Rockwell Automation, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months ended March 31, 2017. The interim financial statements are unaudited and were reviewed by Deloitte & Touche, not audited. Rockwell Automation supplies industrial automation and information products, solutions, and services.
Financial results
| Metric | Q2 FY2017 | Q2 FY2016 | Six months FY2017 | Six months FY2016 |
|---|---|---|---|---|
| Sales | $1,554.3 million | $1,440.3 million | $3,044.6 million | $2,866.9 million |
| Net income | $189.5 million | $168.0 million | $404.2 million | $353.5 million |
| Diluted EPS | $1.45 | $1.28 | $3.11 | $2.68 |
| Adjusted diluted EPS (non-GAAP) | $1.55 | $1.37 | $3.30 | $2.86 |
| Segment operating margin (non-GAAP) | 19.0% | 19.3% | 20.1% | 20.0% |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $611.8 million | $399.3 million |
| Free cash flow (non-GAAP) | Not provided for quarter | Not provided for quarter | $544.4 million | $347.9 million |
Q2 sales rose 7.9% year over year; organic sales grew 6.8%, with acquisitions adding 1.7 percentage points and currency reducing growth by 0.6 points. For the six-month period, sales grew 6.2% and organic sales 5.3%. Q2 gross profit was $656.5 million versus $594.1 million; gross margin was approximately 42.2% versus 41.3% (calculated from reported figures). Q2 income before taxes was $230.3 million versus $217.0 million. The effective tax rate fell to 17.7% from 22.6%; the six-month rate was 17.2% versus 22.1%.
Segments and material comparisons
- Architecture & Software: Q2 sales increased 14.2% to $719.0 million; operating earnings rose 23% to $190.6 million and margin expanded to 26.5% from 24.6%. Organic sales increased 13.7%.
- Control Products & Solutions: Q2 sales increased 3.0% to $835.3 million, but operating earnings fell 14% to $105.4 million and margin declined to 12.6% from 15.2%. Management attributed the margin pressure primarily to higher incentive compensation. Organic sales increased 1.4%.
- Management cited broad-based regional and industry growth, including strength in transportation, automotive, China, and EMEA; Latin America was weaker. Q2 U.S. sales represented 56% of total sales.
- Q2 reported EPS increased 13%; adjusted EPS increased 13%. Higher sales supported earnings, while higher incentive compensation partly offset the benefit. Six-month operating cash flow and free cash flow increased, which management attributed mainly to lower incentive compensation and income-tax payments and higher pretax income.
Cash, debt, and liquidity
At March 31, 2017, cash and cash equivalents were $1,440.8 million and short-term investments were $1,092.7 million. Total debt was approximately $1,863.4 million, comprising $373.4 million short-term debt, $250.0 million current long-term debt, and $1,240.0 million long-term debt. Cash plus short-term investments exceeded reported debt by approximately $670 million. The company also held $111.4 million of investments classified in other assets.
Six-month capital expenditures were $67.4 million; cash dividends were $195.5 million and treasury-stock purchases were $185.0 million. The company had $759.0 million remaining under its $1.0 billion share-repurchase authorization. A $1.0 billion revolving credit facility, expiring March 2020, was undrawn; the company reported compliance with its covenants. Substantially all funds were held by non-U.S. subsidiaries, with undistributed earnings generally subject to U.S. tax if repatriated. Management said it expected no difficulty meeting liquidity needs.
Outlook, risks, and unusual items
- The filing provides no specific updated full-year FY2017 sales or EPS guidance. Management’s long-term goals include above-market organic sales growth, EPS growth exceeding sales growth, return on invested capital above 20%, and free cash flow of about 100% of adjusted income.
- Management described U.S. industrial indicators as generally improving in the quarter and expected industrial production growth in all regions in FY2017 except Latin America; Brazil was expected to remain in recession until mid-calendar 2017. These are outlook statements, not guaranteed results.
- The effective tax rate benefited from favorable discrete tax items, including a share-based compensation tax benefit. Adoption of the new share-based compensation standard reduced the tax provision by $16.8 million in Q2 and $20.2 million for the six months. These benefits affect comparability of reported earnings and cash flows.
- The $250.0 million 5.65% notes due December 2017 were reclassified as current debt. In December 2016, the revolving-credit covenant changed from a maximum debt-to-total-capital ratio to a minimum EBITDA-to-interest ratio of 3.0-to-1.0.
- The Rocky Flats settlement was resolved without a payment by Rockwell Automation: the Department of Energy paid $243.75 million of the indemnified obligation, and the full settlement amount was transferred to the plaintiff escrow account.
- Risks identified include cyclical customer capital spending and macroeconomic conditions, currency movements, competition and pricing, technology acceptance, cybersecurity and IT disruption, supply availability and cost, litigation and tax uncertainty, retirement-benefit costs, and execution of acquisitions and productivity initiatives. The company reported no material change to the risk factors in its prior Form 10-K.
Investor verification points
- Assess whether growth and margin trends persist, particularly the contrasting segment performance and Control Products & Solutions’ incentive-compensation pressure.
- Separate recurring operating performance from tax benefits and the company’s non-GAAP pension-cost adjustments; review the definitions and reconciliations of adjusted EPS and free cash flow.
- Monitor cash generation, repurchases, dividend commitments, the December 2017 note maturity, and the availability and cost of commercial-paper funding.
- Review geographic and end-market exposure, especially Latin America, and the risks around cash held overseas and potential repatriation taxes.
- Track developments in asbestos and other litigation, unrecognized tax benefits, and the company’s stated forward-looking risks.