ROCKWELL AUTOMATION, INC (ROK) FY 2024 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

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 Summary of 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 Adjusted Income, Adjusted EPS, and Adjusted Effective Tax Rate Reconciliation for a reconciliation of Net income attributable to Rockwell 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 provided by operating activities to free cash flow and a discussion of why we believe this non-GAAP measure is useful to investors.

Overview

Rockwell Automation, Inc. is the world’s largest company dedicated to industrial automation and digital transformation. Overall demand for our hardware and software products, solutions, and services is driven by:

•investments in manufacturing, including new facilities or production lines, upgrades, modifications and expansions of existing 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, agility to address evolving consumer preferences, operational productivity, asset management and reliability, and business resilience, including security 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

As the world’s largest company dedicated to industrial automation and digital transformation, our strategy is to bring the Connected Enterprise® to life. We understand and simplify our customers’ complex production challenges and deliver the most valued solutions that combine technology and industry expertise. As a result, we make our customers more resilient, agile, and sustainable, creating more ways to win. We deliver value by helping our customers optimize production, build resilience, empower people, become more sustainable, and accelerate transformation.

Rockwell Automation stands at the intersection of the technological and societal trends that are shaping the future of industrial operations. We see converging megatrends including digitization and artificial intelligence, energy transition and sustainability, shifting demographics, and an increased need for resiliency.

Our long-term profitable growth framework outlines how we will deliver accelerated growth while we continue to transform our company to meet stakeholder expectations over the longer term:

•achieve faster secular growth in traditional markets due to customer needs for resiliency (including cybersecurity), agility, sustainability, and mitigating impacts of labor shortages;

•grow share and create new ways to win through technology differentiation, industry focus, go to market acceleration, expanded offerings and new markets;

•continue double-digit growth in annual recurring revenue;

•add 1% average annual growth from acquisitions; and

•deliver profitable growth within a disciplined financial framework.

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Sustainability

Our 2023 Sustainability Report highlights our sustainability strategy and outcomes. Our sustainability priorities are focused on three outcomes:

•Sustainable Customers - enable our customers to achieve their own sustainability goals, making a positive impact on the world;

•Sustainable Company - create innovative, sustainable products and solutions and foster a culture that empowers employees to operate safely, sustainably, and responsibly; and

•Sustainable Communities - support the communities in which we live and work, having an impact that extends beyond our own organization.

We will meet our customers where they are on their sustainability journey. Whether they are just starting or leading the way, we help them translate insights into impacts across energy, water, and waste. Our technologies provide data transparency across value chains and enable our partners to scale innovative and often industry-first sustainable solutions.

•Energy - contemporary industrial energy management software solutions that put energy data in context to production data, to reduce energy use across the value chain.

•Water - smart water solutions leverage modern software and analytics to improve operations visibility, system reliability, and worker productivity while supporting security needs and meeting regulatory obligations.

•Waste - enabling the circular economy for managing automation assets. Focus on developing solutions to automate industry-specific processes.

Differentiation through Technology Innovation and Domain Expertise

We have an industry leading portfolio of hardware, software, and services to give customers the flexibility to choose on-premises, edge, and cloud-native solutions.

Our integrated control and information architecture, with Logix at its core, is an important differentiator. We are the only automation provider that can support many production disciplines, including discrete, process, batch, safety, security, motion, robotics, and power control, in a single hardware and software environment, helping customers increase the speed of deployment and reduce their total cost of ownership.

Our open architecture and strong partner ecosystem allow customers to work with best-in-class partners across the technology stack and leverage existing infrastructure with new solutions.

Complementing our strong technology differentiation is our own domain expertise. Domain expertise refers to the industry and application knowledge required to deliver solutions and services that support customers through the entire lifecycle of their automation investment. The combination of industry-specific domain expertise of our people with our innovative technologies enables us to help our customers automate and transform their manufacturing processes and solve their business challenges. Our digital services business has a deep understanding of customers’ biggest digital transformation challenges and opportunities for further productivity and growth.

Market Access and Expansion

Over the past decade, our investments in technology and globalization have enabled us to expand our addressed market to approximately $130 billion. With our focus on innovation and growth, we expect to continue to expand our addressed market over our long-term planning horizon. All of our markets are expected to grow over our long-term planning horizon. Our domestic market projections reflect the opportunity to localize our customers’ supply chain and production operations. Our international market projections reflect higher levels of infrastructure investment and the growing middle-class population. We believe that increased demand for consumer products in our addressed markets will lead to manufacturing investment and provide us with additional growth opportunities in the future.

We have developed a powerful partner ecosystem that acts as an amplifier to our internal capabilities and enables us to serve our customers’ evolving needs around the world.

In most countries, our direct sales force works with Original Equipment Manufacturers (OEMs) or machine builders, system integrators, technology partners, and end users in conjunction with independent distributors. Approximately 65 percent of our global sales are transacted through independent distributors. Sales to our two largest distributors in 2024, 2023, and 2022, which are attributable to all three segments, were approximately 20 percent of our total sales.

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Machine builders continue to represent an important growth opportunity. To remain competitive, machine builders need to find the optimal balance of machine cost and performance while reducing their time to market. Our scalable technology, leading design productivity tools, and recent acquisitions support machine builders in addressing these business needs.

Acquisitions and Investments

Our acquisition and investment strategy focuses on hardware and software products, solutions, and services that will be catalytic to the organic growth of our core offerings.

Our key priorities for inorganic investments include:

•annual recurring revenue;

•market expansion in Europe and Asia; and

•application-specific technology in focus industries.

In addition, we make venture investments that enable access to leading-edge and complementary technologies aligned with our strategic priorities, accelerate internal development efforts, reduce time to market, and provide insights into disruptive technologies.

We believe these acquisitions and venture investments will help our served market and deliver value to our customers. See Note 4 in the Consolidated Financial Statements for additional information on our recent acquisitions.

Attracting, Developing, and Retaining Highly Qualified Employees

Our talent management practices are focused on ensuring we can attract, develop, and retain the talent we need to deliver our business strategy. We work to deliver a cohesive and consistent experience throughout the employee lifecycle that aligns with our four culture principles:

•Strengthen our commitment to integrity, diversity and inclusion;

•Be willing to compare ourselves to the best alternatives;

•Increase the speed of decision making;

•Have a steady stream of fresh ideas.

Our programs and processes are designed to enable and inspire great employees to do their best work and to make Rockwell Automation a place where the best want to be.

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There are several ways in which we attract, develop, and retain highly qualified employees, including:

•We make the safety and health of our employees a top priority. We strive for zero workplace injuries and illnesses and operate in a manner that recognizes safety as fundamental to Rockwell Automation being a great place to work. In fiscal 2024, we achieved 0.27 recordable cases per 100 employees.

•We capture and act upon employee feedback through our annual employee engagement survey. It measures several engagement indicators and drivers and provides an overall employee engagement index (EEI) with external benchmark comparison. The latest survey, conducted in February 2024, showed an EEI of 76, which was eight points higher than the industry norm of 68 for this index. Our global inclusion index score was 79, five points higher than the industry norm of 74.

•We invest in growth and development of our employees. As the pace of change increases, it is important we provide re-skilling and upskilling opportunities for our technical talent, along with soft skills and leadership development for all. We offer a portfolio of all employee, managerial, and leader training that spans on-demand, virtual, and live instructor-led formats. Our programs focus on basic as well as transformational skills. We take pride in our culture and in fiscal 2021 created an opportunity for our employees to participate in team-based culture workshops that have evolved into a standard during new employee onboarding. In fiscal 2024, the majority of our employees completed one or more of our training programs representing over 1.1 million learning hours.

•We offer employee assistance and work life benefits to all global employees. Our comprehensive benefits include healthcare benefits, disability and life insurance benefits, paid time off, and leave programs. Rockwell offers plans and resources to help employees meet future savings goals through defined benefit and retirement savings plans. We believe that face to face interaction is critical for our culture, innovation, people development, and engagement, and that flexible, virtual work arrangements help employees be more productive and engaged. During fiscal 2024, we updated our Hybrid Workplace Program, which combines the values of both physical workspaces and virtual work options, both of which are important for attracting, retaining, and developing employees and facilitating innovation, engagement, and productivity. We offer flextime, remote work, and part-time arrangements whenever business conditions permit.

We monitor employee retention and attrition rates by demographic factors including by gender, ethnicity, generation, years of service, career role, region, business, and function. We generally experienced flat attrition rates in fiscal 2024 as compared to fiscal 2023. We believe this is consistent with market trends experienced broadly across labor markets in fiscal 2024. We use attrition rate information to identify and address unfavorable trends to mitigate risk to our business. See Item 1A. Risk Factors for a discussion of risks relating to our inability to attract, develop, and retain highly qualified employees.

At September 30, 2024, our employees, including those employed by consolidated subsidiaries, by region were approximately:

Our employees had the following global gender demographics based on voluntary disclosure:

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Our U.S. employees had the following race and ethnicity demographics based on voluntary disclosure:

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U.S. Economic Trends

In 2024, sales in the U.S. accounted for over half of our total sales. The various indicators we use to gauge the direction and momentum of our served U.S. markets include:

•The Industrial Production (IP) Index, published by the Federal Reserve, which measures the real output of manufacturing, mining, and electric and gas utilities. The Manufacturing IP Index is expressed as a percentage of real output in a base year, currently 2017.

•The Manufacturing Purchasing Managers’ Index (PMI), published by the Institute for Supply Management (ISM), which indicates the current and near-term state of manufacturing activity in the U.S. According to the ISM, a PMI measure above 50 indicates that the U.S. manufacturing economy is generally expanding while a measure below 50 indicates that it is generally contracting.

The table below depicts the trends in these indicators from fiscal 2022 to 2024. These figures are as of November 12, 2024, and are subject to revision by the issuing organizations. The IP Index declined in the fourth quarter of fiscal 2024 versus the third quarter of fiscal 2024. Manufacturing PMI results continued to soften in the fourth quarter of 2024. The Manufacturing PMI reading in the month of September was the highest of the quarter, however it still remains below 50.

Inflation in the U.S. has also had an impact on our input costs and pricing. We used the Producer Price Index (PPI), published by the Bureau of Labor Statistics, which measures the average change over time in the selling prices received by domestic producers for their output. After observing double-digit PPI growth through most of 2022, we have now observed PPI growth in the low single digits for the last four quarters. Producer prices remain elevated, however, year over year increases continued to decelerate following the last two years' surges in prices.

Non-U.S. Economic Trends

In 2024, sales to customers outside the U.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 (GDP), IP, and PMI as indicators of the growth opportunities in each region where we do business. Industrial output outside the U.S. was mixed in the fourth quarter of fiscal 2024. Manufacturing PMI readings outside the U.S were also mixed with results reported above and below 50 and readings improving in some countries during the quarter and softening in others.

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Backlog

Our total order backlog consists of (in millions):

See Note 2 in the Consolidated Financial Statements for additional information on the nature of our products and services and revenue recognition.

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Summary of Results of Operations

The following table reflects our sales and operating results (in millions, except per share amounts and percentages):

(1) See Note 20 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, impairment, corporate and other, non-operating pension and postretirement benefit credit (cost), change in fair value of investments, restructuring charges aligned with enterprise-wide strategic initiatives, interest expense, net, and income tax provision because we do not consider these items 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. See Adjusted Income, Adjusted EPS, and Adjusted Effective Tax Rate Reconciliation for more information on this non-GAAP measure.

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2024 Compared to 2023

Sales

Sales in fiscal 2024 decreased 9 percent compared to 2023. Organic sales decreased 10 percent. Acquisitions increased sales by 1 percentage point. Total annual recurring revenue at September 30, 2024, grew approximately 16 percent compared to September 30, 2023. Organic annual recurring revenue at September 30, 2024 grew approximately 14 percent compared to September 30, 2023. See Annual Recurring Revenue (ARR) for information on this measure. Pricing increased total company sales by approximately 2 percentage points, realized in the Intelligent Devices and Software & Control segments. Volume decreased total company sales by approximately 12 percentage points year over year driven by the Software & Control and Intelligent Devices segments, partially offset by the Lifecycle Services segment.

The table below presents our sales for the year ended September 30, 2024, attributed to the geographic regions based upon country of destination, and the percentage change from the same period in 2023 (in millions, except percentages).

(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.

Corporate and Other

Corporate and other expenses were $135.8 million in fiscal 2024 compared to $127.9 million in fiscal 2023.

Restructuring Charges

Restructuring charges were $97.4 million in fiscal 2024, which relate to actions in conjunction with an enterprise-wide comprehensive program to optimize cost structure and expand margins. See Note 18 in the Consolidated Financial Statements for more information on our restructuring charges.

Income before Income Taxes

Income before income taxes decreased to $1,099.1 million in 2024 from $1,608.5 million in 2023. The decrease was primarily due to lower segment operating earnings in the Software & Control and Intelligent Devices operating segments and the fair value adjustments recognized in the prior year in connection with our previous investment in PTC, Inc. (PTC), partially offset by a $157.5 million accounting charge in 2023 for impairment of goodwill for our Sensia joint venture (goodwill impairment). Total segment operating earnings decreased to $1,595.3 million from $1,929.8 million in 2023, primarily due to lower sales volume and unfavorable mix, partially offset by lower incentive compensation and the positive impact of price realization exceeding input costs.

Income Taxes

The effective tax rate in 2024 was 13.8 percent compared to 20.5 percent in 2023. The decrease in the effective tax rate was primarily due to a valuation allowance established in 2023 on certain deferred tax assets of our Sensia joint venture and tax effects of the related goodwill impairment totaling $33.1 million, and higher discrete tax benefits in 2024 compared to 2023. The adjusted effective tax rate in 2024 was 15.1 percent compared to 16.4 percent in 2023. The decrease in the adjusted effective tax rate was primarily due to higher discrete tax benefits in 2024 compared to 2023.

See Note 16 in the Consolidated Financial Statements for a complete reconciliation of the United States statutory tax rate to the effective tax rate and additional information on tax events in 2024 and 2023 affecting each year’s respective tax rates.

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In October 2021, the Organization for Economic Cooperation and Development (OECD) and G20 Finance Ministers reached an agreement, known as Base Erosion and Profit Shifting (BEPS) Pillar Two, that, among other things, ensures that income earned in each jurisdiction that qualifying multinational enterprises operate in is subject to a minimum corporate income tax rate of at least 15%. Discussions related to the formal implementation and enactment of this agreement, including within the tax law of each member jurisdiction including the United States, are ongoing. Certain countries have enacted the Pillar Two framework, including Singapore, which is expected to result in the greatest impact to the Company. Enactment of this regulation in its current form would generally apply to the Company beginning in fiscal year 2026, resulting in an increase in our effective tax rate as well as in the amount of global corporate income tax paid.

Net Loss Attributable to Noncontrolling Interests

Net loss attributable to noncontrolling interests was $5.2 million in 2024 compared to $109.4 million in 2023. The decrease was driven by the prior year $93.3 million goodwill impairment and related tax effects including tax asset valuation allowances that are attributable to noncontrolling interests.

Diluted EPS and Adjusted EPS

Fiscal 2024 Net income attributable to Rockwell Automation was $952.5 million or $8.28 per share, compared to $1,387.4 million or $11.95 per share in fiscal 2023. The decreases in Net income attributable to Rockwell Automation and diluted EPS were primarily due to lower sales and lower pre-tax margin. Pre-tax margin was 13.3% compared to 17.8% in fiscal 2023. The decrease in pre-tax margin was primarily due to lower sales volume, fair value adjustments recognized in the prior year in connection with our previous investment in PTC, and restructuring charges, partially offset by lower incentive compensation, the prior year goodwill impairment, and the benefits from cost reduction actions. Adjusted EPS was $9.71 in fiscal 2024, down 20 percent compared to $12.12 in fiscal 2023, primarily due to lower sales and lower segment operating margin. Total segment operating margin was 19.3% compared to 21.3% in fiscal 2023. The decrease in total segment operating margin was primarily due to lower sales volume and unfavorable mix, partially offset by lower incentive compensation and the benefits from cost reduction actions.

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Intelligent Devices

Sales

Intelligent Devices sales decreased 7 percent in 2024 compared to 2023. Organic sales decreased 9 percent. Acquisitions increased sales by 2 percentage points. All regions except North America experienced reported and organic sales decreases.

Segment Operating Margin

Intelligent Devices segment operating earnings decreased 15 percent year over year. Segment operating margins decreased to 18.4 percent in 2024 from 20.2 percent in 2023, primarily due to lower sales volume, partially offset by lower incentive compensation, the positive impact of price realization exceeding input costs, and an adjustment to an earnout accrual tied to achievement of the seller’s revenue target on our Clearpath Robotics, Inc. acquisition including its industrial division OTTO Motors (Clearpath).

Software & Control

Sales

Software & Control reported and organic sales decreased 24 percent in 2024 compared to 2023. All regions experienced reported and organic sales decreases.

Segment Operating Margin

Software & Control segment operating earnings decreased 44 percent year over year. Segment operating margin decreased to 24.2 percent in 2024 from 33.0 percent in 2023, primarily due to lower sales volume, partially offset by lower incentive compensation and the positive impact of price realization exceeding input costs.

Lifecycle Services

Sales

Lifecycle Services sales increased 10 percent in 2024 compared to 2023. Organic sales increased 8 percent. Acquisitions increased sales by 2 percentage points. All regions experienced reported sales increases. All regions except Asia Pacific experienced organic sales increases.

Segment Operating Margin

Lifecycle Services segment operating earnings increased 146 percent year over year. Segment operating margin increased to 16.1 percent in 2024 from 7.2 percent in 2023, primarily due to lower incentive compensation, higher sales volume, strong project execution, higher margins in Sensia, and ongoing savings from the prior year structural actions.

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2023 Compared to 2022

For a discussion of the Company’s fiscal 2023 results compared to fiscal 2022, see the Company’s Annual Report on Form 10-K for the year ended September 30, 2023, filed on November 8, 2023.

Supplemental Segment Information

Purchase accounting depreciation and amortization, and impairment, non-operating pension and postretirement benefit (credit) cost, and restructuring charges 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):

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Adjusted Income, Adjusted EPS, and Adjusted Effective Tax Rate Reconciliation

Adjusted Income, Adjusted EPS, and Adjusted Effective Tax Rate are non-GAAP earnings measures that exclude non-operating pension and postretirement benefit (credit) cost, purchase accounting depreciation and amortization, and impairment attributable to Rockwell Automation, change in fair value of investments, restructuring charges aligned with enterprise-wide strategic initiatives, and Net loss attributable to noncontrolling interests, including their respective tax effects. In 2024, we updated the definition of our non-GAAP earnings measures to exclude significant restructuring charges aligned with enterprise-wide strategic initiatives. In the year ended September 30, 2024, we recognized these restructuring charges in conjunction with an enterprise-wide comprehensive program to optimize cost structure and expand margins. We believe the change to our definition provides a more useful presentation of our operating performance to investors as these restructuring charges are significant and enterprise-wide severance actions and not reflective of our ongoing operations. We did not revise prior years because there were no similar restructuring actions with significant costs. See Note 18 in the Consolidated Financial Statements for more information on our restructuring charges.

Purchase accounting depreciation and amortization, and impairment attributable to Rockwell Automation includes an accounting charge related to goodwill impairment for our Sensia joint venture in the year ended September 30, 2023. The tax effect of the purchase accounting depreciation and amortization, and impairment attributable to Rockwell Automation includes the tax effects on the Sensia joint venture goodwill impairment and related Sensia tax asset valuation allowances. Non-operating pension and postretirement benefit (credit) cost is defined as all components of our net periodic pension and postretirement benefit cost except for service cost. See Note 14 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 to Rockwell Automation, diluted EPS, and effective tax rate.

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The following are reconciliations of Net income attributable to Rockwell 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):

(1) 2023 includes $97.3 million net expense from $157.5 million goodwill impairment charge included in Income before income taxes, $33.1 tax effect from goodwill impairment and related valuation allowances recorded in Income tax provision, and ($93.3) million Net loss attributable to noncontrolling interests.

(2) Primarily relates to the change in fair value of our previous investment in PTC.

(3) Restructuring charges include $92.3 million for severance benefits and $5.1 million for strategic advisory services related to the enterprise-wide severance actions.

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Annual Recurring Revenue (ARR)

Total ARR is a key metric that enables measurement of progress in growing our recurring revenue business. It represents the annual contract value of all active recurring revenue contracts at any point in time. Recurring revenue is defined as a revenue stream that is contractual, typically for a period of 12 months or more, and has a high probability of renewal. The probability of renewal is based on historical renewal experience of the individual revenue streams, or management's best estimates if historical renewal experience is not available. Total ARR growth is calculated as the dollar change in ARR, adjusted to exclude the effects of currency, divided by ARR as of the prior period. The effects of currency translation are excluded by calculating Total ARR on a constant currency basis. Total ARR includes acquisitions even if there was no comparable ARR in the prior period. We believe that Total ARR provides useful information to investors because it reflects our recurring revenue performance period over period including the effect of acquisitions. Our measure of ARR may be different from measures used by other companies. Because ARR is based on annual contract value, it does not represent revenue recognized during a particular reporting period or revenue to be recognized in future reporting periods and is not intended to be a substitute for revenue, contract liabilities, or backlog.

Organic ARR growth is calculated as the dollar change in ARR, adjusted to exclude the effects of currency translation and acquisitions, divided by ARR as of the prior period. The effects of currency translation are excluded by calculating Organic ARR on a constant currency basis. When we acquire businesses, we exclude the effect of ARR in the current period for which there was no comparable ARR in the prior period. We believe that Organic ARR provides useful information to investors because it reflects our recurring revenue performance period over period without the effect of acquisitions and changes in currency exchange rates. Organic ARR growth is also used as a financial measure of performance for our annual incentive compensation.

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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):

The following table summarizes free cash flow, which is a non-GAAP financial measure (in millions):

Our definition of free cash flow takes into consideration capital investments required to maintain the operations of our businesses 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 be different from definitions used by other companies.

Cash provided by operating activities was $863.8 million for the year ended September 30, 2024, compared to $1,374.6 million for the year ended September 30, 2023. Free cash flow was $639.1 million for the year ended September 30, 2024, compared to $1,214.1 million for the year ended September 30, 2023. The year-over-year decreases in cash provided by operating activities and free cash flow were primarily due to lower pre-tax income, higher incentive compensation payments in 2024 related to fiscal 2023 performance, and higher tax payments, partially offset by decreases in working capital. Free cash flow for the year ended September 30, 2024, also includes $64.2 million of higher capital expenditures. Taxes paid in the year ended September 30, 2024, include $58.4 million of U.S. transition tax under the Tax Cuts and Jobs Act of 2017 (the Tax Act) and $67.4 million for capital gains from the sale of shares of PTC common stock.

Our Short-term debt as of September 30, 2024, includes commercial paper borrowings of $657.0 million with a weighted average interest rate of 5.14 percent and a weighted average maturity period of 24 days. We had no commercial paper borrowings as of September 30, 2023. In December 2022, Sensia entered into an unsecured $75.0 million line of credit. As of September 30, 2024 and 2023, included in Short-term debt was $70.0 million borrowed against the line of credit with an interest rate of 6.17 percent and 6.29 percent, respectively. Also included in Short-term debt as of September 30, 2024 and September 30, 2023 was $23.5 million of interest-bearing loans from Schlumberger (SLB) to Sensia, due April 2025. In April 2024, $18.8 million of new interest-bearing loans from SLB to Sensia were entered into and were due August 2024, extended to April 2025.

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We repurchased approximately 2.2 million shares of our common stock under our share repurchase program in 2024 at a total cost of $594.2 million and an average cost of $272.97 per share. In 2023, we repurchased approximately 1.2 million shares of our common stock under our share repurchase program at a total cost of $311.0 million and an average cost of $265.48 per share. At September 30, 2024, there were $0.4 million of outstanding common stock share repurchases recorded in Accounts payable that do not settle until 2025. At September 30, 2023, there were $1.1 million of outstanding common stock share repurchases recorded in Accounts payable that did not settle until 2024. Our decision to repurchase shares in 2025 will depend on business conditions, free cash flow generation, other cash requirements, and stock price. At September 30, 2024, we had approximately $1,346.1 million remaining for share repurchases under our existing board authorizations. See Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities, for additional information regarding share repurchases.

We expect future uses of cash to include working capital requirements, capital expenditures, dividends to shareowners, repurchases of common stock, repayments of debt, additional contributions to our retirement plans, and acquisitions of businesses and other inorganic investments. We expect capital expenditures in 2025 to be approximately $250 million. Significant long-term uses of cash include the following (in millions):

(1) The amounts for Long-term debt assume that the respective debt instruments will be outstanding until their scheduled maturity dates and include interest but exclude unamortized discount. See Note 7 in the Consolidated Financial Statements for more information regarding our Long-term debt.

(2) Our postretirement benefit plans are unfunded and are subject to change. Amounts reported are estimates of future benefit payments, to the extent estimable.

(3) Amounts reported for pension funding contributions reflect current estimates. Contributions to our pension plans beyond 2025 will depend on future investment performance of our pension plan assets, changes in discount rate assumptions, and governmental regulations in effect at the time. Amounts subsequent to 2025 are excluded from the summary above, as we are unable to make a reasonably reliable estimate of these amounts. The minimum contribution for our U.S. pension plan as required by the Employee Retirement Income Security Act (ERISA) is currently zero. We may make additional contributions to this plan at the discretion of management.

(4) Under the Tax Act, the Company may elect to pay the transition tax interest-free over eight years, with 8% due in each of the first five years, 15% in year six, 20% in year seven, and 25% in year eight.

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.

At September 30, 2024, the majority of our Cash and cash equivalents were held by non-U.S. subsidiaries. We use a global cash pooling arrangement to allocate capital resources among our entities. As a result of the broad changes to the U.S. international tax system under the Tax Act, the Company accounts for taxes on earnings of substantially all of its non-U.S. subsidiaries including both non-U.S. and U.S. taxes. The Company has concluded that earnings of a limited number of its non-U.S. subsidiaries are indefinitely reinvested.

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In June 2022, we replaced our former $1.25 billion unsecured revolving credit facility with a new five-year $1.5 billion unsecured revolving credit facility, expiring in June 2027. This credit facility uses the secured overnight funding rate (SOFR) as the primary basis for determining interest payments. 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 ended September 30, 2024, or September 30, 2023. 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.

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 $248.5 million at September 30, 2024, were available to non-U.S. subsidiaries, of which approximately $34.6 million was committed under letters of credit. Borrowings under our non-U.S. credit facilities at September 30, 2024 and 2023, were not significant. We were in compliance with all covenants under our credit facilities at September 30, 2024 and 2023. There are no significant commitment fees or compensating balance requirements under our credit facilities.

In July 2024, Standard & Poor’s downgraded our short-term rating from A-1 to A-2 and our long-term rating from A to A- and also changed our outlook from negative to stable. No changes were made to existing ratings by Moody’s or Fitch. The following is a summary of our credit ratings as of November 12, 2024:

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. 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.

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 and short-term investments 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 may 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. 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.

Cash dividends declared to shareowners were $572.8 million in 2024 ($5.00 per common share), $544.0 million in 2023 ($4.72 per common share), and $520.8 million in 2022 ($4.48 per common share). Our quarterly dividend rate as of September 30, 2024, is $1.25 per common share ($5.00 per common share annually), which is determined at the sole discretion of our Board of Directors.

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Supplemental Sales Information

We translate sales of subsidiaries operating outside of the 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 reported sales to organic sales by geographic region (in millions):

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The following is a reconciliation of reported sales to organic sales by operating segment (in millions):

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Critical Accounting Estimates

We believe the following accounting estimates 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. Accounting principles generally accepted in the United States 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. Refer to Note 1 in the Consolidated Financial Statements for information regarding our significant accounting policies.

Goodwill - Sensia Reporting Unit

The quantitative test of goodwill for impairment requires us to estimate the fair value of our reporting units. During the second quarter of fiscal 2024, we performed our annual quantitative impairment test for our Sensia reporting unit. As a result of that quantitative test, we concluded that the second quarter Goodwill balance within the Sensia reporting unit of $160.7 million was not impaired, as the fair value of the Sensia reporting unit was determined to exceed its carrying value by approximately 25 percent.

Critical assumptions used in this approach included management’s estimated future revenue growth rates and margins, a discount rate, and a market multiple. Estimated future revenue growth and margins are based on management’s best estimate about current and future conditions. The revenue growth rate assumption reflects above market growth over the next five years before moderating back to a growth rate approximating longer term average inflationary rates. The forecasted near-term growth rate projections take into account recent revenue performance and the orders backlog. Margin assumptions reflect volume and mix, productivity to offset cost inflation, and price used to fund investments. The assumptions and estimates made are based on a number of factors, including historical experience, reference to external product available market and industry growth publications, analysis of peer group projections, and information obtained from the management team, including backlog. Actual results and forecasts of revenue growth and margins for our Sensia reporting unit may be impacted by its concentration within the Oil & Gas industry and with its customer base. Demand for Sensia hardware and software products, solutions, and services is sensitive to industry volatility and risks, including those related to commodity prices, supply and demand dynamics, production costs, geological activity, and political activities. If such factors impact our ability to achieve forecasted revenue growth rates and margins, the fair value of the reporting unit could decrease, which may result in an impairment. We determined the discount rate using our weighted average cost of capital adjusted for risk factors including risk associated with our above market revenue growth assumptions, historical performance, and industry-specific and economic factors. Also, industry-specific and economic factors that increase the discount rate or decrease the market multiple can decrease the fair value of the Sensia reporting unit, which may result in an impairment.

More information regarding goodwill impairment testing is contained in Note 1 and Note 3 in the Consolidated Financial Statements.

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Retirement Benefits - Pension

Pension costs and obligations are actuarially determined and are influenced by assumptions used to estimate these amounts, including the discount rate. Changes in any of the assumptions and the amortization of differences between the assumptions and actual experience will affect the amount of pension expense in future periods.

Our global pension expense in 2024 was $13.2 million compared to $122.0 million in 2023; global pension expense in 2023 included $123.4 million of settlement charges. Approximately all of our 2024 global pension expense and 70 percent of our global projected benefit obligation relate to our U.S. pension plan. The discount rate used to determine our 2024 U.S. pension expense was 6.10 percent, compared to 5.65 percent for 2023.

For 2025, our U.S. discount rate will decrease to 5.10 percent from 6.10 percent in 2024. The discount rate was set as of our September 30 measurement date and was determined by modeling a portfolio of bonds that match the expected cash flow of our benefit plans.

The changes in our discount rate have an inverse relationship with our net periodic benefit cost and projected benefit obligation. The following chart illustrates the estimated change in projected benefit obligation and annual net periodic benefit cost assuming a change of 25 basis points in the discount rate for our U.S. pension plans (in millions):

(1) Change includes both operating and non-operating pension costs.

More information regarding pension benefits is contained in Note 14 in the Consolidated Financial Statements.

Revenue Recognition - Customer Incentives

We offer various incentive programs that provide distributors and direct sale customers with cash rebates, account credits, or additional hardware and software products, solutions, and services based on meeting specified program criteria. Customer incentives are recognized as a reduction of sales if distributed in cash or customer account credits. We record accruals at the time of revenue recognition as a current liability within Customer returns, rebates, and incentives in our Consolidated Balance Sheet or, where a right of setoff exists, as a reduction of Receivables. Customer incentives for additional hardware and software products, solutions, and services to be provided are considered distinct performance obligations. As such, we allocate revenue to them based on relative standalone selling price. Until the incentive is redeemed, the revenue is recorded as a contract liability.

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. A critical assumption used in estimating the accrual for this program is the time period from when revenue is recognized to when the rebate is processed. Our estimate is based primarily on historical experience. If the time period were to change by 10 percent, the effect would be an adjustment to the accrual of approximately $20.7 million.

More information regarding our revenue recognition and returns, rebates, and incentives policies are contained in Note 1 and Note 2 in the Consolidated Financial Statements.

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Acquisitions - Clearpath Intangible Assets Valuation

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. We engaged an independent third-party valuation specialist to assist with the fair value allocation of the intangible assets assumed through the acquisition of Clearpath. The intangible assets were valued using income approaches, specifically the relief from royalty method and multi-period excess earnings method. This required the use of several assumptions and estimates including forecasted revenue growth rates, margin, and cash flows attributable to existing customers, obsolescence factor, royalty rate, contributory asset charges, customer attrition rate, and discount rates. Although we believe the assumptions and estimates made were reasonable and appropriate, these estimates require judgment and are based in part on historical experience and information obtained from Clearpath management.

The key assumption requiring the use of judgement in the valuation of the $269.9 million technology asset was the obsolescence factor. The obsolescence factor of 12 years was calculated based on the depletion of existing technology using a variety of factors including research and development spend toward new product development and scheduled patent expiration. A two-year change in this assumption would result in a change of approximately $82 million in intangible assets. The key assumption requiring the use of judgement in the valuation of the $41.6 million trademark intangible asset was the weighted average royalty rate of 2.05 percent. This rate was based on royalty market data. A 100 basis point change in the royalty rate would result in a change of $20 million in intangible assets.

More information regarding this business combination is contained in Note 4 in the Consolidated Financial Statements.

Recent Accounting Pronouncements

See Note 1 in the Consolidated Financial Statements regarding recent accounting pronouncements.

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