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

CHICAGO--()--Fitch Ratings has affirmed the ratings for Rockwell Automation, Inc. (Rockwell), including the company's long-term Issuer Default Rating (IDR) at 'A' and short-term IDR and commercial paper (CP) ratings at 'F1'. Fitch also rates the company's $600 million senior notes offering announced this morning at 'A'. The Rating Outlook is Stable.

Fitch's actions affect $2.3 billion of total debt, including the proposed senior notes and $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 results despite a cautious macroeconomic environment. Increased automation solutions penetration will drive long-term demand with the sales mix increasingly shifting to emerging markets, although sales in the U.S. still represent more than 50% of total.

Nearer term, Fitch expects lower single digit organic revenue growth. Foreign exchange headwinds will mute resilient demand in North America, despite weaker spending within oil and gas markets. Asia-Pacific will grow less robustly, given lingering excess capacity and efforts to curtail inflation. Demand in Europe will remain tepid, driven by lower German exports.

Fitch expects operating EBITDA margin will remain near 20% and was a Fitch estimated 21.1% for the latest 12 months (LTM) ended Dec. 31, 2014. Increased exposure to developing economies could pressure longer-term operating profit margins. Rockwell will offset some profit margin compression with productivity initiatives, including completing its global SAP rollout.

Fitch expects annual free cash flow (FCF) will range from $250 million to $500 million driven by consistent profitability over the intermediate term. Rockwell will use FCF mainly for shareholder returns. To a lesser extent, Fitch expects smaller bolt-on acquisitions, mainly to buy domain expertise within faster growing developing economies.

Given roughly 90% of Rockwell's cash is located outside the U.S., Fitch expects CP borrowings may increase to support shareholder returns. Nonetheless, Fitch expects Rockwell will manage shareholder returns or repatriate foreign cash to maintain total debt to operating EBITDA near or below 1.75 times (x) beyond short-term cyclical or event-driven upticks.

Pro forma for the $600 million senior notes issuance, Fitch estimates total leverage was 1.5x for the LTM ended Dec. 31, 2014. Fitch expects operating EBITDA to gross interest will remain over 10x and was a Fitch estimated 15x for the LTM ended Dec. 31, 2014, pro forma for the issuance.

The company's diversified end market exposure reduces operating volatility, although demand within most of Rockwell's served verticals moves in tandem with regional gross domestic product (GDP) and industrial production (IP). Higher software and services content will increase the mix of revenues and cash flows that are recurring in nature, potentially further reducing operating volatility.

Spending for oil and gas markets will weaken but the company's other end markets may benefit from lower oil prices, particularly transportation markets. Demand in mining should level off after multiple years of double digit revenue declines. Productivity initiatives should support modest growth despite more caution with respect to expansion projects.

There are no required contributions to Rockwell's domestic pension plans over the intermediate term; the company has ample foreign liquidity to support modest contributions to worldwide plans.

KEY RATINGS DRIVERS

The ratings and Outlook are supported by:

--Leading share within secular growth automation markets, driven by deep domain expertise and software capabilities and expectations for continued customer investments in productivity and reduced time-to-market driving low- to mid-single digit mid-cycle organic growth;

--Solid vertical market and customer diversification, resulting in Fitch's expectations for lower operating volatility through the cycle; and

--Expectations for modest but consistent annual FCF through the cycle, driven by higher recurring revenues from increasing software content and despite the company's meaningful dividend as a percentage of operating cash flow.

Ratings concerns include:

--Fitch's expectations that modest domestic liquidity may not be sufficient to support Rockwell's intermediate-term shareholder returns strategy, likely resulting in higher debt balances;

--Rockwell's lower exposure to developing economies, which Fitch believes could result in more aggressive pricing and investment activity in order to gain share in these faster growing markets; and

--Fitch's expectations for profit margin pressures from the combination of tight labor markets for software engineers and increasing software content in automation solutions.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:

--Slightly positive organic revenue growth in the current fiscal year followed by low single digit growth through the remainder of the intermediate term.

--Productivity gains largely offset pricing pressures in developing markets through the intermediate term, resulting in roughly to slightly down operating EBITDA margin.

--Dividends will grow by high single to low double digits annually and net share repurchases for fiscal 2015 are slightly higher year-over-year but are constrained by cash location beyond the near term in the absence of Rockwell repatriating cash from outside the U.S.

--Nonetheless, debt will increase to fund shareholder returns, given the geographic mix of FCF.

RATINGS SENSITIVITIES

The ratings may be downgraded if Fitch expects:

--Total leverage approaching 2x beyond short-term cyclical or event driven upticks; or

--Annual FCF below $250 million, driven by reduced competitiveness or greater than operating profit margin compression in developing markets and likely resulting in increased borrowing to support shareholder returns.

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

Fitch believes Rockwell's liquidity as of Dec. 31, 2014 was solid and supported by:

--$1.2 billion of cash and equivalents and $628 million of short-term investments, of which the company estimates 90% is located outside the U.S.;

--An undrawn $750 million RCF maturing May 2018, which backs-stops Rockwell's CP program. $508 million was outstanding under the CP program at Dec. 31, 2014.

Fitch's expectation for $250 million to $500 million of annual FCF also supports liquidity.

As of Dec. 31, 2014, total debt was $2.1 billion and consisted primarily of:

--$508 million of borrowings under Rockwell's CP program;

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

--$600 million of the proposed senior notes offering;

--$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 affirms Rockwell's ratings as follows:

--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' (May 28, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=979530

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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
Robert Curran, +1 212-908-0515
Managing Director
or
Media Relations, New York
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

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
Robert Curran, +1 212-908-0515
Managing Director
or
Media Relations, New York
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com