Fitch Affirms Rockwell Automation's Ratings at 'A/F1'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed Rockwell Automation, Inc.'s (Rockwell) long-term Issuer Default Rating (IDR) and debt ratings at 'A' and its short-term IDR and commercial paper (CP) ratings at 'F1'. The Rating Outlook is Stable. Fitch's actions affect $1.7 billion of total debt, including the $750 million revolving credit facility (RCF). A full list of ratings follows at the end of this release.

The ratings and Stable Outlook reflect Fitch's expectations for solid operating performance within the context of an overall stable operating environment. Over the near-term, Fitch expects low single-digit organic revenue growth, profitability to remain near record levels and solid free cash flow (FCF).

Near-term demand remains mixed by vertical and geographic markets, despite Rockwell exiting the most recent quarter with a 1.1x book-to-bill and raising the lower end of revenue guidance for fiscal 2014. Over the long-term, Fitch believes organic revenue will grow in the low- to mid-single digits with higher rates of growth in emerging markets growth.

In the near-term, strength in oil & gas and food & beverage markets should offset continued weakness in metals and mining, while automotive is flat despite expectations for robust global vehicle production. End market diversification will continue to benefit Rockwell over the longer-term, particularly given the weak intermediate-term outlook for metals and mining.

Geographically, strong demand in the U.S., recovery in Europe and the resumption of investment in China is offsetting flat growth in Canada and softness in Latin America, which is being adversely affected by mining weakness. Rockwell's strategy to reduce dependence on U.S. markets, which represent half of total revenues, will be determined by its ability to benefit from faster emerging market growth.

Revenues from acquisitions may more meaningfully augment growth beyond the near-term, given Rockwell's characterization of a more robust potential deal pipeline. Fitch expects acquisition spending could exceed $100 million in fiscal 2014, having already spent $68 million in the first fiscal quarter.

Fitch expects most deals will be small and technology focused, which could be funded with available cash. However, larger domestic transactions may be debt financed, given 90% of Rockwell's cash is located outside the U.S. and the company's planned cash returns to shareholders.

Profitability will remain near peak levels for 2014, driven by higher revenues. Over the long-term, Fitch expects operating EBITDA to range from 15% to 20% through the business cycle. This will translate into $250 million to $500 million of annual FCF, despite expectations for the resumption of more normalized capital spending and annual dividend growth.

Given solid FCF and modest required cash pension contributions over the intermediate-term, Rockwell plans higher gross share repurchases, guiding to $440 million of stock buybacks in fiscal 2014. This will nearly exhaust the company's remaining board share repurchase authorization and, net of proceeds received from stock option exercises, could constrain share repurchases beyond the near-term.

Rockwell likely will continue funding domestic cash needs with CP and manage debt levels with subsequent FCF. Nonetheless, credit protection measures should remain solid, beyond short-term cyclical upticks. Fitch expects total debt to operating EBITDA will remain at or below 1.5x and total debt adjusted for leases to operating EBITDAR at 2x or below. Operating EBITDA to interest expense (interest coverage) should exceed 10x. For the latest 12 months (LTM) ended Dec. 31, 2013, Fitch estimates total leverage was 1x and interest coverage of nearly 20x.

KEY RATINGS DRIVERS

Ratings are supported by Rockwell's leading positions within secular growth automation markets, vertical market diversification, and consistent annual FCF. Ratings concerns include the company's modest domestic cash balances, cyclical capital spending by customers and less significant exposure to faster growing emerging markets.

RATINGS SENSITIVITIES

Positive rating actions are unlikely in the absence of structurally higher FCF and domestic liquidity.

Negative rating actions could occur if:

--Revenue growth is negative beyond a short-term cyclical downturn, suggesting competitive erosion that also would adversely impact profitability margins.

--Total leverage exceeds 1.5x or total debt adjusted for operating leases to operating EBITDAR exceeds 2x over a sustained period due to elevated borrowing to support domestic stock buybacks and dividends.

Fitch believes liquidity was ample at Dec. 31, 2013 and supported by:

--$1.6 billion of cash and cash equivalents and short-term investments, 90% of which was located outside the U.S. and, therefore, could give rise to tax liabilities upon repatriation;

--$750 million undrawn RCF expiring May 2018, which more than adequately backs up the company's CP program (availability under the RCF was reduced by $251 million of CP outstanding);

--Consistent annual FCF of $250 million to $500 million.

Short-term unsecured credit facilities of approximately $122.1 million at Dec. 31, 2013 which were available to non-U.S. subsidiaries also support liquidity.

As of Dec. 31, 2013, total debt was $1.2 billion and consisted primarily of:

--$251 million of borrowings under Rockwell's CP program;

--$250 million of 5.65% senior notes due 2017;

--$250 million of 6.7% senior debentures due 2028;

--$250 million of 6.25% senior debentures due 2037;

--$200 million of 5.2% senior debentures due 2098.

Fitch expects Rockwell to contribute $45 million to its pension plans in fiscal 2013 versus $41 million in fiscal 2012, related to shoring up foreign plans. The company currently has no required contributions for domestic plans following voluntary contributions of $300 million in fiscal 2012, $150 million in fiscal 2011, and $150 million in fiscal 2010.

Fitch affirms the following ratings:

--Long-term IDR at 'A';

--Short-term IDR at 'F1';

--Senior unsecured bank facilities at 'A';

--Senior unsecured long-term debt at 'A';

--CP at 'F1'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 5, 2013).

--'Short-Term Rating Criteria for Non-Financial Corporates' (Aug. 5, 2013).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Effective 12 August 2011 to 8 August 2012

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

Short-Term Ratings Criteria for Non-Financial Corporates

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=714415

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=825174

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Contacts

Fitch Ratings
Primary Analyst:
Jason Pompeii, +1-312-368-3210
Senior Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Eric Ause, +1-312-606-2302
Senior Director
or
Committee Chairperson:
Craig Fraser, +1-212-908-0310
Managing Director
or
Media Relations:
Brian Bertsch, New York, +1 212-908-0549
brian.bertsch@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst:
Jason Pompeii, +1-312-368-3210
Senior Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Eric Ause, +1-312-606-2302
Senior Director
or
Committee Chairperson:
Craig Fraser, +1-212-908-0310
Managing Director
or
Media Relations:
Brian Bertsch, New York, +1 212-908-0549
brian.bertsch@fitchratings.com