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ROK > SEC Filings for ROK > Form 10-K on 19-Nov-2012All Recent SEC Filings

Show all filings for ROCKWELL AUTOMATION INC

Form 10-K for ROCKWELL AUTOMATION INC


19-Nov-2012

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Non-GAAP Measures
The following discussion includes organic sales and free cash flow, which are non-GAAP measures. See Supplemental Sales Information for a reconciliation of reported sales to organic sales and a discussion of why we believe this non-GAAP measure is useful to investors. See Financial Condition for a reconciliation of cash flows from operating activities to free cash flow and a discussion of why we believe this non-GAAP measure is useful to investors. Overview
We are a leading global provider of industrial automation power, control and information solutions that help manufacturers achieve a competitive advantage for their businesses. Overall demand for our products and services is driven by:
investments in manufacturing, including upgrades, modifications and expansions of existing facilities or production lines, and the creation of new facilities or production lines;

our customers' needs for productivity and cost reduction, sustainable production (cleaner, safer and more energy efficient), quality assurance and overall global competitiveness;

industry factors that include our customers' new product introductions, demand for our customers' products or services, and the regulatory and competitive environments in which our customers operate;

levels of global industrial production and capacity utilization;

regional factors that include local political, social, regulatory and economic circumstances;

the seasonal spending patterns of our customers due to their annual budgeting processes and their working schedule; and

investments in basic materials production capacity, partly in response to higher commodity pricing.

Long-term Strategy
Our vision of being the most valued global provider of innovative industrial automation and information products, services and solutions is supported by our growth and performance strategy, which seeks to:
achieve growth rates in excess of the automation market by expanding our served market and strengthening our competitive differentiation;

diversify our revenue streams by increasing our capabilities in new applications, broadening our solutions and service capabilities, advancing our global presence and serving a wider range of industries;

grow market share by gaining new customers and by capturing a larger share of existing customers' spending;

enhance our market access by building our channel capability and partner network;

make acquisitions that serve as catalysts to organic growth by adding complementary technology, expanding our served market, increasing our domain expertise or continuing our geographic diversification;

deploy human and financial resources to strengthen our technology leadership and our intellectual capital business model; and

continuously improve quality and customer experience and drive annual cost productivity.

By implementing the strategy above, we seek to achieve our long-term financial goals that include revenue growth of 6-8 percent, double-digit EPS growth, return on invested capital in excess of 20 percent, free cash flow of about 100 percent of net income and 60 percent of our revenue outside the U.S, including 30 percent of revenue from emerging markets.
Our customers face the challenge of remaining globally cost competitive and automation can help them achieve their productivity and sustainability objectives. Our value proposition is to help our customers reduce time to market, lower total cost of ownership, improve asset utilization and manage enterprise risks.


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Differentiation through Technology and Domain Expertise We seek a technology leadership position in industrial automation. We believe that our three platforms - integrated architecture, intelligent motor control and solutions and services - provide the foundation for long-term sustainable growth.
Our integrated control and information architecture, with Logix at its core, is an important differentiator. We are the only automation provider that can support discrete, process, batch, safety, motion and motor control on the same hardware platform with the same software programming environment. Our integrated architecture is scalable with standard open communications protocols making it easier for customers to implement more cost effectively.
Intelligent motor control is one of our core competencies and an important aspect of an automation system. These products and solutions enhance the availability, efficiency and safe operation of our customers' critical and most energy-intensive plant assets. Our intelligent motor control offering can be integrated seamlessly with the Logix architecture.
Domain expertise refers to solutions and services that we provide to support customers through the entire life cycle of their automation investment. The combination of industry-specific domain expertise of our people with our innovative technologies enables us to help our customers solve their manufacturing and business challenges.
Global Expansion
As the manufacturing world continues to expand, we must be able to meet our customers' needs in emerging markets. We continue to expand our footprint in emerging markets. We currently have approximately 60 percent of our employees outside the U.S., and 51 percent of our revenues outside of the U.S. As we expand in markets with considerable growth potential and shift our global footprint, we expect to continue to broaden the portfolio of products, solutions and services that we provide to our customers in these regions. We have made significant investments to globalize our manufacturing, product development and customer facing resources in order to be closer to our customers throughout the world. Growth in the emerging markets of Asia-Pacific, including China and India, Latin America, Central and Eastern Europe and Africa is projected to exceed global Gross Domestic Product (GDP) growth rates, due to higher levels of infrastructure investment and the growing middle-class population. We believe that increased demand for consumer products in these markets will lead to manufacturing investment and provide us with additional growth opportunities in the future.
Enhanced Market Access
Over the past decade, our investments in technology and globalization have enabled us to expand our addressed market to approximately $80 billion. Our process initiative has been the most important contributor to this expansion and remains our largest growth opportunity. Logix is the technology foundation that enabled us to become an industry leader for batch process applications and to compete effectively with traditional Distributed Control Systems (DCS) providers for continuous process applications. We complement that with a growing global network of engineers and partners to provide solutions to process customers. OEMs represent another area of addressed market expansion and a strong growth opportunity. To remain competitive, OEMs need to find the optimal balance of machine cost and performance while reducing their time to market. Our scalable integrated architecture and intelligent motor control offerings, along with design productivity tools and our motion and safety products, can assist OEMs in addressing these business needs.
We have developed a powerful network of channel partners, technology partners and commercial partners that act as amplifiers to our internal capabilities and enable us to serve our customers' needs around the world. Broad Range of Industries Served
We apply our knowledge of manufacturing applications to help customers solve their business challenges. We serve customers in a wide range of industries, including consumer products, resource-based and transportation.
Our consumer products customers are engaged in the food and beverage, home and personal care and life sciences industries. These customers' needs include new capacity, incremental capacity from existing facilities, an increasingly flexible manufacturing environment and regulatory compliance. These customers operate in an environment where product innovation and time to market are critical factors.


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We serve customers in resource-based industries, including oil and gas, mining, aggregates, cement, metals, energy, pulp and paper and water/wastewater. Companies in these industries typically invest when commodity prices are relatively high and global demand for basic materials is increasing. In the transportation industry, factors such as geographic expansion, investment in new model introductions and more flexible manufacturing technologies influence customers' automation investment decisions. Our sales in transportation are primarily to automotive and tire manufacturers. Outsourcing and Sustainability Trends
Demand for our products, solutions and services across all industries benefits from the outsourcing and sustainability needs of our customers. Customers increasingly desire to outsource engineering services to achieve a more flexible cost base. Our manufacturing application knowledge enables us to serve these customers globally.
We help our customers meet their sustainability needs pertaining to energy efficiency, environmental and safety goals. Higher energy prices have historically caused customers across all industries to invest in more energy-efficient manufacturing processes and technologies, such as intelligent motor control and energy efficient solutions and services. In addition, environmental and safety objectives often spur customers to invest to ensure compliance and implement sustainable business practices. Acquisitions
Our acquisition strategy focuses on products, solutions or services that will be catalytic to the organic growth of our core offerings. In October 2012, we acquired certain assets of the medium voltage drives business of Harbin Jiuzhou Electric Co., Ltd., a leading manufacturer of medium voltage drives, direct current power supplies, switch gear and wind inverters, headquartered in Harbin, China. The acquisition strengthened our presence in the Asia-Pacific motor control market by adding significant capabilities in design, engineering and manufacturing of medium voltage drive products. In March 2012, we acquired certain assets and assumed certain liabilities of SoftSwitching Technologies Corporation, an industrial power quality detection and protection systems provider in the United States. In May 2011, we purchased a majority stake in the equity of Lektronix Limited and its affiliate, an independent industrial automation repair and service provider primarily in Europe and Asia. In April 2011, we acquired certain assets and assumed certain liabilities of Hiprom (Pty) Ltd and its affiliates, a process control and automation systems integrator for the mining and mineral processing industry in South Africa. We believe the acquired companies will help us expand our served market and deliver value to our customers.
Continuous Improvement
Productivity and continuous improvement are important components of our culture. We have programs in place that drive ongoing process improvement, functional streamlining, material cost savings and manufacturing productivity. We are in the process of developing and implementing common global processes and an enterprise-wide business system. These are intended to improve profitability that can be used to fund investments in growth and to offset inflation. Our ongoing productivity initiatives target both cost reduction and improved asset utilization. Charges for workforce reductions and facility rationalization may be required in order to effectively execute our productivity programs.


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U. S. Industrial Economic Trends
In 2012, sales to U.S. customers accounted for 49 percent of our total sales. The various indicators we use to gauge the direction and momentum of our U.S. served markets include:
The Industrial Production Index (Total Index), published by the Federal Reserve, which measures the real output of manufacturing, mining, and electric and gas utilities. The Industrial Production Index is expressed as a percentage of real output in a base year, currently 2007. Historically there has been a meaningful correlation between the changes in the Industrial Production Index and the level of automation investment made by our U.S. customers in their manufacturing base.

The Manufacturing Purchasing Managers' Index (PMI), published by the Institute for Supply Management (ISM), which is an indication of the current and near-term state of manufacturing activity in the U.S. According to the ISM, a PMI measure above 50 indicates that the U.S. manufacturing economy is generally expanding while a measure below 50 indicates that it is generally contracting.

Industrial Equipment Spending, which is an economic statistic compiled by the Bureau of Economic Analysis (BEA). This statistic provides insight into spending trends in the broad U.S. industrial economy. This measure over the longer term has proven to demonstrate a reasonable correlation with our domestic growth.

Capacity Utilization (Total Industry), which is an indication of plant operating activity published by the Federal Reserve. Historically there has been a meaningful correlation between Capacity Utilization and levels of U.S. industrial production.

The table below depicts the trends in these indicators from fiscal 2010 to 2012, which point to moderating growth in manufacturing activity during fiscal 2012. These indicators are among the factors that lead us to anticipate a period of slower industrial growth. We continue to believe this is a pause in the recovery and not an inflection point. We expect to see improved market conditions in fiscal 2013 but not until the latter part of the year.

Industrial Industrial Equipment Capacity Production Spending Utilization Index PMI (in billions) (percent) Fiscal 2012
Quarter ended:
September 2012 97.2 51.5 197.9 78.5 June 2012 97.3 49.7 197.8 78.9 March 2012 96.7 53.4 190.7 78.7 December 2011 95.3 53.1 196.6 77.9 Fiscal 2011
Quarter ended:
September 2011 94.2 52.5 187.0 77.1 June 2011 92.9 55.8 171.6 76.3 March 2011 92.6 59.7 169.6 76.2 December 2010 91.6 57.3 161.3 75.4 Fiscal 2010
Quarter ended:
September 2010 91.1 56.4 156.5 74.8 June 2010 89.7 56.0 156.4 73.3 March 2010 87.8 59.3 146.9 71.4 December 2009 86.3 55.8 149.9 69.5

Note: Economic indicators are subject to revisions by the issuing organizations.


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Non-U.S. Regional Trends
In 2012, sales to non-U.S. customers accounted for 51 percent of our total sales. These customers include both indigenous companies and multinational companies with expanding global presence. International demand, particularly in emerging markets, has historically been driven by the strength of the industrial economy in each region, investments in infrastructure and expanding consumer markets.
We use changes in Gross Domestic Product (GDP) as one indicator of the growth opportunities in each region where we do business. In 2012, worldwide GDP growth has slowed, and in some regions GDP has declined, indicating a global economic slowdown. In Europe, sovereign debt concerns have put downward pressure on industrial growth. Western Europe continues to operate in a recessionary environment, with potential for an improved outlook in some economies later next year. The emerging markets in Europe, the Middle East and Africa (EMEA) experienced strong growth that is expected to continue next year. In Asia, China experienced its slowest GDP growth since early 2009 but the economy shows some signs of improvement. India was flat in 2012 compared to 2011, and there is no indication of any near term improvement. In Latin America, Mexico was the strongest performing country with projected continued growth. Brazil experienced an economic slowdown in 2012 but the outlook is for some improvement in 2013. We still expect that emerging markets will be the fastest growing automation markets over the long term.


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Summary of Results of Operations
Despite a difficult economic environment in 2012, we delivered sales growth of 4 percent, or 6 percent organically, and ended the year with record sales of $6,259.4 million. All regions experienced organic sales growth year over year, led by Canada with organic sales growth of 20 percent. EMEA had strong organic growth of 6 percent in the face of a recession in Western Europe. The end markets with the strongest sales growth for the year were transportation and oil and gas.
We continued to execute our key initiatives, which contributed to our positive performance:
Sales related to our process initiative grew approximately 20 percent year over year in 2012.

Logix organic sales increased 8 percent compared to 2011.

Sales in emerging markets increased 4 percent, or 8 percent organically, as compared to 2011, with particular strength in Central and Eastern Europe. Acquisitions contributed 2 percentage points to the increase and currency translation reduced sales by 6 percentage points. Emerging markets represented 22 percent of total company sales in 2012, and we expect this proportion to continue to grow.

Total segment operating margin expanded one full percentage point while we continued to invest for growth.
Our effective tax rate for 2012 was 23.7 percent compared to 19.7 percent in 2011, primarily due to larger discrete tax benefits a year ago.


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The following tables reflect our sales and operating results for the years ended September 30, 2012, 2011 and 2010 (in millions, except per share amounts):

                                                               Year Ended September 30,
                                                           2012          2011          2010
Sales
Architecture & Software                                 $ 2,650.4     $ 2,594.3     $ 2,115.0
Control Products & Solutions                              3,609.0       3,406.1       2,742.0
Total sales (a)                                         $ 6,259.4     $ 6,000.4     $ 4,857.0
Segment operating earnings1
Architecture & Software                                 $   702.8     $   659.1     $   475.4
Control Products & Solutions                                428.6         368.5         241.8
Total segment operating earnings2 (b)                     1,131.4       1,027.6         717.2
Purchase accounting depreciation and amortization           (19.8 )       (19.8 )       (18.9 )
General corporate - net                                     (85.6 )       (80.7 )       (93.6 )
Interest expense                                            (60.1 )       (59.5 )       (60.5 )
Income from continuing operations before income taxes       965.9         867.6         544.2
Provision for income taxes                                 (228.9 )      (170.5 )      (103.8 )
Income from continuing operations                           737.0         697.1         440.4
Income from discontinued operations3                            -           0.7          23.9
Net income                                              $   737.0     $   697.8     $   464.3
Diluted earnings per share:
Continuing operations                                   $    5.13     $    4.79     $    3.05
Discontinued operations                                         -          0.01          0.17
Net income                                              $    5.13     $    4.80     $    3.22

Diluted weighted average outstanding shares                 143.4         145.2         144.0
Total segment operating margin2 (b/a)                        18.1 %        17.1 %        14.8 %

(1) See Note 17 in the Condensed Consolidated Financial Statements for the definition of segment operating earnings.

(2) Total segment operating earnings and total segment operating margin are non-GAAP financial measures. We believe that these measures are useful to investors as measures of operating performance. We use these measures to monitor and evaluate the profitability of the company. Our measure of total segment operating earnings and total segment operating margin may be different from those used by other companies.

(3) See Note 13 in the Condensed Consolidated Financial Statements for a description of items reported as discontinued operations.


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2012 Compared to 2011
(in millions, except per share amounts)                    2012         2011       Change
Sales                                                   $ 6,259.4    $ 6,000.4    $ 259.0
Income from continuing operations before income taxes       965.9        867.6       98.3
Diluted earnings per share from continuing operations        5.13         4.79       0.34

Sales
Sales in fiscal 2012 increased 4 percent compared to 2011. Organic sales increased 6 percent. Acquisitions contributed 1 percentage point to the growth rate and currency translation reduced sales by 3 percentage points. Organic sales in our solutions and services businesses grew 12 percent year over year, acquisitions contributed 2 percentage points to the increase and currency translation reduced sales by 4 percentage points. Year-end backlog in these businesses was 7 percent lower than a year ago due to an increase in order delays. Product organic sales grew 4 percent year over year and currency translation reduced sales by 3 percentage points. Volume accounted for substantially all of the organic sales growth during the year as pricing contributed less than 1 percentage point to growth.
The table below presents our sales for the year ended September 30, 2012 by geographic region and the percentage change in sales from the year ended September 30, 2011 (in millions, except percentages):

                                                                                        Change in Organic
                                                                                         Sales vs. Year
                                                Year Ended          Change vs. Year           Ended
                                               September 30,      Ended September 30,     September 30,
                                                  2012(1)                2011                2011(2)
United States                               $         3,067.3               5  %                  5 %
Canada                                                  464.3              17  %                 20 %
Europe, Middle East and Africa                        1,280.6               1  %                  6 %
Asia-Pacific                                            942.4               3  %                  5 %
Latin America                                           504.8              (1 )%                  8 %
Total sales                                 $         6,259.4               4  %                  6 %

(1) We attribute sales to the geographic regions based upon country of destination.

(2) Organic sales are sales excluding the effect of changes in currency exchange rates and acquisitions. See Supplemental Sales Information for information on this non-GAAP measure.

         Organic sales growth in the United States was driven by transportation
          and oil and gas industries, as consumer industries lagged the region
          growth rate.

Strong organic sales growth in Canada reflected continued strength in the resource-based industries.

EMEA's organic sales growth was driven by strong double digit growth in its emerging markets, particularly in Central and Eastern Europe.

         Asia-Pacific organic sales growth was mixed across the countries in the
          region with mature markets generally outperforming emerging markets and
          Australia experiencing significant sales declines.



         Organic sales growth in Latin America was driven by strong growth in
          transportation and oil and gas industries in Mexico, partially offset
          by year-over-year declines in Brazil, which is experiencing an economic
          slowdown.

Income from Continuing Operations before Income Taxes Income from continuing operations before income taxes increased 11 percent from $867.6 million in 2011 to $965.9 million in 2012. The increase was predominantly due to increased volume and lower incentive compensation expense, partially offset by increased spending to support growth.


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Income Taxes
The effective tax rate for 2012 was 23.7 percent compared to 19.7 percent in 2011. The 2012 and 2011 effective tax rates were lower than the U.S. statutory rate of 35 percent because our sales outside of the U.S. benefited from lower tax rates.
During 2012, we recognized net discrete tax benefits of $2.1 million primarily related to the favorable resolution of worldwide tax matters. During 2011, we recognized net discrete tax benefits of $25.0 million related to the favorable resolution of worldwide tax matters and the retroactive extension of the U.S. federal research credit.
See Note 15 in the Financial Statements for a complete reconciliation of the United States statutory tax rate to the effective tax rate and more information on tax events in 2012 and 2011 affecting the respective tax rates.

Architecture & Software
(in millions, except percentages)      2012          2011        Change
Sales                               $ 2,650.4     $ 2,594.3     $  56.1
Segment operating earnings              702.8         659.1        43.7
Segment operating margin                 26.5 %        25.4 %       1.1    pts

Sales
Architecture & Software sales increased 2 percent in 2012. Organic sales increased 5 percent, and the effects of currency translation reduced sales by 3 percentage points. Pricing contributed less than 1 percentage point to growth during the year. Year-over-year organic sales growth in all regions other than Canada and EMEA was slightly above the segment average. Logix organic sales increased 8 percent in 2012 compared to 2011 and currency translation reduced sales by 3 percentage points.
Operating Margin
Architecture & Software segment operating earnings increased 7 percent. Operating margin expanded 1.1 points to 26.5 percent in 2012 as compared to 2011. The increase was predominantly due to volume increases and lower incentive . . .

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