ROCKWELL AUTOMATION, INC (ROK) FY 2023 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

Our strategy is to expand human possibility. Our vision is to create the future of industrial operations. 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;

•accelerate growth in annual recurring revenue;

•add 1% growth from acquisitions annually; and

•deliver profitable growth within a disciplined financial framework.

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Sustainability

Our 2022 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 over $120 billion. With our focus on innovation and growth, we expect to continue to expand our addressed market over our long-term planning horizon.

In most counties, our direct sales force works with Original Equipment Manufacturers (OEMs), system integrators, technology partners, and end users in conjunction with independent distributors. Approximately 70 percent of our global sales are transacted through independent distributors. Sales to our two largest distributors in 2023, 2022, and 2021, which are attributable to all three segments, were approximately 20 percent of our total sales.

OEMs represent an important growth opportunity. To remain competitive, OEMs 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 in our Intelligent Devices and Software & Control businesses support OEMs in addressing these business needs.

The emerging markets of Asia Pacific and Europe, Middle East, and Africa (EMEA) are projected to be the fastest growing over our long-term planning horizon, due to higher levels of infrastructure investment and the growing middle-class population.

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We believe that increased demand for consumer products in these 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.

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 differentiated 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

At Rockwell Automation, we promise to expand human possibility within our company and throughout the world of industrial production, and we work to attract and develop highly engaged people who can and want to do their best work.

Our commitment to diversity, equity, and inclusion starts at the top. Our 11 board members include four female and two African American directors. In fiscal 2021, we hired our first chief diversity officer and made investments to accelerate our efforts to increase diversity, equity, and inclusion across the company.

A culture of integrity is fundamental to Rockwell’s core values, including a formal ethics and compliance organization and an Ombuds office that investigates ethical and legal concerns brought forth by employees. Our code of conduct, along with our partner code of conduct and supplier code of conduct prohibits corrupt acts, bribery, and anticompetitive behavior. Employee training is used to reinforce our values companywide, with participation in trainings related to ethics, environment, health and safety, and emergency responses at or near 100%.

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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 2023, 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 2023, 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 81, six points higher than the industry norm of 75.

•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 2023, the majority of our employees completed one or more of our training programs representing over 650,000 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 offer flextime, remote work, and part-time arrangements whenever business conditions permit. 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 2022, we launched 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 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 lower attrition rates in fiscal 2023 as compared to fiscal 2022. We believe the decrease is consistent with market trends experienced broadly across labor markets in fiscal 2023. 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, 2023, 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:

Continuous Improvement

Productivity and continuous improvement are important components of our culture. We have programs in place that drive ongoing process improvement, functional streamlining, material cost savings, and manufacturing productivity. These are intended to improve profitability that can be used to fund investments in growth and to offset inflation. Our ongoing productivity initiatives target both cost reduction and improved asset utilization. Charges for workforce reductions and facility rationalization may be required in order to effectively execute our productivity programs.

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U.S. Economic Trends

In 2023, 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 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 2021 to 2023. These figures are as of November 8, 2023, and are subject to revision by the issuing organizations. The IP Index remains constant in the fourth quarter of fiscal 2023 versus the third quarter of fiscal 2023. Manufacturing PMI results continued to be soft in the fourth quarter of 2023. 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 three quarters. Producer prices remain elevated, however, year over year increases continued to decelerate following last years' surge in prices.

Non-U.S. Economic Trends

In 2023, 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 2023.

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Supply Chain

We have a global supply chain, including a network of suppliers and distribution and manufacturing facilities. The supply chain has been stressed by increased demand, along with pandemic-related and other global events that have put additional pressures on manufacturing output. Although there has been a continued gradual improvement in the supply chain environment, this has resulted in and could continue to result in:

•challenges in our supply chain;

•difficulty in procuring or inability to procure components and materials necessary for our hardware and software products, solutions, and services;

•increased costs for commodities and components; and

•delays in delivering, or an inability to deliver, our hardware and software products, solutions, and services.

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.

We are closely managing our end-to-end supply chain, from sourcing to production to customer delivery, with a particular focus on all critical and at-risk suppliers and supplier locations globally. We have made large-scale investments to increase capacity across our network in support of our orders growth. Additional actions we are taking include:

•extending order visibility to our supply base to ensure we are appropriately planning for extended component lead times;

•securing longer-term supply agreements with critical partners;

•re-engineering of existing products to increase component supply resiliency;

•capacity investments, including redundant manufacturing lines and additional electronic assembly equipment; and

•qualification of additional suppliers to diversify our supplier base.

We believe these and other actions we are taking are enabling us to normalize our product lead times and reduce our backlog.

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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 19 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 cost, change in fair value of investments, the $70 million legal settlement in fiscal 2021, 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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2023 Compared to 2022

Sales

Sales in fiscal 2023 increased 16.7 percent compared to 2022. Organic sales increased 16.9 percent. Currency translation decreased sales by 1.4 percentage points. Acquisitions increased sales by 1.2 percentage points. Total and organic annual recurring revenue at September 30, 2023, grew approximately 16 percent compared to September 30, 2022. See Annual Recurring Revenue (ARR) for information on this measure. Pricing increased total company sales by approximately 5.5 percentage points, realized in the Intelligent Devices and Software & Control segments.

The table below presents our sales for the year ended September 30, 2023, attributed to the geographic regions based upon country of destination, and the percentage change from the same period in 2022 (in millions, except percentages). The results by region and segment were primarily impacted by the composition of backlog versus underlying demand.

(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 $127.9 million in fiscal 2023 compared to $104.7 million in fiscal 2022. The increase was primarily due to the year over year impact of mark-to-market adjustments related to our deferred and non-qualified compensation plans.

Income before Income Taxes

Income before income taxes increased to $1,608.5 million in 2023 from $1,073.6 million in 2022. The increase was primarily due to higher sales and fair value adjustments in connection with our previous investment in PTC (the PTC adjustments), partially offset by a $157.5 million accounting charge for impairment of goodwill for our Sensia joint venture (goodwill impairment) recognized in 2023, compared to 2022. Total segment operating earnings increased to $1,929.8 million from $1,542.6 million in 2022, due to higher sales, partially offset by higher investment spend and higher incentive compensation.

See Critical Accounting Estimates and Note 3 in the Consolidated Financial Statements for further discussion of the goodwill impairment.

Income Taxes

The effective tax rate in 2023 was 20.5 percent compared to 14.4 percent in 2022. The increase in the effective tax rate was primarily due to a valuation allowance established on certain deferred tax assets of our Sensia joint venture and tax effects of the related goodwill impairment, totaling $33.1 million. The Adjusted Effective Tax Rate in 2023 was 16.4 percent compared to 16.0 percent in 2022.

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 2023 and 2022 affecting each year’s respective tax rates.

Net Loss Attributable to Noncontrolling Interests

Net loss attributable to noncontrolling interests was $109.4 million in 2023 compared to $13.1 million in 2022. The increase was driven by $93.3 million of the accounting charge for goodwill impairment and related tax effects including tax asset valuation allowances that is attributable to noncontrolling interests.

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Diluted EPS and Adjusted EPS

Fiscal 2023 Net income attributable to Rockwell Automation was $1,387.4 million or $11.95 per share, compared to $932.2 million or $7.97 per share in fiscal 2022. The increases in Net income attributable to Rockwell Automation and diluted EPS were primarily due to higher total segment operating earnings and the PTC adjustments, partially offset by $97.3 million of expense for the goodwill impairment net of its related tax and noncontrolling interest effects. Adjusted EPS was $12.12 in fiscal 2023, up 27.7 percent compared to $9.49 in fiscal 2022, primarily due to higher sales, partially offset by higher investment spend and higher incentive compensation.

Intelligent Devices

Sales

Intelligent Devices sales increased 15.6 percent in 2023 compared to 2022. Organic sales increased 14.6 percent. The effects of currency translation decreased sales by 1.3 percentage points and acquisitions increased sales by 2.3 percentage points. All regions experienced reported and organic sales increases.

Segment Operating Margin

Intelligent Devices segment operating earnings increased 15.4 percent year over year. Segment operating margin was 20.2 percent in 2023, unchanged from a year ago.

Software & Control

Sales

Software & Control sales increased 24.8 percent in 2023 compared to 2022. Organic sales increased 26.1 percent. The effects of currency translation decreased sales by 1.3 percentage points. All regions experienced reported and organic sales increases.

Segment Operating Margin

Software & Control segment operating earnings increased 43.0 percent year over year. Segment operating margin increased to 33.0 percent in 2023 from 28.8 percent in 2022, primarily due to higher sales, partially offset by higher investment spend and higher incentive compensation.

Lifecycle Services

Sales

Lifecycle Services sales increased 9.0 percent in 2023 compared to 2022. Organic sales increased 10.0 percent. The effects of currency translation decreased sales by 1.6 percentage points and acquisitions increased sales by 0.6 percentage points. All regions experienced reported and organic sales increases.

Segment Operating Margin

Lifecycle Services segment operating earnings decreased 6.3 percent year over year. Segment operating margin decreased to 7.2 percent in 2023 from 8.3 percent in 2022, as the benefit of higher sales was more than offset by higher incentive compensation costs and one-time expenses to expand future profitability.

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2022 Compared to 2021

For a discussion of the Company’s fiscal 2022 results compared to fiscal 2021, see the Company’s Annual Report on Form 10-K for the year ended September 30, 2022, filed on November 8, 2022.

Supplemental Segment Information

Purchase accounting depreciation and amortization, and impairment and non-operating pension and postretirement benefit cost (credit) 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 cost, purchase accounting depreciation and amortization, and impairment attributable to Rockwell Automation, change in fair value of investments, and Net loss attributable to noncontrolling interests, including their respective tax effects. Purchase accounting depreciation and amortization, and impairment attributable to Rockwell Automation includes an accounting charge related to goodwill impairment for our Sensia joint venture. 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 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.

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) 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.

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Annual Recurring Revenue (ARR)

Organic 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. 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. 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.

Total ARR growth is calculated as the dollar change in ARR, adjusted to exclude the effects of currency. 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.

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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 $1,374.6 million for the year ended September 30, 2023, compared to $823.1 million for the year ended September 30, 2022. Free cash flow was $1,214.1 million for the year ended September 30, 2023, compared to $682.0 million for the year ended September 30, 2022. The year-over-year increases in cash provided by operating activities and free cash flow were primarily due to higher pre-tax income.

As of September 30, 2023, all of our remaining PTC Inc. (PTC) common stock (PTC Shares) have been sold. We began selling our shares in fiscal 2022 utilizing both open market and 10b5-1 plan transactions. As of September 30, 2023 and 2022, the fiscal year sales of our PTC shares under our 10b5-1 plan and open market sales resulted in a gross inflow of $1,210.4 million and $210.2 million, respectively. This excludes any tax liability related to the realized gain on sale of the investment. These proceeds will support our future uses of cash. All of our sales of PTC Shares are consistent with the transfer restrictions in the securities purchase agreement, as amended, with PTC.

Our Short-term debt as of September 30, 2023 and 2022, includes $23.5 million and $42.3 million, respectively, of interest-bearing loans from SLB to Sensia, due December 29, 2023. In December 2022, Sensia entered into an unsecured $75.0 million line of credit. As of September 30, 2023, included in Short-term debt was $70.0 million borrowed against the line of credit with an interest rate of 6.29 percent. Also included in Short-term debt as of September 30, 2022 was commercial paper borrowings of $317.0 million with a weighted average interest rate of 3.03 percent and a weighted average maturity period of 22 days.

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We repurchased approximately 1.2 million shares of our common stock under our share repurchase program in 2023 at a total cost of $311.0 million and an average cost of $265.48 per share. In 2022, we repurchased approximately 1.3 million shares of our common stock under our share repurchase program at a total cost of $301.1 million and an average cost of $223.05 per share. 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. At September 30, 2022, there were $1.6 million of outstanding common stock share repurchases recorded in Accounts payable that did not settle until 2023. Our decision to repurchase shares in 2024 will depend on business conditions, free cash flow generation, other cash requirements, and stock price. At September 30, 2023, we had approximately $940.3 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, acquisitions of businesses and other inorganic investments, dividends to shareowners, repurchases of common stock, additional contributions to our retirement plans and repayments of debt. We expect capital expenditures in 2024 to be approximately $220 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 2024 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 2024 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 Cuts and Jobs Act of 2017 (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, 2023, approximately half of our Cash and cash equivalents were held by non-U.S. subsidiaries. As a result of the broad changes to the U.S. international tax system under the Tax Act, we account for taxes on earnings of substantially all of our non-U.S. subsidiaries including both non-U.S. and U.S. taxes. We have concluded that earnings of a limited number of our non-U.S. subsidiaries are indefinitely reinvested.

In August 2021, we issued $1.5 billion aggregate principal amount of long-term notes in a registered public offering. The offering consisted of $600.0 million of 0.35% notes due in August 2023, $450.0 million of 1.75% notes due in August 2031, and $450.0 million of 2.80% notes due in August 2061, all issued at a discount. Net proceeds to the Company from the debt offering were $1,485.6 million. We used these net proceeds primarily to fund the acquisition of Plex. Refer to Note 4 in the Consolidated Financial Statements for additional information on this acquisition.

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In March 2019, we issued $1.0 billion aggregate principal amount of long-term notes in a registered public offering. The offering consisted of $425.0 million of 3.50% notes due in March 2029 and $575.0 million of 4.20% notes due in March 2049, both issued at a discount. Net proceeds to the Company from the debt offering were $987.6 million. We used these net proceeds primarily to repay our outstanding commercial paper, with the remaining proceeds used for general corporate purposes.

We entered into treasury locks to manage the potential change in interest rates in anticipation of the issuance of the $1.5 billion aggregate notes in August 2021 and the $1.0 billion of fixed rate debt in March 2019. These treasury locks were designated as and accounted for as cash flow hedges. The effective differentials paid on these treasury locks was initially recorded in Accumulated other comprehensive loss, net of tax effect. As a result of the changes in the interest rates on the treasury locks between the time we entered into the treasury locks and the time we priced and issued the notes, the Company made a net payment of $28.0 million to the counterparties from the August 2021 issuance and $35.7 million to the counterparty from the March 2019 issuance. The $28.0 million and $35.7 million net losses on the settlement of the treasury locks were recorded in Accumulated other comprehensive loss, net of tax effect, and are being amortized over the term of the corresponding notes, and recognized as an adjustment to Interest expense in the Consolidated Statement of Operations.

On June 29, 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. 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 or the former credit facility during the periods ended September 30, 2023 and 2022. Borrowings under our new $1.5 billion 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 was the primary basis for determining interest payments on borrowings under our former $1.25 billion credit facility. Our new $1.5 billion credit facility uses the secured overnight funding rate (SOFR) as the primary basis for determining interest payments.

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 $225.8 million at September 30, 2023, were available to non-U.S. subsidiaries, of which approximately $32.0 million was committed under letters of credit. Borrowings under our non-U.S. credit facilities at September 30, 2023 and 2022, were not significant. We were in compliance with all covenants under our credit facilities at September 30, 2023 and 2022. There are no significant commitment fees or compensating balance requirements under our credit facilities.

During the fourth quarter of fiscal 2021, as a result of the additional leverage added to fund the Plex acquisition, Standard & Poor’s elected to downgrade our Outlook from “Stable” to “Negative”. No changes were made to existing ratings by Moody’s or Fitch. The following is a summary of our credit ratings as of September 30, 2023:

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.

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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 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 $544.0 million in 2023 ($4.72 per common share), $520.8 million in 2022 ($4.48 per common share), and $497.5 million in 2021 ($4.28 per common share). Our quarterly dividend rate as of September 30, 2023, is $1.18 per common share ($4.72 per common share annually), which is determined at the sole discretion of our Board of Directors.

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.

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

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. Since formation in October 2019, our Sensia joint venture operations have been challenged by the global pandemic, geopolitical activities, volatility in commodity prices, and supply chain dynamics. The cumulative historical growth and profitability below plan have resulted in a declining cushion between carrying value and fair value in previous impairment tests.

During the second quarter of fiscal 2023, 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 $317.5 million was not impaired, as the fair value of the Sensia reporting unit was determined to exceed its carrying value by approximately 10 percent.

The joint venture partners appointed a new management team in 2023 and have updated the strategy of Sensia, which included downward revisions to growth and profitability projections for 2024 and future years. Lower sales growth reflects historical performance and an updated outlook of market conditions. Lower profitability reflects an updated view of mix and volume. Based upon the update of Sensia’s strategy and projections in the fourth quarter, we determined that it was more likely than not that the fair value of Sensia was below its carrying value. As a result of this triggering event, we performed an interim quantitative analysis, using a combination of an income approach derived from discounted cash flows and a market multiples approach using selected comparable public companies, consistent with our annual impairment testing. As of the fourth quarter testing date, the carrying value of our Sensia reporting unit of $665.1 million was determined to be in excess of the reporting unit’s fair value, resulting in a $157.5 million goodwill impairment charge recorded in the Consolidated Statement of Operations. Subsequent to the impairment, $160.3 million of goodwill remains within the Sensia reporting unit.

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 new 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 additional impairment of the remaining goodwill balance. 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 additional future 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 2023 was $122.0 million compared to $74.4 million in 2022. Approximately all of our 2023 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 2023 U.S. pension expense was 5.65 percent, compared to 3.86 percent for 2022.

For 2024, our U.S. discount rate will increase to 6.10 percent from 5.65 percent in 2023. 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 $24.9 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.

Acquisitions - Plex 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 purchase price paid for the acquisition of Plex to intangible assets. This required the use of several assumptions and estimates including the customer attrition rate, forecasted cash flows attributable to existing customers, and the discount rate for the customer relationship intangible asset and the royalty rate, forecasted revenue growth rates, and the discount rate for the technology intangible asset. 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 Plex management.

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The key assumption requiring the use of judgement in the valuation of the customer relationship intangible asset was the customer attrition rate of 5 percent. This rate was selected based on historical experience and information obtained from Plex management. A change in the customer attrition rate of 250 basis points would result in a change of $63 million in intangible assets. The key assumptions requiring the use of judgement in the valuation of the technology intangible asset were the royalty rate of 25 percent and the obsolescence factor. The royalty rate was based on a detailed analysis considering the importance of the technology to the overall enterprise and market royalty data. A change in the royalty rate of 500 basis points would result in a change of $47 million in intangible assets. The obsolescence factor was calculated assuming phase out over ten years based on discussions with Plex management, the nature of the technology, its integration into customers’ manufacturing systems, and other third-party information for similar transactions. A two-year change in this assumption would result in a change of $52 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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