Rockwell Automation, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2020. The unaudited interim financial statements were reviewed by Deloitte & Touche; the review is not an audit.
Business context and financial performance
Rockwell Automation supplies industrial automation and digital transformation products, solutions, and services through Architecture & Software and Control Products & Solutions. The quarter unfolded amid the rapidly developing COVID-19 pandemic and a sharp downturn in oil markets.
| Metric | Three months ended March 31, 2020 | Six months ended March 31, 2020 |
|---|---|---|
| Sales | $1.681 billion, up 1.5% reported; organic sales down 0.2% | $3.366 billion, up 2.0% reported; organic sales down 0.6% |
| Gross profit | $698.8 million; 41.6% of sales, versus 42.7% a year earlier | $1.402 billion |
| Segment operating earnings / margin | $371.5 million / 22.1%, versus $353.8 million / 21.3% | $710.6 million / 21.1%, versus $728.7 million / 22.1% |
| Net income attributable to Rockwell Automation | $132.2 million, versus $346.0 million | $442.9 million, versus $426.3 million |
| Diluted EPS | $1.13, versus $2.88; adjusted EPS was $2.43, versus $2.04 | $3.80, versus $3.53; adjusted EPS was $4.53, versus $4.26 |
| Cash from operations / free cash flow | Quarterly values not separately stated | $448.5 million / $391.9 million |
Quarterly reported sales growth included a 3.2 percentage-point contribution from acquisitions and a 1.5-point reduction from currency; pricing contributed about 1 point. Architecture & Software sales rose 2.4% and segment margin expanded to 30.7%. Control Products & Solutions sales rose 0.7% reported but declined 3.6% organically; its segment margin declined to 15.0%. Geographic weakness was most pronounced in Asia Pacific, including COVID-19-related weakness in China. Management cited strength in North American Automotive and weakness in Oil & Gas.
Liquidity, debt, and capital allocation
At March 31, 2020, cash and cash equivalents were $641.8 million, down from $1.018 billion at September 30, 2019. Current assets were $2.758 billion and current liabilities $1.762 billion. Debt comprised $1.970 billion of long-term debt and $81.5 million of short-term debt; the latter included $58.0 million of commercial paper. The company repaid $300 million of notes due in March.
Six-month operating cash flow improved from $355.8 million to $448.5 million year over year. Investing activities used $273.6 million, including $259.3 million for acquisitions; financing activities used $534.0 million, including $236.3 million of dividends and $213.7 million of treasury-stock purchases. The company had a $1.25 billion undrawn revolving credit facility at quarter-end and reported compliance with its covenants. On April 20, 2020, it borrowed $400 million under a new 364-day term loan for general corporate purposes, including potential acquisition financing. Cash and short-term investment balances were largely held by non-U.S. subsidiaries.
Material changes and unusual items
- Quarterly pre-tax income fell to $167.4 million from $402.4 million, primarily due to a $144.8 million fair-value loss on Rockwell’s PTC investment, compared with a $98.2 million gain in the prior-year quarter. The PTC investment was valued at $647.7 million at March 31.
- Adjusted quarterly EPS increased 19%, which management attributed largely to lower incentive compensation expense. Six-month adjusted EPS rose 6%, reflecting lower incentive compensation, favorable taxes, and a lower share count, partly offset by lower organic sales, currency, and productivity effects.
- Rockwell consolidated Sensia, a digital oilfield automation joint venture in which it owns 53%, beginning October 1, 2019. Other completed acquisitions included MESTECH Services and Avnet Data Security. ASEM and Kalypso acquisitions were announced but remained subject to closing conditions.
- Adoption of lease accounting resulted in recognition of operating lease right-of-use assets and liabilities; the company reported $318.5 million of lease assets and $341.9 million of total lease liabilities at March 31.
Outlook, management commentary, and risks
Fiscal 2020 guidance, based on information available when the report was filed, was reported sales growth of negative 6.5% to negative 3.0%, organic sales growth of negative 9.5% to negative 6.5%, diluted EPS of $6.05–$6.85, and adjusted EPS of $6.90–$7.70. The guidance included expected ASEM and Kalypso acquisitions. Its midpoint assumed approximately a 15% reported sales decline and 20% organic sales decline in Q3, followed by sequential improvement in Q4. Management emphasized that pandemic effects remained highly uncertain.
COVID-19 had caused project delays and lower labor utilization where customer-site access was restricted, and could disrupt demand, supply chains, operations, workforce availability, asset values, and financing access. Oil & Gas customers faced reduced demand, oversupply, and falling prices, with possible effects on their spending and ability to pay. On April 8, the company announced spending reductions, temporary salary reductions for non-manufacturing employees, director fee reductions, and suspension of the U.S. 401(k) match; it also said it would preserve or selectively increase priority investments. The company concluded that goodwill was not impaired, while noting estimates were exposed to pandemic and oil-market uncertainty.
Rockwell stated that pending litigation, including asbestos claims, was not expected to have a material effect, while acknowledging outcomes are uncertain. It also disclosed tax matters, indemnification obligations, and other contingencies. Disclosure controls were considered effective, and the filing reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether COVID-19, customer-site restrictions, and supply-chain conditions caused results to depart materially from the Q3 and full-year guidance assumptions.
- Whether organic demand, especially in Control Products & Solutions, Asia Pacific, and Oil & Gas, improved or weakened after March 31.
- The size and timing of PTC investment valuation changes and their effect on GAAP earnings versus adjusted results.
- Closing, financing, integration, and expected contribution of ASEM and Kalypso, as well as performance of Sensia and other acquired businesses.
- Cash generation, commercial-paper market access, the $400 million term loan, and capacity to fund dividends, acquisitions, and other obligations.
- Potential changes in goodwill or intangible-asset valuations, tax exposures, and legal or indemnification contingencies as conditions evolve.