Rockwell Automation, Inc. — Q1 FY2021 Form 10-Q
Reporting period: Three months ended December 31, 2020. Financial statement amounts are in millions of dollars, except per-share data. The interim statements were reviewed by Deloitte; this was not an audit.
Business context and results
Rockwell Automation supplies industrial automation products, software, solutions and services. Beginning in FY2021, it reported three segments: Intelligent Devices, Software & Control, and Lifecycle Services.
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Sales | $1,565.3 | $1,684.5 |
| Gross profit | $646.5 | $702.9 |
| Net income attributable to Rockwell | $593.3 | $310.7 |
| Diluted EPS | $5.06 | $2.66 |
| Adjusted EPS (non-GAAP) | $2.38 | $2.15 |
| Operating cash flow | $346.5 | $231.1 |
| Free cash flow (non-GAAP) | $319.4 | $194.1 |
Reported sales fell 7.1%; organic sales fell 9.7%. Gross margin was approximately 41.3%, versus 41.7%. Total segment operating earnings declined 8.8% to $309.3, and segment operating margin was 19.8%, down from 20.1%.
- Intelligent Devices: Sales declined 7.1% to $721.7; operating margin was 19.4%, versus 20.7%.
- Software & Control: Sales declined 2.5% to $441.0; operating margin was 30.2%, versus 31.0%.
- Lifecycle Services: Sales declined 11.6% to $402.6; operating margin improved to 8.9% from 8.4%.
Financial position and liquidity
At December 31, 2020, cash and cash equivalents were $730.4; total debt was $2,130.8, comprising $150.5 short-term and $1,980.3 long-term. Cash-flow reporting includes $25.8 of restricted cash, for total cash, cash equivalents and restricted cash of $756.2. Current assets were $2,932.1 and current liabilities $2,188.6. Shareowners’ equity totaled $1,873.8.
Operating cash flow and free cash flow rose year over year, primarily due to lower incentive compensation payments and a $70.0 legal settlement receipt. Investing cash outflow was $310.1, including $283.1 for acquisitions; financing cash outflow was $37.2. Dividends paid were $124.3 and treasury stock purchases were $83.5 in cash-flow reporting. The company had $1.25 billion available under its revolving credit facility and reported compliance with its covenants.
Material changes, unusual items and outlook
- Reported net income includes a $390.4 gain from the fair-value increase in Rockwell’s PTC investment and a favorable $70.0 legal settlement. These items substantially increased GAAP income; the PTC share-price adjustment also makes reported earnings potentially volatile.
- Adjusted EPS increased 11% to $2.38. This non-GAAP measure excludes investment fair-value changes and specified other items, but includes the settlement gain.
- Sales were weak across most regions and segments. North America weakness included Oil & Gas and Automotive; management cited strength in areas including Life Sciences and e-Commerce. Management said orders exceeded pre-pandemic levels and demand was particularly strong for Intelligent Devices and Information Solutions.
- Rockwell acquired industrial cybersecurity provider Oylo and AI-enabled maintenance software company Fiix. Aggregate net consideration was $287.2; acquired-business sales were not material in the quarter.
- FY2021 guidance: Reported sales growth of 8.5%–11.5%, including organic growth of 4.5%–7.5%, approximately 1.5% inorganic growth and approximately 2.5% currency benefit. Diluted EPS guidance was $11.07–$11.47; adjusted EPS guidance was $8.70–$9.10.
- Guidance assumes no increase in pandemic-related facility closures or supply-chain disruptions. Management warned COVID-19’s duration and severity remain uncertain. Other cited risks include cyclical customer spending, component availability and cost, cybersecurity, competition, acquisitions, litigation, tax matters and PTC investment volatility.
- The company said pending litigation, including asbestos-related claims, was not expected to have a material effect, while noting outcomes and future indemnification claims remain uncertain. It received $70.0 under a favorable trademark infringement and false advertising settlement during the quarter.
Important facts for investors to verify
- How much of the FY2021 earnings outlook depends on operating performance versus the PTC investment adjustment and other exclusions; compare GAAP and non-GAAP measures using the company’s reconciliations.
- Whether the reported order recovery converts into sales and margins, particularly given Q1 organic sales declines and pandemic and supply-chain assumptions.
- PTC investment valuation, transfer restrictions and potential effect of share-price changes on quarterly GAAP earnings.
- Cash generation and working-capital trends, acquisition spending, debt levels and planned dividends or share repurchases.
- Integration and expected returns from Oylo and Fiix, and developments in legal, tax, cybersecurity and other disclosed risks.