Rockwell Automation, Inc. — Q1 FY2020 Form 10-Q
Reporting period: Three months ended December 31, 2019. Balance-sheet comparisons are with September 30, 2019; income and cash-flow comparisons are with the three months ended December 31, 2018. Amounts are in millions except per-share data.
Business context and results
Rockwell Automation supplies industrial automation products, software, solutions and services. It reports Architecture & Software and Control Products & Solutions segments. Management said global growth had stabilized at low levels, but the outlook remained soft, with trade uncertainty contributing to customer project delays. U.S. industrial production and manufacturing PMI had weakened from the prior year.
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Sales | $1,684.5 | $1,642.3 |
| Gross profit / gross margin | $702.9 / 41.7% | $738.7 / 45.0% |
| Income before taxes | $334.6 | $120.8 |
| Net income attributable to Rockwell | $310.7 | $80.3 |
| Diluted EPS | $2.66 | $0.66 |
| Adjusted EPS (non-GAAP) | $2.11 | $2.21 |
| Operating cash flow | $231.1 | $212.0 |
| Free cash flow (non-GAAP) | $194.1 | $170.0 |
Revenue, margins and period-over-period changes
- Reported sales grew 2.6%; organic sales declined 1.0%. Currency reduced reported growth by 0.9 percentage points and acquisitions added 4.5 points. Pricing contributed about 1 point.
- Architecture & Software sales were nearly flat at $751.6; organic sales increased 0.7%. Segment operating margin fell to 29.8% from 31.5%, mainly due to higher investment spending.
- Control Products & Solutions sales rose 4.9% to $932.9, but organic sales declined 2.5%. Acquisitions added 8.2 percentage points to reported growth. Segment operating margin decreased to 12.4% from 15.5%, reflecting Sensia one-time items, unfavorable mix and lower organic sales.
- Total segment operating earnings decreased 9.5% to $339.1 and segment operating margin declined to 20.1% from 22.8%, primarily due to increased spending and unfavorable mix.
- Reported net income and EPS were substantially affected by PTC investment valuation changes: the quarter included a $71.0 gain, versus a $212.7 loss in the prior-year quarter. Adjusted EPS, which excludes specified items including investment valuation changes, declined 5%.
- The effective tax rate was 5.7%, versus 33.5%; the adjusted effective tax rate was 7.9%, versus 18.7%. Management attributed the lower rates mainly to Sensia-related tax benefits and excess share-based compensation tax benefits, as well as PTC-related effects.
Cash, debt and liquidity
- Cash and cash equivalents were $926.2 at December 31, down from $1,018.4 at September 30. Operating cash flow was $231.1; capital expenditures were $37.0; reported free cash flow was $194.1.
- Investing activities used $233.0, including $238.5 for acquisitions net of cash acquired. Financing activities used $95.6, including $117.9 of dividends and $106.0 of treasury-stock purchases, partly offset by $104.8 in stock-option exercise proceeds.
- Debt comprised $23.5 of short-term debt, $301.0 of current long-term debt and $1,953.0 of long-term debt at quarter-end. Short-term debt was Sensia loans from Schlumberger due September 30, 2020.
- The company reported $1.25 billion of capacity under its revolving credit facility, no borrowings against it during the quarter, and compliance with credit-facility covenants. Ratings outlooks were stable.
- Current assets were $3,007.5 and current liabilities were $2,067.5. Receivables increased to $1,298.1 from $1,178.7 and inventories to $625.3 from $575.7 since September 30.
Acquisitions, outlook and other notable items
- Rockwell formed and consolidated Sensia on October 1, 2019, owning 53% alongside Schlumberger’s 47%. It paid Schlumberger $250.0 in cash. Preliminary purchase accounting included $314.1 of goodwill and $254.1 of intangible assets; the allocation remains subject to measurement-period adjustments. Sensia contributed to acquisition-driven sales growth, while its reported year-over-year impact on Control Products & Solutions margin was negative 1.4 percentage points.
- Rockwell also acquired MESTECH Services in October 2019. The filing does not provide a clear purchase price for this acquisition.
- Management’s long-term goals include above-market organic sales growth, EPS growth above sales growth, return on invested capital above 20%, and free cash flow around 100% of adjusted income. It expects acquisitions to add at least one percentage point annually to long-term sales growth. The filing does not provide specific full-year FY2020 sales or EPS guidance.
- Unfulfilled performance obligations were approximately $480, with about $330 expected to be recognized over the next 12 months, subject to the filing’s stated exclusions and practical expedients.
- Lease accounting adoption added right-of-use assets and lease liabilities; at December 31, operating lease liabilities totaled $344.6, including current and long-term portions. The adoption-date impact on retained earnings was immaterial. The company also reclassified $146.8 of tax effects from accumulated other comprehensive loss to retained earnings.
- The company described risks including cyclical customer capital spending, macroeconomic and currency conditions, trade and tariff developments, cybersecurity, competition, component availability, transaction integration, litigation, and volatility in the PTC investment. It said pending litigation and asbestos claims were not expected to have a material effect, while acknowledging outcome uncertainty. No material change to previously disclosed risk factors was reported.
- Management and the independent accountant reported no identified material modifications needed to the interim financial information; the accountant’s review was not an audit. Management concluded disclosure controls were effective and reported no material change in internal control during the quarter.
Key facts for investors to verify
- Whether organic sales and segment margins improve as macroeconomic conditions and customer project timing evolve.
- How much future reported earnings reflects operating performance versus PTC share-price movements, and the implications of the investment’s transfer restrictions.
- Sensia’s operating contribution, integration progress, final purchase-price allocation and effect on leverage and margins.
- Working-capital trends, cash conversion, planned capital allocation and debt maturities, alongside available credit capacity.
- Whether the stated long-term targets remain achievable; the filing supplies no specific FY2020 earnings or sales forecast.