Christian Rothe
Senior Vice President & Chief Financial Officer at Rockwell Automation
Thank you, Blake, and good morning, everyone. I'll start on Slide 7, first quarter key financial information. First quarter reported sales were down about 8.5% versus prior year. The impact of acquisitions was negligible, and currency had a negative impact of 90 basis points in the quarter. About 1 point of our organic growth came from price, and price/cost was favorable.
Segment operating margin was 17.1% compared to 17.3% a year ago, with lower sales volume mostly offset by the benefits of cost -- from cost reduction and margin expansion actions Blake mentioned earlier.
Adjusted EPS of $1.83 was above our expectations, primarily due to the beat on segment operating margins. We'll get into more detail when we discuss the EPS bridge and the cost reduction actions, but I'd like to take a moment to commend the team for outstanding performance in the first quarter. It was about strong execution and good cost controls. The adjusted effective tax rate for the first quarter was 17.5%, below the prior year rate of 17.9%. We remain on track to achieve a 17% ETR for fiscal 2025.
Free cash flow of $293 million was $328 million higher than prior year. Free cash flow conversion was 140% in the first quarter of this year, reflective of continued working capital management by the team as well as 0 incentive payouts on fiscal 2024 performance. This is in contrast to the first quarter of last year, where we had our cash bonus payout for 2023 performance.
Two additional items not shown on the slide. We repurchased approximately 400,000 shares in the quarter at a cost of $99 million. On December 31, we had approximately $1.2 billion remaining under our repurchase authorizations. Return on invested capital was 14.5% for the first quarter of fiscal 2025 and 400 basis points lower than the prior year, primarily driven by lower pretax income.
Slide 8 provides the sales and margin performance overview for our 3 operating segments. Intelligent Devices margin of 14.9% decreased by 130 basis points year-over-year. Purely focusing on decremental conversion, the segment had decrementals in the 20s year-over-year in the first quarter, which reflects strong execution on cost-out programs against the double-digit organic sales decline.
Software & Control margin of 25.1% was flat with the prior year. This segment typically has very high decrementals, but strong execution on our cost-out programs and good price/cost performance kept our year-over-year decremental margins in the 20s, performing above our expectations. It's important to note that R&D spend in this segment was in the low teens as a percentage of sales, reflecting our continued focus on new product introductions and long-term growth and differentiation.
Lifecycle Services margin of 12.5% decreased 190 basis points year-over-year and was slightly below our expectations, mostly driven by Sensia shipments. Incrementals were solid year-over-year, reflecting the low single-digit volume growth and strong execution on our cost-out programs.
Before moving on to EPS, let's expand a little on orders and demand. As Blake mentioned, orders came in better than expected, surpassing $2 billion in the first quarter, and book-to-bill was greater than 1, which hasn't been the case for the last 7 quarters. This is a good sign, but didn't materially change the calendarization of our outlook. The outperformance was largely from project orders scheduled to ship later in the year.
Another favorable data point. In the first quarter, new demand placed on our distributors is flowing through at close to 100% in terms of new orders on Rockwell, matching historical levels, giving us further evidence that the destocking cycle is mostly behind us.
The next slide, 9, provides the adjusted EPS walk from Q1 fiscal 2024 to Q1 fiscal 2025. Core performance was down $0.55 on an 8% organic sales decrease. Those sales declines were primarily in our higher-margin products in both Intelligent Devices and Software & Control, which impacts flow-through. Importantly, the organization took some temporary cost measures in Q1, which helped keep the core decremental flow-through on the high single-digit sales decline to this level. Cost reduction and margin expansion actions, which reflect more structural productivity, provided about $70 million of benefit in the quarter, slightly above our expectations, and were a $0.50 tailwind.
Compensation, which reflects merit and incentive compensation, was a $0.20 headwind. This year-over-year delta reflects merit increases that came into effect at the beginning of the fiscal year as well as higher incentive comp versus prior year. Recall that our full year 2025 guide was for compensation and inflation to be about $190 million headwind compared to fiscal 2025, with $160 million of that coming from compensation. The inflation impact is captured inside of core in this bridge. We expect compensation to be about $0.90 of headwind for the remaining 3 quarters of the year, spread about equally. All other items resulted in a $0.04 net benefit.
Moving on to the next slide, 10, to discuss our updated guidance for the full year fiscal 2025. Our thesis for the year remains largely intact with a couple of changes. We expect organic sales in a range from negative 4% to positive 2%. While our initial guide for reported revenue for fiscal 2025 did not anticipate any significant impacts from currency, the recent strengthening of the dollar requires a modification in our guide. At current rates, we expect the currency headwind to be about 1.5 points, which takes our guidance on reported sales down to slightly below $8.1 billion at the midpoint. We expect price to contribute about 1 point of growth for the year. This excludes any tariff-related price actions.
At the midpoint of our reported sales guidance, which is now negative 2.5%, our current expectations are for Intelligent Devices sales to be down mid-single digits, and Software & Control and Lifecycle Services to be approximately flat year-over-year. From a margin standpoint, we expect ITD margin to be down year-over-year on lower sales, Software & Control margins to expand year-over-year on flat sales, and we expect Lifecycle Services margin to be flat to slightly down year-over-year. Our adjusted EPS range is unchanged at $8.60 to $9.80, with a $9.20 midpoint.
Talk about calendarization. The dollar strengthening late in the first quarter has continued into the second quarter and is a sequential headwind of less than 1%. Our expectation is for reported sales to grow low to mid-single digits sequentially from Q1 to Q2. After Q2, we are expecting gradual sequential sales growth through the remainder of the year.
On a year-over-year basis, the 1.5 points of sales headwind from FX is expected to result in a $0.35 headwind on EPS, which is split evenly to the remaining 3 quarters of the year. As Blake said earlier, we're taking additional temporary measures on spending to offset this impact. The team performed well in spending control in the first quarter. We're going to hold those reins tight so we can continue to drive towards that adjusted EPS midpoint of $9.20.
Specific to Q2, we expect segment operating margins to expand about 100 basis points sequentially on the incremental sales volume. Resulting EPS of those sales and margin expectations would be in the neighborhood of $2 per share.
A few additional comments on fiscal 2025 guidance for your models. Corporate and other expense is expected to be around $145 million. Net interest expense for fiscal 2025 is expected to be about $140 million. We're assuming average diluted shares outstanding of 113.4 million shares, with about $300 million of share repurchases targeted during the year.
Moving away from the slide, I'd like to expand on a couple of topics. First, focusing on cost reduction and margin expansion activities, which gave us a benefit of approximately $0.50 of EPS in the first quarter. For the full year, we continue to expect a benefit of $250 million or about $1.85 per share.
As discussed at our Investor Day in November, there are hundreds of projects supporting these initiatives. And while each one individually may only be a couple of basis points or 10 basis points of yield, when put together and annualized, they are giving us a yield in the hundreds of basis points. The timing and magnitude continues to fluctuate as we execute against these plans. The first quarter was a good one, and we tracked slightly ahead of our goal for the quarter.
The primary driver of the outperformance was manufacturing efficiencies and effective sourcing. There's a lot of year left in front of us and a great deal of work to be done, but I'd like to thank the team for their efforts. Nice work. While you may see this initiative as cost out because that's what we're tracking and reporting to our investors, it's important to note that the ultimate goal of productivity is to drive revenue through competitiveness and speed. These actions are setting us up for long-term growth of both sales and earnings.
To that end, I want to follow up on some other operational excellence topics from our Investor Day. The Rockwell operating model continues to develop as we build the foundation to sustain our long -- our cost-out initiatives as well as drive margin expansion over the long term. During the first quarter, we had another 1,300 Rockwell employees complete Yellow Belt training. In addition, we rationalized over 21,000 SKUs as we seek to simplify our operations and improve customer experience.
Our product resiliency index continues to improve as we steadily reduce single points of failure in our operations. While those initial efforts arose from the supply chain crisis, as we enter into an era of changing tariffs and trade, this resiliency enables us to respond to dynamic conditions.
Moving on, I'd like to go into some depth around the potential tariff impact to our business, including our short-term actions as well as longer-term thoughts. As Blake mentioned earlier, the Rockwell team has taken initial steps in response to new tariffs. We have planned for a number of scenarios and remain ready to adapt quickly. Our priorities are a combination of maintaining profitability and utilizing resiliency in our operations and supply chain to mitigate impacts under a variety of scenarios.
I want to size our exposure so you have context. Cost of finished goods imported from Mexico, Canada and China in total were less than 10% of our U.S. revenue in fiscal 2024. Separately, in fiscal 2024, our direct imports into the United States from Mexico, both from third parties as well as from our own manufacturing facilities, were approximately $350 million. Imports from Canada and China were each approximately $100 million.
Our tariff mitigation plan is multifaceted. For the near term, this will be primarily through price, and we have implemented price changes from the additional China tariffs that were enacted on February 4. We have made and will continue to make changes to manufacturing locations where there's an attractive ROI.
Canada and Mexico tariffs, if they happen in March or sometime in the future, will impact both standard products as well as a portion of our configured-to-order sales. We will enact price increases on impacted products and also intend to reprice our backlog to reflect our new price list. These actions are disruptive for our customers, of course, and there will likely be some noise in the near term. We are working hard to minimize that disruption and ensure continued levels of customer service.
With that said, due to our immediate actions and substantial U.S. manufacturing footprint, we do not expect these tariffs to have a material impact on our profitability for the full year. Beyond pricing, we have a number of projects that are in flight to mitigate tariff costs through alternative sourcing and movement of production locations. We will be leveraging the resiliency that's been built into our operations and supply chain, including moving some production in response to tariffs.
For example, we have some products that are produced in Mexico and destined for the U.S., with similar production that occurs in the U.S. where the destination is outside the United States. We're swapping those out, moving the production for non-U.S. customers outside the U.S. in order to create capacity to manufacture production for U.S. customers inside the U.S. It's a small portion of our overall tariff-impacted operations but a good example of quick moves we can make.
As Blake mentioned at our Investor Day, our operations team has done a good job of keeping infrastructure in place for second shift, sometimes third shift in locations that have been challenged with lower volume in the last 12 months. That creates an opportunity to move production into the U.S. to avoid tariffs with a limited time lag. As you know, we're in a very dynamic environment. So we will continue to leverage our agile supply chain and take additional steps as necessary.
With that, I'll turn it back over to Blake for some closing remarks before we start Q&A.
