UNITED STATES
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).
184,800,903 shares of registrant’s Common Stock, $1.00 par value, were outstanding on June 30, 2003.
TABLE OF CONTENTS
ROCKWELL AUTOMATION, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEET
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 June 30, 2003, and the related condensed consolidated statements of operations for the three- and nine-month periods ended June 30, 2003 and 2002 and of cash flows for the nine-month periods ended June 30, 2003 and 2002. These interim financial statements are the responsibility of the Company’s management.
We conducted our reviews 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 and 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 reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim 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 and included 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, WisconsinAugust 5, 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 June 30, 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):
See Note 12 in the Notes to Condensed Consolidated Financial Statements for the definition of segment operating earnings and reconciliation of segment operating earnings to income from continuing operations before cumulative effect of accounting change.
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 addition, the PMI measure was 51.8 percent in July 2003.
In this mixed environment, the Company’s business has been generally stable since the beginning of 2003, though industrial market conditions in the third quarter were slightly weaker than in the previous quarter.
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2003 Third Quarter Compared to 2002 Third Quarter
Sales were $1,033 million in the third quarter of 2003 compared to $995 million in the third quarter of 2002. Net income for the third quarter of 2003 was $128 million, or 67 cents per diluted share, compared to $90 million, or 47 cents per diluted share, for the third quarter of 2002. Included in net income for the third quarter of 2003 was a tax benefit of $69 million, or 36 cents per diluted share, related to the settlement of a U.S. federal research and experimentation credit refund claim. Included in net income for the third quarter of 2002 was a tax benefit of $30 million, or 16 cents per diluted share, from the resolution of certain tax matters for the period 1995-1999; a tax benefit of $4 million, or 2 cents per diluted share, from a reduction in the fiscal 2002 effective tax rate from 26.6 percent to 24.0 percent; and income of $5 million ($4 million after-tax, or 2 cents per diluted share) from the favorable settlement of intellectual property matters.
Control Systems
Control Systems’ sales in the third quarter of 2003 were $824 million, an increase of 5 percent compared to sales of $788 million in the third quarter of 2002. The entire sales increase was attributable to the effect 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 20 percent (7 percent excluding currency translation), while U.S. sales decreased approximately 5 percent. The Logix™ and Process Solutions businesses each increased approximately 20 percent from last year’s third quarter.
Segment operating earnings of $103 million in the 2003 third quarter were $12 million higher than in the 2002 third quarter due to the benefits of continued cost reduction efforts. Control Systems’ return on sales for the third quarter of 2003 was 12.5 percent compared to 11.5 percent for the third quarter of 2002.
Power Systems
Power Systems’ sales in the 2003 third quarter were $180 million compared to $178 million in the 2002 third quarter. An increase in sales in the Mechanical business of 4 percent over the third quarter of 2002 was partially offset by a slight decrease in sales in the Electrical business. Segment operating earnings were $15 million in the third quarter of 2003 and 2002. Power Systems’ return on sales for the third quarter of 2003 was 8.3 percent compared to 8.4 percent for the third quarter of 2002.
FirstPoint Contact
FirstPoint Contact’s sales were $29 million in the 2003 and 2002 third quarters. During the third quarter of 2003, FirstPoint Contact received orders of approximately $54 million, which was the highest level of orders since the fourth quarter of 1999 and was principally related to one customer. Segment operating earnings were break even in the 2003 third quarter compared to $1 million in the third quarter of 2002.
General Corporate-Net
General corporate expenses were $17 million in the third quarter of 2003 compared to $9 million in the third quarter of 2002. Included in the 2003 third quarter was expense of $2 million related to the bankruptcy of a subtenant in a leased facility. Included in the 2002 third quarter was $5 million of income related to the settlement of intellectual property matters.
Interest Expense
Interest expense was $11 million in the third quarter of 2003 compared to $17 million in the third quarter of 2002. The decrease was the result of the retirement at maturity of the $150 million principal amount of 6.80% notes in April 2003, the benefit of an interest rate swap (see Note 7 in the Notes to Condensed Consolidated Financial Statements), and lower short-term borrowings.
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Nine Months Ended June 30, 2003 Compared to Nine Months Ended June 30, 2002
Sales in the first nine months of 2003 were $3,046 million compared to $2,892 million in the first nine months of 2002. Net income in the first nine months of 2003 was $219 million, or $1.15 per diluted share, compared to $72 million, or 38 cents per diluted share, for the first nine months of 2002. The first nine months of 2003 included a tax benefit of $69 million, or 36 cents per diluted share, related to the settlement of a U.S. federal research and experimentation credit refund claim. The first nine months of 2002 included a tax benefit of $48 million, or 26 cents per diluted share, from the resolution of certain tax matters for the period 1995-1999; income of $5 million ($4 million after-tax, or 2 cents per diluted share) from the favorable settlement of intellectual property matters; and 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 nine months of 2003 were $2,441 million, an increase of 8 percent compared to sales of $2,260 million in the first nine months of 2002. Approximately 3 percent of the sales increase 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 18 percent (10 percent excluding currency translation) and U.S. sales increased 2 percent. The Company’s Logix™ business and the Process Solutions business, including Propack Data GmbH which was acquired in March 2002, each grew more than 30 percent over the first nine months of 2002.
Segment operating earnings were $282 million compared to $239 million in the first nine months of 2002. The increase was due to higher volume and the continuing benefits of cost reduction actions. Control Systems’ return on sales for the first nine months of 2003 was 11.6 percent compared to 10.6 percent in the first nine months of 2002.
Power Systems’ sales in the first nine months of 2003 were $526 million compared to $532 million in the first nine months of 2002. Sales in the Electrical business decreased 4 percent, partially offset by a 2 percent increase in sales in the Mechanical business. Segment operating earnings in the first nine months of 2003 were $39 million compared to $38 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 nine months of 2003 was 7.4 percent compared to 7.1 percent in the first nine months of 2002.
FirstPoint Contact’s sales in the first nine months of 2003 were $79 million compared to $100 million in the first nine months of 2002. The decrease was primarily due to continued lower customer capital spending for telecommunication products. Segment operating earnings in the first nine months of 2003 were break even compared to $4 million in the first nine months of 2002.
General corporate expenses were $43 million in the first nine months of 2003 and 2002. The first nine months of 2002 included $5 million of income related to the settlement of intellectual property matters. The first nine months of 2003 included expense of $2 million related to the bankruptcy of a subtenant at a leased facility. Excluding these amounts, corporate expenses decreased in 2003 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.
Loss on Disposition of a Business
In the second quarter of 2003, the Company sold a majority of its ownership interest in Reliance Electric Limited Japan (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 an additional $8 million in July 2003.
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Interest expense was $41 million in the first nine months of 2003 compared to $50 million in the first nine months of 2002. The decrease was the result of the retirement at maturity of the $150 million principal amount of 6.80% notes in April 2003, the benefit of an interest rate swap (see Note 7 in the Notes to Condensed Consolidated Financial Statements), and lower short-term borrowings.
Income Taxes
The Company recognized in earnings in the third quarter of 2003 a net tax benefit of $69 million related to a U.S. federal research and experimentation credit refund claim (see Note 10 in the Notes to Condensed Consolidated Financial Statements). In the second quarter of 2003, a tax benefit of approximately $2 million was recognized as a result of the Company’s ability to utilize certain capital loss carryforwards for which a valuation allowance had been previously provided. The ability to utilize the capital loss carryforwards was the result of the sale of a majority of the Company’s ownership interest in REJ which took place in the second quarter of 2003 (see Note 12 in the Notes to Condensed Consolidated Financial Statements). The full year effective tax rate for 2003 is estimated to be 30 percent, excluding the effect of the research and experimentation settlement and the second quarter REJ transaction.
The Company recorded a tax benefit of $30 million (16 cents per diluted share) in the third quarter of 2002 and $18 million (10 cents per diluted share) in the second quarter of 2002 from the resolution of certain tax matters for the period 1995-1999.
Accounting Change
Effective October 1, 2001, the Company adopted SFAS 142. In connection with the adoption, 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 other than as a result of the sale of a majority of the Company’s ownership interest in REJ.
Recent Accounting Pronouncements
See Note 2 in the Notes to Condensed Consolidated Financial Statements regarding recent accounting pronouncements.
Business Outlook
The timing and pace of improvement in the global economy remain difficult to predict. During the past quarter, management saw some softening in demand in the U.S. and Europe, but on balance believes there is no discernable trend of further weakness. Management is assuming that the Company’s business will remain at the current run rate for the remainder of the fiscal year. Accordingly, management continues to expect full year diluted earnings per share of approximately $1.10 excluding the third quarter tax benefit.
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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, service of debt principal, 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 $207 million for the nine months ended June 30, 2003 compared to $224 million in the same period in 2002. The decrease in free cash flow was in part the result of a $50 million voluntary contribution made to the Company’s primary U.S. qualified pension plan trust in June 2003 compared to the $24 million contribution related to the spinoff of Rockwell Collins, Inc. made in 2002. Capital expenditures in 2003 are expected to be between $115 million to $125 million.
The Company acquired Weidmüller Holding AG’s North American business and Interwave Technology, Inc. during the first nine months of 2003 for approximately $26 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 three businesses for approximately $68 million.
The Company elects to utilize commercial paper markets as its principal source of short-term financing. At June 30, 2003, the Company had no commercial paper borrowings outstanding. During the nine months ended June 30, 2003, the Company had average borrowings of $12 million under its commercial paper program compared to $81 million in the same period in 2002.
In April 2003, the Company’s $150 million principal amount of 6.80% notes were retired at maturity using a combination of cash on hand and commercial paper borrowings.
The Company repurchased approximately 4.3 million shares of its common stock at a cost of approximately $93.4 million in the first nine months of 2003. At June 30, 2003, the Company had approximately $210 million remaining for stock repurchases under existing board authorizations. In addition, the Company repurchased approximately 70,000 shares at a cost of approximately $1.6 million under a voluntary program that provided shareowners owning fewer than 100 shares of 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 any shares in 2002.
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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 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 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 31.4 percent at June 30, 2003 compared to 36.6 percent at September 30, 2002.
As of June 30, 2003, the Company had $675 million of unsecured committed credit facilities available to support its commercial paper borrowings, with $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 facilities 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 June 30, 2003:
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 June 30, 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 nine months ended June 30, 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 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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INDEX TO EXHIBITS