ROK-2015.03.31-10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
_________________________________________
FORM 10-Q 
_________________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2015
Commission file number 1-12383
_________________________________________
Rockwell Automation, Inc.
(Exact name of registrant as specified in its charter)
_________________________________________
Delaware
 
25-1797617
(State or other jurisdiction
of incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
1201 South Second Street,
Milwaukee, Wisconsin
 
53204
(Address of principal executive offices)
 
(Zip Code)
+1 (414) 382-2000
Registrant’s telephone number, including area code 
_________________________________________
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  x    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  x    No  ¨
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):
Large Accelerated Filer x
 
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 Exchange Act). Yes  ¨    No  x
134,574,906 shares of registrant’s Common Stock, $1.00 par value, were outstanding on March 31, 2015.



Table of Contents
ROCKWELL AUTOMATION, INC.


INDEX
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



2

PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements

ROCKWELL AUTOMATION, INC.

CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(in millions, except per share amounts)




 
March 31,
2015
 
September 30,
2014
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
1,402.9

 
$
1,191.3

Short-term investments
634.7

 
628.5

Receivables
1,060.3

 
1,215.8

Inventories
595.6

 
588.4

Deferred income taxes
152.8

 
163.5

Other current assets
199.7

 
146.7

Total current assets
4,046.0

 
3,934.2

Property, net of accumulated depreciation of $1,271.8 and $1,255.5, respectively
598.0

 
632.9

Goodwill
1,028.6

 
1,050.6

Other intangible assets, net
246.9

 
246.2

Deferred income taxes
191.5

 
205.7

Other assets
169.2

 
159.9

Total
$
6,280.2

 
$
6,229.5

LIABILITIES AND SHAREOWNERS’ EQUITY
Current liabilities:
 
 
 
Short-term debt
$

 
$
325.0

Accounts payable
515.4

 
520.6

Compensation and benefits
196.6

 
277.7

Advance payments from customers and deferred revenue
209.8

 
196.5

Customer returns, rebates and incentives
170.7

 
184.0

Other current liabilities
186.8

 
188.3

Total current liabilities
1,279.3

 
1,692.1

Long-term debt
1,505.4

 
905.6

Retirement benefits
726.3

 
767.9

Other liabilities
202.7

 
205.8

Commitments and contingent liabilities (Note 11)

 

Shareowners’ equity:
 
 
 
Common stock ($1.00 par value, shares issued: 181.4)
181.4

 
181.4

Additional paid-in capital
1,527.1

 
1,512.3

Retained earnings
5,083.8

 
4,839.6

Accumulated other comprehensive loss
(1,040.7
)
 
(948.0
)
Common stock in treasury, at cost (shares held: March 31, 2015, 46.8; September 30, 2014, 44.7)
(3,185.1
)
 
(2,927.2
)
Total shareowners’ equity
2,566.5

 
2,658.1

Total
$
6,280.2

 
$
6,229.5

See Notes to Condensed Consolidated Financial Statements.

3

Table of Contents
ROCKWELL AUTOMATION, INC.


CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(in millions, except per share amounts)


 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
2015
 
2014
 
2015
 
2014
Sales
 
 
 
 
 
 
 
Products and solutions
$
1,394.5

 
$
1,429.1

 
$
2,804.3

 
$
2,851.4

Services
156.3

 
171.4

 
320.9

 
340.8

 
1,550.8

 
1,600.5

 
3,125.2

 
3,192.2

Cost of sales
 
 
 
 
 
 
 
Products and solutions
(768.6
)
 
(825.1
)
 
(1,545.4
)
 
(1,635.5
)
Services
(109.0
)
 
(119.6
)
 
(219.1
)
 
(237.2
)
 
(877.6
)
 
(944.7
)
 
(1,764.5
)
 
(1,872.7
)
Gross profit
673.2

 
655.8

 
1,360.7

 
1,319.5

Selling, general and administrative expenses
(382.4
)
 
(392.5
)
 
(769.3
)
 
(777.9
)
Other income
1.4

 
0.1

 
3.2

 
9.5

Interest expense
(15.7
)
 
(15.0
)
 
(30.6
)
 
(29.9
)
Income before income taxes
276.5

 
248.4

 
564.0

 
521.2

Income tax provision
(70.5
)
 
(68.1
)
 
(143.8
)
 
(142.8
)
Net income
$
206.0

 
$
180.3

 
$
420.2

 
$
378.4

Earnings per share:
 
 
 
 
 
 
 
Basic
$
1.53

 
$
1.30

 
$
3.10

 
$
2.73

Diluted
$
1.51

 
$
1.28

 
$
3.08

 
$
2.70

Cash dividends per share
$
0.65

 
$
0.58

 
$
1.30

 
$
1.16

Weighted average outstanding shares:
 
 
 
 
 
 
 
Basic
134.9

 
138.5

 
135.3

 
138.5

Diluted
136.0

 
140.2

 
136.5

 
140.2

See Notes to Condensed Consolidated Financial Statements.


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ROCKWELL AUTOMATION, INC.


CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
(in millions)

 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
2015
 
2014
 
2015
 
2014
Net income
$
206.0

 
$
180.3

 
$
420.2

 
$
378.4

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Pension and other postretirement benefit plan adjustments (net of tax expense of $9.2, $7.9, $18.4 and $15.7)
17.2

 
14.5

 
34.8

 
29.1

Currency translation adjustments
(67.7
)
 
5.1

 
(160.6
)
 
14.3

Net change in unrealized gains and losses on cash flow hedges (net of tax expense of $8.7, $0.4, $7.6 and $0.8)
25.7

 
(2.0
)
 
33.1

 
(1.3
)
Other comprehensive (loss) income
(24.8
)
 
17.6

 
(92.7
)
 
42.1

Comprehensive income
$
181.2

 
$
197.9

 
$
327.5

 
$
420.5

See Notes to Condensed Consolidated Financial Statements.




5

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ROCKWELL AUTOMATION, INC.


CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(in millions)

 
Six Months Ended
March 31,
 
2015
 
2014
Operating activities:
 
 
 
Net income
$
420.2

 
$
378.4

Adjustments to arrive at cash provided by operating activities:
 
 
 
Depreciation
66.1

 
58.5

Amortization of intangible assets
13.6

 
15.8

Share-based compensation expense
21.2

 
21.9

Retirement benefit expense
71.3

 
66.5

Pension contributions
(21.3
)
 
(25.1
)
Net loss on disposition of property
0.2

 

Income tax benefit from the exercise of stock options

 
0.1

Excess income tax benefit from share-based compensation
(6.6
)
 
(18.6
)
Changes in assets and liabilities, excluding effects of acquisitions and foreign
currency adjustments:
 
 
 
Receivables
81.2

 
(10.9
)
Inventories
(34.6
)
 
(57.1
)
Accounts payable
26.7

 
12.1

Advance payments from customers and deferred revenue
24.6

 
39.5

Compensation and benefits
(70.3
)
 
(32.9
)
Income taxes
(14.0
)
 
(37.3
)
Other assets and liabilities
(24.9
)
 
(4.6
)
Cash provided by operating activities
553.4

 
406.3

 
 
 
 
Investing activities:
 
 
 
Capital expenditures
(58.0
)
 
(58.3
)
Acquisition of business, net of cash acquired
(21.2
)
 
(81.5
)
Purchases of short-term investments
(338.0
)
 
(310.8
)
Proceeds from maturities of short-term investments
323.8

 
197.8

Proceeds from sale of property
0.2

 
0.2

Other investing activities

 
(3.4
)
Cash used for investing activities
(93.2
)
 
(256.0
)
 
 
 
 
Financing activities:
 
 
 
Net (repayment) issuance of short-term debt
(325.0
)
 
163.5

Issuance of long-term debt, net of discount and issuance costs
594.3

 

Cash dividends
(175.9
)
 
(160.9
)
Purchases of treasury stock
(293.0
)
 
(217.8
)
Proceeds from the exercise of stock options
22.7

 
83.9

Excess income tax benefit from share-based compensation
6.6

 
18.6

Other financing activities
(1.6
)
 

Cash used for financing activities
(171.9
)
 
(112.7
)
 
 
 
 
Effect of exchange rate changes on cash
(76.7
)
 
1.3

 
 
 
 
Increase in cash and cash equivalents
211.6

 
38.9

Cash and cash equivalents at beginning of period
1,191.3

 
1,200.9

Cash and cash equivalents at end of period
$
1,402.9

 
$
1,239.8

See Notes to Condensed Consolidated Financial Statements.

6

Table of Contents
ROCKWELL AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



1. Basis of Presentation and Accounting Policies
In the opinion of management of Rockwell Automation, Inc. (the Company or Rockwell Automation), the unaudited Condensed Consolidated Financial Statements contain all adjustments necessary to present fairly the financial position, results of operations and cash flows for the periods presented and, except as otherwise indicated, such adjustments consist only of those of a normal recurring nature. These statements should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended September 30, 2014. The results of operations for the three and six month periods ended March 31, 2015 are not necessarily indicative of the results for the full year. All date references to years and quarters herein refer to our fiscal year and fiscal quarter unless otherwise stated.
Receivables
Receivables are stated net of an allowance for doubtful accounts of $23.2 million at March 31, 2015 and $19.4 million at September 30, 2014. In addition, receivables are stated net of an allowance for certain customer returns, rebates and incentives of $12.2 million at March 31, 2015 and $11.6 million at September 30, 2014.
Earnings Per Share
The following table reconciles basic and diluted earnings per share (EPS) amounts (in millions, except per share amounts):
 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
2015
 
2014
 
2015
 
2014
Net income
$
206.0

 
$
180.3

 
$
420.2

 
$
378.4

Less: Allocation to participating securities
(0.2
)
 
(0.2
)
 
(0.4
)
 
(0.5
)
Net income available to common shareowners
$
205.8

 
$
180.1


$
419.8

 
$
377.9

Basic weighted average outstanding shares
134.9

 
138.5

 
135.3

 
138.5

Effect of dilutive securities
 
 
 
 
 
 
 
Stock options
1.1

 
1.5

 
1.1

 
1.5

Performance shares

 
0.2

 
0.1

 
0.2

Diluted weighted average outstanding shares
136.0

 
140.2

 
136.5

 
140.2

Earnings per share:
 
 
 
 
 
 
 
Basic
$
1.53

 
$
1.30

 
$
3.10

 
$
2.73

Diluted
$
1.51

 
$
1.28

 
$
3.08

 
$
2.70

For the three and six months ended March 31, 2015, share-based compensation awards for 1.6 million shares and 1.7 million shares, respectively, were excluded from the diluted EPS calculation because they were antidilutive. For the three and six months ended March 31, 2014, share-based compensation awards for 0.9 million shares were excluded from the diluted EPS calculation because they were antidilutive.
Recent Accounting Pronouncements
In May 2014, the FASB issued a new standard on revenue recognition from contracts with customers. This standard supersedes nearly all existing revenue recognition guidance and involves a five-step approach to recognizing revenue based on individual performance obligations in a contract. The new standard will also require additional qualitative and quantitative disclosures about contracts with customers, significant judgments made in applying the revenue guidance, and assets recognized from the costs to obtain or fulfill a contract. This guidance is effective for us for reporting periods beginning October 1, 2017. We are currently evaluating the impact the adoption of this guidance will have on our consolidated financial statements and related disclosures.

7

Table of Contents
ROCKWELL AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

2. Share-Based Compensation
We recognized $10.4 million and $21.2 million of pre-tax share-based compensation expense during the three and six months ended March 31, 2015, respectively. We recognized $10.4 million and $21.9 million of pre-tax share-based compensation expense during the three and six months ended March 31, 2014, respectively. Our annual grant of share-based compensation takes place during the first quarter of each fiscal year. The number of shares granted to employees and non-employee directors and the weighted average fair value per share during the periods presented were (in thousands except per share amounts):
 
Six Months Ended March 31,
 
2015
 
2014
 
Grants
 
Wtd. Avg.
Share
Fair Value
 
Grants
 
Wtd. Avg.
Share
Fair Value
Stock options
1,032

 
$
26.70

 
930

 
$
33.97

Performance shares
87

 
103.70

 
69

 
108.48

Restricted stock and restricted stock units
49

 
115.25

 
50

 
108.99

Unrestricted stock
7

 
111.43

 
8

 
108.86

3. Inventories
Inventories consist of (in millions):
 
 
March 31,
2015
 
September 30,
2014
Finished goods
$
252.1

 
$
240.3

Work in process
160.5

 
156.9

Raw materials, parts and supplies
183.0

 
191.2

Inventories
$
595.6

 
$
588.4

4. Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the six months ended March 31, 2015 are (in millions):
 
Architecture &
Software
 
Control
Products &
Solutions
 
Total
Balance as of September 30, 2014
$
395.6

 
$
655.0

 
$
1,050.6

Acquisition of business

 
14.9

 
14.9

Translation and other
(8.5
)
 
(28.4
)
 
(36.9
)
Balance as of March 31, 2015
$
387.1

 
$
641.5

 
$
1,028.6


During the six months ended March 31, 2015, we recognized goodwill of $14.9 million and intangible assets of $5.4 million resulting from the acquisition of the assets of ESC Services, Inc., a global provider of lockout-tagout services and solutions. We assigned the full amount of goodwill related to ESC Services, Inc. to our Control Products & Solutions segment.


8

ROCKWELL AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
4. Goodwill and Other Intangible Assets (continued)



Other intangible assets consist of (in millions):
 
March 31, 2015
 
Carrying
Amount
 
Accumulated
Amortization
 
Net
Amortized intangible assets:
 
 
 
 
 
Computer software products
$
181.9

 
$
86.0

 
$
95.9

Customer relationships
87.6

 
45.9

 
41.7

Technology
83.0

 
40.2

 
42.8

Trademarks
31.8

 
14.4

 
17.4

Other
14.7

 
9.3

 
5.4

Total amortized intangible assets
399.0

 
195.8

 
203.2

Intangible assets not subject to amortization
43.7

 

 
43.7

Total
$
442.7

 
$
195.8

 
$
246.9

 
September 30, 2014
 
Carrying
Amount
 
Accumulated
Amortization
 
Net
Amortized intangible assets:
 
 
 
 
 
Computer software products
$
169.1

 
$
82.5

 
$
86.6

Customer relationships
89.8

 
45.4

 
44.4

Technology
84.0

 
38.2

 
45.8

Trademarks
33.7

 
14.0

 
19.7

Other
15.5

 
9.5

 
6.0

Total amortized intangible assets
392.1

 
189.6

 
202.5

Intangible assets not subject to amortization
43.7

 

 
43.7

Total
$
435.8

 
$
189.6

 
$
246.2

The Allen-Bradley® trademark has an indefinite life and therefore is not subject to amortization.
Estimated amortization expense is $28.9 million in 2015, $30.5 million in 2016, $26.4 million in 2017, $20.3 million in 2018 and $16.9 million in 2019.
We performed the annual evaluation of our goodwill and indefinite life intangible assets for impairment as required by accounting principles generally accepted in the United States (U.S. GAAP) during the second quarter of 2015 and concluded that these assets are not impaired.

9

Table of Contents
ROCKWELL AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

5. Long-term and Short-term Debt
Long-term debt consists of (in millions):
 
 
March 31,
2015
 
September 30,
2014
5.65% notes, payable in December 2017
 
$
250.0

 
$
250.0

2.050% notes, payable in March 2020
 
301.1

 

2.875% notes, payable in March 2025
 
299.3

 

6.70% debentures, payable in January 2028
 
250.0

 
250.0

6.25% debentures, payable in December 2037
 
250.0

 
250.0

5.20% debentures, payable in January 2098
 
200.0

 
200.0

Unamortized discount and other
 
(45.0
)
 
(44.4
)
Long-term debt
 
$
1,505.4

 
$
905.6


In February 2015, we issued $600.0 million of aggregate principal amount of long-term notes in a public offering. The offering consisted of $300.0 million in 2.050% notes payable in March 2020 (2020 Notes) and $300.0 million in 2.875% notes payable in March 2025 (2025 Notes), both issued at a discount. 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 to be 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 $600.0 million aggregate principal amount of our 2020 Notes and 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 0.715 percent for the 2020 Notes and 1.125 percent for the 2025 Notes at March 31, 2015. We have designated these swaps as fair value hedges. The aggregate fair value of the interest rate swap contracts at March 31, 2015 was a net unrealized gain of $0.4 million. The individual contracts were recorded in other assets and other liabilities on the Condensed Consolidated Balance Sheet with corresponding adjustments to the carrying value of the underlying debt. Additional information related to our interest rate swap contracts is included in Note 8.
Our short-term debt obligations are primarily comprised of commercial paper borrowings. There were no commercial paper borrowings outstanding at March 31, 2015. Commercial paper borrowings outstanding were $325.0 million at September 30, 2014. The weighted average interest rate of the commercial paper outstanding was 0.17 percent at September 30, 2014.
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 can increase the aggregate amount of this credit facility by up to $350.0 million, subject to the consent of the banks in the credit facility. We have not borrowed against either credit facility during the periods ended March 31, 2015 or September 30, 2014.
6. Other Current Liabilities
Other current liabilities consist of (in millions):
 
March 31,
2015
 
September 30,
2014
Unrealized losses on foreign exchange contracts
$
21.4

 
$
5.8

Product warranty obligations
32.5

 
34.1

Taxes other than income taxes
32.2

 
37.2

Accrued interest
17.4

 
15.6

Income taxes payable
33.9

 
41.0

Other
49.4

 
54.6

Other current liabilities
$
186.8

 
$
188.3


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ROCKWELL AUTOMATION, INC.


7. Product Warranty Obligations
We record a liability for product warranty obligations at the time of sale to a customer based upon historical warranty experience. Most of our products are covered under a warranty period that runs for twelve months from either the date of sale or installation. We also record a liability for specific warranty matters when they become probable and reasonably estimable. Our product warranty obligations are included in other current liabilities in the Condensed Consolidated Balance Sheet.
Changes in product warranty obligations for the six months ended March 31, 2015 and 2014 are (in millions):
 
Six Months Ended
March 31,
 
2015
 
2014
Balance at beginning of period
$
34.1

 
$
36.9

Accruals for warranties issued during the current period
13.5

 
15.4

Adjustments to pre-existing warranties
(0.6
)
 
(1.3
)
Settlements of warranty claims
(14.5
)
 
(14.0
)
Balance at end of period
$
32.5

 
$
37.0

 

11

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ROCKWELL AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

8. Derivative Instruments and Fair Value Measurement
We use foreign currency forward exchange contracts and foreign currency denominated debt obligations to manage certain foreign currency risks. We also use interest rate swap contracts to manage risks associated with interest rate fluctuations. The following information explains how we use and value these types of derivative instruments and how they impact our Condensed Consolidated Financial Statements.
Additional information related to hedging instruments associated with our long-term debt is included in Note 5. Additional information related to the impacts of cash flow hedges on other comprehensive income is included in Note 10.
Types of Derivative Instruments and Hedging Activities
Cash Flow Hedges
We enter into foreign currency forward exchange 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 (cash flow hedges). We report in other comprehensive income (loss) the effective portion of the gain or loss on derivative financial instruments that we designate and that qualify as cash flow hedges. We reclassify these gains or losses into earnings in the same periods when the hedged transactions affect earnings. To the extent forward exchange contracts designated as cash flow hedges are ineffective, changes in value are recorded in earnings through the maturity date. There was no impact on earnings due to ineffective cash flow hedges. At March 31, 2015, we had a U.S. dollar-equivalent gross notional amount of $736.3 million of foreign currency forward exchange contracts designated as cash flow hedges.
The pre-tax amount of gains (losses) recorded in other comprehensive income related to cash flow hedges that would have been recorded in the Condensed Consolidated Statement of Operations had they not been so designated was (in millions):
 
 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
2015
 
2014
 
2015
 
2014
Forward exchange contracts
$
39.8

 
$
(0.7
)
 
$
50.7

 
$
0.9

The pre-tax amount of (losses) gains reclassified from accumulated other comprehensive loss into the Condensed Consolidated Statement of Operations related to derivative forward exchange contracts designated as cash flow hedges, which offset the related gains and losses on the hedged items during the periods presented, was (in millions):
 
 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
2015
 
2014
 
2015
 
2014
Sales
$
(2.4
)
 
$
(0.8
)
 
$
(3.6
)
 
$
(1.0
)
Cost of sales
7.8

 
1.7

 
13.6

 
2.4

Total
$
5.4

 
$
0.9

 
$
10.0

 
$
1.4

Approximately $44.0 million ($38.9 million after tax) of net unrealized gains on cash flow hedges as of March 31, 2015 will be reclassified into earnings during the next 12 months. We expect that these net unrealized gains will be offset when the hedged items are recognized in earnings.

12

ROCKWELL AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

8. Derivative Instruments and Fair Value Measurement (continued)

Net Investment Hedges
We use foreign currency forward exchange contracts and foreign currency denominated debt obligations to hedge portions of our net investments in non-U.S. subsidiaries (net investment hedges) against the effect of exchange rate fluctuations on the translation of foreign currency balances to the U.S. dollar. For all instruments that are designated as net investment hedges and meet effectiveness requirements, the net changes in value of the designated hedging instruments are recorded in accumulated other comprehensive loss within shareowners’ equity where they offset gains and losses recorded on our net investments globally. To the extent forward exchange contracts or foreign currency denominated debt designated as net investment hedges are ineffective, changes in value are recorded in earnings through the maturity date. There was no impact on earnings due to ineffective net investment hedges. At March 31, 2015, we had a gross notional amount of $452.1 million of foreign currency forward exchange contracts and $13.4 million of foreign currency denominated debt designated as net investment hedges.
The pre-tax amount of (losses) gains recorded in other comprehensive income related to net investment hedges that would have been recorded in the Condensed Consolidated Statement of Operations had they not been so designated was (in millions):
 
 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
2015
 
2014
 
2015
 
2014
Forward exchange contracts
$
(6.4
)
 
$

 
$
(6.4
)
 
$

Foreign currency denominated debt
0.6

 
(0.2
)
 
1.3

 
(0.5
)
Total
$
(5.8
)
 
$
(0.2
)
 
$
(5.1
)
 
$
(0.5
)
Fair Value Hedges
We use interest rate swap contracts to manage the borrowing costs of certain long-term debt. In February 2015, we issued $600.0 million in aggregate principal amount of fixed rate notes. Upon issuance of these notes, we entered into fixed-to-floating interest rate swap contracts that effectively convert these notes from fixed rate debt to floating rate debt. We designate these contracts as fair value hedges because they hedge the changes in fair value of the fixed rate notes resulting from changes in interest rates. The changes in value of these fair value hedges are recorded as gains or losses in interest expense and are offset by the losses or gains on the underlying debt instruments, which are also recorded in interest expense. There was no impact on earnings due to ineffective fair value hedges. At March 31, 2015, the aggregate notional value of our interest rate swaps designated as fair value hedges was $600.0 million.
The pre-tax amount of net gains recognized within the Condensed Consolidated Statement of Operations related to derivative instruments designated as fair value hedges, which fully offset the related net losses on the hedged debt instruments during the periods presented, was (in millions):
 
 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
2015
 
2014
 
2015
 
2014
Interest expense
$
0.4

 
$

 
$
0.4

 
$


13

ROCKWELL AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

8. Derivative Instruments and Fair Value Measurement (continued)

Derivatives Not Designated as Hedging Instruments
Certain of our locations have assets and liabilities denominated in currencies other than their functional currencies resulting from intercompany loans and other transactions with third parties denominated in foreign currencies. We enter into foreign currency forward exchange contracts that we do not designate as hedging instruments to offset the transaction gains or losses associated with some of these assets and liabilities. Gains and losses on derivative financial instruments for which we do not elect hedge accounting are recognized in the Condensed Consolidated Statement of Operations in each period, based on the change in the fair value of the derivative financial instruments. At March 31, 2015, we had a U.S. dollar-equivalent gross notional amount of $223.6 million of foreign currency forward exchange contracts not designated as hedging instruments.
The pre-tax amount of gains from forward exchange contracts not designated as hedging instruments recognized in the Condensed Consolidated Statement of Operations was (millions):
 
 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
2015
 
2014
 
2015
 
2014
Other income
$
13.7

 
$
2.6

 
$
15.3

 
$
6.5

Fair Value of Financial Instruments
U.S. GAAP defines fair value as the price that would be received for an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability. U.S. GAAP also classifies the inputs used to measure fair value into the following hierarchy:
 
Level 1:
Quoted prices in active markets for identical assets or liabilities.
Level 2:
Quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.
Level 3:
Unobservable inputs for the asset or liability.
We recognize all derivative financial instruments as either assets or liabilities at fair value in the Consolidated Balance Sheet. We value our forward exchange contracts using a market approach. We use a valuation model based on observable market inputs including forward and spot prices for currency and interest rate curves. We did not change our valuation techniques during the three months ended March 31, 2015. It is our policy to execute such instruments with major financial institutions that we believe to be creditworthy and not to enter into derivative financial instruments for speculative purposes. We diversify our foreign currency forward exchange contracts among counterparties to minimize exposure to any one of these entities. Our foreign currency forward exchange contracts are usually denominated in currencies of major industrial countries. The U.S. dollar-equivalent gross notional amount of our forward exchange contracts totaled $1,412.0 million at March 31, 2015. Currency pairs (buy/sell) comprising the most significant contract notional values were United States dollar (USD)/euro, USD/Swiss franc, USD/Canadian dollar, Swiss franc/euro, Mexican peso/USD, Singapore dollar/USD, and Swiss franc/Canadian dollar.
We value interest rate swap contracts using a market approach based on observable market inputs including publicized swap curves.

14

ROCKWELL AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

8. Derivative Instruments and Fair Value Measurement (continued)

Assets and liabilities measured at fair value on a recurring basis and their location in our Condensed Consolidated Balance Sheet were (in millions):
 
 
 
Fair Value (Level 2)
Derivatives Designated as Hedging Instruments
Balance Sheet Location
 
March 31,
2015
 
September 30,
2014
Forward exchange contracts
Other current assets
 
$
49.2

 
$
13.1

Forward exchange contracts
Other assets
 
11.6

 
5.0

Forward exchange contracts
Other current liabilities
 
(18.8
)
 
(4.1
)
Forward exchange contracts
Other liabilities
 
(0.8
)
 
(0.3
)
Interest rate swap contracts
Other assets
 
1.1

 

Interest rate swap contracts
Other liabilities
 
(0.7
)
 

Total
 
 
$
41.6

 
$
13.7

 
 
 
 
Fair Value (Level 2)
Derivatives Not Designated as Hedging Instruments
Balance Sheet Location
 
March 31,
2015
 
September 30,
2014
Forward exchange contracts
Other current assets
 
$
21.4

 
$
3.5

Forward exchange contracts
Other current liabilities
 
(2.6
)
 
(1.8
)
Total
 
 
$
18.8

 
$
1.7


We also hold financial instruments consisting of cash, short-term investments, short-term debt and long-term debt. The fair values of our cash, short-term investments and short-term debt approximate their carrying amounts as reported in our Condensed Consolidated Balance Sheet due to the short-term nature of these instruments.
We base the fair value of long-term debt upon quoted market prices for the same or similar issues. The fair value of long-term debt below considers the terms of the debt excluding the impact of derivative and hedging activity. The carrying amount of a portion of our long-term debt is impacted by fixed-to-floating interest rate swap contracts that are designated as fair value hedges.
The following table presents the carrying amounts and estimated fair values of financial instruments not measured at fair value in the Condensed Consolidated Balance Sheet (in millions): 
 
March 31, 2015
 
 
 
Fair Value
 
Carrying Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
Cash and cash equivalents
$
1,402.9

 
$
1,402.9

 
$
1,381.5

 
$
21.4

 
$

Short-term investments
634.7

 
634.7

 

 
634.7

 

Short-term debt

 

 

 

 

Long-term debt
1,505.4

 
1,769.1

 

 
1,769.1

 

 
September 30, 2014
 
 
 
Fair Value
 
Carrying Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
Cash and cash equivalents
$
1,191.3

 
$
1,191.3

 
$
1,154.2

 
$
37.1

 
$

Short-term investments
628.5

 
628.5

 

 
628.5

 

Short-term debt
325.0

 
325.0

 

 
325.0

 

Long-term debt
905.6

 
1,119.4

 

 
1,119.4

 

 

15

Table of Contents
ROCKWELL AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

9. Retirement Benefits
The components of net periodic benefit cost are (in millions):
 
 
Pension Benefits
 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
2015
 
2014
 
2015
 
2014
Service cost
$
21.5

 
$
19.6

 
$
43.2

 
$
39.3

Interest cost
41.6


43.6


83.9


87.2

Expected return on plan assets
(55.8
)

(54.5
)

(111.9
)

(109.0
)
Amortization:
 
 
 
 
 
 
 
Prior service credit
(0.6
)
 
(0.7
)
 
(1.3
)
 
(1.4
)
Net actuarial loss
29.6


24.9


59.6


49.8

Net periodic benefit cost
$
36.3

 
$
32.9

 
$
73.5

 
$
65.9

 

 
Other Postretirement Benefits
 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
2015
 
2014
 
2015
 
2014
Service cost
$
0.4

 
$
0.5

 
$
0.8

 
$
1.0

Interest cost
1.1

 
1.6

 
2.1

 
3.2

Amortization:
 
 
 
 
 
 
 
Prior service credit
(3.7
)
 
(2.7
)
 
(7.4
)
 
(5.2
)
Net actuarial loss
1.1

 
0.9

 
2.3

 
1.6

Net periodic benefit cost
$
(1.1
)
 
$
0.3

 
$
(2.2
)
 
$
0.6



 

16

Table of Contents
ROCKWELL AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

10. Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss by component were (in millions):
Three Months Ended March 31, 2015
 
 
 
 
 
 
 
 
Pension and other postretirement benefit plan adjustments,
net of tax
 
Accumulated currency translation adjustments,
net of tax
 
Net unrealized gains (losses) on cash flow hedges, net of tax
 
Total accumulated other comprehensive loss, net of tax
Balance as of December 31, 2014
$
(891.8
)
 
$
(145.4
)
 
$
21.3

 
$
(1,015.9
)
Other comprehensive (loss) income before reclassifications

 
(67.7
)
 
31.4

 
(36.3
)
Amounts reclassified from accumulated other comprehensive loss
17.2

 

 
(5.7
)
 
11.5

Other comprehensive income (loss)
17.2

 
(67.7
)
 
25.7

 
(24.8
)
Balance as of March 31, 2015
$
(874.6
)
 
$
(213.1
)
 
$
47.0

 
$
(1,040.7
)
Six Months Ended March 31, 2015
 
 
 
 
 
 
 
 
Pension and other postretirement benefit plan adjustments,
net of tax
 
Accumulated currency translation adjustments,
net of tax
 
Net unrealized gains (losses) on cash flow hedges, net of tax
 
Total accumulated other comprehensive loss, net of tax
Balance as of September 30, 2014
$
(909.4
)
 
$
(52.5
)
 
$
13.9

 
$
(948.0
)
Other comprehensive (loss) income before reclassifications

 
(160.6
)
 
43.6

 
(117.0
)
Amounts reclassified from accumulated other comprehensive loss
34.8

 

 
(10.5
)
 
24.3

Other comprehensive income (loss)
34.8

 
(160.6
)
 
33.1

 
(92.7
)
Balance as of March 31, 2015
$
(874.6
)
 
$
(213.1
)
 
$
47.0


$
(1,040.7
)
Three Months Ended March 31, 2014
 
 
 
 
 
 
 
 
Pension and other postretirement benefit plan adjustments,
net of tax
 
Accumulated currency translation adjustments,
net of tax
 
Net unrealized gains (losses) on cash flow hedges, net of tax
 
Total accumulated other comprehensive loss, net of tax
Balance as of December 31, 2013
$
(809.2
)
 
$
18.0

 
$
(2.0
)
 
$
(793.2
)
Other comprehensive income (loss) before reclassifications

 
5.1

 
(2.0
)
 
3.1

Amounts reclassified from accumulated other comprehensive loss
14.5

 

 

 
14.5

Other comprehensive income (loss)
14.5

 
5.1

 
(2.0
)
 
17.6

Balance as of March 31, 2014
$
(794.7
)
 
$
23.1

 
$
(4.0
)
 
$
(775.6
)
Six Months Ended March 31, 2014
 
 
 
 
 
 
 
 
Pension and other postretirement benefit plan adjustments,
net of tax
 
Accumulated currency translation adjustments,
net of tax
 
Net unrealized gains (losses) on cash flow hedges, net of tax
 
Total accumulated other comprehensive loss, net of tax
Balance as of September 30, 2013
$
(823.8
)
 
$
8.8

 
$
(2.7
)
 
$
(817.7
)
Other comprehensive income (loss) before reclassifications

 
14.3

 
(1.0
)
 
13.3

Amounts reclassified from accumulated other comprehensive loss
29.1

 

 
(0.3
)
 
28.8

Other comprehensive income (loss)
29.1

 
14.3

 
(1.3
)
 
42.1

Balance as of March 31, 2014
$
(794.7
)
 
$
23.1

 
$
(4.0
)

$
(775.6
)

17

Table of Contents
ROCKWELL AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

10. Accumulated Other Comprehensive Loss (continued)
The reclassifications out of accumulated other comprehensive loss to the Consolidated Statement of Operations were (in millions):
 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
Affected Line in the Consolidated Statement of Operations
 
2015
 
2014
 
2015
 
2014
 
 
Pension and other postretirement benefit plan adjustments:
Amortization of prior service credit
$
(4.3
)
 
$
(3.4
)
 
$
(8.7
)
 
$
(6.6
)
 
(a)
Amortization of net actuarial loss
30.7

 
25.8

 
61.9

 
51.4

 
(a)
 
26.4

 
22.4

 
53.2

 
44.8

 
Total before tax
 
(9.2
)
 
(7.9
)
 
(18.4
)
 
(15.7
)
 
Provision for tax
 
$
17.2

 
$
14.5

 
$
34.8

 
$
29.1

 
After tax
 
 
 
 
 
 
 
 
 
 
Net unrealized losses (gains) on cash flow hedges:
Forward exchange contracts
$
2.4

 
$
0.8

 
$
3.6

 
$
1.0

 
Sales
Forward exchange contracts
(7.8
)
 
(1.7
)
 
(13.6
)
 
(2.4
)
 
Cost of Sales
 
(5.4
)
 
(0.9
)
 
(10.0
)
 
(1.4
)
 
Total before tax
 
(0.3
)
 
0.9

 
(0.5
)
 
1.1

 
Provision for tax
 
$
(5.7
)
 
$

 
$
(10.5
)
 
$
(0.3
)
 
After tax
 
 
 
 
 
 
 
 
 
 
Total reclassifications
$
11.5

 
$
14.5

 
$
24.3

 
$
28.8

 
After tax
(a) Reclassified from accumulated other comprehensive loss into cost of sales and selling, general and administrative expenses. These components are included in the computation of net periodic benefit costs. See Note 9 for further information.

18

Table of Contents
ROCKWELL AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

11. Commitments and Contingent Liabilities
Various lawsuits, claims and proceedings have been or may be instituted or asserted against us relating to the conduct of our business, including those pertaining to product liability, environmental, safety and health, intellectual property, employment and contract matters. Although the outcome of litigation cannot be predicted with certainty and some lawsuits, claims or proceedings may be disposed of unfavorably to us, we believe the disposition of matters that are pending or have been asserted will not have a material effect on our business, financial condition or results of operations.
We (including our subsidiaries) 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. Currently there are a few thousand claimants in lawsuits that name us as defendants, together with hundreds of other companies. In some cases, the claims involve products from divested businesses, and we are indemnified for most of the costs. However, we have agreed to defend and indemnify asbestos claims associated with products manufactured or sold by our former Dodge mechanical and Reliance Electric motors and motor repair services businesses prior to their divestiture by us, which occurred on January 31, 2007. We are also responsible for half of the costs and liabilities associated with asbestos cases against the former Rockwell International Corporation’s (RIC’s) divested measurement and flow control business. But in all cases, for those claimants who do show that they worked with our products or products of divested businesses for which we are responsible, we nevertheless believe we have meritorious defenses, in substantial part due to the integrity of the products, the encapsulated nature of any asbestos-containing components, and the lack of any impairing medical condition on the part of many claimants. We defend those cases vigorously. Historically, we have been dismissed from the vast majority of these claims with no payment to claimants.
We have maintained insurance coverage that we believe covers indemnity and defense costs, over and above self-insured retentions, for claims arising from our former Allen-Bradley subsidiary. Our insurance carrier entered into a cost share agreement with us to pay the substantial majority of future defense and indemnity costs for Allen-Bradley asbestos claims. We believe that this arrangement will continue to provide coverage for Allen-Bradley asbestos claims throughout the remaining life of the asbestos liability.
The uncertainties of asbestos claim litigation make it difficult to predict accurately the ultimate outcome of asbestos claims. That uncertainty is increased by the possibility of adverse rulings or new legislation affecting asbestos claim litigation or the settlement process. Subject to these uncertainties and based on our experience defending asbestos claims, we do not believe these lawsuits will have a material effect on our financial condition or results of operations.
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.
In connection with the spin-offs of our former automotive component systems business, semiconductor systems business and Rockwell Collins avionics and communications business, the spun-off companies have agreed to indemnify us for substantially all contingent liabilities related to the respective businesses, including environmental and intellectual property matters.
In connection 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 legal, legacy environmental and asbestos matters of these businesses arising before January 31, 2007, for which the maximum exposure would be capped at the amount received for the sale.
In many countries we provide a limited intellectual property indemnity as part of our terms and conditions of sale. We also at times provide limited intellectual property indemnities in other contracts with third parties, such as contracts concerning the development and manufacture of our products. As of March 31, 2015, we were not aware of any material indemnification claims that were probable or reasonably possible of an unfavorable outcome. Historically, claims that have been made under the indemnification agreements have not had a material impact on our operating results, financial position or cash flows; however, to the extent that valid indemnification claims arise in the future, future payments by us could be significant and could have a material adverse effect on our results of operations or cash flows in a particular period.

19

Table of Contents
ROCKWELL AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

12. Income Taxes
At the end of each interim period, we estimate a base effective tax rate that we expect for the full fiscal year based on our most recent forecast of pre-tax 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.
The effective tax rate was 25.5 percent in the three and six months ended March 31, 2015. The effective tax rate was 27.4 percent in the three and six months ended March 31, 2014. The effective tax rate was lower than the U.S. statutory rate of 35 percent in each period primarily because we benefited from lower non-U.S. tax rates.
The amount of gross unrecognized tax benefits was $40.5 million and $38.9 million at March 31, 2015 and September 30, 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 $5.6 million and $8.1 million at March 31, 2015 and September 30, 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 reduction to our income tax provision, including the recognition of interest and penalties and offsetting tax assets, would be $22.3 million as of March 31, 2015.
There was no material change in the amount of unrecognized tax benefits in the six months ended March 31, 2015. We believe it is reasonably possible that the amount of gross unrecognized tax benefits could be reduced by up to $20.5 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 all of 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 $3.1 million.
We conduct business globally and are routinely audited by the various tax jurisdictions in which we operate. We are no longer subject to U.S. federal income tax examinations for years before 2012 and are no longer subject to state, local and foreign income tax examinations for years before 2003.

20

Table of Contents
ROCKWELL AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

13. Business Segment Information
The following tables reflect the sales and operating results of our reportable segments (in millions):
 
 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
2015
 
2014
 
2015
 
2014
Sales
 
 
 
 
 
 
 
Architecture & Software
$
674.3

 
$
686.8

 
$
1,382.1

 
$
1,382.7

Control Products & Solutions
876.5

 
913.7

 
1,743.1

 
1,809.5

Total
$
1,550.8

 
$
1,600.5

 
$
3,125.2

 
$
3,192.2

Segment operating earnings
 
 
 
 
 
 
 
Architecture & Software
$
200.8

 
$
190.2

 
$
422.2

 
$
402.1

Control Products & Solutions
133.4

 
111.9

 
258.8

 
228.0

Total
334.2

 
302.1

 
681.0

 
630.1

Purchase accounting depreciation and amortization
(5.2
)
 
(5.8
)
 
(10.6
)
 
(10.4
)
General corporate – net
(21.4
)
 
(18.9
)
 
(44.2
)
 
(40.6
)
Non-operating pension costs
(15.4
)
 
(14.0
)
 
(31.6
)
 
(28.0
)
Interest expense
(15.7
)
 
(15.0
)
 
(30.6
)
 
(29.9
)
Income before income taxes
$
276.5

 
$
248.4

 
$
564.0

 
$
521.2

Among other considerations, we evaluate performance and allocate resources based upon segment operating earnings before income taxes, interest expense, costs related to corporate offices, non-operating pension costs, certain nonrecurring corporate initiatives, gains and losses from the disposition of businesses and purchase accounting depreciation and amortization. Depending on the product, intersegment sales within a single legal entity are either at cost or cost plus a mark-up, which does not necessarily represent a market price. Sales between legal entities are at an appropriate transfer price. We allocate costs related to shared segment operating activities to the segments using a methodology consistent with the expected benefit.

21


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareowners of
Rockwell Automation, Inc.
Milwaukee, Wisconsin
We have reviewed the accompanying condensed consolidated balance sheet of Rockwell Automation, Inc. and subsidiaries (the “Company”) as of March 31, 2015, and the related condensed consolidated statements of operations and comprehensive income for the three-month and six-month periods ended March 31, 2015 and 2014, and of cash flows for the six-month periods ended March 31, 2015 and 2014. These condensed consolidated interim financial statements are the responsibility of the Company’s management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Rockwell Automation, Inc. and subsidiaries as of September 30, 2014, and the related consolidated statements of operations, comprehensive income, cash flows, and shareowners’ equity for the year then ended (not presented herein); and in our report dated November 18, 2014, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of September 30, 2014 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
May 6, 2015


22

Table of Contents
ROCKWELL AUTOMATION, INC.


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Forward Looking Statement
This Quarterly 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:
 
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;
laws, regulations and governmental policies affecting our activities in the countries where we do business;
the successful development of advanced technologies and demand for and market acceptance of new and existing products;
the availability, effectiveness and security of our information technology systems;
competitive products, solutions and services and pricing pressures, and our ability to provide high quality products, solutions and services;
a disruption of our business due to natural disasters, pandemics, acts of war, strikes, terrorism, social unrest or other causes;
intellectual property infringement claims by others and the ability to protect our intellectual property;
the uncertainty of claims by taxing authorities in the various jurisdictions where we do business;
our ability to attract and retain qualified personnel;
our ability to manage costs related to employee retirement and health care benefits;
the uncertainties of litigation, including liabilities related to the safety and security of the products, solutions and services we sell;
our ability to manage and mitigate the risks associated with our solutions and services businesses;
a disruption of our distribution channels;
the availability and price of components and materials;
the successful integration and management of acquired businesses;
the successful execution of our cost productivity and globalization initiatives; and
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 of our Annual Report on Form 10-K for the fiscal year ended September 30, 2014 for more information.
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 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.
 

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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, services and solutions 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;
our customers’ needs for faster time to market, lower total cost of ownership, improved asset utilization and optimization, and enterprise risk management;
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 growth rates 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;
acquire businesses 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, which include revenue growth of 6-8 percent, double-digit EPS growth, return on invested capital in excess of 20 percent and free cash flow of approximately 100 percent of Adjusted Income.
Acquisitions
Our acquisition strategy focuses on products, solutions and 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 will enable 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 accelerate our development of similar process solutions and remote monitoring services for other industries globally.
We believe these acquisitions will help us expand our served market and deliver value to our customers.



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U. S. Industrial Economic Trends
In the second quarter of 2015, sales to U.S. customers accounted for 56 percent of our total sales. The various indicators we use to gauge the direction and momentum of our served U.S. 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 2007. 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 is an indicator of 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 (BEA), which is an economic statistic that 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 is an indicator of 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 since the quarter ended September 2013. In the second quarter of fiscal 2015, all indicators declined sequentially, indicating a softening in the manufacturing sector partially due to lower oil & gas capital spending and a stronger U.S. dollar, not yet offset by incremental investment in consumer-based industries. Although Industrial Production is expected to grow during the second half of fiscal 2015, for the full year U.S. market growth is expected to be lower in fiscal 2015 than in fiscal 2014.
 
Industrial
Production
Index
 
PMI
 
Industrial
Equipment
Spending
(in billions)
 
Capacity
Utilization
(percent)
Fiscal 2015 quarter ended:
 
 
 
 
 
 
 
March 2015
105.6

 
51.5

 
236.8

 
78.8

December 2014
105.9

 
55.1

 
242.0

 
79.5

Fiscal 2014 quarter ended:
 
 
 
 
 
 
 
September 2014
104.7

 
56.1

 
252.6

 
79.3

June 2014
103.7

 
55.7

 
237.2

 
79.1

March 2014
102.2

 
54.4

 
222.7

 
78.6

December 2013
101.3

 
56.1

 
214.5

 
78.4

Fiscal 2013 quarter ended:
 
 
 
 
 
 
 
September 2013
100.1

 
55.6

 
213.6

 
77.9

Note: Economic indicators are subject to revisions by the issuing organizations.
 

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Non-U.S. Economic Trends
In the second quarter of 2015, sales to non-U.S. customers accounted for 44 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.
Projections of industrial production outside the U.S. still call for higher growth in 2015 compared to 2014, particularly in EMEA where growth is expected to be supported by lower oil prices, a weakening currency and easing monetary policy. In Asia Pacific, China's manufacturing economy decelerated further, mainly due to overcapacity and liquidity concerns. India’s growth prospects continue to improve, benefiting from lower oil prices, infrastructure investment and ongoing government reforms. In Latin America, the economic outlook continues to be mixed, with Brazil, Argentina and Venezuela remaining in recession, but Mexico experiencing stronger growth. Canada’s economy continues to show signs of weakness, impacted by low commodity prices. Despite ongoing weakness in some emerging markets, we still expect automation to grow at a higher rate in these markets over the long term.

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Summary of Results of Operations
Sales in the second quarter of 2015 decreased 3.1 percent compared to the second quarter of 2014. Organic sales increased 2.7 percent year over year, and currency translation reduced sales 6.0 percent. The industries with the strongest growth for the quarter were automotive, consumer-based industries and chemicals.
The following is a summary of our results related to key growth initiatives:
 
Logix sales decreased approximately 1 percent year over year in the second quarter of 2015. Logix organic sales increased approximately 6 percent, with the highest growth rate in Latin America.
Process initiative sales decreased approximately 5 percent year over year in the second quarter of 2015. Excluding the impact of currency translation, process initiative sales increased approximately 2 percent.
Sales in emerging markets decreased 0.9 percent year over year in the second quarter of 2015. Organic sales in emerging markets increased 8.4 percent year over year. Currency translation reduced sales in emerging markets by 9.3 percentage points.

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The following table reflects our sales and operating results for the three and six months ended March 31, 2015 and 2014 (in millions, except per share amounts and percentages):
 
 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
2015
 
2014
 
2015
 
2014
Sales
 
 
 
 
 
 
 
Architecture & Software
$
674.3

 
$
686.8

 
$
1,382.1

 
$
1,382.7

Control Products & Solutions
876.5

 
913.7

 
1,743.1

 
1,809.5

Total sales (a)
$
1,550.8

 
$
1,600.5

 
$
3,125.2

 
$
3,192.2

Segment operating earnings1
 
 
 
 
 
 
 
Architecture & Software
$
200.8

 
$
190.2

 
$
422.2

 
$
402.1

Control Products & Solutions
133.4

 
111.9

 
258.8

 
228.0

Total segment operating earnings2 (b)
334.2

 
302.1

 
681.0

 
630.1

Purchase accounting depreciation and amortization
(5.2
)
 
(5.8
)
 
(10.6
)
 
(10.4
)
General corporate — net
(21.4
)
 
(18.9
)
 
(44.2
)
 
(40.6
)
Non-operating pension costs
(15.4
)
 
(14.0
)
 
(31.6
)
 
(28.0
)
Interest expense
(15.7
)
 
(15.0
)
 
(30.6
)
 
(29.9
)
Income before income taxes (c)
276.5

 
248.4

 
564.0

 
521.2

Income tax provision
(70.5
)
 
(68.1
)
 
(143.8
)
 
(142.8
)
Net income
$
206.0

 
$
180.3

 
$
420.2

 
$
378.4

 
 
 
 
 
 
 
 
Diluted EPS
$
1.51

 
$
1.28

 
$
3.08

 
$
2.70

 
 
 
 
 
 
 
 
Adjusted EPS3
$
1.59

 
$
1.35

 
$
3.23

 
$
2.82

 
 
 
 
 
 
 
 
Diluted weighted average outstanding shares
136.0

 
140.2

 
136.5

 
140.2

 
 
 
 
 
 
 
 
Total segment operating margin2 (b/a)
21.6
%
 
18.9
%
 
21.8
%
 
19.7
%
 
 
 
 
 
 
 
 
Pre-tax margin (c/a)
17.8
%
 
15.5
%
 
18.0
%
 
16.3
%
 
(1)
See Note 13 in the Condensed 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 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 effects. See Adjusted Income, Adjusted EPS and Adjusted Effective Tax Rate Reconciliation for more information on this non-GAAP measure.


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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):
 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
2015
 
2014
 
2015
 
2014
Purchase accounting depreciation and amortization
 
 
 
 
 
 
 
Architecture & Software
$
1.0

 
$
1.0

 
$
2.1

 
$
1.9

Control Products & Solutions
3.9

 
4.5

 
8.0

 
8.0

Non-operating pension costs
 
 
 
 
 
 
 
Architecture & Software
5.6

 
5.1

 
11.4

 
10.3

Control Products & Solutions
8.7

 
8.1

 
17.8

 
16.2

The increases in non-operating pension costs in both segments in the three and six months ended March 31, 2015 were primarily due to the decrease in the discount rate used to measure net periodic pension cost for our U.S. pension plans from 5.05 percent in 2014 to 4.50 percent in 2015.


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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 pension 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 three and six months ended March 31, 2015 and 2014 (in millions):
 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
2015
 
2014
 
2015
 
2014
Service cost
$
21.5

 
$
19.6

 
$
43.2

 
$
39.3

Amortization of prior service credit
(0.6
)
 
(0.7
)
 
(1.3
)
 
(1.4
)
Operating pension costs
20.9

 
18.9

 
41.9

 
37.9

 
 
 
 
 
 
 
 
Interest cost
41.6

 
43.6

 
83.9

 
87.2

Expected return on plan assets
(55.8
)
 
(54.5
)
 
(111.9
)
 
(109.0
)
Amortization of net actuarial loss
29.6

 
24.9

 
59.6

 
49.8

Non-operating pension costs
15.4

 
14.0

 
31.6

 
28.0

 
 
 
 
 
 
 
 
Net periodic pension cost
$
36.3

 
$
32.9

 
$
73.5

 
$
65.9


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 for the three and six months ended March 31, 2015 and 2014 (in millions, except per share amounts and percentages):
 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
2015

2014

2015

2014
Income from continuing operations
$
206.0

 
$
180.3

 
$
420.2

 
$
378.4

Non-operating pension costs
15.4

 
14.0

 
31.6

 
28.0

Tax effect of non-operating pension costs
(5.4
)
 
(5.0
)
 
(11.0
)
 
(10.0
)
Adjusted Income
$
216.0

 
$
189.3

 
$
440.8

 
$
396.4

 
 
 
 
 
 
 
 
Diluted EPS from continuing operations
$
1.51

 
$
1.28