Rockwell Automation, Inc. — Q2 FY2021 Form 10-Q
Reporting period: Fiscal quarter and six months ended March 31, 2021. Unaudited interim results; Deloitte reported that its review identified no material modifications needed for GAAP conformity.
Business context and results
Rockwell Automation supplies industrial automation and digital transformation products, software, solutions, and services. Beginning in FY2021, it reports three segments: Intelligent Devices, Software & Control, and Lifecycle Services.
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Sales | $1,776.1 million | $1,681.3 million | $3,341.4 million | $3,365.8 million |
| Organic sales growth | 1.3% | — | (4.2)% | — |
| Gross profit | $767.4 million | $698.8 million | $1,413.9 million | $1,401.7 million |
| Net income attributable to Rockwell | $415.0 million | $132.2 million | $1,008.3 million | $442.9 million |
| Diluted EPS | $3.54 | $1.13 | $8.59 | $3.80 |
| Adjusted EPS (non-GAAP) | $2.41 | $2.47 | $4.79 | $4.62 |
| Total segment operating margin (non-GAAP) | 22.0% | 22.1% | 20.9% | 21.1% |
Q2 reported sales rose 5.6%, with organic growth of 1.3%; currency translation contributed 2.4 percentage points and acquisitions 1.9 points. For the first half, sales fell 0.7% and organic sales declined 4.2%.
Financial position and cash flow
- Cash and liquidity: Cash and cash equivalents were $641.9 million at March 31, 2021, versus $704.6 million at September 30, 2020. Current assets were $2,969.5 million and current liabilities $2,139.8 million. The company also had an undrawn $1.25 billion revolving credit facility.
- Debt: Short- and long-term debt totaled approximately $2.004 billion, compared with $1.999 billion at September 30, 2020. No commercial paper was outstanding. The company reported compliance with credit-facility covenants.
- Cash flow, six months: Operating cash flow was $595.4 million, versus $448.5 million; capital expenditures were $52.1 million; free cash flow (non-GAAP) was $543.3 million, versus $391.9 million. Cash used for acquisitions was $283.0 million; dividends were $248.7 million and share repurchases $176.9 million.
- Other balance-sheet changes: Receivables increased to $1,458.7 million and inventories to $681.1 million from fiscal year-end. Long-term investments rose to $1,534.9 million, principally reflecting the higher fair value of PTC shares. Total equity was $2,128.7 million, up from $1,346.8 million.
Material changes and segment performance
- Q2 segment sales were $850.2 million for Intelligent Devices, $502.3 million for Software & Control, and $423.6 million for Lifecycle Services. Reported sales grew 8.3%, 12.1%, and declined 5.5%, respectively.
- Q2 segment operating margins were 23.8% for Intelligent Devices (up from 23.0%), 29.8% for Software & Control (down from 30.5%), and 9.0% for Lifecycle Services (down from 12.1%). Lifecycle Services’ weaker sales and margin were notable; its organic sales declined 11.0% in the quarter.
- Six-month segment operating earnings totaled $699.4 million, down 1.6%. Management cited lower sales and restored incentive compensation, partly offset by lower spending and favorable mix.
- The company acquired industrial cybersecurity provider Oylo and maintenance-management software company Fiix. Their combined preliminary purchase-price allocation included $219.8 million of goodwill; acquisition sales and pro forma effects were not material to the periods presented.
Outlook, commentary, risks, and unusual items
- FY2021 guidance: Reported sales growth of 9.0%–12.0%, including organic growth of 5.5%–8.5%, approximately 1.5% inorganic growth, and approximately 2.0% currency benefit. Diluted EPS guidance was $12.53–$12.93; adjusted EPS guidance was $8.95–$9.35. Adjusted EPS is non-GAAP.
- Management cited expected continued order strength but warned that stressed supply chains could constrain component availability, raise material and freight costs, and delay deliveries. COVID-19 impacts remained uncertain.
- Reported earnings included material PTC investment fair-value gains: $190.9 million in Q2 and $581.3 million for six months, compared with losses in the prior-year periods. These market-driven changes substantially affected reported earnings; adjusted EPS excludes them.
- First-half results also included a favorable $70 million pre-tax legal settlement received in Q1. Management attributed higher cash flow partly to this settlement and lower incentive-compensation payments.
- Other stated risks include industrial-market cyclicality and customer capital spending, weakness in Oil & Gas, competition and pricing, cybersecurity and IT security, component supply, acquisition integration, litigation, tax uncertainty, and volatility in PTC’s share price. The filing says pending litigation and disclosed asbestos-related matters are not expected to have a material effect, while noting outcomes remain uncertain.
- Management reported no material change in the risk factors disclosed in its FY2020 Form 10-K and concluded disclosure controls were effective at quarter-end.
Important facts for investors to verify
- How much of FY2021 sales and EPS performance depends on organic demand versus acquisitions, currency, and the PTC investment’s market value.
- Whether supply constraints, component costs, and freight pressures affect the company’s ability to meet its updated guidance.
- Whether Lifecycle Services sales and margins recover, and whether weakness in Oil & Gas persists.
- The comparability and assumptions behind non-GAAP measures, including adjusted EPS, organic sales, segment margin, and free cash flow.
- Potential cash needs for acquisitions, dividends, repurchases, retirement plans, and debt, alongside the effect of working-capital growth.
- Developments in tax matters, litigation and indemnities, and the PTC investment’s transfer restrictions and valuation volatility.