Rockwell Automation, Inc. — Q3 FY2020 Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2020. The company reported results amid the COVID-19 pandemic; interim results are unaudited.
Financial performance
| Metric | Q3 FY2020 | Q3 FY2019 | Nine months FY2020 | Nine months FY2019 |
|---|---|---|---|---|
| Sales | $1,394.0M | $1,665.1M | $4,759.8M | $4,964.6M |
| Gross profit / margin | $554.2M / 39.8% | $730.3M / 43.9% | $1,955.9M / 41.1% | $2,177.2M / 43.9% |
| Net income attributable to Rockwell | $317.8M | $261.4M | $760.7M | $687.7M |
| Diluted EPS | $2.73 | $2.20 | $6.52 | $5.73 |
| Adjusted EPS (non-GAAP) | $1.27 | $2.40 | $5.81 | $6.65 |
| Total segment operating margin (non-GAAP) | 16.5% | 23.8% | 19.7% | 22.7% |
Q3 sales fell 16.3% reported and 17.6% organically; acquisitions added 3.2 percentage points and currency reduced sales by 1.9 points. Nine-month sales declined 4.1% reported and 6.3% organically. Both operating segments weakened: Q3 Architecture & Software sales fell 16.9%, while Control Products & Solutions sales fell 15.8%. Their operating margins contracted to 23.8% and 10.6%, respectively.
Reported Q3 earnings benefited from a $175.5M gain in the fair value of the PTC investment; adjusted EPS, which excludes investment gains and other specified items, declined 47%. The effective tax rate was 6.1% for Q3 and 9.2% for the nine months, versus 18.7% and 18.6% a year earlier, reflecting PTC-related and other favorable tax items, including benefits associated with Sensia.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $794.7M, compared with $707.0M; free cash flow (non-GAAP) was $702.8M, compared with $598.3M. Management attributed the increase mainly to working-capital movements and lower tax and incentive-compensation payments.
- Cash and equivalents were $909.8M at June 30, 2020, down from $1,018.4M at September 30, 2019. Current assets were $2,942.5M and current liabilities $2,242.1M.
- Debt totaled approximately $2,397.2M, including $422.8M short-term debt and $1,974.4M long-term debt. The company drew a $400M 364-day term loan in April; its $1.25B revolving credit facility remained undrawn. It reported compliance with credit covenants and no commercial paper outstanding.
- Nine-month investing cash outflow was $591.1M, including $545.9M for acquisitions. Financing cash outflow was $308.3M, including $354.3M in dividends and $264.2M in treasury-stock purchases, partly offset by debt issuance and stock-option proceeds.
Material changes and notable items
- COVID-19-related economic disruption coincided with steep Q3 sales and segment-earnings declines. Organic sales decreased in all reported geographic regions; North America was particularly affected by Oil & Gas weakness.
- Rockwell formed and consolidated Sensia, a digital oilfield automation joint venture, in which it owns 53%; Schlumberger owns 47%. Sensia and other acquisitions contributed to reported sales and increased goodwill and intangible assets.
- The company also acquired MESTECH, Avnet Data Security, ASEM and Kalypso during the period. Acquisition purchase-price allocations were preliminary.
- Adoption of lease accounting led to recognition of operating lease right-of-use assets and liabilities. The company also reclassified $146.8M of tax effects from accumulated other comprehensive loss to retained earnings.
Guidance, management commentary and risks
Fiscal 2020 guidance was approximately 5.5% reported sales decline, including approximately 8% organic decline, 4% inorganic growth and a 1.5% currency headwind. Diluted EPS guidance was $8.06–$8.26 and adjusted EPS guidance was $7.40–$7.60. The projections assumed a gradual recovery with no further pandemic-related facility closures or supply-chain disruptions.
Management described actions to reduce costs, including eliminating discretionary spending, delaying non-critical investments, reducing contract labor, temporarily cutting non-manufacturing salaries, reducing director cash fees and suspending the U.S. 401(k) match. It said it continued selective investment in priority areas. Management no longer expected a payout under fiscal 2020 incentive plans.
Key risks include the uncertain duration and economic impact of COVID-19; supply-chain and customer-site access disruptions; project delays and lower labor utilization; weak Oil & Gas demand and volatile oil prices; and acquisition integration and goodwill valuation. The filing also discusses asbestos-related claims and other legal matters; management did not expect pending matters to materially affect the company, while noting outcomes are uncertain. No impairment was identified in the reported goodwill tests.
Important facts for investors to verify
- Whether reported results and fiscal 2020 guidance assumptions on pandemic recovery, customer demand and supply-chain continuity were achieved.
- How much of reported earnings reflected PTC fair-value movements and favorable tax items versus underlying operations; review the non-GAAP reconciliations.
- Whether the decline in organic sales and segment margins persisted, particularly in Oil & Gas-exposed businesses and solutions and services.
- Cash generation, debt repayment and liquidity needs, including the maturity and cost of the $400M term loan and Sensia-related borrowing.
- Integration and performance of Sensia and other acquisitions, including the preliminary purchase-price allocations, goodwill and intangible-asset assumptions.