Rockwell Automation, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended September 30, 2018. The filing also reports fourth-quarter results. Rockwell Automation supplies industrial automation products, software, solutions and services through its Architecture & Software and Control Products & Solutions segments.
Financial performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Sales | $6,666.0 million | $6,311.3 million |
| Gross profit / gross margin | $2,872.2 million / 43.1% | $2,624.2 million / 41.6% |
| Segment operating earnings / margin | $1,442.6 million / 21.6% | $1,233.1 million / 19.5% |
| Income before taxes | $1,330.8 million | $1,037.4 million |
| Net income | $535.5 million | $825.7 million |
| Diluted EPS | $4.21 | $6.35 |
| Adjusted diluted EPS (non-GAAP) | $8.11 | $6.76 |
| Cash from operating activities / free cash flow (non-GAAP) | $1,300.0 million / $1,174.5 million | $1,034.0 million / $892.3 million |
- Reported sales rose 5.6%; organic sales rose 5.5%. Currency added 1.4 percentage points to sales growth, while the prior-year divestiture reduced reported growth by 1.3 points.
- Architecture & Software sales increased 6.9%, with segment margin improving to 29.1% from 27.0%. Control Products & Solutions sales increased 4.6%, with margin improving to 15.2% from 13.2%.
- Fourth-quarter sales were $1,729.5 million and net income was $345.9 million. Q4 diluted EPS was $2.80.
Balance sheet, liquidity and capital allocation
- At September 30, 2018, cash and cash equivalents were $618.8 million and short-term investments were $290.9 million. Current assets were $2,830.7 million versus current liabilities of $2,236.9 million.
- Short-term debt was $551.0 million and long-term debt was $1,225.2 million, for total reported debt of $1,776.2 million. The company had a $1.0 billion revolving credit facility available and reported compliance with its covenants.
- Cash and cash equivalents plus short-term investments declined from $2,535.5 million to $909.7 million. The company repatriated about $2.3 billion and used funds primarily for its PTC investment and share repurchases.
- Rockwell repurchased approximately 8.3 million shares for $1.5 billion and paid $440.8 million in dividends during FY2018. The annualized quarterly dividend rate at year-end was $3.68 per share.
Material changes, outlook and unusual items
- Net income and reported EPS fell despite higher sales and segment earnings, principally because FY2018 income tax expense included $538.3 million of Tax Act-related charges. The reported effective tax rate was 59.8%, versus 20.4% in FY2017; the adjusted effective tax rate was 19.3% versus 21.5%.
- The company acquired a 10.6 million-share PTC stake in July 2018 for approximately $1.0 billion. Its year-end carrying value was $1.09 billion, with a reported $90.0 million net gain in FY2018; changes in PTC’s share price and the resale restriction can affect reported earnings. The shares are subject to transfer restrictions, and registration was due by July 2019.
- Management reported favorable demand across many industries, led by food and beverage, mining, life sciences and semiconductor. U.S. industrial indicators remained generally strong, while management expected industrial production and GDP growth rates to slow in 2019. No specific FY2019 revenue or EPS guidance is provided in this filing.
- Management expects FY2019 capital expenditures of about $150 million. Long-term financial goals include above-market organic sales growth, EPS growth faster than sales, return on invested capital above 20%, and free cash flow around 100% of adjusted income.
- Recorded environmental, asset-retirement and indemnification liabilities totaled $93.0 million, offset by $14.1 million of expected recoveries. The company identified 13 Superfund sites and reported a few thousand asbestos claimants, while stating it did not expect pending matters to have a material effect. These outcomes remain uncertain.
- Principal risks include economic and industrial-spending cycles, foreign exchange and trade restrictions, component supply and tariffs, cybersecurity and product security, competition, distributor dependence, project execution, tax disputes, litigation and environmental remediation. Management reported effective disclosure controls and internal control over financial reporting; the auditor issued an unqualified opinion.
Important facts for investors to verify
- Reconcile the $538.3 million Tax Act charge, transition-tax payment schedule and the company’s FY2019 tax treatment, including GILTI.
- Review the PTC investment’s market value, transfer restrictions, registration status and potential effects on quarterly earnings.
- Assess whether organic sales growth and segment-margin improvements continue, especially if industrial activity slows.
- Monitor cash generation against substantial buybacks, dividends, debt obligations and planned capital expenditures.
- Track environmental, asbestos and other contingent liabilities, as well as supply-chain, cyber and foreign-exchange exposures.