Rockwell Automation, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended September 30, 2014. The filing also reports fourth-quarter results. Rockwell provides industrial automation products, software, solutions and services through Architecture & Software and Control Products & Solutions.
Financial results
| Metric | FY2014 | FY2013 |
|---|---|---|
| Sales | $6,623.5 million | $6,351.9 million |
| Gross profit / gross margin | $2,753.9 million / 41.6% | $2,573.8 million / 40.5% |
| Income before tax | $1,134.2 million | $980.9 million |
| Net income | $826.8 million | $756.3 million |
| Diluted EPS | $5.91 | $5.36 |
| Adjusted diluted EPS (non-GAAP) | $6.17 | $5.71 |
| Operating cash flow | $1,033.3 million | $1,014.8 million |
| Free cash flow (non-GAAP) | $922.2 million | $900.5 million |
FY2014 sales increased 4.3%; organic sales increased 5.1%, while currency translation reduced reported sales by 1.0%. Total segment operating earnings rose 9%, and segment operating margin expanded to 20.4% from 19.5%. Net margin was approximately 12.5%, versus 11.9% in FY2013.
Fourth-quarter sales were $1,781.8 million, up from $1,715.7 million; net income was $248.7 million, compared with $215.3 million; diluted EPS was $1.79, compared with $1.53.
Segments and material changes
- Architecture & Software: Sales of $2,845.3 million, up 6.1%; operating margin increased to 29.5% from 28.3%. Logix sales exceeded $1 billion and grew 6%.
- Control Products & Solutions: Sales of $3,778.2 million, up 3.0%; operating margin increased to 13.6% from 13.0%.
- U.S. organic sales grew 6.8%; Canada organic sales declined 0.7%. The oil and gas end market had the strongest annual growth. Products grew 5%, while solutions and services grew 2%.
- Income before tax increased 16%, supported by stronger segment earnings, lower non-operating pension costs and lower corporate net expenses. The effective tax rate rose to 27.1% from 22.9%, chiefly because FY2013 included favorable prior-period tax matters and a research-credit benefit.
Liquidity, debt and capital allocation
- At year-end, cash and cash equivalents were $1,191.3 million and short-term investments were $628.5 million. Current assets were $3,934.2 million and current liabilities were $1,692.1 million.
- Short-term debt was $325.0 million and long-term debt was $905.6 million. Debt-to-total-capital was 31.6%, versus 29.5% a year earlier. The company reported compliance with credit-facility covenants and had a $750 million revolving credit facility available.
- Cash dividends totaled $320.5 million, or $2.32 per share; the quarterly dividend was increased 12%. The company repurchased approximately 4.1 million shares for $483.8 million.
- Approximately 90% of cash, cash equivalents and short-term investments were held in non-U.S. subsidiaries whose earnings were designated permanently reinvested. Management said it expected no difficulty meeting domestic or international liquidity needs.
Outlook, risks and unusual items
- Management expected U.S. growth in FY2015 to be slightly below FY2014, with healthy U.S. conditions overall. International outlook was mixed; management continued to expect emerging markets to be faster-growing over the long term. FY2015 capital expenditures were expected to be about $150 million.
- Long-term financial goals—not FY2015 guidance—include annual sales growth of 6–8%, double-digit EPS growth, return on invested capital above 20%, and free cash flow of about 100% of adjusted income.
- Key risks include industrial-capital-spending cycles, foreign exchange and international exposure, competition and pricing, cybersecurity and product security, supplier and distributor disruption, project execution, acquisitions, and execution of globalization and cost-productivity initiatives.
- Environmental matters: recorded liability was $60.0 million gross ($47.0 million net of related receivables); estimated reasonably possible costs were $105.0 million gross ($90.0 million net). Asbestos suits involve a few thousand claimants; management said it did not expect a material effect, while acknowledging litigation uncertainty.
- Other notable items include an $8.0 million gain in FY2014 from favorable resolutions of intellectual-property and commercial legal matters; FY2013 included a $19.2 million gain of the same general type. The pension funded status worsened to a $645.6 million deficit from $437.8 million, principally reflecting actuarial changes, including a lower year-end discount rate.
- The auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded controls were effective at September 30, 2014.
Important facts for investors to verify
- Whether reported growth and margin expansion persist after separating organic performance from currency effects, acquisitions and pricing.
- How much cash is practically available for U.S. uses given the permanently reinvested offshore earnings position.
- Potential sensitivity of earnings and funding needs to pension assumptions, particularly discount rates and asset returns.
- Developments in environmental remediation, asbestos claims and tax examinations, including whether recorded reserves remain adequate.
- Whether FY2015 market conditions, capital spending and execution support management’s stated outlook and long-term financial goals.