10-Q 1 rok-2018630x10q.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
_________________________________________
FORM 10-Q 
_________________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2018
Commission file number 1-12383
_________________________________________
Rockwell Automation, Inc.
(Exact name of registrant as specified in its charter)
_________________________________________
Delaware
 
25-1797617
(State or other jurisdiction
of incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
1201 South Second Street,
Milwaukee, Wisconsin
 
53204
(Address of principal executive offices)
 
(Zip Code)
+1 (414) 382-2000
Registrant’s telephone number, including area code 
_________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☑    No  ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☑    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
 
Large Accelerated Filer
 
Accelerated Filer
 
 
Non-accelerated Filer
☐ (Do not check if smaller reporting company)
 
Smaller Reporting Company
 
 
 
 
 
Emerging Growth Company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ☐    No  ☑
123,164,853 shares of registrant’s Common Stock, $1.00 par value, were outstanding on June 30, 2018.



ROCKWELL AUTOMATION, INC.


INDEX
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



2

PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements

ROCKWELL AUTOMATION, INC.

CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(in millions, except per share amounts)


 
June 30,
2018
 
September 30,
2017
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
940.1

 
$
1,410.9

Short-term investments
548.6

 
1,124.6

Receivables
1,149.3

 
1,135.5

Inventories
570.3

 
558.7

Other current assets
167.5

 
191.0

Total current assets
3,375.8

 
4,420.7

Property, net of accumulated depreciation of $1,579.3 and $1,511.9, respectively
537.3

 
583.9

Goodwill
1,078.5

 
1,077.7

Other intangible assets, net
222.5

 
238.0

Deferred income taxes
296.7

 
443.6

Other assets
326.8

 
397.8

Total
$
5,837.6

 
$
7,161.7

LIABILITIES AND SHAREOWNERS’ EQUITY
Current liabilities:
 
 
 
Short-term debt
$
0.8

 
$
350.4

Current portion of long-term debt

 
250.0

Accounts payable
641.8

 
623.2

Compensation and benefits
259.8

 
272.6

Advance payments from customers and deferred revenue
261.6

 
240.6

Customer returns, rebates and incentives
195.6

 
188.8

Other current liabilities
394.0

 
220.2

Total current liabilities
1,753.6

 
2,145.8

Long-term debt
1,227.1

 
1,243.4

Retirement benefits
844.5

 
892.5

Other liabilities
568.2

 
216.4

Commitments and contingent liabilities (Note 11)

 

Shareowners’ equity:
 
 
 
Common stock ($1.00 par value, shares issued: 181.4)
181.4

 
181.4

Additional paid-in capital
1,669.7

 
1,638.0

Retained earnings
5,851.5

 
6,103.4

Accumulated other comprehensive loss
(1,140.5
)
 
(1,179.2
)
Common stock in treasury, at cost (shares held: 58.2 and 53.0, respectively)
(5,117.9
)
 
(4,080.0
)
Total shareowners’ equity
1,444.2

 
2,663.6

Total
$
5,837.6

 
$
7,161.7

See Notes to Condensed Consolidated Financial Statements.

3

ROCKWELL AUTOMATION, INC.


CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(in millions, except per share amounts)


 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Sales
 
 
 
 
 
 
 
Products and solutions
$
1,517.8

 
$
1,429.6

 
$
4,400.8

 
$
4,144.2

Services
180.9

 
169.6

 
535.7

 
499.6

 
1,698.7

 
1,599.2

 
4,936.5

 
4,643.8

Cost of sales
 
 
 
 
 
 
 
Products and solutions
(846.0
)
 
(813.9
)
 
(2,468.0
)
 
(2,348.2
)
Services
(111.0
)
 
(107.6
)
 
(328.9
)
 
(319.1
)
 
(957.0
)
 
(921.5
)
 
(2,796.9
)
 
(2,667.3
)
Gross profit
741.7

 
677.7

 
2,139.6

 
1,976.5

Selling, general and administrative expenses
(402.2
)
 
(386.8
)
 
(1,180.7
)
 
(1,166.0
)
Other (expense) income
(71.3
)
 
4.2

 
(56.0
)
 
10.1

Interest expense
(16.5
)
 
(19.1
)
 
(53.8
)
 
(56.7
)
Income before income taxes
251.7

 
276.0

 
849.1

 
763.9

Income tax provision
(53.1
)
 
(59.1
)
 
(659.5
)
 
(142.8
)
Net income
$
198.6

 
$
216.9

 
$
189.6

 
$
621.1

Earnings per share:
 
 
 
 
 
 
 
Basic
$
1.60

 
$
1.69

 
$
1.50

 
$
4.83

Diluted
$
1.58

 
$
1.67

 
$
1.48

 
$
4.77

Cash dividends per share
$
0.92

 
$
1.52

 
$
2.59

 
$
3.04

Weighted average outstanding shares:
 
 
 
 
 
 
 
Basic
124.4

 
128.4

 
126.5

 
128.5

Diluted
125.8

 
129.9

 
128.1

 
130.0

See Notes to Condensed Consolidated Financial Statements.


4

ROCKWELL AUTOMATION, INC.


CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
(in millions)

 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
198.6

 
$
216.9

 
$
189.6

 
$
621.1

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Pension and other postretirement benefit plan adjustments (net of tax expense of $7.2, $12.6, $22.0 and $37.8)
20.2

 
23.8

 
60.6

 
72.1

Currency translation adjustments
(95.7
)
 
24.9

 
(35.3
)
 
(0.5
)
Net change in unrealized gains and losses on cash flow hedges (net of tax expense (benefit) of $6.0, ($1.0), $5.4 and $2.3)
16.4

 
(4.4
)
 
15.9

 
3.6

Net change in unrealized gains and losses on available-for-sale investments (net of tax expense (benefit) of $0.1, ($0.0), ($0.5) and ($0.0))
0.1

 

 
(2.5
)
 
(0.1
)
Other comprehensive (loss) income
(59.0
)
 
44.3

 
38.7

 
75.1

Comprehensive income
$
139.6

 
$
261.2

 
$
228.3

 
$
696.2

See Notes to Condensed Consolidated Financial Statements.


5

ROCKWELL AUTOMATION, INC.


CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(in millions)

 
Nine Months Ended
June 30,
 
2018
 
2017
Operating activities:
 
 
 
Net income
$
189.6

 
$
621.1

Adjustments to arrive at cash provided by operating activities:
 
 
 
Depreciation
103.5

 
100.7

Amortization of intangible assets
21.4

 
23.3

Change in fair value of investments
76.8

 

Share-based compensation expense
28.6

 
29.4

Retirement benefit expense
84.9

 
129.2

Pension contributions
(43.2
)
 
(40.8
)
Net loss (gain) on disposition of property
1.4

 
(0.1
)
Changes in assets and liabilities, excluding effects of acquisitions and foreign
currency adjustments:
 
 
 
Receivables
(37.7
)
 
(39.7
)
Inventories
(26.1
)
 
(53.0
)
Accounts payable
18.7

 
66.7

Advance payments from customers and deferred revenue
22.5

 
30.1

Compensation and benefits
(8.3
)
 
105.7

Income taxes
495.2

 
(22.4
)
Other assets and liabilities
9.9

 
(23.1
)
Cash provided by operating activities
937.2

 
927.1

 
 
 
 
Investing activities:
 
 
 
Capital expenditures
(78.6
)
 
(97.5
)
Acquisition of businesses, net of cash acquired
(9.9
)
 
(1.1
)
Purchases of investments
(296.9
)
 
(916.8
)
Proceeds from maturities of investments
791.5

 
614.9

Proceeds from sale of investments
155.3

 
36.0

Proceeds from sale of property
0.5

 
0.8

Cash provided by (used for) investing activities
561.9

 
(363.7
)
 
 
 
 
Financing activities:
 
 
 
Net repayment of short-term debt
(349.7
)
 
(100.2
)
Repayment of long-term debt
(250.0
)
 

Cash dividends
(328.3
)
 
(293.2
)
Purchases of treasury stock
(1,082.2
)
 
(304.6
)
Proceeds from the exercise of stock options
67.9

 
160.3

Other financing activities
1.8

 

Cash used for financing activities
(1,940.5
)
 
(537.7
)
 
 
 
 
Effect of exchange rate changes on cash
(29.4
)
 
(2.7
)
 
 
 
 
(Decrease) increase in cash and cash equivalents
(470.8
)
 
23.0

Cash and cash equivalents at beginning of period
1,410.9

 
1,526.4

Cash and cash equivalents at end of period
$
940.1

 
$
1,549.4

See Notes to Condensed Consolidated Financial Statements.

6

ROCKWELL AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



1. Basis of Presentation and Accounting Policies
In the opinion of management of Rockwell Automation, Inc. ("Rockwell Automation" or "the Company"), the unaudited Condensed Consolidated Financial Statements contain all adjustments necessary to present fairly the financial position, results of operations and cash flows for the periods presented and, except as otherwise indicated, such adjustments consist only of those of a normal, recurring nature. These statements should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended September 30, 2017. The results of operations for the three and nine-month periods ended June 30, 2018, are not necessarily indicative of the results for the full year. All date references to years and quarters herein refer to our fiscal year and fiscal quarter unless otherwise stated.
Receivables
Receivables are stated net of an allowance for doubtful accounts of $19.7 million at June 30, 2018, and $24.9 million at September 30, 2017. In addition, receivables are stated net of an allowance for certain customer returns, rebates and incentives of $7.8 million at June 30, 2018, and $11.9 million at September 30, 2017.
Earnings Per Share
The following table reconciles basic and diluted earnings per share (EPS) amounts (in millions, except per share amounts):
 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
198.6

 
$
216.9

 
$
189.6

 
$
621.1

Less: Allocation to participating securities
(0.1
)
 
(0.3
)
 
(0.2
)
 
(0.7
)
Net income available to common shareowners
$
198.5

 
$
216.6


$
189.4

 
$
620.4

Basic weighted average outstanding shares
124.4

 
128.4

 
126.5

 
128.5

Effect of dilutive securities
 
 
 
 
 
 
 
Stock options
1.2

 
1.2

 
1.4

 
1.2

Performance shares
0.2

 
0.3

 
0.2

 
0.3

Diluted weighted average outstanding shares
125.8

 
129.9

 
128.1

 
130.0

Earnings per share:
 
 
 
 
 
 
 
Basic
$
1.60

 
$
1.69

 
$
1.50

 
$
4.83

Diluted
$
1.58

 
$
1.67

 
$
1.48

 
$
4.77

For each of the three and nine months ended June 30, 2018, 0.9 million shares related to share-based compensation awards were excluded from the diluted EPS calculation because they were antidilutive. For the three and nine months ended June 30, 2017, 0.6 million and 0.8 million shares, respectively, related to share-based compensation awards were excluded from the diluted EPS calculation because they were antidilutive.
Non-Cash Investing and Financing Activities
Capital expenditures of $13.4 million and $22.3 million were accrued within accounts payable and other current liabilities at June 30, 2018 and 2017, respectively. At June 30, 2018 and 2017, there were $22.6 million and $3.4 million, respectively, of outstanding common stock share repurchases recorded in accounts payable that did not settle until the next fiscal quarter. These non-cash investing and financing activities have been excluded from cash used for capital expenditures and treasury stock purchases in the Condensed Consolidated Statement of Cash Flows.

7

ROCKWELL AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

1. Basis of Presentation and Accounting Policies (continued)

Recent Accounting Pronouncements
In March 2017, the FASB issued a new standard regarding the presentation of net periodic pension and postretirement benefit costs. This standard requires the service cost component to be reported in the income statement in the same line item as other compensation costs arising from services rendered by the related employees during the period. The other components of net periodic benefit cost are required to be presented separately from the service cost component in either a separate line item or within another appropriate line item with disclosure of where those costs are recorded. This standard also requires that only the service cost component is eligible for capitalization, when applicable. This standard is effective for us for reporting periods starting October 1, 2018. We are currently evaluating the impact the adoption of this standard will have on our consolidated financial statements and related disclosures.
In February 2016, the FASB issued a new standard on accounting for leases that requires lessees to recognize right-of-use assets and lease liabilities for most leases, among other changes to existing lease accounting guidance. The new standard also requires additional qualitative and quantitative disclosures about leasing activities. This standard is effective for us for reporting periods beginning October 1, 2019. We are currently evaluating the impact the adoption of this standard will have on our consolidated financial statements and related disclosures.
In May 2014, the FASB issued a new standard on revenue recognition related to contracts with customers. This standard supersedes nearly all existing revenue recognition guidance and involves a five-step principles-based approach to recognizing revenue. The underlying principle is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The new standard will also require additional qualitative and quantitative disclosures about contracts with customers, significant judgments made in applying the revenue guidance, and assets recognized from the costs to obtain or fulfill a contract. We will adopt this new standard under the modified retrospective method in the first quarter of fiscal 2019, with the cumulative effect of initially applying the guidance recognized in retained earnings at the adoption date.
We have established a project plan and a cross-functional implementation team to adopt the new revenue standard. We are in the process of identifying and implementing necessary changes to accounting policies, processes, controls and systems to enable compliance with this new standard. We continue to evaluate the impact the adoption of this standard will have on our consolidated financial statements and related disclosures. Although we do not expect the effect of changes to our accounting for revenue and contract costs to be significant, we do expect the impacts will include changes to the timing of revenue currently recognized under the completed contract method, changes to the timing of revenue from software licenses bundled with services, and the capitalization of certain contract costs. We do expect an increase in qualitative and quantitative disclosures about contracts with customers, significant judgments made in applying the revenue guidance, and assets recognized from the costs to obtain or fulfill a contract.

8

ROCKWELL AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

2. Share-Based Compensation
We recognized $9.9 million and $28.6 million of pre-tax share-based compensation expense during the three and nine months ended June 30, 2018, respectively. We recognized $9.2 million and $29.4 million of pre-tax share-based compensation expense during the three and nine months ended June 30, 2017, respectively. Our annual grant of share-based compensation takes place during the first quarter of each fiscal year. The number of shares granted to employees and non-employee directors and the weighted average fair value per share during the periods presented were (in thousands, except per share amounts):
 
Nine Months Ended June 30,
 
2018
 
2017
 
Grants
 
Wtd. Avg.
Share
Fair Value
 
Grants
 
Wtd. Avg.
Share
Fair Value
Stock options
865

 
$
35.46

 
1,001

 
$
25.49

Performance shares
40

 
219.04

 
42

 
174.37

Restricted stock and restricted stock units
45

 
188.98

 
51

 
138.35

Unrestricted stock
7

 
183.76

 
8

 
128.35

3. Inventories
Inventories consist of (in millions):
 
 
June 30,
2018
 
September 30,
2017
Finished goods
$
223.3

 
$
218.7

Work in process
180.4

 
168.0

Raw materials
166.6

 
172.0

Inventories
$
570.3

 
$
558.7


9

ROCKWELL AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

4. Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the nine months ended June 30, 2018, are (in millions):
 
Architecture &
Software
 
Control
Products &
Solutions
 
Total
Balance as of September 30, 2017
$
417.2

 
$
660.5

 
$
1,077.7

Acquisition of business
6.8

 

 
6.8

Translation
(1.0
)
 
(5.0
)
 
(6.0
)
Balance as of June 30, 2018
$
423.0

 
$
655.5

 
$
1,078.5


Other intangible assets consist of (in millions):
 
June 30, 2018
 
Carrying
Amount
 
Accumulated
Amortization
 
Net
Amortized intangible assets:
 
 
 
 
 
Computer software products
$
190.9

 
$
115.2

 
$
75.7

Customer relationships
113.8

 
65.3

 
48.5

Technology
107.2

 
62.8

 
44.4

Trademarks
32.2

 
23.4

 
8.8

Other
11.3

 
9.9

 
1.4

Total amortized intangible assets
455.4

 
276.6

 
178.8

Allen-Bradley® trademark not subject to amortization
43.7

 

 
43.7

Total
$
499.1

 
$
276.6

 
$
222.5

 
September 30, 2017
 
Carrying
Amount
 
Accumulated
Amortization
 
Net
Amortized intangible assets:
 
 
 
 
 
Computer software products
$
194.8

 
$
113.2

 
$
81.6

Customer relationships
114.5

 
61.5

 
53.0

Technology
104.8

 
57.9

 
46.9

Trademarks
32.3

 
21.1

 
11.2

Other
11.4

 
9.8

 
1.6

Total amortized intangible assets
457.8

 
263.5

 
194.3

Allen-Bradley® trademark not subject to amortization
43.7

 

 
43.7

Total
$
501.5

 
$
263.5

 
$
238.0

Estimated amortization expense is $27.6 million in 2018, $24.6 million in 2019, $21.8 million in 2020, $20.9 million in 2021 and $19.0 million in 2022.
We performed our annual evaluation of goodwill and indefinite life intangible assets for impairment as required by accounting principles generally accepted in the United States (U.S. GAAP) during the second quarter of 2018 and concluded that these assets are not impaired.

10

ROCKWELL AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

5. Short-term Debt
Our short-term debt obligations primarily consist of commercial paper borrowings. We had no commercial paper borrowings outstanding at June 30, 2018. At September 30, 2017, our commercial paper borrowings outstanding were $350.0 million. The weighted average interest rate of the commercial paper outstanding at September 30, 2017 was 1.26 percent.
In December 2017, we repaid our $250.0 million 5.65% notes which were classified as the current portion of long-term debt at September 30, 2017.
On July 19, 2018, in connection with the purchase of PTC, Inc. (PTC) securities, as discussed in Note 8 in the Condensed Consolidated Financial Statements, we issued approximately $675 million of commercial paper at a weighted average interest rate of 2.19 percent.
6. Other Current Liabilities
Other current liabilities consist of (in millions):
 
June 30,
2018
 
September 30,
2017
Unrealized losses on foreign exchange contracts
$
11.2

 
$
31.3

Product warranty obligations
30.0

 
28.5

Taxes other than income taxes
39.3

 
42.7

Accrued interest
15.3

 
16.9

Dividends payable
113.3

 

Income taxes payable
55.5

 
32.6

Other
129.4

 
68.2

Other current liabilities
$
394.0

 
$
220.2

7. Product Warranty Obligations
We record a liability for product warranty obligations at the time of sale to a customer based upon historical warranty experience. Most of our products are covered under a warranty period that runs for twelve months from either the date of sale or installation. We also record a liability for specific warranty matters when they become probable and reasonably estimable.
Changes in product warranty obligations are (in millions):
 
Nine Months Ended
June 30,
 
2018
 
2017
Balance at beginning of period
$
28.5

 
$
28.0

Accruals for warranties issued during the current period
19.2

 
19.0

Adjustments to pre-existing warranties
0.2

 
(1.5
)
Settlements of warranty claims
(17.9
)
 
(18.3
)
Balance at end of period
$
30.0

 
$
27.2

 

11

ROCKWELL AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

8. Investments

We record investments in fixed income and equity securities, classified as available-for-sale investments or trading investments, at fair value.
Available-for-sale Investments
We invest in certificates of deposit, time deposits, commercial paper and other fixed income securities which were classified as available-for-sale as of June 30, 2018, and September 30, 2017. Unrealized gains and losses on available-for-sale investments are included in our Condensed Consolidated Balance Sheet as a component of accumulated other comprehensive loss, net of any deferred taxes. Realized gains and losses are included in net income.
Our available-for-sale investments consist of (in millions):
 
 
June 30,
2018
 
September 30,
2017
Certificates of deposit and time deposits
 
$
477.9

 
$
1,005.3

Commercial paper
 

 
20.3

Corporate debt securities
 
160.3

 
199.4

Government securities
 
65.8

 
116.8

Asset-backed securities
 
30.0

 
45.8

Total
 
$
734.0

 
$
1,387.6

Pre-tax gross unrealized gains and losses on available-for-sale investments were not material as of June 30, 2018. Pre-tax gross realized gains and losses on available-for-sale investments were not material for the three and nine months ended June 30, 2018. At June 30, 2018, there were no outstanding purchases of available-for-sale investments recorded in accounts payable.
We evaluated all available-for-sale investments for which the fair value was less than amortized cost for impairment on an individual security basis at June 30, 2018. This assessment included consideration of our intent and ability to hold the security and the credit risks specific to each security. We determined that the declines in fair value of these investments were not other than temporary as of June 30, 2018, and accordingly we did not recognize any impairment charges in net income.
The table below summarizes the contractual maturities of our investments as of June 30, 2018 (in millions). Actual maturities may differ from the contractual maturities below as borrowers may have the right to prepay certain obligations.
 
 
Fair Value
Less than one year
 
$
548.6

Due in one to five years
 
185.4

Total
 
$
734.0

Classification of our available-for-sale investments as current or noncurrent is based on the nature of the investment and when the investment is reasonably expected to be realized. These investments were included in the following line items within the Condensed Consolidated Balance Sheet (in millions):
 
 
June 30,
2018
 
September 30,
2017
Short-term investments
 
$
548.6

 
$
1,124.6

Other assets
 
185.4

 
263.0

Total
 
$
734.0

 
$
1,387.6


12

ROCKWELL AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

8. Investments (continued)
Trading Investments
On June 11, 2018, we entered into a Securities Purchase Agreement (the "Purchase Agreement") with PTC. PTC agreed to sell 10,582,010 shares of its common stock (the "Shares") to us in a private placement at a purchase price of $94.50 per share for an aggregate purchase price of approximately $1.0 billion. For a period of approximately 3 years after the closing of the Purchase Agreement transaction ("Closing") we are subject to entity-specific transfer restrictions subject to certain exceptions. Following the first anniversary of the Closing, the Company will be allowed to transfer Shares not exceeding, in the aggregate in any 90-day period, a number of Shares equal to up to 1.0% of PTC's total outstanding shares of common stock as of the first day in such 90-day period, but no more than 2.0% of PTC's total outstanding shares of common stock in each of the second year and the third year after the Closing.
The Purchase Agreement, which was a firm commitment as of June 11, 2018, was determined to be a forward contract which was recorded at fair value and designated as a trading security. For the three months ended June 30, 2018, losses of $76.8 million related to this forward contract were recorded in other (expense) income in the Condensed Consolidated Statement of Operations. The forward contract was valued using the difference between the purchase price of $94.50 per share of PTC common stock and the most recent closing price of PTC common stock quoted on Nasdaq, resulting in losses of $7.3 million, less a temporary discount for lack of marketability calculated using a put-option model, resulting in losses of $69.5 million. The discount is due to an instrument-specific restriction as the Shares will be issued as private placements but are contractually required to be registered by PTC under the Securities Act of 1933 within one year, at which time the discount will be reversed. As of June 30, 2018, a corresponding liability is recorded in other current liabilities in the Condensed Consolidated Balance Sheet.
On July 19, 2018, we completed the purchase of the Shares. The investment maintains the same classification as the forward contract, a trading security, and will be recorded at fair value, less a discount for lack of marketability, with any changes in fair value recorded to earnings.
Fair Value of Investments
U.S. GAAP defines fair value as the price that would be received for an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability. U.S. GAAP also classifies the inputs used to measure fair value into the following hierarchy:
Level 1:
 
Quoted prices in active markets for identical assets or liabilities.
Level 2:
 
Quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.
Level 3:
 
Unobservable inputs for the asset or liability.
We recognize all available-for-sale and trading investments at fair value in the Condensed Consolidated Balance Sheet. The valuation methodologies used for our investments measured at fair value are described as follows.
Certificates of deposit and time deposits — These investments are stated at cost, which approximates fair value.
Commercial paper — These investments are stated at amortized cost, which approximates fair value.
Corporate debt securities — Valued at either the yields currently available on comparable securities of issuers with similar credit ratings or valued under a discounted cash flow approach that maximizes observable inputs, such as current yields of similar instruments, but includes adjustments for certain risks that may not be observable such as credit and liquidity risks.
Government securities — Valued at the most recent closing price on the active market on which the individual securities are traded or, absent an active market, utilizing observable inputs such as closing prices in less frequently traded markets.
Asset-backed securities — Valued using a discounted cash flow approach that maximizes observable inputs, such as current yields of benchmark instruments, but includes adjustments for certain risks that may not be observable such as credit and liquidity risks.

13

ROCKWELL AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

8. Investments (continued)
Forward contract — Valued using the difference between the PTC purchase price of $94.50 per share of PTC common stock and the most recent closing price of PTC common stock quoted on Nasdaq, less a temporary discount for lack of marketability. The discount for lack of marketability, which will reverse upon registration of the PTC securities, is calculated using a put-option model which includes observable and unobservable inputs and is categorized as Level 3 in the fair value hierarchy. The primary inputs include historical and implied PTC common stock volatility and the restriction term.

The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while we believe our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. We did not have any transfers between levels of fair value measurements during the periods presented.
Fair values of our investments were (in millions):
 
 
June 30, 2018
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
Certificates of deposit and time deposits
 
$

 
$
477.9

 
$

 
$
477.9

Commercial paper
 

 

 

 

Corporate debt securities
 

 
160.3

 

 
160.3

Government securities
 
55.7

 
10.1

 

 
65.8

Asset-backed securities
 

 
30.0

 

 
30.0

Total assets
 
$
55.7

 
$
678.3

 
$

 
$
734.0

Other current liabilities
 
 
 
 
 
 
 
 
Forward contract
 
$

 
$

 
$
76.8

 
$
76.8

Total liabilities
 
$

 
$

 
$
76.8

 
$
76.8

 
 
September 30, 2017
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Certificates of deposit and time deposits
 
$

 
$
1,005.3

 
$

 
$
1,005.3

Commercial paper
 

 
20.3

 

 
20.3

Corporate debt securities
 

 
199.4

 

 
199.4

Government securities
 
98.9

 
17.9

 

 
116.8

Asset-backed securities
 

 
45.8

 

 
45.8

Total
 
$
98.9

 
$
1,288.7

 
$

 
$
1,387.6

The table below sets forth a summary of changes in the fair value of our Level 3 investment liability (in millions):
 
 
Fair Value
Agreement commencement June 11, 2018
 
$
(96.1
)
Unrealized gains
 
19.3

Balance June 30, 2018
 
$
(76.8
)

The loss of $96.1 million upon the agreement commencement date includes a loss of $28.1 million, resulting from the difference between the purchase price of $94.50 per share of PTC common stock and the June 11, 2018 closing price of PTC common stock, and a $68.0 million valuation adjustment pending registration of the PTC securities. The unrealized gain of $19.3 million includes a gain of $20.8 million, resulting from the appreciation of PTC common stock between the agreement commencement date and the end of the quarter, partially offset by a $1.5 million increase in the valuation adjustment associated with the appreciation of PTC’s common stock. The unrealized loss of $76.8 million at June 30, 2018 includes a $7.3 million loss on investment and a $69.5 million valuation adjustment.

14

ROCKWELL AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

9. Retirement Benefits
The components of net periodic benefit cost are (in millions):
 
 
Pension Benefits
 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Service cost
$
22.2

 
$
24.2

 
$
66.8

 
$
72.5

Interest cost
38.8


37.8


116.6


113.4

Expected return on plan assets
(61.2
)

(56.2
)

(183.9
)

(168.6
)
Amortization:
 
 
 
 
 
 
 
Prior service cost (credit)
0.1

 
(0.9
)
 
0.4

 
(2.8
)
Net actuarial loss
28.3


38.2


85.0


114.4

Settlements

 

 

 
0.2

Net periodic benefit cost
$
28.2

 
$
43.1

 
$
84.9

 
$
129.1

 

 
Other Postretirement Benefits
 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Service cost
$
0.4

 
$
0.3

 
$
1.0

 
$
1.0

Interest cost
0.6

 
0.7

 
1.8

 
1.9

Amortization:
 
 
 
 
 
 
 
Prior service credit
(1.4
)
 
(1.5
)
 
(4.1
)
 
(4.5
)
Net actuarial loss
0.4

 
0.6

 
1.3

 
1.7

Net periodic benefit cost
$

 
$
0.1

 
$

 
$
0.1


15

ROCKWELL AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

10. Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss by component were (in millions):
Three Months Ended June 30, 2018
 
 
 
 
 
 
 
 
 
 
Pension and other postretirement benefit plan adjustments, net of tax
 
Accumulated currency translation adjustments, net of tax
 
Net unrealized gains (losses) on cash flow hedges, net of tax
 
Net unrealized gains (losses) on available-for-sale investments, net of tax
 
Total accumulated other comprehensive loss, net of tax
Balance as of March 31, 2018
$
(886.6
)
 
$
(177.3
)
 
$
(14.9
)
 
$
(2.7
)
 
$
(1,081.5
)
Other comprehensive income (loss) before reclassifications

 
(95.7
)
 
14.2

 
0.1

 
(81.4
)
Amounts reclassified from accumulated other comprehensive loss
20.2

 

 
2.2

 

 
22.4

Other comprehensive income (loss)
20.2

 
(95.7
)
 
16.4

 
0.1

 
(59.0
)
Balance as of June 30, 2018
$
(866.4
)
 
$
(273.0
)
 
$
1.5

 
$
(2.6
)
 
$
(1,140.5
)
 
 
 
 
 
 
 
 
 
 
Nine Months Ended June 30, 2018
 
 
 
 
 
 
 
 
 
Pension and other postretirement benefit plan adjustments, net of tax
 
Accumulated currency translation adjustments, net of tax
 
Net unrealized gains (losses) on cash flow hedges, net of tax
 
Net unrealized gains (losses) on available-for-sale investments, net of tax
 
Total accumulated other comprehensive loss, net of tax
Balance as of September 30, 2017
$
(927.0
)
 
$
(237.7
)
 
$
(14.4
)
 
$
(0.1
)
 
$
(1,179.2
)
Other comprehensive income (loss) before reclassifications

 
(35.3
)
 
4.8

 
(2.5
)
 
(33.0
)
Amounts reclassified from accumulated other comprehensive loss
60.6

 

 
11.1

 

 
71.7

Other comprehensive income (loss)
60.6

 
(35.3
)
 
15.9

 
(2.5
)
 
38.7

Balance as of June 30, 2018
$
(866.4
)
 
$
(273.0
)
 
$
1.5


$
(2.6
)
 
$
(1,140.5
)





16

ROCKWELL AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

10. Accumulated Other Comprehensive Loss (continued)
Changes in accumulated other comprehensive loss by component were (in millions):
Three Months Ended June 30, 2017
 
 
 
 
 
 
 
 
 
 
Pension and other postretirement benefit plan adjustments, net of tax
 
Accumulated currency translation adjustments, net of tax
 
Net unrealized gains (losses) on cash flow hedges, net of tax
 
Net unrealized gains (losses) on available-for-sale investments, net of tax
 
Total accumulated other comprehensive loss, net of tax
Balance as of March 31, 2017
$
(1,191.5
)
 
$
(320.3
)
 
$
3.9

 
$
(0.1
)
 
$
(1,508.0
)
Other comprehensive income (loss) before reclassifications

 
24.9

 
(3.9
)
 

 
21.0

Amounts reclassified from accumulated other comprehensive loss
23.8

 

 
(0.5
)
 

 
23.3

Other comprehensive income (loss)
23.8

 
24.9

 
(4.4
)
 

 
44.3

Balance as of June 30, 2017
$
(1,167.7
)
 
$
(295.4
)
 
$
(0.5
)
 
$
(0.1
)
 
$
(1,463.7
)
 
 
 
 
 
 
 
 
 
 
Nine Months Ended June 30, 2017
 
 
 
 
 
 
 
 
 
Pension and other postretirement benefit plan adjustments, net of tax
 
Accumulated currency translation adjustments, net of tax
 
Net unrealized gains (losses) on cash flow hedges, net of tax
 
Net unrealized gains (losses) on available-for-sale investments, net of tax
 
Total accumulated other comprehensive loss, net of tax
Balance as of September 30, 2016
$
(1,239.8
)
 
$
(294.9
)
 
$
(4.1
)
 
$

 
$
(1,538.8
)
Other comprehensive income (loss) before reclassifications
0.7

 
(0.5
)
 
5.6

 
(0.1
)
 
5.7

Amounts reclassified from accumulated other comprehensive loss
71.4

 

 
(2.0
)
 

 
69.4

Other comprehensive income (loss)
72.1

 
(0.5
)
 
3.6

 
(0.1
)
 
75.1

Balance as of June 30, 2017
$
(1,167.7
)
 
$
(295.4
)
 
$
(0.5
)
 
$
(0.1
)

$
(1,463.7
)

17

ROCKWELL AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

10. Accumulated Other Comprehensive Loss (continued)
The reclassifications out of accumulated other comprehensive loss to the Condensed Consolidated Statement of Operations were (in millions):
 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
Affected Line in the Condensed Consolidated Statement of Operations
 
2018
 
2017
 
2018
 
2017
 
 
Pension and other postretirement benefit plan adjustments:
Amortization of prior service credit
$
(1.3
)
 
$
(2.4
)
 
$
(3.7
)
 
$
(7.3
)
 
(a)
Amortization of net actuarial loss
28.7

 
38.8

 
86.3

 
116.1

 
(a)
Settlements

 

 

 
0.2

 
(a)
 
27.4

 
36.4

 
82.6

 
109.0

 
Income before income taxes
 
(7.2
)
 
(12.6
)
 
(22.0
)
 
(37.6
)
 
Income tax provision
 
$
20.2

 
$
23.8

 
$
60.6

 
$
71.4

 
Net income
 
 
 
 
 
 
 
 
 
 
Net unrealized losses (gains) on cash flow hedges:
Forward exchange contracts
$
(0.2
)
 
$
(0.7
)
 
$
(1.5
)
 
$
0.8

 
Sales
Forward exchange contracts
3.4

 
(0.2
)
 
17.7

 
(3.8
)
 
Cost of sales
Forward exchange contracts
(0.2
)
 
0.1

 
(1.2
)
 
0.7

 
Selling, general and administrative expenses
 
3.0

 
(0.8
)
 
15.0

 
(2.3
)
 
Income before income taxes
 
(0.8
)
 
0.3

 
(3.9
)
 
0.3

 
Income tax provision
 
$
2.2

 
$
(0.5
)
 
$
11.1

 
$
(2.0
)
 
Net income
 
 
 
 
 
 
 
 
 
 
Total reclassifications
$
22.4

 
$
23.3

 
$
71.7

 
$
69.4

 
Net income
(a) Reclassified from accumulated other comprehensive loss into cost of sales and selling, general and administrative expenses. These components are included in the computation of net periodic benefit cost (income). See Note 9 for further information.

18

ROCKWELL AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

11. Commitments and Contingent Liabilities
Various lawsuits, claims and proceedings have been or may be instituted or asserted against us relating to the conduct of our business, including those pertaining to product liability, environmental, safety and health, intellectual property, employment and contract matters. Although the outcome of litigation cannot be predicted with certainty and some lawsuits, claims or proceedings may be disposed of unfavorably to us, we believe the disposition of matters that are pending or have been asserted will not have a material effect on our business, financial condition or results of operations.
We (including our subsidiaries) have been named as a defendant in lawsuits alleging personal injury as a result of exposure to asbestos that was used in certain components of our products many years ago. Currently there are a few thousand claimants in lawsuits that name us as defendants, together with hundreds of other companies. In some cases, the claims involve products from divested businesses, and we are indemnified for most of the costs. However, we have agreed to defend and indemnify asbestos claims associated with products manufactured or sold by our former Dodge mechanical and Reliance Electric motors and motor repair services businesses prior to their divestiture by us, which occurred on January 31, 2007. We are also responsible for half of the costs and liabilities associated with asbestos cases against the former Rockwell International Corporation’s divested measurement and flow control business. But in all cases, for those claimants who do show that they worked with our products or products of divested businesses for which we are responsible, we nevertheless believe we have meritorious defenses, in substantial part due to the integrity of the products, the encapsulated nature of any asbestos-containing components, and the lack of any impairing medical condition on the part of many claimants. We defend those cases vigorously. Historically, we have been dismissed from the vast majority of these claims with no payment to claimants.
We have maintained insurance coverage that we believe covers indemnity and defense costs, over and above self-insured retentions, for claims arising from our former Allen-Bradley subsidiary. Our insurance carrier entered into a cost share agreement with us to pay the substantial majority of future defense and indemnity costs for Allen-Bradley asbestos claims. We believe that this arrangement will continue to provide coverage for Allen-Bradley asbestos claims throughout the remaining life of the asbestos liability.
We also have rights to historic insurance policies that provide indemnity and defense costs, over and above self-insured retentions, for claims arising out of certain asbestos liabilities relating to the divested measurement and flow control business. We initiated litigation against several insurers to pursue coverage for these claims, subject to each carrier's policy limits, and the case is now pending in Los Angeles County Superior Court. In September 2016, we entered into settlement agreements with certain insurance company defendants, and we continue to pursue our claims against the remaining defendants. We believe these settlement agreements will continue to provide partial coverage for these asbestos claims throughout the remaining life of asbestos liability.
The uncertainties of asbestos claim litigation make it difficult to predict accurately the ultimate outcome of asbestos claims. That uncertainty is increased by the possibility of adverse rulings or new legislation affecting asbestos claim litigation or the settlement process. Subject to these uncertainties and based on our experience defending asbestos claims, we do not believe these lawsuits will have a material effect on our business, financial condition or results of operations.
We have, from time to time, divested certain of our businesses. In connection with these divestitures, certain lawsuits, claims and proceedings may be instituted or asserted against us related to the period that we owned the businesses, either because we agreed to retain certain liabilities related to these periods or because such liabilities fall upon us by operation of law. In some instances, the divested business has assumed the liabilities; however, it is possible that we might be responsible for satisfying those liabilities if the divested business is unable to do so.
In connection with the spin-offs of our former automotive business, semiconductor systems business and avionics and communications business, the spun-off companies have agreed to indemnify us for substantially all contingent liabilities related to the respective businesses, including environmental and intellectual property matters.
In conjunction with the sale of our Dodge mechanical and Reliance Electric motors and motor repair services businesses, we agreed to indemnify Baldor Electric Company for costs and damages related to certain legal, legacy environmental and asbestos matters of these businesses arising before January 31, 2007, for which the maximum exposure would be capped at the amount received for the sale.

19

ROCKWELL AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

11. Commitments and Contingent Liabilities (continued)
In many countries we provide a limited intellectual property indemnity as part of our terms and conditions of sale. We also at times provide limited intellectual property indemnities in other contracts with third parties, such as contracts concerning the development and manufacture of our products. As of June 30, 2018, we were not aware of any material indemnification claims where an unfavorable outcome was probable or reasonably possible. Historically, claims that have been made under the indemnification agreements have not had a material impact on our business, financial condition or results of operations; however, to the extent that valid indemnification claims arise in the future, future payments by us could be significant and could have a material adverse effect on our business, financial condition or results of operations in a particular period.
12. Income Taxes
At the end of each interim period, we estimate a base effective tax rate that we expect for the full fiscal year based on our most recent forecast of pre-tax income, permanent book and tax differences and global tax planning strategies. We use this base rate to provide for income taxes on a year-to-date basis, excluding the effect of significant unusual items and items that are reported net of their related tax effects in the period in which they occur.
Our base rate reflects a change in the U.S. federal statutory rate from 35 percent to 21 percent resulting from the enactment of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) on December 22, 2017. The rate change was effective for us at the beginning of our fiscal year, using a blended rate for the annual period. As a result, the blended statutory tax rate for our fiscal year 2018 is 24.53 percent.
The effective tax rate was 21.1 percent and 77.7 percent in the three and nine months ended June 30, 2018, respectively, compared to 21.4 percent and 18.7 percent in the three and nine months ended June 30, 2017, respectively. The effective tax rate was lower than the U.S. statutory rate of 24.53 percent in the three months ended June 30, 2018, primarily because we benefited from lower non-U.S. tax rates and also realized a benefit from discrete tax items, partially offset by the PTC investment adjustments without a corresponding tax benefit. The effective tax rate was higher than the U.S. statutory rate of 24.53 percent in the nine months ended June 30, 2018, due to provisional tax expense ($483.7 million or 57.0 percent) resulting from the Tax Act. The effective tax rate was lower than the U.S. statutory rate of 35 percent in the three and nine months ended June 30, 2017, primarily because we benefited from lower non-U.S. tax rates, and we also realized a benefit from discrete tax items.
Provisional Amounts
The Tax Act requires us to revalue our existing U.S. deferred tax balance to reflect the lower statutory tax rate and pay a one-time tax on earnings of certain foreign subsidiaries that were previously deferred from U.S. tax (“transition tax”). At June 30, 2018, we have not completed our accounting for the tax effects of the Tax Act; however, we have made reasonable estimates of its effects on our existing U.S. deferred tax balance and the transition tax and recorded provisional amounts which are included as a component of income tax expense from continuing operations, as discussed in more detail below.
We revalued our U.S. deferred tax assets and liabilities based on the rate at which they are expected to reverse in the future, which is either 24.53 percent for reversals in 2018 or 21 percent for reversals in 2019 and subsequent years. However, we are still analyzing certain aspects of the Tax Act and refining our calculations, which could potentially affect the valuation of these balances or potentially give rise to new deferred tax amounts. We have recorded a provisional amount of $94.2 million in the nine months ended June 30, 2018, of which the entire amount was recorded in the three months ended December 31, 2017.
The Tax Act requires the transition tax to be computed based on our total post-1986 earnings and profits (“E&P”) at December 31, 2017, that were previously deferred from U.S. income tax. As a result, we are required to make reasonable estimates given our September 30 fiscal year. We have recorded a provisional benefit of $7.5 million and provisional expense of $389.5 million for the transition tax liability for all of our foreign subsidiaries in the three and nine months ended June 30, 2018, respectively. At June 30, 2018, we have recorded income taxes payable of $389.5 million related to the transition tax in the Condensed Consolidated Balance Sheet, of which $34.1 million is recorded within other current liabilities, and $355.4 million is recorded within other liabilities because that portion is payable greater than twelve months after June 30, 2018.

20

ROCKWELL AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

12. Income Taxes (continued)
The transition tax is applied to the balance of post-1986 E&P at rates of 15.5 percent for cash assets (as defined in the Tax Act) and 8 percent for non-cash assets measured at the higher of the balance at September 30, 2018, or the average of the ending balances at September 30, 2016, and September 30, 2017. Our reasonable estimates will change as a result of adjustments impacting E&P, and distributions and other transactions impacting cash. The Company anticipates that it will complete its accounting for the transition tax at December 31, 2018. These uncertainties form the basis for the Company’s provisional reporting based upon reasonable estimates at June 30, 2018.
The Company has historically accounted for the earnings of its foreign subsidiaries as being indefinitely reinvested under ASC 740-30. As a result of the broad changes to the U.S. international tax system under the Tax Act, the Company will begin to account for substantially all of its non-U.S. subsidiaries as being immediately subject to tax other than in certain limited circumstances. The Company has provided for taxes on the balance of historic and current earnings that may be subject to foreign withholding and U.S. state taxes. For future distributions related to historic earnings, we recorded deferred tax liabilities of $59.8 million related to foreign withholding taxes, and deferred tax assets of $59.8 million related to foreign tax credits attributable to the foreign withholding taxes. These provisional amounts are presented net within deferred income tax assets in the Condensed Consolidated Balance Sheet as of June 30, 2018.  We have not yet completed our assessment of whether a portion of these assets and liabilities should be presented as gross amounts.
Unrecognized Tax Benefits
The amount of gross unrecognized tax benefits was $19.4 million and $31.1 million at June 30, 2018, and September 30, 2017, respectively, of which the entire amount would reduce our effective tax rate if recognized.
Accrued interest and penalties related to unrecognized tax benefits were $3.7 million and $4.0 million at June 30, 2018, and September 30, 2017, respectively. We recognize interest and penalties related to unrecognized tax benefits in the income tax provision.
We believe it is reasonably possible that the amount of gross unrecognized tax benefits could be reduced by up to $5.1 million in the next 12 months as a result of the resolution of tax matters in various global jurisdictions and the lapses of statutes of limitations. If all of the unrecognized tax benefits were recognized, the net reduction to our income tax provision, including the recognition of interest and penalties and offsetting tax assets, could be up to $4.5 million.
We conduct business globally and are routinely audited by the various tax jurisdictions in which we operate. We are no longer subject to U.S. federal income tax examinations for years before 2016 and are no longer subject to state, local and foreign income tax examinations for years before 2003.

21

ROCKWELL AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

13. Business Segment Information
The following tables reflect the sales and operating results of our reportable segments (in millions):
 
 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Sales
 
 
 
 
 
 
 
Architecture & Software
$
795.7

 
$
731.9

 
$
2,311.0

 
$
2,147.3

Control Products & Solutions
903.0

 
867.3

 
2,625.5

 
2,496.5

Total
$
1,698.7

 
$
1,599.2

 
$
4,936.5

 
$
4,643.8

Segment operating earnings
 
 
 
 
 
 
 
Architecture & Software
$
239.0

 
$
204.3

 
$
681.8

 
$
603.5

Control Products & Solutions
143.9

 
132.7

 
401.7

 
346.1

Total
382.9

 
337.0

 
1,083.5

 
949.6

Purchase accounting depreciation and amortization
(4.3
)
 
(5.6
)
 
(13.2
)
 
(16.8
)
General corporate – net
(27.7
)
 
(16.5
)
 
(61.7
)
 
(52.8
)
Non-operating pension costs
(5.9
)
 
(19.8
)
 
(17.7
)
 
(59.4
)
Costs related to unsolicited Emerson proposals

 

 
(11.2
)
 

Loss on investments
(7.3
)
 

 
(7.3
)
 

Valuation adjustment pending registration of PTC securities
(69.5
)
 

 
(69.5
)
 

Interest expense
(16.5
)
 
(19.1
)
 
(53.8
)
 
(56.7
)
Income before income taxes
$
251.7

 
$
276.0

 
$
849.1

 
$
763.9

Among other considerations, we evaluate performance and allocate resources based upon segment operating earnings before income taxes, costs related to the unsolicited Emerson proposals in the first quarter of fiscal 2018, interest expense, costs related to corporate offices, non-operating pension costs, certain corporate initiatives, gains and losses on investments, valuation adjustment pending registration of PTC securities, gains and losses from the disposition of businesses, and purchase accounting depreciation and amortization. We incurred $11.2 million of third-party advisory fees in connection with our evaluation of unsolicited Emerson acquisition proposals in the first quarter of 2018. Depending on the product, intersegment sales within a single legal entity are either at cost or cost plus a mark-up, which does not necessarily represent a market price. Sales between legal entities are at an appropriate transfer price. We allocate costs related to shared segment operating activities to the segments using a methodology consistent with the expected benefit.

22


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareowners of
Rockwell Automation, Inc.
Milwaukee, Wisconsin
We have reviewed the accompanying condensed consolidated balance sheet of Rockwell Automation, Inc. and subsidiaries (the “Company”) as of June 30, 2018, and the related condensed consolidated statements of operations and comprehensive income for the three-month and nine-month periods ended June 30, 2018 and 2017, and of cash flows for the nine-month periods ended June 30, 2018 and 2017. These condensed consolidated interim financial statements are the responsibility of the Company’s management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Rockwell Automation, Inc. and subsidiaries as of September 30, 2017, and the related consolidated statements of operations, comprehensive income, cash flows, and shareowners’ equity for the year then ended (not presented herein); and in our report dated November 15, 2017, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of September 30, 2017 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
July 27, 2018


23

ROCKWELL AUTOMATION, INC.


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Forward-Looking Statements
This Quarterly Report contains statements (including certain projections and business trends) that are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Words such as “believe”, “estimate”, “project”, “plan”, “expect”, “anticipate”, “will”, “intend” and other similar expressions may identify forward-looking statements. Actual results may differ materially from those projected as a result of certain risks and uncertainties, many of which are beyond our control, including but not limited to:
macroeconomic factors, including global and regional business conditions, the availability and cost of capital, commodity prices, the cyclical nature of our customers’ capital spending, sovereign debt concerns and currency exchange rates;
laws, regulations and governmental policies affecting our activities in the countries where we do business, including those related to tariffs, taxation, and trade controls;
the successful development of advanced technologies and demand for and market acceptance of new and existing products;
the availability, effectiveness and security of our information technology systems;
competitive products, solutions and services and pricing pressures, and our ability to provide high quality products, solutions and services;
a disruption of our business due to natural disasters, pandemics, acts of war, strikes, terrorism, social unrest or other causes;
our ability to manage and mitigate the risk related to security vulnerabilities and breaches of our products, solutions and services;
intellectual property infringement claims by others and the ability to protect our intellectual property;
the uncertainty of claims by taxing authorities in the various jurisdictions where we do business;
our ability to attract, develop, and retain qualified personnel;
our ability to manage costs related to employee retirement and health care benefits;
the uncertainties of litigation, including liabilities related to the safety and security of the products, solutions and services we sell;
our ability to manage and mitigate the risks associated with our solutions and services businesses;
disruptions to our distribution channels or the failure of distributors to develop and maintain capabilities to sell our products;
the successful integration and management of acquired businesses and technologies;
the availability and price of components and materials;
the successful execution of our cost productivity initiatives; and
risks associated with our investment in common stock of PTC Inc., including the potential for volatility in our reported quarterly earnings associated with changes in the market value of PTC stock;
other risks and uncertainties, including but not limited to those detailed from time to time in our Securities and Exchange Commission (SEC) filings.
These forward-looking statements reflect our beliefs as of the date of filing this report. We undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. See Item 1A, Risk Factors, of our Annual Report on Form 10-K for the fiscal year ended September 30, 2017, for more information.
Non-GAAP Measures
The following discussion includes organic sales, total segment operating earnings and margin, Adjusted Income, Adjusted EPS, Adjusted Effective Tax Rate and free cash flow, which are non-GAAP measures. See Supplemental Sales Information for a reconciliation of reported sales to organic sales and a discussion of why we believe this non-GAAP measure is useful to investors. See Results of Operations for a reconciliation of income before income taxes to total segment operating earnings and margin and a discussion of why we believe these non-GAAP measures are useful to investors. See Results of Operations for a reconciliation of income from continuing operations, diluted EPS from continuing operations and effective tax rate to Adjusted Income, Adjusted EPS and Adjusted Effective Tax Rate, respectively, and a discussion of why we believe these non-GAAP measures are useful to investors. See Financial Condition for a reconciliation of cash flows from operating activities to free cash flow and a discussion of why we believe this non-GAAP measure is useful to investors.
 

24

ROCKWELL AUTOMATION, INC.



Overview
Rockwell Automation, Inc., a leader in industrial automation and information, makes its customers more productive and the world more sustainable. Overall demand for our products, solutions and services is driven by:
 
investments in manufacturing, including upgrades, modifications and expansions of existing facilities or production lines and new facilities or production lines;
investments in basic materials production capacity, which may be related to commodity pricing levels;
our customers’ needs for faster time to market, lower total cost of ownership, improved asset utilization and optimization, and enterprise risk management;
our customers’ needs to continuously improve quality, safety and sustainability;
industry factors that include our customers’ new product introductions, demand for our customers’ products or services, and the regulatory and competitive environments in which our customers operate;
levels of global industrial production and capacity utilization;
regional factors that include local political, social, regulatory and economic circumstances; and
the spending patterns of our customers due to their annual budgeting processes and their working schedules.
Long-term Strategy
Our strategy is to bring The Connected Enterprise to life. We integrate control and information across the enterprise to help industrial companies and their people be more productive. Our vision of being the most valued global provider of innovative industrial automation and information products, solutions and services is supported by our growth and performance strategy, which seeks to:
 
achieve organic sales growth in excess of the automation market by expanding our served market and strengthening our competitive differentiation;
diversify our sales streams by broadening our portfolio of products, solutions and services, expanding our global presence and serving a wider range of industries and applications;
grow market share by gaining new customers and by capturing a larger share of existing customers’ spending;
enhance our market access by building our channel capability and partner network;
acquire companies that serve as catalysts to organic growth by adding complementary technology, expanding our served market, or enhancing our domain expertise or market access;
deploy human and financial resources to strengthen our technology leadership and our intellectual capital business model;
continuously improve quality and customer experience; and
drive annual cost productivity.
By implementing the above strategy, we seek to achieve our long-term financial goals, including above-market organic sales growth, EPS growth above sales growth, return on invested capital in excess of 20 percent and free cash flow equal to about 100 percent of Adjusted Income. We expect acquisitions to add a percentage point or more per year, on average, to long-term sales growth.

25

ROCKWELL AUTOMATION, INC.


U.S. Industrial Economic Trends
In the third quarter of 2018, sales in the U.S. accounted for 54 percent of our total sales. The various indicators we use to gauge the direction and momentum of our served U.S. markets include:
The Industrial Production (IP) Index, published by the Federal Reserve, which measures the real output of manufacturing, mining and electric and gas utilities. The IP Index is expressed as a percentage of real output in a base year, currently 2012. Historically, there has been a meaningful correlation between the changes in the IP Index and the level of automation investment made by our U.S. customers in their manufacturing base.
The Manufacturing Purchasing Managers’ Index (PMI), published by the Institute for Supply Management (ISM), which indicates the current and near-term state of manufacturing activity in the U.S. According to the ISM, a PMI measure above 50 indicates that the U.S. manufacturing economy is generally expanding while a measure below 50 indicates that it is generally contracting.
Industrial Equipment Spending, compiled by the Bureau of Economic Analysis, which provides insight into spending trends in the broad U.S. industrial economy. This measure over the longer term has proven to demonstrate a reasonable correlation with our domestic growth.
Capacity Utilization (Total Industry), published by the Federal Reserve, which measures plant operating activity. Historically, there has been a meaningful correlation between Capacity Utilization and levels of U.S. IP.
The table below depicts trends in these indicators since the quarter ended September 2016. In the third quarter of fiscal 2018, all of these U.S. economic indicators, except Industrial Equipment Spending, improved compared to the prior quarter. Industrial Equipment Spending did increase compared to the same quarter in the prior fiscal year.
 
IP
Index
 
PMI
 
Industrial
Equipment
Spending
(in billions)
 
Capacity
Utilization
(percent)
Fiscal 2018 quarter ended:
 
 
 
 
 
 
 
June 2018
107.5

 
60.2

 
242.1

 
77.9

March 2018
105.9

 
59.3

 
243.9

 
77.2

December 2017
105.3

 
59.3

 
238.5

 
77.0

Fiscal 2017 quarter ended:
 
 
 
 
 
 
 
September 2017
103.3

 
60.2

 
234.6

 
75.8

June 2017
103.7

 
56.7

 
230.1

 
76.2

March 2017
102.5

 
56.6

 
222.1

 
75.4

December 2016
102.2

 
54.3

 
218.1

 
75.3

Fiscal 2016 quarter ended:
 
 
 
 
 
 
 
September 2016
102.0

 
51.4

 
215.3

 
75.2

Note: Economic indicators are subject to revision by the issuing organizations.
While we are optimistic that the impact of U.S. tax reform on our customers' investment decisions could benefit our future performance, it is too early to quantify any such benefits.
In March 2018, the U.S. Government imposed tariffs on steel and aluminum imports. While we have seen increases in the price of steel and aluminum as a result of these tariffs, we believe they will not have a material effect on our business, financial condition, or results of operations. 
The U.S. Government has also enacted tariffs and proposed others on certain imports from China.  In response to the U.S. Government actions, China, Canada, Mexico and the European Union have proposed or enacted tariffs on certain imports from the U.S.  There remains a lot of uncertainty about the particulars of these tariffs.  We continue to evaluate the impact the enacted and proposed tariffs will have on our business, as well as mitigation opportunities. For those tariffs that have been enacted, we do not believe they will have a material effect on our business, financial condition, or results of operations.

Non-U.S. Economic Trends
In the third quarter of 2018, sales to customers outside the U.S. accounted for 46 percent of our total sales. These customers include both indigenous companies and multinational companies with expanding global presence. In addition to the global factors previously mentioned in the "Overview" section, international demand, particularly in emerging markets, has historically been

26

ROCKWELL AUTOMATION, INC.


driven by the strength of the industrial economy in each region, investments in infrastructure and expanding consumer markets. We use changes in the respective countries' gross domestic product and industrial production as indicators of the growth opportunities in each region where we do business.
Recent industrial production forecasts continue to project growth in all regions for the remainder of fiscal 2018.  In Asia Pacific, credit tightening in China could result in slightly lower growth this calendar year, but India’s economic outlook continues to strengthen.  Presidential elections and trade agreement negotiations are creating some uncertainty in Latin America, and economic indicators in EMEA have weakened recently due to rising oil prices and a slowdown in foreign trade. However, both regions are still expected to report growth this year, despite these headwinds.


27

ROCKWELL AUTOMATION, INC.


Summary of Results of Operations
Sales in the third quarter of 2018 increased 6.2 percent compared to the third quarter of 2017. Organic sales increased 5.7 percent year over year. Currency translation increased sales by 1.8 percentage points, and the prior year divestiture reduced sales growth by 1.3 percentage points. Organic sales growth in the quarter was driven by broad-based growth across regions and industries.
The following is a summary of our results related to key growth initiatives:
 
Logix sales increased 12 percent year over year in the third quarter of 2018. Logix organic sales increased 10 percent year over year, and currency translation increased sales by 2 percentage points.
Process initiative sales increased 10 percent year over year in the third quarter of 2018. Process initiative organic sales increased 8 percent year over year, and currency translation increased sales by 2 percentage points.
Sales in emerging countries increased 8 percent year over year in the third quarter of 2018. Organic sales in emerging countries increased 8 percent year over year. Currency translation increased sales in emerging countries by 1 percentage point, and the prior year divestiture reduced sales in emerging countries by 1 percentage point.

28

ROCKWELL AUTOMATION, INC.


The following table reflects our sales and operating results for the three and nine months ended June 30, 2018 and 2017 (in millions, except per share amounts and percentages):
 
 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Sales
 
 
 
 
 
 
 
Architecture & Software
$
795.7

 
$
731.9

 
$
2,311.0

 
$
2,147.3

Control Products & Solutions
903.0

 
867.3

 
2,625.5

 
2,496.5

Total sales (a)
$
1,698.7

 
$
1,599.2

 
$
4,936.5

 
$
4,643.8

Segment operating earnings(1)
 
 
 
 
 
 
 
Architecture & Software
$
239.0

 
$
204.3

 
$
681.8

 
$
603.5

Control Products & Solutions
143.9

 
132.7

 
401.7

 
346.1

Total segment operating earnings(2) (b)
382.9

 
337.0

 
1,083.5

 
949.6

Purchase accounting depreciation and amortization
(4.3
)
 
(5.6
)
 
(13.2
)
 
(16.8
)
General corporate — net
(27.7
)
 
(16.5
)
 
(61.7
)
 
(52.8
)
Non-operating pension costs
(5.9
)
 
(19.8
)
 
(17.7
)
 
(59.4
)
Costs related to unsolicited Emerson proposals

 

 
(11.2
)
 

Loss on investments
(7.3
)
 

 
(7.3
)
 

Valuation adjustment pending registration of PTC securities
(69.5
)
 

 
(69.5
)
 

Interest expense
(16.5
)
 
(19.1
)
 
(53.8
)
 
(56.7
)
Income before income taxes (c)
251.7

 
276.0

 
849.1

 
763.9

Income tax provision
(53.1
)
 
(59.1
)
 
(659.5
)
 
(142.8
)
Net income
$
198.6

 
$
216.9

 
$
189.6

 
$
621.1

 
 
 
 
 
 
 
 
Diluted EPS
$
1.58

 
$
1.67

 
$
1.48

 
$
4.77

 
 
 
 
 
 
 
 
Adjusted EPS(3)
$
2.16

 
$
1.76

 
$
6.01

 
$
5.06

 
 
 
 
 
 
 
 
Diluted weighted average outstanding shares
125.8

 
129.9

 
128.1

 
130.0

 
 
 
 
 
 
 
 
Total segment operating margin(2) (b/a)
22.5
%
 
21.1
%
 
21.9
%
 
20.4
%
 
 
 
 
 
 
 
 
Pre-tax margin (c/a)
14.8
%
 
17.3
%
 
17.2
%
 
16.4
%
 
(1)
See Note 13 in the Condensed Consolidated Financial Statements for the definition of segment operating earnings.
(2)
Total segment operating earnings and total segment operating margin are non-GAAP financial measures. We exclude purchase accounting depreciation and amortization, general corporate – net, non-operating pension costs, costs related to the unsolicited Emerson proposals in the first quarter of fiscal 2018, gains and losses on investments, valuation adjustment pending registration of PTC securities, interest expense and income tax provision because we do not consider these costs to be directly related to the operating performance of our segments. We believe that these measures are useful to investors as measures of operating performance. We use these measures to monitor and evaluate the profitability of our Company. Our measures of total segment operating earnings and total segment operating margin may be different from those used by other companies.
(3)
Adjusted EPS is a non-GAAP earnings measure that excludes the non-operating pension costs and their related income tax effects. See Adjusted Income, Adjusted EPS and Adjusted Effective Tax Rate Reconciliation for more information on this non-GAAP measure.


29

ROCKWELL AUTOMATION, INC.


Purchase accounting depreciation and amortization and non-operating pension costs are not allocated to our operating segments because these costs are excluded from our measurement of each segment's operating performance for internal purposes. If we were to allocate these costs, we would attribute them to each of our segments as follows (in millions):
 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Purchase accounting depreciation and amortization
 
 
 
 
 
 
 
Architecture & Software
$
1.6

 
$
1.6

 
$
4.9

 
$
4.8

Control Products & Solutions
2.6

 
3.7

 
7.6

 
11.2

Non-operating pension costs
 
 
 
 
 
 
 
Architecture & Software
1.8

 
7.1

 
5.3

 
21.3

Control Products & Solutions
2.8

 
11.1

 
8.3

 
33.3

The decreases in non-operating pension costs in both segments for the three and nine months ended June 30, 2018, were primarily due to a $200 million voluntary contribution in fiscal 2017 and other actuarial adjustments.

30

ROCKWELL AUTOMATION, INC.


Adjusted Income, Adjusted EPS and Adjusted Effective Tax Rate Reconciliation

Adjusted Income, Adjusted EPS and Adjusted Effective Tax Rate are non-GAAP earnings measures that exclude non-operating pension costs, costs related to the unsolicited Emerson proposals in the first quarter of fiscal 2018, gains and losses on investments, and valuation adjustment pending registration of PTC securities, including their respective tax effects, and the provisional tax effects of deemed repatriation of foreign earnings and the revaluation of net deferred tax assets due to the enactment of the Tax Act.

We believe that Adjusted Income, Adjusted EPS and Adjusted Effective Tax Rate provide useful information to our investors about our operating performance and allow management and investors to compare our operating performance period over period. Adjusted EPS is also used as a financial measure of performance for our annual incentive compensation. Our measures of Adjusted Income, Adjusted EPS and Adjusted Effective Tax Rate may be different from measures used by other companies. These non-GAAP measures should not be considered a substitute for income from continuing operations, diluted EPS and effective tax rate.

Non-operating pension costs include defined benefit plan interest cost, expected return on plan assets, amortization of actuarial gains and losses and the impact of any plan curtailments or settlements. These components of net periodic pension cost primarily relate to changes in pension assets and liabilities that are a result of market performance; we consider these and other excluded costs to be unrelated to the operating performance of our business.

The following are the components of operating and non-operating pension costs (in millions):
 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Service cost
$
22.2

 
$
24.2

 
$
66.8

 
$
72.5

Amortization of prior service cost (credit)
0.1

 
(0.9
)
 
0.4

 
(2.8
)
Operating pension costs
22.3

 
23.3

 
67.2

 
69.7

 
 
 
 
 
 
 
 
Interest cost
38.8

 
37.8

 
116.6

 
113.4

Expected return on plan assets
(61.2
)
 
(56.2
)
 
(183.9
)
 
(168.6
)
Amortization of net actuarial loss
28.3

 
38.2

 
85.0

 
114.4

Settlements

 

 

 
0.2

Non-operating pension costs
5.9