ROCKWELL AUTOMATION, INC.
Results of Operations
Forward-Looking Statements
This Quarterly Report contains statements (including certain projections and
business trends) that are "forward-looking statements" as defined in the Private
Securities Litigation Reform Act of 1995. Words such as "believe", "estimate",
"project", "plan", "expect", "anticipate", "will", "intend" and other similar
expressions may identify forward-looking statements. Actual results may differ
materially from those projected as a result of certain risks and uncertainties,
many of which are beyond our control, including but not limited to:
• macroeconomic factors, including global and regional business conditions,
the availability and cost of capital, commodity prices, the cyclical
nature of our customers' capital spending, sovereign debt concerns and
currency exchange rates;
• laws, regulations and governmental policies affecting our activities in
the countries where we do business, including those related to tariffs,
taxation, and trade controls;
• the availability and price of components and materials;
• the successful execution of our cost productivity initiatives;
• the availability, effectiveness and security of our information technology
systems;
• our ability to manage and mitigate the risk related to securityvulnerabilities and breaches of our products, solutions and services;
• the successful development of advanced technologies and demand for and
market acceptance of new and existing hardware and software products;
• our ability to manage and mitigate the risks associated with our solutions
and services businesses;
• competitive hardware and software products, solutions and services and
pricing pressures, and our ability to provide high quality products,
solutions and services;
• disruptions to our distribution channels or the failure of distributors to
develop and maintain capabilities to sell our products;
• the successful integration and management of strategic transactions and
achievement of the expected benefits of these transactions;
• a disruption of our business due to natural disasters, pandemics, acts of
war, strikes, terrorism, social unrest or other causes;
• intellectual property infringement claims by others and the ability to
protect our intellectual property;
• the uncertainty of claims by taxing authorities in the various
jurisdictions where we do business;
• our ability to attract, develop, and retain qualified personnel;
• the uncertainties of litigation, including liabilities related to the
safety and security of the hardware and software products, solutions and
services we sell;
• risks associated with our investment in common stock of PTC Inc.,including the potential for volatility in our reported quarterly earnings
associated with changes in the market value of such stock;
• our ability to manage costs related to employee retirement and health care
benefits; and
• other risks and uncertainties, including but not limited to those detailed
from time to time in our
These forward-looking statements reflect our beliefs as of the date of filing this report. We undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. See Item 1A, Risk Factors, of our Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2019 , for more information. Non-GAAP Measures The following discussion includes organic sales, total segment operating earnings and margin, Adjusted Income, Adjusted EPS, Adjusted Effective Tax Rate and free cash flow, which are non-GAAP measures. See Supplemental Sales Information for a reconciliation of reported sales to organic sales and a discussion of why we believe this non-GAAP measure is useful to investors. See Results of Operations for a reconciliation of income before income taxes to total segment operating earnings and margin and a discussion of why we believe these non-GAAP measures are useful to investors. See Results of Operations for a reconciliation of net income attributable toRockwell Automation , diluted EPS and effective tax rate to Adjusted Income, Adjusted EPS and Adjusted Effective Tax Rate, respectively, and a discussion of why we believe these non-GAAP measures are useful to investors. See Financial Condition for a reconciliation of cash flows from operating activities to free cash flow and a discussion of why we believe this non-GAAP measure is useful to investors. 24
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Overview
Rockwell Automation, Inc. is a global leader in industrial automation and digital transformation. We connect the imaginations of people with the potential of technology to expand what is humanly possible, making the world more productive and more sustainable. Overall demand for our hardware and software products, solutions and services is driven by: • investments in manufacturing, including upgrades, modifications and
expansions of existing facilities or production lines and new facilities or
production lines;
• investments in basic materials production capacity, which may be related to
commodity pricing levels;
• our customers' needs for faster time to market, operational productivity,
asset management and reliability, and enterprise risk management;
• our customers' needs to continuously improve quality, safety and
sustainability;
• industry factors that include our customers' new product introductions,
demand for our customers' products or services and the regulatory and
competitive environments in which our customers operate;
• levels of global industrial production and capacity utilization;
• regional factors that include local political, social, regulatory and
economic circumstances; and
• the spending patterns of our customers due to their annual budgeting
processes and their working schedules.
Long-term Strategy Our strategy is to bring The Connected Enterprise to life by integrating control and information across the enterprise. We deliver customer outcomes by combining advanced industrial automation with the latest information technology. Our growth and performance strategy seeks to: • achieve organic sales growth in excess of the automation market by expanding
our served market and strengthening our competitive differentiation;
• grow market share of our core platforms;
• drive double digit growth in information solutions and connected services;
• acquire companies that serve as catalysts to organic growth by increasing our
information solutions and high-value services offerings and capabilities,
expanding our global presence, or enhancing our process expertise;
• enhance our market access by building our channel capability and partner
network;
• deploy human and financial resources to strengthen our technology leadership
and our intellectual capital business model;
• continuously improve quality and customer experience; and
• drive annual cost productivity.
By implementing the above strategy, we seek to achieve our long-term financial
goals, including above-market organic sales growth, EPS growth above sales
growth, return on invested capital in excess of 20 percent and free cash flow
equal to about 100 percent of Adjusted Income. We expect acquisitions to add a
percentage point or more per year to long-term sales growth.
Our customers face the challenge of remaining globally cost competitive and
automation can help them achieve their productivity and sustainability
objectives. Our value proposition is to help our customers reduce time to
market, lower total cost of ownership, improve asset utilization and manage
enterprise risks.
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U.S. Industrial Economic Trends In the first quarter of fiscal 2020, sales in theU.S. accounted for over half of our total sales. The various indicators we use to gauge the direction and momentum of our servedU.S. markets include: • The Industrial Production (IP) Index, published by theFederal Reserve , which
measures the real output of manufacturing, mining and electric and gas
utilities. The IP Index is expressed as a percentage of real output in a base
year, currently 2012. Historically, there has been a meaningful correlation
between the changes in the IP Index and the level of automation investment
made by our
• The Manufacturing Purchasing Managers' Index (PMI), published by the
near-term state of manufacturing activity in the
PMI measure above 50 indicates that the
generally expanding while a measure below 50 indicates that it is generally
contracting.
The table below depicts trends in these indicators since the quarter ended
IP Index PMI
Fiscal 2020 quarter ended:
December 2019 109.3 47.2
Fiscal 2019 quarter ended:
September 2019 109.5 47.8
June 2019 109.2 51.7
March 2019 109.8 55.3
December 2018 110.3 54.3
Fiscal 2018 quarter ended:
September 2018 109.3 59.5
Note: Economic indicators are subject to revision by the issuing organizations.
Non-U.S. Economic Trends In the first quarter of fiscal 2020, sales to customers outside theU.S. accounted for less than half of our total sales. These customers include both indigenous companies and multinational companies with a global presence. In addition to the global factors previously mentioned in the "Overview" section, international demand, particularly in emerging markets, has historically been driven by the strength of the industrial economy in each region, investments in infrastructure and expanding consumer markets. We use changes in key countries' gross domestic product and industrial production as indicators of the growth opportunities in each region where we do business. After slowing throughout fiscal 2019, global economic growth has stabilized during the first quarter of fiscal 2020, although at low levels. The economic outlook remains soft, particularly inEurope andChina , as slowing global growth, trade tensions with theU.S. and continued uncertainty over the impact of Brexit remain. Overall Latin America IP is expected to increase. TheU.S. Government has signed the revisedUnited States -Mexico -Canada Agreement. This free trade agreement is not yet ratified. TheU.S. Government also signed phase 1 of a trade agreement withChina inJanuary 2020 . This agreement is not yet effective. We do not believe either agreement will have a material effect on our business, financial condition, or results of operations. 26
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Summary of Results of Operations Sales in the first quarter of fiscal 2020 increased 2.6 percent compared to the first quarter of 2019. Organic sales decreased 1.0 percent year over year. Currency translation decreased sales by 0.9 percentage points, and acquisitions increased sales by 4.5 percentage points. We believe that uncertainty with respect to global trade is impacting some customers' investment decisions, particularly those related to the timing of capital investments, which has contributed to some project delays. Results from the quarter included:
• Logix sales decreased 3 percent year over year in the first quarter of fiscal
2020. Logix organic sales decreased 2 percent year over year, and currency
translation decreased sales by 1 percentage points.
• Reported sales in emerging countries increased 8.8 percent year over year in
the first quarter of fiscal 2020. Organic sales in emerging countries
increased 2.9 percent year over year. Currency translation decreased sales in
emerging countries by 1.6 percentage points, and acquisitions increased sales
by 7.5 percentage points.
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The following table reflects our sales and operating results (in millions, except per share amounts and percentages):
Three Months Ended
December 31,
2019 2018
Sales
Architecture & Software (a) $ 751.6 $ 753.1
Control Products & Solutions (b) 932.9 889.2
Total sales (c) $ 1,684.5 $ 1,642.3
Segment operating earnings(1)
Architecture & Software (d) $ 223.7 $ 237.0
Control Products & Solutions (e) 115.4 137.9
Total segment operating earnings(2) (f) 339.1
374.9
Purchase accounting depreciation and amortization (10.0 ) (4.1 ) General corporate - net (32.8 ) (21.9 ) Non-operating pension and postretirement benefit (cost) credit (8.7 )
2.6
Loss on investments 71.0 (246.4 ) Valuation adjustments related to the registration of PTC Shares -
33.7
Interest (expense) income, net (24.0 ) (18.0 ) Income before income taxes (g) 334.6 120.8 Income tax provision (19.2 ) (40.5 ) Net income 315.4 80.3 Net income attributable to noncontrolling interests 4.7
-
Net income attributable to Rockwell Automation$ 310.7 $ 80.3 Diluted EPS$ 2.66 $ 0.66 Adjusted EPS(3)$ 2.11 $ 2.21 Diluted weighted average outstanding shares 116.6
121.5
Total segment operating margin(2) (f/c) 20.1 % 22.8 % Pre-tax margin (g/c) 19.9 % 7.4 % Architecture & Software segment operating margin (d/a) 29.8 %
31.5 %
Control Product & Solutions segment operating margin (e/b) 12.4 %
15.5 %
(1) See Note 15 in the Consolidated Financial Statements for the definition of
segment operating earnings.
(2) Total segment operating earnings and total segment operating margin are
non-GAAP financial measures. We exclude purchase accounting depreciation and
amortization, general corporate - net, non-operating pension and
postretirement benefit (cost) credit, gains and losses on investments,
valuation adjustments related to the registration of PTC Shares, interest
(expense) income - net and income tax provision because we do not consider
these costs to be directly related to the operating performance of our
segments. We believe total segment operating earnings and total segment
operating margin are useful to investors as measures of operating
performance. We use these measures to monitor and evaluate the profitability
of our operating segments. Our measures of total segment operating earnings
and total segment operating margin may be different from measures used by
other companies.
(3) Adjusted EPS is a non-GAAP earnings measure that excludes non-operating
pension and postretirement benefit (cost) credit, net income (loss)
attributable to noncontrolling interests, gains and losses on investments,
and valuation adjustments related to the registration of PTC Shares,
including their respective tax effects. See Adjusted Income, Adjusted EPS and
Adjusted Effective Tax Rate Reconciliation for more information on this
non-GAAP measure.
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Three Months EndedDecember 31, 2019 , Compared to Three Months EndedDecember 31, 2018 Sales Sales increased 2.6 percent year over year in the three months endedDecember 31, 2019 . Organic sales decreased 1.0 percent in the three months endedDecember 31, 2019 . Currency translation decreased sales by 0.9 percentage points and acquisitions increased sales by 4.5 percentage points in the three months endedDecember 31, 2019 . Pricing contributed approximately 1 percentage point to sales growth in the three months endedDecember 31, 2019 . The table below presents our sales, attributed to the geographic regions based upon country of destination, and the percentage change from the same period a year ago (in millions, except percentages): Change in Organic Change vs. Sales(1) vs. Three Months Three Months Ended Ended December Three Months Ended December 31, 2019 31, 2018 December 31, 2018 North America $ 1,006.9 0.8 % (3.3 )% EMEA 310.1 5.3 % 1.6 % Asia Pacific 229.6 7.1 % 5.9 % Latin America 137.9 2.4 % (0.7 )% Total Sales $ 1,684.5 2.6 % (1.0 )%
(1) Organic sales and organic sales growth exclude the effect of changes in currency exchange rates, acquisitions and divestitures. See Supplemental Sales Information for information on this non-GAAP measure.
•
primarily due to acquisitions. Organic sales decreased, driven by process
industries, partially offset by growth in Automotive and Semiconductor.
• EMEA sales increased year over year in the three months ended
2019, led by Oil & Gas, Life Sciences, and Tire.
• Sales in
led by Oil & Gas, Life Sciences, and Automotive, with solid growth in
•
primarily due to acquisitions. Organic sales decreased, due to weak
performance in Automotive and Mining.
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Three Months EndedDecember 31, 2019 , Compared to Three Months EndedDecember 31, 2018 General Corporate - Net General corporate - net expenses was$32.8 million in the three months endedDecember 31, 2019 , compared to$21.9 million in the three months endedDecember 31, 2018 . The increase was primarily due to benefit-related adjustments and one-time costs related to Sensia. Income before Income Taxes Income before income taxes increased 177 percent year over year in the three months endedDecember 31, 2019 . The increase in income before income taxes was primarily due to fair value adjustments in connection with the PTC investment, partially offset by a decrease in total segment operating earnings. Total segment operating earnings decreased 9.5 percent in the three months endedDecember 31, 2019 , primarily due to increased spending and unfavorable mix. Income Taxes The effective tax rate for the three months endedDecember 31, 2019 , was 5.7 percent compared to 33.5 percent for the three months endedDecember 31, 2018 . The decrease in the effective tax rate was primarily due to PTC investment adjustments without a corresponding tax benefit in the prior year, tax benefits recognizable upon the formation of the Sensia joint venture, as well as excess income tax benefits of share-based compensation. Our Adjusted Effective Tax Rate for the three months endedDecember 31, 2019 , was 7.9 percent compared to 18.7 percent for the three months endedDecember 31, 2018 . The decrease in the Adjusted Effective Tax Rate was primarily due to tax benefits recognizable upon the formation of the Sensia joint venture as well as excess income tax benefits of share-based compensation. Diluted EPS and Adjusted EPS Fiscal 2020 first quarter net income attributable toRockwell Automation was$310.7 million or$2.66 per share, compared to$80.3 million or$0.66 per share in the first quarter of fiscal 2019. The increases in net income attributable toRockwell Automation and diluted EPS were primarily due to fair-value adjustments recognized in the first quarter of fiscal 2020 and 2019 in connection with the PTC investment. Fiscal 2020 first quarter Adjusted EPS was$2.11 in the first quarter of fiscal 2020, down 5 percent compared to$2.21 in the first quarter of fiscal 2019. The decrease in Adjusted EPS was primarily due to lower organic sales, higher investment spending, and unfavorable mix, partially offset by a lower share count and lower tax rate. The net year-over-year Adjusted EPS impact of Sensia was$0.01 . 30
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Three Months EndedDecember 31, 2019 , Compared to Three Months EndedDecember 31, 2018 Architecture & Software Sales Architecture & Software sales decreased 0.2 percent year over year in the three months endedDecember 31, 2019 . Architecture & Software organic sales increased 0.7 percent in the three months endedDecember 31, 2019 . Currency translation decreased sales by 1.0 percentage points, and an acquisition increased sales by 0.1 percentage points in the three months endedDecember 31, 2019 . For both reported and organic sales, growth inAsia Pacific andthe United States was more than offset by declines in the other regions for the three months endedDecember 31, 2019 . EMEA reported sales decreased but organic sales increased slightly. Logix sales decreased 3 percent year over year in the three months endedDecember 31, 2019 . Logix organic sales decreased 2 percent year over year in the three months endedDecember 31, 2019 , while currency translation decreased Logix sales by 1 percentage point in the three months endedDecember 31, 2019 . Segment Operating Margin Architecture & Software segment operating earnings decreased 5.6 percent year over year in the three months endedDecember 31, 2019 . Segment operating margin decreased to 29.8 percent in the three months endedDecember 31, 2019 , from 31.5 percent in the same period a year ago, primarily due to higher investment spending. Control Products & Solutions Sales Control Products & Solutions sales increased 4.9 percent year over year in the three months endedDecember 31, 2019 . Control Products & Solutions organic sales decreased 2.5 percent in the three months endedDecember 31, 2019 . Currency translation decreased sales by 0.8 percentage points, and acquisitions increased sales by 8.2 percentage points in the three months endedDecember 31, 2019 . Growth in reported sales was broad-based across regions for the three months endedDecember 31, 2019 . Organic growth inAsia Pacific , EMEA, andLatin America was more than offset by declines inNorth America . Product sales decreased 6 percent year over year in the three months endedDecember 31, 2019 . Product organic sales decreased by 5 percent, and currency translation decreased sales by 1 percentage point in the three months endedDecember 31, 2019 . Sales in our solutions and services businesses increased 13 percent in the three months endedDecember 31, 2019 . Organic sales in our solutions and services businesses remained consistent with the prior year period. Currency translation decreased sales by 1 percentage point, and acquisitions increased sales by 14 percentage points in the three months endedDecember 31, 2019 . Segment Operating Margin Control Products & Solutions segment operating earnings decreased 16.3 percent year over year in the three months endedDecember 31, 2019 . Segment operating margin decreased to 12.4 percent in the three months endedDecember 31, 2019 , compared to 15.5 percent in the same period a year ago, primarily due to Sensia one-time items, unfavorable mix, and lower organic sales. Sensia had a year-over-year negative impact of 1.4 percentage points on segment operating margin. 31
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Supplemental Segment Information
Purchase accounting depreciation and amortization and non-operating pension and
postretirement benefit (credit) cost are not allocated to our operating segments
because these costs are excluded from our measurement of each segment's
operating performance for internal purposes. If we were to allocate these costs,
we would attribute them to each of our segments as follows (in millions):
Three Months Ended
December 31,
2019 2018
Purchase accounting depreciation and amortization
Architecture & Software $ 1.7 $ 1.4
Control Products & Solutions 8.0 2.5
Non-operating pension and postretirement benefit (credit) cost
Architecture & Software 2.1 1.5
Control Products & Solutions 3.4 2.4
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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 (credit), net income (loss) attributable to noncontrolling interests, gains and losses on investments, and valuation adjustments related to the registration of PTC Shares, including their respective tax effects. We believe that Adjusted Income, Adjusted EPS and Adjusted Effective Tax Rate provide useful information to our investors about our operating performance and allow management and investors to compare our operating performance period over period. Adjusted EPS is also used as a financial measure of performance for our annual incentive compensation. Our measures of Adjusted Income, Adjusted EPS and Adjusted Effective Tax Rate may be different from measures used by other companies. These non-GAAP measures should not be considered a substitute for net income attributable toRockwell Automation , diluted EPS and effective tax rate.
The following are the components of operating and non-operating pension and postretirement benefit cost (credit) (in millions):
Three Months Ended
December 31,
2019 2018
Service cost $ 23.1 $ 19.8
Operating pension and postretirement benefit cost 23.1 19.8
Interest cost 34.6
40.2
Expected return on plan assets (61.2 ) (61.2 ) Amortization of prior service credit (1.2 ) (1.1 ) Amortization of net actuarial loss 37.2
19.7
Settlements (0.7 ) (0.2 ) Non-operating pension and postretirement benefit cost (credit) 8.7
(2.6 )
Net periodic pension and postretirement benefit cost$ 31.8 $ 17.2 33
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The following are reconciliations of net income attributable toRockwell Automation , diluted EPS, and effective tax rate to Adjusted Income, Adjusted EPS and Adjusted Effective Tax Rate, respectively (in millions, except per share amounts and percentages): Three Months Ended December 31, 2019 2018 Net income attributable to Rockwell Automation$ 310.7
8.7 (2.6 )
Tax effect of non-operating pension and postretirement (2.4 ) 0.3
benefit cost (credit) Change in fair value of investments1 (71.0 )
212.7
Tax effect of the change in fair value of investments1 - (21.7 ) Adjusted Income$ 246.0 $ 269.0 Diluted EPS$ 2.66
0.08 (0.02 )
Tax effect of non-operating pension and postretirement (0.02 ) -
benefit cost (credit) Change in fair value of investments1 (0.61 )
1.75
Tax effect of the change in fair value of investments1 - (0.18 ) Adjusted EPS$ 2.11 $ 2.21 Effective tax rate 5.7 % 33.5 % Tax effect of non-operating pension and postretirement 0.6 % - % benefit cost (credit) Tax effect of the change in fair value of investments1 1.6 % (14.8 )% Adjusted Effective Tax Rate 7.9 % 18.7 % 1In the three months endedDecember 31, 2019 , change in fair value of investments included a$71.0 million gain due to the change in value of our investment in PTC. In the three months endedDecember 31, 2018 , change in fair value of investments included a$246.4 million loss due to the change in value of our investment in PTC and a$33.7 million gain due to the valuation adjustments related to the registration of PTC Shares. 34
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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):
Three Months Ended
December 31,
2019 2018
Cash provided by (used for):
Operating activities $ 231.1 $ 212.0
Investing activities (233.0 ) 140.9
Financing activities (95.6 ) (327.7 )
Effect of exchange rate changes on cash 5.3 (11.7 )
(Decrease) increase in cash and cash equivalents
The following table summarizes free cash flow (in millions), which is a non-GAAP
financial measure:
Three Months Ended
December 31,
2019 2018
Cash provided by operating activities
(37.0 ) (42.0 )
Free cash flow $ 194.1 $ 170.0
Our definition of free cash flow takes into consideration capital investments
required to maintain our businesses' operations and execute our strategy. Cash
provided by continuing operating activities adds back non-cash depreciation
expense to earnings but does not reflect a charge for necessary capital
expenditures. Our definition of free cash flow excludes the operating cash flows
and capital expenditures related to our discontinued operations, if any.
Operating, investing and financing cash flows of our discontinued operations, if
any, are presented separately in our Consolidated Statement of Cash Flows. In
our opinion, free cash flow provides useful information to investors regarding
our ability to generate cash from business operations that is available for
acquisitions and other investments, service of debt principal, dividends and
share repurchases. We use free cash flow, as defined, as one measure to monitor
and evaluate our performance, including as a financial measure for our annual
incentive compensation. Our definition of free cash flow may differ from
definitions used by other companies.
Cash provided by operating activities was $231.1 million for the three months
ended December 31, 2019 , compared to $212.0 million for the three months ended
December 31, 2018 . Free cash flow was $194.1 million for the three months ended
December 31, 2019 , compared to $170.0 million for the three months ended
December 31, 2018 . The year over year increases in cash provided by operating
activities and free cash flow were primarily due to lower incentive compensation
payments in the first three months of fiscal 2020 compared to the first three
months of fiscal 2019.
We repurchased approximately 0.5 million shares of our common stock under our
share repurchase program in the first three months of fiscal 2020. The total
cost of these shares was $100.0 million , of which $3.5 million was recorded in
accounts payable at December 31, 2019 , related to share repurchases that did not
settle until January 2020 . We had $9.3 million in unsettled share repurchases
outstanding at September 30, 2019 , that did not settle until October 2019 . We
repurchased approximately 1.8 million shares of our common stock in the first
three months of fiscal 2019. The total cost of these shares was $292.8 million ,
of which $16.0 million was recorded in accounts payable at December 31, 2018 ,
related to share repurchases that did not settle until January 2019 . Our
decision to repurchase shares in the remainder of 2020 will depend on business
conditions, free cash flow generation, other cash requirements (including
acquisitions) and stock price. On both September 6, 2018 , and July 24, 2019 , the
Board of Directors authorized us to expend an additional $1.0 billion to
repurchase shares of our common stock. At December 31, 2019 , we had
approximately $1,008.4 million remaining for share repurchases under our
existing board authorizations. See Part II, Item 2, Unregistered Sales of Equity
Securities and Use of Proceeds, for additional information regarding share
repurchases.
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We expect future uses of cash to include working capital requirements, capital expenditures, additional contributions to our retirement plans, acquisitions of businesses and other inorganic investments, dividends to shareowners, repurchases of common stock, and repayments of debt. We expect to fund future uses of cash with a combination of existing cash balances and short-term investments, cash generated by operating activities, commercial paper borrowings or a new issuance of debt or other securities. AtDecember 31, 2019 , the majority of our cash and cash equivalents were held by non-U.S. subsidiaries. As a result of the broad changes to theU.S. international tax system under the Tax Act, in fiscal year 2018 the Company began to account for substantially all of its non-U.S. subsidiaries as being immediately subject to tax, while still concluding that earnings are indefinitely reinvested for a limited number of subsidiaries. In addition to cash generated by operating activities, we have access to existing financing sources, including the public debt markets and unsecured credit facilities with various banks. AtDecember 31, 2019 , andSeptember 30, 2019 , our total current borrowing capacity under our unsecured revolving credit facility expiring inNovember 2023 was$1.25 billion . We can increase the aggregate amount of this credit facility by up to$750.0 million , subject to the consent of the banks in the credit facility. We did not borrow against this credit facility during the three months endedDecember 31, 2019 . 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$217.7 million atDecember 31, 2019 , were available to non-U.S. subsidiaries. Borrowings under our non-U.S. credit facilities atDecember 31, 2019 and 2018 were not significant. We were in compliance with all covenants under our credit facilities atDecember 31, 2019 and 2018. There are no significant commitment fees or compensating balance requirements under our credit facilities. Our short-term debt of$23.5 million as ofDecember 31, 2019 , consists of interest-bearing loans from Schlumberger to Sensia dueSeptember 30, 2020 . These loans were entered into following formation of Sensia. See Note 5 in the Consolidated Financial Statements for additional information on Sensia. The following is a summary of our credit ratings as ofDecember 31, 2019 : Credit Rating Agency Short-Term Rating Long-Term Rating Outlook Standard & Poor's A-1 A Stable Moody's P-2 A3 Stable Fitch Ratings F1 A Stable Our ability to access the commercial paper market, and the related costs of these borrowings, is affected by the strength of our credit ratings and market conditions. We have not experienced any difficulty in accessing the commercial paper market to date. 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 among counterparties to minimize exposure to any one of these entities. 36
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We use foreign currency forward exchange contracts to manage certain foreign currency risks. We enter into these contracts to hedge our exposure to foreign currency exchange rate variability in the expected future cash flows associated with certain third-party and intercompany transactions denominated in foreign currencies forecasted to occur within the next two years. We also use these contracts to hedge portions of our net investments in certain non-U.S. subsidiaries against the effect of exchange rate fluctuations on the translation of foreign currency balances to theU.S. dollar. In addition, we use foreign currency forward exchange contracts that are not designated as hedges to offset transaction gains or losses associated with some of our assets and liabilities resulting from intercompany loans or other transactions with third parties that are denominated in currencies other than our entities' functional currencies. Our foreign currency forward exchange contracts are usually denominated in currencies of major industrial countries. We diversify our foreign currency forward exchange contracts among counterparties to minimize exposure to any one of these entities. Net gains and losses related to derivative forward exchange contracts designated as cash flow hedges offset the related gains and losses on the hedged items during the periods in which the hedged items are recognized in earnings. During the three months endedDecember 31, 2019 , we reclassified$4.5 million in pre-tax net gains related to cash flow hedges from accumulated other comprehensive loss into the Consolidated Statement of Operations. During the three months endedDecember 31, 2018 , we reclassified$2.3 million in pre-tax net gains related to cash flow hedges from accumulated other comprehensive loss into the Consolidated Statement of Operations. We expect that approximately$11.1 million of pre-tax net unrealized gains on cash flow hedges as ofDecember 31, 2019 , will be reclassified into earnings during the next 12 months. Information with respect to our contractual cash obligations is contained in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2019 . We believe that atDecember 31, 2019 , there has been no material change to this information. 37
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Supplemental Sales Information We translate sales of subsidiaries operating outside ofthe United States using exchange rates effective during the respective period. Therefore, changes in currency exchange rates affect our reported sales. Sales by acquired businesses also affect our reported sales. We believe that organic sales, defined as sales excluding the effects of changes in currency exchange rates and acquisitions, 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 changes in currency exchange rates and acquisitions. We use organic sales as one measure to monitor and evaluate our regional and operating segment performance. 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 acquire businesses, we exclude sales in the current period for which there are no comparable sales in the prior period. When we divest a business, we exclude sales in the prior period for which there are no comparable sales in the current period. Organic sales growth is calculated by comparing organic sales to reported sales in the prior year, excluding divestitures. We attribute sales to the geographic regions based on the country of destination. The following is a reconciliation of our reported sales by geographic region to organic sales (in millions): Three Months Ended December Three Months Ended December 31, 2019 31, 2018 Sales Excluding Effect of Effect of Changes in Changes in Effect of Organic Sales Currency Currency Acquisitions(1) Sales Sales North America$ 1,006.9 $ -$ 1,006.9 $ (40.8 )$ 966.1 $ 998.8 EMEA 310.1 9.2 319.3 (20.3 ) 299.0 294.4 Asia Pacific 229.6 3.1 232.7 (5.7 ) 227.0 214.4 Latin America 137.9 2.4 140.3 (6.6 ) 133.7 134.7
Total Company Sales
(73.4 )
(1) Includes incremental sales resulting from the formation of the Sensia joint venture.
The following is a reconciliation of our reported sales by operating segment to organic sales (in millions):
Three Months
Ended December
Three Months Ended December 31, 2019 31, 2018
Sales
Excluding
Effect of Effect of
Changes in Changes in Effect of Organic
Sales Currency Currency Acquisitions Sales Sales
Architecture &
Software $ 751.6 $ 7.7 $ 759.3 $ (0.7 ) $ 758.6 $ 753.1
Control Products &
Solutions 932.9 7.0 939.9 (72.7 ) (1) 867.2 889.2
Total Company
Sales $ 1,684.5 $ 14.7 $ 1,699.2 $ (73.4 ) $ 1,625.8 $ 1,642.3 (1) Includes incremental sales resulting from the formation of the Sensia joint venture.
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Critical Accounting Estimates We have prepared the Consolidated Financial Statements in accordance with accounting principles generally accepted inthe United States , which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. These estimates are based on our best judgment about current and future conditions, but actual results could differ from those estimates. Information with respect to accounting estimates that are the most critical to the understanding of our financial statements as they could have the most significant effect on our reported results and require subjective or complex judgments by management is contained in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2019 . We believe that atDecember 31, 2019 , there has been no material change to this information except as noted below. Acquisitions - Consolidation of Sensia Joint Venture In determining whether to consolidate Sensia,U.S. GAAP requires that we evaluate our ability to control the significant financial or operating decisions of the joint venture. Determining the nature and extent of the noncontrolling interest holder's rights involves management judgment. We have evaluated the noncontrolling interest holder's rights and determined that we control and should consolidate Sensia in our financial results. Acquisitions - Sensia Joint Venture Intangibles Valuation The accounting for a business combination requires the excess of the purchase price of the acquisition over the net book value of assets acquired to be allocated to the identifiable assets of the acquired entity. Any unallocated portion is recognized as goodwill. We engaged an independent third-party valuation specialist for the fair value allocation of the purchase price to intangible assets, which required the use of several assumptions and estimates. Although we believe the assumptions and estimates made were reasonable and appropriate, these estimates are based on historical experience and information obtained from the management of the acquired companies. The key assumption requiring the use of judgment was the customer attrition rate ranging from 7.5% to 25%. A change in the customer attrition rate of 250 basis points would result in a change of$40.4 million in intangible assets. More information regarding this business combination is contained in Note 5 in the Consolidated Financial Statements. Environmental Matters Information with respect to the effect of compliance with environmental protection requirements and resolution of environmental claims on us and our manufacturing operations is contained in Note 16 in the Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, of our Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2019 . We believe that atDecember 31, 2019 , there has been no material change to this information. Recent Accounting Pronouncements See Note 1 in the Consolidated Financial Statements regarding recent accounting pronouncements.
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