Rockwell Automation, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended September 30, 2015; filed November 17, 2015. The filing also reports fourth-quarter results. Rockwell Automation supplies industrial automation products, software, solutions and services through Architecture & Software and Control Products & Solutions.
Key financial results
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Sales | $6,307.9 million | $6,623.5 million | Down 4.8% |
| Organic sales growth | 1.1% | 5.1% | Slower growth |
| Gross profit / gross margin | $2,703.1 million / 42.9% | $2,753.9 million / 41.6% | Margin up about 1.3 pts |
| Net income | $827.6 million | $826.8 million | Up slightly |
| Diluted EPS | $6.09 | $5.91 | Up 3.0% |
| Adjusted diluted EPS | $6.40 | $6.17 | Up 3.7% |
| Operating cash flow | $1,187.7 million | $1,033.3 million | Up 15.0% |
| Free cash flow (non-GAAP) | $1,077.2 million | $922.2 million | Up 16.8% |
| Capital expenditures | $122.9 million | $141.0 million | Down |
Segment operating earnings were $1,360.5 million and segment operating margin was 21.6%, compared with $1,352.0 million and 20.4% in FY2014. Income before taxes was $1,127.5 million versus $1,134.2 million; the effective tax rate declined to 26.6% from 27.1%. Adjusted EPS and free cash flow are company-defined non-GAAP measures.
Fourth-quarter snapshot
FY2015 Q4 sales were $1,607.5 million, gross profit $664.2 million, income before taxes $278.9 million, net income $201.3 million and diluted EPS $1.50. In FY2014 Q4, these were $1,781.8 million, $752.9 million, $339.0 million, $248.7 million and $1.79, respectively.
Balance sheet, debt and liquidity
- At September 30, 2015, cash and cash equivalents were $1,427.3 million and short-term investments were $721.9 million; current assets totaled $4,048.0 million against current liabilities of $1,327.7 million.
- Short-term debt was zero, compared with $325.0 million a year earlier. Long-term debt rose to $1,500.9 million from $900.4 million; debt-to-total-capital increased to 39.9% from 31.6%. Cash and short-term investments exceeded reported debt by about $648 million.
- The company issued $600 million of notes in February 2015, primarily using net proceeds to repay commercial paper. It entered into swaps that converted those notes to floating-rate debt. A new $1.0 billion revolving credit facility expires in March 2020; no borrowings were outstanding under the facility, and the company reported compliance with its covenants.
- Shareowners’ equity was $2,256.8 million, down from $2,658.1 million. Pension and currency translation adjustments contributed to the decline. Approximately 90% of cash, cash equivalents and short-term investments were held in non-U.S. subsidiaries whose undistributed earnings were indefinitely reinvested.
Material changes and management commentary
- Reported sales fell primarily because currency translation reduced sales by 6.0%; organic sales increased 1.1%. Consumer and automotive demand helped, while heavy industries—particularly oil and gas—were significant headwinds.
- Architecture & Software sales declined 3.4% to $2,749.5 million; its margin was 29.4% versus 29.5%. Control Products & Solutions sales declined 5.8% to $3,558.4 million, but its margin expanded to 15.5% from 13.6%, which management attributed primarily to strong productivity.
- Management cited strong productivity, working-capital performance and organic growth as positive factors. Higher spending, unfavorable currency effects and increased non-operating pension costs were offsets. Operating cash flow and free cash flow improved primarily due to working-capital performance.
- FY2015 dividends were $2.60 per share, up from $2.32. The company repurchased approximately 5.4 million shares for $606.2 million and had about $445.2 million remaining under its $1.0 billion authorization at year-end.
Outlook, risks and unusual items
- The filing does not provide a clear company-wide FY2016 sales or earnings forecast. Management expected FY2016 capital expenditures of about $150 million and described a mixed near-term economic outlook: U.S. indicators weakened late in FY2015; China faced slowing investment and overcapacity; Brazil and much of Latin America remained in recession; and Mexico was comparatively strong. Emerging markets were expected to remain the fastest-growing automation markets over the long term.
- Management’s long-term goals include organic sales growth above the automation market, EPS growth above sales growth, return on invested capital above 20%, and free cash flow of about 100% of adjusted income. These are long-term goals, not FY2016 guidance.
- Major disclosed risks include industrial-cycle and customer capital-spending weakness; foreign currency exposure; international operating and regulatory risks; cyberattacks or security failures involving industrial-control products or company systems; competitive and pricing pressure; distributor or supplier disruption; project execution; acquisitions; and litigation, tax, pension and environmental exposures.
- Environmental remediation, conditional asset-retirement and indemnification liabilities totaled $114.2 million gross, with $33.2 million of expected recoveries and $81.0 million net recorded liabilities. The company estimated reasonably possible costs for environmental remediation and indemnification at $143.3 million gross ($101.1 million net of related receivables). It disclosed a few thousand asbestos claimants, but stated that it did not expect pending matters to have a material effect; outcomes remain uncertain.
- Net periodic pension cost was $145.7 million, up from $131.7 million. A revised mortality assumption increased the U.S. projected pension benefit obligation by $222.1 million. Management estimated FY2016 net periodic benefit cost at $161.4 million.
- Other notable items: the company recorded $19.8 million of legacy product-liability and environmental charges in FY2015; a prior-year comparison included gains from favorable legal resolutions. Currency translation reduced FY2015 sales, and pension and currency translation losses contributed to other comprehensive loss of $386.6 million. The independent auditor issued an unqualified opinion and reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether organic growth can persist or improve if industrial demand remains weak, and how much sales and margin outcomes depend on currency movements and oil-and-gas recovery.
- Whether FY2015 working-capital-driven cash-flow improvement is repeatable and how cash generation will be allocated among debt, dividends, repurchases, acquisitions and investment.
- The effect of higher debt and floating-rate exposure, and the extent to which substantial offshore funds are practically available for U.S. uses without tax consequences.
- Key pension assumptions, funding needs and sensitivity to discount rates and asset returns; also monitor recorded and reasonably possible environmental, asbestos, tax and indemnification exposures.
- How segment margins, especially Control Products & Solutions’ productivity-led expansion, perform as sales volumes and customer spending change.