Rockwell Automation, Inc. — Q1 FY2019 Form 10-Q
Reporting period: Three months ended December 31, 2018. The company supplies industrial automation and information products, solutions and services through Architecture & Software and Control Products & Solutions. Figures are unaudited; amounts are in U.S. dollars.
Financial results
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Sales | $1,642.3 million | $1,586.6 million |
| Gross profit / margin | $738.7 million / 45.0% | $700.2 million / 44.1% |
| Income before taxes | $120.8 million | $297.8 million |
| Net income (loss) | $80.3 million | $(236.4) million |
| Diluted EPS | $0.66 | $(1.84) |
| Adjusted EPS (non-GAAP) | $2.21 | $1.96 |
| Operating cash flow / free cash flow (non-GAAP) | $212.0 million / $170.0 million | $212.7 million / $178.6 million |
Reported sales grew 3.5%; organic sales grew 5.7%, with currency translation reducing growth by 2.2 percentage points. Segment operating earnings rose 5% to $374.9 million and segment operating margin expanded to 22.8% from 22.4% (both non-GAAP). Gross margin also improved. Sales growth was attributed to strength in heavy industries and consumer markets, partly offset by automotive weakness.
Liquidity, debt and capital allocation
At December 31, 2018, cash and cash equivalents were $632.3 million, short-term investments $121.2 million and long-term investments $1,060.0 million. Current assets were $2,737.9 million versus current liabilities of $2,265.5 million. Short-term and long-term debt totaled $1,866.7 million, including $630.0 million of commercial paper. The company reported a $1.25 billion revolving credit facility maturing in November 2023, no borrowings under it, and compliance with its covenants.
Operating cash flow was nearly flat year over year; free cash flow declined to $170.0 million, with capital expenditures of $42.0 million. The company paid $116.9 million in dividends and repurchased about 1.8 million shares for $292.8 million during the quarter; approximately $815.6 million remained under its then-current repurchase authorization.
Material changes and unusual items
- A $212.7 million decline in the fair value of the company’s PTC Inc. investment was recorded in earnings. The shares were valued at $877.3 million at quarter-end after registration removed a marketability discount; the shares remain subject to transfer restrictions. This investment-related item was the main reason pretax income fell despite higher sales and segment earnings.
- Q1 FY2018 included $479.7 million of provisional tax expense related to the U.S. Tax Act, contributing to the prior-year net loss and unusually high 179.4% effective tax rate. The current-quarter effective tax rate was 33.5%; adjusted effective tax rate was 18.7% (non-GAAP).
- The company adopted ASC 606 revenue recognition on October 1, 2018 using the modified retrospective method, increasing opening retained earnings by $6.1 million. Adoption increased current-quarter net income by $2.3 million versus the result without adoption. Prior-period figures were not restated.
Outlook, management commentary and risks
The filing provides no specific quarterly or full-year FY2019 earnings or sales guidance. Management reported improving U.S. industrial production and capacity utilization; the U.S. PMI declined to 54.1 but remained consistent with expansion. It cited slowing growth and uncertainty in EMEA, Latin American policy uncertainty, and expectations that Chinese stimulus would largely offset slowing domestic demand. Long-term goals include above-market organic sales growth, EPS growth above sales growth, return on invested capital above 20%, and free cash flow near 100% of adjusted income; these are long-term objectives, not near-term guidance.
Disclosed risks include global economic and customer capital-spending conditions, currency and trade policy, component availability and cost, competition and pricing, cybersecurity and IT disruption, product and intellectual-property claims, execution of productivity initiatives, and volatility in the PTC investment. The company reported a few thousand asbestos-related claimants, generally alongside many other defendants; management believes pending matters will not materially affect the company, while acknowledging litigation uncertainty. No material change to previously disclosed risk factors was reported.
Important facts for investors to verify
- PTC investment valuation, transfer restrictions, and the potential for further reported-earnings volatility.
- Whether organic sales growth and segment margin improvement persist, particularly given automotive weakness and regional economic uncertainty.
- Cash generation relative to dividends, repurchases, capital spending and debt obligations; verify the continuing amount and use of repurchase authorization.
- Effects of ASC 606 and the current tax rate on comparability, and whether the adjusted non-GAAP measures reconcile to reported results as expected.
- Developments in asbestos and other legal matters, and any changes to management’s assessment of their potential financial impact.