Rockwell Automation Inc. (NYSE:ROK) Q1 2018 Earnings Conference Call - Final Transcript

Jan 24, 2018 • 08:30 am ET


Rockwell Automation Inc. (NYSE:ROK) Q1 2018 Earnings Conference Call - Final Transcript


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Blake Moret

Patrick. Patrick?

Patrick Goris

Thank you, Blake, and good morning, everyone. Before I talk about our quarterly results, let me make a few additional comments about US corporate tax reform. The new tax law not only leads to a lower expected effective tax rate going forward, but also provides us with greater flexibility to deploy the cash we have, regardless of where it is generated. Like many other US companies, we've had a large amount of excess cash held outside the US. We have initiated the repatriation of that cash, a process that will go beyond the current fiscal year.

As Blake mentioned, our priorities for capital deployment remain the same. Funding accelerated organic growth remains priority number one followed by acquisitions, then the dividend, and finally, share repurchases.

In Q1, we recorded provisional charges associated with tax reform totaling about $480 million. These charges include $386 million for the deemed repatriation and $94 million to reduce the value of net deferred tax assets. We excluded the $480 million charges related to tax reform from adjusted EPS, and updates in future quarters to our estimates of these charges will also be excluded from adjusted EPS.

With that, let's move to Slide 5, key financial information, first quarter. As Blake mentioned, we had a good first quarter of the fiscal year with reported sales up 6.5%. Organic growth was in line with our expectations at 5.3%. Currency translation contributed 2.5 points to sales growth, a bit less than we expected, and the fiscal 2017 Q4 divestiture reduced sales by 1.3 points.

Segment operating margin was very strong at 22.4%, up 120 basis points compared to last year. A margin tailwind from good organic growth was partially offset by higher investment spending. Margin performance in the quarter was a bit better than we expected, as overall operating performance was very strong, but also because spend was a bit light.

General corporate net expense of $16 million was up slightly compared to last year. You will note on our financial statements that we excluded about $11 million of third-party advisory costs related to the Emerson proposals from general corporate net and from adjusted EPS. These costs were not included in our November guidance and are unrelated to the operating performance of the Company.

Adjusted EPS of $1.96 was up $0.21 compared to the first quarter of last year, an increase of 12%. The year-over-year increase in adjusted EPS is primarily due to the benefit of higher sales, offset by investment spending. Last quarter, I mentioned during our earnings call that we did not expect our Q1 EPS to exceed last year's. However, our actual Q1 results came in better than expected, mainly as a result of the much lower-than-expected tax rate and, to a lesser extent, better-than-expected segment operating margin performance.

Free cash flow was $179 million in the quarter, or 70% of adjusted income. During the quarter, we paid the annual incentives that our employees earned in fiscal 2017. There was no such payment