Rockwell Automation(ROK) - 2022 Q4 - Annual Report

Part I Business Overview Rockwell Automation leads in industrial automation and digital transformation, operating through three segments and distributing globally, facing competition from major diversified corporations - The company operates under three segments established in fiscal 2021: Intelligent Devices (drives, motion, safety, sensing), Software & Control (control/visualization software, hardware, information software), and Lifecycle Services (consulting, professional services, Sensia joint venture)[18] - Major competitors include large, diversified corporations such as Siemens AG, ABB Ltd, Schneider Electric SA, and Emerson Electric Co., as well as software-focused companies like AVEVA Group plc and Dassault Systemes[21] - Approximately 75% of global sales are through independent distributors. Sales to the largest single distributor accounted for about 10% of total sales in fiscal years 2020, 2021, and 2022[22] Risk Factors The company faces significant risks across industry, operations, strategic investments, and legal areas, including macroeconomic sensitivity, supply chain issues, and cybersecurity threats Industry and Economic Risks The company's demand is sensitive to macroeconomic cycles, capital spending, and industry conditions, with global disruptions and strong competition posing significant threats - Demand is sensitive to macroeconomic cycles, capital spending reductions, and industry-specific conditions, particularly in the Oil & Gas sector. A strengthening U.S. Dollar adversely impacts sales and profitability from international business[35][36][37] - Global disruptions from events like the COVID-19 pandemic and the Russia-Ukraine conflict pose significant risks, potentially decreasing demand, increasing costs, and disrupting supply chains and operations[41][42] - The company faces strong competition based on product portfolio breadth, technology, domain expertise, quality, and price. Failure to innovate or maintain quality could lead to loss of market share and price erosion[45] Business and Operational Risks Operational risks include reliance on third-party suppliers, potential failures or security breaches of IT systems and products, and disruptions to independent distribution channels - The company relies on third-party suppliers for components and services, exposing it to risks of shortages, cost increases, poor quality, and delivery delays, particularly from single-source suppliers[46][49] - Failures or security breaches of products, connected services, or IT systems are a significant risk. The company's products are used in critical infrastructure, making them targets for cyber-attacks which could harm reputation, and result in legal liability and increased costs[50][51][53] - A substantial portion of sales, particularly in North America, is through independent distributors. Disruption to this channel, such as the financial instability of a distributor, could adversely affect sales[57] Strategic Transactions and Investments Risks Strategic risks involve challenges in integrating acquisitions and joint ventures, along with market volatility from the company's investment in PTC Inc. common stock - The company's strategy includes acquisitions and joint ventures, which carry risks such as difficulties in integration, loss of key employees, and failure to achieve expected benefits like sales growth and cost savings[61] - The company's investment in PTC Inc. common stock exposes it to market volatility. Changes in the fair value of PTC shares are recognized in the income statement, which can materially impact and introduce volatility to reported earnings[64] Legal, Tax, and Regulatory Risks The company faces legal, tax, and regulatory risks, including potential tax increases from new legislation and liabilities from various lawsuits, such as asbestos claims - The company is subject to new legislative and regulatory actions, including potential tax increases from the OECD's agreement on a 15% minimum corporate income tax rate[67][68] - The company faces potential liabilities from various lawsuits and claims, including those related to product safety, employment, and environmental remediation. It has been named as a defendant in lawsuits alleging personal injury from asbestos exposure in historical products[73][74] Properties The company's global headquarters is an owned facility in Milwaukee, Wisconsin, with approximately 50 mostly leased manufacturing and distribution locations worldwide, all in good operating condition - The company's global headquarters is located in an owned facility in Milwaukee, Wisconsin[79] - As of September 30, 2022, the company operated approximately 50 manufacturing and distribution locations globally, with most facilities being leased[79] Legal Proceedings Information regarding legal proceedings is incorporated by reference from Note 17 in the Consolidated Financial Statements, under the section titled "Other Matters" - Details on legal proceedings are provided in Note 17 of the Consolidated Financial Statements[81] Information about our Executive Officers This section lists the company's executive officers as of November 1, 2022, including Blake D. Moret as Chairman, President & CEO, and Nicholas C. Gangestad as SVP & CFO - Blake D. Moret, age 59, serves as the Chairman of the Board, President, and Chief Executive Officer[84] - Nicholas C. Gangestad, age 58, has been the Senior Vice President and Chief Financial Officer since March 1, 2021[84] Part II Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities Rockwell Automation's common stock trades on the NYSE under 'ROK', with share repurchases in Q4 FY2022 and a performance graph showing underperformance relative to the S&P 500 in FY2022 Issuer Purchases of Equity Securities (Q4 FY2022) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | Maximum Approx. Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | | :--- | :--- | :--- | :--- | | July 1 – 31, 2022 | 193,368 | $208.92 | $1,286,459,441 | | August 1 – 31, 2022 | 73,880 | $249.01 | $1,268,062,555 | | September 1 – 30, 2022 | 71,780 | $234.01 | $1,251,265,224 | | Total | 339,028 | $222.97 | | Cumulative Total Return and Dividends | | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Rockwell Automation | $100.00 | $107.27 | $96.48 | $131.85 | $178.54 | $132.89 | | S&P 500 Index | $100.00 | $117.90 | $122.90 | $141.50 | $183.93 | $155.43 | | Cash dividends per common share | $3.04 | $3.51 | $3.88 | $4.08 | $4.28 | $4.48 | Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes the company's financial condition and operational results, detailing its strategy, acquisitions, human capital, economic trends, supply chain challenges, and financial outlook, including critical accounting estimates Overview and Strategy Rockwell Automation's strategy focuses on 'The Connected Enterprise' through integrating control and information technologies, aiming for above-market organic sales growth, double-digit growth in information solutions and ARR, and strategic acquisitions - The company's long-term strategy aims to achieve organic sales growth above the automation market, drive double-digit growth in information solutions and ARR, and acquire companies that catalyze organic growth[98] - Recent strategic acquisitions include Plex Systems (cloud-native smart manufacturing platform), AVATA (supply chain management services), Fiix Inc. (AI-enabled maintenance management system), and Oylo (industrial cybersecurity services)[114][115][116] Human Capital The company prioritizes attracting and retaining talent through safety, engagement, training, and benefits, employing approximately 26,000 globally with a focus on diversity and inclusion Global Employee Count as of September 30, 2022 | Region | Employees | | :--- | :--- | | North America | 10,000 | | Europe, Middle East and Africa | 5,500 | | Asia Pacific | 6,000 | | Latin America | 4,500 | | Total employees | 26,000 | Global Employee Gender Diversity | Category | Women | Men | | :--- | :--- | :--- | | All employees | 32% | 68% | | People Managers | 26% | 74% | | Technical Talent | 17% | 83% | Economic Trends, Supply Chain, and Outlook The company monitors slowing economic indicators, faces persistent global supply chain stress leading to a record $5.2 billion backlog, and projects 7.5% to 11.5% reported sales growth for fiscal 2023 Order Backlog (in millions) | | September 30, 2022 | September 30, 2021 | | :--- | :--- | :--- | | Intelligent Devices | $2,086.1M | $1,052.8M | | Software & Control | $1,456.8M | $618.2M | | Lifecycle Services | $1,654.1M | $1,239.5M | | Total Company | $5,197.0M | $2,910.5M | FY 2023 Financial Guidance | Metric | FY 2023 Guidance | | :--- | :--- | | Reported sales growth | 7.5% - 11.5% | | Organic sales growth | 9.0% - 13.0% | | Diluted EPS | $9.54 - $10.34 | | Adjusted EPS | $10.20 - $11.00 | Results of Operations (2022 vs. 2021) In fiscal 2022, total sales increased 10.9% to $7.76 billion, but Net Income and Diluted EPS decreased significantly due to a loss on the PTC investment, while Adjusted EPS remained relatively flat Key Financial Metrics (FY 2022 vs. FY 2021, in millions) | Metric | FY 2022 | FY 2021 | % Change | | :--- | :--- | :--- | :--- | | Total Sales | $7,760.4M | $6,997.4M | 10.9% | | Total Segment Operating Earnings | $1,542.6M | $1,391.3M | 10.9% | | Net Income Attributable to Rockwell | $932.2M | $1,358.1M | (31.4)% | | Diluted EPS | $7.97 | $11.58 | (31.2)% | | Adjusted EPS | $9.49 | $9.43 | 0.6% | - The significant decrease in Net Income and Diluted EPS was primarily due to a $136.9 million loss from the change in fair value of investments (mainly PTC stock) in 2022, compared to a $397.4 million gain in 2021[143][148][151] - Organic sales grew 11.3%, acquisitions added 2.3%, and currency translation had a negative impact of 2.7%[144] Segment Performance (2022 vs. 2021) In fiscal 2022, all segments grew sales, with Software & Control leading at 18.8% and expanding its operating margin, while Intelligent Devices and Lifecycle Services saw margin contractions Segment Sales and Operating Margins (FY 2022 vs. FY 2021, in millions) | Segment | FY22 Sales | YoY Change | FY22 Op. Margin | FY21 Op. Margin | | :--- | :--- | :--- | :--- | :--- | | Intelligent Devices | $3,544.6M | 7.0% | 20.2% | 21.2% | | Software & Control | $2,312.9M | 18.8% | 28.8% | 27.3% | | Lifecycle Services | $1,902.9M | 9.5% | 8.3% | 9.1% | Results of Operations (2021 vs. 2020) In fiscal 2021, sales increased 10.5% to $7.0 billion, with Net Income and Diluted EPS rising significantly due to higher sales and a substantial gain on the PTC investment, leading to a 19.8% Adjusted EPS growth Key Financial Metrics (FY 2021 vs. FY 2020, in millions) | Metric | FY 2021 | FY 2020 | % Change | | :--- | :--- | :--- | :--- | | Total Sales | $6,997.4M | $6,329.8M | 10.5% | | Total Segment Operating Earnings | $1,391.3M | $1,257.9M | 10.6% | | Net Income Attributable to Rockwell | $1,358.1M | $1,023.4M | 32.7% | | Diluted EPS | $11.58 | $8.77 | 32.0% | | Adjusted EPS | $9.43 | $7.87 | 19.8% | - The increase in Net Income and Diluted EPS was primarily due to higher sales, a $397.4 million gain on the fair value of investments (PTC), and a $70 million favorable legal settlement[143][162][165] Financial Condition, Liquidity, and Capital Resources Cash from operating activities decreased to $823.1 million in FY2022 due to working capital increases, free cash flow declined, and total debt stood at $3.84 billion, with an unused $1.5 billion revolving credit facility Cash Flow Summary (in millions) | Cash Flow (in millions) | FY 2022 | FY 2021 | FY 2020 | | :--- | :--- | :--- | :--- | | Operating activities | $823.1 | $1,261.0 | $1,120.5 | | Investing activities | ($7.8) | ($2,626.6) | ($618.0) | | Financing activities | ($934.2) | $1,297.8 | ($798.9) | - Free cash flow decreased significantly to $682.0 million in FY2022 from $1,140.7 million in FY2021, mainly due to higher working capital needs and increased incentive compensation payments[180][181] - In August 2021, the company issued $1.5 billion in long-term notes to primarily fund the acquisition of Plex[186] - On June 29, 2022, the company replaced its $1.25 billion credit facility with a new five-year $1.5 billion unsecured revolving credit facility, which remained undrawn as of September 30, 2022[190] Critical Accounting Estimates Management's critical accounting estimates include the goodwill impairment test for Sensia, pension benefit obligations, revenue recognition for customer incentives, and the valuation of intangible assets from acquisitions like Plex Systems - For the Sensia reporting unit goodwill impairment test, the estimated fair value exceeded its carrying value by approximately 15% in the fourth quarter of 2022. The valuation is sensitive to assumptions about future revenue growth, margins, and the discount rate[204][205][206] - Pension obligations are sensitive to the discount rate assumption. For 2023, the U.S. discount rate will increase significantly to 5.65% from 3.86% in 2022[209] - The valuation of intangible assets from the Plex acquisition involved significant estimates, particularly the customer attrition rate (5%) for customer relationships and the royalty rate (25%) for technology[214][215] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from foreign currency and interest rate fluctuations, using derivative instruments to hedge these exposures, with a strengthening U.S. dollar negatively impacting results - The company uses foreign currency forward exchange contracts to hedge cash flow exposures and net investments in foreign subsidiaries. As of September 30, 2022, the fair value of these contracts was a net asset of $87.9 million[221] - Interest rate risk primarily affects the company's short-term debt, which consisted of $317.0 million in commercial paper borrowings as of September 30, 2022[226] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for fiscal year 2022 and the preceding two years, including the balance sheet, income statement, cash flow statement, and detailed notes Consolidated Financial Statements This section presents the primary financial statements, including the Balance Sheet with total assets of $10.76 billion, and the Statement of Operations reporting $7.76 billion in sales and $932.2 million net income for fiscal 2022 Consolidated Balance Sheet (in millions) | Balance Sheet (in millions) | Sep 30, 2022 | Sep 30, 2021 | | :--- | :--- | :--- | | Total Current Assets | $3,610.7 | $3,063.4 | | Goodwill | $3,524.0 | $3,625.9 | | Total Assets | $10,758.7 | $10,701.6 | | Total Current Liabilities | $3,572.2 | $2,992.2 | | Long-term Debt | $2,867.8 | $3,464.6 | | Total Liabilities | $7,742.0 | $8,007.5 | | Total Shareowners' Equity | $3,016.7 | $2,694.1 | Consolidated Statement of Operations (in millions) | Statement of Operations (in millions) | FY 2022 | FY 2021 | FY 2020 | | :--- | :--- | :--- | :--- | | Total Sales | $7,760.4 | $6,997.4 | $6,329.8 | | Gross Profit | $3,102.0 | $2,897.7 | $2,595.2 | | Income before income taxes | $1,073.6 | $1,526.2 | $1,136.1 | | Net income attributable to Rockwell | $932.2 | $1,358.1 | $1,023.4 | | Diluted EPS | $7.97 | $11.58 | $8.77 | Notes to Consolidated Financial Statements This section provides detailed disclosures supporting the financial statements, covering accounting policies, revenue recognition, goodwill, acquisitions, debt, investments, retirement benefits, income taxes, commitments, and segment information - As of September 30, 2022, the company had approximately $1.2 billion in unfulfilled performance obligations from existing customer contracts, with about $520 million expected to be recognized as revenue in the next 12 months[307] - The goodwill balance was $3.52 billion as of September 30, 2022, down from $3.63 billion in 2021, primarily due to currency translation. No impairment was recorded[320] - The acquisition of Plex Systems in August 2021 for $2.21 billion resulted in the recognition of $1.73 billion in goodwill and $531.4 million in intangible assets[325][326][327] - The effective tax rate was 14.4% in 2022, 11.9% in 2021, and 9.9% in 2020. The rate is significantly lower than the U.S. statutory rate of 21% due to benefits from non-U.S. operations and tax incentive programs[417] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and internal control over financial reporting were effective as of September 30, 2022, a conclusion affirmed by the independent auditor - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2022[470] - Management concluded that the company's internal control over financial reporting was effective as of September 30, 2022, based on the COSO framework[471] Part III Directors, Executive Officers, and Corporate Governance This section incorporates by reference information from the company's Proxy Statement regarding directors, corporate governance, and stock ownership, confirming a code of ethics for executive officers - Most information required by this item is incorporated by reference from the company's Proxy Statement for the Annual Meeting of Shareowners to be held on February 7, 2023[8][479] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's Proxy Statement - Information on executive compensation is incorporated by reference from the Proxy Statement[482] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section provides information on equity compensation plans as of September 30, 2022, with other security ownership details incorporated by reference from the Proxy Statement Equity Compensation Plan Information as of September 30, 2022 | Plan Category | Number of Securities to be issued upon Exercise (a) | Weighted Average Exercise Price of Outstanding Options (b) | Number of Securities Remaining Available for Future Issuance (c) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by shareowners | 2,862,970 | $186.72 | 10,106,671 | | Equity compensation plans not approved by shareowners | — | n/a | — | | Total | 2,862,970 | $186.72 | 10,106,671 | Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's Proxy Statement - Information on certain relationships, related transactions, and director independence is incorporated by reference from the Proxy Statement[486] Principal Accountant Fees and Services Information concerning principal accountant fees and services is incorporated by reference from the company's Proxy Statement - Information on principal accountant fees and services is incorporated by reference from the Proxy Statement[487] Part IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the Form 10-K, including audited consolidated financial statements and various governance and debt documents - This item lists all financial statements, schedules, and exhibits included in or incorporated by reference into the annual report[490][491]