Rockwell Automation, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended September 30, 2017. The filing also reports fourth-quarter results; FY2017 figures below are full-year amounts unless stated otherwise. Rockwell Automation supplies industrial automation and information products, solutions, and services through Architecture & Software and Control Products & Solutions.
Key financial metrics
| Metric | FY2017 | FY2016 |
|---|---|---|
| Sales | $6,311.3 million | $5,879.5 million |
| Gross profit / gross margin | $2,624.2 million / 41.6% | $2,475.5 million / 42.1% |
| Net income | $825.7 million | $729.7 million |
| Diluted EPS | $6.35 | $5.56 |
| Adjusted diluted EPS (non-GAAP) | $6.76 | $5.93 |
| Operating cash flow | $1,034.0 million | $947.3 million |
| Free cash flow (non-GAAP) | $892.3 million | $833.7 million |
| Capital expenditures | $141.7 million | $116.9 million |
| Total segment operating earnings / margin (non-GAAP) | $1,233.1 million / 19.5% | $1,188.7 million / 20.2% |
| Total debt at year-end | $1,843.8 million | $1,964.9 million |
| Cash and cash equivalents plus short-term investments | $2,535.5 million | $2,429.2 million |
FY2017 sales grew 7.3% year over year; organic sales rose 6.1%, with acquisitions adding 1.5 percentage points and currency reducing growth by 0.3 points. The effective tax rate was 20.4%, versus 22.6%. Cash dividends were $3.04 per share, up from $2.90.
Material changes versus FY2016
- Growth returned after FY2016 sales declined 6.8%. FY2017 gains were broad-based, led by automotive, semiconductor, and food and beverage demand.
- Architecture & Software sales increased 10.0% to $2,899.3 million; segment margin improved to 27.0% from 26.4%.
- Control Products & Solutions sales increased 5.2% to $3,412.0 million, but segment earnings fell 9% and margin declined to 13.2% from 15.2%, primarily due to higher incentive compensation and restructuring charges.
- Net income included a $60.8 million pretax gain on the approximately $94 million sale of W Interconnections, a distribution business, in the fourth quarter.
- Operating cash flow and free cash flow increased year over year. The company made a voluntary $200 million contribution to its U.S. qualified pension plan in 2017.
Outlook, risks, and contingencies
- Management expects capital expenditures of about $160 million in FY2018 and planned to fund the $250 million debt maturity due December 2017 with commercial paper. The filing provides no specific FY2018 sales or EPS guidance.
- 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 around 100% of adjusted income. Acquisitions are expected to contribute at least one percentage point annually to long-term sales growth.
- Management described industrial production as having returned to growth across regions in FY2017, with further growth forecast for FY2018; it cited positive sentiment in Europe, stable conditions in Asia, and improving confidence and investment in Brazil. These expectations are subject to customer capital-spending cycles and broader economic conditions.
- Principal risks include global economic and currency fluctuations; intense competition and pricing pressure; cybersecurity and product-security incidents affecting industrial systems; reliance on distributors and suppliers, including single-source suppliers; project execution risks in solutions and services; and litigation, environmental remediation, tax, and employee-benefit costs.
- Recorded environmental, conditional asset-retirement, and indemnification liabilities, net of expected recoveries, totaled $83.0 million. The company estimated reasonably possible costs from environmental and indemnification matters of $121.3 million gross, or $98.4 million net of related receivables. Asbestos claims involve a few thousand claimants; the company said it believes the claims will not materially affect results, while noting litigation and insurance-recovery uncertainties.
- Substantially all cash and short-term investments were held by non-U.S. subsidiaries whose undistributed earnings were indefinitely reinvested. The company said it expected no difficulty meeting liquidity needs, but repatriating those funds generally could trigger U.S. tax.
Important facts for investors to verify
- How much FY2017 earnings growth depended on the $60.8 million sale gain, favorable discrete tax items, and the $29.0 million income-tax benefit from early adoption of share-based compensation accounting.
- Whether Control Products & Solutions can recover its segment margin, given the decline to 13.2% and higher incentive compensation and restructuring charges.
- The extent to which FY2017 organic sales momentum and regional industrial-production expectations translate into FY2018 orders and margins.
- Liquidity availability and funding costs, including the December 2017 maturity, commercial-paper reliance, and location of cash outside the United States.
- Future pension expense and funding sensitivity to discount-rate and asset-return assumptions, alongside the company’s remaining environmental, asbestos, and other contingent exposures.