Rockwell Automation, Inc. — Q3 Fiscal 2022 Form 10-Q
Reporting period: Three and nine months ended June 30, 2022; filed July 27, 2022. Rockwell Automation supplies industrial automation and digital transformation products, software, solutions, and services through Intelligent Devices, Software & Control, and Lifecycle Services. Interim financial statements were reviewed by Deloitte & Touche, not audited.
Financial performance
| Metric | Q3 FY2022 | Change vs. Q3 FY2021 | Nine months FY2022 | Change vs. prior year |
|---|---|---|---|---|
| Sales | $1,968.7 million | +6.5% reported; +7.1% organic | $5,634.1 million | +8.6% reported; +8.1% organic |
| Net income attributable to Rockwell | $297.9 million | Up from $271.3 million | $593.3 million | Down from $1,279.6 million |
| Diluted EPS | $2.55 | Up from $2.32 | $5.06 | Down from $10.91 |
| Adjusted EPS (non-GAAP) | $2.66 | Up 15.2% | $6.45 | Down 9.2% |
| Segment operating earnings / margin (non-GAAP) | $409.2 million / 20.8% | Earnings +11.0%; margin was 19.9% | $1,047.7 million / 18.6% | Earnings down 1.9%; margin was 20.6% |
| Operating cash flow / free cash flow (non-GAAP) | Not separately presented for the quarter | $423.7 million / $323.4 million | Down from $1,056.9 million / $980.3 million |
Q3 gross profit was $802.4 million, versus $764.4 million a year earlier. Nine-month gross profit was $2,215.6 million, versus $2,178.3 million. Reported sales include acquisition and currency effects; in Q3, acquisitions added 2.5 percentage points while currency translation reduced sales by 3.1 points. For the nine months, acquisitions added 2.4 points and currency reduced sales by 1.9 points.
Segments: Q3 Software & Control sales grew 19.1% and operating margin rose to 31.4% from 25.2%; Intelligent Devices sales decreased 0.5% and margin fell to 19.7% from 21.9%; Lifecycle Services sales grew 6.1% while margin declined to 9.4% from 10.3%. Management cited higher input costs and investment spending as key pressures on margins.
Balance sheet, cash flow, and liquidity
- At June 30, 2022, cash and cash equivalents were $482.9 million, compared with $662.2 million at September 30, 2021. Current assets were $3,492.3 million and current liabilities $3,281.2 million.
- Short-term debt was $601.5 million and long-term debt $3,464.1 million. Short-term debt included $578.0 million of commercial paper and $23.5 million of Sensia loans. Commercial paper’s weighted-average rate was 1.57%, compared with 0.18% at September 2021.
- Nine-month operating cash flow fell mainly due to working-capital increases, lower pre-tax income, higher incentive compensation payments, and the absence of the prior-year legal settlement receipt. Receivables and inventories rose to $1,702.2 million and $989.1 million, respectively, from $1,424.5 million and $798.1 million at September 2021.
- Cash uses included $390.4 million of dividends and $218.5 million of treasury-stock purchases. The company repurchased approximately 1.0 million shares for $225.5 million during the nine months.
- Rockwell replaced its $1.25 billion revolving credit facility with a five-year $1.5 billion facility expiring in June 2027; it had not drawn on the facility. The company reported covenant compliance. S&P’s long-term rating was A with a Negative outlook; Moody’s and Fitch each had Stable outlooks.
Material changes and unusual items
- Nine-month GAAP earnings were substantially lower year over year, principally reflecting a $624.6 million investment gain in the prior-year period versus a $138.3 million investment loss in FY2022, primarily related to PTC shares. The PTC investment was valued at $1,065.6 million at June 30, 2022; investment-value movements can materially affect reported results.
- FY2021 included a $70 million legal settlement gain, which also contributed to lower year-over-year nine-month adjusted EPS comparisons. Q3 FY2022 did not include a comparable settlement.
- Q3 demand and reported sales growth were constrained by component availability rather than underlying demand, according to management. China-related COVID-19 shutdowns contributed to Asia Pacific sales declines. Inflation, supplier constraints, labor shortages, and freight pressures continued to affect costs and delivery.
- The company acquired AVATA and, through Sensia, Swinton Technology during FY2022. The prior-year Plex acquisition contributed materially to Software & Control growth and increased purchase-accounting amortization.
- U.S. pension-plan remeasurement and settlement accounting reduced the net benefit obligation by $86.6 million; the June 2022 discount rate was 4.90%, versus 3.10% at the September 2021 annual measurement. Management reported no goodwill impairment; Sensia’s estimated fair value exceeded carrying value by approximately 20%.
Outlook, risks, and contingencies
As of July 27, 2022, FY2022 guidance was reported sales growth of 10.5%–12.5%, organic sales growth of 10%–12%, diluted EPS of $7.74–$8.14, and adjusted EPS of $9.30–$9.70. Guidance reflects strong demand and record backlog but also the company’s latest view of supply constraints. Adjusted EPS and organic growth are non-GAAP measures.
Management’s longer-term strategy targets above-market organic growth, double-digit growth in information solutions, connected services and recurring revenue, and free cash flow approximating 100% of adjusted income. The filing cautions that actual results may differ, citing component availability and costs, supply-chain disruption, inflation, pandemic effects, geopolitical events and sanctions, cybersecurity, customer spending, foreign exchange, competition, and successful integration of acquisitions. Litigation includes asbestos-related claims and other matters; management does not expect pending matters to have a material effect, while noting outcomes are uncertain. It reported no material indemnification claims known to be probable or reasonably possible of an unfavorable outcome.
Key facts for investors to verify
- Whether record backlog converts into shipments and revenue despite component shortages, and whether input-cost inflation can be recovered through pricing.
- Progress against FY2022 sales and EPS guidance, including the assumptions behind non-GAAP adjusted EPS and the effects of currency and acquisitions.
- PTC share valuation and sale activity, given the investment’s significant impact on reported earnings and cash proceeds.
- Working-capital trends and the sustainability of operating cash flow and free cash flow, alongside dividends, repurchases, and debt maturities.
- Sensia’s Oil & Gas exposure and the key revenue, margin, and discount-rate assumptions supporting its goodwill valuation headroom.
- Developments in asbestos, environmental, intellectual-property, and other legal contingencies, and any effect on reported results.