NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Accounting Policies
Rockwell Automation, Inc. ("Rockwell Automation" or "the Company"),
a leader in industrial automation and information, makes its customers more productive and the world more sustainable
.
Basis of Presentation
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP).
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned and controlled majority-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. Investments in affiliates over which we do not have control but exercise significant influence are accounted for using the equity method of accounting. These affiliated companies are not material individually or in the aggregate to our financial position, results of operations or cash flows.
Use of Estimates
The preparation of consolidated financial statements in accordance with U.S. GAAP requires 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 use estimates in accounting for, among other items, customer returns, rebates and incentives; allowance for doubtful accounts; excess and obsolete inventory; share-based compensation; acquisitions; product warranty obligations; retirement benefits; litigation, claims and contingencies, including environmental matters, conditional asset retirement obligations and contractual indemnifications; and income taxes. We account for changes to estimates and assumptions prospectively when warranted by factually-based experience.
Revenue Recognition
We recognize revenue when it is realized or realizable and earned. Product and solution sales consist of industrial automation and information solutions; hardware and software products; and custom-engineered systems. Service sales include multi-vendor customer technical support and repair, asset management and optimization consulting and training. All service sales recorded in the Consolidated Statement of Operations are associated with our Control Products & Solutions segment.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Basis of Presentation and Accounting Policies (Continued)
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.
Shipping and handling costs billed to customers are included in sales and the related costs are included in cost of sales in the Consolidated Statement of Operations.
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, solutions 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. 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, solutions 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.
Taxes on Revenue Producing Transactions
Taxes assessed by governmental authorities on revenue producing transactions, including sales, value added, excise and use taxes, are recorded on a net basis (excluded from revenue).
Cash and Cash Equivalents
Cash and cash equivalents include time deposits and certificates of deposit with original maturities of three months or less at the time of purchase.
Short-term Investments
Short-term investments include time deposits and certificates of deposit with original maturities longer than three months but shorter than one year at the time of purchase. These investments are stated at cost, which approximates fair value.
Receivables
We record an allowance for doubtful accounts based on customer-specific analysis and general matters such as current assessments of past due balances and economic conditions. Receivables are stated net of an allowance for doubtful accounts of
$24.5 million
at
September 30, 2016
and
$22.0 million
at
September 30, 2015
. In addition, receivables are stated net of an allowance for certain customer returns, rebates and incentives of
$7.9 million
at
September 30, 2016
and
$9.2 million
at
September 30, 2015
.
Inventories
Inventories are stated at the lower of cost or market using the first-in, first-out (FIFO) or average cost methods. Market is determined on the basis of estimated realizable values.
Property
Property, including internal-use software, is stated at cost. We calculate depreciation of property using the straight-line method over
5
to
40 years
for buildings and improvements,
3
to
20 years
for machinery and equipment and
3
to
8 years
for computer hardware and internal-use software. We capitalize significant renewals and enhancements and write off replaced units. We expense maintenance and repairs, as well as renewals of minor amounts. Property acquired during the year that is accrued within accounts payable or other current liabilities at year end is considered to be a non-cash investing activity and is excluded from cash used for capital expenditures in the Consolidated Statement of Cash Flows. Capital expenditures of
$29.9 million
,
$27.3 million
and
$24.6 million
were accrued within accounts payable and other current liabilities at
September 30, 2016
,
2015
and
2014
, respectively.
Intangible Assets
Goodwill and other intangible assets generally result from business acquisitions. We account for business acquisitions by allocating the purchase price to tangible and intangible assets acquired and liabilities assumed at their fair values; the excess of the purchase price over the allocated amount is recorded as goodwill.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Basis of Presentation and Accounting Policies (Continued)
We review goodwill and other intangible assets with indefinite useful lives for impairment annually or more frequently if events or circumstances indicate impairment may be present. Any excess in carrying value over the estimated fair value is charged to results of operations. We perform our annual impairment test during the second quarter of our fiscal year.
We amortize certain customer relationships on an accelerated basis over the period of which we expect the intangible asset to generate future cash flows. We amortize all other intangible assets with finite useful lives on a straight-line basis over their estimated useful lives. Useful lives assigned range from
3
to
15 years
for trademarks,
8
to
20 years
for customer relationships,
5
to
17 years
for technology and
5
to
30 years
for other intangible assets.
Intangible assets also include costs of software developed or purchased by our software business to be sold, leased or otherwise marketed. Amortization of these computer software products is calculated on a product-by-product basis as the greater of (a) the unamortized cost at the beginning of the year times the ratio of the current year gross revenue for a product to the total of the current and anticipated future gross revenue for that product or (b) the straight-line amortization over the remaining estimated economic life of the product.
Impairment of Long-Lived Assets
We evaluate the recoverability of the recorded amount of long-lived assets whenever events or changes in circumstances indicate that the recorded amount of an asset may not be fully recoverable. Impairment is assessed when the undiscounted expected future cash flows derived from an asset are less than its carrying amount. If we determine that an asset is impaired, we measure the impairment to be recognized as the amount by which the recorded amount of the asset exceeds its fair value. We report assets to be disposed of at the lower of the recorded amount or fair value less cost to sell. We determine fair value using a discounted future cash flow analysis.
Derivative Financial Instruments
We use derivative financial instruments in the form of 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. Additionally, we use derivative financial instruments in the form of interest rate swap contracts to manage our borrowing costs of certain long-term debt. We designate and account for these derivative financial instruments as hedges under U.S. GAAP.
Furthermore, 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. It is our policy to execute such instruments with global financial institutions that we believe to be creditworthy and not to enter into derivative financial instruments for speculative purposes. Foreign currency forward exchange contracts are usually denominated in currencies of major industrial countries.
Foreign Currency Translation
We translate assets and liabilities of subsidiaries operating outside of the United States with a functional currency other than the U.S. dollar into U.S. dollars using exchange rates at the end of the respective period. We translate sales, costs and expenses at average exchange rates effective during the respective period. We report foreign currency translation adjustments as a component of other comprehensive (loss) income. Currency transaction gains and losses are included in results of operations in the period incurred.
Research and Development Expenses
We expense research and development (R&D) costs as incurred; these costs were
$319.3 million
in
2016
,
$307.3 million
in
2015
and
$290.1 million
in
2014
. We include R&D expenses in cost of sales in the Consolidated Statement of Operations.
Income Taxes
We account for uncertain tax positions by determining whether it is more likely than not that a tax position will be sustained upon examination based on the technical merits of the position. For tax positions that meet the more-likely-than-not recognition threshold, we determine the amount of benefit to recognize in the consolidated financial statements based on our assertion of the most likely outcome resulting from an examination, including the resolution of any related appeals or litigation processes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Basis of Presentation and Accounting Policies (Continued)
Earnings Per Share
We present basic and diluted earnings per share (EPS) amounts. Basic EPS is calculated by dividing earnings available to common shareowners, which is income excluding the allocation to participating securities, by the weighted average number of common shares outstanding during the year, excluding unvested restricted stock. Diluted EPS amounts are based upon the weighted average number of common and common-equivalent shares outstanding during the year. We use the treasury stock method to calculate the effect of outstanding share-based compensation awards, which requires us to compute total employee proceeds as the sum of (a) the amount the employee must pay upon exercise of the award, (b) the amount of unearned share-based compensation costs attributed to future services and (c) the amount of tax benefits, if any, that would be credited to additional paid-in capital assuming exercise of the award. Share-based compensation awards for which the total employee proceeds of the award exceed the average market price of the same award over the period have an antidilutive effect on EPS, and accordingly, we exclude them from the calculation. Antidilutive share-based compensation awards for the years ended
September 30, 2016
(
2.2 million
shares),
2015
(
1.4 million
shares) and
2014
(
0.8 million
shares) were excluded from the diluted EPS calculation. U.S. GAAP requires unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, to be treated as participating securities and included in the computation of earnings per share pursuant to the two-class method. Our participating securities are composed of unvested restricted stock and non-employee director restricted stock units.
The following table reconciles basic and diluted EPS amounts (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Net income
|
|
$
|
729.7
|
|
|
$
|
827.6
|
|
|
$
|
826.8
|
|
Less: Allocation to participating securities
|
|
(0.7
|
)
|
|
(0.7
|
)
|
|
(1.1
|
)
|
Net income available to common shareowners
|
|
$
|
729.0
|
|
|
$
|
826.9
|
|
|
$
|
825.7
|
|
Basic weighted average outstanding shares
|
|
130.2
|
|
|
134.5
|
|
|
138.0
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
Stock options
|
|
0.9
|
|
|
1.1
|
|
|
1.5
|
|
Performance shares
|
|
—
|
|
|
0.1
|
|
|
0.2
|
|
Diluted weighted average outstanding shares
|
|
131.1
|
|
|
135.7
|
|
|
139.7
|
|
Earnings per share:
|
|
|
|
|
|
|
Basic
|
|
$
|
5.60
|
|
|
$
|
6.15
|
|
|
$
|
5.98
|
|
Diluted
|
|
$
|
5.56
|
|
|
$
|
6.09
|
|
|
$
|
5.91
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Basis of Presentation and Accounting Policies (Continued)
Share-Based Compensation
We recognize share-based compensation expense for equity awards on a straight-line basis over the service period of the award based on the fair value of the award as of the grant date.
Product and Workers’ Compensation Liabilities
We record accruals for product and workers’ compensation claims in the period in which they are probable and reasonably estimable. Our principal self-insurance programs include product liability and workers’ compensation where we self-insure up to a specified dollar amount. Claims exceeding this amount up to specified limits are covered by insurance policies purchased from commercial insurers. We estimate the liability for the majority of the self-insured claims using our claims experience for the periods being valued.
Environmental Matters
We record liabilities for environmental matters in the period in which our responsibility is probable and the costs can be reasonably estimated. We make changes to the liabilities in the periods in which the estimated costs of remediation change. 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 sole 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.
Conditional Asset Retirement Obligations
We record liabilities for costs related to legal obligations 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.
Recent Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (FASB) issued a new standard on share-based compensation. Among other changes to the existing guidance, this standard requires entities to record the excess income tax benefit or deficiency from share-based compensation within the income tax provision rather than within additional paid-in capital. This guidance is effective for us for reporting periods beginning no later than October 1, 2017. We are currently evaluating the impact the adoption of this guidance will have on our consolidated financial statements and related disclosures.
In February 2016, the FASB issued a new standard on accounting for leases which requires lessees to recognize right-of-use assets and lease liabilities for most leases, among other changes to existing lease accounting guidance. The new standard also requires additional qualitative and quantitative disclosures about leasing activities. This guidance is effective for us for reporting periods beginning October 1, 2019. We are currently evaluating the impact the adoption of this guidance will have on our consolidated financial statements and related disclosures.
In November 2015, the FASB issued new guidance that requires all deferred income taxes to be classified on the balance sheet as noncurrent assets or liabilities rather than separating current and noncurrent deferred income taxes based on the classification of the related assets and liabilities. This requirement is effective for us no later than October 1, 2017; however, we elected to adopt earlier as of December 31, 2015. Upon adoption of this guidance we retrospectively reclassified
$151.2 million
of deferred income taxes from current assets to noncurrent assets at September 30, 2015.
In May 2014, the FASB issued a new standard on revenue recognition related to 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, 2018. We are currently evaluating the impact the adoption of this guidance will have on our consolidated financial statements and related disclosures.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the years ended
September 30, 2016
and
2015
were (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
|
|
(7.6
|
)
|
|
(29.1
|
)
|
|
(36.7
|
)
|
Balance as of September 30, 2015
|
|
388.0
|
|
|
640.8
|
|
|
1,028.8
|
|
Acquisition of businesses
|
|
35.0
|
|
|
37.7
|
|
|
72.7
|
|
Translation
|
|
(8.5
|
)
|
|
(19.1
|
)
|
|
(27.6
|
)
|
Balance as of September 30, 2016
|
|
$
|
414.5
|
|
|
$
|
659.4
|
|
|
$
|
1,073.9
|
|
During the year ended
September 30, 2016
, we recognized goodwill of
$72.7 million
and other intangible assets of
$57.5 million
resulting from three acquisitions. In March 2016, we acquired MagneMotion Inc., a manufacturer of intelligent conveying systems. In September 2016, we acquired Automation Control Products (ACP), a provider of centralized thin client, remote desktop and server management software, and Maverick Technologies (Maverick), a systems integrator. We assigned the full amount of goodwill related to MagneMotion Inc. and ACP to our Architecture & Software segment and the full amount of goodwill related to Maverick to our Control Products & Solutions segment. As of
September 30, 2016
, the purchase accounting and figures associated with ACP and Maverick are preliminary and will be finalized within the permitted measurement period.
During the year ended
September 30, 2015
, we recognized goodwill of
$14.9 million
and other 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Goodwill and Other Intangible Assets (Continued)
Other intangible assets consist of (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
Amortized intangible assets:
|
|
|
|
|
|
|
Computer software products
|
|
$
|
182.4
|
|
|
$
|
103.4
|
|
|
$
|
79.0
|
|
Customer relationships
|
|
112.6
|
|
|
51.9
|
|
|
60.7
|
|
Technology
|
|
103.9
|
|
|
48.5
|
|
|
55.4
|
|
Trademarks
|
|
31.4
|
|
|
17.0
|
|
|
14.4
|
|
Other
|
|
11.0
|
|
|
8.9
|
|
|
2.1
|
|
Total amortized intangible assets
|
|
441.3
|
|
|
229.7
|
|
|
211.6
|
|
Allen-Bradley
®
trademark not subject to amortization
|
|
43.7
|
|
|
—
|
|
|
43.7
|
|
Total
|
|
$
|
485.0
|
|
|
$
|
229.7
|
|
|
$
|
255.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2015
|
|
|
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
Amortized intangible assets:
|
|
|
|
|
|
|
Computer software products
|
|
$
|
182.4
|
|
|
$
|
91.9
|
|
|
$
|
90.5
|
|
Customer relationships
|
|
87.2
|
|
|
50.1
|
|
|
37.1
|
|
Technology
|
|
83.4
|
|
|
44.1
|
|
|
39.3
|
|
Trademarks
|
|
32.3
|
|
|
16.3
|
|
|
16.0
|
|
Other
|
|
11.5
|
|
|
8.6
|
|
|
2.9
|
|
Total amortized intangible assets
|
|
396.8
|
|
|
211.0
|
|
|
185.8
|
|
Allen-Bradley
®
trademark not subject to amortization
|
|
43.7
|
|
|
—
|
|
|
43.7
|
|
Total
|
|
$
|
440.5
|
|
|
$
|
211.0
|
|
|
$
|
229.5
|
|
Computer software products represent costs of computer software to be sold, leased or otherwise marketed. Computer software products amortization expense was
$11.5 million
in
2016
,
$9.4 million
in
2015
and
$9.4 million
in
2014
.
Estimated amortization expense is
$30.1 million
in
2017
,
$25.1 million
in
2018
,
$22.0 million
in
2019
,
$19.0 million
in
2020
and
$18.4 million
in
2021
.
We performed our annual evaluation of goodwill and indefinite life intangible assets for impairment as required by U.S. GAAP during the second quarter of
2016
and concluded that these assets are not impaired.
3. Inventories
Inventories consist of (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
2016
|
|
2015
|
Finished goods
|
|
$
|
215.8
|
|
|
$
|
225.7
|
|
Work in process
|
|
158.0
|
|
|
157.5
|
|
Raw materials
|
|
152.8
|
|
|
152.4
|
|
Inventories
|
|
$
|
526.6
|
|
|
$
|
535.6
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Property, net
Property consists of (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
2016
|
|
2015
|
Land
|
|
$
|
4.5
|
|
|
$
|
4.5
|
|
Buildings and improvements
|
|
333.7
|
|
|
319.0
|
|
Machinery and equipment
|
|
1,085.1
|
|
|
1,042.3
|
|
Internal-use software
|
|
451.1
|
|
|
441.3
|
|
Construction in progress
|
|
108.4
|
|
|
97.6
|
|
Total
|
|
1,982.8
|
|
|
1,904.7
|
|
Less accumulated depreciation
|
|
(1,404.5
|
)
|
|
(1,299.1
|
)
|
Property, net
|
|
$
|
578.3
|
|
|
$
|
605.6
|
|
5. Long-term and Short-term Debt
Long-term debt consists of (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
2016
|
|
2015
|
5.65% notes, payable in December 2017
|
|
$
|
250.0
|
|
|
$
|
250.0
|
|
2.050% notes, payable in March 2020
|
|
305.1
|
|
|
304.2
|
|
2.875% notes, payable in March 2025
|
|
314.4
|
|
|
301.2
|
|
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
|
|
(53.2
|
)
|
|
(54.5
|
)
|
Long-term debt
|
|
$
|
1,516.3
|
|
|
$
|
1,500.9
|
|
In February 2015, upon issuance of our notes payable in March 2020 (2020 Notes) and March 2025 (2025 Notes), we entered into fixed-to-floating interest rate swap contracts with multiple banks that effectively converted the
$600.0 million
aggregate principal amount to floating rate debt, each at a rate based on three-month LIBOR plus a fixed spread. The effective floating interest rates were
1.281 percent
for the 2020 Notes and
1.691 percent
for the 2025 Notes at
September 30, 2016
. The aggregate fair value of the interest rate swap contracts at
September 30, 2016
was a net unrealized
gain
of
$19.5 million
. We have designated these swaps as fair value hedges. The individual contracts are recorded in other assets on the 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.
At
September 30, 2016
and
2015
, our total borrowing capacity under our unsecured revolving credit facility expiring in
March 2020
was
$1.0 billion
. 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 years ended
September 30, 2016
or
2015
. Borrowings under this credit facility bear interest based on short-term money market rates in effect during the period the borrowings are outstanding. The terms of this credit facility contain covenants under which we would be in default if our debt-to-total-capital ratio was to exceed
60 percent
. Separate short-term unsecured credit facilities of approximately
$121.2 million
at
September 30, 2016
were available to non-U.S. subsidiaries. Borrowings under our non-U.S. credit facilities at
September 30, 2016
and
2015
were not significant. There are no significant commitment fees or compensating balance requirements under any of our credit facilities.
Our short-term debt obligations are primarily comprised of commercial paper borrowings. Commercial paper borrowings outstanding were
$448.6 million
at
September 30, 2016
. The weighted average interest rate of the commercial paper outstanding was
0.57 percent
at
September 30, 2016
. There were no commercial paper borrowings outstanding at
September 30, 2015
.
Interest payments were
$69.2 million
during
2016
,
$60.8 million
during
2015
and
$58.1 million
during
2014
.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Other Current Liabilities
Other current liabilities consist of (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
2016
|
|
2015
|
Unrealized losses on foreign exchange contracts (Note 8)
|
|
$
|
15.6
|
|
|
$
|
16.4
|
|
Product warranty obligations (Note 7)
|
|
28.0
|
|
|
27.9
|
|
Taxes other than income taxes
|
|
43.1
|
|
|
34.9
|
|
Accrued interest
|
|
16.9
|
|
|
16.9
|
|
Income taxes payable
|
|
28.6
|
|
|
50.9
|
|
Rocky Flats settlement (Note 17)
|
|
242.5
|
|
|
—
|
|
Other
|
|
72.9
|
|
|
61.0
|
|
Other current liabilities
|
|
$
|
447.6
|
|
|
$
|
208.0
|
|
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 known and reasonably estimable.
Changes in product warranty obligations were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
2016
|
|
2015
|
Beginning balance
|
|
$
|
27.9
|
|
|
$
|
34.1
|
|
Warranties recorded at time of sale
|
|
25.0
|
|
|
26.7
|
|
Adjustments to pre-existing warranties
|
|
1.2
|
|
|
(4.5
|
)
|
Settlements of warranty claims
|
|
(26.1
|
)
|
|
(28.4
|
)
|
Ending balance
|
|
$
|
28.0
|
|
|
$
|
27.9
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 consolidated financial statements.
Additional information related to the impacts of cash flow hedges on other comprehensive (loss) income is included in Note 9.
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 (loss) income 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
September 30, 2016
, we had a U.S. dollar-equivalent gross notional amount of
$663.2 million
of foreign currency forward exchange contracts designated as cash flow hedges.
The pre-tax amount of (losses) gains recorded in other comprehensive (loss) income related to cash flow hedges that would have been recorded in the Consolidated Statement of Operations had they not been so designated was (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Forward exchange contracts
|
|
$
|
(6.6
|
)
|
|
$
|
41.7
|
|
|
$
|
16.9
|
|
The pre-tax amount of (losses) gains reclassified from accumulated other comprehensive loss into the 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Sales
|
|
$
|
(5.5
|
)
|
|
$
|
(8.4
|
)
|
|
$
|
(2.3
|
)
|
Cost of sales
|
|
25.5
|
|
|
44.6
|
|
|
0.7
|
|
Selling, general and administrative expenses
|
|
(0.9
|
)
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
19.1
|
|
|
$
|
36.2
|
|
|
$
|
(1.6
|
)
|
Approximately
$5.4 million
of pre-tax net unrealized
losses
on cash flow hedges as of
September 30, 2016
will be reclassified into earnings during the next 12 months. We expect that these net unrealized
losses
will be offset when the hedged items are recognized in earnings.
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
September 30, 2016
, we had a gross notional amount of
$465.0 million
of foreign currency forward exchange contracts designated as net investment hedges.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Derivative Instruments and Fair Value Measurement (Continued)
The pre-tax amount of gains (losses) recorded in other comprehensive income (loss) related to net investment hedges that would have been recorded in the Consolidated Statement of Operations had they not been so designated was (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Forward exchange contracts
|
|
$
|
2.3
|
|
|
$
|
(4.4
|
)
|
|
$
|
—
|
|
Foreign currency denominated debt
|
|
0.8
|
|
|
1.0
|
|
|
(0.3
|
)
|
Total
|
|
$
|
3.1
|
|
|
$
|
(3.4
|
)
|
|
$
|
(0.3
|
)
|
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
September 30, 2016
, 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 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Interest expense
|
|
$
|
14.1
|
|
|
$
|
5.4
|
|
|
$
|
—
|
|
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 Consolidated Statement of Operations in each period, based on the change in the fair value of the derivative financial instruments. At
September 30, 2016
, we had a U.S. dollar-equivalent gross notional amount of
$255.7 million
of foreign currency forward exchange contracts not designated as hedging instruments.
The pre-tax amount of gains (losses) from forward exchange contracts not designated as hedging instruments recognized in the Consolidated Statement of Operations was (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Cost of sales
|
|
$
|
0.9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Other income (expense)
|
|
(11.1
|
)
|
|
20.8
|
|
|
1.4
|
|
Total
|
|
$
|
(10.2
|
)
|
|
$
|
20.8
|
|
|
$
|
1.4
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Derivative Instruments and Fair Value Measurement (Continued)
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 inputs including forward and spot prices for currency and interest rate curves. We did not change our valuation techniques during fiscal
2016
,
2015
or
2014
. 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
$1,383.9 million
at
September 30, 2016
. 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, Swiss franc/Canadian dollar, Singapore dollar/USD and Mexican peso/USD.
We value interest rate swap contracts using a market approach based on observable market inputs including publicized swap curves.
Assets (liabilities) measured at fair value on a recurring basis and their location in our Consolidated Balance Sheet were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value (Level 2)
|
Derivatives Designated as Hedging Instruments
|
|
Balance Sheet Location
|
|
September 30, 2016
|
|
September 30, 2015
|
Forward exchange contracts
|
|
Other current assets
|
|
$
|
5.2
|
|
|
$
|
32.6
|
|
Forward exchange contracts
|
|
Other assets
|
|
0.6
|
|
|
1.7
|
|
Forward exchange contracts
|
|
Other current liabilities
|
|
(11.7
|
)
|
|
(13.3
|
)
|
Forward exchange contracts
|
|
Other liabilities
|
|
(1.8
|
)
|
|
(2.1
|
)
|
Interest rate swap contracts
|
|
Other assets
|
|
19.5
|
|
|
5.4
|
|
Total
|
|
|
|
$
|
11.8
|
|
|
$
|
24.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value (Level 2)
|
Derivatives Not Designated as Hedging Instruments
|
|
Balance Sheet Location
|
|
September 30, 2016
|
|
September 30, 2015
|
Forward exchange contracts
|
|
Other current assets
|
|
$
|
4.4
|
|
|
$
|
20.3
|
|
Forward exchange contracts
|
|
Other current liabilities
|
|
(3.9
|
)
|
|
(3.1
|
)
|
Total
|
|
|
|
$
|
0.5
|
|
|
$
|
17.2
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Derivative Instruments and Fair Value Measurement (Continued)
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 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 Consolidated Balance Sheet (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
|
Fair Value
|
|
Carrying Amount
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Cash and cash equivalents
|
$
|
1,526.4
|
|
|
$
|
1,526.4
|
|
|
$
|
1,480.6
|
|
|
$
|
45.8
|
|
|
$
|
—
|
|
Short-term investments
|
902.8
|
|
|
902.8
|
|
|
—
|
|
|
902.8
|
|
|
—
|
|
Short-term debt
|
448.6
|
|
|
448.6
|
|
|
—
|
|
|
448.6
|
|
|
—
|
|
Long-term debt
|
1,516.3
|
|
|
1,780.5
|
|
|
—
|
|
|
1,780.5
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2015
|
|
|
|
Fair Value
|
|
Carrying Amount
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Cash and cash equivalents
|
$
|
1,427.3
|
|
|
$
|
1,427.3
|
|
|
$
|
1,412.1
|
|
|
$
|
15.2
|
|
|
$
|
—
|
|
Short-term investments
|
721.9
|
|
|
721.9
|
|
|
—
|
|
|
721.9
|
|
|
—
|
|
Short-term debt
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Long-term debt
|
1,500.9
|
|
|
1,682.6
|
|
|
—
|
|
|
1,682.6
|
|
|
—
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Shareowners’ Equity
Common Stock
At
September 30, 2016
, the authorized stock of the Company consisted of
one billion
shares of common stock, par value
$1.00
per share, and
25 million
shares of preferred stock, without par value. At
September 30, 2016
,
13.1 million
shares of authorized common stock were reserved for various incentive plans.
Changes in outstanding common shares are summarized as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Beginning balance
|
|
132.4
|
|
|
136.7
|
|
|
138.8
|
|
Treasury stock purchases
|
|
(4.6
|
)
|
|
(5.4
|
)
|
|
(4.1
|
)
|
Shares delivered under incentive plans
|
|
0.7
|
|
|
1.1
|
|
|
2.0
|
|
Ending balance
|
|
128.5
|
|
|
132.4
|
|
|
136.7
|
|
At
September 30, 2016
and
2015
there were
$5.3 million
and
$12.5 million
, respectively, of outstanding common stock share repurchases recorded in accounts payable that did not settle until the next fiscal year.
Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss by component for the years ended
September 30, 2016
,
2015
and
2014
were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and other postretirement benefit plan adjustments, net of tax (Note 11)
|
|
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 (loss) income before reclassifications
|
|
(143.9
|
)
|
|
(61.3
|
)
|
|
14.2
|
|
|
(191.0
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
|
58.3
|
|
|
—
|
|
|
2.4
|
|
|
60.7
|
|
Other comprehensive (loss) income
|
|
(85.6
|
)
|
|
(61.3
|
)
|
|
16.6
|
|
|
(130.3
|
)
|
Balance as of September 30, 2014
|
|
$
|
(909.4
|
)
|
|
$
|
(52.5
|
)
|
|
$
|
13.9
|
|
|
$
|
(948.0
|
)
|
Other comprehensive (loss) income before reclassifications
|
|
(257.3
|
)
|
|
(199.9
|
)
|
|
36.7
|
|
|
(420.5
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
|
69.6
|
|
|
—
|
|
|
(35.7
|
)
|
|
33.9
|
|
Other comprehensive (loss) income
|
|
(187.7
|
)
|
|
(199.9
|
)
|
|
1.0
|
|
|
(386.6
|
)
|
Balance as of September 30, 2015
|
|
$
|
(1,097.1
|
)
|
|
$
|
(252.4
|
)
|
|
$
|
14.9
|
|
|
$
|
(1,334.6
|
)
|
Other comprehensive loss before reclassifications
|
|
(216.5
|
)
|
|
(42.5
|
)
|
|
(3.6
|
)
|
|
(262.6
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
|
73.8
|
|
|
—
|
|
|
(15.4
|
)
|
|
58.4
|
|
Other comprehensive loss
|
|
$
|
(142.7
|
)
|
|
$
|
(42.5
|
)
|
|
$
|
(19.0
|
)
|
|
$
|
(204.2
|
)
|
Balance as of September 30, 2016
|
|
$
|
(1,239.8
|
)
|
|
$
|
(294.9
|
)
|
|
$
|
(4.1
|
)
|
|
$
|
(1,538.8
|
)
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Shareowners’ Equity (Continued)
The reclassifications out of accumulated other comprehensive loss to the Consolidated Statement of Operations for the years ended
September 30, 2016
,
2015
and
2014
were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
Affected Line in the Consolidated Statement of Operations
|
|
2016
|
|
2015
|
|
2014
|
|
|
Pension and other postretirement benefit plan adjustments:
|
|
|
|
|
|
|
|
Amortization of prior service credit
|
$
|
(14.0
|
)
|
|
$
|
(17.2
|
)
|
|
$
|
(12.9
|
)
|
|
(a)
|
Amortization of net actuarial loss
|
126.8
|
|
|
123.2
|
|
|
102.6
|
|
|
(a)
|
|
112.8
|
|
|
106.0
|
|
|
89.7
|
|
|
Income before income taxes
|
|
(39.0
|
)
|
|
(36.4
|
)
|
|
(31.4
|
)
|
|
Income tax provision
|
|
$
|
73.8
|
|
|
$
|
69.6
|
|
|
$
|
58.3
|
|
|
Net income
|
|
|
|
|
|
|
|
|
Net unrealized losses (gains) on cash flow hedges:
|
|
|
|
|
|
|
|
Forward exchange contracts
|
$
|
5.5
|
|
|
$
|
8.4
|
|
|
$
|
2.3
|
|
|
Sales
|
Forward exchange contracts
|
(25.5
|
)
|
|
(44.6
|
)
|
|
(0.7
|
)
|
|
Cost of sales
|
Forward exchange contracts
|
0.9
|
|
|
—
|
|
|
—
|
|
|
Selling, general and administrative expenses
|
|
(19.1
|
)
|
|
(36.2
|
)
|
|
1.6
|
|
|
Income before income taxes
|
|
3.7
|
|
|
0.5
|
|
|
0.8
|
|
|
Income tax provision
|
|
$
|
(15.4
|
)
|
|
$
|
(35.7
|
)
|
|
$
|
2.4
|
|
|
Net income
|
|
|
|
|
|
|
|
|
Total reclassifications
|
$
|
58.4
|
|
|
$
|
33.9
|
|
|
$
|
60.7
|
|
|
Net income
|
(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 11 for further information.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Share-Based Compensation
During
2016
,
2015
and
2014
we recognized
$40.5 million
,
$41.5 million
and
$42.5 million
of pre-tax share-based compensation expense, respectively. The total income tax benefit related to share-based compensation expense was
$12.9 million
,
$13.2 million
and
$12.9 million
during
2016
,
2015
and
2014
, respectively. We recognize compensation expense on grants of share-based compensation awards on a straight-line basis over the service period of each award recipient. As of
September 30, 2016
, total unrecognized compensation cost related to share-based compensation awards was
$34.5 million
, net of estimated forfeitures, which we expect to recognize over a weighted average period of approximately
1.6 years
.
Our 2012 Long-Term Incentives Plan, as amended (2012 Plan), authorizes us to deliver up to
11.8 million
shares of our common stock upon exercise of stock options or upon grant or in payment of stock appreciation rights, performance shares, performance units, restricted stock units and restricted stock. Our 2003 Directors Stock Plan, as amended, authorizes us to deliver up to
0.5 million
shares of our common stock upon exercise of stock options or upon grant of shares of our common stock and restricted stock units. Shares relating to awards under our 2012 Plan, 2008 Long-Term Incentives Plan, as amended, or our 2000 Long-Term Incentives Plan, as amended, that terminate by expiration, forfeiture, cancellation or otherwise without the issuance or delivery of shares will be available for further awards under the 2012 Plan. Approximately
6.4 million
shares under our 2012 Plan and
0.3 million
shares under our 2003 Directors Stock Plan remain available for future grant or payment at
September 30, 2016
. We use treasury stock to deliver shares of our common stock under these plans. Our 2012 Plan does not permit share-based compensation awards to be granted after February 7, 2022.
Stock Options
We have granted non-qualified and incentive stock options to purchase our common stock under various incentive plans at prices equal to the fair market value of the stock on the grant dates. The exercise price for stock options granted under the plans may be paid in cash, already-owned shares of common stock or a combination of cash and such shares. Stock options expire
ten years
after the grant date and vest ratably over
three years
.
The per-share weighted average fair value of stock options granted during the years ended
September 30, 2016
,
2015
and
2014
was
$21.28
,
$26.70
and
$34.03
, respectively. The total intrinsic value of stock options exercised was
$21.9 million
,
$46.1 million
and
$108.1 million
during
2016
,
2015
and
2014
, respectively. We estimated the fair value of each stock option on the date of grant using the Black-Scholes pricing model and the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Average risk-free interest rate
|
|
1.76
|
%
|
|
1.61
|
%
|
|
1.52
|
%
|
Expected dividend yield
|
|
2.78
|
%
|
|
2.25
|
%
|
|
2.13
|
%
|
Expected volatility
|
|
29
|
%
|
|
31
|
%
|
|
41
|
%
|
Expected term (years)
|
|
5.1
|
|
|
5.1
|
|
|
5.2
|
|
The average risk-free interest rate is based on U.S. Treasury security rates corresponding to the expected term in effect as of the grant date. The expected dividend yield is based on the expected annual dividend as a percentage of the market value of our common stock as of the grant date. We determined expected volatility using daily historical volatility of our stock price over the most recent period corresponding to the expected term as of the grant date. We determined the expected term of the stock options using historical data adjusted for the estimated exercise dates of unexercised options.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Share-Based Compensation (Continued)
A summary of stock option activity for the year ended
September 30, 2016
is:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
(in thousands)
|
|
Wtd. Avg.
Exercise
Price
|
|
Wtd. Avg.
Remaining
Contractual
Term (years)
|
|
Aggregate
Intrinsic Value
of In-The-Money
Options
(in millions)
|
Outstanding at October 1, 2015
|
|
4,574
|
|
|
$
|
85.81
|
|
|
|
|
|
Granted
|
|
1,167
|
|
|
104.36
|
|
|
|
|
|
Exercised
|
|
(556
|
)
|
|
74.17
|
|
|
|
|
|
Forfeited
|
|
(75
|
)
|
|
107.69
|
|
|
|
|
|
Cancelled
|
|
(12
|
)
|
|
105.49
|
|
|
|
|
|
Outstanding at September 30, 2016
|
|
5,098
|
|
|
90.96
|
|
|
6.7
|
|
$
|
160.0
|
|
Vested or expected to vest at September 30, 2016
|
|
4,918
|
|
|
90.31
|
|
|
6.6
|
|
157.5
|
|
Exercisable at September 30, 2016
|
|
3,049
|
|
|
79.15
|
|
|
5.4
|
|
131.7
|
|
Performance Share Awards
Certain officers and key employees are also eligible to receive shares of our common stock in payment of performance share awards granted to them. Grantees of performance shares will be eligible to receive shares of our common stock depending upon our total shareowner return, assuming reinvestment of all dividends, relative to the performance of companies in the S&P 500 Index over a
three
-year period. The awards actually earned will range from
zero percent
to
200 percent
of the targeted number of performance shares for the three-year performance periods and will be paid, to the extent earned, in the fiscal quarter following the end of the applicable three-year performance period.
A summary of performance share activity for the year ended
September 30, 2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
Performance
Shares
(in thousands)
|
|
Wtd. Avg.
Grant Date
Share
Fair Value
|
Outstanding at October 1, 2015
|
|
226
|
|
|
$
|
103.33
|
|
Granted
(1)
|
|
96
|
|
|
87.64
|
|
Adjustment
for performance results achieved
(2)
|
|
(5
|
)
|
|
98.15
|
|
Vested and issued
|
|
(67
|
)
|
|
98.15
|
|
Forfeited
|
|
(10
|
)
|
|
100.01
|
|
Outstanding at September 30, 2016
|
|
240
|
|
|
98.73
|
|
|
|
(1)
|
Performance shares granted assuming achievement of performance goals at target.
|
|
|
(2)
|
Adjustments were due to the number of shares vested under the fiscal
2016
awards at the end of the three-year performance period ended
September 30, 2015
being lower than the target number of shares.
|
The following table summarizes information about performance shares vested during the years ended September 30,
2016
,
2015
and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Percent payout
|
|
93
|
%
|
|
187
|
%
|
|
180
|
%
|
Shares vested (in thousands)
|
|
67
|
|
|
154
|
|
|
127
|
|
Total fair value of shares vested (in millions)
|
|
$
|
7.1
|
|
|
$
|
17.2
|
|
|
$
|
14.2
|
|
For the three-year performance period ending
September 30, 2016
, the payout will be
10 percent
of the target number of shares, with a maximum of
7,000
shares to be delivered in payment under the awards in
December 2016
.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Share-Based Compensation (Continued)
The per-share fair value of performance share awards granted during the years ended
September 30, 2016
,
2015
and
2014
was
$87.64
,
$103.70
and
$108.48
, respectively, which we determined using a Monte Carlo simulation and the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Average risk-free interest rate
|
|
1.21
|
%
|
|
0.96
|
%
|
|
0.60
|
%
|
Expected dividend yield
|
|
2.75
|
%
|
|
2.22
|
%
|
|
2.11
|
%
|
Expected volatility
|
|
22
|
%
|
|
24
|
%
|
|
33
|
%
|
The average risk-free interest rate is based on the three-year U.S. Treasury security rate in effect as of the grant date. The expected dividend yield is based on the expected annual dividend as a percentage of the market value of our common stock as of the grant date. The expected volatilities were determined using daily historical volatility for the most recent three-year period as of the grant date.
Restricted Stock and Restricted Stock Units
We grant restricted stock and restricted stock units to certain employees, and non-employee directors may elect to receive a portion of their compensation in restricted stock units. Restrictions on employee restricted stock and employee restricted stock units generally lapse over periods ranging from
one
to
five years
. Director restricted stock units generally are payable upon retirement. We value restricted stock and restricted stock units at the closing market value of our common stock on the date of grant. The weighted average grant date fair value of restricted stock and restricted stock unit awards granted during the years ended
September 30, 2016
,
2015
and
2014
was
$105.38
,
$115.02
and
$109.69
, respectively. The total fair value of shares vested during the years ended
September 30, 2016
,
2015
, and
2014
was
$7.0 million
,
$8.0 million
, and
$6.4 million
, respectively.
A summary of restricted stock and restricted stock unit activity for the year ended
September 30, 2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
Restricted
Stock and
Restricted
Stock Units
(in thousands)
|
|
Wtd. Avg.
Grant Date
Share
Fair Value
|
Outstanding at October 1, 2015
|
|
163
|
|
|
$
|
98.22
|
|
Granted
|
|
65
|
|
|
105.38
|
|
Vested
|
|
(67
|
)
|
|
80.17
|
|
Forfeited
|
|
(5
|
)
|
|
107.86
|
|
Outstanding at September 30, 2016
|
|
156
|
|
|
108.63
|
|
We also granted approximately
10,000
shares of unrestricted common stock to non-employee directors during the year ended
September 30, 2016
. The weighted average grant date fair value of the unrestricted stock awards granted during the years ended
September 30, 2016
,
2015
, and
2014
was
$98.79
,
$111.43
and
$108.86
, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Retirement Benefits
We sponsor funded and unfunded pension plans and other postretirement benefit plans for our employees. The pension plans cover most of our employees and provide for monthly pension payments to eligible employees after retirement. Pension benefits for salaried employees generally are based on years of credited service and average earnings. Pension benefits for hourly employees are primarily based on specified benefit amounts and years of service. Effective July 1, 2010 we closed participation in our U.S. and Canada pension plans to employees hired after June 30, 2010. Employees hired after June 30, 2010 are instead eligible to participate in employee savings plans. The Company contributions are based on age and years of service and range from
3% to 7%
of eligible compensation. Effective October 1, 2010, we also closed participation in our U.K. pension plan to employees hired after September 30, 2010 and these employees are now eligible for a defined contribution plan. Benefits to be provided to plan participants hired before July 1, 2010 or October 1, 2010, respectively, are not affected by these changes. Our policy with respect to funding our pension obligations is to fund the minimum amount required by applicable laws and governmental regulations. We were not required to make contributions to satisfy minimum funding requirements in our U.S. pension plans. We did not make voluntary contributions to our U.S. qualified pension plan in
2016
,
2015
or
2014
. Other postretirement benefits are primarily in the form of retirement medical plans that cover most of our employees in the U.S. and Canada and provide for the payment of certain medical costs of eligible employees and dependents after retirement.
The components of net periodic benefit cost (income) are (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement
|
|
|
Pension Benefits
|
|
Benefits
|
|
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
Service cost
|
|
$
|
88.0
|
|
|
$
|
85.7
|
|
|
$
|
78.5
|
|
|
$
|
1.3
|
|
|
$
|
1.5
|
|
|
$
|
2.0
|
|
Interest cost
|
|
169.5
|
|
|
167.2
|
|
|
174.2
|
|
|
3.3
|
|
|
4.1
|
|
|
6.5
|
|
Expected return on plan assets
|
|
(218.3
|
)
|
|
(223.2
|
)
|
|
(217.9
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service credit
|
|
(2.9
|
)
|
|
(2.7
|
)
|
|
(2.7
|
)
|
|
(11.1
|
)
|
|
(14.5
|
)
|
|
(10.2
|
)
|
Net actuarial loss
|
|
124.5
|
|
|
118.7
|
|
|
99.7
|
|
|
2.3
|
|
|
4.5
|
|
|
2.9
|
|
Special termination benefit
|
|
0.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Settlements
|
|
—
|
|
|
—
|
|
|
(0.1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Net periodic benefit cost (income)
|
|
$
|
161.3
|
|
|
$
|
145.7
|
|
|
$
|
131.7
|
|
|
$
|
(4.2
|
)
|
|
$
|
(4.4
|
)
|
|
$
|
1.2
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Retirement Benefits (Continued)
Benefit obligation, plan assets, funded status and net liability information is summarized as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Postretirement
Benefits
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Benefit obligation at beginning of year
|
|
$
|
4,282.2
|
|
|
$
|
4,236.6
|
|
|
$
|
93.3
|
|
|
$
|
122.2
|
|
Service cost
|
|
88.0
|
|
|
85.7
|
|
|
1.3
|
|
|
1.5
|
|
Interest cost
|
|
169.5
|
|
|
167.2
|
|
|
3.3
|
|
|
4.1
|
|
Actuarial losses (gains)
|
|
515.4
|
|
|
230.2
|
|
|
(0.2
|
)
|
|
(20.1
|
)
|
Plan amendments
|
|
(10.0
|
)
|
|
(3.5
|
)
|
|
—
|
|
|
—
|
|
Plan participant contributions
|
|
4.3
|
|
|
4.9
|
|
|
4.0
|
|
|
5.4
|
|
Benefits paid
|
|
(232.0
|
)
|
|
(329.1
|
)
|
|
(14.9
|
)
|
|
(17.7
|
)
|
Special termination benefit
|
|
0.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Currency translation and other
|
|
(32.0
|
)
|
|
(109.8
|
)
|
|
0.1
|
|
|
(2.1
|
)
|
Benefit obligation at end of year
|
|
4,785.9
|
|
|
4,282.2
|
|
|
86.9
|
|
|
93.3
|
|
Plan assets at beginning of year
|
|
3,262.5
|
|
|
3,591.0
|
|
|
—
|
|
|
—
|
|
Actual return on plan assets
|
|
394.3
|
|
|
29.5
|
|
|
—
|
|
|
—
|
|
Company contributions
|
|
44.3
|
|
|
41.0
|
|
|
10.9
|
|
|
12.3
|
|
Plan participant contributions
|
|
4.3
|
|
|
4.9
|
|
|
4.0
|
|
|
5.4
|
|
Benefits paid
|
|
(232.0
|
)
|
|
(329.1
|
)
|
|
(14.9
|
)
|
|
(17.7
|
)
|
Currency translation and other
|
|
(25.5
|
)
|
|
(74.8
|
)
|
|
—
|
|
|
—
|
|
Plan assets at end of year
|
|
3,447.9
|
|
|
3,262.5
|
|
|
—
|
|
|
—
|
|
Funded status of plans
|
|
$
|
(1,338.0
|
)
|
|
$
|
(1,019.7
|
)
|
|
$
|
(86.9
|
)
|
|
$
|
(93.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount on balance sheet consists of:
|
|
|
|
|
|
|
|
|
Other assets
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Compensation and benefits
|
|
(11.6
|
)
|
|
(11.3
|
)
|
|
(10.5
|
)
|
|
(11.4
|
)
|
Retirement benefits
|
|
(1,326.5
|
)
|
|
(1,008.5
|
)
|
|
(76.4
|
)
|
|
(81.9
|
)
|
Net amount on balance sheet
|
|
$
|
(1,338.0
|
)
|
|
$
|
(1,019.7
|
)
|
|
$
|
(86.9
|
)
|
|
$
|
(93.3
|
)
|
Amounts included in accumulated other comprehensive loss, net of tax, at
September 30, 2016
and
2015
which have not yet been recognized in net periodic benefit cost are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Postretirement
Benefits
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Prior service cost (credit)
|
|
$
|
4.9
|
|
|
$
|
3.0
|
|
|
$
|
(15.9
|
)
|
|
$
|
(22.9
|
)
|
Net actuarial loss
|
|
1,235.1
|
|
|
1,099.9
|
|
|
15.7
|
|
|
17.1
|
|
Total
|
|
$
|
1,240.0
|
|
|
$
|
1,102.9
|
|
|
$
|
(0.2
|
)
|
|
$
|
(5.8
|
)
|
During
2016
, we recognized prior service credits of
$14.0 million
(
$8.9 million
net of tax) and net actuarial losses of
$126.8 million
(
$82.7 million
net of tax) in pension and other postretirement net periodic benefit cost, which were included in accumulated other comprehensive loss at
September 30, 2015
. In
2017
, we expect to recognize prior service credits of
$9.8 million
(
$6.5 million
net of tax), and net actuarial losses of
$155.5 million
(
$102.1 million
net of tax) in pension and other postretirement net periodic benefit cost, which are included in accumulated other comprehensive loss at
September 30, 2016
.
During
2015
, we offered lump-sum distributions to certain deferred vested participants in the U.S. defined benefit plans. Related payments totaled
$108.8 million
. No settlement charge was required to be recorded.
The accumulated benefit obligation for our pension plans was
$4,429.1 million
and
$3,979.3 million
at
September 30, 2016
and
2015
, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Retirement Benefits (Continued)
Net Periodic Benefit Cost Assumptions
Significant assumptions used in determining net periodic benefit cost included in the Consolidated Statement of Operations for the period ended September 30 are (in weighted averages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
September 30,
|
|
Other Postretirement Benefits
September 30,
|
|
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
U.S. Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
4.55
|
%
|
|
4.50
|
%
|
|
5.05
|
%
|
|
3.85
|
%
|
|
3.65
|
%
|
|
4.60
|
%
|
Expected return on plan assets
|
|
7.50
|
%
|
|
7.50
|
%
|
|
7.50
|
%
|
|
—
|
|
|
—
|
|
|
—
|
|
Compensation increase rate
|
|
3.75
|
%
|
|
3.75
|
%
|
|
3.75
|
%
|
|
—
|
|
|
—
|
|
|
—
|
|
Non-U.S. Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
2.67
|
%
|
|
3.01
|
%
|
|
3.69
|
%
|
|
3.60
|
%
|
|
3.50
|
%
|
|
4.20
|
%
|
Expected return on plan assets
|
|
5.21
|
%
|
|
5.31
|
%
|
|
5.33
|
%
|
|
—
|
|
|
—
|
|
|
—
|
|
Compensation increase rate
|
|
3.11
|
%
|
|
3.16
|
%
|
|
3.11
|
%
|
|
—
|
|
|
—
|
|
|
—
|
|
Net Benefit Obligation Assumptions
Significant assumptions used in determining the benefit obligations included in the Consolidated Balance Sheet are (in weighted averages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
September 30,
|
|
Other Postretirement Benefits
September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
U.S. Plans
|
|
|
|
|
|
|
|
|
Discount rate
|
|
3.75
|
%
|
|
4.55
|
%
|
|
3.10
|
%
|
|
3.85
|
%
|
Compensation increase rate
|
|
3.50
|
%
|
|
3.75
|
%
|
|
—
|
|
|
—
|
|
Health care cost trend rate
(1)
|
|
—
|
|
|
—
|
|
|
6.50
|
%
|
|
7.00
|
%
|
Non-U.S. Plans
|
|
|
|
|
|
|
|
|
Discount rate
|
|
1.77
|
%
|
|
2.67
|
%
|
|
2.80
|
%
|
|
3.60
|
%
|
Compensation increase rate
|
|
2.86
|
%
|
|
3.11
|
%
|
|
—
|
|
|
—
|
|
Health care cost trend rate
(1)
|
|
—
|
|
|
—
|
|
|
4.95
|
%
|
|
5.39
|
%
|
|
|
(1)
|
The health care cost trend rate reflects the estimated increase in gross medical claims costs. As a result of the plan amendment adopted effective October 1, 2002, our effective per person retiree medical cost increase is zero percent beginning in 2005 for the majority of our postretirement benefit plans. For our other plans, we assume the gross health care cost trend rate will decrease to
5.50%
in
2018
for U.S. Plans and
4.50%
in
2017
for Non-U.S. Plans.
|
In October 2014, the U.S. Society of Actuaries released a new mortality table (RP-2014) and new mortality improvement scale (MP-2014). We used these mortality tables to measure our U.S. pension obligation as of
September 30, 2015
. This change in mortality assumptions resulted in a
$222.1 million
increase to our projected benefit obligation. In October 2015, the U.S. Society of Actuaries released a new mortality improvement scale (MP-2015), which was used to measure our U.S. pension obligation as of
September 30, 2016
. This change in mortality assumptions resulted in a
$28.0 million
decrease to our projected benefit obligation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Retirement Benefits (Continued)
In determining the expected long-term rate of return on assets assumption, we consider 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. This resulted in the selection of the weighted average long-term rate of return on assets assumption. Our global weighted-average targeted and actual asset allocations at September 30, by asset category, are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation
|
|
Target
|
|
September 30,
|
Asset Category
|
|
Range
|
|
Allocations
|
|
2016
|
|
2015
|
Equity securities
|
|
40%
|
–
|
65%
|
|
52%
|
|
50%
|
|
48%
|
Debt securities
|
|
30%
|
–
|
50%
|
|
39%
|
|
41%
|
|
43%
|
Other
|
|
0%
|
–
|
15%
|
|
9%
|
|
9%
|
|
9%
|
The investment objective for pension funds related to our defined benefit plans is to meet the plan’s benefit obligations, while maximizing the long-term growth of assets without undue risk. We strive to achieve this objective by investing plan assets within target allocation ranges and diversification within asset categories. Target allocation ranges are guidelines that are adjusted periodically based on ongoing monitoring by plan fiduciaries. Investment risk is controlled by rebalancing to target allocations on a periodic basis and ongoing monitoring of investment manager performance relative to the investment guidelines established for each manager.
As of
September 30, 2016
and
2015
, our pension plans do not directly own our common stock.
In certain countries where we operate, there are no legal requirements or financial incentives provided to companies to pre-fund pension obligations. In these instances, we typically make benefit payments directly from cash as they become due, rather than by creating a separate pension fund.
The valuation methodologies used for our pension plans’ investments measured at fair value are described as follows. There have been no changes in the methodologies used at
September 30, 2016
and
2015
.
Common stock
— Valued at the closing price reported on the active market on which the individual securities are traded.
Mutual funds
— Valued at the net asset value (NAV) reported by the fund.
Corporate debt
— Valued at either the yields currently available on comparable securities of issuers with similar credit ratings or valued under a discounted cash flow approach that maximizes observable inputs, such as current yields of similar instruments, but includes adjustments for certain risks that may not be observable such as credit and liquidity risks.
Government securities
— Valued at the most recent closing price on the active market on which the individual securities are traded or, absent an active market, utilizing observable inputs such as closing prices in less frequently traded markets.
Common collective trusts
— Valued at the NAV as determined by the custodian of the fund. The NAV is based on the fair value of the underlying assets owned by the fund, minus its liabilities then divided by the number of units outstanding.
Private equity and alternative equity
— Valued at the estimated fair value, as determined by the respective fund manager, based on the NAV of the investment units held at year end, which is subject to judgment.
Real estate funds
— Consists of the real estate funds, which provide an indirect investment into a diversified and multi-sector portfolio of property assets. Publicly-traded real estate funds are valued at the most recent closing price reported on the SIX Swiss Exchange. The remainder is valued at the estimated fair value, as determined by the respective fund manager, based on the NAV of the investment units held at year end, which is subject to judgment.
Insurance contracts
— Valued at the aggregate amount of accumulated contribution and investment income less amounts used to make benefit payments and administrative expenses which approximates fair value.
Other
— Consists of other fixed income investments and common collective trusts with a mix of equity and fixed income underlying assets. Other fixed income investments are valued at the most recent closing price reported in the markets in which the individual securities are traded, which may be infrequently.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Retirement Benefits (Continued)
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while we believe our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. Refer to Note 8 for further information regarding levels in the fair value hierarchy. The following table presents our pension plans’ investments measured at fair value as of
September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
U.S. Plans
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2.9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2.9
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
Common stock
|
|
705.9
|
|
|
—
|
|
|
—
|
|
|
705.9
|
|
Mutual funds
|
|
203.6
|
|
|
—
|
|
|
—
|
|
|
203.6
|
|
Common collective trusts
|
|
—
|
|
|
483.6
|
|
|
—
|
|
|
483.6
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
Corporate debt
|
|
—
|
|
|
591.8
|
|
|
—
|
|
|
591.8
|
|
Government securities
|
|
252.6
|
|
|
99.5
|
|
|
—
|
|
|
352.1
|
|
Common collective trusts
|
|
—
|
|
|
161.4
|
|
|
—
|
|
|
161.4
|
|
Other types of investments:
|
|
|
|
|
|
|
|
|
Private equity
|
|
—
|
|
|
—
|
|
|
57.1
|
|
|
57.1
|
|
Alternative equity
|
|
—
|
|
|
—
|
|
|
56.9
|
|
|
56.9
|
|
Insurance contracts
|
|
—
|
|
|
—
|
|
|
0.9
|
|
|
0.9
|
|
Non-U.S. Plans
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
1.9
|
|
|
—
|
|
|
—
|
|
|
1.9
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
Common stock
|
|
48.6
|
|
|
—
|
|
|
—
|
|
|
48.6
|
|
Common collective trusts
|
|
—
|
|
|
279.3
|
|
|
—
|
|
|
279.3
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
Corporate debt
|
|
—
|
|
|
34.1
|
|
|
—
|
|
|
34.1
|
|
Government securities
|
|
10.0
|
|
|
7.6
|
|
|
—
|
|
|
17.6
|
|
Common collective trusts
|
|
—
|
|
|
271.1
|
|
|
—
|
|
|
271.1
|
|
Other types of investments:
|
|
|
|
|
|
|
|
|
Real estate funds
|
|
—
|
|
|
85.4
|
|
|
9.2
|
|
|
94.6
|
|
Insurance contracts
|
|
—
|
|
|
—
|
|
|
79.7
|
|
|
79.7
|
|
Other
|
|
—
|
|
|
1.4
|
|
|
3.4
|
|
|
4.8
|
|
Total plan investments
|
|
$
|
1,225.5
|
|
|
$
|
2,015.2
|
|
|
$
|
207.2
|
|
|
$
|
3,447.9
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Retirement Benefits (Continued)
The following table presents our pension plans’ investments measured at fair value as of
September 30, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
U.S. Plans
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5.1
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
Common stock
|
|
628.5
|
|
|
—
|
|
|
—
|
|
|
628.5
|
|
Mutual funds
|
|
174.6
|
|
|
—
|
|
|
—
|
|
|
174.6
|
|
Common collective trusts
|
|
—
|
|
|
467.5
|
|
|
—
|
|
|
467.5
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
Corporate debt
|
|
—
|
|
|
643.8
|
|
|
—
|
|
|
643.8
|
|
Government securities
|
|
212.0
|
|
|
121.3
|
|
|
—
|
|
|
333.3
|
|
Common collective trusts
|
|
—
|
|
|
124.8
|
|
|
—
|
|
|
124.8
|
|
Other types of investments:
|
|
|
|
|
|
|
|
|
Private equity
|
|
—
|
|
|
—
|
|
|
70.2
|
|
|
70.2
|
|
Alternative equity
|
|
—
|
|
|
—
|
|
|
50.7
|
|
|
50.7
|
|
Insurance contracts
|
|
—
|
|
|
—
|
|
|
0.9
|
|
|
0.9
|
|
Non-U.S. Plans
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
2.3
|
|
|
—
|
|
|
—
|
|
|
2.3
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
Common stock
|
|
37.0
|
|
|
—
|
|
|
—
|
|
|
37.0
|
|
Common collective trusts
|
|
—
|
|
|
259.5
|
|
|
—
|
|
|
259.5
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
Corporate debt
|
|
—
|
|
|
40.0
|
|
|
—
|
|
|
40.0
|
|
Government securities
|
|
2.8
|
|
|
6.6
|
|
|
—
|
|
|
9.4
|
|
Common collective trusts
|
|
—
|
|
|
258.6
|
|
|
—
|
|
|
258.6
|
|
Other types of investments:
|
|
|
|
|
|
|
|
|
Real estate funds
|
|
—
|
|
|
79.4
|
|
|
8.7
|
|
|
88.1
|
|
Insurance contracts
|
|
—
|
|
|
—
|
|
|
63.8
|
|
|
63.8
|
|
Other
|
|
—
|
|
|
1.3
|
|
|
3.1
|
|
|
4.4
|
|
Total plan investments
|
|
$
|
1,062.3
|
|
|
$
|
2,002.8
|
|
|
$
|
197.4
|
|
|
$
|
3,262.5
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Retirement Benefits (Continued)
The table below sets forth a summary of changes in fair market value of our pension plans’ Level 3 assets for the year ended
September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance October 1, 2015
|
|
Realized Gains (Losses)
|
|
Unrealized Gains (Losses)
|
|
Purchases, Sales, Issuances, and Settlements, Net
|
|
Balance September 30, 2016
|
U.S. Plans
|
|
|
|
|
|
|
|
|
|
|
Private equity
|
|
$
|
70.2
|
|
|
$
|
5.3
|
|
|
$
|
(13.3
|
)
|
|
$
|
(5.1
|
)
|
|
$
|
57.1
|
|
Alternative equity
|
|
50.7
|
|
|
2.2
|
|
|
(5.6
|
)
|
|
9.6
|
|
|
56.9
|
|
Insurance contracts
|
|
0.9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.9
|
|
Non-U.S. Plans
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
8.7
|
|
|
—
|
|
|
0.5
|
|
|
—
|
|
|
9.2
|
|
Insurance contracts
|
|
63.8
|
|
|
—
|
|
|
14.5
|
|
|
1.4
|
|
|
79.7
|
|
Other
|
|
3.1
|
|
|
—
|
|
|
—
|
|
|
0.3
|
|
|
3.4
|
|
|
|
$
|
197.4
|
|
|
$
|
7.5
|
|
|
$
|
(3.9
|
)
|
|
$
|
6.2
|
|
|
$
|
207.2
|
|
The table below sets forth a summary of changes in fair market value of our pension plans’ Level 3 assets for the year ended
September 30, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance October 1, 2014
|
|
Realized Gains (Losses)
|
|
Unrealized Gains (Losses)
|
|
Purchases, Sales, Issuances, and Settlements, Net
|
|
Balance September 30, 2015
|
U.S. Plans
|
|
|
|
|
|
|
|
|
|
|
Private equity
|
|
$
|
78.8
|
|
|
$
|
7.2
|
|
|
$
|
(11.0
|
)
|
|
$
|
(4.8
|
)
|
|
$
|
70.2
|
|
Alternative equity
|
|
49.9
|
|
|
4.0
|
|
|
1.7
|
|
|
(4.9
|
)
|
|
50.7
|
|
Insurance contracts
|
|
0.9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.9
|
|
Non-U.S. Plans
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
8.6
|
|
|
—
|
|
|
0.1
|
|
|
—
|
|
|
8.7
|
|
Insurance contracts
|
|
57.8
|
|
|
—
|
|
|
11.3
|
|
|
(5.3
|
)
|
|
63.8
|
|
Other
|
|
3.3
|
|
|
—
|
|
|
0.1
|
|
|
(0.3
|
)
|
|
3.1
|
|
|
|
$
|
199.3
|
|
|
$
|
11.2
|
|
|
$
|
2.2
|
|
|
$
|
(15.3
|
)
|
|
$
|
197.4
|
|
Estimated Future Payments
We expect to contribute
$49.2 million
related to our worldwide pension plans and
$10.6 million
to our postretirement benefit plans in
2017
.
The following benefit payments, which include employees’ expected future service, as applicable, are expected to be paid (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other
Postretirement Benefits
|
2017
|
|
$
|
256.8
|
|
|
$
|
10.6
|
|
2018
|
|
246.2
|
|
|
11.2
|
|
2019
|
|
259.5
|
|
|
10.9
|
|
2020
|
|
268.5
|
|
|
7.0
|
|
2021
|
|
279.2
|
|
|
5.7
|
|
2022 – 2026
|
|
1,478.6
|
|
|
24.9
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Retirement Benefits (Continued)
Other Postretirement Benefits
A one percentage point change in assumed health care cost trend rates would have the following effect (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Percentage
Point Increase
|
|
One Percentage
Point Decrease
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Increase (decrease) to total of service and interest cost components
|
|
$
|
0.2
|
|
|
$
|
0.2
|
|
|
$
|
(0.2
|
)
|
|
$
|
(0.2
|
)
|
Increase (decrease) to postretirement benefit obligation
|
|
2.9
|
|
|
3.0
|
|
|
(2.5
|
)
|
|
(2.6
|
)
|
Pension Benefits
Information regarding our pension plans with accumulated benefit obligations in excess of the fair value of plan assets (underfunded plans) at September 30,
2016
and
2015
are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Projected benefit obligation
|
|
$
|
4,784.5
|
|
|
$
|
4,281.0
|
|
Accumulated benefit obligation
|
|
4,428.0
|
|
|
3,978.3
|
|
Fair value of plan assets
|
|
3,446.5
|
|
|
3,261.2
|
|
Defined Contribution Savings Plans
We also sponsor certain defined contribution savings plans for eligible employees. Expense related to these plans was
$38.6 million
in
2016
,
$46.3 million
in
2015
and
$43.8 million
in
2014
.
12. Other Income (Expense)
The components of other income (expense) are (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Interest income
|
|
$
|
12.7
|
|
|
$
|
10.7
|
|
|
$
|
9.5
|
|
Royalty income
|
|
2.9
|
|
|
2.9
|
|
|
2.5
|
|
Legacy product liability and environmental charges
|
|
(12.7
|
)
|
|
(19.8
|
)
|
|
(14.6
|
)
|
Other
|
|
3.4
|
|
|
0.7
|
|
|
12.3
|
|
Other income (expense)
|
|
$
|
6.3
|
|
|
$
|
(5.5
|
)
|
|
$
|
9.7
|
|
Other income (expense)
included an
$8.0 million
gain
in
2014
from favorable resolutions of certain intellectual property and commercial legal matters.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Income Taxes
Selected income tax data (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Components of income before income taxes:
|
|
|
|
|
|
|
United States
|
|
$
|
512.1
|
|
|
$
|
660.5
|
|
|
$
|
607.3
|
|
Non-United States
|
|
431.0
|
|
|
467.0
|
|
|
526.9
|
|
Total
|
|
$
|
943.1
|
|
|
$
|
1,127.5
|
|
|
$
|
1,134.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of the income tax provision:
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
United States
|
|
$
|
175.9
|
|
|
$
|
238.6
|
|
|
$
|
219.4
|
|
Non-United States
|
|
91.7
|
|
|
73.6
|
|
|
85.3
|
|
State and local
|
|
16.3
|
|
|
17.0
|
|
|
9.9
|
|
Total current
|
|
283.9
|
|
|
329.2
|
|
|
314.6
|
|
Deferred:
|
|
|
|
|
|
|
United States
|
|
(53.7
|
)
|
|
(30.3
|
)
|
|
(3.8
|
)
|
Non-United States
|
|
(8.8
|
)
|
|
2.6
|
|
|
(4.0
|
)
|
State and local
|
|
(8.0
|
)
|
|
(1.6
|
)
|
|
0.6
|
|
Total deferred
|
|
(70.5
|
)
|
|
(29.3
|
)
|
|
(7.2
|
)
|
Income tax provision
|
|
$
|
213.4
|
|
|
$
|
299.9
|
|
|
$
|
307.4
|
|
|
|
|
|
|
|
|
Total income taxes paid
|
|
$
|
299.8
|
|
|
$
|
313.1
|
|
|
$
|
323.8
|
|
Effective Tax Rate Reconciliation
The reconciliation between the U.S. federal statutory rate and our effective tax rate was:
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Statutory tax rate
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State and local income taxes
|
|
0.6
|
|
|
0.9
|
|
|
0.8
|
|
Non-United States taxes
|
|
(8.6
|
)
|
|
(7.9
|
)
|
|
(9.5
|
)
|
Tax effect of foreign dividends
|
|
0.1
|
|
|
(0.2
|
)
|
|
0.5
|
|
Foreign currency transaction loss
|
|
(0.8
|
)
|
|
—
|
|
|
—
|
|
Research and development tax credit
|
|
(2.0
|
)
|
|
(0.6
|
)
|
|
(0.1
|
)
|
Change in valuation allowances
|
|
(0.6
|
)
|
|
(0.5
|
)
|
|
(0.1
|
)
|
Domestic manufacturing deduction
|
|
(1.2
|
)
|
|
(1.2
|
)
|
|
(1.1
|
)
|
Adjustments for prior period tax matters
|
|
0.4
|
|
|
0.5
|
|
|
1.0
|
|
Other
|
|
(0.3
|
)
|
|
0.6
|
|
|
0.6
|
|
Effective income tax rate
|
|
22.6
|
%
|
|
26.6
|
%
|
|
27.1
|
%
|
We operate in certain non-U.S. tax jurisdictions under government-sponsored tax incentive programs, the primary benefit of which will expire in
2019
. These programs may be extended with reduced incentives if certain additional requirements are met. The tax benefit attributable to these incentive programs was
$33.9 million
(
$0.26
per diluted share) in
2016
,
$36.5 million
(
$0.27
per diluted share) in
2015
and
$42.9 million
(
$0.31
per diluted share) in
2014
.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Income Taxes (Continued)
Deferred Taxes
The tax effects of temporary differences that give rise to our net deferred income tax assets (liabilities) at September 30,
2016
and
2015
were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Deferred income tax assets:
|
|
|
|
|
Compensation and benefits
|
|
$
|
16.2
|
|
|
$
|
28.4
|
|
Inventory
|
|
18.0
|
|
|
15.3
|
|
Returns, rebates and incentives
|
|
55.1
|
|
|
50.8
|
|
Retirement benefits
|
|
493.6
|
|
|
371.2
|
|
Environmental remediation and other site-related costs
|
|
34.8
|
|
|
31.1
|
|
Share-based compensation
|
|
40.6
|
|
|
35.5
|
|
Other accruals and reserves
|
|
60.5
|
|
|
48.9
|
|
Net operating loss carryforwards
|
|
24.4
|
|
|
25.9
|
|
Tax credit carryforwards
|
|
13.7
|
|
|
8.5
|
|
Capital loss carryforwards
|
|
9.9
|
|
|
13.6
|
|
Other
|
|
11.4
|
|
|
15.9
|
|
Subtotal
|
|
778.2
|
|
|
645.1
|
|
Valuation allowance
|
|
(17.3
|
)
|
|
(22.2
|
)
|
Net deferred income tax assets
|
|
760.9
|
|
|
622.9
|
|
Deferred income tax liabilities:
|
|
|
|
|
Property
|
|
(63.5
|
)
|
|
(74.9
|
)
|
Intangible assets
|
|
(54.9
|
)
|
|
(53.2
|
)
|
Other
|
|
(8.6
|
)
|
|
—
|
|
Deferred income tax liabilities
|
|
(127.0
|
)
|
|
(128.1
|
)
|
Total net deferred income tax assets
|
|
$
|
633.9
|
|
|
$
|
494.8
|
|
We have not provided U.S. deferred taxes for
$3,274.0 million
of undistributed earnings of certain non-U.S. subsidiaries, since these earnings have been determined to be indefinitely reinvested outside the U.S. and thus are not subject to U.S. income taxes and foreign withholding taxes. It is not practicable to estimate the amount of additional taxes that may be payable upon distribution of these earnings.
We believe it is more likely than not that we will realize our deferred tax assets through the reduction of future taxable income, other than for the deferred tax assets reflected below.
Tax attributes and related valuation allowances at
September 30, 2016
were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Attribute to be Carried Forward
|
|
Tax Benefit Amount
|
|
Valuation Allowance
|
|
Carryforward
Period Ends
|
Non-United States net operating loss carryforward
|
|
$
|
7.7
|
|
|
$
|
4.4
|
|
|
2017
|
-
|
2026
|
Non-United States net operating loss carryforward
|
|
6.1
|
|
|
1.6
|
|
|
Indefinite
|
Non-United States capital loss carryforward
|
|
9.9
|
|
|
9.9
|
|
|
Indefinite
|
United States net operating loss carryforward
|
|
2.8
|
|
|
—
|
|
|
2019
|
-
|
2033
|
United States tax credit carryforward
|
|
2.5
|
|
|
—
|
|
|
2018
|
-
|
2037
|
State and local net operating loss carryforward
|
|
7.8
|
|
|
0.2
|
|
|
2017
|
-
|
2033
|
State tax credit carryforward
|
|
11.2
|
|
|
0.6
|
|
|
2019
|
-
|
2031
|
Subtotal — tax carryforwards
|
|
48.0
|
|
|
16.7
|
|
|
|
|
|
Other deferred tax assets
|
|
0.6
|
|
|
0.6
|
|
|
Indefinite
|
Total
|
|
$
|
48.6
|
|
|
$
|
17.3
|
|
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Income Taxes (Continued)
Unrecognized Tax Benefits
A reconciliation of our gross unrecognized tax benefits, excluding interest and penalties, is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Gross unrecognized tax benefits balance at beginning of year
|
|
$
|
43.9
|
|
|
$
|
38.9
|
|
|
$
|
40.8
|
|
Additions based on tax positions related to the current year
|
|
2.3
|
|
|
2.1
|
|
|
1.0
|
|
Additions based on tax positions related to prior years
|
|
14.9
|
|
|
11.6
|
|
|
2.2
|
|
Reductions based on tax positions related to prior years
|
|
—
|
|
|
(1.0
|
)
|
|
—
|
|
Reductions related to settlements with taxing authorities
|
|
(27.1
|
)
|
|
(4.3
|
)
|
|
—
|
|
Reductions related to lapses of statute of limitations
|
|
(1.6
|
)
|
|
(1.6
|
)
|
|
(4.2
|
)
|
Effect of foreign currency translation
|
|
—
|
|
|
(1.8
|
)
|
|
(0.9
|
)
|
Gross unrecognized tax benefits balance at end of year
|
|
$
|
32.4
|
|
|
$
|
43.9
|
|
|
$
|
38.9
|
|
The amount of gross unrecognized tax benefits that would reduce our effective tax rate if recognized was
$32.4 million
,
$43.9 million
and
$38.9 million
at
September 30, 2016
,
2015
and
2014
, respectively.
Accrued interest and penalties related to unrecognized tax benefits were
$5.2 million
and
$5.1 million
at
September 30, 2016
and
2015
, respectively. We recognize interest and penalties related to unrecognized tax benefits in the income tax provision. Benefits (expense) recognized were
$(0.1) million
,
$2.4 million
and
$4.0 million
in
2016
,
2015
and
2014
, respectively.
We do not expect the amount of gross unrecognized tax benefits to change significantly in the next 12 months
.
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
2014
and are no longer subject to state, local and non-U.S. income tax examinations for years before
2003
.
14. Commitments and Contingent Liabilities
Obligations and expected recoveries related to environmental remediation costs, conditional asset retirement obligations and other recorded indemnification matters as of
September 30, 2016
and
2015
are as follows:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Environmental remediation costs
|
$
|
73.9
|
|
|
$
|
61.4
|
|
Conditional asset retirement obligations
|
20.6
|
|
|
20.2
|
|
Indemnification liabilities
|
17.0
|
|
|
32.6
|
|
Total recorded liabilities
|
111.5
|
|
|
114.2
|
|
Recorded probable expected recoveries
|
(22.5
|
)
|
|
(33.2
|
)
|
Net recorded liabilities
|
$
|
89.0
|
|
|
$
|
81.0
|
|
As of
September 30, 2016
, we have estimated the total reasonably possible costs we could incur from these environmental remediation and indemnification liabilities to be
$133.6 million
(
$105.2 million
, net of related receivables).
Environmental Matters
Federal, state and local requirements relating to the discharge of substances into the environment, the disposal of hazardous wastes and other activities affecting the environment have and will continue to have an effect on our manufacturing operations. Thus far, compliance with environmental requirements and resolution of environmental claims have been accomplished without material effect on our business, financial condition or results of operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. Commitments and Contingent Liabilities (Continued)
We have been designated as a potentially responsible party at
13
Superfund sites, excluding sites as to which our records disclose no involvement or as to which our potential liability has been finally determined and assumed by third parties. In addition, various other lawsuits, claims and proceedings have been asserted against us seeking remediation of alleged environmental impairments, principally at previously owned properties.
Environmental remediation cost liabilities and related expected recoveries at
September 30, 2016
are as follows (in millions):
|
|
|
|
|
|
2016
|
Other current liabilities
|
$
|
14.6
|
|
Other liabilities
|
59.3
|
|
Total recorded environmental remediation costs
(1)
|
73.9
|
|
Receivables
|
(1.8
|
)
|
Other assets
|
(9.6
|
)
|
Total recorded probable expected recoveries
|
(11.4
|
)
|
Net environmental remediation costs
|
$
|
62.5
|
|
|
|
(1)
|
Includes
$51.6 million
related to discounted ongoing operating and maintenance expenditures.
|
Based on our assessment, we believe that our expenditures for environmental capital investment and remediation necessary to comply with present regulations governing environmental protection and other expenditures for the resolution of environmental claims will not have a material effect on our business, financial condition or results of operations. We cannot assess the possible effect of compliance with future requirements.
Conditional Asset Retirement Obligations
We accrue for costs related to a 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.
Conditional asset retirement obligations and related expected recoveries at
September 30, 2016
and
2015
are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Other current liabilities
|
$
|
0.7
|
|
|
$
|
0.4
|
|
Other liabilities
|
19.9
|
|
|
19.8
|
|
Total recorded conditional asset retirement obligations
|
20.6
|
|
|
20.2
|
|
Receivables
|
(0.1
|
)
|
|
—
|
|
Other assets
|
(0.2
|
)
|
|
(0.3
|
)
|
Total recorded probable expected recoveries
|
(0.3
|
)
|
|
(0.3
|
)
|
Net conditional asset retirement obligations
|
$
|
20.3
|
|
|
$
|
19.9
|
|
There have been no significant changes in liabilities incurred, liabilities settled, accretion expense or revisions in estimated cash flows for the periods ended
September 30, 2016
and
2015
, respectively.
Other Matters
Various other 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. Commitments and Contingent Liabilities (Continued)
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 our former Rockwell International Corporation'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. Following litigation against Nationwide Indemnity Company (Nationwide) and Kemper Insurance (Kemper), the insurance carriers that provided liability insurance coverage to Allen-Bradley, we entered into separate agreements on April 1, 2008 with both insurance carriers to further resolve responsibility for ongoing and future coverage of Allen-Bradley asbestos claims. In exchange for a lump sum payment, Kemper bought out its remaining liability and has been released from further insurance obligations to Allen-Bradley. Nationwide 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 with Nationwide will continue to provide coverage for Allen-Bradley asbestos claims throughout the remaining life of the asbestos liability.
We also have rights to historic insurance policies that provide indemnity and defense costs, over and above self-insured retentions, for claims arising out of certain asbestos liabilities relating to the divested measurement and flow control business. We initiated litigation against several insurers to pursue coverage for these claims, subject to each carrier's policy limits, and the case is now pending in Los Angeles County Superior Court. In September 2016, we entered into settlement agreements with certain insurance company defendants. In exchange for a lump sum payment, Lamorak Insurance Company bought out its remaining liability and has been released from further insurance obligations relating to the measurement and flow control business. Certain Underwriters at Lloyd’s, London and certain London Market Insurance Companies entered into a cost share agreement to pay a portion of future defense and indemnity costs for measurement and flow control asbestos claims. We believe this arrangement will continue to provide partial coverage for these asbestos claims throughout the remaining life of 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 business, 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 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 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 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. Commitments and Contingent Liabilities (Continued)
Indemnification liabilities and related expected recoveries at
September 30, 2016
and
2015
are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Other current liabilities
|
$
|
4.9
|
|
|
$
|
3.2
|
|
Other liabilities
|
12.1
|
|
|
29.4
|
|
Total recorded indemnification liabilities
|
17.0
|
|
|
32.6
|
|
Receivables
|
(3.5
|
)
|
|
(2.1
|
)
|
Other assets
|
(7.3
|
)
|
|
(22.6
|
)
|
Total recorded probable expected recoveries
|
(10.8
|
)
|
|
(24.7
|
)
|
Net indemnification liabilities
|
$
|
6.2
|
|
|
$
|
7.9
|
|
Included in the above are certain environmental indemnification liabilities that are substantially indemnified by ExxonMobil Corporation for which we have recorded a liability of
$11.0 million
and
$26.0 million
, and a related receivable of
$10.8 million
and
$24.7 million
, as of
September 30, 2016
and
2015
, respectively.
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
September 30, 2016
, 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 business, financial condition or results of operations; 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 business, financial condition or results of operations in a particular period.
Lease Commitments
Rental expense was
$115.5 million
in
2016
,
$117.0 million
in
2015
and
$121.6 million
in
2014
. As of
September 30, 2016
, minimum future rental commitments under operating leases having noncancelable lease terms in excess of one year are payable as follows (in millions):
|
|
|
|
|
2017
|
$
|
76.2
|
|
2018
|
65.2
|
|
2019
|
52.8
|
|
2020
|
45.5
|
|
2021
|
33.7
|
|
Beyond 2021
|
62.5
|
|
Total
|
$
|
335.9
|
|
Commitments from third parties under sublease agreements having noncancelable lease terms in excess of one year were not significant as of
September 30, 2016
. Most leases contain renewal options for varying periods, and certain leases include options to purchase the leased property.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Business Segment Information
Rockwell Automation,
a leader in industrial automation and information, makes its customers more productive and the world more sustainable
. We determine our operating segments based on the information used by our chief operating decision maker, our Chief Executive Officer, to allocate resources and assess performance. Based upon this information, we organize our products, solutions and services into two operating segments: Architecture & Software and Control Products & Solutions.
Architecture & Software
The Architecture & Software segment contains all of the hardware, software and communication components of our integrated control and information architecture which are capable of controlling the customer’s industrial processes and connecting with their business enterprise. Architecture & Software has a broad portfolio of products including:
|
|
•
|
Control platforms that perform multiple control disciplines and monitoring of applications, including discrete, batch and continuous process, drives control, motion control and machine safety control. Our platform products include controllers, electronic operator interface devices, electronic input/output devices, communication and networking products and industrial computers. The information-enabled Logix controllers provide integrated multi-discipline control that is modular and scalable.
|
|
|
•
|
Software products that include configuration and visualization software used to operate and supervise control platforms, advanced process control software, manufacturing execution systems (MES) and information solutions software that enables customers to improve operational productivity and meet regulatory requirements.
|
|
|
•
|
Other products, including sensors, machine safety components and linear motion control products.
|
Control Products & Solutions
The Control Products & Solutions segment combines a comprehensive portfolio of intelligent motor control and industrial control products, application expertise and project management capabilities. This comprehensive portfolio includes:
|
|
•
|
Low and medium voltage electro-mechanical and electronic motor starters, motor and circuit protection devices, AC/DC variable frequency drives, push buttons, signaling devices, termination and protection devices, relays and timers.
|
|
|
•
|
Value-added solutions ranging from packaged solutions such as configured drives and motor control centers to automation and information solutions where we provide design, integration and start-up services for custom-engineered hardware and information software.
|
|
|
•
|
Services designed to help maximize a customer’s automation investment and provide total life-cycle support, including technical support and repair, asset management, training, predictive and preventative maintenance, and safety and network consulting.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Business Segment Information (Continued)
The following tables reflect the sales and operating results of our reportable segments for the years ended
September 30
,
2016
,
2015
and
2014
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Sales:
|
|
|
|
|
|
|
Architecture & Software
|
|
$
|
2,635.2
|
|
|
$
|
2,749.5
|
|
|
$
|
2,845.3
|
|
Control Products & Solutions
|
|
3,244.3
|
|
|
3,558.4
|
|
|
3,778.2
|
|
Total
|
|
$
|
5,879.5
|
|
|
$
|
6,307.9
|
|
|
$
|
6,623.5
|
|
Segment operating earnings:
|
|
|
|
|
|
|
Architecture & Software
|
|
$
|
695.0
|
|
|
$
|
808.6
|
|
|
$
|
839.6
|
|
Control Products & Solutions
|
|
493.7
|
|
|
551.9
|
|
|
512.4
|
|
Total
|
|
1,188.7
|
|
|
1,360.5
|
|
|
1,352.0
|
|
Purchase accounting depreciation and amortization
|
|
(18.4
|
)
|
|
(21.0
|
)
|
|
(21.6
|
)
|
General corporate-net
|
|
(79.7
|
)
|
|
(85.6
|
)
|
|
(81.0
|
)
|
Non-operating pension costs
|
|
(76.2
|
)
|
|
(62.7
|
)
|
|
(55.9
|
)
|
Interest expense
|
|
(71.3
|
)
|
|
(63.7
|
)
|
|
(59.3
|
)
|
Income before income taxes
|
|
$
|
943.1
|
|
|
$
|
1,127.5
|
|
|
$
|
1,134.2
|
|
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.
The following tables summarize the identifiable assets at
September 30
,
2016
,
2015
and
2014
and the provision for depreciation and amortization and the amount of capital expenditures for property for the years then ended for each of the reportable segments and Corporate (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Identifiable assets:
|
|
|
|
|
|
|
Architecture & Software
|
|
$
|
2,054.3
|
|
|
$
|
1,790.5
|
|
|
$
|
1,874.5
|
|
Control Products & Solutions
|
|
2,034.6
|
|
|
2,078.1
|
|
|
2,273.7
|
|
Corporate
|
|
3,012.3
|
|
|
2,536.1
|
|
|
2,076.1
|
|
Total
|
|
$
|
7,101.2
|
|
|
$
|
6,404.7
|
|
|
$
|
6,224.3
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
Architecture & Software
|
|
$
|
75.0
|
|
|
$
|
69.7
|
|
|
$
|
64.8
|
|
Control Products & Solutions
|
|
77.3
|
|
|
70.3
|
|
|
65.9
|
|
Corporate
|
|
1.5
|
|
|
1.5
|
|
|
0.2
|
|
Total
|
|
153.8
|
|
|
141.5
|
|
|
130.9
|
|
Purchase accounting depreciation and amortization
|
|
18.4
|
|
|
21.0
|
|
|
21.6
|
|
Total
|
|
$
|
172.2
|
|
|
$
|
162.5
|
|
|
$
|
152.5
|
|
Capital expenditures for property:
|
|
|
|
|
|
|
Architecture & Software
|
|
$
|
24.7
|
|
|
$
|
29.4
|
|
|
$
|
33.6
|
|
Control Products & Solutions
|
|
41.5
|
|
|
56.8
|
|
|
51.2
|
|
Corporate
|
|
50.7
|
|
|
36.7
|
|
|
56.2
|
|
Total
|
|
$
|
116.9
|
|
|
$
|
122.9
|
|
|
$
|
141.0
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Business Segment Information (Continued)
Identifiable assets at Corporate consist principally of cash, net deferred income tax assets, prepaid pension and property. Property shared by the segments and used in operating activities is also reported in Corporate identifiable assets and Corporate capital expenditures. Corporate identifiable assets include shared net property balances of
$264.8 million
,
$266.8 million
and
$294.1 million
at
September 30, 2016
,
2015
and
2014
, respectively, for which depreciation expense has been allocated to segment operating earnings based on the expected benefit to be realized by each segment. Corporate capital expenditures include
$50.7 million
,
$36.7 million
and
$56.2 million
in
2016
,
2015
and
2014
, respectively, that will be shared by our operating segments.
We conduct a significant portion of our business activities outside the United States. The following tables present sales and property by geographic region (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
Property
|
|
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
United States
|
|
$
|
3,213.4
|
|
|
$
|
3,446.8
|
|
|
$
|
3,414.6
|
|
|
$
|
445.4
|
|
|
$
|
472.1
|
|
|
$
|
497.5
|
|
Canada
|
|
316.4
|
|
|
366.6
|
|
|
437.0
|
|
|
7.3
|
|
|
7.3
|
|
|
7.6
|
|
Europe, Middle East and Africa
|
|
1,147.2
|
|
|
1,174.0
|
|
|
1,351.8
|
|
|
49.9
|
|
|
50.4
|
|
|
48.8
|
|
Asia Pacific
|
|
764.4
|
|
|
834.5
|
|
|
884.0
|
|
|
37.4
|
|
|
41.9
|
|
|
37.3
|
|
Latin America
|
|
438.1
|
|
|
486.0
|
|
|
536.1
|
|
|
38.3
|
|
|
33.9
|
|
|
41.7
|
|
Total
|
|
$
|
5,879.5
|
|
|
$
|
6,307.9
|
|
|
$
|
6,623.5
|
|
|
$
|
578.3
|
|
|
$
|
605.6
|
|
|
$
|
632.9
|
|
We attribute sales to the geographic regions based on the country of destination.
In most countries, we sell primarily through independent distributors in conjunction with our direct sales force. In other countries, we sell through a combination of our direct sales force and to a lesser extent, through independent distributors. We sell large systems and service offerings principally through our direct sales force, though opportunities are sometimes identified through distributors. Sales to our largest distributor in
2016
,
2015
and
2014
, which are attributable to both segments, were approximately
10 percent
of our total sales.
16. Quarterly Financial Information (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 Quarters
|
|
|
(in millions, except per share amounts)
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
2016
|
Sales
|
|
$
|
1,426.6
|
|
|
$
|
1,440.3
|
|
|
$
|
1,474.0
|
|
|
1,538.6
|
|
|
$
|
5,879.5
|
|
Gross profit
|
|
612.7
|
|
|
594.1
|
|
|
616.8
|
|
|
651.9
|
|
|
2,475.5
|
|
Income before income taxes
|
|
236.9
|
|
|
217.0
|
|
|
252.3
|
|
|
236.9
|
|
|
943.1
|
|
Net income
|
|
185.5
|
|
|
168.0
|
|
|
191.0
|
|
|
185.2
|
|
|
729.7
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
1.41
|
|
|
1.29
|
|
|
1.47
|
|
|
1.44
|
|
|
5.60
|
|
Diluted
|
|
1.40
|
|
|
1.28
|
|
|
1.46
|
|
|
1.43
|
|
|
5.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015 Quarters
|
|
|
(in millions, except per share amounts)
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
2015
|
Sales
|
|
$
|
1,574.4
|
|
|
$
|
1,550.8
|
|
|
$
|
1,575.2
|
|
|
$
|
1,607.5
|
|
|
$
|
6,307.9
|
|
Gross profit
|
|
687.5
|
|
|
673.2
|
|
|
678.2
|
|
|
664.2
|
|
|
2,703.1
|
|
Income before income taxes
|
|
287.5
|
|
|
276.5
|
|
|
284.6
|
|
|
278.9
|
|
|
1,127.5
|
|
Net income
|
|
214.2
|
|
|
206.0
|
|
|
206.1
|
|
|
201.3
|
|
|
827.6
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
1.58
|
|
|
1.53
|
|
|
1.53
|
|
|
1.51
|
|
|
6.15
|
|
Diluted
|
|
1.56
|
|
|
1.51
|
|
|
1.52
|
|
|
1.50
|
|
|
6.09
|
|
Note: The sum of the quarterly per share amounts will not necessarily equal the annual per share amounts presented.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. Rocky Flats Settlement
From 1975 to 1989, Rockwell International Corporation (RIC) operated the Rocky Flats facility in Colorado for the U.S. Department of Energy (DoE). In 1990, a class of landowners near Rocky Flats sued RIC and Dow Chemical, another former operator of the facility. In May 2016, the parties agreed to settle this case and the DoE authorized the settlement. Under the settlement agreement, which is subject to court approval, we and Dow Chemical will pay
$375.0 million
in the aggregate
to resolve the claims.
Under RIC’s contract with the DoE and federal law, RIC is entitled to indemnification by the DoE for the settlement amount. When RIC was acquired by Boeing in 1996, we agreed to indemnify Boeing for RIC’s liabilities related to Rocky Flats and received the benefits of RIC’s corresponding indemnity rights against the DoE.
We expect to be fully reimbursed by the DoE for our obligation of
$243.75 million
under the settlement, either before or after we pay the amounts due. We expect to pay up to
$242.5 million
within the next 12 months.
We will promptly pursue reimbursement from the DoE; however, it is uncertain whether the government indemnification and reimbursement process will be completed by the time payment is due.
At
September 30, 2016
, the liability is included within other current liabilities in the Consolidated Balance Sheet. An indemnification receivable of
$243.75 million
at
September 30, 2016
is also included within other assets in the Consolidated Balance Sheet.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareowners of
Rockwell Automation, Inc.
Milwaukee, Wisconsin
We have audited the accompanying consolidated balance sheets of Rockwell Automation, Inc. (the “Company”) as of
September 30, 2016
and
2015
, and the related consolidated statements of operations, comprehensive income, cash flows, and shareowners’ equity for each of the three years in the period ended
September 30, 2016
. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). We also have audited the Company’s internal control over financial reporting as of
September 30, 2016
, based on criteria established in
Internal Control — Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and financial statement schedule and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Rockwell Automation, Inc. as of
September 30, 2016
and
2015
, and the results of its operations and its cash flows for each of the three years in the period ended
September 30, 2016
, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
September 30, 2016
, based on the criteria established in
Internal Control — Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission
.
/s/ DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
November 15, 2016