Business context and reporting period
Rockwell Automation, Inc. is an industrial automation and digital transformation company. This unaudited Form 10-Q covers the third fiscal quarter and first nine months ended June 30, 2021; comparisons are with the corresponding 2020 periods. The company reports Intelligent Devices, Software & Control, and Lifecycle Services.
Financial results and position
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Sales | $1,848.2 million, up 32.6% | $5,189.6 million, up 9.0% |
| Organic sales growth | 26.4% | 4.7% |
| Gross profit / gross margin | $764.4 million / approximately 41.4% | $2,178.3 million / approximately 42.0% |
| Net income attributable to Rockwell | $271.3 million, versus $317.8 million | $1,279.6 million, versus $760.7 million |
| Diluted EPS | $2.32, versus $2.73 | $10.91, versus $6.52 |
| Adjusted EPS (non-GAAP) | $2.31, versus $1.32 | $7.10, versus $5.95 |
| Total segment operating margin (non-GAAP) | 19.9%, versus 16.5% | 20.6%, versus 19.7% |
For the quarter, sales growth and higher segment operating earnings were offset in reported net income and EPS by lower fair-value gains on the PTC investment than in the prior-year quarter. For the nine months, PTC investment gains and a $70 million legal settlement also materially boosted reported pretax income.
For the nine months, operating cash flow was $1,056.9 million, versus $794.7 million; free cash flow (non-GAAP) was $980.3 million, versus $702.8 million. Cash and cash equivalents were $913.8 million at June 30, 2021, compared with $704.6 million at September 30, 2020. Total debt was approximately $2.00 billion, nearly unchanged from fiscal year-end. Current assets were $3,286.2 million and current liabilities were $2,456.3 million.
Material changes and unusual items
- Quarterly sales increased across all three segments. Intelligent Devices sales rose 33.8%, Software & Control 39.7%, and Lifecycle Services 23.4%. For the nine-month period, Lifecycle Services organic sales declined 4.7%, including weakness in Oil & Gas markets.
- Rockwell recorded $619.5 million of PTC share-value gains in the first nine months, versus $101.7 million in the prior-year period; the quarter’s PTC gain was $38.2 million. These mark-to-market gains contribute to earnings volatility.
- A favorable $70 million legal settlement was recorded in the first quarter of fiscal 2021.
- June pension-plan remeasurement reduced the net benefit obligation by $500.9 million and resulted in $27.2 million of settlement expense. Pension-related other comprehensive income was a significant contributor to the increase in equity.
- The company announced a $2.22 billion cash acquisition of Plex Systems, expected to close in the fourth quarter of fiscal 2021, subject to customary conditions and regulatory review.
Outlook, risks and contingencies
Fiscal 2021 guidance was approximately 12% reported sales growth, including approximately 8% organic growth, 1.5% inorganic growth and 2.5% currency benefit. Diluted EPS guidance was $12.85–$13.05; adjusted EPS guidance was $9.10–$9.30. Adjusted measures are non-GAAP.
Management cited strong orders but expects continued supply-chain constraints, including component availability, higher materials and freight costs, and potential delivery delays. COVID-19 impacts remain uncertain. Other identified risks include cyclical customer spending, Oil & Gas exposure, foreign exchange, cybersecurity, litigation, and volatility in the PTC investment. The Plex acquisition is expected to be financed with cash and short- and long-term debt; ratings agencies were reviewing the company’s ratings following the announcement. Standard & Poor’s had placed its ratings on CreditWatch Negative.
The company reported a few thousand asbestos-related claimants but stated that it believes pending litigation and other disclosed contingencies will not materially affect its financial position or results. It also noted that future valid intellectual-property indemnification claims could be significant. Deloitte & Touche reviewed the interim financial information and reported no material modifications were needed; this was a review, not an audit.
Important facts for investors to verify
- Whether the company achieves its fiscal 2021 sales and EPS guidance amid ongoing supply and freight constraints.
- The Plex acquisition’s closing, financing, integration, and effect on leverage and credit ratings.
- Underlying earnings and cash generation apart from PTC fair-value changes, the legal settlement, and pension-related items; assess non-GAAP measures alongside GAAP results.
- Whether Lifecycle Services and Oil & Gas demand recover, and how segment margins respond to demand, mix, and incentive compensation.