Shortages of electrical components, COVID-19 shutdowns in China and Russia’s invasion of Ukraine all weighed on the performance of Rockwell Automation’
s fiscal second quarter and prompted the company to cut its guidance for the remainder of the year.
The Milwaukee-based maker of software and products used in production and automation across a number of manufacturing industries now expects its sales for the year to be between $7.8 billion and $8 billion, a drop of $300 million at the midpoint from guidance issued in January.
Organic sales are now expected to be up 10% to 14%, a lower midpoint and wide range from January’s guidance of a 14% to 17% increase for the year.
“It's important to understand that this quarter, sales growth or decline in specific industry verticals is primarily based on the particular products being shipped into these verticals and the degree they were impacted by component shortages, rather than underlying demand,” said Blake Moret, chairman and chief executive officer of Rockwell Automation.
Rockwell has seen persistent supply chain constraints and related cost inflation, Moret said. He pointed to the automotive and ecommerce industries where Rockwell tends to sell more products and results were impacted by shortages of components like semiconductors. Life sciences and food and beverage, where Rockwell does more business in services and solutions, results were better.
"This was a tough quarter, but we are aggressively working to temper the impact of persistent and volatile supply chain shortages," Moret said.
But he also said Rockwell has seen broad-based demand across industries, geographies and product offerings. The company’s substantial backlog, low order cancellation rates and more detailed component supply forecasts give the company confidence it can reach double digit revenue growth for the year.
In the second quarter, revenue was up 1.8% as reported and 1.3% organically. For the year, reported sales are up 9.7%.
While volatility in supply chains and uncertainty about the handling of COVID-19 in China prompted the company to widen its guidance range, Moret expressed confidence in the orders and backlog the company has built that suggest it company will continue to grow.
Asked specifically what Rockwell’s customers might do in the case of a recession, Moret said the big, multi-year investments customers are making will likely be resilient, pointing specifically to the semiconductor sector, where customers are adding capacity to keep up with demand.
“I don’t think those are going to be thrown off track by the economic conditions and inflation because there’s just such need for that in the world as we are all seeing,” he said.
The inflationary environment does complicate things for Rockwell. The company instituted three price increases totaling 17% last year. Once fully implemented by the end of fiscal 2023, those increases would add around $400 million to sales annually.
But getting to the point where the increases are fully implemented takes time. Pricing for many Rockwell customers is based on annual agreements and the price increase don’t take effect until those agreements renew.
Moret said the company is taking steps to realize the increases sooner and has an increasing number of agreements where it does not have to wait for a renewal for an increase.
“I wish we had that in place a year ago,” Moret said.
At the same time, Rockwell is confronting increased costs related to the shortages of electrical components. The company expects input costs to be $200 million higher this year compared to fiscal 2021.
Nick Gangestad, chief executive officer of Rockwell, said the company’s plans do include the continuation of inflation throughout the year.
“If inflation forecasts for fiscal ’23 worsen more than expected, we will take further price actions to offset these costs,” he said.
The company is already taking other actions to address increased costs and component availability. As of January, Rockwell planned to increase its investment spending $200 million this year, a figure that has now been trimmed to $100 million.
Some of the other steps include re-reengineering products to improve the resiliency of component supply, investing in redundant manufacturing capacity in Ohio and Singapore, qualifying new suppliers and continuing to diversify the business with software and service offerings that are less dependent on component availability.
"We do expect lead times and backlog to stabilize over the next year and at that point, orders and shipment levels will begin to converge, which is a good thing,” Moret said. “In the near term, the primary limiting factor to growth is component availability"