Rockwell Automation, Inc 10-Q for FY2020 Q3
Rockwell Automation, Inc (ROK)
10-Q
2020-07-28
For: 2020-06-30
View Original
Added on
April 11, 2026
About this 10-Q
Rockwell Automation, Inc filed this 10-Q on July 28, 2020, covering the quarter ended June 30, 2020 (FY2020 Q3).
Headline figures
Quarter ended June 30, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $1.39B
- down 16.3% from $1.67B a year earlier
- Net income
- $317.8M
- up 21.6% from net income of $261.4M a year earlier
- Diluted EPS
- $2.73
- up 24.1% from $2.20 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________
FORM 10-Q
_________________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the Quarterly Period Ended June 30, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the Transition Period from _______ to _______
Commission file number 1-12383
_________________________________________
(Exact name of registrant as specified in its charter)
_________________________________________
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||
(Address of principal executive offices) | (Zip Code) | ||
+1 (414 ) 382-2000
Registrant’s telephone number, including area code
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)
_________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered | ||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
☑ | Accelerated Filer | ☐ | ||||
Non-accelerated Filer | ☐ | Smaller Reporting Company | ||||
Emerging Growth Company | ||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
INDEX
Page No. | |
3
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
ROCKWELL AUTOMATION, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
(in millions, except per share amounts)
June 30, 2020 | September 30, 2019 | ||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | $ | |||||
Receivables | |||||||
Inventories | |||||||
Other current assets | |||||||
Total current assets | |||||||
Property, net of accumulated depreciation of $1,646.8 and $1,566.0, respectively | |||||||
Operating lease right-of-use assets | — | ||||||
Goodwill | |||||||
Other intangible assets, net | |||||||
Deferred income taxes | |||||||
Long-term investments | |||||||
Other assets | |||||||
Total | $ | $ | |||||
LIABILITIES AND SHAREOWNERS’ EQUITY | |||||||
Current liabilities: | |||||||
Short-term debt | $ | $ | |||||
Current portion of long-term debt | |||||||
Accounts payable | |||||||
Compensation and benefits | |||||||
Contract liabilities | |||||||
Customer returns, rebates and incentives | |||||||
Other current liabilities | |||||||
Total current liabilities | |||||||
Long-term debt | |||||||
Retirement benefits | |||||||
Operating lease liabilities | — | ||||||
Other liabilities | |||||||
Commitments and contingent liabilities (Note 12) | |||||||
Shareowners’ equity: | |||||||
Common stock ($1.00 par value, shares issued: 181.4) | |||||||
Additional paid-in capital | |||||||
Retained earnings | |||||||
Accumulated other comprehensive loss | ( | ) | ( | ) | |||
Common stock in treasury, at cost (shares held: 65.4 and 65.7, respectively) | ( | ) | ( | ) | |||
Shareowners’ equity attributable to Rockwell Automation, Inc. | |||||||
Noncontrolling interests | |||||||
Total shareowners’ equity | |||||||
Total | $ | $ | |||||
4
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(in millions, except per share amounts)
Three Months Ended June 30, | Nine Months Ended June 30, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
Sales | |||||||||||||||
Products and solutions | $ | $ | $ | $ | |||||||||||
Services | |||||||||||||||
Cost of sales | |||||||||||||||
Products and solutions | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Services | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Gross profit | |||||||||||||||
Selling, general and administrative expenses | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Change in fair value of investments | ( | ) | ( | ) | |||||||||||
Other income (expense) | ( | ) | |||||||||||||
Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Income before income taxes | |||||||||||||||
Income tax provision (Note 14) | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Net income | |||||||||||||||
Net (loss) attributable to noncontrolling interests | ( | ) | ( | ) | |||||||||||
Net income attributable to Rockwell Automation, Inc. | $ | $ | $ | $ | |||||||||||
Earnings per share: | |||||||||||||||
Basic | $ | $ | $ | $ | |||||||||||
Diluted | $ | $ | $ | $ | |||||||||||
Weighted average outstanding shares: | |||||||||||||||
Basic | |||||||||||||||
Diluted | |||||||||||||||
See Notes to Consolidated Financial Statements.
5
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
(in millions)
Three Months Ended June 30, | Nine Months Ended June 30, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
Net income | $ | $ | $ | $ | |||||||||||
Other comprehensive income (loss), net of tax: | |||||||||||||||
Pension and other postretirement benefit plan adjustments (net of tax (expense) of ($7.9), ($4.2), ($23.7), and ($12.8)) | |||||||||||||||
Currency translation adjustments | ( | ) | ( | ) | ( | ) | |||||||||
Net change in unrealized gains and losses on cash flow hedges (net of tax benefit of $5.0, $0.7, $3.5, and $6.7) | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Net change in unrealized gains and losses on available-for-sale investments (net of tax (expense) of ($0.0), ($0.1), ($0.0), and ($0.4)) | |||||||||||||||
Other comprehensive income | |||||||||||||||
Comprehensive income | |||||||||||||||
Comprehensive loss attributable to noncontrolling interests | ( | ) | ( | ) | |||||||||||
Comprehensive income attributable to Rockwell Automation, Inc. | $ | $ | $ | $ | |||||||||||
See Notes to Consolidated Financial Statements.
6
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(in millions)
Nine Months Ended June 30, | |||||||
2020 | 2019 | ||||||
Operating activities: | |||||||
Net income | $ | $ | |||||
Adjustments to arrive at cash provided by operating activities: | |||||||
Depreciation | |||||||
Amortization of intangible assets | |||||||
Change in fair value of investments | ( | ) | |||||
Share-based compensation expense | |||||||
Retirement benefit expense | |||||||
Pension contributions | ( | ) | ( | ) | |||
Net (gain) loss on disposition of property | ( | ) | |||||
Settlement of interest rate derivatives | ( | ) | |||||
Changes in assets and liabilities, excluding effects of acquisitions and foreign currency adjustments: | |||||||
Receivables | ( | ) | |||||
Inventories | ( | ) | ( | ) | |||
Accounts payable | ( | ) | ( | ) | |||
Contract liabilities | |||||||
Compensation and benefits | ( | ) | ( | ) | |||
Income taxes | ( | ) | ( | ) | |||
Other assets and liabilities | |||||||
Cash provided by operating activities | |||||||
Investing activities: | |||||||
Capital expenditures | ( | ) | ( | ) | |||
Acquisition of businesses, net of cash acquired | ( | ) | ( | ) | |||
Purchases of investments | ( | ) | ( | ) | |||
Proceeds from maturities of investments | |||||||
Proceeds from sale of investments | |||||||
Proceeds from sale of property | |||||||
Other investing activities | ( | ) | |||||
Cash (used for) provided by investing activities | ( | ) | |||||
Financing activities: | |||||||
Net issuance (repayment) of short-term debt | — | ( | ) | ||||
Issuance of short-term debt, net of issuance costs | — | ||||||
Issuance of long-term debt, net of discount and issuance costs | |||||||
Repayment of long-term debt | ( | ) | |||||
Cash dividends | ( | ) | ( | ) | |||
Purchases of treasury stock | ( | ) | ( | ) | |||
Proceeds from the exercise of stock options | |||||||
Other financing activities | |||||||
Cash used for financing activities | ( | ) | ( | ) | |||
Effect of exchange rate changes on cash | ( | ) | ( | ) | |||
(Decrease) increase in cash and cash equivalents | ( | ) | |||||
Cash and cash equivalents at beginning of period | |||||||
Cash and cash equivalents at end of period | $ | $ | |||||
See Notes to Consolidated Financial Statements.
7
CONSOLIDATED STATEMENT OF SHAREOWNERS’ EQUITY
(Unaudited)
(in millions, except per share amounts)
Common stock | Additional paid-in capital | Retained earnings | Accumulated other comprehensive loss | Common stock in treasury, at cost | Total attributable to Rockwell Automation, Inc. | Noncontrolling interests | Total shareowners' equity | |||||||||||||||||||||||||
Balance at March 31, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||
Net income (loss) | — | — | — | — | ( | ) | ||||||||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | — | ||||||||||||||||||||||||||||
Common stock issued (including share-based compensation impact) | — | — | — | — | ||||||||||||||||||||||||||||
Share repurchases | — | — | — | — | ( | ) | ( | ) | — | ( | ) | |||||||||||||||||||||
Cash dividends declared (1) | — | — | ( | ) | — | — | ( | ) | — | ( | ) | |||||||||||||||||||||
Change in noncontrolling interest | — | ( | ) | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
Balance at June 30, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||
Common stock | Additional paid-in capital | Retained earnings | Accumulated other comprehensive loss | Common stock in treasury, at cost | Total attributable to Rockwell Automation, Inc. | Noncontrolling interests | Total shareowners' equity | |||||||||||||||||||||||||
Balance at March 31, 2019 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||
Net income | — | — | — | — | — | |||||||||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | — | — | |||||||||||||||||||||||||||
Common stock issued (including share-based compensation impact) | — | — | — | — | ||||||||||||||||||||||||||||
Share repurchases | — | — | — | — | ( | ) | ( | ) | — | ( | ) | |||||||||||||||||||||
Cash dividends declared (1) | — | — | ( | ) | — | — | ( | ) | — | ( | ) | |||||||||||||||||||||
Balance at June 30, 2019 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||
(1) Cash dividends were $2.04 per share and $1.94 per share in the three months ended June 30, 2020 and 2019, respectively.
See Notes to Consolidated Financial Statements.
8
CONSOLIDATED STATEMENT OF SHAREOWNERS’ EQUITY (continued)
(Unaudited)
(in millions, except per share amounts)
Common stock | Additional paid-in capital | Retained earnings | Accumulated other comprehensive loss | Common stock in treasury, at cost | Total attributable to Rockwell Automation, Inc. | Noncontrolling interests | Total shareowners' equity | |||||||||||||||||||||||||
Balance at September 30, 2019 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||
Net income (loss) | — | — | — | — | ( | ) | ||||||||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | — | ( | ) | ||||||||||||||||||||||||||
Common stock issued (including share-based compensation impact) | — | — | — | — | ||||||||||||||||||||||||||||
Share repurchases | — | — | — | — | ( | ) | ( | ) | — | ( | ) | |||||||||||||||||||||
Cash dividends declared (1) | — | — | ( | ) | — | — | ( | ) | — | ( | ) | |||||||||||||||||||||
Adoption of accounting standards | — | — | ( | ) | — | — | ||||||||||||||||||||||||||
Change in noncontrolling interest | ||||||||||||||||||||||||||||||||
Balance at June 30, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||
Common stock | Additional paid-in capital | Retained earnings | Accumulated other comprehensive loss | Common stock in treasury, at cost | Total attributable to Rockwell Automation, Inc. | Noncontrolling interests | Total shareowners' equity | |||||||||||||||||||||||||
Balance at September 30, 2018 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||
Net income | — | — | — | — | — | |||||||||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | — | — | |||||||||||||||||||||||||||
Common stock issued (including share-based compensation impact) | — | — | — | — | ||||||||||||||||||||||||||||
Share repurchases | — | — | — | — | ( | ) | ( | ) | — | ( | ) | |||||||||||||||||||||
Cash dividends declared (1) | — | — | ( | ) | — | — | ( | ) | — | ( | ) | |||||||||||||||||||||
Adoption of accounting standard | — | — | — | — | — | |||||||||||||||||||||||||||
Balance at June 30, 2019 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||
(1) Cash dividends were $4.08 per share and $3.88 per share in the nine months ended June 30, 2020 and 2019, respectively.
See Notes to Consolidated Financial Statements.
9
1. Basis of Presentation and Accounting Policies
In the opinion of management of Rockwell Automation, Inc. ("Rockwell Automation" or "the Company"), the unaudited Consolidated Financial Statements contain all adjustments necessary to present fairly the financial position, results of operations and cash flows for the periods presented and, except as otherwise indicated, such adjustments consist only of those of a normal, recurring nature. These statements should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended September 30, 2019. The results of operations for the three and nine months ended June 30, 2020, are not necessarily indicative of the results for the full year. All date references to years and quarters herein refer to our fiscal year and fiscal quarter unless otherwise stated.
Receivables
Earnings Per Share
The following table reconciles basic and diluted earnings per share (EPS) amounts (in millions, except per share amounts):
Three Months Ended June 30, | Nine Months Ended June 30, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
Net income attributable to Rockwell Automation | $ | $ | $ | $ | |||||||||||
Less: Allocation to participating securities | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Net income available to common shareowners | $ | $ | $ | $ | |||||||||||
Basic weighted average outstanding shares | |||||||||||||||
Effect of dilutive securities | |||||||||||||||
Stock options | |||||||||||||||
Performance shares | |||||||||||||||
Diluted weighted average outstanding shares | |||||||||||||||
Earnings per share: | |||||||||||||||
Basic | $ | $ | $ | $ | |||||||||||
Diluted | $ | $ | $ | $ | |||||||||||
For the three and nine months ended June 30, 2020, there were 1.4 million and 1.5 million shares, respectively, related to share-based compensation awards that were excluded from the diluted EPS calculation because they were antidilutive. For each of the three and nine months ended June 30, 2019, 1.8 million shares related to share-based compensation awards were excluded from the diluted EPS calculation because they were antidilutive.
Non-Cash Investing and Financing Activities
Capital expenditures of $10.4 million and $12.4 million were accrued within accounts payable and other current liabilities at June 30, 2020 and 2019, respectively. At June 30, 2019, there was $6.0 million of outstanding common stock share repurchases recorded in accounts payable that did not settle until the next fiscal quarter. At June 30, 2020, there were no outstanding common stock share repurchases. These non-cash investing and financing activities have been excluded from cash used for capital expenditures and treasury stock purchases in the Consolidated Statement of Cash Flows.
Leases
We have operating leases primarily for real estate, vehicles, and equipment. We determine if a contract is, or contains, a lease at contract inception. A right-of-use (ROU) asset and a corresponding lease liability are recognized at commencement for contracts that are, or contain, a lease with an original term greater than 12 months. ROU assets represent our right to use an underlying asset during the lease term, including periods for which renewal options are reasonably certain to be exercised, and lease liabilities represent our obligation to make lease payments arising from the lease. Lease expense is recognized on a straight-line basis over the lease term for operating leases with an original term of 12 months or less.
10
ROCKWELL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Some leasing arrangements require variable payments that are dependent on usage or may vary for other reasons, such as payments for insurance and tax payments. A portion of our real estate leases is generally subject to annual changes based upon an index. The changes based upon the index are treated as variable lease payments. The variable portion of lease payments is not included in our ROU assets or lease liabilities and is expensed when incurred. We elected to not separate lease and nonlease components of contracts for all underlying asset classes. Accordingly, all expenses associated with a lease contract are accounted for as lease expenses.
Lease liabilities are recognized at the contract commencement date based on the present value of remaining lease payments over the lease term. To calculate the lease liabilities we use our incremental borrowing rate. We determine our incremental borrowing rate at the commencement date using our unsecured borrowing rate, adjusted for collateralization and lease term. For leases denominated in a currency other than the U.S. dollar, the collateralized borrowing rate in the foreign currency is determined using the U.S. dollar and foreign currency swap spread. Long-term lease liabilities are presented as operating lease liabilities and current lease liabilities are included in other current liabilities in the Consolidated Balance Sheet.
ROU assets are recognized at the contract commencement date at the value of the related lease liability, adjusted for any prepayments, lease incentives received and initial direct costs incurred. Operating lease ROU assets are presented as operating lease right-of-use assets in the Consolidated Balance Sheet.
Lease expenses for operating leases are recognized on a straight-line basis over the lease term and recorded in Cost of sales and Selling, general and administrative expenses in the Consolidated Statement of Operations.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued a new standard on accounting for leases that requires lessees to recognize right-of-use assets and lease liabilities for most leases, among other changes to existing lease accounting guidance. The new standard also requires additional qualitative and quantitative disclosures about leasing activities. We adopted the new standard using the modified retrospective transition method, which resulted in an immaterial cumulative-effect adjustment to the opening balance of retained earnings as of October 1, 2019, our adoption date. The amount of lease right-of-use assets and corresponding lease liabilities recorded in the Consolidated Balance Sheet upon adoption were $316 million and $329 million, respectively. We have implemented necessary changes to accounting policies, processes, controls and systems to enable compliance with this new standard.
In February 2018, the FASB issued a new standard regarding the reporting of comprehensive loss, which gives entities the option to reclassify tax effects of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) stranded in accumulated other comprehensive loss into retained earnings. We adopted the new standard as of October 1, 2019, and elected to reclassify tax effects of $146.8 million from accumulated other comprehensive loss into retained earnings.
11
ROCKWELL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
2. Revenue Recognition
Unfulfilled Performance Obligations
As of June 30, 2020, we expect to recognize approximately $480 million of revenue in future periods from unfulfilled performance obligations from existing contracts with customers. We expect to recognize revenue of approximately $320 million from our remaining performance obligations over the next 12 months with the remaining balance recognized thereafter.
We have applied the practical expedient to exclude the value of remaining performance obligations for (i) contracts with an original term of one year or less and (ii) contracts for which we recognize revenue in proportion to the amount we have the right to invoice for services performed. The amounts above also do not include the impact of contract renewal options that are unexercised as of June 30, 2020.
Disaggregation of Revenue
The following series of tables present our revenue disaggregation by geographic region and types of products or services, and also present these disaggregation categories for our two operating segments. We attribute sales to the geographic regions based on the country of destination.
The following reflects the disaggregation of our revenues by operating segment and by geographic region (in millions):
Three Months Ended June 30, 2020 | Nine Months Ended June 30, 2020 | ||||||||||||||||||||||
Architecture & Software | Control Products & Solutions | Total | Architecture & Software | Control Products & Solutions | Total | ||||||||||||||||||
North America | $ | $ | $ | $ | $ | $ | |||||||||||||||||
Europe, Middle East and Africa (EMEA) | |||||||||||||||||||||||
Asia Pacific | |||||||||||||||||||||||
Latin America | |||||||||||||||||||||||
Total Company Sales | $ | $ | $ | $ | $ | $ | |||||||||||||||||
Three Months Ended June 30, 2019 | Nine Months Ended June 30, 2019 | ||||||||||||||||||||||
Architecture & Software | Control Products & Solutions | Total | Architecture & Software | Control Products & Solutions | Total | ||||||||||||||||||
North America | $ | $ | $ | $ | $ | $ | |||||||||||||||||
Europe, Middle East and Africa (EMEA) | |||||||||||||||||||||||
Asia Pacific | |||||||||||||||||||||||
Latin America | |||||||||||||||||||||||
Total Company Sales | $ | $ | $ | $ | $ | $ | |||||||||||||||||
12
ROCKWELL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The following reflects the disaggregation of our revenues by operating segment and by major types of products or services (in millions):
Three Months Ended June 30, 2020 | Nine Months Ended June 30, 2020 | ||||||||||||||||||||||
Architecture & Software | Control Products & Solutions | Total | Architecture & Software | Control Products & Solutions | Total | ||||||||||||||||||
Products | $ | $ | $ | $ | $ | $ | |||||||||||||||||
Solutions & Services | |||||||||||||||||||||||
Total Company Sales | $ | $ | $ | $ | $ | $ | |||||||||||||||||
Three Months Ended June 30, 2019 | Nine Months Ended June 30, 2019 | ||||||||||||||||||||||
Architecture & Software | Control Products & Solutions | Total | Architecture & Software | Control Products & Solutions | Total | ||||||||||||||||||
Products | $ | $ | $ | $ | $ | $ | |||||||||||||||||
Solutions & Services | |||||||||||||||||||||||
Total Company Sales | $ | $ | $ | $ | $ | $ | |||||||||||||||||
Contract Balances
Contract liabilities primarily relate to consideration received in advance of performance under the contract. We do no t have significant contract assets as of June 30, 2020.
Below is a summary of our contract liabilities balance:
June 30, 2020 | June 30, 2019 | ||||||
Balance as of beginning of fiscal year | $ | $ | |||||
Balance as of end of period | |||||||
The most significant changes in our contract liabilities balance during the nine months ended June 30, 2020, were due to amounts billed, partially offset by revenue recognized that was included in the contract liabilities balance at the beginning of the period.
In the nine months ended June 30, 2020, we recognized revenue of approximately $193.3 million that was included in the opening contract liabilities balance. We did not have a material amount of revenue recognized in the nine months ended June 30, 2020, from performance obligations satisfied or partially satisfied in previous periods.
13
ROCKWELL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
3. Share-Based Compensation
We recognized $12.3 million and $34.7 million of pre-tax share-based compensation expense during the three and nine months ended June 30, 2020, respectively. We recognized $10.7 million and $32.5 million of pre-tax share-based compensation expense during the three and nine months ended June 30, 2019, respectively. Our annual grant of share-based compensation takes place during the first quarter of each fiscal year. The number of shares granted to employees and non-employee directors and the weighted average fair value per share during the periods presented were (in thousands, except per share amounts):
Nine Months Ended June 30, | |||||||||||||
2020 | 2019 | ||||||||||||
Grants | Wtd. Avg. Share Fair Value | Grants | Wtd. Avg. Share Fair Value | ||||||||||
Stock options | $ | $ | |||||||||||
Performance shares | |||||||||||||
Restricted stock and restricted stock units | |||||||||||||
Unrestricted stock | |||||||||||||
4. Inventories
Inventories consist of (in millions):
June 30, 2020 | September 30, 2019 | ||||||
Finished goods | $ | $ | |||||
Work in process | |||||||
Raw materials | |||||||
Inventories | $ | $ | |||||
14
ROCKWELL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
5. Acquisitions
Sensia joint venture
On October 1, 2019, we completed the formation of a joint venture, Sensia, a fully integrated digital oilfield automation solutions provider. Rockwell Automation owns 53 % of Sensia and Schlumberger owns 47 % of Sensia. As part of the transaction, we made $247.0 million of net cash payments to Schlumberger, which were funded by cash on hand. We control Sensia and, as of October 1, 2019, have consolidated Sensia in our financial results.
Rockwell Automation recorded assets acquired and liabilities assumed in connection with the formation of Sensia based on their estimated fair values as of the October 1, 2019, acquisition date. The preliminary purchase price allocation is as follows (in millions):
Purchase Price Allocation | ||||
Accounts receivable | $ | |||
Inventory | ||||
Other current assets | ||||
Property, plant and equipment | ||||
Other assets | ||||
Goodwill | ||||
Intangible assets | ||||
Total assets acquired | ||||
Less: Liabilities assumed | ( | ) | ||
Less: Deferred income taxes | ( | ) | ||
Less: Noncontrolling interest portion | ( | ) | ||
Net assets acquired | $ | |||
Purchase Consideration | ||||
Cash, net of cash acquired | $ | |||
Noncontrolling interest portion of Rockwell Automation's contributed business | ||||
Additional paid in capital adjustment | ||||
Other | ||||
Total purchase consideration, net of cash acquired | $ | |||
The fair value of the noncontrolling interest of the contributed business upon acquisition was $293.8 million. The consolidated value of Sensia is recorded at fair value for Schlumberger's contribution and at carrying value for Rockwell Automation's contribution.
The total incremental sales resulting from the Sensia joint venture included in our consolidated results for the three and nine months ended June 30, 2020, were approximately $37.8 million and $160.8 million, respectively.
15
ROCKWELL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Other acquisitions
In October 2019, we acquired MESTECH Services (MESTECH), a global provider of Manufacturing Execution Systems / Manufacturing Operations Management, digital solutions consulting, and systems integration services. We assigned the full amount of goodwill related to this acquisition to our Control Products & Solutions segment.
In January 2020, we acquired Avnet Data Security, LTD (Avnet), an Israel-based cybersecurity provider with over 20 years of experience providing cybersecurity services. We assigned the full amount of goodwill related to this acquisition to our Control Products & Solutions segment.
In April 2020, we acquired ASEM, S.p.A. (ASEM), a leading provider of digital automation technologies. We assigned the full amount of goodwill related to this acquisition to our Architecture & Software segment in the Consolidated Financial Statements.
In April 2020, we also acquired Kalypso, LP (Kalypso), a privately-held US-based software delivery and consulting firm specializing in the digital transformation of industrial companies with a strong client base in life sciences, consumer products and industrial high-tech. We assigned the full amount of goodwill related to this acquisition to our Control Products & Solutions segment.
Rockwell Automation recorded assets acquired and liabilities assumed in connection with these acquisitions based on their estimated fair values as of the respective acquisition dates. The preliminary aggregate purchase price allocation is as follows (in millions):
Purchase Price Allocation | ||||
Accounts receivable | $ | |||
Inventory | ||||
Other current assets | ||||
Property, plant and equipment | ||||
Other assets | ||||
Goodwill | ||||
Intangible assets | ||||
Total assets acquired | ||||
Less: Liabilities assumed | ( | ) | ||
Less: Deferred income taxes | ( | ) | ||
Net assets acquired | $ | |||
Purchase Consideration | ||||
Total purchase consideration, net of cash acquired | $ | |||
Intangible assets assigned include $76.5 million of customer relationships, technology, and trade names (approximately 10 -year weighted average useful life). We assigned $161.3 million of goodwill to our Architecture & Software segment and $83.1 million of goodwill to our Control Products & Solutions segment. Approximately $68.9 million of the goodwill recorded is expected to be deductible for tax purposes. The purchase consideration includes $25.8 million of contingent consideration held in an escrow account and recorded in cash and cash equivalents in the Consolidated Balance Sheet.
The total sales included in our consolidated results from these four acquisitions for the three and nine months ended June 30, 2020, were approximately $15.5 million and $18.6 million, respectively.
The allocation of the purchase price to identifiable assets for all of the preceding acquisitions are based on the preliminary valuations performed to determine the fair value of the net assets as of the acquisition date. The measurement period for the valuation of net assets acquired ends as soon as information on the facts and circumstances that existed as of the acquisition dates becomes available, but not to exceed 12 months following the acquisition date. Adjustments in purchase price allocations may require a change in the amounts allocated to net assets acquired during the periods in which the adjustments are determined.
16
ROCKWELL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Pro forma consolidated sales for the three and nine months ended June 30, 2019, are approximately $1.8 billion and $5.2 billion, respectively, and the impact on earnings is not material. The preceding pro forma consolidated financial results of operations are as if all of the preceding acquisitions occurred on October 1, 2018. The pro forma information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved had the transaction occurred as of that time.
Acquisition-related costs recorded as expenses for all of the preceding acquisitions in the three and nine months ended June 30, 2020, were not material.
6. Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the nine months ended June 30, 2020, are (in millions):
Architecture & Software | Control Products & Solutions | Total | |||||||||
Balance as of September 30, 2019 | $ | $ | $ | ||||||||
Acquisition of businesses | |||||||||||
Translation | |||||||||||
Balance as of June 30, 2020 | $ | $ | $ | ||||||||
Other intangible assets consist of (in millions):
June 30, 2020 | |||||||||||
Carrying Amount | Accumulated Amortization | Net | |||||||||
Amortized intangible assets: | |||||||||||
Computer software products | $ | $ | $ | ||||||||
Customer relationships | |||||||||||
Technology | |||||||||||
Trademarks | |||||||||||
Other | |||||||||||
Total amortized intangible assets | |||||||||||
Allen-Bradley® trademark not subject to amortization | — | ||||||||||
Total | $ | $ | $ | ||||||||
September 30, 2019 | |||||||||||
Carrying Amount | Accumulated Amortization | Net | |||||||||
Amortized intangible assets: | |||||||||||
Computer software products | $ | $ | $ | ||||||||
Customer relationships | |||||||||||
Technology | |||||||||||
Trademarks | |||||||||||
Other | |||||||||||
Total amortized intangible assets | |||||||||||
Allen-Bradley® trademark not subject to amortization | — | ||||||||||
Total | $ | $ | $ | ||||||||
Estimated amortization expense is $50.5 million in 2020, $53.5 million in 2021, $50.6 million in 2022, $49.4 million in 2023 and $46.4 million in 2024.
17
ROCKWELL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
We perform our annual evaluation of goodwill and indefinite life intangible assets for impairment as required by U.S. GAAP at the beginning of the second quarter of each year, or more frequently if events or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. For our annual evaluation of goodwill, we may perform a qualitative test to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount in order to determine whether it is necessary to perform a quantitative goodwill impairment test. When performing the quantitative goodwill impairment test, we determine the fair value of each reporting unit under a combination of an income approach derived from discounted cash flows and a market multiples approach using selected comparable public companies. Significant assumptions used in the income approach include: management’s forecasted cash flows, including estimated future revenue growth rates and margins, discount rate, and terminal value. Forecasted future revenue growth and margins are based on management’s best estimate about current and future conditions. Discount rates are determined using weighted average cost of capital adjusted for risk factors specific to the reporting unit level, with comparison to market and industry data. The terminal value is estimated following common methodology of calculating the present value of estimated perpetual cash flow beyond the last projected period assuming constant discount and long-term growth rates. Significant assumptions used in the market multiples approach include selection of the comparable public companies and calculation of the appropriate market multiples.
For our 2020 annual evaluation, we performed a qualitative test for our Architecture & Software reporting unit and our Control Products & Solutions (excluding Sensia) reporting unit. We performed a quantitative test for our Sensia reporting unit. Based on those evaluations, we concluded these assets were no t impaired. We also assessed the changes in events and circumstances subsequent to our annual test, including those related to the COVID-19 pandemic and conditions within the Oil & Gas industry, and concluded that a triggering event which would require interim testing has not occurred.
7. Long-term and Short-term Debt
Long-term debt consists of (in millions):
June 30, 2020 | September 30, 2019 | |||||||
2.050% notes, payable in March 2020 | $ | $ | ||||||
2.875% notes, payable in March 2025 | ||||||||
6.70% debentures, payable in January 2028 | ||||||||
3.500% notes, payable in March 2029 | ||||||||
6.25% debentures, payable in December 2037 | ||||||||
4.200% notes, payable in March 2049 | ||||||||
5.20% debentures, payable in January 2098 | ||||||||
Unamortized discount and other | ( | ) | ( | ) | ||||
Total | ||||||||
Less current portion | ( | ) | ||||||
Long-term debt | $ | $ | ||||||
Our short-term debt as of June 30, 2020, consisted of $23.5 million of interest-bearing loans from Schlumberger to Sensia due September 30, 2020, and $399.3 million of term loans, net of issuance costs. The short-term loans from Schlumberger were entered into following formation of Sensia. See Note 5 in the Consolidated Financial Statements for additional information on Sensia.
In March 2020, we repaid our $300.0 million 2.050 % notes which were classified as the current portion of long-term debt at September 30, 2019.
In April 2020, we entered into a $400.0 million senior unsecured 364-day term loan credit agreement and were advanced the full loan amount. This agreement is in addition to our existing $1.25 billion unsecured revolving credit facility expiring in November 2023, which remains available and undrawn. Borrowings under this term loan bear interest based on short-term money market rates in effect during the period the borrowings are outstanding. The term loan agreement contains covenants similar to those under our $1.25 billion unsecured revolving credit facility, under which we agree to maintain an EBITDA-to-interest ratio of at least 3.0 to 1.0. The EBITDA-to-interest ratio is defined in the term loan agreement as the ratio of consolidated EBITDA (as defined in the term loan agreement) for the preceding four quarters to consolidated interest expense for the same period.
In May 2020, we settled the interest swaps that were designated as a fair value hedge of our 2.875 % notes payable in March 2025 ("2025 Notes") and received $22.0 million from the counterparties. The $22.0 million gain on the settlement of the interest rate
18
ROCKWELL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
swaps was recorded as an adjustment to the carrying value of the 2025 Notes and is being amortized over the remaining term of those notes as an adjustment to interest expense in the Consolidated Statement of Operations.
8. Other Current Liabilities
Other current liabilities consist of (in millions):
June 30, 2020 | September 30, 2019 | ||||||
Unrealized losses on foreign exchange contracts | $ | $ | |||||
Product warranty obligations | |||||||
Taxes other than income taxes | |||||||
Accrued interest | |||||||
Dividends payable | |||||||
Income taxes payable | |||||||
Operating lease liabilities | — | ||||||
Other | |||||||
Other current liabilities | $ | $ | |||||
9. Investments
Our investments consist of (in millions):
June 30, 2020 | September 30, 2019 | |||||||
Fixed income securities | $ | $ | ||||||
Equity securities | ||||||||
Other | ||||||||
Total investments | ||||||||
Less: Short-term investments(1) | ( | ) | ( | ) | ||||
Long-term investments | $ | $ | ||||||
(1) Short-term investments are included in other current assets in the Consolidated Balance Sheet.
Equity Securities
On July 19, 2018, we purchased 10,582,010 shares of PTC Inc. ("PTC") common stock (the "PTC Shares") in a private placement at a purchase price of $94.50 per share for an aggregate purchase price of approximately $1.0 billion (the "Purchase"). The PTC Shares are considered equity securities. For a period of approximately 3 years after the Purchase, we are subject to entity-specific transfer restrictions subject to certain exceptions. Since the first anniversary of the Purchase, the Company has had the ability to transfer, in the aggregate in any 90 -day period, a number of PTC Shares equal to up to 1.0 % of PTC's total outstanding shares of common stock as of the first day in such 90 -day period, but no more than 2.0 % of PTC's total outstanding shares of common stock in each of the second year and the third year after the Purchase.
19
ROCKWELL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Fair Value of Investments
U.S. GAAP defines fair value as the price that would be received for an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability. U.S. GAAP also classifies the inputs used to measure fair value into the following hierarchy:
Level 1: | Quoted prices in active markets for identical assets or liabilities. | |
Level 2: | Quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability. | |
Level 3: | Unobservable inputs for the asset or liability. | |
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while we believe our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. We did not have any transfers between levels of fair value measurements during the period presented.
The PTC Shares are classified as level 1 in the fair value hierarchy and recognized at fair value in the Consolidated Balance Sheet using the most recent closing price of PTC common stock quoted on Nasdaq. At June 30, 2020, the fair value of the PTC Shares was $823.2 million, which was recorded in long-term investments in the Consolidated Balance Sheet. For the three and nine months ended June 30, 2020, we recorded gains of $175.5 million and $101.7 million related to the PTC Shares, respectively. For the three and nine months ended June 30, 2019, we recorded losses of $25.6 million and $140.1 million related to the PTC Shares, respectively.
20
ROCKWELL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
10. Retirement Benefits
The components of net periodic benefit cost are (in millions):
Pension Benefits | |||||||||||||||
Three Months Ended June 30, | Nine Months Ended June 30, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
Service cost | $ | $ | $ | $ | |||||||||||
Interest cost | |||||||||||||||
Expected return on plan assets | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Amortization: | |||||||||||||||
Prior service cost | |||||||||||||||
Net actuarial loss | |||||||||||||||
Settlements | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Net periodic benefit cost | $ | $ | $ | $ | |||||||||||
Other Postretirement Benefits | |||||||||||||||
Three Months Ended June 30, | Nine Months Ended June 30, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
Service cost | $ | $ | $ | $ | |||||||||||
Interest cost | |||||||||||||||
Amortization: | |||||||||||||||
Prior service credit | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Net actuarial loss | |||||||||||||||
Net periodic benefit credit | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
21
ROCKWELL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
11. Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss attributable to Rockwell Automation by component were (in millions):
Three Months Ended June 30, 2020 | |||||||||||||||||||
Pension and other postretirement benefit plan adjustments, net of tax | Accumulated currency translation adjustments, net of tax | Net unrealized gains (losses) on cash flow hedges, net of tax | Net unrealized gains (losses) on available-for-sale investments, net of tax | Total accumulated other comprehensive loss, net of tax | |||||||||||||||
Balance as of March 31, 2020 | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
Other comprehensive income (loss) before reclassifications | ( | ) | |||||||||||||||||
Amounts reclassified from accumulated other comprehensive loss | ( | ) | |||||||||||||||||
Other comprehensive income (loss) | ( | ) | |||||||||||||||||
Balance as of June 30, 2020 | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
Nine Months Ended June 30, 2020 | |||||||||||||||||||
Pension and other postretirement benefit plan adjustments, net of tax | Accumulated currency translation adjustments, net of tax | Net unrealized gains (losses) on cash flow hedges, net of tax | Net unrealized gains (losses) on available-for-sale investments, net of tax | Total accumulated other comprehensive loss, net of tax | |||||||||||||||
Balance as of September 30, 2019 | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
Other comprehensive income (loss) before reclassifications | ( | ) | ( | ) | |||||||||||||||
Amounts reclassified from accumulated other comprehensive loss | ( | ) | |||||||||||||||||
Other comprehensive income (loss) | ( | ) | ( | ) | |||||||||||||||
Adoption of accounting standard/other | ( | ) | — | — | — | ||||||||||||||
Balance as of June 30, 2020 | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
22
ROCKWELL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Three Months Ended June 30, 2019 | |||||||||||||||||||
Pension and other postretirement benefit plan adjustments, net of tax | Accumulated currency translation adjustments, net of tax | Net unrealized gains (losses) on cash flow hedges, net of tax | Net unrealized gains (losses) on available-for-sale investments, net of tax | Total accumulated other comprehensive loss, net of tax | |||||||||||||||
Balance as of March 31, 2019 | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Other comprehensive income (loss) before reclassifications | ( | ) | ( | ) | |||||||||||||||
Amounts reclassified from accumulated other comprehensive loss | ( | ) | |||||||||||||||||
Other comprehensive income (loss) | ( | ) | ( | ) | |||||||||||||||
Balance as of June 30, 2019 | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Nine Months Ended June 30, 2019 | |||||||||||||||||||
Pension and other postretirement benefit plan adjustments, net of tax | Accumulated currency translation adjustments, net of tax | Net unrealized gains (losses) on cash flow hedges, net of tax | Net unrealized gains (losses) on available-for-sale investments, net of tax | Total accumulated other comprehensive loss, net of tax | |||||||||||||||
Balance as of September 30, 2018 | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
Other comprehensive income (loss) before reclassifications | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||
Amounts reclassified from accumulated other comprehensive loss | ( | ) | |||||||||||||||||
Other comprehensive income (loss) | ( | ) | ( | ) | |||||||||||||||
Balance as of June 30, 2019 | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
23
ROCKWELL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The reclassifications out of accumulated other comprehensive loss in the Consolidated Statement of Operations were (in millions):
Three Months Ended June 30, | Nine Months Ended June 30, | Affected Line in the Consolidated Statement of Operations | |||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||
Pension and other postretirement benefit plan adjustments: | |||||||||||||||||
Amortization of prior service credit | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | (a) | ||||
Amortization of net actuarial loss | (a) | ||||||||||||||||
Settlements | ( | ) | ( | ) | ( | ) | ( | ) | (a) | ||||||||
Income before income taxes | |||||||||||||||||
( | ) | ( | ) | ( | ) | ( | ) | Income tax provision | |||||||||
$ | $ | $ | $ | Net income attributable to Rockwell Automation | |||||||||||||
Net unrealized losses (gains) on cash flow hedges: | |||||||||||||||||
Forward exchange contracts | $ | $ | ( | ) | $ | $ | ( | ) | Sales | ||||||||
Forward exchange contracts | ( | ) | ( | ) | ( | ) | ( | ) | Cost of sales | ||||||||
Forward exchange contracts | Selling, general and administrative expenses | ||||||||||||||||
Treasury locks related to 2019 debt issuance | Interest expense | ||||||||||||||||
( | ) | ( | ) | ( | ) | ( | ) | Income before income taxes | |||||||||
Income tax provision | |||||||||||||||||
$ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | Net income attributable to Rockwell Automation | |||||
Total reclassifications | $ | $ | $ | $ | Net income attributable to Rockwell Automation | ||||||||||||
(a) Reclassified from accumulated other comprehensive loss into other income (expense). These components are included in the computation of net periodic benefit cost (credit). See Note 10 in the Consolidated Financial Statements for further information.
12. Commitments and Contingent Liabilities
Various lawsuits, claims and proceedings have been or may be instituted or asserted against us relating to the conduct of our business, including those pertaining to product liability, environmental, safety and health, intellectual property, employment and contract matters. Although the outcome of litigation cannot be predicted with certainty and some lawsuits, claims or proceedings may be disposed of unfavorably to us, we believe the disposition of matters that are pending or have been asserted will not have a material effect on our business, financial condition or results of operations. The following outlines additional background for obligations associated with asbestos, divested businesses and intellectual property.
We (including our subsidiaries) have been named as a defendant in lawsuits alleging personal injury as a result of exposure to asbestos that was used in certain components of our products many years ago, including products from divested businesses for which we have agreed to defend and indemnify claims. Currently there are a few thousand claimants in lawsuits that name us as defendants, together with hundreds of other companies. But in all cases, for those claimants who do show that they worked with our products or products of divested businesses for which we are responsible, we nevertheless believe we have meritorious defenses, in substantial part due to the integrity of the products, the encapsulated nature of any asbestos-containing components, and the lack of any impairing medical condition on the part of many claimants. We defend those cases vigorously. Historically, we have been dismissed from the vast majority of these claims with no payment to claimants.
24
ROCKWELL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Additionally, we have maintained insurance coverage that includes indemnity and defense costs, over and above self-insured retentions, for many of these claims. We believe these arrangements will provide substantial coverage for future defense and indemnity costs for these asbestos claims throughout the remaining life of asbestos liability. The uncertainties of asbestos claim litigation make it difficult to predict accurately the ultimate outcome of asbestos claims. That uncertainty is increased by the possibility of adverse rulings or new legislation affecting asbestos claim litigation or the settlement process. Subject to these uncertainties and based on our experience defending asbestos claims, we do not believe these lawsuits will have a material effect on our business, financial condition or results of operations.
We have, from time to time, divested certain of our businesses. In connection with these divestitures, certain lawsuits, claims and proceedings may be instituted or asserted against us related to the period that we owned the businesses, either because we agreed to retain certain liabilities related to these periods or because such liabilities fall upon us by operation of law. In some instances the divested business has assumed the liabilities; however, it is possible that we might be responsible to satisfy those liabilities if the divested business is unable to do so. We do not believe these liabilities will have a material effect on our business, financial condition or results of operations.
In many countries we provide a limited intellectual property indemnity as part of our terms and conditions of sale. We also at times provide limited intellectual property indemnities in other contracts with third parties, such as contracts concerning the development and manufacture of our hardware and software products. As of June 30, 2020, we were not aware of any material indemnification claims that were probable or reasonably possible of an unfavorable outcome. Historically, claims that have been made under the indemnification agreements have not had a material impact on our business, financial condition or results of operations; however, to the extent that valid indemnification claims arise in the future, future payments by us could be significant and could have a material adverse effect on our business, financial condition or results of operations in a particular period.
13. Leases
We have operating leases primarily for real estate, vehicles and equipment. Our leases have remaining lease terms from less than one year to approximately 14 years. We do not have a material amount of finance leases.
We elected the package of practical expedients permitted under the transition guidance within the new standard which allows the Company to carry forward the historical assessments of whether contracts are, or contain, leases, lease classification and initial direct costs. We also elected to not record lease ROU assets or lease liabilities for leases with an original term of 12 months or less. We elected to use the remaining lease term for purposes of calculating the incremental borrowing rate upon transition.
The components of lease expense were as follows (in millions):
Three Months Ended June 30, 2020 | Nine Months Ended June 30, 2020 | |||||||
Operating lease expense(1) | $ | $ | ||||||
Variable lease expense(2) | ||||||||
Total lease expense | $ | $ | ||||||
(1) Operating lease expense includes short-term lease expense which was not material.
(2) Variable lease expense includes sublease income which was not material.
Supplemental balance sheet information related to leases was as follows (in millions):
June 30, 2020 | |||
Weighted average remaining lease term | |||
Weighted average discount rate | % | ||
25
ROCKWELL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Maturities of lease liabilities as of June 30, 2020, were as follows (in millions):
2020 (excluding the nine months ended June 30, 2020) | $ | |||
2021 | ||||
2022 | ||||
2023 | ||||
2024 | ||||
2025 | ||||
Thereafter | ||||
Total undiscounted lease payments | $ | |||
Less imputed interest | ( | ) | ||
Total operating lease liabilities | $ | |||
Undiscounted maturities of operating leases accounted for under ASC 840 as of September 30, 2019, were as follows (in millions):
2020 | $ | |||
2021 | ||||
2022 | ||||
2023 | ||||
2024 | ||||
Thereafter | ||||
Total minimum lease payments | $ | |||
Supplemental cash flow information related to leases was as follows (in millions):
Nine Months Ended June 30, 2020 | ||||
Cash paid for amounts included in the measurement of operating lease liabilities | $ | |||
Operating right-of-use assets obtained in exchange for lease obligations | ||||
14. Income Taxes
At the end of each interim period, we estimate a base effective tax rate that we expect for the full fiscal year based on our most recent forecast of pre-tax income, permanent book and tax differences and global tax planning strategies. We use this base rate to provide for income taxes on a year-to-date basis, excluding the effect of significant unusual items and items that are reported net of their related tax effects in the period in which they occur.
The effective tax rate was 6.1 percent and 9.2 percent in the three and nine months ended June 30, 2020, respectively, compared to 18.7 percent and 18.6 percent in the three and nine months ended June 30, 2019. The effective tax rate was lower than the U.S. statutory rate of 21 percent in the three months ended June 30, 2020, primarily due to PTC investment adjustments and other favorable discrete tax items. The effective tax rate was lower than the U.S. statutory rate of 21 percent in the nine months ended June 30, 2020, primarily due to PTC investment adjustments and other tax benefits recognizable upon the formation of the Sensia joint venture, excess income tax benefits of share-based compensation, and other favorable discrete tax items. The effective tax rate was lower than the U.S. statutory rate of 21 percent in the three months ended June 30, 2019, primarily because we benefited from lower non-U.S. tax rates. The effective rate was lower than the U.S. statutory rate of 21 percent in the nine months ended June 30, 2019 primarily because we benefited from lower non-U.S. tax rates.
Income tax liabilities of $296.0 million and $327.2 million related to the U.S. transition tax under the Tax Act that are payable greater than 12 months from June 30, 2020, and September 30, 2019, respectively, are recorded in other liabilities in the Consolidated Balance Sheet.
We operate in certain non-U.S. tax jurisdictions under government-sponsored tax incentive programs, which may be extended if certain additional requirements are met. The program which generates the primary benefit will expire in 2032.
26
ROCKWELL AUTOMATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Unrecognized Tax Benefits
The amount of gross unrecognized tax benefits was $25.6 million and $19.9 million at June 30, 2020 and September 30, 2019, respectively, of which the entire amount would reduce our effective tax rate if recognized.
Accrued interest and penalties related to unrecognized tax benefits were $3.9 million and $3.3 million at June 30, 2020, and September 30, 2019, respectively. We recognize interest and penalties related to unrecognized tax benefits in the income tax provision.
We believe it is reasonably possible that the amount of gross unrecognized tax benefits could be reduced by up to $24.1 million in the next 12 months as a result of the resolution of tax matters in various global jurisdictions and the lapses of statutes of limitations. If all of the unrecognized tax benefits were recognized, the net reduction to our income tax provision, including the recognition of interest and penalties and offsetting tax assets, could be up to $25.8 million.
We conduct business globally and are routinely audited by the various tax jurisdictions in which we operate. We are no longer subject to U.S. federal income tax examinations for years before 2016 and are no longer subject to state, local and foreign income tax examinations for years before 2009.
15. Business Segment Information
The following tables reflect the sales and operating results of our reportable segments (in millions):
Three Months Ended June 30, | Nine Months Ended June 30, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
Sales | |||||||||||||||
Architecture & Software | $ | $ | $ | $ | |||||||||||
Control Products & Solutions | |||||||||||||||
Total | $ | $ | $ | $ | |||||||||||
Segment operating earnings | |||||||||||||||
Architecture & Software | $ | $ | $ | $ | |||||||||||
Control Products & Solutions | |||||||||||||||
Total | |||||||||||||||
Purchase accounting depreciation and amortization | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
General corporate – net | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Non-operating pension and postretirement benefit (cost) credit | ( | ) | ( | ) | |||||||||||
Gain (loss) on investments | ( | ) | ( | ) | |||||||||||
Valuation adjustments related to the registration of PTC Shares | |||||||||||||||
Interest (expense) income - net | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Income before income taxes | $ | $ | $ | $ | |||||||||||
Among other considerations, we evaluate performance and allocate resources based upon segment operating earnings before income taxes, interest (expense) income - net, costs related to corporate offices, non-operating pension and postretirement benefit credit (cost), certain corporate initiatives, gains and losses on investments, valuation adjustments related to the registration of PTC Shares, gains and losses from the disposition of businesses, and purchase accounting depreciation and amortization. Depending on the product, intersegment sales within a single legal entity are either at cost or cost plus a mark-up, which does not necessarily represent a market price. Sales between legal entities are at an appropriate transfer price. We allocate costs related to shared segment operating activities to the segments using a methodology consistent with the expected benefit.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareowners of
Rockwell Automation, Inc.
Milwaukee, Wisconsin
Results of Review of Interim Financial Information
We have reviewed the accompanying consolidated balance sheet of Rockwell Automation, Inc. and subsidiaries (the “Company”) as of June 30, 2020, the related consolidated statements of operations, comprehensive income, and shareowners' equity for the three-month and nine-month periods ended June 30, 2020 and 2019, and of cash flows for the nine-month periods ended June 30, 2020 and 2019, and the related notes (collectively referred to as the "interim financial information"). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of September 30, 2019, and the related consolidated statements of operations, comprehensive income, cash flows and shareowners’ equity for the year then ended (not presented herein); and in our report dated November 12, 2019, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of September 30, 2019, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Change in Accounting Principle
As discussed in Note 1 to the interim financial information, the Company has changed its method of accounting for leases effective October 1, 2019, due to the adoption of Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), using the modified retrospective approach.
Basis for Review Results
This interim financial information is the responsibility of the Company's management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
/s/ DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
July 28, 2020
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Forward-Looking Statements
This Quarterly Report contains statements (including certain projections, guidance and business trends) that are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Words such as “believe”, “estimate”, “project”, “plan”, “expect”, “anticipate”, “will”, “intend” and other similar expressions may identify forward-looking statements. Actual results may differ materially from those projected as a result of certain risks and uncertainties, many of which are beyond our control, including but not limited to:
• | the severity and duration of disruptions to our business due to pandemics, including the COVID-19 pandemic, natural disasters, acts of war, strikes, terrorism, social unrest or other causes, including the impacts of the COVID-19 pandemic and efforts to manage it on the global economy, liquidity and financial markets, demand for our hardware and software products, solutions and services, our supply chain, our work force, our liquidity and the value of the assets we own; |
• | macroeconomic factors, including global and regional business conditions (including adverse impacts in certain markets, such as Oil & Gas), the availability and cost of capital, commodity prices, the cyclical nature of our customers’ capital spending, sovereign debt concerns and currency exchange rates; |
• | laws, regulations and governmental policies affecting our activities in the countries where we do business, including those related to tariffs, taxation, and trade controls; |
• | the availability and price of components and materials; |
• | the successful execution of our cost productivity initiatives; |
• | the availability, effectiveness and security of our information technology systems; |
• | our ability to manage and mitigate the risk related to security vulnerabilities and breaches of our hardware and software products, solutions and services; |
• | the successful development of advanced technologies and demand for and market acceptance of new and existing hardware and software products; |
• | our ability to manage and mitigate the risks associated with our solutions and services businesses; |
• | competitive hardware and software products, solutions and services and pricing pressures, and our ability to provide high quality products, solutions and services; |
• | disruptions to our distribution channels or the failure of distributors to develop and maintain capabilities to sell our products; |
• | the successful integration and management of strategic transactions and achievement of the expected benefits of these transactions; |
• | intellectual property infringement claims by others and the ability to protect our intellectual property; |
• | the uncertainty of claims by taxing authorities in the various jurisdictions where we do business; |
• | our ability to attract, develop, and retain qualified personnel; |
• | the uncertainties of litigation, including liabilities related to the safety and security of the hardware and software products, solutions and services we sell; |
• | risks associated with our investment in common stock of PTC Inc., including the potential for volatility in our reported quarterly earnings associated with changes in the market value of such stock; |
• | our ability to manage costs related to employee retirement and health care benefits; and |
• | other risks and uncertainties, including but not limited to those detailed from time to time in our Securities and Exchange Commission (SEC) filings. |
These forward-looking statements reflect our beliefs as of the date of filing this report. We undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. See Item 1A, Risk Factors, of our Annual Report on Form 10-K for the fiscal year ended September 30, 2019, and Item 1A, Risk Factors, of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, for more information.
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Non-GAAP Measures
The following discussion includes organic sales, total segment operating earnings and margin, Adjusted Income, Adjusted EPS, Adjusted Effective Tax Rate and free cash flow, which are non-GAAP measures. See Supplemental Sales Information for a reconciliation of reported sales to organic sales and a discussion of why we believe this non-GAAP measure is useful to investors. See Results of Operations for a reconciliation of income before income taxes to total segment operating earnings and margin and a discussion of why we believe these non-GAAP measures are useful to investors. See Results of Operations for a reconciliation of net income attributable to Rockwell Automation, diluted EPS and effective tax rate to Adjusted Income, Adjusted EPS and Adjusted Effective Tax Rate, respectively, and a discussion of why we believe these non-GAAP measures are useful to investors. See Financial Condition for a reconciliation of cash flows from operating activities to free cash flow and a discussion of why we believe this non-GAAP measure is useful to investors.
Overview
Rockwell Automation, Inc. is a global leader in industrial automation and digital transformation. We connect the imaginations of people with the potential of technology to expand what is humanly possible, making the world more productive and more sustainable. Overall demand for our hardware and software products, solutions and services is driven by:
• | investments in manufacturing, including upgrades, modifications and expansions of existing facilities or production lines and new facilities or production lines; |
• | investments in basic materials production capacity, which may be related to commodity pricing levels; |
• | our customers’ needs for faster time to market, operational productivity, asset management and reliability, and enterprise risk management; |
• | our customers’ needs to continuously improve quality, safety and sustainability; |
• | industry factors that include our customers’ new product introductions, demand for our customers’ products or services and the regulatory and competitive environments in which our customers operate; |
• | levels of global industrial production and capacity utilization; |
• | regional factors that include local political, social, regulatory and economic circumstances; and |
• | the spending patterns of our customers due to their annual budgeting processes and their working schedules. |
Long-term Strategy
Our strategy is to bring The Connected Enterprise to life by integrating control and information across the enterprise. We deliver customer outcomes by combining advanced industrial automation with the latest information technology. Our growth and performance strategy seeks to:
• | achieve organic sales growth in excess of the automation market by expanding our served market and strengthening our competitive differentiation; |
• | grow market share of our core platforms; |
• | drive double digit growth in information solutions and connected services; |
• | acquire companies that serve as catalysts to organic growth by increasing our information solutions and high-value services offerings and capabilities, expanding our global presence, or enhancing our process expertise; |
• | enhance our market access by building our channel capability and partner network; |
• | deploy human and financial resources to strengthen our technology leadership and our intellectual capital business model; |
• | continuously improve quality and customer experience; and |
• | drive annual cost productivity. |
By implementing the above strategy, we seek to achieve our long-term financial goals, including above-market organic sales growth, EPS growth above sales growth, return on invested capital in excess of 20 percent and free cash flow equal to about 100 percent of Adjusted Income. We expect acquisitions to add a percentage point or more per year to long-term sales growth.
Our customers face the challenge of remaining globally cost competitive and automation can help them achieve their productivity and sustainability objectives. Our value proposition is to help our customers reduce time to market, lower total cost of ownership, improve asset utilization and manage enterprise risks.
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U.S. Industrial Economic Trends
In the third quarter of fiscal 2020, sales in the U.S. accounted for over half of our total sales. The various indicators we use to gauge the direction and momentum of our served U.S. markets include:
• | The Industrial Production (IP) Index, published by the Federal Reserve, which measures the real output of manufacturing, mining and electric and gas utilities. The IP Index is expressed as a percentage of real output in a base year, currently 2012. Historically, there has been a meaningful correlation between the changes in the IP Index and the level of automation investment made by our U.S. customers in their manufacturing base. |
• | The Manufacturing Purchasing Managers’ Index (PMI), published by the Institute for Supply Management (ISM), which indicates the current and near-term state of manufacturing activity in the U.S. According to the ISM, a PMI measure above 50 indicates that the U.S. manufacturing economy is generally expanding while a measure below 50 indicates that it is generally contracting. |
The table below depicts trends in these indicators since the quarter ended September 2018. These figures are as of July 28, 2020 and are subject to revision by the issuing organizations. During the third quarter of fiscal 2020, the IP Index dropped significantly to a low in April, with sequential improvement in May and June.
IP Index | PMI | ||
Fiscal 2020 quarter ended: | |||
June 2020 | 93.7 | 52.6 | |
March 2020 | 107.7 | 49.1 | |
December 2019 | 109.6 | 47.8 | |
Fiscal 2019 quarter ended: | |||
September 2019 | 109.5 | 48.2 | |
June 2019 | 109.2 | 51.6 | |
March 2019 | 109.8 | 54.6 | |
December 2018 | 110.3 | 54.3 | |
Fiscal 2018 quarter ended: | |||
September 2018 | 109.3 | 59.5 | |
Note: Economic indicators are subject to revision by the issuing organizations.
Non-U.S. Economic Trends
In the third quarter of fiscal 2020, sales to customers outside the U.S. accounted for less than half of our total sales. These customers include both indigenous companies and multinational companies with a global presence. In addition to the global factors previously mentioned in the "Overview" section, international demand, particularly in emerging markets, has historically been driven by the strength of the industrial economy in each region, investments in infrastructure and expanding consumer markets. We use changes in key countries' gross domestic product and IP as indicators of the growth opportunities in each region where we do business.
Industrial output declined significantly in the third quarter of fiscal 2020 as the COVID-19 pandemic spread globally. Sequential growth is projected for the fourth quarter of fiscal 2020 but remains below pre-pandemic levels.
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COVID-19 Pandemic
We are actively monitoring the impacts of the COVID-19 pandemic on all aspects of our business and geographies. While the duration and severity of those impacts are highly uncertain, they have had, and could continue to have, an adverse effect on our business, financial condition and results of operations. Our company is an essential business to support critical infrastructure because our customers cannot build their products at scale without automation.
We have a global supply chain, including a network of suppliers and distribution and manufacturing facilities. Our supply chain team is closely managing our end-to-end supply chain, from sourcing to production to customer delivery, and with a particular focus on all critical and at-risk suppliers and supplier locations globally.
We have implemented safety and hygiene processes at our manufacturing and distribution locations to keep our employees safe, including separation of shifts and workstations, temperature monitoring, and other recommended practices. We have also taken actions to help keep our non-manufacturing employees safe, including: directing employees to work from home, wherever possible, limiting and screening visitors to our facilities, travel restrictions, canceling events that involve large groups of people, encouraging social distancing best practices, and enhanced cleaning in our facilities and major locations. Some of the changes implemented have resulted in, and could continue to result in, operational inefficiencies.
Our solutions and services businesses include engineers and other employees who design and implement solutions through a combination of domain expertise and our technology. Physical access to customer facilities is often important as we deliver those solutions. As a result of COVID-19, access to customer facilities in some instances has been difficult. This has led to some project delays, as well as inefficiencies due to lower labor utilization.
On April 8, 2020, we announced several actions to address the current and anticipated economic conditions as a result of the global COVID-19 pandemic, and we have taken additional cost actions. We no longer expect a payout under our incentive plans for fiscal 2020, and we are adjusting our cost structure to help balance our financial strength and flexibility with protecting our most important investments to drive long-term differentiation. These actions include elimination of all discretionary spending, delays of non-critical investments, further adjustment of levels of contract labor, and deferral of any non-essential capital expenditures. We also implemented the following temporary cost actions, effective beginning in May: salary reductions for all non-manufacturing employees globally; cash fee reductions for the Board of Directors; and temporary suspension of the 401(k) match for all U.S. employees.
While our overall cost structure is coming down, we have maintained and, in some cases, have selectively increased investments in some of our highest priority areas in order to increase differentiation and create long-term value for customers and shareowners.
Oil & Gas Industry
The COVID-19 pandemic has had a cascading effect on the Oil & Gas industry. Business closures and restrictions on people’s mobility has significantly decreased demand for oil and gas. In addition, major global producers have not sufficiently reduced production in light of current demand levels, which has resulted in global oversupply and volatility in oil prices. These factors have had, and could continue to have, adverse impacts to our Oil & Gas customers’ business operations and financial condition, which could lead to a decrease in their liquidity and/or industrial spending. This has resulted in, and could continue to result in, a decrease in demand for our hardware and software products, solutions and services, as well as impact such customers’ ability to pay for such hardware and software products, solutions and services.
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Outlook
The COVID-19 pandemic and global efforts to respond to it are rapidly evolving. Our projections assume that a gradual recovery continues, with no increase in pandemic-related facility closures or disruptions to the supply chain.
Based on the information available to us at the time of this release, the following table provides guidance for projected sales growth and earnings per share for fiscal 2020:
Sales Growth Guidance | EPS Guidance | |||||
Reported sales growth | ~ (5.5)% | Diluted EPS | $8.06 - $8.26 | |||
Organic sales growth1 | ~ (8)% | Adjusted EPS1 | $7.40 - $7.60 | |||
Inorganic sales growth2 | ~ 4% | |||||
Currency translation | ~ (1.5)% | |||||
1Organic sales growth and Adjusted EPS are non-GAAP measures. See Supplemental Sales Information and Adjusted Income, Adjusted EPS and Adjusted Effective Tax Rate Reconciliation for more information on these non-GAAP measures.
2Estimate for incremental sales resulting from the formation of the Sensia joint venture and sales from other acquired businesses in fiscal year 2020.
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Summary of Results of Operations
Sales in the third quarter of fiscal 2020 decreased 16.3 percent compared to the third quarter of 2019. Organic sales decreased 17.6 percent year over year. Currency translation decreased sales by 1.9 percentage points, and acquisitions increased sales by 3.2 percentage points.
Results from the quarter included:
• | Logix sales decreased 18 percent year over year in the third quarter of fiscal 2020. Logix organic sales decreased 16 percent year over year, and currency translation decreased sales by 2 percentage points. |
• | Reported sales in emerging countries decreased 17.2 percent year over year in the third quarter of fiscal 2020. Organic sales in emerging countries decreased 16.4 percent year over year. Currency translation decreased sales in emerging countries by 6.8 percentage points, and acquisitions increased sales by 6.0 percentage points. |
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The following table reflects our sales and operating results (in millions, except per share amounts and percentages):
Three Months Ended June 30, | Nine Months Ended June 30, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
Sales | |||||||||||||||
Architecture & Software (a) | $ | 621.4 | $ | 747.9 | $ | 2,130.1 | $ | 2,240.7 | |||||||
Control Products & Solutions (b) | 772.6 | 917.2 | 2,629.7 | 2,723.9 | |||||||||||
Total sales (c) | $ | 1,394.0 | $ | 1,665.1 | $ | 4,759.8 | $ | 4,964.6 | |||||||
Segment operating earnings(1) | |||||||||||||||
Architecture & Software (d) | $ | 147.8 | $ | 222.9 | $ | 604.3 | $ | 669.8 | |||||||
Control Products & Solutions (e) | 81.6 | 173.0 | 335.7 | 454.8 | |||||||||||
Total segment operating earnings(2) (f) | 229.4 | 395.9 | 940.0 | 1,124.6 | |||||||||||
Purchase accounting depreciation and amortization | (10.6 | ) | (4.1 | ) | (30.1 | ) | (12.5 | ) | |||||||
General corporate — net | (26.4 | ) | (23.8 | ) | (76.9 | ) | (72.4 | ) | |||||||
Non-operating pension and postretirement benefit (cost) credit | (8.6 | ) | 2.6 | (25.9 | ) | 7.8 | |||||||||
Gain (loss) on investments | 175.5 | (25.6 | ) | 101.7 | (173.8 | ) | |||||||||
Valuation adjustments related to the registration of PTC Shares | — | — | — | 33.7 | |||||||||||
Interest (expense) income, net | (24.8 | ) | (23.6 | ) | (72.3 | ) | (62.8 | ) | |||||||
Income before income taxes (g) | 334.5 | 321.4 | 836.5 | 844.6 | |||||||||||
Income tax provision | (20.3 | ) | (60.0 | ) | (77.0 | ) | (156.9 | ) | |||||||
Net income | 314.2 | 261.4 | 759.5 | 687.7 | |||||||||||
Net (loss) attributable to noncontrolling interests | (3.6 | ) | — | (1.2 | ) | — | |||||||||
Net income attributable to Rockwell Automation | $ | 317.8 | $ | 261.4 | $ | 760.7 | $ | 687.7 | |||||||
Diluted EPS | $ | 2.73 | $ | 2.20 | $ | 6.52 | $ | 5.73 | |||||||
Adjusted EPS(3) | $ | 1.27 | $ | 2.40 | $ | 5.81 | $ | 6.65 | |||||||
Diluted weighted average outstanding shares | 116.4 | 118.6 | 116.5 | 120.0 | |||||||||||
Total segment operating margin(2) (f/c) | 16.5 | % | 23.8 | % | 19.7 | % | 22.7 | % | |||||||
Pre-tax margin (g/c) | 24.0 | % | 19.3 | % | 17.6 | % | 17.0 | % | |||||||
Architecture & Software segment operating margin (d/a) | 23.8 | % | 29.8 | % | 28.4 | % | 29.9 | % | |||||||
Control Product & Solutions segment operating margin (e/b) | 10.6 | % | 18.9 | % | 12.8 | % | 16.7 | % | |||||||
(1) | See Note 15 in the Consolidated Financial Statements for the definition of segment operating earnings. |
(2) | Total segment operating earnings and total segment operating margin are non-GAAP financial measures. We exclude purchase accounting depreciation and amortization, general corporate – net, non-operating pension and postretirement benefit (cost) credit, gains and losses on investments, valuation adjustments related to the registration of PTC Shares, interest (expense) income - net and income tax provision because we do not consider these costs to be directly related to the operating performance of our segments. We believe total segment operating earnings and total segment operating margin are useful to investors as measures of operating performance. We use these measures to monitor and evaluate the profitability of our operating segments. Our measures of total segment operating earnings and total segment operating margin may be different from measures used by other companies. |
(3) | Adjusted EPS is a non-GAAP earnings measure that excludes non-operating pension and postretirement benefit (cost) credit, net income (loss) attributable to noncontrolling interests, gains and losses on investments, and valuation adjustments related to the registration of PTC Shares, including their respective tax effects. See Adjusted Income, Adjusted EPS and Adjusted Effective Tax Rate Reconciliation for more information on this non-GAAP measure. |
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Three and Nine Months Ended June 30, 2020, Compared to Three and Nine Months Ended June 30, 2019
Sales
Sales decreased 16.3 percent and 4.1 percent year over year in the three and nine months ended June 30, 2020, respectively. Organic sales decreased 17.6 percent and 6.3 percent in the three and nine months ended June 30, 2020, respectively. Currency translation decreased sales by 1.9 percentage points and 1.4 percentage points in the three and nine months ended June 30, 2020, respectively. Acquisitions increased sales by 3.2 percentage points and 3.6 percentage points in the three and nine months ended June 30, 2020, respectively.
Pricing increased sales by approximately 1 percentage point in the three and nine months ended June 30, 2020.
The table below presents our sales, attributed to the geographic regions based upon country of destination, and the percentage change from the same period a year ago (in millions, except percentages):
Change vs. | Change in Organic Sales(1) vs. | ||||||||
Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2019 | |||||||
North America | $ | 826.0 | (18.1 | )% | (20.0 | )% | |||
EMEA | 280.4 | (8.9 | )% | (13.0 | )% | ||||
Asia Pacific | 206.9 | (11.1 | )% | (10.4 | )% | ||||
Latin America | 80.7 | (30.7 | )% | (22.3 | )% | ||||
Total Sales | $ | 1,394.0 | (16.3 | )% | (17.6 | )% | |||
Change vs. | Change in Organic Sales(1) vs. | ||||||||
Nine Months Ended June 30, 2020 | Nine Months Ended June 30, 2019 | Nine Months Ended June 30, 2019 | |||||||
North America | $ | 2,855.0 | (4.6 | )% | (7.4 | )% | |||
EMEA | 924.1 | (1.0 | )% | (4.5 | )% | ||||
Asia Pacific | 637.3 | (3.7 | )% | (3.8 | )% | ||||
Latin America | 343.4 | (8.5 | )% | (6.3 | )% | ||||
Total Sales | $ | 4,759.8 | (4.1 | )% | (6.3 | )% | |||
(1) Organic sales and organic sales growth exclude the effect of acquisitions, changes in currency exchange rates, and divestitures. See Supplemental Sales Information for information on these non-GAAP measures.
• | The decrease in North America sales in the three and nine months ended June 30, 2020, compared to the prior periods were primarily driven by weakness in Oil & Gas. |
• | EMEA sales decreased year over year in the three and nine months ended June 30, 2020, primarily due to weakness in Food & Beverage and Tire & Rubber. |
• | Sales in Asia Pacific decreased in the three and nine months ended June 30, 2020, due to weakness in Oil & Gas and Food & Beverage, partially offset by growth in Automotive. |
• | Latin America sales decreased in the three and nine months ended June 30, 2020, primarily led by weak Automotive performance. |
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Three and Nine Months Ended June 30, 2020, Compared to Three and Nine Months Ended June 30, 2019
General Corporate - Net
General corporate - net expense was $26.4 million and $76.9 million in the three and nine months ended June 30, 2020, respectively, compared to $23.8 million and $72.4 million in the three and nine months ended June 30, 2019, respectively.
Income before Income Taxes
Income before income taxes increased 4 percent and decreased 1 percent year over year in the three and nine months ended June 30, 2020, respectively. The increase in income before income taxes in the three months ended June 30, 2020, was primarily due to the fair-value adjustments recognized in the third quarter of fiscal 2020 and 2019 in connection with our investment in PTC (the "PTC adjustments"), partially offset by lower sales. Total segment operating earnings decreased 42.1 percent in the three months ended June 30, 2020. Total segment operating earnings decreased 16.4 percent in the nine months ended June 30, 2020. The decreases in total segment operating earnings in the three and nine months ended June 30, 2020 were primarily due to lower organic sales.
Income Taxes
The effective tax rate for the three months ended June 30, 2020, was 6.1 percent compared to 18.7 percent for the three months ended June 30, 2019. The decrease in the effective tax rate was primarily due to PTC adjustments. Our Adjusted Effective Tax Rate for the three months ended June 30, 2020, was 13.6 percent compared to 17.3 percent for the three months ended June 30, 2019. The decrease in the Adjusted Effective Tax Rate was primarily due to favorable discrete tax items in the current year.
The effective tax rate for the nine months ended June 30, 2020, was 9.2 percent compared to 18.6 percent for the nine months ended June 30, 2019. The decrease in the effective tax rate was primarily due to PTC adjustments and other favorable discrete tax items in the current year. Our Adjusted Effective Tax Rate for the nine months ended June 30, 2020, was 11.1 percent compared to 18.2 percent for the nine months ended June 30, 2019. The decrease in the Adjusted Effective Tax Rate was primarily due to favorable discrete tax items in the current year.
Diluted EPS and Adjusted EPS
Fiscal 2020 third quarter net income attributable to Rockwell Automation was $317.8 million or $2.73 per share, compared to $261.4 million or $2.20 per share in the third quarter of fiscal 2019. The increase in net income attributable to Rockwell Automation and diluted EPS were primarily due to the PTC adjustments, partially offset by lower sales. Fiscal 2020 third quarter Adjusted EPS was $1.27 in the third quarter of fiscal 2020, down 47 percent compared to $2.40 in the third quarter of fiscal 2019, primarily due to lower sales.
Net income attributable to Rockwell Automation was $760.7 million or $6.52 per share in the nine months ended June 30, 2020, compared to $687.7 million or $5.73 per share in the nine months ended June 30, 2019. The increases in net income attributable to Rockwell Automation and diluted EPS were primarily due to a lower effective tax rate, partially offset by the decrease in income before income taxes. Adjusted EPS was $5.81 in the nine months ended June 30, 2020, down 13 percent compared to $6.65 in the nine months ended June 30, 2019. The decrease in Adjusted EPS was due to lower organic sales, partially offset by a favorable tax rate and lower incentive compensation expense.
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Three and Nine Months Ended June 30, 2020, Compared to Three and Nine Months Ended June 30, 2019
Architecture & Software
Sales
Architecture & Software sales decreased 16.9 percent and 4.9 percent year over year in the three and nine months ended June 30, 2020, respectively. Architecture & Software organic sales decreased 15.9 percent and 3.7 percent in the three and nine months ended June 30, 2020, respectively. Currency translation decreased sales by 1.8 percentage points and 1.5 percentage points in the three and nine months ended June 30, 2020, respectively. Acquisitions increased sales by 0.8 percentage points and 0.3 percentage points in the three and nine months ended June 30, 2020. The decline in both reported and organic sales in the three and nine months ended June 30, 2020 was broad-based across the regions, with the exception of growth in Asia Pacific in the nine months ended June 30, 2020.
Logix sales decreased 18 percent and 5 percent year over year in the three and nine months ended June 30, 2020, respectively. Logix organic sales decreased 16 percent and 4 percent year over year in the three and nine months ended June 30, 2020, respectively, while currency translation decreased Logix sales by 2 percentage points and 1 percentage point in the three and nine months ended June 30, 2020, respectively.
Segment Operating Margin
Architecture & Software segment operating earnings decreased 33.7 percent and 9.8 percent year over year in the three and nine months ended June 30, 2020, respectively. Segment operating margin decreased to 23.8 percent and 28.4 percent in the three and nine months ended June 30, 2020, respectively, from 29.8 percent and 29.9 percent, respectively, in the same periods a year ago, primarily due to lower sales.
Control Products & Solutions
Sales
Control Products & Solutions sales decreased 15.8 percent and 3.5 percent year over year in the three and nine months ended June 30, 2020, respectively. Control Products & Solutions organic sales decreased 18.9 percent and 8.4 percent in the three and nine months ended June 30, 2020, respectively. Currency translation decreased sales by 2.0 percentage points and 1.5 percentage points in the three and nine months ended June 30, 2020, respectively. Acquisitions increased sales by 5.1 percentage points and 6.4 percentage points in the three and nine months ended June 30, 2020, respectively.
The decline in reported sales in the three and nine months ended June 30, 2020, was broad-based across the regions, with the exception of growth in EMEA in the nine months ended June 30, 2020. All regions experienced a decline in organic sales in the three and nine months ended June 30, 2020.
Product sales decreased 19 percent and 9 percent year over year in the three and nine months ended June 30, 2020, respectively. Product organic sales decreased by 17 percent and 8 percent in the three and nine months ended June 30, 2020, respectively. Currency translation decreased sales by 2 percentage points and 1 percentage point in the three and nine months ended June 30, 2020, respectively.
Sales in our solutions and services businesses decreased 14 percent and increased 1 percent in the three and nine months ended June 30, 2020, respectively. Organic sales in our solutions and services businesses decreased by 20 percent and 8 percent in the three and nine months ended June 30, 2020, respectively. Currency translation decreased sales by 2 percentage points in each of the three and nine months ended June 30, 2020. Acquisitions increased sales by 8 percentage points and 11 percentage points in the three and nine months ended June 30, 2020, respectively.
Segment Operating Margin
Control Products & Solutions segment operating earnings decreased 52.8 percent and 26.2 percent year over year in the three and nine months ended June 30, 2020, respectively. Segment operating margin decreased to 10.6 percent and 12.8 percent in the three and nine months ended June 30, 2020, respectively, compared to 18.9 percent and 16.7 percent, respectively, in the same periods a year ago, primarily due to lower sales.
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Supplemental Segment Information
Purchase accounting depreciation and amortization and non-operating pension and postretirement benefit cost (credit) are not allocated to our operating segments because these costs are excluded from our measurement of each segment's operating performance for internal purposes. If we were to allocate these costs, we would attribute them to each of our segments as follows (in millions):
Three Months Ended June 30, | Nine Months Ended June 30, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
Purchase accounting depreciation and amortization | |||||||||||||||
Architecture & Software | $ | 2.5 | $ | 1.7 | $ | 5.9 | $ | 4.7 | |||||||
Control Products & Solutions | 7.9 | 2.2 | 23.4 | 7.0 | |||||||||||
Non-operating pension and postretirement benefit cost (credit) | |||||||||||||||
Architecture & Software | 2.1 | (1.5 | ) | 6.4 | (4.6 | ) | |||||||||
Control Products & Solutions | 3.3 | (2.4 | ) | 10.0 | (7.2 | ) | |||||||||
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Adjusted Income, Adjusted EPS and Adjusted Effective Tax Rate Reconciliation
Adjusted Income, Adjusted EPS and Adjusted Effective Tax Rate are non-GAAP earnings measures that exclude non-operating pension and postretirement benefit cost (credit), net income (loss) attributable to noncontrolling interests, gains and losses on investments, and valuation adjustments related to the registration of PTC Shares, including their respective tax effects.
We believe that Adjusted Income, Adjusted EPS and Adjusted Effective Tax Rate provide useful information to our investors about our operating performance and allow management and investors to compare our operating performance period over period. Adjusted EPS is also used as a financial measure of performance for our annual incentive compensation. Our measures of Adjusted Income, Adjusted EPS and Adjusted Effective Tax Rate may be different from measures used by other companies. These non-GAAP measures should not be considered a substitute for net income attributable to Rockwell Automation, diluted EPS and effective tax rate.
The following are the components of operating and non-operating pension and postretirement benefit cost (credit) (in millions):
Three Months Ended June 30, | Nine Months Ended June 30, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
Service cost | $ | 22.9 | $ | 19.8 | $ | 69.0 | $ | 59.4 | |||||||
Operating pension and postretirement benefit cost | 22.9 | 19.8 | 69.0 | 59.4 | |||||||||||
Interest cost | 34.4 | 40.3 | 103.5 | 120.6 | |||||||||||
Expected return on plan assets | (60.9 | ) | (61.2 | ) | (183.3 | ) | (183.6 | ) | |||||||
Amortization of prior service credit | (1.2 | ) | (1.1 | ) | (3.4 | ) | (3.2 | ) | |||||||
Amortization of net actuarial loss | 37.1 | 19.6 | 111.4 | 59.0 | |||||||||||
Settlements | (0.8 | ) | (0.2 | ) | (2.3 | ) | (0.6 | ) | |||||||
Non-operating pension and postretirement benefit cost (credit) | 8.6 | (2.6 | ) | 25.9 | (7.8 | ) | |||||||||
Net periodic pension and postretirement benefit cost | $ | 31.5 | $ | 17.2 | $ | 94.9 | $ | 51.6 | |||||||
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The following are reconciliations of net income attributable to Rockwell Automation, diluted EPS, and effective tax rate to Adjusted Income, Adjusted EPS and Adjusted Effective Tax Rate, respectively (in millions, except per share amounts and percentages):
Three Months Ended June 30, | Nine Months Ended June 30, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
Net income attributable to Rockwell Automation | $ | 317.8 | $ | 261.4 | $ | 760.7 | $ | 687.7 | |||||||
Non-operating pension and postretirement benefit cost (credit) | 8.6 | (2.6 | ) | 25.9 | (7.8 | ) | |||||||||
Tax effect of non-operating pension and postretirement benefit cost (credit) | (2.4 | ) | 0.3 | (7.2 | ) | 1.0 | |||||||||
Change in fair value of investments1 | (175.5 | ) | 25.6 | (101.7 | ) | 140.1 | |||||||||
Tax effect of the change in fair value of investments1 | — | — | — | (21.7 | ) | ||||||||||
Adjusted Income | $ | 148.5 | $ | 284.7 | $ | 677.7 | $ | 799.3 | |||||||
Diluted EPS | $ | 2.73 | $ | 2.20 | $ | 6.52 | $ | 5.73 | |||||||
Non-operating pension and postretirement benefit cost (credit) | 0.07 | (0.02 | ) | 0.22 | (0.07 | ) | |||||||||
Tax effect of non-operating pension and postretirement benefit cost (credit) | (0.02 | ) | — | (0.06 | ) | 0.01 | |||||||||
Change in fair value of investments1 | (1.51 | ) | 0.22 | (0.87 | ) | 1.16 | |||||||||
Tax effect of the change in fair value of investments1 | — | — | — | (0.18 | ) | ||||||||||
Adjusted EPS | $ | 1.27 | $ | 2.40 | $ | 5.81 | $ | 6.65 | |||||||
Effective tax rate | 6.1 | % | 18.7 | % | 9.2 | % | 18.6 | % | |||||||
Tax effect of non-operating pension and postretirement benefit cost (credit) | 0.5 | % | — | % | 0.6 | % | 0.1 | % | |||||||
Tax effect of the change in fair value of investments1 | 7.0 | % | (1.4 | )% | 1.3 | % | (0.5 | )% | |||||||
Adjusted Effective Tax Rate | 13.6 | % | 17.3 | % | 11.1 | % | 18.2 | % | |||||||
1In the three and nine months ended June 30, 2020, change in fair value of investments included a $175.5 million gain and $101.7 million gain, respectively, due to the change in value of our investment in PTC. In the three months ended June 30, 2019, change in fair value of investments included a $25.6 million loss due to the change in value of our investment in PTC, and in the nine months ended June 30, 2019, change in fair value of investments included a $173.8 million loss due to the change in value of our investment in PTC and a $33.7 million gain due to the valuation adjustments related to the registration of PTC Shares.
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Fiscal 2020 Guidance | ||
Diluted EPS | $8.06 - $8.26 | |
Non-operating pension and postretirement benefit cost | 0.30 | |
Tax effect of non-operating pension and postretirement benefit cost | (0.08) | |
Change in fair value of investments1 | (0.88) | |
Tax effect of change in fair value of investments | — | |
Adjusted EPS2 | $7.40 - $7.60 | |
Effective tax rate | ~ 11.0% | |
Tax effect of non-operating pension and postretirement benefit cost | ~ 0.5% | |
Tax effect of change in fair value of investments1 | ~ 1.0% | |
Adjusted Effective Tax Rate3 | ~ 12.5% | |
1The actual year-to-date adjustments, which are based on PTC's share price at June 30, 2020, are used for guidance, as estimates of these adjustments on a forward-looking basis are not available due to variability, complexity and limited visibility of these items.
2Fiscal 2020 guidance based on Adjusted Income, which excludes Schlumberger's noncontrolling interest in Sensia.
3Fiscal 2020 guidance includes the impact of a tax benefit recognized upon the formation of the Sensia joint venture on October 1, 2019. This tax benefit is expected to reduce the full year Effective tax rate and the Adjusted Effective Tax Rate by approximately 150 basis points.
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Financial Condition
The following is a summary of our cash flows from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows (in millions):
Nine Months Ended June 30, | |||||||
2020 | 2019 | ||||||
Cash provided by (used for): | |||||||
Operating activities | $ | 794.7 | $ | 707.0 | |||
Investing activities | (591.1 | ) | 129.3 | ||||
Financing activities | (308.3 | ) | (660.6 | ) | |||
Effect of exchange rate changes on cash | (3.9 | ) | (5.7 | ) | |||
(Decrease) increase in cash and cash equivalents | $ | (108.6 | ) | $ | 170.0 | ||
The following table summarizes free cash flow (in millions), which is a non-GAAP financial measure:
Nine Months Ended June 30, | |||||||
2020 | 2019 | ||||||
Cash provided by operating activities | $ | 794.7 | $ | 707.0 | |||
Capital expenditures | (91.9 | ) | (108.7 | ) | |||
Free cash flow | $ | 702.8 | $ | 598.3 | |||
Our definition of free cash flow takes into consideration capital investments required to maintain our businesses' operations and execute our strategy. Cash provided by continuing operating activities adds back non-cash depreciation expense to earnings but does not reflect a charge for necessary capital expenditures. Our definition of free cash flow excludes the operating cash flows and capital expenditures related to our discontinued operations, if any. Operating, investing and financing cash flows of our discontinued operations, if any, are presented separately in our Consolidated Statement of Cash Flows. In our opinion, free cash flow provides useful information to investors regarding our ability to generate cash from business operations that is available for acquisitions and other investments, service of debt principal, dividends and share repurchases. We use free cash flow, as defined, as one measure to monitor and evaluate our performance, including as a financial measure for our annual incentive compensation. Our definition of free cash flow may differ from definitions used by other companies.
Cash provided by operating activities was $794.7 million for the nine months ended June 30, 2020, compared to $707.0 million for the nine months ended June 30, 2019. Free cash flow was $702.8 million for the nine months ended June 30, 2020, compared to $598.3 million for the nine months ended June 30, 2019. The year over year increases in cash provided by operating activities and free cash flow were primarily due to a decrease in working capital and lower income tax and incentive compensation payments in the first nine months of fiscal 2020 compared to the first nine months of fiscal 2019, partially offset by lower pre-tax income, excluding non-cash adjustments.
We repurchased approximately 1.4 million shares of our common stock under our share repurchase program in the first nine months of fiscal 2020. The total cost of these shares was $254.7 million, none of which was recorded in accounts payable at June 30, 2020. We had $9.3 million in unsettled share repurchases outstanding at September 30, 2019, that did not settle until October 2019. We repurchased approximately 4.6 million shares of our common stock in the first nine months of fiscal 2019. The total cost of these shares was $775.1 million, of which $6.0 million was recorded in accounts payable at June 30, 2019, related to share repurchases that did not settle until July 2019. Our decision to repurchase shares in the remainder of 2020 will depend on business conditions, free cash flow generation, other cash requirements (including acquisitions) and stock price. On both September 6, 2018, and July 24, 2019, the Board of Directors authorized us to expend an additional $1.0 billion to repurchase shares of our common stock. At June 30, 2020, we had approximately $853.7 million remaining for share repurchases under our existing board authorizations. See Part II, Item 2, Unregistered Sales of Equity Securities and Use of Proceeds, for additional information regarding share repurchases.
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We expect future uses of cash to include working capital requirements, capital expenditures, additional contributions to our retirement plans, acquisitions of businesses and other inorganic investments, dividends to shareowners, repurchases of common stock, and repayments of debt. We expect to fund future uses of cash with a combination of existing cash balances, cash generated by operating activities, commercial paper borrowings or a new issuance of debt or other securities.
At June 30, 2020, the majority of our cash and cash equivalents were held by non-U.S. subsidiaries. As a result of the broad changes to the U.S. international tax system under the Tax Act, in fiscal year 2018 the Company began to account for substantially all of its non-U.S. subsidiaries as being immediately subject to tax, while still concluding that earnings are indefinitely reinvested for a limited number of subsidiaries.
In addition to cash generated by operating activities, we have access to existing financing sources, including the public debt markets and unsecured credit facilities with various banks.
At June 30, 2020, and September 30, 2019, our total current borrowing capacity under our unsecured revolving credit facility expiring in November 2023 was $1.25 billion. We can increase the aggregate amount of this credit facility by up to $750.0 million, subject to the consent of the banks in the credit facility. We did not borrow against this credit facility during the periods ended June 30, 2020 or September 30, 2019. Borrowings under this credit facility bear interest based on short-term money market rates in effect during the period the borrowings are outstanding. The terms of this credit facility contain covenants under which we agree to maintain an EBITDA-to-interest ratio of at least 3.0 to 1.0. The EBITDA-to-interest ratio is defined in the credit facility as the ratio of consolidated EBITDA (as defined in the facility) for the preceding four quarters to consolidated interest expense for the same period.
Among other uses, we can draw on our credit facility as a standby liquidity facility to repay our outstanding commercial paper as it matures. This access to funds to repay maturing commercial paper is an important factor in maintaining the short-term credit ratings set forth in the table below. Under our current policy with respect to these ratings, we expect to limit our other borrowings under our credit facility, if any, to amounts that would leave enough credit available under the facility so that we could borrow, if needed, to repay all of our then outstanding commercial paper as it matures.
On April 20, 2020, we entered into a $400 million senior unsecured 364-day term loan credit agreement and were advanced the full loan amount. This agreement is in addition to our existing $1.25 billion unsecured revolving credit facility expiring in November 2023, which remains available and undrawn. Borrowings under this term loan bear interest based on short-term money market rates in effect during the period the borrowings are outstanding. The term loan agreement contains covenants similar to those under our $1.25 billion unsecured revolving credit facility, under which we agree to maintain an EBITDA-to-interest ratio of at least 3.0 to 1.0. The EBITDA-to-interest ratio is defined in the term loan agreement as the ratio of consolidated EBITDA (as defined in the term loan agreement) for the preceding four quarters to consolidated interest expense for the same period. The proceeds of the borrowings under the term loan agreement were used for general corporate purposes, including acquisition financing and working capital.
Separate short-term unsecured credit facilities of approximately $227.2 million at June 30, 2020, were available to non-U.S. subsidiaries. Borrowings under our non-U.S. credit facilities at June 30, 2020 and 2019 were not significant. We were in compliance with all covenants under our credit facilities at June 30, 2020 and 2019. There are no significant commitment fees or compensating balance requirements under our credit facilities.
Our short-term debt as of June 30, 2020, consisted of $23.5 million of interest-bearing loans from Schlumberger to Sensia due September 30, 2020, and $399.3 million of term loans, net of issuance costs. The short-term loans from Schlumberger were entered into following formation of Sensia. See Note 5 in the Consolidated Financial Statements for additional information on Sensia. See Note 7 in the Consolidated Financial Statements for more information on our long-term and short-term debt. There were no commercial paper borrowings outstanding at June 30, 2020, or September 30, 2019.
The following is a summary of our credit ratings as of June 30, 2020:
Credit Rating Agency | Short-Term Rating | Long-Term Rating | Outlook | |||
Standard & Poor’s | A-1 | A | Stable | |||
Moody’s | P-2 | A3 | Stable | |||
Fitch Ratings | F1 | A | Stable | |||
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Our ability to access the commercial paper market, and the related costs of these borrowings, is affected by the strength of our credit ratings and market conditions. Conditions in the commercial paper market have improved since the COVID-19 pandemic negatively affected this market in March and April 2020. Although we have had no commercial paper outstanding since mid-April, we do not believe we would have difficulty in issuing commercial paper if the need arose currently. If our access to the commercial paper market is adversely affected due to a change in market conditions or otherwise, we would expect to rely on a combination of available cash and our unsecured committed credit facility to provide short-term funding. In such event, the cost of borrowings under our unsecured committed credit facility could be higher than the cost of commercial paper borrowings.
We regularly monitor the third-party depository institutions that hold our cash and cash equivalents and short-term investments. We diversify our cash and cash equivalents among counterparties to minimize exposure to any one of these entities.
We use foreign currency forward exchange contracts to manage certain foreign currency risks. We enter into these contracts to hedge our exposure to foreign currency exchange rate variability in the expected future cash flows associated with certain third-party and intercompany transactions denominated in foreign currencies forecasted to occur within the next two years. We also use these contracts to hedge portions of our net investments in certain non-U.S. subsidiaries against the effect of exchange rate fluctuations on the translation of foreign currency balances to the U.S. dollar. In addition, we use foreign currency forward exchange contracts that are not designated as hedges to offset transaction gains or losses associated with some of our assets and liabilities resulting from intercompany loans or other transactions with third parties that are denominated in currencies other than our entities' functional currencies. Our foreign currency forward exchange contracts are usually denominated in currencies of major industrial countries. We diversify our foreign currency forward exchange contracts among counterparties to minimize exposure to any one of these entities.
Net gains and losses related to derivative forward exchange contracts designated as cash flow hedges offset the related gains and losses on the hedged items during the periods in which the hedged items are recognized in earnings. During the three and nine months ended June 30, 2020, we reclassified $5.3 million and $15.8 million, respectively, in pre-tax net gains related to cash flow hedges from accumulated other comprehensive loss into the Consolidated Statement of Operations. During the three and nine months ended June 30, 2019, we reclassified $5.0 million and $11.0 million, respectively, in pre-tax net gains related to cash flow hedges from accumulated other comprehensive loss into the Consolidated Statement of Operations. We expect that approximately $4.3 million of pre-tax net unrealized gains on cash flow hedges as of June 30, 2020, will be reclassified into earnings during the next 12 months.
Information with respect to our contractual cash obligations is contained in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the fiscal year ended September 30, 2019. We believe that at June 30, 2020, there has been no material change to this information.
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Supplemental Sales Information
We translate sales of subsidiaries operating outside of the United States using exchange rates effective during the respective period. Therefore, changes in currency exchange rates affect our reported sales. Sales by acquired businesses also affect our reported sales. We believe that organic sales, defined as sales excluding the effects of acquisitions and changes in currency exchange rates, which is a non-GAAP financial measure, provides useful information to investors because it reflects regional and operating segment performance from the activities of our businesses without the effect of acquisitions and changes in currency exchange rates. We use organic sales as one measure to monitor and evaluate our regional and operating segment performance. When we acquire businesses, we exclude sales in the current period for which there are no comparable sales in the prior period. We determine the effect of changes in currency exchange rates by translating the respective period’s sales using the same currency exchange rates that were in effect during the prior year. When we divest a business, we exclude sales in the prior period for which there are no comparable sales in the current period. Organic sales growth is calculated by comparing organic sales to reported sales in the prior year, excluding divestitures. We attribute sales to the geographic regions based on the country of destination.
The following is a reconciliation of our reported sales by geographic region to organic sales (in millions):
Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | ||||||||||||||||||
Sales | Effect of Acquisitions1 | Effect of Changes in Currency | Organic Sales | Sales | |||||||||||||||
North America | $ | 826.0 | $ | (22.6 | ) | $ | 2.5 | $ | 805.9 | $ | 1,008.0 | ||||||||
EMEA | 280.4 | (19.5 | ) | 6.9 | 267.8 | 307.9 | |||||||||||||
Asia Pacific | 206.9 | (5.3 | ) | 6.8 | 208.4 | 232.7 | |||||||||||||
Latin America | 80.7 | (5.9 | ) | 15.7 | 90.5 | 116.5 | |||||||||||||
Total Company Sales | $ | 1,394.0 | $ | (53.3 | ) | $ | 31.9 | $ | 1,372.6 | $ | 1,665.1 | ||||||||
Nine Months Ended June 30, 2020 | Nine Months Ended June 30, 2019 | ||||||||||||||||||
Sales | Effect of Acquisitions1 | Effect of Changes in Currency | Organic Sales | Sales | |||||||||||||||
North America | $ | 2,855.0 | $ | (85.4 | ) | $ | 3.1 | $ | 2,772.7 | $ | 2,993.9 | ||||||||
EMEA | 924.1 | (59.1 | ) | 26.5 | 891.5 | 933.4 | |||||||||||||
Asia Pacific | 637.3 | (17.1 | ) | 16.2 | 636.4 | 661.8 | |||||||||||||
Latin America | 343.4 | (18.9 | ) | 27.4 | 351.9 | 375.5 | |||||||||||||
Total Company Sales | $ | 4,759.8 | $ | (180.5 | ) | $ | 73.2 | $ | 4,652.5 | $ | 4,964.6 | ||||||||
1 Includes incremental sales resulting from the formation of the Sensia joint venture and sales from other acquired businesses in fiscal year 2020.
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The following is a reconciliation of our reported sales by operating segment to organic sales (in millions):
Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | ||||||||||||||||||
Sales | Effect of Acquisitions1 | Effect of Changes in Currency | Organic Sales | Sales | |||||||||||||||
Architecture & Software | $ | 621.4 | $ | (6.1 | ) | $ | 13.9 | $ | 629.2 | $ | 747.9 | ||||||||
Control Products & Solutions | 772.6 | (47.2 | ) | 18.0 | 743.4 | 917.2 | |||||||||||||
Total Company Sales | $ | 1,394.0 | $ | (53.3 | ) | $ | 31.9 | $ | 1,372.6 | $ | 1,665.1 | ||||||||
Nine Months Ended June 30, 2020 | Nine Months Ended June 30, 2019 | ||||||||||||||||||
Sales | Effect of Acquisitions1 | Effect of Changes in Currency | Organic Sales | Sales | |||||||||||||||
Architecture & Software | $ | 2,130.1 | $ | (7.2 | ) | $ | 34.1 | $ | 2,157.0 | $ | 2,240.7 | ||||||||
Control Products & Solutions | 2,629.7 | (173.3 | ) | 39.1 | 2,495.5 | 2,723.9 | |||||||||||||
Total Company Sales | $ | 4,759.8 | $ | (180.5 | ) | $ | 73.2 | $ | 4,652.5 | $ | 4,964.6 | ||||||||
1 Includes incremental sales resulting from the formation of the Sensia joint venture and sales from other acquired businesses in fiscal year 2020.
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Critical Accounting Estimates
We have prepared the Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. These estimates are based on our best judgment about current and future conditions, but actual results could differ from those estimates. Information with respect to accounting estimates that are the most critical to the understanding of our financial statements as they could have the most significant effect on our reported results and require subjective or complex judgments by management is contained in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the fiscal year ended September 30, 2019. We believe that at June 30, 2020, there has been no material change to this information except as noted below.
Acquisitions - Consolidation of Sensia Joint Venture
In determining whether to consolidate Sensia, U.S. GAAP requires that we evaluate our ability to control the significant financial or operating decisions of the joint venture. Determining the nature and extent of the noncontrolling interest holder's rights involves management judgment. We have evaluated the noncontrolling interest holder's rights and determined that we control and should consolidate Sensia in our financial results.
Acquisitions - Sensia Joint Venture Intangibles Valuation
The accounting for a business combination requires the excess of the purchase price for the acquisition over the net book value of assets acquired to be allocated to the identifiable assets of the acquired entity. Any unallocated portion is recognized as goodwill. We engaged an independent third-party valuation specialist for the fair value allocation of the purchase price paid in connection with the Sensia joint venture to intangible assets, which required the use of several assumptions and estimates. Although we believe the assumptions and estimates made were reasonable and appropriate, these estimates are based on historical experience and information obtained from the management of the acquired companies. The key assumption requiring the use of judgment was the customer attrition rate ranging from 7.5% to 25%. A change in the customer attrition rate of 250 basis points would result in a change of $40.4 million in intangible assets.
More information regarding this business combination is contained in Note 5 in the Consolidated Financial Statements.
Goodwill
The quantitative test of goodwill for impairment requires us to estimate the fair value of our reporting units. During the second quarter of 2020, we performed a quantitative impairment test for our Sensia reporting unit. We determined the fair value of the reporting unit under a combination of an income approach derived from discounted cash flows and a market multiples approach using selected comparable public companies.
Critical assumptions used in this approach included management’s estimated future revenue growth rates, estimated future margins, and discount rate. Estimated future revenue growth and margins are based on management’s best estimate about current and future conditions. Although we believe the assumptions and estimates made were reasonable and appropriate, these estimates are based on a number of factors including historical experience and information obtained from reporting unit management. Actual results could differ from these estimates, especially given the uncertainty over the duration and severity of impacts related to the COVID-19 pandemic, and the impact on our Oil & Gas customers which have been, and could continue to be, impacted by the recent volatility in oil prices. We determined the discount rate using our weighted average cost of capital adjusted for risk factors specific to the reporting unit, with comparison to market and industry data. A hypothetical 10 percent decrease in the fair value of this reporting unit or our other reporting units would not impact our conclusion that goodwill was not impaired.
More information regarding goodwill is contained in Note 6 in the Consolidated Financial Statements.
Environmental Matters
Information with respect to the effect of compliance with environmental protection requirements and resolution of environmental claims on us and our manufacturing operations is contained in Note 16 in the Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, of our Annual Report on Form 10-K for the fiscal year ended September 30, 2019. We believe that at June 30, 2020, there has been no material change to this information.
Recent Accounting Pronouncements
See Note 1 in the Consolidated Financial Statements regarding recent accounting pronouncements.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Information with respect to our exposure to interest rate risk and foreign currency risk is contained in Item 7A, Quantitative and Qualitative Disclosures About Market Risk, of our Annual Report on Form 10-K for the fiscal year ended September 30, 2019. We believe that at June 30, 2020, there has been no material change to this information.
Item 4. Controls and Procedures
Disclosure Controls and Procedures: We, with the participation of our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)) as of the end of the fiscal quarter covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the fiscal quarter covered by this report, our disclosure controls and procedures were effective.
Internal Control Over Financial Reporting: There has not been any change in our internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) during the fiscal quarter to which this report relates that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. In the first quarter of fiscal 2020, we completed the formation of Sensia as described elsewhere in this report. We continue to integrate controls, policies, and procedures relating to this transaction and will continue to evaluate the impact of any related changes to our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Information with respect to our legal proceedings is contained in Item 3, Legal Proceedings, of our Annual Report on Form 10-K for the fiscal year ended September 30, 2019. We believe that at June 30, 2020, there has been no material change to this information.
Item 1A. Risk Factors
Information about our most significant risk factors is contained in Item 1A, Risk Factors, of our Annual Report on Form 10-K for the fiscal year ended September 30, 2019, and Item 1A, Risk Factors, of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020. We believe that at June 30, 2020, there has been no material change to this information.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Share Repurchases
The table below sets forth information with respect to purchases made by or on behalf of us of shares of our common stock during the three months ended June 30, 2020:
Period | Total Number of Shares Purchased(1) | Average Price Paid Per Share(2) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Approx. Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(3) | ||||||||||
April 1 - 30, 2020 | 195,311 | $ | 164.85 | 195,311 | $ | 870,048,301 | ||||||||
May 1 - 31, 2020 | 83,351 | 196.28 | 83,351 | 853,688,376 | ||||||||||
June 1 - 30, 2020 | — | — | — | 853,688,376 | ||||||||||
Total | 278,662 | 174.25 | 278,662 | |||||||||||
(1) | All of the shares purchased during the quarter ended June 30, 2020, were acquired pursuant to the repurchase program described in (3) below. |
(2) | Average price paid per share includes brokerage commissions. |
(3) | On July 24, 2019, the Board of Directors authorized us to expend $1.0 billion to repurchase shares of our common stock. Our repurchase program allows us to repurchase shares at management’s discretion or at our broker’s discretion pursuant to a share repurchase plan subject to price and volume parameters. |
51
Item 6. Exhibits
(a) Exhibits:
— | ||||
— | ||||
— | ||||
— | ||||
— | ||||
— | ||||
Exhibit 101 | — | Interactive Data Files. | ||
* | Management contract or compensatory plan or arrangement | |||
52
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ROCKWELL AUTOMATION, INC. (Registrant) | |||||
Date: | July 28, 2020 | By | /s/ PATRICK P. GORIS | ||
Patrick P. Goris Senior Vice President and Chief Financial Officer (Principal Financial Officer) | |||||
Date: | July 28, 2020 | By | /s/ TERRY L. RIESTERER | ||
Terry L. Riesterer Vice President and Controller (Principal Accounting Officer) | |||||
53
Exhibit 10.1
ROCKWELL AUTOMATION, INC.
2020 LONG-TERM INCENTIVES PLAN
RESTRICTED STOCK AGREEMENT
To: <first name> <last name>
In accordance with Section 4(c) of the Rockwell Automation, Inc. 2020 Long-Term Incentives Plan (the Plan), <shares awarded> shares (Restricted Shares) of Stock (as defined in the Plan) of Rockwell Automation, Inc. (Rockwell Automation or Corporation) have been granted to you, effective <award date> (award date), as Restricted Stock (as defined in the Plan) upon the terms and conditions of this Restricted Stock Agreement (this Agreement), subject in all respects to the provisions of the Plan, as it may be amended. Capitalized terms used in this Agreement and not otherwise defined herein shall have the respective meanings ascribed to them in the Plan.
1.Earning of Restricted Shares
The Restricted Shares may be earned as follows:
(a)If you shall continue as an Employee from the date hereof until the third anniversary of the award date, then you shall be deemed to have fully earned all the Restricted Shares subject to this Agreement on such date.
(b)If you shall die or suffer a disability that shall continue for a continuous period of at least six months during the period of your continuous service as an Employee and prior to the third anniversary of the award date, then you shall be deemed to have fully earned all the Restricted Shares subject to this Agreement on the date of your death or the six month anniversary of your disability, as the case may be.
(c)If during the period of your continuous service as an Employee and prior to the third anniversary of the award date, (A) a Change of Control occurs, (B) all Restricted Shares that are outstanding are assumed or substituted with comparable awards by the successor corporation in such Change of Control or its parent corporation and (C) within two years of such Change of Control your employment is terminated (1) by reason of death or disability, (2) by you for a Change of Control Good Reason or (3) by the Corporation other than for Cause, you shall be deemed to have fully earned all the Restricted Shares subject to this Agreement (and any substituted awards of restricted stock) on the date of your separation from service. If during the period of your continuous service as an Employee and prior to the third anniversary of the award date, (A) a Change of Control occurs and (B) all Restricted Shares that are outstanding are not assumed or substituted with comparable awards by the successor corporation in such Change of Control or its parent corporation, then you shall be deemed to have fully earned all the Restricted Shares subject to this Agreement on the date of such Change of Control.
(d)If your employment by Rockwell Automation terminates on or after the first anniversary of the date hereof and prior to the third anniversary of the award date by reason of your retirement, then you shall be deemed to have fully earned a prorated portion of the Restricted Shares subject to this Agreement equal to the number of Restricted Shares subject to this Agreement, multiplied by the percentage of days in the three-year period ended on the third anniversary of the award date during which you were an Employee. For purposes of this Section 1, retirement means termination of employment with Rockwell Automation after attaining age 65 and five (5) years of service or age 55 and ten (10) years of service, except as otherwise determined by the Committee or the Chief Executive Officer of Rockwell Automation or as otherwise may be required by local law.
(e)If your employment by Rockwell Automation terminates (i) prior to satisfaction of any of the conditions set forth in paragraph (a), (b), (c) or (d) of this Section 1, or (ii) for “cause” (as reasonably determined by the Corporation), then you shall be deemed not to have earned any of the Restricted Shares and shall have no further rights with respect to the Restricted Shares or any Stock Dividends.
For purposes of this Section 1, if you receive severance payments in connection with your separation from Rockwell Automation, you will be treated as not having terminated your employment with Rockwell Automation until the last date on which you are entitled to receive severance payments from Rockwell Automation, at which time your employment by Rockwell Automation will be deemed terminated.
2.Retention of Certificates for Restricted Shares
Certificates for the Restricted Shares and any dividends or distributions thereon or in respect thereof that may be paid in additional shares of Stock or other securities of Rockwell Automation or securities of another entity (Stock Dividends) shall be delivered to and held by Rockwell Automation, or shall be registered in book entry form subject to Rockwell Automation’s instructions, until you shall have earned the Restricted Shares in accordance with the provisions of Section 1. To facilitate implementation of the provisions of this Agreement, you undertake to sign and deposit with Rockwell Automation’s Office of the Secretary such documents appropriate to effectuate the purpose and intent of this Agreement as Rockwell Automation may reasonably request from time to time.
3.Dividends and Voting Rights
Notwithstanding the retention by Rockwell Automation of certificates (or the right to give instructions with respect to shares held in book-entry form) for the Restricted Shares and any Stock Dividends, unless and until such shares have been forfeited in accordance with Section 5, you shall be entitled to receive any dividends that may be paid in cash on, and to vote, the Restricted Shares and you shall be entitled to receive any Stock Dividends held by Rockwell Automation (or subject to its instructions) in accordance with Section 2.
4.Delivery of Earned Restricted Shares
As promptly as practicable after (i) you shall have been deemed to have earned the Restricted Shares in accordance with Section 1 and (ii) Rockwell Automation has been reimbursed for all required withholding taxes in respect of your earning all the Restricted Shares and Stock Dividends that you have been deemed to have earned, Rockwell Automation shall deliver to you (or in the event of your death, to your estate or any person who acquires your interest in the Restricted Shares by bequest or inheritance) all or the part of the Restricted Shares and Stock Dividends that you have been deemed to have earned.
5.Forfeiture of Unearned Restricted Shares
(a)Notwithstanding any other provision of this Agreement, other than as provided in Section 5(b), if at any time it shall become impossible for you to earn any of the Restricted Shares in accordance with this Agreement, all the Restricted Shares, together with any Stock Dividends, then being held by Rockwell Automation (or subject to its instructions) in accordance with Section 2 shall be forfeited, and you shall have no further rights of any kind or nature with respect thereto. Upon any such forfeiture, the Restricted Shares, together with any Stock Dividends, shall be transferred to Rockwell Automation.
(b)Notwithstanding any other provision of this Agreement, if Section 1(d) is applicable, all of the unearned Restricted Shares, together with any Stock Dividends thereon, then being held by Rockwell Automation (or subject to its instructions) in accordance with Section 2 shall be forfeited, and you shall have no further rights of any kind or nature with respect thereto. Upon any such forfeiture, such unearned Restricted Shares, together with any Stock Dividends thereon, shall be transferred to Rockwell Automation.
6.Non-competition
As a condition to receiving and being eligible to earn the Restricted Shares, you undertake and agree by your acceptance of this Agreement that:
(a) during your employment with the Corporation or a Subsidiary and for two years after the date of your retirement or other termination of such employment, you shall not (i) directly or indirectly, except with the approval of the Corporation, engage or otherwise participate in any business that is competitive with any significant line of business of the Corporation or any of its Subsidiaries (other than through ownership of not more than 5% of the voting securities of any such competitive business); or (ii) solicit or induce, or cause any other person or entity to solicit or induce, any employee of the Corporation or any of its Subsidiaries to leave his or her employment with the Corporation or any of its Subsidiaries to accept employment or other engagement with any other person or entity; and
(b) in the event that you breach this undertaking, in addition to any and all other remedies the Corporation may have, (i) if you have not earned all the Restricted Shares, the Corporation shall have the right to determine by written notice to you that the Restricted Shares will be forfeited and you will have no further rights of any kind or nature with respect thereto; and (ii) with respect to any Restricted Shares that you have earned, you agree to pay the Corporation upon written demand the amount of the Fair Market Value of the Restricted Shares on the payout date.
If a Change of Control (as defined in the Plan) shall occur, however, the foregoing provisions (a) and (b) shall immediately terminate as of, and shall not limit your activities after, the date of such Change of Control.
7.Adjustments
If there shall be any change in or affecting shares of Stock on account of any stock dividend or split, merger or consolidation, reorganization (whether or not Rockwell Automation is a surviving corporation), recapitalization, reorganization, combination or exchange of shares or other similar corporate changes or an extraordinary dividend in cash, securities or other property, there shall be made or taken such amendments to this Agreement or the Restricted Shares as the Board of Directors may deem appropriate under the circumstances.
8. | Transferability |
This grant is not transferable by you otherwise than by will or by the laws of descent and distribution, and the Restricted Shares, and any Stock Dividends, shall be deliverable during your lifetime only to you.
9. | Beneficiary Designation |
You explicitly agree that the beneficiary designated in your designated beneficiary plan, if any, in your Schwab One Brokerage account linked to your Equity Award Center account will apply to your Equity Award Center account. This includes, without limitation, the Restricted Shares and any equity awards outstanding as of the date hereof, unless you submit to Charles Schwab a written revocation of the designated beneficiary with respect to your Equity Award Center account.
10.Responsibility for Taxes
You acknowledge that, regardless of any action taken by Rockwell Automation, the ultimate liability for all income tax, social insurance contributions, payroll tax, fringe benefits tax, payment on account, and other tax-related items related to your participation in the Plan and legally applicable to you (Tax-Related Items) is and remains your responsibility and may exceed the amount, if any, actually withheld by Rockwell Automation. Prior to any relevant taxable or tax-withholding event, as applicable, you agree to make arrangements satisfactory to Rockwell Automation to satisfy any withholding obligations Rockwell Automation may have for Tax-Related Items. Rockwell Automation shall have the right, in connection with the delivery of the Restricted Shares and any Stock Dividends subject to this Agreement, (i) to deduct from any payment otherwise due by Rockwell Automation to you or any other person receiving delivery of the Restricted Shares and any Stock Dividends an amount equal to any taxes required to be withheld by law with respect to such delivery, (ii) to require you or any other person receiving such delivery to pay to it an amount sufficient to provide for any such taxes so required to be withheld, or (iii) to sell such number of the Restricted Shares and any Stock Dividends as may be necessary so that the net proceeds of such sale shall be an amount sufficient to provide for any such taxes so required to be withheld.
You agree to pay to Rockwell Automation any amount of Tax-Related Items that Rockwell Automation may be required to withhold or account for as a result of your participation in the Plan that cannot be satisfied by the means previously described. Rockwell Automation may refuse to deliver the Restricted Shares or the proceeds of the sale of Restricted Shares, if you fail to comply with your obligations for Tax-Related Items.
11.No Acquired Rights
You acknowledge, agree and consent that: (a) the Plan is discretionary and Rockwell Automation may amend, cancel or terminate the Plan at any time; (b) the grant of the Restricted Shares subject to this Agreement is a one-time benefit offered to you and does not create any contractual or other right for you to receive any grant of Stock as Restricted Stock or benefits under the Plan in the future; (c) future grants, if any, shall be at the sole discretion of Rockwell Automation, including, but not limited to, the timing of any grant, the number of shares and forfeiture provisions; and (d) your participation in the Plan is voluntary.
12. | Applicable Law |
This Agreement and Rockwell Automation’s obligation to deliver Restricted Shares and any Stock Dividends hereunder shall be governed by and construed and enforced in accordance with the laws of Delaware and the Federal law of the United States.
13.Entire Agreement.
This Agreement and the Plan embody the entire agreement and understanding between Rockwell Automation and you with respect to the Restricted Shares subject to this Agreement, and there are no representations, promises, covenants, agreements or understandings with respect to such Restricted Shares other than those expressly set forth in this Agreement and the Plan. In the event of any conflict between this Agreement and the Plan, the terms of the Plan shall govern.
14.Electronic Delivery and Acceptance
Rockwell Automation may, it its sole discretion, decide to deliver any documents related to current or future participation in the Plan by electronic means. You hereby consent to receive such documents by electronic delivery and agree to participate in the Plan through an on-line or electronic system established and maintained by Rockwell Automation or a third-party designated by Rockwell Automation.
15.On-Line Acceptance
This grant of the Restricted Shares is also subject to the condition that you accept your grant on-line through the Schwab Equity Award Center® on the Web at http://eac.schwab.com. By your acceptance of this grant on-line, you explicitly agree to all the terms and conditions of this Agreement and expressly acknowledge receipt of the Plan prospectus. If you do not accept your grant on-line within sixty days of the award date, your Restricted Shares will be cancelled and you will have no further rights with respect to the Restricted Shares, unless Rockwell Automation (in its sole discretion) elects in writing to extend that date.
16.Imposition of Other Requirements
Rockwell Automation reserves the right to impose other requirements on your participation in the Plan, and on the Restricted Shares, to the extent Rockwell Automation determines it is necessary or advisable for legal or administrative reasons, and to require you to sign any additional agreements or undertakings that may be necessary to accomplish the foregoing.
ROCKWELL AUTOMATION, INC.
By:
Exhibit 15
July 28, 2020
The Board of Directors and Shareowners of
Rockwell Automation, Inc.
1201 South Second Street
Milwaukee, Wisconsin 53204
We are aware that our report dated July 28, 2020, on our review of the interim financial information of Rockwell Automation, Inc. and subsidiaries appearing in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, is incorporated by reference in Registration Statement Nos. 333-101780, 333-149581, 333-150019, 333-157203, 333-165727, 333-180557, 333-184400, 333-205022, 333-209706, 333-234642, and 333-236277 on Form S-8 and Registration Statement No.333-228817 on Form S-3.
/s/ DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
Exhibit 31.1
CERTIFICATION
I, Blake D. Moret, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Rockwell Automation, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: July 28, 2020
/s/ BLAKE D. MORET |
Blake D. Moret President and Chief Executive Officer |
Exhibit 31.2
CERTIFICATION
I, Patrick P. Goris, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Rockwell Automation, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: July 28, 2020
/S/ PATRICK P. GORIS |
Patrick P. Goris Senior Vice President and Chief Financial Officer |
Exhibit 32.1
CERTIFICATION OF PERIODIC REPORT
I, Blake D. Moret, President and Chief Executive Officer of Rockwell Automation, Inc. (the “Company”), certify pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(1) the Quarterly Report on Form 10-Q of the Company for the quarter ended June 30, 2020 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: July 28, 2020
/s/ BLAKE D. MORET |
Blake D. Moret President and Chief Executive Officer |
Exhibit 32.2
CERTIFICATION OF PERIODIC REPORT
I, Patrick P. Goris, Senior Vice President and Chief Financial Officer of Rockwell Automation, Inc. (the “Company”), certify pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(1) the Quarterly Report on Form 10-Q of the Company for the quarter ended June 30, 2020 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: July 28, 2020
/S/ PATRICK P. GORIS |
Patrick P. Goris Senior Vice President and Chief Financial Officer |