Rockwell Automation, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months ended March 31, 2018. Financial amounts are in millions of dollars, except per-share data. The interim statements are unaudited; Deloitte performed a review, not an audit.
Business context and results
Rockwell Automation provides industrial automation and information products, solutions and services. Its reportable segments are Architecture & Software and Control Products & Solutions.
| Metric | Three months ended Mar. 31, 2018 | Prior year | Six months ended Mar. 31, 2018 | Prior year |
|---|---|---|---|---|
| Sales | $1,651.2 | $1,554.3 | $3,237.8 | $3,044.6 |
| Gross profit | $700.8 | $656.5 | $1,397.9 | $1,298.8 |
| Income before taxes | $299.6 | $230.3 | $597.4 | $487.9 |
| Net income (loss) | $227.4 | $189.5 | ($9.0) | $404.2 |
| Diluted EPS | $1.77 | $1.45 | ($0.07) | $3.11 |
| Adjusted EPS (non-GAAP) | $1.89 | $1.55 | $3.85 | $3.30 |
- Second-quarter sales rose 6.2%; organic sales increased 3.5%. For the six-month period, sales rose 6.3% and organic sales increased 4.4%. Currency translation boosted reported growth, while prior-year divestitures reduced it.
- Second-quarter gross margin was approximately 42.4%, versus 42.2% a year earlier; six-month gross margin was approximately 43.2%, versus 42.7%.
- Second-quarter segment operating margin increased to 20.9% from 19.0%; six-month margin rose to 21.6% from 20.1%. Both segments reported higher sales, earnings and margins.
Cash flow, debt and liquidity
- Six-month operating cash flow was $594.1, down from $611.8. Capital expenditures were $56.2, producing company-defined free cash flow of $537.9, versus $544.4. Management attributed the decline mainly to higher incentive compensation and income tax payments.
- Cash and cash equivalents were $1,433.9 at March 31, 2018; short-term investments were $613.4. Total debt was approximately $1,538.3: $308.5 short-term and $1,229.8 long-term. The company repaid $250.0 of notes in December 2017.
- During the quarter, the company repatriated $876 of funds from foreign subsidiaries, primarily using the proceeds to repay commercial paper. It expects to repatriate additional amounts during the fiscal year.
- Six-month financing uses included $661.7 of treasury-stock purchases and $213.5 of dividends. The company expected fiscal 2018 share repurchases of $1.2 billion; $934.8 remained under the January 2018 authorization at March 31.
Material changes, outlook and risks
- Tax Act: The six-month tax provision was $606.4, including provisional charges of $397.0 for the transition tax on deemed repatriation and $94.2 from revaluing deferred tax balances. These charges drove the reported six-month net loss despite higher pre-tax income. The company said its accounting remained provisional and expected to complete its transition-tax accounting by December 31, 2018. Adjusted EPS and adjusted tax rates are non-GAAP measures that exclude specified items.
- Demand and management commentary: Management reported broad-based sales growth, with heavy industries including oil and gas, mining, metals and semiconductors among the strongest. U.S. economic indicators generally improved versus the prior quarter. The filing gives no specific full-year fiscal 2018 sales or EPS forecast; it does state the share-repurchase expectation above and longer-term goals including above-market organic growth and free cash flow of about 100% of adjusted income.
- Risks and contingencies: Management cited uncertainty around proposed U.S.-China tariffs and was evaluating potential impacts and mitigation. It said enacted steel and aluminum tariffs had raised input prices but were not expected to have a material effect. Risks also include cyclical customer spending, foreign exchange, cybersecurity, supply availability, tax audits and litigation. Asbestos claims remain outstanding; management believes pending matters will not materially affect results, while noting litigation outcomes are uncertain.
- Other unusual items: The company incurred $11.2 of advisory fees in the first quarter related to unsolicited Emerson acquisition proposals. Goodwill and indefinite-lived intangible assets were tested in the second quarter and were not impaired.
Important facts for investors to verify
- How final Tax Act calculations compare with the provisional $397.0 transition-tax and $94.2 deferred-tax revaluation charges.
- Whether organic growth and segment margin gains persist after separating currency effects and divestiture impacts.
- How much of operating cash flow reflects recurring operations versus timing and tax-related working-capital movements.
- Whether planned repurchases, dividends and additional repatriations affect cash, debt and share count as expected.
- Potential effects of tariffs, asbestos litigation and other contingencies; management’s stated assessments are not guarantees of outcomes.