Jan 24, 2018

Rockwell Automation Inc. (ROK-NYSE) $200.47

Note: FLASH REPORT; more details to come; changes are highlighted. Except where noted, and highlighted, no other sections of this report have been updated

Reason for Report: Flash Update: 1Q18 Earnings Result.

Prev. Ed.: 4Q17 Earnings Update, Jan 16, 2018.

Flash Update [Note: earnings update in progress; final report to follow]

On Jan 24, 2018, Rockwell Automation reported first-quarter fiscal 2018 (ended Dec 31, 2017) adjusted earnings per share of $1.96 in, up 12% from $1.75 recorded in the prior-year quarter. The year-over-year performance was driven by elevated sales, partially offset by higher investment spending. Earnings also surpassed the Zacks Consensus Estimate of $1.74.

Including one-time items, the company recorded a loss of $1.84 per share, compared to earnings of $1.65 per share reported in the year-ago quarter.

Total revenues came in at $1.59 billion in the quarter, up 6.5% year over year. Revenues, however, missed the Zacks Consensus Estimate of $1.60 billion. Organic sales rose 5.3%. Foreign currency translations boosted sales by 2.5%, while divestitures in the prior year reduced sales by 1.3%.

Operational Update

Cost of sales increased 4.9% year over year to $889.5 million. Gross profit inched up 0.6% to $697 million from $642 million reported in the year-ago quarter. Selling, general and administrative expenses flared up 5.2 % to $389.3 million.

Consolidated segment operating income was $355.5 million, up 12.3% from $316.6 million recorded in the prior-year quarter. Segment operating margin was 22.4% in the reported quarter, a 120-basis-point expansion from the year-earlier quarter due to higher sales, partially offset by higher investment spending.

Segment Results

Architecture & Software: Net sales rose 7.3% year over year to $746.9 million in the fiscal first quarter. Organic sales were up 4.6% and currency translation bolstered sales by 2.7%. Segment operating earnings were $224.6 million compared with $208.6 million recorded in the prior year. Segment operating margin was 30.1% compared with 30.0% witnessed in the year-ago quarter.

Control Products & Solutions: Net sales climbed 5.8% to $839.7 million in the reported quarter. Organic sales increased 5.9%, currency translation boosted sales by 2.3%, and the prior-year divestiture reduced sales by 2.4%. Segment operating earnings increased 21% to $131 million from $108 million in the year-ago quarter. Segment operating margin came in at 15.6% compared with 13.6% recorded in the prior-year quarter.

© Copyright 2018, Zacks Investment Research. All Rights Reserved. Financials

As of Dec 31, 2017, cash and cash equivalents were $1,547 million, up from $1,411 million as of Sep 30, 2017. As of Dec 31, 2017, total debt was $2,079 million, up from $1,844 million as of Sep 30, 2017.

Cash flow from operations came in at $212.7 million in the reported quarter compared with $310.8 million recorded in the year-ago quarter. Return on invested capital was 40.8% as of Dec 31, 2017, up from 34.6% as of Dec 31, 2016.

During the fiscal first quarter, Rockwell Automation repurchased 1.1 million shares for $208.6 million. As of Dec 31, 2017, $399.8 million remained available under the Apr 6, 2016 share repurchase authorization. On Jan 15, 2018, the board of directors authorized the company to expend up to an additional $1 billion to repurchase shares.

Guidance

Rockwell Automation revised its fiscal 2018 guidance. The company raised its adjusted EPS guidance to the range of $7.60-$7.90 from the prior band of $7.20-$7.50. However, the company lowered its reported sales growth outlook range to 4.5-7.5% from the previous range of 5-8%.

Rockwell Automation expects to benefit from expanded product offering and strong customer relationships. Its strategic focus on the Connected Enterprise and substantial investments in technology will steer growth. The company is well positioned to benefit from attractive opportunities in the industrial automation and information market.

MORE DETAILS WILL COME IN THE IMMINENT EDITIONS OF ZACKS RD REPORTS ON ROK.

Portfolio Manager Executive Summary

Rockwell Automation Inc. (ROK) is a leading global provider of industrial and control, and information solutions that help customers meet their manufacturing productivity objectives.

Key factors for determining an investment strategy for Rockwell Automation are as follows:

 Roughly more than 50% of the company’s sales are generated in the United States, and the remaining from international markets.

 Rockwell has a strong franchise in automation, as well as the hybrid and process business. It serves a diversified customer base. The company also has good technological and vertical knowledge.

Industry Position: Rockwell's primary competitors in the electrical equipment industry are larger global companies, including Siemens AG, ABB Ltd., Schneider Electric SA, Emerson Electric Co., Mitsubishi Electric Corp. and Honeywell International Inc. In order to successfully achieve the attractive long-term growth rate, the company needs to penetrate markets in developing countries, where manufacturing assets have migrated. The company, being at a size/scale disadvantage, is unable to effectively capture these opportunities.

Of the 12 firms in the Digest group, 11 (91.67%) had a neutral stance on the stock, one (8.33%) provided positive ratings, while none of the firms had a negative stance.

Zacks Investment Research Page 2 www.zacks.com Neutral or equivalent outlook – (11/12 firms or 91.67%) – Firms with neutral outlook believe Rockwell Automation is well positioned to benefit from improvement in industrial demand, particularly larger projects in emerging markets. The cautious firms expect that newer verticals, such as powertrain and the Connected Enterprise will drive the company’s growth. Oil and gas has also returned to meaningful growth which is aiding the process business grow above the company average. However, the firms remain cautious on slowdown in global capacity utilization and industrial production. The cautious firms are also concerned about escalating input costs. Additionally, continued weakness in the mining industry and unfavorable foreign currency will continue to affect Rockwell Automation’s growth.

Positive or equivalent outlook – (1/12 firms or 8.33%) – According to the bullish firm, Rockwell Automation will grow on the back of its diverse product and services portfolio. The company continues to innovate while investing in new growth opportunities. The firm believes expectations of improved global GDP and strong order performance will drive the company’s growth. Strength in OEM/manufacturing, wastewater and consumer-focused verticals also remain tailwinds. Moreover, focus on strategic acquisitions, strong cash generation and share buyback bode well for Rockwell Automation.

Jan 16, 2018

Overview

Key investment considerations as identified by the analysts are as follows:

Key Positive Arguments Key Negative Arguments Strong Fundamentals: Rockwell possesses End Market Risk: Any disruption in the end market or significant domain expertise in various manufacturing volatility might affect the company’s results. verticals.

Strong Growth Opportunities: The company is well Cyclicality: Many of Rockwell’s customers are in positioned to benefit from a number of end markets cyclical businesses, where demand can vary greatly. such as mining, food, and oil and gas. Logix-Growth Driver: The company’s integrated Shift in Revenue Mix: As Rockwell's LOGIX product architecture product suite — LOGIX — is a market accounts for an increasing proportion of sales, the place differentiator and vital component of its growth in company will become more exposed to competitive adjacent and faster-growing process markets. risks owing to the higher risks in the software business. Connected Enterprise (CE)-Growth Driver: The Foreign Exchange Risk: Rockwell’s operations in company’s CE — vision that connects information the international market are quite widespread. Any across the plant floor to the rest of the enterprise — fluctuation in the currencies of those nations relative integrated supply chain management system will drive to the dollar, might affect Rockwell’s sales and incremental growth and boost margins. income.

Strong Cash Flow: Rockwell maintains sharp focus International Trade and Tax Issues: A substantial on generating solid cash flow from its operating units. portion of the company’s revenues comes from overseas operations and is therefore, subject to the U.S. trade and tax laws, which could change adversely to Rockwell's interests.

Based in Milwaukee, WI, Rockwell Automation Inc. is a global provider of industrial automation power, control, and information products and services. The company operates in two segments — Architecture and Software, and Control Products and Solutions. Architecture and Software is aimed at consumer — oriented markets, whereas the Control Products and Solutions segment sells and

Zacks Investment Research Page 3 www.zacks.com drives other products to companies geared toward natural resource and extraction. The company brings together leading brands in industrial automation for Complete Automation solutions, including Allen-Bradley controls and services. Rockwell has 22,000 employees and its business is spread across more than 80 countries. For more information about the company, please visit its website at www.rockwellautomation.com .

Note: The company’s fiscal year ends on Sep 30, all fiscal references differ from the calendar year.

Jan 16, 2018 June 6, 2013

Long-Term Growth

Long-term (3-5 years) earnings growth projection for Rockwell has been given by only two firms with an average earnings per share (EPS) growth rate of 11%.

Rockwell Automation remains committed to executing its growth and performance strategy while investing in core technologies and globalizing business over the long term. The firms believe Rockwell Automation’s balance sheet, revenue diversification strategy, and experienced leadership team provide strength to the company. It intends to reduce costs and enhance short-term financial performance with prospects for long-term growth.

The firms believe Rockwell Automation has a great business model with a significant number of diverse organic growth opportunities. The company is making a concerted effort to increase revenues in emerging economies and consumer-facing industries. The company’s relentless focus on Control Products and Solutions is expected to produce incremental benefits and market share gains in the future. Additionally, Rockwell Automation has been generating strong free cash flow, which will help it reduce debt, support investments in growth areas, and pay dividends, thereby making it an attractive choice for long-term investors.

Rockwell Automation continues to target its long-term financial goal of 6-8% revenue growth. The company also maintains its objective of delivering double-digit EPS growth, return on invested capital (ROIC) of more than 20% over the long term and cash flow of around 100% of adjusted income. These long-term goals will be supported by Rockwell Automation’s strategy involving diversification of sales streams by expansion of products portfolio, solutions and services, and global presence.

Rockwell Automation also aims to achieve growth rates in excess of the automation market by expanding its served market, strengthening competitive differentiation and serving a wider range of industries and applications.

Rockwell Automation will benefit from expansion in the emerging markets and opportunistic acquisitions. The company made three acquisitions during fiscal 2016 which further strengthened its technology differentiation, increased domain expertise and expanded its presence in the markets. In September 2016, the company acquired Automation Control Products, in sync with the Rockwell Automation’s growth strategy, to help customers enhance global competitiveness through The Connected Enterprise — a vision that connects information across the plant floor to the rest of the enterprise. Its acquisition of MagneMotion adds to its portfolio of innovative motion control solutions for consumer and transportation verticals. Finally, the acquisition of MAVERICK Technologies, adds expertise in chemical, consumer, life sciences, along with oil and gas industry applications.

Jan 16, 2018

Zacks Investment Research Page 4 www.zacks.com Target Price/Valuation

Rating Distribution Positive 8.33%↑ Neutral 91.67%↑ Negative 0.00% Digest High $230.00↑ Digest Low $150.00↑ Avg. Target Price $190.60↑ Analysts with Target Price/Total 10/12

Risks to the target price include a stronger U.S. dollar, lower oil prices and weakness in the mining industry. Besides, weakness in general industrial demand and capital spending backslide could adversely impact the company’s performance.

Dec 4, 2015

Recent Events

On Dec 1, 2017, Rockwell Automation acquired Odos Imaging, a Scottish technology company, in order to build a smart sensing and safety products portfolio. Financial terms of the deal remain undisclosed.

Located in Edinburgh, Scotland, Odos Imaging provides three-dimensional, time-of-flight sensing systems for industrial imaging applications. Rockwell Automation will apply Odos Imaging’s 3-D technologies to its sensing products which will serve industrial applications in the spaces, including automotive and general assembly, packaging and material handling, and logistics.

The Odos Imaging buyout will assist Rockwell Automation’s efforts to provide the Connected Enterprise (CE) solutions to clients. The CE exhibits the company’s endeavor to integrate control and information across the enterprise to help industrial companies and people to be more productive.

On Nov 8, 2017, Rockwell Automation reported 4Q17 adjusted earnings of $1.69 per share, up 11% from $1.52 earned in the prior-year quarter. Total revenues were $1.67 billion in the quarter, up 8.4% year over year (y-o-y).

Revenue

Rockwell Automation reported 4Q17 revenues of $1,667.5 million, up 8.4% from $1,538.6 million in the prior-year quarter.

Segment Performance

Architecture and Software: The Architecture and Software segment contains all the elements of integrated control and information architecture that are capable of controlling customers’ industrial processes connected with manufacturing enterprise. The segment’s sales for 4Q17 increased 8% to $752 million from $696 million in 4Q16.

Control Products and Solutions: The Control Products and Solutions segment combines a comprehensive portfolio of intelligent motor control and industrial control products, along with customer support and application knowledge, necessary to implement an automation solution on the plant floor.

Zacks Investment Research Page 5 www.zacks.com 4Q17 sales of Control Products & Solutions were $915.5 million, which increased 8.7% from $842 million in 4Q16.

Guidance

Rockwell Automation projected sales growth of 5-8% for fiscal 2018.

Outlook

The neutral firms believe improvement in industrial demand, particularly larger projects in emerging markets will drive Rockwell’s revenue growth. Further, demand for automation begins to outpace the broader economy. However, the firms also remain cautious on slowdown in global capacity utilization and industrial production. According to the firms with negative outlook, slowdown in capital spending as well as heightened competition will hurt Rockwell Automation’s growth.

The bullish firm believes Rockwell Automation will grow on the back of its diverse product portfolio and investment in new growth opportunities. The firm believes expectations of improved global GDP and strong order performance will support the company’s growth. Moreover, Rockwell Automation is well positioned to gain from improvements in powertrain citing increased wins.

Margins

As reported by the company, cost of sales increased to $1,020 million in 4Q17 from $886.7 million in 4Q16. Gross profit in 4Q17 was $647.7 million compared with $651.9 million in 4Q16. In 4Q17, the company reported operating profit of $283.5 million compared with $304 million in 4Q16. Operating margins during 4Q17 contracted 280 basis points y-o-y to 17%.

Segment Margins

Operating earnings for Architecture & Software segment were $178 million in 4Q17, down from $180 million reported in the year-ago quarter. The segment’s operating margin was 23.7% in 4Q17 compared with 25.8% a year ago.

Control Products & Solutions segment’s operating earnings were $105.5 million in 4Q17, down from $124.3 million in the year-ago quarter. Operating margin of the segment came in at 11.5% in 4Q17 compared with 14.8% in the prior-year quarter.

For 4Q17, general corporate net expenses decreased to $23.5 million from $25.2 million in the prior- year quarter. As reported by the company, the effective tax rate in 4Q17 was 25.2%.

Outlook

The firms with a neutral stance expect that Rockwell Automation’s margins will gain from extensive focus on restructuring to accelerate the rollout of its Connected Enterprise integrated supply chain management software. However, some firms with the same outlook lowered margins assumption given sluggish volumes, more difficult comparisons, and fewer tailwinds from restructuring, deferrals, etc.

The firms with negative ratings expect margins to be weighed down in the near-to-medium term due to escalating input costs. Additionally, the company’s increased spending to support growth will continue to put pressure on margins in the near term.

Zacks Investment Research Page 6 www.zacks.com Earnings per Share

As reported by the company, 4Q17 net income was $204.6 million compared with $185.2 million in the year-ago quarter. EPS in 4Q17 was $1.69 per share compared with $1.52 per share in 4Q16.

Guidance

For fiscal 2018, the company expects adjusted EPS in the range of $7.20-$7.50.

Outlook

Neutral firms believe Rockwell Automation’s earnings will be supported by its strategy of diversifying sales streams by way of expanding products portfolio, solutions and services and global presence. At the same time, one of the neutral firms reduced EPS estimates due to lower energy capital spending and adverse foreign exchange. The firms with a negative outlook are also concerned about continued weakness in the mining industry.

The bullish firm believes strength in OEM/manufacturing, wastewater and consumer-focused verticals will drive the company’s growth. Additionally, focus on strategic acquisitions, strong cash generation and share buyback bode well for Rockwell Automation.

Jan 16, 2018

Analyst Madhurima Das Copy Editor Content Ed.

Lead Analyst Madhurima Das

QCA Anindya Barman No. of brokers reported/Total brokers Reason for Update Flash

Zacks Investment Research Page 7 www.zacks.com