Rockwell Automation, Inc. — Q3 FY2017 Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2017; comparisons are with the corresponding 2016 periods unless otherwise noted. The company provides industrial automation and information products, solutions and services. Interim financial statements are unaudited and were reviewed by Deloitte; the review was not an audit.
Financial results
| Metric | Q3 FY2017 | Q3 FY2016 | Nine months FY2017 | Nine months FY2016 |
|---|---|---|---|---|
| Sales | $1,599.2 million | $1,474.0 million | $4,643.8 million | $4,340.9 million |
| Gross profit | $677.7 million | $616.8 million | $1,976.5 million | $1,823.6 million |
| Gross margin | 42.4% | 41.8% | 42.6% | 42.0% |
| Income before taxes | $276.0 million | $252.3 million | $763.9 million | $706.2 million |
| Net income | $216.9 million | $191.0 million | $621.1 million | $544.5 million |
| Diluted EPS | $1.67 | $1.46 | $4.77 | $4.13 |
| Adjusted diluted EPS (non-GAAP) | $1.76 | $1.55 | $5.06 | $4.41 |
- Q3 reported sales increased 8.5%; organic sales rose 8.2%. Currency reduced growth by 0.9 percentage points and acquisitions contributed 1.2 points. For nine months, reported and organic sales grew 7.0% and 6.3%, respectively.
- Q3 total segment operating margin was 21.1%, unchanged year over year; pre-tax margin was 17.3% versus 17.1%. Nine-month segment operating margin was also 20.4% in both years.
- Architecture & Software Q3 sales rose 9.8% and segment margin improved to 27.9% from 27.6%. Control Products & Solutions sales rose 7.4%, but margin declined to 15.3% from 15.7%. For nine months, the latter segment’s earnings fell 6% and margin declined to 13.9% from 15.4%.
- Effective tax rates were 21.4% for Q3 and 18.7% for nine months, down from 24.3% and 22.9%. Management attributed the reductions primarily to favorable discrete tax items and lower non-U.S. tax rates. Early adoption of share-based compensation accounting reduced tax provision by $4.5 million in Q3 and $24.7 million year to date.
- Nine-month operating cash flow was $927.1 million, versus $675.3 million; free cash flow, a non-GAAP measure, was $829.6 million versus $598.3 million. Management cited higher pre-tax income and lower incentive compensation payments. Capital expenditures were $97.5 million.
- Cash and cash equivalents were $1,549.4 million at June 30, 2017, and short-term investments were $1,065.2 million. Total debt, including current maturities, was $1,842.2 million. The company had a $1.0 billion revolving credit facility, with no borrowings outstanding, and reported compliance with its covenants.
- Cash dividends were $1.52 per share in Q3 and $3.04 per share for nine months. The company repurchased approximately 2.1 million shares for $302.1 million in the first nine months; approximately $643.0 million remained under its authorization at June 30.
Changes, outlook and notable items
- Growth was broad-based, with Q3 strength in transportation, food and beverage, and semiconductor. Asia Pacific and Latin America grew; EMEA sales declined 2.1% in the quarter, primarily due to currency. U.S. sales represented 55% of Q3 revenue, and all cited U.S. economic indicators improved from the prior quarter.
- Management’s stated 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. The filing text provides no specific full-year FY2017 sales or EPS guidance.
- Management expects cash needs for working capital, capital expenditures, retirement contributions, acquisitions, dividends, repurchases and debt repayment to be funded through cash and investments, operating cash flow, commercial paper or debt issuance. Substantially all funds were held by non-U.S. subsidiaries whose undistributed earnings were indefinitely reinvested; repatriation generally could incur U.S. tax.
- Long-term debt included $250.0 million of 5.65% notes due December 2017, classified as current at June 30. Commercial paper outstanding was $348.0 million, at a 1.28% weighted average rate. The credit facility covenant was amended from a debt-to-capital limit to a minimum EBITDA-to-interest ratio of 3.0:1.
- The Rocky Flats settlement required $375.0 million in aggregate from Rockwell and Dow Chemical. The Department of Energy paid Rockwell’s $243.75 million indemnified portion in January 2017; Rockwell reported no payment was required under the settlement.
- Risks include cyclical customer capital spending and macroeconomic conditions, currency movements, competition and pricing, cybersecurity and IT risks, product and intellectual property claims, tax uncertainty, retirement costs, litigation, supply availability, acquisitions and execution of productivity initiatives. The company said pending matters, including asbestos claims, were not expected to have a material effect, while noting outcomes are uncertain.
- Goodwill and indefinite-lived intangibles were assessed in the second quarter and were not impaired. No material changes to previously disclosed risk factors or market-risk exposures were reported.
Investor verification priorities
- Check whether revenue growth and segment profitability continued, particularly the margin pressure in Control Products & Solutions and the contribution from acquisitions.
- Assess earnings quality and sustainability of the lower tax rate, including discrete tax benefits and the share-based compensation accounting impact.
- Track operating cash flow, working-capital movements, retirement contributions, capital spending and free cash flow conversion.
- Monitor the December 2017 note maturity, commercial paper refinancing access, covenant compliance and the location and tax treatment of overseas funds.
- Review share repurchases and dividends against cash needs, and follow developments in asbestos, indemnification, tax and other contingent matters.