Rockwell Automation, Inc. — Q3 FY2019 Form 10-Q
Reporting period: Fiscal third quarter and nine months ended June 30, 2019. Dollar amounts are in millions, except per-share data. The interim financial statements are unaudited; Deloitte’s interim review reported no material modifications needed.
Business context and operating results
Rockwell Automation supplies industrial automation and information products, solutions, and services through Architecture & Software and Control Products & Solutions. Q3 demand was mixed: growth in oil and gas, pulp and paper, mining, and life sciences was offset by weakness in automotive, semiconductor, and food and beverage. Management said global trade uncertainty was affecting investment decisions and delaying some projects.
| Metric | Q3 FY2019 | Q3 FY2018 | Nine months FY2019 | Nine months FY2018 |
|---|---|---|---|---|
| Sales | $1,665.1 | $1,698.7 | $4,964.6 | $4,936.5 |
| Organic sales growth | 0.5% | — | 3.2% | — |
| Net income | $261.4 | $198.6 | $687.7 | $189.6 |
| Diluted EPS | $2.20 | $1.58 | $5.73 | $1.48 |
| Adjusted EPS (non-GAAP) | $2.40 | $2.16 | $6.65 | $6.00 |
| Total segment operating margin (non-GAAP) | 23.8% | 22.5% | 22.7% | 21.9% |
Reported Q3 sales declined 2.0%, as currency translation reduced sales by 2.5 percentage points; pricing contributed about 1.5 points. Nine-month reported sales rose 0.6%. Q3 gross profit was $730.3 (43.9% of sales), versus $744.7 (43.8%); nine-month gross profit was $2,177.2 versus $2,148.8.
Q3 segment results diverged: Architecture & Software sales fell 4.6% and operating margin slipped to 29.8% from 30.4%; Control Products & Solutions sales grew 0.2%, while margin improved to 18.9% from 15.7%. The latter’s earnings improvement reflected lower incentive compensation and stronger organic sales, partly offset by higher investment spending.
Cash flow, balance sheet, and liquidity
- Nine-month operating cash flow was $707.0, down from $937.2; capital expenditures were $108.7, up from $78.6; free cash flow (non-GAAP) was $598.3, down from $858.6. Management attributed the decline mainly to working-capital increases, the treasury-lock settlement payment, and higher tax payments, including Tax Act-related tax.
- Cash and cash equivalents were $788.8 at June 30, compared with $618.8 at September 30, 2018; short-term investments were $124.6, down from $290.9. Current assets were $2,945.8 and current liabilities $1,952.5.
- Total debt was approximately $2,239.9, compared with $1,776.2 at September 30, 2018. This includes $298.8 current maturities; there were no commercial paper borrowings at June 30. The company issued $1.0 billion of notes in March, mainly to repay commercial paper.
- Nine-month financing cash use included $346.9 of dividends and $787.4 of treasury-stock purchases. The company repurchased about 4.6 million shares; $333.3 remained under the $1.0 billion authorization at June 30.
Material changes, unusual items, and outlook
- Reported earnings comparisons are affected by the PTC equity investment. The company recorded PTC-related fair-value losses of $25.6 in Q3 and $140.1 in the first nine months, while the prior-year comparison included a $69.5 million Q3 valuation adjustment related to PTC share registration. The PTC investment’s June 30 fair value was $949.8.
- Nine-month FY2018 net income and tax rate were materially affected by $483.7 of provisional Tax Act expense. The effective tax rate was 18.6% for nine months FY2019 versus 77.7% a year earlier; adjusted effective tax rates were 18.2% and 19.3%, respectively.
- Rockwell announced an agreement to form Sensia, a digital oilfield automation joint venture with Schlumberger. Closing was expected in calendar 2019, subject to approvals and other conditions. Rockwell expects to own 53%, consolidate the venture, and pay Schlumberger $250 at closing; Sensia’s expected initial annual revenue was approximately $400.
- The filing provides no specific updated full-year FY2019 revenue or EPS guidance. Management reiterated long-term goals including above-market organic growth, EPS growth above sales growth, ROIC above 20%, and free cash flow around 100% of Adjusted Income; these are long-term goals, not near-term guidance.
- Risks cited include slowing industrial activity, customer capital-spending cycles and trade uncertainty, foreign-exchange movements, cybersecurity and technology risks, component availability, competition, litigation, tax matters, and volatility in the PTC investment. The company said pending litigation, including asbestos claims, was not expected to have a material effect, while noting outcomes are uncertain.
Most important facts for investors to verify
- Whether organic demand and project activity stabilize, particularly in the industries and regions showing Q3 weakness.
- How much reported earnings and future volatility depend on changes in the fair value of the PTC shares, and the implications of their transfer restrictions.
- Whether operating cash flow and free cash flow recover as working capital and tax payments change.
- Debt maturities, interest costs, liquidity and the planned $250 Sensia payment; confirm Sensia’s closing and consolidation details.
- Whether share repurchases and dividends remain sustainable alongside investment needs and debt obligations.