Rockwell Automation, Inc. — Q1 FY2018 Form 10-Q
Reporting period: Three months ended December 31, 2017; balance-sheet figures are as of December 31, 2017, compared with September 30, 2017. The interim financial statements are unaudited; Deloitte reviewed them but did not express an audit opinion.
Financial performance
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Sales | $1,586.6 million | $1,490.3 million |
| Gross profit | $697.1 million | $642.3 million |
| Income before income taxes | $297.8 million | $257.6 million |
| Income tax provision | $534.2 million | $42.9 million |
| Net income (loss) | $(236.4) million | $214.7 million |
| Diluted EPS | $(1.84) | $1.65 |
| Adjusted EPS (non-GAAP) | $1.96 | $1.75 |
| Operating cash flow | $212.7 million | $310.8 million |
| Free cash flow (non-GAAP) | $178.6 million | $271.4 million |
- Reported sales rose 6.5%; organic sales increased 5.3%. Currency added 2.5 percentage points to reported growth, while a prior-year divestiture reduced it by 1.3 points.
- Total segment operating earnings increased 12% to $355.5 million; segment operating margin rose to 22.4% from 21.2%. Architecture & Software margin was 30.1% versus 30.0%; Control Products & Solutions margin was 15.6% versus 13.6%.
- Operating cash flow and free cash flow declined year over year, primarily due to higher incentive compensation payments. Capital expenditures were $34.1 million.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $1,547.0 million and short-term investments were $1,100.5 million. Total investments, including $274.1 million classified in other assets, were $1,374.6 million.
- Total debt was approximately $2,079.3 million: $840.0 million short-term debt and $1,239.3 million long-term debt. Commercial paper borrowings were $839.4 million, at a 1.66% weighted average rate and 19-day weighted average maturity.
- The company repaid $250.0 million of 5.65% notes in December. It reported $1.0 billion of availability under its revolving credit facility, compliance with credit covenants, and stable credit-rating outlooks.
- Current liabilities were $2,286.6 million. Other liabilities increased to $596.0 million from $216.4 million, including $381.2 million payable for the Tax Act transition tax, due more than 12 months after quarter-end.
Material changes, outlook and risks
- The principal cause of the GAAP net loss was $479.7 million of provisional tax expense related to the Tax Cuts and Jobs Act: $385.5 million for the transition tax on foreign earnings and $94.2 million for revaluation of U.S. deferred tax balances. Management said the accounting was not complete and estimates could change. Adjusted EPS excludes these tax items, non-operating pension costs and $11.2 million of costs related to unsolicited Emerson acquisition proposals.
- Management reported broad-based regional growth, with heavy industries strongest. U.S. manufacturing indicators mostly improved; the PMI remained above 50. Management said it was too early to quantify any additional benefit to customer investment from U.S. tax reform. Its outlook anticipated industrial-production growth across regions in FY2018, while noting regional and macroeconomic uncertainties.
- The company expected to repurchase $1.2 billion of common stock in FY2018, subject to business conditions, free cash flow, other cash needs and share price. It repurchased approximately 1.1 million shares for $208.6 million during the quarter. The board authorized an additional $1.0 billion repurchase program on January 15, 2018.
- Key disclosed risks include cyclical customer capital spending, economic and currency conditions, competition and pricing, cybersecurity and IT security, product and intellectual-property claims, tax uncertainties, retirement-benefit costs, supply availability, execution of productivity initiatives, and acquisition integration. The company described asbestos-related and other litigation, but said pending matters were not expected to have a material effect; outcomes remain uncertain.
- Management’s 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 long-term goals, not specific quarterly guidance.
Most important facts for investors to verify
- How the provisional Tax Act transition-tax and deferred-tax estimates change as the company completes its accounting.
- Whether organic sales growth and segment margins persist, including the relative contribution of currency, pricing, divestitures and end-market demand.
- Whether operating cash flow recovers from the incentive-compensation-related decline and supports planned repurchases, dividends and other cash uses.
- How short-term commercial-paper funding, interest costs and liquidity evolve, and whether the company remains within credit-facility covenants.
- Whether asbestos, indemnification, tax, cybersecurity or other contingencies develop in a way that changes the company’s assessment of their potential financial impact.