Rockwell Automation, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended June 30, 2018. Unless noted otherwise, dollar amounts are in millions. The interim financial statements are unaudited; Deloitte conducted a review, not an audit.
Business context and results
Rockwell Automation supplies industrial automation and information products, solutions, and services. Fiscal Q3 sales were $1,698.7, up 6.2% year over year; organic sales increased 5.7%. Currency added 1.8 percentage points to reported growth, while a prior-year divestiture reduced it by 1.3 points. Management cited broad-based growth across regions and industries.
- Fiscal Q3: Gross profit was $741.7, implying an approximate gross margin of 43.7%, versus $677.7 and 42.4% a year earlier. Net income was $198.6 versus $216.9; diluted EPS was $1.58 versus $1.67. Adjusted EPS, a non-GAAP measure, was $2.16 versus $1.76.
- First nine months: Sales were $4,936.5, up 6.3% (organic growth 4.8%). Gross profit was $2,139.6, an approximate 43.3% margin, versus $1,976.5 and 42.6%. Net income was $189.6 versus $621.1; diluted EPS was $1.48 versus $4.77. Adjusted EPS was $6.01 versus $5.06.
- Segments, fiscal Q3: Architecture & Software sales rose 8.7% to $795.7 and operating margin improved to 30.0% from 27.9%. Control Products & Solutions sales rose 4.1% to $903.0 and margin improved to 15.9% from 15.3%. Total segment operating earnings increased 14% to $382.9, with a 22.5% margin versus 21.1%.
Cash flow, debt, and liquidity
- For the first nine months, operating cash flow was $937.2 versus $927.1; capital expenditures were $78.6 versus $97.5; free cash flow, as defined by the company, was $858.6 versus $829.6.
- Cash and cash equivalents were $940.1 at June 30, down from $1,410.9 at September 30, 2017. Short-term investments were $548.6, down from $1,124.6. Combined cash and short-term investments were $1,488.7.
- Cash used in financing was $1,940.5, including $1,082.2 of treasury-stock purchases, $328.3 of dividends, and debt repayments. Total debt was approximately $1,227.9 at June 30, compared with approximately $1,843.8 at September 30, 2017.
- The company reported $1.0 billion of availability under its revolving credit facility, compliance with credit-facility covenants, and no commercial paper outstanding at June 30. It subsequently issued approximately $675 million of commercial paper to fund the PTC share purchase.
Material changes and unusual items
- PTC investment: In June, Rockwell agreed to buy 10,582,010 PTC shares for approximately $1.0 billion at $94.50 per share; the purchase closed July 19, 2018. The forward contract generated a $76.8 loss in Q3, comprising a $7.3 investment loss and a $69.5 valuation adjustment for transfer restrictions pending registration. Subsequent changes in PTC’s share value will affect reported earnings.
- Tax Act: The nine-month effective tax rate was 77.7%, chiefly reflecting $389.5 of provisional transition-tax expense and $94.2 from revaluation of deferred tax assets. These items drove the sharp year-over-year decline in nine-month GAAP net income. The company had not completed its tax accounting and expected to complete the transition-tax accounting by December 31, 2018. Q3 effective tax rate was 21.1%; adjusted nine-month effective tax rate was 19.3%.
- Capital allocation: Rockwell repurchased approximately 6.1 million shares for $1,104.4 in the first nine months. It raised its fiscal 2018 repurchase target to $1.5 billion, subject to business conditions, cash generation, other cash needs, and share price.
- Other costs: First-quarter costs related to unsolicited Emerson proposals were $11.2. Non-operating pension costs were $17.7 for the first nine months, down from $59.4.
Outlook, risks, and contingencies
- Management described industrial demand as broadly supportive: U.S. industrial indicators generally improved in Q3, and forecasts pointed to growth across regions for the balance of fiscal 2018. It noted uncertainty in China, Latin America, EMEA, and around trade tariffs. The company said enacted tariffs were not expected to have a material effect, while continuing to assess impacts and mitigation options.
- No specific full-year fiscal 2018 sales or earnings guidance is provided in the filing text. Long-term goals include above-market organic sales growth, EPS growth above sales growth, return on invested capital above 20%, and free cash flow approximately equal to adjusted income.
- Key stated risks include economic and customer capital-spending cycles, currency and trade policy, competition and pricing, cybersecurity and IT security, product and intellectual-property claims, tax uncertainty, talent retention, retirement-benefit costs, acquisitions, and component availability. The PTC holding adds market-value, liquidity, and transfer-restriction risks; Rockwell has a minority position and no control over PTC.
- The company disclosed thousands of asbestos claimants across lawsuits involving many companies, but said it has historically been dismissed from most claims without payment and does not expect pending matters to materially affect results. It also noted that valid future indemnification claims could be significant. Management reported no material change in environmental matters from its prior annual filing.
Important facts for investors to verify
- Track final Tax Act accounting and any changes to transition-tax, deferred-tax, or related provisional balances.
- Monitor PTC’s market value, the restricted-share valuation adjustment, registration timing, transfer limits, and resulting earnings volatility.
- Assess whether organic growth and segment margin improvement persist, particularly amid regional and tariff uncertainty.
- Review the cash and debt position after the July PTC purchase and further share repurchases, including commercial-paper funding and remaining repurchase plans.
- Compare GAAP results with the company’s non-GAAP adjusted measures and confirm the effects of excluded items.