Rockwell Automation, Inc. — Q1 FY2017 Form 10-Q
Reporting period: Three months ended December 31, 2016; balance sheet compared with September 30, 2016. The quarter’s results are not necessarily indicative of the full fiscal year. Deloitte reviewed the interim financial statements; this was not an audit.
Business context and performance
Rockwell Automation supplies industrial automation and information products, solutions and services. Sales rose 4.5% year over year to $1.490 billion; organic sales increased 3.8%. Currency reduced reported growth by 1.1 percentage points, while acquisitions added 1.8 points. Consumer and transportation were strong; heavy industries remained weak.
- Architecture & Software sales increased 8.3% to $696.4 million; segment operating earnings rose 18% to $208.6 million and margin expanded to 30.0% from 27.4%.
- Control Products & Solutions sales increased 1.3% to $793.9 million; segment operating earnings fell 10% to $108.0 million and margin declined to 13.6% from 15.3%, primarily due to higher incentive compensation.
- Geographically, Asia Pacific sales increased 18.8%; U.S. sales rose 4.2%. EMEA and Latin America reported declines of 1.3% and 1.9%, respectively.
Financial results and liquidity
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Sales | $1,490.3 million | $1,426.6 million |
| Gross profit / gross margin | $642.3 million / 43.1% | $612.7 million / 43.0% |
| Income before taxes | $257.6 million | $236.9 million |
| Net income | $214.7 million | $185.5 million |
| Diluted EPS | $1.65 | $1.40 |
| Adjusted EPS (non-GAAP) | $1.75 | $1.49 |
| Operating cash flow | $310.8 million | $184.8 million |
| Free cash flow (non-GAAP) | $271.4 million | $145.3 million |
Total segment operating margin, a non-GAAP measure, increased to 21.2% from 20.7%. The effective tax rate fell to 16.7% from 21.7%, mainly due to larger favorable discrete tax items and lower non-U.S. tax rates. Adjusted EPS excludes non-operating pension costs and related tax effects.
At December 31, 2016, cash and cash equivalents were $1.595 billion and short-term investments were $888.0 million. Total debt was approximately $1.900 billion, including $250.0 million of notes due in December 2017; the company also had $408.1 million of commercial paper outstanding. A $1.0 billion revolving credit facility was undrawn. Current assets were $4.487 billion and current liabilities $2.204 billion. Cash flow improvement was attributed primarily to lower incentive compensation payments and higher pre-tax income. The company paid $97.5 million in dividends and repurchased approximately 0.6 million shares during the quarter.
Outlook, risks and unusual items
- The filing gives no specific full-year FY2017 sales or EPS guidance. Long-term goals include above-market organic sales growth, EPS growth above sales growth, return on invested capital above 20%, and free cash flow around 100% of adjusted income.
- Management described expected industrial production growth in most regions, with Latin America an exception; Brazil was expected to remain in recession until late calendar 2017. It noted improving near-term European prospects, stable expected China growth, and weaker Indian demand following demonetization-related cash shortages.
- Key risks include cyclical customer capital spending and macroeconomic conditions, currencies, competition and pricing, technology acceptance, cybersecurity and IT security, supply availability and cost, litigation, tax uncertainties, retirement-benefit costs, and execution and integration of acquisitions.
- The Rocky Flats settlement liability of $242.5 million and related indemnification receivable of $243.75 million were recorded at quarter-end. In January 2017, the Department of Energy paid the indemnification amount and the settlement funds were transferred to escrow; Rockwell stated it would not be required to make a payment.
- The company amended its revolving-credit covenant in December 2016, replacing a debt-to-total-capital limit with a minimum EBITDA-to-interest ratio of 3.0 to 1.0. Management said the change provides greater financial flexibility; the company reported covenant compliance.
- Other contingencies include asbestos claims and other lawsuits. Management did not expect pending matters to have a material effect, while noting litigation outcomes are uncertain. The company also identified foreign-exchange exposure and tax examinations as ongoing considerations.
Most important facts for investors to verify
- Whether organic growth and segment profitability persist, particularly the recovery or further pressure in Control Products & Solutions margins.
- How much earnings growth is attributable to underlying operations versus favorable discrete tax items, acquisitions and pension-related adjustments.
- Cash-flow sustainability after working-capital movements, pension contributions, capital spending, dividends, buybacks and the December 2017 debt maturity.
- That the Rocky Flats settlement payment is fully resolved as described and that the corresponding recorded asset and liability are cleared in subsequent reporting.
- Whether management issues or updates full-year guidance, and how macroeconomic, currency, litigation, tax and cybersecurity risks develop.