10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2015
Commission file number 1-12383
Rockwell Automation, Inc.
(Exact name of registrant as specified in its charter)
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Delaware | | 25-1797617 |
(State or other jurisdiction of | | (I.R.S. Employer |
incorporation or organization) | | Identification No.) |
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1201 South 2nd Street | | |
Milwaukee, Wisconsin | | 53204 |
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code:
+1 (414) 382-2000
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | | Name of each exchange on which registered |
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Common Stock, $1 Par Value | | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☑
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large Accelerated Filer ☑ | | Accelerated Filer ☐ | | Non-accelerated Filer ☐ | | Smaller reporting company ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
The aggregate market value of registrant’s voting stock held by non-affiliates of registrant on March 31, 2015 was approximately $15.5 billion.
132,015,341 shares of registrant’s Common Stock, par value $1 per share, were outstanding on October 31, 2015.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information contained in the Proxy Statement for the Annual Meeting of Shareowners of registrant to be held on February 2, 2016 is incorporated by reference into Part III hereof.
PART I
FORWARD-LOOKING STATEMENTS
This Annual Report 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:
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• | macroeconomic factors, including global and regional business conditions, the availability and cost of capital, commodity prices, the cyclical nature of our customers’ capital spending, sovereign debt concerns and currency exchange rates; |
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• | laws, regulations and governmental policies affecting our activities in the countries where we do business; |
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• | the successful development of advanced technologies and demand for and market acceptance of new and existing products; |
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• | the availability, effectiveness and security of our information technology systems; |
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• | competitive products, solutions and services and pricing pressures, and our ability to provide high quality products, solutions and services; |
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• | a disruption of our business due to natural disasters, pandemics, acts of war, strikes, terrorism, social unrest or other causes; |
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• | our ability to manage and mitigate the risk related to security vulnerabilities and breaches of our products, solutions and services; |
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• | intellectual property infringement claims by others and the ability to protect our intellectual property; |
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• | the uncertainty of claims by taxing authorities in the various jurisdictions where we do business; |
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• | our ability to attract and retain qualified personnel; |
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• | our ability to manage costs related to employee retirement and health care benefits; |
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• | the uncertainties of litigation, including liabilities related to the safety and security of the products, solutions and services we sell; |
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• | our ability to manage and mitigate the risks associated with our solutions and services businesses; |
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• | a disruption of our distribution channels; |
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• | the availability and price of components and materials; |
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• | the successful integration and management of acquired businesses; |
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• | the successful execution of our cost productivity and globalization initiatives; and |
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• | other risks and uncertainties, including but not limited to those detailed from time to time in our Securities and Exchange Commission (SEC) filings. |
These forward-looking statements reflect our beliefs as of the date of filing this report. We undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. See Item 1A. Risk Factors for more information.
Item 1. Business
General
Rockwell Automation, Inc. (Rockwell Automation or the Company) is a leading global provider of industrial automation power, control and information solutions that help manufacturers achieve competitive advantages for their businesses. Our products, solutions and services are designed to meet our customers’ needs to reduce total cost of ownership, maximize asset utilization, improve time to market and reduce enterprise business risk.
The Company continues the business founded as the Allen-Bradley Company in 1903. The privately-owned Allen-Bradley Company was a leading North American manufacturer of industrial automation equipment when the former Rockwell International Corporation (RIC) purchased it in 1985.
The Company was incorporated in Delaware in connection with a tax-free reorganization completed on December 6, 1996, pursuant to which we divested our former aerospace and defense businesses (the A&D Business) to The Boeing Company (Boeing). In the reorganization, RIC contributed all of its businesses, other than the A&D Business, to the Company and distributed all capital stock of the Company to RIC’s shareowners. Boeing then acquired RIC. RIC was incorporated in 1928.
As used herein, the terms “we”, “us”, “our”, “Rockwell Automation”, or the “Company” include subsidiaries and predecessors unless the context indicates otherwise. Information included in this Annual Report on Form 10-K refers to our continuing businesses unless otherwise indicated.
Whenever an Item of this Annual Report on Form 10-K refers to information in our Proxy Statement for our Annual Meeting of Shareowners to be held on February 2, 2016 (the Proxy Statement), or to information under specific captions in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A), or in Item 8. Financial Statements and Supplementary Data (the Financial Statements), the information is incorporated in that Item by reference. All date references to years and quarters refer to our fiscal year and quarters unless otherwise stated.
Operating Segments
We have two operating segments: Architecture & Software and Control Products & Solutions. In 2015, our total sales were $6.3 billion. Our Architecture & Software operating segment recorded sales of $2.7 billion (44 percent of our total sales) in 2015. Our Control Products & Solutions operating segment recorded sales of $3.6 billion (56 percent of our total sales) in 2015.
Our Architecture & Software operating segment is headquartered in Mayfield Heights, Ohio, and our Control Products & Solutions operating segment is headquartered in Milwaukee, Wisconsin. Both operating segments conduct business globally. Major markets served by both segments consist of consumer industries, including food and beverage, home and personal care and life sciences; transportation, including automotive and tire; and heavy industries, including oil and gas, mining and metals.
Additional information with respect to our operating segments, including a description of our operating segments and their contributions to sales and operating earnings for each of the three years ended September 30, 2015, 2014 and 2013 is contained in Note 15 in the Financial Statements and under the caption Results of Operations in MD&A.
Geographic Information
In 2015, sales to customers in the United States accounted for 55 percent of our total sales. Outside the United States, we sell in every region. The largest sales outside the United States on a country-of-destination basis are in Canada, China, the United Kingdom, Mexico, Italy, Germany, and Brazil. See Item 1A. Risk Factors for a discussion of risks associated with our operations outside the United States. Sales and property information by major geographic area for each of the past three years is contained in Note 15 in the Financial Statements.
Competition
Our competitors range from large diversified corporations that also have business interests outside of industrial automation to smaller companies that specialize in niche industrial automation products, solutions and services. Factors that influence our competitive position include the breadth of our product portfolio and scope of solutions, technology differentiation, knowledge of customer applications, installed base, distribution network, quality of products, solutions and services, global presence and price. Our major competitors of both segments include Siemens AG, ABB Ltd, Schneider Electric SA, Emerson Electric Co., Mitsubishi Electric Corp. and Honeywell International Inc.
Distribution
In the United States, Canada and certain other countries, we sell primarily through independent distributors in conjunction with our direct sales force. In the remaining countries, we sell through a combination of our direct sales force and to a lesser extent, through independent distributors. Approximately 70 percent of our global sales are through independent distributors. Sales to our largest distributor in 2015, 2014 and 2013 were approximately 10 percent of our total sales. The independent distributors typically do not carry products that compete with our products.
Research and Development
Our research and development spending for the years ended September 30, 2015, 2014 and 2013 was $307.3 million, $290.1 million and $260.7 million, respectively. Customer-sponsored research and development was not significant in 2015, 2014 or 2013.
Employees
At September 30, 2015, we had approximately 22,500 employees. Approximately 8,500 were employed in the United States.
Raw Materials
We purchase a wide range of equipment, components, finished products and materials used in our business. The raw materials essential to the manufacture of our products generally are available at competitive prices. We have a broad base of suppliers and subcontractors. We depend upon the ability of our suppliers and subcontractors to meet performance and quality specifications and delivery schedules. See Item 1A. Risk Factors for a discussion of risks associated with our reliance on third party suppliers.
Backlog
Our total order backlog consists of (in millions):
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| | September 30, |
| | 2015 | | 2014 |
Architecture & Software | | $ | 165.1 |
| | $ | 159.3 |
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Control Products & Solutions | | 999.5 |
| | 1,074.8 |
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| | $ | 1,164.6 |
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| $ | 1,234.1 |
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Backlog is not necessarily indicative of results of operations for future periods due to the short-cycle nature of most of our sales activities. Backlog orders scheduled for shipment beyond 2016 were approximately $148 million as of September 30, 2015.
Environmental Protection Requirements
Information about the effect of compliance with environmental protection requirements and resolution of environmental claims is contained in Note 14 in the Financial Statements and in Item 3. Legal Proceedings.
Patents, Licenses and Trademarks
We own or license numerous patents and patent applications related to our products and operations. While in the aggregate our patents and licenses are important in the operation of our business, we do not believe that loss or termination of any one of them would materially affect our business or financial condition. Various claims of patent infringement and requests for patent indemnification have been made to us. We believe that none of these claims or requests will have a material adverse effect on our financial condition. See Item 1A. Risk Factors for a discussion of risks associated with our intellectual property.
The Company’s name and its registered trademark “Rockwell Automation®” and other trademarks such as “Allen-Bradley®”, “A-B®” and “PlantPAx Process Automation System™” are important to both of our business segments. In addition, we own other important trademarks that we use, such as “ICS Triplex™” for our control products and systems for industrial automation, and “Rockwell Software®” and “FactoryTalk®” for our software offerings.
Seasonality
Our business segments are not subject to significant seasonality. However, the calendarization of our results can vary and may be affected by the seasonal spending patterns of our customers due to their annual budgeting processes and their working schedules.
Available Information
We maintain a website at http://www.rockwellautomation.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the Exchange Act), as well as our annual report to shareowners and Section 16 reports on Forms 3, 4 and 5, are available free of charge on this site through the "Investor Relations" link as soon as reasonably practicable after we file or furnish these reports with the SEC. All reports we file with the SEC are also available free of charge via EDGAR through the SEC’s website at http://www.sec.gov. Our Guidelines on Corporate Governance and charters for our Board committees are also available on our website. The information contained on and linked from our website is not incorporated by reference into this Annual Report on Form 10-K.
Item 1A. Risk Factors
In the ordinary course of our business, we face various strategic, operating, compliance and financial risks. These risks could have an impact on our business, financial condition, operating results and cash flows. Our most significant risks are set forth below and elsewhere in this Annual Report on Form 10-K.
Our Enterprise Risk Management (ERM) process seeks to identify and address significant risks. Our ERM process uses the integrated risk framework in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) to assess, manage, and monitor risks. We believe that risk-taking is an inherent aspect of the pursuit of our growth and performance strategy. Our goal is to manage risks prudently rather than avoiding risks. We can mitigate risks and their impact on the Company only to a limited extent.
A team of senior executives prioritizes identified risks and assigns an executive to address each major identified risk area and lead action plans to manage risks. Our Board of Directors provides oversight of the ERM process and reviews significant identified risks. The Audit Committee of the Board of Directors also reviews significant financial risk exposures and the steps management has taken to monitor and manage them. Our other Board committees also play a role in risk management, as set forth in their respective charters.
Our goal is to proactively manage risks in a structured approach in conjunction with strategic planning, with the intent to preserve and enhance shareowner value. However, the risks set forth below and elsewhere in this Annual Report on Form 10-K and other risks and uncertainties could cause our results to vary materially from recent results or from our anticipated future results and could adversely affect us.
Adverse changes in business or industry conditions and volatility and disruption of the capital and credit markets may result in decreases in our sales and profitability.
We are subject to macroeconomic cycles and when recessions occur, we may experience reduced orders, payment delays, supply chain disruptions or other factors as a result of the economic challenges faced by our customers, prospective customers and suppliers.
Demand for our products is sensitive to changes in levels of industrial production and the financial performance of major industries that we serve. As economic activity slows, credit markets tighten, or sovereign debt concerns linger, companies tend to reduce their levels of capital spending, which could result in decreased demand for our products.
Our ability to access the credit markets, and the related costs of these borrowings, is affected by the strength of our credit rating and current market conditions. If our access to credit, including the commercial paper market, is adversely affected by a change in market conditions or otherwise, our cost of borrowings may increase or our ability to fund operations may be reduced.
A substantial portion of our sales are to customers outside the U.S. and we are subject to the risks of doing business in many countries.
We do business in more than 80 countries around the world. Approximately 45 percent of our sales in 2015 were to customers outside the U.S. In addition, many of our manufacturing operations, suppliers and employees are located in many places around the world. The future success of our business depends in large part on growth in our sales in non-U.S. markets. Our global operations are subject to numerous financial, legal and operating risks, such as political and economic instability; prevalence of corruption in certain countries; enforcement of contract and intellectual property rights and compliance with existing and future laws, regulations and policies, including those related to tariffs, investments, taxation, trade controls, product content and performance, employment and repatriation of earnings. In addition, we are affected by changes in foreign currency exchange rates, inflation rates and interest rates.
New legislative and regulatory actions could adversely affect our business.
Legislative and regulatory action may be taken in the various countries and other jurisdictions where we operate that may affect our business activities in these countries or may otherwise increase our costs to do business. For example, we are increasingly required to comply with various environmental and other material, product, certification, labeling and customer requirements. These requirements could increase our costs and could potentially have an adverse effect on our ability to ship our products into certain jurisdictions. Our customers may also be required to comply with such legislative and regulatory requirements. Changes in these requirements could impact demand for our products, solutions and services.
An inability to respond to changes in customer preferences could result in decreased demand for our products.
Our success depends in part on our ability to anticipate and offer products that appeal to the changing needs and preferences of our customers in the various markets we serve. Developing new products requires high levels of innovation, and the development process is often lengthy and costly. If we are not able to anticipate, identify, develop and market products that respond to changes in customer preferences, demand for our products could decline.
Failures or security breaches of our products or information technology systems could have an adverse effect on our business.
We rely heavily on information technology (IT) both in our products, solutions and services for customers and in our enterprise IT infrastructure in order to achieve our business objectives. Government agencies and security experts have warned about growing risks of hackers, cyber-criminals, malicious insiders and other actors targeting every type of IT system including industrial control systems such as those we sell and service and corporate enterprise IT systems. These actors may engage in fraud, theft of confidential or proprietary information and sabotage.
Our portfolio of hardware and software products, solutions and services and our enterprise IT systems may be vulnerable to damage or intrusion from a variety of attacks including computer viruses, worms or other malicious software programs. These attacks pose a risk to the security of the products, systems and networks of our customers, suppliers and third-party service providers, as well to the confidentiality of our information and the integrity and availability of our data. While we attempt to mitigate these risks through controls, due diligence, training, surveillance and other measures, we remain vulnerable to information security threats.
Despite the precautions we take, an intrusion or infection of software, hardware or a system that we sold or serviced could result in the disruption of our customers’ business, loss of proprietary or confidential information, or injuries to people or property. Similarly, an attack on our enterprise IT system could result in theft or disclosure of trade secrets or other intellectual property or a breach of confidential customer or employee information. Any such events could have an adverse impact on sales, harm our reputation and cause us to incur legal liability and increased costs to address such events and related security concerns. As the threats evolve and become more potent, we may incur additional costs to secure the products, solutions and services that we sell, as well as our data and infrastructure of networks and devices.
There are inherent risks in our solutions and services businesses.
Risks inherent in the sale of solutions and services include assuming greater responsibility for successfully delivering projects that meet a particular customer specification, including defining and controlling contract scope, efficiently executing projects and managing the performance and quality of our subcontractors and suppliers. If we are unable to manage and mitigate these risks, we could incur cost overruns, liabilities and other losses that would adversely affect our results of operations.
Our industry is highly competitive.
We face strong competition in all of our market segments in several significant respects. We compete based on breadth and scope of our product portfolio and solution and service offerings, technology differentiation, product performance, quality of our products, solutions and services, knowledge of integrated systems and applications that address our customers’ business challenges, pricing, delivery and customer service. The relative importance of these factors differs across the markets and product areas that we serve. We seek to maintain acceptable pricing levels by continually developing advanced technologies for new products and product enhancements and offering complete solutions for our customers’ business problems. If we fail to keep pace with technological changes or to provide high quality products, solutions and services, we may experience price erosion and correspondingly lower sales and margins. We expect the level of competition to remain high in the future, which could limit our ability to maintain or increase our market share or profitability.
We face the potential harms of natural disasters, pandemics, acts of war, terrorism, international conflicts or other disruptions to our operations.
Natural disasters, pandemics, acts or threats of war or terrorism, international conflicts, political instability and the actions taken by governments could cause damage to or disrupt our business operations, our suppliers or our customers, and could create economic instability. Although it is not possible to predict such events or their consequences, these events could decrease demand for our products or make it difficult or impossible for us to deliver products.
Intellectual property infringement claims of others and the inability to protect our intellectual property rights could harm our business and our customers.
Others may assert intellectual property infringement claims against us or our customers. We frequently provide a limited intellectual property indemnity in connection with our terms and conditions of sale to our customers and in other types of contracts with third parties. Indemnification payments and legal expenses to defend claims could be costly.
In addition, we own the rights to many patents, trademarks, brand names and trade names that are important to our business. The inability to enforce our intellectual property rights may have an adverse effect on our results of operations. Expenses related to enforcing our intellectual property rights could be significant.
Claims from taxing authorities could have an adverse effect on our income tax expense and financial position.
We conduct business in many countries, which requires us to interpret the income tax laws and rulings in each of those taxing jurisdictions. Due to the ambiguity of tax laws among those jurisdictions as well as the uncertainty of how underlying facts may be construed, our estimates of income tax liabilities may differ from actual payments or assessments. We must successfully defend any claims from taxing authorities to avoid an adverse effect on our operating results and financial position.
Our business success depends on attracting and retaining highly qualified personnel.
Our success depends in part on the efforts and abilities of our management team and key employees. Their skills, experience and industry knowledge significantly benefit our operations and performance. Competition for highly qualified management and technical personnel is particularly intense in emerging markets. The failure to attract and retain members of our management team and key employees could have a negative effect on our business, operating results and financial condition.
Increasing employee benefit costs could have a negative effect on our operating results and financial condition.
One important aspect of attracting and retaining qualified personnel is continuing to offer competitive employee retirement and health care benefits. The expenses we record for our pension and other postretirement benefit pension plans depend on factors such as changes in market interest rates, the value of plan assets, mortality assumptions and health care trend rates. Significant unfavorable changes in these factors would increase our expenses. Expenses related to employer-funded health care benefits depend on health care cost inflation. An inability to control costs related to employee and retiree benefits could negatively impact our operating results and financial condition.
Potential liabilities and costs from litigation (including asbestos claims and environmental remediation) could reduce our profitability.
Various lawsuits, claims and proceedings have been or may be asserted against us relating to the conduct of our business, including those pertaining to the safety and security of the products, solutions and services we sell, employment, contract matters and environmental remediation.
We have been named as a defendant in lawsuits alleging personal injury as a result of exposure to asbestos that was used in certain of our products many years ago. Our products may also be used in hazardous industrial activities, which could result in product liability claims. The uncertainties of litigation (including asbestos claims) and the uncertainties related to the collection of insurance coverage make it difficult to predict the ultimate resolution.
Our operations are subject to regulation by various environmental regulatory authorities concerned with the impact of the environment on human health, the limitation and control of emissions and discharges into the air, ground and waters, the quality of air and bodies of water, and the handling, use and disposal of specified substances. Environmental laws and regulations can be complex and may change. Our financial responsibility to clean up contaminated property or for natural resource damages may extend to previously owned or used properties, waterways and properties owned by unrelated companies or individuals, as well as properties that we currently own and use, regardless of whether the contamination is attributable to prior owners. We have been named as a potentially responsible party at cleanup sites and may be so named in the future, and the costs associated with these current and future sites may be significant.
We have, from time to time, divested certain of our businesses. In connection with these divestitures, certain lawsuits, claims and proceedings may be instituted or asserted against us related to the period that we owned the businesses, either because we agreed to retain certain liabilities related to these periods or because such liabilities fall upon us by operation of law. In some instances, the divested business has assumed the liabilities; however, it is possible that we might be responsible to satisfy those liabilities if the divested business is unable to do so.
A disruption to our distribution channel could reduce our sales.
In the United States and Canada, approximately 90 percent of our sales are through distributors. In certain other countries, the majority of our sales are also through a limited number of distributors. While we maintain the right to appoint new distributors, any unplanned disruption to our existing distribution channel could adversely affect our sales. A disruption could result from the sale of a distributor to a competitor, financial instability of a distributor, or other events.
We rely on suppliers to provide equipment, components and services, which creates certain risks and uncertainties that may adversely affect our business.
Our business requires that we buy equipment, components and services including finished products, which may include electronic components and commodities such as copper, aluminum and steel. Our reliance on suppliers involves certain risks, including:
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• | poor quality or an insecure supply chain, which could adversely affect the reliability and reputation of our products; |
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• | changes in the cost of these purchases due to inflation, exchange rates, commodity market volatility or other factors; |
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• | intellectual property risks such as ownership of rights or alleged infringement by suppliers; |
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• | information security risks associated with providing confidential information to suppliers; and |
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• | shortages of components, commodities or other materials, which could adversely affect our manufacturing efficiencies and ability to make timely delivery. |
Any of these uncertainties could adversely affect our profitability and ability to compete. We also maintain several single-source supplier relationships, because either alternative sources are not available or the relationship is advantageous due to performance, quality, support, delivery, capacity or price considerations. Unavailability or delivery delays of single-source components or products could adversely affect our ability to ship the related products in a timely manner. The effect of unavailability or delivery delays would be more severe if associated with our higher volume and more profitable products. Even where substitute sources of supply are available, qualifying the alternate suppliers and establishing reliable supplies could cost more or could result in delays and a loss of sales.
We rely on strategic partners to expand our capabilities and to provide more complete automation solutions for our customers, which creates certain risks and uncertainties that may adversely affect our business.
We have relationships with industry-leading strategic partners that provide complementary technology, expertise and thought leadership to enable us to enhance automation solutions for our customers. If we fail to maintain or manage relationships with these third-party partner companies effectively, or these partners are unable or unwilling to perform as expected, our ability to execute our business strategy could be negatively affected.
Our competitiveness depends on successfully executing our globalization and cost productivity initiatives.
Our globalization strategy includes localization of our products, solutions and services to be closer to our customers and identified growth opportunities. Localization of our products, solutions and services includes expanding our capabilities, including supply chain and sourcing activities, product design, manufacturing, engineering, marketing and sales and support. These activities expose us to risks, including those related to political and economic uncertainties, transportation delays, labor market disruptions and challenges to protect our intellectual property. In addition, we continue to invest in initiatives to reduce our cost structure. The failure to achieve our objectives on these initiatives could have an adverse effect on our operating results and financial condition.
Risks associated with acquisitions could have an adverse effect on us.
We have acquired, and will continue to acquire, businesses in an effort to enhance shareowner value. Acquisitions involve risks and uncertainties, including:
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• | difficulties in integrating the acquired business, retaining the acquired business’ customers and achieving the expected benefits of the acquisition, such as sales increases, access to technologies, cost savings and increases in geographic or product presence, in the desired time frames; |
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• | loss of key employees of the acquired business; |
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• | difficulties implementing and maintaining consistent standards, controls, procedures, policies and information systems; and |
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• | diversion of management’s attention from other business concerns. |
Future acquisitions could result in debt, dilution, liabilities, increased interest expense, restructuring charges and amortization expenses related to intangible assets.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We operate manufacturing facilities in the United States and multiple other countries. Manufacturing space occupied approximately 3.4 million square feet, of which 38 percent was in the United States and Canada. Our global headquarters are located in Milwaukee, Wisconsin in a facility that we own. We lease the remaining facilities noted below. Most of our facilities are shared by operations in both segments and may be used for multiple purposes such as administrative, manufacturing, warehousing and / or distribution.
The following table sets forth information regarding our headquarter locations as of September 30, 2015.
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Location | | Segment/Region |
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Milwaukee, Wisconsin, United States | | Global Headquarters and Control Products & Solutions |
Mayfield Heights, Ohio, United States | | Architecture & Software |
Cambridge, Canada | | Canada |
Capelle, Netherlands / Diegem, Belgium | | Europe, Middle East and Africa |
Hong Kong | | Asia Pacific |
Weston, Florida, United States | | Latin America |
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The following table sets forth information regarding our principal manufacturing locations as of September 30, 2015. |
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Location | | Manufacturing Square Footage |
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Monterrey, Mexico | | 637,000 |
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Aarau, Switzerland | | 284,000 |
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Twinsburg, Ohio, United States | | 257,000 |
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Mequon, Wisconsin, United States | | 240,000 |
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Cambridge, Canada | | 216,000 |
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Shanghai, China | | 196,000 |
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Singapore | | 155,000 |
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Katowice, Poland | | 138,000 |
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Tecate, Mexico | | 135,000 |
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Ladysmith, Wisconsin, United States | | 124,000 |
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Richland Center, Wisconsin, United States | | 124,000 |
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Jundiai, Brazil | | 94,000 |
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There are no major encumbrances (other than financing arrangements, which in the aggregate are not significant) on any of our plants or equipment. In our opinion, our properties have been well maintained, are in sound operating condition and contain all equipment and facilities necessary to operate at present levels.
Item 3. Legal Proceedings
The information required by this Item is contained in Note 14 of the Financial Statements within the section entitled Other Matters.
Item 4A. Executive Officers of the Company
The name, age, office and position held with the Company and principal occupations and employment during the past five years of each of the executive officers of the Company as of October 31, 2015 are:
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Name, Office and Position, and Principal Occupations and Employment | Age |
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Keith D. Nosbusch — Chairman of the Board and President and Chief Executive Officer | 64 |
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Sujeet Chand — Senior Vice President and Chief Technology Officer | 57 |
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Theodore D. Crandall — Senior Vice President and Chief Financial Officer | 60 |
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David M. Dorgan — Vice President and Controller | 51 |
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Steven W. Etzel — Vice President and Treasurer | 55 |
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Douglas M. Hagerman — Senior Vice President, General Counsel and Secretary | 54 |
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Frank C. Kulaszewicz — Senior Vice President since April 2011; Vice President and General Manager, Control and Visualization Business previously | 51 |
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John P. McDermott — Senior Vice President | 57 |
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John M. Miller — Vice President and Chief Intellectual Property Counsel | 48 |
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Blake D. Moret — Senior Vice President since April 2011; Vice President and General Manager, Customer Support and Maintenance previously | 52 |
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Susan J. Schmitt — Senior Vice President, Human Resources | 52 |
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Martin Thomas — Senior Vice President, Operations and Engineering Services | 57 |
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There are no family relationships, as defined by applicable SEC rules, between any of the above executive officers and any other executive officer or director of the Company. No officer of the Company was selected pursuant to any arrangement or understanding between the officer and any person other than the Company. All executive officers are elected annually.
PART II
Item 5. Market for the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is listed on the New York Stock Exchange and trades under the symbol “ROK.” On October 31, 2015, there were 19,054 shareowners of record of our common stock.
The following table sets forth the high and low sales price of our common stock on the New York Stock Exchange-Composite Transactions reporting system during each quarter of our fiscal years ended September 30, 2015 and 2014:
|
| | | | | | | | | | | | | | | | |
| | 2015 | | 2014 |
Fiscal Quarters | | High | | Low | | High | | Low |
First | | $ | 118.32 |
| | $ | 98.55 |
| | $ | 119.03 |
| | $ | 102.98 |
|
Second | | 118.96 |
| | 102.31 |
| | 125.66 |
| | 108.83 |
|
Third | | 127.05 |
| | 110.00 |
| | 128.57 |
| | 115.21 |
|
Fourth | | 126.77 |
| | 99.00 |
| | 126.84 |
| | 109.80 |
|
We declare and pay dividends at the sole discretion of our Board of Directors. During 2015 we declared and paid aggregate cash dividends of $2.60 per common share. During the first quarter of fiscal 2015, we increased our quarterly dividend per common share 12 percent to 65 cents per common share effective with the dividend payable in December 2014 ($2.60 per common share annually). During 2014 we declared and paid aggregate cash dividends of $2.32 per common share.
The table below sets forth information with respect to purchases made by or on behalf of us of shares of our common stock during the three months ended September 30, 2015:
|
| | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased | | Average Price Paid Per Share(1) | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Approx. Dollar Value of Shares that may yet be Purchased Under the Plans or Programs(2) |
July 1 – 31, 2015 | | 377,399 |
| | $ | 121.02 |
| | 377,399 |
| | $ | 595,987,005 |
|
August 1 – 31, 2015 | | 699,200 |
| | 112.79 |
| | 699,200 |
| | 517,120,880 |
|
September 1 – 30, 2015 | | 689,598 |
| | 104.30 |
| | 689,598 |
| | 445,195,153 |
|
Total | | 1,766,197 |
| | 111.24 |
| | 1,766,197 |
| | |
| |
(1) | Average price paid per share includes brokerage commissions. |
| |
(2) | On June 4, 2014, the Board of Directors authorized us to expend $1.0 billion to repurchase shares of our common stock. Our repurchase program allows us to repurchase shares at management's discretion or at our broker’s discretion pursuant to a share repurchase plan subject to price and volume parameters. |
Item 6. Selected Financial Data
The following table sets forth selected consolidated financial data of our continuing operations. The data should be read in conjunction with MD&A and the Financial Statements. The selected financial data below has been derived from our audited consolidated financial statements.
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
| | 2015 | | 2014 | | 2013 | | 2012 | | 2011 |
| | (in millions, except per share data) |
Consolidated Statement of Operations Data: | | | | | | | | | | |
Sales | | $ | 6,307.9 |
| | $ | 6,623.5 |
| | $ | 6,351.9 |
| | $ | 6,259.4 |
| | $ | 6,000.4 |
|
Interest expense | | 63.7 |
| | 59.3 |
| | 60.9 |
| | 60.1 |
| | 59.5 |
|
Net income | | 827.6 |
| | 826.8 |
| | 756.3 |
| | 737.0 |
| | 697.8 |
|
Earnings per share: | | | | | | | | | | |
Basic | | 6.15 |
| | 5.98 |
| | 5.43 |
| | 5.20 |
| | 4.88 |
|
Diluted | | 6.09 |
| | 5.91 |
| | 5.36 |
| | 5.13 |
| | 4.80 |
|
Cash dividends per share | | 2.60 |
| | 2.32 |
| | 1.98 |
| | 1.745 |
| | 1.475 |
|
Consolidated Balance Sheet Data: (at end of period) | | | | | | | | | | |
Total assets | | $ | 6,404.7 |
| | $ | 6,224.3 |
| | $ | 5,844.6 |
| | $ | 5,636.5 |
| | $ | 5,284.9 |
|
Short-term debt | | — |
| | 325.0 |
| | 179.0 |
| | 157.0 |
| | — |
|
Long-term debt | | 1,500.9 |
| | 900.4 |
| | 905.1 |
| | 905.0 |
| | 905.0 |
|
Shareowners’ equity | | 2,256.8 |
| | 2,658.1 |
| | 2,585.5 |
| | 1,851.7 |
| | 1,748.0 |
|
Other Data: | | | | | | | | | | |
Capital expenditures | | $ | 122.9 |
| | $ | 141.0 |
| | $ | 146.2 |
| | $ | 139.6 |
| | $ | 120.1 |
|
Depreciation | | 133.1 |
| | 122.5 |
| | 113.8 |
| | 103.9 |
| | 96.5 |
|
Intangible asset amortization | | 29.4 |
| | 30.0 |
| | 31.4 |
| | 34.7 |
| | 34.8 |
|
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Non-GAAP Measures
The following discussion includes organic sales, total segment operating earnings and margin, Adjusted Income, Adjusted EPS, Adjusted Effective Tax Rate and free cash flow, which are non-GAAP measures. See Supplemental Sales Information for a reconciliation of reported sales to organic sales and a discussion of why we believe this non-GAAP measure is useful to investors. See Results of Operations for a reconciliation of income before income taxes to total segment operating earnings and margin and a discussion of why we believe these non-GAAP measures are useful to investors. See Results of Operations for a reconciliation of income from continuing operations, diluted EPS from continuing operations and effective tax rate to Adjusted Income, Adjusted EPS and Adjusted Effective Tax Rate, respectively, and a discussion of why we believe these non-GAAP measures are useful to investors. See Financial Condition for a reconciliation of cash flows from operating activities to free cash flow and a discussion of why we believe this non-GAAP measure is useful to investors.
Overview
We are a leading global provider of industrial automation power, control and information solutions that help manufacturers achieve competitive advantages for their businesses. Overall demand for our products, solutions and services is driven by:
| |
• | investments in manufacturing, including upgrades, modifications and expansions of existing facilities or production lines and new facilities or production lines; |
| |
• | investments in basic materials production capacity, which may be related to commodity pricing levels; |
| |
• | industry factors that include our customers’ new product introductions, demand for our customers’ products or services and the regulatory and competitive environments in which our customers operate; |
| |
• | levels of global industrial production and capacity utilization; |
| |
• | regional factors that include local political, social, regulatory and economic circumstances; and |
| |
• | the spending patterns of our customers due to their annual budgeting processes and their working schedules. |
Long-term Strategy
Our vision of being the most valued global provider of innovative industrial automation and information products, solutions and services is supported by our growth and performance strategy, which seeks to:
| |
• | achieve organic sales growth in excess of the automation market by expanding our served market and strengthening our competitive differentiation; |
| |
• | diversify our sales streams by broadening our portfolio of products, solutions and services, expanding our global presence and serving a wider range of industries and applications; |
| |
• | grow market share by gaining new customers and by capturing a larger share of existing customers’ spending; |
| |
• | enhance our market access by building our channel capability and partner network; |
| |
• | make acquisitions that serve as catalysts to organic growth by adding complementary technology, expanding our served market, enhancing our domain expertise or continuing our geographic diversification; |
| |
• | deploy human and financial resources to strengthen our technology leadership and our intellectual capital business model; |
| |
• | continuously improve quality and customer experience; and |
| |
• | drive annual cost productivity. |
By implementing the strategy above, we seek to achieve our long-term financial goals that include above-market organic sales growth, EPS growth above sales growth, return on invested capital in excess of 20 percent and free cash flow equal to about 100 percent of Adjusted Income.
Our customers face the challenge of remaining globally cost competitive and automation can help them achieve their productivity and sustainability objectives. Our value proposition is to help our customers reduce time to market, lower total cost of ownership, improve asset utilization and manage enterprise risks.
Differentiation through Technology Innovation and Domain Expertise
We seek a technology leadership position in industrial automation. We believe that our three platforms - integrated architecture, intelligent motor control and solutions and services - provide the foundation for a long-term sustainable competitive advantage.
Our integrated control and information architecture, with Logix at its core, is an important differentiator. We are the only automation provider that can support discrete, process, batch, safety, motion and power control on the same hardware platform with the same software programming environment. Our integrated architecture is scalable with standard open communications protocols making it easier for customers to implement more cost effectively.
Intelligent motor control is one of our core competencies and an important aspect of an automation system. These products and solutions enhance the availability, efficiency and safe operation of our customers' critical and most energy-intensive plant assets. Our intelligent motor control offering can be integrated seamlessly with the Logix architecture.
Domain expertise refers to the industry and application knowledge required to deliver solutions and services that support customers through the entire life cycle of their automation investment. The combination of industry-specific domain expertise of our people with our innovative technologies enables us to help our customers solve their manufacturing and business challenges.
Global Expansion
As the manufacturing world continues to expand, we must be able to meet our customers’ needs around the world. We currently have approximately 60 percent of our employees outside the U.S. and 45 percent of our sales outside the U.S. We continue to expand our footprint in emerging markets.
As we expand in markets with considerable growth potential and shift our global footprint, we expect to continue to broaden the portfolio of products, solutions and services that we provide to our customers in these regions. We have made significant investments to globalize our manufacturing, product development and customer facing resources in order to be closer to our customers throughout the world. The emerging markets of Asia Pacific, including China and India, Latin America, Central and Eastern Europe and Africa are projected to be the fastest growing over the long term, due to higher levels of infrastructure investment and the growing middle-class population. We believe that increased demand for consumer products in these markets will lead to manufacturing investment and provide us with additional growth opportunities in the future.
Enhanced Market Access
Over the past decade, our investments in technology and globalization have enabled us to expand our addressed market to over $90 billion. Our process initiative has been the most important contributor to this expansion and remains our largest growth opportunity. Logix is the technology foundation that enabled us to become an industry leader for process applications. We complement that with a growing global network of engineers and partners to provide solutions to process customers.
OEMs represent another area of addressed market expansion and an important growth opportunity. To remain competitive, OEMs need to find the optimal balance of machine cost and performance while reducing their time to market. Our scalable integrated architecture and intelligent motor control offerings, along with design productivity tools and our motion and safety products, can assist OEMs in addressing these business needs.
We have developed a powerful network of channel partners, technology partners and commercial partners that act as amplifiers to our internal capabilities and enable us to serve our customers’ needs around the world.
Broad Range of Industries Served
We apply our knowledge of manufacturing applications to help customers solve their business challenges. We serve customers in a wide range of industries, including consumer products, resource-based and transportation.
Our consumer products customers are engaged in the food and beverage, home and personal care and life sciences industries. These customers’ needs include new capacity, incremental capacity from existing facilities, flexible manufacturing and regulatory compliance. These customers operate in an environment where product innovation and time to market are critical factors.
We serve customers in resource-based industries, including oil and gas, mining, aggregates, cement, metals, energy, pulp and paper and water/wastewater. Companies in these industries typically invest in capacity expansion when commodity prices are relatively high and global demand for basic materials is increasing. In addition, there is ongoing investment in upgrades of aging automation systems and productivity.
In the transportation industry, factors such as geographic expansion, investment in new model introductions and more flexible manufacturing technologies influence customers’ automation investment decisions. Our sales in transportation are primarily to automotive and tire manufacturers.
All of these industries also generate maintenance repair order and ongoing services revenue related to the installed base.
Outsourcing and Sustainability Trends
Demand for our products, solutions and services across all industries benefits from the outsourcing and sustainability needs of our customers. Customers increasingly desire to outsource engineering services to achieve a more flexible cost base. Our manufacturing application knowledge enables us to serve these customers globally.
We help our customers meet their sustainability needs pertaining to energy efficiency, environmental and safety goals. Customers across all industries are investing in more energy-efficient manufacturing processes and technologies, such as intelligent motor control and energy efficient solutions and services. In addition, environmental and safety objectives often spur customers to invest to ensure compliance and implement sustainable business practices.
Acquisitions
Our acquisition strategy focuses on products, solutions or services that will be catalytic to the organic growth of our core offerings.
In October 2014, we acquired the assets of ESC Services, Inc., a global provider of lockout-tagout services and solutions. This acquisition enables our customers to increase asset utilization and strengthen enterprise risk management.
In January 2014, we acquired Jacobs Automation, a leader in intelligent track motion control technology. This technology improves performance across a wide range of packaging, material handling, and other applications for global machine builders.
In November 2013, we acquired vMonitor LLC and its affiliates, a global technology leader for wireless solutions in the oil and gas industry. This acquisition strengthens our ability to deliver end-to-end projects for the oil and gas sector and accelerates our development of similar process solutions and remote monitoring services for other industries globally.
In October 2012, we acquired certain assets of the medium voltage drives business of Harbin Jiuzhou Electric Co., Ltd., a leading manufacturer of medium voltage drives, direct current power supplies, switch gear and wind inverters, headquartered in Harbin, China. The acquisition strengthens our presence in the Asia-Pacific motor control market by adding significant capabilities in design, engineering and manufacturing of medium voltage drive products.
We believe the acquired companies will help us expand our served market and deliver value to our customers.
Continuous Improvement
Productivity and continuous improvement are important components of our culture. We have programs in place that drive ongoing process improvement, functional streamlining, material cost savings and manufacturing productivity. Our implementation of common global processes and an enterprise-wide business system is nearly complete. These are intended to improve profitability that can be used to fund investments in growth and to offset inflation. Our ongoing productivity initiatives target both cost reduction and improved asset utilization. Charges for workforce reductions and facility rationalization may be required in order to effectively execute our productivity programs.
U. S. Industrial Economic Trends
In 2015, sales to U.S. customers accounted for 55 percent of our total sales. The various indicators we use to gauge the direction and momentum of our U.S. served markets include:
| |
• | The Industrial Production Index (IP), published by the Federal Reserve, which measures the real output of manufacturing, mining, and electric and gas utilities. The Industrial Production Index is expressed as a percentage of real output in a base year, currently 2012. Historically there has been a meaningful correlation between the changes in the Industrial Production Index and the level of automation investment made by our U.S. customers in their manufacturing base. |
| |
• | The Manufacturing Purchasing Managers’ Index (PMI), published by the Institute for Supply Management (ISM), which indicates the current and near-term state of manufacturing activity in the U.S. According to the ISM, a PMI measure above 50 indicates that the U.S. manufacturing economy is generally expanding while a measure below 50 indicates that it is generally contracting. |
| |
• | Industrial Equipment Spending, compiled by the Bureau of Economic Analysis, which provides insight into spending trends in the broad U.S. industrial economy. This measure over the longer term has proven to demonstrate a reasonable correlation with our domestic growth. |
| |
• | Capacity Utilization (Total Industry), published by the Federal Reserve, which measures plant operating activity. Historically there has been a meaningful correlation between Capacity Utilization and levels of U.S. industrial production. |
The table below depicts the trends in these indicators from fiscal 2013 to 2015. Changes in these indicators from the most recent quarter are mixed. While there was year-over-year growth in IP in the fourth quarter, IP growth decelerated throughout the quarter and is forecasted to be negative in the first quarter of fiscal 2016. Industrial Equipment Spending grew year over year but was down sequentially in the fourth quarter. Capacity Utilization was flat with the prior quarter and prior year. PMI declined sharply and ended September only slightly above 50.
|
| | | | | | | | | | | | |
| | Industrial Production Index | | PMI | | Industrial Equipment Spending (in billions) | | Capacity Utilization (percent) |
Fiscal 2015 quarter ended: | | | | | | | | |
September 2015 | | 107.5 |
| | 50.2 |
| | 233.3 |
| | 77.9 |
|
June 2015 | | 106.8 |
| | 53.5 |
| | 236.2 |
| | 77.7 |
|
March 2015 | | 107.4 |
| | 51.5 |
| | 224.9 |
| | 78.4 |
|
December 2014 | | 107.5 |
| | 55.1 |
| | 226.1 |
| | 78.8 |
|
Fiscal 2014 quarter ended: | | | |
| | | | |
September 2014 | | 106.3 |
| | 56.1 |
| | 229.2 |
| | 78.3 |
|
June 2014 | | 105.3 |
| | 55.7 |
| | 224.1 |
| | 78.0 |
|
March 2014 | | 103.8 |
| | 54.4 |
| | 215.8 |
| | 77.3 |
|
December 2013 | | 102.9 |
| | 56.1 |
| | 204.0 |
| | 77.0 |
|
Fiscal 2013 quarter ended: | | | |
| | | | |
September 2013 | | 102.0 |
| | 55.6 |
| | 206.7 |
| | 76.7 |
|
June 2013 | | 101.6 |
| | 52.8 |
| | 206.0 |
| | 76.6 |
|
March 2013 | | 101.3 |
| | 52.0 |
| | 211.2 |
| | 76.7 |
|
December 2012 | | 100.6 |
| | 50.0 |
| | 204.6 |
| | 76.5 |
|
Note: Economic indicators are subject to revisions by the issuing organizations.
Non-U.S. Regional Trends
In 2015, sales to non-U.S. customers accounted for 45 percent of our total sales. These customers include both indigenous companies and multinational companies with expanding global presence. In addition to the global factors previously mentioned in the "Overview" section, international demand, particularly in emerging markets, has historically been driven by the strength of the industrial economy in each region, investments in infrastructure and expanding consumer markets. We use changes in the respective countries' Gross Domestic Product (GDP) and Industrial Production as indicators of the growth opportunities in each region where we do business.
Overall, economic projections call for a higher rate of industrial production growth in regions outside the U.S. in 2016 compared to 2015. In Europe, the Middle East and Africa (EMEA), economic forecasts call for moderate growth in both Western Europe and emerging countries. In Asia Pacific, China’s economic growth is impacted by slowing investment, declining exports and industrial overcapacity, whereas the economy in India is slowly improving. In Latin America, much of the region including Brazil remains in recession, but Mexico's economy continues to be strong. Canada will continue to experience a low level of economic growth due to its exposure to resource-based industries. Despite a mixed outlook for emerging markets in 2016, we continue to expect that these will be the fastest growing automation markets over the long term.
Summary of Results of Operations
In 2015, sales were $6,307.9 million, a decrease of 4.8 percent year over year. Organic sales increased 1.1 percent, and currency translation reduced sales by 6.0 percent. The modest organic growth was led by the consumer and automotive industries, offset by significant headwinds from heavy industries, particularly the oil and gas industry.
The following is a summary of our results related to key growth initiatives:
| |
• | Sales related to our process initiative decreased approximately 5 percent in 2015 compared to 2014. Excluding the impact of currency translation, process initiative sales were flat year over year. |
| |
• | Logix sales exceeded $1 billion in 2015, but decreased 2.5 percent compared to 2014. Logix organic sales increased 4.2 percent year over year, with the highest growth rate in Latin America. |
| |
• | Sales in emerging markets decreased 6.5 percent in 2015 compared to 2014. Organic sales in emerging countries increased 4.0 percent year over year, and currency translation reduced sales in emerging countries by 10.6 percent. |
During 2015 we were able to expand segment operating margin by over one percentage point. The favorable impact of strong productivity and organic growth was partially offset by higher spending and unfavorable currency effects.
The following tables reflect our sales and operating results for the years ended September 30, 2015, 2014 and 2013 (in millions, except per share amounts):
|
| | | | | | | | | | | | |
| | Year Ended September 30, |
| | 2015 | | 2014 | | 2013 |
Sales | | | | | | |
Architecture & Software | | $ | 2,749.5 |
| | $ | 2,845.3 |
| | $ | 2,682.0 |
|
Control Products & Solutions | | 3,558.4 |
| | 3,778.2 |
| | 3,669.9 |
|
Total sales (a) | | $ | 6,307.9 |
| | $ | 6,623.5 |
| | $ | 6,351.9 |
|
Segment operating earnings(1) | | | | | | |
Architecture & Software | | $ | 808.6 |
| | $ | 839.6 |
| | $ | 759.4 |
|
Control Products & Solutions | | 551.9 |
| | 512.4 |
| | 477.4 |
|
Total segment operating earnings(2) (b) | | 1,360.5 |
| | 1,352.0 |
| | 1,236.8 |
|
Purchase accounting depreciation and amortization | | (21.0 | ) | | (21.6 | ) | | (19.3 | ) |
General corporate — net | | (85.6 | ) | | (81.0 | ) | | (97.2 | ) |
Non-operating pension costs | | (62.7 | ) | | (55.9 | ) | | (78.5 | ) |
Interest expense | | (63.7 | ) | | (59.3 | ) | | (60.9 | ) |
Income before income taxes (c) | | 1,127.5 |
| | 1,134.2 |
| | 980.9 |
|
Income tax provision | | (299.9 | ) | | (307.4 | ) | | (224.6 | ) |
Net income | | $ | 827.6 |
| | $ | 826.8 |
| | $ | 756.3 |
|
| | | | | | |
Diluted EPS | | $ | 6.09 |
| | $ | 5.91 |
| | $ | 5.36 |
|
| | | | | | |
Adjusted EPS(3) | | $ | 6.40 |
| | $ | 6.17 |
| | $ | 5.71 |
|
| | | | | | |
Diluted weighted average outstanding shares | | 135.7 |
| | 139.7 |
| | 140.9 |
|
Total segment operating margin(2) (b/a) | | 21.6 | % | | 20.4 | % | | 19.5 | % |
Pre-tax margin (c/a) | | 17.9 | % | | 17.1 | % | | 15.4 | % |
| |
(1) | See Note 15 in the Consolidated Financial Statements for the definition of segment operating earnings. |
| |
(2) | Total segment operating earnings and total segment operating margin are non-GAAP financial measures. We exclude purchase accounting depreciation and amortization, general corporate – net, non-operating pension costs, interest expense and income tax provision because we do not consider these costs to be directly related to the operating performance of our segments. We believe that these measures are useful to investors as measures of operating performance. We use these measures to monitor and evaluate the profitability of our operating segments. Our measures of total segment operating earnings and total segment operating margin may be different from measures used by other companies. |
| |
(3) | Adjusted EPS is a non-GAAP earnings measure that excludes the non-operating pension costs and their related income tax effect. See Adjusted Income, Adjusted EPS and Adjusted Effective Tax Rate Reconciliation for more information on this non-GAAP measure. |
Purchase accounting depreciation and amortization and non-operating pension costs are not allocated to our operating segments because these costs are excluded from our measurement of each segment's operating performance for internal purposes. If we were to allocate these costs, we would attribute them to each of our segments as follows (in millions):
|
| | | | | | | | | | | | |
| | Year Ended September 30, |
| | 2015 | | 2014 | | 2013 |
Purchase accounting depreciation and amortization | | | | | | |
Architecture & Software | | $ | 4.3 |
| | $ | 4.1 |
| | $ | 4.0 |
|
Control Products & Solutions | | 15.7 |
| | 16.5 |
| | 14.3 |
|
Non-operating pension costs | | | | | | |
Architecture & Software | | 22.6 |
| | 20.6 |
| | 27.6 |
|
Control Products & Solutions | | 35.3 |
| | 32.2 |
| | 46.6 |
|
The increases in non-operating pension costs in both segments in fiscal 2015 were primarily due to the decrease in the discount rate used to measure net periodic pension cost for our U.S. pension plans. The rate decreased from 5.05 percent in 2014 to 4.50 percent in 2015.
Adjusted Income, Adjusted EPS and Adjusted Effective Tax Rate Reconciliation
Adjusted Income, Adjusted EPS and Adjusted Effective Tax Rate are non-GAAP earnings measures that exclude non-operating pension costs and their related income tax effects. We define non-operating pension costs as defined benefit plan interest cost, expected return on plan assets, amortization of actuarial gains and losses and the impact of any plan curtailments or settlements. These components of net periodic benefit cost primarily relate to changes in pension assets and liabilities that are a result of market performance; we consider these costs to be unrelated to the operating performance of our business. 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. 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 income from continuing operations, diluted EPS and effective tax rate.
The following are the components of operating and non-operating pension costs for the years ended September 30, 2015, 2014 and 2013 (in millions): |
| | | | | | | | | | | | |
| | Year Ended September 30, |
| | 2015 | | 2014 | | 2013 |
Service cost | | $ | 85.7 |
| | $ | 78.5 |
| | $ | 92.1 |
|
Amortization of prior service credit | | (2.7 | ) | | (2.7 | ) | | (2.5 | ) |
Operating pension costs | | 83.0 |
| | 75.8 |
| | 89.6 |
|
| | | | | | |
Interest cost | | 167.2 |
| | 174.2 |
| | 160.2 |
|
Expected return on plan assets | | (223.2 | ) | | (217.9 | ) | | (226.3 | ) |
Amortization of net actuarial loss | | 118.7 |
| | 99.7 |
| | 144.6 |
|
Settlements | | — |
| | (0.1 | ) | | — |
|
Non-operating pension costs | | 62.7 |
| | 55.9 |
| | 78.5 |
|
| | | | | | |
Net periodic pension cost | | $ | 145.7 |
| | $ | 131.7 |
| | $ | 168.1 |
|
The following are reconciliations of income from continuing operations, diluted EPS from continuing operations and effective tax rate to Adjusted Income, Adjusted EPS and Adjusted Effective Tax Rate, respectively, for the years ended September 30, 2015, 2014 and 2013 (in millions, except per share amounts):
|
| | | | | | | | | | | | |
| | Year Ended September 30, |
| | 2015 | | 2014 | | 2013 |
Income from continuing operations | | $ | 827.6 |
| | $ | 826.8 |
| | $ | 756.3 |
|
Non-operating pension costs | | 62.7 |
| | 55.9 |
| | 78.5 |
|
Tax effect of non-operating pension costs | | (21.9 | ) | | (20.0 | ) | | (28.5 | ) |
Adjusted Income | | $ | 868.4 |
| | $ | 862.7 |
| | $ | 806.3 |
|
| | | | | | |
Diluted EPS from continuing operations | | $ | 6.09 |
| | $ | 5.91 |
| | $ | 5.36 |
|
Non-operating pension costs per diluted share | | 0.46 |
| | 0.40 |
| | 0.55 |
|
Tax effect of non-operating pension costs per diluted share | | (0.15 | ) | | (0.14 | ) | | (0.20 | ) |
Adjusted EPS | | $ | 6.40 |
| | $ | 6.17 |
| | $ | 5.71 |
|
| | | | | | |
Effective tax rate | | 26.6 | % | | 27.1 | % | | 22.9 | % |
Tax effect of non-operating pension costs | | 0.4 | % | | 0.4 | % | | 1.0 | % |
Adjusted Effective Tax Rate | | 27.0 | % | | 27.5 | % | | 23.9 | % |
2015 Compared to 2014
|
| | | | | | | | | | | | |
(in millions, except per share amounts) | | 2015 | | 2014 | | Change |
Sales | | $ | 6,307.9 |
| | $ | 6,623.5 |
| | $ | (315.6 | ) |
Income before income taxes | | 1,127.5 |
| | 1,134.2 |
| | (6.7 | ) |
Diluted EPS | | 6.09 |
| | 5.91 |
| | 0.18 |
|
Adjusted EPS | | 6.40 |
| | 6.17 |
| | 0.23 |
|
Sales
Sales in fiscal 2015 decreased 4.8 percent compared to 2014. Organic sales increased 1.1 percent, and currency translation reduced sales by 6.0 percent. Product sales decreased 3 percent year over year. Product organic sales increased 3 percent year over year in 2015, and currency translation reduced sales by 6 percent. Pricing contributed approximately one percentage point to growth.
The table below presents our sales, attributed to the geographic regions based upon country of destination, for the year ended September 30, 2015 and the percentage change from the same period a year ago (in millions, except percentages):
|
| | | | | | | | | | |
| | | | Change vs. | | Change in Organic Sales(1) vs. |
| | Year Ended September 30, 2015 | | Year Ended September 30, 2014 | | Year Ended September 30, 2014 |
United States | | $ | 3,446.8 |
| | 0.9 | % | | 0.9 | % |
Canada | | 366.6 |
| | (16.1 | )% | | (5.3 | )% |
Europe, Middle East and Africa | | 1,174.0 |
| | (13.2 | )% | | 2.1 | % |
Asia Pacific | | 834.5 |
| | (5.6 | )% | | (1.1 | )% |
Latin America | | 486.0 |
| | (9.3 | )% | | 8.9 | % |
Total sales | | $ | 6,307.9 |
| | (4.8 | )% | | 1.1 | % |
| |
(1) | Organic sales are sales excluding the effect of changes in currency exchange rates and acquisitions. See Supplemental Sales Information for information on this non-GAAP measure. |
| |
• | Sales in the United States increased modestly, with strength in the consumer and automotive industries offset by weakness in heavy industries, especially the oil and gas industry. |
| |
• | Sales in Canada declined due to the unfavorable impact of currency translation as well as declines in resource-based industries, particularly the oil and gas industry. |
| |
• | EMEA sales decreased due to the unfavorable impact of currency translation. Organic sales growth was led by emerging countries with modest growth in mature Europe. |
| |
• | Asia Pacific sales declined due to the unfavorable impact of currency translation as well as a decrease in organic sales in China, partially offset by growth in India. |
| |
• | Latin America sales decreased due to the unfavorable impact of currency translation. Organic sales growth in the region was primarily driven by strong sales growth in Mexico. |
General Corporate - Net
General corporate - net expenses were $85.6 million in fiscal 2015 compared to $81.0 million in fiscal 2014.
Income before Income Taxes
Income before income taxes decreased 1 percent from $1,134.2 million in 2014 to $1,127.5 million in 2015, primarily due to increases in non-operating pension costs, general corporate - net expenses and interest expense, partially offset by an increase in segment operating earnings. Total segment operating earnings increased 1 percent year over year, primarily due to strong productivity and higher organic sales, partially offset by unfavorable currency effects and higher spending.
Income Taxes
The effective tax rate for 2015 was 26.6 percent compared to 27.1 percent in 2014. The 2015 and 2014 effective tax rates were lower than the U.S. statutory rate of 35 percent primarily because we benefited from lower non-U.S. tax rates. The Adjusted Effective Tax Rate in 2015 was 27.0 percent compared to 27.5 percent in 2014. The decreases in the effective tax rate and the Adjusted Effective Tax Rate were primarily due to the tax effect of foreign dividends and the retroactive extension of the U.S. federal research and development tax credit (U.S. research tax credit) for calendar year 2014 during the first quarter of fiscal 2015, partially offset by a difference in the mix of pre-tax income across regions.
See Note 13 in the Financial Statements for a complete reconciliation of the United States statutory tax rate to the effective tax rate and more information on tax events in 2015 and 2014 affecting each year's respective tax rates.
Architecture & Software
|
| | | | | | | | | | | | | | |
(in millions, except percentages) | | 2015 | | 2014 | | Change | | |
Sales | | $ | 2,749.5 |
| | $ | 2,845.3 |
| | $ | (95.8 | ) | | |
Segment operating earnings | | 808.6 |
| | 839.6 |
| | (31.0 | ) | | |
Segment operating margin | | 29.4 | % | | 29.5 | % | | (0.1 | ) | | pts |
Sales
Architecture & Software sales decreased 3.4 percent in 2015 compared to 2014. Organic sales increased 3.1 percent, and the effects of currency translation reduced sales by 6.6 percent. Pricing contributed approximately one and a half percentage points to growth during the year. All regions experienced a decline in sales during the year except the United States. Excluding the impact of currency translation, Latin America was the segment's best performing region in 2015, with all other regions experiencing sales growth except for Asia Pacific. Logix sales decreased 2.5 percent in 2015 compared to 2014 and Logix organic sales increased 4.2 percent year over year.
Operating Margin
Architecture & Software segment operating earnings decreased 4 percent. Operating margin was 29.4 percent in 2015 compared to 29.5 percent in 2014. The favorable impact of organic sales growth and productivity was more than offset by higher spending and unfavorable currency effects.
Control Products & Solutions
|
| | | | | | | | | | | | | | |
(in millions, except percentages) | | 2015 | | 2014 | | Change | | |
Sales | | $ | 3,558.4 |
| | $ | 3,778.2 |
| | $ | (219.8 | ) | | |
Segment operating earnings | | 551.9 |
| | 512.4 |
| | 39.5 |
| | |
Segment operating margin | | 15.5 | % | | 13.6 | % | | 1.9 |
| | pts |
Sales
Control Products & Solutions sales decreased 5.8 percent in 2015 compared to 2014. Organic sales decreased 0.4 percent, and currency translation reduced sales by 5.6 percent. Pricing contributed slightly less than one percentage point to growth during the year. All regions experienced a decline in sales except for the United States which was flat year over year. Excluding the impact of currency translation, growth in Latin America was more than offset by declines in Canada with all other regions flat during 2015.
Sales in our solutions and services businesses decreased 8 percent year over year. Organic sales in our solutions and services businesses decreased 2 percent during 2015, and the net effect of currency translation and acquisitions reduced sales by 6 percentage points.
Operating Margin
Control Products & Solutions segment operating earnings increased 8 percent year over year. Segment operating margin was 15.5 percent in 2015 compared to 13.6 percent a year ago, primarily due to very strong productivity.
2014 Compared to 2013
|
| | | | | | | | | | | | |
(in millions, except per share amounts) | | 2014 | | 2013 | | Change |
Sales | | $ | 6,623.5 |
| | $ | 6,351.9 |
| | $ | 271.6 |
|
Income before income taxes | | 1,134.2 |
| | 980.9 |
| | 153.3 |
|
Diluted EPS | | 5.91 |
| | 5.36 |
| | 0.55 |
|
Adjusted EPS | | 6.17 |
| | 5.71 |
| | 0.46 |
|
Sales
Sales in fiscal 2014 increased 4.3 percent compared to 2013. Organic sales increased 5.1 percent, and currency translation reduced sales by 1.0 percent. Product sales grew 5 percent year over year. Pricing contributed about one percentage point to growth.
The table below presents our sales, attributed to the geographic regions based upon country of destination, for the year ended September 30, 2014 and the percentage change from the same period a year ago (in millions, except percentages):
|
| | | | | | | | | | |
| | | | Change vs. | | Change in Organic Sales(1) vs. |
| | Year Ended September 30, 2014 | | Year Ended September 30, 2013 | | Year Ended September 30, 2012 |
United States | | $ | 3,414.6 |
| | 6.6 | % | | 6.8 | % |
Canada | | 437.0 |
| | (6.8 | )% | | (0.7 | )% |
Europe, Middle East and Africa | | 1,351.8 |
| | 5.2 | % | | 2.2 | % |
Asia Pacific | | 884.0 |
| | 3.8 | % | | 5.3 | % |
Latin America | | 536.1 |
| | (1.4 | )% | | 6.0 | % |
Total sales | | $ | 6,623.5 |
| | 4.3 | % | | 5.1 | % |
| |
(1) | Organic sales are sales excluding the effect of changes in currency exchange rates and acquisitions. See Supplemental Sales Information for information on this non-GAAP measure. |
| |
• | Sales growth in the United States was realized broadly across industries, with the highest growth in the oil and gas and home and personal care industries. |
| |
• | Sales in Canada declined due to the unfavorable impact of currency translation. Organic sales declined slightly due to continued weakness in solutions and services in resource-based industries, partially offset by growth in our product businesses. |
| |
• | EMEA sales grew as a result of the favorable impact of currency translation, organic sales growth and a small contribution from acquisitions. Organic sales were driven by growth in our products businesses. |
| |
• | Asia Pacific organic sales growth was driven by strong sales to OEM customers in China and a return to growth in India. |
| |
• | Latin America sales declined due to the unfavorable impact of currency translation. Organic sales growth in the region was driven by strong sales in Brazil and Mexico that more than offset sales declines in the rest of the region. |
General Corporate - Net
General corporate - net expenses were $81.0 million in fiscal 2014 compared to $97.2 million in fiscal 2013. The year-over-year decrease was primarily due to fiscal 2013 charges related to legacy environmental matters.
Income before Income Taxes
Income before income taxes increased 16 percent from $980.9 million in 2013 to $1,134.2 million in 2014, primarily due to an increase in segment operating earnings, lower non-operating pension costs and reduced general corporate - net expenses. Total segment operating earnings increased 9 percent year over year, primarily due to higher sales and favorable mix, partially offset by increased spending.
Income Taxes
The effective tax rate for 2014 was 27.1 percent compared to 22.9 percent in 2013. The 2014 and 2013 effective tax rates were lower than the U.S. statutory rate of 35 percent primarily because we benefited from lower non-U.S. tax rates. The Adjusted Effective Tax Rate in 2014 was 27.5 percent compared to 23.9 percent in 2013. The increases in the effective tax rate and the Adjusted Effective Tax Rate were primarily due to significant net favorable prior period tax matters recognized in fiscal 2013 and a smaller amount of net unfavorable similar items recognized in fiscal 2014. We also recognized a significant benefit from the retroactive extension of the U.S. research tax credit in fiscal 2013. The U.S. research tax credit expired on December 31, 2013.
See Note 13 in the Financial Statements for a complete reconciliation of the United States statutory tax rate to the effective tax rate and more information on tax events in 2014 and 2013 affecting the respective tax rates.
Architecture & Software
|
| | | | | | | | | | | | | | |
(in millions, except percentages) | | 2014 | | 2013 | | Change | | |
Sales | | $ | 2,845.3 |
| | $ | 2,682.0 |
| | $ | 163.3 |
| | |
Segment operating earnings | | 839.6 |
| | 759.4 |
| | 80.2 |
| | |
Segment operating margin | | 29.5 | % | | 28.3 | % | | 1.2 |
| | pts |
Sales
Architecture & Software sales increased 6.1 percent in 2014 compared to 2013. Organic sales increased 6.8 percent, and the effects of currency translation reduced sales by 0.7 percent. Pricing contributed approximately one percentage point to growth during the year. All regions experienced sales growth during the year except Latin America, which grew organically but declined in total due to currency translation. Excluding the impact of currency translation, Canada was the segment's best performing region in 2014. Logix sales increased 6 percent in 2014 compared to 2013 and Logix organic sales increased 7 percent year over year.
Operating Margin
Architecture & Software segment operating earnings increased 11 percent. Operating margin expanded 1.2 points to 29.5 percent in 2014 compared to 28.3 percent in 2013, primarily due to higher sales, partially offset by increased spending.
Control Products & Solutions
|
| | | | | | | | | | | | | | |
(in millions, except percentages) | | 2014 | | 2013 | | Change | | |
Sales | | $ | 3,778.2 |
| | $ | 3,669.9 |
| | $ | 108.3 |
| | |
Segment operating earnings | | 512.4 |
| | 477.4 |
| | 35.0 |
| | |
Segment operating margin | | 13.6 | % | | 13.0 | % | | 0.6 |
| | pts |
Sales
Control Products & Solutions sales increased 3.0 percent in 2014 compared to 2013. Organic sales increased 3.8 percent, and currency translation reduced sales by 1.1 percent. Sales in our solutions and services businesses grew 2 percent year over year. Pricing contributed less than one percentage point to growth during the year. The United States was the segment's best performing region in 2014. Excluding the impact of currency translation, all regions experienced sales growth except Canada, where the solutions business was adversely impacted by resource-based industries.
Operating Margin
Control Products & Solutions segment operating earnings increased 7 percent year over year. Segment operating margin was 13.6 percent in 2014 compared to 13.0 percent a year ago, primarily due to higher sales, partially offset by increased spending.
Financial Condition
The following is a summary of our cash flows from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows (in millions):
|
| | | | | | | | | | | | |
| | Year Ended September 30, |
| | 2015 | | 2014 | | 2013 |
Cash provided by (used for): | | | | | | |
Operating activities | | $ | 1,187.7 |
| | $ | 1,033.3 |
| | $ | 1,014.8 |
|
Investing activities | | (246.9 | ) | | (483.4 | ) | | (256.8 | ) |
Financing activities | | (608.1 | ) | | (521.8 | ) | | (454.6 | ) |
Effect of exchange rate changes on cash | | (96.7 | ) | | (37.7 | ) | | 0.6 |
|
Cash provided by (used for) continuing operations | | $ | 236.0 |
| | $ | (9.6 | ) | | $ | 304.0 |
|
The following table summarizes free cash flow (in millions), which is a non-GAAP financial measure:
|
| | | | | | | | | | | | |
| | Year Ended September 30, |
| | 2015 | | 2014 | | 2013 |
Cash provided by continuing operating activities | | $ | 1,187.7 |
| | $ | 1,033.3 |
| | $ | 1,014.8 |
|
Capital expenditures | | (122.9 | ) | | (141.0 | ) | | (146.2 | ) |
Excess income tax benefit from share-based compensation | | 12.4 |
| | 29.9 |
| | 31.9 |
|
Free cash flow | | $ | 1,077.2 |
| | $ | 922.2 |
| | $ | 900.5 |
|
Our definition of free cash flow takes into consideration capital investments required to maintain the operations of our businesses and execute our strategy. Cash provided by continuing operating activities adds back non-cash depreciation expense to earnings but does not reflect a charge for necessary capital expenditures. Our definition of free cash flow excludes the operating cash flows and capital expenditures related to our discontinued operations. Operating, investing and financing cash flows of our discontinued operations are presented separately in our statement of cash flows. Accounting principles generally accepted in the United States (U.S. GAAP) require the excess income tax benefit to be reported as a financing cash flow rather than as an operating cash flow. We have added this benefit back to our calculation of free cash flow in order to generally classify cash flows arising from income taxes as operating cash flows. 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 one measure to monitor and evaluate performance. Our definition of free cash flow may differ from definitions used by other companies.
Cash provided by operating activities was $1,187.7 million for the year ended September 30, 2015 compared to $1,033.3 million for the year ended September 30, 2014. Free cash flow was $1,077.2 million for the year ended September 30, 2015 compared to $922.2 million for the year ended September 30, 2014. The increase in the cash flow provided by operating activities and the increase in free cash flow are primarily due to strong working capital performance.
We repurchased approximately 5.4 million shares of our common stock under our share repurchase program in 2015. The total cost of these shares was $606.2 million, of which $12.5 million was recorded in accounts payable at September 30, 2015 related to 124,400 shares that did not settle until October 2015. In 2014, we repurchased approximately 4.1 million shares of our common stock under our share repurchase program. The total cost of these shares was $483.8 million, of which $4.5 million was recorded in accounts payable at September 30, 2014 related to 40,757 shares that did not settle until October 2014. Our decision to repurchase stock in 2016 will depend on business conditions, free cash flow generation, other cash requirements and stock price. At September 30, 2015 we had approximately $445.2 million remaining for stock repurchases under the $1.0 billion share repurchase authorization approved by the Board of Directors in 2014. See Part II, Item 5. Market for the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities, for additional information regarding share repurchases.
We expect future uses of cash to include working capital requirements, capital expenditures, additional contributions to our retirement plans, acquisitions of businesses, dividends to shareowners, repurchases of common stock and repayments of debt. We expect capital expenditures in 2016 to be about $150 million. We expect to fund future uses of cash with a combination of existing cash balances and short-term investments, cash generated by operating activities, commercial paper borrowings or a new issuance of debt or other securities.
Given our extensive operations outside the U.S., a significant amount of our cash, cash equivalents and short-term investments (funds) are held in non-U.S. subsidiaries where our undistributed earnings are indefinitely reinvested. Generally, these funds would be subject to U.S. tax if repatriated. As of September 30, 2015, approximately 90 percent of our funds were held in these non-U.S. subsidiaries. The percentage of these non-U.S. funds can vary from quarter to quarter with an average of approximately 90 percent over the past eight quarters. We have not encountered and do not expect to encounter any difficulty meeting the liquidity requirements of our domestic and international operations.
In addition to cash generated by operating activities, we have access to existing financing sources, including the public debt markets and unsecured credit facilities with various banks.
In February 2015, we issued $600.0 million of aggregate principal amount of long-term notes in a public offering. This debt offering yielded $594.3 million in net proceeds. We used the net proceeds from the offering primarily to repay our outstanding commercial paper, with the remaining proceeds used for general corporate purposes. Upon issuance of these notes, we entered into fixed-to-floating interest rate swap contracts with multiple banks that effectively converted the notes to floating rate debt, each series at a rate based on three-month LIBOR plus a fixed spread. Additional information related to our long-term debt and interest rate swap contracts is included in Note 5 and Note 8 of the Financial Statements, respectively.
Our short-term debt obligations are primarily comprised of commercial paper borrowings. There were no commercial paper borrowings outstanding at September 30, 2015. At September 30, 2014, commercial paper borrowings outstanding were $325.0 million, with a weighted average interest rate of 0.17 percent and weighted average maturity period of seven days. Our debt-to-total-capital ratio was 39.9 percent at September 30, 2015 and 31.6 percent at September 30, 2014. The increase in the debt-to-total-capital ratio is primarily due to an increase in debt and a decrease in equity. The decrease in equity is primarily due to pension and other postretirement benefit plan adjustments and currency translation adjustments during the year.
On March 24, 2015, we replaced our former five-year $750.0 million unsecured revolving credit facility with a new five-year $1.0 billion unsecured revolving credit facility expiring in March 2020. We have not borrowed against either credit facility during the periods ended September 30, 2015 or September 30, 2014. Separate short-term unsecured credit facilities of approximately $121.2 million at September 30, 2015 were available to non-U.S. subsidiaries. Borrowings under our non-U.S. credit facilities at September 30, 2015 and September 30, 2014 were not significant. We were in compliance with all covenants under our credit facilities at September 30, 2015 and September 30, 2014. Additional information related to our credit facilities is included in Note 5 of the Financial Statements.
Among other uses, we can draw on our $1.0 billion credit facility as a standby liquidity facility to repay our outstanding commercial paper as it matures. This access to funds to repay maturing commercial paper is an important factor in maintaining the short-term credit ratings set forth in the table below. Under our current policy with respect to these ratings, we expect to limit our other borrowings under our credit facility, if any, to amounts that would leave enough credit available under the facility so that we could borrow, if needed, to repay all of our then outstanding commercial paper as it matures.
The following is a summary of our credit ratings as of September 30, 2015:
|
| | | | | | |
| | | | | | |
Credit Rating Agency | | Short Term Rating | | Long Term Rating | | Outlook |
Standard & Poor’s | | A-1 | | A | | Stable |
Moody’s | | P-2 | | A3 | | Stable |
Fitch Ratings | | F1 | | A | | Stable |
Our ability to access the commercial paper market, and the related costs of these borrowings, is affected by the strength of our credit rating and market conditions. We have not experienced any difficulty in accessing the commercial paper market to date. If our access to the commercial paper market is adversely affected due to a change in market conditions or otherwise, we would expect to rely on a combination of available cash and our unsecured committed credit facility to provide short-term funding. In such event, the cost of borrowings under our unsecured committed credit facility could be higher than the cost of commercial paper borrowings.
We regularly monitor the third-party depository institutions that hold our cash and cash equivalents and short-term investments. Our emphasis is primarily on safety and liquidity of principal and secondarily on maximizing yield on those funds. We diversify our cash and cash equivalents and short-term investments among counterparties to minimize exposure to any one of these entities.
We use foreign currency forward exchange contracts to manage certain foreign currency risks. We enter into these contracts to hedge our exposure to foreign currency exchange rate variability in the expected future cash flows associated with certain third-party and intercompany transactions denominated in foreign currencies forecasted to occur within the next two years. We also use these contracts to hedge portions of our net investments in certain non-U.S. subsidiaries against the effect of exchange rate fluctuations on the translation of foreign currency balances to the U.S. dollar. In addition, we use foreign currency forward exchange contracts that are not designated as hedges to offset transaction gains or losses associated with some of our assets and liabilities resulting from intercompany loans or other transactions with third parties that are denominated in currencies other than our entities' functional currencies. Our foreign currency forward exchange contracts are usually denominated in currencies of major industrial countries. We diversify our foreign currency forward exchange contracts among counterparties to minimize exposure to any one of these entities.
Cash dividends to shareowners were $350.1 million in 2015 ($2.60 per common share), $320.5 million in 2014 ($2.32 per common share) and $276.3 million in 2013 ($1.98 per common share). Our quarterly dividend rate as of September 30, 2015 is $0.65 per common share ($2.60 per common share annually), which is determined at the sole discretion of our Board of Directors.
A summary of our projected contractual cash obligations at September 30, 2015 are (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments by Period |
| | Total | | 2016 | | 2017 | | 2018 | | 2019 | | 2020 | | Thereafter |
Long-term debt and interest (a) | | $ | 3,112.6 |
| | $ | 71.7 |
| | $ | 71.7 |
| | $ | 314.6 |
| | $ | 57.5 |
| | $ | 354.0 |
| | $ | 2,243.1 |
|
Minimum operating lease payments | | 325.7 |
| | 73.6 |
| | 61.3 |
| | 50.5 |
| | 38.9 |
| | 34.7 |
| | 66.7 |
|
Postretirement benefits (b) | | 93.3 |
| | 11.7 |
| | 11.6 |
| | 11.1 |
| | 10.8 |
| | 7.2 |
| | 40.9 |
|
Pension funding contribution (c) | | 47.0 |
| | 47.0 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Purchase obligations (d) | | 176.2 |
| | 55.4 |
| | 42.6 |
| | 27.3 |
| | 27.0 |
| | 21.4 |
| | 2.5 |
|
Other long-term liabilities (e) | | 81.0 |
| | 17.0 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Unrecognized tax benefits (f) | | 49.0 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total | | $ | 3,884.8 |
| | $ | 276.4 |
| | $ | 187.2 |
| | $ | 403.5 |
| | $ | 134.2 |
|
| $ | 417.3 |
| | $ | 2,353.2 |
|
| |
(a) | The amounts for long-term debt assume that the respective debt instruments will be outstanding until their scheduled maturity dates. The amounts include interest but exclude the amounts to be paid or received under interest rate swap contracts, including the $5.4 million fair value adjustment recorded for the interest rate swap contracts at September 30, 2015 and the unamortized discount of $45.4 million at September 30, 2015. See Note 5 in the Financial Statements for more information regarding our long-term debt. |
| |
(b) | Our postretirement benefit plans are unfunded and are subject to change. Amounts reported are estimates of future benefit payments, to the extent estimable. |
| |
(c) | Amounts reported for pension funding contributions reflect current estimates of known commitments. Contributions to our pension plans beyond 2016 will depend on future investment performance of our pension plan assets, changes in discount rate assumptions and governmental regulations in effect at the time. Amounts subsequent to 2016 are excluded from the summary above, as these amounts cannot be estimated with certainty. The minimum contribution for our U.S. pension plan as required by the Employee Retirement Income Security Act (ERISA) is currently zero. We may make additional contributions to this plan at the discretion of management. |
| |
(d) | This item includes long-term obligations under agreements with various service providers and contractual commitments for capital expenditures. |
| |
(e) | Other long-term liabilities include environmental remediation costs, conditional asset retirement obligations and indemnification liabilities, net of related receivables. Amounts subsequent to 2016 are excluded from the summary above, as we are unable to make a reasonably reliable estimate of when the liabilities will be paid. |
| |
(f) | Amount for unrecognized tax benefits includes accrued interest and penalties. We are unable to make a reasonably reliable estimate of when the liabilities for unrecognized tax benefits will be settled or paid. |
Supplemental Sales Information
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 businesses we acquired also affect our reported sales. We believe that organic sales, defined as sales excluding the effects of changes in currency exchange rates and acquisitions, 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 changes in currency exchange rates and acquisitions. We use organic sales as one measure to monitor and evaluate our regional and operating segment performance. 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 acquire businesses, we exclude sales in the current period for which there are no comparable sales in the prior period. Organic sales growth is calculated by comparing organic sales to reported sales in the prior year. We attribute sales to the geographic regions based on the country of destination.
The following is a reconciliation of our reported sales by geographic region to organic sales (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Year Ended September 30, 2014 |
| Year Ended September 30, 2015 | |
| Sales | | Effect of Changes in Currency | | Sales Excluding Changes in Currency | | Effect of Acquisitions | | Organic Sales | | Sales |
United States | $ | 3,446.8 |
| | $ | 4.2 |
| | $ | 3,451.0 |
| | $ | (6.1 | ) | | $ | 3,444.9 |
| | $ | 3,414.6 |
|
Canada | 366.6 |
| | 47.3 |
| | 413.9 |
| | — |
| | 413.9 |
| | 437.0 |
|
Europe, Middle East and Africa | 1,174.0 |
| | 208.6 |
| | 1,382.6 |
| | (2.7 | ) | | 1,379.9 |
| | 1,351.8 |
|
Asia Pacific | 834.5 |
| | 39.5 |
| | 874.0 |
| | — |
| | 874.0 |
| | 884.0 |
|
Latin America | 486.0 |
| | 97.6 |
| | 583.6 |
| | — |
| | 583.6 |
| | 536.1 |
|
Total Company Sales | $ | 6,307.9 |
| | $ | 397.2 |
| | $ | 6,705.1 |
| | $ | (8.8 | ) | | $ | 6,696.3 |
| | $ | 6,623.5 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Year Ended September 30, 2013 |
| Year Ended September 30, 2014 | |
| Sales | | Effect of Changes in Currency | | Sales Excluding Changes in Currency | | Effect of Acquisitions | | Organic Sales | | Sales |
United States | $ | 3,414.6 |
| | $ | 7.7 |
| | $ | 3,422.3 |
| | $ | (0.9 | ) | | $ | 3,421.4 |
| | $ | 3,202.9 |
|
Canada | 437.0 |
| | 28.6 |
| | 465.6 |
| | — |
| | 465.6 |
| | 468.7 |
|
Europe, Middle East and Africa | 1,351.8 |
| | (28.3 | ) | | 1,323.5 |
| | (10.6 | ) | | 1,312.9 |
| | 1,284.9 |
|
Asia Pacific | 884.0 |
| | 12.9 |
| | 896.9 |
| | — |
| | 896.9 |
| | 851.9 |
|
Latin America | 536.1 |
| | 40.2 |
| | 576.3 |
| | — |
| | 576.3 |
| | 543.5 |
|
Total Company Sales | $ | 6,623.5 |
| | $ | 61.1 |
| | $ | 6,684.6 |
| | $ | (11.5 | ) | | $ | 6,673.1 |
| | $ | 6,351.9 |
|
The following is a reconciliation of our reported sales by operating segment to organic sales (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Year Ended September 30, 2014 |
| Year Ended September 30, 2015 | |
| Sales | | Effect of Changes in Currency | | Sales Excluding Changes in Currency | | Effect of Acquisitions | | Organic Sales | | Sales |
Architecture & Software | $ | 2,749.5 |
| | $ | 185.6 |
| | $ | 2,935.1 |
| | $ | (2.2 | ) | | $ | 2,932.9 |
| | $ | 2,845.3 |
|
Control Products & Solutions | 3,558.4 |
| | 211.6 |
| | 3,770.0 |
| | (6.6 | ) | | 3,763.4 |
| | 3,778.2 |
|
Total Company Sales | $ | 6,307.9 |
| | $ | 397.2 |
| | $ | 6,705.1 |
| | $ | (8.8 | ) | | $ | 6,696.3 |
| | $ | 6,623.5 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Year Ended September 30, 2013 |
| Year Ended September 30, 2014 | |
| Sales | | Effect of Changes in Currency | | Sales Excluding Changes in Currency | | Effect of Acquisitions | | Organic Sales | | Sales |
Architecture & Software | $ | 2,845.3 |
| | $ | 19.6 |
| | $ | 2,864.9 |
| | $ | (0.9 | ) | | $ | 2,864.0 |
| | $ | 2,682.0 |
|
Control Products & Solutions | 3,778.2 |
| | 41.5 |
| | 3,819.7 |
| | (10.6 | ) | | 3,809.1 |
| | 3,669.9 |
|
Total Company Sales | $ | 6,623.5 |
| | $ | 61.1 |
| | $ | 6,684.6 |
| | $ | (11.5 | ) | | $ | 6,673.1 |
| | $ | 6,351.9 |
|
Critical Accounting Policies and Estimates
We have prepared the consolidated financial statements in accordance with accounting principles generally accepted in the United States, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. We believe the following critical accounting policies could have the most significant effect on our reported results or require subjective or complex judgments by management.
Retirement Benefits — Pension
Pension costs and obligations are actuarially determined and are influenced by assumptions used to estimate these amounts, including the discount rate, the expected rate of return on plan assets, the assumed annual compensation increase rate, the retirement rate, the mortality rate and the employee turnover rate. Changes in any of the assumptions and the amortization of differences between the assumptions and actual experience will affect the amount of pension expense in future periods.
Our global pension expense in 2015 was $145.7 million compared to $131.7 million in 2014. Approximately 69 percent of our 2015 global pension expense relates to our U.S. pension plan. The actuarial assumptions used to determine our 2015 U.S. pension expense included the following: discount rate of 4.50 percent (compared to 5.05 percent for 2014); expected rate of return on plan assets of 7.50 percent (compared to 7.50 percent for 2014); and an assumed long-term compensation increase rate of 3.75 percent (compared to 3.75 percent for 2014).
In 2015, 2014 and 2013, we were not required to make contributions to satisfy minimum statutory funding requirements in our U.S. pension plans.
The table below presents our estimate of net periodic benefit cost in 2016 compared to net periodic benefit cost in 2015 (in millions):
|
| | | | | | | | | | | | |
| | 2016 | | 2015 | | Change |
Service cost | | $ | 88.4 |
| | $ | 85.7 |
| | $ | 2.7 |
|
Prior service credit amortization | | (2.8 | ) | | (2.7 | ) | | (0.1 | ) |
Operating pension cost | | 85.6 |
| | 83.0 |
| | 2.6 |
|
| | | | | | |
Interest cost | | 170.1 |
| | 167.2 |
| | 2.9 |
|
Expected return on plan assets | | (219.1 | ) | | (223.2 | ) | | 4.1 |
|
Net actuarial loss amortization | | 124.8 |
| | 118.7 |
| | 6.1 |
|
Non-operating pension cost | | 75.8 |
| | 62.7 |
| | 13.1 |
|
Net periodic benefit cost | | $ | 161.4 |
| | $ | 145.7 |
| | $ | 15.7 |
|
For 2016 our U.S. discount rate will increase to 4.55 percent from 4.50 percent in 2015. The discount rate was set as of our September 30 measurement date and was determined by modeling a portfolio of bonds that match the expected cash flow of our benefit plans. For 2016 our U.S. long-term compensation increase rate will remain 3.75 percent. We established this rate by analyzing all elements of compensation that are pension-eligible earnings.
For 2016 our expected rate of return on U.S. plan assets will remain 7.50 percent. In estimating the expected return on plan assets, we considered actual returns on plan assets over the long term, adjusted for forward-looking considerations, such as inflation, interest rates, equity performance and the active management of the plan’s invested assets. We also considered our current and expected mix of plan assets in setting this assumption. The financial markets produced mixed results in 2015. The plan’s debt securities return was positive but below the expected return range in 2015, as lower market interest rates resulted in low single digit bond returns. The plan’s equity securities return was below the expected return range in 2015, as U.S. and international equity returns were negative for the year. The actual return for our portfolio of U.S. plan assets was approximately 5.90 percent annualized for the 15 years ended September 30, 2015, and was approximately 8.40 percent annualized for the 20 years ended September 30, 2015.
The target allocations and ranges of long-term expected return for our major categories of U.S. plan assets are as follows:
|
| | | | | | |
Asset Category | | Target Allocations | | Expected Return |
Equity securities | | 55% | | 9% | – | 10% |
Debt securities | | 40% | | 4% | – | 6% |
Other | | 5% | | 6% | – | 11% |
The changes in our discount rate and return on plan assets have an inverse relationship with our net periodic benefit cost. The change in our discount rate also has an inverse relationship with our projected benefit obligation. The change in our compensation increase rate has a direct relationship with our net periodic benefit cost and projected benefit obligation.
The following chart illustrates the estimated approximate change in projected benefit obligation and annual net periodic benefit cost assuming a change of 25 basis points in the key assumptions for our U.S. pension plans (in millions):
|
| | | | | | | | |
| | Pension Benefits |
| | Change in Projected Benefit Obligation | | Change in Net Periodic Benefit Cost(1) |
Discount rate | | $ | 121.1 |
| | $ | 12.0 |
|
Return on plan assets | | — |
| | 6.0 |
|
Compensation increase rate | | (23.4 | ) | | (4.7 | ) |
(1) Change includes both operating and non-operating pension costs.
More information regarding pension benefits is contained in Note 11 in the Financial Statements.
Revenue Recognition
For approximately 85 percent of our consolidated sales, we record sales when all of the following have occurred: persuasive evidence of a sales agreement exists; pricing is fixed or determinable; collection is reasonably assured; and products have been delivered and acceptance has occurred, as may be required according to contract terms, or services have been rendered. Within this category, we will at times enter into arrangements that involve the delivery of multiple products and/or the performance of services, such as installation and commissioning. The timing of delivery, though varied based upon the nature of the undelivered component, is generally short-term in nature. For these arrangements, revenue is allocated to each deliverable based on that element's relative selling price, provided the delivered element has value to customers on a standalone basis and, if the arrangement includes a general right of return, delivery or performance of the undelivered items is probable and substantially in our control. Relative selling price is obtained from sources such as vendor-specific objective evidence, which is based on our separate selling price for that or a similar item, or from third-party evidence such as how competitors have priced similar items. If such evidence is not available, we use our best estimate of the selling price, which includes various internal factors such as our pricing strategy and market factors.
We recognize substantially all of the remainder of our sales as construction-type contracts using either the percentage-of-completion or completed contract methods of accounting. We record sales relating to these contracts using the percentage-of-completion method when we determine that progress toward completion is reasonably and reliably estimable; we use the completed contract method for all others. Under the percentage-of-completion method, we recognize sales and gross profit as work is performed using the relationship between actual costs incurred and total estimated costs at completion. Under the percentage-of-completion method, we adjust sales and gross profit for revisions of estimated total contract costs or revenue in the period the change is identified. We record estimated losses on contracts when they are identified.
We use contracts and customer purchase orders to determine the existence of a sales agreement. We use shipping documents and customer acceptance, when applicable, to verify delivery. We assess whether the fee is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. We assess collectibility based on the creditworthiness of the customer as determined by credit evaluations and analysis, as well as the customer’s payment history.
Returns, Rebates and Incentives
Our primary incentive program provides distributors with cash rebates or account credits based on agreed amounts that vary depending on the customer to whom our distributor ultimately sells the product. We also offer various other incentive programs that provide distributors and direct sale customers with cash rebates, account credits or additional products and services based on meeting specified program criteria. Certain distributors are offered a right to return product, subject to contractual limitations.
We record accruals for customer returns, rebates and incentives at the time of revenue recognition based primarily on historical experience. Adjustments to the accrual may be required if actual returns, rebates and incentives differ from historical experience or if there are changes to other assumptions used to estimate the accrual. A critical assumption used in estimating the accrual for our primary distributor rebate program is the time period from when revenue is recognized to when the rebate is processed. If the time period were to change by 10 percent, the effect would be an adjustment to the accrual of approximately $11.2 million.
Returns, rebates and incentives are recognized as a reduction of sales if distributed in cash or customer account credits. Rebates and incentives are recognized in cost of sales for additional products and services to be provided. Accruals are reported as a current liability in our balance sheet or, where a right of setoff exists, as a reduction of accounts receivable. The accrual for customer returns, rebates and incentives was $181.4 million at September 30, 2015 and $195.6 million at September 30, 2014, of which $9.2 million at September 30, 2015 and $11.6 million at September 30, 2014 was included as an offset to accounts receivable.
Litigation, Claims and Contingencies
We record liabilities for litigation, claims and contingencies when an obligation is probable and when we have a basis to reasonably estimate its value. We also record liabilities for environmental matters based on estimates for known environmental remediation exposures. The liabilities include expenses for sites we currently own or operate or formerly owned or operated and third party sites where we were determined to be a potentially responsible party. At third-party environmental sites where more than one potentially responsible party has been identified, we record a liability for our estimated allocable share of costs related to our involvement with the site, as well as an estimated allocable share of costs related to the involvement of insolvent or unidentified parties. If we determine that recovery from insurers or other third parties is probable and a right of setoff exists, we record the liability net of the estimated recovery. If we determine that recovery from insurers or other third parties is probable, but a right of setoff does not exist, we record a liability for the total estimated costs of remediation and a receivable for the estimated recovery. At environmental sites where we are the only responsible party, we record a liability for the total estimated costs of remediation. Ongoing operating and maintenance expenditures included in our environmental remediation obligations are discounted to present value over the probable future remediation period. Our remaining environmental remediation obligations are undiscounted due to subjectivity of timing and/or amount of future cash payments. Environmental liability estimates may be affected by changing determinations of what constitutes an environmental exposure or an acceptable level of cleanup. To the extent that the required remediation procedures or timing of those procedures change, additional contamination is identified, or the financial condition of other potentially responsible parties is adversely affected, the estimate of our environmental liabilities may change.
Our accrual for environmental matters, including certain environmental indemnification liabilities that are substantially indemnified by ExxonMobil Corporation, was $54.5 million, net of $32.9 million of related receivables, and $48.2 million, net of $39.7 million of related receivables, at September 30, 2015 and 2014, respectively. Our recorded liability for environmental matters relates almost entirely to businesses formerly owned by us (legacy businesses) for which we retained the responsibility to remediate. The nature of our current business is such that the likelihood of new environmental exposures that could result in a significant charge to earnings is low. As a result of remediation efforts at legacy sites and limited new environmental matters, we expect that gradually, over a long period of time, our environmental obligations will decline. However, changes in required remediation procedures or timing of those procedures at existing legacy sites, or discovery of contamination at additional sites, could result in increases to our environmental obligations.
One of our principal self-insurance programs covers product liability where we self-insure up to a specified dollar amount. Claims exceeding this amount up to specified limits are covered by insurance policies issued by commercial insurers. We estimate the reserve for product liability claims using our claims experience for the periods being valued. Adjustments to the product liability reserves may be required to reflect emerging claims experience and other factors such as inflationary trends or the outcome of claims. The reserve for product liability claims, including asbestos costs, was $17.8 million, net of $10.4 million of related receivables, and $14.8 million, net of $7.5 million of related receivables, as of September 30, 2015 and 2014, respectively.
Various lawsuits, claims and proceedings have been or may be instituted or asserted against us relating to the conduct of our business. As described in Note 14 of the Financial Statements within the section entitled Other Matters, we have been named as a defendant in lawsuits alleging personal injury as a result of exposure to asbestos that was used in certain components of our products many years ago. See Note 14 of the Financial Statements for further discussion.
We accrue for costs related to the legal obligation associated with the retirement of a tangible long-lived asset that results from the acquisition, construction, development or the normal operation of the long-lived asset. The obligation to perform the asset retirement activity is not conditional even though the timing or method may be conditional. Identified conditional asset retirement obligations include asbestos abatement and remediation of soil contamination beneath current and previously divested facilities. We estimate conditional asset retirement obligations using site-specific knowledge and historical industry expertise. A significant change in the costs or timing could have a significant effect on our estimates. We recorded these liabilities in the Consolidated Balance Sheet, which totaled $0.4 million and $0.3 million in other current liabilities at September 30, 2015 and 2014, respectively, and $19.8 million and $21.9 million in other liabilities at September 30, 2015 and 2014, respectively.
In conjunction with the sale of our Dodge mechanical and Reliance Electric motors and motor repair services businesses, we agreed to indemnify Baldor Electric Company for costs and damages related to certain legacy legal, environmental and asbestos matters of these businesses arising before January 31, 2007, for which the maximum exposure is capped at the amount received for the sale. We estimate the potential future payments we could incur under these indemnifications may approximate $6.6 million, of which $1.0 million and $0.8 million has been accrued in other current liabilities at September 30, 2015 and 2014, respectively, and $5.6 million and $7.0 million has been accrued in other liabilities at September 30, 2015 and 2014, respectively. A significant change in the costs or timing could have a significant effect on our estimates.
More information regarding litigation, claims and contingencies is contained in Note 14 in the Financial Statements.
Income Taxes
We operate in numerous taxing jurisdictions and are subject to regular examinations by U.S. federal, state and non-U.S. taxing authorities. Additionally, we have retained tax liabilities and the rights to tax refunds in connection with various divestitures of businesses in prior years. Our income tax positions are based on research and interpretations of the income tax laws and rulings in each of the jurisdictions in which we do business. Due to the ambiguity of laws and rulings in each jurisdiction, the differences and interplay in tax laws between those jurisdictions, the uncertainty of how underlying facts may be construed and the inherent uncertainty in estimating the final resolution of complex tax audit matters, our estimates of income tax liabilities may differ from actual payments or assessments.
While we have support for the positions we take on our tax returns, taxing authorities may assert interpretations of laws and facts and may challenge cross-jurisdictional transactions. Cross-jurisdictional transactions between our subsidiaries involving the transfer price for products, services, and/or intellectual property as well as various U.S. state tax matters comprise our more significant income tax reserves. The gross liability for unrecognized tax benefits, excluding interest and penalties, was recorded in other liabilities in the Consolidated Balance Sheet in the amount of $43.9 million and $38.9 million at September 30, 2015 and 2014, respectively, of which the entire amount would reduce our effective tax rate if recognized. Accrued interest and penalties related to unrecognized tax benefits were $5.1 million and $8.1 million at September 30, 2015 and 2014, respectively. We recognize interest and penalties related to unrecognized tax benefits in the income tax provision. If the unrecognized tax benefits were recognized, the net impact on our income tax provision, including the recognition of interest and penalties and offsetting tax assets, would be $26.5 million as of September 30, 2015. We believe it is reasonably possible that the amount of gross unrecognized tax benefits could be reduced by up to $31.0 million in the next 12 months as a result of the resolution of tax matters in various global jurisdictions and the lapses of statutes of limitations. If the unrecognized tax benefits were recognized, the net reduction to our income tax provision, including the recognition of interest and penalties and offsetting tax assets, could be up to $14.5 million.
We recorded a valuation allowance for a portion of our deferred tax assets related to net operating loss, tax credit, and capital loss carryforwards (Carryforwards) and certain temporary differences in the amount of $22.2 million at September 30, 2015 and $27.8 million at September 30, 2014 based on the projected profitability of the entity in the respective tax jurisdiction. The valuation allowance is based on an evaluation of the uncertainty that the Carryforwards and certain temporary differences will be realized. Our income would increase if we determine we will be able to use more Carryforwards or certain temporary differences than currently expected. Conversely, our income would decrease if we determine we are unable to realize our deferred tax assets in the future.
Our consolidated financial statements provide for tax liability on undistributed earnings of our subsidiaries that will be repatriated to the U.S. As of September 30, 2015, we have not provided U.S. deferred taxes for $3,059.0 million of such earnings, since these earnings have been, and under current plans will continue to be, indefinitely reinvested outside the U.S.
At the end of each interim reporting period, we estimate a base effective tax rate that we expect for the full fiscal year based on our most recent forecast of pretax income, permanent book and tax differences and global tax planning strategies. We use this base rate to provide for income taxes on a year-to-date basis, excluding the effect of significant unusual or extraordinary items and items that are reported net of their related tax effects. We record the tax effect of significant unusual or extraordinary items and items that are reported net of their tax effects in the period in which they occur.
More information regarding income taxes is contained in Note 13 in the Financial Statements.
Recent Accounting Pronouncements
See Note 1 in the Financial Statements regarding recent accounting pronouncements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk during the normal course of business from changes in foreign currency exchange rates and interest rates. We manage exposure to these risks through a combination of normal operating and financing activities as well as derivative financial instruments in the form of foreign currency forward exchange contracts. We sometimes use interest rate swap contracts to manage the balance of fixed and floating rate debt.
Foreign Currency Risk
We are exposed to foreign currency risks that arise from normal business operations. These risks include the translation of local currency balances of foreign subsidiaries, transaction gains and losses associated with intercompany loans with foreign subsidiaries and transactions denominated in currencies other than a location’s functional currency. Our objective is to minimize our exposure to these risks through a combination of normal operating activities and the use of foreign currency forward exchange contracts. Contracts are usually denominated in currencies of major industrial countries. The fair value of our foreign currency forward exchange contracts is an asset of $54.6 million and a liability of $18.5 million at September 30, 2015. We enter into these contracts with major financial institutions that we believe to be creditworthy.
We do not enter into derivative financial instruments for speculative purposes. In 2015 and 2014, the relative strengthening of the U.S. dollar against foreign currencies had an unfavorable impact on our sales and results of operations. While future changes in foreign currency exchange rates are difficult to predict, our sales and profitability may be adversely affected if the U.S. dollar further strengthens relative to 2015 levels.
Certain of our locations have assets and liabilities denominated in currencies other than their functional currencies. We enter into foreign currency forward exchange contracts to offset the transaction gains or losses associated with some of these assets and liabilities. For such assets and liabilities without offsetting foreign currency forward exchange contracts, a 10 percent adverse change in the underlying foreign currency exchange rates would reduce our pre-tax income by approximately $13.6 million.
We record all derivatives on the balance sheet at fair value regardless of the purpose for holding them. The use of foreign currency forward exchange contracts allows us to manage transactional exposure to exchange rate fluctuations as the gains or losses incurred on these contracts will offset, in whole or in part, losses or gains on the underlying foreign currency exposure. Derivatives that are not designated as hedges for accounting purposes are adjusted to fair value through earnings. For derivatives that are hedges, depending on the nature of the hedge, changes in fair value are either offset by changes in the fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive loss until the hedged item is recognized in earnings. We recognize the ineffective portion of a derivative’s change in fair value in earnings immediately. There was no impact on earnings due to ineffective hedges in 2015 or 2014. A hypothetical 10 percent adverse change in underlying foreign currency exchange rates associated with the hedged exposures and related contracts would not be significant to our financial condition or results of operations.
Interest Rate Risk
In addition to existing cash balances and cash provided by normal operating activities, we use a combination of short-term and long-term debt to finance operations. We are exposed to interest rate risk on certain of these debt obligations.
Our short-term debt obligations are primarily comprised of commercial paper borrowings. There were no commercial paper borrowings outstanding at September 30, 2015. At September 30, 2014, commercial paper borrowings outstanding were $325.0 million, with a weighted average interest rate of 0.17 percent and weighted average maturity period of seven days. We have issued, and anticipate continuing to issue, additional short-term commercial paper obligations as needed. Changes in market interest rates on commercial paper borrowings affect our results of operations. A hypothetical 50 basis point increase in average market interest rates related to our short-term debt would not be significant to our results of operations or financial condition.
We had outstanding fixed rate long-term debt obligations with a carrying value of $1,500.9 million at September 30, 2015 and $900.4 million at September 30, 2014. The fair value of this debt was $1,682.6 million at September 30, 2015 and $1,119.4 million at September 30, 2014. The potential reduction in fair value on such fixed-rate debt obligations from a hypothetical 50 basis point increase in market interest rates would not be significant to the overall fair value of our long-term debt. We currently have no plans to repurchase our outstanding fixed-rate instruments before their maturity and, therefore, fluctuations in market interest rates would not have an effect on our results of operations or shareowners’ equity.
In February 2015, we entered into interest rate swap contracts, which we designated as fair value hedges. These interest rate swaps effectively converted the $600.0 million aggregate principal amount of our 2.050% notes payable in March 2020 (2020 Notes) and 2.875% notes payable in March 2025 (2025 Notes) to floating rate debt, each at a rate based on three-month LIBOR plus a fixed spread. The effective floating interest rates were 0.763 percent for the 2020 Notes and 1.173 percent for the 2025 Notes at September 30, 2015. The fair value of our interest rate swap contracts at September 30, 2015 was a net unrealized gain of $5.4 million. A hypothetical 50 basis point increase in average market interest rates related to our interest rate swaps would not be significant to our results of operations or financial condition.
Item 8. Financial Statements and Supplementary Data
CONSOLIDATED BALANCE SHEET
(in millions, except per share amounts)
|
| | | | | | | |
| September 30, |
| 2015 | | 2014 |
ASSETS |
Current assets: | | | |
Cash and cash equivalents | $ | 1,427.3 |
| | $ | 1,191.3 |
|
Short-term investments | 721.9 |
| | 628.5 |
|
Receivables | 1,041.0 |
| | 1,215.8 |
|
Inventories | 535.6 |
| | 588.4 |
|
Deferred income taxes | 151.2 |
| | 163.5 |
|
Other current assets | 171.0 |
| | 146.7 |
|
Total current assets | 4,048.0 |
| | 3,934.2 |
|
Property, net | 605.6 |
| | 632.9 |
|
Goodwill | 1,028.8 |
| | 1,050.6 |
|
Other intangible assets, net | 229.5 |
| | 246.2 |
|
Deferred income taxes | 343.6 |
| | 205.7 |
|
Other assets | 149.2 |
| | 154.7 |
|
Total | $ | 6,404.7 |
| | $ | 6,224.3 |
|
LIABILITIES AND SHAREOWNERS’ EQUITY |
Current liabilities: | | | |
Short-term debt | $ | — |
| | $ | 325.0 |
|
Accounts payable | 521.7 |
| | 520.6 |
|
Compensation and benefits | 225.0 |
| | 277.7 |
|
Advance payments from customers and deferred revenue | 200.8 |
| | 196.5 |
|
Customer returns, rebates and incentives | 172.2 |
| | 184.0 |
|
Other current liabilities | 208.0 |
| | 188.3 |
|
Total current liabilities | 1,327.7 |
| | 1,692.1 |
|
Long-term debt | 1,500.9 |
| | 900.4 |
|
Retirement benefits | 1,116.6 |
| | 767.9 |
|
Other liabilities | 202.7 |
| | 205.8 |
|
Commitments and contingent liabilities (Note 14) |
| |
|
Shareowners’ equity: | | | |
Common stock ($1.00 par value, shares issued: 181.4) | 181.4 |
| | 181.4 |
|
Additional paid-in capital | 1,552.1 |
| | 1,512.3 |
|
Retained earnings | 5,316.9 |
| | 4,839.6 |
|
Accumulated other comprehensive loss | (1,334.6 | ) | | (948.0 | ) |
Common stock in treasury, at cost (shares held: 2015, 49.0; 2014, 44.7) | (3,459.0 | ) | | (2,927.2 | ) |
Total shareowners’ equity | 2,256.8 |
| | 2,658.1 |
|
Total |