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ROK > SEC Filings for ROK > Form 10-Q on 6-Feb-2014All Recent SEC Filings

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Form 10-Q for ROCKWELL AUTOMATION INC


6-Feb-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Forward Looking Statement
This Quarterly Report contains statements (including certain projections and business trends) that are "forward looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Words such as "believe", "estimate", "project", "plan", "expect", "anticipate", "will", "intend" and other similar expressions may identify forward looking statements. Actual results may differ materially from those projected as a result of certain risks and uncertainties, many of which are beyond our control, including but not limited to:

macroeconomic factors, including global and regional business conditions, the availability and cost of capital, the cyclical nature of our customers' capital spending, sovereign debt concerns and currency exchange rates;

laws, regulations and governmental policies affecting our activities in the countries where we do business;

the successful development of advanced technologies and demand for and market acceptance of new and existing products;

the availability, effectiveness and security of our information technology systems;

competitive products, solutions and services and pricing pressures, and our ability to provide high quality products, solutions and services;

a disruption of our operations due to natural disasters, acts of war, strikes, terrorism, social unrest or other causes;

intellectual property infringement claims by others and the ability to protect our intellectual property;

our ability to address claims by taxing authorities in the various jurisdictions where we do business;

our ability to attract and retain qualified personnel;

our ability to manage costs related to employee retirement and health care benefits;

the uncertainties of litigation, including liabilities related to the safety and security of the products, solutions and services we sell;

our ability to manage and mitigate the risks associated with our solutions and services businesses;

a disruption of our distribution channels;

the availability and price of components and materials;

the successful integration and management of acquired businesses;

the successful execution of our cost productivity and globalization initiatives; and

other risks and uncertainties, including but not limited to those detailed from time to time in our Securities and Exchange Commission (SEC) filings.

These forward looking statements reflect our beliefs as of the date of filing this report. We undertake no obligation to update or revise any forward looking statement, whether as a result of new information, future events or otherwise. See Item 1A, Risk Factors of our Annual Report on Form 10-K for the fiscal year ended September 30, 2013 for more information. Non-GAAP Measures
The following discussion includes organic sales, total segment operating earnings and margin, Adjusted Income, Adjusted EPS, Adjusted Effective Tax Rate 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 Results of Operations for a reconciliation of income before income taxes to total segment operating earnings and margin and a discussion of why we believe these non-GAAP measures are useful to investors. See Results of Operations for a reconciliation of income from continuing operations, diluted EPS from continuing operations and effective tax rate to Adjusted Income, Adjusted EPS and Adjusted Effective Tax Rate and a discussion of why we believe these non-GAAP measures are 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.


Table of Contents
ROCKWELL AUTOMATION, INC.

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, services and solutions is driven by:

investments in manufacturing, including upgrades, modifications and expansions of existing facilities or production lines, and new facilities or production lines;

investments in basic materials production capacity, which may be related to commodity pricing levels;

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; and

the spending patterns of our customers due to their annual budgeting processes and their working schedules.

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 sales streams by broadening our portfolio of products, solutions and services, expanding our global presence and serving a wider range of industries and applications;

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, enhancing our domain expertise or continuing our geographic diversification;

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

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 and free cash flow equal to about 100 percent of Adjusted Income.
Acquisitions
Our acquisition strategy focuses on products, solutions and services that will be catalytic to the organic growth of our core offerings.
In January 2014, we acquired Jacobs Automation, the leader in intelligent track motion control technology. This technology improves performance across a wide range of packaging, material handling, and other applications for the global machine builder market.
In November 2013, we acquired vMonitor LLC and its affiliates, a global technology leader for wireless solutions in the oil and gas industry. This acquisition is expected to strengthen our ability to deliver end-to-end projects for the oil and gas sector and accelerate our development of similar process solutions and remote monitoring services for water / wastewater, mining and other industries globally.
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.
We believe these acquisitions will help us expand our served market and deliver value to our customers.


Table of Contents
ROCKWELL AUTOMATION, INC.

U. S. Industrial Economic Trends
In the first quarter of 2014, sales to U.S. customers accounted for 53 percent of our total sales. The various indicators we use to gauge the direction and momentum of our served U.S. markets include:

The Industrial Production Index (IP), 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 indicator 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 indicator 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 since the quarter ended September 2012. The PMI continued to improve indicating expansion in the U.S. manufacturing sector and IP has shown recent improvement after a stable fiscal 2013. We expect market conditions in the U.S. will modestly improve through the remainder of our fiscal year.

                                       Industrial
               Industrial              Equipment        Capacity
               Production               Spending      Utilization
                  Index       PMI    (in billions)     (percent)
Fiscal 2014
Quarter ended:
December 2013       101.2    57.0            204.7           78.9
Fiscal 2013
Quarter ended:
September 2013       99.6    56.2            206.6           78.0
June 2013            99.0    50.9            199.3           77.9
March 2013           98.7    51.3            200.1           78.0
December 2012        97.7    50.2            199.6           77.5
Fiscal 2012
Quarter ended:
September 2012       97.1    51.6            195.9           77.4

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


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ROCKWELL AUTOMATION, INC.

Non-U.S. Economic Trends
In the first quarter of 2014, sales to non-U.S. customers accounted for 47 percent of our total sales. These customers include both indigenous companies and multinational companies with expanding global presence. In addition to the global factors previously mentioned, 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) and Industrial Production Index as indicators of the growth opportunities in each region where we do business. Outside the U.S., we expect stable underlying market conditions. Europe's macroeconomic conditions are improving as currency concerns have abated and inflation has remained in check. Asia Pacific continues to show signs of stabilization; however, limited access to capital and industrial overcapacity remain areas of concern. We expect continued solid economic growth in Mexico and Brazil but weakness in Argentina and Venezuela due to their difficult business climates. We still expect that emerging markets will be the fastest growing automation markets over the long term.


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ROCKWELL AUTOMATION, INC.

Summary of Results of Operations
Sales in the first quarter of 2014 increased 7 percent compared to the first quarter of 2013. Organic sales growth was also 7 percent as the net effect of acquisitions and currency translation was negligible. The industries with the strongest growth for the quarter were oil and gas and food and beverage. We continued to execute our key initiatives:

Sales related to our process initiative increased approximately 8 percent year over year in the first quarter of 2014.

Logix sales in the first quarter of 2014 increased 5 percent year over year. Logix organic sales increased 6 percent, which is in line with the organic growth of Architecture & Software segment as a whole.

Sales in emerging markets increased 7 percent year over year. Organic sales growth was 10 percent, led by growth in China. Acquisitions contributed 1 percentage point to emerging markets sales growth and currency translation reduced sales by 4 percentage points.

The effective tax rate in the first quarter of 2014 was 27.4 percent compared to 25.7 percent in the first quarter of 2013. The Adjusted Effective Tax Rate in the first quarter of 2014 was 27.8 percent compared to 26.6 percent in the first quarter of 2013. The increases in the effective tax rate and Adjusted Effective Tax Rate were primarily due to the year-over-year increase in tax expense related to adjustments for prior period tax matters and the impact of the mix of U.S. and non-U.S. earnings.


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                           ROCKWELL AUTOMATION, INC.


The following table reflects our sales and operating results for the three
months ended December 31, 2013 and 2012 (in millions, except per share amounts):

                                                     Three Months Ended
                                                        December 31,
                                                     2013          2012
Sales
Architecture & Software                           $   695.9     $   657.5
Control Products & Solutions                          895.8         831.7
Total sales (a)                                   $ 1,591.7     $ 1,489.2
Segment operating earnings1
Architecture & Software                           $   211.9     $   183.2
Control Products & Solutions                          116.1          92.8
Total segment operating earnings2 (b)                 328.0         276.0
Purchase accounting depreciation and amortization      (4.6 )        (5.2 )
General corporate - net                               (21.7 )       (18.5 )
Non-operating pension costs                           (14.0 )       (19.7 )
Interest expense                                      (14.9 )       (15.4 )
Income before income taxes (c)                        272.8         217.2
Income tax provision                                  (74.7 )       (55.8 )
Net income                                        $   198.1     $   161.4

Diluted EPS                                       $    1.41     $    1.14

Adjusted EPS3                                     $    1.47     $    1.23

Diluted weighted average outstanding shares           140.4         141.2

Total segment operating margin2 (b/a)                  20.6 %        18.5 %

Pre-tax margin (c/a)                                   17.1 %        14.6 %

(1) See Note 13 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 our operating segments. Our measures of total segment operating earnings and total segment operating margin may be different from measures used by other companies.

(3) Adjusted EPS is a non-GAAP earnings measure that excludes the non-operating pension costs and their related income tax effects. See Adjusted Income, Adjusted EPS and Adjusted Effective Tax Rate Reconciliation for more information on this non-GAAP measure.


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                           ROCKWELL AUTOMATION, INC.


Purchase accounting depreciation and amortization and non-operating pension
costs are not allocated to our operating segments because these costs are
excluded from our measurement of each segment's operating performance for
internal purposes. If we were to allocate these costs, we would attribute them
to each of our segments as follows (in millions):
                                                       Three Months Ended
                                                          December 31,
                                                         2014            2013
Purchase accounting depreciation and amortization
Architecture & Software                           $     0.9             $ 1.1
Control Products & Solutions                            3.5               3.8
Non-operating pension costs
Architecture & Software                                 5.2               6.9
Control Products & Solutions                            8.1              11.7

The decreases in non-operating pension costs in both segments in the three months ended December 31, 2013 were primarily due to the increase in our U.S. discount rate from 4.15 percent in 2013 to 5.05 percent in 2014.


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ROCKWELL AUTOMATION, INC.

Adjusted Income, Adjusted EPS and Adjusted Effective Tax Rate Reconciliation

Adjusted Income, Adjusted EPS and Adjusted Effective Tax Rate are non-GAAP earnings measures that exclude non-operating pension costs and their related income tax effects. We define non-operating pension costs as defined benefit plan interest cost, expected return on plan assets, amortization of actuarial gains and losses and the impact of any plan curtailments or settlements. These components of net periodic benefit cost primarily relate to changes in pension assets and liabilities that are a result of market performance; we consider these costs to be unrelated to the operating performance of our business. We believe that Adjusted Income, Adjusted EPS and Adjusted Effective Tax Rate provide useful information to our investors about our operating performance and allow management and investors to compare our operating performance period over period. Our measures of Adjusted Income, Adjusted EPS and Adjusted Effective Tax Rate may be different from measures used by other companies. These non-GAAP measures should not be considered a substitute for income from continuing operations, diluted EPS and effective tax rate.

The following is a reconciliation of income from continuing operations, diluted EPS from continuing operations, and effective tax rate to Adjusted Income, Adjusted EPS and Adjusted Effective Tax Rate for the three months ended December 31, 2013 and 2012 (in millions, except per share amounts):

                                                               Three Months Ended
                                                                  December 31,
                                                                2013         2012
Income from continuing operations                           $   198.1      $ 161.4
Non-operating pension costs                                      14.0         19.7
Tax effect of non-operating pension costs                        (5.0 )       (7.2 )
Adjusted Income                                             $   207.1      $ 173.9

Diluted EPS from continuing operations                      $    1.41      $  1.14
Non-operating pension costs per diluted share, before tax        0.10         0.14
Tax effect of non-operating pension costs per diluted share     (0.04 )      (0.05 )
Adjusted EPS                                                $    1.47      $  1.23

Effective tax rate                                               27.4 %       25.7 %
Tax effect of non-operating pension costs                         0.4 %        0.9 %
Adjusted Effective Tax Rate                                      27.8 %       26.6 %


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                           ROCKWELL AUTOMATION, INC.


2014 First Quarter Compared to 2013 First Quarter

                                                  Three Months Ended
                                                     December 31,
(in millions, except per share amounts)      2013         2012       Change
Sales                                     $ 1,591.7    $ 1,489.2    $ 102.5
Income before income taxes                    272.8        217.2       55.6
Diluted EPS                                    1.41         1.14       0.27
Adjusted EPS                                   1.47         1.23       0.24

Sales
Our sales increased 7 percent in the three months ended December 31, 2013 compared to the three months ended December 31, 2012. Sales in our solutions and services businesses increased 9 percent in the three months ended December 31, 2013 compared to the three months ended December 31, 2012. Organic sales in our solutions and services businesses increased 10 percent as acquisitions contributed 1 percentage point to the sales growth, and the currency translation reduced sales by 2 percentage points. Product sales increased 6 percent in the three months ended December 31, 2013 compared to the three months ended December 31, 2012. Pricing contributed approximately 1 percentage point to growth during the period.
The tables below present our sales, attributed to the geographic regions based upon country of destination, for the three months ended December 31, 2013 and the change from the same period a year ago (in millions, except percentages):

                                                                                      Change in Organic
                                                               Change vs.                 Sales1 vs.
                                  Three Months Ended       Three Months Ended         Three Months Ended
                                   December 31, 2013        December 31, 2012         December 31, 2012
United States                    $             836.4                     10  %                     10  %
Canada                                          99.6                     (6 )%                     (1 )%
Europe, Middle East and Africa                 324.4                     10  %                      5  %
Asia Pacific                                   206.8                      5  %                      7  %
Latin America                                  124.5                     (3 )%                      3  %
Total Sales                      $           1,591.7                      7  %                      7  %

1 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.

Strong sales growth in the United States in the three months ended December 31, 2013 was driven by strength in the oil and gas and food and beverage industries.

Sales in Canada declined in the three months ended December 31, 2013 compared to the same period last year, with growth in automotive and consumer industries, offset by declines in mining and other heavy industries and due to unfavorable impact of foreign currency translation.

Solid EMEA sales growth in the three months ended December 31, 2013 was primarily due to stronger growth in the emerging markets and the favorable impact of foreign currency translation.

Asia Pacific returned to growth in the three months ended December 31, 2013, fueled by strong growth in China.

Latin America results were mixed in the three months ended December 31, 2013 with double-digit sales growth in Brazil and Mexico, partially offset by difficult business climates in Argentina and Venezuela, weakness in the mining industry across the region and unfavorable impact of foreign currency translation.


Table of Contents
ROCKWELL AUTOMATION, INC.

2014 First Quarter Compared to 2013 First Quarter General Corporate - Net
General corporate - net expenses were $21.7 million and $18.5 million in the three months ended December 31, 2013 and 2012, respectively. Income before Income Taxes
Income before income taxes increased 26 percent year over year in the three months ended December 31, 2013, primarily due to an increase in segment operating earnings and lower non-operating pension costs. Total segment operating earnings increased 19 percent year over year in the three months ended December 31, 2013, primarily due to higher sales and the favorable resolution of certain legal matters.

Income Taxes
The effective tax rate in the three months ended December 31, 2013 was 27.4
percent compared to 25.7 percent in the three months ended December 31, 2012.
Our Adjusted Effective Tax Rate in the three months ended December 31, 2013 was
27.8 percent compared to 26.6 percent in the three months ended December 31,
2012. The increases in the effective tax rate and Adjusted Effective Tax Rate
were primarily due to the year-over-year increase in tax expense related to
adjustments for prior period tax matters and the impact of the mix of U.S. and
non-U.S. earnings.
Architecture & Software
                                           Three Months Ended
                                              December 31,
(in millions, except percentages)     2013        2012       Change
Sales                               $ 695.9     $ 657.5     $  38.4
Segment operating earnings            211.9       183.2        28.7
Segment operating margin               30.4 %      27.9 %       2.5  pts

Sales
Architecture & Software year-over-year sales increased 6 percent in the three months ended December 31, 2013. Excluding the impact of foreign currency translation, EMEA and Asia Pacific were the best performing regions for the segment in the three months ended December 31, 2013. The remaining regions reported the sales growth below the segment average growth rate. Logix sales increased 5 percent year over year in the three months ended December 31, 2013. Logix organic sales increased 6 percent, which is in line with the organic growth of Architecture & Software segment as a whole. Operating Margin . . .

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