Rockwell Automation, Inc. — Q2 FY2019 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2019. Unaudited interim results; dollar amounts are in millions unless noted.
Business context and results
Rockwell Automation supplies industrial automation and information products, solutions, and services through its Architecture & Software and Control Products & Solutions segments. Second-quarter reported sales were nearly flat year over year, while organic sales increased; currency translation was a material offset.
Key financial metrics
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Sales | $1,657.2 | $1,651.2 | $3,299.5 | $3,237.8 |
| Gross profit | $708.2 | $703.9 | $1,446.9 | $1,404.1 |
| Gross margin | 42.7% | 42.6% | 43.9% | 43.4% |
| Net income (loss) | $346.0 | $227.4 | $426.3 | $(9.0) |
| Diluted EPS | $2.88 | $1.77 | $3.53 | $(0.07) |
| Adjusted diluted EPS (non-GAAP) | $2.04 | $1.89 | $4.26 | $3.85 |
| Total segment operating margin (non-GAAP) | 21.3% | 20.9% | 22.1% | 21.6% |
| Operating cash flow | Six months: $355.8 | Prior six months: $594.1 | ||
| Free cash flow (non-GAAP) | Six months: $274.9 | Prior six months: $537.9 |
Q2 organic sales grew 3.6% (reported growth 0.4%); six-month organic sales grew 4.6% (reported growth 1.9%). Currency reduced reported growth by 3.2 and 2.7 percentage points, respectively. Q2 segment operating earnings rose 3% and six-month segment operating earnings rose 4%.
- Segments: Q2 Architecture & Software sales fell 2.2% reported and grew 1.2% organically; its margin was 28.4%, versus 28.7%. Control Products & Solutions sales rose 2.5% reported and 5.7% organically; its margin improved to 15.7% from 14.3%.
- Cash and liquidity: Cash and cash equivalents were $780.0 at March 31, compared with $618.8 at September 30, 2018. Short-term investments were $122.2. The company had no commercial paper outstanding at quarter-end.
- Debt: Total debt carrying value was $2,229.8, including $297.4 current and $1,932.4 long-term. In March, the company issued $1.0 billion of notes due 2029 and 2049, receiving net proceeds of $987.6, primarily used to repay commercial paper.
- Capital returns: Six-month dividends were $232.5 and treasury-stock purchases were $528.8. Approximately $579.6 remained under the $1.0 billion repurchase authorization at March 31.
Material changes and unusual items
- Q2 net income and reported EPS benefited from a $98.2 gain on the PTC investment. For the six-month period, the PTC investment generated a $114.5 net fair-value loss, contributing to lower income before taxes versus the prior year. Adjusted EPS, which excludes investment valuation effects and other specified items, increased to $4.26 for the six months from $3.85.
- Q2 income before taxes rose to $402.4 from $299.6, primarily due to the PTC gain. Six-month income before taxes declined to $523.2 from $597.4, primarily due to the PTC investment loss.
- Six-month operating cash flow and free cash flow declined year over year, which management attributed mainly to higher working capital, settlement of treasury locks, and higher tax payments, including Tax Act-related taxes. Capital expenditures increased to $80.9 from $56.2.
- The effective tax rate was 14.0% for Q2 and 18.5% for six months, versus 24.1% and 101.5% in the prior-year periods. The prior-year six-month rate reflected significant Tax Act charges.
- At March 31, the PTC shares were valued at $975.5 and classified as long-term investments; transfer restrictions apply. Changes in their market value can materially affect reported earnings.
Outlook, risks, and contingencies
The filing does not provide a specific revised full-year FY2019 sales or EPS forecast. Management reported that industrial production forecasts continued to project growth in FY2019, while emphasizing exposure to customer capital-spending cycles, regional economic conditions, currencies, tariffs and trade controls, competition, component availability, cybersecurity, and execution of strategic transactions. Long-term goals include above-market organic sales growth, EPS growth above sales growth, return on invested capital above 20%, and free cash flow of about 100% of Adjusted Income; these are goals, not near-term guidance.
- Rockwell announced an agreement to form Sensia with Schlumberger. Subject to regulatory approvals and other customary conditions, Rockwell expects to own 53%, pay Schlumberger $250 million at closing, and consolidate the venture. Sensia is expected to have initial annual revenue of approximately $400 million.
- Management stated that pending litigation and claims, including asbestos matters, were not expected to have a material effect, while acknowledging the inherent uncertainty of litigation. No material indemnification claim was identified as probable or reasonably possible of an unfavorable outcome.
- The company reported compliance with credit-facility covenants. Its $1.25 billion revolving credit facility expires in November 2023; the company had not drawn on it during the periods reported.
Most important facts for investors to verify
- Underlying demand and segment margin trends, particularly the weakness in Logix and automotive against stronger heavy-industry and consumer demand.
- The PTC investment’s valuation, transfer restrictions, and resulting volatility in reported earnings and cash-flow comparisons.
- Whether working-capital requirements and tax payments continue to weigh on operating and free cash flow.
- Completion, funding, expected economics, and integration risks of the Sensia joint venture, including the planned $250 million payment.
- Debt maturities and interest costs following the $1.0 billion long-term note issuance, alongside continued dividends and share repurchases.