts. Power Systems’ return on sales for the first six months of 2003 was 6.9 percent compared to 6.5 percent in the first six months of 2002.
FirstPoint Contact’s sales in the first six months of 2003 were $50 million compared to $71 million in the first six months of 2002. The decrease was primarily due to continued decreased customer capital spending for telecommunication products. Segment operating earnings in the first six months of 2003 were break even compared to $3 million in the first six months of 2002.
General corporate expenses were $26 million in the first six months of 2003 compared to $34 million in the first six months of 2002. Expenses were lower as a result of lower corporate staff costs and an increase of approximately $2 million in earnings from the Company’s investment in Rockwell Scientific Company LLC.
Interest Expense
Interest expense was $30 million in the first six months of 2003 compared to $33 million in the first six months of 2002. The decrease was due to lower commercial paper borrowings and the benefit of an interest rate swap (see Note 7 in the Notes to Condensed Consolidated Financial Statements).
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Income Taxes
The effective income tax rate for the first six months of 2003 was 27.3 percent compared to 7.4 percent for the same period in 2002. The effective tax rate in 2003 was lower than the estimated annual rate of 30 percent as a result of the effect of the sale of a majority of the Company’s ownership interest in REJ. The effective tax rate in 2002 was reduced by an $18 million benefit from the resolution of tax matters which had the effect of decreasing the rate from 26.6 percent to 7.4 percent. The estimated annual rate of 30 percent for 2003 is higher than the comparable rate in 2002 primarily as a result of higher projected 2003 pre-tax income and utilization in 2002 of foreign tax credit carryforwards.
On March 31, 2003, the Company filed a research and experimentation credit refund claim (Claim) for the years 1997 through 2001. On April 29, 2003, the Company reached an agreement with the Internal Revenue Service with respect to the Claim for $65 million plus interest. In addition, the Company expects to realize related state tax benefits. The Claim will be offset by a reduction of federal foreign tax credits utilized in the periods covered by the Claim. The Company is in the process of quantifying the amount of federal interest, state tax benefits and the offset related to federal foreign tax credits. The Company expects to recognize in earnings in the third quarter of 2003 a net tax benefit of a minimum of $65 million associated with the Claim. The Claim is subject to the approval of the Joint Committee on Taxation of the United States Congress and the state tax benefits are subject to approval by the various state tax authorities. The majority of the cash proceeds from the Claim are expected to be received upon the conclusion of the current federal audit cycle, which is expected to be in 2005.
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 performed its annual evaluation of goodwill and indefinite life intangible assets for impairment during the second quarter of 2003 and concluded that no impairments existed.
Recent Accounting Pronouncements
See Note 2 in the Notes to Condensed Consolidated Financial Statements regarding recent accounting pronouncements.
Business Outlook
Market indicators of the global manufacturing economy continue to be mixed. The Company’s markets have remained generally stable for the past two quarters and this trend is anticipated to continue for the balance of the fiscal year. In this environment, management remains confident in the ability to deliver full year diluted earnings per share of approximately $1.10.
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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 Company’s definition of free cash flow takes into consideration capital investment required to maintain the operations of the Company and execute its strategy. Management believes that free cash flow provides useful information to investors regarding the Company’s ability to generate cash from business operations that is available for acquisitions and other investments, debt service, dividends and share repurchases. Management uses free cash flow as one measure to monitor and evaluate the performance of the Company and compensate its employees. The Company’s definition of free cash flow may be different from definitions used by other companies.
Free cash flow was $159 million for the six months ended March 31, 2003, an increase of $57 million from the same period in 2002. The increase in free cash flow was the result of increased earnings, working capital reductions and slightly lower capital expenditures. 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.
The Company acquired Weidmüller Holding AG’s North American business and Interwave Technology, Inc. during the first six months of 2003 for approximately $25 million (see Note 3 in the Notes to Condensed Consolidated Financial Statements for a discussion of the businesses). During the same period in 2002, the Company acquired two businesses for approximately $55 million.
The Company elects to utilize commercial paper markets as its principal source of short-term financing. During the six-month period ended March 31, 2003, the Company had no borrowings outstanding under its commercial paper program. At March 31, 2002, the Company had outstanding commercial paper borrowings of $90 million. The weighted average interest rate on those borrowings was 2.0 percent. During the six months ended March 31, 2002, the Company had average borrowings of $65 million under its commercial paper program.
The Company repurchased approximately 3.0 million shares at a cost of $65 million in the first six months of 2003 under its current $250 million stock repurchase program. At March 31, 2003, the Company had approximately $39 million remaining under the existing $250 million stock repurchase program. On April 25, 2003, the Board of Directors of the Company authorized the periodic purchase of up to an additional $200 million in shares of common stock under the existing share repurchase program. In addition, the Company repurchased approximately 0.1 million shares at a cost of approximately $1 million under a voluntary program that provided shareowners owning fewer than 100 shares of Rockwell Automation common stock the opportunity to sell all of their shares of common stock to the Company without paying a commission. The Company did not repurchase shares in 2002.
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. On April 25, 2003, the Board of Directors of the Company authorized a voluntary contribution to the Company’s United States qualified pension plan trust of up to $50 million by June 15, 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. In April 2003, the Company’s $150 million of 6.80% notes were retired using a combination of cash on hand and commercial paper borrowings.
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FINANCIAL CONDITION (Continued)
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 36.1 percent at March 31, 2003 and 36.6 percent at September 30, 2002.
As of March 31, 2003, 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. Outstanding commercial paper balances reduce the amount of available borrowings under the unsecured committed credit facilities. 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. 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 following is a summary of the Company’s credit ratings as of March 31, 2003:
*Subsequent to March 31, 2003, the outlook was changed to “Negative”.
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 March 31, 2003, there has been no material change to this information.
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SUPPLEMENTAL SALES INFORMATION
The following is a reconciliation for the Control Systems segment of reported sales to sales excluding currency translation (which is a non-GAAP measure) for the three and six months ended March 31, 2003:
Management believes sales excluding currency translation provides useful information to investors since it reflects regional performance from the Company’s core operational activities without the effect of changes in currency rates, which is outside the control of management. Management uses sales excluding translation to monitor and evaluate Control Systems’ regional core operational activities.
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; epidemics; 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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Item 4. Submission of Matters to a Vote of Security Holders
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Item 6. Exhibits and Reports on Form 8-K
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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: April 30, 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:
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INDEX TO EXHIBITS
* Management contract or compensatory plan or arrangement.