Rockwell Automation, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended September 30, 2019. The filing also reports fourth-quarter results. Rockwell Automation sells industrial automation and digital-transformation hardware, software, solutions and services through two segments: Architecture & Software and Control Products & Solutions.
Financial results and position
- FY2019 revenue: $6.695 billion, up 0.4% reported and 2.8% organically from FY2018; currency translation reduced growth by 2.4 percentage points. Products and solutions generated $5.939 billion and services $756 million.
- Profitability: Gross profit was $2.900 billion (43.3% of sales). Segment operating earnings rose 2% to $1.474 billion, with segment margin up to 22.0% from 21.6%. GAAP net income was $696 million and diluted EPS was $5.83; adjusted EPS, a non-GAAP measure, was $8.67 versus $8.10.
- Material earnings distortion: Income before tax fell 32% to $901 million, mainly reflecting investment-related items, including a $368.5 million loss from the PTC investment. FY2018 included a $90 million PTC fair-value gain and $538.3 million of Tax Act-related charges. The GAAP and adjusted comparisons therefore differ substantially.
- Fourth quarter: Sales were $1.730 billion versus $1.730 billion a year earlier. Net income was $8.1 million and diluted EPS was $0.07, compared with $345.9 million and $2.80 in Q4 FY2018. The filing’s quarterly table does not clearly isolate the drivers of the Q4 year-over-year earnings decline.
- Segment performance: Architecture & Software sales declined 0.9% to $3.022 billion and operating margin slipped to 28.9% from 29.4%. Control Products & Solutions sales rose 1.6% to $3.673 billion and margin improved to 16.3% from 15.0%; solutions and services sales increased approximately 3% reported and 6% organically.
- Cash flow: Operating cash flow was $1.182 billion, down from $1.300 billion; free cash flow was $1.049 billion, down from $1.175 billion. Management attributed the declines primarily to higher working capital, a treasury-lock settlement payment and higher taxes.
- Liquidity and debt: Cash and cash equivalents were $1.018 billion, with $39.6 million of short-term investments. Current assets were $2.986 billion and current liabilities $1.937 billion. Debt totaled $2.257 billion, including $300.5 million current and $1.956 billion long-term, compared with $1.776 billion a year earlier. No commercial paper was outstanding at year-end. The company had a $1.25 billion revolving facility, unused at year-end, and reported covenant compliance.
- Capital returns and equity: The company repurchased approximately 6.1 million shares for $1.0 billion and paid $460 million in dividends ($3.88 per share). Shareowners’ equity fell to $404 million from $1.618 billion, reflecting repurchases and a $546 million other comprehensive loss, including pension-related effects.
Changes, outlook and notable items
- Organic sales growth was broad-based and led by process end markets. North America and Latin America grew organically; reported sales in EMEA and Asia Pacific declined, mainly due to currency translation. U.S. manufacturing PMI fell below 50 in September 2019. Management described a softer outlook for Europe and China amid slower global growth, trade tensions and Brexit uncertainty.
- Management’s long-term objectives include above-market organic sales growth, EPS growth above sales growth, return on invested capital above 20%, and free cash flow of about 100% of adjusted income. These are long-term goals, not specific FY2020 guidance. The filing forecasts FY2020 capital expenditures of approximately $160 million; it provides no clear FY2020 revenue or earnings forecast.
- On October 1, 2019, Rockwell formed Sensia with Schlumberger, owning 53% and consolidating the venture. Rockwell paid Schlumberger $250 million in cash. The purchase-price allocation was preliminary; pro forma FY2019 sales were approximately $6.9 billion and earnings impact was described as not material.
- Other unusual items include a $35.7 million payment to settle treasury locks associated with the March 2019 issuance of $1.0 billion of long-term notes. The company adopted the new revenue-recognition standard in FY2019, increasing opening retained earnings by $6.1 million.
- Key risks include cyclicality in industrial customer spending and softer macroeconomic conditions; foreign exchange, tariffs and trade restrictions; supplier and component availability; cybersecurity and product-security exposures; dependence on distributors (about 75% of global sales, with the largest distributor about 10%); execution risks in solutions projects; and volatility and transfer restrictions related to the PTC shareholding. LIBOR-based contracts also require transition planning.
- Contingencies include environmental remediation liabilities of $56.3 million and conditional asset-retirement obligations of $21.5 million. The company faces asbestos-related claims involving a few thousand claimants, but management stated that pending litigation and claims were not expected to have a material effect. The auditor identified the U.S. pension obligation as a critical audit matter: a 25-basis-point discount-rate change would alter that obligation by approximately $141 million.
Most important facts for investors to verify
- Reconcile GAAP earnings with adjusted EPS and assess the effect of PTC fair-value changes and tax items on reported results.
- Track whether organic growth, segment margins and cash generation hold up amid the softer industrial outlook and sub-50 U.S. PMI.
- Assess leverage and financial flexibility after the new debt issuance, substantial repurchases, and the decline in reported shareowners’ equity.
- Review the PTC investment’s market value, contractual transfer limits and potential future earnings volatility.
- Monitor Sensia’s integration, final purchase-price allocation, cash requirements and contribution to results.
- Evaluate pension sensitivity to discount rates, future funding needs, environmental and asbestos exposures, and the company’s transition from LIBOR-based agreements.