Results of Operations Forward-Looking Statements This Quarterly Report contains statements (including certain projections, guidance and business trends) that are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Words such as "believe", "estimate", "project", "plan", "expect", "anticipate", "will", "intend" and other similar expressions may identify forward-looking statements. Actual results may differ materially from those projected as a result of certain risks and uncertainties, many of which are beyond our control, including but not limited to: •the severity and duration of disruptions to our business due to pandemics, including the COVID-19 pandemic, natural disasters, acts of war, strikes, terrorism, social unrest or other causes, including the impacts of the COVID-19 pandemic and efforts to manage it on the global economy, liquidity and financial markets, demand for our hardware and software products, solutions and services, our supply chain, our work force, our liquidity and the value of the assets we own; •macroeconomic factors, including global and regional business conditions (including adverse impacts in certain markets, such as Oil & Gas), the availability and cost of capital, commodity prices, the cyclical nature of our customers' capital spending, sovereign debt concerns and currency exchange rates; •laws, regulations and governmental policies affecting our activities in the countries where we do business, including those related to tariffs, taxation, and trade controls; •the availability and price of components and materials; •the availability, effectiveness and security of our information technology systems; •our ability to manage and mitigate the risk related to security vulnerabilities and breaches of our hardware and software products, solutions and services; •the successful development of advanced technologies and demand for and market acceptance of new and existing hardware and software products; •our ability to manage and mitigate the risks associated with our solutions and services businesses; •the successful execution of our cost productivity initiatives; •competitive hardware and software products, solutions and services and pricing pressures, and our ability to provide high quality products, solutions and services; •our ability to attract, develop, and retain qualified personnel; •disruptions to our distribution channels or the failure of distributors to develop and maintain capabilities to sell our products; •the successful integration and management of strategic transactions and achievement of the expected benefits of these transactions; •intellectual property infringement claims by others and the ability to protect our intellectual property; •the uncertainty of claims by taxing authorities in the various jurisdictions where we do business; •the uncertainties of litigation, including liabilities related to the safety and security of the hardware and software products, solutions and services we sell; •risks associated with our investment in common stock of PTC Inc., including the potential for volatility in our reported quarterly earnings associated with changes in the market value of such stock; •our ability to manage costs related to employee retirement and health care benefits; and •other risks and uncertainties, including but not limited to those detailed from time to time in ourSecurities and Exchange Commission (SEC) filings. These forward-looking statements reflect our beliefs as of the date of filing this report. We undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. See Item 1A, Risk Factors, of our Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2020 , for more information. 26 -------------------------------------------------------------------------------- Table of Contents Non-GAAP Measures The following discussion includes organic sales, total segment operating earnings and margin, Adjusted Income, Adjusted EPS, Adjusted Effective Tax Rate and free cash flow, which are non-GAAP measures. See Supplemental Sales Information for a reconciliation of reported sales to organic sales and a discussion of why we believe this non-GAAP measure is useful to investors. See Results of Operations for a reconciliation of income before income taxes to total segment operating earnings and margin and a discussion of why we believe these non-GAAP measures are useful to investors. See Results of Operations for a reconciliation of net income attributable toRockwell Automation , diluted EPS and effective tax rate to Adjusted Income, Adjusted EPS and Adjusted Effective Tax Rate, respectively, and a discussion of why we believe these non-GAAP measures are useful to investors. See Financial Condition for a reconciliation of cash flows from operating activities to free cash flow and a discussion of why we believe this non-GAAP measure is useful to investors. OverviewRockwell Automation, Inc. is a global leader in industrial automation and digital transformation. We connect the imaginations of people with the potential of technology to expand what is humanly possible, making the world more productive and more sustainable. Overall demand for our hardware and software products, solutions and services is driven by: •investments in manufacturing, including upgrades, modifications and expansions of existing facilities or production lines and new facilities or production lines; •investments in basic materials production capacity, which may be related to commodity pricing levels; •our customers' needs for faster time to market, operational productivity, asset management and reliability, and enterprise risk management; •our customers' needs to continuously improve quality, safety and sustainability; •industry factors that include our customers' new product introductions, demand for our customers' products or services and the regulatory and competitive environments in which our customers operate; •levels of global industrial production and capacity utilization; •regional factors that include local political, social, regulatory and economic circumstances; and •the spending patterns of our customers due to their annual budgeting processes and their working schedules. Long-term Strategy Our strategy is to bring The Connected Enterprise to life by integrating control and information across the enterprise. We deliver customer outcomes by combining advanced industrial automation with the latest information technology. Our strategy seeks to: •achieve organic sales growth in excess of the automation market by expanding our served market and strengthening our competitive differentiation; •grow market share of our core platforms; •drive double digit growth in information solutions and connected services; •drive double digit growth in annual recurring revenue; •acquire companies that serve as catalysts to organic growth by increasing our information solutions and high-value services offerings and capabilities, expanding our global presence, or enhancing our process expertise; •enhance our market access by building our channel capability and partner network; •deploy human and financial resources to strengthen our technology leadership and our intellectual capital business model; •continuously improve quality and customer experience; and •drive annual cost productivity. By implementing the above strategy, we seek to achieve our long-term financial goals, including above-market organic sales growth, increasing the portion of our total revenue that is recurring in nature, EPS growth above sales growth, return on invested capital in excess of 20 percent and free cash flow equal to about 100 percent of Adjusted Income. We expect acquisitions to add a percentage point or more per year to long-term sales growth. Our customers face the challenge of remaining globally cost competitive and automation can help them achieve their productivity and sustainability objectives. Our value proposition is to help our customers reduce time to market, lower total cost of ownership, improve asset utilization and manage enterprise risks. 27 -------------------------------------------------------------------------------- Table of ContentsU.S. Industrial Economic Trends In the first quarter of fiscal 2021, sales in theU.S. accounted for over half of our total sales. The various indicators we use to gauge the direction and momentum of our servedU.S. markets include: •The Industrial Production (IP) Index, published by theFederal Reserve , which measures the real output of manufacturing, mining and electric and gas utilities. The IP Index is expressed as a percentage of real output in a base year, currently 2012. Historically, there has been a meaningful correlation between the changes in the IP Index and the level of automation investment made by ourU.S. customers in their manufacturing base. •The Manufacturing Purchasing Managers' Index (PMI), published by theInstitute for Supply Management (ISM), which indicates the current and near-term state of manufacturing activity in theU.S. According to the ISM, a PMI measure above 50 indicates that theU.S. manufacturing economy is generally expanding while a measure below 50 indicates that it is generally contracting. The table below depicts trends in these indicators since the quarter endedSeptember 2019 . These figures are as ofJanuary 26, 2021 and are subject to revision by the issuing organizations. In the first quarter of fiscal 2021, PMI and the IP Index improved compared to the prior quarter. The IP index was at the highest level since the COVID-19 pandemic began, although it is still below the pre-pandemic level. Continued sequential growth is projected for the IP Index in the second quarter of fiscal 2021. IP Index PMI Fiscal 2021 quarter ended: December 2020 104.5 60.7 Fiscal 2020 quarter ended: September 2020 102.4 55.4 June 2020 93.7 52.6 March 2020 107.7 49.1 December 2019 109.6 47.8 Fiscal 2019 quarter ended: September 2019 109.5 48.2
Note: Economic indicators are subject to revision by the issuing organizations.
Non-U.S. Economic Trends In the first quarter of fiscal 2021, sales to customers outside theU.S. accounted for less than half of our total sales. These customers include both indigenous companies and multinational companies with a global presence. In addition to the global factors previously mentioned in the "Overview" section, international demand, particularly in emerging markets, has historically been driven by the strength of the industrial economy in each region, investments in infrastructure and expanding consumer markets. We use changes in key countries' gross domestic product and IP as indicators of the growth opportunities in each region where we do business. Industrial output outside theU.S. saw sequential growth in the first quarter of fiscal 2021. Manufacturing PMI readings improved during that same time period. Sequential growth in industrial output is projected for most regions in the second quarter of fiscal 2021. 28 -------------------------------------------------------------------------------- Table of Contents Outlook We are actively monitoring the impacts of the COVID-19 pandemic on all aspects of our business and geographies. While the duration and severity of those impacts are highly uncertain, they have had, and could continue to have, an adverse effect on our business, financial condition and results of operations. Our company is an essential business to support critical infrastructure because our customers cannot build their products at scale without automation. The recovery in manufacturing is happening at a much faster pace than we were anticipating, with our total orders exceeding pre-pandemic levels. Demand was especially strong for Intelligent Devices and Information Solutions, which is expected to drive higher growth for the balance of the year. We continue to increase capacity and are expanding our manufacturing workforce to meet this sharp uptick in demand. The COVID-19 pandemic and global efforts to respond to it continue to evolve. Our projections reflect the strong order performance we saw in the first quarter and assume no increase in pandemic-related facility closures or disruptions to the supply chain. Based on the information available to us at the time of this filing, the following table provides guidance for projected sales growth and earnings per share for fiscal 2021: Sales Growth Guidance EPS Guidance Reported sales growth 8.5% - 11.5% Diluted EPS$11.07 -$11.47 Organic sales growth1 4.5% - 7.5% Adjusted EPS1$8.70 -$9.10 Inorganic sales growth ~1.5% Currency translation ~2.5% 1Organic sales growth and Adjusted EPS are non-GAAP measures. See Supplemental Sales Information and Adjusted Income, Adjusted EPS and Adjusted Effective Tax Rate Reconciliation for more information on these non-GAAP measures. 29 -------------------------------------------------------------------------------- Table of Contents Summary of Results of Operations The following table reflects our sales and operating results (in millions, except per share amounts and percentages). Information for the three months endedDecember 31, 2019 , has been recast to reflect our new operating segments. See Note 15 in the Consolidated financial statements for further information on our change in operating segments: Three Months Ended December 31, 2020 2019 Sales Intelligent Devices (a)$ 721.7 $ 776.6 Software & Control (b) 441.0 452.5 Lifecycle Services (c) 402.6 455.4 Total sales (d)$ 1,565.3 $ 1,684.5
Segment operating earnings(1)
Intelligent Devices (e)$ 140.2 $ 160.6 Software & Control (f) 133.1 140.4 Lifecycle Services (g) 36.0 38.1 Total segment operating earnings(2) (h) 309.3
339.1
Purchase accounting depreciation and amortization (11.7)
(10.0)
Corporate and other (28.0)
(32.8)
Non-operating pension and postretirement benefit cost (7.0) (8.7) Gain on investments 390.4 71.0 Legal settlement 70.0 - Interest (expense) income, net (22.3)
(24.0)
Income before income taxes (i) 700.7 334.6 Income tax provision (110.3) (19.2) Net income 590.4 315.4
Net (loss) income attributable to noncontrolling interests (2.9)
4.70
Net income attributable to Rockwell Automation$ 593.3 $ 310.7 Diluted EPS$ 5.06 $ 2.66 Adjusted EPS(3)$ 2.38 $ 2.15 Diluted weighted average outstanding shares 117.1
116.6
Total segment operating margin(2) (h/d) 19.8 % 20.1 % Pre-tax margin (i/d) 44.8 % 19.9 % Intelligent Devices segment operating margin (e/a) 19.4 %
20.7 %
Software & Control segment operating margin (f/b) 30.2 %
31.0 %
Lifecycle Services segment operating margin (g/c) 8.9 %
8.4 %
(1)See Note 15 in the Consolidated Financial Statements for the definition of segment operating earnings. (2)Total segment operating earnings and total segment operating margin are non-GAAP financial measures. We exclude purchase accounting depreciation and amortization, corporate and other, non-operating pension and postretirement benefit cost, gains and losses on investments, the$70 million legal settlement in fiscal 2021, certain corporate initiatives, interest (expense) income - net and income tax provision because we do not consider these costs to be directly related to the operating performance of our segments. We believe total segment operating earnings and total segment operating margin are useful to investors as measures of operating performance. We use these measures to monitor and evaluate the profitability of our operating segments. Our measures of total segment operating earnings and total segment operating margin may be different from measures used by other companies. (3)Adjusted EPS is a non-GAAP earnings measure that excludes net income (loss) attributable to noncontrolling interests, purchase accounting depreciation and amortization expense attributable toRockwell Automation , non-operating pension and postretirement benefit cost, and gains and losses on investments, including their respective tax effects. See Adjusted Income, Adjusted EPS and Adjusted Effective Tax Rate Reconciliation for more information on this non-GAAP measure. 30 -------------------------------------------------------------------------------- Table of Contents Three Months EndedDecember 31, 2020 , Compared to Three Months EndedDecember 31, 2019 Sales Sales decreased 7.1 percent year over year in the three months endedDecember 31, 2020 . Organic sales decreased 9.7 percent in the three months endedDecember 31, 2020 . Currency translation increased sales by 0.8 percentage points percent in the three months endedDecember 31, 2020 . Acquisitions increased sales by 1.8 percentage points percent in the three months endedDecember 31, 2020 . Pricing increased sales by less than 1 percentage point in the three months endedDecember 31, 2020 . The table below presents our sales, attributed to the geographic regions based upon country of destination, and the percentage change from the same period a year ago (in millions, except percentages): Change in Organic Change vs. Sales(1) vs. Three Months Ended Three Months Ended Three Months Ended December 31, 2020 December 31, 2019 December 31, 2019 North America $ 912.3 (9.4) % (10.6) % EMEA 320.7 3.4 % (7.8) % Asia Pacific 221.9 (3.4) % (7.1) % Latin America 110.4 (19.9) % (11.5) % Total Sales$ 1,565.3 (7.1) % (9.7) % (1) Organic sales and organic sales growth exclude the effect of acquisitions, changes in currency exchange rates, and divestitures. See Supplemental Sales Information for information on these non-GAAP measures. •The decrease inNorth America sales in the three months endedDecember 31, 2020 , compared to the prior period was primarily due to weakness in Oil & Gas and Automotive, partially offset by growth in Life Sciences and e-Commerce. •EMEA sales increased year over year in the three months endedDecember 31, 2020 , primarily due to acquisitions. Organic sales decreased, driven by weakness in Oil & Gas and Metals, partially offset by strength in Food & Beverage. •Sales inAsia Pacific decreased in the three months endedDecember 31, 2020 , driven by weakness in process industries and Food & Beverage, partially offset by strength in Mass Transit and Semiconductor. •Latin America sales decreased in the three months endedDecember 31, 2020 , driven by weakness in Oil & Gas and Mining, partially offset by growth in Food & Beverage. 31 -------------------------------------------------------------------------------- Table of Contents Three Months EndedDecember 31, 2020 , Compared to Three Months EndedDecember 31, 2019 Corporate and Other Corporate and other expense was$28.0 million in the three months endedDecember 31, 2020 , compared to$32.8 million in the three months endedDecember 31, 2019 . Income before Income Taxes Income before income taxes increased from$334.6 million in the three months endedDecember 31, 2019 to$700.7 million in the three months endedDecember 31, 2020 . The increase in income before income taxes in the three months endedDecember 31, 2020 , was primarily due to the fair-value adjustments recognized in the first quarter of fiscal 2021 and fiscal 2020 in connection with our investment in PTC (the "PTC adjustments") and a favorable legal settlement in the first quarter of fiscal 2021. Total segment operating earnings decreased 8.8 percent in the three months endedDecember 31, 2020 . The decrease in total segment operating earnings in the three months endedDecember 31, 2020 , was primarily due to lower sales, partially offset by temporary and structural cost savings. Income Taxes The effective tax rate for the three months endedDecember 31, 2020 , was 15.8 percent compared to 5.7 percent for the three months endedDecember 31, 2019 . Our Adjusted Effective Tax Rate for the three months endedDecember 31, 2020 , was 15.4 percent compared to 8.3 percent for the three months endedDecember 31, 2019 . The increase in the effective tax rate and the Adjusted Effective Tax Rate was primarily due to the absence of tax benefits recognized upon the formation of theSensia joint venture in fiscal 2020 and other discrete items. Diluted EPS and Adjusted EPS Fiscal 2021 first quarter net income attributable toRockwell Automation was$593.3 million or$5.06 per share, compared to$310.7 million or$2.66 per share in the first quarter of fiscal 2020. The increase in net income attributable toRockwell Automation and diluted EPS were primarily due to the PTC adjustments and a$70 million pre-tax favorable legal settlement in the quarter, or a$0.45 per share impact, partially offset by a higher tax rate and higher incentive compensation expense. Fiscal 2021 first quarter Adjusted EPS was$2.38 in the first quarter of fiscal 2021, up 11 percent compared to$2.15 in the first quarter of fiscal 2020, primarily due to the favorable legal settlement in the quarter, partially offset by a higher tax rate and higher incentive compensation expense. 32 -------------------------------------------------------------------------------- Table of Contents Three Months EndedDecember 31, 2020 , Compared to Three Months EndedDecember 31, 2019 Intelligent Devices Sales Intelligent Devices sales decreased 7.1 percent year over year in the three months endedDecember 31, 2020 . Intelligent Devices organic sales decreased 7.9 percent in the three months endedDecember 31, 2020 . Currency translation increased sales by 0.8 percentage points in the three months endedDecember 31, 2020 . The decline in both reported and organic sales in the three months endedDecember 31, 2020 , was broad-based across the regions, with the exception of reported sales growth in EMEA. Segment Operating Margin Intelligent Devices segment operating earnings decreased 12.7 percent year over year in the three months endedDecember 31, 2020 . Segment operating margin decreased to 19.4 percent in the three months endedDecember 31, 2020 , from 20.7 percent in the same period a year ago, primarily due to lower sales, partially offset by temporary and structural cost savings. Software & Control Sales Software & Control sales decreased 2.5 percent year over year in the three months endedDecember 31, 2020 . Software & Control organic sales decreased 6.2 percent in the three months endedDecember 31, 2020 . Currency translation increased sales by 1.0 percentage point in the three months endedDecember 31, 2020 . Acquisitions increased sales by 2.7 percentage points in the three months endedDecember 31, 2020 . The decline in both reported and organic sales in the three months endedDecember 31, 2020 , was broad-based across the regions, with the exception of reported sales growth in EMEA. Segment Operating Margin Software & Control segment operating earnings decreased 5.2 percent year over year in the three months endedDecember 31, 2020 . Segment operating margin decreased to 30.2 percent in the three months endedDecember 31, 2020 , from 31.0 percent in the same period a year ago, primarily due to lower sales, partially offset by temporary and structural cost savings. Lifecycle Services Sales Lifecycle Services sales decreased 11.6 percent year over year in the three months endedDecember 31, 2020 . Lifecycle Services organic sales decreased 16.3 percent in the three months endedDecember 31, 2020 . Currency translation increased sales by 0.8 percentage points in the three months endedDecember 31, 2020 . Acquisitions increased sales by 3.9 percentage points in the three months endedDecember 31, 2020 . The decline in reported sales in the three months endedDecember 31, 2020 , was broad-based across the regions, with the exception of reported sales growth inCanada andAsia Pacific . All regions experienced a decline in organic sales in the three months endedDecember 31, 2020 , with the exception of organic sales growth inCanada . Segment Operating Margin Lifecycle Services segment operating earnings decreased 5.5 percent year over year in the three months endedDecember 31, 2020 . Segment operating margin increased to 8.9 percent in the three months endedDecember 31, 2020 , compared to 8.4 percent in the same period a year ago despite lower sales. Contributing to the year-over-year margin improvement were temporary and structural cost savings, and the absence ofSensia one-time items recognized in the first quarter of fiscal 2020. 33 -------------------------------------------------------------------------------- Table of Contents Supplemental Segment Information Purchase accounting depreciation and amortization and non-operating pension and postretirement benefit cost are not allocated to our operating segments because these costs are excluded from our measurement of each segment's operating performance for internal purposes. If we were to allocate these costs, we would attribute them to each of our segments as follows (in millions): Three Months Ended December 31, 2020 2019 Purchase accounting depreciation and amortization Intelligent Devices$ 0.7 $ 0.7 Software & Control 2.7 1.2 Lifecycle Services 8.0 7.8 Non-operating pension and postretirement benefit cost Intelligent Devices 1.2 1.7 Software & Control 1.2 1.7 Lifecycle Services 1.5 2.2 34
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Table of Contents Adjusted Income, Adjusted EPS and Adjusted Effective Tax Rate Reconciliation
Adjusted Income, Adjusted EPS and Adjusted Effective Tax Rate are non-GAAP earnings measures that exclude net income (loss) attributable to noncontrolling interests, purchase accounting depreciation and amortization expense attributable toRockwell Automation , non-operating pension and postretirement benefit cost, and gains and losses on investments, including their respective tax effects. Non-operating pension and postretirement benefit cost is defined as all components of our net periodic pension and postretirement benefit cost except for service cost. See Note 10 in the Consolidated Financial Statements for more information on our net periodic pension and postretirement benefit cost. We believe that Adjusted Income, Adjusted EPS and Adjusted Effective Tax Rate provide useful information to our investors about our operating performance and allow management and investors to compare our operating performance period over period. Adjusted EPS is also used as a financial measure of performance for our annual incentive compensation. Our measures of Adjusted Income, Adjusted EPS and Adjusted Effective Tax Rate may be different from measures used by other companies. These non-GAAP measures should not be considered a substitute for net income attributable toRockwell Automation , diluted EPS and effective tax rate. The following are reconciliations of net income attributable toRockwell Automation , diluted EPS, and effective tax rate to Adjusted Income, Adjusted EPS and Adjusted Effective Tax Rate, respectively (in millions, except per share amounts and percentages): Three Months Ended December 31, 2020 2019 Net income attributable to Rockwell Automation$ 593.3 $ 310.7 Non-operating pension and postretirement benefit cost 7.0 8.7
Tax effect of non-operating pension and postretirement benefit cost (2.0)
(2.4) Change in fair value of investments1 (390.4) (71.0) Tax effect of the change in fair value of investments1 64.2 -
Purchase accounting depreciation and amortization attributable to 8.7
7.0
Rockwell Automation
Tax effect of purchase accounting depreciation and amortization
attributable to
(2.1) (1.6) Adjusted Income$ 278.7 $ 251.4 Diluted EPS$ 5.06 $ 2.66 Non-operating pension and postretirement benefit cost 0.06 0.08
Tax effect of non-operating pension and postretirement benefit cost (0.02)
(0.02) Change in fair value of investments1 (3.33) (0.61) Tax effect of the change in fair value of investments1 0.55 -
Purchase accounting depreciation and amortization attributable to 0.08
0.06
Rockwell Automation
Tax effect of purchase accounting depreciation and amortization
attributable to
(0.02) (0.02) Adjusted EPS$ 2.38 $ 2.15 Effective tax rate 15.8 % 5.7 %
Tax effect of non-operating pension and postretirement benefit cost 0.1 %
0.6 % Tax effect of the change in fair value of investments1 (0.7) % 1.6 %
Tax effect of purchase accounting depreciation and amortization
attributable to
0.2 % 0.4 % Adjusted Effective Tax Rate 15.4 % 8.3 %
1Primarily relates to the change in value of our investment in PTC.
35
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Table of Contents Fiscal 2021 Guidance Diluted EPS$11.07 -$11.47 Non-operating pension and postretirement benefit cost 0.23
Tax effect of non-operating pension and postretirement benefit cost
(0.07) Change in fair value of investments1 (3.33) Tax effect of change in fair value of investments1 0.55
Purchase accounting depreciation and amortization attributable to
0.33
Tax effect of purchase accounting depreciation and amortization
attributable to
(0.08) Adjusted EPS2$8.70 -$9.10 Effective tax rate ~ 14.1%
Tax effect of non-operating pension and postretirement benefit cost
~ 0.2% Tax effect of change in fair value of investments1 ~ (0.7)%
Tax effect of purchase accounting depreciation and amortization
attributable to
~ 0.4% Adjusted Effective Tax Rate ~ 14.0% 1The actual year-to-date adjustments, which are based on PTC's share price atDecember 31, 2020 , are used for guidance, as estimates of these adjustments on a forward-looking basis are not available due to variability, complexity and limited visibility of these items. 2Fiscal 2021 guidance based on Adjusted Income attributable to Rockwell, which includes an adjustment for Schlumberger's noncontrolling interest inSensia 36 -------------------------------------------------------------------------------- Table of Contents Financial Condition The following is a summary of our cash flows from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows (in millions): Three Months Ended December 31, 2020 2019 Cash provided by (used for): Operating activities$ 346.5 $ 231.1 Investing activities (310.1) (233.0) Financing activities (37.2) (95.6) Effect of exchange rate changes on cash 26.6 5.3
Increase (decrease) in cash, cash equivalents, and restricted cash $
25.8$ (92.2) The following table summarizes free cash flow (in millions), which is a non-GAAP financial measure: Three Months Ended December 31, 2020 2019 Cash provided by operating activities$ 346.5 $ 231.1 Capital expenditures (27.1) (37.0) Free cash flow$ 319.4 $ 194.1 Our definition of free cash flow takes into consideration capital investments required to maintain our businesses' operations and execute our strategy. Cash provided by operating activities adds back non-cash depreciation expense to earnings but does not reflect a charge for necessary capital expenditures. Our definition of free cash flow excludes the operating cash flows and capital expenditures related to our discontinued operations, if any. Operating, investing and financing cash flows of our discontinued operations, if any, are presented separately in our Consolidated Statement of Cash Flows. In our opinion, free cash flow provides useful information to investors regarding our ability to generate cash from business operations that is available for acquisitions and other investments, service of debt principal, dividends and share repurchases. We use free cash flow, as defined, as one measure to monitor and evaluate our performance, including as a financial measure for our annual incentive compensation. Our definition of free cash flow may differ from definitions used by other companies. Cash provided by operating activities was$346.5 million for the three months endedDecember 31, 2020 , compared to$231.1 million for the three months endedDecember 31, 2019 . Free cash flow was$319.4 million for the three months endedDecember 31, 2020 , compared to$194.1 million for the three months endedDecember 31, 2019 . The year over year increases in cash provided by operating activities and free cash flow were primarily due to a decrease in incentive compensation payments in the first three months of fiscal 2021 compared to the first three months of fiscal 2020 and a$70 million pre-tax favorable legal settlement in the first quarter of fiscal 2021. We repurchased approximately 0.4 million shares of our common stock under our share repurchase program in the first three months of fiscal 2021. The total cost of these shares was$87.7 million , of which$4.2 million was recorded in accounts payable atDecember 31, 2020 , that did not settle untilJanuary 2021 . AtSeptember 30, 2020 , there were no outstanding common stock share repurchases recorded in accounts payable. We repurchased approximately 0.5 million shares of our common stock in the first three months of fiscal 2020. The total cost of these shares was$100.0 million , of which$3.5 million was recorded in accounts payable atDecember 31, 2019 , related to share repurchases that did not settle untilJanuary 2020 . Our decision to repurchase shares in the remainder of 2021 will depend on business conditions, free cash flow generation, other cash requirements (including acquisitions) and stock price. OnJuly 24, 2019 , the Board of Directors authorized us to expend an additional$1.0 billion to repurchase shares of our common stock. AtDecember 31, 2020 , we had approximately$766.0 million remaining for share repurchases under our existing board authorizations. See Part II, Item 2, Unregistered Sales ofEquity Securities and Use of Proceeds, for additional information regarding share repurchases. 37 -------------------------------------------------------------------------------- Table of Contents We expect future uses of cash to include working capital requirements, capital expenditures, additional contributions to our retirement plans, acquisitions of businesses and other inorganic investments, dividends to shareowners, repurchases of common stock, and repayments of debt. We expect to fund future uses of cash with a combination of existing cash balances, cash generated by operating activities, commercial paper borrowings or a new issuance of debt or other securities. In addition, we have access to unsecured credit facilities with various banks. AtDecember 31, 2020 , andSeptember 30, 2020 , our total current borrowing capacity under our unsecured revolving credit facility expiring inNovember 2023 was$1.25 billion . We can increase the aggregate amount of this credit facility by up to$750.0 million , subject to the consent of the banks in the credit facility. We did not borrow against this credit facility during the periods endedDecember 31, 2020 , orSeptember 30, 2020 . 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 agree to maintain an EBITDA-to-interest ratio of at least 3.0 to 1.0. The EBITDA-to-interest ratio is defined in the credit facility as the ratio of consolidated EBITDA (as defined in the facility) for the preceding four quarters to consolidated interest expense for the same period. LIBOR is the primary basis for determining interest payments on borrowings under our$1.25 billion credit facility. Banks currently reporting information used to setU.S dollar LIBOR are currently expected to stop doing so during 2023. Various parties, including government agencies, are seeking to identify an alternative rate to replace LIBOR. We are monitoring their efforts, and we will likely seek to amend contracts to accommodate any replacement rate where one is not already provided. Among other uses, we can draw on our credit facility as a standby liquidity facility to repay our outstanding commercial paper as it matures. This access to funds to repay maturing commercial paper is an important factor in maintaining the short-term credit ratings set forth in the table below. Under our current policy with respect to these ratings, we expect to limit our other borrowings under our credit facility, if any, to amounts that would leave enough credit available under the facility so that we could borrow, if needed, to repay all of our then outstanding commercial paper as it matures. Separate short-term unsecured credit facilities of approximately$233.1 million atDecember 31, 2020 , were available to non-U.S. subsidiaries. Borrowings under our non-U.S. credit facilities atDecember 31, 2020 and 2019 were not significant. We were in compliance with all covenants under our credit facilities atDecember 31, 2020 and 2019. There are no significant commitment fees or compensating balance requirements under our credit facilities. Our short-term debt as ofDecember 31, 2020 , primarily consisted of$125.0 million of commercial paper borrowings and$23.5 million of interest-bearing loans from Schlumberger toSensia which were originally dueSeptember 30, 2020 , and are now dueSeptember 30, 2021 . Commercial paper outstanding atDecember 31, 2020 had a weighted average interest rate of 0.22 percent and a weighted average maturity period of 68 days. There were no commercial paper borrowings outstanding atSeptember 30, 2020 . The following is a summary of our credit ratings as ofDecember 31, 2020 : Credit Rating Agency Short-Term Rating Long-Term Rating Outlook Standard & Poor's A-1 A Stable Moody's P-2 A3 Stable Fitch Ratings F1 A Stable Our ability to access the commercial paper market, and the related costs of these borrowings, is affected by the strength of our credit ratings and market conditions. Conditions in the commercial paper market have improved since the COVID-19 pandemic negatively affected this market in March andApril 2020 , and we have not experienced any difficulty in accessing the commercial paper market. If our access to the commercial paper market is adversely affected due to a change in market conditions or otherwise, we would expect to rely on a combination of available cash and our unsecured committed credit facility to provide short-term funding. In such event, the cost of borrowings under our unsecured committed credit facility could be higher than the cost of commercial paper borrowings. AtDecember 31, 2020 , the majority of our cash and cash equivalents were held by non-U.S. subsidiaries. As a result of the broad changes to theU.S. international tax system under the Tax Act, in fiscal year 2018 the Company began to account for substantially all of its non-U.S. subsidiaries as being immediately subject to tax, while still concluding that earnings are indefinitely reinvested for a limited number of subsidiaries. 38 -------------------------------------------------------------------------------- Table of Contents We regularly monitor the third-party depository institutions that hold our cash and cash equivalents and short-term investments. We diversify our cash and cash equivalents among counterparties to minimize exposure to any one of these entities. We use foreign currency forward exchange contracts to manage certain foreign currency risks. We enter into these contracts to hedge our exposure to foreign currency exchange rate variability in the expected future cash flows associated with certain third-party and intercompany transactions denominated in foreign currencies forecasted to occur within the next two years. We also use these contracts to hedge portions of our net investments in certain non-U.S. subsidiaries against the effect of exchange rate fluctuations on the translation of foreign currency balances to theU.S. dollar. In addition, we use foreign currency forward exchange contracts that are not designated as hedges to offset transaction gains or losses associated with some of our assets and liabilities resulting from intercompany loans or other transactions with third parties that are denominated in currencies other than our entities' functional currencies. Our foreign currency forward exchange contracts are usually denominated in currencies of major industrial countries. We diversify our foreign currency forward exchange contracts among counterparties to minimize exposure to any one of these entities. Net gains and losses related to derivative forward exchange contracts designated as cash flow hedges offset the related gains and losses on the hedged items during the periods in which the hedged items are recognized in earnings. During the three months endedDecember 31, 2020 andDecember 31, 2019 , respectively, we reclassified$4.3 million in pre-tax losses and$4.5 million in pre-tax net gains related to cash flow hedges from accumulated other comprehensive loss into the Consolidated Statement of Operations. We expect that approximately$18.5 million of pre-tax net unrealized losses on cash flow hedges as ofDecember 31, 2020 , will be reclassified into earnings during the next 12 months. Information with respect to our contractual cash obligations is contained in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2020 . We believe that atDecember 31, 2020 , there has been no material change to this information. 39 -------------------------------------------------------------------------------- Table of Contents Supplemental Sales Information We translate sales of subsidiaries operating outside ofthe United States using exchange rates effective during the respective period. Therefore, changes in currency exchange rates affect our reported sales. Sales by acquired businesses also affect our reported sales. We believe that organic sales, defined as sales excluding the effects of acquisitions and changes in currency exchange rates, which is a non-GAAP financial measure, provides useful information to investors because it reflects regional and operating segment performance from the activities of our businesses without the effect of acquisitions and changes in currency exchange rates. We use organic sales as one measure to monitor and evaluate our regional and operating segment performance. When we acquire businesses, we exclude sales in the current period for which there are no comparable sales in the prior period. We determine the effect of changes in currency exchange rates by translating the respective period's sales using the same currency exchange rates that were in effect during the prior year. When we divest a business, we exclude sales in the prior period for which there are no comparable sales in the current period. Organic sales growth is calculated by comparing organic sales to reported sales in the prior year, excluding divestitures. We attribute sales to the geographic regions based on the country of destination. The following is a reconciliation of our reported sales by geographic region to organic sales (in millions): Three Months Ended December Three Months Ended December 31, 2020 31, 2019 Effect of Effect of Changes in Organic Sales Acquisitions Currency Sales Sales North America $ 912.3$ (11.1) $ (1.3) $ 899.9 $ 1,006.9 EMEA 320.7 (18.5) (16.4) 285.8 310.1 Asia Pacific 221.9 (0.3) (8.4) 213.2 229.6 Latin America 110.4 - 11.7 122.1 137.9 Total Company Sales$ 1,565.3 $ (29.9) $ (14.4) $ 1,521.0 $ 1,684.5 The following is a reconciliation of our reported sales by operating segment to organic sales (in millions): Three Months Ended December Three Months Ended December 31, 2020 31, 2019 Effect of Effect of Changes in Organic Sales Acquisitions Currency Sales Sales Intelligent Devices $ 721.7 $ -$ (6.4) $ 715.3 $ 776.6 Software & Control 441.0 (12.0) (4.5) 424.5 452.5 Lifecycle Services 402.6 (17.9) (3.5) 381.2 455.4 Total Company Sales$ 1,565.3 $ (29.9) $ (14.4) $ 1,521.0 $ 1,684.5 40
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Table of Contents Critical Accounting Estimates We have prepared the Consolidated Financial Statements in accordance with accounting principles generally accepted inthe United States , which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. These estimates are based on our best judgment about current and future conditions, but actual results could differ from those estimates. Information with respect to accounting estimates that are the most critical to the understanding of our financial statements as they could have the most significant effect on our reported results and require subjective or complex judgments by management is contained in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2020 . We believe that atDecember 31, 2020 , there has been no material change to this information. Environmental Matters Information with respect to the effect of compliance with environmental protection requirements and resolution of environmental claims on us and our manufacturing operations is contained in Note 17 in the Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, of our Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2020 . We believe that atDecember 31, 2020 , there has been no material change to this information. Recent Accounting Pronouncements See Note 1 in the Consolidated Financial Statements regarding recent accounting pronouncements.
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