Rockwell Automation, Inc. — FY2016 Form 10-K Summary
Reporting period: Fiscal year ended September 30, 2016. The filing is an annual report, not a standalone quarterly filing; fourth-quarter figures are included below where available. Amounts are in U.S. dollars.
Business context
Rockwell Automation supplies industrial automation and information products, software, solutions and services. Its two segments are Architecture & Software (45% of FY2016 sales) and Control Products & Solutions (55%). The United States represented 55% of sales; approximately 70% of global sales were made through independent distributors.
Financial performance and position
| Metric | FY2016 | FY2015 |
|---|---|---|
| Sales | $5,879.5 million | $6,307.9 million |
| Gross profit / gross margin | $2,475.5 million / 42.1% | $2,703.1 million / 42.8% |
| Income before taxes / pre-tax margin | $943.1 million / 16.0% | $1,127.5 million / 17.9% |
| Net income | $729.7 million | $827.6 million |
| Diluted EPS | $5.56 | $6.09 |
| Adjusted diluted EPS (non-GAAP) | $5.93 | $6.40 |
| Cash provided by operating activities | $947.3 million | $1,187.7 million |
| Free cash flow (non-GAAP) | $833.7 million | $1,077.2 million |
FY2016 total segment operating earnings were $1,188.7 million, with a 20.2% segment operating margin, versus $1,360.5 million and 21.6% in FY2015. Architecture & Software sales declined 4.2% and its margin fell to 26.4% from 29.4%; Control Products & Solutions sales declined 8.8% and its margin eased to 15.2% from 15.5%.
Fourth-quarter FY2016 sales were $1,538.6 million versus $1,607.5 million in Q4 FY2015; net income was $185.2 million versus $201.3 million, and diluted EPS was $1.43 versus $1.50.
At year-end, cash and cash equivalents were $1,526.4 million and short-term investments were $902.8 million. Current assets were $4,185.0 million against current liabilities of $1,975.9 million. Short-term debt was $448.6 million and long-term debt was $1,516.3 million; debt-to-total-capital was 49.7%, up from 39.9%. Approximately 95% of cash, cash equivalents and short-term investments were held by non-U.S. subsidiaries.
Changes versus prior year
- Reported sales fell 6.8%; organic sales fell 3.9%, with currency translation reducing sales by 3.0 percentage points. Lower demand in heavy industries, especially oil and gas and mining, was partly offset by growth in consumer and automotive markets.
- Income before taxes fell 16%, and net income fell about 12%. Segment operating earnings declined 13%, primarily due to lower organic sales and unfavorable currency effects.
- Operating cash flow and free cash flow decreased, mainly because of lower pre-tax income and less favorable working-capital performance.
- The effective tax rate fell to 22.6% from 26.6%, reflecting the U.S. research tax credit, geographic income mix and discrete tax items.
- Cash dividends rose to $2.90 per share from $2.60. The company repurchased approximately 4.6 million shares for $500.2 million during FY2016.
Outlook, commentary and risks
- Management expected industrial production growth in most regions in 2017, with EMEA the exception; it described regional conditions as mixed, including uncertainty related to the U.K.’s decision to leave the European Union, China’s debt levels, Brazil’s recession and resource-sector investment.
- Management expected FY2017 capital expenditures of approximately $150 million. Long-term financial goals include above-market organic sales growth, EPS growth above sales growth, return on invested capital above 20%, and free cash flow near 100% of adjusted income; these are goals, not FY2017 guidance.
- FY2016 acquisitions included Maverick Technologies, Automation Control Products and MagneMotion, intended to add systems-integration, software and intelligent-conveying capabilities. Purchase accounting for the two September acquisitions remained preliminary at year-end.
- A Rocky Flats settlement, subject to court approval, requires Rockwell and Dow Chemical to pay $375 million in aggregate. Rockwell recorded a $243.75 million obligation and an equal expected Department of Energy reimbursement receivable; up to $242.5 million was expected to be paid within 12 months. Timing of reimbursement was uncertain.
- Key risks include cyclical industrial and customer capital spending, foreign exchange, competition and pricing pressure, cybersecurity and product-security incidents, reliance on distributors and suppliers, project execution, pension costs, tax disputes, litigation and environmental remediation.
- Environmental remediation and indemnification liabilities were recorded, and the company continued to face asbestos claims. Management stated that pending litigation and environmental matters were not expected to have a material adverse effect, while acknowledging uncertainty in outcomes.
Important facts for investors to verify
- Whether demand in oil and gas, mining and other heavy industries stabilizes, and whether organic sales recover across segments and regions.
- Whether margins and cash generation hold up amid lower sales, currency exposure and working-capital variability.
- The timing and collection of the Department of Energy reimbursement for the Rocky Flats settlement and the settlement’s final court approval.
- How pension assumptions, especially discount rates and mortality estimates, affect benefit obligations and future expense; FY2016 retirement benefit liabilities were $1,430.2 million.
- Acquisition integration and realized benefits, including final purchase accounting for Maverick and Automation Control Products.
- Liquidity and repatriation considerations, including the high proportion of funds held outside the United States and the increase in debt-to-total-capital.