Rockwell Automation Reports Third Quarter 2022 Results; Updates Fiscal 2022 Guidance

• Total orders up 17% year over year
• Reported sales up 6.5% year over year; organic sales up 7.1%
  • Acquisitions contributed 2.5%
  • Currency reduced sales (3.1)%
• Total ARR up 59%; Organic ARR up 18%
• Diluted EPS of $2.55 and Adjusted EPS of $2.66; up 10% and 15% year over year, respectively
• Updates fiscal 2022 reported sales growth guidance to 10.5% - 12.5%; organic sales growth to 10% - 12%
• Updates fiscal 2022 Diluted EPS guidance to $7.74 - $8.14; Adjusted EPS guidance to $9.30 - $9.70

Rockwell Automation, Inc. (NYSE: ROK) today reported third quarter fiscal 2022 results.

"Rockwell delivered a strong quarter, both on top line and bottom line, with Adjusted EPS growing over 15% year over year. Our continued order strength reflects the value our customers place on Rockwell’s differentiated offerings and the increased need for automation solutions. This, coupled with gradually improving supply chain, strong operating performance, and price/cost execution resulted in exceptional earnings in the quarter," said Blake Moret, Chairman and CEO.

Fiscal Q3 2022 Financial Results

Fiscal 2022 third quarter sales were $1,969 million, up 6.5% from $1,848 million in the third quarter of fiscal 2021. Organic sales increased 7.1%, currency translation decreased sales by 3.1%, and acquisitions increased sales by 2.5%.

Fiscal 2022 third quarter net income attributable to Rockwell Automation was $298 million or $2.55 per share, compared to $271 million or $2.32 per share in the third quarter of fiscal 2021. The increases in net income attributable to Rockwell Automation and Diluted EPS are primarily due to higher sales, including price increases, lower pension and post-retirement costs, partially offset by fair value adjustments recognized in fiscal 2022 as compared to fiscal 2021 in connection with our investment in PTC (the "PTC adjustments"). Fiscal 2022 third quarter Adjusted EPS was $2.66, up 15% compared to $2.31 in the third quarter of fiscal 2021 primarily due to higher sales and higher margin. Price/cost was positive in the quarter.

Pre-tax margin was 17.5% in the third quarter of fiscal 2022 compared to 17.0% in the same period last year.

Total segment operating earnings were $409 million in the third quarter of fiscal 2022, up 11.0% from $369 million in the same period of fiscal 2021. Total segment operating margin was 20.8% compared to 19.9% a year ago primarily due to higher sales and lower incentive compensation, partially offset by higher investment spend.

Cash flow generated by operating activities in the third quarter of fiscal 2022 was $345 million, compared to $462 million in the third quarter of fiscal 2021. Free cash flow in the third quarter of fiscal 2022 was $327 million, compared to $437 million in the same period last year. Decreases in cash flow from operating activities and free cash flow were due to increases in working capital.

Fiscal Year 2022 Outlook

The table below provides guidance for sales growth and earnings per share for fiscal 2022. Our guidance reflects our strong demand and record backlog along with our latest view of supply chain constraints.

"We continue to expect strong double-digit year-over-year and sequential sales growth in Q4. However, we are reducing the midpoint of our fiscal year organic growth range to reflect ongoing supply chain volatility in this environment. In volatile times like these, we are executing very well, and I'm proud of how our teams are working together with our partners, suppliers, and customers," Moret continued.

Following is a discussion of third quarter results for our business segments.

Intelligent Devices

Intelligent Devices third quarter fiscal 2022 sales were $878 million, a decrease of 0.5% compared to $883 million in the same period last year. Organic sales increased 2.7% and currency translation decreased sales by 3.2%. Segment operating earnings were $173 million compared to $194 million in the same period last year. Segment operating margin decreased to 19.7% from 21.9% a year ago primarily driven by higher investment spend.

Software & Control

Software & Control third quarter fiscal 2022 sales were $607 million, an increase of 19.1% compared to $510 million in the same period last year. Organic sales increased 13.4%, currency translation decreased sales by 2.8%, and our Plex acquisition increased sales by 8.5%. Segment operating earnings were $191 million compared to $128 million in the same period last year. Segment operating margin increased to 31.4% from 25.2% a year ago, driven by higher sales.

Lifecycle Services

Lifecycle Services third quarter fiscal 2022 sales were $484 million, an increase of 6.1% compared to $456 million in the same period last year. Organic sales increased 8.7%, currency translation decreased sales by 3.2%, and acquisitions increased sales by 0.6%. Segment operating earnings were $45.4 million compared to $46.8 million in the same period last year. Segment operating margin decreased to 9.4% from 10.3% a year ago driven by supply chain constraints and higher investment spend, partially offset by higher sales and lower incentive compensation. Segment operating margin was up 210 bps sequentially from prior quarter margin primarily due to higher sales.

Supplemental Information

ARR - Total ARR grew 59% and organic ARR grew 18% compared to the end of the third quarter of fiscal 2021.

Corporate and Other - Fiscal 2022 third quarter corporate and other expense was $15.6 million compared to $29.2 million in the third quarter of fiscal 2021. The decrease was primarily due to mark-to-market adjustments related to our deferred and non-qualified compensation plans.

Purchase Accounting Depreciation and Amortization - Fiscal 2022 third quarter purchase accounting depreciation and amortization expense was $25.9 million, up $13.0 million from the third quarter of fiscal 2021 primarily related to the August 2021 acquisition of Plex Systems.

Tax - On a GAAP basis, the effective tax rate in the third quarter of fiscal 2022 was 14.4% compared to 14.2% in the third quarter of fiscal 2021. The Adjusted Effective Tax Rate for the third quarter of fiscal 2022 was 14.5% compared to 14.6% in the prior year.

Share Repurchases - During the third quarter of fiscal 2022, the Company repurchased approximately 0.8 million shares of its common stock at a cost of $176 million. At June 30, 2022, $1.3 billion remained available under our existing share repurchase authorization.

ROIC - Return on invested capital was 12.8% compared to 40.4% in the third quarter of fiscal 2021. The decrease is driven by lower pre-tax income primarily related to PTC adjustments and higher debt due to the acquisition of Plex Systems.

Definitions

Non-GAAP Measures - Organic sales, total segment operating earnings, total segment operating margin, Adjusted Income, Adjusted EPS, Adjusted Effective Tax Rate, free cash flow, free cash flow conversion, and return on invested capital are non-GAAP measures that are reconciled to GAAP measures in the attachments to this release.

Organic ARR - Annual recurring revenue (ARR) is a key metric that enables measurement of progress in growing our recurring revenue business. It represents the annual contract value of all active recurring revenue contracts at any point in time. Recurring revenue is defined as a revenue stream that is contractual, typically for a period of 12 months or more, and has a high probability of renewal. The probability of renewal is based on historical renewal experience of the individual revenue streams, or management's best estimates if historical renewal experience is not available. Organic ARR growth is calculated as the dollar change in ARR, adjusted to exclude the effects of currency translation and acquisitions, divided by ARR as of the prior period. The effects of currency translation are excluded by calculating Organic ARR on a constant currency basis. When we acquire businesses, we exclude the effect of ARR in the current period for which there was no comparable ARR in the prior period. Organic ARR growth is also used as a financial measure of performance for our annual incentive compensation. Because ARR is based on annual contract value, it does not represent revenue recognized during a particular reporting period or revenue to be recognized in future reporting periods and is not intended to be a substitute for revenue, contract liabilities, or backlog.

Conference Call

A conference call to discuss the quarterly results will be held at 8:30 a.m. Eastern Time on July 27, 2022. The call will be an audio webcast and accessible on the Rockwell Automation website (https://ir.rockwellautomation.com/investors/). Presentation materials will also be available on the website prior to the call.

Interested parties can access the conference call by dialing the following numbers: (888) 330-2022 in the U.S. and Canada; (646) 960-0690 for other countries. Use the following passcode: 5499533. Please dial in 10 minutes prior to the start of the call.

Both the presentation materials and a replay of the call will be available on the Investor Relations section of the Rockwell Automation website through August 27, 2022.

This news release contains statements (including certain projections 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 availability and price of components and materials;
• the severity and duration of disruptions to our business due to pandemics (including the COVID-19 pandemic), natural disasters (including those as a result of climate change), acts of war (including the Russia and Ukraine conflict), 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 inflation, global and regional business conditions (including adverse impacts in certain markets, such as Oil & Gas), commodity prices, currency exchange rates, the cyclical nature of our customers’ capital spending, and sovereign debt concerns;
• the availability and cost of capital;
• our ability to attract, develop, and retain qualified personnel;
• the successful integration and management of strategic transactions and achievement of the expected benefits of these transactions;
• laws, regulations, and governmental policies affecting our activities in the countries where we do business, including those related to tariffs, taxation, trade controls (including sanctions placed on Russia), and climate change;
• 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;
• the successful execution of our cost productivity initiatives;
• competitive hardware and software products, solutions, and services, 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;
• 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;
• 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.

Rockwell Automation, Inc. (NYSE: ROK), 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. Headquartered in Milwaukee, Wisconsin, Rockwell Automation employs approximately 25,500 problem solvers dedicated to our customers in more than 100 countries. To learn more about how we are bringing The Connected Enterprise^(R) to life across industrial enterprises, visit www.rockwellautomation.com.

Organic Sales

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 reported sales to organic sales for the three and nine months ended June 30, 2022, compared to sales for the three and nine months ended June 30, 2021:

The following is a reconciliation of reported sales to organic sales for our operating segments for the three and nine months ended June 30, 2022, compared to sales for the three and nine months ended June 30, 2021:

The following is a reconciliation of reported sales growth to organic sales growth for the three and nine months ended June 30, 2022, compared to sales for the three and nine months ended June 30, 2021:

The following is a reconciliation of reported sales growth to organic sales growth for our operating segments for the three and nine months ended June 30, 2022, compared to sales for the three and nine months ended June 30, 2021:

Adjusted Income, Adjusted EPS, and Adjusted Effective Tax Rate

Adjusted Income, Adjusted EPS, and Adjusted Effective Tax Rate are non-GAAP earnings measures that exclude non-operating pension and postretirement benefit (credit) cost, change in fair value of investments, purchase accounting depreciation and amortization attributable to Rockwell Automation, and net loss attributable to noncontrolling interests, 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 (credit) cost (in millions):

The components of net periodic pension and postretirement benefit cost other than the service cost component are included in the line "Other income (expense)" in the Condensed Statement of Operations.

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:

Free Cash Flow

Our definition of free cash flow, which is a non-GAAP financial measure, takes into consideration capital investments required to maintain the operations of our businesses and execute our strategy. 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 be different from definitions used by other companies.

The following table summarizes free cash flow by quarter:

The table below provides the calculation of free cash flow as a percentage of Adjusted Income ("free cash flow conversion") for the three months ended June 30, 2022, and 2021:

Return On Invested Capital

Our press release contains information regarding Return On Invested Capital (ROIC), which is a non-GAAP financial measure. We believe that ROIC is useful to investors as a measure of performance and of the effectiveness of the use of capital in our operations. We use ROIC as one measure to monitor and evaluate our performance. Our measure of ROIC may be different from that used by other companies. We define ROIC as the percentage resulting from the following calculation:

(a) Net income, before Interest expense, Income tax provision, and Purchase accounting depreciation and amortization, divided by;

(b) average invested capital for the year, calculated as a five quarter rolling average using the sum of Short- term debt, Long-term debt, Shareowners’ equity, and Accumulated amortization of goodwill and other intangible assets, minus Cash and cash equivalents and Short-term and long-term investments (fixed income securities), multiplied by;

(c) one minus the effective tax rate for the period.

ROIC is calculated as follows (in millions, except percentages):

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