Rockwell Automation, Inc. — Q3 FY2016 Form 10-Q
Reporting period: Fiscal quarter and nine months ended June 30, 2016; filed August 3, 2016. Rockwell provides industrial automation products, solutions and services. Comparisons below are with the corresponding 2015 periods unless stated otherwise.
Financial performance
| Metric | Q3 FY2016 | 9M FY2016 |
|---|---|---|
| Sales | $1,474.0 million; down 6.4% (organic down 4.8%) | $4,340.9 million; down 7.6% (organic down 3.9%) |
| Gross profit | $616.8 million, versus $678.2 million | $1,823.6 million, versus $2,038.9 million |
| Income before tax | $252.3 million, down 11% | $706.2 million, down 17% |
| Net income | $191.0 million, versus $206.1 million | $544.5 million, versus $626.3 million |
| Diluted EPS | $1.46, versus $1.52 | $4.13, versus $4.60 |
| Adjusted diluted EPS (non-GAAP) | $1.55, versus $1.59 | $4.41, versus $4.82 |
| Total segment operating margin (non-GAAP) | 21.1%, versus 21.8% | 20.4%, versus 21.8% |
| Operating cash flow | Not presented separately for the quarter | $675.3 million, versus $839.7 million |
| Free cash flow (non-GAAP) | Not presented separately for the quarter | $598.3 million, versus $768.7 million |
Balance sheet, debt and shareholder returns
- At June 30, 2016, cash and cash equivalents were $1,509.3 million and short-term investments were $923.4 million. Current assets totaled $4,153.9 million; current liabilities were $1,699.3 million.
- Total debt was $1,875.8 million, including $354.0 million of commercial paper at a 0.49% weighted-average rate. Debt-to-total-capital was 46.9%, compared with 39.9% at September 30, 2015. The company reported $1.0 billion of capacity under its revolving credit facility and compliance with its covenants.
- About 90% of cash, cash equivalents and short-term investments were held by non-U.S. subsidiaries; the company said it did not expect difficulty meeting liquidity needs.
- For the nine months, cash dividends were $284.7 million and cash purchases of treasury stock were $374.1 million. The company repurchased approximately 3.5 million shares and had about $1,075.2 million remaining under board repurchase authorizations at June 30. The quarterly dividend was $1.45 per share, versus $1.30.
Changes and business drivers
- Sales weakness was concentrated in heavy industries, particularly oil and gas; growth in consumer and automotive industries partly offset the decline. Currency translation reduced sales by 1.8 percentage points in Q3 and 3.8 points year to date.
- Q3 Architecture & Software sales declined 2.5%; segment operating margin fell to 27.6% from 29.2%. Control Products & Solutions sales declined 9.4%; its margin was 15.7% versus 16.1%.
- Q3 Logix sales fell 5% and process-initiative sales fell 23%. Emerging-market sales decreased 9.5%, though organic sales there declined only 1.1% as currency translation reduced reported sales.
- Operating cash flow and free cash flow declined year over year, which management attributed primarily to lower net income and less favorable working-capital performance.
- On March 18, 2016, Rockwell acquired MagneMotion, an intelligent conveying-systems manufacturer. The acquisition added $8.1 million of goodwill and $8.3 million of intangible assets.
Outlook, risks and unusual items
- The filing provides no specific full-year sales or EPS guidance. Management described U.S. indicators as mixed, with industrial production and capacity utilization declining while PMI and equipment spending improved; third-party U.S. industrial-production growth projections remained negative for FY2016.
- Management cited weaker regional prospects in parts of EMEA following the U.K. vote to leave the EU, continued recession in Brazil, and pressure on Canada from low oil and commodity prices. It continued to expect emerging markets to grow faster than mature markets over the long term.
- The effective tax rate was 24.3% for Q3 and 22.9% year to date, down from 27.6% and 26.2%. Lower rates reflected non-U.S. tax rates, discrete tax items and the retroactive, permanent extension of the U.S. research and development tax credit. Adjusted EPS excludes non-operating pension costs; it is a non-GAAP measure.
- A Rocky Flats landowners’ settlement, subject to court approval, requires Rockwell and Dow Chemical to pay $375.0 million in aggregate. Rockwell’s stated obligation is $243.75 million, for which it expects full U.S. Department of Energy reimbursement. Rockwell recorded both a liability and an indemnification receivable; reimbursement timing relative to payment remained uncertain. Up to $7.75 million was expected to be paid within 12 months, with the balance due in July 2017.
- Other risks include cyclical customer capital spending, macroeconomic and foreign-exchange conditions, competition and pricing, cybersecurity and IT disruption, supply availability, litigation and tax examinations, and execution and integration of acquisitions. The company said pending legal matters, including asbestos claims, were not expected to materially affect its financial condition or results, while noting litigation outcomes are uncertain.
Most important facts for investors to verify
- Whether demand and organic sales stabilize, especially in oil and gas, process industries, and the U.S. and Asia Pacific markets.
- Whether segment margins and cash generation recover after the reported year-over-year declines.
- The timing and completion of Department of Energy reimbursement for the Rocky Flats settlement obligation.
- The implications of the higher debt-to-capital ratio, commercial-paper refinancing, and the substantial share-repurchase and dividend outlays.
- How tax benefits, pension costs and foreign-exchange movements affect reported versus adjusted earnings.
The interim financial statements were reviewed by Deloitte & Touche, not audited; the review report stated that the firm was not aware of material modifications needed for GAAP conformity.